Annual Report& Accounts 2014

DIRECTORS        Robert  Derry-­‐Evans   Chairman  (as  from  1  January  2015)  Christopher  M  Smyth   Vice-­‐Chairman  (as  from  1  January  2015)  Dorothy  Ann  Berresford   Senior  Independent  Director  (as  from  1  January  2015)  Richard  D  Jenkins   Chief  Executive  Kevin  A  Gray   Deputy  Chief  Executive  Christopher  W  J  Nott  Denzil  Stirk  Angela  Cha  Christopher  J  L  Moorsom   Chairman  until  retirement  on  31  December  2014  Terence  J  Fussell   Vice-­‐Chairman  until  retirement  on  6  June  2014  David  Coles   (retired  19  January  2014)        OFFICERS    Tonia  Lovell   Head  of  Compliance  and  Society  Secretary  Mark  Wiltshaw   Head  of  Savings  and  Investments  Steve  Matthews   Head  of  Mortgages      PROFESSIONAL  ADVISORS    Bankers:   NatWest    Auditor:   Deloitte  LLP     Bristol    Internal  Auditor:   Baker  Tilly  Risk  Advisory  Services  

  2  Wellington  Place     Leeds     LS14  AP  

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Chairman’s  Statement  For  the  year  ended  31  December  2014    I  am  pleased  to  report  that  the  Society  continues  to  perform  very  well  in  a  rapidly  changing  market  for  financial  services  this  year  and  achieving,  once  again,  record  levels  of  assets,  reserves  and  profit.    Group  key  performance  indicators:  

• Group  reserves  rose  by  14.3%  to  £24m  (2013:  £21.0m);  • Gross  mortgage  lending  of  £37.4m  (2013:  £38.6m)  which  helped  increase  the  Society’s  mortgage  book  by  4.1%  to  a  record  

level  of  £218.9m  (2013:  £210.2m);  • Liquid  assets  reduced  from  23.5%  to  22.5%  of  shares  and  borrowings,  with  further  liquid  resources  being  available  to  the  

Society  from  the  Funding  for  Lending  Scheme;  • Group  profit  on  ordinary  activities  before  taxation  rose  by  37.4%  to  £3.8m  (2013:  £2.8m);  • Assets  of  the  Group  increased  by  2.5%  to  £279.4m  (2013:  £272.5m).  

 Whilst  the  overall  UK  economy  has  been  picking  up,  one  of  the  fastest-­‐growing  elements  has  been  the  housing  sector.    In  2014  the  market  saw  sharp  price  rises  in  the  first  half  -­‐  particularly  in  London  -­‐  followed  by  a  slowing  of  demand  in  the  second  half.    Tougher  new  rules  on  borrowing  in  the  form  of  the  Mortgage  Market  Review  have  probably  contributed  to  the  slowdown  and  have  certainly  proved  challenging  to  implement  for  many  lenders.    The  reform  of  Stamp  Duty  that  was  announced  by  the  Chancellor  in  his  Autumn  Statement  was  a  welcome  change  that  should  help  to  stimulate  demand  once  again  in  2015  and  beyond.    Against  this  backdrop,  the  Society  has  continued  to  steadily  grow  its  mortgage  book,  and  it  has  been  able  to  retain  its  distinctive  position  as  a  lender  focused  on  the  merits  of  each  case  rather  than  placing  reliance  on  computerised  decision-­‐making.    We  are  extremely  mindful  of  the  difficult  position  for  savers  with  savings  rates,  already  at  record  low  levels  as  a  result  of  low  Bank  of  England  interest  rates,  being  pushed  lower  still  by  the  availability  of  low-­‐cost  funding  from  the  Government’s  Funding  for  Lending  Scheme.    We  continue  to  do  all  we  can  to  offer  competitive  rates  to  our  existing  customers.    Looking  to  the  future    We  are  aware  that  many  customers  are  increasingly  turning  away  from  branch-­‐based  banking  and  are  looking  to  other  methods  of  managing  their  money,  such  as  by  phone  or  by  using  the  internet  via  use  of  mobile  devices  such  as  tablets  and  smartphones.    Some  of  these  trends  have  been  reflected  in  our  own  business  and  this  has  brought  about  the  closure  of  our  branch  at  Larkhall  in  2014  as  transactions  had  dipped  to  a  level  where  maintaining  a  branch  there  was  uneconomic  and  was  not  in  the  interests  of  the  wider  membership.    We  expect  to  have  branch  offices  at  Moorland  Road  in  Oldfield  Park  and  in  the  centre  of  Bath  for  many  years  to  come,  but  we  do  believe  that  members’  interests  will  be  well  served  if  we  increase  our  investment  in  technology  to  extend  the  range  of  accounts  that  can  be  operated  online,  and  to  facilitate  the  submission  of  mortgage  applications  over  the  internet.    Values    As  a  new  member  of  the  Board,  I  have  been  impressed  by  the  ethos  of  the  Society’s  Board  and  Management  and  its  focus  on  its  members’  interests:  the  contrast  of  the  Society’s  approach  to  the  reputation  of  the  banking  sector  is  striking.    In  the  few  months  I  have  been  involved  with  the  Society,  I  have  come  to  recognise  it  as  a  very  special  business  in  a  market  where  automation  and  so-­‐called  “efficiency  measures”  have  so  often  been  deployed  to  the  detriment  of  customers.    The  Society  does  offer  a  very  real  alternative  to  the  major  banks  and  it  is  gratifying  to  see  that  traditional  standards  of  service  and  behaviour  are  valued  and  appreciated  by  so  many  of  our  customers.    As  a  mutual  Building  Society,  we  have  different  priorities  to  a  plc  bank.    Our  focus  tends  to  be  longer  term  and,  as  your  incoming  Chairman,  I  am  very  aware  that  my  responsibility  and  that  of  our  Board  is  to  run  the  Society  such  that  we  leave  it  in  better  shape  than  we  found  it.  

 Our  past  Chairman,  Christopher  Moorsom,  who  retired  at  the  end  of  2014  has  done  exactly  that.    Over  the  years  of  his  chairmanship,  the  Society  has  developed  in  size,  in  strength  and  in  resilience  -­‐  no  mean  feat  in  the  face  of  the  most  exacting  conditions  that  the  industry  has  encountered  in  many  generations.    On  behalf  of  his  Board  colleagues,  and  the  staff  and  members  of  the  Society,  I  wish  him  a  happy  and  long  retirement.    He  will  be  a  tough  act  to  follow.    I  would  also  like  to  take  this  opportunity  to  pay  tribute  to  Terry  Fussell  who  served  as  Society  Vice-­‐Chairman  for  many  years  before  passing  away  in  the  summer  of  2014.    Terry  was  a  tireless  supporter  of  the  Society  who  cared  passionately  about  the  interests  of  its  members  and  the  long-­‐term  success  of  the  Society.    He  will  be  fondly  remembered  and  greatly  missed  by  all  who  worked  with  him.      In  replacing  Chris  and  Terry,  and  to  allow  for  some  succession,  the  Society  has  taken  on  three  new  Non-­‐Executive  Directors,  including  myself.    All  of  the  new  Directors  will  stand  for  election  at  the  2015  Annual  General  Meeting.      I  am  excited  to  work  with  the  newly  constituted  Board  and  very  much  hope  to  combine  the  fresh  insight  of  new  Board  members  with  the  expertise  and  experience  of  the  established  Executive  and  Non-­‐Executive  team.      I  am  looking  forward  to  serving  the  members  in  the  months  and  years  ahead.    I  would  like  to  take  this  opportunity  to  thank  all  involved  with  the  Society  -­‐  members,  staff,  suppliers  and  intermediaries  -­‐  for  your  continued  support.    Robert  Derry-­‐Evans  Chairman    3  March  2015  

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Chief  Executive’s  Review  For  the  year  ended  31  December  2014    Mortgages    Following  years  in  the  doldrums,  the  mortgage  market  grew  rapidly  in  2013  and  this  strong  growth  continued  into  2014.    For  various  reasons,  growth  slowed  as  2014  progressed  but  only  back  towards  levels  that  are  more  sustainable  over  the  longer  term.    Government  initiatives  in  the  form  of  the  Help-­‐to-­‐Buy  programmes  and  the  Funding  for  Lending  Scheme,  which  has  offered  cheaper  funding  to  lenders  seeking  to  grow  their  mortgage  assets,  have  boosted  the  demand  for  and  supply  of  mortgages.    This  has  fuelled  increases  in  house  prices  with  virtually  all  parts  of  the  UK  seeing  at  least  some  modest  growth  in  property  values  on  a  year-­‐on-­‐year  basis.    Whilst  press  comment  focused  on  a  bubble  in  house  prices  developing  in  London,  price  rises  were  more  moderate  elsewhere.    The  high  levels  of  house  prices  in  London  have  caused  the  Society  to  introduce  measures  to  slightly  restrict  lending  in  the  capital  given  the  greater  potential  for  a  correction  in  the  London  market.    A  variety  of  ‘headwinds’  and  ‘tailwinds’  have  been  at  play  in  driving  the  housing  market  in  recent  years  but  a  likely  constraint  to  demand  in  the  short  term  will  be  the  fact  that  real  wages  have  been  falling.    Moreover,  the  prospect  of  interest  rate  rises  is  making  lenders  and  borrowers  more  wary,  particularly  given  the  tougher  affordability  rules  introduced  by  the  Financial  Conduct  Authority  in  2014.    By  contrast,  demand  will  be  supported  by  the  failure  of  the  UK  housing  supply  to  match  the  rate  of  new  household  formation.    Overall  the  Society  expects  that  the  mortgage  market  will  remain  reasonably  buoyant  in  the  next  few  years,  and  this  will  encourage  an  intensification  of  competition  for  the  Society.    The  Society  will  strive  to  maintain  its  competitive  position  through  innovation  and  development  of  its  marketing  capability  and  will  resist  the  temptation  to  reduce  its  underwriting  standards  to  attract  business.        The  Society  continues  to  fulfil  a  useful  role  in  the  market,  using  its  manual  underwriting  approach  to  offer  loans  to  creditworthy  customers  that  sometimes  find  it  difficult  to  obtain  loans  at  acceptable  rates  from  highly  automated,  computer-­‐driven  lenders.    This  particularly  affects  some  buy-­‐to-­‐let  customers,  self-­‐employed  applicants,  those  building  their  own  homes  and  some  categories  of  first-­‐time-­‐buyers.    In  2014,  the  Society  reintroduced  its  insured  95%  mortgage  product  specifically  aimed  at  first-­‐time-­‐buyers  and  those  moving  to  their  second  home.    Some  seven  years  ago  we  introduced  our  Buy-­‐for-­‐Uni  mortgage  aimed  at  students  looking  to  purchase  a  home  rather  than  rent  whilst  studying  for  their  degree,  and  this  mortgage  remains  a  popular  product  offering  loans  up  to  100%,  with  parental  support.    The  Society  has  seen  a  reduction  in  the  number  of  arrears  cases  through  2014.    At  the  start  of  the  year,  19  mortgages  had  arrears  in  excess  of  three  months  payments.    By  the  end  of  the  year  this  had  fallen  to  13  cases.    As  at  the  end  of  2014  the  Society  had  one  property  in  possession  (2013:  two).    Analysis  continues  to  support  the  fact  that  a  disproportionately  large  part  of  our  arrears  book  comes  from  loans  originated  in  the  2004-­‐08  period  which  were  adversely  impacted  by  reductions  in  property  values.    The  Society  currently  has  no  loans  with  arrears  in  excess  of  three  months  which  were  originated  since  2012.    Savings  and  funding    In  2012,  in  common  with  many  other  Building  Societies,  the  Society  decided  to  join  the  Bank  of  England’s  Funding  for  Lending  Scheme.    The  scheme  brought  considerable  benefits  to  the  Society  including  cheap  funding  and  recourse  to  contingency  funds  should  this  have  been  necessary.    Whilst  the  Society  qualified  for  substantially  more  funding  from  the  scheme,  as  at  31  December  2014  it  had  drawn  down  only  £17m  of  funds.    In  February  2015,  the  Society  repaid  £8.5m  of  funding  back  to  the  Bank  of  England.    Further  use  of  the  draw  down  facility  of  the  scheme  will  be  subject  to  continuing  management  review.    In  the  context  of  the  Bank  of  England’s  base  rate  remaining  at  0.5%  for  much  longer  than  most  originally  anticipated,  our  strategy  has  been  to  prioritise  the  relatively  small  amount  of  return  available  to  existing  savers  and  the  Society  remains  committed  to  this  approach  while  market  rates  are  so  low.    Even  though  there  is  a  general  expectation  that  rates  will  gradually  rise  in  the  coming  two  to  three  years,  it  is  likely  that  rates  will  remain  below  historic  pre-­‐2008  levels  for  some  considerable  time  to  come.    Although  the  Society  has  periodically  featured  in  best  buy  tables  during  2014  it  has  long  been  the  Society’s  policy  to  offer  consistent  rates  rather  than  to  attract  savers  with  “teaser”  rates  only  to  reduce  them  at  the  end  of  an  initial  period.    A  number  of  existing  customers  took  advantage  of  the  budget  provisions  announced  by  the  Government  to  increase  the  amount  allowed  in  a  tax-­‐free  ISA  to  £15,000  which  is  due  to  be  raised  to  £15,240  in  April  2015.    The  Society  continues  to  offer  a  wide  variety  of  accounts  to  consumers,  businesses,  pension  fund  administrators,  clubs  and  charities  and  trusts,  and  it  considers  the  breadth  of  its  funding  base  to  be  a  source  of  strength.    In  the  spring  of  2014  the  Society  closed  its  counter  at  Larkhall,  Bath.    All  of  the  Larkhall  accounts  were  transferred  to  the  Society’s  Wood  Street  branch  in  the  centre  of  Bath.    This  move  reflects  changing  patterns  of  customer  behaviour  where  the  demand  for  direct  accounts  through  the  post  and  internet  have  increasingly  displaced  branch-­‐based  services.      Property  letting  and  financial  advice    At  the  end  of  2014  the  Society  decided  to  sell  its  shareholding  in  Bath  &  City  Financial  Limited,  a  joint  venture  business  that  had  been  established  with  City  Financial  Planning  Limited  to  offer  independent  financial  advice.    Over  the  years,  Bath  &  City  Financial  Limited  has  helped  hundreds  of  clients  to  take  better  control  of  their  finances  and  has  been  able  to  offer  the  Society’s  customers  a  greater  range  of  financial  services.    The  Society  has  withdrawn  from  financial  advice  to  concentrate  on  its  core  business,  but  clients  of  Bath  &      

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Chief  Executive’s  Review  (continued)  For  the  year  ended  31  December  2014    City  Financial  Limited  will  continue  to  be  looked  after  by  City  Financial  Planning  Limited.    The  Society  sold  its  shareholding  in  Bath  &  City  Financial  Limited  for  a  sum  equal  to  its  initial  investment  in  the  business.    Bath  Property  Letting  Limited  continues  to  provide  letting  services  to  landlords  and  tenants  in  and  around  Bath  and  is  a  wholly-­‐owned  subsidiary  of  the  Society.    Despite  incurring  an  impairment  charge  of  £2,648  (2013:  £nil)  against  goodwill  relating  to  purchased  portfolios  of  properties,  profit  before  tax  for  this  business  rose  substantially  to  £121,349  (2013:  £93,951)  as  a  result  of  a  strong  performance  in  core  letting  activity.    It  remains  the  intention  to  grow  this  business  through  a  combination  of  acquisitions  and  organic  growth.    Community  involvement    The  Society  has  worked  with  a  wide  variety  of  local  charities  throughout  the  year.    Through  its  Charity  Awards  Scheme,  the  Society  aims  to  improve  the  lives  of  disadvantaged  people  by  helping  the  good  work  of  small  local  charities  who  often  find  it  difficult  to  raise  funds.      In  2014,  the  Society  donated  £7,000  plus  a  number  of  hot  air  balloon  tickets  to  a  diverse  range  of  nine  charities.    One  of  the  Society’s  main  awards  was  for  £1,000  to  Bath  Gateway  Out  and  About,  a  charity  founded  to  provide  recreational  opportunities  to  adults  with  learning  disabilities.    This  charity  was  also  nominated  to  become  the  Society’s  Charity  of  the  Year.    Other  charities  benefiting  from  the  awards  included  Keynsham  and  District  Mencap,  Greenlinks,  and  Bath  FoodCycle.      The  Society  also  sponsored  the  annual  fireworks  at  Bath  Recreation  Ground  that  is  organised  by  The  Rotary  Club  of  Bath.    The  event  was  highly  successful  and  raised  approximately  £20,000  for  local  charities.    The  Society’s  sponsorship  also  incorporates  the  children’s  Firework  Safety  Poster  Competition  designed  to  impart  a  lasting  message  about  firework  safety  to  the  city’s  children.    This  event  will  celebrate  its  40th  anniversary  in  2015  and  we  are  grateful  to  The  Rotary  Club  of  Bath  for  its  sound  management  of  this  event.    The  Society  was  also  involved  in  sponsoring  Bath  in  Bloom  in  what  was  a  major  anniversary  year  for  an  event  which  has  had  an  impressive  track  record  over  many  decades.    We  congratulate  the  organisers  on  their  excellent  success  and  all  involved  in  making  Bath  a  visual  summer  delight.        Dick  Jenkins  Chief  Executive    3  March  2015    

4  

Strategic  Report  For  the  year  ended  31  December  2014    The  Directors  have  pleasure  in  presenting  the  Strategic  Report  for  the  year  ended  31  December  2014.    Business  objectives    The  principal  objective  of  the  Society  is  to  be  an  excellent  example  of  a  local  building  society,  possessing  a  secure  and  trusted  brand  that  is  backed  up  by  consistently  strong  financial  results.    The  Society  aims  to  deliver  steady  growth  in  the  level  of  its  mortgage  assets,  primarily  funding  mortgage  assets  through  retail  deposits  and  by  deposits  from  small  businesses.    The  Society’s  subsidiary  company,  Bath  Property  Letting  Limited,  provides  property  letting  and  management,  a  service  considered  complementary  to  the  Society’s  main  business.    Business  strategy    The  Society’s  main  competitive  advantage  lies  in  its  ability  to  apply  traditional  underwriting  techniques  to  the  assessment  of  prime  mortgage  cases  that  are  complex  in  nature  and  that  require  a  high  level  of  personal  input  and  work,  but  for  which  higher  margins  are  appropriate.    The  Society’s  strategy  focuses  on  delivering  strong  profitability  through  offering  a  range  of  innovative  mortgage  products  to  customers  who  demand  a  personal  and  flexible  mortgage  service.    The  Society  has  taken  advantage  of  the  Bank  of  England’s  Funding  for  Lending  Scheme  to  fund  net  mortgage  growth  over  2013  and  2014.    From  2015,  the  Society’s  core  plan  is  to  revert  to  growing  its  funding  base  by  applying  its  skills  and  expertise  to  expand  all  of  its  current  funding  distribution  channels.    Over  the  next  strategic  period  to  2019,  the  Society’s  strategy  recognises  that  total  funding  from  postal,  internet  and  business  channels  is  likely  to  grow  faster  than  from  its  traditional  retail  channels.    The  niche  nature  of  the  Society’s  business  model  is  expected  to  require  a  relatively  higher  investment  in  people  and  systems  than  is  the  norm  in  the  sector.    Business  review  and  future  developments    The  Group’s  business  for  the  year  and  its  future  plans  are  reviewed  by  the  Chairman  and  Chief  Executive  on  pages  1  to  3.    The  Board  of  Directors  principally  monitors  financial  performance  against  five  key  performance  indicators  as  defined  below.    ‘Mortgage  Asset  Growth’  is  the  percentage  growth  in  the  Group’s  total  of  loans  and  advances  to  customers  as  measured  between  calendar  year-­‐ends,  as  stated  in  the  Balance  Sheets  on  page  21.    ‘Profit  Before  Tax’  is  the  Group  profit  on  ordinary  activities  before  taxation  as  stated  in  the  Income  &  Expenditure  Accounts  on  page  20.    ‘Management  Expense  Ratio’  is  the  percentage  given  by  dividing  the  sum  of  Administrative  Expenses  plus  Depreciation  and  Amortisation,  as  stated  in  the  Income  and  Expenditure  Accounts,  by  a  calculation  of  the  average  of  the  total  asset  figures  between  current  year-­‐end  and  the  prior  year-­‐end.    ‘Core  Equity  Tier  1  Ratio’  is  the  percentage  given  by  dividing  Core  Equity  Tier  1  regulatory  capital  of  £23,690,000  (2013:  £20,725,000)  by  the  sum  of  Group  risk  weighted  assets  and  a  regulatory  measure  for  operational  risk.    ‘Leverage  Ratio’  is  the  percentage  given  by  dividing  Group  Tier  1  regulatory  capital  of  £23,690,000  (2013:  £20,725,000)  by  Group  total  assets  as  adjusted  for  mortgage  pipeline  commitments,  off  balance  sheet  interest  rate  swap  exposures,  and  provisions  for  bad  and  doubtful  debts.    The  Bank  of  England/Prudential  Regulation  Authority  requires  all  UK  banks  and  building  societies  to  have  a  minimum  leverage  ratio  of  4%.    Key  Performance  Indicator   2014   2013  Mortgage  Asset  Growth   4.1%   8.7%  Profit  Before  Tax   £3,782,000   £2,753,000  Management  Expense  Ratio  (excluding  FSCS  Levy)   1.34%   1.29%  Core  Equity  Tier  1  Ratio   20.7%   17.7%  Leverage  Ratio   8.4%   7.5%  

 The  Board’s  budgetary  aims  for  2014  were  to  achieve  modest  growth  in  the  Society’s  total  asset  base,  to  convert  excess  liquidity  into  mortgage  asset  growth,  and  to  concentrate  on  strengthening  the  Society’s  capital  base.      The  Board  can  confirm  that  the  actual  increase  in  total  assets  was  within  budgetary  tolerances,  and  that  the  4.1%  growth  in  mortgage  assets  is  considered  very  positive  against  a  background  of  major  regulatory  change  and  an  increase  in  competitive  pressures.    The  management  expense  ratio  increased  on  the  previous  year  due  to  investment  in  more  staff  numbers  across  the  Group  and  an  increase  in  other  administrative  expenses.    The  Society’s  most  effective  means  of  accessing  new  capital  is  through  the  retention  of  earnings.    Political  and  regulatory  pressure  exists  to  encourage  all  banks  and  building  societies  to  further  improve  their  capital  positions  where  they  can.    The  Board  is  of  the  opinion  that  the  level  of  2014  profit  performance  is  appropriate  given  the  requirement  to  balance  the  Society’s  status  as  a  mutual  organisation  with  the  desire  to  achieve  sufficient  profitability  that  will  allow  the  Society  to  continue  to  materially  strengthen  its  capital  position.    The  Group’s  strengthening  capital  base  is  demonstrated  by  the  significant  increase  in  the  Core  Equity  Tier  1  Ratio  and  the  Leverage  Ratio  (both  calculated  on  a  consolidated  basis).    In  2014,  the  Society  made  net  provisions  against  bad  and  doubtful  debts  of  £222,000  (2013:  £630,000)  and  utilised  £390,000  (2013:  £428,000)  of  provisions  against  crystallised  losses.    Total  provisions  decreased  to  £1,608,000  (2013:  £1,768,000).    Specific  provisions  of  £200,000  (2013:  £518,000)  were  made  against  four  new  and  five  existing  arrears  cases.    The  general  provision  decreased  by  £4,000  to  £274,000  (2013:  £278,000).      

