OneSavings Bank plc : Annual Financial Report

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OSB Group (OSB)

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Strategic report
Highlights	IFC
Who we are	01
At a glance	02
Chief Executive Officer's statement	04
Market review	08
Our business model	10
Strategic framework	12
One specialist lender	14
One fair place to save	16
One unique operating model	18
Operating and financial review	20
Key performance indicators	26
Financial review	28
Risk review	32
Principal risks and uncertainties	39
Viability statement	49
Corporate responsibility report	50

Governance
Board of Directors (biographies)	60
Executive team	62
Corporate Governance Report	64
Nomination and Governance Committee Report	72
Audit Committee Report	74
Risk Committee Report	79
Directors' Remuneration Report	81
Directors' Report: Other Information	96
Statement of Directors' responsibilities	98

Financial statements
Independent auditor's report	99
Statement of Profit or Loss	107
Statement of Other Comprehensive Income	108
Statement of Financial Position	109
Statement of Changes in Equity	110
Statement of Cash Flows	111
Notes to the Financial Statements	112
Glossary	178
Company information	179

Net loans and advances	Gross new lending	Average book LTV at 31 December
£5.6bn	£2.4bn	69%
2016: £4.1bn	2016: £1.9bn	2016: 69%

Net loans and advances	Gross new lending	Average book LTV at 31 December
£1.7bn	£0.2bn	56%
2016: £1.9bn	2016: £0.4bn	2016: 58%

Direct	Online	Branches
41%	36%	23%
2016: 37%	2016: 32%	2016: 31%

Priorities	Our goals	2017 progress	Looking forward	Key risks	KPI
Be a leading specialist lender in our chosen markets	Grow profitable loan origination in key markets - Deliver strong end-to-end propositions in target markets - Deliver incremental, non-organic business - Invest in highly responsive, customer-focused culture - Innovate to secure sustainable long-term market leadership	- Buy-to-Let/SME origination up 23% to £2.4bn - £176m originations in commercial lending through our InterBay brand - Received multiple awards including Best Specialist Lender (Mortgage Strategy Awards) and Best Specialist Lender of the Year (The Mortgage Introducer Awards)	- Focus on organic growth in underserved sub-sectors - Further develop commercial lending opportunities - Enhance proposition in residential lending in light of progress to IRB - Develop further opportunities in bridge finance - Identify new market sub-sectors with high returns on a risk-adjusted basis	- Market conditions affecting long-term demand - Increased regulatory pressure - Continued political uncertainty - New specialist lenders entering the market	Loan book £7.3bn +23% [Graphic appear here]
Retain focus on bespoke and responsive underwriting	High quality decisions protecting the business - Skilled manual underwriting supported by clever technology - Deliver a high quality, differentiated service supported by highly responsive decision-making - Clear decisions recognised by intermediaries for their quality and fairness - a critical friend - Integrated underwriting across all brands	- More than 38,500 loans totaling £8.3bn originated since the Bank's creation in 2011 with only 137 cases of arrears over 3 months, with an aggregate balance of £18.4m and an average LTV of 63% - New technology solution for assessing multi-property portfolios - Transactional Credit Committee met 103 times to assist with more complex or larger new mortgage applications	- Identify additional technology to support decision making - Continue training and coaching to further strengthen the underwriting expertise of our team - Maintain focus on consistent decision making outcomes - Find ways to be even more responsive to intermediaries and borrowers whilst remaining a critical friend	- Changing regulation for underwriting - More complex underwriting requirements - Difficulty in recruiting experienced staff - Increasing intermediary demands - Demands of ever-changing technology	Loan loss ratio 7bps improved by 9bps [Graphic appear here]
Further deepen relationships and reputation for delivery with intermediaries	Increase partner reach in response to demand - Provide access to specialist products developed by listening to intermediary partners - Be accessible and available to intermediaries - One distribution model across all brands - Gain intermediary recognition for delivering long-term sustainable proposition - Deliver bespoke solutions to meet intermediary and customer needs	- Introduced high tech solution to ease the burden for assessing multiproperty portfolios - Success of Choices programme in increasing retention rates in 2017 - Restructured relationship team to increase levels of engagement - Attended c.150 intermediary events across our target geographies - Enhanced marketing and brand support for intermediaries - Published periodic market leading 'Buy-to-Let Britain' reports	- Develop enhanced intermediary education programme - Continue to deliver direct relationships with high quality intermediaries - Deliver deeper relationships with more of our target intermediaries - Deliver best in class service performance as we grow and enter new market sub-sectors	- Loss of key broker relationships - Competition reducing pricing below OSB's risk-adjusted return appetite - More complex underwriting requirements slowing the process	Gross new lending £2.6bn +14% [Graphic appear here]
Maintain and build upon over 150 years of heritage in savings	Stable, high quality funding platform - Be primarily funded through attracting and retaining a loyal retail savings customer base - Provide access to our service for customers through their channel of choice - Ensure liquidity requirements are met through the economic cycle - Deliver a proposition offering transparent, straightforward savings products, providing long-term value combined with excellent service levels	- Gained c27,000 new savings customers - Achieved 90% customer retention - Received multiple awards for savings products including ISA Provider of the Year and Best Cash ISA Provider - Loan to deposit ratio of 92%¹ 1. Excluding impact of TFS/FLS drawdowns.	- Enhance service proposition by investing in technology for digital transformation - Continue to invest in and diversify distribution channels from branches to digital - Broaden savings propositions further to include wider savings needs	- Increased competition for retail funds - Potential NS&I/government intervention in the market - Increased customer expectation for technology compared to difficulty and cost of delivery - Increased burden of regulatory compliance - for example, Open Banking (which currently does not apply to OSB)	Customer NPS +62 +3 [Graphic appear here]
Leverage unique and cost-efficient operating model	Best in class customer service - Put customer service at the heart of everything that we do - Extend activity in OSBIndia, developing high quality areas of excellence - Create structure-delivering solutions using cross-company expertise - Deliver cost efficiencies through excellent process design and management	- Investments in training and process development contributed to enhanced customer NPS of +62 - Increased OSBI headcount by 33% to 366	- Extend measurement by benchmarking to best in class - Introduce robotics technology and improve workflows to further enhance service in primary servicing - Increase change capacity through enhanced end-to-end project management capability	- Difficulty in continuous service improvement as OSB grows - Global economic uncertainty increasing costs in India - Increasing complexity from compliance with changing regulation - Lack of operational resilience due to rapid growth	Cost to income ratio 27% [Graphic appear here] Stable despite increasing cost of regulation

