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Annual Report & Accounts 2014

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2 Annual Report & Accounts 2014

Chairman’s Statement ................................................................ 3

Chief Executive’s Review ............................................................. 6

Directors’ Report ...................................................................... 12

Report on Corporate Governance ............................................... 18

Report on Directors’ Remuneration ............................................ 24

Directors’ Responsibilities ......................................................... 28

Auditor’s Report ....................................................................... 29

Income and Expenditure Accounts ............................................. 30

Balance Sheets ........................................................................ 31

Group Cash Flow Statement ...................................................... 32

Notes to the Accounts .............................................................. 34

Annual Business Statement ...................................................... 63

Contents

Annual Report & Accounts 2014 3

Economic background

In 2014, the UK economy continued generally to make progress, in what remain quite volatile and tricky times internationally.

Whilst there was much talk during the year about the next step in interest rates being upwards, and that the timing of this was getting nearer, it has yet to happen. Indeed, it may now remain some way off.

It would be welcome news for savers though. Savers have borne much of the pain of the need to rebalance the economy and 2014 saw a further decline in the rates paid to savers, as liquidity remained high in the economy. With an election in sight, the government has taken some welcome steps for savers, increasing the flexibility of ISAs and introducing its own ‘65+ Guaranteed Growth Bonds’ through National Savings early in 2015 with the latter limited in their availability and proving very popular given interest rates available elsewhere. New freedoms are also to be introduced in relation to people’s pensions, if they have not already bought an annuity. We have done what we are able to for savers. Paying attractive rates whilst having to manage carefully the inflow of money and creating innovative products like our Windfall Bond and Market Tracker account.

For mortgage borrowers, either existing or new, budgeting has to be thought through for if and when rates do rise. Whilst older borrowers have lived through rates going up and down, a significant cohort of newer borrowers have only seen rates go down or remain stable at these historically low rates.

Low interest rates remain one factor sustaining the housing market, although sentiment turned towards the end of the year, especially in London and the South East where falls were reported. The introduction of new regulatory requirements on 26th April increased the responsibility of providers to ensure the affordability of loans, and limits on higher loan to income mortgages were then introduced by the Bank of England, designed to ensure that the housing market did not race away. Both of these actions seem to have had an impact. However, the ongoing significant mismatch between supply and demand of housing remains the key issue. House building has simply not kept pace with demand. Whilst we can do what we can to help first time buyers, this structural imbalance really needs to be addressed. It is also causing some issues in relation to the rental market, with rents rising faster than wages in 2014. Low long term interest rates also impact, for the time being, the value of the hedging of our book of lifetime mortgages.

Financial services

Banks have continued to attract adverse comment. Past issues of conduct are still emerging – involving retail and corporate customers and the inter bank markets. Ever increasing fines have been levied. This has made the provision of retail financial services a political issue including a review by the Competition and Markets Authority with all political parties supporting a reduction in the dominance of the few, largest high street players.

The big banks effectively offer everything to everybody. They want, and need, to deal with millions and millions of customers. They operate at huge scale. That is their strength. But this makes it hard for them to treat people as individuals; to have customer centric offerings aimed at particular groups or segments of people. That is their weakness.

Chairman’sStatement

Chairman’s Statement

Polly Williams



What we do

As I said in my report last year, it is against this background that the Society thought carefully about its future strategy and a considerable part of 2014 has been spent in implementing those strategic changes.

We have, over the years, with a number of specific products, sought to help families – for example with our Family Guarantor Mortgage. We researched how the financial needs of families have changed against the circumstances faced by previous generations. And we spoke to people about their thoughts and experiences. The costs of further education have increased materially; young adults are leaving home later and later but most still have a strong desire to own their own home; to do so they often require help from parents or grandparents; but parents and grandparents are uncertain about their own futures, about how long they will have to fund their own retirements; parents are also having to help their own parents with the many issues related to old age.

In many, many families, the desire to support each other is strong. There is a realisation that the way we live today requires working together, across the generations. Young adults generally have a high level of financial responsibility. Whilst they realise that they need help, they do not want to do anything that might endanger the finances of other family members.

It is to help better meet the needs of these families, to make the most of their money, together, that we launched the Family Building Society in July. This was the first new building society brand launched for over 30 years. We believe that it has been well received; that it resonates with its target customer base.

The products that we have launched already are focused on meeting the needs that families have. The Family Mortgage is designed in a uniquely flexible way to help

first time buyers get a mortgage, at a good rate, with assistance from parents or grandparents but without the need for them to lose control of the money put up as security. The Low Start Mortgage is designed to help those who have gone through divorce to rebuild their finances over a period. On the savings side, we launched our innovative Windfall Bond for those prepared to forego part of the current low levels of interest for the chance of a more significant prize and our Market Tracker savings account tracks the rate paid by the top 20 accounts in the market, thus saving people the bother of having to regularly move their money around to chase the best rate.

We have also partnered with a group of carefully selected third party providers to help serve families’ needs beyond our core savings and mortgage capability. These cover areas such as tax effective with profits university savings plans, car insurance for teenagers, later life planning, advice around equity release and wills, executor and trustee services.

Meanwhile, we have not wanted to disrupt the goodwill around National Counties itself with existing savings customers, mortgagors and our mortgage introducers, from whom most of our new mortgages are introduced. It is fundamental that we continue to serve our existing customers well.

We are able to operate the two brands efficiently and effectively using the same infrastructure in our building in Epsom and from the same Society balance sheet.

Results for 2014

It is pleasing to report that your Society was profitable during 2014 with the accounts showing a Group profit after tax of £4.2 million. This is a good result given the investment in launching the Family Building Society and the IT and operational upgrades that we carried out.

We launched the Family Building Society in July. This was the first

new building society brand launched for over 30 years.



It is also pleasing to have increased staff numbers, particularly of young graduates and school leavers. There is more to do in this regard in 2015. We also had to meet the new and additional requirements set out in the Mortgage Market Review and the Society now provides advice (which is a strictly defined regulatory term beyond providing information) to mortgage customers which we did not do prior to 26 April 2014 – the date the new regulations came into force.

The sale of Hampshire Trust Plc was completed in May. Part of the consideration was deferred pending realisation of certain underlying assets. Most of these have now been realised, with only some small amounts remaining outstanding. Prior to the sale we transferred certain property and solicitors’ practice funding loans to the Society and these have been running off as anticipated.

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 the Society again increased its mortgage book and the Group maintained a very strong capital position.

Looking forward

I would like to thank all our staff for their extra efforts in 2014 – we know that 2015 will be a busy year too. I would also like to thank all our customers for trusting us with their business.

Having pulled back from mortgage lending to a certain extent in the aftermath of the financial crisis, the larger lending institutions have become much more aggressive on pricing recently. This will make 2015 more competitive than the last few years.

The General Election in May will probably offer the British people more divergent policy choices than at any time since 1979. Its outcome may not be decisive.

This makes looking forward even harder than usual but I am confident that the Society is well placed to deal with whatever is the outcome. We retain an enviable capital position, the foundation of any deposit-taking and lending institution. We have a long record of consistently providing attractive products and we give customers a good service. In relation to our core mortgage lending, we have a strong credit record. Ultimately this is the single most important competence for a lending institution to have. Yet we are flexible in assessing the credit quality and affordability for each individual applicant. Independent mortgage advisers, through whom we get much of our mortgage business, value this. We have no branch network, so our cost base is relatively lean and flexible.

At the Annual General Meeting (‘AGM’) in April, I shall retire as Chairman; I have been on the Board for nearly nine years and good governance practice indicates that it is the appropriate time to refresh the role. Rodger Hughes, who joined us following an item in our newsletter having been a member for many years, will take over from me. Peter Goshawk will also retire at the AGM. We thank him for his wise counsel over the years.

By the time of the AGM, we hope to have received regulatory approval for three new Non-executive Directors to replace Peter and me and extend the Board’s capability. Each has a specialism in a particular area relevant to the Society, as well as broad financial services experience.

In 2015 and beyond, we will remain focused on providing current and future members with products that meet their needs, delivered in a way that exceeds their expectations.

Polly Williams Chairman 26 February 2015

We have a strong credit record. Ultimately this is the single most important competence for a lending institution to have.


Chief Executive’s Review

Fellow members, I am pleased to present this review of the Group’s activities during 2014. First, I would like to set something of the background to them.

Economic and political background

The economic recovery that started in 2013 strengthened in 2014. 2015 will be marked by the General Election on 7 May.

The UK bank base rate stayed at its historic low of 0.5% throughout 2014. Whilst this reflects the short term price for money, longer term interest rates, for 10, 20, 30 years, also fell to historically low levels. A trend that has continued in 2015. Whilst this drove ever lower mortgage rates for borrowers, it meant that the pain continued for savers.

There was talk during the year of rates finally rising; indeed the Bank of England started to lay the ground for this. However, by the end of the year, with falling inflation, a rise in the base rate still seemed some way off. Having driven down deposit rates by pumping tens of billions of pounds into the banking system with the Funding for Lending Scheme from 2012, the Chancellor took a step, at least for some, in the other direction, early in 2015, with National Savings’ launch of the 65+ Guaranteed Growth Bonds paying well above market rates.

The structural imbalance between house building and demand meant that the housing market generally remained firm. Whilst the housing market is likely to continue to go through positive and negative cycles, as long as new house building is less, or significantly less as currently, than new household formation, affordability will remain an issue both for owning and renting a home. Measures were brought in by the Financial Conduct

Authority, principally in the form of the Mortgage Market Review (‘MMR’), and the Bank of England, which separately during the year imposed specific Loan to Value Limits, to try and ensure that lending did not fuel unsustainable house price rises threatening the economy and potentially the sustainability of lending institutions. These policy initiatives started to have an impact in the second half of the year.

The referendum on Scottish independence in September has been and gone; so too perhaps the hope that the matter would have been dealt with for at least a generation. So uncertainty remains. On 7 May, we will have a General Election. For the first time really since the 1970s, there seems to be i) a real contrast between the two major parties on some key policy issues, so that the outcome of the election, one way or the other, could have a quite significant fiscal impact, on interest rates and on the housing market and ii) a further splintering of the traditional two party hegemony in Westminster which may lead to another coalition Government or a minority Government followed, perhaps, by another election in relatively short order.

These uncertainties make us cautious for 2015; both about the housing market and about the overall size of the mortgage market. Whatever happens, we will continue to do the best deal that we can in balancing the interests of our depositors and our borrowers, whilst building for a long term future.

Launch of the Family Building Society

The Society has operated since 1896. Few companies can claim that. Yet the Society was largely unknown. We wanted to change that.

Many millions of customers transact much of their financial services business with the large banks. These huge organisations have, by definition, effectively to be


Mark Bogard



everything to everybody. It is the only way that they can engage in the volumes of business that they need to make the returns that their shareholders require.

However, certain customers, certain segments of the population, would benefit from a much more focused, a more customer centric proposition. We believe that families who work together across the generations to make the most of their money require and deserve to have their specific needs met. That is why we launched the Family Building Society in July. It is the first new building society brand for over 30 years.

We have built the Family Building Society on the infrastructure of National Counties, largely using the existing staff. It operates within the same, single balance sheet. We have therefore been able to do it in an extremely cost effective way. We launched with our innovative, flexible Family Mortgage which allows parents and grandparents to help young adults to buy their first home. This is something that many of them tell us they still aspire to but they know they need help to achieve their dream. We also launched a Low Start Mortgage which is designed to help people who have gone through some family dislocation, like a divorce, to get their lives back in shape. We launched a tracker deposit account which tracks the average rate of the top 20 deposit accounts, thus freeing people from the need to endlessly watch rates and move their money around from account to account with all the bureaucracy that that entails. In the Autumn, we launched the Windfall Bond which currently pays Bank of England base rate but offers savers additionally the chance to win a cash prize which might represent the deposit on a house, the cost of a wedding or a year’s university fees for a child or a grandchild. In February 2015, we launched an Offset Mortgage which allows people to reduce the interest cost on their mortgage with their savings. This product should be particularly attractive to the self-employed, who can use the money that they set aside to pay their bi-annual tax bill. In a further innovation, parents and grandparents can also use savings to help family members.

Traditionally the Society has only offered deposit accounts and mortgages. Families’ financial needs go beyond these products. So we have partnered with a number of carefully selected, specialist third party providers, for example who can give independent pensions and investment advice, or advice on later life planning, or car insurance for teenagers, or with equity linked university savings plans, or help with wills, probate and executorship, or advice on equity release mortgages, or helping grandparents downsize. This will enable us to better serve customers and, over time, diversify the income of the Society.

The Family Building Society has been well received. It resonates with people. We have attracted national press coverage and our website has proved popular. Building a new business takes years. We have only just started but we hope that, in years to come, the Family Building Society will be recognised as one of the very best places that families can go to get help managing their money across the generations. There has been much talk of new, ‘challenger’ banks. We firmly believe that there is a real opportunity for a challenger, mutual building society.

National Counties Building Society

Whilst the launch of the Family Building Society is an exciting development, we are very mindful of our need, and our obligation, to continue to serve National Counties customers. And we shall do.

We have done everything that we reasonably can to maintain our deposit rates. More than once, when we have sought to attract new funds, we have offered the best rate in the market. Though unlike some we do not play the game of offering teaser rates, in the hope that people forget to move their money once the tease is over. So in a very competitive market, we are pleased to have been able to offer existing and new members a good deal. Yet we are constrained in what we can do for savers. The Society survives on the margin between the deposit rate it offers savers and the interest it can

We firmly believe that there is a

real opportunity for a challenger, mutual building society.



charge its mortgagors and we must maintain that margin in what is an increasingly aggressive market.

On the mortgage side, National Counties gets most of its mortgage business via third party intermediaries. We have built a reputation with them for sensibly underwriting cases which do not necessarily fit into the larger providers’ computer models or business focus and we shall continue to do this.

I would now like to turn to the financial performance of your Society and its subsidiaries in 2014.

Overall Group Financial Performance

Group operating profit before provisions in 2014 was £4.1 million, a healthy increase on the previous year’s figure of £2.7 million.

