41.  Reconciliation of cash flows for financing activities
The tables below show a reconciliation of the Group’s and Bank’s liabilities classified as financing activities within the Statement of Cash Flows:

Group	Amounts owed to  Debt credit  securities in Subordinated institutions  issue  liabilities  PSBs (see note 32)  (see note 35)  (see note 39)  (see note 40)  Total £m  £m  £m  £m  £m
At 31 December 2017 Cash movements: Principal drawdowns Principal repayments Non-cash movement: Accrued interest movement	1,250.3  –  10.9  37.6  1,298.8   330.7  –  –  –  330.7 –  –  (0.1)  –  (0.1)   3.0  –  –  –  3.0
At 31 December 2018 Cash movements: Principal drawdowns Principal repayments Non-cash movements: CCFS Combination Accrued interest movement	1,584.0  –  10.8  37.6  1,632.4   587.7  285.0  –  –  872.7 (273.7)  (64.6)  (0.2)  –  (338.5)   1,168.4  75.1  –  –  1,243.5 2.4  0.8  –  –  3.2
At 31 December 2019	3,068.8  296.3  10.6  37.6  3,413.3

 

	Amounts
	owed to
	credit		Subordinated
	institutions	Deemed loan	liabilities	PSBs
	(see note 32)	(see note 21)	(see note 39)	(see note 40)	Total
Bank	£m	£m	£m	£m	£m
At 31 December 2017	1,250.3	–	10.9	37.6	1,298.8
Cash movements:
Principal drawdowns	330.7	–	–	–	330.7
Principal repayments	–	–	(0.1)	–	(0.1)
Non-cash movement:
Accrued interest movement	3.0	–	–	–	3.0
At 31 December 2018	1,584.0	–	10.8	37.6	1,632.4
Cash movements:
Principal drawdowns	316.8	285.0	–	–	601.8
Principal repayments	(230.0)	(44.8)	(0.2)	–	(275.0)
Non-cash movements:
CCFS Combination	–	–	–	–	–
Accrued interest movement	0.3	–	–	–	0.3
At 31 December 2019	1,671.1	240.2	10.6	37.6	1,959.5

 

42.  Share capital

Ordinary shares – par value £0.01:	Number of shares authorised and fully paid	Nominal value £m	Premium £m
At 1 January 2018	243,464,688	2.4	158.4
Shares issued under OSB employee share plans	1,022,849	–	0.4
At 31 December 2018	244,487,537	2.4	158.8

 

Shares issued under OSB employee share plans CCFS Combination	1,312,862 199,643,055	0.1 2.0	0.3 705.1
At 31 December 2019	445,443,454	4.5	864.2

The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Bank. All ordinary shares rank equally with regard to the Bank’s residual assets.

43.  Other reserves

The Group’s and Bank’s other reserves are as follows:

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Distributable: Share-based payment	5.6	4.7	5.3	4.7
Non-distributable: Capital contribution	6.5	6.5	6.2	6.2
Transfer	(12.8)	(12.8)	(15.2)	(15.2)
Own shares	(3.7)	–	(3.7)	–
FVOCI	0.5	(0.1)	–	(0.1)
Foreign exchange	(1.0)	(0.4)	–	–
Equity bonds	60.0	60.0	60.0	60.0
	55.1	57.9	52.6	55.6

Capital contribution

The capital contribution reserve relates to one-off nil price share awards of shares in the Bank granted to certain senior managers on its admission to the London Stock Exchange in June 2014. The awards were granted by the Bank’s major shareholder at the time of the IPO.

Transfer reserve

The transfer reserve represents the difference between the value of net assets transferred to the Group from Kent Reliance Building Society in 2011 and the value of shares issued to the A ordinary shareholders.

Own shares

Following the Combination, the Bank has adopted the look-through approach for the CCFS EBT, including the EBT within the Bank. As at 31 December 2019 the CCFS EBT held 862,555 OSB shares which were acquired at a cost of £3.7m. The Group and Bank have shown these shares as a deduction from equity.

FVOCI reserve

The FVOCI reserve represents the cumulative net change in the fair value of investment securities measured at FVOCI.

Foreign exchange

The foreign exchange reserve relates to the revaluation of the Bank’s Indian subsidiary, OSB India Private Limited.

Equity bonds

Equity bonds comprise £60.0m of Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities (‘AT1 securities’) that qualify as Additional Tier 1 capital under the Capital Requirements Directive and Regulation (‘CRD IV’). The securities will be subject to full conversion into ordinary shares of OSB in the event that its CET1 capital ratio falls below 7%. The AT1 securities will pay interest at a rate of 9.125% per annum until the first reset date of 25 May 2022, with the reset interest rate equal to 835.9 basis points over the five-year semi-annual mid-swap rate for such a period. Interest is paid semi-annually on 25 May and 25 November. OSB may, at any time, cancel any interest payment at its full discretion and must cancel interest payments in certain circumstances specified in the terms and conditions of the AT1 securities. The AT1 securities are perpetual with no fixed redemption date. OSB may, in its discretion and subject to satisfying certain conditions, redeem all (but not some) of the AT1 securities at the principal amount outstanding plus any accrued but unpaid interest from the first reset date and on any interest payment date thereafter

Financial commitments and guarantees

1. As at 31 December 2019, the Group’s contracted or anticipated capital expenditure commitments not provided for amounted to nil (2018: £0.2m). 2018 consisted of refurbishment and fixture costs for the relocation of the Interbay office.
2. The Group’s minimum lease commitments under operating leases not subject to IFRS 16 (2018: all operating leases) are summarised in the table below:

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Land and buildings: due within: One year Two to five years More than five years	0.6 – –	0.7 2.3 1.5	0.1 – –	0.5 1.5 0.5
	0.6	4.5	0.1	2.5

   c)         Undrawn loan facilities:

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
OSB mortgages	639.2	704.6	459.7	487.8
CCFS mortgages	568.1	–	–	–
Asset Finance	3.6	6.1	–	–
	1,210.9	710.7	459.7	487.8

Undrawn loan facilities are approved loan applications which have not yet been exercised. They are payable on demand and are usually drawn down or expire within three months.

1. The Group did not have any issued financial guarantees as at 31 December 2019 (2018: nil).

 

 

45. Risk Management

Overview

Financial instruments form the vast majority of the Group’s and Bank’s assets and liabilities. The Group manages risk on a consolidated basis, and risk disclosures that follow are provided on this basis.

Types of financial instrument

Financial instruments are a broad definition which includes financial assets, financial liabilities and equity instruments. The main financial assets of the Group are loans to customers and liquid assets, which in turn consist of cash in the BoE call accounts, call accounts with other credit institutions and UK and EU sovereign debt. These are funded by a combination of financial liabilities and equity instruments. Financial liability funding comes predominantly from retail deposits and drawdowns under the BoE TFS and ILTR, supported by debt securities, subordinated debt, wholesale and other funding. Equity instruments include own shares and AT1
securities meeting the equity classification criteria. The Group’s main activity is mortgage lending; it raises funds or invests in particular types of financial assets to meet customer demand and manage the risks arising from its operations. The Group does not trade in financial instruments for speculative purposes.

The Group uses derivative instruments to manage its financial risks. Derivative financial instruments (‘derivatives’) are financial instruments whose value changes in response to changes in underlying variables such as interest rates. The most common derivatives are futures, forwards and swaps. Of these, the Group only uses swaps.

Derivatives are used by the Group solely to reduce (‘hedge’) the risk of loss arising from changes in market rates. Derivatives are not used for speculative purposes.

 

Types of derivatives and uses

The derivative instruments used by the Group in managing its risk exposures are interest rate swaps. Interest rate swaps convert fixed interest rates to floating or vice versa. As with other derivatives, the underlying product is not sold and payments are based on notional principal amounts.

Unhedged fixed rate liabilities create the risk of paying above-the-market rate if interest rates subsequently decrease. Unhedged fixed rate mortgages and liquid assets bear the opposite risk of income below-the-market rate when rates go up. While fixed rate assets and liabilities naturally hedge each other to a certain extent, this hedge is usually never perfect because of maturity mismatches and principal amounts.

The Group uses swaps to convert its instruments, such as mortgages, deposits and liquid assets, from fixed or base rate-linked rates to LIBOR-linked variable rates. This ensures a guaranteed margin between the interest income and interest expense, regardless
of changes in the market rates.

The PRA and FCA have continued to encourage banks to transition away from using LIBOR as a benchmark in all operations before the end of 2021. Throughout the UK banking sector LIBOR remains a key benchmark and for each market impacted solutions to this issue are progressing through various industry bodies.

In 2019 the Group set up an internal working group comprised of all of the key business lines that are involved with this change with strong oversight from the Compliance and Risk departments. Risk assessments are currently underway to ensure this process is managed in a measured and controlled fashion.

Types of risk

The principal financial risks to which the Group is exposed are credit, liquidity and market risks, the latter comprising interest and exchange rate risk. In addition to financial risks, the Group is exposed to various other risks, most notably operational, conduct and regulatory, which are covered in the Risk review on pages 52 to 57.

Credit risk

Credit risk is the risk that losses may arise as a result of the Group’s borrowers or market counterparties failing to meet their obligations to repay.

The Group has adopted the Standardised Approach for assessment of credit risk regulatory capital requirements. This approach considers risk weightings as defined under Basel II and Basel III principles.

The classes of financial instruments to which the Group is most exposed are loans and advances to customers, loans and advances to credit institutions, cash in the BoE call account, call and current accounts with other credit institutions and investment securities. The maximum credit risk exposure equals the total carrying amount of the above categories plus off-balance sheet undrawn committed mortgage facilities.

Credit risk – loans and advances to customers

Credit risk associated with mortgage lending is largely driven by the housing market and level of unemployment. A recession and/or high interest rates could cause pressure within the market, resulting in rising levels of arrears and repossessions.

All loan applications are assessed with reference to the Group’s lending policy. Changes to the policy are approved by the Board, with mandates set for the approval of loan applications.

The Credit Committee and the ALCO regularly monitor lending activity, taking appropriate actions to reprice products and adjust lending criteria in order to control risk and manage exposure. Where necessary and appropriate, changes to the lending policy are recommended to the Group Risk Committee and the Board.

The following tables show the Group’s and Bank’s maximum exposure to credit risk and the impact of collateral held as security, capped at the gross exposure amount, by impairment stage. Capped collateral excludes the impact of forced sale discounts and costs to sell.

Group	2019
	OSB		CCFS		Total
	Gross carrying amount £m	Capped collateral held £m	Gross carrying amount £m	Capped collateral held £m	Gross carrying amount £m	Capped collateral held £m
Stage 1	10,046.9	9,987.1	7,240.0	7,239.5	17,286.9	17,226.6
Stage 2	442.4	441.8	307.1	307.0	749.5	748.8
Stage 3	277.7	275.2	16.7	16.7	294.4	291.9
Stage 3 (POCI)	53.6	50.1	83.2	83.1	136.8	133.2
	10,820.6	10,754.2	7,647.0	7,646.3	18,467.6	18,400.5

2018

OSB                                                      CCFS                                                   

	Gross carrying amount	Capped collateral held		Gross carrying amount	Capped collateral held		Gross carrying amount	Capped collateral held
Group	£m	£m		£m	£m		£m	£m
Stage 1	8,286.8	8,274.5		–	–		8,286.8	8,274.5
Stage 2	436.8	436.8		–	–		436.8	436.8
Stage 3	225.4	224.2		–	–		225.4	224.2
Stage 3 (POCI)	56.2	56.1		–	–		56.2	56.1
	9,005.2	8,991.6		–	–		9,005.2	8,991.6

 

Bank	2019		2018
	Gross carrying amount £m	Capped collateral held £m	Gross carrying amount £m	Capped collateral held £m
Stage 1	7,785.0	7,774.3	6,657.0	6,653.2
Stage 2	371.3	370.8	346.6	346.5
Stage 3	211.1	209.2	164.8	164.7
Stage 3 (POCI)	53.4	49.9	55.9	55.8
	8,420.8	8,404.2	7,224.3	7,220.2

The Group’s and Bank’s main form of collateral held is property, based in the UK and the Channel Islands.

 

The Group uses indexed loan-to-value (‘LTV’) ratios to assess the quality of the uncapped collateral held. Property values are updated to reflect changes in the HPI. A breakdown of loans and advances to customers by indexed LTV is as follows:

Group	2019
	OSB £m	CCFS £m	Total £m  %
Band 0% – 50%	1,732.6	567.8	2,300.4	12
50% – 60%	1,301.8	612.3	1,914.1	10
60% – 70%	2,435.7	1,588.5	4,024.2	22
70% – 80%	4,182.1	4,236.3	8,418.4	46
80% – 90%	946.0	641.5	1,587.5	9
90% – 100%	91.1	0.6	91.7	–
>100%	131.3	–	131.3	1
Total loans before provisions	10,820.6	7,647.0	18,467.6	100

	OSB	CCFS	Total
Group	£m	£m	£m	%
Band
0% – 50%	1,720.2	–	1,720.2	19
50% – 60%	1,355.6	–	1,355.6	15
60% – 70%	2,215.5	–	2,215.5	25
70% – 80%	3,041.8	–	3,041.8	34
80% – 90%	576.3	–	576.3	6
90% – 100%	65.2	–	65.2	1
>100%	30.6	–	30.6	–
Total loans before provisions	9,005.2	–	9,005.2	100
The table below shows the LTV banding for the OSB segments’ two major lending streams:

 

OSB	2019				2018
	BTL/SME £m	Residential £m	Total £m  %		BTL/SME £m	Residential £m	Total £m  %
Band 0% – 50%	905.9	826.7	1,732.6	16	935.8	784.4	1,720.2	19
50% – 60%	1,062.8	239.0	1,301.8	12	1,105.9	249.7	1,355.6	15
60% – 70%	2,240.2	195.5	2,435.7	23	2,021.4	194.1	2,215.5	25
70% – 80%	3,993.5	188.6	4,182.1	38	2,864.5	177.3	3,041.8	34
80% – 90%	621.4	324.6	946.0	9	414.1	162.2	576.3	6
90% – 100%	45.1	46.0	91.1	1	32.9	32.3	65.2	1
>100%	114.3	17.0	131.3	1	14.6	16.0	30.6	–
Total loans before provisions	8,983.2	1,837.4	10,820.6	100	7,389.2	1,616.0	9,005.2	100

 

The tables below show the sub-segment LTV analysis of the OSB BTL/SME lending stream:

OSB	2019
	Buy-to-Let £m	Commercial £m	Residential development £m	Funding lines £m	Total £m
Band 0% – 50%	579.9	96.5	125.7	103.8	905.9
50% – 60%	894.3	119.8	5.0	43.7	1,062.8
60% – 70%	1,994.1	210.2	5.0	30.9	2,240.2
70% – 80%	3,514.5	445.7	–	33.3	3,993.5
80% – 90%	603.3	7.7	10.4	–	621.4
90% – 100%	38.9	1.4	–	4.8	45.1
>100%	102.0	6.7	–	5.6	114.3
Total loans before provisions	7,727.0	888.0	146.1	222.1	8,983.2

 

			2018
			Residential
	Buy-to-Let	Commercial	development	Funding lines	Total
OSB	£m	£m	£m	£m	£m
Band
0% – 50%	663.9	71.2	108.7	92.0	935.8
50% – 60%	964.8	72.2	38.8	30.1	1,105.9
60% – 70%	1,843.9	163.1	7.3	7.1	2,021.4
70% – 80%	2,617.1	233.5	–	13.9	2,864.5
80% – 90%	408.3	4.8	1.0	–	414.1
90% – 100%	7.5	0.4	–	25.0	32.9
>100%	12.0	2.6	–	–	14.6
Total loans before provisions	6,517.5	547.8	155.8	168.1	7,389.2

The tables below show the sub-segment LTV analysis of the OSB Residential lending stream:

OSB	2019
	First charge £m	Second charge £m	Funding lines £m	Total £m
Band 0% – 50%	708.0	115.4	3.3	826.7
50% – 60%	158.1	77.5	3.4	239.0
60% – 70%	122.3	70.9	2.3	195.5
70% – 80%	137.0	49.5	2.1	188.6
80% – 90%	291.7	32.3	0.6	324.6
90% – 100%	40.0	5.7	0.3	46.0
>100%	9.5	7.3	0.2	17.0
Total loans before provisions	1,466.6	358.6	12.2	1,837.4

	First charge	Second charge	Funding lines	Total
OSB	£m	£m	£m	£m
Band
0% – 50%	651.9	123.2	9.3	784.4
50% – 60%	160.9	81.8	7.0	249.7
60% – 70%	117.2	74.3	2.6	194.1
70% – 80%	125.2	48.3	3.8	177.3
80% – 90%	137.1	24.4	0.7	162.2
90% – 100%	25.1	6.8	0.4	32.3
>100%	6.5	9.2	0.3	16.0
Total loans before provisions	1,223.9	368.0	24.1	1,616.0

 

The table below shows the LTV banding for the CCFS segments’ four major lending streams:

CCFS	2019
	Buy-to- let £m	Residential £m	Bridging £m	Second charge lending £m	Total £m  %
Band 0% – 50%	144.7	261.8	121.1	40.2	567.8	7
50% – 60%	283.9	253.1	29.4	45.9	612.3	8
60% – 70%	957.0	538.6	26.6	66.3	1,588.5	21
70% – 80%	3,246.6	897.7	37.5	54.5	4,236.3	56
80% – 90%	321.5	301.4	1.2	17.4	641.5	8
90% – 100%	0.2	0.4	–	–	0.6	–
Total loans before provisions	4,953.9	2,253.0	215.8	224.3	7,647.0	100

The table below shows the LTV banding for the Bank’s segments’ two major lending streams:

Bank	2019				2018
	BTL/SME £m	Residential £m	Total £m  %		BTL/SME £m	Residential £m	Total £m  %
Band 0% – 50%	670.7	763.6	1,434.3	17	738.6	717.6	1,456.2	20
50% – 60%	816.4	215.0	1,031.4	12	882.4	219.5	1,101.9	15
60% – 70%	1,639.5	175.9	1,815.4	22	1,547.3	168.3	1,715.6	24
70% – 80%	2,925.4	179.1	3,104.5	37	2,201.9	158.3	2,360.2	33
80% – 90%	560.7	321.0	881.7	10	368.1	156.5	524.6	7
90% – 100%	40.0	45.1	85.1	1	27.7	26.9	54.6	1
>100%	54.9	13.5	68.4	1	–	11.2	11.2	–
Total loans before provisions	6,707.6	1,713.2	8,420.8	100	5,766.0	1,458.3	7,224.3	100

The tables below show the sub-segment LTV analysis of the Bank’s BTL/SME lending stream:

Bank	2019
	Buy-to-Let £m	Commercial £m	Residential development £m	Funding lines £m	Total £m
Band 0% – 50%	438.9	2.3	125.7	103.8	670.7
50% – 60%	765.2	2.5	5.0	43.7	816.4
60% – 70%	1,601.1	2.5	5.0	30.9	1,639.5
70% – 80%	2,886.3	5.8	–	33.3	2,925.4
80% – 90%	549.8	0.5	10.4	–	560.7
90% – 100%	35.2	–	–	4.8	40.0
>100%	45.8	3.5	–	5.6	54.9
Total loans before provisions	6,322.3	17.1	146.1	222.1	6,707.6

			2018
			Residential	Funding
	Buy-to-Let	Commercial	development	lines	Total
Bank	£m	£m	£m	£m	£m
Band
0% – 50%	532.5	5.4	108.7	92.0	738.6
50% – 60%	810.9	2.6	38.8	30.1	882.4
60% – 70%	1,527.0	5.9	7.3	7.1	1,547.3
70% – 80%	2,180.6	7.4	–	13.9	2,201.9
80% – 90%	367.0	0.1	1.0	–	368.1
90% – 100%	2.7	–	–	25.0	27.7
Total loans before provisions	5,420.7	21.4	155.8	168.1	5,766.0

  For the year ended 31 December 2019

The tables below show the sub-segment LTV analysis of the Bank’s Residential lending stream:

Bank	2019
	First charge £m	Second charge £m	Funding lines £m	Total £m
Band 0% – 50%	644.9	115.4	3.3	763.6
50% – 60%	134.1	77.5	3.4	215.0
60% – 70%	102.7	70.9	2.3	175.9
70% – 80%	127.5	49.5	2.1	179.1
80% – 90%	288.1	32.3	0.6	321.0
90% – 100%	39.1	5.7	0.3	45.1
>100%	6.0	7.3	0.2	13.5
Total loans before provisions	1,342.4	358.6	12.2	1,713.2

 

	First charge	Second charge	Funding lines	Total
Bank	£m	£m	£m	£m
Band
0% – 50%	585.1	123.2	9.3	717.6
50% – 60%	130.7	81.8	7.0	219.5
60% – 70%	91.4	74.3	2.6	168.3
70% – 80%	106.2	48.3	3.8	158.3
80% – 90%	131.4	24.4	0.7	156.5
90% – 100%	19.7	6.8	0.4	26.9
>100%	1.7	9.2	0.3	11.2
Total loans before provisions	1,066.2	368.0	24.1	1,458.3

 

Analysis of mortgage portfolio by arrears and collateral held

The tables below provide further information on collateral, capped at the value of each individual mortgage, over the mortgage portfolio by payment due status and IFRS 9 stage.

Group	2019
	OSB		CCFS		Total
	Loan balance £m	Capped collateral £m	Loan balance £m	Capped collateral £m	Loan balance £m	Capped collateral £m
Stage 1 Not past due	9,964.3	9,904.5	7,236.2	7,235.7	17,200.5	17,140.2
Past due < 1 month	82.6	82.6	3.8	3.8	86.4	86.4
	10,046.9	9,987.1	7,240.0	7,239.5	17,286.9	17,226.6
Stage 2 Not past due	261.0	260.7	239.1	239.0	500.1	499.7
Past due < 1 month	118.9	118.9	38.1	38.1	157.0	157.0
Past due 1 to 3 months	62.5	62.2	29.9	29.9	92.4	92.1
	442.4	441.8	307.1	307.0	749.5	748.8
Stage 3 Not past due	71.3	71.0	4.8	4.8	76.1	75.8
Past due < 1 month	36.3	36.1	1.4	1.4	37.7	37.5
Past due 1 to 3 months	28.8	28.5	6.0	6.0	34.8	34.5
Past due 3 to 6 months	45.9	45.3	4.5	4.5	50.4	49.8
Past due 6 to 12 months	27.4	27.2	–	–	27.4	27.2
Past due over 12 months	25.3	24.7	–	–	25.3	24.7
Possessions	42.7	42.4	–	–	42.7	42.4
	277.7	275.2	16.7	16.7	294.4	291.9
Stage 3 (POCI) Not past due	20.8	20.2	30.6	30.5	51.4	50.7
Past due < 1 month	6.1	5.9	8.5	8.5	14.6	14.4
Past due 1 to 3 months	4.9	4.6	21.9	21.9	26.8	26.5
Past due 3 to 6 months	6.5	6.1	10.5	10.5	17.0	16.6
Past due 6 to 12 months	5.7	5.3	5.5	5.5	11.2	10.8
Past due over 12 months	8.3	7.2	1.2	1.2	9.5	8.4
Possessions	1.3	0.8	5.0	5.0	6.3	5.8
	53.6	50.1	83.2	83.1	136.8	133.2
Total loans before provisions	10,820.6	10,754.2	7,647.0	7,646.3	18,467.6	18,400.5

 

2018

OSB                                                      CCFS                                                    

	Loan balance	Capped collateral		Loan balance	Capped collateral		Loan balance	Capped collateral
Group	£m	£m		£m	£m		£m	£m
Stage 1
Not past due	8,225.3	8,213.3		–	–		8,225.3	8,213.3
Past due < 1 month	61.5	61.2		–	–		61.5	61.2
	8,286.8	8,274.5		–	–		8,286.8	8,274.5
Stage 2
Not past due	241.9	241.9		–	–		241.9	241.9
Past due < 1 month	124.9	124.9		–	–		124.9	124.9
Past due 1 to 3 months	70.0	70.0		–	–		70.0	70.0
	436.8	436.8		–	–		436.8	436.8
Stage 3
Not past due	67.8	67.2		–	–		67.8	67.2
Past due < 1 month	16.2	16.2		–	–		16.2	16.2
Past due 1 to 3 months	30.4	30.4		–	–		30.4	30.4
Past due 3 to 6 months	57.2	57.2		–	–		57.2	57.2
Past due 6 to 12 months	32.0	31.9		–	–		32.0	31.9
Past due over 12 months	13.9	13.6		–	–		13.9	13.6
Possessions	7.9	7.7		–	–		7.9	7.7
	225.4	224.2		–	–		225.4	224.2
Stage 3 (POCI)
Not past due	18.6	18.6		–	–		18.6	18.6
Past due < 1 month	6.7	6.6		–	–		6.7	6.6
Past due 1 to 3 months	6.6	6.6		–	–		6.6	6.6
Past due 3 to 6 months	7.4	7.4		–	–		7.4	7.4
Past due 6 to 12 months	7.7	7.7		–	–		7.7	7.7
Past due over 12 months	9.2	9.2		–	–		9.2	9.2
	56.2	56.1		–	–		56.2	56.1
Total loans before provisions	9,005.2	8,991.6		–	–		9,005.2	8,991.6

	Bank 2019		Bank 2018
	Loan balance £m	Capped collateral £m	Loan balance £m	Capped collateral £m
Stage 1 Not past due	7,732.1	7,721.4	6,603.2	6,599.4
Past due < 1 month	52.9	52.9	53.8	53.8
	7,785.0	7,774.3	6,657.0	6,653.2
Stage 2 Not past due	207.2	207.0	162.6	162.5
Past due < 1 month	109.2	109.2	117.9	117.9
Past due 1 to 3 months	54.9	54.6	66.1	66.1
	371.3	370.8	346.6	346.5
Stage 3 Not past due	50.1	49.9	32.2	32.1
Past due < 1 month	26.2	26.0	11.4	11.4
Past due 1 to 3 months	27.7	27.4	27.2	27.2
Past due 3 to 6 months	40.4	39.9	54.7	54.7
Past due 6 to 12 months	23.3	23.1	24.7	24.7
Past due over 12 months	12.2	12.0	9.4	9.4
Possessions	31.2	30.9	5.2	5.2
	211.1	209.2	164.8	164.7
Stage 3 (POCI) Not past due	20.6	20.0	18.5	18.5
Past due < 1 month	6.1	5.9	6.5	6.4
Past due 1 to 3 months	4.9	4.6	6.6	6.6
Past due 3 to 6 months	6.5	6.1	7.4	7.4
Past due 6 to 12 months	5.7	5.3	7.7	7.7
Past due over 12 months	8.3	7.2	9.2	9.2
Possessions	1.3	0.8	–	–
	53.4	49.9	55.9	55.8
Total loans before provisions	8,420.8	8,404.2	7,224.3	7,220.2

 

 

The table below shows the analysis of mortgage portfolio by arrears for the OSB segments’ two major lending streams:

OSB	2019			2018
	BTL/SME £m	Residential £m	Total £m	BTL/SME £m	Residential £m	Total £m
Stage 1 Not past due	8,514.9	1,449.4	9,964.3	7,019.0	1,206.3	8,225.3
Past due < 1 month	48.7	33.9	82.6	20.3	41.2	61.5
	8,563.6	1,483.3	10,046.9	7,039.3	1,247.5	8,286.8
Stage 2 Not past due	156.9	104.1	261.0	141.9	100.0	241.9
Past due < 1 month	80.0	38.9	118.9	75.7	49.2	124.9
Past due 1 to 3 months	32.3	30.2	62.5	30.0	40.0	70.0
	269.2	173.2	442.4	247.6	189.2	436.8
Stage 3 Not past due	39.6	31.7	71.3	43.1	24.7	67.8
Past due < 1 month	22.5	13.8	36.3	3.7	12.5	16.2
Past due 1 to 3 months	9.8	19.0	28.8	12.1	18.3	30.4
Past due 3 to 6 months	17.0	28.9	45.9	24.6	32.6	57.2
Past due 6 to 12 months	9.1	18.3	27.4	11.0	21.0	32.0
Past due over 12 months	13.5	11.8	25.3	3.1	10.8	13.9
Possessions	38.7	4.0	42.7	4.4	3.5	7.9
	150.2	127.5	277.7	102.0	123.4	225.4
Stage 3 (POCI) Not past due	0.2	20.6	20.8	0.1	18.5	18.6
Past due < 1 month	–	6.1	6.1	0.2	6.5	6.7
Past due 1 to 3 months	–	4.9	4.9	–	6.6	6.6
Past due 3 to 6 months	–	6.5	6.5	–	7.4	7.4
Past due 6 to 12 months	–	5.7	5.7	–	7.7	7.7
Past due over 12 months	–	8.3	8.3	–	9.2	9.2
Possessions	–	1.3	1.3	–	–	–
	0.2	53.4	53.6	0.3	55.9	56.2
Total loans before provisions	8,983.2	1,837.4	10,820.6	7,389.2	1,616.0	9,005.2