	Group	Group
	31-Dec-2017	31-Dec-2016
	£m	£m
Buy-to-Let	5,033.8	3,613.3
Commercial	370.8	268.3
Residential development	143.9	141.6
Funding lines	104.5	71.7
Personal loans¹	1.1	9.4
Total	5,654.1	4,104.3

		Residential
	BTL/SME	mortgages	Total
YEAR ENDED 31-DEC-2017	£m	£m	£m
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers	5,654.1	1,673.5	7,327.6
Provision for impairment losses on loans and advances	(13.2)	(8.4)	(21.6)
Loans and advances to customers	5,640.9	1,665.1	7,306.0
Risk weighted assets	2,642.8	705.7	3,348.5
PROFIT OR LOSS FOR THE YEAR
Net interest income	177.1	68.3	245.4
Other income/(expense)	(1.5)	(5.8)	(7.3)
Total income	175.6	62.5	238.1
Impairment (losses)/gains	(0.8)	(3.6)	(4.4)
Contribution to profit	174.8	58.9	233.7

	Restated¹	Residential
	BTL/SME	mortgages	Total
YEAR ENDED 31-DEC-2016	£m	£m	£m
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers	4,104.3	1,859.9	5,964.2
Provision for impairment losses on loans and advances	(17.2)	(7.8)	(25.0)
Loans and advances to customers	4,087.1	1,852.1	5,939.2
Risk weighted assets	1,944.3	798.7	2,743.0
PROFIT OR LOSS FOR THE YEAR
Net interest income	135.2	71.4	206.6
Other income / (expense)	(0.5)	(4.7)	(5.2)
Total income	134.7	66.7	201.4
Impairment losses	(1.8)	(7.2)	(9.0)
Contribution to profit	132.9	59.5	192.4

