ANNUAL REPORT - Ipswich Building Society · 2019. 3. 4. · may impact arrears on mortgages....

Year ended 30 November 2018

ANNUAL REPORT

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ContentsChairman’s Report

Chief Executive’s Report

Directors’ Report

Corporate Governance Report

Directors’ Remuneration Report

Statement of Directors’ Responsibilities

Independent Auditor’s Report

Statement of Comprehensive Income

Statement of Financial Position

Statement of Changes in Members’ Interests

Statement of Cash Flows

Notes to the Accounts

Annual Business Statement

Information Relating to Directors 2018

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• Significant activity supporting our communities involving financial education and volunteering programmes, and new initiatives such as a Bereavement Guide and Helping Hand boxes across our branch network.

When we grow our lines of business we aim to provide good long term value but always with a commitment to meeting our members’ service expectations. This is demonstrated by consistently high member satisfaction and supported by a low level of complaints, maintaining an excellent record with the Financial Ombudsman Service.

High quality member service is at the heart of our business model and this is based on the professionalism of our engaged employees. Our partner brokers and our members rely on us for advice and support and our team have again worked to the highest standards during the year, which is consistently demonstrated in our satisfaction results.

The Board structures, oversight controls and information are at the heart of our governance. During the year we were pleased to be able to share with our regulator a new Board Effectiveness Review. The review was conducted externally and highlighted the strength of our current governance but also gave us a number of very helpful ideas to further improve and modernise what we do. In November we were delighted to welcome Fiona Ryder to the Board. Fiona, who lives in Suffolk, brings over 25 years’ experience across the broadcasting, digital and commercial sectors.

Underpinning the Board’s oversight is our Enterprise Risk Management Framework (ERMF), initiated in 2017 with a new suite of risk management tools which were fully embedded during 2018. This is now at the heart of our decision making and incorporates the control structures and mechanisms which are needed in these challenging times, with threats to all businesses growing, especially from fraud and cyber attack. This is, quite rightly, a crucial area of focus for our regulators and the ERMF is guiding our approach to building new resilience and recovery mechanisms into decision making to ensure that we maintain customer service in even the most difficult of circumstances.

ERMF is also about ensuring the Society operates within the Board’s defined appetite for risk and ensuring those risks are understood and can be managed. This brings me to the outlook for the next year and the risks we are currently considering.

At the time of writing the economic and political uncertainty associated with Brexit continues and the UK political landscape is changing. The Financial Policy Committee has said that the UK Banking system could support the real economy through a disorderly Brexit but there are now seemingly a number of potential outcomes. Some of these may negatively impact the UK economy and whilst the Society’s business model means it is largely protected from any direct adverse implications of Brexit, it could be impacted by wider economic changes.

Chairman’s Report

The Society remains committed to providing long term sustainable value to members through competitively priced savings and mortgage products. Each year we aim to earn sufficient profit to ensure we have the capital we need to sustain and grow our business. I am therefore pleased to report that our profit before tax for the year was £3.3m.

During the year, and despite an increasingly price competitive market, we continued to grow our mortgage and savings book. We achieved this whilst maintaining our risk appetite as demonstrated by our pleasing low level of arrears.

Our new business support from our key intermediaries, particularly those in our Prestige Panel, was again at the heart of our business success. The ongoing development of our broker portal continues to facilitate a more efficient transactional model for our partners and our broker satisfaction rating was 87% (2017: 82%).

Our business model remains very straightforward and in the year we performed strongly by continuing to attract and retain personal savings through a combination of good value products and excellent service, and then using these funds to lend responsibly to UK mortgage borrowers.

Highlights of the year were:

• Strong targeted new mortgage business linked to a customer focused retention strategy, delivering an increase in lending of £15m and a stable net interest margin on a total book of £536m at year end.

• Savings balances increasing by £5m taking overall deposits to a record £572m.

• Delivering a focus on quality member outcomes shown in the Society’s member satisfaction levels and Net Promoter Score which remain extremely high at 98.6% (2017: 98.2%) and 83 (2017: 84) respectively.

• An excellent arrears performance. For loans where arrears were greater than 2.5%, these are at 1.02% compared to the market average of 1.04%.

• A significantly improved capital strength in terms of both the regulatory and accounting position and a consistently high liquidity position across 2017 and 2018. The Society’s Leverage Ratio has been improved at 4.9% (2017: 4.4%) and the Liquidity Coverage Ratio at 225% (2017: 217%) remains considerably above the minimum requirement.

• An excellent and improving employee engagement score using benchmarking from new supplier Engagement Multiplier.

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Reduced economic confidence or a fall in either house prices or rental yields could result in a reduced demand for mortgages. In addition reduction in confidence or pressure on real incomes and levels of employment may dampen savings demand and may impact arrears on mortgages. Comprehensive stress tests by the Society give a high degree of confidence in the Society’s ability to withstand a severe and adverse Brexit scenario, where bad debts are significantly increased and property prices fall quickly and dramatically.

In 2018 the mortgage market continued to be very competitive with margins remaining tight and while there has been some softening in some parts of the London market, house price indices remain generally positive. Looking ahead there are a number of factors which could exert pressure on the Society’s net interest margin. Towards the end of 2018 it was clear that price competition within the mortgage market was increasing. This, linked to the continuing low base rate environment, creates an industry wide pressure on margins. There are early signs of increased price competition for savings reflecting perhaps a slow down in the UK savings market and the ending of the Term Funding Scheme.

Although the Society’s simple operating model and high quality loan book improves its resilience to these risks, they are nevertheless at the front of our thoughts and additional business controls and monitoring are being put in place to enhance Board and management oversight.

In concluding this Report I thank my colleagues on the Board, and all of the Society’s employees for their valued personal and team contributions. Last year was a demanding one with many changes affecting the Society internally and externally. That we have seen success in so many areas is because everyone in the team stepped up and took responsibility to support their colleagues, our members and our communities. With this level of commitment, I am confident that although 2019 will be just as demanding, we are well placed to continue to build the business for the future.

Alan Harris Chairman8 February 2019

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Chief Executive’s Report

With a backdrop of continuing economic uncertainty, we began our new financial year with a positive statement and a commitment to our face-to-face services by opening two new premises in the existing branch towns of Ipswich and Woodbridge.

We are proud to be part of Suffolk’s high streets and to play an active part in the local community, particularly when people are seeking stability and reassurance during a time of political and economic volatility.

At the time of this report we do not yet know the impacts of Brexit, and in 2018 witnessed another increase in the Bank of England’s Base Rate - the second successive annual upturn. There is, inevitably, much speculation about how the Base Rate may be affected by Brexit and this is something we will be closely monitoring. Broadly speaking we do not expect the UK’s exit from the EU, if orderly, to impact considerably on the Society’s business. Stress testing gives us confidence that the Society has the ability to withstand a more significant economic impact.

The Autumn budget was positive news for would-be first time buyers, with stamp duty abolished for shared ownership properties up to £500,000 and, in another welcome move, backdated to the last budget in November 2017. A further £500m was promised for the Housing Infrastructure Fund, enabling local councils to apply for cash to help them build more homes, and the Help to Buy scheme was extended for a further two years to April 2023.

One of the most significant events of the year was the introduction of the General Data Protection Regulation (GDPR), a European-wide reform to the Data Protection Act 1998. Whilst this was a complex implementation I am pleased that we worked efficiently and diligently to ensure we were in a good position ahead of the deadline of 25 May.

Membership and branches

I am pleased to report our customer satisfaction remains high, at 98.6% (2017: 98.2%) and our Net Promoter Score, an indicator of how likely members are to recommend us, is 83 (2017: 84), an exceptional score for a financial services organisation. As a mutual we place great importance on the satisfaction and support of our members, and work to meet their needs.

As such, the demand for our face-to-face services in Ipswich town centre and Woodbridge has seen us open new premises in the past year, at a time when other providers have closed branches. Of course, we know we face increasing demand for online services and have been preparing for a complementary digital channel to enable our members better access to our services. This will remain a focus in the coming year.

Through our All In member proposition, designed to make membership meaningful, we again hosted a range of exclusive, entertaining and informative member events. We welcomed 443 members to events featuring scam awareness workshops, a tour of Wilkin & Sons jam factory in Tiptree and a sunset Orwell River Cruise to mark Suffolk Day.

Within our branch towns we have taken part in activities such as the Hadleigh Show, Saxmundham Music Festival and Woodbridge’s bid to be Great Britain’s Best High Street. The space afforded to us by our new Mutual House premises in Ipswich town centre enabled us to host 31 specialist events attracting over 1,400 visitors, such as a MENTA Customer Services Seminar to support small businesses and making use of the Grade II listed building for the popular Heritage Open Days national event.

