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TRANSCRIPT
2 Chairman’s Statement
3 Chief Executive’s Review
6 Directors’ Report
9 Report on Corporate Governance
11 Report on Directors’ Remuneration
12 Statement of Directors’ Responsibilities
13 Independent Auditor’s Report
14 Income and Expenditure Accounts
15 Balance Sheets
16 Group Cash Flow Statement
17 Notes to the Accounts
36 Annual Business Statement
Contents
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AUTHORISED AND REGULATED BY
THE FINANCIAL SERVICES AUTHORITY
FSA Register No. 206080
www.fsa.gov.uk/register/home.do
Member of the Building Societies Association
1
Chairman’s Statement
2
Polly Williams, Chairman
despite the continued low level of interest rates, to raise once again the
spectre of a “double-dip” recession. The election in May 2010 gave
rise to a coalition government. Adverse reaction in the money and
equity markets, out of concern over possible indecision, was headed-off
by fi rm declarations regarding prompt and severe action to address the
country’s huge budget defi cit. The full impact of the medicine, in the
form of tax rises and expenditure cuts, announced over the course of
2010, though, will begin to bite during 2011 and will undoubtedly bear
down on our activities in the years ahead.
As stated earlier, full details regarding the performance and activities last
year follow in subsequent sections. However, I feel it is appropriate that
I comment here on the outturn at our Hampshire Trust Plc subsidiary
(HT). In 2009 HT’s performance was hit by the failure of two large
solicitor fi rms to which it had granted substantial facilities. Solicitor fi rms,
especially those with signifi cant conveyancing departments, have been
badly affected by the sharp decline in housing transactions in the last two
years and this has contributed to further repayment diffi culties emerging
within HT’s book of solicitor practice facilities. In addition, concern over
two large property loans has led to further signifi cant provisioning and
the overall outcome has been the reporting of a second successive
loss. The deterioration in its previously exemplary performance has
led to a thorough review of its activities being commissioned. The
fi nal outcome of that review, with its objective the achievement of
the necessary turnaround in HT’s performance, is anticipated in the
second quarter of 2011. The loss at HT, coupled with the associated
acceleration of our amortisation of its acquisition goodwill, has
inevitably impacted signifi cantly on the overall performance of the
Group, depressing the good profi t performances of the Society and
Counties Home Loan Management.
There is something of a sense of foreboding as 2011 begins. The
downturn in the economy in the fi nal quarter of 2010, before the public
expenditure cuts and increased taxation take effect, is of concern,
especially given the dogged persistence of infl ation. The immediate
outlook is for the housing and mortgage markets to remain sluggish,
with borrowers reluctant to take on new commitments. Meanwhile
savers are understandably concerned that the value of their deposits
is being eroded through infl ation currently exceeding the returns
on offer. The outlook for my fi rst full year as your Chairman does
not appear particularly auspicious but I am entirely confi dent that
your Society has the resolve and resources to be successful,
notwithstanding the conditions, and I look forward to presenting news
of a successful navigation of the choppy waters that lie ahead, and a
more upbeat message as to the future, this time next year.
am delighted to present this, my fi rst, Statement to members am delighted to present this, my fi rst, Statement to members
since becoming Society Chairman with effect from 1 October since becoming Society Chairman with effect from 1 October
last year and I begin it by paying tribute to my predecessor last year and I begin it by paying tribute to my predecessor
John Sinclair. When John stepped down from the post, as a prelude to
his planned retirement from the Board at the year end, he had completed
ten years as a Non-executive Director of the Society, with the last six as
its Chairman. During that time he contributed massively to the Society,
with his broad experience of fi nancial services invaluable in steering the
organisation through the unprecedented challenges of the recent banking
and credit crises and economic slowdown. The fact that the Society
has emerged with its capital position remaining the envy of others is
testimony to his leadership. He will be sorely missed and we wish him
well in his new role elsewhere in the mutual sector.
As alluded to above, your Society remains in excellent shape despite
2010 being problematic as regards our core lending and funding
markets. Full details regarding our activities and performance are
described in the Chief Executive’s Review and Directors’ Report that
follow but I will highlight for you that Group total assets were virtually
unaltered over the year at £1.2 billion, whilst the reserves to assets
ratio increased to 8.6% from last year’s level of 8.5%, following the
addition of Group profi t after tax of £1.3 million. This compares with an
average for the peer group, the top fi fteen building societies, based on
2009 results, of 4.4%. With the quantity and quality of capital held by
fi nancial institutions in the wake of the fi nancial crisis under increasing
scrutiny, our members are able to draw great comfort from the Society’s
paramount standing in this regard; our capital being wholly comprised of
core tier 1 capital in the form of accumulated profi ts in our reserves.
In concluding his Statement last year, John remarked that the outlook
for business during 2010 was uncertain, with the impending general
election adding to the mix. In the event, the economy in 2010 was
somewhat better than many had predicted. The recovery that began
in the fi nal quarter of 2009 was sustained during 2010, at least initially,
with growth surprisingly strong in the second quarter. However, it
slowed in quarter three and then turned negative in the fi nal quarter,
I
Polly Williams
Chairman 24 February 2011
Chief Executive’s Review
3
Operational effi ciency as measured by the management expenses to mean
assets ratios at Group and Society levels are Board KPIs. They show our
running costs relative to the average total assets under management. Whilst
we continue to impose strict control over costs, with total assets little changed
over the year, both ratios increased with the Society’s moving to 0.49% from
0.46% and the Group’s to 0.75% from 0.69%. An associated measure of
operational effi ciency is the net cost ratio. This ratio is the management
expenses to mean assets fi gure adjusted to take account of other income
earned. The Board has adopted this as a KPI at Group level since it shows
where increased expenditure can be benefi cial if it leads to proportionately
higher other income. With business activity remaining subdued in 2010, other
income reduced a little and the ratio increased to 0.57% from 2009’s 0.51%.
Mortgages and Loans
The mortgage market remained in the doldrums in 2010, with gross
advances from all lenders down by around 5% on the year earlier. The
reduction in net advances was even greater at 28% as borrowers looked
to pay down their existing loan balances whenever funds were available.
The Society’s experience refl ected the general trend, especially amongst
mutual lenders, with its fi rst KPI in relation to mortgage and loan activity,
the change in Group loan balances, showing a similar outcome to 2009,
being a net reduction of 6% in 2010.
The Society’s cautious approach to lending is observed through individual
assessment of loan applications by experienced underwriters and the
success of the approach is demonstrated by the incidence of arrears
remaining well below that of lenders generally. Our KPI in this area is the
percentage of accounts in arrears by one or more months’ payments at the
year end and the fi gure for 2010 is unchanged from 2009 at just 1%.
Whilst we endeavour to observe responsible lending principles, so
that borrowers fi nd their mortgages affordable, genuine diffi culties
can arise in relation to maintaining mortgage payments in adverse
economic conditions. We seek to offer borrowers forbearance in such
circumstances, with our arrears policy and procedures fully compliant
with regulatory guidance, best practice and the principles of Treating
Customers Fairly (TCF). Success, though, is dependent on borrowers
making early contact with us and openly discussing their circumstances.
No properties mortgaged to the Society were repossessed during 2010
and no capital losses were incurred. Against this background, our review
of the arrears situation at the end of 2010, which included allowance for
the possibility of a downturn in property values, resulted in a reduction of
£187,000 in our provisions for losses on Society mortgages.
Retail Savings
With lending activity subdued in 2010, there was less need for the Society to
seek funding from either retail savers or the wholesale market. However, as
described later in this Review, it was decided to utilise the funds arising upon
the reduction in mortgage assets to increase our liquid assets, with the overall
outcome that our total funding at the end of 2010 was little changed from the
I am pleased to present this Review of the Society’s am pleased to present this Review of the Society’s
I am pleased to present this Review of the Society’s
I activities during 2010, together with those of its principal activities during 2010, together with those of its principal I activities during 2010, together with those of its principal I subsidiary companies, Counties Home Loan Management subsidiary companies, Counties Home Loan Management
Limited (CHLM) and Hampshire Trust Plc (HT).
The Group’s progress is monitored by the Board using a set of Key
Performance Indicators (KPIs) and in the course of this Review I will highlight
these and comment on the outcomes. For ease of reference, however, the
KPIs are separately tabulated, with comparison against 2009’s outcomes.
Overall Group Financial Performance
The Group Operating profi t before provisions and tax rose in 2010 to £6.6
million; a highly satisfactory 27% increase over the previous year’s fi gure
of £5.2 million as our net interest receivable improved, mainly as a result of
lower funding costs. However, as the Chairman has reported, our banking
subsidiary HT suffered a second diffi cult year, about which I comment later in
this Review. Against the background of a second successive loss, the Board
determined that the amortisation of the goodwill on HT’s acquisition should
be accelerated and the combined effect was to reduce the Group profi t after
tax for 2010 to £1.3 million. This outcome was naturally disappointing with
the Board’s KPI in respect of profi t performance, the ratio of profi t after tax to
mean assets, falling to 0.10% in 2010, from the 2009 fi gure of 0.23%.
Whilst the fi nal level of profi t in the year was disappointing, its addition to
our reserves meant that the second of the Board’s KPIs, the percentage the
Group’s gross capital (reserves) represents of total shares and borrowings,
increased from 9.3% at the end of 2009 to 9.5%. This level is likely to be
amongst the highest of all major building societies and is testament to our
ability to withstand fi nancial shocks in these uncertain economic conditions.
Our guiding principle in relation to fi nancial performance, as set out in our
corporate objective, is the maintenance of fi nancially secure and effi cient
operations. The accepted indicator for the security of fi nancial institution
operations is the level of core tier 1 capital held relative to the value of its
assets, risk-weighted in accordance with capital adequacy rules. In this
regard our Group core tier 1 capital ratio at the 2010 year end was 22%,
an improvement on the 20% of a year earlier, and signifi cantly above the
minimum level set by the regulatory authorities.
John Milton, Chief Executive
4
Key Performance Indicators
position 12 months earlier. The split of the funding between retail savings and
other borrowings was also little changed with the KPI used by the Board in
respect of retail savings showing a 1% growth in the balances outstanding.
Of particular note in relation to our retail savings activity during 2010 was
the launch of three index-linked products, with their return over 5 year terms
geared to retail price infl ation. We had made such products available in the
past but the circumstances prevailing
in 2010, with interest rates historically
low and infl ation relatively high, meant
that the products attracted signifi cant
media attention, especially since the
government’s retail funding arm, National
Savings & Investments, had withdrawn
its offering. It is necessary to manage
the exposure emanating from the funds
accepted on such terms very carefully,
causing the amount raised to be strictly
limited, and it was not a surprise when
these issues were quickly taken up.
In addition to the index-linked products,
limited issue, fi xed term, fi xed rate
products were made available
throughout the year and it was pleasing
that there was always a good level of
take-up of these by existing members as
their Savings Bonds reached maturity.
Inevitably, a time comes when savers
feel unsure as to whether they should
commit their funds for another fi xed
period. In recognition of this we devised
the Bond Saver account, which is exclusively available to existing savers
for the transfer of their Savings Bond maturity proceeds. The funds are
then available on immediate access terms, with no penalty on withdrawal,
earning an attractive rate of interest until they are needed.
Another innovation last year was the launch of our Cash Individual Savings
Account (ISA) and Non-ISA 45 Day Notice accounts. These accounts proved
extremely popular with their tiered interest rates encouraging the consolidation
of funds held elsewhere, particularly as regards ISA balances. We were also
pleased that our Branch Saver account, launched towards the end of 2009
specifi cally for personal callers to our Epsom branch, saw a steady increase
in balances as awareness grew regarding the attractiveness of its interest rate
for immediate access, no penalty withdrawals.
Treasury OperationsAs mentioned above, there was little change in the Society’s overall
funding last year and the Society remained active in the wholesale money
market. Its renowned fi nancial strength enabled it to raise the funding
sought to maintain liquidity at the desired level. Whilst the majority of
the funds were for relatively short periods and from established sources,
it was encouraging that some longer term funding was secured and we
attracted a number of new counterparties.
In accordance with regulatory requirements, the Society implemented during
the year the new liquidity regime for deposit-taking fi nancial institutions.
This involved the conduct of an Individual Liquidity Adequacy Assessment
(ILAA) process to determine the appropriate level and composition of
liquidity given the scope and nature
of its operations. Central to this was
to extend the portfolio of high quality,
readily realisable, investments, mainly
comprising UK Gilts. A feature of the
new liquidity regime is to confi rm at
regular intervals the realisability of the
assets held, either through sale or use
as collateral in sale and repurchase
(repo) transactions. In the course
of the year, as part of such liquidity
management operations, we disposed
of certain fi xed income securities, giving
rise to net gains totalling £1.8 million.
Customer Services
Our guiding principles in relation to
customer service, as set out in our
corporate objective, are consistently
attractive and dependable products
and convenient and personal service.
Consistent with the principles of
TCF, we take care in the design of
our products to ensure that they will
meet customers’ needs and we assess the impact of any new products
on existing account holders. We always notify our savers and borrowers
of the products available to them upon expiry of special terms, such as
fi xed, discounted or bonus rates, and there are a number of standard
mailings undertaken each year, such as statement distributions and
interest rate change notices, which we use to keep customers advised
generally of product and service developments. All feed-back from
customers is very much appreciated. Positive comments reinforce
our actions, whilst any instances of unsatisfactory service cause us to
investigate and determine improvements for the future.
Personnel, Accommodation and Systems
I welcome this opportunity to acknowledge the commitment of the Group’s
employees and to place on record my sincere appreciation for their efforts.
Market conditions continue to present signifi cant operational challenges,
with often widely fl uctuating business volumes, particularly in relation to
retail savings. The response of staff is always excellent enabling us to
maintain the prompt turnaround and high levels of personal customer
service that distinguishes the Society from other fi nancial institutions.
2010 2009
Group gross capital ratio* 9.5% 9.3%Group profi t after tax ratio** 0.10% 0.23%Group managementexpenses ratio** 0.75% 0.69%Society management expenses ratio** 0.49% 0.46%Group net costs ratio** 0.57% 0.51%Increase (Decrease) in Society retail savings balances (to £911m) 1% (2%)(Decrease) in Group loan balances (to £877m) (6%) (6%)
Society mortgages in arrears by one month’s payment or more, as a percentage of all Society mortgage accounts 1% 1%* ratio to total shares and borrowings** ratio to mean assets
5
Our Corporate ObjectiveThe Society’s primary objective is to maximise for its current and future members the long-term benefi ts of its operations, the key components of this being:
consistently attractive and dependable products convenient and personal service fi nancially secure and effi cient operations
results of this review should be available for consideration by the Boards
of the Bank and Society in the second quarter of the year.
Counties Home Loan Management Limited (CHLM) is the Society’s other
active subsidiary, although it did not acquire any new mortgage loans
during 2010. Its residual balances
relate to past mortgage book
acquisitions, including a portfolio
of Lifetime Mortgages. Inevitably,
given the books are in run-off, the
balances outstanding reduced
during the year but not signifi cantly.
It is funded by the Society based
on the cost of wholesale market
funds and with these generally lower
than in 2009 and little change in the
interest earned on its mortgages,
the outcome was a healthy interest
margin. The amount written-off due
to losses was £204,000 in 2010
(2009: £261,000) and, although
additional provisioning of £141,000 was deemed appropriate during
2010, at £568,000 the level of provisions carried forward at 31 December
2010 was below that a year earlier. The overall outcome for 2010 was a
profi t after tax of £0.7m.
The FutureIt is evident that it will take some time before the various measures
determined by the coalition government work through the system and
have the desired effect of re-balancing the economy. The immediate
prospects for the Society’s core markets are thus not particularly
encouraging in terms of growth. Much as we would like to expand our
lending, we recognise and share the reluctance of borrowers to take on
new commitments against an uncertain background regarding job security
and house prices. With mortgage demand subdued, there is evidence that
the large banks are exploiting their dominant market position, making it
diffi cult for other lenders, particularly mutual lenders including the Society,
to price loans appropriately relative to funding costs.