KPI	Definition	2017 performance
1. Gross new lending Performance £2.6bn +14% [Graphic appear here]	This is defined as gross new organic lending before redemptions.	Gross new lending in 2017 reflects growth in new origination, primarily in the BTL/SME segment.
2. Net interest margin Performance 316bps stable [Graphic appear here]	This is defined as net interest income as a percentage of average interest bearing assets (cash, investment securities, loans and advances to customers and credit institutions), including off balance sheet FLS drawings. It represents the margin earned on loans and advances and liquid assets after swap expense /income and cost of funds.	Net interest margin flat to prior year with lower asset yields in line with the reduced cost of funds.
3. Cost to income ratio Performance 27% Stable [Graphic appear here] * Restated	This is defined as administrative expenses including depreciation and amortisation as a percentage of total income. It is a measure of operational efficiency.	Cost to income ratio stable despite additional cost of meeting regulatory requirements in 2017 and continues to be market leading.
4. Underlying profit before taxation Performance £167.7m +21% [Graphic appear here] * Restated	This is defined as statutory profit before taxation before exceptional items. See reconciliation of statutory profit to underlying profit in Alternative performance measures on page 29.	The increase reflects strong balance sheet growth, stable net interest margin, continued focus on cost discipline and efficiency and low loan losses. Statutory profit before taxation of £167.7m in 2017 increased by 3% compared to £163.1m in 2016.
5. Underlying basic EPS Performance 51.1 pence per share +23% [Graphic appear here]	This is defined as underlying profit attributable to ordinary shareholders, which is profit after taxation before exceptional items less after tax effect of coupons on equity PSBs and AT1 securities, divided by the weighted average number of ordinary shares in issue. See reconciliation of statutory profit to underlying profit in Alternative performance measures on page 29.	The strong growth is in line with the significant increase in underlying profitability of the Bank. On a statutory basis basic EPS increased to 51.1 pence per share in 2017 from 49.4 pence per share in 2016.
6. Return on equity Performance 28% -1% [Graphic appear here]	This is defined as underlying profit after taxation and after deducting the after tax effect of coupons on equity PSBs and AT1 securities as a percentage of average shareholders' equity (excluding equity PSBs of £22m and £60m of AT1 securities). For further information on underlying profit after taxation, see reconciliation of statutory profit to underlying profit in Alternative performance measures on page 29.	Return on equity remained strong at 28% (2016: 29%) despite our strengthened capital position.
7. Dividend per share Performance 12.8 pence per share +22% [Graphic appear here]	This is defined as the sum of the recommended final dividend for 2017 plus the interim dividend divided by the number of ordinary shares in issue at the year end.	The Board will recommend a final dividend of 9.3 pence per share in respect of 2017 at the Bank's AGM on 10 May 2018. This, together with the interim dividend of 3.5 pence per share, represents 25% of underlying profit after tax attributable to ordinary shareholders (after deducting the after tax impact of coupons on equity PSBs and AT1 securities) for 2017, in line with the Bank's target dividend payout ratio.
8. CRD IV fully-loaded Common Equity Tier 1 capital ratio Performance 13.7% +0.4% points [Graphic appear here]	This is defined as Common Equity Tier 1 capital as a percentage of risk-weighted assets (calculated on a standardised basis) and is a measure of the capital strength of the Bank.	The capital ratio of 13.7% reflects the ability of the business to generate capital through profitability to support significant loan book growth.
9. Loan loss ratio Performance 7bps improved 9bps [Graphic appear here]	This is defined as impairment losses expressed as a percentage of average gross loans and advances. It is a measure of the credit performance of the loan book.	The improved ratio of 7bps for 2017 (2016: 16bps) mainly reflects the assumption updates that took place in 2016. It also reflects the continued strong performance from the front book of loans, originated by the Bank since its creation in 2011. From more than 38,500 loans totalling £8.3bn of new organic originations since the Bank's creation in February 2011, we only have 137 cases of arrears over three months in duration, with an aggregate balance of £18.4m and average LTV of 63%.
10. Customer satisfaction - netpromoter score Performance +62 +3 [Graphic appear here]	The net promoter score measures our customers' satisfaction with our service and products. It is based on customer responses to the question of whether they would recommend us to a friend. The question scale is 0 for absolutely not to 10 for definitely yes. Based on the score, a customer is defined as a detractor between 0 and 6, a passive between 7 and 8 and a promoter between 9 and 10. Subtracting the percentage of detractors from the percentage of promoters gives a net promoter score of between -100 and +100.	The Bank's customer NPS across the year for 2017 improved from +59 in 2016 to +62. This demonstrates that our investment in customer service in the UK and India and customer-centric strategy of providing transparent savings products which offer long-term value for money continues to deliver high levels of customer satisfaction.

Strong growth in gross new organic lending £2.6bn +14% 2016: £2.3bn	[Graphic appear here]
Net loan book growth 23% 2016: 16% (20% excluding the impact of Rochester disposal	[Graphic appear here]
Cost to income ratio 27% Strong income growth and continued focus on cost discipline and efficiency 2016: 27%²	[Graphic appear here] * Restated

	Group 31-Dec-2017 £m	Group 31-Dec-2016 £m

SUMMARY PROFIT OR LOSS
Net interest income	245.4	206.6
Net losses on financial instruments	(6.3)	(4.3)
Net fees and commissions	0.5	1.7
External servicing fees	(1.5)	(2.6)
Administrative expenses¹	(65.1)	(53.7)
FSCS and other regulatory provisions	(0.9)	(0.5)
Impairment losses	(4.4)	(9.0)
Exceptional items	-	24.9
Profit before taxation	167.7	163.1
Profit after taxation	126.9	120.9
Underlying profit before taxation³	167.7	138.2²
Underlying profit after taxation³	126.9	102.4²
KEY RATIOS
Net interest margin³	316bps	316bps²
Cost to income ratio³	27%	27%2
Management expense ratio⁴	0.86%	0.86%
Loan loss ratio³	0.07%	0.16%
Basic EPS³, pence per share	51.1	49.4
Underlying basic EPS³, pence per share	51.1	41.7
Return on equity³	28%	29%
Dividend per share, pence per share	12.8	10.5
	£m	£m
EXTRACTS FROM THE STATEMENT
OF FINANCIAL POSITION
Loans and advances	7,306.0	5,939.2
Retail deposits	6,650.3	5,952.4
Total assets	8,589.1	6,580.9
KEY RATIOS
Liquidity ratio⁵	15.2%	17.9%
CET1 capital ratio⁶	13.7%	13.3%
Total capital ratio	16.9%	15.1%
Leverage ratio	6.0%	5.5%