This is a good result, even given a relatively benign environment for our net margin, because we have launched the Family Building Society and taken the opportunity to begin to modernise some of the old systems and infrastructure of the Society. Given the tricky environment of the last few years, support costs had been tightly managed and inevitably some investment is now required to keep up to date, efficient and effective.

After allowing for provisioning movements and profit on disposal of a subsidiary, the Group profit after tax for 2014 was £4.2 million, significantly better than last year’s £1.0 million. The Group’s balance sheet was up at just over £1.3 billion. Our Core Tier 1 capital ratio at 27% remains one of the highest in the industry.

Retail Savings

Above all we want to be a safe home for your savings and, as mentioned, we retain one of the highest capital ratios in the industry.

We started the year with sufficient liquidity but with net mortgage lending positive, and a somewhat mixed wholesale funding market, we grew our savings balances by over £60 million in 2014.

Mortgages

The mortgage market strengthened across most of 2014, before falling away somewhat against the previous year in November and December. It is pleasing to report that the Society’s mortgage book at the end of 2014 stood at £911 million, a new record. Owner occupier balances were up by over £50 million or 12% in 2014. This continues our trend of growth, serving customers.

One factor in this success was our lending to people into retirement. Provided older borrowers properly understand the issues that they may face as they get older – and we think that they should, having gone through our mortgage underwriting process – our experience is that they make good customers, almost without exception. Many also come to us through an independent mortgage adviser, who also has an obligation to explain the potential issues to them.

Our new business activity was sustained by the ongoing awareness on the part of intermediaries regarding our willingness and ability to apply individual underwriting assessment to borrowers’ circumstances, such as those at or approaching retirement. We do things ‘by hand’; experienced individuals make judgements; not computers.

From 26 April 2014 the new MMR regulations were applied across the mortgage market. We have been required to take on greater responsibility for assessing a customer’s ability to afford a mortgage, even when they apply to us through a mortgage adviser. This means collecting more data on the individual and looking not only at what they pay today but what they might be expected to have to pay for their mortgage over the next five years. As well as this new ‘affordability model’, we are also required to give customers advice, i.e. which is the best of our mortgages for them to have in their own individual circumstances, rather than merely providing them with information about our mortgages. Whilst we only give customers advice on our own range of mortgages, rather than the market as a whole, this is something that was new to the Society and required an investment in people, systems and processes. There has been some negative comment in the press about how lengthy and intrusive the new requirements are for people but we have had a number of letters from customers complimenting us on how we have handled the process.

The Society’s prudent lending risk appetite is implemented through individual assessment of loan applications by experienced underwriters and the success of the approach is demonstrated by the incidence of arrears remaining below that of residential mortgage lenders generally. Whilst we observe responsible lending principles, so that borrowers should find their mortgages affordable, genuine difficulties can arise in relation to maintaining mortgage payments in adverse economic conditions or changes in personal circumstances. We offer borrowers forbearance in accordance with our arrears policy and procedures which are compliant with regulatory guidance, best practice and the principles of Treating Customers Fairly (‘TCF’). Reaching the best outcome for the customer is, though, dependent on borrowers making early contact with us and openly discussing their circumstances.

It is very pleasing to report that only two residential properties mortgaged to the Society were repossessed and sold during 2014, resulting in a loss of £40k.



Our review of the arrears situation at the end of 2014 took the total of our provisions to £2.7 million in the Society, equivalent to 0.3% of total balances outstanding. £0.9 million of this related to our small portfolio of commercial property, for example shops, which, as we have not sought any new business in this area since 2013, is now in run off.

One of the impacts of MMR has been to increase the proportion of mortgages sold via intermediaries. This is because, given the time that the assessment process takes, potential customers are put off going through multiple fact finds for each individual provider when, if they go to an intermediary, they only have to go through it once. Traditionally the Society has been largely reactive to intermediaries, servicing the business that comes in. We have a good story to tell now both as Family Building Society and as National Counties and going into 2015 we are devoting resource to begin to better develop business that comes through intermediaries.

Treasury Operations

The Society’s overall funding last year remained largely stable. We were active in the wholesale money market and were pleased to take advantage of the relatively low interest rates on offer when compared with retail deposit rates. This activity is subject to careful management with targets set for the mix of funding in terms of both source and duration and other limits set to ensure a prudential approach. It is pleasing that the Society’s renowned financial strength enabled it to raise wholesale funding of varying maturities including some longer term funding on attractive terms.

Although the Society has not experienced any difficulties in raising funds throughout the different market conditions that have prevailed in recent years, we recognise the importance of maintaining a strong liquidity position at all times. The current liquidity regime for deposit-taking financial institutions began being implemented in 2010 and the Society’s framework is subject to a periodic review by the Prudential Regulation Authority. Central to this regime is the holding of a portfolio of high quality, readily realisable liquid assets, mainly UK Gilts and cash at the Bank of England and major UK banks, in order to provide a buffer in the event of any major funding issues arising for any reason. Alongside the holding of these assets, there is a requirement to prove their value at regular intervals, either through sale or use as collateral in sale and repurchase (‘repo’) transactions. In the course of such liquidity management operations, the Society achieved some useful gains on the sale of gilts.

Customer Services

Our guiding principles in relation to customer service, as set out in our corporate objectives, are consistently attractive and dependable products and convenient and personal service. We want to be modern, but with traditional values. So we offer online accounts but we have experienced and well trained people on the telephone in our Epsom office. After some years of necessarily careful cost management, we have taken the opportunity in 2014 to begin to upgrade and update some of our systems and processes. For example we have now installed a new, modern telephone system.

Consistent with the principles of TCF, we take care in the design of our products to ensure they will meet the needs of the customers for whom they are designed and we assess the impact of any new products on existing account holders. We do not reserve any of our products for new customers only and we notify our savers and borrowers of the products available to them upon expiry of special terms, such as fixed or discounted rates. Our websites are updated promptly and provide full details of our product range. In addition, there are a number of standard mailings undertaken each year, such as statement distributions, which we use to keep customers advised generally of product and service developments.

Feedback from customers is very much appreciated, with positive comments reinforcing our actions, whilst any instances of unsatisfactory service cause us to investigate and determine improvements for the future. It is rare that complaints from our members are referred to the Financial Ombudsman Service (‘FOS’), with just eight cases arising in 2014. Determination of these by the FOS can take some time but in the eight cases resolved in 2014, the Society’s response was upheld in seven.

Subsidiary Operations

We completed the sale of Hampshire Trust towards the end of May, resulting in a Group profit of £1.8 million. Almost all the contingent consideration of about £1.4 million has now been paid, with the remainder expected in due course. Certain assets, being principally solicitors’ practice funding loans and development property loans, were transferred to the Society before sale. The run off and collection of these assets has occurred broadly as anticipated to date. Some remain but it is expected that these will largely have been paid off by the end of 2015. Hampshire Trust’s old Head Office building, which the Society owns has recently been put on the market.

Counties Home Loan Management Limited is the Society’s only active subsidiary now, although it has not acquired any new mortgages for some years. Its residual balances relate to past mortgage book acquisitions, including a portfolio of Lifetime Mortgages. As the books are in run-off



and redemptions exceeded capitalised interest, the balances outstanding reduced during the year. It is funded by the Society. It was profitable and a dividend of £300,000 was declared and paid to the Society during 2014.

Personnel

2014 has been an exceptionally busy year. We implemented MMR; we launched the Family Building Society; we have a new phone system; and new boilers; we completed the sale of Hampshire Trust; and have run down its legacy assets; the prudential and conduct burden of regulation has increased further; there are new accounting treatments to prepare for; and additional corporate governance requirements; and meanwhile we have served our existing customers and many new ones. I welcome this opportunity to acknowledge the commitment and industry of the Group’s employees and to place on record my appreciation for all their efforts.

2015 will be busy too. The Society recognises that its continued success depends significantly on the commitment, enthusiasm and professionalism of its staff and these attributes must be maintained through development during their careers with the Society, with financial support provided for those pursuing relevant professional study. It is particularly pleasing that in the lead up to the Society giving customers mortgage advice a number of staff succeeded in obtaining the necessary qualification to do so.

I am sure that the rest of my Board colleagues and all the staff at the Society would like to thank Polly Williams, who is retiring as Chairman at the forthcoming AGM, for helping the Society calmly navigate what has been a tricky time in financial services and help the Society evolve to better meet future challenges.

We also thank Peter Goshawk, who is also retiring from the Board, and as Chairman of the Risk Committee, at the AGM. Risk has been an ever increasing focus of attention across all our areas of activity and his wise counsel and balanced approach have been of great value to the Society.

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 which is driven by a staff led Committee.

Our activities in the community include support for selected charities, clubs and voluntary organisations based locally to the Society’s Head Office. During 2014 we were pleased to participate in an Epsom-based business enterprise initiative, sponsoring the prize for the Best Business for Customer Service, a business competence we hold dear.

The Future

Looking forward, we continue to face significant uncertainties. Our future strategy must deal with the economic issues that we all face and, in significant part, they continue to prescribe the Society’s relationship with you, our members. However, we do believe that we are well placed to serve the needs of those customers that we are seeking to focus on.

So we face the future with optimism and we are investing in that future.

If we offer customers what they want – products that meet their needs, delivered efficiently but with old fashioned customer service, we will continue to prosper.

Mark Bogard Chief Executive26 February 2015

The Society’s Principal Purpose and Corporate Objective

The Society’s Principal Purpose is to meet members’ requirements for residential mortgages and savings accounts.

The Society’s primary objective is to maximise for current and future members the long-term benefits of its operations, the key components of this being:• consistently attractive and dependable products• convenient and personal service, financially secure and efficient operations



Key Performance Indicators

The Group’s progress is monitored by the Board using a set of strategic Key Performance Indicators (‘KPIs’). The outcomes for the KPIs adopted during 2014, with comparison against the 2013 results, are reported below with explanatory comment.

• Group profit after tax to mean assets ratio: As a mutual organisation the Society does not seek to maximise profit in order to pay a dividend to external shareholders. Instead the level of profit is managed to maintain its capital strength against possible losses and to provide the basis for future development. The Group profit after tax ratio in 2014 was 0.33% (2013: 0.08%).

• Society net interest margin: This is the difference between the interest the Society receives on its loans less the interest it pays on its deposits. This needs to be large enough to allow a level of profit but not too high in order to give members fair rates. In 2014 this was 1.2% (2013: 0.8%).

• Society cost/income ratio: This ratio measures how efficient the Society is in terms of generating income from its cost base. For 2014 this was 75.0% (2013: 69.5%). The Society invested heavily in infrastructure, systems and additional staff in 2014 particularly to launch FBS. The ratio reflects this.

• Core Tier 1 capital ratio: This ratio, which is widely used to compare credit institutions, takes into account the perceived risk within the Group’s balance sheet due to its lending operations and liquidity investment holdings. Understandably given the events of recent years, regulators and analysts are looking beyond simply the level of capital held, to its capacity to absorb losses and also the relative risks

within an institution’s operations. Virtually all the Group’s capital is accumulated profits in its reserves and meets the definition of Core Tier 1, the highest quality available, and the ratio of this to the regulatory risk weighted assets at 27% in 2014 (2013: 25%) continues to provide a much envied level of security for its members.

• Movement in Group loan balances: Economic and market conditions bear heavily on the demand for loans and the repayment of existing loans. The Group increased its loan balances by 3.5% (2013: 4.3%).

• Group residential mortgages in arrears by more than 3 months as a percentage of all Group residential mortgage accounts: Our lending policy and underwriting processes are designed to ensure that our lending is responsible and affordable but economic conditions and domestic situations inevitably give rise to some borrowers having difficulties maintaining their mortgage payments. It is very pleasing that during 2014, the incidence of our borrowers incurring payment difficulties at the level of three month’s payment or more remained very low at 0.6% (2013: 0.6%).

• Number of complaints upheld in the year as a percentage of average number of Society members: This KPI tracks our service levels. In 2014 it was 0.1% (2013: 0.1%). Any level of complaints is too high but inevitably some errors will be made. The percentage remains extremely low but we continue to work to get rid of any causes for complaint.

• Percentage of members reporting good or better service in the annual customer survey: At 87.3% (2013: 87.1%) this shows that the Society is regarded by most members as giving consistently good service.

Key Performance Indicators 2014 2013

Group profit after tax to mean assets ratio 0.33% 0.08%

Society net interest margin 1.2% 0.8%

Society cost/income ratio 75.0% 69.5%

Core Tier 1 capital ratio 27% 25%

Movement in Group loan balances +3.5% +4.3%

Group residential mortgages in arrears by more than three months as a percentage of all Group residential mortgage accounts 0.6% 0.6%

Number of complaints upheld in the year as a percentage of average number of Society members 0.1% 0.1%

Percentage of members reporting good or better service in the annual customer survey 87.3% 87.1%


Directors’ Report

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 2014 were £1,304 million (2013: £1,279 million).

Total loans and advances to customers at the year end were £1,014 million (2013: £979 million). At 31 December 2014 a total provision of £4.3 million, comprising £3.9 million specific and £0.4 million general, (2013: £4.3 million, comprising £3.9 million specific and £0.4 million general) was made in the Accounts for possible future loan losses. This figure represented 0.4% of loan balances outstanding (2013: 0.4%). At the end of the year there were no mortgaged properties in the Group’s possession (2013: none), with nine (2013: fifteen) mortgage accounts in arrears by twelve or more months. The principal balances outstanding on these accounts totalled £3.2 million (2013: £6.1 million) and the total amount of the arrears was £2.4 million (2013: £4.8 million). Liquid assets, in the form of authorised investments and cash, amounted to £274 million at the year end (2013: £286 million), representing 23% (2013: 25%) of total shares and borrowings and 21% (2013: 22%) of total assets of the Group. Changes in tangible fixed assets during the year are detailed in Note 14 to the Accounts. Savers’ share balances totalled £940 million at 31 December 2014 (2013: £879 million). Deposits by credit institutions and other customers amounted

to £237 million at the year end (2013: £276 million), representing 20% (2013: 24%) of total shares and borrowings.