Nurturing communities

Our employees are encouraged to spend time getting ‘hands on’ in Suffolk through our volunteering programme, or via our financial education programmes in schools, colleges and prisons. (HMP Highpoint and HMP Hollesley Bay).

It is heartening to report that 53 employees contributed to 836 volunteer hours in 2018, assisting charities such as Halesworth Volunteer Centre, Fresh Start New Beginnings and joining in with an Adnams beach clean for the UK Marine Conservation Society. A further 515 hours was spent delivering financial education, a key life skill.

Alongside practical support we have also been able to make donations to a number of charitable and community organisations. Through our philanthropic Mutual Advantage savings account which supports charities local to each of our branches, plus our closed-issue We-Care account, supporting St Elizabeth Hospice, Suffolk Wildlife Trust and the East Anglian Air Ambulance, we donated over £30,000. Through our Matched Funding scheme, which doubles efforts raised by our employees, a further £12,000 was contributed to causes including Suffolk Mind, Families In Need and Ipswich Hospital’s Somersham Ward Cancer Support Group.

Supporting home ownership

By employing an expert, manual approach to our underwriting we can understand the personal circumstances behind each mortgage application, which enables us to continue to innovate with our mortgage lending.

I am delighted to have seen demand for our new products specifically designed for borrowers aged 50+, offering no maximum age restriction at the end of the mortgage deal. Borrowing in later life brings with it a set of unique needs as well as changing sources of income and lifestyle, which our underwriters can take into consideration. Alongside this we identified a gap in our range for 75% Loan To Value (LTV) products and responded to demand for a limited tranche of five year fixed deals.

We have been able to improve our offering for those either building or remortgaging a property using Modern Methods of Construction (MMC), and launched a new product specifically for shared ownership homeowners to remortgage their deal.

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Our mortgage products are available both to direct applicants and also through a network of mortgage intermediaries, who have accounted for 82% of our mortgage business in the past year. We continue to work closely with our intermediary partners and in 2018 improved our broker proposition, clearly defining how we can help serve their mortgage clients.

Fit for the future

Along with the Board I am mindful of the need to ensure we have the appropriate senior staff in place to lead the Society through the coming years. We have made two internal promotions, welcoming Rebecca Newman to our Executive team as General Manager Legal and HR (formerly Society Secretary and Legal Counsel) and Ian Brighton to our Board as Operations Director (formerly General Manager Operations).

In addition, as highlighted in the 2017 Report, we we are pleased to record that Trevor Slater joined the Society as Finance Director in January 2018.

During the year we have implemented a new tool to help us measure employee satisfaction and engagement, enabling us to monitor initiatives and invite suggestions on how to improve the Society as an employer. I am pleased to report we have consecutively increased our engagement score in each quarterly survey and implemented several suggestions, such as a transparent remuneration policy, core hour working and increased visibility of our senior leadership team in Head Office and branches.

We have pledged our support for the Women in Finance charter, with five internal targets to help achieve a greater level of gender diversity. This includes activities such as unconscious bias training for recruiting managers, and annually reviewing employee salaries to ensure there are no inequality issues relating to gender.

As we now enter our 170th year it gives me satisfaction to report that the Society is in a strong position, well placed to continue our success into 2019.

Richard Norrington Chief Executive 8 February 2019

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Directors’ Report

The Directors have pleasure in presenting the 169th Annual Report for the year ended 30 November 2018.

Business objectives and activities

Offering simple and straightforward savings products to investing members and providing mortgages so that borrowing members can buy a home has been the Society’s main purpose for 169 years and continues to be so.

As a mutual society we are owned by our members and keep our members’ interests at the heart of everything that we do. For 169 years the Society has been bringing savers and borrowers together for their common benefit. We need to balance carefully the need to retain sufficient earnings to ensure the sustainability of the Society for our members, employees and local community, whilst recognising that it is important to still invest in the business.

Business review

The Directors are pleased to end the year with a profit before tax of £3.3m (£3.1m:2017). In addition, the size of the Society’s mortgage assets have increased by £15m.

The uncertainty around Brexit and other economic factors has meant that the mortgage market has remained very competitive during the year and is likely to do so into 2019. This year the Society has refocused efforts on its strategic aim to offer carefully crafted products that are intended to meet the needs of customers who may otherwise find it difficult to obtain a mortgage from larger organisations. This means the different types of lending that the Society has to offer has become more varied. Amongst the type of products that the Society offers are Self-Build, Shared Ownership, Expat and Later Life mortgages. Our individual underwriting of each mortgage means that we are able to assess applications on a case-by-case basis and our Lending Team continue to operate a flexible manual approach to underwriting with a view to helping as many people as possible. The Lending Team processed 929 mortgage applications in 2018 (compared to 1181 applications in 2017). This resulted in 733 completions for the year with an average loan size of £197k. The Society continues to monitor and publish service levels to internal and external customers; the average application to offer turnaround time was 15 days during 2018.

We continue to work with mortgage clubs and networks to grow our relationships, attending various roadshows and conferences and have focused our ‘Broker Breakfast’ intermediary events around niche lending.

The Collections Team has continued to provide support for members with payment difficulties, which has resulted in another year of low arrears. We seek to agree sensible and affordable payment arrangements wherever possible, to enable our borrowers to manage their payment difficulties. Resources have been dedicated to ensuring that the Society is well prepared for any potential economic downturn as a result of Brexit by ensuring early contact with customers who show signs of difficulty in maintaining payments.

Each month the Collections Team write to, and call, borrowers with Interest Only mortgages that have five years, two years, one year or one month remaining on their term. The response rate to these communications has been 84% over the last 12 months.

The Society is fiercely committed to being a membership-owned organisation. We are committed to act in our members’ best interests and believe that an active and engaged membership is key to a successful, secure future for mutual organisations. All In, our unique membership proposition, was developed to make the benefits of being a member clear and tangible and to make it easier for members to get involved with us, our staff and our community. All In offers unique opportunities for our members to have a say, get involved and enjoy more of life in our region.

Looking ahead

The Directors are committed to ensuring the long-term sustainability of the Society and has in place a three-year corporate plan which is dedicated to maintaining the Society as an independent mutual society. The Society’s mission is to support people in our community to buy a home and save for the future by providing carefully crafted products and attentive service. Over the next two years an enhanced savings proposition will be developed which will include a digital offering for our members as well as the ability to offer improved services for face-to-face interactions with members, such as the ability to accept card payments. The safety of members’ savings is paramount and the Society will ensure that necessary protections are in place to guard against potential threats.

Key Performance Indicators

These are the key metrics which the Directors use to monitor the performance of the business.

Key Performance Indicator 2018 2017 2016

Mortgage assets (£m) 536 521 477

Arrears cases over 12 months 9 5 5

Retail savings balance (£m) 572 567 541

Profit before tax (£m) 3.3 3.1 2.6

Management expenses (£m) 9.3 8.9 8.4

Total Regulatory Capital (£m) 37 34 32

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Mortgage assets

The Society has increased mortgage lending by £15m. Whilst this is lower than the prior year, this reflects the management decision to optimise the use of regulatory capital, with the lower level of growth and the high retention of profit enabling the potential early repayment of subordinated debt (subject to regulatory approval) towards the end of 2019. The cost of subordinated debt to the Society in 2018 was £440k.

The Society received mortgage applications from 317 different intermediary firms this year. 115 applications were received from direct customers to the Society’s Mortgage Consultants, accounting for 18% of the net applications.

Arrears

There has been in increase in arrears cases over 12 months compared to the previous financial year and this is being monitored carefully. However, credit quality indicators remain within plan. Arrears performance remains low and below the Society’s risk appetite.

At 30 November 2018 there were 9 (2017: 5) mortgage accounts where the arrears were the equivalent of 12 months payments or more. The total amount of principal outstanding in these cases was £830k (2017: £572k). The total amount of arrears was £89k (2017: £60k). At 30 November 2018 the Society had 4 (2017:5) properties in possession, of which two are under offer.

Mortgage assets (£m)

2016 2017 2018 2016 2017 2018

2016 2017 2018 2016 2017 2018

2016 2017 2018

540520500480460440420

580

560

540

520

500

9.2

8.8

8.4

8.0

7.6

40

30

20

10

0

16

12

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4

0477 541

8.4 32

5521 536 567 572

8.9 9.3 34 37

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Arrears Retail savings balances (£m)

2016 2017 2018

3.4

3.2

3.0

2.8

2.6

2.4

2.22.6 3.1 3.3

Profit before tax (£m) Management expenses (£m) Regulatory Capital (£m)

At 30 November 2018, the Society had 83 (2017: 85) mortgage accounts subject to forbearance, which equates to 2.10% by number of the total mortgage book. These mortgage accounts have a total balance of £6.2m (2017: £6.4m) and 48 of these cases are currently in arrears, with total arrears balances of £129k (2017: £100k). Where the Society considers there is a possibility of loss, a provision is made in accordance with the Society’s policies.

