monmouthshire building society group pillar 3 … · monmouthshire building society group pillar 3...

MONMOUTHSHIRE BUILDING SOCIETY GROUP

PILLAR 3 DISCLOSURE DOCUMENT

30 APRIL 2018

Contents MONMOUTHSHIREBUILDINGSOCIETYGROUP........................................................................1

PILLAR3DISCLOSUREDOCUMENT...........................................................................................1

30APRIL2018............................................................................................................................1

Contents....................................................................................................................................1

1. Introduction......................................................................................................................1

a. Purpose.....................................................................................................................1

b. Coverage....................................................................................................................1

c.LegislativeFramework..................................................................................................1

d.Review..........................................................................................................................2

2. RiskManagementPoliciesandObjectives.......................................................................3

a. RiskStrategy..............................................................................................................5

b. RiskGovernance........................................................................................................6

3. BoardCommittees............................................................................................................6

a. AuditCommittee.......................................................................................................7

b. BoardRiskCommittee...............................................................................................7

c. RemunerationCommittee.........................................................................................8

d. NominationandCorporateGovernanceCommittee................................................9

4. CapitalResources(at30April2018)...............................................................................10

a. AdequacyofCapitalResources...............................................................................11

5. RiskWeightedExposureAmounts,OperationalRiskCapital&LeverageRatio.............12

a. RiskWeightedExposureAmounts..........................................................................12

b. OperationalRisk......................................................................................................13

c. LeverageRatio.........................................................................................................13

6. CounterpartyCreditRisk................................................................................................14

7. AnalysisofPastDueLoans(>1monthinarrearsandbyregion)..................................15

8. ProvisionsforLoansandAdvances.................................................................................15

9. InterestRateRiskintheBankingBook(IRRBB)..............................................................16

10. Remuneration..............................................................................................................17

a. Directors..................................................................................................................17

b. MaterialRiskTakers................................................................................................18

MONMOUTHSHIRE BUILDING SOCIETY GROUP PILLAR 3 DISCLOSURE DOCUMENT 30 APRIL 2018

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1. Introduction

a. Purpose

The purpose of this document is to provide members and other stakeholders with backgroundinformation on the Society’s approach to risk management and the maintenance of its capitalstrength.Assuch,itincludesdetailsof:

• theSociety’sapproachtoriskmanagement,itspoliciesandobjectives;• thegovernancestructureoftheBoardandBoardCommittees;• ownfundsinformation(orcapitalresources);• regulatorycapitalrequirements;and • compliancewiththeEUCapitalRequirementsRegulation.

b. Coverage

ThedisclosuredocumentappliestotheMonmouthshireBuildingSocietyGroup:

TheinformationpresentedisbasedontheSociety’sAnnualReportandAccountsasat30April2018,butmaydifferwhereregulatoryrequirementsdiffer fromtherequirementsunderlyingtheAnnualReportandAccounts.

c. Legislative Framework

Europeanstandards forcapitaland liquidity requirements forbanks,buildingsocietiesandrelatedinstitutionsaresetoutintheCapitalRequirementsDirectiveIV(CRDIV,2013/36/EU)andtheCapitalRequirementsRegulation(CRR,575/2013).Thislegislationcameintoforceon1January2014,andistheEuropean implementationofBasel III,which setsoutglobal standards for capital and liquidityadequacy.Onanationallevel,prudentialsupervisionwithregardstocapitalandliquidityadequacyisoverseenbythePrudentialRegulatoryAuthority(PRA),andCRDIVisimplementedinthePRARulebook.CRRontheotherhandisdirectlyapplicable,withoutimplementationinnationallegislation.CRDIVandCRRaresupportedbyadditionalguidanceandstandardsdefinedbothonaEuropeanandonanationallevel.

MonmouthshireIndependentFinancialAdvisersLtd

(Dormant)

AustinFriars(Newport)DevelopmentCompanyLtd

(InvestmentProperty)

MonmouthshireInsuranceServicedLtd(Dormant)

MonmouthshireBuildingSociety


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CRRsetsoutnotonlycapitalrequirements,butalsospecifieswhattheSocietymustdiscloseinregardtoitsriskmanagementpolicies,procedures,andperformance,includingthemainrisksfacedbytheSocietyandthegovernanceofthoserisks.Thesedisclosurerequirementsareusuallyreferredtoas“Pillar3”,beingthethirdpillarofthethree-pillarapproachwhichisnormallyconsideredforprudentialbankingregulation.