The Group operating profit before provisions was £4.1 million (2013: £2.7 million). After provisions and profit from the sale of a subsidiary, Group profit before tax was £4.9 million (2013: £1.4 million). The Group profit for the year after tax of £4.2 million (2013: £1.0 million) brought the Group gross capital at 31 December 2014, after pension liability adjustments, to £116 million (2013: £113 million). This represented 8.9% (2013: 8.8%) of Group total assets at that date or 9.8% (2013: 9.7%) of total shares and borrowings. In line with many organisations, the Group’s pension fund has a deficit. During the year the deficit increased to £2.2 million after tax (2013: £1.0 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 fixed assets) amounted to £109 million at the end of the year (2013: £106 million), equivalent to 9.3% (2013: 9.2%) 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 2014, as a proportion of the amounts invoiced by suppliers during the full year, was equivalent to seven days (2013: 20 days).

The 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 2014.

Directors’ Report

£4.1mGroup operating profit before provisions

£1.3bnGroup total assets

£274mLiquid assets(investments & cash)

£940mMember share balances


Directors’ Report

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 financial loss will arise from a customer or counterparty failing to meet their obligations. This primarily arises from the Group’s lending activities, which are mainly secured on property, and 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. All of the Group’s non-customer lending is represented by securities issued in sterling by AAA rated European multi-lateral development banks, UK government gilts, or deposits with the Bank of England or UK clearing banks.

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 Financial Risk Management Policy approved by the Board. The Group is not directly exposed to foreign exchange risk as all its transactions are denominated in sterling.

Liquidity risk is the risk that the Group will not have sufficient funds to meet its financial obligations, as they fall due. This could arise for example as a result of imbalances in the cash flows of its activities. The amount of collateral the Society is required to pledge in support of its derivative hedging transactions can also have an adverse effect on the liquidity position. This is mitigated through adherence to the Liquidity and Financial Risk Management Policies approved by the Board and by conducting an Individual Liquidity Adequacy Assessment (‘ILAA’) process as required by the Prudential Regulatory Authority (‘PRA’). Consequently the Society maintains a significant 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 the Bank of England and UK clearing banks, ensures that the Group can meet all its required payments.

Operational risk is the risk of loss resulting from inadequacies, or failures, in the Group’s internal processes and systems, or the actions of its staff. The Society’s risk function has been further strengthened in 2014 following the recruitment of an experienced Associate Director, Risk, the previous year. The Associate Director, Risk is responsible for covering oversight of all the Group’s risks. This has enhanced the Group’s management of risk including operational risk which is reviewed regularly by the Executive Group Risk Committee. This Committee reports to the Board Group Risk Committee comprising Non-executive Directors with specific responsibility to monitor risk management across the Group, covering compliance with regulatory guidance in respect of lending, treasury and business conduct activity, as well as the ongoing update of the ILAA process and Internal Capital Adequacy Assessment Process (‘ICAAP’). Crucially the Risk function reports directly to the Board Group Risk Committee comprising Non-executive Directors and represents the second line of defence against loss for the Society, the third line being Internal Audit which is carried out exclusively by Deloitte overseen by the Group Audit Committee which also consists of Non-executive Directors.

Due to the increase in the volume and sophistication of actual and attempted frauds directed against financial institutions, the Society recognises the increasing potential risk of loss from these activities. Whilst improvements in and the extended use of technology to benefit the Society’s operations and products are essential they add to the risk of criminal attack and error. The Society has therefore stepped up its defences. Continual reviews and enhancements to its operational controls to maintain their effectiveness are undertaken. Consequently the Society has not suffered any material losses from fraud so far.


Directors’ Report

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 Society’s ability to compete and function effectively. The amount of regulatory change in the wake of the financial crisis continues unabated both from the EU and the many regulators who impact on the Society, principally the Prudential Regulatory Authority and the Financial Conduct Authority. The impact of the latter on conduct and compliance issues has increased the risk in this area. Although further resources have been committed or re-assigned to regulatory issues in 2014, additional resource is likely to be needed as changes to the regulatory regime for financial services continue to be made. These requirements of course result in additional cost which is ultimately passed onto members. For example the requirement to produce statutory accounts under International Financial Reporting Standards from 2015 has resulted in increased expenditure on technical advice and systems development.

The continuing difficult and different economic conditions in the UK, Europe and globally, mean that a number of uncertainties are faced by the Group. Although the economic data on the UK is increasingly positive the general election in May 2015 increases economic uncertainty. The most significant issue is the future cost of funding to support lending activities and maintain liquidity at an appropriate level to meet ongoing operations. The Society’s 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 as a result of the relatively low rates of return offered by institutions on deposits. The Society participates modestly in the first phase of the Bank of England’s Funding for Lending Scheme (‘FLS’), which had such a dramatic effect on reducing rates offered to customers, in order to benefit from the reduced funding cost it offers but having exited the commercial lending market was unable to participate and benefit from the follow-on phase of FLS.

Changes in the economy potentially have a mixed impact on the credit risk of the Group’s mortgage and commercial loans, despite the strict criteria that the Group applies to all of its lending operations. The improvement in the economy, particularly unemployment levels, should reduce defaults on loans however we are mindful that when interest rates eventually rise this could lead to fresh affordability issues. These concerns are factored into our underwriting process which is based on individual case assessment by experienced personnel and the affordability requirements of MMR which the Society successfully implemented during the year, should also have a positive impact in this respect.

The Society monitors the payment performance of its existing loan book very closely and encourages borrowers

to contact it in the event of any potential difficulties so that the Society can try and help alleviate the situation. Instances of arrears in payments are followed-up promptly and the full range of forbearance options is considered. These include either a temporary reduction in the monthly repayment amount, temporary transfer of the mortgage to interest only terms or an extension of the term. These actions, designed primarily to assist borrowers facing short term difficulties, are taken after an individual assessment of the case has been undertaken to ensure that the action is in the best interests of both the borrower and the Society because in some instances foreclosure can result in a better outcome for the borrower than temporary help.

Forbearance is also taken account of in the exercise designed to highlight impaired loans and determine appropriate, prudent loss provisioning. This is covered by a specific policy on forbearance.

At year-end 2014, the Society had 102 accounts, including some transferred from its former bank subsidiary Hampshire Trust Plc (‘HT’), with balances totalling £17.6 million (2013: 120 accounts totalling £18.4 million) subject to forbearance against which provisions of £1.8 million (2013: £1.6 million) had been made. At the Group level, 115 accounts with balances of £18.9 million (2013: 142 accounts totalling £27.5 million) had been subject to forbearance with provisions against them totalling £1.9 million (2013: £3.2 million), the majority of which relates to loans originated in HT.

In respect of the Group’s lifetime mortgage portfolio, there are a number of risks and uncertainties that may affect its performance and ultimate recoverability. These include longevity and morbidity risk where increases could result in some mortgages suffering losses under the no negative equity guarantees if not covered by house price inflation. Provisions against potential losses are made accordingly.

The Society held Certificates of Deposit issued by Kaupthing, Singer & Friedlander Limited which were fully provided against in 2008. The securities were sold at 88.5p during the year resulting in a final provision write-back of £0.1 million (2013: £0.5 million).

The Society’s banking subsidiary, Hampshire Trust Plc, which had in recent years booked substantial losses from both its solicitors’ practice funding and secured property lending as a consequence of the economic difficulties following the financial crisis, was sold in May 2014 having received final regulatory approval. The sales proceeds of net asset value plus £2.1 million are recorded in the Society’s Accounts (see Note 13). £1.4 million of the proceeds was deferred on sale, pending realisation of certain assets that remained in the bank’s books. Most of these assets were realised subsequently resulting in the payment of most of the deferred consideration leaving a balance of £0.1 million outstanding which is expected to be paid in the first half of 2015.

Director’s Report


Directors’ Report

As is usual when selling a company, an indemnity was given to the purchaser against certain future liabilities arising from pre-purchase transactions in HT. The likelihood of future losses arising from this indemnity is regarded as highly remote.

The Society paid levies to the Financial Services Compensation Scheme (‘FSCS’) totalling £696k in 2014 (2013: £661k) for the retail deposit guarantee following the default of Bradford & Bingley and other bank failures in 2008 and the interim levy relating to the losses from the failure of the Dunfermline Building Society. Levies will continue to be made in future years in order to pay the interest and capital outstanding. The levy varies depending on the interest rate charged by the government to the FSCS as well as the Society’s share of total deposits covered by the FSCS. Should further financial institutions fail and the FSCS covered losses increase, further levies would become payable. The future FSCS cost is therefore uncertain and represents a substantial burden for the Society.

The Society has a funding obligation for the National Counties Building Society Pension and Life Assurance Scheme. This obligation gives rise to the risk that additional funding may be required should the value of the Scheme’s assets, together with ongoing employer and member contributions, be insufficient to cover the accrued Scheme member benefits. A full actuarial valuation is carried out by a qualified independent actuary every three years. The latest of these as at 30 April 2014 is in the course of assessment. It is expected that this will show a deficit which the Society will have to rectify in order to meet the Pension Ombudsman’s requirements to remove the deficit over time. This follows from a period of low gilt yields coupled with poor fund performance.

In order to reduce the exposure to further actuarial risks the Society decided to cease further accrual in the defined benefit part of the Scheme from May 2013 with all employees being eligible for the hybrid cash benefit part of the Scheme instead. Despite this, the Society still has a deficit in its accounts of £2.2 million (2013: £1.0 million) and still has actuarial risk and investment risk for the defined benefit and hybrid cash benefit elements of the Scheme. The Society has decided to further reduce its pension exposure by closing the Scheme entirely to new members from January 2015, who will instead be enrolled in a new defined contributions scheme.

As noted in the Chief Executive’s Report, the Society successfully launched a new brand – the Family Building Society – in July 2014 as part of its business strategy. The Society has made significant investments in people, systems and processes to support the implementation, some of which benefit the NCBS brand as well, and will continue this into 2015. The continued development and success of this strategy therefore carries some uncertainty and risk to future financial results.

Financial Risk Management Objectives & Policies

As noted above the Risk function has been expanded and strengthened in 2014 as has the Compliance function. In addition the Group has a formal structure for managing financial risk – the Enterprise Risk Management Framework – which includes the establishment of risk appetites, triggers and limits, reporting lines, mandates and other control procedures. This structure is reviewed regularly by an Executive Group Risk Committee, which is charged with responsibility for managing and controlling risks. The Retail Conduct Risk Committee, Data Security Committee and Asset and Liability Committee all report into it. The latter is responsible for balance sheet exposures and the use of financial instruments for risk management purposes in line with the Board-approved Liquidity Policy and Financial Risk Management Policy. Full details regarding the risks and the financial instruments used by the Group are given in Note 26 to the Accounts.

The Group’s ICAAP was revised and submitted to the PRA for review in May 2014 and revised Individual Capital Guidance (‘ICG’) to be observed by the Group has been received. The disclosures required under Pillar 3 of the Capital Requirements Directive are available on the Society’s website, as are the new Country-by-Country Reporting and Basel III leverage ratio. The Group’s ILAA was reviewed by the Financial Services Authority in 2011 and Individual Liquidity Guidance (‘ILG’) received from them with which the Group complies. This guidance was confirmed by the PRA in 2013 as part of that year’s annual assessment.

The Group’s ICAAP and ILAA processes are reviewed regularly and used to identify and quantify the financial 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 identifies 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, Liquidity and Lending Policies to ensure that the Group operates within the parameters set by the Board. The Society is one of the strongest capitalised societies with a Core Tier 1 Ratio of 27% (2013: 25%) which should insulate it against the higher capital requirements and minimum leverage ratio of the EU’s Capital Requirements Directive IV and allow for future growth. The Society also maintains significant high quality liquidity.

Director’s Report


Directors’ Report

Directors

Full details relating to the Society’s Directors can be found in the Annual Business Statement.

Under the requirements of the Society’s Rules, Chris Croft, having been appointed to the Board since the last AGM, is required to seek election and to meet the rotation requirements, John Howard is required to seek re-election to the Board. Chris was appointed an Executive Director in May 2014 and is Group Secretary and Chairman of the Executive Group Risk Committee and the Data Security Committee. John was appointed a Non-executive Director in May 2008 and is Senior Independent Director and Chairman of the Retail Conduct Risk Committee.

Tony Gration retired as Deputy Chief Executive and Secretary in April 2014. Polly Williams, Chairman of the Society and Non-executive Director and Peter Goshawk, Non-executive Director and Chairman of the Board Group Risk Committee have decided to resign at the AGM as explained more fully in the Chairman’s Report.

At the end of the year no Director had a beneficial 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 6 to 11. The financial 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 financial 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.

Auditor

KPMG Audit Plc were first appointed as Auditor to the Society in 2005. The firm’s extensive knowledge and experience of the financial services industry has been of considerable benefit to the Society. KPMG changed the legal structure of their auditing practice. Consequently a resolution was passed at the last AGM to appoint KPMG LLP as Auditor of the Society. The Society proposes to re-elect KPMG LLP at the AGM.

Polly Williams Chairman26 February 2015


Directors’ Report


Report on Corporate Governance

The Role of the Board

Code Principle A.1: Every company should be headed by an effective Board, which is collectively responsible for the long-term success of the company.

Society’s ApproachThe Society’s Board is collectively responsible for the long-term success of the organisation. Its principal function 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 financial 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, relevant legislation and regulation and that proper accounting records and effective systems of business control are established, maintained, documented and audited.

There are 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 benefit, at the Society’s expense, of liability insurance in respect of their responsibilities as Directors and have access to independent legal or other professional advice if required. The Board has a formal schedule of matters which are reserved for its consideration and it has established

four committees to consider specific issues in greater detail, being the Group Audit, Board Group Risk, Remuneration and Nomination Committees. The Terms of Reference for each of these committees are published on the Society’s website.

Group Audit CommitteeThe Group Audit Committee meets at least three times each year and comprises three Non-executive Directors, currently Rodger Hughes (Chairman), John Howard and Peter Goshawk. The Executive Directors and representatives from the internal and external Auditors attend by invitation. Its role is described more fully below.

Board Group Risk CommitteeThe Board Group Risk Committee also comprises three Non-executive Directors, currently Peter Goshawk (Chairman), Polly Williams and John Howard. The Executive Directors, the Associate Director, Risk and the Manager, Operational Risk attend by invitation. The Committee meets at least three times a year and is responsible for reviewing the Society’s risk management framework as described later.

