year ended 31st march 2016 annual report and accounts€¦ · independent auditor’s report to the...

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Annual Report and AccountsINCLUDING ANNUAL BUSINESS STATEMENT

Year ended 31st March 2016

Annual Report and Accounts for the year ended 31st March 2016

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Directors and Executives as at 31st March 2016 Directors Bankers Auditor M.C. McDermott, FCIB, CeMAP, MIoD National Westminster Bank plc KPMG LLP D.G. Jervis, ACIB 21 High Street 1 Sovereign Square J.M. Boss, FCCA Reigate Sovereign Street M.R. Neve, FCA RH2 9AD Leeds K.E. Halstead, MA (Oxon), FCA LS1 4DA Chief Executive D.G. Jervis, ACIB Finance Director J.M. Boss, FCCA Compliance Manager, Secretary/MLRO D.P.J. Old, CeMAP, PC.dp

Contents

Page

Foreword 2

Chairman’s Statement 2

Business Review and Strategic Report 7

Board of Directors 10

Directors’ Report 11

Corporate Governance Report 13

Directors’ Remuneration Report 17

Statement of Directors’ Responsibilities 19

Independent Auditor’s Report to the Members of Holmesdale Building Society 20

Income and Expenditure Account 21

Statement of Other Comprehensive Income 21

Balance Sheet 22

Statement of Changes in Members’ Interest 23

Cash Flow Statement 24

Notes to Annual Accounts 25

Annual Business Statement 57


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Foreword

Welcome to our review of the year ended 31st March 2016. I‘m delighted to report that we’ve had a highly successful year and have helped more people buy properties and save for their future than ever before.

I became Chief Executive on 1st January 2015 and am enjoying the role. I am passionate about modernising, improving and growing the Society for the benefit of future generations whilst maintaining our reputation for providing excellent customer service.

Financial Highlights

Total assets £190.4m up 15.1%

Profit before tax £1.5m

New Mortgage lending £45.9m, up 11.1%

Capital and reserves £14.7m, up 9.1%

Low mortgage arrears remained stable at 0.32%

David Jervis Chief Executive

Chairman’s Statement

I am proud and pleased to present the Holmesdale Building Society’s 161st annual report. Our year which ended on 31st March 2016 has seen growth of 15.1% and excellent pre-tax profits of £1.5m. I must here pay tribute to our

former Chairman, Mark Thompson, who led Project Spark which included producing a new corporate plan that has substantially improved the performance of the Society and created the foundation for the results I am now able to report. Mark stepped down from his roles as Chairman and Director of the Society in January 2016 due to his other work commitments, having devoted much of his time to the Society over the previous few years. We wish him every success in his ventures away from the Holmesdale. Your Board is fully committed to keeping the Society an independent, strong and vibrant entity based on values that have stood the test of time. While banks now recognise the need to look after their customers, they still struggle to provide the service, flexibility or commitment that we do. Straightforward values and respect for our Members have been at the core of the business and will remain unchanged, whatever the climate. Indeed, in an age of automation we believe personal service is more important than ever. Business objective The principal objective of the Society is to make it easy for people to buy a home and save for the future through straightforward products at attractive rates, personal attention, and complete security. Economic environment We continue to operate in an exceptional economic environment, currently affected by uncertainty caused by the referendum on EU membership. House prices,

particularly in our area of the south east have continued to rise, though predictions are that future increases are likely to be more modest. The Bank of England base rate has remained at an historic low of 0.5% since March 2009 and its forecasts of an increase have been pushed back further as a result of the state of the global economy. The buy-to-let sector faces some changes as the government tries to prevent the market becoming overheated. Changes to tax and stamp duty are likely to deter many individuals from entering the market. Meanwhile, ISAs continue to dominate the savings market, with a number of new initiatives being announced in recent budgets, the most recent being Lifetime ISAs, following on from the Help to Buy ISA. The Society continues to monitor these developments and will introduce new products when appropriate. Savings The savings market remains challenging, and whilst we have needed to make some reductions in our rates to reflect falling savings and mortgage rates from our competitors, and to maintain prudent levels of liquidity, we have tried to minimise the impact wherever possible by offering a number of loyalty rates for existing members. There is no sign of an increase in rates, and indeed the pressure continues to be downward. We do however recognise that savings income is a material factor for many of our Members and the Board remains vigilant on this issue. We offer a broad range of accounts to suit the needs of everyone, from youngsters to home savers, easy access to fixed term bonds. Our corporate deposits for clubs, associations and charities have proved especially popular through this year. During the year, our retail savings and deposit balances have increased by £20.8m.


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Chairman’s Statement (continued) Mortgages Record gross lending of £45.9m was achieved which is an increase on the £41.3m achieved in the previous year. Mortgage rates have increasingly come under pressure during the year and the volume of lending that we have achieved only serves to reinforce the level of service that our mortgage team provides. After taking into account repayments and redemptions, our net lending amounted to £19m. Our mortgage book continues to experience a low level of arrears, with lending decisions undertaken on an individual basis to protect the Society and offer a high quality and balanced response to borrowers. Manual underwriting allows the Society to focus on customers who value a personal approach or require a more sophisticated understanding of their circumstances. We have a broad range of products available and our personal approach enables us to assist many different types of borrower including first-time and subsequent buyers, shared ownership applicants, those borrowing into retirement, those building their own homes and re-mortgage borrowers to name but a few. Financial results This year’s financial results were excellent, particularly in terms of profit, where we were able to benefit from good margins on our lending in the early part of the year and an improved arrears position which allowed us to release a large part of the provisions we were holding against potential bad debt. Our capital ratios have been helped by this year’s profits and are a key indicator of the continuing strength of the Society. We continue to invest in our IT systems, our processes and our people to enable the Society to compete in a rapidly evolving marketplace. The refurbishment of our building has been delayed but we hope to complete this during the forthcoming year to provide a better environment for our staff and Members. Information Technology We are constantly investing in IT and this year we have implemented a number of changes to meet regulatory requirements. We have commenced a project to scan documents to make them easier to retrieve. This will also free up space previously occupied by paper documents. We are currently working on a project to launch an internet savings account and electronic mortgage applications for intermediaries. Regulatory and industry developments The last twelve months has seen a great amount of new regulation which has required a good deal of

resource as we have worked to ensure compliance in the required timeframes. It is a tribute to the Society’s staff that they have successfully coped with a number of regulatory projects running alongside their day-to-day business duties. The Senior Manager’s Regime, which came into effect on 7th March 2016 seeks to ensure that there is a clear identification and allocation of responsibilities to the Directors responsible for running the Society and to impose criminal sanctions against those found to be in breach. This follows well-publicised failings in other firms whose culture has been found lacking. The Mortgage Credit Directive came into effect on 21st March 2016. This has caused us to change some of our processes as well as bringing some products, such as consumer buy-to-let, within the scope of regulation. Our full Annual Accounts are significantly longer than those of previous years. This is due to changes the Financial Reporting Council has made to the way firms report their accounts. This has created the Financial Reporting Standard (FRS 102) which we are now following. As a consequence, we have had to restate our 2015 results, which now show a smaller profit, and the impact on our 2016 figures is to increase profit beyond what we would have reported using our historic approach. This does not mean that previously stated accounts were incorrect; it is just a change in the way the figures are calculated. Risk Management and Internal Controls We have a Compliance Manager and a Regulatory Risk and Reporting Manager who both play an active part in our Audit Risk and Compliance Committee (‘ARCC’). We conduct an annual review of risk management and internal controls which is reported to the ARCC. Board of Directors I mentioned earlier that Mark Thompson had resigned from his role as Chairman and Director in January of this year and we wish him every success as he concentrates on his roles outside of the Society. Hannah McCaughey and Sarah Wilkinson also resigned as Non-Executive Directors during the year, and again we wish them well in their careers. Following these resignations, we have recruited Joanne Hindle and Jan Smith as Non-Executive Directors, via external advertising and by using the search agency, Fletcher Jones. Joanne lives close to Reigate and has a compliance and legal background with extensive experience in financial services. She is currently the Chairman of a Friendly Society and


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Chairman’s Statement (continued) combines this with a number of other roles. Jan Smith has a strategic marketing and customer service background, with significant experience in the financial services and other sectors. She recently completed 10 years’ service as a Vice Chairman/Senior Independent Director on the board of a larger Building Society before standing down and holds a number of other non-executive roles. I joined the Society as Non-Executive Director in October 2015 and was elected Chairman following Mark Thompson’s resignation. I bring more than 30 years’ experience of senior management with other small Building Societies. I also spent some time with the Society in a consultancy role supporting the creation and implementation of Project Spark. I am currently undertaking the role on an interim basis and it is intended that a new Chairman will be appointed in due course. Staff and management The Society is committed to the principles of diversity. We strive to create an environment where the contributions of our employees are recognised and valued, providing a working environment which is safe and accessible to all and one which promotes dignity and respect, free from unfair treatment, discrimination and harassment. At last year’s Annual General Meeting, the Society congratulated its longest serving member of staff, Colin Dyde, who, on 4th August 2015, celebrated 40 years of service to the Society and its Members. He was presented with a wrist watch to thank him for his long service. Back in 1975, when Colin first joined us, Margaret Thatcher was the new leader of the Conservative party; inflation reached 24.2%; the Society’s premises at 43 Church Street were worth £85,000 and Society assets were £9.2m (they are now £190.4m). Colin’s record of serving the people of Reigate and the surrounding area is something to which everyone at the Holmesdale aspires. After 11 years’ service with the Society, Nick Pettitt left from his role as Secretary and Risk Director to take up a similar position with a new lender. I would like to take this opportunity to thank him for his contribution and loyal service. In his place we have welcomed Dave Old who brings a wealth of compliance expertise, gained from a Building Society and a number of mortgage lenders.

We are also pleased to welcome Dave Johnson who has joined as Head of Lending. Dave has considerable lending experience gained from a number of lenders and, in his last role, worked for a large Building Society. I would like to record the Board’s appreciation of the excellent contribution made by all staff and we remain grateful for their hard work. The team continues to provide a high level of personal, friendly and responsible service to all Members. Community Initiative Supporting our local community has always been important to the Holmesdale, where we regularly support local initiatives. Our approach is outlined on our “In the Community” section of our website. Some recent examples of local community initiatives that have been supported by the Holmesdale are below.

Holmesdale staff complete the Run Reigate 10k and raise £650 in support of a weekly free

lunch service for those in need in our local community

Two of the Holmesdale Building Society team – Dave Johnson and Ian Giles – presented Phil Andrew, Vicar of St Mary’s Reigate, and Chris Gladstone, Organiser of St Mary’s Easter Project, with a cheque for £650. The Easter Project provides a free lunch every Saturday at St Mary’s Church Centre for the homeless, lonely and disadvantaged in our local community. This donation has come from friends, colleagues and Society Members plus a top-up donation from the Society. The sponsorship was for Dave and Ian’s completion of the 2015 Run Reigate 10k where they both completed the course in under 50 minutes and achieved a very respectable 48th and 49th place out of 655 runners.


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Chairman’s Statement (continued)

Redhill and Reigate Marlins Swimming Club gets sponsorship

The Society has sponsored Redhill and Reigate Marlins Swimming Club. David Jervis, Chief Executive, presenting the cheque to Marlins chairman Mark Mendoza at a club swimming session at Donyngs Leisure Centre. David Jervis said, “The Holmesdale is committed to supporting local initiatives and we are proud to be associated with the Marlins Swimming Club. We fully support their efforts in bringing swimming to the children of the borough.” Mark Mendoza thanked David Jervis and The Holmesdale for their support and said, “This is the beginning of a long-term relationship with the only truly local Building Society in the area. We are pleased to be supported by local organisations such as The Holmesdale and we look forward to other businesses coming forward to support such an important cause.”

“Thanks for our shed” – local Childminder Allotment Group gets grant

from the Holmesdale

A group of Reigate and Redhill childminders have formed a Childminding Allotment Group and created a plot which they use to teach the children in their care about many aspects of the outdoors, such as growing fruit and vegetables, staying healthy, keeping safe and working as a team. The Group is made up of seven locally based childminders, many of whom are rated “Outstanding” by Ofsted. “We are always keen to take learning to the outdoors where possible,” said Mandy Race. “Our children benefit hugely from getting stuck in and learning by actively taking part in every process from planting seeds, caring for them, watching them grow over time and then eventually harvesting their produce. I don’t think any of us anticipated just how much the children would love being down at Tot’s Patch, a name thought up by one of the children.” The group soon realised, however, that they would need somewhere to store equipment for the children and were “absolutely delighted” when the Society, agreed to support them and provide the funds to purchase a shed. Mandy added, “They are now learning the importance of how packing away the tools at the end of each session is good practice to keep the plot safe and tidy for all as well as encouraging great teamwork!”

Holmesdale wins "Best Dressed Christmas Window" competition

Reigate Business Guild ran a “Best Dressed Christmas Window” competition in time for the Reigate Christmas Fayre held on 5th December 2015. Our festive window was judged to be the best in the town. Alison Heffernan, the Chief Executive’s Secretary, was responsible for most of the decorating and is extremely proud of the achievement. Pictured above (left to right) are Holmesdale employees Alison Heffernan, Sarah Fish and Colin Dyde who helped put the window display together.


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Chairman’s Statement (continued)

Christmas Jumpers to Provide Lunches for Disadvantaged People

The Holmesdale staff wore their woollies for National Christmas Jumper day on 18th December, raising further funds towards St Mary’s Church Easter Project. The project provides a free lunch every Saturday at St Mary’s Church Centre for the homeless, lonely and disadvantaged in our local community.

Holmesdale supports The Lucy Rayner Foundation’s annual event

Pictured from left to right – Jenny Rayner (TLRF trustee), Sam Page (Savings Supervisor), Ed Suter (Cashier/Administrator), Emma Rayner (TLRF trustee).

The Holmesdale has provided sponsorship for The Lucy Rayner Foundation’s 4th annual ball, which is being held in October. This is a local charity set up in remembrance of Lucy Rayner who went to school with a number of our staff. The charity aims to promote and raise awareness of the physical and mental health of persons suffering from depression, particularly – but not exclusively – young adults. Looking Forward This has been an exceptional year, particularly in terms of profit and service to Members. We believe that next year will be challenging as pressures in both the mortgage and the savings market will squeeze our margins. However our commitment to our key principles of security, service, fairness and flexibility, should enable the Society to continue to see healthy growth. We will continue to adapt and develop our service to meet the changing needs of our Members. To this end, we welcome feedback, whether it be good or bad, to enable us to improve our service to you. We will concentrate on our core aim of providing value to Members by offering simple, attractive and safe savings and mortgage products that meet your needs. As such, I believe that the Society is well placed to take advantage of the many opportunities ahead that will continue to exist for an independent, regional financial service provider.

Mike McDermott Chairman

10th June 2016

there’s no place like…


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Business Review & Strategic Report

Overview The Business Review and Strategic Report sets out how the Society will continue to strive to achieve its vision and outlines the key performance indicators the Board uses to measure the Society’s progress. Capital is our key measure of financial strength, and ensuring we generate profits is important to enable the business to grow and build its financial strength. This is a key factor in maintaining the security of our Member interests and providing the Society with resilience in the long term. The greater the capital the Society holds the more flexibility it is able to exercise in investing in the future and providing better products and services for its Members. The industry continues to experience disproportionately high levels of regulatory compliance costs, especially where smaller organisations are concerned, and this trend promises to continue. These costs add even greater pressure in seeking to build a strong capital buffer for the future. As we remain firmly committed to mutuality, we do not need to maximise our profits to pay shareholders. It is however essential that the right balance is struck in our measures of success: supporting our Members, generating sufficient profit to maintain a strong Balance Sheet and taking long-term decisions to invest in the future development of the business. Our primary purpose remains to provide a secure home for our Members’ savings, allowing the Society to lend to borrowers and enable home ownership. Performance against objectives We monitor our progress using a number of non-financial and financial key performance indicators (KPIs), aligned to our strategic goals. The following sections summarise how we performed against our KPIs during 2016. Our Financial Strength Our financial strength is of fundamental importance to our Members. Therefore, there is a clear focus on maintaining strong capital levels. In particular there is focus on the Common Equity Tier 1 (CET 1) ratio, and delivering sustainable profits which provide a balance between ensuring the business is financially strong and ensuring we are providing good long-term value for our customers.

Profit before Tax for the financial year ended 31st March 2016 was £1,543,042 (2015: £68,427) as presented under FRS 102. Improvement in the Society’s performance was driven by strong performance with mortgage growth, underpinned by a healthy increase in our Savings balances.