   

5  

Strategic  Report  (continued)  For  the  year  ended  31  December  2014    Business  review  and  future  developments  (continued)    Given  the  weakness  of  the  economic  recovery  and  the  continuing  fragile  condition  of  the  UK  property  market,  the  Board  is  expecting  the  Society  to  have  to  continue  to  make  new  provisions  against  bad  and  doubtful  debts  for  some  years  ahead.    As  at  31  December  2014,  the  Society  had  four  (2013:  six)  mortgage  loans  that  were  over  12  months  or  more  in  arrears.    The  total  balance  outstanding  on  these  loans  was  £1,239,668  (2013:  £1,285,733)  and  the  total  arrears  outstanding  was  £132,350  (2013:  £155,125).    The  Society  has  made  specific  provisions  of  £368,234  (2013:  £602,178)  against  these  loans.   The  Society  uses  certain  forbearance  techniques  to  help  borrowers  whose  finances  are  stressed.    These  techniques  include  moving  loans  from  a  ‘capital  and  interest’  basis  to  an  ‘interest-­‐only’  basis,  moving  loans  onto  fixed  rates  of  interest,  acceptance  of  temporary  reductions  in  mortgage  payments  and  the  active  management  of  repossessed  properties  out  of  arrears.    The  impact  of  forbearing  loans  on  the  Society’s  arrears  position  is  fully  considered  before  provisions  are  finalised  for  the  year-­‐end  statutory  accounts.    The  Board  is  of  the  opinion  that  the  use  of  forbearance  techniques  has  not  had  a  material  impact  on  the  scale  of  the  Society’s  provisions  for  bad  and  doubtful  debts.    Capital  Requirements  (country-­‐by-­‐country  reporting)  Regulations  2013    The  Capital  Requirements  (country-­‐by-­‐country)  Reporting  Regulations  2013  introduced  reporting  obligations  for  institutions  within  the  scope  of  the  European  Union’s  Capital  Requirements  Directive  (CrD  IV).    Article  89  of  the  Capital  Requirements  Directive  IV  (CrD  IV)  requires  credit  institutions  and  investment  firms  in  the  EU  to  disclose  annually,  specifying,  by  Member  State  and  by  third  country  in  which  it  has  an  establishment,  the  following  information  on  a  consolidated  basis  for  the  year  ended  31  December  2014:    EU  Member  State  and/or  third  country  

Nature  of  activities   Turnover*   Number  of  employees  

Profit  before  tax   Cash  tax  paid  in  2014  

Public  subsidies  

United  Kingdom   Deposit  taking,  Mortgage  lending,  Property  management  

£7,915,000   58   £3,782,000   £750,071   £nil  

 *Turnover  is  stated  as  Group  total  income  as  per  income  and  expenditure  account  on  page  20.    Profit  and  capital    The  profit  after  tax  transferred  to  the  General  Reserve  was  £2,942,000  (2013:  £2,103,000).    Gross  capital  at  31  December  2014  was  £23,956,000  (2013:  £21,014,000),  representing  the  aggregate  of  the  General  and  Revaluation  Reserves.    Free  capital  at  31  December  2014  was  £21,396,000  (2013:  £18,340,000),  representing  the  aggregate  of  gross  capital  and  general  loss  provisions  for  bad  and  doubtful  debts  less  tangible  fixed  assets.    At  31  December  2014  the  ratios  of  gross  capital  and  free  capital,  as  a  percentage  of  shares  and  borrowings,  was  9.4%  (2013:  8.4%)  and  8.4%  (2013:  7.3%)  respectively.    Principal  risks  and  uncertainties    The  recent  banking  crisis  and  current  economic  conditions  bring  a  range  of  risks  and  uncertainties  to  a  small  Building  Society.    Foremost  amongst  these  are  heightened  levels  of  credit  risk  in  the  mortgage  book  and  in  the  Society’s  own  treasury  deposits  with  other  institutions.    Credit  risk  –  treasury  portfolio  Credit  risk  in  the  treasury  portfolio  is  primarily  managed  by  limiting  the  maximum  size  of  investments  and  by  only  investing  directly  with  counterparties  that  are  of  a  predetermined  credit  quality.    The  Society  does  not  invest  in  structured  investments.    As  part  of  its  treasury  credit  risk  control  processes,  the  Board  utilises  the  published  data  from  international  credit  ratings  agencies  and  also  takes  professional  advice  from  treasury  market  experts.    The  Society  does  not  believe  that  there  is  a  current  likelihood  of  a  loss  from  direct  exposure  to  any  of  its  counterparties;  however,  the  Society  prudently  limits  its  exposure  to  individual  market  counterparties  to  £1m  but  will  place  larger  investments  with  the  main  UK  clearing  banks,  the  UK  Government,  the  Bank  of  England  and  the  European  Investment  Bank.    The  Society  has  no  exposure  to  foreign  banks  and  does  not  hold  any  investments  denominated  in  Euros.    Credit  risk  –  residential  mortgage  book  Credit  risk  in  the  mortgage  book  is  controlled  through  stringent  lending  criteria  where  a  focus  is  placed  on  ensuring  that  the  quality  of  new  lending  remains  high.    The  Board  continuously  monitors  the  level  of  arrears  in  the  Society’s  existing  loan  book  and  also  how  individual  arrears  cases  are  progressing.    In  common  with  all  lenders,  arrears  levels  are  negatively  impacted  by  rising  unemployment  and  falling  house  prices.    There  remains  great  uncertainty  as  to  whether  the  economy  will  continue  to  deliver  sufficient  growth  to  sustain  the  recent  increase  in  employment  and  average  property  prices.    The  Society  has  generally  experienced  a  low  level  of  new  residential  arrears  cases  but  it  recognises  that  likely  future  increases  in  the  Bank  of  England  base  rate  would  result  in  pressure  to  increase  mortgage  rates  and  that  this  could  potentially  increase  the  future  level  of  loan  arrears  and  defaults.    In  2014,  the  Society  did  not  dispose  of  any  repossessed  residential  properties  (2013:  four).    The  occurrence  of  new  residential  arrears  cases  is  slowing  and  the  arrears  situation  on  long-­‐standing  cases  has  stabilised.    The  Society  has,  however,  provided  for  potential  losses  against  a  small  number    

6  

Strategic  Report  (continued)  For  the  year  ended  31  December  2014    Principal  risks  and  uncertainties  (continued)    Credit  risk  –  residential  mortgage  book  (continued)  of  loans  that  were  not  in  arrears  as  at  31  December  2014  but  where  an  impairment  alert  had  occurred  and  where  losses  are  very  likely  due  to  particular  circumstances  and  localised  distressed  property  prices.    The  Society  considers  there  to  be  a  strong  likelihood  of  it  continuing  to  experience  further  material  losses  from  its  residential  lending  activities  although  these  are  expected  to  be  within  the  Board’s  appetite  for  credit  risk.    Credit  risk  –  commercial  mortgage  book  The  Society  engages  in  commercial  lending  although  its  current  strategy  is  to  reduce  its  commercial  book  as  a  proportion  of  total  mortgage  assets.    Commercial  risk  appetite  is  regularly  reviewed  in  light  of  economic  and  market  conditions.    Commercial  lending  is  operated  within  a  framework  of  conservative  credit  criteria,  principally  focusing  on  underlying  income  streams,  debt  servicing  cover  and  property  values.    The  Society  operates  stricter  maximum  loan-­‐to-­‐value  rules  for  commercial  lending  than  it  does  for  lending  on  residential  property.    The  Society  maintains  a  preference  for  lending  on  commercial  properties  that  have  a  secondary  or  alternative  residential  use.    The  Society  will  not  lend  on  certain  types  of  commercial  property  or  fund  development  projects  that  are  considered  to  be  high  risk  or  where  it  lacks  some  form  of  specialist  commercial  property  knowledge.    Commercial  lending  relationships  are  subject  to  regular  reviews  to  ensure  that  facilities  are  fully  performing  and  to  identify  cases  of  potential  cause  for  concern,  in  order  to  facilitate  early  risk  mitigation  activity.  The  Society’s  Credit  Committee  monitors  a  series  of  credit  exposure  limits  which  are  aimed  at  producing  a  diversified  commercial  portfolio  with  minimal  concentration  risk.    In  2014,  the  Society  crystallised  losses  on  the  disposal  of  four  repossessed  commercial  properties  (2013:  nil).    In  2014,  the  Society  reduced  its  overall  exposure  to  commercial  lending;  however,  it  had  to  increase  its  provision  against  one  long-­‐standing  commercial  case  that  is  in  arrears  by  a  further  £13,387  to  £195,897  (2013:  £182,510).      The  Society  considers  there  to  be  a  likelihood  of  having  to  make  further  provision  for  losses  on  its  commercial  lending  activities  although  the  occurrence  of  new  commercial  arrears  cases  is  slowing.   Liquidity  risk  As  a  deposit-­‐taking  institution,  the  Society  is  mindful  of  the  need  to  maintain  a  sufficient  level  of  liquid  assets  to  ensure  the  smooth  operation  of  the  Society’s  business  in  normal  and  stressed  economic  circumstances.    In  2014,  the  Society  reduced  its  overall  level  of  liquidity  as  a  result  of  access  to  the  Bank  of  England’s  Funding  for  Lending  Scheme.    As  at  31  December  2014,  the  Society  had  drawn  £17m  (2013:  £8.5m)  from  the  scheme  in  the  form  of  UK  Treasury  Bills  and  these  were  held  off  balance  sheet.    In  February  2015,  the  Society  made  £8.5m  of  early  repayments  back  to  the  scheme.    The  Society  held  a  further  £13.5m  (2013:  £15m)  on  deposit  with  the  Bank  of  England’s  Reserve  Account  facility  and  a  further  £2m  in  supranational  financial  instruments.    All  of  these  investments  are  highly  liquid  and  qualify  towards  the  Society’s  liquidity  buffer  which  was  significantly  in  excess  of  its  minimum  regulatory  requirement  at  year-­‐end.    The  Board  has  determined  that  in  these  uncertain  times  the  Society  should  continue  to  focus  on  retaining  existing  funding  and  that  it  should  seek  to  maintain  relatively  high  levels  of  readily  accessible  liquidity.    The  Society  considers  there  to  be  a  low  likelihood  of  it  not  having  sufficient  liquidity  to  meet  intended  requirements.    Interest  rate  risk  The  Society  holds  treasury  and  mortgage  assets  that  earn  a  fixed  rate  of  interest  to  the  Society.    It  also  has  funding  liabilities  that  require  the  Society  to  pay  interest  on  fixed  rate  terms.    The  Society  is  therefore  exposed  to  the  risk  of  market  interest  rates  moving  when  certain  of  its  assets  and  liabilities  are  on  fixed  rate  terms.    The  Society  regularly  calculates  its  net  exposure  to  interest  rate  risk  and  purchases  interest  rate  swaps  to  reduce  the  Society’s  overall  exposure  to  interest  rate  gap.    The  Society  considers  there  to  be  a  low  likelihood  of  incurring  a  loss  from  exposure  to  interest  rate  risk.    Conduct  risk  As  a  regulated  deposit-­‐taker  and  mortgage  lender,  the  Society  risks  regulatory  censure  and  fines  if  its  activities  were  ever  deemed  to  be  placing  customers  in  situations  which  were  to  their  significant  detriment,  were  unfair  or  were  unethical.    The  Society  regularly  examines  its  practices,  procedures  and  processes  with  the  objective  of  maintaining  a  business  culture  that  always  delivers  the  intended  and  most  positive  outcomes  for  the  Society’s  customers.    The  Society  considers  there  to  be  a  low  likelihood  of  incurring  losses  through  conduct  risk.    Nevertheless,  as  a  reflection  of  the  growing  risk  of  operating  in  an  environment  where  claims  for  compensation  for  mis-­‐selling  are  increasing,  the  Society  has  prudently  increased  the  Society’s  provision  for  possible  customer  redress  by  £19,000  to  £20,000  (2013:  £1,000).    Operational  risk  The  Society  is  vulnerable  to  the  risk  of  making  losses  from  inadequate  or  failed  internal  processes  or  systems,  human  error,  fraud  or  external  events.    Processes  and  systems  are  in  place  to  minimise  these  risks.    In  2014,  the  Society  upgraded  its  automatic  data  back-­‐up  processes  to  its  Information  Technology  recovery  site  outside  the  City  of  Bath.    The  Society  considers  there  to  be  a  low  likelihood  of  incurring  a  material  loss  from  operational  risk.    Uncertainties  The  future  timing  and  scale  of  increases  in  the  Bank  of  England  base  rate  remains  uncertain  although  the  Board  is  of  the  opinion  that  the  Bank  of  England’s  base  rate  is  likely  to  remain  at  0.5%  throughout  most  of  2015.    A  small  rise  in  future  interest  rates  would  generally  be  beneficial  to  the  Society  as  yield  from  the  treasury  portfolio  would  increase  and,  in  the  short  term,  the  relative  cost  of  current  fixed  rate  funding  would  also  fall.    Large  increases  in  future  interest  rates  might,  however,  require  the  Society  to  narrow  its  margins  in  order  to  protect  its  borrowers.    The  Board  also  remains  uncertain  as  to  the  scale  of  the  Society’s  future  liability  towards  the  Financial  Services  Compensation  Scheme  or  to  any  future  European  initiative  to  pre-­‐fund  a  replacement  deposit  protection  scheme.      

7  

Strategic  Report  (continued)  For  the  year  ended  31  December  2014    Principal  risks  and  uncertainties  (continued    Uncertainties  (continued)  The  final  capital  shortfall  from  the  bail-­‐out  of  the  Bradford  &  Bingley  is  not  known  and  neither  is  the  impact  from  the  bail-­‐out  of  the  Dunfermline  Building  Society.    Risk  management  objectives  and  policies    The  Board  of  Directors  has  the  objective  of  establishing  a  suitably  robust  control  environment  that  successfully  reduces  the  potential  impact  of  risks  that  are  present  in  the  Society’s  business.    The  control  environment  is  designed  to  reduce  both  the  probability  of  risks  actually  crystallising,  and  to  reduce  the  impact  of  risks  when  they  do  crystallise.    The  Board  of  Directors  has  developed  a  Financial  Risk  Management  Policy  that  deals  with  the  procedures  to  reduce  interest  rate,  liquidity  and  hedging  risks;  and  a  Lending  Policy  that  dictates  the  procedures  to  reduce  credit  risk.    The  Society’s  committee  structure  is  specifically  designed  to  monitor  and  control  different  aspects  of  risk  on  an  ongoing  basis.    Furthermore,  a  Risk  Committee  exists  to  measure  and  appraise  risk  across  the  whole  business  and  to  keep  the  potential  impact  from  risks  that  could  crystallise  as  losses  to  within  parameters  set  out  in  the  Board’s  stated  risk  appetite.    A  full  disclosure  of  the  Society’s  policy  for  managing  the  risks  associated  with  financial  instruments  is  given  in  note  25  to  the  Notes  to  the  Accounts  on  pages  32  to  34.    R  Derry-­‐Evans  Chairman  3  March  2015                                                                  

8  

Directors’  Report  For  the  year  ended  31  December  2014    The  Directors  have  pleasure  in  presenting  the  Report  and  Accounts  for  the  year  ended  31  December  2014.    The  Directors  consider  that  the  Report  and  Accounts,  taken  as  a  whole,  are  fair,  balanced  and  understandable  and  provide  the  information  necessary  for  members  to  assess  the  Group’s  performance,  business  model  and  strategy.   Creditors’  payment  policy    The  Society’s  policy  is  to  pay  trade  creditors  in  accordance  with  agreed  terms  once  such  creditors  have  fulfilled  all  aspects  of  the  contract.    At  the  end  of  2014  trade  creditors  outstanding  represented  17  days  of  purchases  (2013:  18  days).    Asset  encumbrance  policy    The  Society’s  policy  is  to  permit  the  encumbrance  of  assets  where  this  is  required  as  a  norm  of  standard  market  practices  or  where  it  is  necessary  to  obtain  central  bank  funding  facilities  or  liquidity  insurance.    As  a  standard  precondition  of  the  Bank  of  England’s  Funding  for  Lending  Scheme,  the  Society  prepositioned  a  portfolio  of  residential  mortgage  loans  in  2013  with  the  Bank  of  England.    Staff    The  Directors  place  on  record  their  sincere  appreciation  of  the  commitment  and  dedication  shown  by  the  Group’s  staff  during  the  year.    The  professionalism  and  skill  demonstrated  across  all  aspects  of  the  Group’s  operations  is  a  credit  to  all  concerned  and  cannot  be  underestimated  in  the  context  of  the  success  achieved.    The  Board  maintains  the  view  that  the  future  of  the  Group  will  increasingly  depend  on  a  partnership  between  the  Board,  the  staff  and  the  Society  members.    To  ensure  that  this  is  promoted,  Directors  will  continue  the  policy  of  employing  excellent  people  in  all  areas  of  the  business.    Auditor    Deloitte  LLP  has  expressed  its  willingness  to  continue  in  office  and,  in  accordance  with  Section  77  of  the  Building  Societies  Act  1986,  a  resolution  for  its  reappointment  will  be  proposed  at  the  Annual  General  Meeting.    Directors’  responsibilities  for  preparing  Annual  Accounts    The  following  statement,  which  should  be  read  in  conjunction  with  the  statement  of  the  auditor’s  responsibilities  on  page  19,  is  made  by  the  Directors  to  explain  their  responsibilities  in  relation  to  the  preparation  of  the  Annual  Accounts,  Annual  Business  Statement  and  Directors’  Report.    The  Building  Societies  Act  1986  (‘the  Act’)  requires  the  Directors  to  prepare  annual  accounts  for  each  financial  year  which  give  a  true  and  fair  view  of  the  state  of  affairs  of  the  Society  and  the  Group  as  at  the  balance  sheet  date  and  of  the  income  and  expenditure  of  the  Society  and  the  Group  for  the  year.    In  preparing  those  accounts,  the  Directors  are  required  to:    • Select  appropriate  accounting  policies  and  apply  them  consistently;    • Make  judgements  and  accounting  estimates  that  are  reasonable  and  prudent;    • State  whether  applicable  accounting  standards  have  been  followed;  and    • Prepare  the  accounts  on  the  going  concern  basis,  unless  it  is  inappropriate  to  presume  that  the  Group  will  continue  in  business.    In  addition  to  the  accounts,  the  Act  requires  the  Directors  to  prepare,  for  each  financial  year,  an  Annual  Business  Statement  and  a  Directors’  Report,  each  containing  prescribed  information  relating  to  the  business  of  the  Society  and  its  subsidiary  undertakings.    Directors’  responsibilities  for  Accounting  Records  and  Internal  Control    The  Directors  are  responsible  for  ensuring  that  the  Group:    • Keeps  accounting  records  in  accordance  with  the  Building  Societies  Act  1986  or  the  Companies  Act  2006  (as  relevant);  and    • Takes  reasonable  care  to  establish,  maintain,  document  and  review  such  systems  and  controls  as  are  appropriate  to  its  business  

in  accordance  with  the  rules  made  by  the  Financial  Services  Authority  under  the  Financial  Services  and  Markets  Act  2000.    