Remuneration CommitteeThe Remuneration Committee usually meets at least twice a year and comprises all Non-executive Directors, with the Chief Executive and the Secretary attending by invitation. It is currently chaired by the Society’s Senior Independent Director, John Howard, and is responsible for determining the remuneration of all Executive Directors. It also sets the additional payments for the


The Board of Directors is committed to best practice in corporate governance. This report explains how the Society has regard to the principles in the UK Corporate Governance Code issued by the Financial Reporting Council in June 2010 and updated in September 2012 (“Code”), which was the prevailing guidance for the year covered by this report.



Chairman of the Board, the Chairmen of the Group Audit, Remuneration and Board Group Risk Committees and the Senior Independent Director, with Committee members not taking part in discussions concerning their own remuneration. More detail relating to the role of the Remuneration Committee can be found in the Report on Directors’ Remuneration on pages 24 to 26.

Nomination CommitteeThe Nomination Committee, which meets at least once a year, is comprised of the Society’s Chairman (Polly Williams), the Senior Independent Director (John Howard) and the Chief Executive. It is chaired by Polly Williams and is responsible for making recommendations to the Board on matters relating to the composition of the Board, including Executive and Non-executive Director succession planning, the appointment of new Directors and the election and re-election of Directors.

Division of Responsibilities

Code Principle A.2: There should be a clear division of responsibilities at the head of the company between the running of the Board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.

Society’s ApproachThe offices 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 in all aspects of its role, promoting a culture of openness of debate 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 and recommending strategy to the Board.

The Chairman

Code Principle A.3: The Chairman is responsible for leadership of the Board and ensuring its effectiveness on all aspects of its role.

Society’s ApproachThe Chairman sets the direction of the Board and promotes a culture of openness and debate by facilitating the effective contribution of Non-executive Directors and ensuring constructive relations between Executive and Non-executive Directors. The Chairman also ensures that Directors receive accurate, timely and clear information.

Non-executive Directors

Code Principle A.4: As part of their role as members of a unitary Board, Non-executive Directors should constructively challenge and help develop proposals on strategy.

Society’s ApproachThe Non-executive Directors are responsible for bringing independent judgement to the discussions held by the Board, using their breadth of experience and understanding of the business. Their key responsibilities are to constructively challenge and contribute to strategic proposals, and to monitor performance, resources, and standards of conduct, compliance and control, whilst providing support to executive management in developing the Society.



The Composition of the Board

Code Principle B.1: The Board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.

Society’s ApproachAt the year end, the Board comprised four 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 to have an appropriate balance of skills and recent, relevant experience. They are all also considered to be free of any relationship or circumstances which could materially interfere with the exercise of their judgement, impede the provision of constructive challenge to management and provide assistance with the development of strategy. The Vice Chairman is designated to be the Senior Independent Director, to act as a sounding board for the Chairman and an intermediary for the other Directors and members when necessary.

Appointments to the Board

Code Principle B.2: There should be a formal, rigorous and transparent procedure for the appointment of new Directors to the Board.

Society’s ApproachThe principal purpose of the Nomination Committee is to undertake the assessment of the balance of skills, experience, independence and knowledge on the Board against the requirements of the business, with a view to determining whether any shortages exist. Having completed the assessment, the Committee makes recommendations to the Board accordingly. Appointments to the Board are made on merit, with due regard to the benefits of diversity, including gender. Within this context, the paramount objective is the selection of the best candidate, irrespective of background, and it is the view of the Board that establishing quotas or targets for the diversity of the Board is not appropriate. Candidates for Non-executive Directorship are identified in a variety of ways as determined by the Nomination Committee, including the use of recruitment specialists, notification in the Society’s periodic newsletters to customers and through press advertisements.

As mentioned in the Chairman’s statement, The Chairman and another Director are standing down at the AGM and the Nominations Committee commenced an exercise to identify new Non-executive Directors. Lomond Consulting a specialist recruitment firm were appointed to assist in the search and following a comprehensive selection exercise and a rigorous interview process, three candidates have been identified. The Society has conducted

appropriate enquiries and has now submitted applications to the Prudential Regulation Authority and the Financial Conduct Authority for authorisation of the candidates – all Directors must, before they are appointed to the Board, meet the tests of fitness and propriety as laid down by the regulators and are required to be authorised by the regulators as an ‘approved person’ in order to undertake their ‘controlled function’ as a Director.

Commitment

Code Principle B.3: All Directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.

Society’s ApproachPrior to appointment Non-executive Directors are required to demonstrate that they are able to allocate sufficient time to undertake their duties. The formal performance evaluations carried out each year also assess whether Non-executive Directors have demonstrated this ability during the year.

Attendance of Directors at the Board and its committees during 2014 is shown in the accompanying table, with the total number of meetings each Director was eligible to attend shown in brackets.

Director Board Audit Risk Remuneration Nomination

Polly Williams 12 (12) 4 (4) 4 (4) 2 (2)

John Howard 12 (12) 4 (4) 4 (4) 4 (4) 2 (2)

Peter Goshawk 12 (12) 4 (4) 4 (4) 4 (4)

Rodger Hughes 12 (12) 4 (4) 4 (4)

Mark Bogard 12 (12) 2 (2)

Chris Fry 12 (12)

Chris Croft* 9 (9)

Anthony Gration** 3 (5)

*Chris Croft was appointed as Director on 30 May 2014 **Anthony Gration ceased to be a Director on 30 April 2014

Development

Code Principle B.4: All Directors should receive induction on joining the Board and should regularly update and refresh their skills and knowledge.

Society’s ApproachAll new Directors undergo formal induction with any training or development needs being identified during this process and in the course of the annual performance evaluations referred to below. Directors continue to attend external and internal seminars and presentations to maintain and update their knowledge and skills.



Information and Support

Code Principle B.5: The Board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.

Society’s ApproachThe Chairman ensures that the Board receives accurate, timely and clear information in a form and of sufficient quality to enable it to fulfil its responsibilities, with a review being undertaken by the full Board at least annually.

All Directors have access to the advice and services of the Secretary who is responsible for ensuring compliance with all Board procedures and advising the Board on governance matters.

Evaluation

Code Principle B.6: The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual Directors.

Society’s ApproachA formal internal 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. 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.

In accordance with the Code provisions applicable to larger companies, an external evaluation of the Board, its committees and the Directors should be carried out every three years. In 2013, the Board decided to commission an external evaluation in lieu of the usual internal evaluation. Accordingly, Thorburn McAlister, a firm specialising in such assessment work, were engaged to carry out a performance review of the Board to verify its effectiveness and to identify areas where it could improve its performance. The outcome of this review was considered by the Board in 2014 and actioned, as appropriate. Thorburn McAlister has no other connection with the Society. In addition the Prudential Regulation Authority carry out regular Board Effectiveness reviews.

Re-election

Code Principle B.7: All Directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

Society’s ApproachThe Society’s Rules require that all Directors are submitted for election at the AGM following their first appointment to the Board, except where their appointment occurs in the period between the end of the Society’s financial year and the AGM itself, in which case they must seek election at the AGM in the following year. Having considered the Code provisions as they apply to larger companies in relation to the annual re-election of all Directors, the Board does not believe it is appropriate for a building society to subject all Directors to annual re-election because of the continuity and succession needs of an effective Board. Instead it has concluded that, consistent with the provisions of the Society’s Rules, all Directors should seek re-election at least 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 a maximum of four. As stated above, the Nomination Committee is responsible for recommending to the Board whether an individual should be submitted for re-election. Appointments lasting beyond six years are subject to particularly rigorous annual review, reflecting the need for progressive refreshment of the Board.

Financial and Business Reporting

Code Principle C.1: The Board should present a fair, balanced and understandable assessment of the company’s position and prospects.

Society’s ApproachThe Board confirms that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for members to assess the Society’s performance, business model and strategy. The responsibilities of the Directors in relation to the preparation of the Society’s accounts are set out on page 28. The Chief Executive’s Review and the Directors’ Report on pages 6 to 16 provide a detailed review of the Society’s business activities and future prospects and include the statement that the business is a going concern.



Risk Management and Internal Control

Code Principle C.2: The Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The Board should maintain sound risk management and internal control systems.

Society’s ApproachThe Board is responsible for determining a framework for risk management and control, to include the Group’s risk appetite and tolerance. Senior management are responsible for designing, operating and monitoring risk management and internal control processes in line with the risk appetite and tolerance while the Group Audit and Board Group Risk Committees, on behalf of the Board, are responsible for reviewing the adequacy and effective operation of these processes. The role of the Group Audit Committee is described below, while that of the Board Group Risk Committee is to provide the Board with independent assurance that the Group is operating specifically in accordance with the risk appetite parameters determined and approved by the Board and to ensure that the outcomes for the Group’s various activities are in line with those parameters. The Society’s Risk Oversight function acts as the ‘second line of defence’ in this respect and reports directly to the Board Group Risk Committee.

The system of internal control overall is designed to enable the Group to achieve its corporate objectives within the Board’s pre-determined risk appetite, not to eliminate risk. The internal audit function, now undertaken by Deloitte LLP, provides independent and objective assurance that these processes are appropriate and effectively applied and acts as the ‘third line of defence’.

Audit Committee and Auditors

Code Principle C.3: The Board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s Auditors.

Society’s ApproachAt the end of the year the Group Audit Committee comprised three Non-executive Directors. The Chairman of the Board is not a member of the Committee. The Board is satisfied that the Committee is comprised of members with recent relevant financial or other relevant experience who are capable of discharging its duties and responsibilities. The role of the Committee is to review the integrity of the financial statements and the balance of information disclosed in the accompanying Directors’ Report, 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 Auditor. The Committee reviews and monitors the external Auditor’s objectivity, competence, effectiveness and independence, ensuring that if they or their associates are invited to undertake non-audit work, in accordance with the appropriate policy, it will not compromise Auditor objectivity and independence. The activities of the Group’s internal audit function, which is now undertaken by Deloitte LLP, are overseen by the Secretary but the firm has direct access to the Committee Chairman.



Remuneration

Code Principle D.1: Levels of remuneration should be sufficient to attract, retain and motivate Directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of Executive Directors’ remuneration should be structured so as to link rewards to corporate and individual performance.

Code Principle D.2: There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual Directors. No Director should be involved in deciding his or her own remuneration.

Society’s ApproachThe Report on Directors’ Remuneration, prepared by the Chairman of the Society’s Remuneration Committee, is to be found on pages 24 to 26 and explains how the Society complies with the Code Principles relating to remuneration. Details of Directors’ Emoluments during 2013 can be found in Note 7 to the Accounts.

Dialogue with Shareholders

Code Principle E.1: There should be a dialogue with shareholders based on the mutual understanding of objectives. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.

Society’s ApproachAs 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 of developments, with reaction and feedback encouraged. Communication with members is also increasingly undertaken through the Society’s website. John Howard, as Senior Independent Director, is the point of contact for members if for any reason they feel communication with the Chief Executive or Chairman is inappropriate.

Constructive Use of the AGM

Code Principle E.2: The Board should use the AGM to communicate with investors and to encourage their participation.

Society’s ApproachEach year the Society sends details of the AGM, including appointment of proxy and voting 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 subsequently 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 four committees are therefore available to answer any questions.

Polly Williams Chairman26 February 2015


Report on Directors’ Remuneration

This report illustrates how the Society complies with the principles set out in the UK Corporate Governance Code 2012 relating to Directors’ remuneration.

The Society has adopted a Remuneration Policy, which describes how the Society complies with the relevant sections of the FCA’s Remuneration Code. This Policy is reviewed periodically by the Remuneration Committee. The Committee wished to enable members to understand more about how remuneration is decided and, in line with the undertaking provided in last year’s report, the policy statement has since been published on the Society’s website. The remuneration details of individual Directors are set out in Note 7 to the Accounts, which should be read in conjunction with this report.

The Level and Components of Executive Director Remuneration

UK Corporate Governance Code 2012 Principle D.1: Levels of remuneration should be sufficient to attract, retain and motivate Directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of Executive Directors’ remuneration should be structured so as to link rewards to corporate and individual performance.

Society’s ApproachAs set out in its Remuneration Policy Statement the primary objective of the Society is to operate for the financial benefit of its members and not for the disproportionate financial benefit of any of its employees. However the Board also believes that employees should be fairly rewarded for their efforts. The aim of the Society’s Remuneration Policy is therefore to achieve a fair level of financial reward for the Society’s staff whilst ensuring primacy of

members’ interests and avoiding incentives to take inappropriate levels of risk. Against this background the objectives of the Remuneration Policy include the following:-

• To attract and retain staff with the appropriate skills, attitude and motivation.

• To reward staff fairly, paying due regard to the statutory duties of equality and non-discrimination.

• To benchmark salaries and benefits against prevailing industry/sector/role norms.

• To take account of prevailing economic and employment trends.

• To prevent inappropriate risk-taking with the potential to damage the interests of the Society’s stakeholders and the viability of the business.

In line with the Board’s approach, which reflects that adopted within other comparable organisations, the Society’s remuneration policy provides for the reward of Executive Directors through salaries and other benefits. An annual incentive scheme, designed to recognise their individual contributions to improved corporate performance, has operated for Executive Directors previously but was suspended in 2008 against the background of the prevailing economic climate. In 2013 ad hoc awards were made. As noted in last year’s report, the Remuneration Committee commissioned a report from Kepler Associates which was received and reviewed in early 2014. We looked at the structure and overall level of remuneration in light of the Kepler Associates report and have introduced a remuneration package for Executive Directors which is detailed below. This is linked to performance and specifically to certain key performance indicators of the Society.

Executive Directors’ Emoluments

The remuneration for Executive Directors reflects their responsibilities. It comprises basic salary, performance


John Howard



related variable pay and various benefits detailed below. Performance related payments are not pensionable. The Society has no share option scheme and none of the Directors has any beneficial interest in, or any rights to subscribe for shares in or debentures of any connected undertaking of the Society.