Retail savings balance

The Society is pleased to note that retail savings balances have increased by £5m in the last year (2017: £26m). Whilst this increase is less than the previous year’s increase this was a planned decision by the Board to carefully balance savings inflow, and manage the level of surplus funds on deposit with the Bank of England.

The Society carried out a savings product and pricing refresh in October 2018 which has had a positive effect on inflow and membership.

In 2018 there was a net reduction of 710 in the number of accounts members held with the Society. However, following the product refresh in October it was pleasing to note that October and November saw a small net increase in accounts. The Society works hard to ensure that its savings products are straightforward and easy to understand.

The Society always seeks to pay a competitive rate of interest. It is encouraging to see that we retained 86% of maturing funds in 2018 (2017: 80%). Members tell us that they appreciate the communications provided.

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Directors’ Report continuedProfit for the financial year

The Society achieved a healthy profit before tax of £3.3m. This is an increase compared with last year’s £3.1m. Achieving a profit is important for the Society’s long term sustainability because it enables the Society to add to its capital reserves and further grow. The Board remains confident the Society can remain profitable over the three-year corporate plan period, which will build the capital required to support the growth of the mortgage book at a rate which will be faster than the rate of growth of management expenses in the longer term.

Management expenses

Management expenses consist of administrative expenses, depreciation and amortisation. It is important that the Board and Executive exercise close control over costs in the forthcoming years while continuing to invest in the business. In 2018 there was an increase in management expenses, however these fell within the Society’s planned level. Costs have been very closely tracked throughout the year, and this has been assisted by the Society carrying out a half year profit verification process. This has resulted in a smoother recognition of costs through the year and the ability to predict and better manage the year-end outcome, which is marginally favourable to the plan.

Capital

As at 30 November 2018 gross capital and free capital as a percentage of share and deposit liabilities stood at 6.03% (2017: 5.68%) and 5.2% (2017: 5.05%) respectively. The Society’s total regulatory capital is £37 million, an increase of £3 million on the prior year.

10% of the Society’s total regulatory capital is subordinated debt (remunerated capital), and is approximately equal to the amount of reserves which have been added during the year from the Society’s operations. This improvement in reserves during 2018 presents the potential opportunity to repay the subordinated debt at the end of 2019 when the option becomes available. The interest on subordinated debt was £440k during 2018, and the Board is considering the redemption, subject to regulatory approval, as a long-term measure which would improve the profitability and sustainability of the Society. The matter will remain under review during 2019.

As part of the Capital Requirements Directive (CRD) the Board has conducted an assessment of the adequacy of the Society’s capital resources. Information about the Society’s Pillar 3 disclosures, which are a requirement of the CRD, together with the disclosure to comply with the requirements of Article 89 of the Capital Requirements Directive IV (CRDIV), are provided on the Society’s website www.ibs.co.uk.

Community, economy and environment

The Society has a strong commitment to social responsibility in all its forms. We continued our employee volunteering programme which allows all employees four hours per month to volunteer. In addition, our employees raised money for local charities through fundraising in

branches or personal sponsorship. The Society offers matched funding for personal sponsorship of local charities and also supports charities through partnership affinity savings accounts.

In 2018 the Society commissioned an environmental review from an external company. The purpose of the review was to enable the Society to prepare an environmental strategy. Each site (Head Office and branches) had a carbon footprint calculation carried out, which considered buildings, employee behaviour etc. The results of the review will be used by the Society to put in place an Environment Action Plan and Environmental Policy. The Society already supports the environment by using solar panels, light saving switches, reducing printing wherever possible and recycling office waste.

Customer satisfaction

Member satisfaction levels and Net Promoter Score remain extremely high at 98.6% (2017: 98.2%) and 83 (2017: 84) respectively. Net Promoter Score is a score showing how likely members are to recommend us to others. These results are based on 2317 completed surveys for the financial year across a spectrum of activities including account opening and closing.

During 2018 the Society relocated two of its branches to larger and more prominent premises in Woodbridge and Ipswich town centre. The Society’s flagship branch, Mutual House, opened to members in January 2018 and the Woodbridge branch opened in February 2018. Since opening, Mutual House has hosted 31 community and member events, attracting over 1400 visitors. Further events and seminars are planned for 2019. The relocation of our Woodbridge office to the main thoroughfare has seen a net increase in membership and accounts.

Directors

The Directors of the Society during the year were as follows:-

Alan Harris (Chairman)Ian Brighton (Executive Director appointed 1 May 2018)Valerie M DiasPeter C ElcockSteve LiddellRichard Norrington (Executive Director)Steve ReidFiona Ryder (appointed 25 October 2018)Trevor Slater (Executive Director appointed 28 June 2018)Michelle A Tennens (Senior Independent Director) Kieron F Blackburn (Executive Director Resigned 25 January 2018)

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We welcome Fiona Ryder to the Board as Non-Executive Director. Fiona is a senior media executive with over 25 years’ experience across the broadcasting, digital and commercial sectors, developing creative content for national and multi-national clients. Fiona is President of the Norfolk Chamber of Commerce, Honorary Treasurer of Royal Television Society East and Managing Director of TCD Media. We also welcomed Ian Brighton to the Board as Operations Director, expanding his former General Manager Operations role. Michelle Tennens will retire from the Board in March 2019.

Kieron Blackburn resigned as Finance Director on 25 January 2018. We would like to thank Kieron for his invaluable service to the Society. We appointed Trevor Slater to take over the role of Finance Director and, by making an early appointment, were able to conduct a comprehensive handover enabling a smooth transition period.

Principle risks and uncertainties

During 2018 the Society has completed a review of its risk management framework, undertaken detailed risk assessments of all of its material risks and reviewed its risk strategy in line with the Society’s corporate plan. We continue to adopt a generative risk management culture to deliver the following headline risk objectives:

• To hold sufficient capital so no investor suffers a loss in all reasonably foreseeable circumstances.

• To hold sufficient liquidity to ensure all payments due and expenses can be met on time.

• To hold sufficient liquidity to ensure members’ requests to withdraw funds can be met in all reasonably foreseeable circumstances.

The risk strategy has been developed to provide clarity on the objectives for risk management across the Society and to highlight the linkages between our corporate strategy and risk appetite. This supports the development of a more detailed articulation of the types and materiality of risk that the Society wishes to take in pursuit of its strategic objectives, which is outlined in the Society’s risk appetite statement. Each risk is monitored monthly through relevant and forward-looking risk appetite limits and triggers (early warning indicators). The risk strategy forms part of the Society’s Enterprise Risk Management Framework (ERMF).

The key risks incurred in the Society’s activities include retail credit, financial, operational and conduct. Based on the Society’s strategic objectives, outlined below are the high level risk objectives and level 1 risk categories. Each level 1 risk is owned by a nominated member of the Society’s Senior Management Team. No risk is presently deemed outside Board-approved appetite and management actions are in place to ensure the Society operates adequate and effective controls within Board-approved limits over the longer term.

Risk appetite objective Level 1 risk

FinancialOur objective is to manage profit volatility within defined parameters with capital and liquidity at levels that allow the Society to operate effectively in both normal and stressed conditions.

· Capital· Liquidity and funding· Interest rate risk on the banking book· Wholesale credit risk· Financial reporting risk

Retail creditOur objective is to manage and control credit risk within defined limits and exposures and to underwrite more complex mortgages for our customers that fit with our underwriting expertise.

· Lending Quality· Concentration · Problem debt management· Credit monitoring

OperationalOur objective is to develop and maintain cost effective and robust systems, infrastructure and processes to deliver the corporate strategy. We will have in place the right number of skilled and motivated people. We will develop and retain our best talent.

· People· Data quality· Information security and records management· Systems· Third party providers· Fraud

ConductIn striving to deliver good customer outcomes consistent with our vision, our foundations are the delivery of compliant products, processes and systems in how we treat or interact with our customers. We will seek full compliance with appropriate regulations.

· Product design· Sales· Post sales service· Governance and culture· Legal· Compliance oversight


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Directors’ Report continuedThe Society has an Executive Risk Committee (ERC) that monitors and reports monthly on the Society’s risk profile to Board Risk and Compliance Committee. Retail Credit Risk Committee, Assets and Liabilities Committee and the Operational and Conduct Risk Committee now report to the ERC.

