2018 Annual report and accounts

Marsden Building Society Annual report and accounts 2018 01

Contents

Key Financial Highlights 2 Chairman’s Statement 3 Chief Executive’s Review 4 Strategic Report 8 Your Board 15 Directors’ Report 17 Corporate Governance 19 Audit Committee Report 23 Directors’ Remuneration Report 25 Independent Auditor’s Report to the members of Marsden Building Society 27 Income statement 33 Statement of comprehensive income 33 Statement of financial position 35 Statement of cahnges in members interests 36 Cash flow statement 37 Notes to the accounts 38 Annual Business Statement 67

Principal Office 6-20 Russell Street Nelson Lancashire BB9 7NJ t 01282 440500 www.themarsden.co.uk [email protected] Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, registration number 206050. A member of the Building Societies Association and the Financial Services Compensation Scheme. Marsden Building Society 02 Annual report and accounts 2018

Key Financial Highlights

Key Performance Highlights

• Share balances up £47.3m to £433.0m up 12.3% with 1,818 new members joining the Society • Residential Mortgage Balances up £37.0m to £417.8m, up 9.7% • Gross Residential Mortgage Advances of £122.8m with 1,232 new members joining the Society • Total Assets up £41.4m to £514.2m, up 8.8% • Net Interest Margin increased by 11bps to 1.68% • Administrative Expenses net of Other Income down 1bp to 1.24% • Operating profit before impairment losses and provisions up 46.4% at £2.205m • Profit after Tax up 52.2% at £1.761m • Strong Core Tier 1 Solvency Ratio of 22.83%, down 0.8% as a result of growth in mortgage assets • Society Leverage Ratio of 7.46%, down 0.28% as a result of balance sheet growth

5 Year Financial Highlights

Year ended 31 December 2018 2017 2016 2015 2014 Net Interest Income (£000) 8,280 6,977 6,000 5,555 5,558 Net Interest Margin (%) 1.68 1.57% 1.46% 1.41% 1.50% Admin Expenses Net of Other Income (£000) 6,111 5,576 4,866 4,570 3,857 Admin Expenses Net of Other Income (%) 1.24% 1.25% 1.19% 1.16% 1.04% Operating Profit before impairment losses and 2,205 1,506 1,246 1,121 1,775 provisions Impairment Losses on Loans and Advances 79 (83) 16 6 (141) Provisions for Liabilities – FSCS (£000)^ (19) (12) (87) (210) (216) Profit on Sale of Properties (£000) - 10 122 205 91 Profit before Tax 2,208 1,440 1,279 1,122 1,420 Profit after Tax 1,761 1,157 1,029 915 1,175

As at 31 December Share Balances (£000) 433,008 385,658 344,610 332,452 309,889 Loans to Customers (£000) 417,831 380,822 342,414 301,928 290,218 Total Assets 514,226 472,836 416,004 403,517 384,139 Liquidity 92,226 85,916 67,169 93,867 85,767 Wholesale Funding 34,469 41,765 26,453 24,207 25,153 Loan to Deposit Ratio (including Reserves) 113.87% 111.52% 111.81% 122.87% 120.53% Core Tier 1 Solvency 22.83% 23.61% 25.26% 26.56% 26.14% Marsden Building Society Annual report and accounts 2018 03

Chairman’s Statement

I have joined the Marsden in Changes to your Board a year of continued growth During the year we saw a number of changes to the Marsden Board. I would and we look forward to like to thank those directors who have left building our ambition for our the Board during the year. Roger Barlow members into 2019. It’s a had a long and successful tenure with the Society of almost 17 years, with over new chapter for the Society 10 years as Chair and to Tim Brooke who and we owe a lot to the past had served the Society most ably for 4 years. I want to thank Roger and Tim support from all connected for their significant contributions during with the Marsden in building their time with the Society. We welcomed the business we are today Mark Gray and Chris McDonald as new non-executive directors and I would invite and look to the future with you to find out more about them in the excitement. Director’s overview. I am pleased to introduce my first The world we operate in welcome as Chairman of the Marsden, As a business, we’re required to have having joined the Society in March 2018. an awareness of how the world around This year, I’ve seen the successful delivery us has the potential to both create new of the Marsden’s ambition for the year opportunities and bring disruption to as we maintained a continued focus on our plans. The economic environment is building financial strength and supporting changing and so is the political landscape our members. My first impression of the in which we operate. Our Strategic Society was its strong sense of purpose Planning sees the Society continuing to and values. Across my many discussions grow in the coming years and we have and meetings with board colleagues, the invested more time in looking at how management team led by Rob Pheasey the external factors may impact on our and the wider Marsden team staff, was members and in our forward plans. Rob a real desire to make a difference for provides more detail on the successes in you, our members. Your Society has real year and shares our plans for the future ambition, supporting the changing needs within his review. of members with a willingness to embrace change and diversify where necessary. What next? Mutual heritage As the pace of change quickens in our everyday lives and the economic As a mutual, we are extremely proud of outlook remains uncertain, I believe that our heritage and our core purpose to the Marsden is well equipped to deliver support people owning their homes and against the ambition that we’ve set building their savings for the future. Our forward. Our financial strength, our ability teams, custodians of the Marsden for to be agile and our customer focus allows this generation, work hard to deliver for us to continue to grow and evolve, as we members and to continue to build on our step forward into this next period of our financial strength maintaining a strong, history. I’m confident it will be both exciting sustainable business that is fit for the and rewarding for our staff, our Society future. and most importantly, our members. In thanking all members for their support, I do hope you will continue to be part of the future of your Society.

J L Walker Chairman 4 March 2019 Marsden Building Society 04 Annual report and accounts 2018

Chief Executive’s Review

The Marsden, as it has for 159 years, operates for the benefit of members now and remains resilient for future generations. eW build on the simple purpose within society to support people in owning their homes and saving for their future and as the world around us changes we evolve to make sure that we stay true to our roots. A year in view Last year, I shared with you our focus for the year and I’m pleased to be sharing some fantastic progress across all of these as well as our plans for your Society forward:

Our success Our future this year plans

• Our focus in year has • We aim to simplify our surrounded our face-to-face operations, removing any servicing in branch, seeking to friction in doing business provide further improvements with the Society whether in our approach to savings for members, staff or our & home insurance than is intermediary partners. Customer Experience traditionally found on the • Improved connections Our approach is simple…. “to do the high-street; being open, between our face-to-face basics brilliantly”, delivering our highly approachable, professional and the digital experience for personal and quality service every time and engaging. members. we engage with our members and our • We’ve also introduced the • New online services to be partners. ability to take savings receipts introduced across savings by debit card in branches accounts and mortgage which has so far had great product transfers. feedback from staff and our members.

• Launched our new people • Plan to widen People Strategy framework which included to better define the capacity our review of reward and and skills that our people will recognition. need for our future and in their • Delivered new colleague development. intranet to improve the way we • We continue to welcome more People communicate internally. new people to the Society and “Our people define our brand”… It’s build on the talents and skills our employees that make the Marsden that our teams bring. what it is today, whether in branch, over the phone or supporting the business in service areas. We have invested to make the Marsden a great place to work.

• Substantially completed our • Finalise the remainder of our IT transition plans moving to IT transition. a more resilient outsourced • 2019 will see the digital servicing model. capability extended and • Upgraded our core savings delivered to members and loan administration and across savings and borrower Technology origination platforms. retention. In a world of increased technology • Completed the initial transition • Our mortgage intermediaries adoption and public concerns to our new Online Savings will benefit from the new surrounding cyber security, your Society platform for existing eSavings Online platform supporting continues to invest to keep pace customers. loan application. with these developments. We want • Wordplay teller technologies • Improved support for remote customers to have increased levels of for receipt in branch. working will improve working access to the Society digitally, using practices for our colleagues. technology to ensure we remain efficient and operationally resilient. Marsden Building Society Annual report and accounts 2018 05

“A strong and balanced performance in year, maintained growth across our savings and mortgage business and our customers continue to tell us that we deliver a highly personal customer service. As Chief Executive, these are all pillars of success for the Marsden and I’m proud to be leading the Society into 2019 with a Society that’s stronger than ever before.”

Our success Our future this year plans

• We launched our new lending • Further support for First Time operation in Guernsey. Buyers with the introduction • We increased our support of a Joint Borrower Sole for First Time Buyers with our proprietor product. Family Step product offering • Continue to widen our Lending 100% mortgages with support Solutions, available through Products from family through property intermediaries, to support Rewarding our members through better or savings. second homes and rural value products by offering better rates • Launched Retirement Interest lending. for savers and borrowers. We continue to Only (RIO) products widening • Reviewing our home insurance innovate new products and services and our later life lending options provider proposition. build partnerships across the financial further. services sector to provide the type of • Continue to increase savings solutions demanded by members. choices with the introduction of 18m and 5 year fixed rates bond and ISAs.

• Successfully implemented • Sees the launch of our retail our plans to improve our engagement programme in data quality and insights staying better connected with culminating in the embedding our members. of industry standards as firm • Increased digital access for foundations for the future. customers including Savings Reach • Delivered a number of Online and Online mortgage Improved engagement with members customer engagement product transfers. and a planned widening of our brand programme pilots to support awareness as we seek to strengthen more direct enquiries to the our positioning across our North West Society. retail branches and grow our national • Built on our social media awareness around our lending solutions. audience in year.

• We have maintained our • Technology foundations will investment to support be an important aspect, but improving our customer more importantly will be our experience, with a big part ability to embrace changes of the year surrounding and to change the way in foundation setting and which we deliver our services Investment resilience for what comes and support. Strategic investment in the Society next. remains significant supporting our investment in services, products, people and operational resilience for the long term interests of our members. Marsden Building Society 06 Annual report and accounts 2018

Chief Executive’s Review (continued)

Our members Our year in numbers experience that will help the business develop, but will also introduce some We continued to grow our saving Overall the Society remains in an new approaches to the ways in which business in year with a net retail growth excellent financial position, with strong we work and engage with colleagues. on £46.9m, taking total retail savings with capital ratios and high quality liquidity. The happiness and wellbeing of staff is the Society to £438.6m. We’re pleased We have also sought to diversify our central to the values of the Society and is to have welcomed 1,818 new saving lending into lower risk markets whilst reflected in the fantastic services that our members who are the main source of maintaining our focus on risk adjusted teams deliver to our members. new funding into the Society, with net returns. As a result, we have widened our growth achieved entirely through our net interest margin, particularly pleasing Secondly, this year, we’ve delivered a retail branch estate. with the headwinds in year brought by number of significant IT infrastructure increased competition in the lending projects that will support our future Our commitment to the branch estate market. plans and strengthen our operational and to the communities in which we resilience and cyber security. This operate remains and whilst we have no Our financial performance this year will ensure that we are best placed to immediate plans in the coming year to sees the Marsden celebrating a new continue to meet the evolving needs widen our branch estate, the opportunity milestone as we increased the size of of our members and support closer to improve and extend our engagement our business to over half a billion for the integration across our branch and digital through improved digital capability first time in our history (assets increasing channels through which members have and communications to reach more by 8.75% to £514.2m). In addition to access to their Society. In 2018 new rules households in our branch catchments this, our total mortgage business has were introduced under GDPR (General features in our plans. grown by 9.06% to £419.1m and our total Data Protection Rules) describing savings business by 11.97% to £438.6m. how organisations hold and use the Our mortgage business performed well We delivered improved profitability, personal data of customers. The new in year and we increased our gross our profits after tax being £1.761m, an standards offer important protection lending to £122.8m (2017: £116.6m). increase of 52.2% on the previous year, and transparency for our members, We continue to grow our support for further strengthening our capital position particularly at a time when the digital later life lending and have maintained and underpinning our future investment capability to be offered to members our positioning to expats working plans in members best interests. abroad investing in UK property. We increases as part of our future strategy. have maintained our support for first Our future built on resilience, Prioritising investment and exercising time buyers, both through conventional efficiency and great people appropriate oversight over costs is low deposit mortgage schemes and fundamental to plans for the business. complementing this with new lending The strength of the Society is delivered In year we increased our teams and initiatives such as Family Step which by our team and the constant drive to systems capabilities which increased offers 100% mortgages when supported develop and grow the Marsden. There’s administrative expenses net of other by family through savings or property, a passion in the Marsden to continually income but as a proportion of mean to encourage more people taking a improve our internal processes, the assets the ratio has reduced by 1bp step onto the property ladder. We also service we give to our members and to to 1.24%. Decisions to defer systems delivered on our plans to extend into strengthen the Society as we grow in deployment and new people joining our to new areas with our first mortgages size and capability. team into Q4 2018 and into Q1 2019 has completed in year through our Guernsey During 2018, much of what we have resulted in higher profitability in year. operations. done strengthens and evolves the With increased lending volumes comes services we already provide, striving Our digital plans the requirement to support more of our to be even better at what we’re good The advancements in technology aligned loyal borrowing members approaching at delivers a better experience for to the changing needs of our members the end of their product terms. In year, colleagues and for customers. I would paints an exciting picture of the future. our borrower contact programme highlight two particular areas that Whether through increased access to the reached 1046 households, with 2 in 3 represent foundations for the future. Marsden digitally or improving the way in opting to continue with their Marsden Firstly, our people strategy recognises which we communicate with you, we’re mortgage. the importance of every member of the aiming to give you more options in how you choose to stay connected with a August brought with it an increase in Marsden team who each play their part business that is owned by you. the Bank Base Rate and to balance the in building a better future for the Society. interests of all members, the Society It starts with the basics around improving Over the year, look out for; adjusted rates for borrowers and for our working environments as well as many of our savers. We continually recognising and celebrating the success • Our new Marsden Online; savers will review the products on offer to both our of our people. As we continue to grow, be able to register for the Marsden mortgage and savings customers to we will look to nurture and retain our Online service to view their existing make sure the value of membership is talent as well as attracting new skills and savings accounts and with the passed back wherever possible. opportunity to open new eSavings products too. Marsden Building Society Annual report and accounts 2018 07

• Online Mortgage Product Switching; increased on our trading operations. on year. Another busy year ahead, I look borrowers approaching the end of This will be largely down to the need to forward to sharing an update with you in their current product term will be ensure value for existing members and the future! able to register for our Marsden to compete for new members within our Online Product Switching Service, to chosen markets. The Society’s strong view their current mortgage and to financial position, our balance sheet select their new mortgage product, structure and strong mortgage pipeline making the process as simple and as places the Society in a strong position as R M Pheasey easy as possible. we enter 2019. Chief Executive 4 March 2019 • Member newsletters; If you’re signed Our future up to our member marketing you can The world around us has changed since keep up to date with our member we were founded in 1860 and we have newsletter which will launch this year. responded and evolved into the modern If not, sign up via our website or mutual we are today. And whilst our core speak to a member of our team. mutual purpose has not changed, the Our people requirement to continue to evolve and adapt remains and will quicken in the We’re a growing business and with years ahead. that, a growing team. When we’ve set our ambition forward around what we Ensuring we continue to serve our need to deliver across our infrastructure, members delivering the products and estates and technology, we’re not services they need, across channels forgetting a continued focus on investing that support the way in which they in our people which is paramount. All want to connect with their Society are of our future ambition will be measured as important today as they will most ultimately in the service we offer to our certainly be in the future. members, a service that is delivered through our people. We remain focused Our response is to maintain our on creating an environment where investment in our technology and our working as a team is celebrated, one in people – building a capability to engage which colleagues continue to feel part of delivered by our people with the skills something special. they will need to support both our members and the Society into the future. Our members and the economy We continue to attach importance to the customer journey, improving the services We see no immediate change to we offer and in so doing, making it the economic uncertainty and risks easier for members, colleagues and associated with Brexit. At a macro- intermediaries to do business with the economic level, this may bring changes Society. in interest rates, movements in house prices, GDP and perhaps employment As I reflect on 2018, I am immensely levels. What is more evident is the proud of what the Marsden team has impact of uncertainty on both customer achieved. Together, we’ve delivered confidence and behaviour. a strong year of performance, both financially and with the organisational In setting our business plans forward, capability we have enhanced to support we’ve invested more time in assessing our future services. 2019 will be an the disruption that this may bring to our equally busy period for the Marsden, plans for 2019. We enter this period once with our continued success dependent again positioned for growth in our core upon the commitment and enthusiasm mortgage and savings business, but with we bring as a team. an expectation that overall profitability will be maintained, not necessarily Excited by the challenge this represents and ever mindful of the external environment and the challenges that this will bring, we have an assured confidence that is drawn from the successes we continue to deliver year Marsden Building Society 08 Annual report and accounts 2018

Strategic Report

Our business strategy avoids the requirement of our non-mutual competitors to maximise profit to meet supports the requirement shareholder expectations. Our strategic to manage the very special objectives are supported by a clear focus relationship with our on the following: members, balancing the • Customer Proposition – Our strategy will continue to match the products needs of our savers and and services available from the borrowers, retaining our Society to the changing needs of our members. The success we focus on capital strength have seen in delivering a strong and continuing to invest in financial performance is matched by the decisions we have taken in infrastructure, products and supporting the interests of members. services that members both We have continued to invest in the retail franchise, focused on lending today and in the future will markets suited to our lending strategy require from their Society. and continued our developments to increase the level of engagement and improve the way we do things. Our strategic objective is to grow our savings and mortgage business to deliver • People – Our strategy is to run the long term sustainable value to members. Society with people who live by the This will be achieved by: values of the Society in the interests of our members. We aim to ensure that • Funding – Maintaining a primary focus staff are fully engaged in the business on retail savings from individuals through continuing and effective through our branch distribution, communication and management to continuing to provide a range of maximise business performance. We savings accounts to those who value have invested in improving our focus the face-to-face, highly personal in this respect during the year through delivery that is ‘Marsden in branch’. work on our employee values and will continue to do so. • Lending – Maintaining an exclusive focus on residential and buy to let • Financial Strength – Our strategy lending across the British Isles, is to utilise our capital strength to continuing to base our decision to grow the business and deliver long lend on an individual assessment term sustainable value for members. of loan requirements and personal Our pricing policies are intended to circumstances. balance the needs of both saving and borrowing members to achieve an The Board considers the mutual model optimum level of profitability reflecting to be the best means to deliver long the risk adjusted cost of both funding term value for members. It allows the and lending and the desired level of Society to take long term decisions which profit to maintain capital strength. We create value for members and avoid a aim to manage our costs and make focus on short term performance. The investment decisions with a view mutual model has limitations in the ability to building a long term platform for to raise external capital, particularly sustainable growth. for smaller entities, but does permit a focus on generation of sufficient profit to maintain financial strength to support member confidence and development of the business. This ownership structure Marsden Building Society Annual report and accounts 2018 09

