LEI: 213800WTQKOQI8ELD692

OneSavings Bank plc

(the Company)

2019 Annual Report and Accounts

The following regulated information, disseminated pursuant to DTR6.3.5, comprises the 2019 Annual Report and Accounts which was sent to shareholders of the Company on 31 March 2020. A copy of the Annual Report and Accounts is available at www.osb.co.uk.

Enquiries:

OneSavings Bank plc
Nickesha Graham-Burrell 
Head of Company Secretariat                                         t:  01634 835 796

Brunswick                                                                  
Robin Wrench / Simone Selzer                                       t:  020 7404 5959

Notes to Editors

About OneSavings Bank plc

OneSavings Bank plc (OSB) began trading as a bank on 1 February 2011 and was admitted to the main market of the London Stock Exchange in June 2014 (OSB.L). OSB joined the FTSE 250 index in June 2015. On 4 October 2019, OSB acquired Charter Court Financial Services Group plc (CCFS) and its subsidiary businesses. OSB is a specialist lending and retail savings Group authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority.

OneSavings Bank

OSB primarily targets market sub-sectors that offer high growth potential and attractive risk-adjusted returns in which it can take a leading position and where it has established expertise, platforms and capabilities. These include private rented sector Buy-to-Let, commercial and semi-commercial mortgages, residential development finance, bespoke and specialist residential lending, secured funding lines and asset finance.

OSB originates mortgages organically via specialist brokers and independent financial advisers through its specialist brands including Kent Reliance for Intermediaries, InterBay Commercial and Prestige Finance. It is differentiated through its use of highly skilled, bespoke underwriting and efficient operating model.

OSB is predominantly funded by retail savings originated through the long-established Kent Reliance name, which includes online and postal channels, as well as a network of branches in the South East of England. Diversification of funding is currently provided by securitisation programmes, the Term Funding Scheme  and the Bank of England Indexed Long-Term Repo operation.

Charter Court Financial Services Group

CCFS focuses on providing Buy-to-Let and specialist residential mortgages, mortgage servicing, administration and credit consultancy and retail savings products. It operates through its three brands – Precise Mortgages, Exact Mortgage Experts and Charter Savings Bank.

It is differentiated through risk management expertise and best-of-breed automated technology and systems, ensuring efficient processing, strong credit and collateral risk control and speed of product development and innovation. These factors have enabled strong balance sheet growth whilst maintaining high credit quality mortgage assets.

CCFS is predominantly funded by retail savings originated through its Charter Savings Bank brand. Diversification of funding is currently provided by securitisation programmes, the Term Funding Scheme and the Bank of England Indexed Long-Term Repo operation.

who we are

OneSavings Bank (‘OSB’) is a leading specialist mortgage lender, primarily focused on carefully selected segments of the mortgage market. Our specialist lending is supported by our Kent Reliance and Charter Savings Bank retail savings franchises. Diversification of funding is provided by sophisticated securitisation platforms.
OSB’s unique cost-efficient operating model is supported by our wholly-owned subsidiary OSBIndia.

On 4 October 2019, OSB combined with Charter Court Financial Services Group plc (‘CCFS’), bringing increased scale, diversification and product capabilities to the Group.

Our purpose

To become our customers’ favourite bank; one that delivers its very best, challenges convention and opens doors that others can’t.

Our strategy

} Be a leading specialist lender in our chosen market segments, targeting customers in underserved, secured lending market segments that offer attractive risk-adjusted returns

} Leverage OSB’s bespoke, manual underwriting
with CCFS’ automated risk assessment to offer a full range of specialist mortgages to our target market segments through our specialist brands

• Further deepen the relationships and reputation for delivery with our intermediaries increasing breadth of channels to market
• Deliver consistently good value savings products and excellent customer service to build on the Kent Reliance and Charter Savings Bank propositions
• Pursue sophisticated wholesale funding and active balance sheet management opportunities

View more online

Our investor site gives you direct access to a wide range of information about OSB: www.osb.co.uk

To find out more about our strategy, see Strategic framework on page 24

Why invest in OSB?

} Market-leading customer propositions

} Experienced leadership team

} Experts in specialist lending market segments, including professional Buy-to-Let

} Sustainable growth, margin and returns

} Strong risk management framework

} Capital strength

Highlights

On 4 October 2019, OneSavings Bank plc (‘OSB’) combined with Charter

Gross new lending

Net loan book

Court Financial Services Group plc (‘CCFS’), creating a leading specialist lender.

As a result, throughout this Strategic Report, in addition to statutory results, we also present pro forma underlying results.

Read more on page 46

+36%                         +10%                                                  +105%                        +16%

Net interest margin

Cost to income ratio

(0.62)

bps

(0.20)

bps

+4pts                   +1pt

} Group statutory 2019
} Group statutory 2018
} Group pro forma underlying 2019
} Group pro forma underlying 2018

Loan loss ratio                                              Profit before tax                                          Basic EPS

(pence per share)

+0.03

bps

+0.03

bps

+14%

+9%

(5)%

+9%

Return on equity

(7)

pts

(3)

pts

Explanation of statutory

and pro forma underlying results

Fully loaded Common Equity Tier 1 ratio

+2.7

pts

Statutory results

In this Annual Report, statutory results are the results prepared under the requirements of accounting standards and constitute the Financial statements.

Statutory results reflect 12 months
of OSB’s results and CCFS’ results from 4 October 2019, the date on which the Combination completed and became effective, to 31 December 2019. The comparative period results reflect 12
months of OSB’s results only as presented in the OSB 2018 Annual Report.

Pro forma underlying results

Pro forma underlying results are also presented in the Strategic Report, as Management believes they provide a more consistent basis for comparing the Group’s performance between financial periods.

Pro forma underlying results assume that the Combination occurred on
1 January 2018, and include 12 months of results from CCFS. They also exclude exceptional items, integration costs and other acquisition-related items.

A reconciliation between results
on a pro forma underlying basis and statutory basis is presented on page 51, and the calculation of APMs is presented in the Appendix on page 260.

Full year dividend per share (pence per share)

+10%

1. To align calculation methods post Combination, OSB amended NIM calculation to include average interest earning assets on a 13 point average from a simple average. The comparative NIM ratio was restated.
2. To align calculation methods post Combination, loan loss ratio was amended to include gross loans on a 13 point average from a simple average. The comparative ratio remained unchanged.

3. Profit before tax was restated to recognise interest expense on the £22m Perpetual Subordinated Bonds previously classified as equity.
4. To align calculation methods post Combination, return on equity was amended to include average shareholders’ equity on a 13 point average from a simple average.

The comparative ratio was restated.

It is a year since we announced the
Combination and I am particularly pleased that both businesses maintained momentum during the process of the transaction. Strong financial and operational performances by both OSB and CCFS underpin the
first combined results for the Group.

As promised, we moved at pace to deliver the Combination and I will introduce
you later to the newly combined Board. We have also created a single Executive team and are well advanced in merging corporate and support functions.

I am confident that we have the right team in place to complete the integration and deliver greater shareholder value through the enhanced capabilities we have across the Group. We are on target to create a leading specialist lender in the UK.

Focused on our stakeholders

Your Board is focused on ensuring that the Group delivers value to all our
stakeholders – our customers, our people, our owners, our partners and the wider community, all within a secure risk management framework. On page 89 we talk in more detail about our stakeholder approach (s.172); nonetheless, I would like to highlight a couple of achievements during a year of significant change:

} Both OSB and CCFS achieved
exceptional customer Net Promoter Scores in the year, demonstrating strong customer satisfaction, and
} Employees also continue to demonstrate their satisfaction and both OSB and CCFS were included in the Sunday Times 100 Best Companies to Work For in 2019.

Board and corporate governance framework

Following completion of the Combination,
I have the pleasure of introducing the Group’s newly combined Board to
shareholders. All members are introduced on pages 96 and 97 of this Annual Report. Changes were necessary in order to downsize the combined Board and we are now at eight people. The combined Board is committed to the highest standards of corporate governance and we have made several changes to our Board and Committee membership.

I would like to thank the Board for its continued dedication during the
Combination and the integration work to date. I would also like to personally thank Sir Malcolm Williamson, who recently retired from his role as Non- Executive Chairman of the Board, for his contribution to CCFS and OSB and for his stewardship that led to the successful combination of the two groups. I would also like to thank Eric Anstee, Rod Duke, 
Tim Brooke, Margaret Hassall and
Ian Ward, who have stood down from the Board or are not standing for election or re-election at the AGM, for their significant contributions to OSB and CCFS; Eric as previous Chair of the OSB Audit Committee, Rod as Senior Independent Director for OSB, Margaret as a member of various Committees for OSB and Tim and Ian for their contributions to CCFS.

Dividend proposal

I am pleased to welcome all of our new shareholders to the register. In recognition of the Group’s continued excellent progress and confidence in its future prospects, the Board is recommending the payment of a final dividend of 11.2 pence per share. Together with the interim dividend of 4.9 pence per share, this brings the total ordinary dividend for the year to 16.1 pence per share. 

Future prospects

The economic outlook remains uncertain, as it has been since the decision to
leave the European Union was taken. Negotiations regarding trade deals and our ongoing commercial relationships continue. The potential impact of the Coronavirus on the global and UK economies is also very uncertain at this time. However, we have continued to deliver excellent business growth and increased returns. Now, with greater scale, enhanced underwriting capabilities and leading positions in the market segments we serve, we are better positioned to deliver attractive, sustainable returns
for our shareholders, across the cycle. 
Before I go, I cannot leave without mentioning the obvious; the critical importance of all my colleagues (wherever they are based, in the UK or in India) to the success of the business. I do so unashamedly and
would like to thank all of you for your dedicated contribution during 2019. You are building a fantastic business.

David Weymouth

Non-Executive Chairman

19 March 2020

The rationale behind the Combination

• Create a leading specialist lender in the UK with greater scale and resources to deploy on growth opportunities.
• Leverage complementary strengths to create a comprehensive and diversified platform across product capabilities, brands and team cultures.
• Leverage complementary underwriting capabilities to enhance the customer proposition.
• Establish well-balanced, resilient and diversified retail-wholesale funding platform.
• Maintain two leading, independent distribution platforms to create an enhanced proposition to the broker community.

} Maintain operational centres of excellence
to drive service levels and platform efficiency.

Resources and relationships

Brands and heritage We have a family of specialist lending brands targeting selected segments of the mortgage market underserved by large and medium UK banking institutions, as well as our savings franchises through Kent Reliance, with its 150-year heritage, and the Charter Savings Bank brand.

Employees Our team of highly skilled employees possesses expertise and in-depth knowledge of the property, capital and savings markets, risk assessment and customer management.

Infrastructure We benefit from cost and efficiency advantages provided by our wholly- owned subsidiary OSBIndia as well as credit expertise and mortgage administration services provided by Exact Mortgage Experts.

Relationships with intermediaries Our strong and deep relationships with mortgage intermediaries that distribute our products continue to win us industry recognition.

Capital strength We have a strong CET1 ratio and proven capital generation and management capability to support significant loan book growth through profitability.

Sophisticated funding platform Our key strengths Stable savings funding via Kent Reliance and Charter Savings Bank brands Capital markets expertise with securitisation platforms allowing for programmatic issuance of high quality residential mortgage-backed securities (‘RMBS’)

Statutory retail deposits £16.3bn 2018: £8.1bn

Specialist lending business Our key strengths } Strong levels of mortgage origination } Excellent loan performance } Award-winning product propositions } Strong relationships with intermediaries

Statutory net loans to customers £18.4bn 2018: £9.0bn

Unique operating model Our key strengths OSBIndia: Best-in-class customer service Exact Mortgage Experts: credit expertise and mortgage administration service Continued, disciplined cost management

Statutory cost to income ratio 32% 2018: 28%

 

Strategic priorities

• Provide cost-efficient funding through a resilient and diversified funding platform to support our future growth
• Deliver consistently good value savings products to our customers
• Pursue sophisticated wholesale funding markets and efficient balance sheet management

Strategic priorities

• Be a leading specialist lender in our chosen market segments
• Retain focus on our complementary underwriting platforms: OSB’s bespoke and manual and CCFS’ automated risk assessment platforms
• Further deepen relationships and distribution with intermediaries

Strategic priorities

• Continue to leverage our unique and cost-efficient operating model
• Leverage deep credit expertise and data analytics of Exact Mortgage Experts
• Maintain an efficient, scalable and resilient infrastructure

£5.7bn

2018: 13 securitisations worth £4.2bn

Assets administered by Exact as at

31 December 2019

£9.3bn

2018: £7.8bn
(pro forma underlying)

Outcomes and value creation
For shareholders
Statutory basic EPS 52.6p	Dividend per share 16.1p
For customers
OSB customer NPS1 +66	OSB customer retention2 91%
CCFS customer NPS1 +72	CCFS retention2 88%
For intermediaries
OSB broker NPS1 +27	CCFS broker NPS1 +18
For employees
Total number of employees at the end of 2019 1,834	Number of Group employees promoted in 2019 206
For communities
Pro forma underlying sponsorship and donations3 £398k
1. OSB customer score relates to Kent Reliance savings customers; CCFS customer NPS relates to Charter Savings Bank customers; OSB broker NPS relates to Kent Reliance brokers and CCFS broker NPS relates to Precise Mortgage brokers. 2 Retention is defined as average maturing fixed contractual retail deposits that remain with the Bank on their maturity date. 3. Includes pre-Combination donations from CCFS.

 

Specialist lending

Buy-to-Let/SME sub-segments

Residential sub-segments

business

Gross loan book1

£10.8bn

2018: £9.0bn

Buy-to-Let

We provide loans to limited companies and individuals, secured on residential property held for investment purposes. We target experienced and professional landlords or high net worth individuals with

Residential development

We provide development loans to small and medium- sized developers of residential property.

Funding lines

First charge

We provide loans to individuals, secured by a first charge against their residential home.

Our target customers include those with a high net worth and complex income streams.

Funding lines

We provide funding lines to non-bank lenders who operate in high-yielding, specialist sub- segments  such as residential bridge finance.

 

originations1

£3.4bn

2018: £3.0bn

 

property portfolios.

Commercial mortgages

We provide loans to limited companies and individuals,

We provide loans to non-bank finance companies secured against portfolios of financial assets, principally mortgages and leases.

Asset finance

We are also experts in shared ownership, lending to first-time buyers and key workers buying a property in conjunction with a housing association.

Second charge

Net interest

secured on commercial and                   

We provide loans to individuals

income1

£316m

2018: £286m

semi-commercial properties held for investment purposes or for owner-occupation.

We provide loans under hire purchase, leasing and refinancing arrangements to UK SMEs and small corporates to finance business-critical assets.

seeking to raise additional funds secured by a second charge against their residential home.

Sophisticated funding platform

Statutory retail deposits

£16.3bn

2018: £8.1bn

17

Securitisations since 2013 across OSB and CCFS worth over

£5.7bn

Retail savings Online

Kent Reliance is our award-

winning retail savings franchise with over 150 years of heritage, attracting retail savings deposits via the internet.

Charter Savings Bank is a multi- award-winning online bank providing a range of competitive savings products.

D irect

The direct channel sources savings products via telephone (Kent Reliance) and post

(Kent Reliance and Charter Savings Bank).

High street branches

       

Our Kent Reliance branded network operates in the South East of England and offers a variety of fixed, notice, easy access and regular savings products, including ISAs.

Charter Mortgage Funding (‘CMF’) franchises, completing 12 securitisations worth more than £3.8bn since 2013 to

31 December 2019.

OSB issued its inaugural securitisation under Canterbury Finance in July 2019, having previously issued two securitisations in the

Rochester programme.

Specialist lending business

Gross loan book2

£7.4bn

2018: £6.7bn

Organic originations2

£3.1bn

2018: £2.8bn

Net interest income2

£202m

2018: £181m

Buy-to-Let

We provide products to professional and non- professional landlords with good quality credit history, through a wide product offering, including personal and limited company ownership and lifetime trackers.

Residential

We provide a range of competitive products to prime borrowers, complex prime borrowers (including self-employed, Help to Buy, Right to Buy and new-build) and near-prime borrowers.

Bridging

We offer products with flexible features, focusing on lending to prime borrowers only, for customers who need to fund short-term cash flow needs, for example, to cover light

and heavy refurbishments, home improvements, auction purchases and also to ‘bridge’ delays in obtaining mortgages and ‘chain breaks’.

Second charge

We offer loans to prime residential and Buy-to-Let customers, with low loan- to-value ratios, who require additional capital and who wish to secure a loan with a charge against a property which is already charged

to another lender.

Unique operating model

Statutory cost to income ratio

32%

2018: 28%

Assets administered by Exact

£9.3bn

2018: £7.8bn (pro forma underlying)

OSBIndia

OSBIndia (‘OSBI’) is a wholly- owned subsidiary based in Bangalore, India.

OSBI puts customer service at the heart of everything it does, demonstrated by our excellent customer Net Promoter Score.

Various functions are also supported by OSBI, including support services, operations, IT, finance and human resources.

We have a one team approach between the UK and India.