As with staff generally, whose salaries are now subject to annual as opposed to twice yearly reviews, basic salaries payable to Executive Directors are reviewed each year with reference to jobs carrying similar responsibilities in comparable financial organisations, market conditions generally and the impact on local salaries of the Society’s proximity to the central London market. The salaries of staff beneath the level of Executive Director were reviewed in May 2014 taking account of externally compiled data relating to pay awards across the economy and the prevailing employment dynamics. This resulted in an uplift for staff equating to 3% of salaries, plus minor adjustments to allow for evidenced anomalies arising primarily from market conditions. The salary uplift for relevant staff was brought into effect from 1 May 2014. Notwithstanding the arrangements implemented for staff generally, no increase was made to the basic salary of the Chief Executive in 2014. The salary of the Finance Director was increased to reflect more accurately the appropriate rate for the role.

The Executive Directors are now eligible to participate in an incentive scheme based upon the performance of both the individual and that of the Society. The incentive scheme is subject to detailed rules which permit clawback of any award in the event of any unforeseen circumstances or any evidence of inappropriate conduct in full compliance with the Remuneration Code set out by the Prudential Regulation Authority.

Under the scheme Executives are eligible for an annual variable pay award based upon personal performance. This award is limited to a maximum 25% of base pay. In addition there is a medium term incentive plan which is based upon performance over a three year period

ending 31 December 2016. The amount of the award depends upon the Society performance over the period as measured by four performance indicators: capital protection and growth, increasing net revenue, customer satisfaction and maintaining a fair margin between lending and borrowing rates. The maximum possible bonus accruing under this scheme is 100% of base salary over three years. No payments are made until the end of the three year period and will be paid out in two annual payments in 2017 and 2018. This incentive plan is focused on retention as well as reward and is subject to normal restrictions so that the entitlement lapses if the Director leaves in the award period otherwise than through redundancy or other similar circumstances that make the Executive a ‘good leaver’. The incentive plan is subject to an overriding discretion by the Remuneration Committee.

In the exercise of its overall discretion in 2014 the Committee made special performance awards to the Chief Executive and the Finance Director based upon the successful sale of Hampshire Trust Plc. This sale was successfully achieved in difficult circumstances when an easier but far less beneficial alternative would have been to close the business. Closure of the business would have led to further significant losses to the Group whereas the successful sale realised a profit of £1.8 million for the Group. This is reflected in the special performance award.

Executive Directors are contributing members of the National Counties Building Society Pension and Life Assurance Scheme, which was available to all staff at the year-end.

Executive Directors are eligible to receive other taxable benefits including a car, or car allowance, healthcare provision for themselves and their immediate family, and concessionary mortgage loans 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

In keeping with current recommended practice, the standard terms for new Executive Director appointments include a contractual notice period of no more than 12 months by the Society and six months by the Executive Director. Mr M A Bogard and Mr C J Fry both have contracts on this basis issued in 2012 and 2010 respectively. Mr C R Croft has a contract which requires 12 months notice from either party issued in 2014.

Non-executive Directors’ Remuneration

Non-executive Directors do not receive any benefits other than their fees and travelling expenses for which they are reimbursed. The level of fees payable to Non-executive Directors is assessed using benchmarks from a group of comparable financial organisations. In recognition of the increased responsibility associated with the roles, additional fees are paid to the Chairmen of Board Sub-committees and the Senior Independent Director. No increases to either the Non-executive Director fee nor to the additional fee paid to the Chairman were made during 2014. Similarly no increases to the fees paid to the Chairmen of Board Sub-committees, nor in respect of the position of the Senior Independent Director, were made during 2014.

The Procedure for Determining Remuneration

UK Corporate Governance Code 2012 Principle D.2: There should be a formal and transparent procedure for developing policy on Executive remuneration and for fixing the remuneration packages of individual Directors. No Director should be involved in deciding his or her own remuneration.

Society’s ApproachThe Remuneration Committee, comprising all of the Non-executive Directors, is responsible for setting the remuneration of the Executive Directors and is chaired by the Senior Independent Director. The Committee also sets the additional payments for the Chairman of the Board, the Chairmen of the Group Audit, Remuneration and Board Group Risk Committees and the Senior Independent Director, with Committee members not taking part in discussions concerning their own remuneration. The basic Non-executive Director fee is set by the Executive Directors. Minutes of the Committee’s meetings are distributed to all Board members, and the Chairman of the Committee usually reports at the Board meeting following a Committee meeting.

External consultants are commissioned periodically to examine Director remuneration and a review was commissioned in 2013 from Kepler Associates, a specialist Executive Remuneration consultancy firm which has no other connection with the Society. This review was delivered in March 2014 and has been reviewed by the Remuneration Committee. Changes to the remuneration of Executive Directors were implemented as a result. The Committee considers these changes were fair and appropriate to provide a remuneration structure consistent with the prevailing conditions in the industry and with the Society’s risk appetite.

It is the view of the Committee that Directors’ remuneration for the year has been in accordance with the Society’s stated Remuneration Policy and on behalf of the Committee I recommend that you endorse this report.

John Howard Chairman Remuneration Committee 26 February 2015




Directors’ Responsibilities

Directors’ responsibilities in respect of the Annual Report, the Annual Business Statement, the Directors’ Report and the Annual Accounts

The Directors are responsible for preparing the Annual Report, Annual Business Statement, Directors’ Report and the Annual Accounts in accordance with applicable law and regulations.

The Building Societies Act (‘the Act’) requires the Directors to prepare Group and Society Annual Accounts for each financial year. Under that law they have elected to prepare the Group and Society Annual Accounts in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).

The Group and Society Annual 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 financial year and of the income and expenditure of the Group and of the Society for the financial year.

In preparing each of the Group and Society Annual Accounts, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Annual Accounts;

• prepare the Annual 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 financial year, an Annual Business Statement and a Directors’ Report, each containing prescribed information relating to the business of the Group.

Directors’ responsibilities for accounting records and internal controls

The Directors are responsible for ensuring that the Group:

• keeps proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and Society, in accordance with the Act;

• 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 Conduct Authority and Prudential Regulation 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 financial information included on the Society’s website. Legislation in the UK governing the preparation and dissemination of Annual Accounts may differ from legislation in other jurisdictions.

Directors’ Responsibilities


Auditor’s Report

Independent 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 2014 set out on pages 30 to 62. The financial 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 responsibilities of Directors and Auditor

As explained more fully in the Directors’ Responsibilities Statement set out on page 28, 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 Ethical Standards for Auditors.

Scope of the audit of the Annual Accounts

A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate

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 2014 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 prescribed by 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 financial 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.

Richard Gabbertas (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants One SnowhillSnow Hill QueenswayBirmingham B4 6GH 26 February 2015

Auditor’s Report


Income and Expenditure Accounts

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Interest receivable and similar income 2 37,536 37,555 36,391 36,029

Interest payable and similar charges 3 (21,160) (26,714) (20,987) (26,114)

Net interest receivable 16,376 10,841 15,404 9,915

Pension finance charge 22 (10) (213) (10) (213)

Income from investments 4 – – 300 200

Fees and commissions receivable 2,113 2,827 1,959 2,309

Fees and commissions payable (920) (799) (918) (786)

Other operating income 147 182 127 167

Total other income 1,330 1,997 1,458 1,677

Total income 17,706 12,838 16,862 11,592

Administrative expenses 5 (13,194) (9,806) (12,254) (7,826)

Depreciation 14 (348) (236) (331) (200)

Other operating charges 8 (73) (51) (73) (51)

Operating profit before provisions 4,091 2,745 4,204 3,515

Provisions for bad and doubtful debts 9a (428) (1,152) (535) (1,141)

Provisions for contingent liabilities and commitments 9b (687) (694) (687) (674)

Operating profit 2,976 899 2,982 1,700

Operating profit from continuing operations 3,603 1,762 2,982 1,700

Operating loss from discontinued operations (627) (863) – –

Provisions against fixed asset investments 9c 146 474 146 474

Write-off of fixed asset investment – – – (658)

Profit/(loss) on disposal of subsidiary 13 1,776 – (872) –

Profit on ordinary activities before tax 4,898 1,373 2,256 1,516

Tax on profit on ordinary activities 10a (680) (354) (461) (496)

Profit for the financial year 23 4,218 1,019 1,795 1,020

Profit for the financial year 4,218 1,019 1,795 1,020

Actuarial (loss)/gain recognised in the pension scheme 22 (1,558) 657 (1,558) 657

Movement in taxation relating to the pension scheme 300 (169) 300 (169)

Total gains recognised in the year 2,960 1,507 537 1,508

Group Society

Statements of Total Recognised Gains and Losses

The notes on pages 34 to 62 form part of these Accounts.

Income and Expenditure AccountsFor the year ended 31 December


Balance Sheets

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Assets

Liquid Assets

Cash in hand and balances with the Bank of England 115,197 49,153 115,197 49,152

Loans and advances to credit institutions 11a 938 71,815 938 57,157

Debt securities 11b 157,573 164,704 157,573 164,704

Total liquid assets 273,708 285,672 273,708 271,013

Loans and advances to customers

Loans fully secured on residential property 12 987,811 938,323 887,551 833,383

Other loans 12 25,721 40,657 25,721 30,295

Total loans and advances to customers 1,013,532 978,980 913,272 863,678

Investments

Investments in subsidiary undertakings 13 – – 100,680 115,514

Tangible fixed assets 14 6,945 6,505 6,945 5,830

Other assets 15 740 764 677 410

Prepayments and accrued income 16 8,586 6,912 6,608 4,649

Total assets 1,303,511 1,278,833 1,301,890 1,261,094

Liabilities

Shares 17 939,551 878,996 939,551 878,996

Other borrowings

Amounts owed to credit institutions 18 46,800 76,297 46,800 76,297

Amounts owed to other customers 19 189,742 199,405 189,742 174,737

Total other borrowings 236,542 275,702 236,542 251,034

Total shares and borrowings 1,176,093 1,154,698 1,176,093 1,130,030

Other liabilities 20 6,753 8,454 6,607 14,573

Accruals and deferred income 21 2,523 1,741 2,374 1,479

Provisions for liabilities 9b 354 388 354 363

Net pension liability 22 2,230 954 2,230 954

Reserves

General reserves 23 115,558 112,598 114,232 113,695

Total liabilities 1,303,511 1,278,833 1,301,890 1,261,094

Memorandum items

Contingent liabilities 24 114,946 53,446 114,946 53,446

Commitments 24 39,293 54,339 39,293 54,330

Group Society


These Accounts were approved by the Board of Directors on 26 February 2015 and were signed on its behalf by:

Polly Williams Chairman Mark Bogard Chief Executive Christopher Fry Finance Director

Balance SheetsAs at 31 December


Group Cash Flow Statement

2014 2013

£’000 £’000

Net cash outflow from operating activities (17,923) (84,659)

Taxation 44 (344)

Capital expenditure and financial investment:

Purchase of tangible fixed assets (1,422) (329)

Proceeds from disposal of tangible fixed assets 48 28

Purchase of debt securities (119,449) (187,450)

Sale and maturity of debt securities 125,857 196,294

Total capital expenditure and financial investment 5,034 8,543

Acquisitions and disposals:

Mortgage portfolio premiums paid (154) (166)

Sale of subsidiary 8,166 –

Total acquisitions and disposals 8,012 (166)

Decrease in cash (4,833) (76,626)

Reconciliation of operating profit to net cash outflow from operating activities

Profit on ordinary activities before tax 4,898 1,373

Less profit on disposal of subsidiary (1,776) –

Net increase in prepayments and accrued income (1,954) (3,667)

Net increase/(decrease) in accruals and deferred income 1,800 (277)

Provisions for bad and doubtful debts charged 428 1,152

Loans and advances written off (366) (8,406)

Net (decrease)/increase in provisions for FSCS levies (34) 9

Net decrease in provisions against fixed asset investments (983) (474)

Depreciation 348 236

Loss/(profit) on sale of tangible fixed assets 2 (5)

Amortisation of premium on mortgage portfolios 357 410

Amortisation of premium on debt securities 1,650 1,452

Net cash inflow/(outflow) from trading activities 4,370 (8,197)

Net increase in loans and advances to customers (37,096) (33,230)

Net increase/(decrease) in shares 58,851 (42,071)

Net decrease in amounts owed to credit institutions and other customers (43,297) (6,938)

Net (increase)/decrease in other assets (13) 160

Net (decrease)/increase in cash collateral deposits held (2,153) 5,122

Net increase in other liabilities and provisions for liabilities 1,394 188

Pension charge 543 780

Pension contributions (522) (473)

Net cash outflow from operating activities (17,923) (84,659)

Group Cash Flow StatementFor the year ended 31 December


Group Cash Flow Statement

2014 2013

£’000 £’000

Analysis of decrease in cash

Cash balances at 1 January 120,968 197,594

Decrease in cash (4,833) (76,626)

Cash balances at 31 December 116,135 120,968

Comprising:

Cash in hand and balances with the Bank of England 115,197 49,153

Loans and advances to credit institutions repayable on demand 938 71,815

Cash balances at 31 December 116,135 120,968


For the year ended 31 December


Notes to the 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.

As noted in the Directors’ Report, the Directors are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future and therefore these Accounts are prepared on the going concern basis.

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 flows 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, loans assigned from subsidiary undertakings are stated at cost less provisions for impairment in value at the point of assignment. Investments in subsidiary undertakings are stated at cost less provisions for impairment in value.

1.3 Income and cost recognition

Interest is recognised in the income and expenditure account on an accruals basis with the exception of any loan interest that has been suspended.

In relation to residential mortgage accounts taken into possession, interest charged in the year which has not been capitalised at the point of possession is suspended and excluded from interest receivable in the year. Other loans are considered on a case by case basis and interest charged is suspended where recovery is considered doubtful. 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 and loyalty incentives 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.

The accrual of costs for the FSCS levy is based on a 1 April trigger date in line with IFRC Interpretation 21 ‘Levies’ published by the IASB in May 2013.

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:




1.4 Tangible fixed assets and depreciation

The cost of additions and major alterations to land and buildings, and additions to equipment, fixtures, fittings 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:

Office equipment, fixtures, fittings 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 fifty 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.

1.5 Liquid assets

Debt securities 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.