Key Performance Indicators and increase in share funding. This is • Geographic Analysis – The Society consistent with the strategic objective of has a nationally diversified portfolio of The Chief Executive’s Review on pages 4 attracting funding from individuals. loans secured on residential property to 7 provides an overview of the Society’s with the largest concentrations of performance during 2018 which should Lending 25.2% in the South East (2017: 23.2%) be read in conjunction with this report. As a mutual the Society is required to and 17.9% in the North West (2017: This section focuses on the key business 17.6%). performance indicators which the Board advance a significant majority of lending reviews on a regular basis. secured on residential property. The net • Loan to Value Analysis – The average change in loans to customers reflects the indexed loan to value is 35.9% (2017: Funding change in the size of the loan book as a 38.7%), the ratio having benefited result of new lending net of repayments As a mutual, the Society is required to from both increases in house prices and redemptions plus interest capitalised. fund the majority of its lending through and changes in the lending mix during the year. retail deposits from members. The net During the year the Society continued change in share balances reflects the net to grow the residential loan book. New • Mortgage Arrears – At 31 December movement in and out of share balances advances remained strong with gross 2018 only 0.06% of the portfolio was held by individuals with the Society. lending slightly above the level in 2017 past due by 3 months or more or at £122.8m, up 5.2% (2017: £116.6m, impaired (2017: 0.11%). Share Balances down £3.9m or 3.2%). This in conjunction • Forbearance – Levels of forbearance (£m) with strong performance on retention of are modest and relate primarily to 433.0 customers reaching the end of their initial 385.7 short term interest only concessions. 332.5 344.6 product period contributed to loan book Balances recorded as benefiting from 309.9 growth of £37.0m to £417.8m, up 9.7% forbearance amounted to £0.215m (2017: £38.4m to £380.8m, up 11.2%). across 2 accounts (2017: £0.030m The Society funds its lending through retail across 1 account) deposits from individuals and aims to continue to grow lending at a pace at least The Society retains a modest exposure equivalent to the total of retail savings and to commercial lending, this aspect of the loan book being managed down. At 31 2014 2015 2016 2017 2018 reserves. December 2018 these loans amounted to Loans to Customers £1.315m (2017: £3.523m), a number of The Society continues to focus on (£m) accounts having redeemed in full in the generation of growth in retail funding 417.8 380.8 year. These exposures are predominantly through the branch network across 342.4 on commercial premises purchased by Lancashire. The Society has positioned 290.2 301.9 borrowers as an investment and to a its mortgage asset strategy to support lesser extent premises occupied by the payment of competitive savings rates business owning the property. In terms of relative to high street competitors and geographical location these exposures continues to work hard to provide a high are located in North West England. Whilst quality customer experience in terms of 58.0% of these loans are past due by both service and branch environment. 2014 2015 2016 2017 2018 3 months or above or impaired (2017: This strategy has continued to deliver 68.1%) the exposures are managed net growth in share balances of £47.3m Society lending is focused primarily on closely and are gradually improving to £433.0m, up 12.3% (2017: £41.1m to as they are managed to resolution, the £385.7m, up 11.9%). loans to owner occupiers up to 100% LTV and buy to let lending up to 75% LTV. The balances having decreased by £1.721m The Society also maintains other deposit Society continually evaluates the relative to £1.077m (2017: £2.798m), a significant funding, predominantly from small and risk reward relationship of different types commercial exposure having been repaid medium sized companies of £5.6m (2017: of residential lending and adjusts its in full in the year. Again further analysis is £6.1m). To provide further diversification lending mix accordingly having regard to provided in Note 26 Financial Instruments the Society maintains a degree of funding the overall risk appetite of the Board. on pages 56 to 66. from the wholesale markets through a combination of central bank funding Key points to note in respect of loans schemes and term deposits from local secured on residential property are authorities and other building societies of summarised below, further information £36.5m (2017: £41.8m). The decrease in being contained within Note 26 Financial the year is in the main attributable to the Instruments on pages 56 to 66: repayment of £9.0m drawn under the Bank • Lending Analysis – Loans to owner of England Funding for Lending Scheme occupiers represents 75.7% (2017: in January 2018. The proportion of 75.4%) of mortgages secured on funding not in the form of shares of 8.5% residential property with the remaining (2017: 11.1%) of shares and borrowings 24.3% (2017: 24.6%) being secured has reduced reflecting the reduction on residential buy to let property. in both wholesale and deposit funding Marsden Building Society 10 Annual report and accounts 2018

Strategic Report (continued)

Assets Both free and gross capital ratios, whilst 1 Capital (including the minimum CET1 reducing in the year, maintain a very plus £2.856m Tier 1) and a maximum of Growth in Society assets is a key factor strong position. Ratios will continue to £3.808m in Tier 2 Capital (2017: 10.539m in improving efficiency arising from reduce over the next couple of years due Tier 1 and £3.513m Tier 2). Regulatory economies of scale to provide increased to forecast increase in total assets exceed- Capital held by the Society at the balance value for members, subject to an ing the rate of growth in capital following sheet date was £39.045m of which appropriate risk reward relationship to which, asset and capital growth rates are £38.554m was CET1 and £0.491m Tier ensure the value of members capital is not anticipated to converge and the solvency 2, well in excess of Individual Capital placed at undue risk. ratio should stabilise. Guidance (2017: £37.265m of which During the year the Society continued to £36.751m CET1 and £0.514m Tier 2). achieve asset growth in excess of inflation Core Tier 1 Solvency Ratio with an increase of £41.4m to £514.2m, Individual Capital Guidance 26.14% 26.56% up 8.8% (2017: £56.8m to £472.8m, up 25.26% 23.61% 22.83% 16.000 13.7%). 14.000 Total Assets 12.000 (£m) 514.2 10.000 472.8 8.000 403.5 416.0 384.1 6.000 4.000 2.000 2014 2015 2016 2017 2018 Requirement In addition to the size of capital resources Pillar 2A 1.721 relative to assets it is important to Pillar 1 13.513 measure asset size relative to the risk 2014 2015 2016 2017 2018 of assets on the balance sheet. The The medium term objective remains to Core Tier 1 Solvency ratio measures continue to grow the balance sheet to the ratio of Society Reserves against Individual Capital Guidance vs maintain and improve economies of scale Risk Weighted Assets calculated under Regulatory Capital given the pressure on both costs and the Capital Requirements Directive IV. In 40.000 net interest margin. the case of the Society this is under the standardised approach to credit risk which 35.000 Capital uses standard risk weights and places no 30.000 25.000 A strong capital position provides a reliance on internally developed capital 20.000 financial cushion against any difficulties models. 15.000 which might arise in the business of The ratio has reduced in the year by 0.78% 10.000 the Society and provides protection for to 22.83% (2017: 1.65% to 23.61%) on a 5.000 members and depositors. Society capital like for like comparative basis as a result is made up almost entirely of retained of an increase in the capital requirement Requirement Actual profits accumulated over its 158 year relative to capital resources in comparison Tier 2 0.491 3.808 history. to 2017, primarily as a result of the growth Tier 1 - 2.857 Free Capital Ratio in residential mortgage assets. CET1 38.554 8.569 The Society must also maintain at all times 9.35% 9.02% 9.10% minimum capital requirements under Pillar CRDIV also introduced the Leverage Ratio, 8.26% 7.95% 1 of the Capital Requirements Directive defined as the ratio of Tier 1 capital to the plus requirements under Pillar 2A as total exposure defined as total on and off specified by the Prudential Regulation balance sheet exposures less deductions Authority (PRA). At the balance sheet from Tier 1 Capital. The ratio decreased date Society Individual Capital Guidance by 0.28% to 7.46% (2017: -0.77% to was £15.234m, with total requirements 7.74%). The strong level of Core Tier 1 constituted of £13.513m relating to Pillar capital relative to the total exposures of 2014 2015 2016 2017 2018 1 and £1.721m relating to Pillar 2A (2017: the Society will ensure the Society retains £14.051m, of which £12.453m Pillar one of the strongest Leverage Ratios in Free capital represents gross capital and 1 and £1.599m Pillar 2A). In terms of the Sector for a standardised approach collective mortgage loss provisions less quality of capital Article 92 of the Capital lender. tangible and intangible assets as shown in Requirements Regulations require a Core the balance sheet. Society free capital is The Society already holds more than Tier 1 requirement of 4.5% (56%), a Total sufficient capital to meet the new capital £37.6m or 7.95% of total share and depos- Tier 1 requirement of 6% (75%) and a Total it liabilities (2017: £35.8m or 8.25%). Gross requirements directive (CRDIV) when Capital Ratio of 8% (100%). The Society fully phased in. This provides a solid capital comprises reserves, as shown in is required to hold a minimum of £8.569m the balance sheet. Gross capital is £38.7m platform from which to pursue a measured in Core Equity Tier 1 Capital (2017: and sustainable increase in assets or 8.17% of share and deposit liabilities £7.904m), a minimum of £11.425m in Tier (2017: £36.9m or 8.51%). whilst maintaining the protection of a Marsden Building Society Annual report and accounts 2018 11

strong capital position for members and that margins on mortgage lending will expenses net of other income reduced by depositors. remain under pressure which is likely to 1bp to 1.24% (2017: +6bps to 1.25%). continue to moderate funding costs. As Whilst the absolute value of expenses net The Pillar 3 Disclosure as at 31 December in previous years this emphasises the of other income has increased, again due 2018, as required under the CRD IV, which continuing need for assessment of the risk to increased investment in both people contains key pieces of information on reward relationship of all lending. and IT, the pace of balance sheet growth the Society’s Capital, Risk Exposures, has marginally exceeded this. Risk Assessment Process and Individual The cost of holding excess liquidity Capital Guidance, is available on the represents a drag on the Net Interest Looking forward, upward pressure on website at www.themarsden.co.uk. Margin as a result of the cost of investing absolute cost continues from a number funds raised from retail savings in liquid of sources, the principal source being Net Interest Margin assets with a yield at or around bank rate the finalisation of the IT transition project which involves the outsource of the The Net Interest Margin represents the pending them being lent on mortgage at core systems, network and supporting average rate received on assets less the a higher yield. In the first half of the year environment. Investment in people will also average rate paid on liabilities during the Society operated above the target level continue as the Society attracts, retains the year. The principal drivers of the of liquidity, primarily as a result of lower and rewards staff required to support margin are the net interest received from than anticipated net mortgage lending. In delivery of objectives moving forward. borrowers and liquid assets less interest the second half of 2018 the Society made The Society aims to mitigate continued paid to investing members and wholesale considerable progress in managing down growth in costs through a combination counterparties. the level of liquidity as a result of strong net lending. of continued balance sheet growth and Net Interest Margin maintenance and strengthening of the Net The Society maintains a stable retail Interest Margin. 1.68% 1.57% funding base with 31.7% of share and 1.50% 1.41% 1.46% deposit liabilities not accessible within Profit less than three months (2017: 34.3%). As a mutual the maximisation of profit is During the year the Board intends to not a key aim, however maintenance of balance operation to the targeted level an appropriate level of profit on ordinary of liquidity, thereby improving the Net activities is important to maintain financial Interest Margin for the benefit of members strength and provide cover against within a prudent framework of liquidity risk negative impacts on capital. management, and its long term objective 2014 2015 2016 2017 2018 The relationship of the Net Interest Margin of achievement of building sustainable to the Ratio of Management Expenses growth in retail funding. During the year the Net Interest net of Other Income is the primary driver Margin strengthened as a result of the The Board will continue to manage the of profitability. During the year the Society improvement in overall mortgage yield Net Interest Margin to deliver the level of widened the Net Interest Margin, in relative to funding costs, operating closer profitability judged appropriate to support the main due to a change in the mix of to targeted liquidity for the majority of 2018 a sustainable level of growth in both mortgage assets and to a lesser extent and maturity of the final interest rate swaps assets and capital in the long term the adjustment to margins in Q4 2018 taken prior to the financial crisis. following the change in Bank Rate, in Management Expenses order to improve profitability to cover In respect of mortgage margins, the increasing costs and progress to a point increase in Bank Rate on 2 August 2018 The ratio of management expenses net that the rate of growth in capital matches was passed on in full to borrowers with of other income represents the cost of growth in assets. The anticipated increase variable rate loans administered by the operating the Society net of fees and in administrative expenses as result of IT Society from 1 October 2018. This resulted commission payable and other non- was less pronounced as a result of a delay in varying degrees of increase in rates on interest income when measured against in the implementation. The widening of the retail savings notified at the same time for mean total assets. This represents margin and relative containment of growth the vast majority of savers with variable a measure of the Society’s net cost in expenses resulted in a 46.4% increase rate accounts. efficiency. in operating profit before impairment Margins on mortgage lending continued Management Expenses Ratio Net losses and provisions to £2.21m (2017: to narrow in the year, particularly in of Other Income 20.9% to £1.50m). 1.25% 1.24% volume oriented markets, as the supply of 1.16% 1.19% mortgage funding continued to increase. 1.04% Despite this the Society managed to increase mortgage margins overall through adjustments to the lending mix, this feeding through to an increased Net Interest Margin with mortgage yield increasing faster than funding costs. Looking forward to 2019 it is anticipated 2014 2015 2016 2017 2018 During the year the ratio of management Marsden Building Society 12 Annual report and accounts 2018

Strategic Report (continued)

Net Interest Margin vs Principal Risks and business model has proved resilient Management Expenses Ratio net Uncertainties since the reduction in Bank Rate to 0.5% in 2009, the recent reduction of Other Income The principal risks facing the Society are in August 2017 and subsequent summarised below: increases in November 2017 and 1.68%

1.57% • The Society is not immune from the August 2018. At the time of writing the 1.50% 1.46% 1.41% impact of changes in the economic outlook for interest rates is for them to 1.24% 1.25% 1.19% 1.16% environment within which it operates. begin to move upward dependent on 1.04% The United Kingdom’s vote to leave the outlook for the economy. the European Union introduced a • The residential loan book is currently significant degree of uncertainty performing well in the benign interest around the outlook for the UK rate environment with the majority of economy. As the principal focus of borrowers currently on variable rate 2014 2015 2016 2017 2018 the Society is domestic within the products. Guidance provided by the British Isles it remains exposed to Net Interest Management Expenses Monetary Policy Committee indicates the broader economic uncertainties when Bank Rate does begin to rise it Society profit before tax was £2.21m posed by Brexit on its funding and is expected to do so more gradually (2017: £1.44m). Profit after tax as a lending activities. This uncertainty will and to a lower level than in recent percentage of mean assets relates the continue, both in the period leading cycles. Whilst the Society maintains level of profitability to the average of up to, and after, the point at which the prudent control over affordability total assets on the balance sheet at the UK leaves the EU and could manifest there is a risk that at the point interest beginning and end of the year. During the itself in a number of ways from rates rise customers will experience year the ratio widened by 10bps to 0.36% variations in GDP, sterling exchange additional financial pressure. (2017: +1bps to 0.26%). rates, interest rates, unemployment and house prices. Through the Profit before tax • As competition in the mortgage process of business, capital and market increases there is a risk that (£m) liquidity planning, including stress 2.21 yields will be further compressed testing of adverse economic resulting in deterioration in the risk scenarios, the directors have reward relationship in established 1.42 1.44 concluded that the Society has more lending markets. As some markets 1.28 1.12 than sufficient capital and liquidity become less attractive this may resources. This includes consideration prompt the Society to increase or of the Bank of England assessment decrease its appetite for particular of a variety of outcomes of Brexit on types of lending in existing markets the UK Economy published in late and extend into new forms of lending 2014 2015 2016 2017 2018 November 2018. In the disorderly secured on residential property in Brexit scenarios modelled by the order to strike an appropriate balance Bank interest rates are forecast to between return and capital at risk. Profit to Mean Assets increase on average over years 1 to Whilst this process is a continuing 3 to 4%, peaking at 5.5%. Whilst the feature of the lending market the 0.36% increase in rates would be positive compression of yields at this level of 0.32% for the business model it would be interest rates and level of competition 0.25% 0.26% negative for loan impairment and makes the degree of disruption more 0.23% losses as summarised below. In terms broad based than usual. The recent of the impact of market volatility on changes to fiscal and prudential policy accounting estimates the directors in relation to the Buy to Let Market have concluded that disclosures in are reducing demand from private Note 1.15 to the accounts provide a individuals and prompting lenders sufficient indication of the impact of to focus on niche areas of the BTL 2014 2015 2016 2017 2018 variations in this respect. market and to divert greater supply into the owner occupier market further Moving forward during 2019 administrative • The Building Society Model performs compressing yields. The change in expenses will continue to increase in less well in a low interest rate lending mix will need to be managed absolute terms as the IT transition project environment. This is because the carefully to avoid a dip in lending is fully implemented and investment in return on unremunerated capital is and increased liquidity impacting people continues. In terms of profitability reduced as the average return on total on profitability in the short term to mean assets the Society will continue assets decreases. In addition as the and restricting the scope to deliver to progress to a point at which the rate of Net Interest Margin compresses, the profitable growth in the medium to growth in capital, through retained profit, larger the cost base of the institution long term. is equal to or greater than growth in assets the greater the pressure on trading to deliver sustainable growth in the long profitability. Despite this the Society term. Marsden Building Society Annual report and accounts 2018 13

• For a number of years the Society Society is exposed to the risk that In addition to the specific risks outlined has managed the requirement to a continuing requirement to invest above, the table below provides a both invest in the business in terms remains, increasing the cost base summary of the principal sources of risk, of people and IT and grow the and the rate of growth at the desired a Society risk overview and a summary of balance sheet profitably to support level of profitability is constrained due how the risks are controlled and mitigated. its medium term strategic objective to increased competition for funding to transition to a point where growth and mortgages. The Board remains in capital resources through retained focused on delivery of both growth profit and the rate of growth in and cost requirements to manage this the balance sheet converge. The risk.

Source of Risk Society Risk Overview Risk control and mitigation Mortgage Credit Risk The principal driver of credit risk in relation • All mortgage loans are manually to mortgage lending remains a slowdown underwritten according to a Board The risk that mortgagors will fail to meet in the UK economy leading to higher approved Lending Policy. their obligations as they fall due which unemployment and falling house prices results in a potential loss following • The performance of the loan portfolio which would result in increased arrears enforcement of the loan and realisation of is monitored closely with action taken and impairment losses. The ratio of house the mortgage security and related additional to manage the collection and recovery prices to earnings continues to deteriorate, security. process. particularly in London and the South East. Due to its lending criteria the Society is less • All portfolios are subject to periodic active in lending in London with lending stress testing to ensure they remain diversified across the rest of the British within the quantified risk appetite of the Isles. This risk is elevated at the moment Board. as a result of uncertainty as to the broad impact of Brexit on the economy as a whole.

Counterparty Credit Risk Since the financial crisis there has been a • Liquidity invested according to a Board shift away from unsecured lending towards approved policy and risk appetite. The risk that Market Counterparties will fail secured funding and retail funding. to meet their obligations as they fall due • A significant majority of liquidity is and subsequently default resulting in a loss. Prudential regulation requires that regulatory invested with the Bank of England and liquidity is held in high quality liquid assets UK Government Treasury Bills. reducing risk exposure. • Limited short term deposits with approved Bank and Building Society Due to a range of prudential regulatory counterparties domiciled and reforms the health of the UK Banking authorised in the UK. System has improved however the risk of counterparty default remains.

Interest Rate Risk The Society is exposed to this risk as a • The risk is either managed on balance retailer of financial instruments, in the sheet or through interest rate swaps in The adverse impact on the Society’s future form of mortgage and savings products a manner consistent with the Building cashflows arising from changes in interest and the investment of both liquid assets Societies Act 1986. rates including: and wholesale borrowing. The economic • Interest rate risk is managed within • Economic Value (NPV) – The risk to the environment remains exceptional by a Board Approved Financial Risk capital value of Society as a result of historical standards. The UK vote to leave Management Policy. changes in interest rates. the EU has introduced a considerable • The Board has set out clear quantified • Earnings Risk (NII) – The risk to degree of uncertainty over the economic statements of risk appetite for each profitability of the Society as a result of outlook. Accordingly the outlook for UK aspect of Interest Rate Risk. changes in interest rates. interest rates varies considerably, both • Exposure is stressed monthly to ensure • Basis Risk – The risk to profitability upward and downward, with the market it is managed in compliance with the arising from non-parallel movement in view of the timing of potential rate increases policy. net exposures to different interest rate varying considerably. bases. • Optionality – The risk to profit arising from provision of embedded optionality in products such as early prepayment or access with or without penalty. Marsden Building Society 14 Annual report and accounts 2018

Strategic Report (continued)

Source of Risk Society Risk Overview Risk control and mitigation Liquidity Risk The proportion of Society shares and • The Society manages this risk through borrowings which comes from shareholding continuous forecasting of cashflow The risk that the Society, though solvent, members/retail depositors is 93% (2017: requirements and assessment of retail either does not have sufficient financial 90%) representing over 105% (2017: 102%) and wholesale funding risk. resources available to enable it to meet of mortgage loans. its obligations when they fall due, or can • The required amount, quality and type secure them only at excessive cost. When taking reserves as a source of of liquid assets required to ensure funding in addition to funding from obligations can be met at all times is shareholding members and retail depositors maintained in accordance with the this ratio rises to 112% (2017: 114%). Liquidity and Funding Policy. The Society is holding a level of liquidity • Periodic stress testing is performed to in excess of the amount considered ensure obligations can be met in both appropriate both in anticipation of normal and stressed circumstances. continued lending growth in 2019 and the risk of a disruptive or disorderly Brexit on the funding market. Accordingly a measured reduction in liquid assets is anticipated in 2019 whilst maintaining the amount of liquidity considered appropriate which is held in a conservative mix of high quality and readily accessible assets relative to its perceived requirement.