OSBI operates a fully paperless office – all data and processing are in the UK.

Our vision is to become our customers’ favourite bank; one that delivers its very best, challenges convention and opens doors that others can’t.

Strong relationships, built on regular engagement with all our stakeholders, are fundamental to achieving this vision, central to the Group’s culture and embedded

in the Board’s responsibilities.

The Combination with CCFS extended

In addition, the Management and the Board engage with customers through
the Kent Reliance Provident Society (‘KRPS’) which conducts customer engagement activity studies for OSB. During 2019 KRPS conducted six such studies.

For further information on how we focused on being our savings customers’ favourite bank in the year, see page 76.

Shareholders

As a result of the Combination with CCFS, we welcomed new investors to OSB Group and some of our existing investors increased their holdings.
Even though our shareholder register has changed, our approach to

our stakeholder reach as we added new colleagues, customers, brokers and shareholders. The Board is committed to doing the right thing for all of our stakeholders as they fulfil their duty to promote the success of the Group under section 172 of the Companies Act 2006.

The following pages outline how OSB Group engaged with its key stakeholders during the year, which includes information on how the Directors have discharged their duty under section
172 of the Companies Act 2006. For more information on how the Directors discharged their duty under section 172 of the Companies Act 2006, see page 89 and the Corporate Governance Report.

Customers

We pride ourselves on delivering straightforward and transparent products and propositions to both our borrowers and our savers.

Each time that Kent Reliance savers call
or interact with the Bank, we offer them an opportunity to let us know how we did. We listen to them and act upon what they tell us. The feedback that we regularly gather informs and reflects our unique product offering and the excellent customer service we offer. We consistently achieve high satisfaction scores and in 2019 the Kent Reliance customer Net Promoter Score increased to +66.

97% of customers who save via Charter Savings Bank had a good or excellent experience with the Bank1 and the Net Promoter Score increased to +72 in 2019.

Kent Reliance welcomed over 40,000 new savings customers in the year and achieved a retention rate of 91%. Charter Savings Bank had nearly 27,000 new customers join in the year, reflecting our propositions being highly valued in the marketplace, with an 88% retention rate.

The satisfaction scores, retention rates, together with the number of complaints, and how long it took us to resolve them, form part of the management and Board monthly reporting packs, ensuring the visibility of the customer experience to management.

investor engagement has remained straightforward and uncomplicated as we favour an open dialogue.

The Group’s Chief Executive Officer (‘CEO’) and Chief Financial Officer (‘CFO’) are supported by the Investor Relations team and meet with institutional investors and sell-side analysts. The Board’s primary contact with shareholders comes through the CEO and the CFO. The Board is also regularly informed by Investor Relations updates which include shareholders’ feedback, analysts’ recommendations and market views.

The Annual General Meeting is another opportunity for shareholders to engage and it is attended by Board members and Management.

As a result of the Combination with CCFS, the Group conducted a remuneration consultation regarding the Executive Directors during the year, consulting with the top 20 shareholders. This included meetings attended by the then Chairman, Sir Malcolm Williamson, and the new Chairman, David Weymouth, providing
an opportunity to discuss not only the proposed remuneration, but also any other topics of interest to our investors.

In 2019, for OSB only, the Investor Relations team met 140 individual investors at one-to-one meetings, industry conferences and roadshows.

Our corporate website contains useful investor information, as well as the Group’s previous results: www.osb.co.uk/investors

For further information on how the Board engaged with the shareholders in the year, please see

page 108.

Intermediaries

All of our lending products, with the exception of funding lines and residential development loans, are distributed via mortgage brokers. Needless to say, mortgage intermediaries are vital
to our success.

The unique and consistent lending propositions across all lending brands fulfil our goal of making it easier for intermediaries to serve our borrowers. However, our efforts extend beyond our proposition, as we continuously
enhance the service we provide, grow our teams as the number of intermediaries grows and regularly engage with
the broker community. Our business development managers listen and work with intermediaries, making themselves available to discuss cases and helping to obtain swift and reliable decisions.

The Board and Management track broker satisfaction scores in monthly Board reporting packs. The Board is also presented with monthly borrowers’ satisfaction scores for both the OSB and CCFS brands and details of complaints.

The OSB Sales team participated in 224 intermediary events and CCFS in 297 during 2019, interacting with brokers and keeping abreast of industry developments and intermediary requirements. The OSB broker NPS score was +27 and the CCFS score was +18 for 2019.

Colleagues

Our people are our key asset, and our success depends on the talented individuals we employ. Following the
Combination with CCFS, the talent pool of the combined Group increased and at
the end of 2019 we had 1,834 employees.

We have always favoured two-way communication between management and our employees through regular town hall meetings, informal sessions with management and opportunities to ask questions anonymously. These interactions are a source of many initiatives undertaken throughout the
business to make OSB the best workplace it can be. We have introduced ‘OneVoice’, a platform for employees to express their ideas and feedback. This increases the level of engagement that employees have with the Board and operates as a formal forum. The forum meets quarterly and representatives from each Group office location gather opinions from employees and feed this back to the Board and Executives.

What our employees think is paramount to us and we also regularly ask for their opinion in Group-wide surveys. Responses from UK employees enabled us to enhance the working experience, resulting in
both OSB and CCFS being included in The Sunday Times 100 Best Companies to Work For in 2019. OSB employees also
took part in the Banking Standards Board Survey for the third time. OSBIndia was officially certified as a ‘Great Place to Work’ in 2019. Detailed results of these surveys are also discussed by the Board and feature frequently on the Board’s agenda.

For more details on how we strived to make OSB the best workplace it can be, see page 77.

Communities

OSB Group cares about the communities in which it is based. Each year, OSB engages with charitable causes in Kent and supports a chosen national charity by taking part in a variety of charitable events and partnerships. CCFS is heavily involved in the West Midlands community and every year supports a chosen local charity. OSBIndia is also active in the community local to the office in Bangalore, as well as in areas where there are critical needs.

In 2019, the combined Group raised
£398,0002 for its charity partners and
our employees dedicated time in a variety of volunteering activities.

For more information on how the Group engages with the communities it operates in, see page 86.

Market review

UK Buy-to-Let gross advances

£41bn

Source: UK Finance, New and outstanding Buy-to-Let mortgages, 6 Feb 2020.

UK average house price inflation

2.2%

Source: ONS, UK House Price Index, 19 Feb 2020.

The UK housing and mortgage market

For the majority of 2019, the housing market continued to experience slowing transaction levels from lacklustre buyer demand as recent trends continued.
Political uncertainty surrounding Brexit continued and caused a market drag,
with prospective buyers delaying decisions until the outlook became clearer. The combination of affordability challenges and low housing supply also contributed to slowing levels of transaction activity.
House price growth fell with price reductions again seen in some parts of London and the South East.

However, the year ended on a more buoyant note for the housing market following the results of the UK General Election in December 2019. There was a boost in market activity in the final weeks of 2019 which has continued into 2020, matched by strong house price growth in the first month of the year. Reports of both new instructions and new buyer enquiries are at their highest level since before the Brexit referendum in 2016. As uncertainty reduces, pent-up demand is being released into the marketplace. This demand is supported by low mortgage interest
rates as competition persists.

According to the Bank of England, gross mortgage lending reached £267.6bn1
in 2019, broadly flat compared with
£269.3bn in 2018, with refinancing driving lending activity.

The UK savings market

The UK savings market continued to grow in 2019 with c.£71bn added in the year to reach a total of £1,731bn2 (2018: £1,660bn).

Despite new competition entering the savings market (6% more providers than a year ago2), rates showed a gradual decrease during 2019 as a result of economic uncertainty caused in part by concerns around Brexit. Average one-year fixed rate bonds were paying 1.23% in December 2019, down from an average of 1.45% a year ago, with similar falls seen in the longer-term bond market (34bps) and ISA fixed bond markets (17bps for one- year ISA and 25bps for longer-term ISAs).2

Average rates also fell on no-notice accounts, down from 0.63% to 0.60% at the end of 2019, with ‘top of the market’ rates falling by c. 15bps.2 Although the Bank of England base rate has remained at 0.75% since August 2018, the percentage of accounts paying over base rate has now fallen to 68.7%, the lowest percentage since September 2018.2

Despite the falling interest rates, variable rate products continued to be popular with growth of £25bn2 in the year, 35% of total growth, as customers sought flexibility and accessibility of their funds over higher returns, potentially reflecting the macroeconomic uncertainty during the year.

Aside from the rates offered, other trends in the savings market included:

• the growth of platforms in the UK, which offer a marketplace for savings products and a ‘one-stop shop’ for consumers to maximise their Financial Services Compensation Scheme coverage while benefiting from competitive deposit rates, and
• a resurgence in ISA accounts has been seen for the first time since the introduction of the personal savings allowance in 2016.

The Group’s lending segments

Buy-to-Let/SME

Positive dynamics for the specialist Buy-to-Let sector

Government and regulatory intervention in the Buy-to-Let segment of the mortgage market slowed in 2019, following a period of sustained regulatory change. The only notable changes during the year were the penultimate instalment of the phased tax relief restrictions in April (which will be fully implemented from 6 April 2020) and the implementation of the Tenant Fees Act on 1 June 2019.

Whilst these changes have the potential to disrupt the Buy-to-Let sector, the impact
is likely to be relatively small against the context of much larger regulatory
changes in recent years. The culmination of these changes to the regulatory and tax landscape has deterred amateur landlords from entering the segment, while professional landlords have had to adjust their approach by diversifying their portfolios – benefiting the more specialist aspects of the market such as limited company Buy-to-Let and high-yielding property types.

The private rented sector, however, grew in 2019, showing its sustained importance to the UK housing market, and new lending in the Buy-to-Let segment increased 1%  to £41.0bnfrom £40.5bn in 2018.3 Despite a softening of house price inflation in 2019, house prices remain high, and affordability measures remain stretched, as such, the market for rental property is expected to remain strong. Landlord confidence did, however, fall in 2019, weighed down by political and economic uncertainty, and perhaps exacerbated by the introduction of the Tenant Fees Act in June. This
could ultimately put upwards pressure on rents as landlords pass on increased costs via rent hikes or sell properties, leading to reduced supply. However, 2020 has started on a positive note with
reduced uncertainty fuelling a rise in sales expectations, consumer confidence and housing market indicators.

The trend in amateur landlords withdrawing from the market looks set to stay, leaving professional landlords, whose primary income is obtained from their property portfolio, to pick up the
demand. The professional segment, whilst not immune to the changes, has persisted because of the strong fundamentals which underpin it: sustained demand from tenants, and the potential for long-term capital gains.

Borrowing through limited company structures also continues to be a feature of the market, with professional landlords continuing to mitigate the impact of income tax changes via this route. The Group is a respected lender within the specialist Buy-to-Let sector, through its Kent Reliance, InterBay Commercial and Precise brands, with a strong reputation for limited company lending which has been beneficial to date and is expected to continue to be so.

Commercial

Resilience in UK yields

Investment in UK commercial property reduced to £48.4bn4 in 2019, a fall
of c.£11.0bn compared with 2018, although that figure remains above the ten-year average.

Since the UK General Election, anecdotal evidence suggests increased investor activity, and there is optimism that greater political certainty could lead to positive investment returns across the sector in 2020 and during the next five years.

The UK remains attractively priced, relative to other European markets, largely due to perceived Brexit risk. Overseas investors continued to dominate the segment in 2019, increasing market share to 49%,4 with a significant rise in North American investors.

The office segment performed well
in 2019, with rents increasing in central London and other key UK cities, while demand for industrial and logistics space is supported by continued growth in e-commerce.

Once again, the retail property segment is expected to be challenging during 2020, with values in high-yielding high streets and shopping centres likely to be the hardest hit, and where excess space may need to be redeveloped and repositioned for alternative uses.

The lending segment is dominated by the high street banks. Opportunity exists for specialist lenders, whose manual underwriting approach, and willingness to engage in a dialogue to ensure robust
understanding of customer requirements, can provide a service differential.

Residential development

Continued under-supply

The UK has experienced a long-term upward trend in real house prices, creating affordability problems, as demand for housing outstripped both supply and real wage growth. Turnover in the second- hand housing market has fallen, resulting in reduced liquidity within this segment.

The new-build segment has also been adversely affected, especially in London, with some regions structurally reliant on the Government’s Help to Buy product, which will be restricted to first-time buyers and be subject to regional caps from April 2021. The support required by the small and medium-sized developers, which form our core audience for development finance, will continue to increase as high street lenders appear to be pulling away from development finance.

Specialist residential lending

In spite of support from the Help to Buy scheme, political uncertainty and lower remortgage activity impacted the market- wide residential sector, which was largely flat in 2019 compared with 2018.

The Help to Buy scheme remains popular and has supported strong first-time buyer activity in recent years and UK Finance suggests that Government support for the scheme has had a material impact on the supply of new homes. The Help to Buy scheme was originally due to end in 2021; however, it has been extended until April 2023 but will be restricted to first-time buyers only and regional price caps will
be applied.

Market analysis by Savills estimates that 36%5 of current Help to Buy sales across England could be lost once the new regional house price caps are introduced if developers fail to adapt the size of homes they deliver.

Residential remortgage activity decreased by 1.8% in 2019 to £80.2bn6 compared with £81.6bn in 2018. Remortgages
have been fuelled by low rates and uncertainty in recent years as borrowers looked to lock in their repayments for the medium term. The remortgage market slowed throughout 2019 due to the market shift towards five-year fixed rate products and the concurrent growth in product transfers.

The Group targets complex prime borrowers including those with non- standard asset and income structures, the self-employed, Help to Buy, Right to Buy, new-build and near-prime borrowers as well as those seeking shared ownership mortgages. They are ill-served by the commoditised and inflexible decision- making processes of mainstream lenders.

Second charge lending

 

The second charge sector grew strongly  in 2019, with approximately £1.25bn7 of gross new lending (2018: £1.07bn). Growth has been supported by increased house prices over the past few years, which
has reduced outstanding loan to values, increasing the capital available for release via a second charge. Homeowners are also moving less frequently, partly due
to market uncertainty, and are instead choosing to remain in their current property and make home improvements which
may be financed by a second charge loan. There is also the potential for the growing volume of borrowers on five-year fixed rate mortgages to use a second charge mortgage rather than remortgage, to avoid the cost of early repayment charges.

Funding lines

 

Strong pipeline

There are a number of successful non- bank or alternative providers of finance to retail and SME customers in the UK. These businesses are funded through a variety  of means, including wholesale finance provided by banks and securitisation/bond markets, high net worth investors and market-based/peer-to-peer platforms.

OSB is an active provider of secured funding lines to these specialty finance providers, to date focusing on short- term real estate finance, leasing and development finance. Through these
activities OSB has achieved senior secured exposure at attractive returns to asset classes that it knows well. This financing activity covers a broad range of business sectors and its overall size is thus difficult to quantify. OSB sees a regular flow of opportunities, adopts a very selective approach and has a strong pipeline
of new business.

1. 1. UK Finance, New mortgage lending by purpose of loan, 3 Feb 2020.
   2. Moneyfacts, UK Savings Trends Treasury Report, Dec 2019.
   3. UK Finance, New and outstanding buy-to-let mortgages, 6 Feb 2020.
   4. Savills, UK Commercial outlook, January 2020.
   5. Savills, Market in Minutes: New Homes and Help to Buy, December 2019.
   6. UK Finance, UK residential originations, 18 February 2020.
   7. FLA, Second charge mortgage market reports volumes up by 19% in 2019, Feb 2020.

Chief Executive Officer’s statement

We successfully completed our Combination with Charter Court

We are in the early stages of integration, however, I am pleased with progress so far and I am particularly happy to have many talented staff from both organisations working really well together to benefit the combined Group.

The logic for the Combination

remains compelling.

Andy Golding

CEO

I am delighted with OneSavings Bank’s achievements in 2019 and particularly pleased that we successfully completed our Combination with Charter Court Financial Services Group plc (‘CCFS’), whilst delivering strong results for the year, in both Banks. We are in the early stages
of integration, however, I am pleased with progress so far and I am particularly
happy to have so many talented staff from both organisations working really well together to benefit the combined Group.
I am also pleased with progress to date on integration.

The logic for the Combination remains compelling: to create a leading specialist lender, focused on providing fair financial solutions to our customers, with greater scale and resources to deploy on growth opportunities.

Statutory pre-tax profit was up 14% to
£209m for 2019, as a result of strong growth at attractive margins and the inclusion of CCFS’ profits from the date
of Combination, more than offsetting the impact of exceptional items, integration costs and other acquisition-related adjustments. Despite the increase in profit, statutory basic earnings per share decreased by 5% to 52.6 pence per share, due to the increased share count post Combination. On a pro forma underlying basis, profit before tax and basic earnings per share both increased by 9%, due to strong growth at attractive margins and continued cost-efficiency and discipline.

Statutory net interest margin (‘NIM’) for 2019 reduced to 243bps (2018: restated 305bps1), primarily due to the dilutive impact of including CCFS’ results post Combination and the impact of the changing mix of the OSB loan book, despite broadly stable asset pricing.

