CONTENTS 3 Chairman’s Report 6 Chief Executive’s Report 12 Business Review 32 Corporate Responsibility 36 Directors and Senior Management 40 Directors’ Report 43 Corporate Governance Report 52 Audit Committee Report 55 Risk Management Report 64 Directors’ Remuneration Report 71 Directors’ Responsibilities Statement 72 Independent Auditor’s Report 73 Income Statements 74 Statements of Comprehensive Income 75 Statements of Financial Position 76 Statements of Changes in Members’ Interest 77 Statements of Cash Flows 78 Notes to the Accounts 134 Annual Business Statement 138 Glossary CHAIRMAN’S REPORT Ed Anderson ANOTHER LANDMARK YEAR In my sixth annual review as Chairman of Yorkshire Building Society I am pleased to report that the Society has achieved an excellent overall performance, improving profits and increasing mortgage assets in very difficult market conditions and strengthening our position as the UK’s second-largest independent mutual building society. Demanding market conditions and regulatory change The Board’s focus presented the Society with significant challenges as well as fresh opportunities over the course of the The Board maintained its focus on the following critical year. In 2011 the resilience of the Yorkshire’s balance areas in 2011 as well as addressing important discrete sheet enabled us to pursue and successfully conclude issues such as the appointment of the Society’s next two major transactions: a merger with Norwich & Chief Executive: Peterborough Building Society (N&P) and the acquisition • Core business performance of the mortgage and savings business of Egg Banking The Board continued to give close attention to plc, both of which serve to strengthen the Yorkshire’s overseeing the Society’s delivery of a consistent level position. It is a pleasure to welcome all our new members of profitability, which is essential to maintaining its who have joined us either as a result of the merger with capital strength and its ability to deliver benefits to N&P or by virtue of being customers of Egg. Regrettably, our members. In particular, new mortgage lending after careful consideration we took the decision to continued to be undertaken in a controlled and wind-down the Society’s offshore subsidiary Yorkshire sustainable way. As a result of our focussed approach, Guernsey Ltd after regulatory changes meant that it was the lending undertaken in recent years is proving to be unable to serve its original role. of consistently high quality. A comprehensive review The Board’s view of the external environment is that the of the Society’s performance is set out in the Chief level of uncertainty in the economy has increased over Executive’s Report and in the Business Review on pages the past year with the stabilisation evident in some areas 6 to 31. earlier in 2011, such as the wholesale markets, reversing • Merger, acquisition and integration by the end of the year. As a consequence we believe that In addition to overseeing the successful completion of our prudent approach remains right for the Society and is the programme to integrate the operations of Chelsea in the best interests of our current and future members. Building Society into the business, the Board supervised The Board, particularly the non-executive directors, is the programmes responsible for the Yorkshire’s merger responsible for the corporate governance of the Society with N&P and the acquisition of Egg’s mortgage and and for ensuring that best practice is adopted in this savings business. Planning for the full integration of area. Our approach to corporate governance and details these two additions to the Society is well underway of the formal committee structures in place to deliver it and, as with the Chelsea, the Board will strive to are set out in detail in the Corporate Governance Report ensure that the expected benefits are obtained and on pages 43 to 51. thereby additional value is generated for our members. • Corporate governance and regulation As noted above we continue to ensure that the Board adopts the highest standards of corporate governance and that the Society operates in accordance with both the spirit and letter of all relevant regulation. Yorkshire Building Society | Report and Accounts 2011 3 CHAIRMAN’S REPORT continued Regulatory reform at both domestic and international Under Iain’s outstanding leadership the Society has not levels continues apace requiring every part of our only survived the global financial crisis so far, but has business to respond to the changes. One important emerged stronger, having undergone transformational development is the Financial Services Authority development. I would especially like to thank Iain for his (FSA) restarting the funding review of the Financial tremendous contribution to the Society’s success over his Services Compensation Scheme (FSCS). The review long career with the Yorkshire and, on behalf of myself originally started in 2009 but was put on hold due to and my colleagues, wish him well for the future. the development of EU directives and UK regulatory Iain is succeeded as Chief Executive by Chris Pilling reform. The review will look at a range of issues who brings with him a wealth of skills and experience including how the annual levy is calculated. We in delivering exceptional customer service in the retail continue to be actively engaged in lobbying to ensure financial services sector, which will prove invaluable in that as a result of their prudent, primarily retail-funded equipping him to lead the Society forward, building on business models, building societies, and in turn their the strong position we have established. Teamwork is members, are protected from further inequitable central to our culture and Chris joins an extremely payments to the FSCS. strong leadership team which has done an impressive Looking ahead, our regulator the FSA will cease to exist job in leading the Society through an exceptionally in its present form and will be replaced by two new demanding period. regulatory bodies. The Prudential Regulation Authority (PRA) will be a subsidiary of the Bank of England Richard Davey, Non-executive Director, has announced responsible for day-to-day supervision of financial his intention to stand down at the forthcoming AGM institutions, whilst the Financial Conduct Authority after six years on the Board and having served as our Vice (FCA) will regulate how financial services firms conduct Chairman for the past five years. Richard has made an their business. The new regulators are expected to be excellent contribution to the Board and I am particularly in place by the end of 2012 and the Board will ensure grateful for his commitment and support in the role of that the Society continues to comply with the relevant Vice Chairman during the period of global economic regulatory frameworks. crisis. It is anticipated that his successor as Vice Chairman will be announced at the AGM. • Succession of Chief Executive The non-executive directors exercised utmost diligence There were no other changes to the Board or General in undertaking the process of finding and appointing a Management team during 2011. suitable successor to Iain Cornish following his decision A complete list of the Board of Directors can be found to step down. The process was overseen personally on page 51 and profiles of each of the Society’s directors by me and I am confident that Chris Pilling, who and General Managers can be found on pages 36 to 39. succeeded Iain on 31 December 2011, will continue to drive the Yorkshire forward towards the achievement of our vision, ‘to be the best organisation that our Our people customers do business with’. We seek to achieve this It has been impressive to see how the capability and by providing our members and other customers with confidence of the Society’s people have developed over products and services that offer long-term value and the past two years as they have worked together to financial security, backed up by excellent service. successfully drive the business forward in challenging and volatile times. Board and General The strong year for the Society in 2011 in terms Management changes of financial performance, as well as the successful completion of two major mergers and acquisitions, is Iain Cornish, who served as the Society’s Chief Executive testament to the hard work and commitment of our for the past eight years, stood down from his role at the staff. As a Board we believe the remuneration awarded end of the year. As I explained in my report last year, this to our staff for 2011 is a fair and proportionate reward was entirely a personal decision on Iain’s part, as he felt for the results that have been delivered, reflecting that the time was right to allow a new leader to take the the Society’s all-round excellent performance as well Society forward. as individual contributions. Further details of our remuneration policy can be found in the Directors’ Remuneration Report on pages 64 to 70. 4 Yorkshire Building Society | Report and Accounts 2011 2012 will see continued focus by the Board on our people strategy, ensuring on-going support and development for our staff. I wish to thank everyone who works for the Society for the way in which they have continued to focus on providing excellent service to our members and other customers across all of our brands, as well as taking the organisation forward so successfully. The future We recognise that the outlook for the economy and the impact of regulatory changes on our business is more uncertain than at any time since the emergence of the global financial crisis, hence we will continue to manage the business in a prudent manner within our clearly defined risk appetite. We are mindful that the ongoing economic uncertainties are likely to result in continued margin pressures.