 

The tables below show the sub-segment analysis of mortgage portfolio by arrears of the OSB BTL/SME lending stream:

OSB	2019
	Buy-to-Let £m	Commercial £m	Residential development £m	Funding lines £m	Total £m
Stage 1 Not past due Past due < 1 month	7,317.3 32.8	829.4 15.9	146.1 –	222.1 –	8,514.9 48.7
	7,350.1	845.3	146.1	222.1	8,563.6
Stage 2 Not past due Past due < 1 month Past due 1 to 3 months	128.6 78.5 29.2	28.3 1.5 3.1	– – –	– – –	156.9 80.0 32.3
	236.3	32.9	–	–	269.2
Stage 3 Not past due Past due < 1 month Past due 1 to 3 months Past due 3 to 6 months Past due 6 to 12 months Past due over 12 months Possessions	37.1 21.0 9.8 16.1 8.0 13.1 35.5	2.5 1.5 – 0.9 1.1 0.4 3.2	– – – – – – –	– – – – – – –	39.6 22.5 9.8 17.0 9.1 13.5 38.7
	140.6	9.6	–	–	150.2
Stage 3 (POCI) Not past due	–	0.2	–	–	0.2
	–	0.2	–	–	0.2
Total loans before provisions	7,727.0	888.0	146.1	222.1	8,983.2

			2018
			Residential	Funding
	Buy-to-Let	Commercial	development	lines	Total
OSB	£m	£m	£m	£m	£m
Stage 1
Not past due	6,193.4	501.7	155.8	168.1	7,019.0
Past due < 1 month	18.5	1.8	–	–	20.3
	6,211.9	503.5	155.8	168.1	7,039.3
Stage 2
Not past due	102.8	39.1	–	–	141.9
Past due < 1 month	74.7	1.0	–	–	75.7
Past due 1 to 3 months	29.3	0.7	–	–	30.0
	206.8	40.8	–	–	247.6
Stage 3
Not past due	40.6	2.5	–	–	43.1
Past due < 1 month	3.3	0.4	–	–	3.7
Past due 1 to 3 months	12.0	0.1	–	–	12.1
Past due 3 to 6 months	24.5	0.1	–	–	24.6
Past due 6 to 12 months	10.9	0.1	–	–	11.0
Past due over 12 months	3.1	–	–	–	3.1
Possessions	4.4	–	–	–	4.4
	98.8	3.2	–	–	102.0
Stage 3 (POCI)
Not past due	–	0.1	–	–	0.1
Past due < 1 month	–	0.2	–	–	0.2
	–	0.3	–	–	0.3
Total loans before provisions	6,517.5	547.8	155.8	168.1	7,389.2

  For the year ended 31 December 2019

The tables below show the sub-segment analysis of mortgage portfolio by arrears of the OSB Residential mortgages lending stream:

OSB	2019
	First charge £m	Second charge £m	Funding lines £m	Total £m
Stage 1 Not past due	1,164.8	272.4	12.2	1,449.4
Past due < 1 month	27.7	6.2	–	33.9
	1,192.5	278.6	12.2	1,483.3
Stage 2 Not past due	86.1	18.0	–	104.1
Past due < 1 month	34.4	4.5	–	38.9
Past due 1 to 3 months	24.4	5.8	–	30.2
	144.9	28.3	–	173.2
Stage 3 Not past due	28.1	3.6	–	31.7
Past due < 1 month	11.2	2.6	–	13.8
Past due 1 to 3 months	13.8	5.2	–	19.0
Past due 3 to 6 months	20.7	8.2	–	28.9
Past due 6 to 12 months	14.5	3.8	–	18.3
Past due over 12 months	9.8	2.0	–	11.8
Possessions	3.3	0.7	–	4.0
	101.4	26.1	–	127.5
Stage 3 (POCI) Not past due	13.4	7.2	–	20.6
Past due < 1 month	4.2	1.9	–	6.1
Past due 1 to 3 months	2.0	2.9	–	4.9
Past due 3 to 6 months	3.2	3.3	–	6.5
Past due 6 to 12 months	2.6	3.1	–	5.7
Past due over 12 months	2.3	6.0	–	8.3
Possessions	0.1	1.2	–	1.3
	27.8	25.6	–	53.4
Total loans before provisions	1,466.6	358.6	12.2	1,837.4

		2018
	First	Second	Funding
	charge	charge	lines	Total
OSB	£m	£m	£m	£m
Stage 1
Not past due	906.6	275.6	24.1	1,206.3
Past due < 1 month	32.5	8.7	–	41.2
	939.1	284.3	24.1	1,247.5
Stage 2
Not past due	80.8	19.2	–	100.0
Past due < 1 month	43.2	6.0	–	49.2
Past due 1 to 3 months	32.7	7.3	–	40.0
	156.7	32.5	–	189.2
Stage 3
Not past due	22.2	2.5	–	24.7
Past due < 1 month	10.2	2.3	–	12.5
Past due 1 to 3 months	13.0	5.3	–	18.3
Past due 3 to 6 months	23.8	8.8	–	32.6
Past due 6 to 12 months	16.9	4.1	–	21.0
Past due over 12 months	8.8	2.0	–	10.8
Possessions	3.5	–	–	3.5
	98.4	25.0	–	123.4
Stage 3 (POCI)
Not past due	12.1	6.4	–	18.5
Past due < 1 month	4.4	2.1	–	6.5
Past due 1 to 3 months	4.1	2.5	–	6.6
Past due 3 to 6 months	3.5	3.9	–	7.4
Past due 6 to 12 months	3.4	4.3	–	7.7
Past due over 12 months	2.2	7.0	–	9.2
	29.7	26.2	–	55.9
Total loans before provisions	1,223.9	368.0	24.1	1,616.0

  For the year ended 31 December 2019

The table below shows the analysis of mortgage portfolio by arrears for the CCFS segments’ four major lending streams:

CCFS	2019
	Buy-to-let £m	Residential £m	Bridging £m	Second charge lending £m	Total £m
Stage 1 Not past due	4,767.9	2,056.4	195.5	216.4	7,236.2
Past due < 1 month	0.5	1.1	–	2.2	3.8
	4,768.4	2,057.5	195.5	218.6	7,240.0
Stage 2 Not past due	139.6	83.6	14.6	1.3	239.1
Past due < 1 month	10.1	27.1	0.8	0.1	38.1
Past due 1 to 3 months	6.3	22.4	0.3	0.9	29.9
	156.0	133.1	15.7	2.3	307.1
Stage 3 Not past due	1.1	3.2	0.2	0.3	4.8
Past due < 1 month	0.5	0.9	–	–	1.4
Past due 1 to 3 months	1.6	4.4	–	–	6.0
Past due 3 to 6 months	3.2	1.2	0.1	–	4.5
	6.4	9.7	0.3	0.3	16.7
Stage 3 (POCI) Not past due	10.9	16.6	1.7	1.4	30.6
Past due < 1 month	2.5	5.4	0.4	0.2	8.5
Past due 1 to 3 months	2.6	16.8	1.8	0.7	21.9
Past due 3 to 6 months	1.3	8.8	–	0.4	10.5
Past due 6 to 12 months	1.0	3.9	0.2	0.4	5.5
Past due over 12 months	0.9	0.3	–	–	1.2
Possessions	3.9	0.9	0.2	–	5.0
	23.1	52.7	4.3	3.1	83.2
Total loans before provisions	4,953.9	2,253.0	215.8	224.3	7,647.0

 The table below shows the analysis of mortgage portfolio by arrears for the Bank’s two major lending streams:

Bank	2019			2018
	BTL/SME £m	Residential £m	Total £m	BTL/SME £m	Residential £m	Total £m
Stage 1 Not past due	6,374.7	1,357.4	7,732.1	5,512.3	1,090.9	6,603.2
Past due < 1 month	20.3	32.6	52.9	16.5	37.3	53.8
	6,395.0	1,390.0	7,785.0	5,528.8	1,128.2	6,657.0
Stage 2 Not past due	111.0	96.2	207.2	65.0	97.6	162.6
Past due < 1 month	72.7	36.5	109.2	72.3	45.6	117.9
Past due 1 to 3 months	27.1	27.8	54.9	29.3	36.8	66.1
	210.8	160.5	371.3	166.6	180.0	346.6
Stage 3 Not past due	27.5	22.6	50.1	18.3	13.9	32.2
Past due < 1 month	13.2	13.0	26.2	2.6	8.8	11.4
Past due 1 to 3 months	9.3	18.4	27.7	11.1	16.1	27.2
Past due 3 to 6 months	12.8	27.6	40.4	24.5	30.2	54.7
Past due 6 to 12 months	7.6	15.7	23.3	7.4	17.3	24.7
Past due over 12 months	2.9	9.3	12.2	2.3	7.1	9.4
Possessions	28.5	2.7	31.2	4.4	0.8	5.2
	101.8	109.3	211.1	70.6	94.2	164.8
Stage 3 (POCI) Not past due	–	20.6	20.6	–	18.5	18.5
Past due < 1 month	–	6.1	6.1	–	6.5	6.5
Past due 1 to 3 months	–	4.9	4.9	–	6.6	6.6
Past due 3 to 6 months	–	6.5	6.5	–	7.4	7.4
Past due 6 to 12 months	–	5.7	5.7	–	7.7	7.7
Past due over 12 months	–	8.3	8.3	–	9.2	9.2
Possessions	–	1.3	1.3	–	–	–
	–	53.4	53.4	–	55.9	55.9
Total loans before provisions	6,707.6	1,713.2	8,420.8	5,766.0	1,458.3	7,224.3

 

The table below shows the analysis of mortgage portfolio by arrears for the Bank’s BTL/SME lending stream:

Bank	2019
	Buy-to-Let £m	Commercial £m	Residential development £m	Funding lines £m	Total £m
Stage 1 Not past due	5,993.2	13.3	146.1	222.1	6,374.7
Past due < 1 month	19.9	0.4	–	–	20.3
	6,013.1	13.7	146.1	222.1	6,395.0
Stage 2 Not past due	110.0	1.0	–	–	111.0
Past due < 1 month	72.3	0.4	–	–	72.7
Past due 1 to 3 months	27.0	0.1	–	–	27.1
	209.3	1.5	–	–	210.8
Stage 3 Not past due	27.5	–	–	–	27.5
Past due < 1 month	12.2	1.0	–	–	13.2
Past due 1 to 3 months	9.3	–	–	–	9.3
Past due 3 to 6 months	12.4	0.4	–	–	12.8
Past due 6 to 12 months	7.5	0.1	–	–	7.6
Past due over 12 months	2.8	0.1	–	–	2.9
Possessions	28.2	0.3	–	–	28.5
	99.9	1.9	–	–	101.8
Total loans before provisions	6,322.3	17.1	146.1	222.1	6,707.6

 

			2018
			Residential	Funding
	Buy-to-Let	Commercial	development	lines	Total
Bank	£m	£m	£m	£m	£m
Stage 1
Not past due	5,170.6	17.8	155.8	168.1	5,512.3
Past due < 1 month	16.2	0.3	–	–	16.5
	5,186.8	18.1	155.8	168.1	5,528.8
Stage 2
Not past due	63.3	1.7	–	–	65.0
Past due < 1 month	71.3	1.0	–	–	72.3
Past due 1 to 3 months	29.3	–	–	–	29.3
	163.9	2.7	–	–	166.6
Stage 3
Not past due	17.9	0.4	–	–	18.3
Past due < 1 month	2.6	–	–	–	2.6
Past due 1 to 3 months	11.0	0.1	–	–	11.1
Past due 3 to 6 months	24.4	0.1	–	–	24.5
Past due 6 to 12 months	7.4	–	–	–	7.4
Past due over 12 months	2.3	–	–	–	2.3
Possessions	4.4	–	–	–	4.4
	70.0	0.6	–	–	70.6
Total loans before provisions	5,420.7	21.4	155.8	168.1	5,766.0

 

The table below shows the analysis of mortgage portfolio by arrears for the Bank’s Residential mortgages lending stream:

Bank	2019
	First charge £m	Second charge £m	Funding lines £m	Total £m
Stage 1 Not past due	1,072.7	272.5	12.2	1,357.4
Past due < 1 month	26.4	6.2	–	32.6
	1,099.1	278.7	12.2	1,390.0
Stage 2 Not past due	78.2	18.0	–	96.2
Past due < 1 month	32.1	4.4	–	36.5
Past due 1 to 3 months	22.0	5.8	–	27.8
	132.3	28.2	–	160.5
Stage 3 Not past due	19.0	3.6	–	22.6
Past due < 1 month	10.4	2.6	–	13.0
Past due 1 to 3 months	13.2	5.2	–	18.4
Past due 3 to 6 months	19.4	8.2	–	27.6
Past due 6 to 12 months	11.9	3.8	–	15.7
Past due over 12 months	7.3	2.0	–	9.3
Possessions	2.0	0.7	–	2.7
	83.2	26.1	–	109.3
Stage 3 (POCI) Not past due	13.4	7.2	–	20.6
Past due < 1 month	4.2	1.9	–	6.1
Past due 1 to 3 months	2.0	2.9	–	4.9
Past due 3 to 6 months	3.2	3.3	–	6.5
Past due 6 to 12 months	2.6	3.1	–	5.7
Past due over 12 months	2.3	6.0	–	8.3
Possessions	0.1	1.2	–	1.3
	27.8	25.6	–	53.4
Total loans before provisions	1,342.4	358.6	12.2	1,713.2

 

	First charge	Second charge	Funding lines	Total
Bank	£m	£m	£m	£m
Stage 1
Not past due	791.2	275.6	24.1	1,090.9
Past due < 1 month	28.6	8.7	–	37.3
	819.8	284.3	24.1	1,128.2
Stage 2
Not past due	78.4	19.2	–	97.6
Past due < 1 month	39.6	6.0	–	45.6
Past due 1 to 3 months	29.5	7.3	–	36.8
	147.5	32.5	–	180.0
Stage 3
Not past due	11.4	2.5	–	13.9
Past due < 1 month	6.5	2.3	–	8.8
Past due 1 to 3 months	10.8	5.3	–	16.1
Past due 3 to 6 months	21.4	8.8	–	30.2
Past due 6 to 12 months	13.2	4.1	–	17.3
Past due over 12 months	5.1	2.0	–	7.1
Possessions	0.8	–	–	0.8
	69.2	25.0	–	94.2
Stage 3 (POCI)
Not past due	12.1	6.4	–	18.5
Past due < 1 month	4.4	2.1	–	6.5
Past due 1 to 3 months	4.1	2.5	–	6.6
Past due 3 to 6 months	3.5	3.9	–	7.4
Past due 6 to 12 months	3.4	4.3	–	7.7
Past due over 12 months	2.2	7.0	–	9.2
	29.7	26.2	–	55.9
Total loans before provisions	1,066.2	368.0	24.1	1,458.3

Forbearance measures undertaken

The Group has a range of options available where borrowers experience financial difficulties which impact their ability to service their financial commitments under the loan agreement. These are explained in the Principal risks and uncertainties on page 70.