1.6 Repurchase agreements

Debt securities held by the Society may be sold subject to a commitment to repurchase them (‘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 (‘reverse repo’) it does not retain the risks and rewards of the securities and therefore treats them as secured loans.

The difference between the sale and repurchase price is accrued as income or expenditure over the life of the agreements.

1.7 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.

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 forbearance has been exercised in the conduct of the account due to actual or apparent financial stress of the borrower, whether in arrears or not, or,

• when loans have no monthly repayment requirement and eventual cash flows may be insufficient to fully repay those loans.

Specific provision is made against the relevant proportion of all loans and advances which are considered impaired based on historical experience.

The specific provision for impaired loans secured on residential properties is calculated on a loan by loan basis. A loss propensity factor, which reflects the impairment severity, is applied to the difference between the outstanding loan balance and the estimated market value of the property net of costs. The loss propensity factor is increased to account for any forbearance measures taken to assist borrowers who are experiencing financial difficulty. 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 specific provision is made where the net estimated market value, plus any amounts recoverable under mortgage indemnity policies or from other security, 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.

Commercial and unsecured loans are continuously monitored for performance and are assessed individually when considered impaired.

A general provision is made against loans and advances which have not been specifically identified as impaired, but where the Group’s experience would indicate that losses may ultimately be realised. The general provision is increased to account for forbearance measures taken and potential impairment indicators on loans which are not currently expected to lead to a loss.



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.

1.8 Taxation

The charge for taxation is based on the profit 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’.

1.9 Financial instruments

The Society enters into off-balance sheet transactions as a means of hedging market risk, primarily interest rate fluctuations.

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 reflect movements in the market values of the instruments involved. Interest on cash 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.

1.10 Pensions

The Society operates a defined benefits pension scheme under the National Counties Building Society Pension and Life Assurance Scheme (‘the Scheme’) providing benefits for Group employees.

The Pension Benefit section of the Scheme was closed to new members with effect from 1 May 2007 and further service accruals were ceased from 1 May 2013. A cash benefit section was introduced for Group employees from 1 May 2007. All members of the Pension Benefit section became eligible for the Cash Benefit section from 1 May 2013. Both sections are considered to be defined benefit schemes within the Scheme for the purposes of FRS 17.

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 benefits 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 finance 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 deficit 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.



Group Society

2. Interest receivable and similar income

Included within interest receivable on loans fully secured on residential property is a charge of £357,000 (2013: £410,000) for the

Group in respect of the amortisation of premiums paid in relation to the acquisition of mortgage portfolios by a subsidiary undertaking.

Movements on this account were as follows:

Included within Interest receivable on loans fully secured on residential property is a charge of £161,000 for the Group and Society

(2013: £247,000) relating to mortgage incentives to new borrowers.

Interest receivable has been reduced by £288,000 in the Group (2013: £370,000) and £255,000 in the Society (2013: £31,000) 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:

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

On loans fully secured on residential property 42,904 41,609 38,636 37,687

On other loans:

Connected undertakings – – 3,289 3,928

Other 1,685 3,027 1,563 1,562

On debt securities:

Interest and other income from fixed income securities 2,411 2,657 2,411 2,657

Net gains arising on realisation 517 1,001 517 1,001

On other liquid assets:

Interest and other income 690 762 646 695

Net expense on financial instruments (10,671) (11,501) (10,671) (11,501)

37,536 37,555 36,391 36,029

At 1 January 817 1,163 31 12

Interest suspended in the year:

On loans fully secured on residential property 62 5 62 5

On other loans 226 365 193 26

Amounts applied in writing off loans:

On loans fully secured on residential property – (12) – (12)

On other loans (832) (704) (13) –

At 31 December 273 817 273 31

At 1 January 2,181 2,425

Deferred premium 154 166

Amortisation of premium (357) (410)

At 31 December 16 1,978 2,181



Group Society

3. Interest payable and similar charges

4. Income from investments

5. Administrative expenses

The dividend received was declared by Counties Home Loans Management Ltd, a fully owned subsidiary of the Society.

There were no other payments made to the Auditor or their associates during 2014 (2013: No other payments made).

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

On shares held by individuals 22,225 25,149 22,225 25,149

On deposits and other borrowings:

Connected undertakings – – 23 67

Other 2,259 3,326 2,063 2,659

Other interest payable:

Net income on financial instruments (3,324) (1,761) (3,324) (1,761)

21,160 26,714 20,987 26,114

Staff costs 6 7,459 6,177 7,002 4,979

Other administrative expenses 5,735 3,629 5,252 2,847

13,194 9,806 12,254 7,826

Other administrative expenses include:

Remuneration of Auditor and its associates (excluding value added tax):

Group and Society statutory audit 81 78 81 78

Subsidiary statutory audit 8 32 8 7

89 110 89 85

For other services:

Services to associated pension scheme 7 6 7 6

Other services pursuant to legislation 4 4 4 4

Other services relating to taxation 14 7 14 7

Services relating to corporate finance transactions 15 11 15 11

All other services – 14 – 14

Total Auditor remuneration 129 152 129 127

Dividends from subsidiary undertakings – – 300 200



Group

2014

Society

6. Employees

Emoluments of the Directors of the Society totalling £1,191,000 (2013: £850,000) are detailed as follows:

A medium term incentive plan (‘Plan’) for the Executive Directors was approved by the Remuneration Committee covering performance

over 3 years from 1 January 2014 (see Report on Directors’ Remuneration). Included in the table above is the accrual of one third of

the expected payment under the Plan if the performance against target continues at the same rate as in 2014.

The Society makes pension contributions equivalent to 14% of salary. The figures shown for pension emoluments reflect the benefit

accrued in the year and are calculated using a modified version of HMRC tax rules for pension savings using an input amount derived

from the increase in benefit less increases due to inflation.

Mr Gration is a member of the Pension Benefit section of the Group’s pension scheme which was closed to new entrants with effect from

1 May 2007. Following cessation of further service accrual in the Pension Benefit section at 1 May 2013 Mr Gration became eligible for

the Cash Benefit part of the Scheme instead. All the Executive Directors are now members of the Cash Benefit section of the Scheme.

Mr Gration received £380,034 as compensation for loss of office.

The special performance award relates to the sale of Hampshire Trust Plc.

2014 2013 2014 2013

Note Number Number Number Number

The average number of persons employed (including Executive Directors) during the year was as follows:

Full-time 128 111 119 90

Part-time 19 20 19 20

£’000 £’000 £’000 £’000

The aggregate staff costs were as follows:

Wages and salaries 6,208 4,954 5,826 3,980

Social security costs 650 571 597 423

Other pension costs 601 652 579 576

7,459 6,177 7,002 4,979

Salary

Performance

bonus

Medium term

incentive plan

Benefits

Pension

Special performance

award

Total

£’000 £’000 £’000 £’000 £’000 £’000 £’000

a) Executive Directors:

Mark Bogard 210 44 67 16 49 70 456

Chris Fry 149 31 49 14 34 20 297

Tony Gration (to 30.04.14) 51 – – 14 14 – 79

Chris Croft (from 30.05.14) 88 25 48 8 24 – 193

498 100 164 52 121 90 1,025

7. Directors’ emoluments



Directors’ loans and related party transactions

At 31 December 2014 the amount outstanding in respect of loans made by the Society on normal staff terms to Directors was £nil

(2013: to one Director: £55,000).

A register is maintained at the Head Office 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 Office during the period of fifteen days up to and including the

date of the AGM.

2013

2014

Fee

£’000

b) Non-executive Directors:

Polly Williams 54

John Howard 36

Peter Goshawk 36

Rodger Hughes 38

164

2013

Polly Williams 54

John Howard 36

Peter Goshawk 36

Rodger Hughes (from 01.07.13) 19

Martin Young (to 30.04.13) 13

158

Mr Howard received benefits in the year of £2,000 (2013: £nil) in respect of travel expenses.

Salary

Performance

bonus

Medium term incentive plan

Benefits

Pension

Special performance

award

Total

£’000 £’000 £’000 £’000 £’000 £’000 £’000

a) Executive Directors:

Mark Bogard 210 30 – 15 56 – 311

Chris Fry 138 20 – 14 31 – 203

Tony Gration 152 – – 13 13 – 178

500 50 – 42 100 – 692



Group Society

8. Other operating charges

Where possible, forbearance measures are offered to assist borrowers experiencing financial difficulties. Included within Provisions for

bad and doubtful debts are provisions for £1,906,000 in relation to 115 accounts under forbearance (2013: £3,242,000; 142

accounts). Of this, £1,836,000 relates to the 102 Society customers (2013: £1,552,000; 120 customers) currently being helped by

such measures.

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Mortgage incentives to existing borrowers 73 51 73 51

9. Provisionsa) Provisions for bad and doubtful debts

Society

Specific General Specific General Specific General Specific General

£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000

At 1 January 2014 966 332 631 28 223 – 1.820 360

Provision utilised net of recoveries

(40) – (8) – 27 – (21) –

Charge for the year 190 27 243 (5) 80 – 513 22

At 31 December 2014 1,116 359 866 23 330 – 2,312 382

Loans fully secured on residential property

Loans fully secured on land

Other loans Total

Group

Specific General Specific General Specific General Specific General

£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000

At 1 January 2014 1,136 359 1,572 28 1,194 – 3,902 387

Provision utilised net of recoveries

44 – (251) – (159) – (366) –

Charge for the year 129 26 243 (5) 35 – 407 21

At 31 December 2014 1,309 385 1,564 23 1,070 – 3,943 408

Loans fully secured on residential property

Loans fully secured on land

Other loans Total



Group Society

Provisions against fixed asset investments for Group and Society related to an amount due from Kaupthing, Singer & Friedlander Limited

(‘KSF’), in administration. KSF was authorised and regulated by the Financial Services Authority and was placed into administration

in October 2008. At this time, the Society held £7 million of debt securities that had been issued by KSF 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. As at 31 December 2013,

distributions of 86.5p in the £ had been recognised by your Board based on Administrator expectations and other market intelligence.

Of this, 81.5p had been distributed.

In March 2014, the securities were sold at a carrying value of 88.5p releasing a further 2p in the £ of the provision in 2014.

b) Provisions for liabilities

c) Provisions against fixed asset investments

Specific General Total Specific General Total

Note £’000 £’000 £’000 £’000 £’000 £’000

At 1 January 2014 388 – 388 363 – 363

Amounts paid – FSCS levy 25 (721) – (721) (696) – (696)

Charge for the year – FSCS levy 25 687 – 687 687 – 687

At 31 December 2014 354 – 354 354 – 354

At 1 January 2014 983 – 983 983 – 983

Provision utilised 11 (837) – (837) (837) – (837)

Provision written back 11 (146) – (146) (146) – (146)

At 31 December 2014 – – – – – –



10. Taxation

a) Tax on profit on ordinary activities

Group Society

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Corporation tax 490 225 300 395

Adjustment in respect of prior year (32) 18 4 15

Total current tax 458 243 304 410

Deferred tax 222 111 157 86

Total taxation 680 354 461 496

Factors affecting the corporation tax charge for the year are explained as follows:

Profit on ordinary activities at the standard rate of corporation tax of 21.50% (2013: 23.25%)

1,056 319 485 352

Effect of:

Difference between capital allowances and depreciation (65) (19) (65) (13)

Provisions not deductible for tax 5 (17) 5 3

Pension contributions (117) (54) (117) (54)

Different tax rates applicable to losses and subsidiary undertakings

– (1) – –

(Profit)/loss on loss of subsidiary (382) – 187 –

Group losses not paid for – – (132) –

Other items not deductible for tax (7) (3) 1 153

Non-taxable income – – (64) (46)

Adjustment in respect of prior year (32) 18 4 15

Total current tax 458 243 304 410



b) Deferred taxation

11. Liquid assets

a) Loans and advances to credit institutions

Group

Group

Society

Society

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Deferred taxation asset in relation to timing differences, at the applicable corporation tax rate (Society 20% (2013: 21%), 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

59 166 4 47

Loan loss general provisions 81 81 76 75

Excess pension fund contributions – 119 – 119

15 140 366 80 241

Deferred tax asset movements in the year:

At 1 January 366 241

Credit for the year (222) (157)

Deferred tax adjustment re pension contributions (4) (4)

At 31 December 15 140 80

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Accrued interest – – – –

Repayable on demand 938 71,815 938 57,157

In not more than three months – – – –

In more than three months but not more than one year – – – –

938 71,815 938 57,157

A reduction in the UK corporation tax rate from 23% to 21% (effective from 1 April 2014) was enacted on 2 July 2013.

A further reduction to 20% (effective from 1 April 2015) was also substantively enacted at the same date. This will reduce the Society’s

future current tax charge accordingly. The deferred tax asset at 31 December 2014 has been calculated based on the rate of 20%

substantively enacted at the balance sheet date.



b) Debt securities

Group Society

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Issued by public bodies 157,573 164,340 157,573 164,340

Issued by other borrowers – 364 – 364

157,573 164,704 157,573 164,704

Debt securities have remaining maturities as follows:

Accrued interest 1,736 1,792 1,736 1,792

In not more than one year 10,114 20,392 10,114 20,392

In more than one year 145,723 142,520 145,723 142,520

157,573 164,704 157,573 164,704

Debt securities analysed, excluding accrued interest

Transferable securities:

Listed on a recognised investment exchange 140,657 137,124 140,657 137,124

Unlisted 15,180 25,788 15,180 25,788

155,837 162,912 155,837 162,912

Market value of transferable debt securities

Listed on a recognised investment exchange 144,902 133,545 144,902 133,545

Unlisted 15,257 25,472 15,257 25,472

160,159 159,017 160,159 159,017

Movements in the year of transferable securities held as financial fixed assets (excluding accrued interest) are analysed as follows:

At cost less amortisation and provisions

At 1 January 162,912 162,912

Additions 119,449 119,449

Disposals and maturities (125,857) (125,857)

Reduction in provisions against fixed asset investments 9c 983 983

Amortisation of premium (1,650) (1,650)

At 31 December 155,837 155,837

Included within the Debt securities analysis are debt securities that are pledged as collateral for derivative and other financial

transactions. As at 31 December 2014, the Group and Society had pledged listed debt securities with a book value of £114,574,000

(2013: £53,446,000) and a market value of £118,540,000 (2013: £52,858,000). Further details are provided at note 26.