	Profit before taxation		Profit after taxation
Reconciliation of statutory profit to underlying profit	Group 31-Dec-2017 £m	Restated Group 31-Dec-2016 £m	Group 31-Dec-2017 £m	Restated Group 31-Dec-2016 £m
Statutory profit	167.7	163.1	126.9	120.9
Gain on Rochester 1 disposal	-	(34.7)	-	(25.8)
Exceptional amortisation of fair value adjustments on hedged assets	-	9.8	-	7.3
Underlying profit	167.7	138.2	126.9	102.4

Change in key ratio calculation	2017 %	2016 %
Cost to income ratio
Previous method	27	27
Add back coupons on equity PSBs	(0)	(0)
Current method	27	27
Net interest margin
Previous method	3.15	3.14
Add back coupons on equity PSBs	0.01	0.02
Current method	3.16	3.16

	2017 £m	2016 £m
Underlying profit before tax
Previous method	166.7	137.0
Add back coupons on equity PSBs	1.0	1.2
Current method	167.7	138.2
Underlying profit after tax
Previous method	126.2	101.5
Add back coupons on equity PSBs	0.7	0.9
Current method	126.9	102.4

SUMMARY CASH FLOW STATEMENT	Group 31-Dec-2017 £m	Restated³ Group 31-Dec-2016 £m
Profit before tax	167.7	163.1
Net cash generated/(used in):
Operating activities	(512.9)	(323.8)
Investing activities	26.0	381.9
Financing activities	1,167.5	56.7
Net increase/(decrease) in cash and cash equivalents	680.6	114.8
Cash and cash equivalents at the beginning of the period	485.3	370.5
Cash and cash equivalents at the end of the period	1,165.9	485.3

Key risk indicators	Commentary
CET1 ratio [Graphic appear here]	The Group further strengthened its fully-loaded CET1 ratio to 13.7% during 2017 (2016: 13.3%) demonstrating the strong organic capital generation capability of the business to support significant growth.
Total capital ration [Graphic appear here]	The Group's total capital ratio increased by 1.8% to 16.9% during 2017 driven by the strengthened CET1 ratio and the issuance of £60m of AT1 securities.
3+ months in arrears* [Graphic appear here]	There was a reduction in the percentage of loans more than three months in arrears during 2017 driven by a strong performance across newly originated loans. *Note: 3+ months in arrears ratio excludes legacy problem loans.
Cost of risk [Graphic appear here]	Improved impairment performance was primarily driven by increased prudence in assumptions introduced in 2016 following the UK referendum vote to leave the EU, as well as lower underlying loan losses on acquired residential portfolios and the effect of increasing property values.
Liquidity ratio [Graphic appear here]	The Group's liquidity ratio remained well above regulatory and risk appetite limits in 2017 finishing the year at 15.2%. The Group managed liquidity levels within its target range in the year and its liquidity coverage ratio was 225% against a regulatory minimum of 90%.

Business model characteristics
- Specialist, and primarily secured lender to underserved sectors	- Desired levels of credit exposure to key segments (Buy-to-Let/SME, residential) - Potential for concentrations	- Also incurs exposure to potentially riskier sub-sectors (second charge, bridging and development finance)	- Manage infrastructure and operations to support its core business activities - Perform activities to ensure regulatory compliance	- The Bank is subject to variations in the macroeconomic environment and movements in key variables (e.g. Gross Domestic Product, unemployment, interest rates)