The risk profile of the Society has remained stable during 2018. Material risks remain around protecting the Society and its members from financial crime and cyber crime. We continue to carefully manage the Society’s liquidity risk, assess and set aside sufficient capital to protect members from all reasonable, foreseeable circumstances and ensure we manage our retail credit risk within pre-agreed risk appetite levels. We continue to ensure we meet all regulatory requirements and conduct business to ensure good customer outcomes. We have focused considerable time on training our staff to identify and report cases where our members may be vulnerable.Comprehensive stress testing and scenario modelling has been undertaken which demonstrates that in the event of an adverse Brexit impact, liquidity and capital are able to withstand a severe shock.

Capital risk:The Board complies with the Capital Requirements Directive IV (CRD IV) which requires the Society to assess the adequacy of its capital through an Internal Capital Adequacy Assessment Process (ICAAP). To assist the Board in determining the level of capital required, stress testing and scenario analysis is performed on key business risks to assess whether the Society could survive a severe economic downturn and other severe business shocks. Through this process the Board ensures that the Society holds a level of capital sufficient to satisfy regulatory requirements. The Pillar 3 disclosures required under the CRD are available from the Society’s Secretary, or on our website.

Liquidity risk:Liquidity risk is the risk that the Society will not be able to meet its financial obligations as they fall due. This includes requests from members to withdraw funds and new mortgage drawdowns. The Society is required by regulation to hold a calculated level of liquidity. Liquidity investments are held in either on-call accounts or as short term dated investments including Certificates of Deposit (CDs) and Floating Rate Notes (FRNs). However, we hold the majority of our on-call liquidity investments with the Bank of England.

At 30 November 2018 we had a total of £115m held as liquid assets (£95m of this was available on-call with the Bank of England) and the remainder was held in deposits, cash, CDs and Floating Rate Notes.

Interest rate risk:Interest rate risk arises from a mismatch between the interest rate characteristics or maturity profiles of assets and liabilities. The Board-approved Financial Risk Management Policy includes set limits for assets and liabilities on different interest rate bases. Where possible we use natural hedging between our fixed rate mortgages and fixed rate savings bonds. We also use derivatives termed interest rate swaps to manage interest rate risk within our Balance Sheet. Further details can be found in note 31 of the accounts.

Wholesale credit risk:Wholesale credit risk is the risk of default on assets held to mitigate liquidity risk (on-call accounts, CDs and FRNs). We manage the risk of investing these liquid assets by having strict criteria for accepting counterparties to invest in and absolute limits for these investments with each counterparty. These criteria and limits are stated in our Board-approved Liquidity Policy, and include a requirement for counterparties to have a Fitch rating of A- or higher (except building societies where management may use their specialist knowledge). We review our approved counterparty list and investments made monthly at the Assets and Liabilities Committee.

Financial reporting risk:The Society carries an inherent risk that it provides inaccurate reports to key stakeholders including the Prudential Regulatory Authority, the Bank of England and the Financial Conduct Authority. In order to ensure that all reports are provided accurately and on time, detailed process notes for each report have been produced with qualitative and quantitative control reviews embedded throughout the production process.

Retail credit risk:This risk materialises when a loss is incurred through non-repayment of mortgage lending and is mitigated through our Board-approved Lending Policy, which states our risk appetite for lending and includes clear guidelines for mandate levels and lending. We also focus on supporting borrowers who may be having payment difficulties to help mitigate any potential loss and assist the borrowers in returning to a normal repayment pattern.

Where we consider the potential for a loss we make a provision for this in accordance with our policies.

Operational risk:Operational risk is the risk of loss through inadequate or failed internal processes or systems, including human error or external events.

Operational risk events and near misses are captured and root cause analysis is undertaken to identify and mitigate further risk events. During 2018 we have introduced a new third party supplier framework undertaking detailed due diligence on all existing and new suppliers on a risk-based approach. Suppliers are assessed and managed through contractual terms with agreed service level agreements, performance indicators and documented processes where relevant.

We believe our membership can only be served by having committed, knowledgeable staff, with the ability and authority to meet requirements and expectations of our members. As such we encourage all staff to undertake personal development and advancement, and we recognise and reward their achievements, creating a sense of pride in serving our membership, and in providing total customer satisfaction. During 2018 we have undertaken a detailed assessment of operational resilience to ensure we can continue to provide members with the services they expect in a timely fashion.

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Conduct risk:Conduct risk arises when a firm’s behaviour results in inappropriate or poor outcomes for customers. Our culture is based upon ensuring that each of our members has a right to expect that his or her relationship with us will be conducted in a fair and consistent manner. We recognise our members as the owners of the Society with individual requirements and expectations, and this approach is demonstrated within our conduct risk framework. We design products with target markets in mind.

Financial crime, compliance and legal risk:There is an overarching “regulatory risk” that the Society breaches a regulatory requirement. As a result we have policies and procedures in place to ensure compliance with the regulations that affect our business. The volume and complexity of compliance with these regulatory issues may impact the Society’s ability to compete and grow. The Board will continue to monitor regulatory changes to ensure that the Society continues to meet all of its regulatory requirements.

Internal Audit

The Society’s internal auditors provide independent and objective assurance that there are appropriate systems and controls in place and that they are effectively applied. The Society outsources the Internal Audit function to Deloitte LLP. The Directors consider that this is beneficial to the Society because it means it is able to benefit from a wide range of expertise and resources. The Society considers that the Internal Audit function is adequately resourced and sufficiently independent.

Defined benefit pension scheme

The Society has an ongoing commitment to fund the defined benefit pension scheme. This scheme was closed to new members in 2001 and future accruals in 2006. During 2018, the Society paid an additional £2m into the scheme to accelerate payment of the defecit. This will be recognised in the next full triennial actuarial valuation which is due as at 30 November 2018. The results of the triennial valuation are expected during 2019, at which time an amended schedule of contributions will be agreed with the scheme Trustees. Further details are given in Note 9 to the Accounts.

Supplier payment policy

Our policy is to pay invoices on receipt of the completed provision or service, unless staged payments are agreed in advance. We operate within agreed payment terms with our suppliers. At 30 November 2018 we had an average of 7 days’ purchases outstanding in trade creditors (2017: 7 days).

Going concern

The Board regularly engages in the forward planning of the business to ensure we meet the liquidity, capital, lending and retail savings balances defined in our corporate strategy and annual plan. Board members also consider our liquidity and capital requirements in further detail within our capital and liquidity adequacy assessments; these include the results of placing both requirements under significant stress scenarios. In particular, Brexit uncertainties have been tested as part of the ICAAP scenario modelling and the Society is well placed to deal with such circumstances. As a result of these considerations the Directors are satisfied that the Society has adequate resources to continue in business for the foreseeable future. For this reason, the Accounts continue to be prepared on a going concern basis.

Auditor

In accordance with Section 77 of the Building Societies Act 1986, a resolution for the re-appointment of KPMG LLP as Auditor is to be proposed at the forthcoming Annual General Meeting.

The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Society’s auditor is unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Society’s auditor is aware of that information.

On behalf of the Board of Directors.



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Corporate Governance ReportThe Society is not required to fully comply with the Corporate Governance Code 2014, however we have regard to it when establishing and reviewing our own corporate and governance arrangements. The Society’s Directors are committed to best practice in corporate governance and as noted in the Directors’ Report, this year the Society commissioned an external Board Effectiveness Review. The review noted that all elements of the Corporate Governance Code are being met, considering the Society’s size and complexity. This report highlights the best practice suggested by the Code by inclusion of the relevant paragraph and then explains the Society’s approach. The Society is aware that the Code was revised in July 2018 and applies to accounting periods commencing on or after 1 January 2019. The Society will give regard to the revisions when they are due to be applied.

The Role of the Board

A.1. Every company should be headed by an effective Board, which is collectively responsible for the long term success of the Company.

The Board of Directors’ focus is to ensure the long term sustainability for the good of our members. The Board formulates the strategy, reviews business performance, oversees the identification and management of risks, adherence to laws and regulations and ensures that the required controls are in place and aligned to our strategy. The results achieved by the Society over recent years are a testament to the Board’s effectiveness.

In 2018 the Board of Directors has met at least 11 times with two additional days dedicated to strategy. Board meetings have a formal schedule with papers circulated in a timely manner to ensure Board members can perform their duties effectively. Minutes record details of Board, Board Committees and management meetings.

The Society has a process to evaluate at least annually the performance and effectiveness of individual Non-Executive Directors, the Chairman, the Board and Board Committees. The performance of the Chief Executive is assessed by the Chairman and the Deputy Chairman and discussed at the Chairman’s and Nominations Committee. This appraisal process includes a 360-degree questionnaire and feedback from all the Non-Executive Directors. The Chairman is evaluated by the Deputy Chairman with assistance from the Senior Independent Director. The Chairman also evaluates the performance of all the Non-Executive Directors on an annual basis. This year 360-degree appraisals have been used to evaluate the performance of all Non-Executive Directors. The Chief Executive evaluates the Finance Director and Operations Director as members of the Executive Team. This year the Board and Board committees were reviewed by an external company, BP&E Global. Annually the various committees review and agree their Terms of Reference. The Terms of Reference are endorsed by the Board.