Also included within the Debt securities analysis are debt securities with a book value of £20,144,000 (2013: £32,860,000) and a

market value of £20,300,000 (2013: £31,992,000) which have been sold subject to a commitment to repurchase them.

The Directors consider that all debt securities are intended for use on a continuing basis in the Group’s activities. These debt securities

have therefore been classified as financial fixed assets.

The unamortised premium on the transferable securities at 31 December 2014 amounts to £12,837,000 (2013: £13,547,000).



12. Loans and advances to customers

Group Society

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Loans and advances to customers net of provisions are analysed as follows:

Loans fully secured on residential property 987,811 938,323 887,551 833,383

Other loans:

Loans fully secured on land 23,602 33,533 23,602 26,774

Other loans 2,119 7,124 2,119 3,521

1,013,532 978,980 913,272 863,678

Loans and advances to customers have remaining maturities from the balance sheet date as follows:

Repayable on call and at short notice 1,667 11,839 624 3,960

In not more than three months 3,606 2,189 2,832 1,464

In more than three months but not more than one year 4,983 10,246 4,706 5,984

In more than one year but not more than five years 43,134 40,719 38,945 36,709

In more than five years 964,493 918,276 868,859 817,741

Provisions for bad and doubtful debts 9a (4,351) (4,289) (2,694) (2,180)

1,013,532 978,980 913,272 863,678

This maturity analysis assumes that loans and advances run for their full, agreed term or, in the case of equity release loans, for the

actuarial life expectancy of the borrower. In practice, loans seldom continue to the maturity date and, therefore, the actual repayment

profile of loans is likely to be significantly different from that disclosed above.



13. Investments in subsidiary undertakings

a) Disposal of subsidiary

On 21 May 2014, the Society sold its 100% holding in its banking subsidiary, Hampshire Trust Plc, for net asset value plus

£2,100,000 in cash. £1,424,000 of the consideration was deferred pending realisation of certain assets on the bank’s books.

The Society also placed a deposit on commercial terms with Hampshire Trust equal to the value of the assets to be realised.

At 31 December 2014, £138,000 of assets remain to be realised. This deferred consideration and deposit with Hampshire Trust

are reported within Other Assets (note 15).

The Society has indemnified the purchaser against certain potential future liabilities. These include those arising from pre-purchase

transactions in Hampshire Trust on which the Society has taken legal advice and the likelihood of these liabilities crystalising is

considered highly remote.

b) Movements in the year

c) Subsidiary activities

Society

Society

Group

Group Society

2014 2013

Note £’000 £’000

Operating loss from discontinued operations was as follows:

Interest receivable and similar income 168 1,194

Interest payable and similar charges (173) (600)

Other income 154 501

Administrative expenses and depreciation (822) (1,883)

Provisions 46 (75)

Operating loss from discontinued operations (627) (863)

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Profit/(loss) on disposal of investment in subsidiary 1,776 – (872) –

Shares in subsidiary undertakings

Loans to subsidiary undertakings

Total

£’000 £’000 £’000

At 1 January 2014 9,201 106,313 115,514

Disposal of investment in subsidiary (9,176) – (9,176)

Net repayment – (5,658) (5,658)

At 31 December 2014 25 100,655 100,680

Country of registration

Major activities

Class of share held

Society interest

The Society’s trading subsidiary undertakings (which operate in the United Kingdom) are:

National Counties Financial Services Ltd England Insurance broking Ordinary 100%

Counties Home Loan Management Ltd England Mortgage lending Ordinary 100%



Group Society

The net book value of freehold land and buildings occupied for own activities at 31 December 2014 was: for the Group £5,331,000

(2013: £5,331,000); for the Society £5,331,000 (2013: £4,923,000).

Freehold land and buildings

Equipment, fixtures

& fittings and vehicles

Total

Freehold land and buildings

Equipment, fixtures

& fittings and vehicles

Total

£’000 £’000 £’000 £’000 £’000 £’000

Cost

At 1 January 2014 5,782 4,678 10,460 5,374 4,649 10,023

Additions – 1,343 1,343 408 1,088 1,496

Disposals – (417) (417) – (176) (176)

At 31 December 2014 5,782 5,604 11,386 5,782 5,561 11,343

Depreciation

At 1 January 2014 – 3,955 3,955 – 4,193 4,193

Charge for year – 348 348 – 331 331

Eliminated on disposals – 138 138 – (126) (126)

At 31 December 2014 – 4,441 4,441 – 4,398 4,398

Net book value

At 31 December 2013 5,782 723 6,505 5,374 456 5,830

At 31 December 2014 5,782 1,163 6,945 5,782 1,163 6,945

14. Tangible fixed assets

15. Other assets

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Deferred tax asset 10b 140 366 80 241

Corporation tax debtor – 189 – 18

Cash collateral pledged against off-balance sheet contracts 26 372 – 372 –

Sundry debtors 228 209 225 151

740 764 677 410

Group Society



16. Prepayments and accrued income

18. Amounts owed to credit institutions

17. Shares

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Accrued interest relating to off-balance sheet contracts 6,040 4,145 6,040 4,145

Unamortised premiums on mortgage portfolio acquisitions 2 1,978 2,181 – –

Other 568 586 568 504

8,586 6,912 6,608 4,649

Repayable from the date of the balance sheet in the ordinary course of business:

Accrued interest 62 119 62 119



In more than one year but not more than five years 4,838 – 4,838 –

46,800 76,297 46,800 76,297

Held by individuals


Accrued interest 11,962 10,258 11,962 10,258

On demand 197,907 189,292 197,907 189,292




In more than five years – – – –

939,551 878,996 939,551 878,996

Group Society

This maturity analysis assumes that balances are repayable at the earliest possible date of withdrawal without penalty. Some fixed

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.



19. Amounts owed to other customers

21. Accruals and deferred income

20. Other liabilities

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000


Accrued interest 857 795 857 769

On demand 8,134 5,546 8,134 3,559




189,742 199,405 189,742 174,737

Accrued interest relating to off-balance sheet contracts 961 870 961 870

Other 1,562 871 1,413 609

2,523 1,741 2,374 1,479

Income tax 30 62 30 62

Corporation tax creditor 313 – 67 –

Cash collateral held against off-balance sheet contracts 26 5,812 7,593 5,812 7,593

Loans from subsidiary undertakings – – 100 6,712

Other creditors 598 799 598 206

6,753 8,454 6,607 14,573

Group Society



22. Pensions

2014 2013

The principle assumptions used by the actuary were as follows:

Pension commitments discount 3.6% 4.6%

Pensionable salaries increase 2.5% 2.5%

Pensions in payment increase accrued before 1 May 2003 3.6% 3.5%

Pensions in payment increase accrued before 6 April 2005 3.0% 3.4%

Pensions in payment increase accrued before 6 April 2011 2.1% 2.5%

Pensions in payment increase accrued after 6 April 2011 1.7% 2.5%

Deferred pensions increase from date of leaving accrued before 6 April 2009 2.1% 2.7%

Deferred pensions increase from date of leaving accrued before 6 April 2011 2.5% 2.5%

Deferred pensions increase from date of leaving accrued from 6 April 2011 2.1% 2.5%

Retail Price Index increase 3.1% 3.4%

Consumer Price Index increase 2.1% 2.7%

The number of years life expectancy from age 65 is as follows:

Pensioners (aged 65 in 2014) – males 22.2 22.1

Pensioners (aged 65 in 2014) – females 24.5 24.4

Future pensioners (aged 65 in 2034) – males 24.0 23.9

Future pensioners (aged 65 in 2034) – females 26.4 26.3

Group

The Group operates the National Counties Building Society Pension and Life Assurance Scheme (‘the Scheme’), a trustee-administered

defined benefit pension scheme for staff. The Pension Benefit section of the Scheme was closed to new entrants with effect from

1 May 2007. A replacement Cash Benefit section was introduced from the same date. The Pension Benefit section provides a defined

pension to the member, while the Cash Benefit section provides a cash amount which is utilised to provide a pension.

Further service accruals were ceased within the Pension Benefit section from 1 May 2013. At that point all Pension Benefit section

members became eligible for the Cash Benefit section.

The Group has adopted Financial Reporting Standard 17 ‘Retirement benefits’ (‘FRS 17’), which requires that the assets of defined

benefit 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 defined benefit schemes and these disclosures therefore relate to both sections.

A number of employees of Hampshire Trust Plc were members of the Cash Benefit section of the Scheme until the company was

sold in May 2014. 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.

A full actuarial valuation is carried out by a qualified independent actuary every three years.

The service cost has been calculated using the Projected Unit method.

Longevity assumptions are based on the S1PMA (males) and S1PFA (females) year of birth tables adjusted in line with the Continuous

Mortality Investigation’s 2013 model with a 1.25% long-term rate of improvement in mortality.



The Group contributed at the rate of 21% of pensionable salaries for the period to cessation of further service accruals in respect of the

Defined Pension section of the Scheme. As such no contributions were paid after 30 April 2013, and no further contributions are due to

be paid under the current schedule.

The Group contributed at the rate of 14% (2013: 14%) for the year in respect of the Cash Benefit section of the Scheme. Group

contributions for the next financial year, based on contribution rates and membership at 31 December 2014, are estimated at £550,000.

2014 2013 2012 2011 2010

£’000 £’000 £’000 £’000 £’000

The amounts recognised in the balance sheet are:

Present value of scheme obligations (21,423) (17,848) (17,178) (15,160) (9,862)

Fair value of scheme assets 18,636 16,640 15,620 12,709 9,379

Pension liability (2,787) (1,208) (1,558) (2,451) (483)

Deferred tax 557 254 358 613 131

Net pension liability (2,230) (954) (1,200) (1,838) (352)

2014 2013

£’000 £’000

Reconciliation of the present value of scheme obligations:

At 1 January 17,848 17,178

Interest cost 829 748

Current service cost 755 766

Benefits paid (384) (366)

Charges paid (16) (16)

Actuarial loss/(gain) 2,391 (512)

Curtailment loss – 50

At 31 December 21,423 17,848

Reconciliation of the fair value of scheme assets:

At 1 January 16,640 15,620

Expected return on assets 819 585

Contributions 744 672

Benefits paid (384) (366)

Charges paid (16) (16)

Actuarial gain 833 145

At 31 December 18,636 16,640

Group



2014 2014 2013 2013

Yield per annum

£’000

Yield per annum

£’000

The fair value of the assets in the Scheme and the expected rates of return at 31 December were:

Equities 5.8% 5,988 7.0% 5,541

Bonds 2.8% 1,574 4.0% 1,036

Gilts 1.8% 2,356 3.0% 1,472

Other -0.1% 279 -0.1% 1,228

Purchased annuity contracts 8,439 7,363

Total scheme assets 18,636 16,640

Group

The yields per annum shown are net rates of return and allow for the annual management charge of 0.6% collected through the pricing

of units.

2014 2013

£’000 £’000

Analysis of amount charged to operating profit

Current service cost 533 567

Past service cost – –

Total operating charge (included within administrative expenses) 533 567

Analysis of net return on scheme

Expected return on pension scheme assets 819 585

Interest on pension scheme liabilities (829) (748)

Curtailment loss – (50)

Net return being the pension finance charge (10) (213)

Analysis of amount recognised in statement of total recognised gains and losses

Actual return less expected return on pension scheme assets 833 145

Experience gains and losses arising on the scheme liabilities 24 (5)

Changes in assumptions underlying the present value of the scheme liabilities

(2,415)

517

Actuarial (loss)/gain recognised in statement of total recognised gains and losses

(1,558) 657

Movement in deficit during the year

Deficit in scheme at beginning of year (1,208) (1,558)

Movement in year:

Current service cost (533) (567)

Contributions 522 473

Past service cost – –

Net return on assets (10) (213)

Actuarial (loss)/gain (1,558) 657

Deficit in scheme at end of the year (2,787) (1,208)

Group



2014 2013 2012 2011 2010

Details of experience gains and losses for the year to 31 December

Difference between the actual and expected return on scheme assets:

Amount (£’000) 833 145 284 (738) 439

Percentage of scheme assets 4.5% 0.9% 1.8% 5.8% 4.7%

Experience gain/(losses) on scheme liabilities:

Amount (£’000) 24 (5) (268) (864) (167)

Percentage of the present value of the scheme liabilities 0.1% 0.0% 1.6% 5.7% 1.7%

Total amount recognised in statement of total recognised gains and losses:

Amount (£’000) (1,558) 657 (839) (2,128) 272

Percentage of the present value of the scheme liabilities 7.3% 3.7% 4.9% 14.0% 2.8%

Group

23. Reserves – general reserves

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

At 1 January 112,598 111,091 113,695 112,187

Profit for the financial year 4,218 1,019 1,795 1,020

Actuarial (losses)/gains net of deferred tax (1,258) 488 (1,258) 488

At 31 December 115,558 112,598 114,232 113,695

General reserves excluding net pension liability 117,788 113,552 116,462 114,649

Net pension liability 22 (2,230) (954) (2,230) (954)

General reserves including net pension liability 115,558 112,598 114,232 113,695

Group Society

24. Memorandum items

Contingent liabilities

Assets pledged as collateral security against derivative contracts at the year end

26

114,946

53,446

114,946

53,446

Commitments

Irrevocable undrawn loan facilities to borrowers at the year end

18,802

22,138

18,802

22,129

Commitment to repurchase assets sold under repo agreements

20,491

32,201

20,491

32,201



25. Financial commitments a) Financial Services Compensation Scheme (‘FSCS’)

As a regulated UK deposit-taker, the Society, in common with all regulated UK deposit-takers, pays levies based on its share of deposits

protected by the FSCS to enable the scheme to meet claims against it. There are two FSCS levies – a management expenses levy

(‘MEL’) and a compensation costs levy (‘CCL’). The MEL covers the running costs of the scheme and the CCL covers the amount of

compensation the scheme pays, net of any recoveries it makes using the rights that have been assigned to it.