Net interest income is the amount earned on assets (mortgages, other loans and liquidity), less that paid on

liabilities (retail savings and wholesale funding), and includes the unwind of the Ecclesiastical Financial Advisory Services (‘EFAS’) discount and retention over their expected life. The Society’s net interest margin, which measures net interest income as a percentage of assets, increased to 1.82% for the year, up from 1.38% in 2015. The improvement in the Society’s net interest income was the result of increased mortgage lending at competitive rates, without increasing our credit risk, together with continuing prudent management of the retail savings portfolio by offering attractive rates to savers which also deliver sustainable returns for the business. That, coupled with a decision to retain strong balances of relatively cheap wholesale funding in the year, has seen the increased margin directly contribute to the improved profitability this year.

Administrative expenses for the Society increased by 7.5% to £2,058,658 (2015: £1,915,454). We continue to focus on managing costs to offset wage inflation and the ever increasing need to invest further in regulatory compliance.

We recognise that our staff are key to ensuring the Society is able to deliver the best possible outcome for our customers, whilst ensuring that we keep the longevity of our product offering in sight. To support our growth ambitions we have invested in attracting people with the right skills into the Society. In trying to encourage long-term performance targets, our reward strategy is an important part of retaining the right skills and experience and reinforcing our culture. Importantly, delivering a fair outcome for our Members will remain at the forefront, ensuring that any remuneration relating to performance encourages the right behaviours and customer outcomes.

Key Performance Indicator 2016 2015

Total Comprehensive Income £1,247,010 £62,370

Administrative Expenses £2,058,658 £1,915,454

Net Interest Margin 1.82% 1.38%

Management Expenses ratio 1.21% 1.29%

Return on assets 0.69% 0.04% The following graph shows how the Society has performed over the past five years in relation to its return on assets and management expenses ratios. The return indicator shows the impact of continued close management of the mortgage products whilst ensuring retail rates are maintained at competitive levels.


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Business Review & Strategic Report (continued) The management expenses ratio has remained broadly stable from 2015 to 2016, with a small decrease in 2016.

Our Customers A key measure of success as a mutual is the growth of our membership and mortgage and savings balances. We grew net mortgage balances by 16% (2015: 29%), Member savings balances by 11% (2015: 3%) and Corporate deposits by 41% (2015: 118%). Even within our prudent credit risk appetite we continued to achieve strong growth. This demonstrates our success in delivering products and services that are valued by both new and existing Holmesdale Members. Mortgages:

“making it easy for people to buy a home...”

Gross mortgage advances totalled £45.9m (2015: £41.3m) in the year. We aim to grow our customer base in a sustainable manner, bringing the benefits of membership to an increasing number of customers going forward. There was a credit to the Income and Expenditure Statement of £207,533 for loan impairments (2015: £177,440 charge), due to the migration to FRS 102 accounting and the release of a large provision made in 2015 for a mortgage that redeemed this year without loss. The performance of the Society’s prime residential mortgage book remains good and arrears (defined as the number of all mortgages with arrears greater than 2.5% of its balance, as a percentage of the total number of mortgages) have remained largely constant at 0.32% (2015: 0.31%). Through actively working with our Members in times of financial difficulty we have been able to help Members in arrears back to recovery. Where appropriate for customers, the Society applies a policy of forbearance. This may be applied where the actual or apparent financial stress of the customer is considered to be short-term with a potential to be recovered. Forbearance may involve a reduction in the monthly payment (known as a concession), a conversion to interest only or a mortgage term

extension. These strategies are undertaken in order to achieve the best outcome for both the customer and the wider membership through dealing with issues at an early stage.

2016 2015

£ £

Fully secured on Residential Properties 137,054,737 116,965,213

Fully secured on Land 3,893,326 4,782,574

140,948,063 121,747,787

Residential Provision 261,339 252,623

Commercial Provision - 216,249

261,339 468,872

Savings:

“making it easy for people to ... save for the future…”

As a Building Society, the Holmesdale is required to obtain the majority of its funding from retail deposits and the Society retains a strong retail base, with limited reliance on the wholesale market. As a result of the continued availability of cheap funding through the Funding for Lending Scheme and the Bank of England Base Rate continuing at only 0.5%, there are few low risk options available for the Society for investment purposes in order to maximise its return on liquidity. However, as a mutual Building Society, our focus continues to be on offering competitive products to our Members.

0.0%

0.4%

0.8%

1.2%

1.6%

2012 2013 2014 2015 2016

Average %

Return on Assets Management Expenses

-

20

40

60

80

100

120

140

160

2012 2013 2014 2015 2016

£m

Mortgage Book

Gross Mortgage Lending Mortgage Asset Balances


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Business Review & Strategic Report (continued)

At 31st March 2016, £166.2m (2015: £145.4m) of our funding came from retail savings and deposits, representing 95% (2015: 96%) of our total funding. In 2016, retail savings balances increased due to strong retention of existing savings balances and the attraction of new customers through competitive rates – a particular success was the launch of our 1-year fixed rate ISA in the Summer of 2015.

2016 2015

£ £

Shares 142,741,614 128,767,175

Wholesale Borrowings 8,122,591 5,457,261

Deposits 23,494,703 16,646,330

174,358,908 150,870,766

Wholesale funds are primarily other Building Societies investing in the Holmesdale and we use this relatively cheap funding to manage differences in the rate of growth between our mortgage business and savings business. While wholesale funding may form part of our funding mix going forward, it will only ever represent a small proportion and will be complemented by other channels.

Capital

The following table shows the Society’s Free, Gross, T1 , CET1 and Total Capital ratios. The Gross and Free ratios are defined in the Annual Business Statement. A key indicator of the Society’s 5 year Corporate Plan is its capital strength and all targets are approved whilst ensuring capital resilience is maintained. The Total Capital Ratio has increased and reflect the strong performance over the past year, whereas the Gross and Free ratios have decreased due to the healthy inflows of retail deposits. The Prudential Regulation Authority (‘PRA’) regulates the Society, which is required to manage its capital in accordance with the rules and guidance issued by the PRA under CRD IV. The capital requirements of the Society are monitored on an on-going basis to ensure the minimum regulatory requirement is always met and that the Society has sufficient

levels of capital for current and projected future activities. CRD IV requires the Society to conduct an assessment of the adequacy of its capital and resources; this is its Internal Capital Adequacy Assessment Process (ICAAP). The Society updates its ICAAP at least annually ensuring it includes all emerging risks and removes all risks that are no longer relevant. Details of the Society’s Basel III disclosures for Pillar 3 are available on our website via: http://www.theholmesdale.co.uk/about-us/financial-reports/.

2016 2015

Gross Capital Ratio 8.42% 8.92%

Free Capital Ratio 7.93% 8.38%

CET1 Ratio 19.6% 19.0%

T1 Capital Ratio 19.6% 19.0%

Total Capital Ratio 19.8% 19.3%

Liquidity

The Society’s liquidity ratio (as a percentage of shares, deposits and borrowings) at 31st March 2016 was 27.5% (2015: 27.9%). The Society continues to hold healthy levels of liquid assets to support business and counter economic uncertainty, but intends to maximise the return on its cash by using it to lend in line with its growth strategy over the coming years. The Liquidity Coverage ratio (LCR) has been introduced this year as a key liquidity measure and is designed to ensure that financial institutions have the necessary assets on hand to manage any short-term liquidity disruption. The Society’s LCR at 31st March 2016 was 553% (2015: 228%), which is above the current regulatory requirement of 80% and the target limit of 100%. The Society regularly conducts an Individual Liquidity Systems Assessment (ILSA) in accordance with the Board’s requirements, and will change to an Internal Liquidity Adequacy Assessment Process (‘ILAAP’) later in the year. The Board remains satisfied that the Society has sufficient liquid assets at its disposal in order to meet its obligations as they fall due.

2016 2015

Liquid Assets £47,869,328 £42,017,789

Liquidity Ratio 27.5% 27.9%

Liquidity Coverage Ratio 553% 228%

Jeff Boss Finance Director 10th June 2016

- 20 40 60 80

100 120 140 160 180

2012 2013 2014 2015 2016

£m

Share & Deposits balances

Share & Deposits balances


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Board of Directors (at the date of signing the accounts)

Mike McDermott Chairman (59) Mike joined the Board in October 2015 and became Chairman in January 2016. Mike has worked in senior management roles with small Building Societies for more than thirty

years including twelve years as Chief Executive of a Building Society. More recently, Mike has provided support to a number of Building Societies and other financial services firms and currently works as a Business Adviser providing advice and support to small and medium sized businesses.

David Jervis Chief Executive (52) David joined the Board on 1st September 2014 and was appointed Chief Executive on 1st January 2015. He has worked in Financial Services for over 30 years including five years

on the Board of a top 10 Building Society as Operations Director. David started his career on a fast track development scheme in a high street bank where he qualified as an Associate of the Chartered Institute of Bankers. He serves on the Assets, Liabilities and Management Committee and on the Audit, Risk and Compliance Committee. He is married with two adult daughters.

Jeff Boss Finance Director (39) Jeff joined the Holmesdale in March 2014. He is a Chartered Certified Accountant and has, since 2001, worked in Financial Services across a number of disciplines ranging from

Fund Management to Retail Banking. His focus has primarily been Financial Control, spanning multi-European jurisdictions. Originally from South Africa, Jeff moved to the UK in 1999 after completing his Bachelor of Commerce Degree and has settled in Walton on Thames.

Martin Neve Senior Independent Director (65) Martin joined the Board in November 1995. He was Chairman from July 2002 to September 2013 and is now the Senior Independent Director and chairs the Assets, Liabilities and

Management Committee. Martin trained as a Chartered Accountant in London and became a partner when the London practice opened up an office locally. He was based in Reigate for 27 years and, following a merger, his office is now based in Crawley. His clients range from owner-managed businesses to quoted companies and therefore Martin has a broad range of experience in auditing, accounting and taxation matters. His extracurricular activities include assisting on the financial side of local charities. He is married with adult daughters.

Keith Halstead Non-Executive Director (59) Keith is a Chartered Accountant living in Epsom, Surrey and is a partner in Kingston Smith LLP Chartered Accountants, a top 20 accountancy firm, and is based at their Redhill

office. He trained with Ernst & Whinney (now Ernst & Young), a top 4 practice, and has been a partner in the Chartered Accountancy profession for over 20 years. He specialises in family financial planning and tax planning for a wide variety of individuals and owner-managed businesses. He joined the Board in February 2005. Keith is Chairman of the Society’s Audit, Risk and Compliance Committee. He is married with a daughter at university and a son at a local school.

Joanne Hindle Non-Executive Director (58) Joanne Hindle joined the Holmesdale Board in May 2016 and is serving on the Audit, Risk and Compliance Committee and the Assets, Liabilities and Management Committee. She is

a lawyer by background and has worked in financial services in a variety of roles for 30 years. Her last executive role was as an executive director for 8 years for a major disability insurer. For the last 8 years she has had a portfolio career including serving on the board of, and now chairing, Shepherd’s Friendly Society and acting as legal adviser to part of the AXA Group. She also serves on the board of a company in the South West of England which helps the long term unemployed into work.

Jan Smith Non-Executive Director (69) Jan joined the Holmesdale Board in May 2016. She is a Strategy, Marketing and Customer Service specialist with extensive experience in the financial services sector at Board level for

First Direct, TSB, and LV=. For the last 17 years, she has run her own strategic marketing consultancy. Jan is a Non-Executive Director at Which? Financial Services and the Council for Licensed Conveyancers. She is also a Trustee and Council member at AQA. She recently stepped down as Vice Chairman/Senior Independent Director at Saffron Building Society after 10 years and has held other Non-Executive roles in different organisations such as the Royal Mint and HM Land Registry. Jan will serve on the Audit, Risk and Compliance Committee and the Assets, Liabilities and Management Committee.


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Directors’ Report

The Directors have pleasure in presenting their Annual Report and Accounts for the year ended 31st March 2016. As set out in the statement of accounting policies, the Annual Report and Accounts are prepared in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” . The financial information given in this Directors’ Report is taken from the statutory accounts prepared on this basis.

Business Review The Chairman’s Statement and the Business Review and Strategic Report comment on the performance of the business and its future objectives. Financial Risk Management Objectives and Policies The Society adopts a policy of low exposure to risk, which is consistent with its risk appetite, the objective of which is to minimise the impact of financial risk upon its performance. Financial and other risks faced by the Society include: Liquidity Risk; Credit Risk; Interest Rate Risk; Market Risk; Operational Risk and Regulatory Risk and are summarised in the section below (Principal Risks and Uncertainties). See Note 22 in the Notes to the Annual Accounts for an analysis of the credit, liquidity and interest rate risks affecting the Society’s assets and liabilities.

Principal Risks and Uncertainties Liquidity Risk concerns the Society’s ability to meet its financial obligations as they fall due as a result of imbalances in the cash flow of its activities. The Society has policies in place to ensure that it maintains sufficient funds in a liquid form at all times, so that the Society can meet its liabilities as they fall due, thereby maintaining public confidence in the solvency of the Society. Liquid funds in the form of readily realisable investments are maintained well above the regulatory minimum and the Society is not dependent on wholesale funding as the majority of our activities are funded by retail deposits.

Credit Risk arises primarily from mortgage loans, but also as a result of the Society’s investments as part of its treasury activities. The Society has policies in place to ensure that mortgage loans and treasury investments are transacted strictly in accordance with prudent policy limits thereby minimising risk and reflecting the Board’s stated risk appetite. As a responsible lender, the Society uses a number of forbearance measures to assist those borrowers who are, or could be, approaching a period of financial difficulty. In such cases, the Society may agree to a temporary payment concession or a temporary transfer to interest only payments in order to reduce the financial pressure on the borrower. We expect borrowers to resume normal payments as soon as their financial position improves. The Society offered forbearance measures for one mortgage account with a total

balance of £888,749 as at 31st March 2016 (2015: £870,585, 6 cases).

Interest Rate Risk is the risk to profits and/or capital arising from movements in interest rates, or imbalances within the Society’s structure relating to the interest rate basis. The Society currently has limited appetite for exposure to interest rate or basis risk and regular monitoring of both the interest rate gap and the basis risk are reported to the Assets, Liabilities & Management Committee (‘ALMCo’) on a monthly basis.

Market Risk incorporates the loss of income as a result of changes to interest rates. The ALMCo has delegated authority from the Board to manage exposure to market risk and approve all changes to the Society’s interest rate structure.

Conduct Risk is the risk that the Society does not treat its members fairly resulting in poor customer outcomes. The Society has in place processes and controls to ensure that all aspects of the business consider the customer impact, from product design to customer literature. Conduct risk is monitored at the ARCC and at Board, and it is the responsibility of all employees at the Society to ensure that the customer is central to the way we conduct our business.

Operational Risk is associated with the Society’s internal processes and systems and the potential for these to not function properly, or a risk arising from external events. The management of operational risk, which includes fraud, regulatory risk, IT risk and risk associated with both organisational and operational change, is the collective responsibility of senior management.

Regulatory Risk is the risk that the volume, complexity and cumulative effect of regulatory changes may adversely impact the Society’s ability to compete and function effectively.

Going Concern The Board regularly engages in a forward planning process where it considers future growth, profitability, liquidity and level of capital both in normal market conditions and various stressed scenarios. As a result of these considerations, the Directors are satisfied that the Society has adequate resources to continue in business for the foreseeable future and that they consider the Annual Report and Accounts, taken as a whole, to be fair, balanced and understandable and provide the information necessary for Members to assess the Society’s performance, business model and strategy. As a result, the Board was satisfied that the Society is continuing as a Going Concern, and the accounts have been prepared on this basis.

Directors The following persons were Directors of the Society during the year: J.M. Boss, K.E. Halstead, D.G. Jervis, H.R. McCaughey (resigned 30th September 2015), M.C. McDermott (appointed 7th October 2015) M.R. Neve,


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Directors’ Report (continued)

M.A. Thompson (resigned 20th January 2016) and S.F. Wilkinson (resigned 30th September 2015). The following persons were appointed as Directors of the Society after the year-end: J. Hindle and J.E. Smith.

Political and Charitable Donations The Society made no political donations in the year (2015: £nil) but has made £392 (2015: £200) of charitable donations and has sponsored local events during the year and incurred community expenditure of £2,447 (2015: £2,280). Auditor KPMG LLP has expressed its willingness to continue in office and a resolution for its re-appointment will be proposed at the Annual General Meeting.

Mortgage Arrears The Society has no appetite for material credit losses and keeps arrears to a minimum by maintaining high credit quality standards and robust underwriting rules. During the financial year there was a low level of accounts more than twelve months in arrears, with the year-end positions shown in the table below.