In 2018 the Society has embedded its Enterprise Risk Management Framework (ERMF). There are four committees that report directly into the Board: Board Risk and Compliance Committee and the Audit Committee which meet at least quarterly; the Remuneration Committee and Chairman’s and Nominations Committee both

of which meet at least twice a year. In addition, the Society has an Executive Risk Committee that is part of the Society’s second line of defence and reports into the Board Risk and Compliance Committee. There are three first line management committees; Assets and Liabilities Committee, Retail Credit Risk Committee and Operational and Conduct Risk Committee, all of which meet monthly. The Terms of Reference for committees can be found on the Society’s website www.ibs.co.uk, or are available from the Society’s Secretary on request.

Audit Committee

The purpose of the Committee is to oversee all audit related matters, in particular, to review the Society’s financial reporting arrangements, the effectiveness of its internal controls and its risk management framework, the internal and external audit processes and the Society’s whistleblowing procedures which enables employees to raise concerns confidentially. The Committee makes recommendations to the Board and reports on its activities. Minutes of the meetings are circulated to the Board of Directors, along with a verbal report from the Chairman of the Audit Committee highlighting key issues for Board review. The key responsibilities of the Committee are set out below, together with examples of how it discharges its duties.

At least annually the Committee meets with the External and Internal Auditors without the Executive Directors present. The Board is satisfied that the members of the Committee have specialist expertise including current and relevant financial, legal and risk management expertise.

The key responsibilities of the Audit Committee are as follows. These are reflected in the Committee’s Terms of Reference:

• Financial reporting, including;

o Monitoring the integrity of the Society’s financial statements and reviewing critical accounting policies, judgements and estimates.

o Reviewing the appropriateness of the going concern basis for preparing the accounts.

o Providing advice to the Board on whether the Annual Report, taken as a whole, are fair, balanced and understandable.

• External Audit, including;

o Reviewing the continued objectivity and independence of External Audit, including the level and appropriateness of non-audit services.

o Considering the appointment, removal, performance and remuneration of the external audit firm.

o Considering the planning, scope and findings of the annual external audit, the receipt of and responses to, the Auditor’s management letter and reviewing the degree of liaison with Internal Audit.

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• Internal controls and risk management, including;

o Reviewing the adequacy and effectiveness of the Society’s internal financial controls and internal control and risk management systems in conjunction with reviewing reports produced by Internal and External Audit.

o Reviewing the statements to be included in the Annual Report concerning internal controls and risk management.

• Whistleblowing, including;

o Reviewing the adequacy and security of the Society’s whistleblowing arrangements for its employees and contractors to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters.

o Ensuring that whistleblowing arrangements allow proportionate and independent investigation of such matters.

• Internal Audit, including;

o Considering and approving the strategic and annual plans of work.

o Considering management responses to recommendations.

o Considering the appointment, removal, performance and remuneration of the internal audit firm.

Financial reporting:

The Committee considered the following significant judgments and estimates, and considers reports and representations from external auditors and management. More detail on the principal judgements and accounting estimates is set out in Note 1 of these Accounts.

Effective Interest Rate (“EIR”): The application of the EIR method of accounting requires judgement and the accounting entries involve estimates based on key assumptions, particularly around behavioural life of products and requires management to make a number of assumptions.

The Statement of Financial Position as at 30 November 2018 includes the recognition of a deferred EIR asset of £0.2m (2017: £0.3m).

The Committee spent time understanding and challenging the judgements made and the EIR methodology applied by management in determining the EIR. The Committee agreed that management’s judgements were appropriate in respect of the year ended 30 November 2018.

Allowance for impairment losses on loans and receivables: Determining the appropriateness of impairment losses involves judgement and requires management to make a number of assumptions around default rates, likely asset recoveries and other factors. The loan loss impairment provisions recorded by the Society as at 30 November 2018 were £0.6m (2017: £0.8m).

The Committee considered and challenged the provisioning methodology applied by management, including the results of

statistical loan loss models to support the impairment provisions. The Committee was satisfied that the impairment provisions were appropriate.

Hedge accounting: The Society has implemented hedge accounting in line with FRS 102. The designated macro hedges require matching, hedge effectiveness documentation and testing, and fair valuing both the hedged instrument and the underlying hedged item.

The Committee considered the appropriateness of the hedging arrangements and the fair value processes in respect of hedging instruments and the underlying hedged items. The Committee agreed that hedge accounting had been applied in accordance with FRS 102.

Retirement benefit obligations: The Society makes significant judgements to calculating the present value of the retirement benefit obligations. The major assumptions are in respect of mortality, price inflation, discount rates, pension increases and earnings growth. The pension scheme liability recorded at 30 November 2018 was £431k (2017: £2,888k)

The Committee considered the assumptions used by reference to advice received from our Actuaries and independent challenge from our external auditors. The Committee is satisfied that the assumptions used are reasonable.

Accounting Policies:

The Committee examined the Society’s accounting policies to ensure they are appropriate and applied consistently. They also confirmed that the policies are in line with applicable Accounting Standards.

The Committee considered whether the 2018 Annual Report, when taken as a whole, is fair, balanced and understandable and whether it provides the necessary information for members to assess the Society’s performance, business model and strategy. The Committee is satisfied that the 2018 Annual Report meets this requirement, and, in particular, that appropriate disclosure has been included for both positive and negative developments in the year. In January 2019, the Committee recommended the approval of the final 2018 Annual Report to the Board.

Internal Audit:

Internal Audit is outsourced to Deloitte LLP. During 2017/18 the Committee monitored the effectiveness of Internal Audit and the Internal Audit programme, approving the audit plan and budget, and confirming that appropriate resources were in place to execute the plan effectively.

In the year ended 30 November 2018, Internal Audit carried out a significant number of audits of varying size and complexity. The findings from each individual review are presented to the Audit Committee including management responses. The Audit Committee considers the adequacy of management responses and the implications of significant findings on the effectiveness of the overall internal control system and the risk management framework.

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Corporate Governance Report continuedInternal Control and Risk Management:The Committee was satisfied that internal controls over year end financial reporting were appropriately designed and operating effectively.

External AuditThe Audit Committee is responsible for assessing the effectiveness of the annual audit process, for monitoring the independence and objectivity of the External Auditor and for making recommendations to the Board in relation to the appointment of the External Auditor. Both the Board and the External Auditor have safeguards in place to protect the independence and objectivity of the External Auditor. The current External Auditor is KPMG LLP. Performance is reviewed annually.

The Society has a policy for the use of external auditors for non-audit work in line with new legislative requirements. The Society would not consider the appointment of the External Auditor for the provision of other services that might impair independence.

Other Board Committees

Chairman’s and Nominations Committee

The Committee is responsible for making recommendations to the Board on matters relating to the composition of the Board. This includes Board and Executive succession planning, the appointment of new Directors, election and re-election of Directors and the Chief Executive’s annual appraisal.

Remuneration Committee

The Committee’s main role is to approve the remuneration and incentive schemes for the Society’s Executive and senior management. The Executive together with the Chairman meet annually to review Non-Executive Director fees, including those of the Deputy Chairman, Senior Independent Director, Chairman of the Audit Committee and Chairman of Board Risk and Compliance Committee.

The Directors’ Remuneration Report can be found on page 22.

Board Risk and Compliance Committee

The role of the Committee is to act as a second line of defence to the Society’s risk management framework. The Committee assists the Board in fulfilling its oversight responsibilities by receiving regular reports from the Executive Risk Committee which enables it to assess the risks involved in the Society’s business (including those risks that would threaten its business model, future performance, solvency or liquidity) and to consider the principal risks identified by management and if they are appropriate. It reviews the Society’s Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP). The Committee is responsible for ensuring the Society complies with the Board’s risk appetite and also reviews the Society’s future risk strategy for economic, capital, liquidity, reputational and operational risk profiles. The Committee uses a variety of internal and external sources to make these assessments.

Management Committees

Executive Risk Committee

The purpose of the Executive Risk Committee is to monitor and oversee the Society’s risk profile in accordance with the Enterprise-wide Risk Management Framework (ERMF) and Board risk appetite. The Committee is part of the Society’s second line of defence. The Committee supports the Board Risk and Compliance Committee by providing oversight of the adequacy of the Society’s application and embedding of ERMF tools and processes. The Executive Risk Committee reports to the Board Risk and Compliance Committee.