Directors’  responsibilities  to  disclose  information  to  auditors        Each  person  who  is  a  Director  at  the  time  when  the  Directors’  Report  is  approved  must:    • Ensure  that  there  is  no  relevant  audit  information  of  which  the  Group’s  auditors  are  unaware;  and      

9  

Directors’  Report  (continued)  For  the  year  ended  31  December  2014    Directors’  responsibilities  to  disclose  information  to  auditors  (continued)        • Ensure  that  all  steps  have  been  taken  that  ought  to  have  been  taken  to  make  themselves  aware  of  any  relevant  audit  

information  and  to  establish  that  the  Group’s  auditors  are  aware  of  that  information.    The  Directors  have  general  responsibility  for  safeguarding  the  assets  of  the  Group  and  for  taking  reasonable  steps  for  the  prevention  and  detection  of  fraud  and  other  irregularities.    The  Directors  are  also  responsible  for  the  integrity  of  the  Society’s  website  www.bathbuildingsociety.co.uk.    The  work  carried  out  by  the  auditor  does  not  involve  consideration  of  these  matters  and,  accordingly,  the  auditor  accepts  no  responsibility  for  any  changes  that  may  have  occurred  to  the  financial  statements  since  they  were  initially  presented  on  the  website.  Information  published  on  the  internet  is  accessible  in  many  countries  with  different  legal  requirements  relating  to  the  preparation  and  dissemination  of  financial  statements.  Information  in  these  financial  statements  is  provided  under  the  legislation  of  the  United  Kingdom.    Going  concern    In  the  opinion  of  the  Directors,  the  Group  continues  to  deliver  excellent  results  despite  the  uncertainty  arising  from  the  slow  recovery  from  economic  recession  and  the  continuing  requirement  to  make  substantial  provisions  against  potential  losses  on  mortgage  loans.    The  core  profitability  of  the  Society  remains  very  strong,  due  to  a  combination  of  mortgage  asset  growth  and  successful  management  of  margins.    Profits  from  Bath  Property  Letting  Limited  were  higher  in  2014  than  in  the  previous  year.    The  property  portfolio  managed  by  Bath  Property  Letting  Limited  increased  in  2014  due  to  a  combination  of  improved  organic  growth  and  increased  business  from  the  company’s  ‘let  only’  service.    The  underlying  profitability  of  the  business  continues  to  provide  a  source  of  diversified  income  that  remains  important  to  the  overall  performance  of  the  Group.    In  the  coming  year,  the  Society  expects  to  achieve  similar  growth  in  the  level  of  its  mortgage  assets  to  that  which  it  has  achieved  in  2014.    Unlike  2013  and  2014,  the  Society  does  not  intend  to  fund  the  majority  of  its  planned  growth  in  mortgage  assets  in  2015  from  the  Bank  of  England’s  Funding  for  Lending  Scheme  but  will  instead  rely  on  funding  mortgage  growth  from  current  liquid  resources  and  by  increasing  the  Society’s  base  of  shares  and  deposits  primarily  via  retail  channels  and  from  local  businesses.    It  does  not  expect  to  have  to  seek  any  wholesale  funding  from  the  money  markets.    The  Board  of  Directors  has  conducted  a  recent  review  of  going  concern  which  has  included  a  review  of  funding,  liquidity  and  capital  projections  for  a  four-­‐year  period  after  the  balance  sheet  date.    This  review  indicates  that  the  Society  is  likely  to  generate  sufficient  liquidity  to  fund  expected  mortgage  growth  whilst  maintaining  its  current  high  levels  of  short-­‐term  liquidity  throughout  the  period.    With  the  Society  now  operating  in  an  environment  that  includes  access  to  Bank  of  England  funding  facilities,  the  Board  has  established  a  policy  of  maintaining  the  Society’s  overall  level  of  liquid  resources  above  20%  of  its  total  funding  liabilities.    The  Board  has  stress-­‐tested  its  planned  liquidity  and  capital  positions  over  a  four-­‐year  period  to  31  December  2018  to  ensure  that  adequate  capital  and  liquidity  will  be  available  throughout  this  strategic  period.    The  Board  is  expecting  the  Society’s  net  margin  to  narrow  once  the  economy  starts  to  grow  more  rapidly  and  when  competitors  feel  confident  to  seek  market  share  via  improved  product  pricing.    Despite  the  prospect  of  narrower  margins  and  lower  profitability  in  future  periods,  the  Board  does,  however,  expect  the  Society  to  continue  to  deliver  profits  that  will  remain  relatively  strong  when  compared  in  a  historical  context  and  for  the  Society’s  surplus  of  capital  over  the  PRA’s  Internal  Capital  Guidance  requirement  to  continue  to  grow.    Short  of  the  negative  impacts  on  the  Society’s  liquidity  and  capital  positions  that  might  be  caused  by  major  economic  events  such  as  the  collapse  of  a  major  UK  clearing  bank,  a  ‘run’  on  the  whole  UK  banking  system,  or  the  occurrence  of  massive  unemployment  combined  with  further  very  large  reductions  in  property  values,  the  Board  is  confident  that  the  Society  will  continue  to  have  sufficient  liquidity  and  capital  available  in  future  periods  to  permit  the  delivery  of  the  Society’s  strategic  plan.    The  Board  is  of  the  opinion  that  measures  taken  in  recent  years  by  national  governments  and  central  banks  throughout  the  world  have  made  it  unlikely  that  very  serious  economic  events,  of  the  nature  mentioned,  will  occur.    In  common  with  all  other  banks  and  building  societies,  in  2010  the  Society  incorporated  the  requirements  of  the  Prudential  Regulation  Authority’s  regulations  on  liquidity  risk  management  into  its  operations.    This  has  involved  building  a  substantial  ‘liquidity  asset  buffer’  of  exceptionally  liquid  assets  with  very  strong  institutions  such  as  with  the  Bank  of  England  and  the  UK  Treasury.    As  at  31  December  2014,  the  Society’s  liquidity  asset  buffer  stood  at  £32.5m  (2013:  £25.5m).    Short  of  the  occurrence  of  a  catastrophic  economic  event,  the  Directors  are  satisfied  that  the  Group  has  adequate  resources  to  continue  in  business  for  the  foreseeable  future.    For  this  reason  they  continue  to  adopt  the  going  concern  basis  in  preparing  the  accounts.    Directors    The  following  persons  served  as  Directors  during  the  year:    R  D  Jenkins,  K  A  Gray,  C  W  J  Nott,  D  A  Berresford  ,  C  M  Smyth,  R  Derry-­‐Evans,  D  Stirk  and  A  Cha.    D  Coles  retired  from  the  Board  on  19  

January  2014.    T  J  Fussell  retired  from  the  Board  on  6  June  2014.    C  J  L  Moorsom  retired  from  the  Board  on  31  December  2014.      

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Directors’  Report  (continued)  For  the  year  ended  31  December  2014    Directors  (continued)    In  accordance  with  the  Society’s  rules,  R  D  Jenkins  and  C  M  Smyth  will  retire  from  the  Board  at  the  Annual  General  Meeting.    Being  eligible,  they  offer  themselves  for  re-­‐election.    R  Derry-­‐Evans,  D  Stirk  and  A  Cha  were  all  appointed  on  16  June  2014  and  will  offer  themselves  for  election  at  the  Annual  General  Meeting.    None  of  the  Directors  holds  any  shares  in,  or  debentures  of,  any  connected  undertaking  of  the  Group.    On  behalf  of  the  Board    R  Derry-­‐Evans  Chairman  3  March  2015    

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Report  of  the  Directors  on  Corporate  Governance  For  the  year  ended  31  December  2014    The  Directors  are  committed  to  best  practice  in  Corporate  Governance.    This  report  explains  how  the  Society  applies  the  principles  in  the  UK  Corporate  Governance  Code  issued  by  the  Financial  Reporting  Council  in  2014.    Although  the  Code  does  not  directly  apply  to  Mutual  organisations,  the  Board  has  paid  due  regard  to  the  Code  and  believes  that  the  Society  complies  with  all  the  Code  provisions  and  industry  guidelines,  unless  the  contrary  is  stated.    Code  Principle:  ‘Every  company  should  be  headed  by  an  effective  Board,  which  is  collectively  responsible  for  the  success  of  the  company.’    The  principal  functions  of  the  Board  are  to  provide  leadership  and  challenge;  set  the  Society’s  strategy,  policy  and  internal  limits;  ensure  appropriate  resources  are  available  to  meet  objectives;  ensure  there  are  robust  systems  and  controls  in  place;  ensure  the  Society  operates  within  its  constitution,  regulation  and  legislation;  consider  and  if  appropriate  approve  any  proposed  new  initiatives;  and  review  business  performance  against  objectives.    The  Board  Manual  describes  how  decisions  relating  to  these  matters  are  reserved  for  the  Board.    The  Board  meets  as  often  as  necessary  for  the  proper  conduct  of  business  (usually  monthly).    The  attendance  record  is  detailed  at  Table  1  on  page  14.    The  Board  has  a  minuted  meeting  at  least  once  a  year  without  the  Executive  Directors  being  present  and  at  least  once  a  year  without  the  Chairman  being  present  for  the  whole  meeting.    All  Directors  show  clear  commitment  to  the  future  success  of  the  Society.    Changes  to  the  Society’s  committee  structures  were  introduced  in  June  2014  following  the  appointment  of  three  new  Non-­‐Executive  Directors  and  a  subsequent  review  of  governance  arrangements  by  the  whole  Board.    The  Board  takes  an  interest  in  all  aspects  of  the  business  but  delegates  certain  decisions  and  responsibilities  to  the  following  committees:    Audit  Committee:  Constituted  by  three  Non-­‐Executive  Directors  –  C  W  J  Nott  (Chairman),  D  A  Berresford,  C  M  Smyth  (until  June  2014).      Following  the  appointment  of  new  Directors,  D  Stirk  became  a  member  of  the  Audit  Committee.      Meetings  are  held  at  least  four  times  per  year  and  it  is  normal  for  executives  and  representatives  from  Deloitte  LLP  and  Baker  Tilly  Risk  Advisory  Services    (the  Society’s  external  and  internal  auditors  respectively)  to  attend  by  invitation.    The  Audit  Committee  has  terms  of  reference  that  include  all  aspects  of  audit,  compliance,  risk  and  control  and  the  review  of  changes  to  accounting  standards  that  may  affect  the  Society.    The  committee  approves  internal  audit  monitoring  plans  and  assesses  the  adequacy  of  the  audit  and  compliance  functions.    In  2014,  subsequent  to  the  introduction  of  the  Mortgage  Market  Review,  particular  attention  was  paid  to  the  Society’s  systems  of  procedures  and  controls  for  testing  mortgage  affordability.    Cyber  and  data  security  were  also  particular  areas  of  focus  in  2014,  including  close  monitoring  of  the  Society’s  development  of  enhanced  business  continuity  plans.    The  committee  also  confirmed  the  position  of  the  Society’s  Internal  Auditors  following  Mutual  One’s  purchase  by  Baker  Tilly  and  the  subsequent  change  of  name  to  that  firm.    The  committee  examined  the  adequacy  of  the  Society’s  accounting  provisions  to  cover  loan  losses  and  payments  to  the  FSCS.    The  committee  also  examined  the  risk  from  possible  claims  of  mis-­‐selling  and  the  adequacy  of  customer  redress  provisions.    In  each  of  these  areas  the  committee  was  provided  with  papers  discussing  key  assumptions  and  issues,  and  any  impacts  on  the  accounts.    These  were  reviewed  in  detail  and  discussed  with  the  relevant  Group  staff  and  the  results  of  this  work  were  considered,  together  with  the  results  of  testing  by  the  Auditor.    The  committee  also  considered  whether  the  Annual  Report,  taken  as  a  whole,  is  fair,  balanced  and  understandable  and  provides  the  information  necessary  for  members  to  assess  the  Group’s  performance,  business  model  and  strategy.    The  committee  resolved  to  commend  the  Annual  Report  to  the  Board  for  approval.    Nomination  and  Remuneration  Committee:  Constituted  by  two  Non-­‐Executive  Directors  –  C  W  J  Nott  (Chairman)  and  T  J  Fussell  until  his  retirement  in  June  2014.    R  Derry-­‐Evans  was  appointed  to  the  committee  in  June  2014  and  A  Cha  was  appointed  to  the  committee  in  November  2014.    C  J  L  Moorsom  also  attended  during  2014.    The  Nomination  and  Remuneration  Committee  has  terms  of  reference  that  include  senior  appointments,  remuneration,  directors’  contractual  terms  and  review  of  Board  performance  both  collectively  and  individually.    The  Chief  Executive  attends  meetings  by  invitation  but  none  that  relate  to  his  remuneration.    Credit  Committee:  This  comprised  two  Non-­‐Executive  Directors  until  changes  to  the  Society’s  governance  structure  were  implemented  in  June  2014.    The  changes  saw  the  number  of  Non-­‐Executive  Directors  reduced  to  one  and  the  inclusion  of  all  members  of  the  Senior  Management  Team.      C  W  J  Nott  and  C  Smyth  were  the  participating  Non-­‐Executive  Directors  until  June  2014,  after  which  C  Smyth  continued  as  the  sole  Non-­‐Executive  appointment.      The  Chief  Executive  –  R  D  Jenkins;  Head  of  Mortgages  –  S  Matthews;  Society  Secretary  –  T  Lovell,  and  Senior  Underwriter  –  C  Powell  constituted  the  rest  of  the  committee  until  June  2014  when  they  were  joined  by  Deputy  Chief  Executive  –  K  A  Gray  (Chairman)  and  Head  of  Investments  -­‐  M  Wiltshaw.    The  Credit  Committee  has  terms  of  reference  that  include  maintaining  the  quality  of  the  Society’s  mortgage  book,  oversight  of  the  Society’s  lending  policy  and  underwriting.    The  committee  reviews  quarterly  reports  from  the  Head  of  Mortgages  covering  mortgage  arrears  and  the  volume  and  nature  of  exceptions  to  the  lending  policy.    The  committee  also  approves  new  underwriting  mandates  and  gives  approval  for  certain  loans  as  specified  in  the  Society’s  lending  policy.    Assets  and  Liabilities  Committee  (ALCO):  Until  changes  to  the  Society’s  governance  structure  were  implemented  in  June  2014,  this  committee  was  attended  by  two  Non-­‐Executive  Directors;  D  A  Berresford  and  T  J  Fussell  (until  his  retirement  in  June  2014).    Following  the  governance  changes,  D  Stirk  joined  the  committee  as  the  sole  Non-­‐Executive  Director.      The  Chief  Executive  –  R  D  Jenkins  (Chairman);  Deputy  Chief  Executive  –  K  A  Gray;  Head  of  Mortgages  –  S  Matthews;  Head  of  Investments  –  M  Wiltshaw,  and  Society  Secretary  –  T  Lovell  also  attend  the  committee.    

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Report  of  the  Directors  on  Corporate  Governance  (continued)  For  the  year  ended  31  December  2014    The  Assets  and  Liabilities  Committee  has  terms  of  reference  that  include  financial  risk  management  and  liquidity.    The  committee  reviews  monthly  reports  from  the  Deputy  Chief  Executive  covering  the  ongoing  management  of  interest  rates,  treasury  investment  strategy,  asset  encumbrance  levels,  Funding  for  Lending  Scheme  capacity  and  liquidity  and  hedging.    The  committee  also  recommends  changes  to  the  Society’s  Financial  Risk  Management  Policy  to  the  Board.    Risk  Committee:  Until  the  reorganisation  of  the  Society’s  governance  structure  in  June  2014,  this  committee  was  made  up  of  the  following  Non-­‐Executive  Directors  -­‐  C  Smyth  (Chairman),  D  A  Berresford,  C  W  J  Nott  and  D  Coles  (retired  19  January  2014).    All  Non-­‐Executive  Directors  became  members  of  this  committee  following  the  reorganisation.    The  Chief  Executive  -­‐  R  D  Jenkins,  Deputy  Chief  Executive  -­‐  K  A  Gray  and  Society  Secretary  -­‐  T  Lovell  are  also  members  of  the  committee.    The  committee  focuses  on  delivering  the  Society’s  Risk  Management  Framework  including  reviewing  the  Society’s  risk  register,  its  risk  appetite  statement  and  its  reverse  stress-­‐testing  processes.    The  committee  also  approves  the  Society’s  Recovery  and  Resolution  Plan  on  an  annual  basis.    Conduct  and  Operations  Committee  (formerly  the  Conduct  and  Treating  Customers  Fairly  Committee):  This  committee  was  chaired  by  a  Non-­‐Executive  Director  -­‐  D  Coles,  until  his  retirement  in  January  2014,  thereafter  the  role  of  Chairman  was  filled  by  Chief  Executive  –  R  D  Jenkins.    Following  the  governance  structure  changes  in  June  2014,  A  Cha  was  appointed  as  the  Non-­‐Executive  Director  attendee  and  the  Head  of  Investments  –  M  Wiltshaw  was  appointed  as  Chairman.    The  Deputy  Chief  Executive  –  K  A  Gray,  Head  of  Mortgages  –  S  Matthews  and  the  Society  Secretary  –  T  Lovell  are  also  members  of  the  committee.    The  Risk,  Audit,  and  Nominations  and  Remuneration  Committees  all  report  directly  to  the  Board  of  Directors  whereas  the  ALCO,  Credit  and  Conduct  and  Operations  Committees  all  report  to  the  Risk  Committee.    All  committee  terms  of  reference  are  available  to  members  on  request  from  the  Society  Secretary.    The  Senior  Independent  Director  provides  an  alternative  channel  of  communication  for  directors,  staff  and  members  and  has  responsibility  for  chairing  meetings  of  the  Board  of  Directors  when  the  Society  Chairman’s  performance  is  being  appraised.    The  role  was  performed  by  C  W  J  Nott  until  31  December  2014  until  replaced  by  D  A  Berresford  from  1  January  2015.  The  Society  maintains  liability  insurance  for  all  Board  members.    Board  members  have  access  to  independent  legal  advice.    Code  Principle:  ‘There  should  be  a  clear  division  of  responsibilities  at  the  head  of  the  Society  between  the  running  of  the  Board  and  the  Executive  responsibility  for  the  running  of  the  Society’s  business.    No  individual  should  have  unfettered  powers  of  decision’.    The  offices  of  Chairman  and  Chief  Executive  are  distinct  and  are  held  by  different  people.    The  role  of  each  is  set  out  in  their  terms  of  appointment  and  service  contract  respectively.    The  Chairman  is  responsible  for  leading  the  Board,  communication  with  members  and  ensuring  that  directors  receive  accurate,  timely  and  clear  information.    The  Chairman  is  independent.    The  Chief  Executive  is  responsible  for  managing  the  Society’s  business  within  the  parameters  set  by  the  Board.    Code  Principle:  ‘The  Chairman  is  responsible  for  the  leadership  of  the  Board  and  ensuring  its  effectiveness  on  all  aspects  of  its  role.’    The  Chairman  sets  the  Board  agenda  with  the  Chief  Executive  and  ensures  that  adequate  time  is  available  for  all  discussions.    The  Chairman  promotes  debate  and  challenge  and  ensures  that  there  is  contribution  from  all  members  of  the  Board.      Code  Principle:  ‘As  part  of  their  role  as  members  of  a  unitary  Board,  Non-­‐Executive  Directors  should  constructively  challenge  and  help  develop  proposals  on  strategy.’    Non-­‐Executive  Directors  challenge  all  strategic  proposals  and  propose  amendments  where  this  is  thought  to  be  necessary.    They  regularly  monitor  management’s  progress  in  delivering  the  annual  operating  plan.    Through  the  Nominations  and  Remunerations  Committee  the  Non-­‐Executive  Directors  consider  the  performance  of  the  Executive  Directors,  remuneration  and  succession  planning.    Code  Principle:  ‘The  Board  and  its  committees  should  have  the  appropriate  balance  of  skills,  experience,  independence  and  knowledge  of  the  Society  to  enable  them  to  discharge  their  respective  duties  and  responsibilities  effectively.’    At  the  year-­‐end  the  Board  comprised  two  Executive  Directors  and  seven  Non-­‐Executive  Directors  (including  the  Chairman).    The  Board  is  of  an  appropriate  size,  with  the  necessary  balance  of  skills  and  experience  to  meet  the  business  needs.    Code  Principle:  ‘There  should  be  a  formal,  rigorous  and  transparent  procedure  for  the  appointment  of  new  directors  to  the  Board.’    The  Nomination  and  Remuneration  Committee  considers  the  balance  of  skills  and  experience  on  the  Board  and  the  business  requirements.    Board  composition  and  succession  planning  are  regularly  reviewed.    Appointments  are  made  on  merit,  against  objective  criteria  and  with  due  regard  to  the  benefits  of  diversity  on  the  Board.    As  at  31  December  2014,  the  Board  consisted  of  nine  directors  (2013:  eight)  of  which  two  were  female  (2013:  one).    All  directors  meet  the  tests  of  fitness  and  propriety  laid  down  by  the  regulators  and  all  directors  are  registered  with  the  regulators  as  Approved  Persons  to  fulfil  their  Controlled  Function  as  a  director.    Letters  of  appointment  relating  to  Non-­‐Executive  Directors  are  available  for  inspection  on  request.    