Accounts >12 months in arrears 2016 2015

Number of Accounts - 1

Value of arrears - £74,793

Value of Loan - £1,260,031

Key Performance Indicators The Directors use a wide range of KPIs to measure the Society’s performance. Some of the main ones, adjusted for FRS 102 for 2015 & 2016 (2012 – 2014 still reflect UK GAAP), are as follows:

KPI Relevance 2016 2015 2014 2013 2012

Total Comprehensive Income

Adds to the Capital that underpins growth and improves resilience in times of stress £1,247k £62k (£191k) £7k £29k

Gross Mortgage Lending Conservative lending ensures long-term security of the business £46m £41m* £17m £14m £24m

Net Mortgage Lending A measure of the growth in the main source of revenue generation £19m £21m* (£2m) £5m £10m

Shares & Deposits balance The Society seeks a diversified product mix that offers attractive interest rates £166m £145m £133m £123m £127m

Mortgage Asset balance The mortgage book is the principal source of revenue for the Society £141m £122m £95m £97m £92m

Total Assets Asset levels indicate the resources available to the business to generate future returns £190m £165m £147m £137m £141m

Capital A measure of the Society’s financial strength and its ability to absorb losses £14.7m £13.4m £13.4m £13.6m £13.6m

Gross Capital % of Shares & Borrowings

Such capital provides a financial cushion against any losses that may arise in the Society’s business and therefore protects Members 8.41% 8.89% 10.12% 11.06% 10.74%

Free Capital % of Shares & Borrowings

As with the gross capital %, but focussed on short-term coverage 8.06% 8.49% 9.52% 10.36% 10.06%

Management Expenses % of Mean Assets

Managing costs is part of an efficient business model and improved profitability 1.21% 1.29% 1.22% 1.13% 1.02%

Liquid Assets % of Shares & Borrowings

Liquidity is essential for the Society to manage its obligations as they arise 27.5% 27.9% 38.2% 31.7% 37.4%

Total Asset Growth Asset growth indicates that more resources are available for future investment 15.1% 12.8% 6.9% (2.6%) (3.7%)

Arrears (>2.5% of balance) A measure of the Society’s lending prudence and the risk in its portfolio 0.32% 0.31% 0.47% 0.80% 0.88%

*Excludes impact of mortgage book acquisition

M.C. McDermott On behalf of the Board of Directors

10th June 2016


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Corporate Governance Report

The Board of Directors is responsible for the governance of the Society and setting its strategic direction within a framework of prudent and effective controls which enable risk to be assessed and managed. This report provides Members with information on the Society’s Corporate Governance Framework. The Society has regard to the UK Corporate Governance Code 2014, to the extent that it is applicable to a Building Society.

LEADERSHIP

The Board The Board is responsible for setting the strategic aims of the Society and ensuring that appropriate financial and human resources are in place to meet the objectives and for review of the performance of the Executive team. The Board also determines the framework to enable risk to be assessed and managed. As at 31st March 2016, the Board consisted of two Executive Directors and three Non-Executive Directors whose role is to provide independent challenge to the Executive. Since the end of the financial year the Society has appointed two additional Non-Executive Directors to strengthen the Board. The full Board normally meets eight times a year, with two additional strategy meetings, and adheres to a formal calendar of items for review and decision-making. The Non-Executive Directors also meet twice a year independently, to review all aspects of the Society’s performance. All Directors receive a comprehensive Board report monthly in between meetings setting out the Society’s key measures of performance. The Board has established Committees to consider certain specialist areas in more detail which are listed below. The Committees operate within defined Terms of Reference, details of which can be obtained from our website via: http://www.theholmesdale.co.uk/about-us/our-board-and-management-team/. The Chairman is responsible for the leadership of the Board and its effectiveness. The Society has arranged appropriate liability insurance in respect of its Directors who have access to independent legal and other professional advice, if required, at the expense of the Society.

COMMITTEES – Summary Terms of Reference

Audit, Risk & Compliance Committee (ARCC) The ARCC comprises three Non-Executive Directors and is chaired by Mr K.E. Halstead. Members of the Executive are invited to attend, as appropriate. The ARCC meets six times a

year. Ad hoc meetings may be convened as deemed necessary by the Chairman of the ARCC. The ARCC reviews the effectiveness of the Society’s systems of internal control and monitors compliance with regulatory requirements and relevant codes of practice. The ARCC also monitors and guides all aspects of the Society’s risk management processes based on the three lines of defence approach, ensuring that the Society remains within its stated risk appetite. The ARCC’s other responsibilities include:

reviewing and recommending for approval to the Society’s Board the Directors’ Report, Accounts and Annual Business Statements including the Members’ Review incorporating the Summary Annual Accounts;

recommending the appointment of the external auditors, and monitoring their effectiveness;

reviewing the external auditor’s plan and reports on significant matters and controls;

reviewing and approving the Going Concern Statement;

approving documentation relating to the Annual General Meeting;

approving the Pillar 3 Disclosures (see link from this page of our website: http://www.theholmesdale.co.uk/about-us/financial-reports/);

reviewing, approving and monitoring the internal audit plan, and considering internal audit reports.

Assets, Liabilities & Management Committee (ALMCo) The ALMCo comprises two Non-Executive Directors and two Executive Directors who attend in an ex officio capacity and is chaired by Mr M.R. Neve (Senior Independent Director). The ALMCo meets six times a year. The Chairman of the ALMCo may convene a special meeting of the ALMCo, if an issue arises that cannot wait until the next regularly scheduled meeting and the issue cannot be adequately dealt with via a quorum of ALMCo members, or using the Rapid Response Protocol. The ALMCo actively manages both sides of the Balance Sheet to deliver financial security and profitability to protect Members’ interests. The Board has delegated the following authority to the ALMCo:

determine and implement an asset and liability management strategy for the Society, including its funding and lending activity;

approve all product design and pricing;

manage and approve the Recovery & Resolution Plan including the Contingency Funding Plan.


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Corporate Governance Report (continued)

develop and ensure compliance with the Board approved risk management, liquidity and wholesale funding policies and interest rate risk.

The ALMCo’s other responsibilities include:

Financial Risk Management;

Liquidity;

Funding;

Structural Risks;

Treasury Credit Risk;

Interest Rate Structure;

Review of mortgage applications that exceed normal lending policy.

Nominations Committee The Nominations Committee comprises the entire Board and is chaired by the Society’s Chairman, Mr M.C. McDermott. The Committee reviews the balance of Board skills, independence, experience and knowledge, its structure and composition, and the performance of its Directors. The Committee meets at least annually and, in addition, the Chairman may call a special meeting to discuss the Board Succession Plan and to address matters concerning the appointment of new Directors. Remuneration Committee The Committee comprises the entire Board except that Executive Directors are excluded from Committee meetings when their own remuneration packages or service contracts are reviewed. The Committee is chaired by the Society’s Chairman, Mr M.C. McDermott and meets at least twice annually. The overarching purpose of the Committee is to consider and agree a remuneration policy and philosophy for the Society that is aligned with its long-term business strategy, risk appetite, values and the interests of its Members. The Committee takes responsibility for monitoring compliance with the Regulatory Remuneration Code as it applies to Code staff. Roles of the Chairman, Non-Executive Directors and Executive Directors The Chairman sets the governance agenda, standards and expectations for Board Directors and ensures constructive challenge and openness between Non-Executive and Executive Directors. The Executive Directors are expected to manage the Society under the strategic direction of the Board as a whole.

EFFECTIVENESS

Board Balance & Independence At 31st March 2016, the Board comprises three Non-Executive Directors and two Executive Directors. Two Non-Executive Directors have been appointed since the end of the financial year. In addition, other senior managers are invited to attend meetings, as required. The Board considers that all Non-Executive Directors are independent in character and judgement and are able to provide an objective view of the Society’s activities. The annual review of the Board and its effectiveness also covers the consideration of the balance of skills, experience, independence and knowledge of the Society and the Board, its diversity and how the Board works together as a unit, and other factors relevant to its effectiveness. Two Non-Executive Directors, M.R. Neve and K.E. Halstead, both have relevant financial accounting experience. In addition, Mr M.R. Neve, in his role as Senior Independent Director, is available to receive comments from any Members of the Society or staff on issues that they may wish to raise independent of meetings when the Chairman is unavailable. Details setting out why the Directors seeking appointment or re-appointment are deemed to be suitable are set out in the Members’ Review issued to all voting Members in the Annual General Meeting mailing documentation. Appointments to the Board The Nominations Committee considers all appointments to the Board. The Board maintains a succession plan and produces a skills matrix/specification for vacancies to be filled and to ensure that the appropriate mix of skills, experience, independence, diversity and knowledge of the business is represented on the Board and Committees to enable them to discharge their respective duties and responsibilities effectively. The Board uses a range of sources to advertise Board vacancies including advertising on the Society’s website, external advertising and external consultancies/agencies. The appointment of Directors is based on objective criteria including the ability to meet the requirements of the regulatory Senior Managers’ Regime. The Nominations Committee ensures that Directors are able to commit the time required to effectively fulfil the role, at the time of appointment and on an on-going basis for existing Directors. During 2015/16, one new Non-Executive Director joined the Board, M.C. McDermott (appointed 7th October 2015).


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Corporate Governance Report (continued) The new Non-Executive Director is standing for election by Members at the July 2016 Annual General Meeting. Following the end of the financial year, two new Non-Executive Directors have been appointed to the Board, Joanne Hindle and Jan Smith. These two Non-Executive Directors will stand for election at the Annual General meeting in July 2017. The Society used a firm of external recruitment consultants, Fletcher Jones, that has no other connection to the Society, during 2015/16. It is anticipated that by the end of the financial year, Mr M.R. Neve will have retired from the Board. The Directors will keep the composition of the Board under review and make appropriate appointments when it identifies that additional skills and/or expertise are required. Directors’ Interests The Society requires all Directors to disclose any relevant external interests that may be considered to conflict with their role at the Society, including any directorships that they may hold. The Society also requires all Directors to re-affirm their external interests on an annual basis and to declare at each meeting of the Society any interests that they may have that could compromise the best interests of the Society. Information and Professional Development The Board undertakes an annual review of the information provided to it to ensure that such information is appropriate and sufficiently comprehensive to form a balanced opinion of the Society’s business. Non-Executive Directors attend internal and external training sessions including Building Societies Association and Council of Mortgage Lenders seminars and conferences; Prudential Regulation Authority and Financial Conduct Authority seminars; and they receive copies or extracts of industry circulars and regulatory publications to maintain an adequate knowledge of sector issues. All Non-Executive Directors are expected to complete a range of appropriate electronic training modules and tests on an annual basis. All new Non-Executive Directors participate in a comprehensive induction programme arranged by the Chairman and Chief Executive to ensure that they can provide effective challenge as soon as possible after appointment.

Performance Evaluation The Chairman appraises the performance of all Non-Executive Directors on an annual basis to evaluate overall effectiveness. The SID leads the Board evaluation of the Chairman’s performance. This process is used to inform the decision to recommend a Director for re-election. As the Society is deemed to be smaller than a FTSE 350 company it is therefore not required to undertake an external Board effectiveness review. The Board has engaged external consultants to undertake assessments of all existing and new members of the Board with the objective of ensuring the Society has a fully effective Board. Re-election Policy All Directors are subject to election, in accordance with the Rules, at an Annual General Meeting within 16 months following after their appointment. Non-Executive Directors normally serve for a maximum of three terms of three years. K.E. Halstead and M.R. Neve have both served more than nine years and are subject to annual re-election which is in line with the requirements of the UK Corporate Governance Code relating to the annual re-election of all Directors.

ACCOUNTABILITY

Financial and Business Reporting The Directors’ responsibilities for financial reporting are set out in the Statement of Directors’ Responsibilities on page 19. Following an internal review of the Annual Report and Accounts, the Board has concluded that these Annual Accounts are fair, balanced and understandable. Internal Control & Risk The Board sets the risk appetite appropriate to achieving its strategic objectives and reviews the processes and procedures to ensure robust risk management and internal control systems are in place. Senior management is responsible for designing systems to identify and control risk to enable the Board to be aware of risk management through a quarterly review programme, which is open to challenge. Internal Audit provides an independent confirmation to the ARCC that appropriate procedures are in place and are being followed. The Board receives a formal annual report of the effectiveness of systems and controls from the ARCC. The Board has satisfied itself that a strong culture of compliance operates and that systems are effective and appropriate given the nature of the business activity undertaken. Audit The ARCC oversees the internal and external audit functions as described on page 13.


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Corporate Governance Report (continued)

The appointment or re-appointment of external auditors is recommended by the ARCC and confirmed by the Board on an annual basis. The Society is recommending the re-appointment of KPMG LLP as external auditors to Members at the forthcoming Annual General Meeting. The Society confirms that the external auditor has not been involved in management functions, decision making or assuring the adequacy of internal controls or reporting.

REMUNERATION

The Directors’ Remuneration Report on page 17 details the Board position on UK Corporate Governance Code 2014 principles related to remuneration issues.

MEMBER ENGAGEMENT

The Society communicates with all Members on an individual basis by letter in connection with interest rate changes, rather than advertising the rate change in a range of newspapers. We believe that this individual approach enables us to explain the background and reasoning for the change and to maintain closer contact with our Members. We regularly receive complimentary comments from our Members regarding the standard of our communications and we welcome all comments which are fed into our reporting systems which are reviewed by the Board on a quarterly basis. We distribute a Members’ Survey to provide Members with an opportunity to comment on our products and services and any other issues they feel relevant to their membership of the Society. Members may also contact the Chairman directly via an e-mail link on our website.

All feedback received is then fed back into our review process to ensure that future product/service levels are aligned with our Members’ requirements. Constructive Use of the Annual General Meeting The Society actively encourages Members to take an interest in the affairs of the Society. All voting Members are mailed documentation relating to the Annual General Meeting and are encouraged to attend or to vote on the resolutions. The Society provides pre-paid envelopes to enable Members to send their voting instructions or to appoint a Proxy, if they are unable to attend the meeting, direct to our independent scrutineer, Corporate Mailing Solutions Limited. Members may also vote for resolutions online through a secure website which an increasing number of Members find convenient and suited to their busy lifestyles. The Proxy Voting form provides the opportunity to abstain formally from resolutions should the Member so wish. The Society publishes the results of voting on the Society’s website and in the Banking Hall of our Head Office the day following the Annual General Meeting. At the Annual General Meeting, the Chairman calls for a poll on all resolutions and all proxy votes are recorded. A separate resolution is proposed on each issue including receiving the Annual Report and Accounts. Members will be given an opportunity to submit questions for the 2016 Annual General Meeting prior to the event to ensure that all Member issues are given an appropriate platform. Board and Committee Attendance Record The table below shows, against each Director’s name, the number of meetings of the Board and its Committees at which the Director was present and, in brackets, the number of such meetings the Director was eligible to attend as a member of the Board or Committee.

Director

Board

ARCC

ALMCo

Nom

inations Com

mittee

Remuneration

Comm

ittee

M.C. McDermott, Chairman (appointed to Board 07.10.15; appointed Chairman 25.01.16) 4 (4) 1 (1) 3 (3) 2 (2) 4 (4)

M.A. Thompson, Chairman (resigned 20.01.16) 6 (6) 4 (4) 5 (5) 1 (1) 1 (1)

J.M. Boss, Finance Director 9 (10) 5 (5) 6 (6) 2 (2) 4 (4)

K.E. Halstead, Non-Executive Director 9 (10) 5 (5) - 2 (2) 4 (4)

D.G. Jervis, Chief Executive 10 (10) 4 (5) 6 (6) 2 (2) 4 (4)

H.R. McCaughey, Non-Executive Director (resigned 30.09.15) 2 (6) - - - -

M.R. Neve, Senior Independent Director 9 (10) 5 (5) 6 (6) 2 (2) 4 (4)

S.F. Wilkinson, Non-Executive Director (resigned 30.09.15) 5 (6) - - - -


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Directors’ Remuneration Report for the year ended 31st March 2016

Directors’ Remuneration The Board has an established Remuneration Committee, which comprises all of the Non-Executive Directors. The Committee reviews and approves remuneration policy and service contracts for Executive Directors. This report explains how the Society complies voluntarily with the principles relating to remuneration in the UK Corporate Governance Code 2014 as well as meeting the requirements of the regulator’s Remuneration Code. Remuneration Committee The Remuneration Committee is chaired by the Society’s Chairman, Mr M.C. McDermott and approves the overall remuneration policy and levels of remuneration for Executive Directors. The Committee also ensures compliance with the regulator’s Remuneration Code. The Committee uses a variety of methods for comparing Executive salaries within the Building Society sector including reference to the Building Societies Association (BSA) remuneration survey. Loans to Directors & Staff All loans to Executive Directors, Non-Executive Directors and staff are approved individually by members of the ALMCo on terms available to Members of the Society. Executive Directors’ Remuneration The Board’s policy is to set remuneration levels in order to attract and retain a sufficient number of Executives who are committed to achieving the Society’s strategic objectives. Executive Directors are designated as ‘Code Staff’ under the regulator’s Remuneration Code due to their material impact on the Society’s risk profile. Code Staff are senior managers and colleagues, including Executive and Non-Executive Directors, whose actions have a material impact on the risk profile of the Society. The main components of the remuneration package for Executive Directors are: Basic Salary Basic salaries for Executive Directors take into account the following principal factors:

job content and responsibilities;

individual performance which is assessed annually; and

salary levels for similar positions in comparable organisations.