Operational The principal operational risks facing • Risks and controls are reviewed the Society are change management, periodically with a report on the The risk of loss resulting from inadequate fraud, IT and cyber and operational significant operational risks to the Board or failed internal processes, people and resilience, management of third party Risk Committee (BRC). systems or from external events. The suppliers, provision of inappropriate scope of operational risks includes legal • In respect of regulatory risks, the advice to consumers, non-compliance with and regulatory, financial crime, business Society has an independent compliance regulation, key person risk and business continuity, information technology, people function which monitors compliance interruption. and resources, process and conduct, with existing legislation, controls implemented to ensure compliance and Execution of IT change is a key driver of In relation to IT the Society is in the process the impact of new requirements. Operational Resilience risk and can impact of finalising the outsource of key IT services on systems availability and the ability to to third party suppliers in the UK. During • Finalisation of the change project for deliver services to customers to the level the year the Society has successfully Outsource of key IT Infrastructure in desired. transitioned its e-savings platform to a new 2019 will improve operational resilience supplier and into 2019 plans to expand the and further strengthen defences against In relation to IT Cyber Risk incorporates range of digital services to both mortgage cyber risk, providing a strong platform a wide array of potential risks including and savings customers and mortgage for the expansion of digital services. network and perimeter threats and a breach intermediaries. of online controls leading to increased risk of fraud and data leakage.

Further information regarding how the Board ensures the Society operates within a framework of prudent controls which enables risk to be assessed and managed is provided within the corporate governance report. On behalf of the Board of Directors J L Walker Chairman 4 March 2019 Marsden Building Society Annual report and accounts 2018 15

Your Board

Our Board is made up of Executive and Non-Executive Directors. Executive Directors are all full-time employees of the Society and lead the Senior Management Team in managing the day-to-day business; and Non-Executive Directors are all considered to be independent in accordance with the criteria Rob Pheasey BSc (Hons), John Walker ACIB, set out in the UK Corporate Chief Executive Chairman Governance Code. All Having joined the Society in 1989, Rob John joined the Board as Non-Executive Directors are put up for became a member of the Society’s Senior Director in March 2018 and was appointed Management in 2000. Chairman on 1st June 2018. periodic election/re-election He was appointed to the Board in A qualified banker, John spent time with at the Society’s Annual December 2008 as Operations Director Barclays gaining both corporate and before becoming Chief Executive in March business experience before moving to General Meeting. 2011. Barclays Private Equity, latterly Equistone, Rob has overall responsibility for where he remained for some 21 years. managing the Society and implementing John brings diverse experience as a strategies agreed by the Board. Rob is a Non-Executive Director, having sat on member of the Board Assets & Liabilities numerous boards across a range of and Retail Conduct Committees. sectors, including insurance broking, Outside the Society Rob is Vice Chairman online retailing and recruitment. of Nelson & Colne College and Chairman Outside of the Society, John is a non- of Pendle Education Trust. executive director at WRS (Worldwide Recruitment Solutions), NRG Group Limited and Fruugo.com.

Neal Walker BA (Hons) ACIB, Finance Director & Chief Risk Officer Neal joined the Society in 1987, becoming a member of the Senior Management team in 2000 prior to being appointed to the Board in December 2008 as Finance Director & Secretary. As Finance Director, Neal has overall responsibility for financial and budgetary planning, treasury and liquidity, risk and risk management functions. Neal chairs the Board Assets & Liabilities Committee and is also a member of the Board Risk and Retail Conduct Committees. Marsden Building Society 16 Annual report and accounts 2018

Your Board (continued)

Alison Hope BSc (Hons) FCA, Mark Gray, Michele Ibbs BA (Hons) PGDip, Non-executive Director Non-executive Director Senior Independent Director Alison joined the Board as Non Executive Mark joined the Board as a Non Executive Michele joined the Board as Non Director in 2010. Director in June 2018. Executive Director in April 2014. A fellow of the Institute of Chartered Mark has extensive risk and governance Michele has a breadth of brand, Accountants, Alison was a partner with experience gained within the financial development and partnership experience KPMG LLP for 15 years, specialising in sector holding previous positions at with a very strong customer led focus corporate transactions. Shawbrook Bank, GMAC (General Motors across a number of sectors. Alison is a Trustee of Eureka! The National Acceptance Corporation) and The British Outside the Society, Michele is a non- Children’s Museum and Pro-Chancellor at Business Bank. executive Director of The Ombudsman the University of Sheffield. He is currently a member of the Executive Services Limited and a Trustee of The Alison chairs the Board Audit & team at Homes England responsible Liverpool Merchants’ Guild. Compliance Committee and is also for financial, market, operational and Michele is the Senior Independent a member of the Board Risk and regulatory risk. Director. She chairs the Nominations Nominations Committees. For the Society, Mark chairs the Board Committee and is a member of the Board Risk Committee and sits on the Board Audit & Compliance and Remuneration Audit & Compliance Committee. Committees.

Carol Ann Ritchie BA (Hons) ACA CTA, Chris McDonald BSc (Hons), Non-executive Director Non-executive Director Carol was appointed Non Executive Chris joined the Board as a Non Executive Director to the Board in April 2014. Director in June 2018 bringing recent and highly relevant financial services Carol has significant Board financial and experience gained during his previous risk experience gained during interim and role as Operations & HR Director at permanent positions, including roles at Cumberland Building Society. One Family, Engage Mutual, Royal Liver and HBOS Business Banking. Chris has a strong marketing focus and functional breadth including change Carol chairs the Remuneration Committee management and operations within the and is also a member of the Board Audit & financial services sector. Compliance and Board Risk Committees. For the Society, Chris is a member of the Board Risk and Board Remuneration Committees. Marsden Building Society Annual report and accounts 2018 17

Directors’ Report

The Directors have Mortgage Arrears Directors’ responsibilities in At 31 December 2018 there was one respect of the Annual Report, the pleasure in presenting (2017: two) mortgage account, including Annual Business Statement, the those in possession, which was twelve Directors’ Report and the Annual their Annual Report, or more months in arrears. There was together with the Annual a balance outstanding of £606,816 on Accounts this loan (2017: £635,709) and arrears The Directors are responsible for Accounts and Annual outstanding of £117,710 (2017: £89.962). preparing the Annual Report, Annual Business Statement, Directors’ Report and Business Statement of Charitable Donations the Annual Accounts in accordance with the Society for the year During the year the Society made a applicable law and regulations. donation of £411 (2017: £340) to North The Building Societies Act 1986 (“the West Air Ambulance in respect of votes ended 31 December Act”) requires the directors to prepare received at the Annual General Meeting. In society annual accounts for each financial addition the Society accrued for donations 2018. year. Under that law they have elected of £23,216 (2017: £24,068) which will be to prepare society annual accounts paid over during 2019 to the following in accordance with UK Accounting Business Objectives Charities in connection with Affinity Standards and applicable law (UK account relationships: Information on the business objectives Generally Accepted Accounting Practice), of the Society are detailed within the • North West Air Ambulance including FRS 102 The Financial Reporting Strategic Report on pages 8 to 14. Standard applicable in the UK and • Burnley and Pendle Hospice Business Review Republic of Ireland. • Sight Advice South Lakes The Chairman’s Statement on page 3, the The Society annual accounts are required Chief Executive’s Review on pages 4 to 7 No contributions were made for political by law to give a true and fair view of the and the Strategic Report on pages 8 to 14 purposes. state of affairs of the Society as at the end report on the performance of the Society, of the financial year and of the income and referring to key performance indicators, Supplier Payment Policy expenditure of the society for the financial year. and its future objectives. It is the Society’s policy to: In preparing the Society annual accounts, Principal Risks and Uncertainties • Agree payment terms at the the directors are required to: The Strategic Report on pages 8 to 14 commencement of trading with all provides information on the Principal Risks suppliers; • select suitable accounting policies and then apply them consistently; and Uncertainties facing the Society. • Ensure there is a system for dealing with queries and advising suppliers of • make judgements and estimates that Financial Risk Management contested invoices; and are reasonable and prudent; Policies and Objectives • state whether applicable UK • Settle invoices in accordance with The Society’s objective is to minimise Accounting Standards have been payment terms unless there is prior the impact of financial risk upon its followed, subject to any material agreement to extend these terms. performance. The financial risks facing the departures disclosed and explained in Society are summarised together with an The creditor days outstanding at 31 the annual accounts; overview of arrangements for managing December 2018 were 21 days (2017: 20 • assess the Society’s ability to continue risk in the Strategic Report on pages 8 to days). as a going concern, disclosing, as 14 and Note 26 Financial Instruments on applicable, matters related to going pages 56 to 66. Staff concern; and The Board recognises the important Profits and Capital • use the going concern basis of contribution made by management and accounting unless they either intend In 2018 the Society profit before tax was staff to the success of the Society and to liquidate the Society or to cease £2.208m (2017: £1.440m). Total profit after wishes to thank them for their efforts operations, or have no realistic tax transferred to general reserves was during 2018. alternative but to do so. £1.763m (2017: £1.182m). The Society is committed to effective In addition to the annual accounts the Total Society Reserves at 31 December communication at all levels of operation to Act requires the directors to prepare, for 2018 were £38.668m (2017: £36.905m) enhance understanding and involvement. each financial year, an Annual Business with no available for sale reserve. Employee training and development are Statement and a Directors’ Report, each important aspects of the business. Free capital represents gross capital and containing prescribed information relating to the business of the Society. collective mortgage loss provisions less It is the Society’s policy to ensure that no fixed assets as shown in the balance employee or job applicant is treated less sheet. Society free capital is £37.6m or favourably on the grounds of age, gender, 7.95% of total share and deposit liabilities race, religion, disability, marital status or (2017: £35.8m or 8.26%). Gross capital sexual orientation. In respect of disabled comprises reserves, as shown in the applicants and employees the Society balance sheet. Gross capital is £38.7m ensures compliance with the Disability or 8.17% of share and deposit liabilities Discrimination Act 1995. (2017: £36.9m or 8.51%). Marsden Building Society 18 Annual report and accounts 2018

Directors’ Report (continued)

Directors’ responsibilities for Post Balance Sheet Events accounting records and internal The Directors consider that no events have controls occurred since the year end to the date of this report that are likely to have a material The directors are responsible for ensuring effect on the financial position of the that the Society: Society as disclosed in the accounts. • keeps proper accounting records that Directors disclose with reasonable accuracy at any time the financial position of the The following persons were Directors of Society, in accordance with the Act; the Society during the year: • takes reasonable care to establish, J L Walker Appointed 1 March 2018 maintain, document and review R W Barlow Retired 24 July 2018 such systems and controls as T T Brooke Retired 24 July 2018 are appropriate to its business in M R Gray Appointed 1 June 2018 accordance with the rules made by A M Hope the Financial Conduct Authority and M L Ibbs Prudential Regulation Authority under C McDonald Appointed 1 June 2018 the Financial Services and Markets Act 2000. R M Pheasey N Walker The directors are responsible for such internal control as they determine is Biographies of the Directors appear on necessary to enable the preparation pages 15 and 16. of annual accounts that are free from M L Ibbs will retire by rotation at the material misstatement, whether due Annual General Meeting and being to fraud or error, and have general eligible will seek re-election. J L Walker, responsibility for taking such steps as are M R Gray and C McDonald, all being reasonably open to them to safeguard the eligible, will seek election without assets of the society and to prevent and nomination at the Annual General detect fraud and other irregularities. Meeting. The Directors are responsible for the At 31 December 2018 none of the maintenance and integrity of the corporate Directors had any interest in the shares, and financial information included on or debentures of any connected the Society’s website. Legislation in undertakings of the Society. the UK governing the preparation and Auditors dissemination of annual accounts may differ from legislation in other jurisdictions.. The Society’s Auditor’s, KPMG LLP, have expressed their willingness to continue Going concern and in accordance with Section 77 of the The Directors have prepared forecasts of Building Societies Act 1986, a resolution the Society’s capital, liquidity and financial is to be proposed at the Annual General position for the foreseeable future. The Meeting for the re-appointment of KPMG Directors are satisfied that the Society LLP as auditors of the Society. has adequate resources to continue in On behalf of the board of directors business for the foreseeable future. For this reason they continue to adopt the J L Walker going concern basis in preparing the Chairman annual accounts (refer note 1). 4 March 2019 Marsden Building Society Annual report and accounts 2018 19

Corporate Governance

The Board believes that good governance review management performance. The Board on risk appetite, tolerance and is vital in providing effective leadership Board also has a duty to ensure the strategy, including strategy for capital and and ensuring the Society continues as a Society operates within a framework of liquidity management, and the embedding successful organisation run for the benefit prudent controls which enables risk to be and maintenance of a supportive culture for its current and future members. assessed and managed. in relation to the management of risk. The composition of the Committee The Financial Reporting Council published The Board has a formal schedule of at 31 December 2018 was M R Gray the UK Corporate Governance Code in matters which are reserved to it and (Chairman), A M Hope, C McDonald and April 2016. The Code applies to publicly has delegated authority in other matters C Ritchie. quoted companies. In the interests of to a number of Board Committees as transparency the Financial Conduct described below. The Board Nominations Committee Authority (FCA) and Prudential Regulation meets at least once a year and has The Board Audit and Compliance Authority (PRA) also encourage each responsibility for succession planning and Committee meets at least four times each building society to explain in its annual the appointment of new directors. The year and considers all matters relating report and accounts whether, and to what Chief Executive attends each meeting to internal control and risk management extent, it adheres to the Code. by invitation. The composition of the systems and regulatory compliance. The Committee at 31 December 2018 was M L The Board is committed to having regard Committee receives regular updates from Ibbs (Chairman), M R Gray, A M Hope and to the UK Corporate Governance Code, to Internal Audit, the Compliance Function J L Walker. the extent that its provisions are relevant and External Audit. The composition of the to a building society of this scale, in the Committee as at 31 December 2018 was During the year the Board Assets and continuing development of corporate A M Hope (Chairman), M R Gray, M L Ibbs Liabilities Committee and the Board Retail governance practice at the Society. This and C Ritchie. Conduct Committees were discontinued report explains the extent to which the with responsibilities subsumed in the The Board Remuneration Committee Society would have complied with the Board and Board Risk Committee. meets at least twice a year and has Code issued by the Financial Reporting responsibility for policy on remuneration All committees report to the Board. The Council in April 2016, were it required to of the executive directors, senior Board meets as often as is necessary for do so. management and the Chairman. The the proper conduct of business and there Section A: Leadership composition of the Committee as at are usually ten meetings a year with a 31 December 2018 was C A Ritchie further two days focused on strategy. Non- A.1 The Role of the Board (Chairman), M L Ibbs, C McDonald and executive directors also meet informally Main Principle – Every company should J L Walker. The Chief Executive attends without the executive directors being be headed by an effective board which is each meeting by invitation. The Chairman present. collectively responsible for the long-term and Chief Executive take no part in the success of the company discussion concerning their individual remuneration. The role of the Board is to set the strategic aims of the Society, ensure sufficient The Board Risk Committee meets at least financial and human resources are in four times a year and is responsible for place to meet the objectives set and to oversight and provision of advice to the

Details of the number of Board and Committee meetings in 2018 and the attendance record of individual directors are set out below. All directors have the right of attendance at Committee meetings, however only the attendance record of those who were members of the respective Committee meeting is detailed.

Audit & Director Board ALCO Risk Compliance Conduct Remuneration Nominations J L Walker (Chairman) (from 01 March 6 (8) - - - - 1 (1) 1 (1) 2018) R W Barlow (to 24 July 2018) 7 (7) - - - - 1 (1) 1 (1) T T Brooke (to 24 July 2018) 5 (7) 5 (7) 2 (2) 1 (2) - 1 (1) - M R Gray (from 01 June 2018) 5 (5) - 2 (2) 2 (2) - - 1 (1) A M Hope 9 (10) 7 (8) 3 (4) 4 (4) - - 2 (2) M L Ibbs (Senior Independent Director) 10 (10) - 3(3) 4 (4) 3 (3) 1 (1) 2 (2) C McDonald 5 (5) - 1 (1) - - 1 (1) - R M Pheasey (Chief Executive) 10 (10) 8 (8) - - 3 (3) - - C A Ritchie 10 (10) 8 (8) 0 (1) 3 (4) 3 (3) 2 (2) - N Walker (Finance Director & CRO) 9 (10) 8 (8) 3 (3) - 3 (3) - - ()= Number of meetings eligible to attend Marsden Building Society 20 Annual report and accounts 2018

Corporate Governance (continued)

The Society maintains appropriate liability M L Ibbs was appointed by the Board to and balance of skills, with independence insurance cover in respect of any legal the role of Senior Independent Director and experience being key determinants, action against its directors and officers. (SID) in September 2017. The role of the where selection of the most suitable The Board has access to independent SID is to appraise the performance of candidate is paramount. For these professional advice, at the expense of the the Chairman and act as a focal point of reasons it does not have a measurable Society, if required. contact for members wishing to make diversity objective. representation to the Board. A.2 Division of Responsibilities The Terms of Reference of the Nominations Committee are published Main Principle – There should be a clear Section B: Effectiveness on the Society’s website. The terms division of responsibilities at the head of and conditions of appointment of non- the company between the running of the B.1 The composition of the executive directors are available on board and the executive responsibility for Board request from the Secretary of the Society. the running of the company’s business. Main Principle - The board and No one individual should have unfettered its committees should have the B.3 Commitment powers of decision. appropriate balance of skills, experience, Main Principle – All Directors should independence and knowledge of The roles of the Chairman and Chief be able to allocate sufficient time to the the company to enable them to Executive are held by different individuals, company to discharge their responsibilities discharge their respective duties and with a clear division of responsibilities. effectively. responsibilities effectively. The letter of engagement issued to The requirement for directors to devote the Chairman clearly sets out the At 31 December 2017 the Board sufficient time to discharge their responsibilities of the role. The role profile comprised five non-executive and two responsibilities effectively is stated in of the Chief Executive confirms the overall executive directors. On 24 July 2018 R the letter of engagement supplied on responsibility for managing the Society W Barlow and T T Brooke retired from appointment. The annual performance and implementing strategies agreed by the Board. On 1 March 2018 J L Walker evaluation review considers this point. the Board. joined the Board with M R Gray and C The attendance record during the year of McDonald joining on 1 June 2018. At 31 Board and Committee members is set out A.3 The Chairman December 2018 the Board comprised six on page 19. Main Principle – The chairman is non-executive and two executive directors responsible for leadership of the board providing a balance of skills appropriate to B.4 Development and ensuring its effectiveness on all the requirements of the Business. aspects of its role. Main Principle – All directors should The Board has considered the receive induction on joining the board The Chairman sets the direction and independence of all non-executive and should regularly update and refresh culture of the Board, facilitating effective directors. The UK Corporate Governance their skills and knowledge. contribution from directors, maintaining Code confirms that the test of constructive relations between executive independence is not appropriate to Following appointment, new directors and non-executive directors and ensuring the position of Chairman. The Board undertake an induction process which that directors receive accurate, timely considers all its non-executive directors involves attendance at a cross-section of and clear advice and information. The to be independent in character and Board Committees and external courses Chairman was appointed in March 2018 judgement. and events where appropriate. Directors and meets the independence criteria continue to receive internal briefings All non-executive directors have held office detailed at Section B1.1 of the Code. and attend external courses and events for less than nine years. following induction as required to update A.4 Non-executive Directors their skills and knowledge. B.2 Appointments to the Board Main Principle - As part of their role as Main Principle – There should be a formal, B.5 Information and Support members of a unitary board, non- rigorous and transparent procedure for the – The board should executive directors should constructively Main Principle appointment of new directors to the board. be supplied in a timely manner with challenge and help develop proposals information in a form and of a quality on strategy. The Nominations Committee has appropriate to enable it to discharge its responsibility for succession planning The non-executive role at the Society duties. and the appointment of new directors. requires: Appointments to the Board are subject The directors receive timely, accurate and • understanding of the risks in the to a formal, rigorous and transparent relevant information to enable them to fulfil business process. The Society will utilise executive their duties. • commercial leadership within a search and selection consultants to All directors have access to the advice framework of prudent and effective support the process of making new and services of the Secretary who is risk and management controls appointments to the Board unless it is judged appropriate not to do so. responsible for ensuring compliance • providing an independent perspective, Where this is not deemed necessary an with all Board procedures and advising monitoring performance and explanation will be provided within the the Board, through the Chairman, on resources; and Corporate Governance Report in the year governance matters. The Board has • developing, scrutinising and the appointment is made. access to independent professional constructively challenging strategic advice, at the expense of the Society, if proposals, whilst supporting executive The Society values diversity and reflects required. management this within policy. In making appointments, the Board will seek to achieve a diversity Marsden Building Society Annual report and accounts 2018 21