• Pillar1-Minimumcapitalrequirements,onarisk-basedapproach• Pillar2-Assessmentoftheadequacyofcapitalrequirementsandtheriskmanagement

system• Pillar3-Disclosure

TheinformationprovidedisinaccordancewiththeruleslaidoutinPart8ofCRR.

d. Review

ThisdocumentwillbereviewedannuallybytheAuditCommittee(approvedbytheBoard)andwillbepublishedon the Society’s corporatewebsite (www.monbs.com) in conjunctionwith the Society’s2018AnnualReport.The Pillar 3 disclosures are intended to explain the basis onwhich the Society has prepared anddisclosedcertaincapitalrequirementsandinformationaboutthemanagementofcertainrisksandfornootherpurpose.ThedisclosuresdonotconstituteanyformoffinancialstatementandmustnotberelieduponinmakinganyjudgementontheSociety.IntheeventthatauserhascommentsorrequiresfurtherinformationthenpleasecontactIwanJones,[email protected].


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2. Risk Management Policies and Objectives MonmouthshireBuildingSocietyviewsriskmanagementasanintegralpartofgoodinternalcontroland corporategovernance. TheSocietyhas recently enhanced itsRiskManagementprocesses, byincreasingresourcewithinitsriskfunction,andfurtherdevelopingitsRiskManagementFramework.The Risk Management Framework is the cornerstone for ensuring a risk culture is in operationthroughouttheSocietyandthatall risksare identified,measured,assessed,monitored,controlledandmitigatedwithinthecontextoftheSociety’sRiskAppetite,whichissetbytheBoard.ItisacknowledgedthatriskisinherentinthebusinessactivitiesoftheSocietyandcanneverbefullyeliminated.TheframeworkassistsindefiningtheboundarieswithinwhichmanagementisexpectedtooperatewhenpursuingtheBoardapprovedbusinessstrategyandtogivethebestoutcomesforcustomers.Asoundriskculturesupportingappropriateriskawareness,behavioursandjudgementsaboutrisk-takingwithinastronggovernanceframeworkisrecognisedasakeyelementinensuringthesuccessfuloperationoftheSociety’sframework.ToensurethattheframeworkoperateseffectivelyandefficientlytheSocietyhasadoptedthethreelinesofdefencemodelanddefinedcleargovernancestructuresfortheoperationoftheframework.Risksareassessedusingbothaqualitativeandquantitativeapproach.Thequalitativeriskassessmentsareundertakenthroughriskreviewswhilstanumberofriskappetitemeasureshavebeendefinedtorepresentthequantitativeassessments.AllSocietyrisksarecategorisedintoanumberofprimaryandsecondaryrisktypeswithdefinedRiskOwners.TheSociety’sriskappetiteforeachprimaryriskandfortheSocietyasawholearedefined.A description of the Society’s primary risks, as agreed by the Board and corresponding appetitestatementsaredetailedinthetablebelow:


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TheGroupseightPrimaryRisksandcorrespondingRiskAppetiteStatementsare:

Primary Risk Risk Appetite Statement Business Risk: The risk arising from changes to the Group’s business model (5 Year Business Plan) and the risk of the Plan proving inappropriate due to macroeconomic, geopolitical, regulatory or other factors.

Maintain earnings stability over the 5 year business plan to maintain sustainable asset growth and capital reserves.

Credit Risk: The risk of losses arising from a debtor’s failure to meet their legal and contractual obligations.

A prudent lending approach to mortgage customers and treasury counterparties to minimise default rates and impact on earnings or capital whilst generating an appropriate level of return reflecting the risk.

Financial Soundness Risk: The risk that insufficient funds are available to meet financial obligations as they fall due or the ability to meet liquidity and capital regulatory requirements.

Liquidity Maintain sufficient liquid resources over and above financial minimums to give members confidence on the Group’s ability to meet its obligations. Capital Maintain sufficient Capital to support current and future business initiatives, including stressed losses that arise as a result of plausible but extreme scenarios and to meet regulatory requirements.

Market Risk: The risk of losses arising from changes in market rates or prices.

Minimise potential losses on interest rate and basis risk positions from adverse movements in market rates to ensure they remain within forecast market expectations.

Operational Risk: The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Develop robust processes and controls to optimise resources and reduce the impact of operational risks on the Group’s performance.