The CCFS business has a lower NIM than the OSB business and statutory NIM in 2019 was also negatively impacted by the amortisation of the fair value uplift on acquisition of the CCFS loan book. The mix of the OSB loan book continued to change as the higher yielding back book refinanced onto front book pricing. The impact of this mix effect had largely run its course by the end of the first half, assuming stable mortgage pricing, cost
of funds and swap spreads going forward.

On a pro forma underlying basis NIM was 266bps (2018: 286bps) and reflected the changing asset mix of the OSB loan book and marginally higher cost of funds of CCFS’ business.

Our customer-focused propositions are designed to position the Group as a credible partner of choice with
intermediaries in the specialist mortgage markets in which we operate. The complementary nature of OSB’s bespoke, manual underwriting approach and CCFS’ automated risk assessment, together with strong risk management and enhanced stress testing, give us
a deep understanding of our lending market segments.

We strengthened our funding model during the year as OSB returned to the securitisation market with our inaugural transaction under the self-originated Canterbury Finance programme, and CCFS successfully executed a transaction in its Buy-to-Let PMF programme. The expertise in securitisation funding and balance sheet management is a capability that has been enhanced through the Combination and demonstrates efficiency in accessing the capital markets. I am pleased that in early 2020, we had the opportunity to execute further transactions, demonstrating our agility in this market by selling notes we held from the Canterbury securitisation generating a gain on sale of c. £18m.
In addition, the Group sold its entire economic interest in PMF 2020-1B resulting in a gain of £2m on a statutory basis
and £15m on an underlying basis.

An award-winning secured lender

Through the Combination and underlying growth, the Group’s statutory loan book more than doubled in 2019 to £18.4bn. On a pro forma underlying basis, it grew by 16% from £15.6bn in 2018, or 23% excluding the impact of structured asset sales in CCFS.

Mortgage originations in the year were
£6.5bn for the combined Group on a pro forma underlying basis. Such strong new business volumes reflect the
attractiveness of our lending propositions to borrowers, particularly to professional landlords, and the excellent levels of customer service the Banks provide.

Our Buy-to-Let businesses grew in the year
                                                                           as landlords continued to professionalise

Our target market of professional/ multi-property landlords accounted for 81% of completions by value for
OSB during 2019, with a continued high proportion of professional landlords choosing to remortgage with us as their existing mortgage reaches maturity.
This performance demonstrates the success of our Choices programme and the sustainable strength of OSB’s proposition, in particular our specialist, manual underwriting, as well as our deep and historical relationships with mortgage intermediaries.

The OSB Buy-to-Let sub-segment gross loan book grew by 19% to £7,727m from
£6,518m in 2018.

The commercial sub-segment of Buy- to-Let/SME, which lends through the

“Strong new business volumes reflect attractive lending propositions.”

and look for a reliable lender with
specialism and expertise in lending to limited companies and portfolio landlords. Both OSB and CCFS have distinct, but complementary, propositions in their

InterBay brand, had a very successful year, with the loan book reaching £888m at 31 December 2019 (2018: £548m),
an increase of 62%. We used our strong understanding of this sub-segment

                                                                           target lending market segments, meaning
different customer and intermediary preferences can be satisfied, ensuring the Group can maximise its share of new originations. We intend to preserve and build on the value of OSB’s and CCFS’ individual lending brands through a multi-brand lending strategy.

OSB and CCFS have further strengthened broker networks and relationships with mortgage intermediaries in the year, especially amongst those that support borrowers with more complex needs.
The Combination allows us to underwrite a wider range of customer cases than would have been possible as standalone businesses. On a pro forma underlying basis, the Group sustained its market share as industry-wide gross Buy-to-Let advances reached £41bn2 in the year.

For 2019, the Group reported under two segments: OSB and CCFS.

The OSB’s Buy-to-Let/SME sub-segment performed well during 2019, with new Buy-to-Let/SME mortgage originations
of £2.8bn, as we continued to target both professional, large portfolio landlords and those investing in commercial and semi- commercial property.

and our investment in products, service and innovation to build a proposition that proved increasingly popular with commercial borrowers. In 2019, we further increased distribution among our intermediaries who focus more on this market sub-segment. This business lends at sensible loan to values (‘LTVs’), and generates strong returns on a risk- adjusted basis.

We continue to be cautious in our approach to asset finance, however, InterBay Asset Finance performed well in the year as
we saw high-quality opportunities.

OSB’s Heritable Development Finance business provides development finance to small and medium-sized residential developers operating in areas of the UK where demand for housing is consistently

strong. The business had commitments to finance the development of just over 2,000 residential units as at the end of 2019.

The Bank’s secured funding lines business in both Buy-to-Let/SME and Residential segments continued to grow, with cautious risk fundamentals applied. Total commitments have increased by 31% to
£571m, with total loans outstanding of
£234m. This increase was due to increased commitments with certain existing customers and three new funding lines were added during the year.

The OSB residential net loan book grew by 14% to £1,837m (2018: £1,616m)
largely through increased originations, as we saw attractive opportunities in more complex prime and second charge
segments and the products we introduced in 2018 continued to prove popular with our borrowers.

CCFS originated £1.9bn of new Buy-to-Let

CCFS bridging finance activities maintained their focus on high-quality lending in the year, and as a consequence saw strong repayments as well as originations, leading to a reduction in net loans of 12% to £214m during the full year on a pro forma underlying basis. We chose to be cautious and did not react to increased price competition during the year.

Both segments concentrate on new and existing customers, investing in and improving our sales capability
across our brands. We continued to gain recognition from mortgage customers and intermediaries, and in 2019 we won multiple awards. For OSB these included Best Buy-to-Let Lender and Best Specialist Lender from Mortgage Strategy Awards. I am particularly pleased that Kent Reliance
was awarded Best Specialist Lender from                                                                           

mortgages on a pro forma underlying basis, an increase of 15% from £1.6bn in 2018. This growth reflects the continuing demand, whilst maintaining a disciplined approach to underwriting. As with OSB,

CCFS observed a continued trend that is supportive of professional landlords, with increased use of limited company structures and a move towards higher
yielding property types. CCFS proactively improved service standards early in
the year, which was well received by intermediaries. As a result, CCFS was ranked highly according to research by BVA BDRC, as the lender mortgage intermediaries are most likely to recommend to portfolio landlords.

The CCFS residential net loan book grew by 27% to £2,167m on a pro forma
underlying basis, despite a small reduction in originations, as no portfolio asset sales took place in the year and there were fewer maturities in the portfolio. We focused on segments of residential lending where competitive pressure has not seen significant margin erosion, such as self- employed applicants. CCFS’ second charge originations performed strongly with an increase of 44% in the year on a pro forma underlying basis, as both products and distribution were enhanced.

the UK’s largest mortgage distributor: L&G Mortgage Club. Our more specialist businesses were also recognised with the Bridging Funding Partner of the Year award from Bridging and Commercial

Awards. CCFS was recognised by Mortgage Introducer, being named as both Mortgage Lender of the Year and Specialist Lender of the Year.

Through OSB’s mortgage product transfer scheme, Choices, the proportion of borrowers who choose a new product within three months of their initial product ending remained strong at around 69% by December 2019. This is driven by success in highlighting opportunities available to borrowers who might otherwise leave
the Group and enables them to actively choose appropriate mortgage pricing and features.

We are excited about opportunities arising from the Combination with CCFS and continue to believe in the advantages that will come from a more resilient, diversified funding platform, together with greater scale and resources. We now have a larger footprint in the UK Buy-to-Let and residential markets, with an enhanced proposition to the broker community to ensure we remain at the forefront of UK specialist mortgage lending.

Sophisticated funding model

Through the Combination with CCFS we brought together OSB’s established Kent Reliance retail deposit franchise with Charter Savings Bank’s savings
deposit platform, and CCFS’ sophisticated securitisation funding and balance
sheet management. These capabilities create a more resilient and diversified funding platform to support our future growth, with cost efficient funding for the combined Group.

The combined Group remained predominantly retail funded in 2019 and we had £16bn of retail deposits at the end of 2019. On a pro forma underlying basis, retail deposits were up 23% from £13bn at the end of 2018. We offer a competitive retail savings proposition, which allows the Group to raise significant funds as we require them. Over 40,000 new savings customers joined Kent Reliance in 2019 and Charter Savings Bank grew customer numbers by nearly 27,000 for the full year of 2019. Our vision remains to become our customers’ favourite bank and we
continue to put our customers at the heart of everything we do. This was reflected
in a retention rate of 91% amongst Kent Reliance customers with maturing fixed rate bonds and ISAs and a Net Promoter Score (‘NPS’) of +66 for the year. 97% of Charter Savings Bank’s customers had
a good or excellent experience with the Bank3 and the NPS was exceptional, at
+72 for 2019. Charter Savings Bank had a retention rate of 88% at the end of 2019.

I am delighted that Kent Reliance was highly commended with the Savers’ Choice Award by Savings Champion and we won Best Business Easy Access Account Provider, also from Savings Champion.

CCFS won ISA Provider of the Year and Best Bank Savings Provider from Moneyfacts and Best Savings Provider from Savings Champion amongst others.

Our enhanced wholesale funding platforms enable us to maintain optionality and benefit from the potential to execute structured balance sheet management transactions across the combined Group’s enlarged balance sheet. Our track record in 2019 was impressive; CCFS successfully executed a £734m securitisation transaction of Buy-to-Let mortgages and took advantage of a strong residuals market, generating gains of £59m on three structured asset sales prior to the Combination. In July, OSB completed an inaugural transaction of
£500m of organically originated Buy-to- Let mortgages.

 

For further information on our securitisation platforms, see page 41

We have further demonstrated our expertise in the securitisation market post Combination, with additional deals completed in early 2020, benefiting from high demand and attractive market pricing. In January 2020, the Group disposed of its remaining notes under the Canterbury securitisation and the notes in PMF 2020-1B. The capability
and experience of CCFS in sophisticated securitisation funding and balance sheet management have been adopted across the Group and pave the way for future transactions.

Retail savings and securitisation funding were complemented in the year by the Bank of England’s funding schemes; drawdowns under the Term Funding Scheme remained unchanged for OSB and CCFS at £1.5bn and £1.1bn, respectively, and Indexed Long-Term Repo borrowings were £160m and £130m for OSB and CCFS, respectively as at 31 December 2019.

In addition, through the Combination, the Group now has access to contingent wholesale funding, with a total of up to
£600m available to it through warehouse facilities, £94m of which was utilised at the year end.

Our strong and sustainable business

The Combination provides  opportunities to create centres of excellence for core processes and capabilities on a best-in- class basis across OSB’s and CCFS’ existing locations in Chatham, Wolverhampton and India. This work is fully underway and we will report on progress later in the year.

The combined Group achieved a statutory cost to income ratio of 32% for the year, 29% on a pro forma underlying basis, reflecting our efficient and scalable operating platform, despite additional investment in the business, including
our ongoing Internal Ratings-Based (‘IRB’) projects. We also continued with improvements to our technology infrastructure. As ever, we focus on
delivering further efficiencies in the cost of running the Bank on a ‘business as usual’ basis, through continued disciplined cost management, benefits of scale and leveraging our unique operating platform
in India (‘OSBI’), as well as delivering on the synergies identified due to the Combination.

OSBI undertakes a range of primary processing  services at a significantly lower cost than an equivalent UK-based operation, whilst delivering consistently high-quality service levels. I am especially pleased that we continue to achieve
this whilst maintaining our focus on our customer-led vision, borne out by an increase in customer NPS to an outstanding +66 in 2019 (2018: +63).

Both OSB and CCFS are working towards IRB applications and we remain pleased with the progress made and are seeing benefits from using the enhanced risk models developed as part of the process. We remain of the view that achieving
IRB will be beneficial to the Group’s capital requirements, especially under the new calibrations and final IRB output floors
                                                                           as outlined in Basel III.

“The expertise in securitisation            The Group continued to exercise strong

2019 was a year of significant change for the Group and I would like to thank my colleagues for their hard work and continued commitment throughout the year. I look forward to us all working together for a successful future.

Looking forward to 2020

I am delighted that the Combination with CCFS was successfully completed and that all the hard work to achieve it did not distract the OSB and CCFS teams from continuing to develop, manage and
grow the underlying businesses, achieving strong levels of originations during the year. We have made good progress to date on the integration.

The UK and global economies are currently experiencing unprecedented uncertainty stemming from COVID-19. Whilst we entered the year with a robust pipeline,

funding and balance sheet management is a capability that has been enhanced through the Combination...”

diligence over loan and customer assessment. The Group’s statutory loan loss ratio of 13bps as at 31 December 2019 (2018: 10bps) includes an additional provision due to the initial recognition
of expected credit losses on CCFS’ loan book and reflects an alignment of IFRS 9 modelling methodologies. It also includes the impact of a number of high-value Buy-to-Let cases in OSB having Law of Property Act (‘LPA’) receivers appointed during the first half of 2019, which attracted higher provision requirement under the IFRS 9 modelling approach.
During the second half of 2019, the number of LPA appointments stabilised.

The weighted average LTV of OSB’s mortgage book remained low at 68% at the end of 2019, with an average LTV of 70% on new origination during the year. CCFS had similarly low LTVs with the overall book weighted average LTV of 70% and 71% for new origination in the year on a pro forma underlying basis.

strong application levels in our core businesses and stable margins, it is too soon to say what the impact will be and we therefore consider it imprudent to provide forward guidance for 2020.

We enter this period of uncertainty as an enlarged business with the strength of our combined lending and funding franchises, robust capital position, secured loan book and strong risk management capabilities.

Andy Golding

Chief Executive Officer

19 March 2020

1. To align calculation methods post Combination, OSB amended NIM calculation to include average interest earning assets on a 13 point average from a simple average. The comparative NIM was restated.

2. UK Finance, New and outstanding buy-to-let mortgages,  6 Feb 2020
3. Based on the Charter Savings Bank Customer Satisfaction Survey conducted throughout 2019.

Our strategic framework

Our vision is to become our customers’ favourite bank; one that delivers its very best, challenges convention and opens doors that others can’t.

Priorities             Our goals	Specialist lending business     Be a leading specialist lender in our chosen market segments         Grow loan originations at attractive margins in our chosen market segments } Target market segments that offer attractive returns on a risk-adjusted basis } Deliver incremental, non-organic business Invest in highly responsive, customer-focused culture Innovate to secure sustainable long-term market leadership		Specialist lending business     Focus on automated and bespoke manual underwriting         High-quality decisions protecting the business Use deep credit experience to deliver high-quality lending decisions Leverage CCFS’ automated approach in conjunction with OSB’s skilled manual underwriting capabilities and in-house real estate expertise Deliver a quality, differentiated service supported by highly responsive decision-making Clear decisions recognised by intermediaries for their quality and fairness – a critical friend
2019 progress
	Organic originations of £4.1bn on a statutory basis. On a pro forma underlying basis organic originations were £6.5bn, up 10% from £5.9bn in 2018 OSB commercial business loan book £888m, up 62% Multiple awards for Kent Reliance including Best Specialist Lender and Best Buy-to-Let Lender from Mortgage Strategy Awards and Best Specialist Lender by the L&G Mortgage Club CCFS was awarded Mortgage Lender of the Year and Specialist Lender of the Year by Mortgage Introducer		} The OSB Transactional Credit Committee met twice a week in 2019 to assist with more complex or larger new mortgage applications } Increased stress testing in specialist sub-segments
Looking forward
	Continue to evaluate the attractiveness and growth opportunities in our current market sub-segments Deploy greater scale and resources on organic growth opportunities Identify new market sub-segments with high returns on a risk-adjusted basis } Identify potential revenue synergies		Bring together OSB’s and CCFS’ credit experience in a best-of-both approach Leverage differentiated but complementary underwriting capabilities to enhance customer propositions Increase underwriting efficiency to better serve borrower needs across complementary brands Create enhanced data insight and analysis by combining OSB and CCFS data sets and analytic capabilities
Key risks
Key performance indicators	} Market conditions affecting long-term demand } Increased regulatory pressure } Continued political and economic uncertainty } New specialist lenders entering the market             Read more on page 26     Organic originations, pro forma underlying £6.5bn 2018: £5.9bn		} Changing regulation for underwriting } More complex underwriting requirements } Difficulty in recruiting experienced staff } Increasing intermediary demands } Demands of ever-changing technology           Read more on page 26     Loan loss ratio, pro forma underlying 10bps 2018: 7bps

Specialist lending business         Sophisticated funding platform       Unique operating model

Further deepen relationships and reputation for delivery with intermediaries

Deliver a stable, high- quality diversified funding platform

Leverage our unique and cost-efficient operating model

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Increase partner reach in response to demand

} Access to specialist products developed by listening to intermediary partners

} Be accessible and available to intermediaries

• Complementary distribution models for CCFS and OSB brands
• Gain intermediary recognition for delivering sustainable propositions
• Deliver bespoke solutions to meet intermediary and customer needs