B.6 Evaluation Section C: Accountability • Determining the Society’s appetite for risk; Main Principle - The board should undertake a formal and rigorous annual C.1 Financial and Business • Determining which types of risk are evaluation of its own performance and Reporting acceptable and which are not; that of its committees and individual Main Principle – The board should • Providing guidance to management directors. present a balanced and understandable on conduct and probity; assessment of the company’s position At least annually the Chairman conducts • Review and approval of the Society and prospects. a review of the contribution of individual Internal Capital Adequacy Assessment directors taking account of the views of The responsibility of the directors in Process (ICAAP), Individual Liquidity other directors. The Senior Independent respect of preparation of the annual Adequacy Assessment Process Director reviews the performance of the accounts, accounting records and (ILAAP) and Recovery Plan (RP) Chairman taking into account the views of internal controls and the statement that The Board has overall responsibility for other directors. The Board also maintains the Society’s accounts are prepared on a ensuring the Society maintains adequate processes for evaluation of performance going concern basis are set out on pages financial resources, both in terms of of both the Board and individual sub 17 to 18 in the Directors’ Report. The Chief capital and liquidity, through review and Committees. Executive’s Review on pages 4 to 7 and approval of both the Society Internal the Strategic Report on pages 8 to 14 Capital Adequacy Assessment Process All evaluations involve a numeric provide members with a detailed review (ICAAP) and ILAAP (Individual Liquidity assessment of performance against of the position of the Society and its future Adequacy Assessment Process). The predetermined criteria with further prospects. Board monitors the role of Management comment in support where appropriate. in identification, monitoring and review of All responses are consolidated by the Prior to approval, the Directors review major risks facing the Society through the Secretary and Head of Compliance and and resolve that the Annual Report and following Committee Structure: presented for review on a non-attributable Accounts, taken as a whole: basis to the Chairman or, in the case of the • Board Risk Committee - Responsible • are fair, balanced and understandable; performance evaluation of the Chairman, for ensuring that both the entire and the Senior Independent Director. risk management framework and • that narrative reports are consistent monitoring and oversight of significant B.7 Re-election with the financial statements and risk positions are effective and Main Principle – All directors should accurately reflect performance of the advising the Board on overall and be submitted for re-election at Society; and local risk appetite regular intervals, subject to continued • contains the information necessary • Board, Audit and Compliance satisfactory performance. for members to assess the Society’s Committee - Responsible for ensuring performance, business model and All directors are required under the Rules that monitoring of the effectiveness of strategy. of the Society to submit themselves systems and controls over the whole risk universe, in particular control over for election at the first Annual General The Audit Committee report on pages significant risks, is effective. Meeting following appointment and for 23 and 24 describes the main areas of subsequent re-election at least every three accounting judgement considered by the • Senior Management Committee - The years. Audit Committee. management committee responsible for monitoring and review of strategic The current Chairman is now elected C.2 Risk Management and risks prior to review at Board. annually by the Board. Directors are only submitted for re-election following an Internal Control • Management Assets and Liabilities assessment of their contribution taking Main Principle – The board is responsible Committee – Responsible for into account the latest evaluation. for determining the nature and extent of managing significant Financial Risks the significant risks it is willing to take including Interest Rate, Counterparty The Nominations Committee has in achieving its strategic objectives. Credit, Liquidity, Funding and responsibility for succession planning The board should maintain sound Encumbrance Risk and Product and the Board is committed to a situation risk management and internal control Pricing and the Net Interest Margin. whereby: systems. • Mortgage Credit & Markets Committee – The management committee • a non-executive director will serve for The Board has a duty to ensure the responsible for review of existing a maximum of three terms of three Society operates within a framework of and new lending markets and credit years; and prudent controls which enables risk to be criteria. • if, in exceptional circumstances, it is assessed and managed. deemed that a non-executive director • Mortgage Credit & Concentration should remain on the Board for longer, The Board of Directors has overall Risk Committee - The management annual re-election by the membership responsibility for the Society’s internal committee responsible for monitoring will be sought. control system and for reporting its and review of arrears and forbearance effectiveness to the members in the and post-sale credit issues prior to annual financial statements. The Board review at the Board Risk Committee. is also responsible for defining and • Operational & Regulatory Risk influencing the culture of risk management Committee - The management across the Society including: committee responsible for monitoring Marsden Building Society 22 Annual report and accounts 2018

Corporate Governance (continued)

and review of operational and Each year the Board conducts a review of The proxy form provides the opportunity regulatory risks prior to review at the the effectiveness of the risk management to formally abstain from voting should Board Risk Committee. and internal control systems. The review the member so wish. A secure facility to • Financial Risk Sub Group - The involves consideration of material risks use the branch to deposit proxy votes management committee responsible facing the Society and related controls, when visiting our branches is provided. for monitoring and review of interest the adequacy of controls in place to Members also have the option to cast their rate risk prior to review at the ensure compliance with standards under proxy vote by accessing a secure online Management ALCO. the regulatory system and the findings voting portal. of Internal Audit activity in the year. The • Product Pricing Sub Group - The Board has concluded that the Society At the AGM a poll is called on each management committee responsible operates effective systems and controls resolution and the proxy votes are cast for monitoring and review of which are appropriate to the nature, scale and included in the result. The results are product pricing prior to review at the and complexity of the Society’s business. disclosed and subsequently published in Management ALCO. branches and on the Society’s website. • Cashflow Risk Sub Group - The C.3 Audit Committee and All directors attend the AGM and are management committee responsible Auditors available both during and after the for maintaining a rolling cashflow The Audit Committee Report on pages meeting to answer questions from forecast and monitoring and review of 23 and 24 describes how the Audit and members. liquidity prior to review at Management Compliance Committee applies the Code ALCO. principles in relation to corporate reporting J L Walker The Society operates a three lines of and internal control. defence model as summarised below: Chairman Section D: Remuneration 4 March 2019 • The first line of defence is management within the business The Directors’ Remuneration Report which through implementation of on pages 25 to 26 details the Board’s the Society risk framework identifies, position on code principles related to assesses and manages risk. remuneration. • The second line of defence is Section E: Relations with comprised of distinct risk functions, in the case of the Society the Risk Shareholders and Compliance Functions, which are E.1 Dialogue with Shareholders as independent as is practicable at this scale where the Finance Director Main Principle – There should be a and Chief Risk Officer performs a dialogue with shareholders based on the dual role. The Secretary and Head of mutual understanding of objectives. The Compliance oversees the Compliance board as a whole has responsibility for Function. These functions challenge ensuring that a satisfactory dialogue with and guide the business in managing shareholders takes place. risk exposure. These functions As a mutual organisation the Society does are represented on various risk not have shareholders but is responsible committees detailed overleaf which to its members. feed up to the Board Risk Committee, which is responsible for oversight of The Society has created a focal point for the risk management framework and members to communicate their opinions monitoring risk profile against Board on all aspects of the running of the Society Risk Appetite. called ‘Tell us what you think’ both on the Society website and in branch. • The third line of defence is the outsourced Internal Audit function M L Ibbs, the Senior Independent which provides independent Director, also acts as a point of contact for assurance to the Board, via the Board members wishing to make representation Audit & Compliance Committee, to the Board. of the adequacy and effectiveness of systems and controls in the first E.2 Constructive use of the AGM and second lines in identifying and Main Principle – The Board should use managing risk. the AGM to communicate with investors Senior management is responsible for and encourage their participation. designing, implementing, maintaining and monitoring the systems of internal control. Each year the Society sends details of The Board and each Board Committee the AGM to members who are eligible to has oversight responsibility for risks within vote and encourages members to vote its remit. The Society’s internal auditors and attend through a donation to charity provide assurance that systems and for each vote cast via proxy or in person. controls are effectively applied. Pre-paid envelopes are included to enable members to appoint a proxy to vote on their behalf if they are unable to attend. Marsden Building Society Annual report and accounts 2018 23

Audit Committee Report

This report explains the extent to which Provisioning for loan impairment C.3 Audit Committee and the Society would have complied with During the year the Committee monitored Auditors the provisions of the UK Corporate loan impairment provisions through review Governance Code relative to Audit Main Principle – The board should of the key inputs and assumptions to Committees, were it required to do so. establish formal and transparent the Society provisioning model. In the The Financial Reporting Council published arrangements for considering how they absence of historical loss experience current Guidance on Audit Committees in should apply the corporate reporting by the Society the Committee focused April 2016. and risk management and internal closely on the methodology and model control principles and for maintaining The following report details how the inputs developed by management. The an appropriate relationship with the Society has applied the principles of Committee paid particular attention to the company’s auditor. the Code and Guidance, in particular impact of different assumptions on the significant issues reviewed and concluded outcome of the models to satisfy itself that Membership and attendees on including those areas on which the quantification of impairment provisions The Board has an Audit and Compliance accounting judgement was exercised. is appropriate. Committee consisting of four independent Effective Interest Rate non-executive directors. The composition C.1 Financial and Business of the Committee as at 31 December 2018 Reporting Income in the form of interest receivable, was A M Hope (Chairman), M R Gray, Main Principle – The board should together with fees earned and incurred M L Ibbs and C Ritchie. At the invitation present a balanced and understandable as a result of bringing mortgages onto of the Chairman of the Committee, the assessment of the company’s position the balance sheet, are measured under Chief Executive, Finance Director and and prospects. the effective interest rate method. This Chief Risk Officer and representatives approach involves consideration of from both Internal and External Audit The Directors are responsible for both the effective life of the loan, and attend meetings. The Committee meets preparation of the Annual Report and degree of amortisation of balance over with representatives of Internal Audit Accounts. In advance of consideration the effective life, based on observed and External Audit without management of the Annual Report and Accounts by behaviour of mortgages and management present prior to the commencement of the Board, the Audit and Compliance judgement. The Committee reviewed each meeting. The Board is satisfied Committee considers whether the Annual empirical data prepared by management that the composition of the Audit and Report and Accounts: on both effective life and amortisation of Compliance Committee contains relevant balance and conclusions formed on the • are fair, balanced and understandable; and recent financial sector experience same for utilisation in determining the and to provide appropriate challenge to approach taken and judgements applied management. • that narrative reports are consistent by management in recognition of income with the financial statements and on mortgages. Committee responsibilities and accurately reflect performance of the Internal Control Society; and Statutory Audit An overview of the responsibilities of the • contains the information necessary The Committee considered matters Committee is as follows: for members to assess the Society’s raised during the Statutory Audit, through performance, business model and discussion with senior management • Monitoring the integrity of financial strategy. of the Society and the external auditor, statements of the Society. In order to discharge this responsibility, and concluded there were no material • Reviewing effectiveness of the internal the Audit and Compliance Committee adjustments required to the financial controls and risk management considered the accounting policies statements. systems. adopted by the Society, the presentation Having regard to the above the Committee • Approving the arrangements for and disclosure of financial information and is satisfied that the Annual Report and whistleblowing. the key accounting judgements made by Accounts: management. • Appointment, re-appointment and • are fair, balanced and understandable; removal of providers of Internal Audit During the year the Committee focused and services. on the following matters in particular having regard to the significance of • that narrative reports are consistent • Reviewing the effectiveness of the their impact on the reported position with the financial statements and provider of Internal Audit services and the involvement of a high degree of accurately reflect performance of the including consideration of quarterly complexity, judgement or estimation by Society; and reports and monitoring the delivery of the Internal Audit Plan. management. • contains the information necessary for members to assess the Society’s • Making recommendations to performance, business model and the Board on the appointment, strategy. re-appointment and removal of external auditors and approval of their remuneration and terms of engagement. Marsden Building Society 24 Annual report and accounts 2018

Audit Committee Report (continued)

• Reviewing and monitoring the At the start of the audit cycle each independence, objectivity and year the Committee undertakes effectiveness of the external auditors a review of the Audit Strategy put and setting and monitoring policy forward by the External Auditor for the engagement of the external and receives a formal update on auditors to supply non-audit services. conclusion of the Interim and Final • Reviewing the effectiveness of the Audit including details of any material compliance functions including control weaknesses brought to its consideration of quarterly reports. attention. The Society recognises the importance of The Committee is also responsible maintenance of a sound system of internal for monitoring the performance, control. Management is responsible for objectivity and independence of the designing an internal control framework external auditor, ensuring the policy appropriate to the nature, scale and on provision of non-audit services by complexity of its operations. The Audit and the external auditor is strictly applied. Compliance Committee is responsible for During the year the external auditor oversight and assessment of effectiveness was engaged for non-audit services in of the systems of control implemented by respect of TFS Reporting Assurance management. The Terms of Reference of work for the Bank of England only, the Audit and Compliance Committee are the ratio of non-audit services relative published on the Society’s website. to the audit fee during the year being 11% (2017: nil). During the year the Committee undertook As a result of EU Audit Reforms the following activities in the discharge of from the year end commencing on these responsibilities. or after 17 June 2016 the Society • Compliance - The Head of is classified as a Public Interest Compliance and Secretary provides Entity and therefore subject to the second line assurance on systems related EU Directive (2016/56/EU) and controls over compliance with and Regulations (575/2014). This regulatory obligations across Society introduces mandatory tender of Operations. The Committee receives, statutory audit firms every ten years considers and approves the annual and mandatory rotation after 20 plan of compliance activity. The years. In addition these restrictions Committee receives a report on on non-audit services that audit firms activity in respect of implementation can provide to statutory audit clients of the plan including activity on as well as enhanced reporting and assurance over regulatory risk and corporate governance requirements. compliance support provided to KPMG LLP has acted as auditors business units. to the Society since April 1993 with a policy of periodic rotation of both • Internal Audit - RSM Risk Assurance Audit Partners and Managers. The Services LLP deliver internal audit Audit and Compliance Committee services to the Society and provide currently has no concerns regarding independent assurance to the the independence and objectivity of Board, via the Audit and Compliance KPMG LLP or the effectiveness of Committee, on the effectiveness the audit process. Whilst the Society of the Internal Control Framework. does not currently have a formal The Committee receives, considers policy on periodic tender for the and approves the Internal Audit external audit contract, this matter is Strategy and Plan, including the considered periodically when deemed budget for and focus of assurance appropriate by the Committee. In activity. Internal Audit provides the relation to mandatory rotation of the Committee with reports on its findings External Auditor transitional provisions and recommendations as part of its of the EU regulation detailed above work and updates on progress by will mean the current statutory auditor management in implementing agreed cannot be reappointed beyond the actions, including verification actions 2020 year end. have been implemented as agreed. A M Hope • External Audit - The Audit Committee Chair of the Audit and Compliance is responsible for overseeing the Committee Society’s relationship with the External 4 March 2019 Auditor including appointment and tendering, terms of engagement and remuneration, assessment of independence and the annual audit cycle. Marsden Building Society Annual report and accounts 2018 25

Directors’ Remuneration Report

The purpose of this report is to inform Executive directors participate in the D.2 Procedure for determining members about the policy for the Society’s Bonus Scheme. The level of remuneration remuneration of executive and non- bonus paid is based on criteria set by executive directors. This report also the Board each year, linked to the overall Code Principle: There should be a explains the extent to which the Society performance of the Society including both formal and transparent procedure has complied with the provisions of the UK business and risk management objectives. for developing policy on executive Corporate Governance Code relating to In addition, Executive Directors can remuneration and for fixing remuneration Remuneration, were it required to do so. receive an amount in excess of the Society packages of individual directors. The Society has adopted a Remuneration Bonus Scheme reflecting individual No director should be involved in Policy which describes how the Society performance in delivering outcomes in determining his or her own remuneration. has complied with the requirements of the excess of planned performance of the The Remuneration Committee is Remuneration Code, as defined by the Society. Any payment is taxable but responsible for determination of policy Regulator. non-pensionable. A 17% bonus, as a on the level of remuneration payable proportion of reference salary prior to any We are committed to best practice to the senior management team and salary sacrifice, was payable in respect in corporate governance and will ask Chairman. The Chairman takes no part of 2018 (2017: 17%), 9% in respect of members to vote, on an advisory basis, on in the discussion in respect of his own the Society Bonus Scheme and 8% in the Directors’ Remuneration Report at the remuneration. The Committee takes recognition of individual performance forthcoming Annual General Meeting. account of information on remuneration (2017: 10% plus 7%). Payments under the payable at comparable building D.1 The level and composition of scheme are made during the first half of societies and the time commitment and the year following that in question and are responsibility in respect of the Chairman. remuneration not currently subject to deferral. Code Principle – Levels of remuneration The Remuneration Committee had two should be sufficient to attract, retain and Executive directors participated in a meetings during 2018. The composition motivate directors of the quality required defined contribution Group Personal of the Committee as at 31 December to run the company successfully, but a Pension Scheme which is available to 2018 was C A Ritchie (Chairman), M L company should avoid paying more than all eligible employees of the Society at Ibbs, C McDonald and J L Walker. The necessary for this purpose. A significant a contribution rate of 10% of salary per Chief Executive attends each meeting proportion of executive directors’ annum. From 1 July 2011 the Society by invitation. The Chairman and Chief remuneration should be structured so introduced a Salary Sacrifice Scheme for Executive take no part in the discussion as to link rewards to corporate and all staff, in which the executive directors concerning their individual remuneration. individual performance. participate. The Terms of Reference of the The Society’s policy is that remuneration of There are currently no formal service Remuneration Committee are published executive directors and senior managers contracts in existence for executive on the Society’s website. should be comparable with that of similar directors at the Society. The employment organisations in the financial sector to of executive directors can be terminated attract, retain, and motivate individuals by either party giving one year’s notice with the required skills and competence. with compensation for loss of office being 12 months remuneration. Directors’ Remuneration Non-executive directors Executive Directors Remuneration of non-executive directors, The remuneration of executive directors excluding the Chairman, is determined is basic salary, an annual bonus (when by the Chairman and the executive payable), pension, death in service directors taking account of the time benefits, company car and private medical commitment and responsibility of the role insurance. and the remuneration and conditions for Basic salaries are reviewed annually taking non-executive directors at comparable into account the following: societies and financial institutions. • individual performance Non-executive directors do not participate in the Society’s Bonus Scheme or receive • salaries and incentives payable to other benefits or any pension entitlement. executives in similar roles within There are no service contracts in existence building societies and levels generally within the wider financial services for non-executive directors of the Society. industry • the Society’s overall performance Marsden Building Society 26 Annual report and accounts 2018

Directors’ Remuneration Report (audited information)

2018 Pensions and Variable group life Non-executive Fees/Salary Remuneration Benefits contributions Total £ £ £ £ £ J L Walker Chairman From 1 March 2018 34,418 - - - 34,418 R W Barlow To 24 July 2018 27,751 - - - 27,751 T T Brooke To 24 July 2018 14,920 - - - 14,920 M R Gray From 01 June 2018 15,169 - - - 15,169 A M Hope 25,755 - - - 25,755 M L Ibbs Senior Independent Director 25,755 - - - 25,755 C McDonald From 01 June 2018 15,169 - - - 15,169 C A Ritchie 25,755 - - - 25,755 184,692 - - - 184,692

Executive R M Pheasey Chief Executive 162,873 29,325 41,427 9,277 242,902 N Walker Finance Director and CRO 113,532 22,950 29,361 21,416 187,259 276,405 52,275 70,788 30,693 430,161

2017 Pensions and Variable group life Non-executive Fees/Salary Remuneration Benefits contributions Total £ £ £ £ £ R W Barlow Chairman 45,555 - - - 45,555 T T Brooke 24,423 - - - 24,423 I J Bullock To 13 September 2017 18,171 - - - 18,171 A M Hope 24,423 - - - 24,423 M L Ibbs Senior Independent Director 24,423 - - - 24,423 C A Ritchie 24,423 - - - 24,423 161,418 - - - 161,418

Executive R M Pheasey Chief Executive 154,446 28,050 28,814 17,215 228,525 N Walker Finance Director and CRO 108,839 22,101 18,396 28,057 177,393 263,285 50,151 47,210 45,272 405,918

From 1 July 2017, in response to implementation of changes to personal taxation is respect of pension contributions, the Board resolved to transition from an allowance of 10% of salary in respect of pension contributions to a £10,000 pension contribution with the balance to 10% of salary paid as a cash allowance. Executive directors’ salaries are disclosed net of salary sacrificed under the scheme available to all staff, within which the executive directors’ participate, with salary sacrificed disclosed within pensions and group life contributions.

