Skipton Building Society Annual Report & Accounts skipton.co.uk Contents Five Year Summary 4 Chairman’s Statement 6 Group Chief Executive’s Report 8 The Board of Directors 12 Business Review 14 Directors’ Report 30 Directors’ Report on Corporate Governance 34 Directors’ Remuneration Report 39 Independent Auditor’s Report 43 Income Statements 44 Statements of Comprehensive Income 45 Statements of Financial Position 46 Statements of Changes in Members’ Interests 47 Statements of Cash Flows 49 Notes to the Accounts 51 Annual Business Statement 117 Glossary 122 2 Skipton Building Society • Group profit before tax from continuing operations up 94% to £35.0m (2009: £18.0m) • Core Tier One capital ratio up 18% to 11.1% (2009: 9.4%) • Solvency ratio up 14% to 16.6% (2009: 14.5%) • Group retail funding as a percentage of total funding 82% (2009: 79%) • Improved quality of liquid assets – Core liquidity buffer eligible assets as a percentage of total liquid assets 56% (2009: 37%) …Skipton Building Society further improved its financial strength during 2010 by both substantially increasing the Group’s trading profits and improving its Core Tier One capital ratio. D J Cutter Group Chief Executive Annual Report & Accounts 2010 3 Five Year Summary Total pre-tax profit for the year (£m) Total assets (£m) 163.9 145.3 15,569 13,647 13,740 12,531 10,596 63.5(1) 22.5 35.0 06 07 08 09 10 06 07 08 09 10 The Group’s capital resources profile 2006 2007 2008 2009 2010 Core Tier 1 ratio (%) 8.64 8.67 8.6 1 9.37 11.06 Total capital ratio (%) 12.88 12.30 12.28 14.48 16.60 Tier 1 ratio (%) 9. 1 4 9.09 9.03 10.77 12.64 Tier 1 capital (before deductions(2)) (£m) 647 771 780 873 910 Tier 1 capital (after deductions) (£m) 463 541 537 69 1 719 Gross capital (£m) 813 935 918 1,063 1,120 Free capital (£m) 557 631 606 8 1 1 854 Notes 1. Includes profits of £45.5m from discontinued operations. 2. Intangible assets. 4 Skipton Building Society Group Income Statements 2006 2007 2008 2009 2010 £m £m £m £m £m Net interest receivable 98.8 110.7 87.5 53.3 54.9 Other income 415.8 433. 1 351.7 386.5 387.0 Share of profits from joint ventures and associates 1.0 3.7 3.9 0.2 0.3 Profit on disposals of subsidiary undertakings 15.7 36.0 31.4 - 1.2 and associates Total income 531.3 583.5 474.5 440.0 443.4 Administrative expenses (376.8) (416.2) (389.7) (383.7) (395.5) Negative goodwill arising on merger - - - - 3. 1 Impairment losses on loans and advances (5.6) (5.4) (34.6) (43.6) (14.8) Impairment (losses) / recoveries on debt securities - - (11.5) 1.3 (0. 1) Provisions for liabilities (1.6) (0.8) (20.8) 4.0 (1.1) Profit before tax from continuing operations 147.3 161. 1 17.9 18.0 35.0 Tax (expense) / income (32.6) (36.3) 2.8 (4.3) (9.8) Profit from continuing operations 114.7 124.8 20.7 13.7 25.2 Operating profit / (loss) from discontinued (1.6) 1.8 3. 1 4.2 - operation (net of tax) Profit on disposal of discontinued operation - - - 39.7 - Profit for the financial year 113. 1 126.6 23.8 57.6 25.2 Attributable to: Members of Skipton Building Society 111.7 125.5 22.8 57.4 25.5 Non-controlling interests 1.4 1. 1 1.0 0.2 (0.3) 113. 1 126.6 23.8 57.6 25.2 As at 31 December Total assets 10,596 12,531 13,647 15,569 13,740 2009 2010 £m £m Profit before tax from continuing operations 18.0 35.0 Profit before tax from discontinued operations 5.8 - Profit on sale of discontinued operations 39.7 - Group profit before tax 63.5 35.0 Annual Report & Accounts 2010 5 Chairman’s Statement The past year has been characterised by continued external challenges such as fiscal tightening measures initiated by the Government – the full impact of which 2011 will see remains, as yet, unclear – and the Europe wide ripple effects of the implementation of sovereign debt rescue Skipton continuing to packages. These measures, coupled with the effects of growing unemployment; regulatory changes which threaten further to restrict access to mortgage finance; pursue a strategy of and the imminent withdrawal of support measures such as government funding for financial institutions, mean controlled growth with that caution will remain key to our effective management of the business for the foreseeable future. members’ interests I am pleased to say that the prudence we have exercised throughout the global financial crisis and the recession firmly at its core. which followed – coupled with our willingness to make necessary and pragmatic decisions such as increasing There is little doubt that further potential threats to the Society’s mortgage Standard Variable Rate (‘SVR’) economic recovery, and thus to the Group’s businesses, and restructuring to manage cost effectively – have remain on the horizon for 2011. These include continued contributed to our latest reported performance. All of uncertainty about the pace and extent of economic this is, of course, further underpinned