Expertise in funding options

• Create resilient and diversified funding platform to support future growth and ensure liquidity requirements are met through the economic cycle, and cost of funds is optimised
• Be primarily funded through attracting and retaining a loyal retail savings customer base
• Maintain a sophisticated securitisation funding and balance sheet management capability
• Deliver a proposition offering transparent, straightforward savings products, providing long- term value combined with excellent service levels

Best-in-class customer service

• Have customer service at the heart of everything that we do
• Maintain centres of excellence across OSB’s and CCFS’ existing locations in Chatham, Wolverhampton and Bangalore, India
• Extend activity in OSBIndia (‘OSBI’), developing high-quality areas of excellence
• Deliver cost efficiencies through excellent process design and management

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

• The Kent Reliance Choices programme had another successful year with retention rates in 2019 of 69%
• CCFS enhanced service standards including direct to broker second charge proposition
• Increased attendance at intermediary events across our target geographies for both CCFS and OSB to 521 in total
• Published thought leadership pieces including periodic market-leading Kent Reliance ‘Buy-to-Let Britain’ reports
   
• Gained c. 67,000 new savings customers across both Banks for full year 2019
• Achieved 91% customer retention for Kent Reliance and 88% for Charter Savings Bank
• Charter Savings Bank accessed four new third party funding pools of savings bringing the total to six
• Received multiple awards for savings products, including Best Business Easy Access Account Provider from Savings Champion for Kent Reliance, and Best Bank Savings Provider and ISA Provider of the Year by Moneyfacts for Charter Savings Bank
   
• Investments in training and process development contributed to enhanced customer NPS of +66 for Kent Reliance and +72 for Charter Savings Bank
• Continued to develop deep credit know-how through proprietary data analytics at Exact Mortgage Experts
• Increased number of employees in OSBI to 490 from 445 in 2018

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

• Continue to deliver direct relationships with high-quality intermediaries
• Increase breadth of channels to market via the direct to broker and packager channels
• Leverage best practice of CCFS and OSB across the combined Group to maintain and further enhance best-in-class service performance to brokers
   
• Continue to invest in the established Kent Reliance retail deposit franchise
• Ensure optionality to benefit from the potential to execute structured balance sheet management transactions across the combined Group’s enlarged balance sheet
• Utilise CCFS’ in-house expertise to enable efficient access to capital markets
   
• Use greater scale to deliver efficient, scalable and resilient infrastructure including IT security
• Deliver cost efficiencies and operational enhancements by leveraging OSBI’s lending, savings and support operations and capabilities
• Deliver efficiencies and enhanced capabilities in centres of excellence
• Use robotics technology and improve workflows to further enhance primary servicing

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

} Loss of key broker relationships

• Competition reducing pricing below the Group’s risk-adjusted return appetite
• More complex underwriting requirements slowing the process

} Increased competition for retail funds

} Increased customer expectation for technology

} Volatility of capital markets

• Increased burden of regulatory compliance – for example, Open Banking (which currently does not apply to the Group)
   
• Difficulty in continuous service improvement as OSB grows
• Global economic uncertainty increasing costs in India
• Increasing complexity from compliance with changing regulation

} Lack of operational resilience due to rapid growth

Read more on page 26                                                          Read more on page 28                                                         Read more on page 30

OSB broker NPS         CCFS broker NPS

+27                +18

2018: +28                           2018: +41

17

securitisations since 2013 across OSB and CCFS worth over

£5.7bn

Cost to income ratio, pro forma underlying

29%

Creating a leading specialist lender in our chosen market segments

The Combination with CCFS provides us with greater scale, complementary strengths and enhanced customer propositions to become a leading specialist lender in the UK.

 

+16%

Pro forma underlying loan book
growth in 20191

Leading lender in our chosen market segments

Our market coverage and depth have increased as a result of the Combination and we can now attract customers

who want an automated approach to underwriting in addition to those who need a bespoke manual solution.

Through the Group’s greater scale and resources, we:

• are leaders and experts in our chosen specialist, secured market segments
• offer both bespoke and automated underwriting capability
• have strong relationships with intermediaries which provide us with rapid and widespread distribution, supporting stronger origination volumes.

Our market segments

Through our lending brands we target specialist mortgage market segments that are underserved by UK retail banks and building societies, and are underpinned by positive long-term market dynamics. We continually evaluate the attractiveness and growth opportunities within our current market segments, together with assessing opportunities to move into new specialist segments. We concentrate on areas where margins are attractive relative to risk and lending is sustainable within our conservative risk appetite. Our increased scale enables us to achieve growth in market share and expand our reach
across specialist segments.

We currently lend in the following specialist market segments:

} Buy-to-Let

} commercial and semi-commercial

} residential development

} bespoke specialist and near prime residential

} second charge residential

} shared ownership residential

} bridging and short-term loans

} funding lines, and

} asset finance.

Deep credit expertise

Our credit expertise and extensive product knowledge will help us to achieve market leadership. Each of our brands are led by experienced industry professionals and are supported by highly skilled teams
with experience and insight spanning the entire mortgage life cycle. Through Exact Mortgage Experts, we have gained
proprietary data analytics, enhancing our deep credit knowledge. The Group uses this knowledge and data to adapt quickly to changing market conditions, identifying niche lending opportunities and tailoring its product offering accordingly.

Expanded underwriting capability

Bespoke underwriting

Our Kent Reliance brand does not use automated or scorecard-based processes. All of its loans are underwritten by experienced and skilled underwriters,

10

minutes – average time to Decision
in Principle through Precise Mortgages

624

cases referred to OSB Transactional
Credit Committee during the year

supported by technology to reduce the administrative burden on underwriters and mortgage intermediaries. We consider each loan on its own merit, responding quickly and flexibly to offer the best solution for each of our customers. No case is too complex for us, and for those borrowers with more tailored or larger borrowing requirements, our Transactional Credit Committee meets twice a week, demonstrating our responsiveness to broker needs.

Automated underwriting platform

The Combination provided the Group with an automated underwriting platform to manage mortgage applications, delivering a rapid decision in principle, based on rigorous lending policy rules and credit scores. The platform is underpinned

by extensive underwriting expertise, enabling identification of new niches and determining appropriate lending

parameters. The platform enables Precise Mortgages to react quickly to non-standard mortgage requests which
are common in the Group’s target market segments, while ensuring consistent underwriting within the Group’s risk appetite. Quick response times help the Group to compete for the ‘first look’ at credit opportunities, while a robust manual verification process further strengthens the disciplined approach to credit risk.

Expanded intermediary relationships

Both OSB and CCFS have developed extensive intermediary relationships and combined, the Group can now leverage both sets of intermediaries to support stronger origination volumes.

Sophisticated funding platform

The Combination with CCFS provides attractive diversification to the Group’s primarily retail savings base, through wholesale funding. This enables the enlarged Group to optimise its cost of funds while prudently managing funding and liquidity risks.

Retail savings

+23%

Customer satisfaction and transparent savings products

Our customers’ satisfaction is key to how we do business and at the heart of our corporate culture.

Our key strengths are:

} customer focus, and

} transparent, good-value savings products.

The outstanding customer service that we consistently provide to our savings customers is evidenced by our high NPS.
For 2019, Kent Reliance had NPS of +66 and CSB +72. In addition, 91% of Kent Reliance customers whose savings products matured in the year renewed with us
and 97% of CSB’s customers had a Good or Excellent experience with the Bank1. During the year, Kent Reliance welcomed over 40,000 new customers and CSB welcomed nearly 27,000 customers.

Both Banks were also recognised by the industry, winning multiple awards in the year, including Best Business Easy Access

Pro forma underlying retail savings growth in 20191

OSB Group is predominantly funded by
retail savings deposits, operated under two brands: Kent Reliance and Charter Savings Bank (‘CSB’).

Kent Reliance is a savings franchise with over 150 years of heritage and eight branches in the South East of England. It also takes deposits via post and online while CSB offers its products online
and via post.

Both Banks have a wide range of savings products, including easy access, fixed term bonds, cash ISAs and business savings accounts. Kent Reliance continued to offer its business savings account for SMEs
with total deposits of c. £83m at the end of 2019.

In line with its dynamic funding strategy, CSB continued to diversify its retail funding sources by expanding the number of pooled funding platforms from two to six in the year. The range of products sourced via these platforms includes easy access and non-retail deposits.

Account Provider from Savings Champion
for Kent Reliance and ISA Provider of the Year and Best Bank Savings Provider from Moneyfacts for CSB amongst others.

Kent Reliance’s proposition for savers is simple: to offer consistently good-value savings products that meet customer needs for cash savings without having to price at the very top of the best buy tables. The Bank also offers loyalty rates for its existing customers.

CSB’s philosophy is to maintain and develop its award-winning business, by further diversifying its product offering to access new funding pools. It also aims to offer competitively priced new savings products in its existing product lines.
Operating with an agile, nimble approach, CSB can respond quickly to the funding requirements of the business, providing advantageous cost of funds.

Wholesale funding

The Combination with CCFS in October 2019 provided the Group with attractive diversification opportunities to
retail funding.

CCFS historically utilised its securitisation platform as a means of providing low- cost, term duration funding. Wholesale funding enabled the business to rebalance the weighted average life of liabilities away from shorter duration retail funding, and thereby optimise the funding mix. The Group recognises the cyclical nature of capital markets funding and therefore utilises it opportunistically, taking advantage of favourable
market conditions.

17

securitisations to date across
OSB and CCFS worth over
£5.7bn

CCFS has been a programmatic issuer of high-quality residential mortgage-backed securities (‘RMBS’) through the Precise Mortgage Funding and Charter Mortgage Funding franchises since 2013.

OSB returned to the securitisation market in July 2019, securitising £500m of organically originated mortgages under its newly established Canterbury Finance programme.

CCFS also maintains warehouse funding capacity through two tier 1 investment banks. These facilities act as a bridge
to RMBS funding, helping the Group to maximise the efficiency of its liquidity position through the transition from retail deposit to securitisation funding.

The Group also has the capability to engage in transactions which could result in the full derecognition of the underlying mortgage assets, through the sale of residual positions in its securitisation vehicles.

 

For more information about the Group’s securitisation funding, see page 41.

Bank of England funding

The Group also takes advantage of the Bank of England’s funding schemes.

Drawings under the Term Funding Scheme were £1.5bn for OSB and £1.1bn for CCFS at 31 December 2019. In addition, borrowings under the Indexed Long-Term Repo were
£290m at base rate +15bps, a total of 90bps as at 31 December 2019.

1. Based on the Charter Savings Bank Customer Satisfaction Survey conducted throughout 2019.

Efficient and resilient infrastructure

and systems

Through its wholly-owned subsidiary OSBIndia, the Group leverages its unique and cost-efficient operating model.

+29%

Pro forma underlying cost to income
ratio in 20191

Focus on customers

Our customer service functions, based in our wholly-owned subsidiary OSBIndia and in Wolverhampton post the Combination, help us deliver on our aim of putting customers first.

We reward our people based on
the quality of service they provide to customers, further protecting our retail savings franchise and leading to high customer satisfaction. In 2019, OSB

We are proud of our low employee turnover in India, with an excellent
16% regretted attrition rate, substantially outperforming local industry averages.

Our key strengths:

} Excellent customer experience

} High customer NPS

} High employee retention rates

Focus on quality and cost discipline

achieved a customer NPS of +66 and                   

CCFS’ was an excellent +72.

At OSBI, we employ highly talented and motivated employees at a competitive cost. We benchmark our processes against industry best practice, challenging what we do and eliminating customer pain points as they arise. We continue to invest in developing skills that enable highly efficient service management, matching those to business needs both in India
and the UK.

The Combination has increased the Group’s scope to deliver efficient, scalable and resilient infrastructure and invest in IT security, supported by market-leading data security and resilience experts.

Both OSB and CCFS are extremely cost- efficient with low cost to income ratios, reflecting historical high growth in income, the benefits of OSBI to OSB and high operating leverage as the balance sheets have grown.

OSBI colleagues at the end of 2019

490

2018: 445

Exact Mortgage Experts

 

Exact is a valuable addition to the Group’s operating model, providing an administration service for mortgages
originated by Precise Mortgages. Its proven collections capabilities and expertise in case management, from initial arrears through to repossession, provide  the Group with access to the experience and
expertise of a larger-scale bank, supporting future growth and offering valuable insights into, as well as the opportunity
to learn from, the performance of other lenders’ mortgage loan products.

Over the years, Exact has developed deep credit expertise through proprietary data analytics.

 

Operating review

The Combination with CCFS in October 2019 was an important milestone for the Group on our journey to create a leading specialist lender in the UK, with greater scale and resources to deploy on growth opportunities.

performance from its first charge residential sub-segment, where new product ranges launched in 2018 proved popular and continued to gain momentum during 2019. CCFS’ residential segment also benefited from an improved product range, with the gross loan book up 27% in the year on a pro forma underlying basis.

During 2019, OSB’s net loan book increased by 20% to £10,785.0m (2018: £8,983.3m)
and CCFS’ net loan book grew by 15% to £7,661.8m (2018: £6,661.5m), or 27%
excluding the impact of structured assets sales, both on a statutory basis. The combined Group’s net loan book reached
£18,446.8m by the end of 2019 on a statutory basis. Buy-to-Let comprised approximately 67% of the Group’s total gross loan book at the end of 2019.

The combined Group remained predominantly retail funded in 2019 with
£16,255.0m of retail deposits on a statutory basis (2018: £8,071.9m). On a pro forma
underlying basis, retail balances were up

Statutory net loan book

£18.4bn

2018: £9.0bn

Statutory net interest income

£345m

2018: restated £286m1

Statutory total assets

£21.4bn

2018: £10.5bn

Group highlights

2019 was not only a year of continued strong business performance, but also a year when we advanced on our strategic objective to create a leading specialist lender of scale in the UK, through the Combination with CCFS. The Combination provides us with the scale and resources to deploy on growth opportunities across the economic cycle, to deliver long-term value for our shareholders. We are committed to delivering on that strategy, by leveraging our complementary strengths across products, brands, distribution, underwriting, funding and team culture.

Against the backdrop of a competitive mortgage market, organic originations in 2019 proved resilient at £4.1bn on a statutory basis (2018: £3.0bn) with £0.8bn contributed by CCFS in the final three months of the year. On a pro forma underlying basis, organic originations were £6.5bn in 2019, compared with £5.9bn in 2018.

During 2019, 69% of Kent Reliance borrowers chose a new product within three months of their initial product ending, totalling £885m (2018: 69%, £722m). This performance demonstrates the success of our Choices programme. Buy-to-Let performed strongly in both businesses, due to continued activity from professional landlords. OSB also saw exceptional growth in lending through its InterBay Commercial brand and a strong

23% from £13,166.4m as at 31 December 2018. The savings proposition offered
by the Kent Reliance brand continued to be in demand, as we welcomed over
40,000 new retail customers in the year. Excellent customer service was reflected in a +66 customer Net Promoter Score and
retention rate for maturing fixed term bond and ISA balances of 91% in 2019. Charter Savings Bank saw customer numbers
grow by almost 27,000 during the year as savings customers continued to value the competitive interest rates and excellent customer service it provides. CCFS also achieved an exceptional Net Promoter Score of +72 and a retention rate of 88% for 2019.

Diversification of funding was provided by access to the securitisation market and Bank of England funding. Both Banks were active in the securitisation market during the year. OSB completed an inaugural transaction of c.£500m of organically originated mortgages under the Canterbury Finance RMBS programme in July 2019.
CCFS successfully executed a £734m securitisation transaction of Buy-to-Let mortgages and recognised gains of £58.7m on three structured asset sales in the year, prior to the Combination.

For further information on the Group’s securitisation platforms, see page 41.

As at 31 December 2019, drawings under the Term Funding Scheme remained unchanged at £1.5bn for OSB and £1.1bn for CCFS. In addition, the Group had £290m of borrowings under the Bank of England’s Indexed Long-Term Repo across the two Banks at base rate +15bps, a total of 90bps, as at 31 December 2019 (2018: OSB £80m, CCFS £nil). Through the Combination, the Group now has access to contingent wholesale funding, with up to £600m available to it through the CCFS warehouse facilities, £94m of which were utilised at year end. 

Statutory pre-tax profit was up 14% to £209.1m for 2019 (2018: restated
£182.8m1),  as a result of strong growth at attractive margins and the inclusion of
CCFS’ profits from the date of Combination, more than offsetting the impact of exceptional items, integration costs and other acquisition-related items. On a pro forma underlying basis, profit before tax increased by 9% due to strong growth at attractive margins and continued cost efficiency and discipline.

Profitable lending and cost discipline and efficiency contributed to a return on equity of 18% on a statutory basis (2018: restated 25%2) and 25% on a pro forma underlying basis (2018: 28%).

The Group ended the year with a CET1
ratio of 16.0% (2018: 13.3%), demonstrating the strength of the capital generation capability of the business to support significant growth through profitability
and the beneficial impact of the fair value uplift on CCFS’ net assets on Combination. The Group’s total capital ratio of 17.3% and leverage ratio of 6.5% remained strong (2018: 15.8% and 5.9% respectively).