Assets and Liabilities Committee

This Committee manages wholesale credit risk (the risk of default on assets), capital risk, liquidity risk (the risk that the Society will not be able to meet its financial obligations) and interest rate risk (which arises from a mismatch between interest rate characteristics). The Committee is responsible for ensuring the Society operates within agreed parameters set out in the Board’s Liquidity and Financial Risk Management policies. On a monthly basis the Committee reviews the relevant risk appetite profiles and metrics to ensure that the Society is operating within the Board-approved risk appetite. It refers any relevant matters or any recommendations for amendments to risk metrics to the Executive Risk Committee.

Operational and Conduct Risk Committee

The Committee manages operational and conduct risk. Operational risk is the risk of loss through inadequate or failed internal processes or systems, including human error or external events. Conduct risk is the risk that the Society’s behaviour results in inappropriate or poor outcomes for customers. On a monthly basis the Committee reviews the relevant risk appetite profiles and metrics to ensure that the Society is operating within the Board-approved risk appetite. It refers any relevant matters or recommendations for amendments to risk metrics to the Executive Risk Committee.

Retail Credit Risk Committee

Retail credit risk arises when unexpected losses are incurred through non-repayment of mortgage lending. This Committee is responsible for monitoring the Society’s high level policy on lending and for monitoring that the Society is operating within the Board-approved risk appetite. This includes ensuring the mortgage assets stay within agreed Board-approved levels, including reference to the PRA’s Specialist Sourcebook for Building Societies. The Committee reviews the Society’s Lending Policy Statement, ensuring this aligns with our Risk appetite, and it recommends changes to the Policy to the Board for approval. It refers any relevant matters or any recommendations for amendments to risk metrics to the Executive Risk Committee.

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Role of the Deputy Chairman

Valerie Dias is the Society’s Deputy Chairman. The Deputy Chairman acts as a sounding board for the Chairman and with the Senior Independent Director undertakes the Chairman’s annual appraisal. They also stand in for the Chairman, in the event that the Chairman is unable to attend a meeting or perform their duties.

Role of the Senior Independent Director

The Senior Independent Director is Michelle Tennens. The Senior Independent Director is available for members to refer issues to that they have not been able to resolve via the Chairman, Chief Executive or other Executive Directors or for matters where it is not appropriate to raise these issues directly with these Directors. The Senior Independent Director also assists the Deputy Chairman in performing the Chairman’s appraisal. Michelle is also the Society’s Whistleblowing Champion and provides an independent point of contact for members of staff who may wish to raise issues.

Role of the Executive team

The Executive Team work with the Chief Executive and Board to ensure the effective implementation of strategies and policies within agreed budgets and timeframes. They hold a leadership role within the business, acting to ensure the correct culture is developed and that the relevant resources, people and systems are utilised efficiently and towards the aims of the corporate strategy and policies set by the Board. They are also responsible for the development of employees, delivering consistent high quality customer service standards, implementation of effective systems within the business and reporting and tracking progress towards our key performance indicators and key results indicators. The Executive Team is also responsible for designing, operating and monitoring risk management systems and controls.

Chairman• Leadership of the Board, setting the tone of organisational culture and values• Ensuring the Board is effective in its duties• Setting and monitoring the strategic direction and risk appetite• Ensuring long term sustainability of the Society• Development and evaluation of Board Directors• Leading open and honest debate and encouraging challenge in

Board meetings• Liaising with regulators as appropriate

Chief Executive• With support of the Executive Team, implementation of the Board strategies

and policies• Ongoing management of the Society guided by risk management • Implementing and monitoring processes, people and systems to ensure

effective delivery of corporate plans and budgets• Developing an effective working relationship with the Chairman and Board

of Directors• Develop positive relationships with regulators, media, trade organisations,

and other building societies to promote the Society and lobby on key issues in the corporate strategy

Ipswich Building Society Members


Executive Risk Committee

Operational Risk and Conduct Risk

Committee

Retail Credit Risk Committee

Assets and Liabilities

Committee (ALCO)

Chairman’s and Nominations Committee

Board Risk and Compliance Committee

Board Audit Committee

Ipswich Building Society Board

Board Committees

Third line of defence

Division of Responsibilities

A.2. There should be a clear division of responsibilities at the head of the company between the running of the Board and the Executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.

A.3. The Chairman is responsible for leadership of the Board and ensuring its effectiveness of all aspects of its role.

We have separate roles for Chairman and Chief Executive and these are held by different people. Each role has its own job description approved by the Board. No individual has autonomous powers of decision making. The Chairman is appointed by the Board annually.

Below is a summary of each role:

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Corporate Governance Report continuedNon-Executive Directors

A.4. As part of their role as members of a unitary Board, Non-Executive Directors should constructively challenge and help develop proposals on strategy.

The Non-Executive Directors of the Society are drawn from a wide range of backgrounds to ensure that the Board has the appropriate skills, knowledge and experience to provide a robust level of challenge and debate. The role requires an understanding of the risks in business, commercial leadership within a framework of prudent and effective risk management controls and the ability to monitor performance and resources whilst providing support to the Executive in developing the Society. On 25 October 2018 Fiona Ryder was appointed to the Board as Non-Executive Director. The Society has a succession plan in place for all Non-Executive Director positions.

The Composition of the Board

B.1. The Board and its Committees should have the appropriate balance of skills, experience, independence and knowledge of the Company to enable them to discharge their respective duties and responsibilities effectively.

As at 30 November the Board consisted of seven Non-Executive Directors (including the Chairman) and three Executive Directors providing a balance of skills and experience appropriate for the requirements of the Society. The member mix of the Board and Committees is reviewed annually by the Chairman’s and Nominations Committee to ensure that appropriate expertise and skills are maintained. One Non-Executive Director was appointed in 2018, subject to appointment at the AGM. One Executive Director resigned from the Board during 2018 and two Executive Directors were appointed.

In the view of the Board, all of the Non-Executive Directors are independent in character and judgement, are free of any relationship or circumstance which could interfere with the exercise of their judgement, bring wide and varied commercial experience to Board deliberations and continue to represent the interests of the Society’s members.

Appointments to the Board

B.2. There should be a formal, rigorous and transparent procedure for the appointment of new Directors to the Board.

The Society makes Non-Executive Director appointments on merit, based on the specific skills and experience required under the succession plan. The Chairman’s and Nominations Committee meet as necessary to oversee the Board succession plan. The Society appoints an independent executive search agency to identify and shortlist candidates for positions on the Board. This agency follows a methodical process for searching and shortlisting candidates to conduct a broad search of the marketplace. The Chairman’s and Nominations Committee lead the recruitment process, although the Board as a whole makes the final decision. During 2018 Fiona Ryder joined the Board as a Non-Executive Director of the Society.

During 2018 two new Executive Directors were appointed to the Board. Trevor Slater was appointed as Finance Director on 28 June 2018. Ian Brighton was appointed as Operations Director on 1 May 2018.

An external recruitment provider was used for the position of Finance Director. A role specification was prepared setting out the expectations of a new Finance Director and the competency and capability required to assist the recruitment provider’s search. A shortlist of two candidates was agreed. Both candidates attended the Society’s Head Office and met with members of the Senior Management Team. The candidates were then asked to give a presentation to the Society’s Non-Executive Directors. The presentation was followed by a full interview. Trevor Slater was appointed at the end of this process by the Non-Executive Directors.

Ian Brighton was promoted to the role of Operations Director. Ian previously held the position of General Manager (Operations) at the Society. He has been employed by the Society since 2003.

All Directors must meet the tests of fitness and propriety designed by the Financial Conduct Authority and Prudential Regulation Authority and all Directors are required to be notified to the regulators. All Directors undergo basic DBS checks prior to appointment. Senior Managers (including Non-Executive Directors) with responsibilities for specific areas of business allocated to them are required to be pre-approved by the Regulator.

The Society is committed to diversity and currently has a 30% (2017: 25%) female representation on the whole Board and is therefore aligned with the recommendations of the Davies Report which, for diversity purposes, has set a minimum target of 25% female representation. In 2018 the Society signed up to the Woman in Finance Charter to signify its commitment to diversity.

Commitment

B.3. All Directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.

The Chairman’s and Nominations Committee evaluate the ability of Directors to commit the time required for the role, prior to appointment. The appraisal process carried out by the Chairman each year also assesses whether Directors have demonstrated this ability during the year.

Set out below are details of the Directors during 2018 and their attendance record at Board meetings and relevant Board Committee meetings in the year. The number in brackets is the maximum number of scheduled meetings that each Director was eligible to attend.