by our diversified recovery; the risks associated with increasing inflation; the Group, which brings additional income and opportunity to expected impact of rising unemployment which will affect the Society through the economic cycle. the Society’s mortgage arrears levels; a housing market and house prices which seem set to remain flat at best We have improved our performance over the past 12 for the next 12 months and the probability that historically months, as shown by increased underlying profits and a low interest rates will remain for some considerable time. stronger capital base. Our funding has remained robust These continue to put pressure on our earnings and thus and we have responded to the regulatory requirements to our ability to generate the capital required to support our hold higher quality liquidity. Risks faced by the business growth. We will continue to work with others in the sector continue to be closely managed including the potential to develop a form of external capital which is consistent for increased arrears resulting from the pressures the with mutual ownership, attractive to the market and current economic climate is placing on individuals. accepted by the regulator. 6 Skipton Building Society Our members can, however, rest assured that we remain up elsewhere. I would like to thank them both sincerely vigilant and well-placed to withstand such issues, and for their contributions to the Group during their time 2011 will see Skipton continuing to pursue a strategy of with Skipton. Our former Group Finance Director, Tom controlled growth with members’ interests firmly at its Wood, also left the Society in September to develop his core. We will remain true to our mutual ethos by offering career elsewhere and I was pleased that we were able what our members tell us they require; straightforward, to reappoint Richard Twigg to this role, which he had dependable, good value savings accounts and previously held for seven years. competitive and innovative mortgage products for I must also give credit to the achievement of our skilled people feeling the detrimental effects of current market team of senior managers. Through their delivery of conditions on both the returns on their savings and the consistently solid results, our members, counterparties amount of equity in their homes. We will also offer a and other stakeholders can have confidence that the variety of options which cater effectively for the full range Society has the management capability and experience of our members’ needs, through attractive products and needed to ensure our ongoing success as the current services ranging from independent financial advice to will economic recovery hopefully consolidates. writing and funeral planning. Of course, such resilience would not have been possible without the efforts of all our people in all our businesses and, on behalf of the Board, I recognise the contribution of our staff who have demonstrated energy, determination and commitment in order to deliver positive business and service performance for the benefit of Skipton’s members. While challenging economic conditions remain, we are confident that, supported by a strategic business transformation programme – we, both members and those who work in our businesses, can all look forward to remaining part of an organisation of which they can be truly proud. A I Findlay Chairman 22 February 2011 We continue to maintain our commitment to the communities in which our members live and work, through our established partnerships, branch-based giving to local communities through our Community Contribution Award Scheme and the Skipton Building Society Charitable Foundation. I was appointed chairman in the spring, succeeding John Rawlings on his retirement. I must take this opportunity to thank John for his contribution to Skipton over 14 years of service – five as Chairman – during which time he played an integral part in ensuring the Society’s continued success despite latterly experiencing one of the most difficult economic environments in a generation. During the year we also said goodbye with regret to two Non-Executive Directors, John Spence and Paula Hay- Plumb, who resigned from the Board due to potential conflicts of interest posed by new roles they have taken Annual Report & Accounts 2010 7 Group Chief Executive’s Report Overview We have also taken steps to re-focus on core business and related activities, reaffirming our members’ status at I am pleased to report that Skipton Building Society the heart of everything we do, which resulted in – among further improved its financial strength during 2010 by both other things – the sale of our subsidiary mortgage substantially increasing the Group’s trading profits and distribution business Pink Home Loans for a profit of improving its Core Tier One capital ratio to 11.1%.