1. Net interest income and profit before tax were restated as a result of the recognition of interest expense on

the £22m of Perpetual Subordinated Bonds previously classified as equity.

2. To align calculation methods post Combination, OSB amended its calculation of return on equity to include average equity on a 13 point average from a simple average. The comparative return on equity ratio

Segment review – OneSavings Bank Buy-to-Let/SME

Following the Combination, the Group segmented its lending

Buy-to-Let/SME

Gross loan book*

£8,983.2m

+22%

2018: £7,389.2m

Net interest income*

£253.5m

+15%

business into two segments: OSB and CCFS.

Buy-to-Let/SME sub-segment: gross loans

	31-Dec-2019 £m	31-Dec-2018 £m
Buy-to-Let	7,727.0	6,517.5
Commercial	888.0	547.8
Residential development	146.1	155.8
Funding lines	222.1	168.1
Total	8,983.2	7,389.2

2018: restated £219.5m1

Contribution to profit*

£231.7m

+9%

2018: restated £212.8m1

* Statutory.

This segment comprises Buy-to-Let mortgages secured on residential

property held for investment purposes by experienced and professional landlords, commercial mortgages secured on commercial and semi-commercial properties held for investment purposes or for owner-occupation, bridge finance, residential development finance to small and medium-sized developers, secured funding lines to other lenders and asset finance.

The volume of new organic lending in our Buy-to-Let/SME sub-segment reached
£2,847.2m in 2019, an increase of 3% on the prior year (2018: £2,769.7m). Gross loans were £8,983.2m, up 22% from

£7,389.2m in 2018. The Buy-to-Let/SME net loan book represented 83% of total OSB loans as at 31 December 2019.

Gross loans in the Buy-to-Let sub-segment increased by 19% to £7,727.0m (2018:
£6,517.5m) with lending mostly dominated by professional, multi-property landlords who remained at 81% of completions by value for OSB in 2019. For our Kent Reliance brand, 75% (2018: 70%) of mortgage applications were from landlords borrowing via a limited company, as recent changes to personal taxation favour structuring portfolios in this way.

Refinancing continued to represent 60% of Kent Reliance Buy-to-Let completions and five-year fixed rate mortgages were 52% (2018: 58% and 56%, respectively). This mix reflected the wider market which saw reduced purchases in 2019 and continued demand for five-year fixed rate products. Our retention programme, Choices, continued to be popular, with around 69% (2018: 69%) of existing borrowers choosing a new product with the Bank within three months of their original product ending.

The weighted average loan to value (‘LTV’) of the Buy-to-Let book as at 31 December 2019 was 73% with an average loan size of £260,000 (2018: 70% and £260,000).
The weighted average interest coverage ratio for Buy-to-Let origination during 2019 was 187% (2018: restated 185%2).

2019 was an exceptional year for our InterBay business with the commercial and semi-commercial gross loan book up 62% to £888.0m (2017: £547.8m) as we continued to expand our distribution
network to reach those brokers who work with borrowers with needs closely aligned to InterBay’s products. Through  this brand OSB lends to borrowers investing

in commercial, semi-commercial and bridging, reported in the Commercial total, and more complex Buy-to-Let
properties, reported in the Buy-to-Let total. Lending was supported by the business’ core strengths in rapid and effective underwriting and our ability to deal with large and complex cases. The weighted average LTV in the commercial sub- segment remained low at 67% and the average loan size was £375,000 in 2019 (2018: 66% and £360,000, respectively).

InterBay Asset Finance, which predominantly targets UK SMEs and small corporates financing business-critical assets, was launched in 2018. The gross carrying amount under finance leases was £47.7m as at 31 December 2019 (2018: £7.2m).

Our Heritable residential development business continues to provide prudent development finance to small and medium-sized residential developers. The preference is to fund house builders who operate outside central London and provide relatively affordable family housing, as opposed to complex city centre schemes where affordability and construction cost control can be more challenging. New applications come
primarily from a mixture of repeat business from the team’s extensive existing relationships and referrals.

The residential development funding gross loan book at the end of 2019 was £146.1m, with a further £115.1m committed
(31 December 2018: £155.8m and £90.3m, respectively). Since inception through to the end of 2019, the business has written
£1,013m of loans, of which £534m have been repaid to date. The business had commitments to finance the development of just under 2,000 residential units as at the end of 2019, the majority of which are houses located outside central London.

In addition, OSB continued to provide secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, such as bridging finance and asset finance. Total credit- approved limits as at 31 December
2019 were £540.0m with total loans outstanding of £222.1m (31 December 2018: £385.0m and £168.1m, respectively).
During 2019,  three new funding lines were added and credit-approved limits increased by a further £50.0m across three existing funding lines. The pipeline remains robust, however, given the macroeconomic uncertainty, the business continues to adopt a cautious approach.

Buy-to-Let/SME made a contribution to profit of £231.7m in 2019, up 9% compared with the restated value of

£212.8m1 in 2018, primarily due to the growth in new lending, partially offset by higher impairment losses of £13.8m
(2018: £5.7m). The increase in impairment

losses was driven by an increase in the number of Law of Property Act (‘LPA’) receivers appointed in the first half of the year, which attract higher provision requirements under an IFRS 9 approach. During the second half of 2019, the
LPA flow stabilised. Alignment of IFRS 9 modelling methodologies and loan book growth also contributed to the increase in loan losses.

The Group remains highly focused on the risk assessment of new lending as demonstrated by the average LTV in the Buy-to-Let/SME segment as at 31 December 2019 of 72% (31 December
2018: 70%) with only 1.8% of loans
exceeding 90% LTV (31 December 2018: 0.6%). The average LTV for new Buy-to- Let/SME origination remained at 70%.

1. Net interest income and contribution to profit

were restated as a result of the recognition of interest expense on the £22m of Perpetual Subordinated Bonds previously classified as equity.

2. Interest coverage ratio was restated for 2018 from 171% to 185% due to an improvement in the calculation methodology.

Segment review – OneSavings Bank Residential mortgages

	31-Dec-2019 £m	31-Dec-2018 £m
First charge	1,466.6	1,223.9
Second charge	358.6	368.0
Funding lines	12.2	24.1
Total	1,837.4	1,616.0

  Residential sub-segment: gross loans

 

Residential mortgages

Gross loan book*

£1,837.4m

+14%

2018: £1,616.0m

Net interest income*

£62.7m

-6%

2018: restated £66.8m1

Contribution to profit*

£59.7m

-1%

2018: restated £60.2m1

* Statutory.

This segment comprises lending to owner-occupiers, secured via either first or second charges  against the residential home.

The Bank also provides funding lines to non-bank lenders who operate in high-yielding, specialist sub-segments such as residential bridge finance.

The Residential gross loan book was
£1,837.4m as at 31 December 2019, up 14% compared with the previous year (2018: £1,616.0m) with organic originations nearly doubling in the year to £540.5m (2018: £280.1m).

OSB’s first charge gross loan book grew in the year to £1,466.6m, which was 20% up from £1,223.9m in 2018. This strong performance was largely due to new organic lending as the Bank’s ability to make quick underwriting decisions and the product range launched in 2018 proved popular with borrowers.

Our Kent Reliance brand provides bespoke first charge mortgages, typically to prime credit quality borrowers with
more complex circumstances, for example, high net worth borrowers with multiple income sources and self-employed borrowers. These circumstances often preclude them from the mainstream lenders, as most favour automated decision-making over manual underwriting. The extended product range launched in 2018 also includes near-
prime residential products. Kent Reliance also operates in the shared ownership sector, where borrowers buy a property in conjunction with a housing association and in 2019 the Bank’s share of this sector increased.

Our second charge mortgage brand, Prestige Finance, provides secured finance to good credit quality borrowers who are seeking a loan to raise funds without refinancing their first charge mortgage. Competitive pressure in the second charge segment kept pricing low and OSB continued to focus on pricing for risk. The second charge residential loan book had a gross value of £358.6m as
at 31 December 2019 (2018: £368.0m).

OSB continued to provide secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub- segments, such as residential first and
second charge finance. The Bank continued to adopt a cautious approach to these more cyclical businesses given macroeconomic uncertainty. Total credit- approved limits
as at 31 December 2019 were £31.0m with total loans outstanding of £12.2m (2018:
£51.8m and £24.1m, respectively).

Residential mortgages made a contribution to profit of £59.7m in 2019, broadly flat compared with the restated value of £60.2m1 in 2018, despite growth in the loan book, primarily due to the changing mix of the book and EIR gains on acquired portfolios in the prior year, partially offset by provision releases resulting from falling arrears levels across both first and second charge lending.

The average LTV remained low at 58% (2018: 56%) with only 3.3% of loans by
value with LTVs exceeding 90% (2018: 3%). The average LTV of new residential origination during 2019 was 69%
(2018: 68%).

 

1. 1. Net interest income and contribution to profit were restated as a result of the recognition of interest expense on the £22m of Perpetual Subordinated Bonds previously classified as equity.

The following tables show the OSB segment’s statutory loans and advances and contribution to profit:

Year ended 31-Dec-2019	BTL/SME £m	Residential £m	Total £m
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers	8,983.2	1,837.4	10,820.6
Provision for impairment losses	(21.6)	(14.0)	(35.6)
Loans and advances to customers	8,961.6	1,823.4	10,785.0
Risk-weighted assets	4,244.0	846.0	5,090.0
PROFIT OR LOSS FOR THE YEAR
Net interest income	253.5	62.7	316.2
Other expense	(8.0)	(4.9)	(12.9)
Total income	245.5	57.8	303.3
Impairment (losses)/credit	(13.8)	1.9	(11.9)
Contribution to profit	231.7	59.7	291.4

Year ended 31-Dec-2018	BTL/SME £m	Residential £m	Total £m
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers	7,389.2	1,616.0	9,005.2
Provision for impairment losses	(11.0)	(10.9)	(21.9)
Loans and advances to customers	7,378.2	1,605.1	8,983.3
Risk-weighted assets	3,453.8	758.0	4,211.8
PROFIT OR LOSS FOR THE YEAR
Net interest income1	219.5	66.8	286.3
Other expense	(1.0)	(4.2)	(5.2)
Total income1	218.5	62.6	281.1
Impairment losses	(5.7)	(2.4)	(8.1)
Contribution to profit1	212.8	60.2	273.0

1. In 2019, the Group restated the prior year comparatives to recognise interest expense on the £22m Perpetual Subordinated Bonds previously classified as equity.

Segment review – Charter Court Financial Services

The CCFS segment review is presented on a pro forma underlying

Charter Court Financial Services

Gross loan book*

£7,374.4m

+11%

2018: £6,665.1m

Net interest income*

£202.2m

+12%

2018: £180.5m

Contribution to profit*

basis, which assumes that the Combination occurred on 1 January 2018 and includes 12 months of results from CCFS. It excludes acquisition-related items.

Statutory information is shown in the table on page 40.

CCFS segment: gross loans

	31-Dec-2019 £m	31-Dec-2018 £m
Buy-to-Let	4,748.5	4,508.3
Residential	2,170.8	1,707.0
Bridging	214.4	244.1
Second charge	218.6	184.2
Other1	22.1	21.5
Total	7,374.4	6,665.1

1. Other relates to the net interest income from acquired loan portfolios and fee income from third party mortgage servicing.

£254.8m

+14%

2018: £222.8m

* Pro forma underlying.

Charter Court Financial Services targets underserved specialist mortgage market segments with a focus on specialist Buy-to-Let, residential, bridging and second charge lending.

The CCFS gross loan book grew 11%
to £7,374.4m at the end of 2019 (2018:
£6,665.1m). Excluding the impact of structured asset sales, the gross loan book would have been £8,491.9m, 27% higher than in 2018. This growth was supported by organic originations of £3,108.2m at attractive margins (2018: £2,846.1m).

Buy-to-Let sub-segment

During 2019, CCFS’ organic originations in the Buy-to-Let sub-segment were
£1,895.2m, an increase of £253.2m versus the prior year (2018: £1,642.0m). The growth reflects continuing demand for the Group’s specialist lending proposition. The net loan book increased 5% in the year to £4,745.0m after structured asset sales and on a pro forma underlying basis, Buy-to-Let mortgages represented 64% of CCFS’ total net loan book.

All CCFS’ Buy-to-Let products proved popular with borrowers, especially with those investing via limited companies, which increased 21% in the year, and those investing in specialist property types including houses of multiple occupation, multi-unit properties and holiday lets, which increased 63% in 2019.

In 2019, CCFS enhanced its product range which enabled it to grow in the specialist Buy-to-Let market segments. The Precise branded Buy-to-Let product mix became more diverse during the year, with particular growth in shorter-term fixed rate products, following the introduction of a top slicing proposition for landlords with excess income to contribute towards a stressed affordability assessment. This resulted in a fall in five-year fixed rate products as a percentage of total Buy-to- Let originations to 72% from 77% in 2018.

The business maintained its position in the BVA BDRC’s Project Mercury rankings (effectiveness of lenders intermediary marketing) as the fourth most frequently mentioned lender by intermediaries for Buy-to-Let, reflecting CCFS’ broad product offering across the Buy-to-Let segment.

On a pro forma underlying basis, Buy- to-Let made a contribution to profit of
£112.3m in 2019, up 6% compared with
£105.7m in 2018. Net interest income increased 9% to £114.3m and fees and commissions income reduced due to early repayment charges being included in net interest income and not in fees and commissions as in 2018 following an accounting policy change. The increase in impairment losses in 2019 was primarily driven by alignment in IFRS 9 modelling methodologies post Combination.

On a statutory basis, the Buy-to-Let sub- segment made a contribution to profit of £12.3m.

New lending average loan to value in this segment was 73% with an average loan size of £183,000 (2018: 74% and £169,000). The book loan to value was 71% as at
31 December 2019 (2018: 73%). The weighted average interest coverage ratio for Buy-to-Let origination during 2019 was 202% (2018: 201%).

Residential sub-segment

CCFS’ specialist residential lending decreased in 2019 compared with
2018, albeit still at a high level, with new originations down 3% to £797.2m (2018:
£825.4m). CCFS concentrated on lending in areas that had stronger risk-adjusted returns versus mainstream markets, where intense competition reduced residential mortgage rates. The Help to Buy proposition continued to perform particularly well and focus on self- employed borrowers led to an increase in the residential gross loan book of 27% to £2,170.8m in the year.

In 2019, CCFS enhanced its residential proposition with new products targeting zero-hour contracts, Help to Buy in Scotland and Help to Buy remortgages. The Group continues to maintain a strong new product pipeline to support its growth in the specialist residential segment going forward.

The average loan size for the residential sub-segment was £159,000 (2018:
£152,000) with average LTV for new lending of 71% (2018: 72%) and book LTV of 67%
(2018: 70%) as at 31 December 2019.

On a pro forma underlying basis, residential mortgages represented 28% of CCFS’ total net loan book as at 31 December 2019.

The residential sub-segment made a contribution to profit of £62.1m on a pro forma underlying basis, up 12% compared with £55.6m in 2018 reflecting growth in the loan book partially offset by higher impairment losses due to loan book growth and alignment in IFRS 9 modelling methodologies post Combination.

On a statutory basis, the Residential sub-segment made a contribution to profit of £9.2m.

Bridging sub-segment

Short-term bridging originations increased by 4% in 2019, reaching £333.7m (2018:
£321.8m). The business maintained its focus on high-quality lending in regulated and unregulated markets, rather than reacting to increased competition in
the short-term lending market. Strong repayments during the year saw the gross loan book reduce to £214.4m compared with £244.1m at the end of 2018.

The Standard and Refurbishment segments both increased along with the Regulated and Non-Regulated segments. The Non-Regulated and Refurbishment segments saw the strongest growth, boosted by the launch of CCFS’
Refurbishment Buy-to-Let product at the end of 2018. These products require
strong combined Buy-to-Let and bridging capability, areas of strength for CCFS.
In addition, CCFS enhanced its distribution by expanding its reach to direct brokers.

On a pro forma underlying basis, the bridging sub-segment made a contribution to profit of £15.1m in 2019, broadly flat compared with £15.2m in 2018 despite higher impairment losses of £0.5m
(2018: £nil) due to IFRS 9 modelling enhancements made during 2019.

On a statutory basis, the bridging sub- segment made a contribution to profit of £3.4m.

Second charge sub-segment

The second charge gross loan book increased by 19% to £218.6m (2018:
£184.2m), supported by strong originations of £82.2m, which were up 44% on 2018.

During the year, CCFS enhanced its product offering and distribution network, whilst maintaining its focus on the quality
of lending in this segment.

In response to market feedback, from early 2019, CCFS removed early repayment charges in its residential second charge product range. This brought a significant increase in applications. Distribution was also enhanced in the year, with a focus on direct-to-broker business through major networks and panels, which provides the business with a competitive advantage over smaller players, which generally
deal through master brokers.

The second charge sub-segment made a contribution to profit of £7.0m on a pro
forma underlying basis, up 8% compared with £6.5m in 2018.