However, current conditions are ideal for the development of innovative
and niche products to meet particular circumstances. There was
evidence of that last year, on both sides of our balance sheet, with the
success of our index-linked, infl ation beating savings products and
guarantor mortgage, under which family members help a relative gain
a foothold on the housing ladder. It is on such initiatives that we will be
focusing our attention during 2011 and beyond.
Usage of the full transactional facilities available through our secure Internet
service, National Counties Online, has steadily increased as our customers
have appreciated the convenience and ease of its operation. During the
year the project to update the online mortgage application system was
completed and the facility made live
after the conduct of thorough testing.
Corporate Social Responsibility (CSR)
The Society has always recognised its
community, marketplace, employer and
environmental responsibilities. Having
previously met these responsibilities,
almost instinctively, as a by-product of
its mutual status and business ethos,
they are now enshrined in a Board-
approved CSR Policy Statement that
encompasses all facets and provides
a steer for the ongoing development of
this important issue.
Our activities in the community include support for many charities,
clubs and voluntary organisations based locally to the Society’s Head
Offi ce. In the marketplace, as an adjunct to our mainstream products,
which are subject to our TCF regime, we have devised a small loan
scheme for the tenants of a local housing association, to help combat
fi nancial exclusion. The Society recognises that its continued business
success depends signifi cantly on the commitment, enthusiasm and
professionalism of its staff and these attributes are maintained through
continuous development during their careers with the Society, with
fi nancial support provided for those pursuing relevant professional study.
As regards the environment, we are alert to reducing our use of scarce
resources and willing to alter our operating practices accordingly.
Subsidiary OperationsThe Chairman has commented quite extensively in her Statement on
the disappointing performance at the Society’s banking subsidiary
Hampshire Trust Plc (HT), which recorded a loss after tax of £1.5 million
in 2010, and further comment appears within the Directors’ Report.
The Bank has specialised for many years in roughly equal measure in
commercial property loans, particularly small development loans, and
solicitor practice funding, being primarily in connection with personal
injury compensation claims. Until 2009 its performance had been
entirely satisfactory but the extreme economic conditions of recent times
have now impacted signifi cantly in both areas; diffi culties having been
encountered fi rst as regards solicitor practice funding and then in 2010
signifi cant provisioning was considered appropriate against certain long
standing property loans. Stricter lending criteria were imposed in respect
of all its activities during 2009 and its control processes strengthened.
Whilst these appear to have stabilised the position, in February 2011
an independent review of the Bank’s business was commissioned. The
John Milton
Chief Executive 24 February 2011
Chief Executive’s Review - continued
6
Directors’ Report
he directors have pleasure in presenting their Annual Report,
together with the Annual Accounts and Annual Business
Statement of the Society and its subsidiary undertakings (the
Group) for the year ended 31 December 2010.
Business Review
Commentary on the Group’s Key Performance Indicators (KPIs) is
included in the Chief Executive’s Review, which provides a summary of
business activities.
Results for the Year
The Group total assets at 31 December 2010 were £1,238 million (2009:
£1,246 million).
Total loans and advances to customers at the year end were
£877 million (2009: £935 million). At 31 December 2010 a total
provision of £10.1 million, comprising £9.6 million specifi c and
£0.5 million general, (2009: £7.5 million, comprising £6.9 million
specifi c and £0.6 million general) was made in the Accounts for
possible future loan losses. This fi gure represented 1.2% of loan
balances outstanding (2009: 0.8%). At the end of the year, as in 2009,
there was only one mortgaged property in the Group’s possession, with
a further ten (2009: thirteen) mortgage accounts in arrears by twelve or
more months. The principal balances outstanding on these accounts
totalled £1,588,000 (2009: £1,926,000) and the total amount of the
arrears was £99,000 (2009: £108,000). Liquid assets, in the form of
authorised investments and cash, amounted to £343 million at the year
end (2009: £290 million), representing 30% (2009: 26%) of total shares
and borrowings and 28% (2009: 23%) of total assets of the Group.
Changes in intangible and tangible fi xed assets during the year are
detailed in Notes 13 and 14 to the Accounts. Savers’ share balances
totalled £911 million at 31 December 2010 (2009: £904 million).
Deposits by credit institutions and other customers amounted to
£215 million at the year end (2009: £229 million), representing 19%
(2009: 20%) of total shares and borrowings.
The Group operating profi t prior to provisions was £6.6 million (2009:
£5.2 million). After provisions Group operating profi t before tax was
£2.4 million (2009: £4.4 million). The Group profi t for the year after tax
of £1.3 million (2009: £3.0 million) brought the Group gross capital at
31 December 2010, after pension liability adjustments, to £107 million
(2009: £106 million). This represented 8.6% (2009: 8.5%) of Group
total assets at that date or 9.5% (2009: 9.3%) of total shares and
borrowings. In line with many organisations, the Group has a pension
defi cit. During the year the defi cit had decreased to £0.4 million after
tax (2009: £0.6 million) and details of this appear in Note 22 of the
Accounts. Group free capital (i.e. capital plus general provisions for
bad and doubtful debts, less tangible and intangible fi xed assets)
amounted to £99 million at the end of the year (2009: £96 million),
equivalent to 8.8% (2009: 8.4%) of total shares and borrowings.
The Society is committed to maintaining good relationships with its
suppliers and its practice has and will continue to be to pay invoices
within fourteen days of receipt. The amounts owed to trade creditors at
31 December 2010, as a proportion of the amounts invoiced by suppliers
during the full year, was equivalent to 8 days (2009: 9 days).
Principal Risks & Uncertainties
The principal business risks to which the Group is exposed are credit,
market, liquidity, operational and regulatory.
Credit risk is the risk that a fi nancial loss will arise from a customer or
counterparty failing to meet their obligations. This primarily arises from
the Group’s lending activities but also as a result of the Group’s Treasury
investments and transactions. This risk is mitigated by the Group’s
conservative lending and investment approach as prescribed in the
Board-approved lending and liquidity policies.
Market risk is the risk of loss through adverse movements in market
rates which for the Group is mainly changes to, and relative movements
in, interest rates. This risk is managed through a combination of natural
hedges in the Group balance sheet and the use of derivative contracts,
principally interest rate swaps, as permitted under the Board-approved
Financial Risk Management Policy.
Liquidity risk is the risk that the Group will not have suffi cient funds
to meet its fi nancial obligations, as they fall due. This could arise for
example as a result of imbalances in the cash fl ow of its activities. This
is mitigated through adherence to the Board-approved Liquidity and
Financial Risk Management Policies and the conducting of an Individual
Liquidity Adequacy Assessment (ILAA) process as required by the
Financial Services Authority (FSA). As a result the Society maintains
a signifi cant portfolio of highly liquid assets that may be sold or used
as collateral in sale and repurchase (repo) transactions. This portfolio,
together with large call and overnight deposits with major banks, ensure
that it can meet all its required payments.
Operational risk is the risk of loss from failures in the Group’s internal
processes and systems or actions of its staff. A dedicated operational
risk function enhances the Group’s management in this respect and
an Executive Group Risk Committee reviews the situation. During the
year the terms of reference of the Audit Committee were extended
specifi cally to embrace risk and it now receives the minutes of the Group
Risk Committee and regular reports from the operational risk function.
An unfortunate development in recent years has been the increase in
fraudulent activity directed against fi nancial institutions and the Society’s
operational controls in this respect are subject to continual review and
strengthening to maintain their effectiveness.
Regulatory risk is the risk of loss arising from failure to comply with
statutory and regulatory requirements and the risk that the volume,
complexity and cumulative effect of regulatory issues may impact the
T
7
Society’s ability to compete and function effectively. The hiatus of
regulatory changes in the wake of the fi nancial crisis has impacted
on business progress. Additional resources have been committed to
this aspect and are likely to be fully utilised as the structural changes
to the regulatory regime for fi nancial services, announced by the new
government, are implemented in the course of the next few years.
There are a number of uncertainties faced by the Group the most
signifi cant of which presently is the future cost of funding to support
lending activities and maintain liquidity at an appropriate level to meet
ongoing operations. In this respect wholesale funding is subject to
market sentiment and conditions and retail funding varies according
to economic activity and competition, including that from equity-based
investments. Continuing uncertainty regarding the economy is also of
concern as it potentially increases credit risk on the Group’s mortgage
and commercial loans and this is causing the Group to apply increasingly
strict criteria in respect of all of its lending operations.
The Society has an historic portfolio of fl oating rate notes (FRNs) issued
by banks and building societies which is in run-off. The portfolio includes
FRNs issued by Irish Banks maturing in 2012. They are senior debt,
currently guaranteed by the Irish government and whilst the economic
and political environment in Ireland remains very challenging, we do not
currently expect any impairment to be required for these investments.
Developments in respect of the portfolio are being continuously
monitored and reported to the ALCO and Board.
The Society’s banking subsidiary, Hampshire Trust Plc (HT) has had
to provide for substantial losses over the past two fi nancial years
resulting from lending to solicitors’ practices and property lending. In the
current economic climate there is some uncertainty about HT’s future
performance. Following extensive internal review, however, HT’s Board
believe that the business has stabilised and a strategic review is being
conducted to ensure that the future business plan is appropriate.
In addition to the forthcoming changes to the regulatory framework, risk
management within building societies has been subjected to recent
review by the FSA and this has given rise to fresh guidance that is
currently being interpreted. Meanwhile, other key aspects, such as the
wide-ranging review by the FSA of the mortgage market, are yet to be
fi nalised. There is therefore some uncertainty about the full effect of
regulatory changes on the Group.
Financial Risk ManagementObjectives & Policies
In addition to the operational risk function, the Group has a formal
structure for managing fi nancial risk, which includes the establishment
of risk appetites and limits, reporting lines, mandates and other control
procedures. This structure is reviewed regularly by an Executive Group
Asset and Liability Committee, which is charged with responsibility
for managing and controlling balance sheet exposures and the use
of fi nancial instruments for risk management purposes in line with
the Board-approved Financial Risk Management Policy. Full details
regarding the risks and the fi nancial instruments used by the Group are
given in Note 26 to the Accounts.
The Group’s Internal Capital Adequacy Assessment Process (ICAAP)
was reviewed by the FSA towards the end of 2009 and the Individual
Capital Guidance (ICG) level to be observed by the Group and its
constituent entities was determined at the start of 2010. The disclosures
required under Pillar 3 of the Capital Requirements Directive (CRD) are
available for reference via the Society’s website.
The Group’s ICAAP and ILAA processes are reviewed regularly and
used to identify and quantify the fi nancial and other risks faced by the
Group. Stress and reverse stress testing is employed separately and
as part of these processes to ensure that the Group identifi es and
understands the extent of potential risks. The output is then used to
decide the Group’s risk appetite, objectives and limits and encapsulate
them in the Financial Risk Management and Liquidity Policies to ensure
that the Group operates within the parameters set by the Board.
Directors
Full details relating to the Society’s directors can be found in the Annual
Business Statement.
As advised in last year’s Report, in accordance with the Board’s
succession planning for non-executives, David Gibson and John Sinclair
retired from the Board with effect from 28 April 2010 and 31 December
2010 respectively. In anticipation of these retirements a recruitment
process had been undertaken involving national press advertising
and notifi cation to Society customers via a newsletter. These elicited
a tremendous response in terms of the number of applications and a
fi lter process was devised to identify candidates with the qualifi cations
and experience deemed appropriate by the Board having regard for its
composition and the envisaged Group activities going forward. Following
a series of initial interviews conducted by the Nomination Committee and
fi nal interviews by the Board, it was agreed to invite Martin Young and
Peter Goshawk to join the Board, with effect from 1 February and
1 May 2010 respectively. Martin and Peter are both qualifi ed
accountants, who have gained highly relevant and valuable experience
whilst they were previously employed in senior executive positions within
UK banks. In accordance with the Rules of the Society, both Martin and
Peter will be required to retire from the Board at the AGM in 2011, with a
view to seeking election then by members.
Also as advised in last year’s report Paul Batchelor, Finance Director,
retired with effect from 28 April 2010. His replacement was identifi ed
following national press advertising and a series of interviews, which
culminated in the Board offering the position to Chris Fry. Chris has
excellent fi nance, accounting, risk and treasury experience, gained
at senior level whilst employed by a major UK bank. With his
Directors’ Report - continued
8
Polly Williams
Chairman 24 February 2011
appointment as Finance Director effective from 28 April 2010, Chris will
similarly be required to retire from the Board at the 2011 AGM and seek
election by members.
A further director, Colin Sheppard, will retire from the Board at the
2011 AGM, under the rotation requirements of the Society’s Rules, as
three years have elapsed since he was last re-elected to the Board.
Colin is a Non-executive Director, who was fi rst appointed to the
Board in September 2004. As he will have completed two three year
terms, in accordance with good corporate governance, the Nomination
Committee and Board gave especially careful consideration to his
position, being mindful of the need to maintain the independence of
the Board and ensure regular refreshment of its composition. The
outcome was unanimous endorsement for Colin to seek re-election at
the forthcoming AGM.
At the end of the year no director had a benefi cial interest in any shares
or debentures of any connected undertaking of the Society.
Going Concern
The Society’s and Group’s business activities and objectives together
with the factors likely to affect its future development, performance and
position are set out in the Chief Executive’s Review on pages 3 to 5. The
fi nancial position of the Society and principal risks and uncertainties are
described earlier within this Report. The Society’s position in respect of
liquidity risk and other fi nancial risks is shown in Note 26 to the Accounts.
The directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for the
foreseeable future. Thus they continue to adopt the going concern basis
of accounting in preparing the annual accounts.
Auditors
KPMG Audit Plc were fi rst appointed as auditors to the Society in
2005. The fi rm’s extensive knowledge and experience of the fi nancial
services industry has been of considerable benefi t to the Society and a
resolution to re-appoint KPMG Audit Plc as auditors of the Society will
be proposed at the AGM.
9
Report on Corporate Governance
TMr Sinclair was Chairman of the Board until 30 September 2010 when
he stepped down in anticipation of his retirement from the Board at
31 December 2010 and Mrs Williams was elected in his place.
Mr Gibson was Chairman of the Audit & Risk Committee until 28 April
2010 when he retired. Mrs Williams succeeded him until her election
as Board Chairman, whereupon Mr Young assumed Chairmanship of
the Committee. Mr Sheppard chaired the Remuneration and
Mr Sinclair the Nomination Committees throughout 2010.
Chairman and Chief Executive
The offi ces of Chairman and Chief Executive are distinct and held
by different people. The role of each is set out in their respective job
descriptions. The Chairman is responsible for leading the Board,
ensuring its effectiveness and communicating with the Society’s
members on behalf of the Board. The Chief Executive is responsible for
managing the Society’s business and operations within the parameters
set by the Board.
Board Balance and Independence
At the year end, following the retirement of Mr Sinclair, the Board
comprised fi ve Non-executive Directors (including the Chairman) and
three Executive Directors. All Non-executive Directors are considered by
the Board to be independent in character and judgement and free of any
relationship or circumstances which could materially interfere with the
exercise of their judgement. The Vice Chairman is designated to be the
Senior Independent Director.
Appointments to the Board
The principal purpose of the Nomination Committee is to undertake the
assessment of the balance of skills and experience on the Board and the
requirements of the business, with a view to determining whether any
skill shortages exist. Having completed the assessment, the Committee
makes recommendations to the Board accordingly. Appointments to the
Board are made on merit and against objective criteria. Candidates for
Non-executive Directorship are identifi ed in a variety of ways, including
advertisements both in the Society’s periodic newsletters to customers
and the national press.