C A Ritchie Chairman of the Remuneration Committee 4 March 2019 Marsden Building Society Annual report and accounts 2018 27

Independent Auditor’s Report to the members of Marsden Building Society

1 Our opinion is unmodified Overview We have audited the annual accounts of Marsden Building Society for the year Materiality £90,000 (2017:£70,000) ended 31 December 2018 which comprise 4.1% (2017: 4.9%) of profit before tax the Income Statement, Statement of financial statements as a whole Comprehensive Income, the Statement of Financial Position, the Statement of Key audit matters vs 2017 Changes in Members’ Interests, the Cash Flow Statement, and the related notes, Impairment of loans and advances including the accounting policies in note 1. Recurring risks to customers In our opinion the annual accounts: Effective interest rate income recognition • give a true and fair view of the state of affairs of the Society as at 31 Event driven The impact of uncertainties due to the UK December 2018 and of the income exiting the European Union on our audit and expenditure of the Society for the year then ended; • have been properly prepared in accordance with UK accounting 2 Key audit matters: our standards, including FRS 102 The Financial Reporting Standard assessment of risks of material applicable in the UK and Republic of misstatement Ireland; and Key audit matters are those matters • have been prepared in accordance that, in our professional judgment, were with the requirements of the Building of most significance in the audit of the Societies Act 1986 and regulations annual accounts and include the most made under it. significant assessed risks of material misstatement (whether or not due to fraud) Basis for opinion identified by us, including those which had We conducted our audit in accordance the greatest effect on: the overall audit with International Standards on Auditing strategy; the allocation of resources in UK) (“ISAs (UK)”) and applicable law. Our the audit; and directing the efforts of the responsibilities are described below. We engagement team. We summarise below believe that the audit evidence we have the key audit matters in arriving at our obtained is a sufficient and appropriate audit opinion above, together with our key basis for our opinion. Our audit opinion audit procedures to address those matters is consistent with our report to the audit and, as required for public interest entities, committee. We were appointed as auditor our results from those procedures. These by the Society before 31 December matters were addressed, and our results are based on procedures undertaken, in 1994. The period of total uninterrupted the context of, and solely for the purpose engagement is for 26 financial years of, our audit of the annual accounts as a ended 31 December 2018. whole, and in forming our opinion thereon, We have fulfilled our ethical responsibilities and consequently are incidental to that under, and we remain independent of the opinion, and we do not provide a separate Society in accordance with, UK ethical opinion on these matters. requirements including the FRC Ethical Standard applicable to public interest entities. No non-audit services prohibited by that standard were provided. Marsden Building Society 28 Annual report and accounts 2018

Independent Auditor’s Report to the members

of Marsden Building Society (continued)

The Risk Our response The impact of uncertainties due Unprecedented levels of We developed a standardised firm-wide to the UK exiting the European uncertainty: approach to the consideration of the uncertainties arising from Brexit in planning Union on our audit All audits assess and challenge the and performing our audits. reasonableness of estimates, in particular as described in the impairment of loans Our procedures included: Refer to page 23 Audit Committee Report, and advances to customers and effective • Our Brexit knowledge: We considered page 38 (accounting policy) and page 40 interest rate income recognition section the directors’ assessment of Brexit- (financial disclosures) below, and related disclosures and the related sources of risk for the Society’s appropriateness of the going concern business and financial resources basis of preparation of the annual compared to our own understanding of accounts (see below). All of these depend the risks. We considered the directors’ on assessments of the future economic plans to take action to mitigate the environment and the Society’s future risks; prospects and performance. • Sensitivity analysis: When addressing Brexit is one of the most significant the impairment of loans and advances economic events for the UK and at the to customers, effective interest date of this report its effects are subject rate income recognition and other to unprecedented levels of uncertainty of areas that depend on forecasts, we outcomes, with the full range of possible compared the directors’ analysis to effects unknown. our assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount factors for the level of remaining uncertainty; • Assessing transparency: As well as assessing individual disclosures as part of our procedures on impairment of loans and advances to customers and effective interest rate income recognition we considered all the Brexit related disclosures together, including those in the strategic report, comparing the overall picture against our understanding of the risks. Our results As reported under impairment of loans and advances to customers and effective interest rate income recognition, we found the resulting estimates and related disclosures of impairment, income recognition and disclosures of going concern to be acceptable. However, no audit should be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit. Marsden Building Society Annual report and accounts 2018 29

The Risk Our response

Impairment of loans and Subjective estimate: Our procedures included: advances to customers Impairment allowances cover loans • Control design: We tested the design (£1.030 million (2017: £1.139 million) specifically identified as impaired and those and implementation of controls over assessed for collective impairment for those the approval of the loan impairment where impairment has been incurred but assumptions and estimates. Refer to page 23 Audit Committee Report, not yet specifically identified. • Benchmarking assumptions: We page 38 (accounting policy) and page 40 The directors judge individual impairments compared the key assumptions used (financial disclosures). by reference to loans that have reached in the model with externally available two or more months in arrears, or been data. We compared the loan portfolio repossessed by the Society. key metrics, including arrears trends and provision coverage with those of The collective impairment is derived from comparable lenders; a model that uses a combination of the Society’s historical experience and, due • Our sector experience: We to the Society’s limited loss experience, challenged the key impairment external data, adjusted for current assumptions used in the model, conditions. including probability of default and forced sale discounts using our In particular, judgement is required on the knowledge of recent impairment key assumptions of probability of defaults experience in this industry; existing, time taken for defaults to the identify and forced sale discounts against • Sensitivity analysis: We assessed collateral. the collective models and individual impairments for their sensitivity to The specifically impaired loans are changes in the key assumptions by derived from the same model with performing stress testing to help us tailored probability of default assumptions assess the reasonableness of the calculated by management. assumptions; The impairment model is most sensitive • Historical analysis: We assessed the to movements in the propensity to default key assumptions used in the collective applied to mortgaged properties. and individual models, being probability of default and forced sale discounts, against the Society’s historical experience; • Tests of detail: We identified a sample of loans based on various risk characteristics (i.e. arrears, forbearance flagging, LTV) of individual loans which may have unidentified impairments. We tested the provision attached to those loans by reference to relevant supporting information such as property type and valuation to challenge the completeness and accuracy of the Society’s individual impairment provision estimate; • Assessing transparency: We assessed the adequacy of the Society’s disclosures about the degree of estimation involved in arriving at the provision. Our results: We found the resulting estimate of the impairment of loans and advances to customers to be acceptable (2017: result acceptable). Marsden Building Society 30 Annual report and accounts 2018

Independent Auditor’s Report to the members

of Marsden Building Society (continued)

The Risk Our response

Effective interest rate income Subjective estimate: Our procedures included: recognition Using an excel based model, interest • Control design: We tested the design EIR income £65,000, (2017: £32,000); year earned and fees earned and incurred on and implementation of controls over the end EIR asset £436,000, (2017: £319,000) loans are recognised using the effective approval of the EIR assumptions. interest rate (‘EIR’) method that spreads • Our sector experience: We assessed directly attributable cash flows over the the key EIR assumptions behind the Refer to page 23 (Audit Committee Report), expected lives of the loans. expected customer lives and profiles page 38 (accounting policy) and page 40 The directors apply judgement in deciding of significant loan products against our (financial disclosures). and assessing the expected repayment own knowledge of industry experience profiles used to determine the EIR period. and trends, including benchmarking The most critical element of judgement with comparative lenders; in this area is the estimation of the future • Sensitivity analysis: We challenged repayment profiles of the loans is the the models for their sensitivities to effective life assumptions. This is informed changes in the key assumptions by by product mix and past customer considering different profiles to help behaviour of when loans are repaid. us assess the reasonableness of the assumptions used and identify areas of potential additional focus. • Historical comparison: We assessed the reasonableness of the model’s expected repayment profiles assumptions against historical experience of loan lives based on customer behaviour, product mix and recent performance. • Assessed transparency: We assessed the adequacy of the Society’s disclosures about the degree of estimation involved in arriving at the interest income recognised. Our results We found the resulting estimate of the effective interest rate income recognition to be acceptable (2017: acceptable).

3 Our application of materiality Forecast Profit Before Tax Materiality and an overview of the scope of £2.208m (2017: £1.440m) £90,000 (2017: £70,000) our audit Materiality for the annual accounts as a £90,000 whole was set at £90,000 (2017: £70,000), Whole financial statements determined with reference to a benchmark materiality(2017: £70,000) profit before tax of £2.208 million (2017: £1.440 million), of which it represents 4.1% (2017: 4.9%). We agreed to report to the Audit and Compliance Committee any corrected or uncorrected identified misstatements exceeding £4,500 (2017: £3,500), in addition to other identified misstatements that warranted reporting on qualitative £4,500 grounds. Misstatements reported to Forecast PBT Materiality Our audit of the Society was undertaken the audit committee (2017: to the materiality level specified above and £3,500) was performed at the Society’s head office in Nelson. Marsden Building Society Annual report and accounts 2018 31

4 We have nothing to report on 5 We have nothing to report 6 We have nothing to report on going concern on the other information in the other matters on which we are The directors have prepared the annual Annual Report required to report by exception accounts on the going concern basis as The directors are responsible for the Under the Building Societies Act 1986 we they do not intend to liquidate the Society other information presented in the Annual are required us to report to you if, in our or to cease its operations, and as they Report together with the annual accounts. opinion: have concluded that the Society’s financial Our opinion on the annual accounts position means that this is realistic. They does not cover the other information and, • adequate accounting records have have also concluded that there are no accordingly, we do not express an audit not been kept by the Society; or material uncertainties that could have cast opinion or, except as explicitly stated • the annual accounts are not in significant doubt over its ability to continue below, any form of assurance conclusion agreement with the accounting as a going concern for at least a year thereon. records; or from the date of approval of the annual • we have not received all the accounts (“the going concern period”). Our responsibility is to read the other information and, in doing so, consider information and explanations and Our responsibility is to conclude on whether, based on our annual accounts access to documents we require for the appropriateness of the directors’ audit work, the information therein is our audit conclusions and, had there been a materially misstated or inconsistent We have nothing to report in these material uncertainty related to going with the annual accounts or our audit respects. concern, to make reference to that in knowledge. Based solely on that work we this audit report. However, as we cannot have not identified material misstatements 7 Respective responsibilities predict all future events or conditions in the other information. and as subsequent events may result Directors’ responsibilities in outcomes that are inconsistent with Annual Business Statement and As explained more fully in their statement judgements that were reasonable at the Directors’ Report set out on pages 17 to 18, the directors time they were made, the absence of are responsible for: the preparation of In our opinion: reference to a material uncertainty in this annual accounts which give a true and auditor’s report is not a guarantee that the • the Annual Business Statement and fair view; such internal control as they Society will continue in operation. the Directors’ Report have each determine is necessary to enable the been prepared in accordance with preparation of annual accounts that are In our evaluation of the directors’ the applicable requirements of the free from material misstatement, whether conclusions, we considered the inherent Building Societies Act 1986 and due to fraud or error; assessing the risks to the Society’s business model, regulations thereunder; Society’s ability to continue as a going including the impact of Brexit, and concern, disclosing, as applicable, matters • the information given in the Directors’ analysed how those risks might affect related to going concern; and using the Report for the financial year is the Society’s financial resources or ability going concern basis of accounting unless consistent with the accounting records to continue operations over the going they either intend to liquidate the Society and the annual accounts; and concern period. We evaluated those or to cease operations, or have no realistic risks and concluded that they were not • the information given in the Annual alternative but to do so. significant enough to require us to perform Business Statement (other than additional audit procedures. the information upon which we are Auditor’s responsibilities not required to report) gives a true Based on this work, we are required to Our objectives are to obtain reasonable representation of the matters in report to you if we have anything material assurance about whether the annual respect of which it is given. to add or draw attention to in relation accounts as a whole are free from material to the directors’ statement in Note 1 to misstatement, whether due to fraud or the annual accounts on the use of the other irregularities (see below), or error, going concern basis of accounting with and to issue our opinion no material uncertainties that may cast in an auditor’s report. Reasonable significant doubt over the Society’s use assurance is a high level of assurance, of that basis for a period of at least twelve but does not guarantee that an audit months from the date of approval of the conducted in accordance with ISAs (UK) annual accounts. will always detect a material misstatement We have nothing to report in these when it exists. Misstatements can arise respects, and we did not identify going from fraud, other irregularities or error and concern as a key audit matter. are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the annual accounts. A fuller description of our responsibilities is provided on the FRC’s website at www.frc. org.uk/auditorsresponsibilities Marsden Building Society 32 Annual report and accounts 2018

Irregularities – ability to detect suspected non-compliance. We identified areas of laws and regulations Owing to the inherent limitations of an that could reasonably be expected to have audit, there is an unavoidable risk that a material effect on the annual accounts we may not have detected some material from our general commercial and sector misstatements in the annual accounts, experience and through discussion with even though we have properly planned the directors and other management (as and performed our audit in accordance required by auditing standards), and from with auditing standards. For example, inspection of the Society’s regulatory and the further removed non-compliance with legal correspondence and discussed laws and regulations (irregularities) is from with the directors and other management the events and transactions reflected in the policies and procedures regarding the annual accounts, the less likely the compliance with laws and regulations. inherently limited procedures required We communicated identified laws and by auditing standards would identify regulations throughout our team and it. In addition, as with any audit, there remained alert to any indications of non- remained a higher risk of non-detection compliance throughout the audit. of irregularities, as these may involve collusion, forgery, intentional omissions, The potential effect of these laws and misrepresentations, or the override of regulations on the annual accounts varies internal controls. We are not responsible considerably. for preventing non-compliance and cannot Firstly, the Society is subject to laws and be expected to detect non-compliance regulations that directly affect the annual with all laws and regulations. accounts including financial reporting legislation (including related building 8 The purpose of our audit society legislation), and taxation legislation work and to whom we owe our and we assessed the extent of compliance responsibilities with these laws and regulations as part This report is made solely to the Society’s of our procedures on the related annual members, as a body, in accordance account items. with section 78 of the Building Societies Secondly, the Society is subject to many Act 1986. Our audit work has been other laws and regulations where the undertaken so that we might state to the consequences of non-compliance could Society’s members those matters we are have a material effect on amounts or required to state to them in an auditor’s disclosures in the annual accounts, for report and for no other purpose. To the instance through the imposition of fines fullest extent permitted by law, we do not or litigation or the loss of the Society’s accept or assume responsibility to anyone licence to operate. We identified the other than the Society and the Society’s following areas as those most likely to members as a body, for our audit work, have such an effect: regulatory capital for this report, or for the opinions we have and liquidity and certain aspects of formed. building society legislation recognising David Allen (Senior Statutory Auditor) the financial and regulated nature of the for and on behalf of KPMG LLP, Society’s activities and its legal form. Statutory Auditor Auditing standards limit the required audit Chartered Accountants procedures to identify non-compliance 1 Sovereign Square with these laws and regulations to enquiry Sovereign Street of the directors and other management Leeds and inspection of regulatory and legal West Yorkshire correspondence, if any. These limited LS1 4DA procedures did not identify actual or 4 March 2019 Marsden Building Society Annual report and accounts 2018 33

Income Statement For the year ended 31 December 2018

Note 2018 2017 £000 £000 Interest receivable and similar income 2 12,851 10,363 Interest payable and similar charges 3 (4,571) (3,386) Net interest income 8,280 6,977

Fees and commissions receivable 116 117 Fees and commissions payable (67) (73) Other income 320 294 Net income from financial instruments at fair value through profit and loss 4 36 105 Total Income 8,685 7,420

Administrative expenses 5 (6,170) (5,580) Depreciation and amortisation 16,17 (310) (334) Operating profit before impairment losses and provisions 2,205 1,506

Impairment losses on loans and advances 15 79 (83) Provisions for liabilities – FSCS Levy 24 19 12 Provisions for liabilities – Others 24 (119) Operating Profit 2,184 1,435

Profit on disposal of tangible and intangible assets 16,17 24 5 Profit on ordinary activities before tax 2,208 1,440

Tax expense on ordinary activities 9 (447) (283) Profit for the financial year 1,761 1,157

Profit for the financial year arises from continuing operations. Both the profit for the financial year and total comprehensive income for the year are attributable to the members of the Society. The notes on pages 38 to 66 form part of these accounts. Marsden Building Society 34 Annual report and accounts 2018

Statement of comprehensive income For the year ended 31 December 2018

Note 2018 2017 £000 £000 Profit for the financial year 1,761 1,157

Other comprehensive income Items that will not be reclassified to the income statement - - Re-measurement of the net defined benefit liability 25 2 30 Tax on items that will not be re-classified to the income statement 9 - (5) Items which may be subsequently reclassified to the income statement Available for sale reserve - - Valuation gains/(losses) taken to reserves 12 - - Amount transferred to the income statement 12 - - Tax on items which may subsequently be re-classified to the income statement 9 - - Other comprehensive income for the period 2 25 Total comprehensive income for the period 1,763 1,182 Marsden Building Society Annual report and accounts 2018 35

Statement of financial position As at 31 December 2018

Note 2018 2017 £000 £000 Assets Liquid Assets

Cash in hand 10 431 474 Loans and advances to credit institutions 11 91,795 85,442 Debt Securities 12 - - Derivative financial instruments 13 26 27 Loans and advances to customers 14 419,146 384,345 Tangible fixed assets 16 1,428 1,437 Intangible assets 17 114 154 Other debtors 18 1,286 957 Total assets 514,226 472,836

Liabilities Shares 19 433,008 385,658 Amounts owed to credit institutions 20 28,851 35,351 Amounts owed to other customers 21 11,229 12,484 Derivative financial instruments 13 11 61 Other liabilities 22 1,210 940 Accruals and deferred income 221 445 Deferred tax liabilities 23 135 151 Provisions for liabilities 24 137 50 Retirement benefit obligations 25 756 791 Total liabilities 475,558 435,931

Reserves General reserves 38,668 36,905 Total reserves attributable to members of the Society 38,668 36,905

Total reserves and liabilities 514,226 472,836

The notes on pages 38 to 66 form part of these accounts. These accounts were approved by the Board of directors on 04 March 2019 and signed on its behalf:

J L Walker R M Pheasey N Walker Chairman Chief Executive Finance Director & Chief Risk Officer Marsden Building Society 36 Annual report and accounts 2018

Statement of changes in members’ interests As at the year ended 31 December 2018

General Available for Total Reserve Sale Reserve 2018 2018 2018 £000 £000 £000 Balance at 1 January 2018 36,905 - 36,905