On a statutory basis, the contribution to profit from the second charge sub- segment was a loss of £0.1m as net interest income was more than offset by higher impairment losses.

The following tables show CCFS’ pro forma underlying and statutory segment’s loans and advances and contribution to profit:

Year ended 31-Dec-2019	Buy-to-Let £m	Residential £m	Bridging £m	Second charge £m	Other1 £m	Total pro forma underlying £m	Reverse pre- acquisition results £m	Acquisition- related items £m	Total statutory £m
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers	4,748.5	2,170.8	214.4	218.6	22.1	7,374.4	–	294.7	7,669.1
Provision for impairment losses	(3.5)	(3.6)	(0.5)	(0.4)	–	(8.0)	–	0.7	(7.3)
Loans and advances to customers	4,745.0	2,167.2	213.9	218.2	22.1	7,366.4	–	295.4	7,661.8
Risk-weighted assets	2,002.4	934.0	127.9	95.4	8.4	3,168.1	–	124.9	3,293.0
PROFIT OR LOSS FOR THE YEAR
Net interest income	114.3	63.6	15.5	7.1	1.7	202.2	(152.1)	(21.6)	28.5
Fees and commissions income	0.1	0.2	0.1	–	3.4	3.8	(3.7)	–	0.1
Fair value losses on financial instruments	–	–	–	–	(5.5)	(5.5)	13.7	3.3	11.5
Gain on sale of loans	–	–	–	–	58.7	58.7	(58.7)	–	–
Total income	114.4	63.8	15.6	7.1	58.3	259.2	(200.8)	(18.3)	40.1
Impairment losses	(2.1)	(1.7)	(0.5)	(0.1)	–	(4.4)	4.3	(3.6)	(3.7)
Contribution to profit	112.3	62.1	15.1	7.0	58.3	254.8	(196.5)	(21.9)	36.4

Year ended 31-Dec-2018	Buy-to-Let £m	Residential £m	Bridging £m	Second charge £m	Other1 £m	Total pro forma underlying £m
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers	4,508.3	1,707.0	244.1	184.2	21.5	6,665.1
Provision for impairment losses	(1.5)	(1.8)	–	(0.3)	–	(3.6)
Loans and advances to customers	4,506.8	1,705.2	244.1	183.9	21.5	6,661.5
Risk-weighted assets	1,789.2	685.4	141.6	74.0	7.5	2,697.7
PROFIT OR LOSS FOR THE YEAR
Net interest income	104.6	54.5	15.0	6.4	–	180.5
Fees and commissions income	1.9	2.2	0.2	0.3	3.4	8.0
Gain on sale of loans	–	–	–	–	36.4	36.4
Total income	106.5	56.7	15.2	6.7	39.8	224.9
Impairment losses	(0.8)	(1.1)	–	(0.2)	–	(2.1)
Contribution to profit	105.7	55.6	15.2	6.5	39.8	222.8

1. Other relates to the net interest income from acquired loan portfolios and fee income from third party mortgage servicing.

Wholesale funding overview

Securitisation is a key strategic funding source for the combined Group, with historical issuances across CCFS and OSB since 2013 of £5.7bn.

As well as providing cost-efficient funding through securitisation, the Group has benefited from the capability to accelerate organic capital generation through the sale of residual positions. The Group’s strategy is to be nimble and dynamic rather than deterministic with its securitisation issuance plans, enabling it to take advantage of a strong market with repeat issuances, and utilise other options when market conditions are
less favourable. To that end, the Group’s activities in the wholesale markets during 2019 were more limited than was the case during the equivalent period in 2018. The ongoing uncertainty around negotiations of the UK’s exit from the European Union continued to hamper UK residential mortgage-backed securities market (‘RMBS’), with spreads tracking relatively wide throughout the year, as they had through the last few months of 2018.

The introduction of a raft of regulatory changes at the beginning of 2019, together with the market transitioning away from LIBOR as an index, also acted as a brake on new issue supply, particularly during the first quarter of 2019.

Nonetheless, the Group was able to complete a number of strategically important wholesale transactions during the year. In January 2019, despite facing a difficult political backdrop, CCFS was able to sell its residual interest in the PMF 2018-1B and PMF 2018-2B transactions, generating a gain on sale of £29.8m, equivalent to a 5.3% premium on the underlying £564.3m of mortgage assets.
This excellent outcome was made possible through the earlier strategic sales of significant components of CCFS’ residual interest in these transactions through 2018, at a time when the market was notably stronger. This strategy minimised the market exposure faced by CCFS
when selling its final residual positions in these transactions in January 2019. The trade enabled CCFS to increase its capital headroom and provide the capital capacity to fully take advantage of the commercial opportunities available to the business through its lending activities during
the year.

CCFS re-entered the debt securitisation market in May 2019 with the PMF 2019-1B transaction, securitising £733.7m of prime Buy-to-Let mortgages. PMF 2019-1B was the first SONIA-linked UK RMBS transaction to issue mezzanine notes referencing
the index, and was well received by the market. The senior fast-pay notes in the transaction were sold at SONIA plus 93bps, equivalent to a spread over LIBOR of c.

80bps; on that basis the tightest such UK Buy-to-Let securitisation achieved by any issuer in 2019.

In July 2019, CCFS sold its remaining junior residual interest in the transaction to generate a further gain on sale of
£28.8m, bringing the total gains from such transactions for the year to £58.7m.

In July 2019, OSB issued its inaugural RMBS transaction of own-originated Buy-to-Let mortgage assets, Canterbury Finance No.1. The transaction was well received, with senior funding in the order of SONIA plus 117bps achieved across the £200m
of senior notes placed.

In addition to providing the Group with attractively priced term funding, both the PMF and Canterbury transactions were structured in such a way as to provide the Group with a significant portfolio of retained senior bonds. These enhance the contingent funding options available to the Group, and can be used to access commercial as well as central bank
repo facilities.

The PMF transaction also enabled CCFS to refinance assets held on its committed warehouse facility. The facility, which provides committed senior finance of up to £350m (31 December 2018: £350m for CCFS only) against both prime residential and Buy-to-Let mortgage assets, was extended during the year for a further
15 months. In combination with a second facility available for such purposes, on a statutory basis, the Group had a total of up to £600m (31 December 2018: £nil)
of contingent wholesale funding capacity available to it through its warehouse facilities, £94m of which was utilised
at the year end.

The Group maintains commercial repo lines with eight counterparties, as well as the ability to access ordinary course central bank funding facilities, such as
the Bank of England’s Indexed Long-Term Repo auctions.

OSB and CCFS issuances from 2013 to 31 December 2019 (£m)

	PMF No.1 2013	ROCHFIN No.1 20131	PMF 2014-1	PMF 2014-2	PMF 2015-1	PMF 2015-2B1	PMF 2015-3R	ROCHFIN No.2 20161	PMF 2017-1B1	CMF 2017-11	PMF 2018-1B1	PMF 2018-2B1	CMF 2018-11	PMF 2019-1B1	CANBY No.1
Number of accounts 3+ months in arrears	n/a	n/a	n/a	n/a	4	2	13	179	2	7	0	2	8	1	3
Losses to date (£k)	n/a	n/a	n/a	n/a	0	7	20	1,546	0	0	0	0	0	0	0
Weighted average mortgage interest rate	n/a	n/a	n/a	n/a	5.02%	4.76%	4.71%	3.53%	4.08%	4.79%	4.14%	4.06%	4.51%	3.66%	3.79%
Senior note spread (over LIBOR)	1.15%	1.45%	0.80%	0.95%	0.95%	1.25%	n/a	1.30%	0.75%	0.50%	0.65%	0.68%	0.47%	n/a	n/a
Senior note spread (over SONIA)	n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	0.93%	1.17%
Weighted average margin at closing	1.43%	n/a	0.88%	1.11%	1.10%	1.53%	1.00%	n/a	1.02%	0.64%	0.74%	0.77%	0.55%	1.27%	1.45%

1. Group derecognition deal.

PMF – Precise Mortgage Funding plc

ROCHFIN – Rochester Finance plc

CMF – Charter Mortgage Funding plc

CANBY – Canterbury Finance plc

Throughout the Strategic Report, we present KPIs on a statutory and a pro forma underlying basis, which

Management believes provide a more consistent basis for comparing the Group’s performance between financial periods.

Pro forma underlying results assume that the Combination occurred on

1 January 2018, and include 12 months of results from CCFS. They also exclude exceptional items, integration costs and other acquisition-related items.

For a reconciliation of statutory

results to pro forma underlying results, see page 51.

} Group statutory 2019
} Group statutory 2018
} Group pro forma underlying 2019
} Group pro forma underlying 2018
} OSB
} CCFS

1. Gross new lending

Statutory £4.1bn (2018: £3.0bn)

Pro forma underlying £6.5bn (2018: £5.9bn)

Definition

Gross new lending is defined as gross new organic lending before redemptions.

2019 performance

Gross new lending reflects strong growth in new origination. For both OSB and CCFS,

Buy-to-Let and residential lending performed strongly as our specialist propositions continued to appeal to professional  landlords and homeowners.

3. Cost to income ratio

Statutory 32% (2018: 28%)

Pro forma underlying 29% (2018: 28%)

Definition

Cost to income ratio is defined as administrative expenses as a percentage of total income. It is a measure of operational efficiency.

2019 performance

Statutory cost to income ratio of 32% was impacted by the acquisition-related adjustments, which reduced total income and the inclusion of CCFS income and

administrative expenses post Combination.

On a pro forma underlying basis, cost to income remained strong at 29% as the business retained its focus on cost efficiency and discipline.

2. Net interest margin (‘NIM’) Statutory 243bps (2018: restated 305bps1) Pro forma underlying 266bps (2018: 286bps)

Definition

NIM is defined as net interest income as a percentage of a 13 point average of interest earning assets (cash, investment securities, loans and advances to customers and credit institutions). It represents the margin earned on loans and advances and liquid assets after swap expense/income and cost of funds.

2019 performance

Statutory NIM was lower primarily due to the dilutive impact of including CCFS’ results post Combination and the changing asset mix of the OSB loan book, despite broadly stable asset pricing.

Pro forma NIM also reflects the changing asset mix of the OSB loan book and marginally higher cost of funds in CCFS.

4. Loan loss ratio

Statutory 13bps (2018: restated 10bps1) Pro forma underlying 10bps (2018: 7bps)

 Definition
Loan loss ratio is defined as impairment losses expressed as a percentage of a 13 point average of gross loans and advances. It is

a measure of the credit performance of the loan book.

2019 performance

The 2019 statutory and pro forma underlying loan loss ratios reflect an alignment of IFRS 9 modelling methodologies post Combination and an impact of a number of high value Buy- to-Let cases having LPA receivers appointed during the first half of 2019 which attract higher provision requirements under an IFRS 9 approach.

In addition, the statutory loan loss ratio included the initial recognition of ECL provisions on the CCFS loan book on Combination.

4. Dividend per share Statutory 16.1 pence per share (2018: 14.6 pence per share)

Definition

Dividend per share is defined as the sum of the recommended final dividend for 2019 plus the interim dividend divided by the number

of ordinary shares in issue at the year end.

2019 performance

The Board will recommend a final dividend of

11.2 pence per share in respect of 2019 at the Bank’s AGM on 7 May 2020. This, together with the interim dividend of 4.9 pence per share, and the pre-acquisition CCFS interim dividend, represents 25% of pro forma underlying profit after tax after deducting coupons on AT1 securities.

For calculation of the final dividend, see page 262 in the Appendix.

5. Basic EPS

Statutory 52.6 pence per share (2018: 55.5) Pro forma underlying 64.9 pence per share (2018: 59.4)

Definition

Basic EPS is defined as profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, divided by the

weighted average number of ordinary shares in issue.

2019 performance

The reduction in basic statutory EPS was due to the 14% increase in profit after taxation being more than offset by the impact of the additional shares issued for the all-share Combination with CCFS.

On a pro forma underlying basis, EPS increased broadly in line with the increase in profit after taxation.

6. Return on equity

Statutory 18% (2018: restated 25%1)

Pro forma underlying 25% (2018: 28%)

Definition

Return on equity is defined as profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons

on AT1 securities, gross of tax, as a percentage of a 13 point average shareholders’ equity (excluding £60m of AT1 securities).

2019 performance

On a statutory basis, return on equity decreased, primarily due to exceptional items, integration costs and other acquisition- related items.

On a pro forma underlying basis, return on equity remained strong at 25%.

7. CRD IV fully-loaded Common Equity Tier 1 capital ratio Statutory 16.0% (2018: 13.3%)

  

 Definition
This is defined as Common Equity Tier 1 (‘CET1’) capital as a percentage of risk- weighted assets (calculated on a standardised basis) and is a measure of the capital strength of the Bank.

2019 performance

The CET1 ratio of 16.0% reflects the strong organic capital generation capability of the business to support significant growth

through profitability and the beneficial impact of the fair value uplift on CCFS’ net assets

on Combination.

  

4. Net Promoter Score (‘NPS’)

OSB +66 (2018: +63)

CCFS +72 (2018: +39)

 Definition
The NPS measures our customers’ satisfaction with our service and products. It is based

on customer responses to the question of whether they would recommend us to a friend. The question scale is 0 for absolutely not to 10 for definitely yes. Based on the score, a customer is defined as a detractor between 0 and 6, a passive between 7 and 8 and a promoter between 9 and 10. Subtracting the percentage of detractors from the percentage of promoters gives an NPS of between -100 and +100.

2019 performance

OSB’s customer NPS improved to +66 and CCFS’ was an outstanding +72.

 1.To align calculation methods post Combination, OSB amended NIM, loan loss and return on equity calculations to include average interest earning assets for NIM, average gross loans for loan loss ratio and average shareholders’ equity for return on equity on a 13 point average from a simple average. The comparative ratios were restated accordingly.

 

Review of the Group’s performance presented on a statutory basis including CCFS from the date

of the Combination

Strong profit growth

The Group reported 14% growth in statutory profit before taxation to
£209.1m (2018: restated £182.8m1) after exceptional items, integration costs and other acquisition-related items of £33.2m2 (2018: exceptional cost of Heritable option of £9.8m) and including £28.0m of profit before taxation from the CCFS business, after exceptional transaction costs
of £15.7m.

Statutory profit after taxation in 2019 increased by 14% to £158.8m (2018: restated £139.6m1) including the after tax exceptional items, integration costs and other acquisition-related items of £27.4m2 (2018: exceptional cost of  Heritable option of £7.2m) and including £24.8m
of profit after taxation from the CCFS business, after post tax pre-combination transaction costs of £15.5m.

The Group’s effective tax rate was 22.8%3 in 2019 (2018: 23.7%), primarily due to
a lower proportion of the Group’s profits being subject to the Bank Corporation Tax Surcharge.

Statutory return on equity for 2019 fell to 18% (2018: restated 25%4), primarily due to exceptional items, integration costs and other acquisition-related items. Statutory basic earnings per share fell by 5% to 52.6 pence per share (2018: 55.5 pence per share), due to the 14% increase in profit after taxation being more than offset by the impact of the additional shares issued for the all-share Combination with CCFS.

Summary statutory results for 2019 and 2018

Summary Statement of Profit or Loss	Group 31-Dec-2019 £m	Restated1 Group 31-Dec-2018 £m
Net interest income	344.7	286.3
Net losses on financial instruments	(3.4)	(5.2)
Net fees and commissions	2.2	0.6
External servicing fees	(0.1)	(0.6)
Administrative expenses	(108.7)	(79.6)
Provisions	–	(0.8)
Impairment losses	(15.6)	(8.1)
Gain on Combination with CCFS	10.8	–
Integration costs	(5.2)	–
Exceptional items	(15.6)	(9.8)
Profit before taxation	209.1	182.8
Profit after taxation	158.8	139.6

Key ratios – for more information, see Appendix
Net interest margin1, 4	243bps	305bps
Cost to income ratio5	32%	28%
Management expense ratio6	0.76%	0.84%
Loan loss ratio4, 5	0.13%	0.10%
Basic EPS, pence per share5	52.6	55.5
Return on equity1, 4	18%	25%
Dividend per share, pence per share5	16.1	14.6

Extracts from the Statement of Financial Position	£m	£m
Loans and advances to customers	18,446.8	8,983.3
Retail deposits	16,255.0	8,071.9
Total assets	21,417.1	10,460.2

Key ratios – for more information, see Appendix
Common Equity Tier 1 ratio7	16.0%	13.3%
Total capital ratio	17.3%	15.8%
Leverage ratio	6.5%	5.9%

Notes

1. The Group restated the prior year comparatives to recognise interest expense and taxation on the £22m Perpetual Subordinated Bonds previously classified as equity.
2. This comprises £48.9m (£42.9m after tax) of acquisition-related items as shown in the reconciliation of statutory to pro forma underlying results on page 51, less CCFS’ pre-acquisition transaction costs of £15.7m (£15.5m after tax).
3. Effective tax rate excludes £2.7m of adjustments relating to prior years.
4. To align calculation methods post Combination, OSB amended the NIM, loan loss ratio and return on equity calculations to include average interest earning assets for NIM, average gross loans for loan loss ratio and average shareholders’ equity for return on equity on a 13 point average rather than a simple average. The comparative ratios were restated.
5. See definition in Key performance indicators on pages 44 and 45.
6. Administrative expenses as a percentage of 13 point average of total assets.
7. Fully-loaded under Basel III/CRD IV.