A summary of the forbearance measures undertaken during the year, where CCFS forbearance is included post Combination, is shown below. The balances disclosed reflect the year end balance of the accounts where a forbearance measure was undertaken during
the year.

Group	Number of accounts 2019	At 31 December 2019 £m	Number of accounts 2018	At 31 December 2018 £m
Forbearance type Interest-only switch	59	8.4	26	3.7
Interest rate reduction	35	1.6	5	0.8
Term extension	30	6.6	33	3.5
Payment holiday	87	4.1	31	0.6
Voluntary assisted sale	26	1.0	4	0.1
Payment concession (reduced monthly payments)	73	3.6	75	3.5
Full or partial debt forgiveness	6	–	–	–
Total	316	25.3	174	12.2
Loan type First charge owner-occupier	85	10.5	40	3.4
Second charge owner-occupier	198	7.4	106	2.9
Buy-to-Let	32	7.4	28	5.9
Commercial	1	–	–	–
Total	316	25.3	174	12.2

 

Bank	Number of accounts 2019	At 31 December 2019 £m	Number of accounts 2018	At 31 December 2018 £m
Forbearance type Interest-only switch	48	7.2	21	2.9
Interest rate reduction	34	1.3	2	0.2
Term extension	19	6.1	28	2.7
Payment holiday	72	1.7	31	0.6
Voluntary assisted sale	24	0.5	4	0.1
Payment concession (reduced monthly payments)	69	2.5	75	3.6
Full or partial debt forgiveness	6	–	–	–
Total	272	19.3	161	10.1
Loan type First charge owner-occupier	59	7.0	22	1.6
Second charge owner-occupier	185	5.8	112	2.9
Buy-to-Let	28	6.5	27	5.6
Total	272	19.3	161	10.1

 

Geographical analysis by region

An analysis of loans by region is provided below:

Region	Group 2019				Group 2018
	OSB	CCFS	Total		OSB
	£m	£m	£m  %		£m  %
East Anglia	391.9	810.9	1,202.8	7	316.4	4
East Midlands	415.2	410.3	825.5	4	325.4	4
Greater London	4,738.7	2,713.7	7,452.4	41	3,965.5	43
Guernsey	45.3	–	45.3	–	61.7	1
Jersey	141.4	–	141.4	1	176.0	2
North East	136.7	179.5	316.2	2	115.6	1
North West	587.3	605.4	1,192.7	6	447.6	5
Northern Ireland	14.2	–	14.2	–	14.6	–
Scotland	48.5	190.9	239.4	1	45.2	1
South East	2,375.2	1,209.6	3,584.8	20	1,955.1	22
South West	747.5	466.0	1,213.5	7	634.2	7
Wales	239.3	202.6	441.9	2	187.1	2
West Midlands	702.2	496.0	1,198.2	6	557.5	6
Yorks and Humberside	237.2	362.1	599.3	3	203.3	2
Total loans before provisions	10,820.6	7,647.0	18,467.6	100	9,005.2	100

 

Region	Bank 2019		Bank 2018
	£m  %		£m  %
East Anglia	319.3	4	267.3	4
East Midlands	297.1	4	245.5	3
Greater London	3,737.7	44	3,270.7	45
North East	109.3	1	94.7	1
North West	448.1	5	346.9	5
Northern Ireland	14.1	–	14.4	–
Scotland	44.0	1	44.0	1
South East	1,921.3	23	1,667.9	24
South West	601.4	7	515.5	7
Wales	191.1	2	151.3	2
West Midlands	556.8	7	454.9	6
Yorks and Humberside	180.6	2	151.2	2
Total loans before provisions	8,420.8	100	7,224.3	100

Approach to measurement of credit quality

The Group categorises the credit quality of loans and advances to customers into internal risk grades based on the 12-month PD calculated at the reporting date. The PDs include a combination of internal behavioural and credit bureau characteristics. The risk grades are further grouped into the following credit quality segments:

} Excellent quality – where there is a very high likelihood the asset will be recovered in full with a negligible or very low risk of default.
} Good quality – where there is a high likelihood the asset will be recovered in full with a low risk of default.
} Satisfactory quality – where the assets demonstrate a moderate default risk.
} Lower quality – where the assets require closer monitoring and the risk of default is of greater concern.

 

The credit grade for the Group’s investment securities and loans and advances to credit institutions is based on the external credit rating of the counterparty.

The following tables disclose the credit risk quality ratings of Loans and advances to customers by IFRS 9 stage:

Group 2019	Stage 1 £m	Stage 2 £m	Stage 3 £m	Stage 3 (POCI) £m	Total £m
Loans and advances to customers – OSB Excellent	4,985.9	11.0	–	–	4,996.9
Good	4,859.3	200.5	–	–	5,059.8
Satisfactory	147.3	154.8	–	–	302.1
Lower	6.7	76.1	–	–	82.8
Impaired	–	–	277.7	–	277.7
POCI	–	–	–	53.6	53.6
Loans and advances to customers – CCFS Excellent	3,632.7	20.5	–	–	3,653.2
Good	3,359.7	93.7	–	–	3,453.4
Satisfactory	222.8	39.1	–	–	261.9
Lower	24.8	153.8	–	–	178.6
Impaired	–	–	16.7	–	16.7
POCI	–	–	–	83.2	83.2
	17,239.2	749.5	294.4	136.8	18,419.9

 

Group 2018
Loans and advances to customers – OSB
Excellent	4,351.9	8.7	–	–	4,360.6
Good	3,755.1	188.6	–	–	3,943.7
Satisfactory	163.1	164.8	–	–	327.9
Lower	9.5	74.7	–	–	84.2
Impaired	–	–	225.4	–	225.4
POCI	–	–	–	56.2	56.2
	8,279.6	436.8	225.4	56.2	8,998.0

 

Bank 2019	Stage 1 £m	Stage 2 £m	Stage 3 £m	Stage 3 (POCI) £m	Total £m
Loans and advances to customers Excellent	3,565.3	10.3	–	–	3,575.6
Good	4,086.1	148.0	–	–	4,234.1
Satisfactory	127.3	147.0	–	–	274.3
Lower	6.3	66.0	–	–	72.3
Impaired	–	–	211.1	–	211.1
POCI	–	–	–	53.4	53.4
	7,785.0	371.3	211.1	53.4	8,420.8

 

Bank 2018
Loans and advances to customers
Excellent	3,321.1	3.4	–	–	3,324.5
Good	3,189.2	126.8	–	–	3,316.0
Satisfactory	138.6	149.9	–	–	288.5
Lower	8.1	66.5	–	–	74.6
Impaired	–	–	164.8	–	164.8
POCI	–	–	–	55.9	55.9
	6,657.0	346.6	164.8	55.9	7,224.3

 

The tables below show the Group’s and Bank’s other financial assets by credit risk rating grade:

Group 2019	Excellent £m	Good £m	Satisfactory £m	Total £m
Investment securities	635.3	–	–	635.3
Loans and advances to credit institutions	2,047.8	146.1	10.7	2,204.6
Derivative assets	11.6	9.5	–	21.1
	2,694.7	155.6	10.7	2,861.0

 

Group 2018	Excellent £m	Good £m	Satisfactory £m	Total £m
Investment securities	58.9	–	–	58.9
Loans and advances to credit institutions	1,315.2	25.4	6.7	1,347.3
Derivative assets	1.3	10.4	–	11.7
	1,375.4	35.8	6.7	1,417.9

 

Bank 2019	Excellent £m	Good £m	Satisfactory £m	Total £m
Investment securities Loans and advances to credit institutions Derivative assets	149.8 1,140.7 7.2	– 55.3 1.5	– – –	149.8 1,196.0 8.7
	1,297.7	56.8	–	1,354.5

 

Bank 2018	Excellent £m	Good £m	Satisfactory £m	Total £m
Investment securities	58.9	–	–	58.9
Loans and advances to credit institutions	1,315.2	24.8	–	1,340.0
Derivative assets	1.3	10.4	–	11.7
	1,375.4	35.2	–	1,410.6

Credit risk – loans and advances to credit institutions and investment securities

The Group holds treasury instruments in order to meet liquidity requirements and for general business purposes. The credit risk arising from these investments is closely monitored and managed by the Group’s treasury department. In managing these assets, Group treasury operates within guidelines laid down in the treasury policy approved by the Board and performance is monitored and reported to ALCO monthly, including through the use of an internally developed rating model based on counterparty credit default swap spreads.

The Group has limited exposure to emerging markets (Indian operations) and non-investment grade debt. ALCO is responsible for approving treasury counterparties.

During the year, the average balance of cash in hand, loans and advances to credit institutions and investment securities on a monthly basis was £2,016.2m (2018: £1,296.1m).

The tables below show the industry sector of the Group’s loans and advances to credit institutions and investment securities:

	Group 2019		Group 2018
	£m  %		£m  %
BoE1	1,957.9	69	1,315.2	94
Other banks	246.7	9	32.1	2
Central government	149.8	5	39.8	3
Supranationals	–	–	19.1	1
Securitisation	485.5	17	–	–
Total	2,839.9	100	1,406.2	100

        1.      Balances with the BoE include £41.7m (2018: £20.0m) held in the cash ratio deposit.

 

	Bank 2019		Bank 2018
	£m  %		£m  %
BoE1	1,109.3	83	1,315.2	94
Other banks	86.7	6	24.8	2
Central government	149.8	11	39.8	3
Supranationals	–	–	19.1	1
Total	1,345.8	100	1,398.9	100

   1.      Balances with the BoE include £27.5m (2018: £20.0m) held in the cash ratio deposit.

The tables below show the geographical exposure of the Group’s loans and advances to credit institutions and investment securities:

	Group 2019		Group 2018
	£m  %		£m  %
United Kingdom	2,829.2	100	1,380.5	98
Rest of Europe	–	–	19.1	2
India	10.7	–	6.6	–
Total	2,839.9	100	1,406.2	100

 

	Bank 2019		Bank 2018
	£m  %		£m  %
United Kingdom	1,345.8	100	1,379.8	99
Rest of Europe	–	–	19.1	1
Total	1,345.8	100	1,398.9	100

The Group monitors exposure concentrations against a variety of criteria, including asset class, sector and geography. To avoid refinancing risks associated with any one counterparty, sector or geographical region, the Board has set appropriate limits.

Liquidity risk

Liquidity risk is the risk of having insufficient liquid assets to fulfil obligations as they become due or the cost of raising liquid funds becoming too expensive.

The Group’s approach to managing liquidity risk is to maintain sufficient liquid resources to cover cash flow imbalances and fluctuations in funding in order to retain full public confidence in the solvency of the Group and to enable the Group to meet its financial obligations as they fall due. This is achieved through maintaining a prudent level of liquid assets and control of the growth of the business.
The Group has established a call account with the BoE and has access to its contingent liquidity facilities.

Liquidity management is the responsibility of ALCO, with day-to-day management delegated to treasury as detailed in the treasury policy. ALCO is responsible for setting limits over the level and maturity profile of wholesale funding and for monitoring the composition of the Group financial position. For each material class of financial liability a contractual maturity analysis is provided below.

The Group also monitors a range of triggers, defined in the contingency funding plan and recovery and resolution plan, which are designed to capture liquidity stresses in advance in order to allow sufficient time for management action to take effect. These are monitored daily by the Risk team, with breaches immediately reported to the CRO, CEO, CFO and the Head of Treasury.

The tables below provide a contractual maturity analysis of the Group’s financial assets and liabilities:

Carrying Less than 3–12 1–5 More than

 

Restated Group1	amount	On demand	3 months	months	years	5 years
2018	£m	£m	£m	£m	£m	£m
Financial liability by type
Amounts owed to retail depositors	8,071.9	2,538.2	880.6	3,008.3	1,644.8	–
Amounts owed to credit institutions	1,584.0	1.0	40.1	40.0	1,502.9	–
Amounts owed to other customers	32.9	–	10.5	22.4	–	–
Derivative liabilities	24.9	–	0.1	11.3	7.0	6.5
Subordinated liabilities	10.8	–	0.2	0.1	0.5	10.0
Perpetual Subordinated Bonds	37.6	–	0.6	–	–	37.0
Total liabilities	9,762.1	2,539.2	932.1	3,082.1	3,155.2	53.5
Financial asset by type
Cash in hand	0.4	0.4	–	–	–	–
Loans and advances to credit institutions	1,347.3	1,327.3	–	–	–	20.0
Investment securities	58.9	–	–	58.9	–	–
Loans and advances to customers	8,983.3	–	176.0	270.4	522.9	8,014.0
Derivative assets	11.7	–	–	–	11.7	–
Total assets	10,401.6	1,327.7	176.0	329.3	534.6	8,034.0
Cumulative liquidity gap		(1,211.5)	(1,967.6)	(4,720.4)	(7,341.0)	639.5

        1.     The Group has restated the prior year comparatives for the £22.0m PSBs previously classified as equity (see note 1).