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Board Risk and

Compliance Committee

11 (11)

11 (11)

10 (11)

8 (11)

10 (11)*

11 (11)

1 (1)

–

–

–

–

Name/Title

Alan HarrisNon-Executive Director and Chairman

Michelle Tennens Non-Executive Director and Senior Independent Director

Valerie Dias Non-Executive Director and Audit Committee Chairman

Peter Elcock Non-Executive Director

Steve Reid Non-Executive Director

Steve Liddell Non-Executive Director

Fiona RyderNon-Executive Director (appointed 25 October 2018)

Richard NorringtonChief Executive

Trevor Slater Finance Director (appointed 28 June 2018)

Ian Brighton Operations Director (appointed 1 May 2018)

Kieron BlackburnFinance Director (resigned 25 January 2018)

Board Meetings

11 (11)*

11 (11)

10 (11)

8 (11)

10 (11)

11 (11)

1 (1)

11 (11)

5(5)

6(7)

2(2)

Audit Committee

7 (7)

–

7 (7)*

3 (7)

–

7 (7)

–

–

–

–

–


3 (3)

–

–

3 (3)*

3 (3)

3 (3)

–

–

–

–

–

Chairman’s and

NominationsCommittee

4 (4)*

4 (4)

4 (4)

–

–

–

–

4 (4)

–

–

–

– not a member of the Committee

* Denotes Chairman of the Committee. It should also be noted that in addition to attendance at the above meetings both Executive and Non-Executive Directors have been invited on occasion to attend Committees of which they are not members.

Attendance at Board and Board Committee meetings

Committee of the Board is responsible for evaluating the effectiveness of the information received and improvements are made where necessary. Board information is subject to ongoing review to ensure that it meets the needs of the Board in the current and future environment.

The Executive Directors and/or the Secretary ensure that information requests are delivered in accordance with the requests of the Board.

Evaluation

B.6. The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its Committees and individual Directors.

Each Non-Executive Director has an annual performance appraisal carried out by the Chairman. The Chairman’s performance is facilitated through the Deputy Chairman and Senior Independent Director, taking into account the views of all the Directors. The Non-Executive Directors and Chairman give feedback to the Board on general issues of performance following the results of the Committee effectiveness review.

Re-election

B.7. All Directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

The Society’s Rules require that all Directors be submitted for election at the Annual General Meeting (AGM) following their appointment to the Board and accordingly Fiona Ryder, Trevor Slater and Ian Brighton stand for election in March 2019. Each Non-Executive

Development

B.4. All Directors should receive an induction on joining the Board and should regularly refresh their skills and knowledge.

The Society provides a formal induction for Directors tailored to their individual needs. The induction programme includes the nature of building societies; the wider financial services industry; Directors responsibilities and duties; the management information they will be provided with and how to interpret this; information on the Society and its local market, and an overview of regulatory requirements together with details of any significant current issues for the industry. The Chairman ensures that Non-Executive Directors continually update their skills and knowledge to fulfil their role on the Board and Committees. Training and development needs are identified as part of the annual appraisal of the Board and individual Director performance and effectiveness; these needs are usually met by attendance at industry seminars and conferences, internal briefings and specialist speakers. For 2019 a formal schedule of professional development training has been put in place for the year.

Information and Support

B.5. The Board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.

The Chairman ensures that the Board receives the appropriate information to enable it to discharge its responsibilities. Each

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Corporate Governance Report continuedDirector is appointed to the Board for a term of up to three years, subject to satisfactory performance. After three terms the Board is required to review and satisfy itself of the continued independence of judgement and character of a Non-Executive Director prior to re-election. At the 2019 Annual General Meeting Michelle Tennens will have held office for over nine years. Michelle Tennens will retire from the Board in March 2019 and will not stand for re-election.

Financial and Business Reporting

C.1. The Board should present a balanced and understandable assessment of the Company’s position and prospects.

The responsibilities of the Directors in relation to the preparation of the Society’s accounts and the statement that the business is a going concern are contained in the Directors’ Report starting on page 8 and Directors’ Responsibilities on page 24.

Risk Management and Internal Control

C.2 The Board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The Board should maintain sound risk management and internal control systems.

The Directors have a responsibility, both under the Building Societies Act and the Financial Services and Markets Act, to establish and maintain systems of control appropriate to the business. The Executive Team is responsible for designing, operating and monitoring risk management systems and controls. During the year the Society embedded the ERMF which had been implemented the previous year. The principal risks faced by the Society are set out in the Directors’ Report starting on page 8. Each Board and management committee is responsible for the risks and controls within its remit. The Board Risk and Compliance Committee assess the adequacy of this process on behalf of the Board. The Internal Auditor provides independent assurance to the Board on the effectiveness of the system of internal control through the Audit Committee.

The Board has reviewed the effectiveness of the ERMF and concluded that the Society has a strong risk management and compliance culture and that the current framework is effective and appropriate for the size and complexity of the business.

The information received and considered by the Audit Committee provided reasonable assurance that during the financial year there were no material breaches of control or regulatory standards, and that overall, the Society maintained an adequate system of internal control.

Audit Committee and Auditors

C.3. The Board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.

The role and membership of the Audit Committee have been set out earlier in the Directors’ Report.

Remuneration

D.1 Executive Directors’ remuneration should be designed to promote the long term success of the company. Performance-related elements should be transparent, stretching and rigorously applied.

The Directors’ Remuneration Report on page 22 explains how the Society complies with the Code Principles relating to remuneration.

Dialogue with Shareholders

E.1. There should be a dialogue with shareholders based on the mutual understanding of objectives. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.

The Society does not have shareholders in the same way as a listed company; as a mutual society our members are our shareholders. The importance of listening to and engaging with members in the Society’s activities is an integral part of our culture. We endeavour to elicit their views on the products and service being offered by the Society through market research and dialogue with our staff. We hold member events and do all we can to encourage members to attend and ask questions at the Annual General Meeting (AGM). Each year the Society sends the details of its AGM within its voting packs. This is distributed by an independent scrutineer 21 days prior to the AGM and is sent to all qualifying members. Voting enables members to have their say on issues such as Directors’ Remuneration and the election and re-election of Directors.

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Constructive use of the Annual General Meeting (AGM)

E.2. The members of the Board should use the AGM to communicate with members of the Society and to encourage their participation.

Each year the Society sends details of the AGM and voting forms to those members eligible to vote. The resolutions include receipt of the Report and Accounts, election and re-election of Directors, the Directors’ Remuneration Policy and any other relevant matters. Members are provided with forms and given online access, which enable them to appoint a proxy to vote on their behalf if they are unable to attend in person. The distribution of AGM notices (with at least 21 clear days’ notice) and the receipt and counting of proxy votes is carried out by independent scrutineers. At the AGM a poll is called in relation to each resolution and the proxy votes cast are included in the result. The results are subsequently disclosed on the Society’s website.

The Society is keen to encourage as many members as possible to attend the Annual General Meeting as this gives the opportunity for members to meet the Society’s Directors and Executive Team to discuss issues that are of concern. The Chairmen of all the Committees are also available to answer any questions.

Directors’ Remuneration ReportThe purpose of this Report is to inform members of the Society about our policy on the remuneration of Executive and Non-Executive Directors. The Report explains how the Society regards the principles of the UK Corporate Governance Code 2014 relating to remuneration, as far as they are applicable to a mutual organisation of our size. The Society has adopted a Remuneration Policy, which complies with the relevant elements of the FCA’s Remuneration Code and the PRA’s Remuneration Policy. The remuneration of individual Directors is detailed in note 6 of the accounts.

The level and components of remuneration

D.1. Executive Directors’ remuneration should be designed to promote the long term success of the company. Performance related elements should be transparent, stretching and rigorously applied.

The Society’s policy is to reward Directors according to their expertise, experience and overall contribution to the successful performance of the Society and reflects their roles and responsibilities within the Society. The Executive Directors’ benefit package is designed to motivate decision-making in the long term interests of the Society and members as a whole. A performance-related pay scheme operated during the year for Executive Directors. This was carefully designed to encourage achievement of targets that maintain the financial strength and integrity of the Society, the embedding of the Society’s risk management framework and to recognise performance factors that contributed to the Society’s overall business and member objectives.

Non-Executive Directors

The level of fees payable to Non-Executive Directors is assessed using information from comparable organisations (building societies of a similar size).

Remuneration comprises a basic fee with a supplementary payment for holding the position of Chairman of a Committee, Deputy Chairman or Senior Independent Director. This fee reflects the additional responsibilities and time commitments of these positions. Fees for Non-Executive Directors are not pensionable and Non-Executive Directors do not take part in any incentive scheme or receive any other benefits. Non-Executive Directors do not have employment contracts with the Society.