   

13  

Report  of  the  Directors  on  Corporate  Governance  (continued)  For  the  year  ended  31  December  2014    Code  Principle:  ‘All  directors  should  be  able  to  allocate  sufficient  time  to  the  Society  to  discharge  their  responsibilities  effectively.’    The  Chairman’s  job  specification  outlines  the  main  role  of  the  Chairman  with  regard  to  meetings  and  commitment.    The  commitment  of  Directors  is  assessed  through  annual  appraisal  with  the  Chairman.    Code  Principle:  ‘All  directors  should  receive  induction  on  joining  the  Board  and  should  regularly  update  and  refresh  their  skills  and  knowledge.’    New  directors  receive  induction  training  including:  the  nature  of  building  societies,  responsibilities  and  duties,  interpretation  of  management  information,  the  Society’s  business  and  local  market,  overview  of  regulatory  requirements  and  significant  issues  for  the  industry.    Training  is  provided  to  the  Board  via  management  and  external  courses.    Training  and  development  needs  are  identified  during  appraisals.    Code  Provision:  ‘The  Board  should  be  supplied  in  a  timely  manner  with  information  in  a  form  and  of  a  quality  appropriate  to  enable  it  to  discharge  its  duties.’    The  Chairman  ensures  that  the  Board  receives  information  in  a  timely  way  which  is  sufficient  to  enable  it  to  fulfil  its  responsibilities.    Code  Principle:  ‘The  Board  should  undertake  a  formal  and  rigorous  annual  evaluation  of  its  own  performance  and  that  of  its  Committees  and  individual  Directors.’    The  Chairman  follows  a  formal  annual  appraisal  process  for  all  Directors.    The  Senior  Independent  Director  evaluates  the  Chairman,  taking  into  account  the  views  of  other  directors.    The  Nomination  and  Remuneration  Committee  reviews  the  findings  of  these  appraisals.    The  Board  formally  considers  its  overall  performance  and  that  of  the  committees  on  an  annual  basis  and  performance  is  also  discussed  at  a  meeting  of  the  Non-­‐Executive  Directors  which  is  normally  held  in  August.    Code  Principle:  ‘All  directors  should  be  submitted  for  re-­‐election  at  regular  intervals,  subject  to  continued  satisfactory  performance.’    All  directors  are  submitted  for  election  at  the  Annual  General  Meeting  (AGM)  following  their  first  appointment  to  the  Board.    If  any  director  has  served  for  more  than  nine  years  or  is  70  years  or  older,  they  will  be  submitted  for  re-­‐election  annually  at  the  AGM.    One  third  of  directors  retire  by  rotation  and  apply  for  re-­‐election  at  the  AGM.    Directors  are  only  submitted  for  re-­‐election  if  the  appraisal  confirms  their  ongoing  contribution  and  the  Nomination  and  Remuneration  Committee  recommends  re-­‐election  based  on  the  specialist  knowledge,  skills,  experience  and  independence  of  character  of  the  individual  director.    Code  Principle:  ‘The  Board  should  present  a  balanced  and  understandable  assessment  of  the  company’s  position  and  prospects.’    The  responsibilities  of  the  directors  in  relation  to  the  preparation  of  the  Society’s  accounts  and  the  statement  that  the  Society’s  business  is  a  going  concern  are  contained  in  the  Directors’  Report  on  pages  8  to  10.    Code  Principle:  ‘The  Board  is  responsible  for  determining  the  nature  and  extent  of  the  significant  risks  it  is  willing  to  take  in  achieving  its  strategic  objectives.    The  Board  should  maintain  sound  risk  management  and  internal  control  systems.’    The  Board  is  responsible  for  determining  appropriate  strategies  for  risk  management  and  control.    The  Board  recognises  compliance  as  a  key  part  of  the  business  and  the  Internal  Auditor  provides  independent  and  objective  assurance  that  processes  are  appropriate  and  effectively  applied.    The  Society  Secretary  is  responsible  for  risk  control  and  provides  guidance  to  the  Board  on  this  matter.    The  Board  reviews  key  documents  at  least  annually.    These  include  the  Lending  Policy,  Mortgage  Forbearance  and  Arrears  Policy,  Financial  Risk  Management  Policy;  the  Risk  Management  Framework  (reflecting  the  Board’s  risk  appetite);  Corporate  Strategy;  the  Internal  Capital  Adequacy  Assessment  Process  (ICAAP);  the  Internal  Liquidity  Systems  Assessment  (ILSA);  the  Board  Manual.    The  risk  register  element  of  the  Risk  Management  Framework  is  subject  to  ongoing  review  by  the  Board  Committees  and  has  been  updated  during  the  year  to  ensure  the  Board  is  satisfied  that  all  significant  risks  are  documented  in  a  system  of  controls,  which  continues  to  be  effective  and  appropriate  to  the  nature,  scale  and  complexity  of  the  Society’s  business  in  the  current  environment.    Management  takes  responsibility  for  operating  within  the  control  framework.    The  register  reflects  the  risk  categories  used  in  the  Capital  Requirement  Directives,  for  example,  credit  risk  (risk  that  a  customer  or  counterparty  will  fail  to  meet  their  obligations  to  the  Society  as  they  fall  due);  operational  risk  (risk  of  a  loss  arising  from  inadequate  or  failed  internal  processes  or  systems,  human  error  or  external  events);  business  risk  (risk  that  the  Society  fails  to  meet  the  demands  of  its  members  as  a  whole);  and  liquidity  risk  (risk  that  the  Society  is  not  able  to  meet  its  financial  obligations  as  they  fall  due,  or  can  do  so  only  at  excessive  cost).    Key  controls  include  segregation  of  duties  and  monitoring/reporting  against  Board  approved  limits.    Code  Principle:  ‘The  Board  should  establish  formal  and  transparent  arrangements  for  considering  how  it  would  apply  the  corporate  reporting  and  risk  management  and  internal  control,  and  for  maintaining  an  appropriate  relationship  with  the  Society’s  auditor.’    The  Board  is  satisfied  that  the  Audit  Committee  includes  members  who  have  adequate,  recent  and  relevant  financial  experience.    The  Society  Chairman  is  not  a  member  of  the  Audit  Committee.    The  Audit  Committee  meets  with  the  auditor,  without  the  Executives  present,  after  each  meeting.    Minutes  of  Committee  meetings  are  distributed  to  all  Board  members  and  the  Chairman  of  the  Audit  Committee  reports  to  the  Board.    The  main  Audit  Committee  responsibilities  are  described  on  page  11.  

14  

Report  of  the  Directors  on  Corporate  Governance  (continued)  For  the  year  ended  31  December  2014    Deloitte  LLP  has  served  three  years  of  an  extended  five  year  contract.    Deloitte  LLP  has  been  the  Society’s  auditor  for  a  total  of  10  years.    The  firm  was  re-­‐engaged  as  auditor  in  2012  following  a  rigorous  tender  process  at  which  its  pitch  for  the  audit  was  selected  from  those  of  other  leading  audit  firms  due  to  it  being  considered  as  offering  the  best  and  most  cost-­‐effective  service  to  the  Society.    The  Audit  Committee  operates  a  policy  of  retendering  the  audit  contract  a  minimum  of  once  every  five  years.    In  2014,  the  Audit  Committee  approved  the  appointment  of  the  auditor  for  the  following  non-­‐audit  engagements:  £5,000  for  tax  advisory  work  (2013:  £5,000),  £5,000  for  work  re  the  Society’s  participation  in  the  Funding  for  Lending  Scheme  (2013:  £9,600),  £11,000  for  consultancy  on  fair  value  adjustments  for  inclusion  in  the  Society’s  Recovery  and  Resolution  Plan  and  £2,000  for  other  consultancy  work  (2013:  £2,000).    The  Audit  Committee  conducts  a  formal  annual  review  of  the  level  and  split  of  total  fees  to  the  auditor  and  it  assesses  whether  auditor  independence  is  being  maintained.    Following  the  last  annual  review,  the  Audit  Committee  considered  that  independence,  effectiveness  and  objectivity  were  not  being  compromised  by  current  arrangements.    The  Audit  Committee  reviews  the  effectiveness  of  the  audit  arrangements,  the  performance  of  the  auditor,  and  the  performance  of  the  internal  audit  function  after  completion  of  each  annual  cycle.    The  Audit  Chairman  also  liaises  closely  with  the  Chief  Executive,  Finance  Director  and  the  Head  of  Compliance  to  assess  relationships  and  operational  working  practices.    The  ongoing  effectiveness  of  the  audit  process  is  considered  by  the  Audit  Committee  by  way  of  a  formal  review  of  the  Annual  Audit  Plan  and  by  review  of  interim  reports  to  the  Committee.    The  Audit  Committee  assesses  its  own  effectiveness  by  formally  assessing  the  results  from  an  annual  Audit  Effectiveness  Questionnaire  that  is  completed  by  all  participants.    Code  Principle:  ‘There  should  be  a  dialogue  with  shareholders  based  on  the  mutual  understanding  of  objectives.    The  Board  as  a  whole  has  responsibility  for  ensuring  that  a  satisfactory  dialogue  with  shareholders  takes  place.’    As  a  mutual  organisation,  the  Society  has  a  membership  composed  of  individual  customers.    The  Society  proactively  seeks  the  views  of  customers  via  questionnaires  and  requests  for  member  feedback.    All  such  feedback  is  considered  at  the  Conduct  and  Operations  Committee  and  contributes  to  the  Society’s  drive  to  improve  outcomes  for  its  customers.    The  Society  is  seeking  ways  to  increase  this  dialogue  in  the  future.    Code  Principle:  ‘The  Board  should  use  the  AGM  to  communicate  with  investors  and  to  encourage  their  participation.’    Each  year  the  Society  sends  details  of  the  AGM,  including  the  election  of  the  directors,  to  all  members  eligible  to  vote.    Members  are  encouraged  to  exercise  their  right  to  vote  and  are  sent  forms  enabling  them  to  appoint  a  proxy  to  vote  for  them  if  they  cannot  attend  the  AGM.    At  the  AGM  a  presentation  is  given  by  the  Society  Chairman  and  Chief  Executive  covering  the  Society’s  performance  and  current  issues.    A  poll  is  called  in  relation  to  each  resolution  at  the  AGM,  enabling  all  proxy  votes  to  count.    A  scrutineer  oversees  the  counting  of  votes  at  the  AGM.    Members  of  the  Board  are  present  at  the  AGM  and  are  available  to  answer  questions  from  the  membership.    Table  1:  Attendance  Record    

Director   Full  Board   Risk   Audit   Credit   ALCO  

Conduct  and  

Operations  

Nomination  and  

Remuneration  

C  J  L  Moorsom  (Chairman)   10/10   2/2       1/1     3/3  T  J  Fussell  (Vice  Chairman)  –  (retired  6  June  2014)   4/5   1/1       1/2     1/1  D  A  Berresford  (Vice  Chairman  as  from  16  June  2014)   10/10   3/3   4/4     2/2      C  W  J  Nott  (Audit  Committee  Chairman)   9/10   2/3   4/4         3/3  C  M  Smyth  (Risk  Committee  Chairman)   10/10   3/3   2/2   4/4        

R  Derry-­‐Evans  (appointed  16  June  2014)  (Chairman  as  from  1  January  2015)   5/5   2/2            D  Stirk  (appointed  16  June  2014)   5/5   2/2   2/2     2/2      A  Cha  (appointed  16  June  2014)   4/5   1/2         2/2    R  D  Jenkins  (Chief  Executive)   10/10   3/3   4/4   4/4   4/4   4/4    K  A  Gray  (Deputy  CEO  and  Finance  Director)   10/10   3/3   3/3   1/1   4/4   2/2      (Number  of  meeting  commitments  actually  attended  /  number  of  meeting  commitments)    On  behalf  of  the  Board    R  Derry-­‐Evans  Chairman    3  March  2015

15  

Report  of  the  Directors  on  Remuneration  For  the  year  ended  31  December  2014    Unaudited  information    The  following  Report  of  the  Directors  on  Remuneration  will  be  put  to  an  advisory  vote  of  the  members  at  the  forthcoming  Annual  General  Meeting.    The  Board  is  committed  to  best  practice  in  its  remuneration  policy  for  directors.    This  report  explains  how  the  Society  applies  the  principles  in  the  UK  Corporate  Governance  Code  relating  to  remuneration.    The  Society  complies  with  the  code  provisions  as  far  as  they  are  applicable  to  a  mutual  organisation  unless  the  contrary  is  stated.    Level  and  components  of  remuneration      Code  Principle:  ‘Executive  Director  remuneration  should  be  designed  to  promote  the  long-­‐term  success  of  the  company.    Performance  related  elements  should  be  transparent,  stretching  and  rigorously  applied.’    

The  Society’s  remuneration  policy  is  to  reward  directors  through  salary  according  to  their  expertise,  experience  and  contribution.    The  Society  also  carries  out  benchmarking  against  other  comparable  organisations.    Executive  Directors’  emoluments    The  remuneration  arrangements  for  Executive  Directors  consist  only  of  basic  salary,  annual  bonus,  pension  and  other  benefits.    The  Executive  Directors  do  not  hold  outside  directorships  that  provide  an  income  for  the  benefit  of  themselves.    The  Nomination  and  Remuneration  Committee  designs  the  Executive  Directors’  bonus  scheme  to  align  the  interests  of  Executive  Directors  with  the  interests  of  members  and  provide  incentives  that  recognise  corporate  and  personal  performance.    If  a  range  of  challenging  personal  and  operational  targets  is  achieved,  R  D  Jenkins  and  K  A  Gray  can  achieve  a  bonus  of  10%  of  basic  salary.    The  Committee  has  the  discretion  to  reward  the  Executive  Directors  with  an  additional  bonus  element  equivalent  to  a  maximum  of  5%  of  basic  salary  if  exceptional  performance  is  deemed  to  be  delivered.    The  Executive  Directors  benefit  from  a  pension  scheme  whereby  the  Society  contributes  12%  of  basic  salary  per  annum  to  a  money  purchase  scheme.    In  lieu  of  his  entitlement  to  pension  contributions,  from  1  April  2014  R  D  Jenkins  opted  to  receive  a  cash  equivalent  sum  at  no  extra  gross  cost  to  the  Society.    The  Society  operates  no  final  salary  pension  arrangements.    Executive  Directors  receive  other  taxable  benefits  including  a  car.    The  aggregate  amount  of  these  benefits  is  included  in  Table  2.    Executive  Directors’  contractual  terms    Each  Executive  Director  has  a  service  contract  with  the  Society,  terminable  by  either  party  giving  six  months’  notice.    Non-­‐Executive  Directors    The  level  of  fees  payable  to  Non-­‐Executive  Directors  is  assessed  by  the  Nomination  and  Remuneration  Committee  using  information  from  comparable  organisations.    These  fees  are  not  pensionable.    Non-­‐Executive  Directors  do  not  participate  in  any  bonus  schemes  and  they  do  not  receive  any  other  benefits.    Details  of  Non-­‐Executive  Directors’  emoluments  are  set  out  in  Table  3.    The  terms  of  appointment  letter  for  each  Non-­‐Executive  Director  specifies  that  either  party  giving  one  month’s  notice  may  terminate  the  agreement.    Procedure  for  determining  remuneration    Code  Principle:  ‘There  should  be  a  formal  and  transparent  procedure  for  developing  policy  on  Executive  remuneration  and  for  fixing  the  remuneration  packages  of  individual  Directors.    No  Director  should  be  involved  in  deciding  his  or  her  own  remuneration.’    C  W  J  Nott,  R  Derry-­‐Evans  and  A  Cha  constitute  the  Nomination  and  Remuneration  Committee.    It  is  responsible  for  setting  Executive  Director  remuneration.    In  view  of  the  increasing  responsibilities  and  work  load  of  Non-­‐Executive  Directors,  the  Committee  approved  a  6%  rise  for  2015.    The  Nomination  and  Remuneration  Committee  normally  reviews  basic  salaries,  annually,  by  reference  to  jobs  carrying  similar  responsibilities  in  comparable  organisations  and  local  market  conditions  generally.    

16  

Report  of  the  Directors  on  Remuneration  (continued)  For  the  year  ended  31  December  2014      Audited  information    Table  2:  Executive  Directors’  Emoluments    

  Basic  salary    

Salary  in  lieu  of  pension  contributions  

Annual  bonus   Benefits  

Pension  contributions  

TOTAL  2014  

2014   £   £   £   £   £   £  R  D  Jenkins   128,500   11,424   16,900   7,844   2,420   167,088  K  A  Gray   98,833   -­‐   13,000   7,785   11,860   131,478  TOTALS  2014   227,333   11,424   29,900   15,629   14,280   298,566    

  Basic  salary  

Salary  in  lieu  of  pension  contributions  

Annual  bonus   Benefits  

Pension  contributions  

TOTAL  2013  

2013   £   £   £   £   £   £  R  D  Jenkins   111,767   -­‐   20,272   7,484   13,412   152,935  K  A  Gray   85,767   -­‐   11,868   6,428   10,292   114,355  TOTALS  2013   197,534   -­‐   32,140   13,912   23,704   267,290    Table  3:  Non-­‐Executive  Directors’  Emoluments  (comprising  fees  only)    

 2014  £  

2013  £  

C  J  L  Moorsom  (Society  Chairman  until  retirement  31  December  2014)   30,381   29,640  T  J  Fussell  (Society  Vice-­‐Chairman  until  retirement  6  June  2014)   11,119   20,931  C  W  J  Nott  (Audit  Committee  Chairman)   21,122   20,607  D  A  Berresford   21,122   20,607  D  Coles  (retired  19  January  2014)              874   21,631  C  M  Smyth  (Risk  Committee  Chairman,  Society  Vice-­‐Chairman  as  from  1  January  2015)   21,122   20,607  A  Cha  (appointed  16  June  2014)   12,346   -­‐  R  Derry-­‐Evans  (appointed  16  June  2014,  Society  Chairman  as  from  1  January  2015)   14,816   -­‐  D  Stirk  (appointed  16  June  2014)   12,346   -­‐  A  Harris  (retired  25  April  2013)   -­‐   6,629  TOTALS   145,248   140,652      On  behalf  of  the  Nomination  and  Remuneration  Committee            R  Derry-­‐Evans  Society  Chairman    3  March  2015                          

17  

 Independent  auditor’s  report  to  the  members  of  Bath  Investment  &  Building  Society  

 

Opinion  on  financial  statements  of  Bath  Investment  &  Building  Society  

In  our  opinion  the  financial  statements:  

• give  a  true  and  fair  view,  in  accordance  with  United  Kingdom  Generally  Accepted  Accounting  Practice,  of  the  state  of  the  Group’s  and  the  Society’s  affairs  as  at  31  December  2014  and  of  the  Group’s  and  the  Society’s  income  and  expenditure  for  the  year  then  ended;  and  

• have  been  prepared  in  accordance  with  the  requirements  of  the  Building  Societies  Act  1986.  