Conduct Risk: The risk of financial or reputational loss as a result of treating customers unfairly, and delivering inappropriate outcomes that lead to customer detriment.

Aim to deliver positive outcomes for customers, maintaining a high degree of customer and public confidence by focusing on the Group’s aims and values.

Legal and Regulatory Risk: The risk of fines, public censure, limitation on business, or restitution costs arising from failing to understand, interpret, implement and comply with UK or EU legal and regulatory requirements.

Maintain a robust risk management culture to ensure compliance with legal and regulatory requirements.

Pension Obligation Risk: The risk of a material financial deficit in the Group’s Defined Benefit Scheme

Ensure the Group’s contractual and regulatory obligations are met.


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a. Risk Strategy

TheSocietyrecognisesthedeliveryoftheBoard’sstrategygivesrisetoanumberofpotentialrisksthatareinherentinthebusinessactivitiesoftheGroup.Whilsttheseriskscanneverbecompletelyeliminated,throughcarefulmanagementtheycanbemitigated.TheBoardhasagreedariskappetitethatseekstolimittheamountofriskacceptedbythebusinessinpursuitof its longtermstrategy,helping theGroupachieve sustainable growthand serving thebest interestsofourmembersandcustomers.TheBoardisresponsibleforensuringaneffectiveriskmanagementframeworkisinplace,promoting a risk aware culture that ensures all principal risks are identified andmitigated in thepursuitofstrategicobjectives.ThroughouttheyeartheBoardhascontinuedtoinvestintheGroup’sapproachtoriskmanagementtoensureitcontinuestodelivereffectivelyandsupportsthenextstageoftheGroup’ssustainablegrowth. Indeveloping theGroup’sStrategicPlan,potential risksare identifiedwhenassessing thestrengths, weaknesses, opportunities and threats (SWOT) facing the Group. These risks are thenexaminedtoconsidertheirpotentialimpactandlikelihood,andtodeterminetheGroup’sappetiteforsuchrisks,indevelopingspecificobjectives.Finallytheserisksarethenmanagedandmonitoredastheactionsnecessarytodelivertheagreedbusinessstrategyareundertaken.AspartoftheGroup’sstrategicbusinessplanningastandalonestrategicriskassessmentismaintained.TheRiskManagement Framework assists in defining theboundarieswithinwhichmanagement isexpectedtooperatewhenpursuingtheGroup’sbusinessstrategy.RiskManagementStructure

TheGroup’sapproachtoriskmanagementisdesignedtoensuretheGroup’sobjectivesareachievedthrough its business strategy, which is outlined in the Strategic Plan, the Risk ManagementFramework,riskappetitestatements,andappropriatepolicies,processes,controlsandprocedures.


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b. Risk Governance

The Board have overall accountability and ownership of the Risk Management Framework, anddelegatetotheBoardRiskCommitteetoensurethedevelopment,implementationandmaintenanceoftheframework.ArobustgovernancestructureandsoundmanagementoftheRiskManagementFrameworkisanindicationoftheeffectivenessoftheBoardinmanagingtheGroupThere are three management risk committees to ensure there is proactive management andgovernanceofriskandcontrol issuesunder theRiskManagementFrameworkandtheoperationofarobust riskcultureacrosstheGroup.

3. Board Committees The current terms of reference of the Group’s Board committees are published on the Society’swebsite.AsummaryoftheBoardCommitteesisdetailedbelow.


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a. Audit Committee

The Committee comprises three Non-Executive Directors. Representatives from the SocietyExecutive,togetherwiththeSociety’soutsourcedInternalAuditorandExternalAuditor,alsoattendCommitteemeetings by invitation. The purpose of the Committee is to consider all audit relatedmatters,inparticular,toreviewtheGroup’sfinancialreportingarrangements,theeffectivenessofitsinternalcontrolsanditsriskmanagementframework,theinternalandexternalauditprocessesandtheGroup’swhistleblowing procedures. The Committee reports to the Board on its activities andmakesrecommendationstotheBoard.ThekeyresponsibilitiesoftheCommitteearesetoutbelow: AuditCommitteekeyresponsibilitiesFinancialReporting • MonitoringtheintegrityoftheGroup’sfinancialstatementsand

reviewingcriticalaccountingpolicies,judgementsandestimates.• Reviewing the appropriateness of the going concern basis for

preparingtheaccounts.ProvidingadvicetotheBoardonwhethertheAnnualReportandAccounts,takenasawhole,arefair,balancedandunderstandable.