 

Bank 2019	Carrying amount £m	On demand £m	Less than 3 months £m	3–12 months £m	1–5 years £m	More than 5 years £m
Financial liability by type Amounts owed to retail depositors	9,435.7	3,254.6	1,338.4	3,229.0	1,613.7	–
Amounts owed to credit institutions	1,671.1	7.8	160.5	–	1,502.8	–
Amounts owed to other customers	8.9	–	0.5	8.4	–	–
Derivative liabilities	54.3	–	–	0.6	46.8	6.9
Lease liabilities	4.3	–	–	0.2	0.4	3.7
Subordinated liabilities	10.6	–	0.2	0.1	10.3	–
Perpetual Subordinated Bonds	37.6	–	0.6	–	–	37.0
Total liabilities	11,222.5	3,262.4	1,500.2	3,238.3	3,174.0	47.6
Financial asset by type Cash in hand	0.4	0.4	–	–	–	–
Loans and advances to credit institutions	1,196.0	1,168.5	–	–	–	27.5
Investment securities	149.8	–	49.9	99.9	–	–
Loans and advances to customers	8,394.2	–	136.7	168.4	273.3	7,815.8
Derivative assets	8.7	–	0.1	1.0	7.1	0.5
Total assets	9,749.1	1,168.9	186.7	269.3	280.4	7,843.8
Cumulative liquidity gap		(2,093.5)	(3,407.0)	(6,376.0)	(9,269.6)	(1,473.4)

 

Restated Bank1	Carrying amount	On demand	Less than 3 months	3–12 months	1–5 years	More than 5 years
2018	£m	£m	£m	£m	£m	£m
Financial liability by type
Amounts owed to retail depositors	8,071.9	2,538.2	880.6	3,008.3	1,644.8	–
Amounts owed to credit institutions	1,584.0	1.0	40.1	40.0	1,502.9	–
Amounts owed to other customers	32.9	–	10.5	22.4	–	–
Derivative liabilities	24.9	–	0.1	11.3	7.0	6.5
Subordinated liabilities	10.8	–	0.2	0.1	0.5	10.0
Perpetual Subordinated Bonds	37.6	–	0.6	–	–	37.0
Total liabilities	9,762.1	2,539.2	932.1	3,082.1	3,155.2	53.5
Financial asset by type
Cash in hand	0.4	0.4	–	–	–	–
Loans and advances to credit institutions	1,340.0	1,320.0	–	–	–	20.0
Investment securities	58.9	–	–	58.9	–	–
Loans and advances to customers	7,208.2	–	131.8	165.1	232.4	6,678.9
Derivative assets	11.7	–	–	–	11.7	–
Total assets	8,619.2	1,320.4	131.8	224.0	244.1	6,698.9
Cumulative liquidity gap		(1,218.8)	(2,019.1)	(4,877.2)	(7,788.3)	(1,142.9)

   1.     The Bank has restated the prior year comparatives for the £22.0m PSBs previously classified as equity (see note 1).

 

Liquidity risk – contractual cash flows

The following tables provide an analysis of the Group’s gross contractual cash flows, derived using interest rates and contractual maturities at the reporting date and excluding impacts of early payments or non-payments:

Group 2019	Carrying amount £m	Gross inflow/ outflow £m	Up to 3 months £m	3–12 months £m	1–5 years £m	More than 5 years £m
Financial liability by type Amounts owed to retail depositors	16,255.0	16,407.3	5,532.0	4,309.7	4,911.8	1,653.8
Amounts owed to credit institutions and other customers	3,098.5	3,133.3	255.1	229.5	2,648.7	–
Derivative liabilities	92.8	91.4	5.6	20.7	61.4	3.7
Debt securities in issue	296.3	315.3	14.4	82.9	218.0	–
Lease liabilities	13.3	22.4	0.7	1.4	17.1	3.2
Subordinated liabilities	10.6	14.2	0.4	0.5	13.3	–
Perpetual Subordinated Bonds	37.6	45.5	0.4	1.3	6.8	37.0
Total liabilities	19,804.1	20,029.4	5,808.6	4,646.0	7,877.1	1,697.7
Off-balance sheet loan commitments	1,210.9	1,210.9	1,210.9	–	–	–
Financial asset by type Cash in hand	0.4	0.4	0.4	–	–	–
Loans and advances to credit institutions	2,204.6	2,204.6	2,162.9	–	–	41.7
Investment securities	635.3	672.4	52.1	123.2	497.1	–
Loans and advances to customers	18,446.8	37,024.4	371.6	1,423.6	5,032.4	30,196.8
Derivative assets	21.1	23.4	2.4	5.7	15.1	0.2
Total assets	21,308.2	39,925.2	2,589.4	1,552.5	5,544.6	30,238.7

 

Restated Group1	Carrying amount	Gross inflow/ outflow	Up to 3 months	3–12 months	1–5 years	More than 5 years
2018	£m	£m	£m	£m	£m	£m
Financial liability by type
Amounts owed to retail depositors	8,071.9	8,479.5	3,433.0	3,236.7	1,809.8	–
Amounts owed to credit institutions and other customers	1,616.9	1,646.2	54.5	71.2	1,520.5	–
Derivative liabilities	24.9	27.1	3.3	15.6	5.0	3.2
Subordinated liabilities	10.8	15.0	0.3	0.4	3.6	10.7
Perpetual Subordinated Bonds	37.6	46.5	0.5	1.4	7.6	37.0
Total liabilities	9,762.1	10,214.3	3,491.6	3,325.3	3,346.5	50.9
Off-balance sheet loan commitments	710.7	710.7	710.7	–	–	–
Financial asset by type
Cash in hand	0.4	0.4	0.4	–	–	–
Loans and advances to credit institutions	1,347.3	1,347.3	1,327.3	–	–	20.0
Investment securities	58.9	59.0	–	59.0	–	–
Loans and advances to customers	8,983.3	18,311.2	183.6	841.5	2,649.6	14,636.5
Derivative assets	11.7	12.2	0.4	1.0	10.8	–
Total assets	10,401.6	19,730.1	1,511.7	901.5	2,660.4	14,656.5

        1.     The Group has restated the prior year comparatives for the £22.0m PSBs previously classified as equity (see note 1).

 

Bank 2019	Carrying amount £m	Gross inflow/ outflow £m	Up to 3 months £m	3–12 months £m	1–5 years £m	More than 5 years £m
Financial liability by type Amounts owed to retail depositors	9,435.7	9,495.9	3,657.4	917.0	3,267.7	1,653.8
Amounts owed to credit institutions and other customers	1,680.0	1,697.6	174.6	13.8	1,509.2	–
Derivative liabilities	54.3	55.0	2.3	11.8	37.3	3.6
Lease liabilities	4.3	4.8	0.2	0.4	1.9	2.3
Subordinated liabilities	10.6	14.2	0.4	0.5	13.3	–
Perpetual Subordinated Bonds	37.6	45.5	0.4	1.3	6.8	37.0
Total liabilities	11,222.5	11,313.0	3,835.3	944.8	4,836.2	1,696.7
Off-balance sheet loan commitments	459.7	459.7	459.7	–	–	–
Financial asset by type Cash in hand	0.4	0.4	0.4	–	–	–
Loans and advances to credit institutions	1,196.0	1,196.0	1,168.5	–	–	27.5
Investment securities	149.8	150.0	50.0	100.0	–	–
Loans and advances to customers	8,394.2	18,218.7	114.8	717.7	2,256.2	15,130.0
Derivative assets	8.7	8.7	0.7	1.7	6.2	0.1
Total assets	9,749.1	19,573.8	1,334.4	819.4	2,262.4	15,157.6

 

Restated Bank1	carry amount	gross inflow/outflow	up to 3 months	3 to 12 months	1 to 5 years	More than 5 years
2018	£m	£m	£m	£m	£m	£m
Financial liability by type
Amounts owed to retail depositors	8,071.9	8,479.5	3,433.0	3,236.7	1,809.8	–
Amounts owed to credit institutions and other customers	1,616.9	1,646.2	54.5	71.2	1,520.5	–
Derivative liabilities	24.9	27.1	3.3	15.6	5.0	3.2
Subordinated liabilities	10.8	15.0	0.3	0.4	3.6	10.7
Perpetual Subordinated Bonds	37.6	46.5	0.5	1.4	7.6	37.0
Total liabilities	9,762.1	10,214.3	3,491.6	3,325.3	3,346.5	50.9
Off-balance sheet loan commitments	487.8	487.8	487.8	–	–	–
Financial asset by type
Cash in hand	0.4	0.4	0.4	–	–	–
Loans and advances to credit institutions	1,340.0	1,340.1	1,320.1	–	–	20.0
Investment securities	58.9	59.0	–	59.0	–	–
Loans and advances to customers	7,208.2	15,496.7	107.3	647.8	1,931.3	12,810.3
Derivative assets	11.7	12.2	0.4	1.0	10.8	–
Total assets	8,619.2	16,908.4	1,428.2	707.8	1,942.1	12,830.3

   1.     The Bank has restated the prior year comparatives for the £22.0m PSBs previously classified as equity (see note 1).

The actual repayment profile of retail deposits may differ from the analysis above due to the option of early withdrawal with a penalty.

The actual repayment profile of loans and advances to customers may differ from the analysis above since many mortgage loans are repaid prior to the contractual end date.

 

Liquidity risk – asset encumbrance

Asset encumbrance levels are monitored by ALCO. The following tables provide an analysis of the Group’s encumbered and unencumbered assets:

	Group 2019
	Encumbered		Unencumbered
	Pledged as collateral £m	Other² £m		Available as collateral £m	Other3 £m		Total £m
Cash in hand	–	–		0.4	–		0.4
Loans and advances to credit institutions	110.4	41.7		1,916.2	136.3		2,204.6
Investment securities	173.0	–		462.3	–		635.3
Loans and advances to customers	4,922.4	40.4		1,939.6	11,544.4		18,446.8
Derivative assets	–	–		–	21.1		21.1
Non-financial assets	–	–		–	108.9		108.9
	5,205.8	82.1		4,318.5	11,810.7		21,417.1

Restated Group1 2018

 

Encumbered                                      Unencumbered

	Pledged as collateral	Other2		Available as collateral	Other3	Total
	£m	£m		£m	£m	£m
Cash in hand	–	–		0.4	–	0.4
Loans and advances to credit institutions	3.5	20.0		1,295.2	28.6	1,347.3
Investment securities	–	–		58.9	–	58.9
Loans and advances to customers	2,552.5	16.0		293.5	6,121.3	8,983.3
Derivative assets	–	–		–	11.7	11.7
Non-financial assets	–	–		–	58.6	58.6
	2,556.0	36.0		1,648.0	6,220.2	10,460.2

1. The 2018 comparatives have been restated to show excess collateral with the BoE under TFS and ILTR as unencumbered available as collateral in line with PRA guidance.
2. Represents assets that are not pledged but that the Group believes it is restricted from using to secure funding for legal or other reasons,
3. Represents assets that are not restricted for use as collateral, but the Group treats as available as collateral once they are readily available to secure funding in the normal course of business.

	Bank 2019
	Encumbered		Unencumbered
	Pledged as collateral £m	Other2 £m		Available as collateral £m	Other3 £m		Total £m
Cash in hand	–	–		0.4	–		0.4
Loans and advances to credit institutions	62.2	27.5		1,081.8	24.5		1,196.0
Investment securities	–	–		149.8	–		149.8
Loans and advances to customers	3,010.0	40.4		910.1	4,433.7		8,394.2
Derivative assets	–	–		–	8.7		8.7
Non-financial assets	–	–		–	3,720.8		3,720.8
	3,072.2	67.9		2,142.1	8,187.7		13,469.9

 

		Restated Bank1 2018
	Encumbered	Unencumbered
	Pledged as collateral	Available as Other2  collateral  Other	3  Total
	£m	£m  £m  £m	£m
Cash in hand	–	–  0.4  –	0.4
Loans and advances to credit institutions	3.5	20.0  1,295.2  21.3	1,340.0
Investment securities	–	–  58.9  –	58.9
Loans and advances to customers	2,552.5	16.0  293.5  4,346.2	7,208.2
Derivative assets	–	–  –  11.7	11.7
Non-financial assets	–	–  –  1,950.3	1,950.3
	2,556.0	36.0  1,648.0  6,329.5	10,569.5

1. The 2018 comparatives have been restated to show excess collateral with the BoE under TFS and ILTR as unencumbered available as collateral in line with PRA guidance.
2. Represents assets that are not pledged but that the Group believes it is restricted from using to secure funding for legal or other reasons.
3. Represents assets that are not restricted for use as collateral, but the Group treats as available as collateral once they are readily available to secure funding in the normal course of business.

Liquidity risk – liquidity reserves

The tables below analyse the Group’s liquidity reserves, where carrying value is considered to be equal to fair value:

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Unencumbered balances with central banks	1,916.2	1,295.2	1,081.8	1,295.2
Unencumbered cash and balances with other banks	136.3	28.6	24.5	21.3
Other cash and cash equivalents	0.4	0.4	0.4	0.4
Unencumbered investment securities	462.3	58.9	149.8	58.9
	2,515.2	1,383.1	1,256.5	1,375.8

Market risk

Market risk is the risk of an adverse change in the Group’s income or the Group’s net worth arising from movement in interest rates, exchange rates or other market prices. Market risk exists, to some extent, in all the Group’s businesses. The Group recognises that the effective management of market risk is essential to the maintenance of stable earnings and preservation of shareholder value.

Interest rate risk

The primary market risk faced by the Group is interest rate risk. Interest rate risk is the risk of loss from adverse movement in the overall level of interest rates. It arises from mismatches in the timing of repricing of assets and liabilities, both on and off-balance sheet. It is most prevalent in mortgage lending where fixed rate mortgages are not funded by fixed rate deposits of the same duration, or where the fixed rate risk is not hedged by a fully matching interest rate derivative. Exposure is mitigated on a continuous basis through the use of derivatives and reserve allocations.

Currently interest rate risk is managed by separate risk appetites for OSB and CCFS. The Group is currently looking to align measures and risk appetites in 2020. Both banks apply an economic value at risk approach. OSB applies an earnings at risk approach for basis risk while CCFS applies an earnings at risk approach for both interest rate risk and basis risk. The interest rate sensitivity is impacted by behavioural assumptions used by the Group, the most significant of which are prepayments and reserve allocations. Expected prepayments are modelled based on historical analysis and current market rates. The reserve allocation strategy is approved by ALCO and set to reflect the current balance sheet and future plans.

 

OSB measures economic value at risk using the impact of six different internally derived interest rate scenarios and a parallel 250bps rate curve shift up and down. The internal scenarios are defined by ALCO and are based on three ‘shapes’ of curve movement (shift, twist and flex). Historical data is used to calibrate the severity of the scenarios to the Group’s risk appetite. The Board has set a limit on interest rate risk exposure of 2.25% of CET1. After taking into account the derivatives entered into by OSB, the maximum decrease under these scenarios as at 31 December 2019 would have been £4.2m (2018: £5.6m) and the maximum increase £4.2m (2018:
£1.8m). Against a parallel interest rate increase of 250bps, the impact would have been a decrease of £1.9m, (2018: £11.6m).

For CCFS, risk appetite for economic value at risk is set against the impact of a parallel +/-200bps shock. The down shock is floored at zero. The Board has set a limit on interest risk exposure of 1% of CET1 as at 31 December 2019. After taking into account the
derivatives entered into by CCFS, the maximum decrease under these scenarios as at 31 December 2019 would have been £1.0m and the maximum increase £0.3m. Exposure for earnings at risk is measured by the impact of a +/-50bps parallel shift in interest rates on the expected profitability of the Group in the next 12 months. The risk appetite limit is 2% of projected 12-month net interest income (‘NII’). As at 31 December 2019 the maximum decrease would have been £0.9m.