Net interest margin (‘NIM’)

The Group reported an increase in net interest income of 20% to £344.7m in 2019 (2018: restated £286.3m1), reflecting strong growth in the loan book and the inclusion of CCFS’ net interest income  post Combination.

Net interest income included effective interest rate (‘EIR’) reset gains of £5.0m in 2019 (2018: £5.6m) due to assuming a period spent on standard variable rate (‘SVR’) on additional products,

as behavioural trends emerged, and cash out-performance on purchased mortgage portfolios.

Statutory NIM for 2019 reduced to 243bps (2018: restated 305bps1, 4), primarily due to the dilutive impact of including CCFS’ results post Combination and the impact of the changing mix of the OSB loan book, despite broadly stable asset pricing.

The CCFS business has a lower NIM than the OSB business and statutory NIM in 2019 was also negatively impacted by the amortisation of the fair value uplift on acquisition of the CCFS loan book.

The mix of the OSB loan book continued to change as the higher-yielding back book refinanced onto front book pricing. The impact of this mix effect had largely run its course by the end of the first half, assuming stable mortgage pricing, cost
of funds and swap spreads going forward.

Losses on financial instruments

The statutory fair value loss on financial instruments in 2019 of £3.4m
(2018: £5.2m) includes a net loss of £1.3m from the Group’s hedging activities (2018:
£0.3m net loss), £5.5m amortisation of fair value adjustments on hedged assets relating to cancelled swaps (2018: £4.6m) and a gain of £3.3m due to acquisition- related inception adjustments under hedge accounting.

The net loss on hedging activities includes a loss of £4.8m in respect of the ineffective portion of hedges and net gains on unmatched swaps of £3.5m (2018: £2.7m loss and £2.4m gain respectively). The
net gains on unmatched swaps, which primarily relate to mortgage pipeline hedges, include the impact of gains in CCFS post Combination due to movements in the LIBOR curve.

The amortisation of fair value adjustments on hedged assets in both years, includes the impact of accelerating the amortisation in line with the run-
off of the underlying legacy long-term fixed rate mortgages, due to faster than expected prepayments.

Net fees and commission

Statutory net fees and commission income of £2.2m (2018: £0.6m) comprised fees and commission receivable of £3.4m (2018:
£1.7m) partially offset by commission expense of £1.2m (2018: £1.1m).

Fees and commissions receivable doubled in the year mostly as a result of the inclusion of £1.5m of fees and commissions from CCFS.

Fees and commissions payable in 2019 remained broadly flat and related to branch agency fees and commissions paid to the Kent Reliance Provident Society for conducting member engagement activities for OSB.

Efficient and scalable operating platform

Statutory administrative expenses were up 37% to £108.7m in 2019 (2018: £79.6m), due to growth in the balance sheet and the inclusion of
£19.2m of CCFS administrative expenses post Combination.

The Group’s statutory cost to income ratio of 32% (2018: 28%) was impacted by the acquisition-related adjustments which reduced total income on a statutory basis and the inclusion of CCFS income and administrative expenses post Combination.

The management expense ratio was 0.76% (2018: 0.84%) reflecting cost efficiencies in the day-to-day running
of the Group on a business as usual basis and further economies of scale, despite continued investment in the business.

Provisions

Statutory regulatory provisions were
£nil in 2019 as the provision expense was fully offset by an FSCS refund.

In 2018, regulatory provisions were
£0.8m and included levies due to Financial Services Compensation Scheme and other regulatory provisions on acquired books.

Impairment losses

Statutory impairment losses increased to
£15.6m in 2019 (2018: £8.1m) representing 13bps on average gross loans and advances (2018: 10bps).

Impairment losses included a provision relating to the initial recognition of expected credit losses on the CCFS portfolios of £3.6m and the impact of aligning IFRS 9 provision methodologies post Combination. Impairment losses were also impacted by a number of high-value Buy-to-Let cases in OSB having Law of Property Act (‘LPA’) receivers appointed during the first half of 2019, which attracted a higher provision requirement under an IFRS 9 modelling approach.
During the second half of 2019, the number of LPA appointments stabilised.

Gain on Combination with CCFS

The Group recorded a gain of £10.8m which represents negative goodwill on the Combination with CCFS. Negative goodwill arose as a result of a decrease in the
OSB share price between announcement and completion dates and an increase in the fair value of the loan book acquired due to movements in the LIBOR curve between announcement and completion. For more information, see note 4 to the Financial statements.

Integration costs

There were £5.2m of integration costs incurred in 2019 post completion of the Combination.

Exceptional items

Statutory exceptional items of £15.6m in 2019 comprise transaction costs incurred by OSB in relation to the Combination with CCFS.

The exceptional item of £9.8m in 2018 related to the fair value of the Heritable option.

Dividend

The Board recommends a final dividend for 2019 of 11.2 pence per share. Together with the 2019 interim dividend of 4.9 pence per share and the pre-Combination CCFS interim dividend of 4.3 pence per share, this represents 25% of pro forma underlying profit attributable to ordinary shareholders. For the calculation of the 2019 final dividend, see the Appendix on page 262.

Summary Cash Flow Statement	Group 31-Dec-2019 £m	Restated1 Group 31-Dec-2018 £m
Profit before tax	209.1	182.8
Net cash generated/(used in):
Operating activities	(536.1)	(85.8)
Investing activities	826.6	(45.6)
Financing activities	488.1	289.7
Net increase in cash and cash equivalents	778.6	158.3
Cash and cash equivalents at the beginning of the period	1,324.2	1,165.9
Cash and cash equivalents at the end of the period	2,102.8	1,324.2

 

The proposed final dividend will be paid on 13 May 2020, subject to approval at the AGM on 7 May 2020, with an ex-dividend date of 26 March 2020 and a record date of 27 March 2020.

 

Balance sheet growth

Net loans and advances to customers more than doubled in 2019 to £18,446.8m (31 December 2018: £8,983.3m) on a statutory basis, reflecting strong gross originations and the inclusion of the CCFS loan book.

Retail deposits increased to £16,255.0m from £8,071.9m in 2018 on a statutory basis, commensurate with the growth in the loan book.

Drawings under the Term Funding Scheme (‘TFS’) increased from £1.5bn to £2.6bn for the Group, due to the inclusion of CCFS’ drawings of £1.1bn.

The TFS drawdowns are offered in the form of collateralised cash loans. The scheme closed to new drawings at the end of February 2018 and the Group has four years from the date of drawing to repay the existing loans.

The Group also took the opportunity to complement its retail and TFS funding in 2019 with further borrowing under the Bank of England’s Indexed Long-Term Repo scheme (‘ILTR’) which is an auction with borrowings offered as a collateralised cash loan repayable in six months. At
31 December 2019, the Group had
£290.0m (2018: £80.0m) of borrowings under the ILTR scheme at base rate
+15bps, a total of 90bps.

The Group had up to £600m (2018: £nil) of contingent wholesale funding capacity
available to it through the CCFS warehouse facilities, £94m of which was utilised at the year end.

The Group also utilises sophisticated securitisation platforms to complement its funding requirements. For more information on residential mortgage- backed securities issuances in 2019,
see page 41.

Liquidity

Both OSB and CCFS operate under the Prudential Regulation Authority’s liquidity regime and are managed separately for liquidity risk. Both Banks hold their own

significant liquidity buffer of liquidity coverage ratio (‘LCR’) eligible high-quality liquid assets (‘HQLA’).

As at 31 December 2019, OSB had
£1,231.8m (2018: £1,354.6m) and CCFS
had £1,077.3m (2018: £868.3m) of HQLA LCR eligible assets. CCFS also held a £186.2m (2018: £131.9m) portfolio
of RMBS qualifying as Bank of England level 3 collateral.

Both Banks operate within a target liquidity runway in excess of the minimum LCR regulatory requirement, which is based

on internal stress testing. Both Banks have a range of contingent liquidity and funding options available for possible stress periods.

As at 31 December 2019, OSB had a liquidity coverage ratio of 199% (2018:
224%) and CCFS 145% (2018: 173%),
both significantly in excess of the 2019 regulatory minimum of 100%.

Capital

The Group’s fully-loaded CET1 capital ratio under CRD IV strengthened to 16.0% as at 31 December 2019 (31 December
2018: 13.3%), demonstrating the strong organic capital generation capability of the business to support significant growth through profitability and the beneficial impact of the fair value uplift on CCFS’
net assets on acquisition.

The Group had a total capital ratio of 17.3% and a leverage ratio of 6.5% as at 31 December 2019 (31 December
2018: 15.8% and 5.9% respectively).

The combined Group had a Pillar 2a requirement of 1.67% of risk-weighted assets (excluding a static integration add- on) as at 31 December 2019 (31 December
2018: 1.1% for OSB only).

Cash flow statement

The Group’s cash and cash equivalents increased by £778.6m during the year to
£2,102.8m as at 31 December 2019.

Loans and advances to customers increased by £2,230.8m during the year, partially funded by £1,637.8m of deposits from retail customers.  The movements in loan book and retail funds exclude the acquired positions from CCFS due to the merger being a share for share exchange. Additional funding was provided by cash generated from financing activities of
£488.1m and included £170.0m of net drawings under the Indexed Long-Term Repo scheme, £220.4m of proceeds from securitisation of mortgages, warehouse funding of £93.5m and £41.3m from commercial repos offset by dividend payment of £37.3m. Cash generated from investing activities increased to £826.6m largely as a result of £870.4m of cash
and cash equivalents acquired on the Combination with CCFS.

In 2018, the increase in the Group’s loans and advances to customers of £1,689.5m was largely funded by £1,421.6m of deposits from retail customers and contributed to £85.1m of cash used in operating activities. The remaining funding came largely from the final drawdown under the TFS of £250.0m and £80.0m
of funding under the Bank of England’s Indexed Long-Term Repo scheme, which generated £289.0m of cash from financing activities. Cash used in investing activities was £45.6m, primarily driven by net purchases and maturities of investment securities of £40.0m.

 1. The Group restated the prior year comparatives to recognise interest expense and taxation on the £22m Perpetual Subordinated Bonds previously classified as equity.

Review of the Group’s performance on a pro forma underlying basis

Strong profit growth

Pro forma underlying profit  before taxation was £381.1m in 2019, up 9% from
£350.8m in 2018, due primarily to strong growth in the loan book, net of structured asset sales, at attractive margins and continued cost discipline.

Pro forma underlying profit after taxation was £294.2m in 2019, up 10% from £267.6m in 2018. On a pro forma underlying basis, the Group’s effective
tax rate was 22.8% in 2019 (2018: 23.7%), with a lower proportion of the Group’s profits subject to the Bank Corporation Tax Surcharge.

On a pro forma underlying basis, return on equity for 2019 remained strong at 25% (2018: 28%) and basic earnings per share increased by 9% to 64.9 pence per
share (2018: 59.4 pence per share), broadly commensurate with the increase in profit after taxation.

Net interest margin

On a pro forma underlying basis, net interest income was up 11% from £466.8m in 2018 to £518.4m in 2019 due to growth in the loan book at attractive margins.

Net interest income included EIR reset gains of £5.0m in 2019 (2018: £5.6m) due to assuming a period spent on standard variable rate on additional products,

as behavioural trends emerged, and cash out-performance on purchased mortgage portfolios.

On a pro forma underlying basis,
NIM reduced to 266bps (2018: 286bps), primarily reflecting the impact of the changing asset mix of the OSB loan book, despite broadly stable asset pricing and  a marginally higher cost of funds in the CCFS business.

The mix of the OSB loan book continued to change as the higher-yielding back book refinanced onto front book pricing. The impact of this mix effect had largely run its course by the end of the first half, assuming stable mortgage pricing, cost of funds and swap spreads going forward.

Summary pro forma underlying results for 2019 and 2018

Summary Statement of Profit or Loss	Group 31-Dec-2019 £m	Group 31-Dec-2018 £m
Net interest income	518.4	466.8
Gain on sale of loans	58.6	36.4
Net losses on financial instruments	(20.3)	(5.2)
Net fees and commissions	5.9	8.6
External servicing fees	(0.1)	(0.6)
Administrative expenses	(165.1)	(144.2)
Provisions	–	(0.8)
Impairment losses	(16.3)	(10.2)
Profit before taxation	381.1	350.8
Profit after taxation	294.2	267.6

Key ratios – for more information, see Appendix
Net interest margin	266bps	286bps
Cost to income ratio	29%	28%
Management expense ratio	0.84%	0.88%
Loan loss ratio	0.10%	0.07%
Basic EPS, pence per share	64.9	59.4
Return on equity	25%	28%

Extracts from the Statement of Financial Position	£m	£m
Loans and advances	18,151.4	15,644.8
Retail deposits	16,248.6	13,166.4
Total assets	21,166.5	18,246.7

Alternative performance measures

The Group presents alternative performance measures (‘APMs’) in this Strategic Report as Management believes they provide a more consistent basis for comparing the Group’s performance between financial periods. Pro forma underlying results assume that the Combination occurred on

1 January 2018, and include 12 months of results from CCFS. They also exclude exceptional items, integration costs and other acquisition-related items.

APMs reflect an important aspect of the way in which operating targets are defined and performance is monitored by the Board. However, any APMs in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well.

For more information on the APMs and the reconciliation between APMs and the statutory equivalents, see page 260 in the Appendix.

Gain on sale of loans

The gain on sale of loans of £58.6m on a pro forma underlying basis relates to sales of residual interests in three CCFS securitisations to third party investors in 2019, prior to the Combination (2018: £36.4m).

Losses on financial instruments

Pro forma underlying net fair value  loss on financial instruments increased to £20.3m (2018: £5.2m loss). This increase was largely due to £13.3m of losses on unmatched swaps, primarily relating to mortgage pipeline hedges, due to movements in the LIBOR curve during 2019.

Net fees and commissions

Pro forma underlying net fees and commissions of £5.9m (2018: £8.6m) primarily relate to CCFS’ fees for servicing third party mortgage portfolios.

Administrative expenses

Pro forma underlying administrative expenses were £165.1m in 2019, up 14% from £144.2m in 2018, primarily due
to balance sheet growth.

The cost to income ratio on a pro forma underlying basis remained strong at 29% (2018: 28%) as the business retained its focus on cost efficiency and discipline.

The management expense ratio reduced to 0.84% on a pro forma underlying basis (2018: 0.88%), reflecting this cost discipline and benefits of scale, despite continued investment in the business.

Provisions

Provisions on a pro forma underlying basis were £nil in 2019 as the provision expense was fully offset by an FSCS refund.

In 2018, provisions were £0.8m and included levies due to Financial Services Compensation Scheme and other regulatory provisions on acquired books.

Impairment losses

Impairment losses on a pro forma underlying basis increased to £16.3m in 2019 (2018: £10.2m) representing 10bps (2018: 7bps) on average gross loans and advances.

The loan loss ratio remained strong as both Banks delivered strong credit
performance driven by robust underwriting and prudent lending policies. The year-
on-year increase in the loan loss ratio was primarily due to the impact of aligning IFRS 9 modelling approaches post Combination and the impact of a number of high value Buy-to-Let cases having LPA receivers appointed during the first half of 2019, attracting higher provision requirements under the IFRS 9 modelling approach.
The number of LPA appointments stabilised in the second half of 2019.

Balance sheet

On a pro forma underlying basis, the loan book increased by 16% to £18,151.4m (2018: £15,644.8m), primarily due to strong levels of originations in the year for both OSB and CCFS, partially offset by structured asset sales by CCFS prior to the
Combination. The loan book growth would have been 23% excluding the impact
of these sales.

Retail deposits increased by 23% during 2019 to £16,248.6m (2018: £13,166.4m)
as both Banks continued to attract new savers by offering attractively priced savings products and outstanding customer service.

Total assets increased in the year by 16% to £21,166.5m (2018: £18,246.7m).

Drawings under the TFS were £2.6bn on a pro forma underlying basis, unchanged from 2018.

In 2019, the Group also took the opportunity to complement its retail and TFS funding with further borrowing under the Bank of England’s ILTR and at 31 December 2019 it had £290.0m (2018: £80.0m) of borrowings under the
ILTR scheme at base rate +15bps, a total of 90bps.

The Group had up to £600m (2018:
£600m) of contingent wholesale funding capacity available to it through the CCFS warehouse facilities, £94m of which was utilised at the year end.

The Group also utilises sophisticated securitisation platforms to complement its funding requirements. For more information on RMBS issuances in 2019, see page 41.