Non-executive Directors are required to demonstrate that they are able
to allocate suffi cient time to undertake their duties and all Directors
must meet the tests of fi tness and propriety laid down by the Financial
Services Authority (FSA), with which all Directors are required to be
registered as Approved Persons in order to undertake their Controlled
Functions as Directors.
Information and Professional Development
The Chairman ensures that the Board receives information suffi cient to
enable it to fulfi l its responsibilities, with a review being undertaken by the
Director Board Audit & Risk Remuneration NominationDirector Board Audit & Risk Remuneration NominationDirector
J Sinclair 10 (11) 2 (3) 2 (2) J Sinclair 10 (11) 2 (3) 2 (2) J Sinclair 10 (11) 2 (3) 2 (2) J Sinclair 10 (11) 2 (3) 2 (2)
Mrs P Williams 11 (11) 2 (2) 3 (3) 2 (2) Mrs P Williams 11 (11) 2 (2) 3 (3) 2 (2) Mrs P Williams 11 (11) 2 (2) 3 (3) 2 (2) Mrs P Williams 11 (11) 2 (2) 3 (3) 2 (2)
D Gibson 3 (3) 1 (1) 1 (1) D Gibson 3 (3) 1 (1) 1 (1) D Gibson 3 (3) 1 (1) 1 (1) D Gibson 3 (3) 1 (1) 1 (1)
J Howard 11 (11) 3 (3) 3 (3) J Howard 11 (11) 3 (3) 3 (3) J Howard 11 (11) 3 (3) 3 (3)
P Batchelor 3 (3)
C J Fry 8 (8)
P Goshawk 7 (7) 2 (2) 2 (2) P Goshawk 7 (7) 2 (2) 2 (2) P Goshawk 7 (7) 2 (2) 2 (2)
A P Gration 11 (11)
J S Milton 11 (11) 2 (2) J S Milton 11 (11) 2 (2) J S Milton 11 (11) 2 (2) J S Milton 11 (11) 2 (2)
C Sheppard 11(11) 3 (3) C Sheppard 11(11) 3 (3) C Sheppard 11(11) 3 (3)
M Young 9 (10) 2 (3) 3 (3) M Young 9 (10) 2 (3) 3 (3) M Young 9 (10) 2 (3) 3 (3)
he Board of Directors is committed to best practice in
corporate governance. This report explains how the corporate governance. This report explains how the corporate governance. This report explains how the T corporate governance. This report explains how the T Society adheres to the principles in the Combined Code on Society adheres to the principles in the Combined Code on Society adheres to the principles in the Combined Code on T Society adheres to the principles in the Combined Code on TCorporate Governance issued by the Financial Reporting Council in June
2008 (the Code), which was the prevailing guidance for the year covered
by this report.
The Board
The principal function of the Board is to determine the strategy and
policies of the National Counties Group within an effective control
framework, which enables risk to be assessed and managed. The
Board ensures that the necessary fi nancial and human resources are
in place for the Group to meet its objectives and that business and
management performances are reviewed. Furthermore, the Board
ensures that the Group operates within the Society’s constitution and
relevant legislation and regulation and that proper accounting records
and effective systems of business control are established, maintained,
documented and audited.
There are usually at least ten formal Board meetings each year. In
addition, at least once a year, the Non-executive Directors meet
without the Executive Directors present. All Board members have the
benefi t, at the Society’s expense, of liability insurance in respect of
their responsibilities as Directors and have access to independent
legal advice if required. The Board has three committees; the Audit
& Risk, Remuneration and Nomination Committees, the Terms of
Reference for which are published on the Society’s website. The fi rst
two are comprised only of Non-executive Directors and have different
Chairmen, neither of which is the Chairman of the Society. The
Nomination Committee is comprised of the Society’s Chairman, the
Vice Chairman and the Chief Executive.
Attendance of Directors at the Board and its committees during 2010
is shown in the accompanying table, with the total number of meetings
that each Director was eligible to attend shown in brackets.
10
full Board at least annually. All new Directors undergo formal induction
with any training or development needs being identifi ed during this process
and in the course of the annual performance evaluations referred to below.
Performance Evaluation
A formal process exists to evaluate, on an annual basis, the performance
and effectiveness of individual Directors and of the Board and its
committees. The Non-executive Directors are evaluated by the
Chairman, taking into account the views of other Directors, and the
Chairman is evaluated by the Vice Chairman, as Senior Independent
Director, also having regard for the views of the other Directors. The
Board evaluates its own overall performance and that of its committees.
Executive Directors are evaluated in accordance with the appraisal
framework for Society employees generally with the Chief Executive’s
appraisal being conducted by the Chairman, after taking into account the
views of other Directors and his immediate subordinates.
Election and Re-election
The Society’s Rules require that all Directors are submitted for election
at the Annual General Meeting (AGM) following their fi rst appointment to
the Board, except where their appointment occurs in the period between
the end of the Society’s fi nancial year and the AGM itself, in which
case they must seek election at the AGM in the following year, and all
Directors are required to seek re-election every three years. The Board’s
policy with regard to maintaining the independence of Non-executive
Directors is that they can expect to serve between two and three, full
three-year terms, with the exception of the Chairman who may serve
for a maximum of four. As stated above, the Nomination Committee is
responsible for recommending to the Board whether a Non-executive
Director should be submitted for re-election. Appointments lasting
beyond six years are subject to particularly rigorous annual review,
refl ecting the need for progressive refreshment of the Board.
Remuneration
The Report on Directors’ Remuneration, prepared by the Chairman of the
Society’s Remuneration Committee, is to be found on page 11.
Internal Control and Risk
The Board is responsible for determining a framework for risk
management and control. Senior management are responsible for
designing, operating and monitoring risk management and internal
control processes, and the Audit & Risk Committee, on behalf of the
Board, is responsible for reviewing the adequacy and effective operation
of these processes. The system of internal control is designed to
enable the Group to achieve its corporate objectives within a managed
risk profi le, not to eliminate risk. The internal audit function provides
independent and objective assurance that these processes are
appropriate and effectively applied.
Audit & Risk Committee and Auditors
At the end of the year the Audit & Risk Committee comprised
three Non-executive Directors. The Chairman of the Board is not
a member of the Committee. The Board is satisfi ed that at least
two members of the Committee have relevant fi nancial experience.
The role of the Committee, which usually meets three times a year,
is to review the integrity of the fi nancial statements, to review the
effectiveness of internal controls and risk management systems, to
monitor and review the effectiveness of the internal audit function
and to consider and recommend to the Board (for approval by the
members) the appointment or re-appointment of the external auditors.
The Committee reviews and monitors the external auditors’ objectivity,
competence, effectiveness and independence, ensuring that if they
or their associates are invited to undertake non-audit work it will not
compromise auditor objectivity and independence. The Group’s
internal audit function reports to the Chief Executive but has direct
access to the Committee Chairman.
Dialogue with Shareholders
As a mutual body the Society does not have institutional shareholders
but has a membership composed exclusively of individuals, all
of whom are also customers of the Society. Periodic customer
newsletters are produced and mailings undertaken to ensure that
members are kept informed regarding developments at the Group,
with reaction and feed-back encouraged. Communication with
members is also increasingly conducted via the Society’s website.
The Vice Chairman, as Senior Independent Director, is the point
of contact for members if they feel communication with the Chief
Executive or Chairman is inappropriate for any reason.
Constructive Use of the AGM
Each year the Society sends details of the AGM, including appointment
of proxy forms, to members who are eligible to vote. Consistent with
the Code the AGM voting forms include a “Vote withheld” option.
The Society’s normal practice is that a poll is called in relation to
each resolution at the AGM and all proxy votes cast are included in
the voting results which are published on the Society’s website. All
members of the Board are normally present at the AGM each year
and the Chairmen of the Board and its three committees are therefore
available to answer any questions.
Polly Williams
Chairman 24 February 2011
11
Report on Directors’ Remuneration
Tperiod of no more than 12 months by the Society and 6 months by the
Executive Director. Mr C J Fry has a contract on this basis issued in
2009, whereas Mr J S Milton and Mr A P Gration have contracts which
were entered into in 1997, before the current guidelines were introduced,
and these are terminable by them on one year’s notice or by the Society
on two years’ notice.
Non-executive Directors' Remuneration
The level of fees payable to Non-executive Directors is assessed using
benchmarks from a comparator group comprising comparable fi nancial
organisations. Details of Non-executive Directors’ emoluments for
2010 and comparatives for 2009 are set out in Note 6 to the Accounts,
which should be read in conjunction with this report. There was
no increase in the basic Non-executive Director fee when it was
reviewed in April 2010 but in recognition of the increased responsibility
associated with the roles, additional payments were determined as
appropriate for the Chairmen of the Audit & Risk and Remuneration
Committees and the Senior Independent Director. Non-executive
Directors do not receive any benefi ts other than their fees and travelling
and subsistence expenses.
The Procedure for Determining Remuneration
The Remuneration Committee, comprising all of the Non-executive
Directors, is responsible for setting the remuneration of the Executive
Directors. The Committee, which is not chaired by the Society’s
Chairman, also sets the additional payments for the Chairman of the
Board, the Chairmen of the Audit & Risk and Remuneration Committees
and the Senior Independent Director, with the Committee members
not taking part in discussions concerning their own remuneration. The
basic Non-executive Director fee is set by the Executive Directors.
External consultants are commissioned periodically to undertake a
thorough investigation of director remuneration. Such an investigation
was undertaken in 2007 and provided the basis then for the respective
determinations of Executive Director remuneration by the Remuneration
Committee and the basic fee for Non-executive Directors by the
Executive Directors.
Colin Sheppard
Chairman Remuneration Committee 24 February 2011
he Board is committed to best practice in its remuneration
policy for Directors. This report explains how the Society policy for Directors. This report explains how the Society T policy for Directors. This report explains how the Society T applies, in relation to remuneration, the principles in the applies, in relation to remuneration, the principles in the T applies, in relation to remuneration, the principles in the TCombined Code on Corporate Governance issued by the Financial
Reporting Council in June 2008 (the Code).
The Level and Make-up of Executive Director Remuneration
The Society’s remuneration policy for Executive Directors, consistent with
the approach observed in comparable organisations, involves rewarding
Executive Directors through salaries and other benefi ts. Previously
this has included an incentive scheme designed to recognise corporate
performance on an annual basis. However, against the background of
continued economic uncertainty the Remuneration Committee decided
that the Executive Directors’ incentive scheme should remain suspended
throughout 2010, with its subsequent re-introduction being subject to
incorporation of updated guidance issued by the Financial Services
Authority to ensure consistency with best practice.
Executive Directors' Emoluments
Details of Executive Directors’ emoluments for 2010 and comparatives
for 2009 are set out in Note 6 to the Accounts, which should be read in
conjunction with this report. The Society has no share option scheme.
Basic salaries are normally reviewed annually by reference to jobs
carrying similar responsibilities in comparable fi nancial organisations
and in the light of market conditions generally. In September 2010
the Remuneration Committee decided that Executive Directors’ basic
salaries should be increased in line with the 3% award made to staff
generally but the Chief Executive waived his increase.
Executive Directors are contributing members of the National Counties
Building Society Pension and Life Assurance Scheme, which is available
to all staff. The Society’s contribution rate to the Scheme during 2010
was 21.0%. With effect from 1 May 2007 a Group Self Invested Pension
Plan (SIPP) was established to receive the Society’s contributions in
respect of the element of the Executive Directors’ salaries in excess
of the Scheme salary cap. Executive Directors are eligible to receive
other taxable benefi ts including a car, or car allowance, and healthcare
provision for themselves and their immediate family, plus concessionary
mortgage facilities on terms that are also available to all staff. Standard
professional body subscriptions and travelling and subsistence expenses
are also met.
Executive Directors' Contractual Terms
The standard terms for new Executive Director appointments, in keeping
with current recommended practice, include a contractual notice
12
Statement of Directors’ Responsibilities
TAnnual Report and Accounts
he directors are responsible for preparing the Annual he directors are responsible for preparing the Annual T he directors are responsible for preparing the Annual T Report and Accounts in accordance with applicable law Report and Accounts in accordance with applicable law T Report and Accounts in accordance with applicable law Tand regulations.
The Building Societies Act (“the Act”) requires the directors to prepare
Group and Society accounts for each fi nancial year. Under that law they
have elected to prepare the Group and Society accounts in accordance
with UK Accounting Standards and applicable law (UK Generally
Accepted Accounting Practice).
The Group and Society accounts are required by law to give a true and
fair view of the state of affairs of the Group and of the Society as at the
end of the fi nancial year and of the income and expenditure of the Group
and of the Society for the fi nancial year.
In preparing these accounts, the directors are required to:
• select suitable accounting policies and apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
accounts; and
• prepare the accounts on the going concern basis, unless it is
inappropriate to presume that the Group and Society will continue
in business.
In addition to the annual accounts, the Act requires the directors to
prepare, for each fi nancial year, an annual business statement and a
directors’ report, each containing prescribed information relating to the
business of the Group.
Accounting Records and Internal Control
The directors are responsible for ensuring that the Group:
• keeps proper accounting records that disclose with reasonable
accuracy at any time the fi nancial position of the Group and Society,
in accordance with the Act; 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.
The directors have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Group and to
prevent and detect fraud and other irregularities.
The directors are responsible for the maintenance and integrity of the
corporate and fi nancial information included on the Society’s website.
Legislation in the UK governing the preparation and dissemination of
fi nancial statements may differ from legislation in other jurisdictions.
Polly Williams
Chairman 24 February 2011
13
Independent Auditor’s Report
ndependent Auditor’s Report to the members of National
Counties Building Society.
We have audited the Group and Society annual accounts of National
Counties Building Society for the year ended 31 December 2010 set
out on pages 14 to 35. The fi nancial reporting framework that has
been applied in their preparation is applicable law and UK Accounting
Standards (UK Generally Accepted Accounting Practice).
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 and the Society’s members as a body, for our audit work, for
this report, or for the opinions we have formed.
Respective responsibilitiesof directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set
out on page 12 the directors are responsible for the preparation of annual
accounts which give a true and fair view. Our responsibility is to audit, and
express an opinion on, the annual accounts 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 (APB’s)
Ethical Standards for Auditors.
Scope of the auditof the annual accounts
A description of the scope of an audit of annual accounts is provided on
the APB’s website at www.frc.org.uk/apb/scope/private.cfm.
Opinion on annual accounts
In our opinion the annual accounts:
• give a true and fair view, in accordance with UK Generally Accepted
Accounting Practice, of the state of affairs of the Group and of the
Society as at 31 December 2010 and of the income and expenditure
of the Group and of the Society for the year then ended; and
• have been prepared in accordance with the requirements of the
Building Societies Act 1986 and regulations made under it.
Opinion on other matters prescribedby the Building Societies Act 1986
In our opinion:
• the Annual Business Statement and the Directors’ Report have each
been prepared in accordance with the applicable requirements of the
Building Societies Act 1986 and regulations thereunder;
• the information given in the Directors’ Report for the fi nancial year
for which the annual accounts are prepared, is consistent with the
accounting records and the annual accounts; 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.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the
Building Societies Act 1986 requires us to report to you if, in our opinion:
• proper accounting records have not been kept by the Society; or
• the annual accounts 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.