In May 2013, the International Accounting Standards Board issued an Interpretation to clarify the accounting treatment for levies in the

financial statements of an entity subject to such levies. The interpretation explains that there is no obligation to recognise the liability

for a levy until the activity that triggers payment occurs. Applying the interpretation to the FSCS levies, the liability should only be

recognised after the trigger date of 1st April. As at the balance sheet date, the MEL liability accrued relates to the 12 month period to

31st March 2015 triggered at 1st April 2014. No liability for the levies is recognised for scheme years beyond March 2015.

The charge for the current year in the Society is £687,000 (2013: £674,000).

FSCS invoices totalling £696,000 have been paid by the Society during 2014 (2013: £661,000) which, together with the above-mentioned

provision charge, results in FSCS Levy provisions totalling £354,000 (2013: £363,000). These provisions are included in the income

and expenditure accounts within provisions for contingent liabilities and commitments and in the balance sheets within provisions for

liabilities (note 9b).

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:

2014 2013 2014 2013

Note £’000 £’000 £’000 £’000

Capital expenditure contracted but not provided for: 240 104 240 41

Group Society



26. Financial instruments

A financial instrument is a contract which gives rise to a financial asset of one entity and a financial liability of another entity. The Group

is a retailer of financial instruments in the form of mortgage and savings products and uses wholesale financial 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 appetite, risk limits, reporting lines, mandates, policies

and other control procedures. This structure is reviewed regularly by the Asset and Liability Committee (‘ALCO’), which is charged with

the responsibility for managing and controlling the balance sheet and the use of financial instruments for risk management purposes.

Instruments used for risk management purposes include derivative financial instruments (‘derivatives’), which are contracts or

agreements whose value is derived from one or more of underlying price, rate or index inherent in the 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 specified in the legislation.

Derivatives are not used in trading activity or for speculative purposes.

The Society uses 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

mainly to hedge balance sheet exposures arising from fixed rate mortgage lending and fixed rate borrowing. The Society also uses

swaps based on the movement of inflation 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 rules set by the regulator, reflect 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 reflect a measure of the Group’s exposure should all counterparties default. The Society uses industry

standard documentation for its derivative contracts. All 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 counterparties against default. Details of this collateral are provided in the final section of this note entitled ‘fair

values of financial instruments’.

Derivatives at the balance sheet dates are predominantly sterling interest rate swap contracts, with the rest based on the Retail

Price Index (‘RPI’) as shown in the following table.



Group and Society2014 2013

Notional principal amount

Risk weighted

amount

Replacement

cost

Notional principal amount

Risk weighted

amount

Replacement

cost

£’000 £’000 £’000 £’000 £’000 £’000

Sterling interest rate contracts with remaining maturities as follows:

In not more than one year 86,800 – 1 2,500 – 66

In more than one year but not more than five years

186,835 461 6 119,575 299 658

In more than five years 238,587 781 2 235,957 754 109

Total sterling interest rate contracts

512,222

1,242

9

358,032

1,053

833

Contracts based on the RPI with remaining maturities as follows:

In not more than one year 41,300 – 7,063 – – –

In more than one year but not more than five years

8,600 22 1,776 49,900 125 8,545

In more than five years – – – – – –

Total contracts based on RPI

49,900

22

8,839

49,900

125

8,545

Total contracts 562,122 1,264 8,848 407,932 1,178 9,378



Group

3 months or less

More than 3 months less than 6 months

More than 6 months less than

1 year

More than 1 year

less than 5 years

More than 5 years

Non-

interest bearing

Total

£’000 £’000 £’000 £’000 £’000 £’000 £’000

Assets

Liquid assets 115,508 – 10,114 45,559 100,163 2,364 273,708


383,754

51,491

37,892

323,507

221,512

(4,624)

1,013,532

Tangible fixed assets – – – – – 6,945 6,945

Other assets – – – – – 740 740

Prepayments and accrued income

–

–

–

–

–

8,586

8,586

Total assets 499,262 51,491 48,006 369,066 321,675 14,011 1,303,511

Liabilities

Shares 645,259 45,251 106,921 130,158 – 11,962 939,551

Amounts owed to credit institutions and other customers

134,174

45,900

42,211

13,338

–

919

236,542

Other liabilities – – – – – 6,753 6,753

Accruals and deferred income

–

–

–

–

–

2,523

2,523

Provisions for liabilities – – – – – 354 354

Net pension liability – – – – – 2,230 2,230

Reserves – – – – – 115,558 115,558

Total liabilities 779,433 91,151 149,132 143,496 – 140,299 1,303,511

Off-balance sheet items 424,054 20,000 14,500 (206,985) (251,569) – –

Interest rate sensitivity gap 143,883 (19,660) (86,626) 18,585 70,106 (126,288) –

Cumulative gap 143,883 124,223 37,597 56,182 126,288 – –

At 31 December 2014

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

3 months or less

More than 3 months less than 6 months

More than 6 months less than

1 year

More than 1 year

less than 5 years

More than 5 years

Non-

interest bearing

Total

£’000 £’000 £’000 £’000 £’000 £’000 £’000

Assets

Liquid assets 123,370 – 10,001 36,946 105,575 9,780 285,672


469,329

6,668

25,749

260,037

222,321

(5,124)

978,980

Tangible fixed assets – – – – – 6,505 6,505

Other assets – – – – – 764 764

Prepayments and accrued income

–

–

–

–

–

6,912

6,912

Total assets 592,699 6,668 35,750 296,983 327,896 18,837 1,278,833

Liabilities

Shares 580,747 24,971 70,789 192,231 – 10,258 878,996

Amounts owed to credit institutions and other customers

146,225

51,348

60,031

17,184

–

914

275,702

Other liabilities – – – – – 8,454 8,454

Accruals and deferred income

–

–

–

–

–

1,741

1,741

Provisions for liabilities – – – – – 388 388

Net pension liability – – – – – 954 954

Reserves – – – – – 112,598 112,598

Total liabilities 726,972 76,319 130,820 209,415 – 135,307 1,278,833

Off-balance sheet items 309,100 – – (64,675) (244,425) – –

Interest rate sensitivity gap 174,827 (69,651) (95,070) 22,893 83,471 (116,470) –

Cumulative gap 174,827 105,176 10,106 32,999 116,470 – –

At 31 December 2013

Liquidity risk

The Group’s liquidity policy is to maintain sufficient 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 significant amount of highly liquid

assets, mainly UK gilts, Treasury bills, multilateral development bank securities and deposits with the Bank of England, which are

eligible to meet its required liquidity buffer set by the regulator and for use as collateral with derivative counterparties. Day-to-day

operational requirements are met from deposits placed on call or overnight with the Bank of England and major banks.



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.

These gains and losses represent the expected future impact of derivative hedging contracts to the Group if current economic

conditions remain unchanged until the maturity of the contracts.

£110,623,000 of the unrecognised loss at 31 December 2014 relates to a derivative contract hedging the interest rate risk on the

Group’s lifetime mortgage book. This unrealised loss and that arising in the year on this derivative of £63,743,000 was driven by the

current low long-term interest rate environment and assumes that these conditions persists for 34 years until maturity of the contract

in 2048. It is effectively offset by the correspondingly lower cost of funding the lifetime mortgages.

Group

Gains Losses Net Gains/(Losses)

£’000 £’000 £’000

Unrecognised gains and losses on hedges

At 1 January 2014 9,378 (49,243) (39,865)

Of which recognised during the year 66 – 66

Gains and losses brought forward and not recognised in the year

9,312

(49,243)

(39,931)

Gains and losses arising in the year that were not recognised in the year

(464)

(67,762)

(68,226)

At 31 December 2014 8,848 (117,005) (108,157)

Of which:

Expected to be recognised in the year to 31 December 2015

7,064

(316)

6,748

Expected to be recognised after 31 December 2015 1,784 (116,689) (114,905)



Book value

Fair value

Book value

Fair value

Book value

Fair value

Book value

Fair value

£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000

Comparison of the book and fair values of some of the Group’s financial instruments as at 31 December.

On-balance sheet instruments:

Loans and advances to credit institutions

938

938

–

–

71,815

71,815

–

–

Debt securities 157,573 161,895 – – 164,704 161,173 – –

Amounts owed to credit institutions

–

–

(46,800)

(46,800)

–

–

(76,297)

(76,297)

Off-balance sheet instruments:

Interest rate/index-based swaps

–

8,848

–

(117,005)

–

9,378

–

(49,243)

Collateral (held)/pledged against the market value of off-balance sheet instruments

(5,812)

(5,812)

114,946

118,273

(7,593)

(7,593)

53,446

49,933

2014 2013

Positive PositiveNegative Negative

Group

The fair value of a financial 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 derivative instruments, fair values are calculated by discounting cash flows at prevailing interest rates. The above table

excludes certain financial 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 derivative 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

liquid assets in the balance sheets (note 11). Interest on these deposits is included in the income and expenditure accounts within

interest receivable and similar income or interest payable and similar charges, as appropriate.



27. Segmental analysis

The Group operates only in the United Kingdom and all its transactions are denominated in pounds sterling.

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 financial services for its members, together with transactions

ancillary to this. The Non-member segment relates to business transacted by subsidiary entities, secured loans to businesses and

unsecured loans and other financial 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 some non-

member business and this is analysed accordingly. Non-member business conducted by the Society relates to 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:

2014 2013

Group

Member

business

Non-member

business

Group total

Member

business

Non-member

business

Group

total

£’000 £’000 £’000 £’000 £’000 £’000

Income & Expenditure Account

Interest receivable:

External 30,896 3,351 34,247 30,118 3,509 33,627

Inter-segmental 3,289 – 3,289 3,928 – 3,928

34,185 3,351 37,536 34,046 3,509 37,555

Profit for the year before taxation 2,489 2,409 4,898 1,261 112 1,373

Balance Sheet

Total assets 1,160,173 143,338 1,303,511 1,103,404 175,429 1,278,833

Liabilities (1,045,966) (141,987) (1,187,953) (998,910) (167,325) (1,166,235)

Net assets 114,207 1,351 115,558 104,494 8,104 112,598


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 fixed 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 debts on those loans.

1. Statutory percentages

Statutory limit

% %

a) Lending limit

Proportion of business assets other than in the form of loans fully secured on residential property

3.67

25

b) Funding limit

Proportion of shares and other borrowings other than in the form of shares held by individuals

20.11

50

Annual Business StatementFor the year ended 31 December 2014

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.



2. Other percentages

2014 2013

% %

As a percentage of shares and borrowings:

Gross capital 9.83 9.75

Free capital 9.27 9.22

Liquid assets 23.27 24.74

As a percentage of mean assets:

Profit after taxation 0.33 0.08

Management expenses – Group 1.05 0.77

Management expenses – Society 0.98 0.63

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 fixed assets.

Mean total assets represents the average of the aggregate of total assets at the beginning and end of the year.

Profit after taxation is described as profit for the financial year in the income and expenditure account.

Management expenses are the aggregate of administrative expenses and depreciation.



3. Information relating to Directors and other officers

Directors at 31 December 2014

Polly Ann Williams BA, ACA (Chairman)Born: June 1965

Appointed: November 2006

Business Occupation: Company Director

John Henry Howard BSc (Vice Chairman)Born: February 1951

Appointed: May 2008


Mark Alexander Bogard MABorn: January 1962

Appointed: May 2012

Business Occupation: Building Society Chief Executive

Christopher Rendell Croft LLBBorn: September 1951

Appointed: May 2014

Business Occupation: Building Society Company Secretary

Christopher James Fry BA, ACABorn: June 1957

Appointed: April 2010

Business Occupation: Building Society Finance Director

Peter Richard Goshawk ACMA, FCTBorn: April 1959

Appointed: May 2010


Counties Home Loan Management Ltd*

National Counties Estate Agents Ltd*

Scotiabank (Ireland) Ltd

Worldspreads Plc

Daiwa Capital Markets Europe Ltd

TSB Group Plc

TSB Bank Plc

Other Directorships:

Gas and Electricity Markets Authority

Quayviews Ltd

Alexander Hall Associates Ltd


National Counties Estate Agents Ltd*

National Counties Financial Services Ltd*

Law Unlimited Ltd

Onecounsel Ltd


Woodlands 2000 Ltd

Barclays Pensions Funds Trustees Ltd

The Association of Corporate Treasurers

ANZ Pensions (U.K.) Ltd

Daiwa Capital Markets Europe Ltd



Officers at 31 December 2014

Keith Andrew Barber DMS, ACIB, DipPFSBusiness Occupation: Associate Director Business Development

Andrew Richard Deeley MCICMBusiness Occupation: Associate Director Lending

Charles Nicholas Blaise Hodges BSc, AMCT, ACMABusiness Occupation: Associate Director Treasury

David Horsman LLM, FCCABusiness Occupation: Associate Director Finance

Roy Howcutt MCICMBusiness Occupation: Associate Director Member Accounts

Kathryn Elizabeth Mendoza LLBBusiness Occupation: Associate Director Compliance and Legal Services

Mark Andrew Willis MA (Oxon), FCA, MCTBusiness Occupation: Associate Director Risk

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.

Peter Goshawk (Chairman), Polly Williams (employer-nominated) and Mark Willis (member-nominated) 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.

Directors at 31 December 2014

Rodger Grant Hughes MA, FCABorn: August 1948

Appointed: July 2013


Chime Communications Plc

National Counties Financial Services Ltd*

None

None

None

None

None

Nationwide Pension Fund Trustee Ltd

Nationwide Pension Fund Nominee Ltd

Mawsley Management Ltd

*Companies within the National Counties Group

Other Directorships:


Section Header goes here

Principal Office

Ebbisham House, 30 Church Street

Epsom, Surrey KT17 4NL

Tel: 01372 747771

Email: [email protected]

www.ncbs.co.uk

Counter Services

Ashley Square

Ashley Centre

Epsom

Surrey

KT18 5DD

Ebbisham House, 30 Church Street

Epsom, Surrey KT17 4NL

Tel: 03330 140142

Email: [email protected]

www.familybuildingsociety.co.uk

Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Firm Reference Number 206080. Member of the Building Societies Association. www.fca.org.uk/register

Documents

Annual Report & Accounts 2014€¦ · Financial services Banks have continued ... our core savings and mortgage capability. These cover areas such as tax effective with profits university