Externalaudit • Reviewing the continued objectivity and independence ofexternal audit, including the level and appropriateness of non-auditservices.

• Considering the appointment, removal, performance andremunerationoftheexternalauditfirm.Consideringtheplanning,scopeandfindingsoftheannualexternalaudit,thereceiptof,andresponsesto,theauditor’smanagementletterandreviewingthedegreeofliaisonwithinternalaudit.

InternalControlsandRiskmanagement

• Reviewing the adequacy and effectiveness of the Society’sinternal financial controls and internal control and riskmanagement systems in conjunction with reviewing reportsproducedbyinternalandexternalaudit.ReviewingthestatementstobeincludedintheAnnualReportconcerninginternalcontrolsandriskmanagement.

Whistleblowing • Reviewing the adequacy and security of the Group’swhistleblowingarrangementsfor itsemployeesandcontractorsto raise concerns, in confidence, about possiblewrongdoing infinancialreportingorothermatters.

• Ensuringthatwhistleblowingarrangementsallowproportionateandindependentinvestigationofsuchmatters.

Internalaudit • Consideringandapprovingthestrategicandannualplansofwork.• Consideringmanagementresponsestorecommendations.• Considering the appointment, removal, performance and

remunerationoftheinternalauditfirm.

b. Board Risk Committee

TheCommitteecomprisesthreeNon-ExecutiveDirectors.RepresentativesfromothermembersoftheSocietyExecutive,alsoattendCommitteemeetingsbyinvitation.


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ThepurposeoftheCommitteeistomonitortheGroup’scompliancewiththeBoard’sapprovedriskappetite,riskmanagementframeworkandriskculture.ThekeyresponsibilitiesoftheCommitteearesetoutinthetablebelow:

c. Remuneration Committee

TheCommitteecomprisesthreeNon-ExecutiveDirectors.TheCommitteedeterminestermsandconditionsofemploymenttogetherwithlevelsofremunerationin respectof theSociety’s staff.Thekey responsibilitiesof theCommitteearesetout in the tablebelow.RemunerationCommitteeKeyResponsibilitiesDirectorsremuneration

• DeterminingremunerationfortheChairman,allexecutivedirectorsandothermembersoftheexecutiveincludingpensionrightsandanycompensationpayments.Theremunerationofnon-executivedirectorsisdeterminedbytheChairmanandexecutivedirectors.

• DeterminingremunerationforallemployeesoftheSociety.

BoardRiskCommitteekeyresponsibilitiesSettingriskappetite • Reviewing and approve the Group’s Risk Appetite Statements

takingaccountofthecurrentandfuturemacroeconomicfinancialandregulatoryenvironment.

• ApprovingtheRiskAppetiteMeasurestobeusedtomonitortheGroup’sriskmanagementperformance.

Monitoringbusinessoperation

• Monitoringemergingprudentialrisks,conductrisksandareasofpotential concern, in particular those matters identified orhighlighted by the regulatory authorities, and satisfy itself thatappropriatereviewsareundertakentoidentifyandmanageanyimpactontheGroupanditsMembersinatimelymanner.

• Reviewingandchallengetheinternalcontrolenvironment.MonitortheGroup’scurrentriskexposures,includingperformanceandcomplianceagainsthighlevelriskappetitelimitsandtolerances.

Riskreporting • ReviewingthequarterlyreportsprovidedbytheHeadofRisk&Compliance on the activities of the Risk Department and itsassessmentofriskwithintheorganisation

Riskmanagement • Reviewing and approve the Group’s Risk ManagementFramework.

• Reviewing the implementation of the Risk ManagementFramework ensuring all risks are managed with adequateresourceandasatisfactorycontrolenvironment.

• Ensuring that the Group’s Risk Management Structure isadequatelyresourcedandeffective.


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RemunerationReporting

• ReportingtomembersannuallyintheAnnualReport&Accounts.ThereportwillbepresentedandbesubjecttoanadvisoryvoteattheAnnualGeneralMeeting.