Total comprehensive income for the period Profit for the year 1,761 - 1,761 Other comprehensive income 2 - 2 Total comprehensive income for the period 1,763 - 1,763

Balance at 31 December 2018 38,668 - 38,668

General Available for Total Reserve Sale Reserve 2017 2017 2017 £000 £000 £000 Balance at 1 January 2017 35,723 - 35,723

Total comprehensive income for the period Profit for the year 1,157 - 1,157 Other comprehensive income 25 - 25 Total comprehensive income for the period 1,182 - 1,182

Balance at 31 December 2017 36,905 - 36,905 Marsden Building Society Annual report and accounts 2018 37

Cash flow statement For the year ended 31 December 2018

2018 2017 £000 £000 Cash flows from operating activities Profit before tax 2,208 1,440 Adjustments for Depreciation and amortisation 310 334 Profit on disposal of tangible fixed assets (24) (5) Net gains on re-measurement of the net defined benefit liability 2 30 Net gains on disposal and amortisation of debt securities - - (Credit)/Impairment on loans and advances to customers (credit)/impairment (79) 83 Loans and advances written off net of recoveries (30) - Total 2,387 1,882

Changes in operating assets and liabilities Increase in prepayments, accrued income and other assets (343) (196) Increase/(decrease) in accruals, deferred income and other liabilities 652 (114) Increase in loans and advances to customers (34,698) (38,415) Increase in shares 46,635 41,276 Decrease/(increase) in amounts owed to credit institutions decrease/(increase) (6,500) 14,395 Decrease/(increase) in amounts owed to other customers decrease/(increase) (1,266) 295 Decrease in loans and advances to credit institutions - - Decrease/(increase) in retirement benefit obligation (35) (58) Taxation paid (285) (222) Net cash generated by /(used in) operating activities 6,547 18,843

Cash flows from investing activities Purchase of debt securities (13,000) (5) Disposal of debt securities 13,000 10,765 Purchase of tangible fixed assets (263) (129) Disposal of tangible fixed assets 54 111 Purchase of intangible assets (28) (78) Net cash generated in investing activities (237) 10,664

Net increase/(decrease) in cash and cash equivalents 6,310 29,507

Cash and cash equivalents at 1 January 85,916 56,409

Cash and cash equivalents at 31 December 92,226 85,916

Marsden Building Society 38 Annual report and accounts 2018

Notes to the Accounts

1 Accounting Policies Marsden Building Society (the “Society”) has prepared these annual accounts in accordance with the Building Societies Act 1986, the Building Societies (Accounts and Related Provisions) Regulations 1998 and Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”) as issued in September 2015. The Society has also chosen to apply the recognition and measurement provisions of IAS 39 Financial Instruments: Recognition and Measurement (as adopted for use in the EU). The presentation currency of these annual accounts is sterling. All amounts in the annual accounts have been rounded to the nearest £1,000. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. Judgements made by the directors, in the application of these accounting policies that have significant effect on the annual accounts and estimates with a significant risk of material adjustment in the next year, are discussed in section 1.15.

1.1 Going Concern The Directors have prepared forecasts for the Society, including its capital position, for a period in excess of 12 months from the date of approval of these financial statements. The Directors have also considered the effect upon the Society’s business, financial position, liquidity and capital of more pessimistic, but plausible, scenarios on its business through stress testing and scenario analysis. Analysis of the outcomes support the conclusion that there are no material uncertainties that lead to significant doubt upon the Society’s ability to continue as a going concern and for this reason the Directors continue to adopt the going concern basis in preparing the Annual Accounts. 1.2 Changes in accounting policy There have been no changes in accounting policy during the year. 1.3 Measurement Convention The annual accounts are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments classified at fair value through the profit or loss (“FVTPL”) or available-for-sale. 1.4 Interest Interest income and expense are recognised in the income statement using the effective interest method. The ‘effective interest rate’ (“EIR”) is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or financial liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Society estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. The calculation of the effective interest rate includes transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability. Interest income and expense presented in the income statement and other comprehensive income include: • interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest basis; and • interest on available-for-sale investment securities calculated on an effective interest basis; Fair value changes on other derivatives held for risk management purposes, and other financial assets and financial liabilities carried at fair value through profit or loss, are presented in Net income from other financial instruments at fair value through profit or loss in the income statement. 1.5 Fees and commission Fees and commission income and expense that are integral to the effective interest rate on a financial asset or financial liability are included in the measurement of the effective interest rate (refer 1.3). Other fees and commission income, including account administration and legal fees and general and life insurance commission, are recognised as the related services are performed. If a loan commitment is not expected to result in the draw-down of a loan, then the related loan commitment fees are recognised in the income statement as received. Other fees and commission expense relate mainly to bank charges and payments in connection with affinity account relationships. 1.6 Expenses Operating lease Payments (excluding costs for services and insurance) made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease unless the payments to the lessor are structured to increase in line with expected general inflation; in which case the payments related to the structured increases are recognised as incurred. Incentives received on leases commencing on or after 1 January 2015, where material, are recognised in the income statement over the term of the lease as an integral part of the total lease expense. 1.7 Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity or other comprehensive income, in which case it is recognised directly in equity or Marsden Building Society Annual report and accounts 2018 39

other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on timing differences which arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the annual accounts. Timing differences arising as a result of differences between accumulated depreciation and tax allowances for the cost of a fixed asset if and when all conditions for retaining the tax allowances have been met are not provided for. Deferred tax is not recognised on permanent differences arising because certain types of income or expense are non-taxable or are disallowable for tax or because certain tax charges or allowances are greater or smaller than the corresponding income or expense. Deferred tax is measured at the tax rate that is expected to apply to the reversal of the related difference, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax balances are not discounted. 1.8 Financial Instruments Recognition The Society initially recognises loans and advances and deposits on the date on which they are originated. All other financial instruments (including regular-way purchases and sales of financial assets) are recognised on the trade date, which is the date on which the Society becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. Classification Financial assets The Society classifies its financial assets into one of the following categories. No assets are classified as held to maturity: a) Loans and receivables ‘Loans and advances’ are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Society does not intend to sell immediately or in the near term. Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method (refer 1.3). When the Society purchases a financial asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a fixed price on a future date (reverse repo or stock borrowing), the arrangement is accounted for as a loan or advance, and the underlying asset is not recognised in the Society’s financial statements. b) Available-for-sale Available-for-sale investments’ are non-derivative investments that are designated as available-for-sale, or are not classified as another category of financial assets. Available-for-sale investments comprise of debt securities which are measured at fair value after initial recognition. Interest income is recognised in the income statement using the effective interest method (refer 1.3). Impairment losses are recognised in the income statement. Other fair value changes, other than impairment losses, are recognised in other comprehensive income and presented in the available for sale reserve within equity. When the investment is sold, the gain or loss accumulated in equity is reclassified to the income statement. c) At fair value through profit and loss Derivative financial instruments are recognised at fair value. The gain or loss on re-measurement to fair value is recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. On initial designation of the hedge, the Society formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Society makes an assessment, both at inception of the hedge relationship and on an ongoing basis, of whether the hedging instrument(s) are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged item(s) during the period for which the hedge is designated, and retrospectively whether the actual results of regression analysis over the life of the portfolio demonstrate the portfolio is highly effective of a continuing basis within a range of 80 – 125%. These hedging relationships are discussed below. Fair value hedges Where a derivative financial instrument is designated as a hedge of the variability in fair value of a recognised asset or liability or an unrecognised firm commitment, all changes in the fair value of the derivative are recognised immediately in profit or loss. The carrying value of the hedged item is adjusted by the change in fair value that is attributable to the risk being hedged (even if it is normally carried at cost or amortised cost) and any gains or losses on re-measurement are recognised immediately in the income statement (even if those gains would normally be recognised directly in reserves). If the fair value of the derivative has changed prior to entering into the hedge relationship the movement will be amortised in the income statement on a straight line basis over Marsden Building Society 40 Annual report and accounts 2018

Notes to the Accounts (continued)

the remaining life of the derivative. If hedge accounting is discontinued and the hedged financial asset or liability has not been derecognised, any adjustments to the carrying amount of the hedged item are amortised in the income statement using the effective interest method over the remaining life of the hedged item. Financial liabilities The Society classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost or fair value through profit or loss. De-recognition The Society derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Society neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. On de-recognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in other comprehensive income is recognised in profit or loss. Any interest in transferred financial assets that qualify for de-recognition that is created or retained by the Society is recognised as a separate asset or liability. The Society enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. In such cases, the transferred assets are not derecognised. Examples of such transactions are securities lending and sale and repurchase transactions. The Society derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. a) Sterling Monetary Framework/Term Funding Scheme Mortgage Assets are pledged as collateral to access the scheme. Where the risk reward relationship of these assets remains with the Society they are retained on the statement of financial position. The carrying amount of assets pledged as collateral which the Society continues to recognise are included within the total of assets prepositioned at the Bank of England detailed at note 14. b) Sale and Repurchase Agreements Treasury Bills are pledged as collateral as part of bi-lateral sale and repurchase agreements with market counterparties. Where the risk reward relationship of these assets remains with the Society they are retained on the statement of financial position. The carrying amount of assets pledged as collateral which the Society continues to recognise are detailed at note 12 as appropriate. Measurement a) Amortised Cost Measurement The ‘amortised cost’ of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. b) Fair Value Measurement ‘Fair value’ is the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction. When available, the Society measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Society uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received. If the Society determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out.

Identification and measurement of impairment At each reporting date, the Society assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is ‘impaired’ when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s) and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably. Objective evidence that financial assets are impaired includes: • significant financial difficulty of the borrower or issuer; Marsden Building Society Annual report and accounts 2018 41

• default or delinquency by a borrower; • breach of contract or terms; • the restructuring of a loan or advance by the Society on terms that the Society would not consider otherwise, including forbearance granted to the borrower or issuer; • indications that a borrower or issuer will enter bankruptcy; • the disappearance of an active market for a security; • observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuer in the Society, or economic conditions that correlate with defaults in the Society; or • Any other information discovered during regular review suggesting a risk of loss in the short to medium term. The Society considers evidence of impairment for loans and advances at both a specific asset and a collective level. All individually significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances that are not individually significant are collectively assessed for impairment by grouping together loans and advances with similar risk characteristics. In assessing collective impairment, the Society uses relevant peer group experience for comparable groups of assets due to the lack of a material amount of historical trends of probability of default, the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than is suggested by peer group experience. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets measured at amortised cost are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. In considering expected future cashflow, account is taken of any discount required against the value of the security at the statement of financial position date thought necessary to achieve as sale, anticipated foreclosure timing, anticipated realisation costs and amounts recoverable under mortgage indemnity policies. A range of forbearance options are available to support customers who are in financial difficulty. The purpose of forbearance is to support customers who have temporary financial difficulties and help them get back on track. The main options offered by the Society include: • a reduced monthly payment; • an arrangement to clear outstanding arrears; • extension of the mortgage term; and • capitalisation of arrears. Customers requesting a forbearance option will need to provide information to support the request which is likely to include a budget planner, bank statements, payslips etc. in order that the request can be properly assessed. If the forbearance request is granted this will normally be for an initial period of three months, with extension as required for further three month periods normally not exceeding twelve months in total, during which the account is monitored in accordance with our policy and procedures to assess the risk to the Society and the suitability of the arrangement for the customer. At the appropriate time the forbearance option that has been implemented is cancelled, with the exception of capitalisation of arrears, and the customer’s normal contractual payment is restored. Loans that are subject to restructuring may only be classified as restructured and up-to-date once a specified number and/or amount of qualifying payments have been received. These qualifying payments are set at a level appropriate to the nature of the loan and the customer’s ability to make the repayment going forward. Typically the receipt of six months of qualifying payments is required. Loans that have been restructured and would otherwise have been past due or impaired are classified as renegotiated for a period of six months following the change. Impairment losses are recognised in the income statement and reflected in an allowance account against loans and receivables. Interest on the impaired assets continues to be recognised through the unwinding of the discount. If an event occurring after the impairment was recognised causes the amount of impairment loss to decrease, then the decrease in impairment loss is reversed through the income statement. 1.9 Cash and cash equivalents For the purposes of the Statements of Cash Flows, cash comprises cash in hand and unrestricted loans and advances to credit institutions repayable on demand. Cash equivalents comprise highly liquid unrestricted investments that are readily convertible into cash with an insignificant risk of changes in value with original maturities of less than three months. The Statements of Cash Flows have been prepared using the indirect method. 1.10 Tangible fixed assets Tangible fixed assets are stated at cost or deemed cost less accumulated depreciation and accumulated impairment losses. Tangible fixed assets include investment property whose fair value cannot be measured reliably without undue cost or effort. The Society capitalises the cost of additions, major alterations to and refurbishments of office premises and equipment as land and buildings. Where parts of an item of tangible fixed assets have different useful lives, they are accounted for as separate items of tangible fixed assets, for example land is treated separately from buildings. All leases are classified as operating leases, the Society having no leases in which the Society assumes substantially all the risks and Marsden Building Society 42 Annual report and accounts 2018

Notes to the Accounts (continued)

rewards of ownership of the leased asset which would be classified as finance leases. The Society assesses at each reporting date whether tangible fixed assets are impaired. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of tangible fixed assets. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The estimated useful lives are as follows: • buildings (freehold and leasehold) – Between 20 and 50 years • refurbishment of buildings and roofs – Between 10 and 20 years • plant and equipment, fixtures and fittings – between 3 and 10 years Depreciation methods, useful lives and residual values are reviewed if there is an indication of a significant change since last annual reporting date in the pattern by which the Society expects to consume an asset’s future economic benefits. 1.11 Intangible assets Computer software Purchased software is capitalised as an intangible asset where the software is an identifiable asset controlled by the Society which will generate future economic benefits. Other costs relating to internal development of software are recognised as an expense as incurred. Intangible assets that are acquired by the Society are stated at cost less accumulated amortisation and less accumulated impairment losses. Amortisation Amortisation is charged to the profit or loss on a straight-line basis over the estimated useful lives of intangible assets. Intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: • Software – 3 to 5 years The Society reviews the amortisation period and method when events and circumstances indicate that the useful life may have changed since the last reporting date. Intangible assets are tested for impairment in accordance with Section 27 Impairment of assets when there is an indication that an intangible asset may be impaired. 1.12 Impairment excluding financial assets and deferred tax assets The carrying amounts of the Society’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognised if the carrying amount of an asset exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. An impairment loss is reversed if and only if the reasons for the impairment have ceased to apply. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 1.13 Employee benefits Defined contribution plans and other long term employee benefits A defined contribution plan is a post-employment benefit plan under which the Society pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. The Society makes contributions to a Group Personal Pension Scheme through a life insurance company. The scheme is independent of the finances of the Society. Obligations for contributions to the scheme are recognised as an expense in the income statement in the periods during which services are rendered by employees. Defined benefit plans A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Society has an Employer Financed Retirement Benefit Scheme. This represents a retirement benefit obligation to certain pensioners outside the scope of the Society defined contribution plan. The obligation is funded by the Society and has no scheme assets. All obligations are in payment and the amount and escalation in benefit cannot change. The Society’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future payments due; that benefit is discounted to determine its present value. The entity determines the net interest expense on the net defined benefit liability for the period by applying the discount rate as determined at the beginning of the annual period to the net defined benefit liability taking account of changes arising as a result of benefit payments. Marsden Building Society Annual report and accounts 2018 43

The discount rate is the yield at the balance sheet date on AA credit rated bonds denominated in the currency of, and having maturity dates approximating to the terms of the Society’s obligations. A valuation is performed annually by the directors using the details of ‘in payment’ obligations and escalation terms and the latest discount rate and bi-annual mortality assumptions. Changes in the net defined benefit liability, the net interest on the net defined benefit liability, and the costs of plan introductions, benefit changes, curtailments and settlements during the period are recognised in the income statement. Re-measurement of the net defined benefit liability is recognised in Other comprehensive income in the period in which it occurs. 1.14 Provisions and contingent liabilities A provision is recognised in the statement of financial position when the entity has a present legal or constructive obligation as a result of a past event, that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are recognised at the best estimate of the amount required to settle the obligation at the reporting date. Contingent liabilities are potential obligations from past events which shall be confirmed by future events. Contingent liabilities are not recognised in the statement of financial position. 1.15 Accounting estimates and judgements Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the year ended 31 December 2018 are set out below: • EIR – The Society determines the effective life of mortgages through analysis of historical data with a qualitative management overlay. The effective life is monitored during the year to ensure assumptions remain reasonable with adjustments applied as appropriate. Any variation in the expected life would change the carrying value in the statement of financial position and the timing of recognition of interest income. A one month increase in life profile of mortgage assets would increase the value of loans on the statement of financial position by £48,875 (2017: £52,854). • Loan Loss Impairment Provisions – The Society reviews the portfolio of mortgages regularly during the year to assess for impairment. Impairment provisions are calculated using peer group experience as outlined in note 1.7 above. The accuracy of the provision is dependent on the assumptions regarding probability of default. A 10% relative variation in the assumption regarding probability of default would increase the impairment provision on loans and advances by £50,681 (2017: £68,165). • Fair Value of Financial Instruments – Derivative financial instruments are calculated by projecting expected future principal and interest cash flows, discounted using the prevailing LIBOR curve. The LIBOR yield curve is observable market data which is derived from quoted interest rates in similar time bandings which match the timings of cash flows and maturities of the instruments. At the year end, a parallel increase of 50bps in the LIBOR curve would change the net fair value of derivative financial instruments and related hedged items where appropriate by -£12,033 (2017: -£3,709). • Defined benefit obligations: key actuarial assumptions – The Society has a retirement benefit obligation to certain pensioners outside the scope of the Society defined contribution plan. The obligation is funded by the Society and has no scheme assets. All obligations are in payment and the amount and escalation in benefit cannot change. The Society’s net obligation in respect of defined benefit plans is calculated by estimating the present value of future payments due. The discount rate is the yield at the balance sheet date on AA credit rated bonds denominated in the currency of, and having maturity dates approximating to the terms of the entity’s obligations. A 50bps decrease in the discount rate will increase the obligation by £32,000 (2017: £32,724) at the year end. Marsden Building Society 44 Annual report and accounts 2018

Notes to the Accounts (continued)

2 Interest receivable and similar income

2018 2017 £000 £000 On loans fully secured on residential property 12,163 10,315 On other loans 180 172 On liquid assets 527 168 Other income 19 5 Net interest (expense) on derivatives (38) (297) 12,851 10,363

Included within interest 2018 other income is income from available-for-sale assets of the Society in the form of Treasury Bills of £19,000 (2017: £5,000) Included within interest income is £59,000 (2017: £64,000) in respect of interest income accrued on impaired loans two or more months in arrears.

3 Interest payable and similar charges

2018 2017 £000 £000 On shares held by individuals 4,223 3,066 On deposits and other borrowings 348 320 4,571 3,386

4 Net gains/(losses) on derivative financial instruments

2018 2017 £000 £000 Derivatives in designated fair value hedge relationships 6 217 Adjustments to hedged items in fair value hedge relationships 6 (207) Derivatives not in designated fair value hedge relationships 24 95 36 105

Some accounting volatility arises on these items due to accounting ineffectiveness on designated hedge relationships or fair value movements on derivatives where hedge accounting is not achievable. The movement is primarily due to timing differences in income recognition between derivative instruments and the hedged items or fair value movements on derivatives not designated for hedge accounting. This gain or loss will trend to zero over time for individual instruments but not the portfolio as a whole. Marsden Building Society Annual report and accounts 2018 45

5 Administrative expenses

2018 2017 £000 £000 Wages and salaries 2,582 2,381 Social security costs 270 244 Contributions to defined contribution plans 409 393 Expenses relating to defined benefit plans 18 21 3,279 3,039 Other administrative expenses 2,891 2,541 6,170 5,580

The remuneration of the external auditor, which is included within legal, professional and consultancy costs above, is set out below (excluding VAT):

2018 2017 £000 £000 Audit of these annual accounts 72 70 Amounts received by the Society’s auditor and its associates in respect of: Taxation compliance services - - Other advisory services 8 - 80 70

6 Employee numbers

2018 2017 No. No. Full Time 67 63 Part Time 26 26 93 89

Principal office 57 54 Branch offices 36 35 93 89

7 Directors’ remuneration Directors’ emoluments are set out within the Directors’ Remuneration Report. Total Directors’ emoluments for the year amounted to £614,853 (2017: £567,336).