Executive Directors are excluded from all Remuneration Committee meetings where their remuneration packages are discussed. Payments made to Executive Directors are listed in the table on page 18.

Bonus During the financial year to 31st March 2016, the Society operated a bonus scheme offering up to one week’s basic salary for all employees, based on corporate performance, and up to a further two weeks’ basic salary based on personal performance against individual objectives. The Executive Directors do not participate in these schemes.

The Remuneration Committee designs and approves the Executive Directors’ bonus scheme to align the interest of the Executive Team with the interests of Members and provide incentives that recognise corporate and personal performance. If a range of challenging personal and operational targets is achieved, D.G. Jervis and J.M.Boss can achieve a bonus of up to 15% of basic salary.

Pension J.M. Boss is the only Executive Director that is a member of the Holmesdale Building Society Group Personal Pension Scheme, which is a defined contribution scheme. In lieu of his entitlement to pension contributions, D.G. Jervis opted to receive a cash equivalent sum at the same gross cost to the Society. Other Benefits The Executive Directors are provided with private medical insurance, permanent health insurance and life cover. Service Contracts The Chief Executive and the Finance Director are each employed under contracts, which require six months’ notice by the employer or employee to terminate employment. Non-Executive Directors’ Appointments Non-Executive Directors are appointed by letter for a three year period and ordinarily serve for a maximum of three periods (nine years). Due to the length of service of certain Non-Executive Directors, they are re-elected annually.

Non-Executive Directors’ Fees The Remuneration Committee reviews the level of fees for Non-Executive Directors each year, taking into account data on fees paid in the Building Society sector, the local economy, level of responsibility, personal liability and time commitments. In the year to 31st March 2016, Non-Executive Directors’ fees were increased following a review, conducted by the Chief Executive, which included comparison with peer societies and informal discussion with appropriate recruitment agencies.

Non-Executive Directors are remunerated by fees; are not members of the Society’s pension scheme; and do not have service contracts as their terms of service are set out in an initial letter of appointment. All Directors’ fees are processed through payroll and subject to NI and PAYE accordingly.


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Directors’ Remuneration Report for the year ended 31st March 2016 (continued)

Analysis of Directors’ Remuneration The following tables show each Director’s remuneration for the year to 31st March 2016 with the 2015 comparatives shown in the final column/table. Variance in Fees Totals reflects the number and type of meetings attended by each Director, as well as changes in Board committee structure.

Non-Executive Directors Fees Total 2016 Fees Total 2015

£ £

M.C. McDermott (appointed 07.10.15) 12,082 -

M.A. Thompson (resigned 20.01.16) 25,484 30,800

N.M.H. Fallowfield (retired 24.07.14) - 4,914

K.E. Halstead 22,400 21,400

H.R. McCaughey (appointed 24.07.14; resigned 30.09.15) 8,600 11,891

M.R. Neve 23,630 21,800

S.F. Wilkinson (appointed 26.03.15; resigned 30.09.15) 8,500 261

100,696 91,066

During the year, McDermott Solutions Ltd charged the Society £1,983 for consultancy services to assist with the implementation of the Mortgage Credit Directive. At 31st March 2016 £nil remained unpaid. McDermott Solutions Ltd is a company in which M.C. McDermott, the current Chairman, is a director and a shareholder. Consultancy services were provided by Tiptree House Ltd, a company in which Mr Thompson is a shareholder, in the year ended 31st March 2015; £nil was paid for the year ended 31st March 2016. See Note 25 Related Party Transactions, for more details.

Executive Directors (2016) Salary/Fees Benefits1 Bonus2 Pension

Contributions3 Total 2016

£ £ £ £ £

D.G. Jervis 121,200 15,605 18,180 10,650 165,635

J.M. Boss 92,500 539 13,875 9,250 116,164

213,700 16,144 32,055 19,900 281,799

Executive Directors (2015) Salary/Fees Benefits Bonus Pension Contributions3

Total 2015

£ £ £ £ £

D.G. Jervis (appointed 29.09.14) 70,000 675 3,500 4,000 78,175

K.C. Morgan (retired 31.12.14) 91,597 5,590 - 41,674 138,861

J.M. Boss 90,000 586 9,000 7,500 107,086

251,597 6,851 12,500 53,174 324,122

K.C. Morgan purchased a car from the Society, on 30th March 2015, 3 months after his retirement, for £100. The net book value of the vehicle was recorded at £14,677. No Directors’ bonuses are deferred. M.C. McDermott Chairman of the Remuneration Committee

10th June 2016

1 Included in Benefits in 2016 is a one-off £15,000 relocation package paid to D.G. Jervis. 2 Executive Directors, D.G. Jervis and J.M. Boss, will receive their full bonus payments in June 2016, with no deferral. 3 D.G. Jervis opted, in lieu of his 10% of salary pension entitlement, to receive a cash equivalent sum at no extra gross cost to the Society.


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Statement of Directors’ Responsibilities for the year ended 31st March 2016

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 1986 (“the Act”) requires the Directors to prepare the Society Annual Accounts for each financial year. Under that law they have elected to prepare the Society Annual Accounts in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.

The Society Annual Accounts are required by law to give a true and fair view of the state of affairs of the Society as at the end of the financial year and of the income and expenditure of the Society for the financial year.

In preparing these 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 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 Society.

Directors’ responsibilities for accounting records and internal controls

The Directors are responsible for ensuring that the Society:

keeps proper accounting records that disclose with reasonable accuracy at any time the financial position of the 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 Society 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.


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Independent Auditor’s Report to the Members of the Holmesdale Building Society

Independent auditor’s report to the members of Holmesdale Building Society

We have audited the society annual accounts of Holmesdale Building Society for the year ended 31 March 2016 set out on pages 21 to 56. The financial reporting framework that has been applied in their preparation is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. 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 19, 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 society as at 31 March 2016 and of the income and expenditure 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 financial statements 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.

Andrew Walker (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 1 Sovereign Square Sovereign Street Leeds LS1 4DA

10 June 2016


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Income and Expenditure Account for the year ended 31st March 2016

Note 2016 2015 £ £ Interest receivable and similar income 2 5,774,967 4,330,308 Interest payable and similar charges 3 (2,306,375) (2,038,367) Net interest income 3,468,592 2,291,941 Fees and commissions receivable 142,740 128,713 Fees and commissions payable (112,567) (102,794) Net income from other financial instruments at fair value through profit and loss 15 34,987 4,888 Other operating income 34,149 15,492 Total net income 3,567,901 2,338,240 Administrative expenses 4

- Ongoing (2,058,658) (1,857,067) - Restructuring costs - (43,810) - Loss on disposal of fixed assets - (14,577)

Depreciation and amortisation (90,210) (90,813) 1,419,033 331,973 Impairment losses on loans and advances 8 207,533 (177,440) Operating profit before provisions 1,626,566 154,533 Provisions for liabilities – FSCS 21 (83,524) (86,106) Profit before tax 1,543,042 68,427 Tax expense 9 (304,424) (16,815) Profit for the financial year 1,238,618 51,612

Statement of Other Comprehensive Income for the year ended 31st March 2016

Note 2016 2015 £ £ Profit for the financial year 1,238,618 51,612 Revaluation of tangible fixed assets - - Available-for-sale fair value movement - - Re-measurement of defined benefit obligation 24 10,492 13,447 Income tax on other comprehensive income (2,100) (2,689) Other comprehensive income 8,392

10,758

TOTAL Comprehensive Income for the year 1,247,010 62,370

The notes on pages 25 to 56 form part of these accounts.


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Balance Sheet as at 31st March 2016

Note 2016 2015

Assets £ £

Liquid Assets: Cash in hand and balances held with Bank of England 27,262,579 17,852,616 Treasury bills 499,735 499,743 Loans and advances to credit institutions 10 20,107,014 23,665,430 47,869,328 42,017,789

Loans and Advances to Customers:

Loans fully secured on residential property 137,054,737 116,965,213 Loans fully secured on land 3,893,326 4,782,574 11 140,948,063 121,747,787

Tangible fixed assets 12 732,600 752,191 Intangible assets 14 191,978 177,600 Investment property 13 253,422 222,300 Derivative financial instruments 15 305,930 340,917 Prepayments and accrued income 90,064 94,541 Total assets 190,391,385 165,353,125

Liabilities Shares 17 142,741,614 128,767,175 Amounts owed to credit institutions 19 8,122,591 5,457,261 Amounts owed to other customers 18 23,494,703 16,646,330 Other liabilities 20 972,547 787,409 Deferred tax liability 16 51,341 25,181 Accruals and deferred income 308,217 218,595 Provisions for liabilities 21 45,456 43,268 Total liabilities 175,736,469 151,945,219

Reserves Available-for-sale reserve - - Revaluation reserve 464,592 478,193 General reserves 14,190,324 12,929,713 Total reserves attributable to the Members of the Society 14,654,916 13,407,906

Total liabilities and reserves 190,391,385 165,353,125 The notes on pages 25 to 56 form part of these accounts. These accounts were approved by the Board of Directors on 10th June 2016 and were signed on its behalf by:

………………………………………………………………… M.C. McDermott (Chairman)

………………………………………………………………… J.M. Boss (Finance Director)

……………………………………………………………… D.G. Jervis (Chief Executive)


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Statement of Changes in Members’ Interest Available-for-

sale reserve Revaluation

Reserve General

Reserve TOTAL

£ £ £ £ At 1st April 2014 - 491,794 12,853,742 13,345,536 Total comprehensive income for the year - - 62,370 62,370 Transfer of excess depreciation to general reserves - (13,601) 13,601 - At 31st March 2015 - 478,193 12,929,713 13,407,906

Total comprehensive income for the year - - 1,247,010 1,247,010 Transfer of excess depreciation to general reserves - (13,601) 13,601 - At 31st March 2016 - 464,592 14,190,324 14,654,916

The notes on pages 25 to 56 form part of these accounts. Details of the impact of the transition to FRS 102 on opening Members’ interest are shown in note 26.


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Cash Flow Statement for the year ended 31st March 2016

2016 2015 Cash flows from operating activities £ £

Profit before tax 1,543,042 68,427 Adjustments for Revaluation of investment property (30,222) (5,970) Depreciation and amortisation 90,209 82,263 Loss on disposal of tangible fixed assets - 14,577 Other non-cash items 41,041 (23,711) (Decrease)/Increase in impairment of loans and advances (207,533) 177,440

Total 1,436,537 313,026 Changes in operating assets and liabilities

Decrease/(Increase) in prepayments, accrued income and other assets 4,477 (35,519) Increase in accruals, deferred income and other liabilities 303,108 790,386 (Increase) in loans and advances to customers (19,298,673) (27,608,891)

Increase in shares 13,974,439 3,527,898 Increase in amounts owed to other credit institutions and other customers 9,513,703 14,474,186 (Increase)/Decrease in loans and advances to credit institutions (2,000,000) 3,000,000 Taxation paid 541 -

Net cash generated by/(used in) operating activities 3,934,132 (5,538,914) Cash flows from investing activities

Purchase of Treasury Bills (997,588) (998,035) Disposal of Treasury Bills 1,000,000 1,000,000 Purchase of tangible fixed assets (28,297) (82,034) Disposal of tangible fixed assets - 100 Purchase of intangible fixed assets (56,700) (46,989)

Net cash generated by/(used in) investing activities (82,585) (126,958)

Net increase/(decrease) in cash and cash equivalents 3,851,547 (5,665,872) Cash and cash equivalents at 1st April 41,518,046 47,183,918 Cash and cash equivalents at 31st March 45,369,593 41,518,046

Cash and cash equivalents comprise: 2016 £

2015 £

Cash in hand and balances held with Bank of England 27,262,579 17,852,616 Loans and advances to credit institutions due in 3 months or less

18,107,014

23,665,430 45,369,593 41,518,046


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Notes to Annual Accounts for the year ended 31st March 2016 (continued)

1. Accounting Policies

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

(a) Basis of Preparation

Holmesdale Building Society (the “Society”) has prepared these accounts on the going concern basis and in accordance with the Building Societies Act 1986, the Building Societies (Accounts and Related Provisions) Regulations 1998 and Financial Reporting Standard 102; The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”). The Society has also chosen to apply the recognition and measurement provisions of IAS 39 Financial Instruments: Recognition and Measurement (as adopted for use in the EU). The presentation currency of these Annual Accounts is sterling. All amounts in the Annual Accounts have been rounded to the nearest £. FRS 102 is mandatory for accounting periods beginning on or after 1st January 2015. All prior year comparative figures have been restated in accordance with the requirements of FRS 102. The accounts have been prepared on the going concern basis, as set out in the Directors’ Report on page 11. In the transition to FRS 102 from old UK GAAP, the Society has made measurement and recognition adjustments. An explanation of how the transition to FRS 102 has affected financial position and financial performance of the Society is provided in note 26. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Annual Accounts. Judgements made by the Directors, in the application of these accounting policies that have significant effect on the Annual Accounts and estimates with a significant risk of material adjustment in the next year are discussed in note 1(p).

(b) Measurement Convention The Annual Accounts are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, available-for-sale assets (Treasury Bills), investment property and tangible fixed assets measured in accordance with the revaluation model.

(c) Interest receivable Interest income and expense are recognised in the Income and Expenditure Account using the effective interest method. The effective interest rate (‘EIR’) is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or financial liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Society estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. The calculation of the effective interest rate includes transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability. Interest income and expense presented in the income statement and other comprehensive income (‘OCI’) include:

interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest basis; and

interest on available-for-sale assets calculated on an effective interest basis

(d) Operating Leases Payments (excluding costs for services and insurance) made under operating leases are recognised in the Income and Expenditure Account on a straight-line basis over the term of the lease unless the payments to the lessor are structured to increase in line with expected general inflation; in which case the payments related to the structured increases are recognised as incurred.


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(e) Fees and Commissions Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or financial liability are included in the measurement of the effective interest rate. Other fees and commission income are recognised on an accruals basis when the service has been provided or on the completion of an act to which the fee relates.

(f) Financial Instruments

Recognition The Society initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities on the date on which they are originated. All other financial instruments are recognised on the trade date, which is the date on which the Society becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. Classification

Financial assets The Society classifies its financial assets at inception into the following categories:

o Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market and that the Society does not intend to sell immediately or in the near term. Loans and advances to customers are sums advanced to the Society’s borrowers, secured on property or land. Loans to credit institutions are sums deposited in instant access accounts or short term fixed period accounts with high street banks or Building Societies. Loans and receivables are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method through the Income and Expenditure Account. Impairment losses and gains are recognised in the Income and Expenditure Account.

o Available-for-sale Available-for-sale investments are non-derivative investments that are designated as available-for-sale financial assets. Available-for-sale investments for the Society comprise Treasury Bills. Available-for-sale investments are measured at fair value after initial recognition. Interest income is recognised in the Income and Expenditure Account using the effective interest method.

o Fair value through profit or loss All derivatives are carried at fair value and are initially recognised at the trade date. Gains and losses from changes in fair value are recognised in the Income and Expenditure Account. Financial assets are derecognised when the obligation is discharged, cancelled or has expired.

Financial liabilities The Society classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost or fair value through profit or loss.

Derecognition The Society derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Society neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.


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(f) Financial instruments (continued)

On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed), and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Society is recognised as a separate asset or liability. The Society derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. During the year ended 31st March 2016 the Society has not transferred any financial assets or liabilities to another party.