Remunerationpolicy • ReviewingtheRemunerationPolicyannually.

d. Nomination and Corporate Governance Committee

TheCommitteecomprisesthreeNon-ExecutiveDirectorsandtheChiefExecutiveOfficer. TheCommitteeisresponsibleforsuccessionplanningforbothexecutiveandnon-executivedirectorpositions.TheCommitteemeetsasoftenasisnecessarytofulfilitsresponsibilities.DuringtheyeartheCommitteeextendeditsremittoincludecorporategovernancematters.TheCommitteeannuallyreviewstheConflictsRegistertoensuretherearenopotentialoractualconflictsthatcouldaffectadirector’sabilitytoactinthebestinterestsoftheSociety. NominationCorporateGovernanceCommitteeKeyResponsibilitiesBoardComposition • EndeavourtoensurethattheBoardanditsCommitteeshavethe

capabilitiesrequiredtobeeffectiveandoverseetheSociety.Thiswillincludeanappropriaterangeandbalanceofskills,experience,independence,knowledgeandbehaviours.

• Responsible for identifying and recommending candidates forBoardapproval.

• Reviewingthemembershipandchairmanshipofcommitteestoensurethatcommitteemembershipisprogressivelyrefreshedandthatunduerelianceisnotplacedonparticularindividuals.

Successionplanning • ConsiderationofsuccessionplanningformembersoftheBoardinthecourseofitswork,takingintoaccountthechallengesandopportunitiesfacingtheSociety,itsleadershipneedsandwhatskillsandexpertisearethereforeneededontheBoardinthefuture.

• ReviewingtheleadershipneedsoftheSociety,bothexecutiveandnon-executive,withaviewtoensuringthecontinuedabilityoftheSocietytoperformeffectivelyinthemarketplace.


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4. Capital Resources (at 30 April 2018) Asat30April2018andthroughouttheyearended30April2018theGroupcompliedwithitsCapitalRequirementsaslaiddownbythePRA.TheCapitalResourcesoftheGrouparecalculatedunderPillar1ofCapitalRequirementsDirectiveIV.Thefollowingshowsthebreakdownofavailablecapitalforthegroup: 30April2018

£000Tier1CapitalGeneralReservesLessintangibleassetsTotalTier1CapitalCoreTier1Capitalasapercentageofriskweightedassets

64,688

(1,345)________

63,343

16.82%

Tier2CapitalCollectiveProvisionsTotalTier2Capital

223________

223 TotalRegulatoryCapitalResources 63,566 Totalregulatorycapitalasapercentageofriskweightedassets

16.88%

ReconciliationofAccountingandRegulatoryCapitalResources

30April2018£000

AccountingCapitalResources–GeneralReserves Adjustedfor:CollectiveProvisionsIntangibleassets

64,688

223(1,345)

RegulatoryCapitalResources 63,566


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a. Adequacy of Capital Resources

UnderpinningtheSociety’sCorporatePlanistheneedtomaintainitscapitalstrengthabovetheBoardagreedrequirement,whichisthesameastheregulatoryrequiredminimumcapital.Inordertodothis,theSocietyneedstogenerate,andretain,profitsthatwilladdtothegeneralreserves,themainsourceofcapital.Complementing the Strategic Plan, the Society annually undertakes an Internal Capital AdequacyAssessmentProcess(ICAAP),toensurethattheSociety’scapitalresourcesaresufficienttodelivertheStrategicPlanobjectivesinnormalaswellasstressedconditions.ThisprocessinvolvesreviewingallrisksrelevanttotheSociety,andassessingtherequiredcapitaltomitigatethoserisks,throughanalysingtheimpactofarangeofstressscenarios.ThekeyrisksthatareevaluatedaspartoftheICAAParetheprimaryrisksidentifiedinSection2.TheBoardassessesrelevantinformationoneachoftheseareasagainstaclearlydefinedriskappetiteandapprovesthecapitalrequirementsarisingfromthisdetailedreview.Initschallengeofthecapitalassessments,theBoardalsotakes intoaccountanyareaswheretheyfeelthemodelsand internalassessments do not adequately capture the full risk exposure by holding extra capital whereappropriate.The Society translates its overall risk appetite for risk into a range of policy limits controlling theexposurestaken.Theseexposures,andotherrisks,arecarefullymonitoredbytheBoardandBoardcommitteesonaregularbasis,aspartoftheSociety’sGovernancestructure.