The  financial  statements  comprise  Group  and  Society  Income  and  Expenditure  Accounts,  Group  and  Society  Balance  Sheets,  the  Group  Cash  Flow  Statement,  the  Group  and  Society  Statement  of  Total  Recognised  Gains  and  Losses  and  the  related  notes  1  to  25.    The  financial  reporting  framework  that  has  been  applied  in  their  preparation  is  applicable  law  and  United  Kingdom  Accounting  Standards  (United  Kingdom  Generally  Accepted  Accounting  Practice).  

 

Going  concern   We  have  reviewed  the  directors’  statement  contained  within  the  Directors’  Report  on  page  9  that  the  group  is  a  going  concern.  We  confirm  that:  

• we  have  concluded  that  the  directors’  use  of  the  going  concern  basis  of  accounting  in  the  preparation  of  the  financial  statements  is  appropriate;  and  

• we  have  not  identified  any  material  uncertainties  that  may  cast  significant  doubt  on  the  group’s  ability  to  continue  as  a  going  concern.  

However,  because  not  all  future  events  or  conditions  can  be  predicted,  this  statement  is  not  a  guarantee  as  to  the  group’s  ability  to  continue  as  a  going  concern.  

 

Our  assessment  of  risks  of  material  misstatement  

The  assessed  risks  of  material  misstatement  described  below  are  those  that  had  the  greatest  effect  on  our  audit  strategy,  the  allocation  of  resources  in  the  audit  and  directing  the  efforts  of  the  engagement  team.  For  all  assessed  risks  described  below,  we  tested  the  design  and  implementation  of  the  associated  key  controls  identified.  

 Risk   How  the  scope  of  our  audit  responded  to  the  risk  Loan  loss  provisions    The  Group  holds  £1.6  million  of  impairment  provisions  at  year-­‐end  (2013:  £1.8  million)  against  total  loans  and  advances  to  customers  of  £220.5  million  (2013:  £212.0  million).    Determining  impairment  provisions  against  loans  to  customers  is  a  judgemental  area  requiring  an  estimate  to  be  made  of  the  incurred  loss  within  the  residential  mortgage  and  commercial  lending  portfolios.  This  requires  the  estimation  of  customer  default  rates,  property  values,  sales  costs,  forced  sale  discounts,  likelihood  of  repossession,  and  potential  impairment  indicators  all  of  which  may  be  sensitive  to  changes  in  the  economic  environment.    Loan  loss  provision  balances  are  detailed  within  Notes  9  and  12.    Management’s  associated  accounting  policies  are  detailed  on  page  25.  

   We  challenged  the  appropriateness  of  management’s  key  assumptions  used  in  the  impairment  calculations  for  loans  and  receivables,  including  the  impairment  trigger  point,  the  estimation  of  property  values,  sales  costs,  forced  sale  discounts  and  the  likelihood  of  repossession.    This  was  achieved  through:  benchmarking  against  internal  and  external  data,  undertaking  sensitivity  analysis,  review  of  credit  committee  minutes  and  case  files  and  comparing  historical  levels  of  write-­‐offs  to  provisions.    We  involved  our  IT  specialists  to  test  the  accuracy  of  the  provisioning  models  through  independent  re-­‐calculation  in  accordance  with  the  approved  provisioning  policy  and  at  the  same  time  assessed  the  completeness  and  accuracy  of  data  used  by  the  models.  

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Independent  auditor’s  report  to  the  members  of  Bath  Investment  &  Building  Society  (continued)  

Our  assessment  of  risks  of  material  misstatement  (continued)    Risk   How  the  scope  of  our  audit  responded  to  the  risk  Revenue  recognition    We  have  identified  the  key  risk  as  being  the  accurate  calculation  of  fees  and  commissions  on  new  mortgage  products  because  it  involves  a  manual  process.    The  Group  received  £0.5  million  (2013:  £0.5  million)  of  fees  and  commissions  during  the  year.        Management’s  associated  accounting  policies  are  detailed  on  page  26.  

   We  performed  testing  of  management’s  design  and  implementation  of  controls  over  appropriate  calculation  of  fees  and  commissions  and  also  tested  the  accuracy  of  a  sample  of  fees  by  agreement  to  original  mortgage  contracts.    We  involved  our  IT  specialists  to  independently  assess  the  completeness  of  the  fees  recognised.  

Financial  Services  Compensation  Scheme  levy    The   Group   holds   a   provision   for   the   Financial   Services  Compensation   Scheme   (“FSCS”)   levy   of   £0.1  million   at   year-­‐end  (2013:  £0.1  million).  Accounting  for  the   levy   is  reliant  on  data   extracted   from   the   core   savings   system   and   involves  making   assumptions   regarding   the  Group’s   share   of   industry  protected   deposits.   There   is   also   uncertainty   regarding   the  extent  to  which  additional  levies  will  be  raised  to  cover  future  capital   shortfalls   on   the   loans   to  HM  Treasury   and   therefore  the  extent  of   any   contingent   liabilities   to  be  disclosed   in   the  financial  statements.    Management’s  associated  accounting  policies  are  detailed  on  page  33.    Details  of  the  provision  are  included  in  Note  19  with  details  of  the  contingent  liability  in  Note  24a.  

   We  challenged  the  accuracy  and  completeness  of  the  provision  for  the  FSCS  levy  by  performing  an  independent  calculation  of  the  amount  based  on  latest  information  published  by  the  FSCS  and  internal  data  from  the  core  savings  system.  In  respect  of  the  deposit  balances  guaranteed  by  the  FSCS  we  have  tested  this  balance  through  extraction  of  data  from  the  core  savings  system  with  the  support  of  our  IT  specialists.    We  also  assessed  and  benchmarked  the  contingent  liability  disclosure  in  the  annual  report.  

 

19  

Independent  auditor’s  report  to  the  members  of  Bath  Investment  &  Building  Society  (continued)  Our  assessment  of  risks  of  material  misstatement  (continued)    Risk   How  the  scope  of  our  audit  responded  to  the  risk  Funding  for  lending  scheme    The  accounting  treatment  for  the  Group’s  participation  in  the  Funding  for  Lending  Scheme  requires  a  skilled  input  and  oversight  by  management  and  thorough  understanding  of  the  terms  of  the  transaction  to  ensure  appropriate  recognition,  derecognition  and  fair  value  measurement  of  associated  assets  and  liabilities.    Further  detail  about  the  Scheme  and  encumbrance  levels  are  noted  on  page  2  and  25.  

   We  challenged  management’s  accounting  treatment  including  verification  to  supporting  documentation  including  original  contracts  and  statements  from  the  Bank  of  England.    We  also  reviewed  and  benchmarked  the  disclosure  of  such  transactions  in  the  annual  report  including  disclosed  levels  of  encumbrance.      

Valuation  of  Derivatives  

As  described  in  Note  25,  the  Society  uses  interest  rate  derivatives  to  economically  hedge  net  interest  rate  risks  arising  from  issuance  of  fixed  interest  rate  products.    The  accounting  framework  applied  requires  the  fair  value  of  such  derivatives  to  be  disclosed  rather  than  recognised  on  the  balance  sheet.    The  valuation  of  derivatives  disclosed  in  Note  25  to  the  financial  statements  requires  significant  judgement  to  determine  appropriate  inputs.    Such  inputs  include  quoted  market  prices,  but  where  these  are  not  available,  inputs  such  as  interest  rates,  volatility,  exchange  rates,  counterparty  credit  ratings  and  valuation  adjustments.  There  is  a  risk  that  appropriate  consideration  and  calculation  methodologies  are  not  applied  resulting  in  incorrect  valuations  of  the  swaps.    The  fair  value  of  derivatives  totalled  £60k  liability  at  the  year-­‐end  (2013:  £121k  liability).  

 

We  assessed  the  appropriateness  of  valuation  techniques  as  set  out  on  page  26  used  to  calculate  the  fair  values  of  derivatives.    We  also  used  our  financial  instrument  specialists  to  independently  recalculate  a  sample  of  valuations.  

 

  The  description  of  risks  above  should  be  read  in  conjunction  with  the  significant  issues  considered  by  the  Audit  Committee  discussed  on  page  11.  

Our  audit  procedures  relating  to  these  matters  were  designed  in  the  context  of  our  audit  of  the  financial  statements  as  a  whole,  and  not  to  express  an  opinion  on  individual  accounts  or  disclosures.  Our  opinion  on  the  financial  statements  is  not  modified  with  respect  to  any  of  the  risks  described  above,  and  we  do  not  express  an  opinion  on  these  individual  matters.  

   Our  application  of  materiality  

We  define  materiality  as  the  magnitude  of  misstatement  in  the  financial  statements  that  makes  it  probable  that  the  economic  decisions  of  a  reasonably  knowledgeable  person  would  be  changed  or  influenced.  We  use  materiality  both  in  planning  the  scope  of  our  audit  work  and  in  evaluating  the  results  of  our  work.    The  accumulation  of  profits  is  critical  to  maintaining  and  building  capital  for  regulatory  purposes  and  allowing  the  Group  to  invest  in  activities  for  its  members.    We  have  therefore  selected  profit  before  tax  as  the  benchmark  for  determining  materiality.    We  have  determined  materiality  by  applying  5.0%  of  this  benchmark.  The  reduction  from  7.5%  in  the  prior  year  has  not  impacted  the  way  in  which  we  assess  the  significant  risk  areas.  We  have  changed  the  percentage  applied  to  align  more  closely  with  other  comparable  societies.    We  determined  planning  materiality  for  the  Group  to  be  £182,000  (2013:  £206,000)  which  represents  0.07%  of  total  Group  assets  (2013:  0.08%).    This  was  determined  on  the  basis  of  profit  before  tax.    We  agreed  with  the  Audit  Committee  that  we  would  report  to  the  committee  all  audit  differences  in  excess  of  £3,200  (2013:  £3,200),  as  well  as  differences  below  that  threshold  that,  in  our  view,  warranted  reporting  on  qualitative  grounds.  We  also  report  to  the  Audit  Committee  on  disclosure  matters  that  we  identified  when  assessing  the  overall  presentation  of  the  financial  statements.  

20  

Independent  auditor’s  report  to  the  members  of  Bath  Investment  &  Building  Society  (continued)  

 

An  overview  of  the  scope  of  our  audit  

As  in  the  prior  year,  our  group  audit  scope  involved  performing  full  audits  on  the  Group’s  parent  and  main  subsidiaries  which  accounted  for  more  than  99%  of  the  Group’s  net  assets  and  profit  before  tax.  These  audits  were  performed  directly  by  the  group  audit  team  and  executed  at  levels  of  materiality  applicable  to  each  individual  entity  which  were  lower  than  group  materiality  and  ranged  from  £18,125  to  £182,000.        At  the  parent  entity  level  we  also  tested  the  consolidation  process  and  carried  out  analytical  procedures  to  confirm  our  conclusion  that  there  were  no  significant  risks  of  material  misstatement  of  the  aggregated  financial  information  of  the  remaining  subsidiaries  not  subject  to  audit  or  audit  of  specified  account  balances.  

Independent  auditor’s  report  to  the  members  of  Bath  Investment  &  Building  Society  (continued)  

 

Opinion  on  other  matters  prescribed  by  the  Building  Societies  Act  1986  

In  our  opinion:    

• the  Annual  Business  Statement  and  the  Directors’  Report  have  been  prepared  in  accordance  with  the  requirements  of  the  Building  Societies  Act  1986;  

 • the  information  given  in  the  Directors’  Report  for  the  financial  year  for  which  the  financial  

statements  are  prepared  is  consistent  with  the  accounting  records  and  the  financial  statements;  and  

 • the  information  given  in  the  Annual  Business  Statement  (other  than  the  information  upon  

which  we  are  not  required  to  report)  gives  a  true  representation  of  the  matters  in  respect  of  which  it  is  given.  

 

Opinion  on  other  matters  prescribed  by  the  Capital  Requirements  (Country-­‐by-­‐Country  Reporting)  Regulations  2013  

In  our  opinion  the  information  given  on  page  5  for  the  financial  year  ended  31  December  2014  has  been  properly  prepared,  in  all  material  respects,  in  accordance  with  the  Capital  Requirements  (Country-­‐by-­‐Country  Reporting)  Regulations  2013.  

 

Matters  on  which  we  are  required  to  report  by  exception  

 

 

Adequacy  of  explanations  received  and  accounting  records  

Under  the  Building  Societies  Act  1986  we  are  required  to  report  to  you  if,  in  our  opinion:  

• proper  accounting  records  have  not  been  kept  by  the  Society;  or    • the  Society  financial  statements  are  not  in  agreement  with  the  accounting  records;  or    • we  have  not  received  all  the  information  and  explanations  and  access  to  documents  we  require  

for  our  audit.  We  have  nothing  to  report  in  respect  of  these  matters.  

 

Our  duty  to  read  other  information  in  the  Annual  Report  

Under  International  Standards  on  Auditing  (UK  and  Ireland),  we  are  required  to  report  to  you  if,  in  our  opinion,  information  in  the  annual  report  is:  

• materially  inconsistent  with  the  information  in  the  audited  financial  statements;  or  

• apparently  materially  incorrect  based  on,  or  materially  inconsistent  with,  our  knowledge  of  the  group  acquired  in  the  course  of  performing  our  audit;  or  

• otherwise  misleading.  In  particular,  we  are  required  to  consider  whether  we  have  identified  any  inconsistencies  between  our  knowledge  acquired  during  the  audit  and  the  directors’  statement  that  they  consider  the  annual  report  is  fair,  balanced  and  understandable  and  whether  the  annual  report  appropriately  discloses  those  matters  that  we  communicated  to  the  audit  committee  which  we  consider  should  have  been  disclosed.    We  confirm  that  we  have  not  identified  any  such  inconsistencies  or  misleading  statements.  

21  

Independent  auditor’s  report  to  the  members  of  Bath  Investment  &  Building  Society  (continued)    

Respective  responsibilities  of  directors  and  auditor  

As  explained  more  fully  in  the  Directors’  Responsibilities  Statement,  the  directors  are  responsible  for  the  preparation  of  financial  statements  which  give  a  true  and  fair  view.    Our  responsibility  is  to  audit  and  express  an  opinion  on  the  financial  statements  in  accordance  with  applicable  law  and  International  Standards  on  Auditing  (UK  and  Ireland).    Those  standards  require  us  to  comply  with  the  Auditing  Practices  Board’s  Ethical  Standards  for  Auditors.  We  also  comply  with  International  Standard  on  Quality  Control  1  (UK  and  Ireland).  Our  audit  methodology  and  tools  aim  to  ensure  that  our  quality  control  procedures  are  effective,  understood  and  applied.  Our  quality  controls  and  systems  include  our  dedicated  professional  standards  review  team  and  independent  partner  reviews.    

This  report  is  made  solely  to  the  Society’s  members,  as  a  body,  in  accordance  with  section  78  of  the  Building  Societies  Act  1986.    Our  audit  work  has  been  undertaken  so  that  we  might  state  to  the  Society’s  members  those  matters  we  are  required  to  state  to  them  in  an  auditor’s  report  and  for  no  other  purpose.    To  the  fullest  extent  permitted  by  law,  we  do  not  accept  or  assume  responsibility  to  anyone  other  than  the  Society  or  the  Society’s  members  as  a  body,  for  our  audit  work,  for  this  report,  or  for  the  opinions  we  have  formed.  

 

Scope  of  the  audit  of  the  financial  statements  

An  audit  involves  obtaining  evidence  about  the  amounts  and  disclosures  in  the  financial  statements  sufficient  to  give  reasonable  assurance  that  the  financial  statements  are  free  from  material  misstatement,  whether  caused  by  fraud  or  error.    This  includes  an  assessment  of:  whether  the  accounting  policies  are  appropriate  to  the  Group’s  and  Society’s  circumstances  and  have  been  consistently  applied  and  adequately  disclosed;  the  reasonableness  of  significant  accounting  estimates  made  by  the  directors;  and  the  overall  presentation  of  the  financial  statements.    In  addition,  we  read  all  the  financial  and  non-­‐financial  information  in  the  annual  report  to  identify  material  inconsistencies  with  the  audited  financial  statements  and  to  identify  any  information  that  is  apparently  materially  incorrect  based  on,  or  materially  inconsistent  with,  the  knowledge  acquired  by  us  in  the  course  of  performing  the  audit.    If  we  become  aware  of  any  apparent  material  misstatements  or  inconsistencies  we  consider  the  implications  for  our  report.  

Stephen  Williams  ACA  (Senior  statutory  auditor)  for  and  on  behalf  of  Deloitte  LLP  Chartered  Accountants  and  Statutory  Auditor,    Bristol,  United  Kingdom  4  March  2015                                                                

22  

   

                           

Group SocietyNotes 2014 2013 2014 2013

£000 £000 £000 £000

Interest,receivable,and,similar,income 2, 10,3757 10,348, 10,3757 10,348,Interest,payable,and,similar,charges 3, (3,129) (3,992) (3,129) (3,992)Net7interest7receivable 7,2467 6,356, 7,2467 6,356,

Fees,and,commissions,receivable 5327 496, 117 11,Fees,and,commissions,payable (142) (146) (142) (146)Other,operating,income 4, 2797 330, 2707 322,Total7income 7,9157 7,036, 7,3857 6,543,

Administrative,expenses 5, (3,454) (3,243) (3,110) (2,909)Depreciation,and,amortisation (249) (257) (217) (223)Other,operating,charges (10) (8) (9) (7)Operating7profit7before7provisions 4,2027 3,528, 4,0497 3,404,

Movement,in,provisions,for,bad,and,doubtful,debts 9, (222) (630) (222) (630)Impairment,loss,on,purchased,goodwill,in,subsidiary 14, (3) L, G7 G7Movement,in,provisions,for,liabilities,L,customer,redress 19, (19) L, (19) L,Movement,in,provisions,for,liabilities,L,FSCS,Levy,charge 19,24 (166) (145) (166) (145)

3,7927 2,753, 3,6427 2,629,

Net,(loss)/profit,on,disposal,of,subsidiary 13, (10) L, 257 L,Operating7profit7and7profit7on7ordinary7activities7before7tax 3,7827 2,753, 3,6677 2,629,

Tax,on,profit,on,ordinary,activities 8, (828) (635) (797) (617)Equity,minority,interest 21, (12) (15) G LProfit7for7the7financial7year 20, 2,9427 2,103, 2,8707 2,012,

Notes 2014 2013 2014 2013

£000 £000 £000 £000Profit,for,the,financial,year 2,9427 2,103,,,,,,,, 2,8707 2,012,Unrealised,gain,on,revaluation,of,fixed,assets 20, G7 69,,,,,,,,,,,,, G7 69,,,,,,,,,,,,,

The above results all arise from the Group's principal activities in the United Kingdom. In 2014, the Society disposed of its majority shareholding in Bath & CityFinancial Limited. The operations of this subsidiary company were immaterial to the Group and as such the above consolidated Group results have been statedas,though,they,were,derived,from,continuing,operations.

STATEMENT7OF7TOTAL7RECOGNISED7GAINS7AND7LOSSESSocietyGroup

Total,recognised,gains,relating,to,the,year 2,9427 2,172,,,,,,,, 2,8707777777777777 2,081,,,,,,,,

Notes 2014 2013 2014 2013

£000 £000 £000 £000Profit,for,the,financial,year,before,taxation 3,7827777777777777 2,753,,,,,,,, 3,6677777777777777 2,629,,,,,,,,

NOTE7OF7HISTORICAL7COST7PROFITS7AND7LOSSESGroup Society

Gain,on,fixed,asset,revaluation,written,back,against,revaluation,deficit,of,previous,years,, G7 (65) G7 (65)Depreciation,on,revalued,element,of,fixed,assets 20, 377777777777777777777 9,,,,,,,,,,,,,,, 377777777777777777777 9,,,,,,,,,,,,,,,Historical,cost,profit,for,the,financial,year,before,taxation,and,minority,interest 3,7857 2,697, 3,6707 2,573,

The,notes,on,pages,25,to,36,form,part,of,these,accounts

The above results are all derived from continuing operations. Profit on ordinary activities before tax represents operating profit as defined by FRS3 Reporting Financial Performance.