The Group is also exposed to basis risk. Basis risk is the risk of loss from an adverse divergence in interest rates. It arises where assets and liabilities reprice from different variable rate indices. These indices may be market rates (e.g. bank base rate, LIBOR or SONIA)
or administered (e.g. the Group’s SVR, other discretionary variable rates, or that received on call accounts with other banks).

OSB measures basis risk using the impact of five scenarios on net interest income over a one-year period including movements such as diverging base, LIBOR and SONIA rates. Historical data is used to calibrate the severity of the scenarios to the Group’s risk appetite. The Board has set a limit on basis risk exposure of 2.25% of CET1 as at 31 December 2019.

CCFS measures basis risk using the impact of three scenarios on net interest income over a one-year period including movements such as diverging base, LIBOR and SONIA rates. The Board has set a limit on basis risk exposure of 3% of 12-month NII as at
31 December 2019.

Foreign exchange rate risk

The Group has limited exposure to foreign exchange risk in respect of its Indian operations. A 5% movement in exchange rates would result in a £0.4m (2018: £0.3m) effect in profit or loss and £0.4m (2018: £0.3m) in equity.

The Bank is not exposed to foreign exchange risk since all its assets and liabilities are denominated in Pounds Sterling.

Structured entities

The structured entities within the Group at 31 December 2019 were Canterbury Finance No.1 plc and Precise Mortgage Funding 2015-1 plc. Both entities hold legal title to a pool of mortgages which are used as a security for issued debt. The transfer of mortgages fails derecognition criteria because the Bank retained the remaining notes and residual certificates issued and as such did not transfer substantially the risks and rewards of ownership of the securitised mortgages. Therefore, the Group is exposed to credit, interest rate and other risks on the securitised mortgages to the same extent as other mortgages. The Group mitigates these risks consistently with non-securitised mortgages.

Cash flows generated from the structured entities are ring-fenced and can only be used to pay interest and principal of the issued debt securities in a waterfall order according to the seniority of the bonds. The structured entities are self-funded and the Group is not
contractually or constructively obliged to provide further liquidity or financial support. The maximum loss exposure at any point in time is the amount of cash and cash equivalents held in the structured entities.

The Group had no structured entities as at 31 December 2018.

 46. Financial instruments and fair values

i. Financial assets and financial liabilities

The following tables summarise the classification and carrying value of the Group’s financial assets and financial liabilities:

Group	Note	2019
		Fair value through profit or loss £m	FVOCI £m	Amortised cost £m	Total carrying amount £m
Assets Cash in hand		–	–	0.4	0.4
Loans and advances to credit institutions	18	–	–	2,204.6	2,204.6
Investment securities	19	–	508.7	126.6	635.3
Loans and advances to customers	20	22.1	–	18,424.7	18,446.8
Derivative assets	25	21.1	–	–	21.1
		43.2	508.7	20,756.3	21,308.2
Liabilities Amounts owed to retail depositors  33		–	–	16,255.0	16,255.0
Amounts owed to credit institutions	32	–	–	3,068.8	3,068.8
Amounts owed to other customers	34	–	–	29.7	29.7
Debt securities in issue  35		–	–	296.3	296.3
Derivative liabilities  25		92.8	–	–	92.8
Subordinated liabilities  39		–	–	10.6	10.6
Perpetual Subordinated Bonds  40		–	–	37.6	37.6
		92.8	–	19,698.0	19,790.8

 

			2018
		Fair value
		through profit		Amortised	Total carrying
		or loss	FVOCI	cost	amount
Restated Group1	Note	£m	£m	£m	£m
Assets
Cash in hand		–	–	0.4	0.4
Loans and advances to credit institutions	18	–	–	1,347.3	1,347.3
Investment securities	19	–	58.9	–	58.9
Loans and advances to customers	20	–	–	8,983.3	8,983.3
Derivative assets	25	11.7	–	–	11.7
		11.7	58.9	10,331.0	10,401.6
Liabilities
Amounts owed to retail depositors	33	–	–	8,071.9	8,071.9
Amounts owed to credit institutions	32	–	–	1,584.0	1,584.0
Amounts owed to other customers	34	–	–	32.9	32.9
Derivative liabilities	25	24.9	–	–	24.9
Subordinated liabilities	39	–	–	10.8	10.8
Perpetual Subordinated Bonds	40	–	–	37.6	37.6
		24.9	–	9,737.2	9,762.1
1. The Group has restated the prior year comparatives for the £22.0m PSBs previously classified as equity (see note 1).

Bank  Note	2019
	Fair value through profit or loss £m	FVOCI £m	Amortised cost £m	Total carrying amount £m
Assets Cash in hand	–	–	0.4	0.4
Loans and advances to credit institutions  18	–	–	1,196.0	1,196.0
Investment securities  19	–	149.8	–	149.8
Loans and advances to customers  20	–	–	8,394.2	8,394.2
Derivative assets  25	8.7	–	–	8.7
	8.7	149.8	9,590.6	9,749.1
Liabilities Amounts owed to retail depositors  33	–	–	9,435.7	9,435.7
Amounts owed to credit institutions  32	–	–	1,671.1	1,671.1
Amounts owed to other customers  34	–	–	8.9	8.9
Derivative liabilities  25	54.3	–	–	54.3
Subordinated liabilities  39	–	–	10.6	10.6
Perpetual Subordinated Bonds  40	–	–	37.6	37.6
	54.3	–	11,163.9	11,218.2

 

		2018
	Fair value through profit		Amortised	Total carrying
Restated Bank1  Note	or loss £m	FVOCI £m	cost £m	amount £m
Assets Cash in hand	–	–	0.4	0.4
Loans and advances to credit institutions  18	–	–	1,340.0	1,340.0
Investment securities  19	–	58.9	–	58.9
Loans and advances to customers  20	–	–	7,208.2	7,208.2
Derivative assets  25	11.7	–	–	11.7
	11.7	58.9	8,548.6	8,619.2
Liabilities Amounts owed to retail depositors  33	–	–	8,071.9	8,071.9
Amounts owed to credit institutions  32	–	–	1,584.0	1,584.0
Amounts owed to other customers  34	–	–	32.9	32.9
Derivative liabilities  25	24.9	–	–	24.9
Subordinated liabilities  39	–	–	10.8	10.8
Perpetual Subordinated Bonds  40	–	–	37.6	37.6
	24.9	–	9,737.2	9,762.1
1. The Bank has restated the prior year comparatives for the £22.0m PSBs previously classified as equity (see note 1).
The Group has no financial assets nor financial liabilities classified as held for trading.

 

ii.Fair values

The following tables summarise the carrying value and estimated fair value of financial instruments not measured at fair value in the Statement of Financial Position:

Group	2019		Restated	20181
	Carrying value £m	Estimated fair value £m	Carrying value £m	Estimated fair value £m
Assets Cash in hand	0.4	0.4	0.4	0.4
Loans and advances to credit institutions	2,204.6	2,204.6	1,347.3	1,347.3
Investment securities	126.6	126.6	–	–
Loans and advances to customers	18,424.7	18,654.2	8,983.3	9,151.1
	20,756.3	20,985.8	10,331.0	10,498.8
Liabilities Amounts owed to retail depositors	16,255.0	16,259.7	8,071.9	8,097.5
Amounts owed to credit institutions	3,068.8	3,068.8	1,584.0	1,584.0
Amounts owed to other customers	29.7	29.7	32.9	32.9
Debt securities in issue	296.3	296.3	–	–
Subordinated liabilities	10.6	10.7	10.8	10.8
Perpetual Subordinated Bonds	37.6	33.2	37.6	35.1
	19,698.0	19,698.4	9,737.2	9,760.3

   1.     The Group has restated the prior year comparatives for the £22.0m PSBs previously classified as equity (see note 1).

Bank	2019		Restated	20181
	Carrying value £m	Estimated fair value £m	Carrying value £m	Estimated fair value £m
Assets Cash in hand	0.4	0.4	0.4	0.4
Loans and advances to credit institutions	1,196.0	1,196.0	1,340.0	1,340.0
Loans and advances to customers	8,394.2	8,566.3	7,208.2	7,340.1
	9,590.6	9,762.7	8,548.6	8,680.5
Liabilities Amounts owed to retail depositors	9,435.7	9,435.8	8,071.9	8,097.5
Amounts owed to credit institutions	1,671.1	1,671.1	1,584.0	1,584.0
Amounts owed to other customers	8.9	8.9	32.9	32.9
Subordinated liabilities	10.6	10.7	10.8	10.8
Perpetual Subordinated Bonds	37.6	33.2	37.6	35.1
	11,163.9	11,159.7	9,737.2	9,760.3

1. The Bank has restated the prior year comparatives for the £22.0m PSBs previously classified as equity (see note 1).

 

The fair values in these tables are estimated using the valuation techniques below. The estimated fair value is stated as at 31 December and may be significantly different from the amounts which will actually be paid on the maturity or settlement dates of each financial instrument.

Cash in hand
This represents physical cash across the Group’s branch network where fair value is considered to be equal to carrying value.

Loans and advances to credit institutions
This mainly represents the Group’s working capital current accounts and call accounts with central governments and other banks with an original maturity of less than three months. Fair value is not considered to be materially different to carrying value.

Loans and advances to customers
This mainly represents secured mortgage lending to customers. The fair value of fixed rate mortgages has been estimated by discounting future cash flows at current market rates of interest. Future cash flows include the impact of expected credit losses. The interest rate on variable rate mortgages is considered to be equal to current market product rates and as such fair value is estimated to be equal to carrying value.

Amounts owed to retail depositors
The fair value of fixed rate retail deposits has been estimated by discounting future cash flows at current market rates of interest. Retail deposits at variable rates and deposits payable on demand are considered to be at current market rates and as such fair value is estimated to be equal to carrying value.

Amounts owed to credit institutions
This mainly represents amounts drawn down under the BoE TFS and ILTR, warehouse funding and commercial repos. Fair value is considered to be equal to carrying value.

Amounts owed to other customers
This represents fixed rate saving products to corporations and local authorities with original maturities greater than three months. The fair value is estimated by discounting future cash flows at current market rates of interest.

Debt securities in issue

While the Group’s debt securities in issue are listed, the quoted prices for an individual note may not be indicative of the fair value of the issue as a whole, due to the specialised nature of the market in such instruments and the limited number of investors participating in it. Fair value is not considered to be materially different to carrying value.

Subordinated liabilities and Perpetual Subordinated Bonds
The fair value of subordinated liabilities is estimated by discounting future cash flows at current market rates of interest. The PSBs are listed on the London Stock Exchange with fair value being the quoted market price at the reporting date.

iii.        Fair value classification

The following tables provide an analysis of financial assets and financial liabilities measured at fair value in the Statement of Financial Position grouped into Levels 1 to 3 based on the degree to which the fair value is observable:

Group 2019	Carrying amount £m	Principal amount £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Financial assets Investment securities Loans and advances to customers Derivative assets	509.7 22.1 21.1	509.5 24.8 7,795.4	149.8 – –	358.9 – 21.0	– 22.1 0.1	508.7 22.1 21.1
	552.9	8,329.7	149.8	379.9	22.2	551.9
Financial liabilities Derivative liabilities	92.8	9,982.4	–	92.8	–	92.8

 

	Carrying amount	Principal amount	Level 1	Level 2	Level 3	Total
Group 2018	£m	£m	£m	£m	£m	£m
Financial assets Investment securities	58.9	59.0	58.9	–	–	58.9
Derivative assets	11.7	1,999.0	–	11.7	–	11.7
	70.6	2,058.0	58.9	11.7	–	70.6
Financial liabilities Derivative liabilities	24.9	4,532.2	–	24.9	–	24.9

 

Bank 2019	Carrying amount £m	Principal amount £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Financial assets Investment securities Derivative assets	149.8 8.7	150.0 3,080.0	149.8 –	– 8.7	– –	149.8 8.7
	158.5	3,230.0	149.8	8.7	–	158.5
Financial liabilities Derivative liabilities	54.3	4,462.9	–	54.3	–	54.3

 

	Carrying amount	Principal amount	Level 1	Level 2	Level 3	Total
Bank 2018	£m	£m	£m	£m	£m	£m
Financial assets Investment securities	58.9	59.0	58.9	–	–	58.9
Derivative assets	11.7	1,999.0	–	11.7	–	11.7
	70.6	2,058.0	58.9	11.7	–	70.6
Financial liabilities Derivative liabilities	24.9	4,532.2	–	24.9	–	24.9

Level 1: Fair values that are based entirely on quoted market prices (unadjusted) in an actively traded market for identical assets and liabilities that the Group has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on readily available observable market prices, this makes them most reliable, reduces the need for management judgement and estimation and also reduces the uncertainty associated with determining fair values.

Level 2: Fair values that are based on one or more quoted prices in markets that are not active or for which all significant inputs are taken from directly or indirectly observable market data. These include valuation models used to calculate the present value of
expected future cash flows and may be employed either when no active market exists or when there are no quoted prices available for similar instruments in active markets.

 

Level 3: Fair values for which any one or more significant input is not based on observable market data and the unobservable inputs have a significant effect on the instrument’s fair value. Valuation models that employ significant unobservable inputs require a higher degree of management judgement and estimation in determining the fair value. Management judgement and estimation are usually required for the selection of the appropriate valuation model to be used, determination of expected future cash flows on the financial instruments being valued, determination of the probability of counterparty default and prepayments, determination of expected volatilities and correlations and the selection of appropriate discount rates.