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5. Risk Weighted Exposure Amounts, Operational Risk Capital & Leverage Ratio

a. Risk Weighted Exposure Amounts

TheassetsoftheSocietyareanalysedbyriskcategoryandgivenriskweightingsaccordingtothelevelofriskentailed.Theriskweightingsaredeterminedbythe“standardisedapproach”tocreditriskand“basicindicatorapproach”tooperationalrisk.TheSociety’sgroupPillar1capitalrequirementasat30April2018basedon8%ofitsrisk-weightedassetsisderivedasfollows: 30 April 2018 Assets

£000 £000

Risk Weighted Asset £000

Minimum Capital Required

£000 Pillar1Capital-CreditRisk CentralGovernmentsorCentralBanks

120,970 - -

Institutions 84,119 16,874 1,350FullySecuredonResidentialPropertyMortgageassets

819,240 293,552 23,484

FullySecuredonLandMortgageAssets

22,927 22,927 1,834

OtherItems 11,795 11,795 944Total 1,059,051 345,148 27,612Offbalancesheetexposures 26,876 1,478 118Pillar1Capital–OperationalRisk 29,950 2,396TotalPillar1CapitalRequirement 376,576 30,126

£000

AmountofRegulatoryCapitalResources 63,566TotalRequirement (30,126)ExcessofReservesoverRequirement 33,440

Themajority of the Society’s own funds are in the formof CommonEquity Tier 1, and consist ofretained earnings. Specific and collective provisions are subtracted from CET 1 capital, but thecollectiveprovisionisincludedaspartofTier2.DuetotheadoptionofFRS102,deferredtaxassetsthatrelyonfutureprofitandarisefromtemporarydifferencesarealsorequiredtobedeductedfromCET1capital,butanexemptionisapplicableaslongastheamountisbelow10%oftotalCET1capital.


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b. Operational Risk

OperationalRiskiscalculatedunderthe“BasicIndicatorApproach”as15%ofthesumoftheaveragenetinterestafteradjustingforotheroperatingincomeandcharges,overthepreviousthreeyears.AbreakdownofthecalculationofcapitalrequirementsforOperationalRiskisprovidedbelow:

Basic Indicator Approach to Operational Risk (£000) 2016 2017 2018 NetinterestIncome 15,116 15,362 15,914OtherIncome/charges 687 69 768Total 15,803 15,431 16,682BasicIndicator(3yearaverage) 15,972OwnFundsRequirement(15%oftheBasicIndicator) 2,396

c. Leverage Ratio

TheleverageratioisdefinedasratiobetweentheTier1capitalandthetotalonandoffbalancesheetassetexposure,without taking toaccountany riskweighting. Itsobjective is to reduce the riskofexcessiveleverage(i.e.anexcessivelylowamountofownfundscomparedtototalassets),aswellasactingasabackstopagainstthemodelcomplexitiesinvolvedincalibratingriskweights.TheSocietycalculatesitsTier1CapitalonthebasisthatwillapplyonceCRDIVhasbeenfullyphasedin.Thetotalexposuremeasureand leverageratioareshownbelowbasedonthetotalbalancesheetexposuresat30thApril2018.

Leverage Ratio Calculation £000 Capital Capital 64,688Lessintangibleasset (1,345)

63,343TotalBalancesheetexposures 1,059,051

Derivativesadjustment 1,879Lessintangibleasset (1,345)

Offbalancesheetexposures 3,937 1,063,522LeverageRatio 5.96%

TheSociety’scalculatedleverageratioat30April2018was5.96%(30April20175.81%).


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6. Counterparty Credit Risk TheSocietyisexposedtocounterpartycreditriskinrelationtoitsliquidassetinvestmentswhichareinvestedincentralgovernment,multilateraldevelopmentbanks,banks,buildingsocietiesandlocalauthorities.TheRiskCommitteeisresponsibleforrecommendingtotheBoardwhichcounterpartiesshouldbeincludedontheauthorisedcounterpartylistandwhatthemaximumexposureshouldbeforeachcounterparty. TheRiskCommitteetakesintoaccounttheratingsassignedtoanentitybyFitch,Moody’sandStandard&Poor’screditratingagenciesandalsoconsidersanyotherpertinentdatathatisconsideredtorelatetothecreditworthinessofeachentity.Currentpolicyforacceptingnewcounterpartiesisasfollows:

• TheSocietycannotinvestinanyCounterpartyforadurationofmorethanoneyearunlessitcarriesaminimumlongtermcreditratingofAA-,orequivalentfromeachofFitch,Moody’sandStandard&Poor’sRatingAgencies.