INCOME7&7EXPENDITURE7ACCOUNTS7FOR7THE7YEAR7ENDED7317DECEMBER720147

23  

 

                               

Group SocietyNotes 2014 2013 2014 2013

£000 £000 £000 £000

ASSETSLiquid9AssetsCash*in*hand 119 145 118 145Balances*with*the*Bank*of*England 13,500 15,000 13,500 15,000Loans*and*advances*to*credit*institutions 10* 41,468 41,668 41,202 41,460Debt*securities*issued*by*other*borrowers 11* 2,010 2,004 2,010 2,004

57,097 58,817 56,830 58,609Loans9and9advances9to9customersLoans*fully*secured*on*residential*property 199,607 189,640 199,607 189,640Loans*fully*secured*on*land 19,245 20,558 19,245 20,558

12* 218,852 210,198 218,852 210,198InvestmentsInvestments*in*subsidiary*undertakings 13* F9 F9 252 253Intangible9fixed9assets 14* 266 289 F9 F9Tangible9fixed9assets 14* 2,834 2,952 2,806 2,930Deferred9tax9asset 15* 49 449 50 42*Prepayments9and9accrued9income 264 241 245 213Total9Assets 279,362 272,541 279,035 272,245

LIABILITIESShares 16* 188,286 188,223 188,286 188,223Amounts9owed9to9other9customers 17* 65,892 62,149 65,994 62,249Other9liabilities 18* 919 871 763 703Accruals9and9deferred9income 192 162 183 148Provisions9for9liabilities 19* 117 100 117 100

255,406 251,505 255,343 251,423

Revaluation9reserve 20* 428 431 428 431General9reserves 20* 23,528 20,583 23,264 20,391Minority9interests 21* F9 22* F9 F9Total9Liabilities 279,362 272,541 279,035 272,245

Approved*by*the*Board*of*Directors*on*3*March*2015*and*signed*on*its*behalf*by:

R*DerryNEvansChairman

C*M*SmythViceNChairman

R*D*JenkinsChief*Executive

The*notes*on*pages*25*to*36*form*part*of*these*accounts

BALANCE9SHEETS9AS9AT9319DECEMBER920149

*

The notes on pages 19to 31 form part of these accounts

24  

 

               

2014 2013£000 £000

Net)cash)outflow)from)operating))activities)(see)below) (3,365) (2,411)Taxation (750) (640)Capital)expenditure))))Purchase)of)fixed)assets (120) (153))))Sale)of)fixed)assets 1- .-Net)(purchase))of)debt)securities (5) .-Decrease)in)cash (4,239) (3,204)

2014 2014 2013 2013£000 £000 £000 £000

Reconciliation-of-operating-profit-to-net-cash---outflow-from-operating-activitiesProfit)on)ordinary)activities)before)tax 3,782- 2,753)Consolidated)profit)from)subsidiary)business)sold)prior)to)year)end (31) .-(Increase)/decrease)in)prepayments)and)accrued)income (37) 30)Increase)in)accruals)and)deferred)income 30- 29Increase/(decrease))in)provisions)for)liabilities 17- (14)Goodwill)impairment) 3- .-Charge)for)provisions)for)bad)and)doubtful)debts 222- 630)Charge)for)provisions)for)suspended)interest)on)impaired)loans 18- 17Depreciation)and)amortisation 249- 257)Net)cash)inflow)from)trading)activities 4,253- 3,702

Net)increase)in)loans)and)advances))to)customers (8,894) (17,426)Net)increase)in)shares 63- 7,324)Net)increase/(decrease))in)amounts)owed)to)other)customers 3,743- (7,091)Net)(increase)/decrease)in)loans)and)advances)to)credit))institutions (2,500) 11,000)Net)(decrease)/increase)in)other)liabilities (30) 80)

(7,618) (6,113)Net)cash)outflow)from)operating)activities (3,365) (2,411)

Reconciliation-of-cash-balances 2013 Cash)flow 2014£000 £000 £000

Cash)in)hand)and)balances)with)the)Bank)of)England 15,145) (1,526) 13,619-Loans)and)advances)to)credit)institutions)))S)repayable)on)demand 39,650) (2,713) 36,937-

54,795) (4,239) 50,556-

The)Society)has)taken)advantage)of)the)exemption)in)FRS1,)“Cash)Flow)Statements”,)which)provides)that)where)an)entity)is)a)member)of)a)group)and)a)Consolidated)Cash)Flow)Statement)is)published,)the)entity)does)not)have)to)prepare)a)Cash)Flow)Statement.

GROUP-CASH-FLOW-STATEMENT-FOR-THE-YEAR-ENDED-31-DECEMBER-2014-

-)

25  

         

1. Accounting+policies

The$Group$balance$sheet$consolidates$the$assets$and$liabilities$of$the$Society$and$its$remaining$subsidiary$undertaking,$Bath$Property$Letting$Limited,$which$also$has$a$31$December$yearAend.$$The$Group$income$and$expenditure$account$consolidates$the$complete$2014$income$and$expenditure$accounts$of$the$Society$and$Bath$Property$Letting$Limited$plus$the$income$and$expenditure$accounts$of$Bath$&$City$Financial$Limited$to$30$November$2014,$after$which$the$Society's$investment$in$this$subsidiary$business$was$disposed$of.$$In$the$Society’s$accounts$the$investments$in$subsidiary$undertakings$are$stated$at$cost,$less$any$provisions$for$impairment.

Tangible+fixed+assetsTangible$fixed$assets$are$stated$at$cost$or$valuation,$less$accumulated$depreciation$and$any$provision$for$impairment.$Depreciation$is$provided$on$all$tangible$fixed$assets,$other$than$freehold$land,$at$rates$calculated$to$write$off$the$cost$or$valuation,$less$estimated$residual$value,$of$each$asset$on$a$straightAline$basis$over$its$useful$life,$as$follows:

25%$per$annum

NOTES+TO+THE+ACCOUNTS

The$following$accounting$policies$have$been$applied$consistently$in$dealing$with$items$which$are$considered$material$in$relation$to$the$accounts.

Basis+of+preparationThe$accounts$are$prepared$under$the$historical$cost$convention$as$modified$by$the$revaluation$of$certain$fixed$assets$and$in$accordance$with$the$Building$Societies$(Accounts$and$Related$Provisions)$Regulations$1998,$and$applicable$United$Kingdom$accounting$standards$issued$by$the$Accounting$Standards$Board.$As$noted$in$the$Directors’$Report$on$page$8,$the$Directors$are$satisfied$that$the$Group$has$adequate$resources$to$continue$in$business$for$the$foreseeable$future.$For$this$reason$they$continue$to$adopt$the$going$concern$basis$in$preparing$the$accounts.$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

FOR+THE+YEAR+ENDED+31+DECEMBER+2014

Basis+of+consolidation

25%$per$annum

Provisions+for+bad+and+doubtful+debtsThe$creation$of$impairment$provisions$for$a$portfolio$of$mortgage$loans$is$inherently$uncertain$and$requires$the$exercise$of$a$significant$degree$of$judgement.$$The$calculation$requires$significant$judgement$to$be$exercised$in$predicting$future$economic$conditions$(e.g.$interest$rates$and$house$prices)$and$customer$behaviour$(e.g.$likelihood$of$default).

Liquid+assets

Specific$provisions$are$made$based$on$calculations$of$the$irrecoverable$amount$of$individual$loans$and$advances$that$are$three$months$or$more$in$arrears$at$the$balance$sheet$date.

16.7%$per$annumSummit$computer$system$implementation$costs

Fixtures$and$fittingsComputer$equipmentMotor$vehicles

10%$A$20%$per$annum

1%$per$annumterm$of$lease

General$provisions$are$made$against$all$loans$that$have$not$been$considered$for$specific$provisions.$$Loans$that$are$fully$secured$on$residential$property$have$provisioning$rates$of$0.25%$or$0.5%$applied$to$the$respective$proportion$of$each$loan$that$is$under$80%$loan$to$value$or$over$80%$loan$to$value.$$Loan$to$values$are$calculated$based$on$estimations$of$current$market$values.$$General$provisions$are$also$made$against$similar$loans$that$are$fully$secured$on$land$using$the$same$basis$but$using$provisioning$rates$of$either$0.5%$or$0.75%.

Provisions$are$made$to$reduce$the$value$of$loans$and$advances$to$the$amount$that$the$Directors$consider$is$likely$to$be$recoverable$based$on$formal$valuations$where$they$are$considered$relevant.$$

Debt$securities$intended$for$use$on$a$continuing$basis$in$the$Society’s$activities$are$classified$as$financial$fixed$assets$and$are$stated$at$cost.$$Premiums$and$discounts$arising$on$the$purchase$of$a$financial$fixed$asset$are$amortised$over$the$period$to$the$maturity$date$of$the$security.$$Any$amounts$so$amortised$are$charged/(credited)$to$the$income$and$expenditure$account$for$the$relevant$financial$years.$$Where$there$is$an$impairment$in$value$of$a$financial$fixed$asset,$a$provision$is$made$to$write$down$the$cost$of$the$security$to$its$recoverable$amount.

Freehold$buildingsLeasehold$improvements

Funding+for+Lending+SchemeThe$Bank$of$England's$Funding$for$Lending$Scheme$takes$the$form$of$a$collateral$swap.$$The$Society$has$pledged$collateral$to$the$Bank$of$England$in$the$form$of$a$pool$of$mortgage$loans$in$exchange$for$collateral$from$the$Bank$of$England$in$the$form$of$UK$Treasury$bills.$$The$Bank$of$England$determines$the$quantity$and$quality$of$loan$collateral$that$must$be$provided$by$the$Society$and$it$can$request$early$repayment$of$its$Treasury$bills$if$sufficient$collateral$is$not$made$available$to$the$bank.$$Until$such$time$as$Treasury$bills$from$the$scheme$are$monetised$by$the$Society,$either$by$outright$sale$or$via$use$of$sale$and$repurchase$agreements,$no$assets$or$liabilities$are$recognised$on$balance$sheet.$$If$Treasury$bills$are$monetised,$the$resulting$cash$assets$are$recognised$on$balance$sheet$together$with$the$corresponding$funding$liabilities.$$As$at$31$December$2014,$the$Society$had$recognised$£nil$(2013:$£nil)$on$balance$sheet$relating$to$the$Funding$for$Lending$Scheme.

A$revaluation$of$individual$freehold$and$leasehold$properties$is$performed$every$five$years$with$an$interim$revaluation$carried$out$in$the$third$year$after$the$full$revaluation.$$Properties$used$in$the$Group$businesses$are$valued$using$an$existing$use$value$basis.$$Properties$that$are$surplus$to$the$Group$businesses$are$valued$using$a$market$value$basis.$$An$annual$impairment$test$is$also$performed$on$tangible$fixed$assets$that$have$an$estimated$remaining$useful$life$exceeding$50$years.$$The$surplus$or$deficit$on$revaluation$is$transferred$to$the$revaluation$reserve,$except$where$a$deficit$is$in$excess$of$any$previously$recognised$surplus$over$depreciated$cost$relating$to$the$same$property,$or$the$reversal$of$such$a$deficit,$when$the$amount$is$charged$(or$credited)$to$the$income$and$expenditure$account.

Intangible+fixed+assetsThe$acquisition$by$Bath$Property$Letting$Limited$of$portfolios$of$property$owning$landlords$creates$an$intangible$asset$in$the$consolidated$Group$balance$sheet$in$the$form$of$purchased$goodwill.$$The$amount$attributed$to$purchased$goodwill$is$initially$calculated$as$the$difference$between$the$fair$value$of$consideration$given$and$the$fair$values$of$the$separable$net$assets$acquired.$$Purchased$goodwill$is$amortised$over$a$period$of$twenty$years,$this$being$the$directors'$best$estimate$of$the$maximum$expected$life$of$purchased$portfolios.$$An$annual$impairment$review$of$goodwill$is$undertaken$and$deficits$are$taken$to$the$income$and$expenditure$account$where$events$or$changes$in$circumstances$indicate$that$its$carrying$value$may$not$be$recoverable$in$full.

Revaluation+of+properties

26  

               

Fees$and$commissions$receivableFees$generated$from$landlords$and$tenants$within$Bath$Property$Letting$Limited$are$recognised$on$a$cash$received$basis.$$Fees$and$commissions$generated$within$

Bath$&$City$Financial$Limited$are$recognised$on$a$'work$in$progress'$basis$once$advised$sales$go$on$cover$with$product$providers.$$Commissions$received$by$the$

Society$relating$to$a$transferred$back$book$of$homes$and$contents$insurance$policies$are$recognised$on$a$receipts$basis.

Fees$and$commissions$payableCommissions$payable$by$the$Society$to$investment$agents$and$investment$introducers$are$calculated$on$an$accruals$basis.

Other$operating$incomeOther$operating$income$shows$the$net$of$other$fees$receivable$and$payable$on$core$and$non$core$activities$not$otherwise$disclosed$within$fees$and$commissions$

receivable$and$payable.$$Mortgage$application$fees$are$recognised$on$a$cash$received$basis.$$Mortgage$arrangement$fees$and$broker$procuration$fees$are$recognised$

at$the$point$mortgages$advance.$$Property$valuation$fees$and$charges$relating$to$individual$valuations$are$matched$against$each$other$on$an$accruals$basis.

Pension$costs

The$Society$uses$forbearance$techniques$to$help$some$borrowers$through$periods$where$their$finances$have$become$stressed$and$where$the$servicing$of$their$

normal$mortgage$commitments$has$become$difficult.$$Definitions$of$forbearance$are$consistent$with$the$FSA’s$paper$entitled$‘Forbearance$and$Impairment$

Provisions$J$Mortgages’$issued$in$October$2011.$$As$a$result$of$this$paper,$the$arrears$management$section$of$the$Society’s$Mortgage$Department$now$maintains$

forbearance$information$which$is$reported$regularly$to$the$Society’s$Credit$Committee.$$In$2014,$thirteen$accounts$(2013:$ten)$with$balances$totalling$£2,273,648$

(2013:$£1,731,082)$in$value$were$granted$forbearance$concessions.$$As$at$31$December$2014,$thirteen$accounts$(2013:$ten)$with$balances$totalling$£3,174,088$(2013:$

£1,731,082)$remained$on$special$payment$arrangements$plus$a$further$eleven$accounts$(2013:$three)$with$balances$totalling$£1,917,670$(2013:$£361,358)$remained$

on$concessionary$interest$only$terms$following$the$occurence$of$impairment$alerts.$$The$Society$takes$full$consideration$of$the$impact$on$its$arrears$position$from$

using$these$forbearance$techniques$and$the$potential$for$losses$on$these$accounts$is$assessed$and$considered$in$the$level$of$overall$provisions$held$against$the$

mortgage$portfolio.

Taxation

Forbearance

Income$from$subsidiary$business

The$Society$takes$in$deposits$from$retail$customers$and$corporate$investors$in$order$to$fund$its$mortgage$activities.$$Interest$payable$on$deposits$is$accrued$on$a$daily$

basis$and$capitalised$to$customers'$balances$on$either$31$December$each$year$or$on$the$date$of$maturity$for$fixed$rate$bond$products.

LeasingAll$payments$under$operating$lease$contracts$are$charged$to$the$income$and$expenditure$account$on$a$straightJline$basis$over$the$period$of$the$lease.$$

Current$tax,$including$UK$corporation$tax,$is$provided$at$amounts$expected$to$be$paid$(or$recovered)$using$the$tax$rates$and$laws$that$have$been$enacted$or$

substantively$enacted$by$the$balance$sheet$date.$$In$accordance$with$FRS19,$deferred$taxation$is$provided$in$full$on$timing$differences$which$represent$an$asset$or$

liability$at$the$balance$sheet$date,$at$rates$expected$to$apply$when$they$crystallise$based$on$current$tax$rates$and$law.$$Timing$differences$arise$from$the$inclusion$of$

items$of$income$and$expenditure$in$taxation$computations$in$periods$different$from$those$in$which$they$are$included$in$the$financial$statements.$$Deferred$tax$assets$

are$recognised$to$the$extent$that$it$is$regarded$as$more$likely$that$not$that$they$will$be$recovered.$$Deferred$tax$assets$and$liabilities$are$not$discounted.

The$Society$operates$an$externally$managed,$defined$contribution$Group$personal$pension$scheme$in$respect$of$staff,$under$which$the$costs$of$the$Society’s$

contributions$are$charged$to$the$income$and$expenditure$account$in$the$year$in$which$the$pensionable$salary$is$earned.

Incentives$to$borrowers

Derivative$financial$instruments

The$Society$operates$schemes$under$which,$as$an$incentive$to$borrowers,$discounts$in$the$form$of$cashback$and$interest$are$given.$$It$is$the$Society’s$policy$that$all$

such$sums$given$as$cashbacks$under$this$scheme$are$written$off$to$other$operating$charges$when$incurred.$$Sums$given$in$the$form$of$interest$discount$are$

recognised$against$interest$receivable$as$incurred.

Trading$and$nonJtrading$income$generated$within$Bath$Property$Letting$Limited$is$recognised$when$rents$and$charges$are$collected$from$tenants$and$landlords,$and$

when$commissions$are$collected$from$service$suppliers.$$The$trading$income$from$the$subsidiary$company$is$recognised$within$the$‘fees$and$commissions$receivable’$

caption$within$the$Group$accounts.$$All$nonJtrading$income$is$recognised$within$the$‘other$operating$income’$caption.

Derivatives$are$only$utilised$in$nonJtrading$activities$and$profits$or$losses$arising$on$such$investments$are$recognised$on$an$accruals$basis$in$interest$receivable$and$

similar$income$for$asset$hedges,$and$in$interest$payable$and$similar$charges$for$liability$hedges.$$Interest$rate$swap$contracts$are$not$recognised$on$balance$sheet$but$

the$fair$value$of$all$swap$contracts$is$disclosed$in$Note$25.$$Market$values$are$used$to$determine$fair$values,$these$being$calculated$from$the$net$present$value$of$

future$cash$flows.

Loans$to$and$from$credit$institutionsLoans$to$and$from$credit$institutions$are$stated$in$the$balance$sheet$at$the$lower$of$cost$and$net$realisable$value.

Interest$receivable

Interest$payable

The$Society's$main$business$is$to$advance$mortgage$loans$that$are$fully$secured$on$residential$property$and$on$land.$$Interest$is$charged$on$individual$loans$using$

either$an$'annual$rest'$or$'daily$balance'$methodology.$$Early$release$charges$are$recognised$as$interest$receivable$on$receipt.$$The$Society$also$receives$interest$from$

its$liquid$asset$portfolio.$Interest$from$this$source$is$recognised$on$an$accruals$basis.

27  

                                   

2014 2013 2014 2013£000 £000 £000 £000

2& Interest&receivable&and&similar&incomeOn(loans(fully(secured(on(residential(property 9,112& 8,927( 9,112& 8,927(On(loans(fully(secured(on(land 1,063& 1,098( 1,063& 1,098(On(debt(securities:((((((((((Interest(and(similar(income 13& 10((((((((((((( 13& 10(((((((((((((

NOTES&TO&THE&ACCOUNTS&C&continuedFOR&THE&YEAR&ENDED&31&DECEMBER&2014

Group Society

On(other(liquid(assets:((((((((((Interest(and(similar(income 334& 464( 334& 464(Net(expenses(on(financial(instruments (147) (151) (147) (151)

10,375& 10,348( 10,375& 10,348(

3& Interest&payable&and&similar&chargesOn(shares(held(by(individuals 2,424& 2,997( 2,424& 2,997(On(deposits(and(other(borrowings 705& 995( 705& 995(

3,129& 3,992( 3,129& 3,992(

4& Other&operating&income&Other&operating&income&includes:Valuation(fees 105& 81( 105& 81(Rental(income 50& 32( 50& 52(

5& Administrative&expensesStaff&costs:Wages(and(salaries 1,718& 1,573( 1,540& 1,408(Social(security(costs 197& 176( 180& 160(Other(pension(costs 68& 75( 63& 68(

1,983& 1,824( 1,783& 1,636(

Other(administrative(expenses: 1,471& 1,419( 1,327& 1,273(

Total&administrative&expenses 3,454& 3,243( 3,110& 2,909(

((Other(administrative(expenses(include(the(following: 2014 2013Remuneration(paid(to(the(auditor: £000 £000(((For(audit(of(the(Society's(annual(accounts 39& 36(

(((For(audit(of(the(Society's(subsidiary(company 3& 7((((Other(work 19& 36(((For(tax(advisory(work 5& 5(

66& 84(

Operating(lease(charges(relating(to(land(and(buildings 112& 117( 82& 87(Operating(lease(charges(relating(to(office(equipment 4& R( 4& R(

Profit/(loss)(on(disposal(of(fixed(assets 1& (4) 1& R(

28  

                                     

6" Employees

The$average$number$of$staff$employed$during$the$year$was:2014 2013 2014 2013

Full1time Full=time Part1time Part=timeHead$Office 33" 30$ 5" 4$Branches 6" 6$ 6" 4$Total$Society 39" 36$ 11" 8$Subsidiary$undertakings 8" 8$ 1" 1"Total$Group 47" 44$ 11" 8$

7" Directors'"emoluments"and"transactions"with"Directors2014 2013

£ £a)#Remuneration#of#Directors

For$services$as$Non=executive$Directors 145,248" 140,652$For$Executive$services 298,566" 267,290$

443,814" 407,942$

Full$details$are$given$in$the$Report$of$the$Directors$on$Remuneration$on$pages$15$and$16.

b)#Transactions#with#Directors#and#connected#persons

Mortgage#Loans

Related#Party#Transactions

NOTES"TO"THE"ACCOUNTS"1"continuedFOR"THE"YEAR"ENDED"31"DECEMBER"2014

At$31$December$2014$there$was$an$outstanding$mortgage$loan$granted$in$the$ordinary$course$of$business$to$one$Director$(2013:$one$Director).$$The$balance$outstanding$on$the$mortgage$was$£372,586$(2013:$£380,087).