8 Directors loans and transactions As at 31 December 2018, there were outstanding mortgage loans granted in the ordinary course of business to two Directors (2017: two) and no connected persons (2017: none), amounting in aggregate to £393,411 (2017: £502,535). A register is maintained by the Society containing details of loans, transactions and agreements made between the Society and the Directors and their connected persons. A register of loans to Directors and connected persons is maintained under Section 68 of the Building Societies Act 1986 at the Principal Office of the Society. This is available for inspection during normal office hours over the period of 15 days prior to the Society’s Annual General Meeting and at the Annual General Meeting. Marsden Building Society 46 Annual report and accounts 2018

Notes to the Accounts (continued)

9 Taxation

2018 2017 £000 £000 Current tax Current tax on income for the period 452 278 Adjustments in respect of prior periods (2) (14) Total current tax 450 264

Deferred tax (refer note 23) Origination and reversal of timing differences (5) 7 Adjustment in respect of previous periods 1 17 Change in tax rate 1 - Total Deferred tax (3) 24

Total tax 447 288

Current tax Deferred tax Total 2018 2018 2018 £000 £000 £000 Recognised in the Income Statement 450 (3) 447 Recognised in Other Comprehensive Income - - - Total tax 450 (3) 447

Current tax Deferred tax Total 2017 2017 2017 £000 £000 £000 Recognised in the Income Statement 264 19 283 Recognised in Other Comprehensive Income - 5 5 Total tax 264 24 288

Analysis of current tax payable in the income statement 2018 2017 £000 £000 Corporation tax 450 264 Total current tax 450 264 Marsden Building Society Annual report and accounts 2018 47

Reconciliation of effective tax rate 2018 2017 £000 £000 Profit for the year 2,208 1,440 Total tax expense 447 283

Tax using the UK corporation tax rate of 19.00%(2017: 19.25%) 420 277 Expenses not deductible for corporation tax purposes 27 2 Effect of change in tax rate 1 - (Over)/under provision of tax in prior years (1) 4 Total tax charge in the income statement 447 283

Reductions in the UK corporation tax rate from 19% to 17% (effective 1 April 2020) were substantively enacted on 6 September 2016 respectively. This will reduce the Society’s future current tax charge accordingly. The deferred tax assets and liabilities at 31 December 2018 have been calculated on these rates.

10 Cash and cash equivalents

2018 2017 £000 £000 Cash in hand 431 474 Loans and advances to credit institutions (refer note 11) 91,795 85,442 Cash and cash equivalents per the cash flow statements 92,226 85,916

11 Loans and advances to credit institutions

2018 2017 £000 £000 Repayable on demand Balances with the Bank of England 84,104 79,019 Loans and advances to credit institutions 7,691 6,423 91,795 85,442

Total loans and advances to credit institutions 91,795 85,442 Total included within cash equivalents 91,795 85,442 Marsden Building Society 48 Annual report and accounts 2018

Notes to the Accounts (continued)

12 Debt securities

2018 2017 £000 £000 Treasury bills - - - -

Debt securities have remaining maturities as follows In not more than one year - - - -

Of this total £nil (2017: £nil) is attributable to fixed income debt securities. Movements in debt securities during the year are summarised as follows:

2018 2017 £000 £000 At 1 January - 10,760 Additions 13,000 5 Disposals and maturities (13,000) (10,765) Net gains/(losses) from changes in Fair Value recognised in OCI - - At 31 December - -

13 Derivative financial instruments

Notional Fair Values Fair Values Principal Assets Liabilities 2018 2018 2018 £000 £000 £000 Derivatives designated as fair value hedges Interest rate swaps 18,500 26 11 Total derivatives designated as fair value hedges 18,500 26 11

Derivatives not designated in hedge relationships Interest rate swaps - - - Total derivatives not designated as fair value hedges - - -

Notional Fair Values Fair Values Principal Assets Liabilities 2017 2017 2017 £000 £000 £000 Derivatives designated as fair value hedges Interest rate swaps 9,500 27 23 Total derivatives designated as fair value hedges 9,500 27 23

Derivatives not designated in hedge relationships Interest rate swaps 5,000 - 38 Total derivatives not designated as fair value hedges 5,000 - 38 Marsden Building Society Annual report and accounts 2018 49

14 Loans and advances to customers 2018 2017 £000 £000 Loans fully secured on residential property 417,835 380,832 Loans fully secured on land 1,315 3,523 Fair value adjustment for hedged risk (4) (10) 419,146 384,345 The remaining maturity of loans and advances to customers from the reporting date is as follows: In not more than three months 3,114 2,948 In more than three months but not more than one year 8,455 8,296 In more than one year but not more than five years 61,636 57,125 In more than five years 346,971 317,115 420,176 385,484 Less allowance for impairment (refer note 15) (1,030) (1,139) 419,146 384,345

The maturity analysis above is based on contractual maturity not behavioural or expected maturity. At 31 December 2018 £91.2m (2017: £121.8m) of mortgage assets were prepositioned with the Bank of England, including assets which are both encumbered and unencumbered.

15 Allowance for impairment Loans fully secured on Loans fully residential property secured on Land Total 2018 2018 2018 £000 £000 £000 At 1 January 2018 Individual impairment 58 567 625 Collective Impairment 498 16 514 556 583 1,139 Amounts written off during the year, net of recoveries Individual impairment (30) - (30) Collective Impairment - - - (30) - (30) Income statement Impairment losses on loans and advances Individual impairment 12 122 134 Collective Impairment (23) - (23) (11) 122 111 Income statement Adjustment to impairment losses on loans and advances resulting from recoveries during the year Individual impairment (26) (164) (190) Collective Impairment - - - Charge for the year (26) (164) (190)

At 31 December 2018 Individual impairment 14 525 539 Collective Impairment 475 16 491 489 541 1,030 Marsden Building Society 50 Annual report and accounts 2018

Notes to the Accounts (continued)

Loans fully secured on Loans fully residential property secured on Land Total 2017 2017 2017 £000 £000 £000 At 1 January 2017 Individual impairment 25 563 588 Collective Impairment 452 16 468 477 579 1,056 Amounts written off during the year, net of recoveries Individual impairment - - - Collective Impairment ------Income statement Impairment losses on loans and advances Individual impairment 33 4 37 Collective Impairment 46 - 46 79 4 83 Income statement Adjustment to impairment losses on loans and advances resulting from recoveries during the year Individual impairment - - - Collective Impairment - - - Charge for the year - - -

At 31 December 2017 Individual impairment 58 567 625 Collective Impairment 498 16 514 556 583 1,139 Marsden Building Society Annual report and accounts 2018 51

16 Tangible fixed assets

Equipment, fixtures Land and buildings fittings and vehicles Total 2018 2018 2018 £000 £000 £000 Cost Balance at 1 January 2018 1,106 1,932 3,038 Acquisitions - 263 263 Disposals - (155) (155) Balance at 31 December 2018 1,106 2,040 3,146

Depreciation and impairment Balance at 1 January 2018 318 1,283 1,601 Depreciation charge for the year 21 221 242 On disposals - (125) (125) Balance at 31 December 2018 339 1,379 1718

Net book value Balance at 1 January 2018 788 649 1,437 Balance at 31 December 2018 767 661 1,428

The Society’s freehold and long leasehold land and buildings were revalued during July 1999. Other tangible fixed assets are included at cost.

2018 2017 £000 £000 The net book value of land and buildings comprises: Freehold 767 788 767 788

The above land and buildings are occupied for own use. Marsden Building Society 52 Annual report and accounts 2018

Notes to the Accounts (continued)

17 Intangible assets

Purchased Software 2018 £000 Cost Balance at 1 January 2018 797 Acquisitions 28 Written off in the year - Balance at 31 December 2018 825

Amortisation Balance at 1 January 2018 643 Amortisation charge for the year 68 Written off in the year - Balance at 31 December 2018 711

Net book value Balance at 1 January 2018 154 Balance at 31 December 2018 114

Intangible assets are included at cost.

18 Other debtors

2018 2017 £000 £000 Other debtors 100 14 Deferred tax assets (refer note 23) 175 189 Prepayments and accrued income 1,011 754 1,286 957

19 Shares

2018 2017 £000 £000 Held by individuals 432,885 385,445 Other shares 123 213 433,008 385,658

Shares are repayable with remaining maturities from the date of the reporting as follows:

Accrued Interest 2,334 1,619 On demand 172,504 168,347 In not more than three months 122,992 107,946 In more than three months but not more than one year 100,726 83,240 In more than one year but not more than five years 32,851 24,506 In more than five years 1,601 - 433,008 385,658 Marsden Building Society Annual report and accounts 2018 53

20 Amounts owed to credit institutions

2018 2017 £000 £000 Amounts owed to credit institutions are repayable from the date of the statement of financial position as follows: Accrued Interest 51 51 In not more than three months - 3,000 In more than three months but not more than one year 14,000 17,500 In more than one year but not more than five years 14,800 14,800 28,851 35,351

21 Amounts owed to other customers

2018 2017 £000 £000 Amounts owed to other customers are repayable from the date of the statement of financial position as follows: Accrued Interest 42 31 On demand 1,601 1,663 In not more than three months 3,310 2,916 In more than three months but not more than one year 6,276 5,474 In more than one year but not more than five years - 2,400 11,229 12,484

22 Other liabilities

2018 2017 £000 £000 Corporation tax 423 258 Payments to insurance companies 1 2 Other creditors 786 680 1,210 940

Marsden Building Society 54 Annual report and accounts 2018

Notes to the Accounts (continued)

23 Deferred tax assets and liabilities

Assets Liabilities Net 2018 2017 2018 2017 2018 2017 £000 £000 £000 £000 £000 £000 Accelerated capital allowances - 110 126 (110) (126) FRS 102 transitional adjustment 47 55 - 47 55 Employee benefits 128 134 - 128 134 Unused tax losses - - - Other - 25 25 (25) (25) 175 189 135 151 40 38

The majority of deferred tax assets and liabilities are anticipated to be recoverable after one year.

24 Provisions

2018 2018 2018 2017 2017 2017 FSCS Other Total FSCS Other Total £000 £000 £000 £000 £000 £000 At 1 January 32 18 50 104 19 123 (Credit)/Charge for the year (19) 119 100 (12) - (12) Provision utilised (13) - (13) (60) (1) (61) At 31 December - 137 137 32 18 50

Financial Services Compensation Scheme (FSCS) The Financial Services Compensation Scheme (FSCS) makes annual levies on all regulated UK deposit-takers in relation to its running expenses (the management expenses levy) and any compensation claims made against it (the compensation levy). The levies for each deposit-taker are based on its share of the total of protected deposits. The management expenses levy includes the cost of interest on sums borrowed by the FSCS from the Bank of England, and eventually HM Treasury, in order to fund the exceptional compensation payments arising from deposit-taker failures during 2008 and 2009. Levies were made in relation to Bradford and Bingley plc, the UK retail deposit-taking arms of Icelandic banks (Heritable, Kaupthing Edge and Icesave), London Scottish Bank plc and Dunfermline Building Society. Interest is charged on each outstanding loan at the higher of 12 months LIBOR plus 100 basis points and the relevant gilt rate published by the Debt Management Office. In the current year the Society paid £13,000 in respect of the levy for the 2017/18 scheme year. At 31 December 2018 it is understood that no further levies will be made in respect of the deposit-taker failures of 2008 and 2009 and the residual provision of £19,000 was released in the year. Others Other provisions have been made in respect of regulatory compensation for customer redress and a potential legal claim relating to two specific matters. Past sale of payment protection insurance in connection with mortgages The provision was established in response to claims in relation to previous sales of mortgage payment protection insurance. A provision of £18,000 was brought forward at 1 January (2017: £18,000). During the year £nil (2017: nil) of the provision was utilised for this purpose with a recovery of provisioning of nil (2017: £nil). In response to an increase in claim activity during the year an additional £18,000 (2017: nil) was added to leave a provision of £36,000 (2017: £18,000) at the reporting date. Non-adherence to disclosure requirements under the Consumer Credit Act 1974 Past non adherence to disclosure requirements has resulted in the Society having to refund interest to customers for the period between when disclosures should have been made and the date the non-disclosure issue was remedied. A provision of £1,000 (2017: £1,000) was brought forward at 1 January. During the year £1,000 (2017: nil) of the provision was utilised to settle the obligation in full. Potential legal claim Marsden Building Society Annual report and accounts 2018 55

During the year the Society received repayment in full of a commercial loan, within which the Society had a silent sub-participation in a loan by a larger lender, which had been the subject of recovery proceedings following a breach of terms a number of years ago. Following redemption notice of a potential claim has been received by the larger lender in relation to the proceedings surrounding the renegotiation, the Society having an obligation for a proportion of any liability and costs in accordance with the sub-participation agreement. A provision of £101,000 (2017: nil) has been recognised as the best estimate of the amount required to settle the obligation. The Society has no further exposure to sub participation loans of this type.

25 Employee benefits

Defined benefit scheme

Net pension liability The Society has an Employer Financed Retirement Benefit Scheme. This represents a retirement benefit obligation to certain pensioners. All obligations are in payment with the obligation funded from the financial resources of the Society, the scheme having no distinct assets independent of the Society. The information disclosed below relates to this scheme alone. 2018 £000 Defined benefit obligation 756 Net pension liability 756

Movement in present value of defined benefit obligation 2018 £000 At 1 January 791 Interest expense 18 Re-measurement: actuarial gains/(losses) (2) Benefits paid (51) At 31 December 756

Principal actuarial assumptions

2018 2017 % % Discount rate 2.72 2.40 Future pension increases 2.85 2.85

The obligation is measured internally by the Directors on at least an annual basis using the following inputs: • AA Sterling Corporate Non-financial Bond Index for the closest approximation of the average duration of obligation, currently iBoxx +15yrs • ONS Cohort Life Expectancy Tables – England and Wales (Higher Life Expectancy Variant), the statistics being updated on a bi-annual basis • Rate of future pension increases provided for under the terms of the agreement Marsden Building Society 56 Annual report and accounts 2018

Notes to the Accounts (continued)

Defined contribution scheme The Society contributes to a defined contribution group personal pension scheme which is open to contracted employees over eighteen years of age. The Scheme is funded separately through a life assurance company and the funding is independent of the Society’s finances. The Society’s contributions are charged against profits in the year in which they are made. Total expense relating to this plan in the current year was £409,000 (2017: £393,000). There were no outstanding or prepaid contributions at either the beginning or end of the financial year.

26 Financial Instruments A financial instrument is a contract which gives rise to a financial asset of one entity and a financial liability of another entity. The Society uses financial instruments to invest liquid asset balances and raise wholesale funding. The Society also uses derivative financial instruments (derivatives) to manage the risks arising from its operations. The Society uses derivatives for economic hedging purposes only in accordance with the Building Societies Act 1986 to limit the extent to which the Society will be affected by changes in interest rates. The Society does not run a trading book. Where an on balance sheet hedge cannot be achieved the principal derivatives used are interest rate swaps. These instruments are used to hedge exposures arising from underlying business activities in the form of fixed rate mortgage lending, fixed rate savings products and fixed rate deposit funding. The duration of the off balance sheet contracts and the maturity profile reflect the nature of the exposures arising from the underlying business activities being hedged. Categories of financial assets and liabilities Financial assets and liabilities are measured on an on-going basis either at fair value or at amortised cost. Note 1.7 ‘Financial instruments’ describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The tables below analyse the Society’s assets and liabilities by financial classification:

Carrying values by Measured at amortised cost Measured at fair value category at 31 December 2018 Financial assets and Derivatives liabilities at designated Loans and amortised Available for as fair value Unmatched Receivables cost sale hedges Derivatives Total £000 £000 £000 £000 £000 £000 Assets Cash in hand - 431 - - - 431 Loans and advances to credit institutions 91,795 - - - - 91,795 Debt Securities ------Derivative financial instruments - - - 26 - 26 Loans and advances to customers 419,146 - - - - 419,146 Non financial assets - 2,828 - - - 2,828 Total assets 510,941 3,259 - 26 - 514,226 Liabilities Shares - 433,008 - - - 433,008 Amounts owed to credit institutions - 28,851 - - - 28,851 Amounts owed to other customers - 11,229 - - - 11,229 Derivative financial instruments - - - 11 - 11 Non financial liabilities - 41,127 - - - 41,127 Total liabilities - 514,215 - 11 - 514,226 Marsden Building Society Annual report and accounts 2018 57

Carrying values by Measured at amortised cost Measured at fair value category at 31 December 2017 Financial assets and Derivatives liabilities at designated Loans and amortised Available for as fair value Unmatched Receivables cost sale hedges Derivatives Total £000 £000 £000 £000 £000 £000 Assets Cash in hand - 474 - - - 474 Loans and advances to credit institutions 85,442 - - - - 85,442 Debt Securities ------Derivative financial instruments - - - 27 - 27 Loans and advances to customers 384,345 - - - - 384,345 Other assets - 2,548 - - - 2,548 Total assets 469,787 3,022 - 27 - 472,836 Liabilities Shares - 385,658 - - - 385,658 Amounts owed to credit institutions - 35,351 - - - 35,351 Amounts owed to other customers - 12,484 - - - 12,484 Derivative financial instruments - - - 23 38 61 Non financial liabilities - 39,282 - - - 39,282 Total liabilities - 472,775 - 23 38 472,836

At the year end, the Society had loan commitments of £18.0m (2017: £17.0m) measured at cost.

Valuation of financial instruments carried at fair value The Society holds certain financial assets and liabilities at fair value, grouped into Levels 1 to 3 of the fair value hierarchy (see below). Valuation techniques Fair values are determined using the following fair value hierarchy that reflects the significance of the inputs in measuring fair value: Level 1 The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date. Level 2 Inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly. Level 3 Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability. Marsden Building Society 58 Annual report and accounts 2018

Notes to the Accounts (continued)

The table below summarises the fair values of the Society’s financial assets and liabilities that are accounted for at fair value, analysed by the valuation methodology used by the Society to derive the financial instruments fair value:

Note Level 1 Level 2 Level 3 Total £000 £000 £000 £000 At 31 December 2018 Financial assets Derivative financial instruments Interest Rate SWAPs 13 - 26 - 26 - 26 - 26

Financial liabilities Derivative financial instruments Interest Rate SWAPs 13 - 11 - 11 - 11 - 11

At 31 December 2017 Financial assets Derivative financial instruments Interest Rate SWAPs 13 - 27 - 27 - 27 - 27

Financial liabilities Derivative financial instruments Interest Rate SWAPs 13 - 61 - 61 - 61 - 61

Credit Risk ‘Credit risk’ is the risk that a borrower or counterparty of the Society will cause a financial loss for the Society by failing to discharge an obligation. The Society is exposed to credit risk from its lending to: • Individual customers (mortgages on residential and commercial property) • Companies (mortgages to corporates secured on residential and commercial property) • Wholesale counterparties (investment of liquid assets and derivative financial instruments) Credit risk arising from mortgage lending to individuals and companies is managed within a framework to ensure risk is underwritten and managed within the risk appetite set by the Board. This involves the use of risk adjusted pricing models, mandates, exposure limits and stress testing and is subject to monitoring by the Board Risk Committee. Credit risk arising from investment of liquid assets and entering into derivative financial instruments is managed within a framework to ensure risk exposure is managed within the risk appetite set by the Board. This involves use of strict mandates and both counterparty risk assessment and monitoring. The Society’s maximum credit risk exposure is detailed in the table below: Marsden Building Society Annual report and accounts 2018 59

2018 2017 £000 £000 Cash in hand 431 474 Loans and advances to credit institutions 91,795 85,442 Loans and advances to customers 419,146 384,345 Total statement of financial position exposure 511,372 470,261 Off balance sheet exposure: Mortgage Commitments 18,141 16,969 529,513 487,230

Details on collateral held as security that mitigate the Society’s exposure to credit risk are provided on page 64. The Society does not use credit derivatives, or similar instruments, to manage its credit risk. Credit Risk – Loans and advances to customers Mortgages secured on Residential Property The Society currently lends in the prime residential mortgage market, including buy to let. The table below outlines the mix of loans secured on residential property at the reporting date.