Risk profile
Financial risks	Non-financial risks
Portfolio credit risk The risk of losses due to one or more borrowers failing to meet all or part of their obligations towards the Bank. Credit risk also includes other elements such as pre-settlement and settlement risk, residual risk of credit risk mitigation and concentration risk. Market risk (inc. IRRBB) The risk of losses in on and off-balance sheet positions arising from adverse movements in market prices.	Strategic and business risk The risk to the Bank's earnings and profitability arising from its strategic decisions, change in the business conditions, improper implementation of decisions or lack of responsiveness to industry changes.	Reputational risk Refers to the potential adverse effects that can arise from the Bank's reputation being sullied due to factors such as unethical practices, adverse regulatory actions, customer dissatisfaction and complaints or negative/adverse publicity. Reputational risk can arise from a variety of sources and is a second order risk - the crystallisation of a credit risk or operational risk can lead to a reputational risk impact.	Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes legal risk but excludes strategic and reputational risk.
			Conduct risk Conduct risk is the risk that the firm's culture, organisation, behaviours and actions result in poor outcomes and detriment for customers and/or damage to consumer trust and integrity in the markets in which we operate.
			Regulatory/compliance risk The risk of failure due to non-adherence to provisions of the PRA handbook and all relevant prudential and conduct standards in the UK or non-compliance with reporting requirements or submission of incorrect information.
Solvency risk The potential inability of the Bank to ensure that it maintains sufficient capital levels for its business strategy and risk profile under both the base and stress case financial forecasts.
Liquidity and funding risk The potential inability of the Bank to fund increases in assets, manage unplanned changes to funding sources and to meet obligations when required. It primarily arises due to the maturity mismatch associated with the Bank's assets and liabilities and the growth in mortgage lending.

Risk appetite statement	Risk	Mitigation	Direction
The Group does not knowingly conduct business or organise its operations to put its reputation and franchise value at risk.	Potential loss of trust and confidence that our stakeholders place in us as a responsible and fair provider of financial services.	Culture and commitment to treating customers fairly and being open and transparent in communication with key stakeholders. Established processes to proactively identify and manage potential sources of reputational risk.	Unchanged The Group has increased the size and capabilities of its Risk and Compliance function to ensure appropriate oversight and challenge to how the Group discharges its responsibilities to the various stakeholders.

Risk appetite statement	Risk	Mitigation	Direction
The Group seeks to maintain a high quality lending portfolio that generates adequate returns, under normal and stressed periods. The portfolio is actively managed to operate within set criteria and limits based on profit volatility, focusing on key sectors, recoverable values, and affordability and exposure levels. The Group aims to continue to generate sufficient income and control credit losses to a level such that it remains profitable even when subjected to a credit portfolio stress of a 1 in 20 intensity stress scenario.	Individual borrower defaults Borrowers may encounter idiosyncratic problems in repaying their loans, for example loss of a job or execution problems with a development project. While most of the Bank's lending is secured, some borrowers may fail to maintain the value of the security.	All loans are extended only after thorough bespoke and expert underwriting to ensure ability and propensity of borrowers to repay and sufficient security in case of default. Should there be problems with a loan, the collections and recoveries team works with customers unable to meet their loan service obligations to reach a satisfactory conclusion while adhering to the principle of treating customers fairly. Our strategic focus on lending to professional landlords means that properties are likely to be well managed, with income from a diversified portfolio mitigating the impact of rental voids or maintenance costs. Lending to owner-occupiers is subject to a detailed affordability assessment, including the borrower's ability to continue payments if interest rates increase. Lending on commercial property is more based on security, and is scrutinised by the Group's independent Real Estate team as well as by external valuers. Development lending is extended only after a deep investigation of the borrower's track record and stress testing the economics of the specific project. The Group's Transactional Credit Committee actively reviews and approves larger or more complex mortgage applications.	Unchanged The Group continues to observe strong and stable credit profile performance.
	Macroeconomic downturn A broad deterioration in the economy would adversely impact both the ability of borrowers to repay loans and the value of the Group's security. Credit losses would impact across the lending portfolio, so even if individual impacts were to be small, the aggregate impact on the Group could be significant.	The Group works within portfolio limits on LTV, affordability, name, sector and geographic concentration that are approved by the Risk Committee and the Board. These are reviewed on a semi-annual basis. In addition, stress testing is performed to ensure that the Group maintains sufficient capital to absorb losses in an economic downturn and continue to meet its regulatory requirements.	Unchanged Although the UK economy has remained stable during 2017, the economic outlook is uncertain with the final terms of Brexit to be confirmed.
	Wholesale credit risk The Bank has wholesale exposures both through call accounts used for transactional and liquidity purposes and through derivative exposures used for hedging.	The Group transacts only with high quality wholesale counterparties. Derivative exposures include collateral agreements to mitigate credit exposures.	Unchanged The Group continues to utilise a reserve account with the Bank of England, enabling it to eliminate credit risk on most of its liquidity portfolio.

Key elements	Risk principles and culture Risk strategy and appetite Risk governance and function organisation Risk definitions and categorisation
Principal risks	Financial risks		Non-financial risks
	Credit risk Market risk Liquidity risk Solvency risk		Strategic and business risk Reputational risk Regulatory/compliance risk	Operational risk Conduct risk
Capabilities	Risk framework and policies	Risk data and IT	Risk analytics	Risk MI
Risk regulatory submissions	ICAAP	ILAAP	Recovery plan/ Resolution pack

Information and reporting	Information and reporting	Business and risk strategy	Business and risk strategy provide the context within which the Group outlines its business objectives and establishes its SRMF. The risk appetite seeks to articulate the willingness of the Group to take risks in light of its strategic and risk objectives.
		Overarching appetite statement	The overarching risk appetite sets the tone for risk management. It provides a framework to develop and cascade the Group's risk culture and to establish risk policies, controls and limits in a consistent manner.
		Risk types and individual risk level appetite statements	The overarching risk appetite statement is supported by the individual, risk type level appetite statements for all relevant risks.
		Risk metrics	Risk appetite statements are supported by a broad range of qualitative and quantitative metrics.