I
Simon Clark (Senior Statutory Auditor)
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
One Snowhill
Snow Hill Queensway
Birmingham
B4 6GH 24 February 2011
14
Income and Expenditure Accounts
Group Society For the year ended 31 December 2010 2009 2010 2009
£ 000 £ 000 £ 000 £ 000 Note
Interest receivable and similar income 2 35,820 46,908 30,846 42,959 Interest payable and similar charges 3 (22,099) (34,959) (20,727) (33,331)
Net interest receivable 13,721 11,949 10,119 9,628
Pension fi nance charge 22 (30) (79) (30) (79) Fees and commissions receivable 2,706 2,874 729 1,126 Fees and commissions payable (533) (541) (309) (352) Other operating income 150 113 171 78
Total other income 2,293 2,367 561 773
Total income 16,014 14,316 10,680 10,401
Administrative expenses 4 (8,297) (7,891) (5,543) (5,415) Depreciation and amortisation 13 & 14 (1,079) (1,188) (378) (492) Other operating charges 7 (25) (27) (25) (27)
Operating profi t before provisions 6,613 5,210 4,734 4,467
Provisions for bad and doubtful debts 8a (3,295) (4,913) 187 (202) Provisions for contingent liabilities and commitments 8b (65) 425 (57) 384 Provisions against fi xed asset investments 8c 219 3,643 219 3,643 Write-off of fi xed asset investment 13 (1,100) (1,100) - (1,100) -
Profi t on ordinary activities before tax 2,372 4,365 3,983 8,292
Tax on profi t on ordinary activities 9a (1,119) (1,325) (1,408) (2,259)
Profi t for the fi nancial year 23 1,253 3,040 2,575 6,033
The above results are all derived from continuing activities.
Statements of Total Recognised Gains and Losses
Profi t for the fi nancial year Profi t for the fi nancial year Profi t for the fi nancial year 1,253 3,040 2,575 6,033
Movement in the actuarial loss recognised in the pension scheme 22 272 (726) 272 (726) Movement in taxation relating to the pension scheme (82) 203 (82) 203
Total gains recognised in the year Total gains recognised in the year Total gains recognised in the year 1,443 2,517 2,765 5,510
The notes on pages 17 to 35 form part of these Accounts.
Group Group Society
2010 2009 2010 2009 £ 000 £ 000 £ 000 £ 000 £ 000
15
Balance Sheets
Group Society
As at 31 December 2010 2009 2010 2009 £ 000 £ 000 £ 000 £ 000
Assets Note
Liquid assets Liquid assets Liquid assets Cash in hand and balances with the Bank of England Cash in hand and balances with the Bank of England Cash in hand and balances with the Bank of England 301 510 510 299 509
Treasury bills and similar securities 9,998 - - 9,998 -Loans and advances to credit institutions 10a 110,383 74,184 74,184 105,368 68,142
Debt securities 10b 222,575 215,644 222,575 215,644
Total liquid assets 343,257 290,338 338,240 284,295
Loans and advances to customers Loans and advances to customers Loans fully secured on residential property Loans fully secured on residential property Loans fully secured on residential property 11 814,605 862,412 705,032 753,060
Other loans 11 62,764 72,353 25,065 27,099
Total loans and advances to customers 877,369 934,765 730,097 780,159
InvestmentsInvestments in subsidiary undertakings 12 12 12 - - - 127,405 134,240
Intangible fi xed assets 13 2,001 3,636 - - Tangible fi xed assets 14 6,715 6,945 5,925 6,132 Other assets 15 3,152 3,483 2,469 1,492 Prepayments and accrued income 16 5,646 6,477 2,708 3,273
Total assets 1,238,140 1,245,644 1,206,844 1,209,591
Liabilities
Shares 17 910,767 903,875 910,767 903,875
Other borrowingsAmounts owed to credit institutions 18 63,349 117,095 63,349 117,095Amounts owed to other customers 19 151,543 111,668 111,021 68,597
Total other borrowings 214,892 228,763 174,370 185,692
Total shares and borrowings 1,125,659 1,132,638 1,085,137 1,089,567
Other liabilities 20 1,766 3,215 6,967 7,570 Accruals and deferred income 21 2,707 2,633 2,367 2,257 Provisions for liabilities 8b 607 903 574 866 Net pension liability 22 352 649 352 649
ReservesGeneral reserves 23 107,049 105,606 111,447 108,682
Total liabilities 1,238,140 1,245,644 1,206,844 1,209,591
Memorandum items
Contingent liabilities 24 22,114 7,806 22,114 7,806
Commitments 24 30,313 41,255 30,300 41,255
The notes on pages 17 to 35 form part of these Accounts.
These accounts were approved by the Board of directors on 24 February 2011 and were signed on its behalf by:
Polly Williams John Milton Chris FryChairman Chief Executive Finance Director
16
Group Cash Flow Statement
For the year ended 31 December 2010 2009 £ 000 £ 000
Net cash outfl ow from operating activities (534) (104,025) Taxation 1,136 (201)
Capital expenditure and financial investment: Purchase of tangible fixed assets (342) (351)
Proceeds from disposal of tangible fixed assets 23 3 Purchase of debt securities (73,380) (90,000)
Sale and maturity of debt securities 66,528 224,361
Total capital expenditure and fi nancial investment (7,171) 134,013 Acquisitions:
Mortgage portfolio premiums paid Mortgage portfolio premiums paid Mortgage portfolio premiums paid (126) (226)
Total acquisitions (126) (226)
(Decrease)/Increase in cash (6,695) 29,561
Reconciliation of operating profi t to net cash outfl ow from operating activities Profi t on ordinary activities before tax 2,372 4,365 Purchase of Treasury bills (9,979) - Sale and maturity of Treasury bills - - Net decrease in prepayments and accrued income 100 2,956 Net decrease in accruals and deferred income (1) (10,413) Provisions for bad and doubtful debts charged 3,305 4,913 Loans and advances written off (673) (2,591) Net decrease in provisions for FSCS levies (294) (744) Net decrease in provisions against fi xed asset investments (219) (3,643) Write off of fi xed asset investments 1,100 - Depreciation and amortisation 1,079 1,188 Loss on sale of tangible fi xed assets 5 - Amortisation of premium on mortgage portfolios 412 467 Amortisation of premium on debt securities 501 306
Net cash outfl ow from trading activities (2,292) (3,196)
Net decrease in loans and advances to customers 54,764 53,596 Net increase/(decrease) in shares 7,116 (10,847) Net decrease in amounts owed to credit institutions and other customers (14,062) (130,755) Net increase in loans and advances to credit institutions (42,608) (15,702) Net decrease/(increase) in other assets 332 (499) Net increase in cash collateral deposits (pledged)/held (3,901) 4,769 Net increase/(decrease) in other liabilities and provisions for liabilities 264 (130) Pension charge 471 397 Pension contributions (618) (1,658)
Net cash outfl ow from operating activities (534) (104,025)
Analysis of (decrease)/increase in cash Cash balances at 1 January 45,228 15,667 (Decrease)/increase in cash (6,695) 29,561
Cash balances at 31 December 38,533 45,228
Comprising: Cash in hand and balances with the Bank of England 301 510 Loans and advances to credit institutions repayable on demand 38,232 44,718
Cash balances at 31 December 38,533 Cash balances at 31 December 38,533 Cash balances at 31 December 45,228
Balances of £291,000 (2009: £499,000) included above are required to be maintained with the Bank of England. The notes on pages 17 to 35 form part of these Accounts.
17
Notes to the Accounts
1. Principal accounting policiesThe following accounting policies have been applied consistently in dealing with
items that are considered material in relation to the Group and Society Accounts:
1.1 Basis of preparation The Accounts are prepared under the historical cost convention
and in accordance with British Bankers’ Association Statements of
Recommended Practice, where relevant and material, the Building
Societies (Accounts and Related Provisions) Regulations 1998,
the Building Societies Act 1986 and applicable United Kingdom
Accounting Standards.
An analysis by geographical segment has not been given as the
Group’s business is wholly based within the United Kingdom.
1.2 Basis of consolidation The Group Accounts consolidate the state of affairs, income
and expenditure and cash fl ows of the Society and all its trading
subsidiary undertakings, all of which are made up to 31 December.
The acquisition method of accounting has been adopted, under which
the results of subsidiary undertakings acquired or disposed of in a year
are included in the income and expenditure account from the date of
acquisition or up to the date of disposal.
In the Society’s Accounts, investments in subsidiary undertakings are
stated at cost less provisions for impairment in value.
1.3 Goodwill Goodwill arising on the acquisition of subsidiary undertakings
represents the excess of consideration, including costs directly
attributable to the acquisition, over the fair value of net assets acquired
at the date of acquisition.
Goodwill is amortised over its useful economic life, up to a maximum
of ten years.
In the event of the sale of a subsidiary, the profi t or loss incurred
would be calculated after taking account of the unamortised amount
of any related goodwill.
Goodwill is reviewed annually for impairment by comparing the book
value with the recoverable amount. Any such impairment would be
charged to the income and expenditure account immediately.
1.4 Income and cost recognition Interest is recognised in the income and expenditure account on an
accruals basis with the exception of any mortgage interest that has
been suspended.
Interest charged to mortgage accounts in the year relating to
properties in possession, which is considered doubtful, is suspended
and excluded from interest receivable in the year. Suspended interest
is deducted from the appropriate loan balances within loans and
advances to customers in the balance sheet.
The cost of mortgage cashbacks and other incentives is charged to
the income and expenditure account in the year in which it is incurred.
Cashbacks are included in other operating charges, whilst other
incentives are charged against interest receivable. Interest discounts
reduce interest receivable over the period of the relevant discount.
Premiums paid on the acquisition of mortgage portfolios are included
in the balance sheet under prepayments and accrued income and
amortised in the income and expenditure account against interest
receivable over the expected lives of those portfolios.
Other fees, commissions and costs are recognised on an accruals
basis in the period during which they are earned or incurred.
1.5 Tangible fi xed assets and depreciation The cost of additions and major alterations to land and buildings, and
additions to equipment, fi xtures, fi ttings and vehicles, is capitalised.
Depreciation is provided at rates calculated to write down the assets to
their estimated residual values over the course of their anticipated useful
lives. The principal rates and bases of depreciation applied are as follows:
Offi ce equipment, fi xtures, fi ttings and motor vehicles:
25% per annum on a reducing balance basis.
Computer equipment including associated system software:
25% per annum on a straight line basis commencing from operational
deployment within the business.
Replacement core computer system implementation costs:
16% per annum on a straight line basis commencing from operational
deployment within the business.
Freehold buildings are properly maintained in a state of good repair
and are considered to have a useful life of at least fi fty years. The
directors believe that the recoverable amount exceeds the book value
and consequently no depreciation has been provided. In accordance
with FRS 15 ‘Tangible Fixed Assets’, non-depreciated assets are
reviewed annually for impairment. Any such impairment would be
charged to the income and expenditure account immediately.
1.6 Leases Assets acquired under fi nance leases are capitalised and future
obligations are shown in other liabilities.
1.7 Liquid assets Debt securities and Treasury bills are shown at cost, adjusted for
premium or discount on purchase, amortised over the period to maturity.
Interest receivable on debt securities and other liquid assets includes
interest accrued to the date of the balance sheet.
1.8 Repurchase Agreements Debt securities held by the Society may be sold subject to a commitment
to repurchase them (a “repo”). Where substantially all the risks and
rewards of ownership are retained by the Society the securities remain
on the balance sheet and the counterparty liability is included separately
in the balance sheet. Where the Society purchases debt securities with a
commitment to resell them (a “reverse repo”) it does not retain the risks
and rewards of the securities and therefore treats them as secured loans.
18
The difference between the sale and repurchase price is accrued as
income or expenditure over the life of the agreements.
1.9 Provisions for bad and doubtful debts Provisions are made to reduce the value of loans and advances
secured on land and other loans, which includes unsecured loans, to
the amount which the directors consider to be recoverable.
Unsecured loans are continuously monitored for performance and are
assessed individually when considered impaired.
Throughout the year and at the year end, assessments are made of
all loans and advances secured on properties:
• when those properties are in possession, or,
• when monthly repayments on the loans have not been maintained
for one month or more, or,
• when loans have no monthly repayment requirement and eventual
cash fl ows may be insuffi cient to fully repay those loans.
Specifi c provision is made against the relevant proportion of all loans and
advances which are considered impaired based on historical experience.
The specifi c provision for impaired loans secured on properties is
calculated, on a property by property basis, as the difference between
the outstanding loan balance and the estimated market value of the
property net of costs. Estimated market value is calculated by indexing
the latest known property valuation to the balance sheet date and
applying those discounts considered necessary to effect a sale within
three months of that date. The estimated market value is reduced
by applying estate agent, legal and other disposal costs. No specifi c
provision is made where the net estimated market value, plus any
amounts recoverable under mortgage indemnity policies, exceeds the
outstanding loan balance. For loans where monthly repayments are not
required, a similar calculation is performed, based on the present value
of the outstanding loan balance at the projected redemption date.
A general provision is made against loans and advances which have
not been specifi cally identifi ed as impaired, but where the Group’s
experience would indicate that losses may ultimately be realised.
The amount charged in the income and expenditure account
represents the net change in the ongoing provision, after allowing for
losses written off in the year and bad debt recoveries.
Provisions for bad and doubtful debts are deducted from loans and
advances to customers in the balance sheet.
Suspended interest is credited to an interest suspense account, the
balance of which is deducted from loans and advances to customers
in the balance sheet.
1.10 Taxation The charge for taxation is based on the profi t for the year and takes
into account taxation deferred because of timing differences between
the treatment of certain items for taxation and accounting purposes.
Deferred taxation is recognised in full, without discounting, in respect of all
such timing differences which have arisen but not reversed by the balance
sheet date, except as otherwise required by FRS 19 ‘Deferred Tax’.
1.11 Financial instruments The Society enters into off-balance sheet transactions as a means of
hedging the risk of interest rate fl uctuations.
The net income and expense on hedging instruments is accounted
for on a basis consistent with the underlying position being hedged
and is included in the income and expenditure account, within interest
receivable and similar income or interest payable and similar charges,
on an accruals basis.
Amounts accrued on hedging instruments are included in the balance
sheet, within prepayments and accrued income or accruals and
deferred income.
The Society enters into credit support agreements, which protect against
counterparty default in respect of hedging instruments by means of
collateral transactions which refl ect movements in the market values of
the instruments involved. Interest on collateral is included within interest
receivable and similar income or interest payable and similar charges,
as appropriate. Collateral is included in the balance sheet within liquid
assets, other assets or other liabilities, as appropriate.
1.12 Pensions The Society operated a defi ned benefi ts pension scheme under
the National Counties Building Society Pension and Life Assurance
Scheme (‘the Scheme’) providing benefi ts for Society employees,
which was closed to new members with effect from 1 May 2007.
Subsequently, a new cash benefi t section was introduced for Group
employees. Both sections are considered to be defi ned benefi t
schemes within the Scheme for the purposes of FRS 17.
The Society also makes contributions into a self-invested personal
pension scheme for each of the executive directors.
All pension schemes are held in separate funds, managed and
administered by third parties.
The schemes are funded by contributions from the Group and its
employees.
The costs of benefi ts accruing during the year are charged to the
income and expenditure account as administrative expenses to the
extent that they are not covered by employee contributions.
In respect of the Scheme, the extent to which the interest cost of
scheme liabilities exceeds the expected return on scheme assets,
or vice versa, is charged/credited to the income and expenditure
account as a pension fi nance charge/credit.
At the balance sheet date, the assets of the Scheme are measured at
market value and the liabilities are measured using the projected unit
valuation method. The resulting pension scheme surplus or defi cit is
recognised immediately in the balance sheet net of deferred taxation. Any
resulting actuarial gains and losses are recognised immediately in the
statement of total recognised gains and losses, net of deferred taxation.