Reconciliation of statutory to pro forma underlying results

2019							2018
	Statutory results £m	CCFS pre- acquisition results £m	Reverse acquisition- related items £m	Pro forma underlying results £m		Restated14 OSB statutory results £m	CCFS statutory results £m	Reverse exceptional item £m	Pro forma underlying results £m
Net interest income	344.7	152.1	21.61	518.4		286.3	180.5	–	466.8
(Loss)/gain on sale of loans	(0.1)	58.7	–	58.6		–	36.4	–	36.4
Net losses on financial instruments	(3.3)	(13.7)	(3.3)2	(20.3)		(5.2)	–	–	(5.2)
Net fees and commissions	2.2	3.7	–	5.9		0.6	8.0	–	8.6
External servicing fees	(0.1)	–	–	(0.1)		(0.6)	–	–	(0.6)
Total income	343.4	200.8	18.3	562.5		281.1	224.9	–	506.0
Administrative expenses	(108.7)	(57.7)	1.33	(165.1)		(79.6)	(64.6)	–	(144.2)
Provisions	–	–	–	–		(0.8)	–	–	(0.8)
Impairment losses	(15.6)	(4.3)	3.64	(16.3)		(8.1)	(2.1)	–	(10.2)
Gain on Combination with CCFS	10.8	–	(10.8)5	–		–	–	–	–
Integration costs	(5.2)	–	5.26	–		–	–	–	–
Exceptional items	(15.6)	(15.7)	31.37	–		(9.8)	–	9.8	–
Profit before tax	209.1	123.1	48.9	381.1		182.8	158.2	9.8	350.8
Profit after tax	158.8	92.5	42.9	294.2		139.6	120.8	7.2	267.6
Summary Balance Sheet
Loans and advances to customers	18,446.8	–	(295.4)8	18,151.4		8,983.3	6,661.5	–	15,644.8
Other financial assets	2,878.2	–	63.29	2,941.4		1,438.1	1,111.4	–	2,549.5
Other non-financial assets	92.1	–	(18.4)10	73.7		38.8	13.6	–	52.4
Total assets	21,417.1	–	(250.6)	21,166.5		10,460.2	7,786.5	–	18,246.7
Amounts owed to retail depositors	16,255.0	–	(6.4)11	16,248.6		8,071.9	5,094.5	–	13,166.4
Other financial liabilities	3,544.0	–	10.012	3,554.0		1,690.2	2,198.7	(7.2)	3,881.7
Other non-financial liabilities	141.1	–	(63.1)13	78.0		39.7	43.0	–	82.7
Total liabilities	19,940.1	–	(59.5)	19,880.6		9,801.8	7,336.2	(7.2)	17,130.8
Net assets	1,477.0	–	(191.1)	1,285.9		658.4	450.3	7.2	1,115.9

1. 1. Amortisation of the net fair value uplift to CCFS’ mortgage loans and retail deposits on Combination.
   2. Inception adjustment on CCFS’ derivative assets and liabilities on Combination.
   3. Amortisation of intangible assets recognised on Combination.
   4. Recognition of expected credit losses arising on acquisition of CCFS’ loan book.
   5. Recognition of negative goodwill on Combination as a result of a decrease in the OSB share price between announcement and completion and an increase in the fair value of the loan book acquired due to movements in the LIBOR curve between announcement and completion.
   6. Costs of integration of the two Banks post Combination.
   7. Transaction costs include consultant, legal, professional and success fees in relation to the Combination.

8. 8. Recognition of a fair value uplift to CCFS’ loan book of £317.0m less amortisation of the fair value uplift of £22.6m and a movement on credit provisions of £1.0m.
   9. Fair value adjustment to hedged assets of £63.2m.
   10. Adjustment of £0.7m to deferred tax asset and £19.1m relating to recognition of acquired intangibles on Combination.
   11. Fair value adjustment to CCFS’ retail deposits of £7.4m at Combination less amortisation of £1.0m.
   12. Fair value adjustment to hedged liabilities of £10.0m.
   13. Adjustment to deferred tax liability of £63.1m relating to the fair value adjustments on the loan book and retail deposits and other acquisition-related adjustments.
   14. The Group restated the prior year comparatives to recognise interest expense and taxation on the £22m Perpetual Subordinated Bonds previously classified as equity.

Executive summary

During the year, the Group maintained a low and stable risk profile, in line with
the Board’s risk management objectives.
The Group continued to enhance its risk identification and management
capabilities to ensure ongoing compliance with industry and regulatory standards.

By leveraging its Strategic Risk Management Framework (‘SRMF’), the Group actively managed its risk profile in accordance with the Board-approved risk appetite. Through continuous
monitoring and assessment of underlying risk drivers, the Group took appropriate and timely actions in response to the changing economic, political, business and regulatory environment.

The Group maintained its focus on
risk-based investment to enhance data governance and controls, and made good progress towards building Internal Ratings- Based (‘IRB’) approach capabilities.

The discipline associated with effective operational resilience continued to be an area of focus. The Group established effective and scalable operating models across all risk types, which included leveraging its OSBI operations.

The Group delivered strong and profitable growth whilst maintaining a low and stable risk profile. Loan assets continued to perform strongly in 2019 and the Group maintained high quality capital and liquidity buffers to meet both current and future requirements.

Ongoing stress testing demonstrates that the Group is resilient to extreme, but plausible, scenarios in the context of ongoing uncertainty surrounding the economic, political and regulatory environment. In particular, the
Group continues to actively monitor the developments relating to
Brexit negotiations.

The Group successfully managed its funding and liquidity profile throughout the year, ensuring that it supported the continued growth of the balance sheet.

High level key risk indicators

The Group aligns its risk appetite to a select range of key performance indicators that are used to assess its success against strategic, business, operational and regulatory objectives. Actual performance against these indicators is continually assessed and reported. The table on the opposite page outlines the comparative analysis of the leading risk indicators
with supporting commentary.

Key achievements in 2019

Following the Combination with CCFS, significant progress was made on aligning a number of key risk management items, while two Chief Risk Officers were retained to ensure an appropriate level of oversight across the two regulated Banks. Significant work was undertaken during due diligence, and progress continued post completion to identify and manage risks associated with the integration. The risk management frameworks of the two Banks were
well aligned pre-integration, which will support both the integration process and the ongoing risk management oversight of both Banks.

Work is underway to produce a combined Group Internal Capital Adequacy Assessment Process (‘ICAAP’) in addition to individual OSB and CCFS ICAAPs. A consistent approach has been agreed to ensure risks to capital are fully assessed across the two Banks and the Group.

The Group also made significant progress throughout the year in further enhancing its SRMF, with a view to ensuring that it is not only fit for purpose today but also in the future, as the Group continues to grow.

The Group undertakes a full review of the appropriateness of its risk appetite at least twice a year. During 2019, enhancements were made across a number of risk types including credit, conduct and compliance and regulatory risk.

Improvements were made to the Group’s data management and governance capabilities, driven by the Group’s strategic data management objectives. This initiative is designed to deliver integrated data controls,
aggregation and reporting capabilities.

During 2019, further enhancements were made to the Group’s credit risk management information and reporting capabilities, with more

granular information being provided to the Credit and Group Risk Committees. Particular focus was given to providing more segmented information to allow management and the Board to identify
any changes in sub-segment performance, with respect to organically-originated business and acquired portfolios.

The Group continued to enhance its operational risk and operational resilience activities with increased training and awareness being rolled out across the organisation. A successful live scenario exercise was carried out with senior management and the Board over a two day period, testing the Group’s operational and financial resilience.

The Group continued to positively drive forward the vulnerable customer agenda via the Vulnerable Customer Review Committee to ensure all customers continue to consistently receive
fair outcomes.

Key risk indicators

 

Loan loss ratio                                                 Liquidity coverage ratio                                3+ months in arrears

Commentary

The Group’s statutory loan loss ratio remained low at 13bps (2018: 10bps), on a pro forma underlying basis1 the loan loss ratio was 10bps (2018: 7bps).

During 2019 impairment losses included initial recognition of expected credit losses across the CCFS book following the Combination, as well as a one-off charge across the OSB Group aligning IFRS 9 provisioning methodologies.

During the first half of 2019, the Group implemented a more focused collections approach across the OSB Buy-to-Let portfolio which increased the number of cases where Law of Property Act receivers were appointed, which resulted in higher provisions. The number of LPA appointments stabilised

in the second half of 2019.

Commentary

As at 31 December 2019, both OSB and CCFS continued to hold strong levels of liquidity, significantly in excess of the 2019 regulatory minimum of 100%.

Both Banks operate within a target liquidity runway in excess of the minimum LCR regulatory requirement, which is based on internal stress testing. Both Banks have a range of contingent liquidity and funding options available for possible stress periods.

Commentary

Across the OSB lending portfolios the percentage of loans more than three months in arrears at the end of 2019 was 1.3% (2018: 1.5%). This trend was driven by changes in the loan book mix, improvement in arrears performance across the Residential segment and the impact of more targeted collections activity across Buy-to-Let lending.

The CCFS lending portfolios continue to display low levels of arrears of 0.3% as at 31 December 2019 (2018: 0.2%), with a marginal increase observed as the lending portfolios continued to season in line with expectations.

Statutory CET1 ratio

Commentary

The Group remained well above targeted capital levels throughout 2019, with lending portfolios continuing to generate strong levels of organic capital.

Statutory total capital ratio

 Commentary
The Group’s total capital ratio remained strong at 17.3% in 2019 (2018: 15.8%).

1. 1. 1. Pro forma underlying basis assumes that the Combination completed on 1 January 2018  and includes 12 months of OSB and CCFS results.

Priority areas for 2020

The Group will continue to enhance its risk management activities in 2020, ensuring appropriate oversight of both Banks, while also focusing on the risks posed by the Combination. The Group will manage integration risk as a principal risk, ensuring appropriate oversight by identifying and assessing key risks, developing a risk appetite and reporting to Management and Board Committees.

During 2020, the Group will further refine and embed its risk management capabilities in the context of changing economic, business and operating conditions. Priority areas for enhancement include:

• Alignment of risk management frameworks across OSB and CCFS.
• Development of a combined Group risk appetite across all principal risk types, with supporting monitoring and reporting capabilities.
• Integration of second generation IRB credit risk models within credit portfolio monitoring, stress testing and capital planning, risk appetite and risk-based pricing.
• Development of IRB waiver documentation, demonstrating compliance with approval requirements.
• Alignment of operational risk management systems and integration of the operational risk management frameworks across OSB and CCFS.
• Enhancements to operational resilience and business continuity testing to incorporate live data to create a more realistic testing environment.
• Enhanced conduct risk awareness training, including bespoke face-to-face training for key business areas.

The Board and senior Management continue to provide appropriate oversight and direction to all risk and compliance initiatives. The Group also engages external subject matter experts and consults with supervisory authorities to ensure appropriate levels of transparency and successful outcomes are achieved.

Pandemic risk factors

The outbreak of Coronavirus (COVID-19) has now been labelled a global pandemic by the World Health Organization. If this continues to spread through contagion, it is likely to further intensify the disruptive impact on the global and UK economy.
This would result in deteriorating market sentiments, falling investment and consumer spending and diminishing trade flows. Government actions, both fiscal and monetary, may prove to be slow to take effect and/or uncertain in their impact.

The financial services sector in a global pandemic could be adversely impacted as a consequence of deteriorating credit risk profile, market uncertainty, declining liquidity and curtailed operational capacity.

A spreading global pandemic could adversely impact the Group across a number of key financial and operational areas.

The asset quality profile could be impacted through declining customer affordability, increasing delinquency and diminishing underlying security values. This would feed through into increasing credit write-offs, credit provisions and capital requirements. Use of forbearance may also need to be reassessed to manage the asset quality profile in a prudent and a conduct sensitive manner. The Group may also be required to re-evaluate the key judgements and assumptions underpinning its business, capital, provisioning and wider risk models.

The Group’s capital requirements may reduce relative to the business-as-usual plans owing to reduced lending volumes. However, this may be offset by increasing contingency and risk- based requirements. Additionally, opportunities to effectively deploy capital may also diminish as capital generating capacity is impacted by declining net interest margins and increasing inefficiencies in the underlying operating model.

The Group’s funding sources could be impacted as retail savers prioritise their diminishing available funds towards daily essentials. Retail deposits may also decline as customers reduce savings and investments to operate within the deposit insurance scheme limit. Retail savings and investments could
also be impacted by reduced confidence in the UK banking sector. Wholesale are also expected to experience reduced liquidity and risk appetite though this may be offset by more aggressive central bank open market operations.

The Group’s operational capacity could be adversely impacted as a consequence of sickness-based absenteeism, remote and distributed working arrangements and restricted international and local travel.

The Group’s service quality levels could be adversely impacted as a consequence of increased information requests and transactional support requirements. This would put additional pressure on already diminished customer facing teams. This would adversely impact service quality levels and may result in poor customer outcomes and remediation costs.

The Group’s operational risk and resilience profiles would also be adversely impacted as a consequence of reduced staffing levels, declining effectiveness of third-party support services and increased propensity for human error owing to a reduced and stretched workforce.

Risk management

Approach to risk management

The Group views its capabilities to effectively identify, assess and manage its risk profile as critical to its growth strategy. The
Group’s approach to risk management is outlined within the SRMF.

The SRMF is the overarching framework which enables the Board and senior management to actively manage and optimise the risk profile within the constraints of the risk appetite. The SRMF also enables informed risk-based decisions to be taken in a timely manner by allowing for the interests and expectations
of key stakeholders.

The SRMF also provides a structured mechanism to align all critical components of an effective approach to risk management. The SRMF links overarching risk principles to day-to-day risk monitoring and management activities.

The modular construct of the SRMF provides an agile approach to keeping pace with the evolving nature of the risk profile and underlying drivers. The SRMF and its core modular components are subject to periodic review and approval by the Board and its relevant Committees. The key modules of the SRMF structure are as follows:

1. Risk principles and culture – the Group has established a set of risk principles which inform and guide all risk management activities and has a strong, proactive and transparent ‘risk culture’ where all employees across the Group are aware of their responsibilities in relation to risk management.
2. Risk strategy and appetite – the Group has a clear business mission, vision and strategy which is supported by an articulated risk vision and underlying principles. The Group calibrates its risk appetite to reflect the Group’s strategic objectives and business operating plans, as well as external economic, business and regulatory constraints.
3. Risk assessment and control – the Group’s business model and strategy exposes it to a defined risk profile and the risk governance structure is informed by this risk profile such that

the Group can identify and manage its risks in an effective and efficient manner.

1. Risk definitions and categorisation – the Group sets out its principal risks which represent the primary risks to which the Group is exposed.

5. Risk analytics (including stress testing and scenario development) – the Group uses quantitative analysis and statistical modelling to help improve its business decisions.
6. Risk data and IT – the maintenance of high quality risk information, along with the Group’s data enrichment and aggregation capabilities, are central to the Risk function’s objectives being achieved.
7. Risk frameworks, policies and procedures – risk frameworks, policies and supporting documentation outline the process by which risk is effectively managed and governed within the Group.
8. Risk management information (‘MI’) and reporting – the Group has established a comprehensive suite of risk MI and reports covering all principal risk types.
9. Risk governance and function organisation – risk governance refers to the processes and structures established by the Board to ensure that risks are assumed and managed within the Board-approved risk appetite, with clear delineation between risk taking, oversight and assurance responsibilities. The Group’s risk governance framework is structured to adhere

to the ‘three lines of defence’ model.

Further detail on these modules is set out in the Group’s Pillar 3 disclosures. The following diagrams outline the core components of the SRMF and the organisational arrangements to ensure
that the Group operates in accordance with the requirements of the SRMF.

Risk appetite

The Group aligns its strategic and business objectives with its risk appetite, enabling the Board and senior management to monitor the risk profile relative to its strategic and business performance objectives. Risk appetite is a critical mechanism through which the Board and senior management are able to identify adverse trends and respond to unexpected developments in a timely
and considered manner.

The Group risk appetite is articulated by means of a series of statements which outline the level and nature of risks that the Group is able and willing to assume in pursuit of its strategic and business objectives. These statements are further supported
by a suite of risk thresholds which ensure that the Group’s risk profile is monitored and controlled within defined parameters and appetite breaches are subject to appropriate management and Board oversight. The Risk Appetite Framework also helps to outline roles and responsibilities pertaining to all aspects of the risk appetite, based on a defined structure, processes, procedures and governance.

Risk appetite is calibrated to reflect the Group’s strategic objectives, business operating plans, as well as external economic, business and regulatory constraints. In particular, risk appetite is calibrated to ensure that the Group continues to
deliver against its strategic and business objectives and maintains sufficient financial resource buffers to withstand plausible but extreme stresses. The primary objective of the risk appetite is to ensure that the Group’s strategy and business operating model
is sufficiently resilient.

The risk appetite is calibrated using statistical analysis and stress testing to inform the process for setting management triggers and limits against key risk indicators. The calibration process is designed to ensure that timely and appropriate actions are taken to maintain the risk profile within approved thresholds. The Board and senior management actively monitor actual performance against approved management triggers and limits.

The Group risk appetite is subject to a full refresh annually across all principal risk types and an additional mid-year review where any metrics can be assessed and updated as appropriate.

The Group’s principal risks are set out in the  below heat map and in detail, on pages 58 to 66.

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