Emerging risks	Description	Mitigation action
Political and macroeconomic uncertainty	As a result of the UK government triggering Article 50 and the subsequent general election result, there is an increased likelihood of a period of macroeconomic uncertainty. The Group's lending activity is solely focused in the United Kingdom and, as such, will be impacted by any risks emerging from changes in the macroeconomic environment.	The Group has implemented robust monitoring processes and via various stress testing activity (i.e. ad hoc, risk appetite and ICAAP) understands how the Group performs over a variety of macroeconomic stress scenarios and has subsequently developed a suite of early warning indicators which are closely monitored to identify changes in the economic environment.
General data usage	From 25 May 2018, the Group will comply with GDPR. This will result in increased regulatory requirements with respect to processing customer and employee personal and other data in the course of day-to-day business activities.	The Group has mobilised a project (with dedicated resources) to implement the GDPR as required.

Segment	Measure	31-Dec-2017	31-Dec-2016	Variance	Commentary
BTL/SME	New origination average LTV	70%	70%	-	New lending average LTV remained stable
	Weighted average Interest Coverage Ratio for new lending	185%	171%	+14%	Resulting from a tightening of affordability rules
Residential lending	New origination average LTV	65%	66%	-1%	New lending average LTV reduced
	Percentage of new residential lending with a loan to income (LTI) greater than 4.5	3.2%	2.6%	+0.6%	Increase in cases with LTI > 4.5

Forbearance type	Number of accounts 2017	2017 year- end balance £m	Number of accounts 2016	2016 year- end balance £m (restated)	'17 vs. '16 variance number of accounts	'17 vs. '16 variance of balances £m
Interest only switch	35	3.8	60	6.3	-25	-2.5
Interest rate reduction	-	-	3	2.2	-3	-2.2
Term extension	29	4.9	31	5.9	-2	-1.0
Payment holiday	50	1.5	37	1.6	13	-0.1
Voluntary assisted sale	2	0.7	-	-	2	0.7
Payment concession (reduced monthly payments)	42	0.8	58	3.5	-16	-2.7
Capitalisation	-	-	3	0.1	-3	-0.1
Total	158	11.7	192	19.6	-34	-7.9

Loan type	Number of accounts 2017	2017 year- end balance £m	Number of accounts 2016	2016 year- end balances £m (restated)	'17 vs. '16 variance number of accounts	'17 vs. '16 variance of balances £m
First charge owner-occupier	55	4.5	117	12.4	-62	-7.9
Second charge owner-occupier	77	1.6	60	1.3	17	0.3
Buy-to-Let	26	5.6	14	5.5	12	0.1
Commercial	-	-	1	0.4	-1	-0.4
Total	158	11.7	192	19.6	-34	-7.9

Impairment coverage review	31 December 2017	31 December 2016
Gross loans and advances to customers £m	7,327.6	5,964.2
Provisions for impairment losses £m	21.6	25.0
Incurred loss remaining £m¹	7.9	8.4
Coverage ratio versus loans and advances %²	0.40	0.56
Coverage ratio versus impaired balances %³	36.2	41.5

	Male	Female
Number of Board Directors	7	3
Number of Directors of subsidiaries	13	1
Number of senior managers (not Directors)	58	17
All other employees¹	318	517

Emission type	CO₂e tonnes
Emission type	Location- based method	Market- based method
Scope 1: Operation of facilities	12	-
Scope 1: Combustion	101	-
TOTAL SCOPE 1 EMISSIONS	113	_
Scope 2: Purchased energy (UK)	458	264
Scope 2: Purchased energy
(rest of world)	452
TOTAL SCOPE 2 EMISSIONS	910	264
Total emissions	1,023	264

	Total footprint (Scope 1 and Scope 2) - CO₂e
	Previous year	Current year	Year on year
	(2016)	(2017)	variance
Turnover (£m)	201.4	238.1	18%
Intensity ratio - Scope 2 location-based method (tCO₂e/£100,000)	0.004	0.004	-
Intensity ratio - Scope 2 market-based method (tCO₂e/£100,000)	0.003	0.003	-