19
On shares held by individuals 25,184 32,153 25,184 32,153 On deposits and other borrowings:
Connected undertakings - - 43 43Other 3,800 9,459 2,385 7,788
Other interest payable Net income on fi nancial instruments (6,885) (6,653) (6,885) (6,653)
22,099 34,959 20,727 33,331
3. Interest payable and similar charges
Group Society 2010 2009 2010 2009 £ 000 £ 000 £ 000 £ 000
2. Interest receivable and similar income On loans fully secured on residential property 41,656 43,892 37,372 39,364 On other loans:
Connected undertakings - - 3,424 5,039Other 5,452 5,848 1,387 1,422
On debt securities:Interest and other income from fixed income securities 5,106 7,848 5,106 7,848
Net gains arising on realisation 1,769 4,029 1,769 4,029 On other liquid assets:
Interest and other income 730 908 681 874 Other interest receivable 1 10 1 10 Net expense on fi nancial instruments (18,894) (15,627) (18,894) (15,627)
35,820 46,908 30,846 42,959
Included within Interest receivable on loans fully secured on residential property is a charge of £412,000 (2009: £467,000) for the Group in respect of the Interest receivable on loans fully secured on residential property is a charge of £412,000 (2009: £467,000) for the Group in respect of the Interest receivable on loans fully secured on residential propertyamortisation of premiums paid on the acquisition of mortgage portfolios by a subsidiary undertaking. Movements on this account were as follows:
At 1 January 3,158 3,399 Additions 126 226 Amortisation of premium (412) (467)
At 31 December (note 16) 2,872 3,158
Included within Interest receivable on loans fully secured on residential property is a charge of £45,000 for the Group and Society (2009: £6,000) relating to Interest receivable on loans fully secured on residential property is a charge of £45,000 for the Group and Society (2009: £6,000) relating to Interest receivable on loans fully secured on residential propertymortgage incentives to new borrowers.
Interest receivable has been reduced by £518,000 in the Group (2009: £443,000) and £Nil in the Society (2009: £9,000) in respect of interest suspended on non-performing loans in accordance with the Group’s accounting policy.
Movements on the Interest suspense account were as follows:Interest suspense account were as follows:Interest suspense account
At 1 January 425 120 - 81 Interest suspended in the year: On loans fully secured on residential property 1 58 - 9 On other loans 517 385 - -
Amounts applied in writing off loans: On loans fully secured on residential property (1) (57) - (9) On other loans (165) (81) - (81)
At 31 December 777 425 - -
Notes to the Accounts - continued
20
Services to associated pension scheme relate to fees for auditing the Society Pension Scheme Accounts.
Other services pursuant to legislation relate to client assets regulatory audit and iXBRL conversion work.
There were no other payments made to the auditors or their associates during 2010 (2009: No other payments made).
6. Directors’ emoluments
2010 Contributions Increase to personal in accrued Salary Bonus Benefi ts Sub-total pension plan pension Total £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
(a) Executive directors:
John Milton 182 - 14 196 12 3 211 Tony Gration 141 - 13 154 4 3 161 Chris Fry 81 - 9 90 - 1 91
404 - 36 440 16 7 463
£ 000 £ 000 £ 000 £ 000
The aggregate staff costs were as follows: Wages and salaries 4,558 4,449 3,132 3,074 Social security costs 455 450 299 293 Other pension costs 505 389 344 238
5,518 5,288 3,775 3,605 Less: staff costs capitalised (97) (105) - -
5,421 5,183 3,775 3,605
Number Number Number Number The average number of persons employed (including executive directors) during the year was as follows:
Full-time 117 118 83 86 Part-time 13 13 10 10
5. Employees
John Milton, Tony Gration and Chris Fry (the executive directors) are members of the Group’s defi ned benefi t pension scheme up to the level of the Scheme salary cap. The pension fi gures relating to them in the above table represent the increase in value of their accrued pensions under that scheme for the year. In addition, the Group made payments into a separate pension fund for each of the executive directors in relation to those portions of their salaries not covered by the Scheme. The amounts paid are included within ‘Contributions to personal pension plan’ in the above table.‘Contributions to personal pension plan’ in the above table.‘Contributions to personal pension plan’
Emoluments of the directors of the Society totalling £686,000(2009: £714,000) are detailed as follows:
Group Society
2010 2009 2010 2009 £ 000 £ 000 £ 000 £ 000
4. Administrative expenses
Staff costs (note 5) 5,421 5,183 5,183 3,775 3,605 Other administrative expenses 2,876 2,708 2,708 1,768 1,810
8,297 7,891 5,543 5,415
Other administrative expenses include: Remuneration of auditors and their associates (excluding value added tax):
Group and Society statutory audit 70 67 67 70 67 For other services:
Subsidiary statutory audit 43 42 42 7 6 Other services pursuant to legislation 5 2 2 5 3 Other services relating to taxation 7 11 11 5 10 Services relating to corporate finance transactions 120 - - 120 - Services to associated pension scheme 6 6 6 6 5
Finance charges in respect of fi nance leases 3 5 5 3 5
6. Directors’ emoluments - continued(a) Executive directors: - continued
Directors' loans and related party transactions
At 31 December 2010 the amount outstanding in respect of loans made by the Society on normal staff terms to one director was £84,000 (2009: to one director: £94,000).
A register is maintained at the Head Offi ce of the Society, in accordance with the requirements of Section 68 of the Building Societies Act 1986, which shows details of all loans, transactions and arrangements with directors and connected persons. The register will be available for inspection at the Society’s Head Offi ce during the period of fi fteen days up to and including the date of the Annual General Meeting.
21
The following table gives the value of directors' pension benefi ts from the Group's pension scheme:
Transfer Transfer Increase value of value of value of value of in transfer in transfer in transfer Increase
accrued accrued value during in accrued Accrued benefi ts at benefi ts at the year net pension pension at
start of end of of directors’ during end of the year the year contributions the year the year £ 000 £ 000 £ 000 £ 000 £ 000
John Milton 976 1,102 114 3 49976 1,102 114 3 49976 1,102 114 3 49976 1,102 114 3 49976 1,102 114 3 49 Tony Gration 729 795 53 3 42 729 795 53 3 42 729 795 53 3 42 729 795 53 3 42 729 795 53 3 42 Chris Fry - 22 14 1 1- 22 14 1 1- 22 14 1 1- 22 14 1 1- 22 14 1 1
2009 Contributions Increase to personal in accrued Salary Bonus Benefi ts Sub-total pension plan pension Total £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
John Milton 182 - 14 196 12 4 212 John Milton 182 - 14 196 12 4 212 John Milton 182 - 14 196 12 4 212 John Milton 182 - 14 196 12 4 212 John Milton 182 - 14 196 12 4 212 John Milton 182 - 14 196 12 4 212 John Milton 182 - 14 196 12 4 212 Tony Gration 140 - 14 154 4 4 162 Tony Gration 140 - 14 154 4 4 162 Tony Gration 140 - 14 154 4 4 162 Tony Gration 140 - 14 154 4 4 162 Tony Gration 140 - 14 154 4 4 162 Tony Gration 140 - 14 154 4 4 162 Tony Gration 140 - 14 154 4 4 162 Paul Batchelor 129 - 14 143 1 2 146 Paul Batchelor 129 - 14 143 1 2 146 Paul Batchelor 129 - 14 143 1 2 146 Paul Batchelor 129 - 14 143 1 2 146 Paul Batchelor 129 - 14 143 1 2 146 Paul Batchelor 129 - 14 143 1 2 146 Paul Batchelor 129 - 14 143 1 2 146
451 - 42 493 17 10 520451 - 42 493 17 10 520451 - 42 493 17 10 520451 - 42 493 17 10 520451 - 42 493 17 10 520451 - 42 493 17 10 520451 - 42 493 17 10 520
2010 Fee Benefi ts Total £ 000 £ 000 £ 000
(b) Non-executive directors:
John Sinclair 50 1 5150 1 5150 1 51 Polly Williams 39 - 39 39 - 39 39 - 39 David Gibson 13 1 1413 1 1413 1 14 John Howard 33 2 3533 2 3533 2 35 Peter Goshawk 21 - 21 21 - 21 21 - 21 Colin Sheppard 32 1 33 32 1 33 32 1 33 Martin Young 30 - 30 30 - 30 30 - 30
218 5 223218 5 223218 5 223
2009 Fee Benefi ts Total £ 000 £ 000 £ 000
John Sinclair 57 2 59 57 2 59 57 2 59 David Gibson 38 1 39 38 1 39 38 1 39 John Howard 31 2 3331 2 3331 2 33 Colin Sheppard 31 1 3231 1 3231 1 32 Polly Williams 31 - 31 31 - 31 31 - 31
188 6 194188 6 194188 6 194
2010
Notes to the Accounts - continued
22
7. Other operating charges Group Society 2010 2009 2010 2009 £ 000 £ 000 £ 000 £ 000 Mortgage incentives 25 27 25 27
8. Provisions Group Loans fully Loans fully secured on secured Other residential property on land loans Totalresidential property on land loans Totalresidential property on land loans Total
(a) Provisions for bad Specifi c General Specifi c General Specifi c General Specifi c General Specifi c General Specifi c General Specifi c General Specifi c General Specifi c General Specifi c General Specifi c General Specifi c General Specifi c General Specifi c General Specifi c General Specifi c Generaland doubtful debts £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
At 1 January 2010 1,521 334 627 30 4,773 241 6,921 6051,521 334 627 30 4,773 241 6,921 6051,521 334 627 30 4,773 241 6,921 6051,521 334 627 30 4,773 241 6,921 6051,521 334 627 30 4,773 241 6,921 6051,521 334 627 30 4,773 241 6,921 6051,521 334 627 30 4,773 241 6,921 6051,521 334 627 30 4,773 241 6,921 605 Amounts written off (204) - (35) - (434) - (673) -(204) - (35) - (434) - (673) -(204) - (35) - (434) - (673) -(204) - (35) - (434) - (673) -(204) - (35) - (434) - (673) -(204) - (35) - (434) - (673) -(204) - (35) - (434) - (673) -(204) - (35) - (434) - (673) - Recoveries of amounts previously written off - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - - - (10) - Charge/(credit) for the year (15) (26) 1,753 (4) 1,666 (69) 3,404 (99) (15) (26) 1,753 (4) 1,666 (69) 3,404 (99) (15) (26) 1,753 (4) 1,666 (69) 3,404 (99) (15) (26) 1,753 (4) 1,666 (69) 3,404 (99) (15) (26) 1,753 (4) 1,666 (69) 3,404 (99) (15) (26) 1,753 (4) 1,666 (69) 3,404 (99) (15) (26) 1,753 (4) 1,666 (69) 3,404 (99) (15) (26) 1,753 (4) 1,666 (69) 3,404 (99)
At 31 December 2010 1,302 308 2,335 26 6,005 172 9,642 506 1,302 308 2,335 26 6,005 172 9,642 506 1,302 308 2,335 26 6,005 172 9,642 506 1,302 308 2,335 26 6,005 172 9,642 506
Society Loans fully Loans fully secured on secured Other residential property on land loans Total Specifi c General Specifi c General Specifi c General Specifi c General £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 At 1 January 2010 922 302 - 30 - - 922 332 Amounts written off - - - - - - - - Recoveries of amounts previously written off - - - - - - - - Credit for the year (155) (28) - (4) - - (155) (32)
At 31 December 2010 767 274 - 26 - - 767 300
Group Society Specifi c General Total Specifi c General Total
(b) Provisions for liabilities £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
At 1 January 2010 901 2 903 866 - 866 Amounts paid - FSCS levy (note 25) (361) - (361) (349) - (349) Charge for the year - FSCS levy (note 25) 69 - 69 57 - 57 Credit for the year - other provisions (2) (2) (4) - - -
At 31 December 2010 607 - 607 574 - 574
Apart from the FSCS levy movements shown above, provisions for liabilities relates to notifi ed and expected claims for customer redress in respect of advice and charges.provisions for liabilities relates to notifi ed and expected claims for customer redress in respect of advice and charges.provisions for liabilities
(c) Provisions against fi xed asset investments
At 1 January 2010 3,643 - 3,643 3,643 - 3,643 Release of provision (note 10) (219) - (219) (219) - (219)
At 31 December 2010 3,424 - 3,424 3,424 - 3,424
Provisions against fi xed asset investments for Group and Society comprise £3,424,000 in relation to amounts due from Kaupthing, Singer & Friedlander Limited, in Provisions against fi xed asset investments for Group and Society comprise £3,424,000 in relation to amounts due from Kaupthing, Singer & Friedlander Limited, in Provisions against fi xed asset investmentsadministration (2009: £3,643,000). Kaupthing, Singer & Friedlander Limited was authorised and regulated by the Financial Services Authority and was placed into administration in October 2008. At this time, the Society held £7m of debt securities that had been issued by Kaupthing, Singer & Friedlander Limited and became an unsecured creditor in the administration for the value of the investment and the interest accrued on it to the date the administration commenced.
A provision for the full amount of this exposure, totalling £7,286,000, was made at 31 December 2008. The administrators have now indicated that unsecured creditors may expect a total distribution of 75p to 84p in the £, of which 53p in the £ has been distributed to date, totalling £3,862,000. Your Board has taken the view that signifi cant uncertainties remain, which could affect the level and timing of further recoveries. In light of this, it is considered prudent to assume no further distribution will be forthcoming. Provisions against fi xed asset investments are deducted from Provisions against fi xed asset investments are deducted from Provisions against fi xed asset investments debt securities in the debt securities in the debt securities balance sheets.
23
Deferred taxation asset in relation to timing differences, at the applicable corporation tax rate (Society 27% (2009: 28%), subsidiary undertakings at reduced rates where applicable), is included under
other assets in the balance sheets and is made up as follows:Difference between accumulated depreciation and capital
allowances and other timing differences 205 164 164 95 73Loan loss general provisions 137 170 170 81 93
Excess pension fund contributions 94 195 195 94 195 (note 15) 436 529 270 361
Deferred tax asset movements in the year: Deferred tax asset movements in the year: Deferred tax asset movements in the year: At 1 January At 1 January At 1 January 529 361
Credit for the year Credit for the year Credit for the year (133) (131) Deferred tax adjustment re pension contributions 40 40
At 31 December (note 15) 436 270
(a) Tax on profi t on ordinary activities Corporation tax 1,008 557 1,293 1,388 Adjustment in respect of prior year (22) (60) (16) (66)
Total current tax 986 497 497 1,277 1,322
Deferred tax 133 825 825 131 934 Adjustment in respect of prior year - 3 3 - 3
Total deferred tax 133 828 828 131 937
Total taxation 1,119 1,325 1,325 1,408 2,259
Factors affecting the corporation tax charge for the year are explained as follows: are explained as follows:
Profit on ordinary activities at the
standard rate of corporation tax of 28.0% (2009: 28.0%) 664 1,221 1,221 1,115 2,320 Effect of: Effect of:
Difference between capital allowances and depreciation 34 70 70 19 57Tax on losses carried forward - (817) (817) - (817)
Provisions not deductible for tax (31) 51 51 (11) (15)Pension contributions (139) (158) (158) (139) (158)
Different tax rates applicable to losses and subsidiary undertakings (1) 20 20 - -Goodwill amortisation not deductible for tax 150 150 150 - -
Other items not deductible for tax 331 20 20 309 1 Adjustment in respect of prior year (22) (60) (60) (16) (66)
Total current tax 986 497 497 1,277 1,322
(b) Deferred taxation
9. Taxation Group Society
2010 2009 2010 2009
£ 000 £ 000 £ 000 £ 000
Notes to the Accounts - continued
24
10. Liquid assets
Group Society
2010 2009 2010 2009 £ 000 £ 000 £ 000 £ 000
(a) Loans and advances to credit institutions
Accrued interest 91 14 91 14 Repayable on demand 38,232 44,718 33,217 38,676 In not more than three months 58,060 29,452 58,060 29,452 In more than three months but not more than one year 14,000 - 14,000 -
110,383 74,184 105,368 68,142
(b) Debt securities
Issued by public bodies 131,612 100,352 100,352 131,612 100,352 Issued by other borrowers 90,963 115,292 115,292 90,963 115,292
222,575 215,644 222,575 215,644
Debt securities have remaining maturities as follows:Accrued interest 1,833 1,472 1,472 1,833 1,472
In not more than one year 41,901 35,994 35,994 41,901 35,994 In more than one year 178,841 178,178 178,178 178,841 178,178
222,575 215,644 222,575 215,644
Debt securities analysed, excluding accrued interest Transferable securities:
Listed on a recognised investment exchange 129,890 98,961 98,961 129,890 98,961Unlisted 90,852 115,211 115,211 90,852 115,211
220,742 214,172 220,742 214,172
Market value of listed debt securities 133,334 98,718 133,334 98,718
Included within the Debt securities analysis are debt securities that are pledged as collateral. As at 31 December 2010, the Group and Society had pledged listed debt securities with a book value of £19,934,000 (2009: £7,396,000) and a market value of £20,593,000 (2009: £7,215,000). Further details are provided at note 26.