• TheSocietycannotinvestinanyCounterpartyforadurationofuptoamaximumofoneyearunlessitcarriesaminimumshorttermcreditratingofF1orequivalentfromeachofFitch,Moody’sandStandard&Poor’sRatingAgencies.

• ThelowestratingofeachAgencywillbeusedforassessmentpurposes.• CertainestablishedCounterpartieswithalowerthanminimumcreditratingcanbeincluded

ontheSociety’scounterpartylistwherespecificallyapprovedbytheBoard.ThematurityandcreditqualityprofileofTreasuryinvestmentsat30April2018isshownbelow:Maturity Profile

< 8 Days £'000

< 1 Month £'000

< 3 Months £'000

> 3 Months £'000

Total £'000

Minimum CreditRating

AAA to AA-(including BSocCovered Bonds &RMBS)

2,567 5,061

- 17,858 25,486

A+toA- 7,249 4,017 - - 11,266BuildingSocieties - 6,230 2,012 10,023 18,265Multi-LateralDevelopmentBanks(AAA)

29,100 29,100

CentralGovernments andBanks

104,541 - - 15,422 119,970

Localauthorities 1,009 1,009Total 114,364 15,308 2,012 73,412 205,089


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Exposure Class Less than 3 months

3 months to 1 year

1 year to 5 years

Greater than 5 years Total

Centralgovernmentsorcentralbanks 109,080 10,890 - 119,970Institutions 22,413 38,285 24,421 - 85,119

Securedbymortgages 10,231 23,711 149,202 659,023 842,167Otheritems 11,795 - - - 11,795TotalCreditRisk 153,519 72,390 174,119 659,023 1,059,051

7. Analysis of Past Due Loans (> 1 month in arrears and by region) Thetablebelowshowsanoverviewofthemortgageportfolioseparatedbyriskcharacteristics(i.e.owner-occupiedresidential,buytoletresidential,orcommercialmortgages),aswellasgeographicalregions.

Mortgage Portfolio Owner occupied

Residential

Buy To Let Residential

Commercial Total

£000 £000 £000 £000

Totalexposure Performing 647,160 163,935 22,107 832,719Non-performing* 7,248 1,226 974 9,448

Collectiveprovision 156 39 28 223Specificprovision 10627 127 260

Exposurebyregion % % % %Wales 61 77 86 64SouthWest 14 16 6 14WestMidlands 7 3 8 6OuterMetropolitan 4 - - 3OtherSouthEast 4 1 - 3GreaterLondon 4 1 - 3NorthWest 3 - - 2Other 3 2 - 5Total 100 100 100 100

*Loansareclassifiedasnonperformingwhentheyareonemonthormoreinarrears.

8. Provisions for Loans and Advances Provisions(underCRRreferredtoascreditriskadjustments)oncommercialandresidentialaccountsaremadetoreducethevalueofloansandadvancestotheamountthatisconsideredtobelikelyto


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be ultimately recoverable in the event of the relevant property held as security being sold inpossessionbytheSociety.Throughouttheyear,andattheyear-end,individualassessmentsaremadeofallloansandadvanceswhichare inpossessionoraresignificantly inarrearsandaspecificcredit riskadjustment ismadeagainstthosecaseswhichareconsideredtobeimpaired.Inconsideringtheindividualprovisionsforimpaired loans, account is taken of any discount whichmay be needed against the value of theproperty at the balance sheet date to agree a sale within three months of that date. Where,unfortunatelyacustomerhasbeenunabletomaketheirrepaymentsandwherethebestoutcomeisforthepropertytobetakenintopossession,andwherethepropertyissubjecttoanacceptableofferfroma potential purchaser andmanagement are satisfied that commitment to completionof thetransactionexists,theindividualprovisionhasbeenmadeonthebasisoftheagreedsellingprice.TheSocietyalso looks tomitigate losses throughtheuseofMortgage IndemnityGuarantee insurance,whichistakenoutonalmostallresidentiallendingover80%loantovalue.OnthebasisoftheSociety’spreviousexperienceitisrecognisedthatnotallseriousarrearscaseswillultimatelyresultinpossession,andtheamountsprovidedonindividualcaseseithernotinpossessionorseriouslyinarrears,reflecttheestimatedpropensityforalosstoberealised.An individual provision is also considered in the case of accounts,whichmay not currently be inarrears,wheretheSocietyhasexercisedforbearancetoworkwiththecustomerintheconductoftheaccount.Theprovisionisbasedonthepropensityoftheaccounttorealisealoss,hadforbearancenotbeenshown.Noprovisionismadeagainstthefuturecarryingcostsofimpairedloans.AcollectiveprovisionisalsomadeagainstthoseadvancesforwhichtheSociety’sexperienceandthegeneraleconomicclimatewouldindicatethatimpairmenteventshaveoccurredbuthaveyettobenotifiedandassuchcouldultimatelyresultinaloss.Theamountchargedintheincomeandexpenditureaccountrepresentslosseswrittenoffintheyeartogetherwiththenetchangeincreditriskadjustments.Interestinrespectofallloansiscreditedtotheincomeandexpenditureaccountasitbecomesreceivable.