The$register,$required$to$be$maintained$under$Section$68$of$the$Building$Societies$Act$1986$detailing$all$loans,$transactions$and$arrangements$with$Directors$and$their$connected$persons,$is$held$at$the$Society's$Head$Office.$It$is$available$for$inspection,$by$members,$in$normal$office$hours$by$arrangement$with$the$Society's$Secretary,$during$the$period$of$15$days$prior$to$the$Annual$General$Meeting$and$at$the$Annual$General$Meeting.

Other$than$the$single$mortgage$advance$stated$above,$there$were$no$transactions$with$Directors$that$constituted$related$party$transactions.

29  

       

8" Taxationa) Analysis"of"charge"in"the"year 2014 2013 2014 2013

£000 £000 £000 £000Current'Tax:Corporation.tax.at.21.49%.(2013:.23.25%) 834" 701. 805" 683.Deferred'Tax:

NOTES"TO"THE"ACCOUNTS"C"continuedFOR"THE"YEAR"ENDED"31"DECEMBER"2014

Group Society

Origination.and.reversal.of.timing.differences (6) (66) (8) (66)Tax.on.profit.on.ordinary.activities 828" 635. 797" 617.

The.standard.rate.of.corporation.tax.reduced.from.23%.to.21%.as.from.6.April.2014.

b) Factors"affecting"tax"charge"for"the"yearProfit.on.ordinary.activities.before.tax 3,782" 2,753. 3,667" 2,629.Profit.on.ordinary.activities.multiplied.byeffective.rate.of.corporation.tax.of.21.49%.(2013:.23.25%) 813" 640. 788" 611.

Effects'of:Expenses.not.deductible.for.tax.purposes 22" 14. 14" 14.Income.not.taxable (5) (15) (5) (15)Other.rates./credits (2) (11) P. P.Difference.between.capital.allowances.and..depreciation 3" 18. 5" 18.Adjustment.to.tax.charge.in.respect.of.previous.year P. 2. P. 2.ShortPterm.timing.differences 3" 53. 3" 53.Current.tax.charge.for.the.year 834" 701. 805" 683.

c) Factors"that"may"affect"future"tax"charges

9" Provisions"for"bad"and"doubtful"debtsLoans"fully"secured"on"residential"property"

Loans"fully"secured"on"

land

Total"

£000 £000 £000At.1.January.2014General.provision 177. 101. 278.Specific.provision 941. 549. 1,490.

1,118. . 650. . 1,768.

Provisions.for.loan.impairments.charged.to.income.and.expenditure.account:General.provision 3. 27. 30.Specific.provision 197. 3. 200.

200. . 30. . 230.Provisions.utilised.against.crystallised.losses:.General.provision P. (34) (34)Specific.provision P. (356) (356)

P. (390) (390)

Group"&"Society

No provision has been made for deferred taxation on gains recognised on revaluing property to its market value. Such tax would become payable only if theproperty were sold without it being possible to claim rollover relief. The total amount payable is £19,000 (2013: £21,000). At present, it is not envisaged that anytax will become payable in the foreseeable future. The standard rate of corporation tax will reduce from 21% to 20% with effect from 1 April 2015. No materialimpact.will.arise.from.the.planned.future.reductions.in.the.standard.rate.of.corporation.tax.

At.31.December.2014General.provision 180. . 94. . 274.Specific.provision 1,138. 196. 1,334.

1,318. . 290. . 1,608.

10" Loans"and"advances"to"credit"institutions

2014 2013 2014 2013£000 £000 £000 £000

Accrued.interest 31" 18. 31" 18.Repayable.on.demand 36,937" 39,650. 36,671" 39,442.Repayable.within.three.months 3,500" 500. 3,500" 500.Repayable.in.more.than.three.months.and.less.than.one.year 1,000" 1,500. 1,000" 1,500.

41,468" 41,668. 41,202" 41,460.

In.2014,.the.Society.recovered.£8,000.(2013:.£nil).from.loans.previously.written.off...This.has.been.combined.with.the.above.movement.in.the.total.provisions.figure,.excluding.utilised.provisions,.for.bad.and.doubtful.debts.of.£230,000.(2013:.£630,000).to.give.a.net.charge.to.the.income.and.expenditure.account.of.£222,000.(2013:.£630,000).

Group Society

30  

                                       

11" Debt"securities"issued"by"other"borrowers

2014 2013 2014 2013

£000 £000 £000 £000

Society

NOTES"TO"THE"ACCOUNTS">"continued

FOR"THE"YEAR"ENDED"31"DECEMBER"2014

Group

Analysis-of-other-debt-securities:

Issued-by-public-bodies 2,010" 2,004-------------- 2,010" 2,004--------------

2,010" 2,004-------------- 2,010" 2,004--------------

Debt-securities-have-remaining-maturities-as-follows:

Accrued-interest 3" 2--------------------- 3" 2---------------------

Repayable-in-more-than-one-year-and-less-than-five-years 2,007" 2,002-------------- 2,007" 2,002--------------

2,010" 2,004-------------- 2,010" 2,004--------------

12" Loans"and"advances"to"customers

The-remaining-contractual-maturity-of-loans-and-advances-secured-on-residential-property-and- 2014 2013

other-advances-fully-secured-on-land,-from-the-date-of-the-balance-sheet,-is-as-follows: £000 £000

On-call-and-at-short-notice 298" 132-

In-not-more-than-three-months 1,576" 636-

In-more-than-three-months-but-not-more-than-one-year 3,126" 2,610-

In-more-than-one-year-but-not-more-than-five-years 26,836" 25,463-

In-more-than-five-years 188,642" 183,142-

Group"&"Society

220,478" 211,983-

Less:-Provisions-for-bad-and-doubtful-debts-(see-note-9) (1,608) (1,768)

Less:-Provisions-for-suspended-interest-on-impaired-loans-(see-below) (18) (17)

218,852" 210,198-

The-above-table-may-not-reflect-actual-experience-of-repayments-since-many-mortgage-loans-are-repaid-early.

13" Investment"in"subsidiary"undertakings

a) Investment"in"Bath"Property"Letting"Limited

Movements-during-the-year-were-as-follows: Shares Loans Total

£ £ £

At-1-January-2014 250,000- 1,744- 251,744-

Net-loans T (130) (130)

Net-book-value-at-31-December-2014 250,000- 1,614- 251,614-

-Net-book-value-at-31-December-2013 250,000- 1,744- 251,744-

Bath-Property-Letting-Limited-is-a-100%-subsidiary-of-the-Society-and-is-registered-in-England-and-Wales.-The-principal-business-activity-of-the-subsidiary-is-that-of-property-

management-operating-wholly-in-the-United-Kingdom.

The-Society-participates-in-the-Bank-of-England's-Funding-for-Lending-Scheme.--The-scheme-requires-the-Society-to-place-a-proportion-of-its-total-portfolio-of-mortgage-loans-with-

the-bank-to-be-held-as-collateral-against-funds-drawn-from-the-scheme.--The-portfolio-of-loans-that-is-prepositioned-with-the-bank-is-fully-encumbered.

The-Society-continues-to-invest-in-developing-and-enhancing-its-arrears-management-strategies-to-minimise-credit-risk-losses-whilst-ensuring-customers-are-treated-fairly.-These-

forbearance-arrangements-(see-note-1)-are-undertaken-in-line-with-the-Society’s-credit-policy,-and-include-the-conversion-of-loan-payments-to-an-interestTonly-basis,-capitalisation-

of-property-management-charges,-conversion-of-loans-onto-fixed-rate-interest-and-other-special-arrangements-agreed-on-a-caseTbyTcase-basis.--As-at-31-December-2014-the-Society-

had-one-case-where-interest-of-£18,000-(2013:-£17,000),-relating-to-arrears-balances,-had-been-suspended.

Society

b) Investment"in"Bath"&"City"Financial"Limited

The-Society-disposed-of-its-51%-shareholding-in-Bath-&-City-Financial-Limited-for-£25,500-on-30-November-2014.--All-existing-interTcompany-loans-and-balances-were-settled-before-

the-date-of-sale.--The-Society's-equity-investment-in-Bath-&-City-Financial-Limited-had-previously-been-fully-written-down-to-£nil.--The-sale-resulted-in-a-gain-on-disposal-of-£25,500-

being-booked-to-the-Society's-income-and-expenditure-account.--On-consolidation-into-the-Group-accounts,-a-shortfall-of-£10,000-occured-between-the-sale-proceeds-received-and-

the-net-assets-of-Bath-&-City-Financial-Limited-as-at-the-date-of-disposal-and-thus-a-loss-on-disposal-of-£10,000-has-been-booked-to-the-Group-income-and-expenditure-account.

31  

                 

14# Fixed#assets

Tangible#fixed#assetsa) Group Leasehold Office-and Furniture,

Freehold premises computer fittings

premises (short) equipment and-cars Total

£000 £000 £000 £000 £000

At#cost#or#valuation

At-1-January-2014 2,559- 65- 2,596- 683- 5,903-

NOTES#TO#THE#ACCOUNTS#@#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014

Additions H- H- 88- 32- 120-

Disposals H- H- (22) (24) (46)

At-31-December-2014 2,559- 65- 2,662- 691- 5,977-

Accumulated#depreciationAt-1-January-2014 H- 34- 2,368- 549- 2,951-

Charge 34- 17- 119- 59- 229-

Disposals H- H- (20) (17) (37)

At-31-December-2014 34- 51- 2,467- 591- 3,143-

Net#book#value#

At#31#December#2014 2,525# 14# 195# 100# 2,834#At-31-December-2013 2,559- 31- 228- 134- 2,952-

b) SocietyAt#cost#or#valuation

At-1-January-2014 2,559- 65- 2,512- 636- 5,772-

Additions H- H- 71- 32- 103-

Disposals H- H- (10) (24) (34)

At-31-December-2014 2,559- 65- 2,573- 644- 5,841-

Accumulated#depreciation

At-1-January-2014 H- 34- 2,292- 516- 2,842-

Charge 34- 16- 114- 54- 218-

Disposals H- H- (8) (17) (25)

At-31-December-2014 34- 50- 2,398- 553- 3,035-

Net#book#value#

At#31#December#2014 2,525# 15# ## 175# 91# 2,806#At-31-December-2013 2,559- 31- -- 220- 120- 2,930-

c)

d)

e)

The depreciated historical cost of revalued freehold and leasehold premises at 31 December 2014 was £2,145,502 (2013: £2,197,196); the premises are stated above at their

revalued-amounts-totalling-£2,538,667-(2013:-£2,589,327).

During-the-year-the-Society-and-Group-occupied-for-its-own-use-freehold-and-leasehold-property-with-a-net-book-value-of-£1,955,998-(2013:-£1,964,488).--

An-external-revaluation-of-all-the-Group's-freehold-and-leasehold-land-and-buildings-was-last-conducted-as-at-31-December-2013-by-Brooks-Chartered-Surveyors.--The-

valuation-of-properties-used-in-Group-businesses-was-prepared-on-'existing-use-value'-as-defined-in-Practice-Statement-4.3-of-the-RICS-Manual-of-Valuation.--Properties-not-

used-in-Group-businesses-were-valued-using-a-market-value-basis.--The-different-bases-used-in-the-revaluation-process-made-no-material-difference-to-the-valuations-

obtained.

Intangible#fixed#assets

Group Purchased-

goodwill

£000

At#cost#or#valuationAt-1-January-2014-and-31-December-2014 413-

AmortisationAt-1-January-2014-and-31-December-2014 99-

Charge 20-

At-31-December-2014 119-

ImpairmentAt-1-January-2014- (25)

Charge (3)

At-31-December-2014 (28)

Net#book#value#At#31#December#2014 266#At-31-December-2013 289-

32  

 

15# Deferred#taxation

2014 2013 2014 2013

£000 £000 £000 £000

Deferred+tax+asset/(liability)+at+1+January 44# (22) 42# (24)

Movement+during+the+year 5# 66+ 8# 66+

Deferred+tax+asset+at+31+December 49# 44+ 50# 42+

The$elements$of$deferred$taxation$are$as$follows:Capital+allowances+in+excess+of+depreciation+ (11) (13) (10) (15)

ShortHterm+timing+differences 60# 57+ 60# 57+

Deferred+tax+asset 49# 44+ 50# 42+

16# Shares

2014 2013

Repayable+on+demand: £000 £000

Accrued+interest 444# 595+

Held+by+individuals 187,842# 187,628+

188,286# 188,223+

17# Amounts#owed#to#other#customers

Amounts+owed+to+other+customers+are+repayable+ 2014 2013 2014 2013

++from+the+balance+sheet+date+in+the+ordinary+course £000 £000 £000 £000

++of+business+as+follows:

Accrued+interest 13# 20+ 13# 20+

Repayable+on+demand 42,841# 36,157+ 42,943# 36,157+

In+not+more+than+three+months 139# 451+ 139# 551+

In+more+than+three+months+but+not+more+than+one+year 22,899# 25,521+ 22,899# 25,521+

In+more+than+one+year C# + C# +

65,892# 62,149+ 65,994# 62,249+

18# Other#liabilities

2014 2013 2014 2013

£000 £000 £000 £000

Amounts$falling$due$within$one$year:Income+tax 156# 160+ 156# 160+

Corporation+tax 428# 350+ 406# 331+

Other+taxation+and+social+security 70# 64+ 54# 48+

Other+creditors 265# 297+ 147# 164+

919# 871+ 763# 703+

19# Provisions#for#liabilities

Group#&#Society

Provision+for Provision+for+ Provision Total

dilapidations Financial for+customer

Services redress

Compensation

Scheme+levy

£000 £000 £000 £000

At+1+January+2014 12+ 87+ 1+ 100+

Charge+for+the+year H+ 166+ 19 185+

Paid+in+the+year H+ (168) H+ (168)

At+31+December+2014 12+ 85+ 20+ 117+

Society

Society

The+provision+for+dilapidations+will+likely+be+utilised+in+2015+if+Bath+Property+Letting+Limited+exits+its+leased+business+premises+at+Southgate,+

Bath.++The+provision+for+the+Financial+Services+Compensation+Scheme+Levy+will+be+utilised+in+2015.++See+the+Strategic+Report+on+page+6+for+details+

The+provision+for+the+Financial+Services+Compensation+Scheme+levy+was+disclosed+within+accruals+and+deferred+income+in+the+prior+year+but+has+

been+reclassified+as+a+provision+for+liabilities+to+better+reflect+how+management+report+the+provision+internally.

Group

NOTES#TO#THE#ACCOUNTS#C#continued

FOR#THE#YEAR#ENDED#31#DECEMBER#2014

Group#&#Society

Group Society

Group

33  

                                       

20# Reserves

Group Society Group Society2014 2014 2013 2013 2014 2013

£000 £000 £000 £000 £000 £000 &

Balance&at&1&January&as&previously&stated 20,583# 20,391# 18,471& 18,370& 431# 371&

NOTES#TO#THE#ACCOUNTS#B#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014

RevaluationGeneral

Group#&#Society

Profit&for&the&year 2,942# 2,870# 2,103& 2,012& B# B#Revaluation&of&fixed&assets&in&the&year B# B# B# B# B# 69&Transfer&in&respect&of&revalued&fixed&assets 3# 3# 9& 9& (3) (9)

Balance&at&31&December 23,528# 23,264# 20,583& 20,391& 428# 431&

21# Minority#interests2014 2013

£000 £000

Balance&at&1&January& 22# 7&

Group

Profit&on&ordinary&activities&after&taxation 12# 15&

Movement&in&investment&in&subsidiary (34) B#Balance&at&31&December& B# 22&

22# Commitments#SocietyGroup

2014 2013 2014 2013

£000 £000 £000 £000

Operating*leasesThe&Group&and&the&Society&have&the&following&annual&commitments&under

operating&leases&relating&to&land&and&buildings&that&expire&as&follows:

Less&than&one&year 112# 5&&&&&&&&&&&&&&&& 82# 5&&&&&&&&&&&&&&&&

Between&one&and&two&years B# 112&&&&&&&&&&&& B# 82&&&&&&&&&&&&&&

The&Group&and&the&Society&have&the&following&annual&commitments&underoperating&leases&relating&to&office&equipment&that&expire&as&follows:

Between&one&and&two&years 4# R&&&&&&&&&&&&&&&&& 4# R&&&&&&&&&&&&&&&&&

23# Pension#schemes

24# Contingent#liabilities

a) Financial#Services#Compensation#Scheme

During&the&year&ended&31&December&2014&the&Group&operated&a&defined&contribution&Group&personal&pension&scheme&in&respect&of&staff,&and&the&charge&for&the&year&was&£68,284&

(2013:&£74,625).&&As&at&31&December&2014&there&were&outstanding&contributions&of&£5,255&(2013:&£6,470).

Payments&in&respect&of&levies&to&the&Financial&Services&Compensation&Scheme&are&made&in&each&fiscal&year,&based&on&the&Society's&share&of&protected&Scheme&deposits&at&the&start&of&

each&calendar&year.&&The&Society's&liability&to&the&Scheme&consists&of&three&elements,&namely&a&management&levy,&a&capital&shortfalls&levy&and&a&levy&contribution&to&the&resolution&

costs&in&respect&of&the&bailout&of&the&Dunfermline&Building&Society.&The&management&levy&is&calculated&based&on&an&applicable&interest&rate&of&12Rmonth&LIBOR&plus&one&hundred&

basis&points.&As&at&31&December&2014,&the&Society&had&paid&over&£626,779&to&the&Scheme&relating&to&the&period&covered&by&fiscal&years&2007/08&through&to&2014/15.&&The&FSCS&has&

indicated&that&the&capital&shortfalls&levy&is&likely&to&continue&over&scheme&year&2015/16.&A&further&provision&of&£166,000&has&been&made&in&the&current&year&to&ensure&that&the&

Society&is&fully&provided&against&all&estimates&of&current&levy&liabilities.&&The&Society&has&provided&against&liabilities&to&the&Scheme&using&best&estimates&of&the&level&of&its&current&

expected&exposure.&&There&exists&a&level&of&uncertainty&as&to&the&Society's&&precise&exposure&to&the&scheme&for&fiscal&year&2014/15&but&the&Society&estimates&that&it&remains&liable&for&

further&commitments&covering&fiscal&year&2014/15&totalling&£84,775.&&Furthermore,&there&is&uncertainty&over&the&future&duration&of&the&current&Scheme&and&as&to&the&level&of&future&

interest&rates&that&would&apply.&&There&is&also&uncertainty&as&to&whether&the&Society&will&have&any&further&liability&to&the&Scheme&if&projected&capital&shortfalls&should&increase&and&

what&the&scale&of&those&liabilities&would&likely&be.&The&final&capital&shortfall&from&the&bailout&of&the&Bradford&&&Bingley&is&not&known&and&neither&is&the&full&impact&from&the&bailout&of&

the&Dunfermline&Building&Society.

b) Other#liabilities

Section&22&of&the&Building&Societies&Act&1986&was&repealed&with&effect&from&11&June&1996&and&the&Society&therefore&has&no&obligation&to&stand&by&its&subsidiaries&in&respect&of&

liabilities&incurred&after&this&date.&&However,&it&is&the&intention&of&the&Board&to&continue&to&support&its&subsidiary&undertakings&if&support&is&required.

34  

 

                                                                           

25# Financial#instruments

Outstanding#derivative#contracts

The$Society's$management$committee$structure$is$designed$such$that$each$committee$concentrates$on$monitoring$one$of$the$Society's$key$risk$areas$such$as$credit$risk,$financial$risk,$conduct$and$operational$risk.$$Each$committee$has$established$risk$limits,$reporting$lines,$mandates$and$other$control$procedures$and$these$are$reviewed$by$the$Board's$Risk$Committee$on$a$regular$basis.

NOTES#TO#THE#ACCOUNTS#=#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability of another entity. The Group is a retailer of financialinstruments, mainly in the form of mortgages and savings products. The Group uses wholesale financial instruments to invest liquid asset balances, raise wholesalefunds$and$to$manage$the$financial$risks$arising$from$its$operations.

The$derivative$instruments$used$by$the$Society$in$managing$its$balance$sheet$exposures$are$interest$rate$swaps.$$These$are$used$to$protect$the$Society$from$exposures$arising$principally$from$fixed$rate$mortgage$lending.$$The$durations$of$the$off$balance$sheet$contracts$are$generally$short$to$medium$term$and$their$maturity$profile$reflects$the$nature$of$the$exposures$arising$from$the$underlying$business$activities.

