Annual Report & Accounts Leeds Building Society2008 Financial Highlights For the year ended 31 December 2008 £10.1billion in assets £6.6 billion total savings balances £1.3 billion new mortgage lending £20.3 million pre-tax profits £526million capital and reserves Contents Chairman’s Statement 2 Chief Executive’s Review 4 The Board of Directors 6 Directors’ Report 8 Corporate Governance Report 12 Directors’ Remuneration Report 15 Directors’ Responsibilities 17 Five Year Highlights 18 Independent Auditors’ Report 19 Group Income Statement 20 Society Income Statement 21 Balance Sheets 22 Statements of Recognised Income and Expense 23 Cash Flow Statements 24 Notes to the Accounts 25 Annual Business Statement 63 Where to find us 68 Directors Peter A. Hill, ACIB Robin A. Smith TD, LLB, DL (Operations Director) (Chairman) Carol M. Kavanagh, BA, MA S. Rodger G. Booth, MA, DL Ian Marshall, MA, FCA (Vice Chairman) David Pickersgill, FCA Ian W. Ward FCIB (Deputy Chief Executive) (Chief Executive) Abhai Rajguru, BSC (Hons), ACMA John N. Anderson QA CBE Ian Robertson, CA, CCMI Robert W. Stott Secretary Andrew J. Greenwood, LLB Chairman’s statement For the year ended 31 December 2008 our savers and keeping a vigilant control Covered Bond Programme to enable us to of costs to preserve our operating profits. participate in the Bank of England’s Special 2008 will be remembered This was to ensure that we could maintain Liquidity Scheme. This, together with other as a year of unprecedented our already strong capital position and add activity, provided additional wholesale change in world economies. to our reserves from the profit generated funding. Our liquid assets continue to without requiring any external assistance. be invested in short-term cash deposits The Governor of the Bank of We had another successful year on retail and marketable financial instruments. We England, Mervyn King, said: savings, with balances rising by over £500m have no investments in US mortgages, “Instability in banking and to £6.6bn. This was more than £400m collateralised debt obligations (CDOs) above the net amount that we lent and, or structured investment vehicles (SIVs). financial markets intensified therefore, we became even less reliant Our investments in marketable financial to levels not seen for almost on wholesale funding. All our increase in instruments include Floating Rate Notes and lending since the beginning of 2006 has UK Mortgage Backed Securities. a century.” I am, therefore, been financed entirely by our savers. The interest margin on our core activities pleased to be able to report We have always operated a prudent reduced from 1.09% to 0.96% to the overall that, against this background, approach to lending but we applied some benefit of members. There was a small additional restrictions to criteria in 2008 in decrease in our level of costs in the year and Leeds Building Society view of the uncertain economic conditions consequently our cost/asset ratio improved operated profitably, grew its and the fall in house prices (which was to 48p per £100 of assets compared to 53p 16% in 2008 as measured by the Halifax a year ago. Our cost/income ratio was the membership and increased house price index). The Society’s reaction lowest of any building society in 2007, and savings balances and assets to the market changes resulted in new this ratio has again been maintained at 40%. to their highest ever levels. advances of £1.3bn, much less than the We achieved another strong operating profit £2.1bn advanced in 2007. However, before impairment losses and provisions of despite adopting a more cautious approach, £68.6m, this being similar to the 2007 total At a time when banks and savings of £69.4m. organisations have been urgently looking we made every effort to retain existing for more capital, Leeds Building Society has borrowers, which resulted in the Society There were, however, two unexpected items maintained a level of capital and reserves having less redemptions than the average of expenditure in 2008. substantially in excess of what is required figure reported by the Council of Mortgage The first was a provision of £9.7m being the by the regulators. For 2009, the Board is Lenders (CML). full amount imposed under the Financial continuing with this policy and we have The deteriorating economic situation Services Compensation Scheme (FSCS). deliberately adopted a prudent approach has resulted in a small, but inevitably This was, in effect, a levy on the Society in to the level of provisioning in the 2008 growing, number of our borrowers having order to compensate the savers in failed accounts. It is against this background difficulty meeting their repayments. At 31 banks, including Bradford & Bingley, that Fitch, one of the principal external December 2008, only 0.83% (2007 0.28%) London Scottish and three Icelandic rating agencies, reaffirmed our credit rating of mortgages were over three months in banks with UK subsidiaries. It is extremely on 21 