				Nomination and
		Audit	Remuneration	Governance	Risk
Director	Board	Committee	Committee	Committee	Committee
David Weymouth¹ (Chairman)	3/3	n/a	n/a	2/2	n/a
Mike Fairey²	3/5	n/a	n/a	2/5	n/a
Graham Allatt	10/10	6/6	n/a	n/a	7/7
Eric Anstee	10/10	6/6	n/a	n/a	7/7
Andrew Doman	9/10	5/6	3/3	n/a	6/7
Rod Duke	10/10	n/a	7/7	8/9	n/a
Andy Golding	10/10	n/a	n/a	n/a	n/a
Tim Hanford³	9/10	n/a	n/a	6/9	n/a
Margaret Hassall	9/10	n/a	n/a	n/a	6/7
Mary McNamara	10/10	n/a	7/7	9/9	6/7
Nathan Moss⁴	5/5	4/4	3/3	3/6	n/a
April Talintyre	10/10	n/a	n/a	n/a	7/7

Chairman's responsibilities	Activities carried out in 2017
Chairing the Board and general meetings of the Company.	The Chairman chaired almost all of the Board meetings held in 2017 and the 2017 AGM. The Senior Independent Director assumed the role of Interim Chairman from May to August 2017.
Setting Board agenda and ensuring that adequate time is available for discussion of all agenda items.	The Chairman, in liaison with the Company Secretary, sets the annual calendar of Board business and the agendas for the individual meetings. Time is allocated for each item of business at meetings.
Promoting the highest standards of integrity, probity and corporate governance throughout the Company.	The Board received regular updates from its Committees and reviewed its responsibilities and obligations at its meeting in May.
Ensuring that the Board receives accurate, timely and clear information in advance of meetings.	The Chairman, in liaison with the Company Secretary and the CEO, agrees the information to be circulated to the Board in advance of each meeting.
Promoting a culture of openness and debate by facilitating the effective contribution of all Non-Executive Directors.	The Chairman runs the meetings in an open and constructive way, encouraging contribution from all Directors. He regularly meets with the Non-Executive Directors without management present so that any concerns could be expressed.
Ensuring constructive relations between Executive and Non-Executive Directors and the CEO in particular.
Regularly considering succession planning and the composition of the Board.	The Board receives regular updates from the Nomination and Governance Committee. Details of the Committee's activities are explained in the Nomination and Governance Committee report on pages 72 and 73.
Ensuring training and development needs of all Directors are met, and that all new Directors receive a full induction.	The Chairman, in liaison with the Company Secretary, has reviewed Directors training requirements. Details of induction and training held during the year are given on page 70.
Ensuring effective communication with shareholders and stakeholders.	The Chairman, with the Board, assisted by the CEO, Chief Financial Officer and Investor Relations Manager, agrees a programme of investor relations meetings. Details of those carried out during the year are shown on page 71.

Theme	Action taken
The frequency of meetings and the breadth and frequency of matters discussed	The Board has reviewed the frequency of its meetings and the timings of meetings of its Committees. A revised calendar is now in place to enhance the flow of recommendations from Committees to the Board.
Alignment of terms of reference	All terms of reference relating to the Board and its Committees were reviewed and substantially updated in 2017.
The length and quality of papers	A series of improvement initiatives was introduced in 2017. Training has been provided to the preparers of papers and a revised template is now used to assist those preparers when drafting.

Objective		Action taken
Review and embed Board effectiveness recommendations from the Promontory Report²		The recommendations from the Promontory Report² have been implemented and the Committee will continue to monitor and ensure that they are embedded.
Chairman search		The Committee spent a considerable amount of time searching for a new Chairman. A new Chairman has been appointed with effect from 1 September 2017.
Succession planning for senior executives		The Committee considered succession planning of senior executives.
Developing the talent pipeline		The Committee considered reports on the talent pool and the actions being taken to develop and retain key talent.
Development of corporate purpose and sustainability		The Group has enhanced its environmental policy. This will continue to be an area of focus in 2018.
Oversee the successful implementation of diversity initiatives		A number of diversity initiatives relating to disability, mental health and unconscious bias were introduced throughout the Group.
Focusing on the attainment of the Women in Finance Charter target by 2020		With an Executive Committee and senior management team that to date have seen little attrition, we are aware that this target is something that will take time to achieve. To address our current position we are introducing a range of initiatives, including seeking to interview equal numbers of male and female candidates at first round interview stage for all vacant roles at management level and above.