Instruments$used$for$risk$management$purposes$include$derivative$financial$instruments$('derivatives'),$which$are$contracts$or$agreements$whose$value$is$derived$from$one$or$more$of$underlying$price,$rate$or$index$inherent$in$the$contracts$or$agreement,$such$as$interest$rates$or$stock$market$indices.$$All$transactions$in$derivatives$are$undertaken$to$manage$the$risks$arising$from$underlying$business$activities.

These$derivatives$are$only$used$by$the$Society$in$accordance$with$the$Building$Societies$Act$1986$to$limit$the$extent$to$which$the$Society$will$be$affected$$by$changes$in$interest$rates$or$other$factors$specified$in$the$legislation.$Derivatives$are$not$used$in$trading$activity$for$speculative$purposes,$and$consequently$all$such$instruments$are$classified$as$hedging$contracts.

The$table$below$shows$the$notional$principal$amounts,$credit$weighted$amounts$and$replacement$costs$of$derivatives.$$Notional$principal$amounts$indicate$the$volume$of$business$outstanding$at$the$balance$sheet$date$and$do$not$represent$amounts$of$risk.$$The$credit$risk$weighted$amount$is$calculated$according$to$the$rules$specified$by$the$Financial$Services$Authority$that$takes$into$account$the$residual$maturity$of$derivative$contracts$and$the$nature$of$each$counterparty.$$The$replacement$cost$represents$the$cost$of$replacing$contracts$with$a$positive$value,$calculated$at$market$rates$current$at$the$balance$sheet$date,$and$reflects$the$Society's$maximum$exposure$should$all$counterparties$default.

The$Society's$management$committee$structure$is$designed$such$that$each$committee$concentrates$on$monitoring$one$of$the$Society's$key$risk$areas$such$as$credit$risk,$financial$risk,$conduct$and$operational$risk.$$Each$committee$has$established$risk$limits,$reporting$lines,$mandates$and$other$control$procedures$and$these$are$reviewed$by$the$Board's$Risk$Committee$on$a$regular$basis.

NOTES#TO#THE#ACCOUNTS#=#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability of another entity. The Group is a retailer of financialinstruments, mainly in the form of mortgages and savings products. The Group uses wholesale financial instruments to invest liquid asset balances, raise wholesalefunds$and$to$manage$the$financial$risks$arising$from$its$operations.

The$derivative$instruments$used$by$the$Society$in$managing$its$balance$sheet$exposures$are$interest$rate$swaps.$$These$are$used$to$protect$the$Society$from$exposures$arising$principally$from$fixed$rate$mortgage$lending.$$The$durations$of$the$off$balance$sheet$contracts$are$generally$short$to$medium$term$and$their$maturity$profile$reflects$the$nature$of$the$exposures$arising$from$the$underlying$business$activities.

Instruments$used$for$risk$management$purposes$include$derivative$financial$instruments$('derivatives'),$which$are$contracts$or$agreements$whose$value$is$derived$from$one$or$more$of$underlying$price,$rate$or$index$inherent$in$the$contracts$or$agreement,$such$as$interest$rates$or$stock$market$indices.$$All$transactions$in$derivatives$are$undertaken$to$manage$the$risks$arising$from$underlying$business$activities.

These$derivatives$are$only$used$by$the$Society$in$accordance$with$the$Building$Societies$Act$1986$to$limit$the$extent$to$which$the$Society$will$be$affected$$by$changes$in$interest$rates$or$other$factors$specified$in$the$legislation.$Derivatives$are$not$used$in$trading$activity$for$speculative$purposes,$and$consequently$all$such$instruments$are$classified$as$hedging$contracts.

The$table$below$shows$the$notional$principal$amounts,$credit$weighted$amounts$and$replacement$costs$of$derivatives.$$Notional$principal$amounts$indicate$the$volume$of$business$outstanding$at$the$balance$sheet$date$and$do$not$represent$amounts$of$risk.$$The$credit$risk$weighted$amount$is$calculated$according$to$the$rules$specified$by$the$Financial$Services$Authority$that$takes$into$account$the$residual$maturity$of$derivative$contracts$and$the$nature$of$each$counterparty.$$The$replacement$cost$represents$the$cost$of$replacing$contracts$with$a$positive$value,$calculated$at$market$rates$current$at$the$balance$sheet$date,$and$reflects$the$Society's$maximum$exposure$should$all$counterparties$default.

2014£000

Notional$principal$amount 11,900#Credit$risk$weighted$amount 13#Replacement$cost =#

2013£000

$$$$$$$$$$$$$$11,650$23$$$$$$$$$$$$$$$$$$$$10$$$$$$$$$$$$$$$$$$$$

35  

25# Financial#instruments#(continued)

Fair#values#of#financial#instruments

On#balance#sheet#instrumentsDebt%securities

Off#balance#sheet#instrumentsInterest%rate%swaps

Hedges

Gains%and%losses%arising%in%the%year%ended%31%December%2014that%were%not%recognised%in%the%same%yearGains%and%losses%to%be%realised%in%the%year%to%31%December%2015Gains%and%losses%to%be%realised%after%31%December%2015

Risk#management

Credit#risk

Hedges%which%comprise%the%'derivatives'%referred%to%above%are%used%to%reduce%the%risk%of%loss%arising%from%changes%in%interest%rates.%%Gains%and%losses%on%instruments%used%for%hedging%are%recognised%in%line%with%the%item%being%hedged%and%are%only%recognised%in%the%event%of%the%underlying%exposure%itself%being%unwound.%%The%following%table%sets%out%the%movements%in%unrecognised%gains%and%losses%in%the%year%to%31%December%2014.

NOTES#TO#THE#ACCOUNTS#B#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014

The main risks arising from the Group's activities are credit risk, liquidity risk and interest rate risk. The Board reviews and agrees policies for managing each of these risks, assummarised%below.

Set out below is a comparison of book and fair values of some of the Group's financial assets and financial liabilities as at 31 December 2014 and 2013. Market values havebeen used to determine fair values. The table excludes certain financial assets and financial liabilities which are not listed or publicly traded, or for which a liquid and activemarket%does%not%exist.%%It%therefore%excludes%items%such%as%mortgages,%share%accounts%and%bank%deposits.

The%Group's%credit%risk%arises%from%its%loan%portfolio%and%from%potential%losses%that%could%result%from%the%failure%of%counterparties%to%observe%the%terms%of%the%contract%entered%into.%All%loan%applications%are%assessed%with%reference%to%lending%policy.%Changes%to%the%policy%are%approved%by%the%Board.%The%Assets%and%Liabilities%Committee%is%responsible%for%approving%treasury%counterparties.%%The%Society%holds%security%against%all%loans%made%to%customers%by%way%of%first%charge%mortgages%made%against%residential%property%and%land.

2014 2014 2013 2013Book#value Fair#value Book%value Fair%value

£000 £000 £000 £000

2,007# 2,013# 2,002% 2,002%

B# (60) P% (121)

2014 2014 2014Unrecognised#

gainsUnrecognised#

lossesNet#gain#/#(loss)

£000 £000 £000

B# (60) (60)B# (7) (7)B# (53) (53)

Hedges%which%comprise%the%'derivatives'%referred%to%above%are%used%to%reduce%the%risk%of%loss%arising%from%changes%in%interest%rates.%%Gains%and%losses%on%instruments%used%for%hedging%are%recognised%in%line%with%the%item%being%hedged%and%are%only%recognised%in%the%event%of%the%underlying%exposure%itself%being%unwound.%%The%following%table%sets%out%the%movements%in%unrecognised%gains%and%losses%in%the%year%to%31%December%2014.

NOTES#TO#THE#ACCOUNTS#B#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014

The main risks arising from the Group's activities are credit risk, liquidity risk and interest rate risk. The Board reviews and agrees policies for managing each of these risks, assummarised%below.

Set out below is a comparison of book and fair values of some of the Group's financial assets and financial liabilities as at 31 December 2014 and 2013. Market values havebeen used to determine fair values. The table excludes certain financial assets and financial liabilities which are not listed or publicly traded, or for which a liquid and activemarket%does%not%exist.%%It%therefore%excludes%items%such%as%mortgages,%share%accounts%and%bank%deposits.

The%Group's%credit%risk%arises%from%its%loan%portfolio%and%from%potential%losses%that%could%result%from%the%failure%of%counterparties%to%observe%the%terms%of%the%contract%entered%into.%All%loan%applications%are%assessed%with%reference%to%lending%policy.%Changes%to%the%policy%are%approved%by%the%Board.%The%Assets%and%Liabilities%Committee%is%responsible%for%approving%treasury%counterparties.%%The%Society%holds%security%against%all%loans%made%to%customers%by%way%of%first%charge%mortgages%made%against%residential%property%and%land.

Liquidity#riskThe Group's liquidity policy is to maintain sufficient liquid resources to cover cash flow imbalances and fluctuations in funding to retain full public confidence in the solvency ofthe Group and to enable the Group to meet its financial obligations. This is achieved through maintaining a prudent level of liquid assets and through management control ofasset%growth%in%the%business.%The%Group%has%£nil%(2013:%£nil)%of%its%liquid%assets%encumbered%as%part%of%credit%support%agreements%attached%to%interest%rate%swap%contracts.

The Group's liquidity policy is to maintain sufficient liquid resources to cover cash flow imbalances and fluctuations in funding to retain full public confidence in the solvency ofthe Group and to enable the Group to meet its financial obligations. This is achieved through maintaining a prudent level of liquid assets and through management control ofasset%growth%in%the%business.%The%Group%has%£nil%(2013:%£nil)%of%its%liquid%assets%encumbered%as%part%of%credit%support%agreements%attached%to%interest%rate%swap%contracts.

36  

                       

25# Financial#instruments#(continued)

Interest#rate#risk

Not$morethan$three Non+interest

months bearing Total31#December#2014 £000 £000 £000 £000 £000 £000AssetsLiquid$assets 56,055$$$$$$$$$$$$$ =# 1,000$$$$$$$$$$$$$$$ =# 42 57,097$$$$$$$$$$$$$Loans$and$advances$to$customers 210,837$$$$$$$$$$$ 388$ 2,329$ 6,906$ (1,608) 218,852$Tangible$fixed$assets =# =# =# =# 2,834$ 2,834$Other$assets =# =# =# =# 579$ 579$Total$assets 266,892$ 388$ 3,329$ 6,906$$$$$$$$$$$$$$$ 1,847$ 279,362$

LiabilitiesShares 160,093$ 12,769$ 14,980$ =# 444$ 188,286$Amounts$owed$to$customers 63,967$ 920$ 992$ =# 13$ 65,892$Accruals$and$deferred$income =# =# =# =# 192$ 192$Other$liabilities =# =# =# =# 1,036$ 1,036$Reserves =# =# =# =# 23,956$ 23,956$Minority$interest =# =# =# =# =# =#Total$liabilities 224,060$ 13,689$ 15,972$ =# 25,641$ 279,362$

Net$assets/(liabilities) 42,832$ (13,301) (12,643) 6,906$ (23,794) =#Off$balance$sheet$items (2,500) (850) (2,250) (6,300) 11,900$ +$$$$$$$$$$$$$$$$$$$$$$$

Interest$rate$sensitivity$gap 40,332# (14,151) (14,893) 606# (11,894) +$$$$$$$$$$$$$$$$$$$$$$$

31#December#2013AssetsLiquid$assets 57,297$ 1,500$ =# +$ 20$ 58,817$Loans$and$advances$to$customers 200,383$ 649$ 3,393$ 7,541$ (1,768) 210,198$Tangible$fixed$assets =# =# =# =# 2,952$ 2,952$Other$assets =# =# =# =# 574$ 574$Total$assets 257,680$ 2,149$ 3,393$ 7,541$ 1,778$ 272,541$

LiabilitiesShares 145,394$ 16,885$ 25,349$ =# 595$ 188,223$Amounts$owed$to$customers 60,306$ 913$ 910$ =# 20$ 62,149$Accruals$and$deferred$income =# =# =# =# 162$ 162$Other$liabilities =# =# =# =# 971$ 971$Reserves =# =# =# =# 21,014$ 21,014$Minority$interest =# =# =# =# 22$ 22$Total$liabilities 205,700$ 17,798$ 26,259$ =# 22,784$ 272,541$

Net$assets/(liabilities) 51,980$ (15,649) (22,866) 7,541$ (21,006) =#Off$balance$sheet$items =# (750) (1,850) (9,050) 11,650$ =#

Interest$rate$sensitivity$gap 51,980$ (16,399) (24,716) (1,509) (9,356) =#

More$than$one$year$but$not$

more$than$five$years

NOTES#TO#THE#ACCOUNTS#=#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014

More$than$three$months$but$not$more$

than$six$months

More$than$six$months$but$

not$more$than$one$year

As$at$the$balance$sheet$date,$the$Society$estimates$that$the$positive$impact$on$the$Society’s$profitability$from$a$parallel$shift$of$+2%$in$the$gilt$yield$curve$would$be$£258,000$(2013:$£342,000).$$The$Society$estimates$that$the$negative$impact$on$the$Society's$profitability$from$a$parallel$shift$of$+2%$in$the$gilt$yield$curve$would$be$£258,000$(2013:$£342,000).

The$Society$is$exposed$to$movements$in$interest$rates$reflecting$the$mismatch$between$the$dates$on$which$interest$receivable$on$assets$and$interest$payable$on$liabilities$are$next$reset$to$market$rates,$or,$if$earlier,$the$dates$on$which$the$instruments$mature.$$The$Society$manages$this$exposure$by$using$both$on$and$off$balance$sheet$instruments.$$After$taking$into$account$the$derivatives$entered$into$by$the$Society,$the$interest$rate$exposures$at$31$December$2014$and$31$December$2013$were:

37  

       

                                           

1" Statutory"percentages Statutory2014 Limit% %

Lending'Limit 9.0 25.0Funding'Limit 26.1 50.0

X'=

Y'=

X'=

1'

2'

3'

Y'=

the'principal'value'of,'and'interest'accrued'on,'shares'in'the'Society;'and

the principal value of, and interest accrued under, instruments or agreements creating or acknowledging indebtednessand accepted, made, issued or entered into by the Society or any such undertaking less any amounts qualifying as ownfunds.

the principal value of, and interest accrued on, shares in the Society held by individuals otherwise than as bare trustees forbodies'corporate'or'for'persons'who'include'bodies'corporate.

the principal of, and interest accrued on, sums deposited with the Society or any subsidiary undertaking of the Society;and

The'Funding'Limit'measures'the'proportion'of'shares'and'borrowings'not'in'the'form'of'shares'held'by'individuals'and'is'calculated'as'(XKY)/X'where:

shares'and'borrowings,'being'the'aggregate'ofK

ANNUAL"BUSINESS"STATEMENTFOR"THE"YEAR"ENDED"31"DECEMBER"2014

The'above'percentages'have'been'calculated'in'accordance'with'the'provisions'of'the'Building'Societies'Act'1986.

The Lending Limit measures the proportion of business assets not in the form of loans fully secured on residential property and iscalculated'as'(XKY)/X'where:

business'assets,'being'the'total'assets'of'the'Group,'plus'provisions'for'bad'and'doubtful'debts,'less'liquid'assets'and'tangible'fixed'assets'as'shown'in'the'Group'Balance'Sheet.

the'principal'of,'and'interest'accrued'on,'loans'owed'to'the'Group,'as'shown'in'the'Group'Balance'Sheet,'gross'of'mortgage'loss'provisions,'which'are'fully'secured'on'residential'property.'

The statutory limits are as laid down under the Building Societies Act 1986, and ensure that the principal purpose of a building societyis'that'of'making'loans'which'are'secured'on'residential'property'and'are'funded'substantially'by'its'members.

38  

 

                                                 

2" Other"percentages"(Group)2014 2013

% %

9.4 8.48.4 7.322.5 23.5

1.07 0.781.34 1.29

*

*

*

*

*

*

Management4expenses4as4a4percentage4of4mean4total4assets:

'Mean total assets' represent the amount produced by halving the aggregate of total assets at the beginning and end ofthe4financial4year.

The4above4percentages4have4been4prepared4from4the4Group4accounts4and4in4particular:

'Shares4and4borrowings'4represent4the4total4of4shares4and4amounts4owed4to4other4customers.

'Gross4capital'4represents4the4aggregate4of4general4reserves4and4revaluation4reserve.

'Liquid assets' represents the total of cash in hand, loans and advances to credit institutions and debt securities issuedby4other4borrowers4as4shown4in4the4balance4sheet.

ANNUAL"BUSINESS"STATEMENT"G"continuedFOR"THE"YEAR"ENDED"31"DECEMBER"2014

As4percentage4of4shares4and4borrowings:

Gross4capitalFree4capital

'Management expenses' represent the aggregate of administrative expenses, depreciation and amortisation andexclude4the4Levy4to4the4Financial44Services4Compensation4Scheme.

Liquid4assets

Profit4for4the4year4as4a4percentage4of4mean4total4assets

'Free capital' represents the aggregate of gross capital and general loss provisions for bad and doubtful debts lesstangible4fixed4assets.

39  

                               

3.#######Directors#and#Officers

The$Directors$and$Officers$of$the$Society$at$31$December$2014$together$with$their$further$particulars$were$as$follows:

Name Occupation Appointment Other#Directorships

C#J#L#Moorsom Professional$Director Saturday,$1$October$05 Amati$VCT$2$PlcRWCMD$Ltd

C#W#J#Nott Accountant Friday,$1$December$06

D#A#Berresford Accountant Friday,$1$February$08 The$Pensions$RegulatorTriodos$Renewables$PlcHyperion$Insurance$Group$Ltd

C#M#Smyth Business$Consultant Tuesday,$1$January$13 C$M$Smyth$Ltd

R#Derry@Evans Professional$Director$and$Legal$Consultant Sunday,$1$June$14 360$Legal$Group$LtdOmnia$Legal$LtdCobalt$Health$LtdRomi$Behrens$Paintings$Ltd

D#Stirk Management$Consultant Sunday,$1$June$14

A#Cha Solicitor Sunday,$1$June$14

R#D#Jenkins Building$Society$CEO Monday,$1$December$03 Bath$Property$Letting$Ltd

K#A#Gray Building$Society$Finance$Director$and$Deputy$ Sunday,$1$September$02

Documents$may$be$served$on$the$above$named$Directors$c/o$The$Society$Secretary,$Bath$Building$Society,$15$Queen$Square,$Bath,$BA1$2HN.

Details$of$Directors’$service$contracts$are$shown$in$the$Directors’$Remuneration$Report.

Other#Officers

Name Business#Occupation DirectorshipsT$Lovell Society$Secretary Bath$Property$Letting$LimitedMark$Wiltshaw Head$of$Savings$and$InvestmentsSteve$Mathews Head$of$Mortgages

No$Director$or$other$Officer$has$any$rights$to$subscribe$for$shares$in$the$Society’s$subsidiary$undertaking.

ANNUAL#BUSINESS#STATEMENT#@#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014

40  

                                                     

(01225)'330'837(01225)'445271

(01225)'314055

Registered'No.'30B

YOUR%LOCAL%SOCIETYREGISTERED%NAME%AND%OFFICE

Bath'Investment'&'Building'Society15'Queen'Square,'Bath,'BA1'2HN,'Tel'Bath'(01225)'423271

BRANCH%OFFICES

Ilminster'J'Harper'Dolman'&'West,'20'East'Street,'TA19'0AJ (01460)'53095

Bath'J'3'Wood'Street,'BA1'2JQOldfield'Park'J'12/13'Moorland'Road,'Oldfield'Park,'Bath,'BA2'3PL

AGENCY%OFFICES

BATH%PROPERTY%LETTING

Bath'J'34'Southgate,'BA1'1TP

Wellington 'J'MJC'Financial'Planning,'22'South'Street,'TA21'8NS (01823)'663174

Midsomer%Norton 'J'Waterhouse'Financial'Advisers,'23'High'Street,'BA3'2DR (01761)'412980Shaftesbury 'J'Chaffers'Estate'Agents,'48'High'Street,'SP7'8AA (01747)'852301South%Petherton 'J'Hamdon'Financial'Services,'36'St'James'Street,'TA13'5BT (01460)'240000Staple%Hill 'J'Mark'Richard'Insurance,'141'High'Street,'BS16'5HQ (01179)'575008

Head Office:15 Queen Square, Bath BA1 2HN.

Investment enquiries:Telephone:01225 423271Fax:01225 446914Email:investments@bibs.co.uk

Mortgage enquiries:Telephone:01225 475702Fax:01225 424590Email:mortgages@bibs.co.uk

Web:www.bathbuildingsociety.co.uk

Telephone calls may be recorded to help the Society to maintain high standards of service delivery.

Bath Investment & Building Society is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority, Registration Number 206026.