Measurement Amortised cost measurement The ‘amortised cost’ of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Fair Value measurement ‘Fair value’ is the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction. When available, the Society measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Society uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The Society accounts for derivatives at fair value, with movements in fair value going through the Income and Expenditure Account. A derivative may be embedded in another instrument, known as the host contract. Where the economic characteristics and risks of an embedded derivative are not closely related to those of the host contract (and the host contract is not carried at fair value through profit or loss), the embedded derivative is separated from the host and held on the Balance Sheet within derivatives. Movements in fair value are posted to the Income and Expenditure Account, whilst the host contract is accounted for according to the relevant accounting policy for that particular asset or liability. The Society has an embedded derivative which has arisen from the purchase of the EFAS mortgage book in February 2015 and relates to the Society’s portion of the shared equity mortgages. The instrument’s fair value is estimated using a discounted cash flow model with key inputs being the forecast changes in House Price Index (‘HPI’) and the anticipated run off of the underlying mortgage portfolio. Identification and measurement of impairment At each reporting date, the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is ‘impaired’ when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s) and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably. Objective evidence that financial assets are impaired includes:

significant financial difficulty of the borrower or issuer;

default or delinquency by a borrower;

the restructuring of a loan or advance by the Society on terms that the firm would not consider otherwise;

indications that a borrower will enter bankruptcy;

the disappearance of an active market for a security; or

observable data relating to a group of assets such as adverse changes in the payment status of borrowers.


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(f) Financial instruments (continued)

The Society considers evidence of impairment for loans and advances at both a specific asset and a collective level. All individually significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances that are not individually significant are collectively assessed for impairment by grouping together loans and advances with similar risk characteristics. In assessing collective impairment, the Society uses statistical modelling of historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than is suggested by historical trends. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets measured at amortised cost are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised. A range of forbearance options is available to support borrowers who are in financial difficulty. The purpose of forbearance is to support borrowers who have temporary financial difficulties and help them get back on track. The main options offered by the Society include:

interest only payments; and

payment plans. Borrowers requesting a forbearance option will need to provide information to support the request. If the forbearance request is granted the account is monitored in accordance with our policy and procedures. At the appropriate time the forbearance option that has been implemented is cancelled, with the exception of capitalisation of arrears, and the customer’s normal contractual payment is restored. Loans that are subject to restructuring may only be classified as restructured and up-to-date once a specified number and/or amount of qualifying payments have been received. These qualifying payments are set at a level appropriate to the nature of the loan and the customer’s ability to make the repayment going forward. Impairment losses are recognised in the Income and Expenditure Account and reflected in an allowance account against loans and receivables. Interest on the impaired assets continues to accrue. If an event occurring after the impairment was recognised causes the amount of impairment loss to decrease, then the decrease in impairment loss is reversed through profit or loss.

(g) Tangible fixed Assets Tangible fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses. Where parts of an item of tangible fixed assets have different useful lives, they are accounted for as separate items of tangible fixed assets, for example land is treated separately from buildings. The Society assesses at each reporting date whether tangible fixed assets are impaired. Depreciation is charged to the profit and loss account on a straight-line basis over the estimated useful lives of each part of an item of tangible fixed assets. Land is not depreciated. The estimated useful lives are as follows:

Buildings 50 years

Fixtures and fittings 5-10 years depending on the nature of the asset


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(g) Tangible fixed Assets (continued)

Revaluation Land and Buildings are stated at fair value less any subsequent accumulated depreciation and impairment losses. Gains on revaluation are recognised in other comprehensive income and accumulated in the revaluation reserve. However, the increase is recognised in profit or loss to the extent that it reverses a revaluation decrease previously recognised in the Income and Expenditure Account. Losses arising on revaluation are recognised in other comprehensive income to the extent of any previously recognised revaluation increase accumulated in equity, in respect of that asset. Any excess is recognised in the Income and Expenditure Account.

(h) Investment property Investment properties are properties which are held either to earn rental income or for capital appreciation or for both. The Society’s investment property is valued every three years with the main freehold branch and is not valued in the intervening years without undue cost or effort. Management takes a view at the end of each year as to the value of the property using market data available at the time. No depreciation is provided in respect of investment properties, applying the fair value model, all gains/losses in the value of the investment property are recognised in the Income and Expenditure Account in the period they arise.

(i) Cash and cash equivalents For the purposes of the Statements of Cash Flows, cash comprises cash in hand and unrestricted loans and advances to credit institutions repayable on demand. Cash equivalents comprise highly liquid unrestricted investments that are readily convertible into cash with an insignificant risk of changes in value with original maturities of less than three months. The Statements of Cash Flows have been prepared using the indirect method.

(j) Intangible assets Purchased software that is not an integral part of a related hardware is recognised as an intangible asset. Amortisation of such assets is charged to the Income and Expenditure Account on a straight-line basis over their estimated useful life. The useful life of computer software is between five and ten years. The Society reviews the amortisation period and method when events and circumstances indicate that the useful life may have changed since the last reporting date. Intangible assets are tested for impairment in accordance with Section 27 of FRS 102 Impairment of Assets when there is an indication that an intangible asset may be impaired.

(k) Impairment excluding financial assets and deferred tax assets The carrying amounts of the Society’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). An impairment loss is recognised if the carrying amount of an asset exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. An impairment loss is reversed if, and only if, the reasons for the impairment have ceased to apply. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.


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(l) Provisions for liabilities and charges

A provision is recognised in the Balance Sheet when the entity has a present legal or constructive obligation as a result of a past event, that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are recognised at the best estimate of the amount required to settle the obligation at the reporting date.

(m) Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the Income and Expenditure Account except to the extent that it relates to items recognised directly in equity or other comprehensive income, in which case it is recognised directly in equity or other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the Balance Sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on timing differences which arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the Annual Accounts. The following timing differences are not provided for: differences between accumulated depreciation and tax allowances for the cost of a fixed asset if and when all conditions for retaining the tax allowances have been met. Deferred tax is not recognised on permanent differences arising because certain types of income or expense are non-taxable or are disallowable for tax or because certain tax charges or allowances are greater or smaller than the corresponding income or expense. Deferred tax is measured at the tax rate that is expected to apply to the reversal of the related difference, using tax rates enacted or substantively enacted at the Balance Sheet date. For investment property that is measured at fair value, deferred tax is provided at the rates and allowances applicable to the sale of the asset/property, except when the investment property has a limited useful life and the objective of the entity’s business model is to consume substantially all of the value through use. In the latter case the tax rate that is expected to apply to the reversal of the related difference is used. Deferred tax balances are not discounted. Unrelieved tax losses and other deferred tax assets are recognised only to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits.

(n) Employee benefits Defined contribution plan A defined contribution plan is a post-employment benefit plan under which the Society pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an expense in the profit and loss account in the periods during which services are rendered by employees. The Society contributes to a Group Personal Pension scheme which is a money purchase scheme. The assets of this scheme are held separately from those of the Society in an independently administered fund. Defined benefit plan The Society operates a defined benefit pension scheme administered by trustees, the funds of which are separate from those of the Society. The pension costs relating to the defined benefit scheme are assessed in accordance with the advice of a qualified actuary using the projected unit method. The Society recognises net defined benefit plan assets to the extent that it is able to recover the surplus either through reduced contributions in the future or through refunds from the plan. Changes in the net defined benefit liability arising from employee service rendered during the period, net interest on net defined benefit liability, and the cost of plan introductions, benefit changes, curtailments and settlements during the period are recognised in the Income and Expenditure Account Re-measurement of the net defined benefit liability/asset is recognised in other comprehensive income in the period in which it occurs.


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(o) Mortgage Book acquisition

On acquisition in February 2015, the Society accounted for the purchase at fair value, recognising a discount and a deferred liability. The discount will be unwound through the Income and Expenditure Account over the expected life applying the EIR method; the deferred liability will be assessed annually on the anniversary of the acquisition and, if certain conditions are met, repaid to the seller over a period of up to seven years. Remaining re-measurement movements of the deferred liability will be recognised in the Income and Expenditure Account.

(p) Assumptions and estimation uncertainties Certain asset and liability amounts reported in the accounts are based on management estimates, judgements and assumptions. There is, therefore, a risk of changes to the carrying amounts for these assets and liabilities within the next financial year. The most significant areas where judgements and assumptions are made are as follows:

Impairment losses on loans and advances to customers

In determining whether an impairment loss should be recorded, the Society is required to exercise a degree of judgement. Impairment provisions are calculated as the difference between expected future cash-flows and the current outstanding balance, using managements best estimate of Propensity to Default using all available data. Estimates and assumptions are around the probability of any account going into default, the probability of defaulting accounts progressing to possession, the time taken to complete the sale of properties in possession and the eventual loss incurred in the event of forced sale or write-off. These assumptions are based on observable historical data and updated as management considers appropriate to reflect current circumstances.

The collective impairment provision is sensitive to changes in the underlying assumptions, with the forced sales discount (‘FSD’) being the most critical. If the FSD were to rise by 10% then the closing collective impairment provision would increase by £53,000.

Effective interest Rate (‘EIR’)

The Society recognises interest on loans and advances to customers on the basis of their EIR. This is a constant rate that averages out the effect of incentives and fees across the expected life of the loan account. A critical assumption in the calculation is the expected life, as this determines the assumed period over which customers may be paying various differentiated interest rates. The determination of the estimated life is based on expected redemption data as well as management judgement.

Any changes to the average life will create an adjustment to the loan balance in the Balance Sheet with a corresponding adjustment to interest receivable in the income statement. An increase in the expected life by 2 months would result in an additional £32,000 of interest income being recognised during the period.


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2. Interest Receivable and Similar Income 2016 2015 £ £ On loans fully secured on residential property 4,868,020 3,677,287 On other loans 372,027 355,447 On liquid assets 259,751 297,574 Discount unwind on mortgage book 275,169 - 5,774,967 4,330,308

Included within interest income is £nil (2015: £44,672) in respect of interest income accrued on impaired loans one or more months in arrears.

3. Interest Payable and Similar Charges 2016 2015 £ £ On shares held by individuals 1,922,391 1,844,107 On loans from credit institutions 70,203 8,677 On deposits and other borrowings 304,858 185,583 Discount unwind on retentions 8,923 - 2,306,375 2,038,367

4. Administrative Expenses

2016 2015 Staff costs: £ £

Wages and salaries 967,628 961,598 Social security costs 106,164 105,961 Other pension costs 98,340 123,439

1,172,132 1,190,998 Other expenses - ongoing 886,526 666,070 - restructuring costs - 43,810 Loss on disposal of fixed assets - 14,577 2,058,658 1,915,455

5. Auditor’s Remuneration

2016 2015 £ £

Auditor’s and its associates’ remuneration (exclusive of VAT): Audit of these Annual Accounts 81,000 38,800 Taxation compliance services 5,000 -

86,000 38,800 The Society manages a separate pension scheme (detailed in note 24) that is audited by KPMG LLP. Their fees of £3,000 (2015: £2,500) are paid by the Society.


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6. Employees

The average number of persons employed by the Society (excluding the Non-Executive Directors) at its only office during the year was as follows:

2016

2015

Full Time 21 20 Part Time 3 5

24 25 7. Directors’ Remuneration

Details outlining the policy on Directors’ remuneration is shown within the Directors’ Remuneration Report on pages 17 to 18. Total Directors’ remuneration for the year was £382,495 (2015: £415,188). Details of director loans and transactions are in note 25.

8. Allowance for Impairment Provisions against loans and advances to customers are as follows:

2016 2015 Fully secured

on Residential Property

Fully secured on Land

Fully secured on Residential

Property

Fully secured on Land

As at 1st April Individual Impairment £107,752 £200,967 £125,703 -

Collective Impairment £144,871 £15,282 £180,241 £7,236 Charge/(release) for the year Individual Impairment £22,309 (£200,967) (£17,951) £200,967 Collective Impairment (£13,593) (£15,282) (£35,370) £8,046 At 31st March Individual Impairment £130,061 - £107,752 £200,967 Collective Impairment £131,278 - £144,871 £15,282 TOTAL £261,339 - £252,623 £216,249


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9. Taxation

2016 2015 The taxation charge for the year comprises: £ £

UK Corporation Tax based on the profit for the year on ordinary activities at 20% (2015: 20%)

278,264

541

Under/(over) provision of tax in prior years - -

Total current tax charge for the year 278,264 541 Deferred Tax Origination and reversal of timing differences 31,948 16,274 Effects of tax rate change on opening balances (5,788) - Total deferred tax 26,160

16,274

Tax charge for the year 304,424 16,815

The difference between the Corporation Tax rate and the effective tax rate, defined as the taxation charge for the year as a percentage of profit on ordinary activities before taxation is explained as follows:

2016 2015 £ £ Profit on ordinary activities before tax 1,543,042 68,427

Current tax at 20% (2015: 20%) 308,608 13,685 Effect of:

Expenses not deductible for tax purposes 93 978 Difference in tax rate (5,956) - Deferred tax on pension surplus 1,679 2,152

Total current tax charge for the year (see above) 304,424 16,815

The main rate of UK corporation tax is 20%. Reductions in the UK Corporation tax rate from 20% to 19% (effective from 1st April 2017) and to 18% (effective 1st April 2020) were substantively enacted on 26th October 2015. A further reduction to 17% with effect from 1st April 2020 was announced in the UK Budget on 16th March 2016 but had not been substantively enacted at the Balance Sheet date.

10. Loans and Advances to Credit Institutions

2016 2015 Loans and advances to credit institutions have remaining maturities as follows:

£ £

Accrued interest 8,250 12,392 Repayable on demand 18,098,764 23,653,038 In more than three months but less than one year 2,000,000 -

20,107,014 23,665,430

11. Loans and Advances to Customers The maturity of loans and advances to customers from the date of the Balance Sheet is as follows:

2016 2015 £ £ On call and at short notice 6,342,763 7,444,390 In not more than three months 1,100,275 1,501,615 In more than three months but not more than one year 4,273,648 2,904,716 In more than one year but not more than five years 23,549,875 20,688,259 In more than five years 105,942,841 89,677,679 141,209,402 122,216,659 Less: Allowance for impairment (Note 8) (261,339) (468,872) 140,948,063 121,747,787


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12. Tangible Fixed Assets

2016 Land & Buildings

Equipment, Fixtures &

Fittings

Motor Vehicles

Total

Cost or valuation £ £ £ £ At 1st April 2015 576,250 378,486 - 954,736 Additions - 28,297 - 28,297 At 31st March 2016 576,250 406,783 - 983,033 Depreciation At 1st April 2015 12,711 189,835 - 202,546 Charge for the year 12,711 35,176 - 47,887 At 31st March 2016 25,422 225,011 - 250,433 Net book value

At 31st March 2016 550,828 181,772 - 732,600 2015

Cost or valuation

At 1st April 2014 576,250 464,365 33,873 1,074,488 Additions - 82,034 - 82,034 Disposals - (167,913) (33,873) (201,786) At 31st March 2015 576,250 378,486 - 954,736 Depreciation At 1st April 2014 326,161 12,421 338,582 Charge for the year 12,711 31,586 6,775 51,072 Disposals - (167,913) (19,196) (187,109) At 31st March 2015 12,711 189,834 - 202,545 Net book value

At 31st March 2015 563,539 188,652 - 752,191

The Society commissions a triennial valuation of the entire property, the last valuation being conducted as at 31st March 2014. The Society’s investment freehold property was revalued at £576,250 as per the valuation report dated 31st March 2014 by Mr N. Packington, FRICS, on behalf of Robinsons with Martin Brown, Chartered Surveyors, Reigate. Management assesses the market value in between triennial valuations and adjusts accordingly. The Directors consider the value in use of these premises to be in line with the book value. The Freehold land and buildings are being used for the Society’s own activities. The Society does not depreciate the land portion which comprises 25% of the total of Freehold Buildings and the Investment property, valued at £197,500.

13. Investment Property

2016 2015

Valuation £ £ Balance at 1st April 2015 222,300 213,750 Net gain from fair value adjustments 31,122 8,550 Balance at 31st March 2016 253,422 222,300


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13. Investment Property (continued)

FRS 102 requires all investment property to be recognised separately to Land and Buildings and recorded at fair value – its market value assessed on a yearly basis for fair value accounting. The Society commissions a triennial valuation of the entire property, the last valuation being conducted as at 31st March 2014. The Society’s investment property, which is freehold, was revalued at £213,750 as per the valuation report dated 31st March 2014 by Mr N. Packington, FRICS, on behalf of Robinsons with Martin Brown, Chartered Surveyors, Reigate. Management assesses the market value in between triennial valuations and adjusts accordingly. In the Financial year ended 31st March 2016, the Society recognised an income of £31,122 (2015: £8,550) in the Income and Expenditure Account related to the increase in value of the investment property. The table above shows the fair value as recorded under FRS 102 and what the value would have been had the property continued to be recorded at historical costs.

Property rental income earned during the year was £9,900 (2015: £6,900). No contingent rents have been recognised as income in the current or prior year.