The directors of the Society consider that all debt securities are intended for use on a continuing basis in the Group’s activities. These debt securities have therefore been classifi ed as fi nancial fi xed assets. Due to their short term nature, Treasury bills with a maturity period of 1 year or less are not classifi ed as fi nancial fi xed assets.
The unamortised premium on the transferable securites at 31 December 2010 amounted to £9,752,000 (2009: £3,725,000).
Movements in the year of transferable securities held as fi nancial fi xed assets (excluding accrued interest) are analysed as follows:
At cost less amortisation and provisionsAt 1 January 214,172 214,172
Additions 73,380 73,380 Disposals and maturities (66,528) (66,528)
Reduction in provisions against fixed asset investments (note 8c) 219 219 Amortisation of premium (501) (501)
At 31 December 220,742 220,742
25
This maturity analysis assumes that loans and advances run for their full, agreed term. In practice, mortgage loans seldom continue to the agreed maturity date and, therefore, the actual repayment profi le of loans is likely to be signifi cantly different from that disclosed above.
11. Loans and advances to customers Group Society 2010 2009 2010 2009 £ 000 £ 000 £ 000 £ 000 Loans and advances to customers
net of provisions are analysed as follows: Loans fully secured on residential property 814,605 862,412 862,412 705,032 753,060 Other loans: Other loans: Other loans: Loans fully secured on land 38,758 41,132 41,132 25,063 27,098
Other loans 24,006 31,221 31,221 2 1
877,369 934,765 934,765 730,097 780,159
Loans and advances to customers have remaining maturities from the balance sheet date as follows:
Repayable on call and at short notice 16,490 14,844 14,844 - -In not more than three months 4,450 7,902 7,902 710 2,545
In more than three months but not more than one year In more than three months but not more than one year In more than three months but not more than one year 20,036 14,216 14,216 5,275 3,259In more than one year but not more than five years 52,564 58,915 58,915 39,766 41,903
In more than five years 793,977 846,414 846,414 685,413 733,706
Provisions for bad and doubtful debts (note 8a) (10,148) (7,526) (7,526) (1,067) (1,254)
877,369 934,765 934,765 730,097 780,159
12. Investments in subsidiary undertakings Society Shares in Loans to subsidiary subsidiary undertakings undertakings Total (a) Movements in the year £ 000 £ 000 £ 000
At 1 January 2010 17,371 116,869 134,240 Write-off of fi xed asset investment (1,100) - (1,100) Movements - (5,735) (5,735)
At 31 December 2010 16,271 111,134 127,405
Following losses made by the Society’s banking subsidiary Hampshire Trust Plc (“HT”), the directors have written down the value of the Society’s investment in that subsidiary by £1,100,000. The impairment value was calculated in accordance with FRS11 by comparing the expected future recovery value with the carrying value of the subsidiary. The cashfl ows used in calculating the recovery value were based on those used in HT’s corporate plan 2011-2015 reduced by 50% to arrive at a ‘risk free’ basis. These adjusted cashfl ows were then discounted using a ‘risk free’ pre-tax rate of 4.2%. At the consolidated level, goodwill was written down by the same amount.
(b) Subsidiary activities
The Society's trading subsidiary undertakings (which operate in Country of Major Class of Society the United Kingdom) are: registration activities share held interest
National Counties Financial Services Ltd England Insurance Ordinary 100%
broking
Counties Home Loan Management Ltd England Mortgage Ordinary 100%
lending
Hampshire Trust Plc England Banking Ordinary 100%
Notes to the Accounts - continued
15. Other assets Group 15. Other assets Group 15. Other assets Society
2010 2009 2010 2009 £ 000 £ 000 £ 000 £ 000
Deferred tax asset (note 9b) 436 529 270 361 Corporation tax debtor - 1,665 - 529 Cash collateral pledged against off-balance sheet contracts (note 26) 2,180 410 2,180 410 Sundry debtors 536 879 19 192
3,152 3,483 2,469 1,492
26
13. Intangible fi xed assets Group
£ 000Goodwill
Cost At 1 January 2010 5,351 Movements -
At 31 December 2010 5,351
Amortisation At 1 January 2010 1,715 Charge for year 535 Write-off of fi xed asset investment 1,100
At 31 December 2010 3,350
Net book value At 31 December 2009 3,636
At 31 December 2010 2,001
The above goodwill, which arose on the acquisition of Hampshire Trust Plc (“HT”) in October 2006, is considered to have a useful economic life of at least ten years from the acquisition date. Due to losses incurred at HT in 2009 and 2010, the directors have recognised an impairment charge of £1,100,000 in line with the write-down in investment value (note 12). In accordance with accounting policy (note 12). In accordance with accounting policy (note 12) (note 1.3), the remaining cost will be amortised on a (note 1.3), the remaining cost will be amortised on a (note 1.3)straight-line basis over the period to 2016, being ten years from the acquisition date.
14. Tangible fi xed assets Group 14. Tangible fi xed assets Group 14. Tangible fi xed assets Society Equipment Equipment Freehold fi xtures & Freehold fi xtures & land and fi ttings and land and fi ttings and buildings vehicles Total buildings vehicles Total £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Cost At 1 January 2010 5,780 4,413 10,193 5,780 4,413 10,193 5,780 4,413 10,193 5,374 4,093 9,467 Additions - 342 342 - 342 342 - 342 342 - 199 199 Disposals - (97) (97) - (97) (97) - (97) (97) - (91) (91)
At 31 December 2010 5,780 4,658 10,438 5,780 4,658 10,438 5,780 4,658 10,438 5,374 4,201 9,575
Depreciation At 1 January 2010 - 3,248 3,248 - 3,248 3,248 - 3,248 3,248 - 3,335 3,335 Charge for year - 544 544 - 544 544 - 544 544 - 378 378 Eliminated on disposals - (69) (69) - (69) (69) - (69) (69) - (63) (63)
At 31 December 2010 - 3,723 3,723 - 3,723 3,723 - 3,723 3,723 - 3,650 3,650
Net book value At 31 December 2009 5,780 1,165 6,945 At 31 December 2009 5,780 1,165 6,945 At 31 December 2009 5,780 1,165 6,945 5,374 758 6,132
At 31 December 2010 5,780 935 6,715 5,780 935 6,715 5,780 935 6,715 5,374 551 5,925
The net book value of freehold land and buildings occupied for own activities at 31 December 2010 was: for the Group £5,329,000 (2009: £5,329,000); for the Society £4,923,000 (2009: £4,923,000).Assets held under fi nance leases are included within equipment fi xtures & fi ttings and vehicles. At 31 December 2010, the value of net assets held under fi nance leases for Group and Society was £21,000 (2009: £31,000). Included in the depreciation charge for the year is £10,000 in relation to assets held under fi nance leases (2009: £10,000).
27
18. Amounts owed to credit institutions Repayable from the date of the balance sheet in the ordinary course of business:
Accrued interest 349 345 349 345In not more than three months 47,500 106,250 47,500 106,250
In more than three months but not more than one year 15,500 10,500 10,500 15,500 10,500
63,349 117,095 63,349 117,095
19. Amounts owed to other customers Repayable from the date of the balance sheet
in the ordinary course of business:Accrued interest 644 457 580 352
On demand 4,587 4,098 2,725 2,665 In not more than three months 61,742 50,085 59,016 46,330
In more than three months but not more than one year 77,524 50,928 48,700 19,250 In more than one year but not more than five years 7,046 6,100 - -
151,543 111,668 111,021 68,597
20. Other liabilities Income tax 42 54 54 42 54 Corporation tax creditor 458 - - 815 - Cash collateral held against off-balance sheet contracts (note 26) 660 2,791 2,791 660 2,791 Loans from subsidiary undertakings - - - 5,256 4,467 Other creditors 606 370 370 194 258
1,766 3,215 6,967 7,570
Included within other creditors are obligations in relation to fi nance leases Maturity analysis of fi nance lease obligations:
In not more than one year 11 10 10 11 10 In more than one year but not more than five years 13 24 24 13 24
24 34 24 34
This maturity analysis assumes that fi xed rate and index linked products run for their full, agreed term. Some fi xed rate and index linked products provide the facility for early access on payment of an interest penalty but, in practice, this facility is seldom utilised.
17. SharesHeld by individuals
Repayable from the date of the balance sheet in the ordinary course of business:
Accrued interest 8,115 8,339 8,339 8,115 8,339On demand 195,956 248,039 248,039 195,956 248,039
In not more than three months 389,044 254,760 254,760 389,044 254,760In more than three months but not more than one year 82,302 237,087 237,087 82,302 237,087
In more than one year but not more than five years 226,584 155,650 155,650 226,584 155,650 In more than five years 8,766 - - 8,766 -
910,767 903,875 910,767 903,875
16. Prepayments and accrued income
Accrued interest relating to off-balance sheet contracts 2,657 3,214 3,214 2,657 3,214 Unamortised premiums on mortgage portfolio acquisitions (note 2) 2,872 3,158 3,158 - - Other 117 105 105 51 59
5,646 6,477 6,477 2,708 3,273
21. Accruals and deferred income Accrued interest relating to off-balance sheet contracts 2,096 2,064 2,064 2,096 2,064 Other 611 569 569 271 193
2,707 2,633 2,367 2,257
Group Society 2010 2009 2010 2009
£ 000 £ 000 £ 000 £ 000
Notes to the Accounts - continued
22. PensionsThe Group operated a trustee-administered ‘defi ned benefi t’ pension scheme for staff, which was closed to new entrants with effect from 1 May 2007.
A replacement ‘cash benefi t’ scheme was introduced from the same date, although there were no new entrants until 1 May 2008. The two schemes are
operated as separate sections of the National Counties Building Society Pension and Life Assurance Scheme (the ‘Scheme’). The ‘defi ned benefi t’ section
provides a defi ned pension to the member, while the ‘cash benefi t’ section provides a cash amount which is utilised to provide a pension.
The Group has adopted Financial Reporting Standard 17 ‘Retirement benefi ts’ (FRS 17), which requires that the assets of defi ned benefi t schemes are
included within the balance sheet together with related liabilities. For the purposes of FRS 17, both sections of the Scheme are considered to be defi ned
benefi t schemes and these disclosures therefore relate to both sections.
A number of employees of Hampshire Trust Plc became members of the ‘cash benefi t’ section of the Scheme during 2008. It is not practical to separate
FRS 17 disclosures between the Society and Hampshire Trust Plc. Disclosures are therefore made at the Group level. The Society, as principal employer,
accepts ultimate responsibility for Scheme liabilities.
Hampshire Trust Plc discloses a contingent liability to the Society in its Accounts, in relation to any specifi c defi cits in the Scheme that may occur on the
retirement of Hampshire Trust Plc employees.
A full actuarial valuation is carried out by a qualifi ed independent actuary every three years.
The service cost has been calculated using the Projected Unit method.
Group
2010 2009The principal assumptions used by the actuary were as follows:
Pension commitments discount 5.4% 5.7%
Pensionable salaries increase 2.5% 3.0%
Pensions in payment increase accrued before 1 May 2003 3.7% 3.8%
Pensions in payment increase accrued before 6 April 2005 3.5% 3.5%
Pensions in payment increase accrued from 6 April 2005 2.4% 2.4%
Deferred pensions increase from date of leaving
up to April 2011 accrued before 6 April 2009 3.5% 3.5%
Deferred pensions increase from date of leaving
up to April 2011 accrued after 5 April 2009 2.4% n/a
Deferred pensions increase from April 2011 accrued before 6 April 2009 3.0% n/a
Deferred pensions increase from April 2011 accrued after 5 April 2009 2.2% n/a
Retail Price Index increase 3.5% 3.5%
Longevity assumptions are based on the PNMA00 (males) and PNFA00
(females) year of birth tables adjusted in line with the medium cohort
projection with a minimum 1% year on year improvement in mortality.
The number of years’ life expectancy from age 65 is as follows:
Pensioners - males 23.9 23.8
Pensioners - females 26.3 26.2
Future pensioners - males 25.9 25.8
Future pensioners - females 28.2 28.1
The Group contributed at the rate of 21% (2009: 21%) of pensionable salaries for the year in respect of the defi ned benefi ts section of the Scheme
and at the rate of 14% (2009: 14%) in respect of the cash benefi ts section of the Scheme. The Group made an additional contribution of £nil during
the year (2009: £1,055,000). Group contributions for the next fi nancial year, based on contribution rates and membership at 31 December 2010, are
estimated at £608,000.
28
Group
2010 2009 £ 000 £ 000
Reconciliation of the present value of scheme obligations:
At 1 January 9,021 6,708
Interest cost 541 455
Current service cost 697 576
Benefi ts paid (550) (145)
Charges paid (14) (13)
Actuarial loss 167 1,440
At 31 December 9,862 9,021
Reconciliation of the fair value of scheme assets:
At 1 January 8,119 5,271
Expected return on assets 511 376
Contributions 874 1,916
Benefi ts paid (550) (145)
Charges paid (14) (13)
Actuarial gain 439 714
At 31 December 9,379 8,119
The fair value of the assets in the Scheme and
the expected rates of return at 31 December were:
Equities 8.0% 6,1648.0% 6,164 8.6% 5,323 8.6% 5,323
Bonds 5.4% 1,0325.4% 1,032 5.7% 795 5.7% 795
Gilts 4.2% 1,0284.2% 1,028 4.1% 1,040 4.1% 1,040
Other 0.5% 1,1550.5% 1,155 0.5% 961 0.5% 961
Total scheme assets 9,379 9,379 8,119 8,119
The yields per annum are shown gross. Disclosures have been calculated using net rates after allowing for the annual management charge of 0.6%
collected through the pricing of units.
Group
2010 2010 2009 2009 Yield per Yield per annum £ 000 annum £ 000
29
Notes to the Accounts - continued
22. Pensions - continued
2010 2009 2008 2007 2006 £ 000 £ 000 £ 000 £ 000 £ 000
Present value of scheme obligations (9,862) (9,021) (6,708) (6,972) (7,654)
Fair value of scheme assets 9,379 8,119 5,271 6,206 5,495
Pension liability (483) (902) (1,437) (766) (2,159)
Deferred Tax 131 253 403 215 648
Net Pension Liability (352) (649) (1,034) (551) (1,511)
The amounts recognised in the balance sheet are: The amounts recognised in the balance sheet are:
30
Group
2010 2009 2008 2007 2006
Difference between the actual and expected return on scheme assets:Amount (£ 000) 439 714 (1,566) (64) 67
Percentage of scheme assets 4.7% 8.8% 29.7% 1.0% 1.2% Experience losses on scheme liabilities:
Amount (£ 000) (167) (119) (209) (119) (339)Percentage of the present value of the scheme liabilities 1.7% 1.3% 3.1% 1.7% 4.4%
Total amount recognised in statement of total recognised gains and losses:
Amount (£ 000) 272 (726) (912) 1,334 (1,253)Percentage of the present value of the scheme liabilities 2.8% 8.0% 13.6% 19.1% 16.4%
The Group operated separate defi ned contribution and stakeholder pension schemes for employees of Hampshire Trust Plc, which were discontinued during 2008 as those employees became eligible to join the ‘cash benefi ts’ section of the Scheme.
The Group also makes contributions to personal pension plans for the executive directors of the Society. Contributions to these schemes are charged to the Group/Society income and expenditure accounts as they become due.