Lending Analysis 2018 2017 £000 % £000 % Residential Owner Occupied 316,502 75.74 287,231 75.37 Buy to Let 101,386 24.26 93,839 24.63 417,888 100.00 381,070 100.00 Impairment and EIR adjustments (57) (248) Total net exposure 417,831 380,822

The Society has a diverse exposure to loans secured on residential property across the United Kingdom. The table below outlines the geographical spread of exposures at the reporting date.

Geographical Analysis 2017 2016 £000 % £000 % North 15,154 3.63 16,897 4.43 Yorkshire & Humberside 34,567 8.27 35,966 9.44 North West 74,846 17.91 66,874 17.55 East Midlands 26,922 6.44 27,713 7.27 West Midlands 29,050 6.95 27,897 7.32 East Anglia 13,326 3.19 14,110 3.70 South West 43,745 10.47 40,315 10.58 South East 105,441 25.23 88,329 23.18 Greater London 57,706 13.81 46,704 12.26 Wales 16,046 3.84 16,265 4.27 Scotland - - - - Guernsey 1,085 0.26 - - 417,888 100.00 381,070 100.00 Marsden Building Society 60 Annual report and accounts 2018

Notes to the Accounts (continued)

The table below outlines the indexed loan to value of exposures.

Indexed Loan to Value Analysis 2018 2017 £000 % £000 % <=50% 202,726 48.51 149,826 39.32

>50% <=70% 144,810 34.65 154,936 40.66 >70% <=80% 35,461 8.49 49,821 13.07 >80% <=90% 11,770 2.82 8,351 2.19 >90% <=100% 22,947 5.49 18,136 4.76 >100% 174 0.04 - - 417,888 100.00 381,070 100.00

In respect of residential property collateral values are adjusted quarterly according to the Halifax Regional Historic House Price Index (non- seasonally adjusted) administered by IHS Markit to derive the indexed valuation at the reporting date. At the reporting date the average indexed loan to value of residential property was 35.9% (2017: 38.7%). The table below provides by payment due status.

Indexed Loan to Value Analysis by Past Due/Impairment Status 2018 2017 £000 % £000 % Neither past due nor individually impaired 416,133 99.58 379,752 99.65 Past due but not impaired 1,588 0.38 1,092 0.29 <=70% 1,416 0.34 898 0.24 >70% 172 0.04 194 0.05 In possession - - - - Impaired 167 0.04 226 0.06 <=70% - - - - >70% 167 0.04 226 0.06 In possession - - - - 417,888 100.00 381,070 100.00

Mortgages secured on Commercial Property The Society no longer provides new loans secured on commercial property. An analysis of the type of loans secured by commercial property is outlined below.

Lending Analysis 2018 2017 £000 % £000 % Commercial Owner Occupied 1,434 77.26 1,496 36.43 Investment 422 22.74 2,610 63.57 1,856 100.00 4,106 100.00 Impairment and EIR adjustments (541) (583) Total net exposure 1,315 3,523 Marsden Building Society Annual report and accounts 2018 61

The table below outlines the geographical spread of exposures at the reporting date.

Geographical Analysis 2018 2017 £000 % £000 % North 172 9.27 508 12.37 Yorkshire & Humberside 320 17.24 320 7.79 North West 1,364 73.49 3,278 79.84 1,856 100.00 4,106 100.00

The table below outlines the loan to value of exposures.

Loan to Value Analysis 2018 2017 £000 % £000 % <=50% 527 28.39 1,067 25.99 >50% <=70% 402 21.66 402 9.79 >70% <=80% - - - - >80% <=90% 320 17.24 2,001 48.73 >90% <=100% - - 188 4.58 >100% 607 32.71 448 10.91 1,856 100.00 4,106 100.00

In respect of commercial property the loan to value reflects the latest valuation on file. The table below provides by payment due status.

Loan to Value Analysis by Past Due/Impairment Status 2018 2017 £000 % £000 % Neither past due nor individually impaired 779 41.97 1,308 31.86 Past due but not impaired 68 3.66 79 1.92 <=70% 68 3.66 79 1.92 >70% - - - - In possession - - - - Impaired 1,009 54.37 2,719 66.22 <=70% 402 21.66 402 9.79 >70% - - 1,681 40.94 In possession 607 32.71 636 15.49 1,856 100.00 4,106 100.00 Marsden Building Society 62 Annual report and accounts 2018

Notes to the Accounts (continued)

Credit quality analysis of loans and advances to customers The tables below set out information about the credit quality of financial assets and the allowance for impairment/loss held by the Society against those assets.

2018 2017 Loans fully secured Loans fully secured Loans fully secured on Loans fully secured on residential property on land residential property on land £000 % £000 % £000 % £000 % Neither past due nor impaired 416,133 99.58 779 41.97 379,752 99.65 1,308 31.86

Past due but not impaired 1,588 0.38 68 3.66 1,092 0.29 79 1.92 Past due less than 2 months but 1,388 0.33 - - 853 0.23 - - not impaired Past due =>2 but <3 months 111 0.03 - - 45 0.01 - - Past due =>3 but <6 months 53 0.01 - - 149 0.04 79 1.92 Past due =>6 but <12 months 36 0.01 68 3.66 45 0.01 - - Past due over 12 months ------Possessions ------

Impaired 167 0.04 1,009 54.37 226 0.06 2,719 66.22 Not past due - - 402 21.66 - - 2,083 50.73 Past due less than 2 months ------Past due =>2 but <3 months ------Past due =>3 but <6 months 167 0.04 - - 226 0.06 - - Past due =>6 but <12 months ------Past due over 12 months ------Possessions - - 607 32.71 - - 636 15.49 417,888 100.00 1,856 100.00 381,070 100.00 4,106 100.00 Allowance for impairment Individual 14 525 58 567 Collective 475 16 498 16 Total allowance for impairment 489 541 556 583

Value of Collateral held Indexed Unindexed Unindexed Indexed Unindexed Unindexed Neither past due nor impaired 1,158,362 1,023,374 2,170 981,982 841,682 3,190 Past due but not impaired 5,061 3,248 275 3,350 2,158 275 Impaired 189 175 736 289 225 2,869 1,163,612 1,026,797 3,181 985,621 844,065 6,334

Individual assessments are made of all mortgage loans where objective evidence indicates that losses are likely (for example when loans are past due) or the property is in possession, or where fraud or negligence has been identified. urtherF information is given in accounting policy 1.7 to the accounts. The collateral consists of residential or commercial property. In respect of residential property collateral values are adjusted quarterly according to the Halifax Regional Historic House Price Index (non-seasonally adjusted) administered by IHS Markit to derive the indexed valuation at the reporting date. Commercial property reflects the latest valuation on file. Where the Society holds collateral in excess of the mortgage debt this cannot be used to offset those instances where the outstanding loan exceeds the collateral held. In respect of mortgages secured on residential property, loans past due but not impaired and loans impaired respectively, the amount of collateral, this being the lower of the outstanding balance of the loan or the property, was £1.588m Marsden Building Society Annual report and accounts 2018 63

(2017: £1.092m) and £0.167m (2017: £0.226m). In respect of mortgages secured on commercial property, loans past due but not impaired and loans impaired respectively, the amount of collateral, this being the lower of the outstanding balance of the loan or the property, was £0.068m (2017: £0.079m) and £0.552m (2017: £2.446m). Mortgage indemnity insurance acts as additional security. It is taken out for all loans in excess of 80% Loan to Value at inception of the mortgage. The Society’s policy is to pursue timely realisation of the collateral in an orderly manner. Forbearance A range of forbearance options are available to support customers who are in financial difficulty. The purpose of forbearance is to support customers who have temporary financial difficulties and help them get back on track. The main options offered by the Society include: • a reduced monthly payment; • an arrangement to clear outstanding arrears; • extension of the mortgage term; and • capitalisation of arrears. Further information is given in accounting policy 1.7 to the accounts.

2018 2017 Loans fully secured Loans fully secured Loans fully secured on Loans fully secured on residential property on land residential property on land £000 No £000 No £000 No £000 No Forbearance type Reduced monthly payment 215 2 - - 30 1 121 1 Arrangement to clear outstanding ------arrears Extension of the mortgage term ------Capitalisation of arrears ------Of which: Amount of individual impairment ------provisions

Liquidity Risk ‘Liquidity risk’ is the risk that the Society, though solvent, either does not have sufficient financial resources available to enable it to meet its obligations when they fall due, or can secure them only at excessive cost. This is an inherent risk of the Society business model of funding long term mortgages funded by short term retail savings balances. Mortgages are normally on a range of terms between 10 and 35 years but customer behaviour often results in mortgages being repaid in a much shorter period, either on product maturity or sale of the property. Retail savings are either on demand or not available on terms between 1 months and up to 5 years but in practice remain with the Society for periods well in excess of their contractual notice. The Society manages this risk through continuous forecasting of cashflow requirements and assessment of funding risk. The required amount, quality and type of liquid assets required to ensure obligations can be met at all times is maintained in accordance with the Board Risk Appetite. Periodic stress testing is performed to ensure obligations can be met in both normal and stressed circumstances. Compliance with Risk Appetite is monitored by the Board Risk Committee. Marsden Building Society 64 Annual report and accounts 2018

Notes to the Accounts (continued)

Maturity analysis for financial assets and liabilities The tables below set out the remaining contractual maturities of the Society’s financial liabilities and financial assets. In practice as referred to above, contractual maturities are not always reflected in actual experience. Accordingly the actual repayment profile is likely to be significantly different from that shown in the analysis. At 31 December 2018 More than More than one year Not more three months but not On than three but not more more than More than demand months than one year five years five years Total £000 £000 £000 £000 £000 £000 Financial assets Cash in hand 431 - - - - 431 Loans and advances to credit institutions 91,795 - - - - 91,795 Debt securities ------Derivative financial instruments - 8 13 5 - 26 Loans and advances to customers 436 2,678 7,964 61,097 346,971 419,146 Total financial assets 92,662 2,686 7,977 61,102 346,971 511,398

Financial liabilities Shares 173,220 123,726 101,404 33,050 1,608 433,008 Amounts owed to credit institutions - - 14,023 14,828 - 28,851 Amounts owed to other customers 1,603 3,324 6,302 - - 11,229 Derivative financial instruments - 6 9 (4) - 11 Total financial liabilities 174,823 127,056 121,738 47,874 1,608 473,099

Net liquidity gap (82,161) (124,370) (113,761) 13,228 345,363 38,299

At 31 December 2017 More than More than one year Not more three months but not On than three but not more more than More than demand months than one year five years five years Total £000 £000 £000 £000 £000 £000 Financial assets Cash in hand 474 - - - - 474 Loans and advances to credit institutions 85,442 - - - - 85,442 Debt securities ------Derivative financial instruments - - 9 18 - 27 Loans and advances to customers 319 2,629 7,782 56,500 317,115 384,345 Total financial assets 86,235 2,629 7,791 56,518 317,115 470,288

Financial liabilities Shares 168,749 108,618 83,723 24,568 - 385,658 Amounts owed to credit institutions - 3,010 17,528 14,813 - 35,351 Amounts owed to other customers 1,664 2,918 5,491 2,411 - 12,484 Derivative financial instruments - 38 23 - - 61 Total financial liabilities 170,413 114,584 106,765 41,792 - 433,554

Net liquidity gap (84,178) (111,955) (98,974) 14,726 317,115 36,734 Marsden Building Society Annual report and accounts 2018 65

Market Risk ‘Market risk’ is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. The principal element of Market risk to which the Society is exposed is Interest Rate Risk as a retailer of financial instruments, mainly in the form of mortgage and savings products and the investment of both liquid assets and wholesale borrowing. This risk can arise as a result of actual or market anticipation of changes in general interest rates, changes in the relationship between short and long term interest rates and divergence of rates on different bases across assets and liabilities (basis risk). The Board has set agreed risk appetite for exposure to each element of Interest Rate Risk. The Society ensures compliance with risk appetite through monitoring interest rate risk exposure by the Board Assets and Liabilities Committee with the following metrics: • Economic Value +/-200bps with +/-100bps and 300bps parallel yield curve shift and 4 non parallel shifts in the yield curve • Earnings +/-100bps with +/-200bps and 300bps static earnings at risk over a 12m period In addition to this a range of variations in different interest rate bases outside the control of the Society are stressed, including LIBOR and Bank Rate Exposures. Balance sheet composition is also monitored to determine the extent to which the Society maintains control over the level of interest rates across the balance sheet through administered rate mortgages and savings balances. The following is an analysis of the Society’s sensitivity to an increase or decrease in market rates assuming no non-parallel movement in yield curves, deviation from base behavioural prepayment assumptions and a constant financial position.

+200bps Parallel Increase 2018 2017 £000 £000 Sensitivity of reported reserves to interest rate movement (economic value) At 31 December (55) 53 Average for the period 37 (365) Maximum for the period 549 53 Minimum for the period (256) (684)

+100bps Parallel Increase 2018 2017 £000 £000 Sensitivity of projected net interest income to interest rate movement (earnings) At 31 December 470 426 Average for the period 444 316 Maximum for the period 539 426 Minimum for the period 371 263

The Society only deals with products denominated in sterling so is not directly affected by currency risk. Society products are also only interest orientated products so are not exposed to other pricing risks. Marsden Building Society 66 Annual report and accounts 2018

Notes to the Accounts (continued)

Derivatives held for risk management The Society uses derivatives to assist management of interest rate risk. Fair value hedges of interest rate risk The Society uses interest rate swaps to hedge its exposure to changes in fair values of its exposure to market interest rates on fixed rate funding and loans and advances. The fair values of derivatives designated as fair value hedges are as follows:

2018 20167 Assets Liabilities Assets Liabilities £000 £000 £000 £000 Instrument type Interest rate swap 26 11 27 23 26 11 27 23

Capital The objective of the Board is to maintain a strong capital base to provide protection for members and depositors. The Society is required to manage its capital to meet the requirements of the Capital Requirements Directive (CRD IV) and related requirements set by the Prudential Regulation Authority. The capital requirements of the Society are planned as part of the Internal Capital Adequacy Assessment Process (ICAAP). As part of the ICAAP process the Board establishes an internal minimum threshold for capital sufficient to support present and future capital requirements, withstand a severe but plausible stress and ensure the minimum regulatory requirement (Individual Capital Guidance) is always met. Compliance with capital requirements is monitored monthly, the results of which are reported to the Board. The Society complied with and maintained surplus capital requirements above the regulatory minimums during the reporting period.

27 Commitments Capital commitments Contractual commitments to purchase tangible fixed assets at the year-end were £nil (2017: £nil). The contractual commitments for the acquisition of intangible assets at the year-end were £nil (2017: £nil).

28 Country by country reporting The Capital Requirements (Country by Country Reporting) Regulations 2013 came into effect on 1 January 2014 and place certain reporting obligations on financial institutions that are within the scope of CRD IV. The purpose of the regulations is to provide clarity on the source of the Society’s income and the location of its operations. The annual reporting requirements as at 31 December 2018 are as detailed below:

Name Marsden Building Society Nature of activities Member owned deposit taker, mortgage lender and provider of related products and services Geographical location The Society is incorporated, registered and located in the United Kingdom Turnover £8.685m Number of employees 93 of which 67 full time and 26 part time per note 6 Profit before tax £2.208m Tax on profit £0.285m per Cashflow Statement Public subsidies received None Marsden Building Society Annual report and accounts 2018 67

Annual Business Statement For the year ended 31 December 2018

1 Statutory percentages

2018 Statutory limit % % Lending Limit Proportion of business assets not in the form of loans secured on residential property 0.75 25 Funding Limit Proportion of shares and borrowings not in the form of shares held by individuals 8.50 50

The percentages are calculated in accordance with the, and the statutory limits are those prescribed by, Section 6 and 7 of the Building Societies Act 1986 and are based on the Society’s balance sheet. Business assets are the total assets of the Society as shown in the balance sheet plus provisions for impairment losses on loans and receivables, less liquid assets, tangible assets and intangible assets as shown in the statement of financial position. Loans fully secured on residential property are the principal amount owing by borrowers and interest accrued not yet payable. Total shares and borrowings are the aggregate of shares, amounts owed to credit institutions and amounts owed to other customers in the statement of financial position.

2 Other percentages

2018 2017 % % As a percentage of shares and borrowings Gross capital 8.17 8.51 Free capital 7.95 8.26 Liquid assets 19.49 19.82

As a percentage of mean total assets Profit after taxation 0.36 0.26 Management expenses 1.31 1.33 Management expenses net of other income 1.24 1.25

The above figures have been calculated from the Society income statement and statement of financial position. Total shares and borrowings are the aggregate of shares, amounts owed to credit institutions and amounts owed to other customers in the statement of financial position. Gross Capital is the aggregate of General Reserves and Available for Sale Reserves in the statement of financial position. Free Capital is gross capital plus collective impairment for losses on loans and advances less tangible and intangible assets in the statement of financial position. Mean total assets are calculated by halving the aggregate of total assets at the beginning and the end of the financial year. Liquid assets are the aggregate of Cash in Hand, Loans and Advances to Credit Institutions and Debt Securities in the statement of financial position. Management expenses are the aggregate of administrative expenses and depreciation taken from the income statement. Management expenses net of other income are management expenses less fees and commissions receivable, fees and commissions payable and other income in the income statement. Marsden Building Society 68 Annual report and accounts 2018

Annual Business Statement (continued) For the year ended 31 December 20187

3 Information relating to the Directors as at 31 December 2018

Name and Occupation Date of Birth Date of Appointment Other Directorships J L Walker ACIB 26 April 1958 1 March 2018 WRS (Worldwide Recruitment Solutions) Director & Chairman NRG Group Limited Fruugo.com M R Gray BA (Hons) 31 July 1962 1 June 2018 - Director A M Hope BSc (Hons) FCA 28 February 1957 1 October 2010 1855 Station Building Limited Director Eureka! The National Children’s Museum M L Ibbs BA (Hons) 12 July 1963 1 April 2014 The Ombudsman Services Limited Director C McDonald BSc (Hons) 6 November 1962 1 June 2018 Director R M Pheasey BSc (Hons) 12 June 1967 22 December 2008 Nelson and Colne College Building Society Chief Executive & Pendle Education Trust Director C A Ritchie BA (Hons) ACA CTA 11 January 1959 1 April 2014 Ritchie Consulting (UK) Limited Director N Walker BA (Hons) ACIB 29 November 1970 22 December 2008 - Building Society Finance Director, Chief Risk Officer and Director

Documents may be served on the above named directors, either individually or collectively, marked ‘Private and Confidential’ c/o KPMG LLP, 1 Sovereign Square, Sovereign Street, Leeds, West Yorkshire, LS1 4DA. There are currently no formal service contracts in existence for Executive Directors at the Society. The employment of Executive Directors can be terminated by either party giving one year’s notice with compensation for loss of office being twelve months remuneration. At the balance sheet date no formal service contracts existed for Non-Executive Directors. Each of the Non-Executive Directors were appointed under the Rules for a three year term commencing from the Annual General Meeting at which they were first elected or re-elected unless terminated earlier at the request of the Board, in accordance with the Rules or at the request of the individual concerned. Marsden Building Society Annual report and accounts 2018 69 Contact 6-20 Russell Street, Nelson Lancashire BB9 7NJ 01282 440500

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