14. Intangible Fixed Assets

2016 2015

Cost or valuation £ £ At 1st April 285,027 238,038 Additions 56,700 46,989 At 31st March 341,727 285,027 Depreciation At 1st April 107,427 67,688 Charge for the year 42,322 39,739 At 31st March 149,749 107,427 Net book value At 31st March 191,978 177,600

Intangible fixed assets comprise purchased software that is not an integral part of a related hardware.

15. Derivative Financial instruments

2016 2015

Positive market value

Negative market value

Positive market value

Negative market value

£ £ £ £ Derivatives designated as fair value through

Shared Equity 305,930 - 340,917 - 305,930 - 340,917 -

The derivative financial asset has arisen on purchase of the EFAS mortgage book in February 2015, and relates to the Society’s portion of the shared equity mortgages. Under FRS 102 this is considered to be a complex financial instrument that needs to be fair valued on an annual basis, if practical. The fair value is estimated using Level 3 inputs in a Discounted Cash Flow Model and is achieved by anticipating the run-off of the embedded derivative over six years from 31st March 2016. The cash flows from the run-off of the embedded derivative is assumed to increase each year in line with forecasted HPI growth. The time value of money is taken into account by discounting future cash flows at an appropriate discount rate.


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16. Deferred Tax

The deferred tax liability at 31st March 2016 is attributable as follows:

2016 2015 £ £ As at 1st April 25,181 8,907 Charge to Income and Expenditure Account for the year 26,160 16,274 At 31st March 51,341 25,181

The elements of deferred tax are as follows: Accelerated capital allowances 51,831 (51,655) Short-term timing differences – general mortgage provision - 20,400 Short-term timing differences – change in accounting policy - 32,700 Losses (76,551) 60,607 Property revaluation 76,061 (87,233)

Deferred tax liability 51,341 25,181

No significant reversal of the deferred tax liability in respect of accelerated capital allowances, and a reversal of £8,506 of the deferred tax asset in respect of changes in accounting policy are expected to occur in the year to 31st March 2017. The corporation tax impact of the EIR transitional adjustments is spread over ten years and so deferred tax has been recognised accordingly.

17. Shares

2016 2015 £ £ Held by individuals 142,741,614 128,767,175

Shares held by individuals are repayable from the Balance Sheet date in the ordinary course of business as follows:

2015 2015 £ £ Repayable on demand 134,934,423 126,411,585 In not more than three months 1,165,671 759,933 In more than three months but not more than one year 6,641,520 1,595,657 142,741,614 128,767,175

18. Amounts Owed to Other Customers

Amounts owed to other customers are repayable from the Balance Sheet date in the ordinary course of business as follows: 2016 2015 £ £ Repayable on demand 23,494,703 16,646,330 23,494,703 16,646,330


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19. Amounts Owed to Credit Institutions

Amounts owed to credit institutions are repayable from the Balance Sheet date in the ordinary course of business as follows: 2016 2015 £ £ Accrued interest 22,591 7,261 In not more than three months 5,100,000 2,950,000 In more than three months but not more than one year 3,000,000 2,500,000 8,122,591 5,457,261

20. Other Liabilities

2016 2015 £ £ Income tax 61,037 57,733 Corporation tax 278,196 541 Mortgage acquisition retention 626,166 722,054 Other creditors 7,148 7,081 972,547 787,409

As part of the purchase agreement of the mortgage book, the Society has a retention of £626,166 (2015: £722,054), against the purchase price to mitigate any risks that might arise in the future.

21. Provisions for Liabilities – FSCS Levy 2016 2015 £ £ At 1st April 43,268 42,212 Provisions used during the year (81,335) (85,050) Provisions made during the year 83,523 86,106 At 31st March 45,456 43,268

As a regulated UK deposit taker the Society pays levies to the FSCS to enable the Scheme to meet claims against it. The FSCS levy is composed of two components: a management expenses levy, to meet the running costs of the Scheme, which the Society pays fully in each financial year and, a compensation levy which is provided for in advance of payment by the Society. The Society has made provision for its expected share of interest charges and repayment of capital to be levied by the FSCS, based on its liability to contribute by reference to the amount of protected deposits held by the Society. The Society’s estimates are sensitive to the level of estimated management expenditure incurred by the FSCS and interest rates over the period. In accordance with IFRIC 21 – Levies, the trigger date for recognition of a provision in respect of the FSCS levy is 1st April each year and at 31st March the Society holds an accrual for one year’s interest levy.

22. Financial Instruments

A financial instrument is a contract that gives rise to a financial asset or financial liability. Holmesdale Building Society is a retailer of financial instruments in the form of mortgage and savings products. The Society uses wholesale financial instruments to invest in liquid assets and raise wholesale funding in order to manage the risks arising from its operations. The Society has a formal structure for managing risk, including established risk limits, reporting lines, mandates, credit risk appetite and other control procedures. The Audit, Risk and Compliance Committee (‘ARCC’) is tasked with managing the Society’s overall exposure to risk. The Assets, Liabilities and Management Committee (‘ALMCo’) reviews treasury and Balance Sheet risk related activities and examines market movements to discern changes required to the Society’s product range. Key performance indicators are provided to the Board on a monthly basis and summary information is reviewed on a weekly basis by Management.


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The table below analyses the Society’s assets and liabilities by financial classification:

Held at amortised cost

Held at fair value TOTAL

Recognised through Income and Expenditure

Available for sale

£ £ £ £ Carrying Value by Category 31 March 2016 Financial Assets Cash in hand and balances held with Bank of England 27,262,578 - - 27,262,578 Treasury Bills - - 499,735 499,735 Loans and advances to credit institutions 20,107,014 - - 20,107,014 Loans and Advances to customers 140,948,063 - - 140,948,063 Derivative Financial Asset - 305,930 - 305,930 TOTAL Financial Assets 188,317,655 305,930 499,735 189,123,320 Non-Financial Assets 1,014,643 253,422 - 1,268,065 TOTAL Assets 189,332,298 559,352 499,735 190,391,385 Financial Liabilities Shares 142,741,614 - - 142,741,614 Amounts owed to credit institutions 8,122,591 - - 8,122,591 Amounts owed to other customers 23,494,703 - - 23,494,703 TOTAL Financial Liabilities 174,358,908 - - 174,358,908 Reserves 14,654,916 - - 14,654,916 Non-financial liabilities 1,377,561 - - 1,377,561 TOTAL Liabilities 190,391,385 - - 190,391,385 Carrying Value by Category 31 March 2015 Financial Assets Cash in hand and balances held with Bank of England 17,852,616 - - 17,852,616 Treasury Bills - - 499,743 499,743 Loans and advances to credit institutions 23,665,430 - - 23,665,430 Loans and Advances to customers 121,747,787 - - 121,747,787 Derivative Financial Asset - 340,917 - 340,917 TOTAL Financial Assets 163,265,833 340,917 499,743 164,106,493 Non-Financial Assets 1,024,332 222,300 - 1,246,632 TOTAL Assets 164,290,165 563,217 499,743 165,353,125 Financial Liabilities Shares 128,767,175 - - 128,767,175 Amounts owed to credit institutions 5,457,261 - - 5,457,261 Amounts owed to other customers 16,646,330 - - 16,646,330 TOTAL Financial Liabilities 150,870,766 - - 150,870,766 Reserves 13,407,906 - - 13,407,906 Non-financial liabilities 1,074,453 - - 1,074,453 TOTAL Liabilities 165,353,125 - - 165,353,125


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Fair values of financial assets and liabilities carried at amortised cost Fair value is the value for which an asset or liability could be exchanged or settled in an arm’s length transaction. The Society measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

Level 1: quoted prices (unadjusted) in active markets for identical instruments.

Level 2: valuation techniques for which all significant inputs are based on observable market data.

Level 3: valuation techniques for which significant inputs are not based on observable market data Where applicable, the Society measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis. For all other financial instruments the Society determines fair values using other appropriate valuation techniques.

The table below analyses the book and fair values of the Society’s financial instruments held at amortised cost at 31st March:

2016 2015 Book Value Fair Value Book Value Fair Value

£ £ £ £ Financial Assets

Cash in hand and balances held with Bank of England

27,262,579 27,262,579 17,852,616 17,852,616

Treasury Bills

499,735 499,735 499,743 499,735

Loans and advances to credit institutions

20,107,014 20,111,464 23,665,430 23,665,430

Loans and Advances to customers 140,948,063 140,918,916 121,747,787

121,748,804

Embedded Derivative 305,930 305,930 340,917 340,917 Financial Liabilities Shares

142,741,614 142,652,925 128,767,175 128,754,794

Amounts owed to credit institutions

8,122,591 8,118,404 5,457,261 5,454,551

Amounts owed to other customers 23,494,703 23,494,703 16,646,330 16,646,330

The estimated fair value of the financial assets and liabilities above has been calculated using the following valuation methodology:

Cash in hand and balances held with Bank of England – Level 1 The fair value of cash in hand and deposits with central banks is the amount repayable on demand.

Treasury Bills – Level 1

The fair value of the Treasury Bill is based on the quoted price in the active market.

Loans and advances to credit institutions – Level 2

The fair value of overnight deposits is the amount repayable on demand, whilst the fair value of term deposits are recorded net of the fair value adjustment as required by FRS 102. The estimated fair value of term deposits represents the discounted amount of future cash flows expected to be received. Estimated cash flows are discounted at the effective interest rate for deposit type, based on its estimated life.


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Loans and advances to customers – Level 2

Loans and advances are recorded net of provisions for impairment. The estimated fair value represents the discounted amount of future cash flows expected to be received. Estimated cash flows are discounted at the prevailing market rate for a similar mortgage type, based on its estimated life. As most of the Society’s mortgages are relative to SVR, the fair value calculation only focuses on the fixed rate products. Embedded Derivative – Level 3

The fair value of the embedded derivative that arose from the purchase of shared equity mortgages is recorded net of the fair value adjustment as required by FRS 102. The estimated fair value of the derivative is the discounted amount of future cash flows expected to be received. Estimated cash flows are discounted at the effective interest rate, based on the HPI movement over its estimated life.

Shares and amounts owed to other customers – Level 2

The fair value of shares, deposits and other borrowings is the amount repayable on demand, apart from the 1-year fixed rate bond that represents the discounted amount of future cash flows expected to be received

Amounts owed to other credit institutions – Level 2

The fair value of loans from other credit institutions are recorded net of the fair value adjustment as required by FRS 102. The estimated fair value of term deposits represents the discounted amount of future cash flows expected to be received. Estimated cash flows are discounted at the effective interest rate for deposit type, based on its estimated life.

Credit Risk Credit risk is the risk of loss or delay if a customer or counterparty fails to perform their obligations, such as the timely repayment of a loan or other credit arrangement. The Society has no appetite for material credit losses. This is controlled through credit quality standards, underwriting rules, as well as limits by exposure to counterparty, sector, country and instrument. The Society’s maximum credit exposure is detailed in the table below:

2016 £

2015 £

Credit Risk Exposure

Cash in hand and balances held with Bank of England 27,262,579 17,852,616 Loans and advances to credit institutions 20,107,014 23,665,430 Treasury Bills 499,735 499,743 Loans and advances to customers 140,948,063 121,747,787 TOTAL Balance Sheet exposure 188,817,391 163,765,576 Off Balance Sheet exposure – mortgage commitments 7,736,940 18,464,507 TOTAL 196,554,331 182,230,083

a) Loans and advances to credit institutions, debt securities and derivative financial instruments

The ALMCo is responsible for approving treasury counterparties for both derivatives and investment purposes. The credit risk appetite for liquid assets is defined by: the minimum counterparty credit rating; the permissible instruments; the maximum percentage of total liquid assets held at each credit risk level; and the investment term. This is monitored daily by the Society’s Treasury team and reviewed monthly by the ALMCo.


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An analysis of the Society’s treasury asset concentration is shown in the table below:

2016 2015 £ % £ % Industry Sector

Banks 18,106,262 39% 23,665,430 56% Building Societies 2,000,752 4% - - Local Authorities - - - - Central Government 27,753,313 57% 18,343,359 44% TOTAL 47,860,327 100% 42,008,789 100%

The Society has no exposure to foreign exchange risk. All instruments are denominated in sterling.

b) Loans and advances to customers

All mortgage loan applications are assessed with reference to the Society’s risk appetite statement and Board approved lending policy. The Board’s risk appetite is based on:

(i) the maximum proportion of the total mortgage portfolio that certain loan types can represent;

(ii) a limit on the proportion of new business on a rolling 12-month basis that certain loan types can represent;

(iii) Loan-to-Value (LTV) ratios; and

(iv) the arrears level. LTV and arrears levels are key drivers of the Pillar 1 credit risk capital calculation. All mortgage products should be priced to ensure that the margin appropriately reflects the credit risk involved and the carrying cost of the incremental risk capital. The Board believes in a stepwise approach to product development. New products should typically be introduced via a limited number of channels, such as well-established and highly reputable specialist brokers. Capital will be committed in a staged manner, with regular product performance reviews being performed. For the Society as a whole, mortgages on prime owner occupied residential properties will be a minimum of 80% of mortgage assets and arrears rates will be kept below the national average reported by the Council of Mortgage Lenders. The lending portfolio is monitored by the ALMCo to ensure that it remains in line with the stated risk appetite of the Society. All mortgage applications are underwritten individually on a case-by-case basis ensuring that they meet the lending policy rules which support the risk appetite of the Society. All mortgage applications will be overseen by the Head of Lending who ensures that all lending criteria have been applied and that all information submitted within the application is validated. Loans and advances to customers, net of impairment provisions, are shown below:

2016 2015 £ % £ % Industry Sector

Residential Mortgages – owner occupied 116,986,892 83% 101,050,663 83% Residential Mortgages – Buy-to-let 18,323,248 13% 14,609,735 12% Commercial Mortgages 5,637,923 4% 6,087,389 5% TOTAL 140,948,063 100% 121,747,787 100%

The Society operates throughout England and Wales.


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An analysis of the Society’s geographical concentration is shown in the table below:

2016 2015 £ £ Wales 2,809,439 1,743,905 Outer Metropolitan 39,118,829 35,796,587 Outer South East 31,853,983 30,107,234 Greater London 31,511,746 24,089,715 East Anglia 3,757,113 3,000,343 South West 12,926,601 8,756,248 Midlands 11,542,642 11,040,100 Yorks, North and West 7,199,482 6,955,747 Other 228,228 257,908 TOTAL 140,948,063 121,747,787

The Society’s value of collateral is reflected in the Loan to Value (‘LTV’) profile of the mortgage book. The estimated value of the mortgage portfolio is updated on a quarterly basis using the Nationwide regional House Price Index. An analysis of the Society’s indexed LTV profile is shown in the table below:

2016 2015 % % <30% 60.2 63.7 30% - 60% 27.2 24.7 60% - 80% 12.0 10.8 80% - 100% 0.53 0.8 100% - 115% 0.07 - TOTAL 100.00 100.00 Average LTV 46.6 45.9

The band comprising mortgages with LTV in excess of 100% comprises one loan (2015: nil) with a balance of £111,662. This loan was acquired as part of the EFAS purchase. The table below provides information on mortgage loans by payment due status:

2016 2015 £ % £ %

Not Impaired

Neither past due nor impaired 137,763,156 97.7 117,964,037 96.9 Past due up to 3 months but not impaired 1,965,493 1.4 1,508,839 1.2 Past due over 3 months but not impaired 524,806 0.4 651,323 0.5 Possessions - - - - Impaired Current 955,947 0.7 67,096 0.1 Past due up to 3 months 764,333 0.6 Past due 3 to 6 months - - - - Past due 6 to 12 months - - - - Past due over 12 months - - 1,261,031 1.0 Possessions - - - - Provisions (261,339) (0.2) (468,872) (0.3) TOTAL 140,948,063 100.00 121,747,787 100.00


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The status “Past due up to 3 months but not impaired” and “Past due over 3 months but not impaired” includes any asset where a payment due is received late or missed but no individual provision has been allocated. The amount included is the entire loan amount rather than just the overdue amount. Possession balances would represent those loans where the Society has taken ownership of the underlying security pending its sale. Repossessed properties are made available-for-sale in accordance with statutory guidelines with proceeds used to reduce or repay the outstanding loan. Any collateral surplus on the sale of repossessed properties, after a deduction for costs incurred in relation to the sale, would be returned to the borrower. The Society has various forbearance options to support customers who may find themselves in financial difficulty. These include payment plans, capitalisations, term extensions, temporary transfer to interest only and reduced payment concessions. All forbearance arrangements are formally discussed with the customer and reviewed prior to acceptance of the forbearance arrangement. By offering customers in financial difficulty the option of forbearance the Society potentially exposes itself to an increased level of risk through prolonging the period of non-contractual payment and/or potentially placing the customer into a detrimental position at the end of the forbearance period. Regular monitoring of the level and different types of forbearance activity are reported on a monthly basis. In addition all forbearance arrangements are reviewed and discussed with the customer on a regular basis to assess the ongoing potential risk to the Society and suitability of the arrangement for the customer. The table below analyses residential mortgage balances with renegotiated terms at the year-end:

2016 £

2015 £

Payment Plan 888,749 870,585 There was a total of 1 account in forbearance at 31st March 2016 (2015: 6). These accounts are shown above as impaired. There were no Individual impairment provisions required (2015: nil) in respect of these mortgages. Liquidity Risk

Liquidity Risk is the risk that the Society, although solvent, has insufficient financial resources available to meet its obligations as they fall due, or can only secure those resources at excessive cost. The Society must at all times have sufficient liquidity to meet its liabilities over all reasonable market-wide and Society-specific stress scenarios (both short-term and long-term) over the economic cycle, expressed in terms of a survival period. The Society has a conservative approach to managing liquidity risk and requires sufficient liquid assets to be maintained in order to:

meet day-to-day business needs;

cater for an unexpected funding stress scenarios;

ensure maturity mismatches are provided for. Balance Sheet and liquidity risk limits (including counterparty limits) are set to support this Risk Appetite within the Treasury Management Policy. The monitoring of liquidity, in line with the Society’s policy framework, is performed daily. The Society’s liquidity policy is designed to ensure that the Society has sufficient liquid resources to withstand a range of stressed scenarios. A series of liquidity stress tests have been developed as part of the Society’s Individual Liquidity Systems Assessment (‘ILSA’). They include scenarios that fulfil the specific requirements of the PRA (the idiosyncratic, market-wide and combination stress-tests) and scenarios identified by the Society which are specific to its business model. The Society is due to update its ILSA in the new financial year to an Individual Liquidity Adequacy Assessment Process (‘ILAAP’) to comply with new regulations.