Prohibited services		Approved permitted services
Book-keeping and preparing accounting records and financial statements		General accounting advice on the application of IFRS and training support
Financial information systems design and implementation. Internal control or risk management procedures relating to financial information design or implementation		Regulatory advice and reporting tools
Valuation services, including those in connection with actuarial or litigation support services		Comfort letters, accounting opinions as required by the regulator, FLS/TFS net lending assurance opinions, agreed upon procedures in relation to securitisations
HR and payroll services		Other audit-related services; interim profit verification; half year review
Services linked to the financing, capital structure and allocation and investment strategy of the Company other than assurance services in relation to the financial statements such as comfort letters		Such other activities as may be agreed by the Committee from time to time
Promoting, dealing in or underwriting shares in the Company
Legal services with respect to the provision of general counsel, negotiating on behalf of the audit entity and acting in an advocacy role in the resolution of litigation
Internal audit services
HR and payroll services
Tax services, including tax compliance and advice
Services that play any part in the management or decision making of the Company

Nature of service	2017 £'000	2016 £'000
Audit-related assurance services
including half year review and interim
profit verifications	96	96
Tax compliance and advice	-	70
Regulatory advice and support	8	36
Other¹	47	48
Total non-audit services	151	250

Element	Purpose and link to strategy	Operation and performance conditions	Maximum
Salary	To reward Executives for the role and duties required. Recognises individual's experience, responsibility and performance.	Paid monthly. Base salaries are usually reviewed annually, with any changes usually effective from 1 April. No performance conditions apply to the payment of salary. However, when setting salaries, account is taken of an individual's specific role, duties, experience and contribution to the organisation. As part of the salary review process, the Committee takes account of individual and corporate performance, increases provided to the wider workforce and the external market for UK listed companies both in the financial services sector and across all sectors.	Increases will generally be broadly in line with the average of the workforce. Higher increases may be awarded in exceptional circumstances such as a material increase in the scope of the role, following the appointment of a new executive (which could also include internal promotions) to bring an initially below-market package in line with market over time or in response to market factors.
Benefits	To provide market competitive benefits to ensure the well-being of employees.	The Company currently provides: - car allowance - life assurance - income protection - private medical insurance, and - may pay other benefits as appropriate for the role.	There is no maximum cap on benefits, as the cost of benefits may vary according to the external market.
Pension	To provide retirement planning to employees.	Directors may participate in a defined contribution plan, or, if they are in excess of the HMRC annual or lifetime allowances for contributions, may elect to receive cash in lieu of all or some of such benefit.	Up to 13% of salary.
Annual bonus	To incentivise and reward individuals for the achievement of pre-defined, Committee approved, annual financial, operational and individual objectives which are closely linked to the corporate strategy.	The annual bonus targets will have a 90% weighting based on performance under an agreed balanced scorecard which includes an element of risk appraisal. Within the scorecard at least 50% of the bonus will be based on financial performance. 10% of bonus will be based on personal performance targets. The objectives in the scorecard, and the weightings on each element will be set annually, and may be flexed according to role. Each element will be assessed independently, but with Committee discretion to flex the payout (including to zero) to ensure there is a strong link between payout and performance. 50% of any bonus earned will be deferred into an award over shares. These deferred shares will normally vest after three years provided that the executive remains in employment at the end of the three-period. Clawback/malus provisions apply, as described in note 1 below.	The maximum bonus opportunity is 150% of salary. The threshold level for payment is up to 25% for any measure.

Provision	Policy
Notice period	12 months on either side.
Termination payments	A payment in lieu of notice may be made on termination to the value of their basic salary at the time of termination. Such payments may be made in instalments and in such circumstances can be reduced to the extent that the Executive Directors mitigate their loss. Rights to DSBP and PSP awards on termination are shown below. The employment of each Executive Director is terminable with immediate effect without notice in certain circumstances, including gross misconduct, fraud or financial dishonesty, bankruptcy or material breach of obligations under their service agreements.
Remuneration	Salary, pension and core benefits are specified in the agreements. There is no contractual right to participate in the annual bonus plan or to receive long-term incentive awards.
Post-termination	These include six-month post-termination restrictive covenants against competing with the Company; nine-month restrictive covenants against dealing with clients or suppliers of the Company; and nine-month restrictive covenants against soliciting clients, suppliers and key employees.
Contract date	Andy Golding 4 June 2014, April Talintyre 19 May 2014.
Unexpired term	Rolling contracts.

Element	Purpose and link to strategy	Operation	Maximum opportunity
Fees	To attract and retain a high-calibre Chairman and Non-Executive Directors by offering a market competitive fee level.	The Chairman and Non- Executive Directors are entitled to an annual fee, with supplementary fees payable for additional responsibilities including the Chair of the Audit, Remuneration, Nomination and Risk Committees and for acting as the Senior Independent Director. Fees are reviewed periodically. The Chairman and Non- Executive Directors are entitled to reimbursement of travel and other reasonable expenses incurred in the performance of their duties.	There is no prescribed maximum annual increase. The Committee is guided by the general increase in the Non-Executive market but on occasions may need to recognise, for example, change in responsibility and/or time commitments.

Provision	Policy
Period of appointment	Initial three-year term.
Notice periods	Three months on either side. The appointments are also terminable with immediate effect and without compensation or payment in lieu of notice if the Chairman or Non-Executive Director is not re-elected to their position as a Director of the Company by shareholders.
Payment in lieu of notice	The Company is entitled to make a payment in lieu of notice on termination.