The following table provides an analysis of financial assets and financial liabilities not measured at fair value in the Statement of Financial Position grouped into Levels 1 to 3 based on the degree to which the fair value is observable:

Group 2019	Carrying amount £m	Principal amount £m	Level 1 £m	Estimated fair value   Level 2  Level 3 £m  £m		Total £m
Financial assets Cash in hand	0.4	0.4	–	0.4	–	0.4
Loans and advances to credit institutions	2,204.6	2,204.3	–	2,204.6	–	2,204.6
Investment securities	126.6	126.4	126.6	–	–	126.6
Loans and advances to customers	18,424.7	18,281.3	–	3,409.1	15,245.1	18,654.2
	20,756.3	20,612.4	126.6	5,614.1	15,245.1	20,985.8
Financial liabilities Amounts owed to retail depositors	16,255.0	16,133.5	–	3,817.8	12,441.9	16,259.7
Amounts owed to credit institutions	3,068.8	3,063.3	–	3,068.8	–	3,068.8
Amounts owed to other customers	29.7	29.5	–	–	29.7	29.7
Debt securities in issue	296.3	295.5	–	296.3	–	296.3
Subordinated liabilities	10.6	10.4	–	–	10.7	10.7
Perpetual Subordinated Bonds	37.6	37.0	33.2	–	–	33.2
	19,698.0	19,569.2	33.2	7,182.9	12,482.3	19,698.4

Restated Group1	Carrying amount	Principal amount	Level 1	Level 2	Level 3	Total
2018	£m	£m	£m	£m	£m	£m
Financial assets
Cash in hand	0.4	0.4	–	0.4	–	0.4
Loans and advances to credit institutions	1,347.3	1,346.9	–	1,347.3	–	1,347.3
Loans and advances to customers	8,983.3	9,121.4	–	4,195.3	4,955.8	9,151.1
	10,331.0	10,468.7	–	5,543.0	4,955.8	10,498.8
Financial liabilities
Amounts owed to retail depositors	8,071.9	8,019.7	–	2,916.4	5,181.1	8,097.5
Amounts owed to credit institutions	1,584.0	1,581.0	–	1,584.0	–	1,584.0
Amounts owed to other customers	32.9	32.8	–	–	32.9	32.9
Subordinated liabilities2	10.8	10.6	–	–	10.8	10.8
Perpetual Subordinated Bonds	37.6	37.0	35.1	–	–	35.1
	9,737.2	9,681.1	35.1	4,500.4	5,224.8	9,760.3

1. The Group has restated the prior year comparatives for the £22.0m PSBs previously classified as equity (see note 1).
2. The Bank has reclassified the comparatives to disclose the fair value level of subordinated liabilities as Level 3 as the bi-lateral nature of the agreements means the calculation is based on unobservable inputs.

 

Bank 2019	Carrying amount £m	Principal amount £m	Level 1 £m	Estimated fair value   Level 2  Level 3 £m  £m		Total £m
Financial assets Cash in hand	0.4	0.4	–	0.4	–	0.4
Loans and advances to credit institutions	1,196.0	1,195.7	–	1,196.0	–	1,196.0
Loans and advances to customers	8,394.2	8,533.2	–	2,431.5	6,134.8	8,566.3
	9,590.6	9,729.3	–	3,627.9	6,134.8	9,762.7
Financial liabilities Amounts owed to retail depositors	9,435.7	9,364.5	–	3,817.8	5,618.0	9,435.8
Amounts owed to credit institutions	1,671.1	1,667.8	–	1,671.1	–	1,671.1
Amounts owed to other customers	8.9	8.8	–	–	8.9	8.9
Subordinated liabilities	10.6	10.4	–	–	10.7	10.7
Perpetual Subordinated Bonds	37.6	37.0	33.2	–	–	33.2
	11,163.9	11,088.5	33.2	5,488.9	5,637.6	11,159.7

Restated Bank1	Carrying amount	Principal amount	Level 1	Level 2	Level 3	Total
2018	£m	£m	£m	£m	£m	£m
Financial assets
Cash in hand	0.4	0.4	–	0.4	–	0.4
Loans and advances to credit institutions	1,340.0	1,339.7	–	1,340.0	–	1,340.0
Loans and advances to customers	7,208.2	7,337.6	–	3,123.7	4,216.4	7,340.1
	8,548.6	8,677.7	–	4,464.1	4,216.4	8,680.5
Financial liabilities
Amounts owed to retail depositors	8,071.9	8,019.7	–	2,916.4	5,181.1	8,097.5
Amounts owed to credit institutions	1,584.0	1,581.0	–	1,584.0	–	1,584.0
Amounts owed to other customers	32.9	32.8	–	–	32.9	32.9
Subordinated liabilities2	10.8	10.6	–	–	10.8	10.8
Perpetual Subordinated Bonds	37.6	37.0	35.1	–	–	35.1
	9,737.2	9,681.1	35.1	4,500.4	5,224.8	9,760.3

1. The Bank has restated the prior year comparatives for the £22.0m PSBs previously classified as equity (see note 1).
2. The Bank has reclassified the comparatives to disclose the fair value level of subordinated liabilities as Level 3 as the bi-lateral nature of the agreements means the calculation is based on unobservable inputs.
    
3. Pension scheme

Defined contribution scheme

The amount charged to profit or loss in respect of contributions to the Group’s defined contribution and stakeholder pension arrangements is the contribution payable in the period. The total pension cost in the year amounted to £3.0m (2018: £1.7m).

Defined benefit scheme

Kent Reliance Building Society (the ‘Society’) operated a defined benefit pension scheme (‘the Scheme’) funded by the payment
of contributions to a separately administered fund for nine retired members. The Society’s Board decided to close the Scheme with effect from 31 December 2001 and introduced a new defined contribution scheme to cover service for Scheme members from
1 January 2002.

The Scheme Trustees, having taken actuarial advice, decided to wind up the Scheme rather than continue to operate it on a ‘paid up’ basis. The winding up is largely complete. As at 31 December 2019 the liability to remaining members is £2k (31 December 2018: £2k) matched by Scheme assets.

 

48.       Operating segments

Following the Combination, the Group segments its lending business and operates under two segments in line with internal reporting to the Board:

- OSB
- CCFS

In 2018, the Group operated under two segments: BTL/SME and Residential mortgages. The 2018 comparatives have been restated. The financial position and results of operations of the above segments are summarised below:

2019	OSB £m	CCFS £m	Total £m
Balances at the reporting date Gross loans and advances to customers Expected credit losses	10,820.6 (35.6)	7,669.1 (7.3)	18,489.7 (42.9)
Loans and advances to customers	10,785.0	7,661.8	18,446.8
Capital expenditure	10.2	1.1	11.3
Depreciation and amortisation	6.3	1.9	8.2
Profit or loss for the year
Net interest income	316.2	28.5	344.7
Other (expense)/income	(12.9)	11.6	(1.3)
Total income	303.3	40.1	343.4
Administrative expenses	(92.3)	(16.4)	(108.7)
Provisions	0.1	(0.1)	–
Impairment losses	(11.9)	(3.7)	(15.6)
Gain on Combination with CCFS	–	10.8	10.8
Integration costs	(2.5)	(2.7)	(5.2)
Exceptional items	(15.6)	–	(15.6)
Profit before taxation	181.8	28.0	209.1
Taxation	(47.1)	(3.2)	(50.3)
Profit for the year	134.0	24.8	158.8

 

	OSB	CCFS	Total
Restated 20181	£m	£m	£m
Balances at the reporting date
Gross loans and advances to customers	9,005.2	–	9,005.2
Expected credit losses	(21.9)	–	(21.9)
Loans and advances to customers	8,983.3	–	8,983.3
Capital expenditure	6.3	–	6.3
Depreciation and amortisation	4.7	–	4.7
Profit or loss for the year
Net interest income	286.3	–	286.3
Other expense	(5.2)	–	(5.2)
Total income	281.1	–	281.1
Administrative expenses	(79.6)	–	(79.6)
Provisions	(0.8)	–	(0.8)
Impairment losses	(8.1)	–	(8.1)
Exceptional cost – Heritable option	(9.8)	–	(9.8)
Profit before taxation	182.8	–	182.8
Taxation	(43.2)	–	(43.2)
Profit for the year	139.6	–	139.6

1. The Group has restated the prior year comparatives for the interest expense and taxation on the £22.0m PSBs previously classified as equity (see note 1).

 

Notes to the Financial Statements continued

For the year ended 31 December 2019

   49.      Country by country reporting
Country by Country Reporting (‘CBCR’) was introduced through Article 89 of CRD IV, aimed at the banking and capital markets industry. The name, nature of activities and geographic location of the Group’s companies are presented below:

Jurisdiction	Country	Name	Activities
UK1	England	OneSavings Bank plc
		5D Finance Limited
		Broadlands Finance Limited
		Charter Court Financial Services Group plc
		Charter Court Financial Services Limited
		Charter Mortgages Limited
		Easioption Limited
		Exact Mortgage Experts Limited
		Guernsey Home Loans Limited
		Heritable Development Finance Limited
		Inter Bay Financial I Limited	Commercial
		Inter Bay Financial II Limited	banking
		InterBay Asset Finance Limited
		Interbay Funding, Ltd
		Interbay Group Holdings Limited
		InterBay Holdings Ltd
		Interbay ML, Ltd
		Jersey Home Loans Limited
		Prestige Finance Limited
		Reliance Property Loans Limited
		Rochester Mortgages Limited
	Guernsey	Guernsey Home Loans Limited
	Jersey	Jersey Home Loans Limited

   1.   Guernsey Home Loans Limited (Guernsey) and Jersey Home Loans Limited (Jersey) are incorporated in Guernsey and Jersey respectively but are considered to be located in the UK as they are managed and controlled in the UK with no permanent establishments in Guernsey or Jersey.

Jurisdiction	Country	Name	Activities
UK	England	Canterbury Finance No.1 plc
		CMF 2020-1 plc
		CML Warehouse Number 1 Limited
		CML Warehouse Number 2 Limited
		Precise Mortgage Funding 2014-1 plc	Special purpose
		Precise Mortgage Funding 2014-2 plc	vehicle
		Precise Mortgage Funding 2015-1 plc
		Precise Mortgage Funding 2015-3R plc
		Precise Mortgage Funding 2020-1B plc
India	India	OSB India Private Limited	Back office processing

 

Other disclosures required by the CBCR directive are provided below:

2019	UK	India	Consolidation2	Total
Average number of employees	1,335	454	–	1,789
Turnover1, £m	343.1	8.9	(8.6)	343.4
Profit/(loss) before tax, £m	208.8	1.6	(1.3)	209.1
Corporation tax paid, £m	52.6	0.4	–	53.0

 

Restated 20183	UK	India	Consolidation2	Total
Average number of employees	588	401	–	989
Turnover1, £m	280.7	7.2	(6.8)	281.1
Profit/(loss) before tax, £m	182.4	1.1	(0.7)	182.8
Corporation tax paid, £m	38.9	0.2	–	39.1

1. Turnover represents total income before impairment losses, regulatory provisions and operating costs, but after net interest, net commissions and fees, gains and losses on financial instruments and external servicing fees.
2. Relates to a management fee from Indian subsidiaries to OneSavings Bank plc for providing back office processing.
3. The Group has restated the prior year comparatives for the interest expense and taxation on the £22.0m PSBs previously classified as equity (see note 1).

The tables below reconcile tax charged and tax paid during the year.

2019	UK £m	India £m	Total £m
Tax charge	49.8	0.5	50.3
Effects of: Other timing differences	4.3	(0.1)	4.2
Tax outside of profit or loss	(0.9)	–	(0.9)
Prior year tax paid during the year	22.1	–	22.1
Current year tax to be paid after the reporting date	(22.7)	–	(22.7)
Tax paid	52.6	0.4	53.0

 

Restated 20181	UK £m	India £m	Total £m
Tax charge	43.0	0.2	43.2
Effects of: Other timing differences	(0.8)	–	(0.8)
Tax outside of profit or loss	(3.1)	–	(3.1)
Prior year tax paid during the year	19.5	–	19.5
Current year tax to be paid after the reporting date	(19.7)	–	(19.7)
Tax paid	38.9	0.2	39.1
1. The Group has restated the prior year comparatives for the taxation on the interest expense on the PSBs previously classified as equity (see note 1).

 50. Adjustments for non-cash items and changes in operating assets and liabilities

	Group 2019 £m	Restated Group1 2018 £m	Bank 2019 £m	Restated Bank1 2018 £m
Adjustments for non-cash items: Depreciation and amortisation	8.2	4.7	5.4	4.0
Interest on subordinated liabilities	0.7	0.7	0.7	0.7
Interest on Perpetual Subordinated Bonds	1.8	1.9	1.8	1.9
Interest on securitised debt	0.8	–	–	–
Interest on financing debt2	2.4	3.0	0.3	3.0
Impairment charge on loans	15.6	8.1	7.5	7.1
Loss on sale of financial instruments	0.1	0.1	0.1	0.1
Provisions	–	0.8	–	0.8
Interest on lease liabilities	0.1	–	0.1	–
Fair value losses on financial instruments	3.3	5.1	13.3	5.1
Share-based payments	4.0	2.5	4.0	2.6
Gain on combination with CCFS	(10.8)	–	–	–
Exceptional items	–	9.8	–	9.8
Total adjustments for non-cash items	26.2	36.7	33.2	35.1
Changes in operating assets and liabilities: Increase in loans and advances to credit institutions	(36.8)	(1.7)	(66.2)	(1.7)
Increase in loans to customers	(2,230.8)	(1,689.5)	(1,193.5)	(1,166.1)
Increase in intercompany balances	–	–	(644.0)	(475.2)
Increase in retail deposits	1,637.8	1,421.6	1,363.8	1,421.6
Net increase in other assets	(4.8)	(0.8)	(1.9)	(0.8)
Net decrease in derivatives and hedged items	(20.1)	(5.3)	(14.0)	(5.3)
Net (decrease)/increase in credit institutions and other customers' deposits2	(19.2)	7.2	(24.0)	7.2
Net (decrease)/increase in other liabilities	(37.3)	2.9	2.4	1.3
Exchange differences on working capital	(0.6)	(0.2)	–	–
Total changes in operating assets and liabilities	(711.8)	(265.8)	(577.4)	(219.0)

1. The Group and Bank have restated the prior year comparatives for the interest expense on the £22.0m PSBs previously classified as equity (see note 1).
2. The Group has reclassified the prior year comparatives to include all components of amounts owed to credit institutions as financing activities. Previously the Group only classified the Bank of England Term Funding Scheme and Indexed Long-Term Repo scheme as financing activities.
    
3. Events after the reporting date

On 17 January 2020, the Bank sold the Canterbury A2 note for proceeds of £ 225.4m. After incurring costs of £0.2m, the Bank recognised a gain on sale of £1.9m.

On 23 January 2020, the Bank sold the F note and residual certificates of the Canterbury securitisation for proceeds of £23.6m. The sale resulted in the Bank having no remaining interest in the Canterbury securitisation, with consolidation of Canterbury into the OSB Group ceasing on disposal. The Group recognised a gain on sale of £16.5m upon deconsolidation.

On 23 January 2020, the Group securitised £375.5m of mortgage loans through Precise Mortgage Funding 2020-1B plc (‘PMF 2020-1B’), issuing £388.9m of Sterling floating rate notes. The Group retained the class A2 notes, with all other note classes and the residual certificates being sold to the external market. As such, the Group has not consolidated PMF 2020-1B as the risks and rewards have been transferred. The Group recognised a gain on sale of £2.0m upon deconsolidation.