9. Interest Rate Risk in the Banking Book (IRRBB) The Society has pledged part of its loan book as collateral with the Bank of England, in order toparticipate in the Bank’s Sterling Monetary Framework (SMF) and Asset Purchase Facility (APF).Participation in these schemes provides the Society with a source of funding that diversifies thefundingportfolioandreducestheoverallfundingcost,andallowstheSocietytooptimisemortgageratesforitsmembers.AlthoughtheloansremainfullyownedandoperatedbytheSociety,theyarereportedasencumbered.Otherencumberedassetsarecollateralpostedforthederivativeportfoliothatsupportsthemanagementof interestraterisk.Detailsoftheencumberedassetsare includedbelow:


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EncumberedAssetsIRRBBismanagedusingbalancesheethedgingthroughtheuseofderivatives.BasisriskismeasuredandcontrolledthroughstaticanddynamicstresstestsagainstBoardapprovedlimits.Static gap analysis is performedmonthly against a 2% parallel shift in interest rates, the Societycurrently stress tests a downwards shift against a fall of 0.5% in interest rates. The results arereviewedbytheALCOandRiskCommittee.Theresultsofthestresstestat30April2018areasfollows: Net Gap £000 Impact on net interest

income £000 At30April2018 57,163 -Impactofinterestrateshiftof+2% 58,172 (1,009)Impactofinterestrateshiftof(0.5%) 56,659 504

10. Remuneration

a. Directors

FulldetailsoftheSociety’sremunerationpolicyanddetailsofExecutiveDirectors’emolumentsfor2018andcomparativesfor2017aresetoutintheDirectorsReportintheAnnualReportandAccounts,availableontheSociety’swebsite,whichshouldbereadinconjunctionwiththisreport.TheSociety’sobjective insetting remunerationpolicies is to rewardExecutiveDirectorsandotherseniorstaffthroughsalariesandotherbenefits,includinganincentiveschemedesignedtorecognisethe achievement of corporate objectives. Remuneration is set at a level to retain and attractindividualsofthecalibrenecessarytooperateinanorganisationsuchastheSociety.NoExecutiveDirectorholdsacontractwithanoticeperiodofmorethan12months.


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b. Material Risk Takers

TheBoardhavedetermined that for the year to 30April 2018, in addition to the threeExecutiveDirectorsoftheSociety,fourotherexecutives,includingthoseinvolvedincontrolledfunctionsandtwomanagersaredesignatedasbeingsubjecttothePRARemunerationCode,assetoutinSYSC19A.Thesestaffarenowidentifiedas“MaterialRiskTakers”underCRDIV.Theremunerationof theSocietyExecutiveDirectorsandothermembersofseniormanagement isdeterminedbytheRemunerationCommittee,whichconsistsofthreeNon-ExecutiveDirectors.ThetermsofreferenceoftheCommitteeareavailableontheSociety’swebsite.Rewardsareprincipallyintwoparts,beingbasicsalaryandanannualincentivepayment.Paymentsmadeasaresultoftheannualincentiveschemearenotpensionable.Theannualincentiveschemeislinkedtokeycorporateperformancemeasures,suchaspeergroupcomparisonandtheachievementoffinancialorregulatorycompliancetargets(e.g.inrelationtogrowthandefficiency).Fortheyearto 30 April 2018, the schemewas designed to deliver amaximum award of 20% of basic salary,followingfinalisationandapprovaloftheAccounts.Paymentsmadetomaterialrisktakerstheyearto30April2018wereasfollows: Total

£000Remuneration Fixed 681Variable 73 754

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