November 2008 due to our ‘solid arrears, which is considerably lower than galling for building societies, which run capital base, good profitability and cost the CML average. However, in view of the less risky business models, to meet these management’. current level of uncertainty in the UK, it costs particularly as there has been no Turning to the past year’s trading, financial is likely that the situation will deteriorate compensation whatsoever paid to the services organisations faced very difficult further in 2009 and we have, therefore, members of any society under the FSCS. In trading conditions, with the need to attract reflected this in our provisions which the our opinion, the particular unfairness of the retail savings deposits continuing to dominate Board is satisfied are at a prudent level. scheme has been that it effectively imposes and, therefore, causing them to become I comment on this later in this report. the highest levy on those organisations, increasingly expensive. Customers still Whenever possible, we adopt a flexible such as building societies, which have the required mortgage finance but the volume and sympathetic approach to members greatest proportion of savers’ balances. of products available in the market reduced with financial worries and we encourage Therefore, an organisation run in a similar considerably as many specialist lenders ceased them to contact the Society at the earliest manner to Northern Rock (when it was to trade and the criteria for loans tightened. opportunity to enable our expert staff to an independent bank) would have paid Net mortgage lending in the UK was down discuss their individual circumstances. considerably less as it relied extensively on substantially to £40bn in 2008 compared to Our total assets rose by over £900m to wholesale funding. Building societies have £108bn the previous year. £10.1bn, with the majority of this increase made strong representations for a more equitable scheme. Your Society’s response to these conditions being the higher level of liquid assets at the was to concentrate on our traditional values end of 2008 – £2.3bn compared to £1.9bn Secondly, we have made a £10m provision of lending the funds that we attracted from a year earlier. We successfully launched a in respect of our possible gross exposure 02 | Annual Report & Accounts 2008 Annual Report & Accounts 2008 03 “The ratings of Leeds Building Society reflect its solid capital base, good profitability and cost management” to Kaupthing Singer and Friedlander. In November 2008, we were one of only page 7. All three are subject to election at Although there has been much talk in the two societies, amongst those assessed at the Annual General Meeting. press about the ‘Icelandic Banks’, Kaupthing that time by the credit rating agency Fitch, It has taken a tremendous amount of Singer and Friedlander was (until it went that did not have their ratings downgraded. skill and commitment to achieve these into administration in October 2008) a Fitch said: “The ratings of Leeds Building results in unprecedented turbulent market long-established UK bank which, although Society were affirmed and reflect its solid conditions. I wish to record my thanks to the ultimately owned by an Icelandic Bank, capital base, good profitability and cost Society’s professional and dedicated staff, was regulated by the UK authorities. We management, as well as the Society’s small under the leadership of Chief Executive Ian are waiting to see the background to the credit risk which is reflected in its relatively Ward, for their hard work during the year. events surrounding its sudden demise. In small proportion of specialist lending and Notwithstanding this, significantly reduced the meantime, however, we have taken the focus on lower LTV lending. In Fitch’s awards have been made this year under the prudent action of making this level of view, Leeds’ strong cost efficiency and low the senior executives’ bonus scheme. This provision although there is a possibility that credit risk profile should help the Society is the result of their performance, good as it the ultimate loss may be less. to withstand the negative impact of an was, being measured against testing criteria The significant deterioration in the UK economic downturn on its profitability, asset specified by the Board at the outset in the economy, and the bleak outlook for 2009 quality and capital.” context of challenging market conditions. with possible further reductions in house Following the successful completion of Further information is contained in the prices and rising unemployment, has led the refurbishment of our Head Office, we Remuneration Committee’s report on us to increase our total residential and were very pleased to welcome His Royal pages 15 and 16. I am also very grateful commercial mortgage provisions. We Highness, the Duke of York, formally to to my Board colleagues, for their started the year with a level of £17m and re-open our building.