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The stress tests are performed periodically and reported to the ALMCo to confirm that liquidity policy remains appropriate. The Society’s liquid resources comprise high quality liquid assets, including a Bank of England reserve account and T-Bills. At the end of the year the ratio of liquid assets to shares and deposits was 27.5% compared to 27.9% at 31st March 2015. The Society maintains a contingency funding plan to ensure that it has so far as possible, sufficient liquid financial resources to meet liabilities as they fall due under each of the scenarios. Maturity analysis for financial assets and financial liabilities

The table below analyses the Society’s assets and liabilities into relevant maturity groupings, based on the remaining period to contractual maturity at the Balance Sheet date. This is not representative of the Society’s management of liquidity. Loans and advances to customers rarely run their full course. The actual repayment profile is likely to be significantly different from that shown in the analysis. For example, most mortgages have a contractual maturity of around 25 years but are generally repaid much sooner. Conversely, retail deposits repayable on demand generally remain on the Balance Sheet much longer.

As at 31st March 2016 On Demand Not more than 3

months

More than 3 months but

not more than 1 year

More than 1 year but not more than 5

years

More than 5 years

No Contractual

Maturity

TOTAL

£ £ £ £ £ £

Financial Assets Liquid Assets Cash in hand and with Bank of England 27,262,579 - - - - - 27,262,579 Loans and advances to credit institutions 18,107,014 - 2,000,000 - - - 20,107,014 Treasury Bills - 499,735 - - - - 499,735 Loans and advances to customers 6,294,706 1,091,939 4,241,268 23,371,445 105,948,705 - 140,948,063 Derivative Financial instruments - - - - - 305,930 305,930 Other Assets 90,064 - - - - 1,178,000 1,268,064 TOTAL Assets 51,754,363 1,591,674 6,241,268 23,371,445 105,948,705 1,483,930 190,391,385 Financial Liabilities and reserves - - - - - - - Shares 134,934,423 1,165,671 6,641,520 - - - 142,741,614 Amounts owed to credit institutions - 5,114,224 3,008,367 - - - 8,122,591 Amounts owed to other customers 23,494,703 - - - - - 23,494,703 Other Liabilities 421,857 - 692,770 237,197 25,737 - 1,377,561 Reserves - - - - - 14,654,916 14,654,916 TOTAL Liabilities 158,850,983 6,279,895 10,342,657 237,197 25,737 14,654,916 190,391,385 Net Liquidity Gap (107,096,620) (4,688,221) (4,101,389) 23,134,248 105,922,968 (13,170,986) -


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As at 31st March 2015 On Demand Not more

than 3 months

More than 3 months but



years

More than 5 years

No Contractual

Maturity

TOTAL

£ £ £ £ £ £

Financial Assets Liquid Assets Cash in hand and with Bank of England 17,852,616 - - - - - 17,852,616 Loans and advances to credit institutions 23,665,430 - - - - - 23,665,430 Treasury Bills - 499,743 - - - - 499,743 Loans and advances to customers 7,360,377 1,484,669 2,871,935 20,454,785 89,576,021 - 121,747,787 Derivative Financial instruments - - - - - 340,917 340,917 Other Assets 94,541 - - - - 1,152,091 1,246,632 TOTAL Assets 48,972,964 1,984,412 2,871,935 20,454,785 89,576,021 1,493,008 165,353,125 Financial Liabilities and reserves Shares 126,411,585 759,933 1,595,657 - - - 128,767,175 Amounts owed to credit institutions - 2,953,930 2,503,331 - - - 5,457,261 Amounts owed to other customers 16,646,330 - - - - - 16,646,330 Other Liabilities 326,677 - 386,699 302,764 58,313 - 1,074,453 Reserve - - - - - 13,407,906 13,407,906 TOTAL Liabilities 143,384,592 3,713,863 4,485,687 302,764 58,313 13,407,906 165,353,125 Net Liquidity Gap (94,411,898) (1,729,451) (1,613,752) 20,152,021 89,517,708 (11,914,898) -

Some Society assets can be used to support collateral requirements for secured funding or central bank operations. Encumbrance benefits the Society as it provides cheaper and more stable funding. At 31st March 2016 the Society has £nil encumbered assets (2015:£nil)


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The following is an analysis of Gross contractual flows payable under financial liabilities; this differs from the analysis of residual maturity due to the inclusion of interest accrued at current rates for the average period until maturity on the amounts outstanding at the financial position date:

2016 On Demand Not more than

3 months More than 3 months but



years

More than 5 years

TOTAL

£ £ £ £ £ £ Shares 134,934,423 1,165,671 6,732,047 - - 142,832,141 Amounts owed to credit institutions - 5,124,150 3,017,618 - - 8,141,768 Amounts owed to other customers 23,494,703 - - - - 23,494,703 Total Financial Liabilities 158,429,126 6,289,821 9,749,665 - - 174,468,612 2015 On Demand Not more than

3 months More than 3 months but



years

More than 5 years

TOTAL

£ £ £ £ £ £ Shares 126,411,585 759,933 1,637,143 - - 128,808,661 Amounts owed to credit institutions - 2,955,926 2,516,863 - - 5,472,789 Amounts owed to other customers 16,646,330 - - - - 16,646,330 Total Financial Liabilities 143,057,915 3,715,859 4,154,006 - - 150,927,780

Market Risk

Market risk is the risk that the value of, or income arising from, the Society’s assets and liabilities changes as a result of changes in market prices, the principal elements being interest rate risk, foreign currency risk and equity risk. As the Society only deals with products in sterling it is not exposed to foreign currency risk. The Society’s products are also only interest orientated products so are not exposed to other pricing risks. The level of equity risk is not material. The Society monitors interest rate risk exposure against limits by determining the effect on the Society’s current net notional value of assets and liabilities for a parallel shift in interest rates equivalent to 200 basis points (bp) or 2% for all maturities, in line with regulatory requirements. The results are reported to ALMCo and the Board on a monthly basis. The following table provides an analysis of the Society’s sensitivity to an increase or decrease in market interest rates, assuming no asymmetrical movement in yield curves and a constant financial position:

Sensitivity to reported equity to interest rate movements

2.00% parallel increase

2.00% parallel decrease

2016 £000s £000s At 31st March Average for the period (275) 380 Maximum for the period (333) 438 Minimum for the period (228) 328


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Sensitivity to reported equity to interest rate movements

2.00% parallel increase

2.00% parallel decrease

£000s £000s 2015 At 31st March Average for the period (124) 153 Maximum for the period (367) 482 Minimum for the period (35) 36

The sensitivity to rate movements is heavily influenced by the EFAS mortgage book acquisition, with circa £2m fixed for life loans, that was assigned a long expected maturity on purchase. These calculations assume that the Society would not react to an interest rate movement, when in reality it would respond accordingly. The risk of reduction to equity arising from this sensitivity was mitigated at point of purchase by a discount for this purpose. This length of maturity is currently under review with appropriate guidance. The Society currently has limited appetite for exposure to interest rate or basis risk:

all mortgage products are priced relative to SVR and basis/interest rate risk occurs due to (i) the timing requirements for notice of SVR changes; and (ii) the time required to adjust systems. This risk is mitigated by effective business planning;

a proportion of the Society’s assets and liabilities are non-interest bearing. While the Board accepts this risk in the near term, due to the practical difficulties of hedging the risk, the medium term aspiration is to duration hedge assets and liabilities during any period of interest rate volatility;

liquid assets are exposed to a mix of fixed rates, variable rates and base rate tracking rates. This risk is managed by limiting the distribution of liquid asset durations and the proportion of liquid assets.

The interest rate sensitivity of the Society as at 31st March 2016 and 31st March 2015 in relation to the time bands, by reference to the earlier of the next interest rate re-pricing date and the maturity date, was as follows:

2016

Not more than three months

More than three months but not more than six

months

More than six months but not more than one

year

More than one year but not

more than five years

More than five years

Non- interest bearing

Total

£ £ £ £ £ £ £ Assets

Liquid assets 45,854,475 - 2,000,000 - - 14,853 47,869,328

Loans and advances to customers 136,095,587 958,459 2,678,246 - 2,291,841 (1,076,070) 140,948,063

Tangible fixed assets - - - - - 732,600 732,600

Other assets - - - - - 841,394 841,394

Total assets 181,950,062 958,459 4,678,246 - 2,291,841 512,777 190,391,385

Liabilities

Shares 123,347,806 10,770,957 8,418,060 - - 204,791 142,741,614

Amounts owed to credit institutions 5,100,000 2,500,000 500,000 - - 22,591 8,122,591

Amounts owed to other customers 23,393,156 - - - - 101,547 23,494,703

Other liabilities - - - - - 1,377,561 1,377,561

Reserves - - - - - 14,654,916 14,654,916

Total liabilities 151,840,962 13,270,957 8,918,060 - - 16,361,406 190,391,385

Interest rate sensitivity gap 30,109,100 (12,312,498) (4,239,814) - 2,291,841 (15,848,629) -

Cumulative gap 30,109,100 17,796,602 13,556,788 13,556,788 15,848,629 - -


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2015

Not more than three months

More than three months but not more

than six months

More than six months but not more than one

year

More than one year but not

more than five years

More than five years

Non- interest bearing

Total

£ £ £ £ £ £ £ Assets

Liquid assets 41,997,456 - - - - 20,333 42,017,789

Loans and advances to customers 119,397,829 792,697 916,478 - 2,030,427 (1,389,644) 121,747,787

Tangible fixed assets - - - - - 752,191 752,191

Other assets - - - - - 835,358 835,358

Total assets 161,395,285 792,697 916,478 - 2,030,427 218,238 165,353,125

Liabilities

Shares 125,233,722 - 3,476,777 - - 56,676 128,767,175

Amounts owed to credit institutions 2,950,000 500,000 2,000,000 - - 7,261 5,457,261

Amounts owed to other customers 16,574,187 - - - - 72,143 16,646,330

Other liabilities - - - - - 1,074,453 1,074,453

Reserves - - - - - 13,407,906 13,407,906

Total liabilities 144,757,909 500,000 5,476,777 - - 14,618,439 165,353,125

Interest rate sensitivity gap 16,637,376 292,697 (4,560,299) - 2,030,427 (14,400,201) -

Cumulative gap 16,637,376 16,930,073 12,369,774 12,369,774 14,400,201 - -

Capital

The Society’s policy is to maintain a strong capital base to maintain Member, creditor and market confidence and to sustain future development of the business. The formal ICAAP process (Internal Capital Adequacy Assessment Process) assists the Society with its management of capital. The Board monitors the Society’s capital position on a monthly basis to assess whether adequate capital is held to mitigate the risks it faces in the course of its business activities. The Society’s actual and expected capital position is reviewed against stated risk appetite which aims to maintain capital at a specific level above its Internal Capital Guidance (ICG). The Board manages the Society’s capital and risk exposures to maintain capital in line with regulatory requirements which includes monitoring of:

Lending Decisions – The Society maintains a comprehensive set of sectoral limits on an overall and 12-month rolling basis to manage credit risk appetite. Individual property valuations are monitored against House Price Index (HPI) data and updated quarterly.

Concentration risk – The design of lending products takes into account the overall mix of the loan portfolio to manage exposure to risks arising from the property market and other markets the Society is active in.

Counterparty risk – Wholesale lending is only carried out with approved counterparties in line with the Society’s lending criteria and is subject to a range of limits that reflect the risk appetite of the Society.

Stress tests are used as part of the process of managing capital requirements.

The Society’s capital requirements are set and monitored by the PRA. During 2016 the Society has continued to comply with the EU Capital Requirements Regulation and Directive (Basel III) as amended by the PRA. Regulatory capital is analysed into two tiers:

Tier 1 capital – which comprised retained earnings, revaluation reserve less intangibles.

Tier 2 capital – which includes collective provisions.


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The level of capital is matched against risk-weighted assets which are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets. There were no reported breaches of capital requirements during the year. There have been no material changes in the Society’s management of capital during the year. The Society’s regulatory position as at 31st March 2016 under the standardised approach was as follows:

2016 2015 £ £ Tier 1 Capital General Reserves 14,190,324 12,929,713 Other Reserves 464,592 478,193 Less: Intangibles (191,978) (177,600) Total Tier 1 Capital 14,462,938 13,230,306 Tier 2 Capital Collective provision 131,278 160,153 Total Tier 2 Capital 131,278 160,153 TOTAL Regulatory Capital 14,594,216 13,390,459

23. Guarantees and Other Financial Commitments

(a) The Society has a contingent liability in respect of contributions to the Financial Services Compensation Scheme provided for by the Financial Services and Markets Act 2000.