During the period, contributions to these schemes amounted to £16,000 (2009: £17,000) in the Group and £16,000 (2009: £17,000) in the Society. Included in these contributions is the sum of £nil (2009: £nil) in respect of bonuses awarded to the executive directors for 2010, which were paid as pension contributions. There were no contributions outstanding at 31 December 2010.
2010 2009 £ 000 £ 000
Analysis of amount charged to operating profi t Current service cost 441 318 Past service cost - -
Total operating charge (included within administrative expenses) 441 318
Analysis of net return on scheme Expected return on pension scheme assets 511 376 Interest on pension scheme liabilities (541) (455)
Net return being the pension fi nance cost (30) (79)
Analysis of amount recognised in statement of total recognised gains and losses Actual return less expected return on pension scheme assets 439 714 Experience gains and losses arising on the scheme liabilities (167) (119) Changes in assumptions underlying the present value of the scheme liabilities - (1,321)
Actuarial gain/(loss) recognised in statement of total recognised gains and losses 272 (726)
Movement in defi cit during the year Movement in defi cit during the year Movement in defi cit during the year
Defi cit in scheme at beginning of year (902) (1,437) Movement in year:
Current service cost (441) (318)Contributions 618 1,658
Past service cost - -Net return on assets (30) (79)Actuarial gain/(loss) 272 (726)
Defi cit in scheme at end of the year (483) (902)
Details of experience gains and losses for
the year to 31 December
Group
31
23. Reserves - general reserves
At 1 January 105,606 103,089 103,089 108,682 103,172 Profi t for the fi nancial year 1,253 3,040 3,040 2,575 6,033 Actuarial gains/(losses) net of deferred tax 190 (523) (523) 190 (523)
At 31 December 107,049 105,606 105,606 111,447 108,682
General reserves excluding net pension liability 107,401 106,255 106,255 111,799 109,331
Net pension liability (note 22) (352) (649) (649) (352) (649)
General reserves including net pension liability 107,049 105,606 105,606 111,447 108,682
24. Memorandum items
Contingent liabilities Assets pledged as collateral security at the year end 22,114 7,806 7,806 22,114 7,806
Commitments Irrevocable undrawn loan facilities to borrowers at the year end 30,313 41,255 41,255 30,300 41,255
52,427 49,061 49,061 52,414 49,061
25. Financial commitments
(a) Financial Services Compensation Scheme (FSCS)
Within the Group, both the Society and Hampshire Trust Plc are regulated UK deposit-takers.
Based on their share of protected deposits, the Society and Hampshire Trust Plc, in common with all regulated UK deposit-takers, pay levies to the FSCS to enable the scheme to meet claims against it. The FSCS Levy consists of two parts - a management expenses levy and a compensation levy. The management expenses levy covers the running costs of the scheme and the compensation levy covers the amount of compensation the scheme pays, net of any recoveries it makes, using the rights that have been assigned to it.
In 2008, claims were triggered against the FSCS by fi ve banking failures, referred to as the Specifi ed Deposit-taker Defaults (SDDs).
The FSCS’s contibution to SDDs was fi nanced by borrowing under facilities originally provided by the Bank of England, and subsequently refi nanced by HM Treasury. The FSCS has, in turn, acquired the rights to the realisation of the assets of these banks and plans to repay the principle amounts borrowed under the loan facility by applying its share of any recoveries. The FSCS is liable to pay interest on the loan and these interest payments are included within the scheme’s management expenses levy.
To the extent that, by 31 March 2012, the loans have not been repaid in full from the realisation of the assets of the banks, the FSCS will agree a schedule of repayments with HM Treasury. The FSCS will then levy the industry (including National Counties Building Society and Hampshire Trust Plc) accordingly.
In 2009 the Financial Services Authority notifi ed fi rms that provision should be made only for liabilities incurred as a result of market participation up to the balance sheet date. This notifi cation limits the period of interest accruals at 31 December 2010 to the two-year period ending March 2012 and has resulted in a provision charge in the Group of £69,000 (2009: a release of £397,000) and a Society charge of £57,000 (2009: a release of £380,000).
FSCS invoices totalling £361,000 in the Group and £349,000 in the Society have been paid during 2010 (2009: Group: £328,000; Society: £320,000) which, together with the abovementioned provision charge, results in Group management expenses levies totalling £607,000 (2009: £899,000), of which £574,000 relates to the Society (2009: £866,000). These provisions are included in the income and expenditure accounts within provisions for contingent liabilities and commitments and in the and commitments and in the and commitments balance sheets within provisions for liabilities (note 8b).
These provisions do not include management expenses levies for any scheme periods beyond March 2012. Neither do they include any compensation levies that may eventually arise as a result of there being insuffi cient funds available from the realisation of assets.
Group Society 2010 2009 2010 2009
£ 000 £ 000 £ 000 £ 000
Notes to the Accounts - continued
32
26. Financial instruments
A fi nancial instrument is a contract which gives rise to a fi nancial asset of one entity and a fi nancial liability of another entity. The Group is a retailer of fi nancial instruments in the form of mortgage and savings products and uses wholesale fi nancial instruments to invest liquid asset balances, raise wholesale funding and manage risks arising from its operations.
The Group has a formal structure for managing risk, including establishing risk limits, reporting lines, mandates, policies and other control procedures. This structure is reviewed regularly by the Asset and Liabilitiy Committee (ALCO), which is charged with the responsibility for managing and controlling the balance sheet and the use of fi nancial instruments for risk management purposes.
Instruments used for risk management purposes include derivative fi nancial instruments (‘derivatives’), which are contracts or agreements whose value is derived from one or more of, underlying price, rate or index inherent in the contract or agreement, such as interest rates.
Derivatives are only used by the Society in accordance with the Building Societies Act 1986 (as amended by the Building Societies Act 1997) to reduce the risk of loss arising from changes in interest rates or other factors specifi ed in the legislation.
Derivatives are not used in trading activity or for speculative purposes.
The Society uses sale and repurchase agreements “repos” and “reverse repos” which are effectively secured borrowing and lending, in its liquidity management operations.
Types of derivatives
The principal derivatives used by the Society in balance sheet risk management are sterling interest rate swaps which are used to hedge balance sheet exposures arising from fi xed rate mortgage lending and fi xed rate borrowing. The Society also uses swaps based on the movement of infl ation and equity indices to hedge balance sheet exposures arising from index-linked borrowing.
The table below shows the notional principal amounts, risk 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 at risk. The risk weighted amounts, which are calculated in accordance with Financial Services Authority rules, refl ect a measure of the extent of potential future exposure and the nature of the counterparty.
The replacement costs represent the cost of replacing contracts with positive values, calculated at market rates current at the balance sheet date, and refl ect a measure of the Group’s exposure should all counterparties default. The Society uses industry standard documentation for its derivative contracts. Most of these contracts include credit support agreements, as a result of which collateral is pledged or held, in the form of listed debt securities (usually UK gilts) or cash deposits to provide protection to both the Society and its counterparty against default. Details of this collateral are provided in the fi nal section of this note entitled ‘fair values of fi nancial instruments’.
Derivatives at the balance sheet dates are predominantly sterling interest rate swap contracts, with the rest based on the Retail Price Index, as shown in the following table.
(b) It is the intention of the Society to continue to support fully its subsidiary undertakings.
(c) Capital commitments at 31 December, for which no provision has been made in the accounts, were as follows:
Group Society
2010 2009 2010 2009 £ 000 £ 000 £ 000 £ 000
Capital expenditure contracted but not provided for: 2 9 9 - 9
33
Group
Interest rate risk
The Group is exposed to interest rate risk through a number of potential mismatches. The Group manages this exposure on a continuous basis through the ALCO, within limits set by the Board, using a combination of on- and off-balance sheet instruments. These mismatches are primarily: interest rate basis risk, where instruments with similar re-pricing characteristics reprice differently e.g. LIBOR rates increase more quickly than mortgage rates; yield curve risks, causing assets and liabilities to reprice differently; and repricing mismatches e.g. where there is a mismatch between the dates on which interest receivable on assets and interest payable on liabilities are next reset to market rates. The latter interest rate sensitivity exposure for the Group, after taking into account off-balance sheet derivative hedge contracts entered into by the Society to manage this risk, was as follows:
Group and Society
2010 2009
Notional Risk Notional Risk Notional Risk principal weighted Replacement principal weighted Replacement principal weighted Replacement amount amount cost amount amount cost amount amount cost £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Sterling interest rate contracts with remaining maturities as follows:In not more than one year 127,000 - 2,118127,000 - 2,118127,000 - 2,118 274,000 - 2,685 274,000 - 2,685 274,000 - 2,685 274,000 - 2,685
In more than one year but not more than five years 219,300 219 2,116219,300 219 2,116219,300 219 2,116 336,300 336 3,149 336,300 336 3,149 336,300 336 3,149 336,300 336 3,149In more than five years 218,843 657 1,071218,843 657 1,071218,843 657 1,071 170,313 511 281 170,313 511 281 170,313 511 281 170,313 511 281
Total sterling interest rate contracts 565,143 876 5,305565,143 876 5,305565,143 876 5,305 780,613 847 6,115 780,613 847 6,115 780,613 847 6,115 780,613 847 6,115
Contracts based on the RPI with remaining maturities as follows:
In not more than one year 16,750 - -16,750 - -16,750 - - 600 7 - 600 7 - 600 7 - 600 7 -In more than one year but not more than five years 41,300 41 -41,300 41 -41,300 41 - 16,750 268 - 16,750 268 - 16,750 268 - 16,750 268 -
In more than five years 21,213 64 -21,213 64 -21,213 64 - - - - - - - - - - - - -
Total contracts based on other indices 79,263 105 -79,263 105 -79,263 105 - 17,350 275 - 17,350 275 - 17,350 275 - 17,350 275 -
Total contracts 644,406 981 5,305644,406 981 5,305644,406 981 5,305 797,963 1,122 6,115 797,963 1,122 6,115 797,963 1,122 6,115 797,963 1,122 6,115
3 More than More than More than months 3 months 6 months 1 year More Non- or less than less than less than than interest At 31 December 2010 less 6 months 1 year 5 years 5 years bearing Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000Assets
Liquid assets 184,580 27,000 - 11,000 118,890 1,787 343,257184,580 27,000 - 11,000 118,890 1,787 343,257184,580 27,000 - 11,000 118,890 1,787 343,257184,580 27,000 - 11,000 118,890 1,787 343,257184,580 27,000 - 11,000 118,890 1,787 343,257184,580 27,000 - 11,000 118,890 1,787 343,257184,580 27,000 - 11,000 118,890 1,787 343,257Loans and advances to customers 465,081 - 40,750 176,506 205,138 (10,106) 877,369465,081 - 40,750 176,506 205,138 (10,106) 877,369465,081 - 40,750 176,506 205,138 (10,106) 877,369465,081 - 40,750 176,506 205,138 (10,106) 877,369465,081 - 40,750 176,506 205,138 (10,106) 877,369465,081 - 40,750 176,506 205,138 (10,106) 877,369465,081 - 40,750 176,506 205,138 (10,106) 877,369
Intangible fixed assets - - - - - 2,001 2,001 - - - - - 2,001 2,001 - - - - - 2,001 2,001 - - - - - 2,001 2,001 - - - - - 2,001 2,001 - - - - - 2,001 2,001 - - - - - 2,001 2,001 Tangible fixed assets - - - - - 6,715 6,715- - - - - 6,715 6,715- - - - - 6,715 6,715- - - - - 6,715 6,715- - - - - 6,715 6,715- - - - - 6,715 6,715- - - - - 6,715 6,715
Other assets - - - - - 3,152 3,152 - - - - - 3,152 3,152 - - - - - 3,152 3,152 - - - - - 3,152 3,152 - - - - - 3,152 3,152 - - - - - 3,152 3,152 - - - - - 3,152 3,152 Prepayments and accrued income - - - - - 5,646 5,646- - - - - 5,646 5,646- - - - - 5,646 5,646- - - - - 5,646 5,646- - - - - 5,646 5,646- - - - - 5,646 5,646- - - - - 5,646 5,646
Total assets 649,661 27,000 40,750 187,506 324,028 9,195 1,238,140Total assets 649,661 27,000 40,750 187,506 324,028 9,195 1,238,140Total assets 649,661 27,000 40,750 187,506 324,028 9,195 1,238,140Total assets 649,661 27,000 40,750 187,506 324,028 9,195 1,238,140Total assets 649,661 27,000 40,750 187,506 324,028 9,195 1,238,140Total assets 649,661 27,000 40,750 187,506 324,028 9,195 1,238,140Total assets 649,661 27,000 40,750 187,506 324,028 9,195 1,238,140
Liabilities
Shares 584,223 17,240 64,475 227,948 8,766 8,115 910,767584,223 17,240 64,475 227,948 8,766 8,115 910,767584,223 17,240 64,475 227,948 8,766 8,115 910,767584,223 17,240 64,475 227,948 8,766 8,115 910,767584,223 17,240 64,475 227,948 8,766 8,115 910,767584,223 17,240 64,475 227,948 8,766 8,115 910,767584,223 17,240 64,475 227,948 8,766 8,115 910,767Amounts owed to credit institutions
& other customers 110,184 38,226 37,085 28,467 - 930 214,892110,184 38,226 37,085 28,467 - 930 214,892110,184 38,226 37,085 28,467 - 930 214,892110,184 38,226 37,085 28,467 - 930 214,892110,184 38,226 37,085 28,467 - 930 214,892110,184 38,226 37,085 28,467 - 930 214,892110,184 38,226 37,085 28,467 - 930 214,892Other liabilities - - - - - 1,766 1,766- - - - - 1,766 1,766- - - - - 1,766 1,766- - - - - 1,766 1,766- - - - - 1,766 1,766- - - - - 1,766 1,766- - - - - 1,766 1,766
Accruals and deferred income - - - - - 2,707 2,707- - - - - 2,707 2,707- - - - - 2,707 2,707- - - - - 2,707 2,707- - - - - 2,707 2,707- - - - - 2,707 2,707- - - - - 2,707 2,707Provisions for liabilities - - - - - 607 607 - - - - - 607 607 - - - - - 607 607 - - - - - 607 607 - - - - - 607 607 - - - - - 607 607 - - - - - 607 607
Net pension liability - - - - - 352 352- - - - - 352 352- - - - - 352 352- - - - - 352 352- - - - - 352 352- - - - - 352 352- - - - - 352 352Reserves - - - - - 107,049 107,049- - - - - 107,049 107,049- - - - - 107,049 107,049- - - - - 107,049 107,049- - - - - 107,049 107,049- - - - - 107,049 107,049- - - - - 107,049 107,049
Total liabilities 694,407 55,466 101,560 256,415 8,766 121,526 1,238,140 694,407 55,466 101,560 256,415 8,766 121,526 1,238,140 694,407 55,466 101,560 256,415 8,766 121,526 1,238,140 694,407 55,466 101,560 256,415 8,766 121,526 1,238,140 694,407 55,466 101,560 256,415 8,766 121,526 1,238,140 694,407 55,466 101,560 256,415 8,766 121,526 1,238,140 694,407 55,466 101,560 256,415 8,766 121,526 1,238,140
Off-balance sheet items 180,526 32,613 20,250 (3,900) (229,489) - -180,526 32,613 20,250 (3,900) (229,489) - -180,526 32,613 20,250 (3,900) (229,489) - -180,526 32,613 20,250 (3,900) (229,489) - -180,526 32,613 20,250 (3,900) (229,489) - -180,526 32,613 20,250 (3,900) (229,489) - -180,526 32,613 20,250 (3,900) (229,489) - - Interest rate sensitivity gap 135,780 4,147 (40,560) (72,809) 85,773 (112,331) -135,780 4,147 (40,560) (72,809) 85,773 (112,331) -135,780 4,147 (40,560) (72,809) 85,773 (112,331) -135,780 4,147 (40,560) (72,809) 85,773 (112,331) -135,780 4,147 (40,560) (72,809) 85,773 (112,331) -135,780 4,147 (40,560) (72,809) 85,773 (112,331) -135,780 4,147 (40,560) (72,809) 85,773 (112,331) -
Cumulative gap 135,780 139,927 99,367 26,558 112,331 - -135,780 139,927 99,367 26,558 112,331 - -135,780 139,927 99,367 26,558 112,331 - -135,780 139,927 99,367 26,558 112,331 - -135,780 139,927 99,367 26,558 112,331 - -135,780 139,927 99,367 26,558 112,331 - -135,780 139,927 99,367 26,558 112,331 - -
Notes to the Accounts - continued
26. Financial instruments - continued
34
3 More than More than More than months 3 months 6 months 1 year More Non- or less than less than less than than interest At 31 December 2009 less 6 months 1 year 5 years 5 years bearing Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000Assets
Liquid assets 190,184 - - - 98,961 1,193 290,338 Loans and advances to customers 419,687 5,741 77,218 243,103 195,897 (6,881) 934,765
Intangible fixed assets - - - - - 3,636 3,636Tangible fixed assets - - - - - 6,945 6,945
Other assets - - - - - 3,483 3,483Prepayments and accrued income - - - - - 6,477 6,477
Total assets 609,871 5,741 77,218 243,103 294,858 14,853 1,245,644
Liabilities
Shares 416,408 149,591 150,202 179,335 - 8,339 903,875Amounts owed to credit institutions
& other customers 187,169 28,007 12,292 493 - 802 228,763Other liabilities - - - - - 3,215 3,215
Accruals and deferred income - - - - - 2,633 2,633 Provisions for liabilities - - - - - 903 903
Net pension liability - - - - - 649 649 Net pension liability - - - - - 649 649 Net pension liability
Reserves - - - - - 105,606 105,606
Total liabilities 603,577 177,598 162,494 179,828 - 122,147 1,245,644
Off-balance sheet items 139,693 (9,000) 73,600 (4,950) (199,343) - - Interest rate sensitivity gap 145,987 (180,857) (11,676) 58,325 95,515 (107,294) -
Cumulative gap 145,987 (34,870) (46,546) 11,779 107,294 - - -
Group
Liquidity risk-Liquidity risk-
The Group’s liquidity policy is to maintain suffi cient assets in liquid form at all times to ensure that the Group can meet all its liabilities as they fall due and also meet all regulatory liquidity requirements.