52.  Controlling party

As at 31 December 2019 there was no controlling party of OSB.

 

53.  Capital management

The Group’s prime objectives in relation to the management of capital are to provide a sufficient capital base to cover business risks and support future business development. The Group is compliant with the requirements set out by the PRA, the Group’s primary prudential supervisor.

Capital management is based on the three ‘pillars’ of Basel II. Under Pillar 1, the Group calculates its minimum capital requirements based on 8% of risk-weighted assets. The PRA then applies a multiplier to this amount to cover risks under Pillar 2 of Basel II
and generates an individual capital guidance (‘ICG’). The Group manages and reports its capital both at a Group level and on a solo consolidated basis for the two regulated entities within the Group. The capital position of the two regulated entities are not disclosed separately.

To comply with Pillar 2, the Group, and the two regulated entities, complete an annual self-assessment of risks known as the internal capital adequacy assessment process (‘ICAAP’) reviewed by the PRA. Pillar 3 requires firms to publish a set of disclosures which allow market participants to assess information on that firm’s capital, risk exposures and risk assessment process. The Group’s Pillar 3 disclosures can be found on the Group’s website.

Basel III came into force through CRD IV. Basel III complements and enhances Basel I and II with additional safety measures. Basel III changed definitions of regulatory capital, introduced new capital buffers and liquidity ratios, and modified the way regulatory capital is calculated.

The ultimate responsibility for capital adequacy rests with the Board of Directors. The Group’s ALCO is responsible for the management of the capital process within the risk appetite defined by the Board, including approving policy, overseeing internal controls and setting internal limits over capital ratios.

The Group actively manages its capital position and reports this on a regular basis to the Board and senior management via the ALCO and other governance committees. Capital requirements are included within budgets, forecasts and strategic plans with initiatives being executed against this plan.

The Group’s Pillar 1 capital information is presented below:

	(Unaudited) 2019 £m	(Unaudited) 2018 £m
Common Equity Tier 1 capital Called up share capital	4.5	2.4
Share premium, capital contribution and share-based payment reserve	876.3	170.0
Retained earnings	553.2	439.6
Transfer reserve	(12.8)	(12.8)
Other reserves	(4.2)	(0.5)
Total equity excluding equity bonds	1,417.0	598.7
Foreseeable dividends	(49.9)	(25.2)
Solo consolidation adjustments¹	–	(5.4)
IFRS 9 transitional adjustment²	5.3	2.7
Deductions from Common Equity Tier 1 capital Prudent valuation adjustment³	(0.5)	(0.1)
Intangible assets	(31.4)	(7.7)
Deferred tax asset	(0.9)	(1.4)
Common Equity Tier 1 capital	1,339.6	561.6
Additional Tier 1 capital AT1 securities	60.0	60.0
Total Tier 1 capital	1,399.6	621.6
Tier 2 capital Subordinated debt and PSBs	47.4	47.4
Deductions from Tier 2 capital	(0.7)	(3.3)
Total Tier 2 capital	46.7	44.1
Total regulatory capital	1,446.3	665.7
Risk-weighted assets (unaudited)	8,383.0	4,211.8

1. Prior to the Combination the Bank had solo consolidation waivers for most of its subsidiaries. The equity for unconsolidated entities has been removed from CET1 for the 2018 comparatives.
2. The regulatory capital includes a £5.3m add-back under IFRS 9 transitional arrangements. This represents 85% of the IFRS 9 transitional adjustment booked directly to retained earnings of £6.5m. The full impact of IFRS 9, if applied, would reduce total regulatory capital to £1,441.0m.
3. The Group has adopted the simplified approach under the Prudent Valuation rules, recognising a deduction equal to 0.1% of fair value assets and liabilities.

The movement in CET1 during the year was as follows:

	Group (Unaudited) 2019 £m	Group (Unaudited) 2018 £m
At 1 January	561.6	460.1
Movement in retained earnings	113.6	102.1
Share premium from Sharesave Scheme vesting	0.3	0.4
Shares issued on Combination with CCFS	707.1	–
Movement in other reserves	(2.7)	(0.6)
Movement in foreseeable dividends	(24.7)	(2.6)
Movement in solo consolidation adjustment	5.4	(0.6)
IFRS 9 transitional adjustment	2.6	2.7
Movement in prudent valuation adjustment	(0.4)	(0.1)
Net increase in intangible assets	(23.7)	(0.9)
Movement in deferred tax asset for carried forward losses	0.5	1.1
At 31 December	1,339.6	561.6

 

Appendix

1. Alternative performance measures

In this Annual report, the Group used alternative performance measures (‘APMs’) when presenting pro forma underlying results as management believe they provide a more consistent basis for comparing the Group’s performance between financial periods.

Pro forma underlying results assume that the Combination with CCFS 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 Annual report are not a substitute for IFRS measures and readers should consider the IFRS measures as well.

Below we provide definitions and the calculation methodology of ratios used throughout this Annual report both a on statutory and pro forma underlying basis.

Key performance indicators

Net interest margin (‘NIM’)

NIM is defined as net interest income as a percentage of a 13 point average1 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 £m	2018 £m
Net interest income – statutory A	344.7	286.32
CCFS 2018 results	–	180.5
CCFS 2019 pre-acquisition results	152.1	–
Add back: acquisition-related items3	21.6	–
Net interest income – pro forma underlying B	518.4	466.8
13 point average of interest earning assets – statutory C	14,163.5	9,383.8
13 point average of interest earning assets – pro forma underlying D*	19,484.3	16,301.2
NIM statutory equals A/C	2.43%	3.05%4
NIM pro forma underlying equals B/D	2.66%	2.86%

   *    Pro forma underlying average interest earning assets assume that the Combination completed on 1 January 2018 and exclude the impact of average acquisition related items. Acquisition related items comprise the fair value uplift to CCFS’ loan book, the amortisation of the fair value uplift and the recognition of expected credit losses.

Cost to income ratio

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

	2019 £m	2018 £m
Administrative expenses – statutory A	108.7	79.6
CCFS 2018 results	–	64.6
CCFS 2019 pre-acquisition results	57.7	–
Add back: acquisition-related items3	(1.3)	–
Administrative expenses – pro forma underlying B	165.1	144.2
Total income – statutory C	343.4	281.1
CCFS 2018 results	–	224.9
CCFS 2019 pre-acquisition results	200.8	–
Add back: acquisition-related items3	18.3	–
Total income – pro forma underlying D	562.5	506.0
Cost to income statutory equals A/C	32%	28%
Cost to income pro forma underlying equals B/D	29%	28%

 

Management expense ratio

The management expense ratio is defined as administrative expenses as a percentage of a 13 point average1 of total assets.

	2019 £m	2018 £m
Administrative expenses – statutory (as in cost to income ratio above) A	108.7	79.6
Administrative expenses – pro forma underlying (as in cost to income ratio above) B	165.1	144.2
13 point average of total assets – statutory C	14,298.0	9,445.1
13 point average of total assets – pro forma underlying D*	19,752.6	16,373.5
Management expense ratio statutory equals A/C	0.76%	0.84%
Management expense ratio pro forma underlying equals B/D	0.84%	0.88%

* Pro forma underlying average total assets assume that the Combination completed on 1 January 2018 and exclude the impact of average acquisition related items. Acquisition related items comprise the net fair value uplift to CCFS’ loan book, adjustment to fair value on hedged assets, recognition of acquired intangibles on Combination and deferred tax assets arising on Combination.

Loan loss ratio

The loan loss ratio is defined as impairment losses as a percentage of a 13 point average1 of gross loans and advances. It is a measure of the credit performance of the loan book.

	2019 £m	2018 £m
Impairment losses – statutory A	15.6	8.1
CCFS 2018 results	–	2.1
CCFS 2019 pre-acquisition results	4.3	–
Add back: acquisition-related items3	(3.6)	–
Impairment losses – pro forma underlying B	16.3	10.2
13 point average of gross loans – statutory C	12,171.5	8,117.5
13 point average of gross loans – pro forma underlying D*	16,684.6	13,981.8
Loan loss ratio statutory equals A/C	0.13%	0.10%4
Loan loss ratio pro forma underlying equals B/D	0.10%	0.07%

* Pro forma underlying average gross loans assume that the Combination completed on 1 January 2018 and exclude the impact of average acquisition related items. Acquisition related items comprise the fair value uplift to CCFS’ loan book recognised on Combination.

Return on equity (‘RoE’)

RoE is defined as profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, as a percentage of a 13 point average1 of shareholders’ equity (excluding £60m of AT1 securities).

	2019 £m	2018 £m
Profit after tax – statutory Coupons on AT1 securities Tax on coupons on AT1 securities	158.8 (5.5) –	139.62 (5.5) 1.5
Profit attributable to ordinary shareholders – statutory A	153.3	135.6
Add back: Heritable option		7.2
CCFS 2018 results	–	120.8
CCFS 2019 pre-acquisition results	92.5	–
Add back: acquisition-related items3	42.9	–
Profit attributable to ordinary shareholders – pro forma underlying B	288.7	263.6
13 point average of shareholders’ equity (excluding AT1 securities) – statutory C	866.6	551.2
13 point average of shareholders’ equity (excluding AT1 securities) – pro forma underlying D*	1,147.1	948.7
Return on equity statutory equals A/C	18%	25%4
Return on equity pro forma underlying equals B/D	25%	28%

* Pro forma underlying average shareholders’ equity assumes that the Combination completed on 1 January 2018 and excludes the impact of average acquisition-related items.

Basic earnings per share

Basic earnings per share 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 £m	2018 £m
Profit attributable to ordinary shareholders – statutory (as in return on equity ratio above) A Profit attributable to ordinary shareholders – pro forma underlying (as in return on equity ratio above) B*	153.3 288.7	135.6 263.6
Weighted average number of ordinary shares in issue – statutory C	291.6	244.2
Weighted average number of ordinary shares in issue – pro forma underlying D	444.8	443.9
Basic earnings per share statutory equals A/C	52.6	55.5
Basic earnings per share pro forma underlying equals B/D	64.9	59.4

1. Pro forma underlying average shareholders’ equity assumes that the Combination completed on 1 January 2018 and excludes the impact of average acquisition-related items.
    
2. 13 point average is calculated as an average of opening balance and closing balances for 12 months of the financial year.
3. In 2019, the Group restated the prior year comparatives to recognise interest expense on the £22m Perpetual Subordinated Bonds previously classified as equity.
4. The acquisition-related items are detailed in the Financial review on page 51.
5. To align calculation methods post Combination, OSB amended 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 from a simple average. The comparative ratios were restated accordingly.

2. Calculation of 2019 final dividend

The table below shows the basis of calculation of the Bank’s proposed final dividend for 2019:

	2019 £m	2018 £m
Statutory profit after tax Less: Coupons on AT1 Securities classified as equity Tax on coupons	158.8 (5.5) –	139.61 (5.5) 1.5
Statutory profit attributable to ordinary shareholders Add: CCFS pre-acquisition profits Add back: CCFS pre-acquisition exceptional items Add back: CCFS pre-acquisition integration costs Tax on CCFS pre-acquisition integration  costs Add back: Group’s exceptional items Add back: Tax on Heritable option Add back: Amortisation of fair value adjustment Add back: Inception adjustment Add back: Amortisation of intangible assets acquired Release of deferred taxation on the above amortisation adjustments Less: gain on Combination Add back: ECL on Combination	153.3 92.5 15.7 5.2 (1.6) 15.6 2.6 21.6 (3.3) 1.3 (7.0) (10.8) 3.6	135.6 – – – – 9.8 (2.6) – – – – – –
Pro forma underlying profit attributable to ordinary shareholders   Total dividend: 25% of pro forma underlying profit attributable to ordinary shareholders Less interim dividends paid: CCFS (pre-acquisition) OSB	288.7   72.2   (10.3) (12.0)	142.8   35.7     (10.5)
Proposed final dividend	49.9	25.2

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

 

Glossary

AGM       Annual General Meeting
ALCO     Assets and Liabilities Committee AT1                 Additional Tier 1 Capital
BoE        Bank of England
CCFS     Charter Court Financial Services Group plc CEO            Chief Executive Officer
CFO        Chief Financial Officer
CRD IV Capital Requirement Directive and Regulation CRO          Chief Risk Officer
DSBP     Deferred Share Bonus Plan EAD                Exposure at Default
ECL        Expected Credit Loss EIR       Effective Interest Rate EPS                Earnings Per Share
EU          European Union
FCA        Financial Conduct Authority FRC                Financial Reporting Council
FSCS     Financial Services Compensation Scheme FSD               Forced Sale Discount
FTSE      Financial Times Stock Exchange HMRC        Her Majesty Revenue and Customs HPI      House Price Inflation
IAS          International Accounting Standards
ICAAP    Internal Capital Adequacy Assessment Process ICR Interest Coverage Ratio
IFRS       International Financial Reporting Standards ILAAP        Internal Liquidity Adequacy Assessment Process ILTR        Indexed Long-Term Repo
IPO         Initial Public Offering
IRB          Internal Ratings-Based approach to credit risk ISA              Individual Savings Account
KRPS     Kent Reliance Provident Society LCR Liquidity Coverage Ratio
LGD        Loss Given Default
LIBOR    London Inter Bank Offered Rate LTIP       Long-Term Incentive Plan
LTV         Loan to value
NIM         Net Interest Margin NPS Net Promoter Score OSB                OneSavings Bank plc PD Probability of Default
PPD        Propensity to go to Possession Given Default PRA     Prudential Regulation Authority
PSBs      Perpetual Subordinated Bonds PSP  Performance Share Plan
RMBS     Residential Mortgage Backed Securities RoE            Return on equity
RWA       Risk weighted assets
SAYE      Save As You Earn or Sharesave SDLT        Stamp Duty Land Tax
SICR       Significant Increase in Credit Risk SID            Senior Independent  Director SME                Small Medium  Enterprises SONIA     Sterling Overnight Index Average
SRMF     Strategic Risk Management Framework TFS          Term Funding Scheme

Company information

Registered office and head office

Reliance House Sun Pier Chatham
Kent ME4 4ET
United Kingdom

Registered in England no: 07312896 www.osb.co.uk

Registrars Equiniti Limited Aspect House Spencer Road Lancing
West Sussex BN99 8LU
United Kingdom

Telephone: 0371 384 2030
International: +44 121 415 7047

Investor relations

Email: osbrelations@osb.co.uk Telephone: 01634 838973

Private shareholders are welcome to contact the Company Secretary if they have any questions or concerns they wish to be raised with the Board.

 

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