(b) Non-cancellable operating lease rentals were as follows:

2016 2015 £ £

Payable in up to 1 year 9,500 9,500 Payable in between 1 and 5 years 4,750 14,263 Payable in more than 5 years - - TOTAL 14,250 23,763

24. Retirement Benefits

The Society operates two pension schemes; a funded defined benefit scheme that was open to employees up to 1st August 1993 and a defined contribution scheme for all employees since then. For the defined contribution group personal pension scheme, the charge for the year was £94,839 (2015: £120,289). For the defined benefit scheme, this is a separate trustee administered fund holding the pension scheme assets to meet long-term pension liabilities. A full actuarial valuation was carried out at 31st December 2014 and updated to 31st March 2016 by a qualified actuary, independent of the scheme's sponsoring employer. The major assumptions used by the actuary are shown below. This most recent actuarial valuation showed a defined benefit funding deficit of £79,000. The Society has agreed with the trustees that it will aim to eliminate the deficit on or before 30th April 2016 by making one-time payment of amount of £82,000 in respect of the deficit. In addition and in accordance with the actuarial valuation, the Society has agreed with the trustees that it will meet expenses of the scheme and levies to the Pension Protection Fund. Net Pension (liability)/asset measured in line with FRS 102:

2016 £ Defined benefit obligations 513,336 Plan Assets 617,983 Net pension (liability)/asset 104,647


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Movements in present value of defined benefit obligation 2016 £ At 1st April 2015 530,408 Expenses 13,993 Interest expense 17,420 Re-measurement: actuarial losses (29,412) Benefits Paid (19,073) At 31st March 2016 513,336

Movements in fair value of plan assets 2016 £ At 1st April 2015 661,236 Interest Income 21,565 Re-measurement: actuarial losses (49,246) Contributions by the Society 3,501 Benefits paid (19,073) At 31st March 2016 617,983

Defined benefit costs recognised in the Income and Expenditure Account 2016 2015 £ £ Current service costs 13,993 16,846 Defined benefit costs recognised in profit or loss 13,993 16,846

Defined benefit costs recognised in Other Comprehensive Income 2016 2015 £ £ Return on plan assets (excluding interest income) (49,246) 30,539 Experience gains and losses arising on the plan liabilities 5,609 3,537 Effects of changes in the demographic and financial assumptions 23,803 (96,193) Effects of changes in the amount of surplus that is not recoverable 30,326 75,564 Total amount recognised in other comprehensive income 10,492 13,447

Fair value of the plan assets and the return on those assets were as follows: 2016 2015 £ £ UK equities 48,290 160,299 Overseas equities 239,924 184,424 Corporate bonds 127,587 82,562 Government bonds 62,014 - Cash 138,643 181,412 Other 1,525 52,539 TOTAL assets 617,983 661,236 Actual Return on plan assets (including interest income) (27,681) 58,080


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Principal actuarial assumptions at the year-end were as follows: 2016 2015 % % Discount Rate 3.60 3.30 Inflation (RPI) 3.00 3.00 Inflation (CPI) 2.00 2.00 Allowance for revaluation of deferred pensions of CPI or 5% p.a. if less 2.00 2.00 Allowance for commutation of pension for cash at retirement No Allowance No Allowance

None of the fair values of the assets shown above include any direct investments in the Society’s own financial instruments or any property occupied by, or other assets used by, the Society. In valuing the liabilities of the pension fund at 31st March 2016, mortality assumptions have been made as indicated below. The assumptions relating to longevity underlying the pension liabilities at the Balance Sheet date are based on standard actuarial mortality tables and include an allowance for future improvements in longevity. The assumptions are equivalent to expecting a 62-year old to live for a number of years as follows:

Life expectancy at age 62

(years) Male retiring in 2016 26.2 Female retiring in 2016 28.3 Male retiring in 2036 28.5 Female retiring in 2036 30.7

25. Related parties

Related party transactions

During the year, McDermott Solutions Ltd charged the Society £1,983 for consultancy services to assist with the implementation of the Mortgage Credit Directive. At 31st March 2016 £nil remained unpaid. McDermott Solutions Ltd is a company in which M.C. McDermott, the current Chairman, is a director and a shareholder. During the current year, £nil (2015: £68,460) was charged by Tiptree House Ltd. Tiptree House Ltd is a company in which M. A. Thompson, the former Chairman, was a director and a shareholder. At 31st March 2016 £nil (2015: £3,780) remained unpaid. A close family member of the former Chairman, M. A. Thompson, provided services of £1,058 (2015: £3,405) to the Society during the year. At the year end, £nil (2015: £nil) was outstanding. Transactions with key personnel

Key management personnel consists of the Executive Directors and Non-Executive Directors who are responsible for ensuring that the Society meets its strategic and operational objectives. In the normal course of business, key management personnel, and their close family members, transacted with the Society. The balances of transactions with key management personnel, and their close family members, are as follows:


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25. Related parties (continued)

No. of Key management

personnel and their close family members

2016

Amounts in respect of Key management


2016

No. of Key management


2015

Amounts in respect of Key management


2015 £ £ Loans and advances to customers - - - - Deposits and share accounts 5 38,268 7 41,685 Remuneration 8 382,495 9 415,188

A Register is maintained at the head office of the Society, under Section 68 of the Building Societies Act 1986, which shows details of all loans, transactions and arrangements with Directors and their connected persons. A statement of the appropriate details contained in the Register, for the financial year ended 31st March 2016, will be available for inspection at the head office for a period of 15 days up to and including the Annual General Meeting.

26. Transition to FRS 102 This is the first year that the Society has presented its results under FRS 102. The last Annual Report and Accounts were prepared under UK GAAP for the year ended 31st March 2015. The date of transition to FRS 102 was 1st April 2014. In preparing their FRS 102 Balance Sheet, the Society has adjusted amounts reported previously in Annual Report and Accounts prepared in accordance with UK GAAP. An explanation of how the transition from UK GAAP to FRS 102 has affected the Society’s financial position, financial performance and statement of cash flows is set out in the following tables and notes that accompany the tables.

Reconciliation of profit for the year ended 31st March 2015: UK GAAP FRS 102

Transition Post-FRS 102

Interest receivable and similar income a 4,286,458 43,850 4,330,308 Interest payable and similar charges (2,038,367) - (2,038,367) Net interest receivable 2,248,091 43,850 2,291,941 Fees and commissions receivable a 390,493 (261,780) 128,713 Fees and commissions payable a (238,402) 135,608 (102,794) Net income from other financial instruments at fair value through profit and loss

g

-

4,888

4,888

Net profit on financial operations 2,400,182 (77,434) 2,322,748 Other operating income c 11,830 3,662 15,492 Total income 2,412,012 (73,772) 2,338,240 Administrative expenses d,e (1,838,120) (77,334) (1,915,454) Depreciation and amortisation c (88,233) (2,580) (90,813) 485,659 (153,686) 331,973 Impairment losses on loans and advances b (175,297) (2,143) (177,440) Operating profit before FSCS Levy and exceptional expenses

310,362 (155,829) 154,533

Provisions for liabilities – FSCS Levy f (85,867) (239) (86,106) Operating profit/(loss) before exceptional expenses 224,495 (156,068) 68,427 Exceptional expenses - restructuring costs d (43,810) 43,810 - Loss on disposal of Fixed Assets d (14,577) 14,577 - Profit/(Loss) on ordinary activities before tax 166,108 (97,681) 68,427 Tax (charge)/credit on profit/(loss) on ordinary activities j (38,113) 21,298 (16,815) Profit/(Loss) for the financial year 127,995 (76,383) 51,612 Other Comprehensive Income d - 10,758 10,758 TOTAL COMPREHENSIVE INCOME 127,995 (65,625) 62,370


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Reconciliation of Equity:

1st April 2014 31st March 2015 UK GAAP FRS 102

Transition Post-FRS

102 UK GAAP FRS 102

Transition Post-FRS

102 Assets Liquid Assets: Cash in hand and balances held with Bank of England

17,240,050 - 17,240,050 17,852,616 - 17,852,616

Treasury Bills 499,832 - 499,832 499,743 - 499,743 Loans & advances to credit institutions 32,943,868 - 32,943,868 23,665,430 - 23,665,430 50,683,750 - 50,683,750 42,017,789 - 42,017,789 Loans and Advances to Customers: Loans fully secured on residential property a,g 89,946,224 (308,836) 89,637,388 117,694,363 (729,150) 116,965,213 Loans fully secured on land a 4,975,353 22,764 4,998,117 4,789,823 (7,249) 4,782,574 94,921,577 (286,072) 94,635,505 122,484,186 (736,399) 121,747,787 Tangible fixed assets h,c 960,508 (224,602) 735,906 986,621 (234,430) 752,191 Intangible fixed assets h - 170,352 170,352 - 177,600 177,600 Investment Property c - 213,750 213,750 - 222,300 222,300 Derivative Financial Assets g - - - - 340,917 340,917 Deferred Tax asset j 39,017 (39,017) - 1,445 (1,445) - Prepayments & accrued income 59,022 - 59,022 94,541 - 94,541 Total assets 146,663,874 (165,589) 146,498,285 165,584,582 (231,457) 165,353,125 Liabilities Shares 125,239,277 - 125,239,277 128,767,175 - 128,767,175 Amounts owed to credit institutions - - - 5,457,261 - 5,457,261 Amounts owed to other customers 7,629,405 - 7,629,405 16,646,330 - 16,646,330 Other liabilities j 70,117 - 70,117 812,355 (24,946) 787,409 Deferred Tax Liability j - 8,907 8,907 - 25,181 25,181 Accruals and deferred income e 153,928 8,903 162,831 201,502 17,093 218,595 Provisions for liabilities f 127,047 (84,835) 42,212 127,864 (84,596) 43,268 133,219,774 (67,025) 133,152,749 152,012,487 (67,268) 151,945,219 Reserves Revaluation Reserve c 457,098 34,696 491,794 453,919 24,274 478,193 General Reserves 12,987,002 (133,260) 12,853,742 13,118,176 (188,463) 12,929,713 Total Liabilities and Reserves 146,663,874 (165,589) 146,498,285 165,584,582 (231,457) 165,353,125

a) Effective interest rate accounting

Previously under UK GAAP interest income and expense on financial assets and liabilities was accounted for on an accruals basis. In addition, fees directly attributable to the origination of financial assets or liabilities were recognised immediately in the Income and Expenditure Account whilst commissions were spread on a straight line basis over 12 months. Under FRS 102 (with IAS 39), the main change in accounting relates to the recognition of fees and commissions that are directly incremental to the acquisition or issue of financial assets or liabilities. These are included as part of the EIR and are included within interest income or expense for the associated assets and liabilities respectively. This results in fees and commission incomes that are integral to the effective interest rate of a loan being amortised over the expected life.


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a) Effective interest rate accounting (continued)

Financial assets and liabilities held at amortised cost under FRS 102 (with IAS 39) include the amount of any cumulative amortisation calculated using the EIR method of any fees and costs which are included as part of interest income or expense under EIR.

b) Impairment on loans and advances Under FRS 102 impairment provisions are calculated as the difference between the assets carrying amount and the present value of estimated future cash flows discounted at the assets original effective interest rate. Under UK GAAP the provision was calculated against those loans and advances where the Society’s experience and general economic climate indicated that losses may ultimately be realised whereas, under FRS 102 loans and advances are assessed to see if there is objective evidence of impairment. See note 1 for further explanation of the methodology. As a result, in the year ended 31st March 2015 the Society recognised an additional impairment loss of £2,143 in the Income and Expenditure Account.

c) Investment and freehold property

On transition to FRS 102, the fair value of the investment and freehold property was assessed; the net movement between removing the investment property portion of the reserve and increasing for the fair value of the freehold property was £7,333 in the year ended 31st March 2015. Adjustments for the deferred tax element of the revaluation reserve was £89,953 at the transition date.

FRS 102 requires all investment property to be recognised separately to Land and Buildings and its market value assessed on a yearly basis under the revaluation model. The Society commissions a triennial valuation of the entire property, the last valuation being conducted as at 31st March 2014. Management exercises its judgement as to the value of the property at the end of each intervening year and believes it appropriate to use the most recent market rate of increase. In the Financial year ended 31st March 2015, the Society recognised an income of £8,550 in the Income and Expenditure Statement related to the increase in value of the investment property and a debit to the asset of £8,550.

d) Presentational changes

Under UK GAAP certain costs were separately disclosed as exceptional (£43,810) and loss on disposal of fixed assets (£14,577) for the year ended 31st March 2015. This presentation is not permitted under FRS 102 and as a result are now included within administrative expenses.

In addition, there have been changes to the classification of the movements in respect of the Society’s defined benefit obligation. The change has been to increase administrative costs with an equal and opposite movement through other comprehensive income.

e) Employee benefits Under FRS 102 an accrual is required for unused holiday at each Balance Sheet date, with the movement in this accrual recognised in the Income and Expenditure Account.

f) Provision for liabilities

In accordance with IFRIC 21, the trigger date for recognition of a provision in respect of the FSCS levy is 1st April rather than 31st March. As a result, this is applied retrospectively and changes the carrying provision as at the date of transition.

g) Embedded Derivative

The Society has an Embedded Derivative which is bifurcated under FRS 102 (with IAS 39). The Embedded Derivative is attached to the shared equity mortgages within the EFAS portfolio. The Embedded Derivative is measured at fair value with the increase in value of £4,888 being recognised in the Income and Expenditure Account.

h) Tangible fixed assets

Under FRS 102 computer software has been reclassified from tangible to intangible fixed assets. This has had no effect on the Society’s net assets, net equity or on the profit for the year, except that the previous depreciation charge is now described as amortisation.


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i) Retentions

The value of the retentions held against the EFAS mortgage book, which are being repaid over 7 years, are discounted for the time value of money.

j) Taxation

The taxation charge has been impacted by the adjustments made above.

k) Cash flow statement

The Society’s cash flow statement reflects the presentation requirements of FRS 102, which is different to that prepared under UK GAAP. In addition, the cash flow statement reconciles to cash and cash equivalents whereas under UK GAAP the cash flow statement reconciles to cash, the latter definition being more restrictive.

27. Country-by-country Reporting

The Society is UK registered, with the head office and branch in one location in Reigate, Surrey. The chief operating decision maker has been identified as the Board. The Board reviews the Society’s internal reporting in order to assess performance and allocate resources. The table below sets out the country by country disclosures required by CRD IV:

Name Type of entity Nature of activity

Location Turnover Number of employees

Profit before tax

Tax paid in the year

£ £ £ Year ended 31st March 2016 Holmesdale Building Society

Credit Institution

Financial Services

United Kingdom

3,468,592 24 1,543,042 541

Year ended 31st March 2015

Holmesdale Building Society

Credit Institution

Financial Services

United Kingdom

2,291,941 25 68,427 nil

28. Subsequent events There have been no events subsequent to the year end to report.


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Annual Business Statement for the year ended 31st March 2016

1. Statutory percentages

At 31st March 2016 Statutory limit

% %

Lending limit 3.86 25

Funding limit 18.13 50 The above percentages have been calculated in accordance with the provisions of the Building Societies Act 1986. The lending limit measures the proportion of business assets not in the form of loans fully secured on residential property (calculated gross of mortgage loss provisions held). The funding limit measures the proportion of shares and borrowings not in the form of shares held by individuals. The statutory limits are as prescribed by the Building Societies Act 1986, and ensure that the principal purpose of a Building Society is that of making loans which are secured on residential property and are funded substantially by Members.

2. Other percentages

2016 2015

% %

Gross Capital as a percentage of Shares and Borrowings 8.41 8.89 Free Capital as a percentage of Shares and Borrowings 8.06 8.49 Liquid Assets as a percentage of Shares and Borrowings 27.45 27.85 Profit after Taxation as a percentage of mean Total Assets (excluding FSCS Levy)

0.85 0.08

Profit after Taxation as a percentage of mean Total Assets (including FSCS Levy)

0.80 0.04

Management Expenses as a percentage of mean Total Assets 1.21 1.29 Gross Capital represents the general and revaluation reserves as shown in the Balance Sheet. Shares and Borrowings represent the total of shares and amounts owed to other customers, including accrued interest. Free capital represents gross capital and provisions for collective impairment losses on loans and advances to customers, less property, plant and equipment, investment properties and intangible assets as shown in the Balance Sheet. Liquid Assets are taken from the amounts shown in the Balance Sheet. Management Expenses are the Administrative expenses plus Depreciation amortisation shown in the Income and Expenditure Account. Mean Total Assets are the average of the 2016 and 2015 total assets.


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Annual Business Statement for the year ended 31st March 2016 (continued)

3. Information Relating to the Directors, Chief Executive and Other Officers as at 31st March 2016 DIRECTOR’S NAME (and age at 31.03.16)

Date of Appointment

Business Occupation Other Directorships

J.M. Boss (39)

31.03.14 Building Society Finance Director –

K.E. Halstead (59)

22.02.05 Chartered Accountant –

D.G. Jervis (51)

29.09.14 Building Society Chief Executive Acclaim Business Solutions Limited

M.C. McDermott (59)

07.10.15 Business Adviser McDermott Solutions Limited The Dynamic Boardroom Limited

M.R. Neve (65)

20.11.95 Chartered Accountant –

Documents may be served on the above Directors at the following address:

Ref: Holmesdale Building Society c/o Thomas Eggar Belmont House Station Way Crawley West Sussex RH10 1JA

DIRECTORS’ SERVICE CONTRACTS None of the Directors has a service contract, except the Executive Directors, Mr D.G. Jervis (who has a service contract dated 1st September 2014, which may be terminated by either party giving six months’ notice), and Mr J.M. Boss (who has a service contract dated 10th March 2014, which may be terminated by either party giving six months’ notice). DIRECTOR’S/ OFFICER’S NAME (and age at 31.03.16)

Date of Appointment

Business Occupation Other Directorships

D.G. Jervis

(51) 01.01.15

Building Society Chief Executive Acclaim Business Solutions Ltd

J.M. Boss

(39)

31.03.14 Building Society Finance Director –

D.P.J. Old

(38)

04.01.16 Building Society Compliance Manager, Secretary/MLRO

–

Savings

01737 232320 [email protected]

Mortgages

01737 232310 [email protected]

General

01737 245716 [email protected] 54107 - REIGATE 2Fax 01737 246962Minicom 01737 223596

Chief Executive

David Jervis

Member of the Building Societies Association. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Our Firm Reference Number is 206037.

43 Church Street, Reigate, Surrey RH2 0AE

www.theholmesdale.co.uk