The Group manages this risk on a continuous basis through the ALCO and by ensuring compliance with the Liquidity and Financial Risk Management Policies approved by the Board. In practice this results in the Group holding a signifi cant amount of highly liquid assets, mainly UK gilts and Treasury bills, which are eligible to meet its regulatory liquidity buffer requirement set by the FSA. The Society also holds a separate pool of such assets for use as collateral with derivative counterparties. In addition the Group maintains deposits placed on call or overnight with major banks to meet its operational needs without drawing on its buffer requirements.
Hedges
Instruments used for hedging are accounted for on an accruals basis in line with the underlying instruments being hedged. Consequently unrealised gains and losses on such instruments are not recognised. The following table shows the gains and losses that would occur if hedging instruments were carried at market value.
Unrecognised gains and losses on hedges Group and Society Net Gains/ Gains Losses (Losses) £ 000 £ 000 £ 000
At 1 January 2010 6,116 (21,862) (15,746) 6,116 (21,862) (15,746) 6,116 (21,862) (15,746) Of which recognised during the year 2,685 (2,859) (174)2,685 (2,859) (174)2,685 (2,859) (174)
Gains and losses brought forward and not recognised in the year 3,431 (19,003) (15,572)3,431 (19,003) (15,572)3,431 (19,003) (15,572)
Gains and losses arising in the year that were
not recognised in the year 1,874 (15,182) (13,308) 1,874 (15,182) (13,308) 1,874 (15,182) (13,308)not recognised in the year 1,874 (15,182) (13,308)not recognised in the year
At 31 December 2010 5,305 (34,185) (28,880) 5,305 (34,185) (28,880) 5,305 (34,185) (28,880)
Of which: Of which: Of which: Expected to be recognised in the year to 31 December 2011 2,118 (843) 1,2752,118 (843) 1,2752,118 (843) 1,275
Expected to be recognised after 31 December 2011 3,187 (33,342) (30,155)3,187 (33,342) (30,155)3,187 (33,342) (30,155)
These gains and losses represent the expected future impact of off-balance sheet hedging contracts to the Group, given current economic conditions. They extend over a period of 40 years and do not take account of the net income that will be derived from the underlying fi nancial instruments.
The Group operates only in the United Kingdom.
The Group operates through two business segments: Member and Non-member. The Member business segment relates to traditional building society operations, focusing on savings, mortgages and other fi nancial services for its members. The Non-member business segment relates to secured loans, unsecured loans and other fi nancial services for businesses and individuals.
Member business is conducted entirely by the Society and forms the majority of its activities. The Society also conducts a small proportion of the Non-member business and this is analysed accordingly. Non-member business conducted by the Society relates entirely to secured lending to businesses and represents part of the proportion reported under ‘Lending limit’ in the Annual Business Statement. The majority of Non-member business is conducted through the Society’s subsidiary undertakings.
The segmental information, as described above, is given below:
35
27. Segmental analysis
The fair value of a fi nancial instrument represents the amount at which assets, liabilities and derivatives held could be sold to willing parties at the balance sheet date. In respect of on-balance sheet instruments, market values are used to determine the fair value. In respect of off-balance sheet instruments, fair values are calculated by discounting cash fl ows at prevailing interest rates. The above table excludes certain fi nancial instruments which are not listed or publicly traded, or for which a liquid and active market does not exist. It therefore excludes items such as mortgages, bank deposits, shares and amounts owed to other customers.
The collateral (held)/pledged against the market value of off-balance sheet instruments comprises interest-bearing cash deposits, which are included in other assets/(other liabilities) in the balance sheets (notes 15 and 20), and listed debt securities, which are included in (notes 15 and 20), and listed debt securities, which are included in (notes 15 and 20) liquid assets in the liquid assets in the liquid assets balance sheets (note 10). Interest on these deposits is included in the (note 10). Interest on these deposits is included in the (note 10) income and expenditure accounts within income and expenditure accounts within income and expenditure accounts interest receivable and similar income or interest payable and similar charges, as appropriate.
Fair values of fi nancial instruments
Comparison of the book and fair values of some ofthe Group’s fi nancial instruments as at 31 December.
On-balance sheet instruments:
Treasury bills 9,998 9,977 - - 9,998 9,977 - - 9,998 9,977 - - 9,998 9,977 - - - - - - - - - - - - - - - - - - - - - - Loans and advances to credit institutions 110,383 110,383 - - 110,383 110,383 - - 110,383 110,383 - - 110,383 110,383 - - 74,184 74,184 - - 74,184 74,184 - - 74,184 74,184 - - 74,184 74,184 - - 74,184 74,184 - -
Debt securities 222,575 230,085 - -222,575 230,085 - -222,575 230,085 - -222,575 230,085 - - 215,644 209,596 - - 215,644 209,596 - - 215,644 209,596 - - 215,644 209,596 - - 215,644 209,596 - - 222,575 230,085 - - 215,644 209,596 - - 222,575 230,085 - -Amounts owed to credit institutions - - (63,349) (63,349) - - (63,349) (63,349) - - (63,349) (63,349) - - (63,349) (63,349) - - (117,095) (117,095) - - (117,095) (117,095) - - (117,095) (117,095) - - (117,095) (117,095)
Off-balance sheet instruments:Interest rate/index-based swaps
(excluding accrued interest) - 5,305 - (34,185)- 5,305 - (34,185)- 5,305 - (34,185)- 5,305 - (34,185) - 6,115 - (21,861) - 6,115 - (21,861) - 6,115 - (21,861) - 6,115 - (21,861) - 6,115 - (21,861)
Collateral (held)/pledged against the market value of off-balance sheet instruments (660) (660) 22,114 22,107 (660) (660) 22,114 22,107 (660) (660) 22,114 22,107 (660) (660) 22,114 22,107 (2,791) (2,791) 7,806 7,364 (2,791) (2,791) 7,806 7,364 (2,791) (2,791) 7,806 7,364 (2,791) (2,791) 7,806 7,364 (2,791) (2,791) 7,806 7,364
Group2010 2009
Positive NegativePositive Negative Positive Negative Positive Negative Positive Negative Book Fair Book FairBook Fair Book Fair Book Fair Book Fair Book Fair Book Fair Book Fair Book FairBook Fair Book Fair Book Fair Book FairBook Fair Book Fair value value value valuevalue value value value value value value value value value value value value value value value £ 000 £ 000 £ 000 £ 000£ 000 £ 000 £ 000 £ 000£ 000 £ 000 £ 000 £ 000£ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Notes to the Accounts - continued
26. Financial instruments - continued
2010 2009 Member Non-member Group Member Non-member Group Member Non-member Group business business total business business total business business total £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Income & Expenditure Account Interest receivable:
External 26,128 9,692 35,82026,128 9,692 35,82026,128 9,692 35,820 36,487 10,421 46,908 36,487 10,421 46,908 36,487 10,421 46,908 36,487 10,421 46,908Inter-segmental 3,382 (3,382) -3,382 (3,382) -3,382 (3,382) - 4,998 (4,998) - 4,998 (4,998) - 4,998 (4,998) - 4,998 (4,998) -
29,510 6,310 35,82029,510 6,310 35,82029,510 6,310 35,820 41,485 5,423 46,908 41,485 5,423 46,908 41,485 5,423 46,908 41,485 5,423 46,908
Profi t/(Loss) for the year before taxation 4,380 (2,008) 2,3724,380 (2,008) 2,3724,380 (2,008) 2,372 7,899 (3,534) 4,365 7,899 (3,534) 4,365 7,899 (3,534) 4,365 7,899 (3,534) 4,365
Balance Sheet Total assets 1,052,134 186,006 1,238,1401,052,134 186,006 1,238,1401,052,134 186,006 1,238,140 1,046,013 199,631 1,245,644 1,046,013 199,631 1,245,644 1,046,013 199,631 1,245,644 1,046,013 199,631 1,245,644 Liabilities (959,198) (171,893) (1,131,091)(959,198) (171,893) (1,131,091)(959,198) (171,893) (1,131,091) (956,942) (183,096) (1,140,038) (956,942) (183,096) (1,140,038) (956,942) (183,096) (1,140,038) (956,942) (183,096) (1,140,038)
Net assets 92,936 14,113 107,04992,936 14,113 107,04992,936 14,113 107,049 89,071 16,535 105,606 89,071 16,535 105,606 89,071 16,535 105,606 89,071 16,535 105,606
for the year ended 31 December 2010
The annual business statement sets out certain information and explanations prescribed by regulations made under the Building Societies Act 1986 in respect of the Group’s business for the year.
Statutory
1. Statutory percentages limit % %
(a) Lending limit Proportion of business assets
other than in the form of loans fully secured on residential property 8.94 25
(b) Funding limit Proportion of shares and other borrowings
other than in the form of shares held by individuals 19.09 50
Annual Business Statement
The statutory percentages demonstrate that the Group complies with the principal purpose of a building society, namely the making of loans which are secured on residential property and funded substantially by its members.
The above percentages are derived directly from the Group balance sheet.
Business assets are the total assets of the Group plus provisions for bad and doubtful debts less tangible and intangible fi xed assets and liquid assets.
Loans fully secured on residential property comprises the amount of those loans shown in the Group balance sheet plus provisions for bad and doubtful balance sheet plus provisions for bad and doubtful balance sheetdebts on those loans.
2. Other percentages 2010 2009 % %
As a percentage of shares and borrowings: Gross capital 9.51 9.32 Free capital 8.78 8.44 Liquid assets 30.49 25.63
As a percentage of mean assets: Profi t after taxation 0.10 0.23 Management expenses - Group 0.75 0.69 Management expenses - Society 0.49 0.46
The above percentages have been compiled directly from the Group accounts.
Gross capital represents general reserves.
Free capital represents the aggregate of general reserves and general provision for bad and doubtful debts less tangible and intangible fi xed assets.
Mean total assets represents the average of the aggregate of total assets at the beginning and end of the year.
Profi t after taxation is described as profi t for the fi nancial year in the income and expenditure account.
Management expenses are the aggregate of administrative expenses and depreciation and amortisation.
36
37
Polly Ann Williams BA, ACA (Chairman) APS Financial Ltd
Born: June 1965 Counties Home Loan Management Ltd *
Appointed: November 2006 Hampshire Trust Plc *
Business Occupation: Company Director Scotiabank (Ireland) Ltd
Worldspreads Plc
3. Information relating to directors and other offi cers Directors at 31 December 2010 Other directorships
Annual Business Statement - continued
John Stephen Milton BSc, ACIB, FIIA Counties Home Loan Management Ltd *
Born: December 1950 Hampshire Bank Ltd *
Appointed: December 1989 Hampshire Trust Nominees Ltd *
Business Occupation: Building Society Chief Executive Litigation Funding Ltd *
National Counties Financial Services Ltd *
Nationwide Compensation Service Ltd *
Anthony Philip Gration FCIB, CMIIA, ACoI, MBCS Counties Home Loan Management Ltd *
Born: August 1955 Hampshire Bank Ltd *
Appointed: July 1996 Hampshire Trust Nominees Ltd *
Business Occupation: Building Society Deputy Chief Hampshire Trust Plc *
Executive and Secretary Litigation Funding Ltd *
National Counties Estate Agents Ltd *
National Counties Financial Services Ltd *
Nationwide Compensation Service Ltd *
Peter Richard Goshawk ACMA, FCT The Association of Corporate Treasurers
Born: April 1959
Appointed: May 2010
Business Occupation: Company Director
Christopher James Fry BA, ACA Counties Home Loan Management Ltd *
Born: June 1957 Woodlands 2000 Ltd
Appointed: April 2010
Business Occupation: Building Society Finance Director
John Henry Howard Solicitor (Vice Chairman) Gas and Electricity Markets Authority
Born: February 1951 The Thalidomide Trust
Appointed: May 2008
Business Occupation: Company Director and Broadcaster
38
Colin George Sheppard JP, FRICS Barnardos
Born: May 1950 Barnardos Developments Ltd
Appointed: September 2004 Hertfordshire Partnership Foundation Trust
Business Occupation: Company Director and
Property Consultant
Other directorships
Offi cers at 31 December 2010
Keith Andrew Barber DMS, ACIB, DipPFS National Counties Financial Services Ltd *
Associate Director Business Development
Patricia Mary Boyd Chartered MCIPD (None)
Associate Director Human Resource and Management Services
David Horsman LLB, LLM, ACCA (None) LLB, LLM, ACCA (None) LLB, LLM, ACCA
Associate Director Finance
Roy Howcutt MICM (None)
Associate Director Member Accounts
Kathryn Elizabeth Mendoza LLB (None)
Associate Director Compliance and Legal Services
Lee Alan Meyers BSc, CPA, FCT (None)
Associate Director Treasury
David Andrew Parsons ACIB (None)
Associate Director Lending
Adrian William Westgate MBCS, MIMIS (None)
Associate Director Technology Services
* Companies within the National Counties Group
Details of directors’ service contracts are provided in the Report on Directors’ Remuneration.
Details of membership of and attendances at main Board Committees are given in the Report on Corporate Governance.
Colin Sheppard (Chairman), Anthony Gration (member-nominated) and John Sinclair are trustees of National Counties Building Society Pension and Life
Assurance Scheme.
The address for service of documents for each director is Addleshaw Goddard (GAB), Sovereign House, PO Box 8, Sovereign Street, Leeds LS1 1HQ.
Martin Henry Young FCA Kensal Enterprises Ltd
Born: May 1946 Octavia Foundation
Appointed: February 2010 Octavia Housing
Business Occupation: Company Director T & Y Consultants Ltd