22


Executive Directors

The remuneration of Executive Directors reflects their responsibilities and roles within the Society. This year it comprised basic salary, participation in a three-year performance-related pay scheme and various benefits as set out below. The Society has no share option scheme and none of the Executive Directors has any beneficial interest in, or any rights to subscribe to any instruments (or shares in or debentures of, any connected undertaking of the Society).

Basic salary

Salaries are reviewed by benchmarking against jobs carrying similar responsibilities, from external salary benchmarking data from the building society sector and the financial services sector as a whole, as well as other UK and regional salary data. This encompasses consideration as to the responsibility and complexity of the role, market conditions and demands and the Society’s very high quality standards.

The Society’s approach is not to compromise on quality standards and seek to secure the best and most appropriate people for any particular role at a rate of remuneration consistent with the Society’s financial, business and member objectives.

Notwithstanding the current very competitive market for high quality financial services directors, during the year the Society was delighted to appoint a new Finance Director. The role was externally advertised and the salary was set at a benchmarked level in accordance with the comparison criteria above.

Three year performance-related pay scheme

A three year performance-related pay (PRP) scheme operated during the year for Executive Directors, which was designed to encourage the achievement of targets central to the long term sustainability of the Society. The PRP currently allows a maximum of 20% of salary earned for achievement of all targets set which are based on cost management, mortgage growth and member and broker satisfaction metrics and which are subject firstly to meeting defined financial performance and risk management criteria. One third of this payment is deferred until the end of the three-year period to ensure consistent performance is delivered over the longer term. As part of the process the Remuneration Committee sets targets and assesses whether any payment should be made prior to recommendation for board approval.

Pensions

The Society makes a contribution of between 17.5% and 20% of salary for Executive Directors’ pension arrangements. For Richard Norrington and Trevor Slater this is in the form of a cash equivalent payment.

23

Peter ElcockChairman of the Remuneration Committee8 February 2019

Benefits

Executive Directors receive other taxable benefits including a car allowance, travel and accommodation allowance when on Society business and a private health care scheme, which covers the Directors and their families. The Society does not provide concessionary home loans to Directors.

Contractual terms

The Executive Directors are employed on open-ended service contracts; they require 12 months notice to be given by the Society and six months notice by the individual.

The procedure for determining remuneration

D.2. There should be a formal and transparent procedure for developing policy on Executive remuneration and for fixing the remuneration packages of individual Directors. No Director should be involved in deciding his or her own remuneration.

The Remuneration Committee consists of four Non-Executive Directors under the Chairmanship of Peter Elcock. The Chief Executive attends by invitation only but takes no part in the discussion of his own salary. The Committee is responsible for the remuneration policy of all Executive Directors and it makes recommendations to the Board regarding remuneration and contractual arrangements. The Committee meets at least twice a year and reviews supporting evidence, including external professional advice if appropriate, on comparative remuneration packages. It also regularly reviews regulatory requirements as they apply to remuneration to ensure that the regulators’ guidance is followed and applied in practice.

Reports and minutes of the Committee’s meetings are circulated to all members of the Committee and the Chairman of the Committee reports at the Board meeting following a Committee meeting.

Annually the Executive Team together with the Chairman are responsible for setting the Non-Executive Directors’ fees. The Board, with the exception of the Chairman, agrees the Chairman’s fee.

24


Directors’ responsibilities for accounting records and internal controls

The Directors are responsible for ensuring that the Society:

• keeps proper accounting records that disclose with reasonable accuracy at any time the financial position of the Society, in accordance with the Act;

• takes reasonable care to establish, maintain, document and review such systems and controls as are appropriate to its business in accordance with the rules made by the Financial Conduct Authority and Prudential Regulation Authority under the Financial Services and Markets Act 2000.

The Directors are responsible for such internal control as they determine is necessary to enable the preparation of Annual Accounts that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Society and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Society’s website. Legislation in the UK governing the preparation and dissemination of Annual Accounts may differ from legislation in other jurisdictions.

Directors’ responsibilities in respect of the Annual Report, the Annual Business Statement, the Directors’ Report and the Annual Accounts

The Directors are responsible for preparing the Annual Report, Annual Business Statement, Directors’ Report and the Annual Accounts in accordance with applicable law and regulations.

The Building Societies Act 1986 (“the Act”) requires the Directors to prepare Annual Accounts for each financial year. Under that law they have elected to prepare the Annual Accounts in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.

The Annual Accounts are required by law to give a true and fair view of the state of affairs of the Society as at the end of the financial year and of the income and expenditure of the Society for the financial year.

In preparing these Annual Accounts, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Annual Accounts;

• assess the Society’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

• use the going concern basis of accounting unless they either intend to liquidate the Society or to cease operations, or have no realistic alternative but to do so.

In addition to the Annual Accounts the Act requires the Directors to prepare, for each financial year, an Annual Business Statement and a Directors’ Report, each containing prescribed information relating to the business of the Society.

Statement of Directors’ Responsibilities

2525

to the members of Ipswich Building Society

1. Our opinion is unmodified

We have audited the annual accounts of Ipswich Building Society for the year ended 30 November 2018 which comprise the Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Members’ Interests, Statement of Cash Flows and the related notes, including the accounting policies in note 1.

In our opinion the annual accounts:

— give a true and fair view of the state of the Society’s affairs as at 30 November 2018 and of the Society’s profit for the year then ended;

— have been properly prepared in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; and

— have been prepared in accordance with the requirements of the Building Societies Act 1986 and regulations made under it.

Basis for opinion:

We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee. We were appointed as joint auditor by the members for the year ended 30 November 1987 and then as sole auditor by the members for the year ended 30 November 1988. The period of total uninterrupted engagement is for the 32 financial years ended 30 November 2018.

We have fulfilled our ethical responsibilities under, and we remain independent of the Society in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to public interest entities. No non-audit services prohibited by that standard were provided.

Overview

Materiality: Annual accounts as a whole

£158,000 (2017:£125,000)

4.8% (2017:4.0%) of profit before tax

Key audit matters vs 2017

Other matter

Recurring risks

The impact of uncertainties due to Britain exiting the European Union on our audit

Impairment of loans and advances to customers

Effective interest rate (EIR) income recognition

Valuation of defined benefit scheme obligation

Key audit matter The risk Our response

The impact of uncertainties due to Britain exiting the European Union on our audit

Refer to page 11 (principal risks), page 6 (Chief Executive Report).

Unprecedented levels of uncertainty

All audits assess and challenge the reasonableness of estimates, in particular as described in impairment of loans and advances to customers, interest receivable on loans and advances to customers – effective interest rate adjustment, valuation of defined benefit obligation below, and related disclosures and the appropriateness of the going concern basis of preparation of the financial statements. All of these depend on assessments of the future economic environment and the Society’s future prospects and performance.

We developed a standardised firm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our audits. Our procedures included:

–– Our Brexit knowledge – We considered the directors’ assessment of Brexit-related sources of risk for the Society’s business and financial resources compared with our own understanding of the risks. We considered the directors’ plans to take action to mitigate the risks;

–– Sensitivity analysis – When addressing impairment of loans and advances to customers, interest receivable on loans and advances to customers –effective interest rate adjustment, valuation of defined benefit obligation and other areas that depend on forecasts, we compared the directors’ sensitivity analysis to our assessment of the worst reasonably possible, known adverse scenario resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty; and

–– Assessing transparency – As well as assessing individual disclosures as part of our procedures on impairment of loans and advances to customers, interest receivable on loans and advances to customers – effective interest rate adjustment, valuation of defined benefit obligation we considered all of 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, interest receivable on loans and advances to customers – effective interest rate adjustment, valuation of defined benefit obligation, we found the resulting estimates and related disclosures of sensitivity and disclosures in relation to going concern to be acceptable. However, no audit should be expected to predict the unknowable factors or all possible future implications for a Society and this is particularly the case in relation to Brexit.

2. Key audit matters: including our assessment of risks of material misstatement

Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.

26

27


Impairment of loans and advances to customers

(£0.6 million; 2017: £0.8 million)

Refer to page 15 (Corporate Governance Report), page 36 (accounting policy) and page 49 (financial disclosures).

Subjective estimate:

The impairment provision relating to the Society’s loan portfolio requires the directors to make significant judgements and estimates in order to determine incurred losses on loans and advances to customers. In making these judgements and estimates the directors have considered both the Society specific historical data as well as their experience and knowledge of their current mortgage book.

Impairment provisions are assessed on an individual and collective basis.

The directors judge individual impairments by reference to loans that have current or historical arrears, or are subject to forbearance flagging. The collective impairment is derived from a model that uses a combination of the Society’s historical experience and, due to the Society’s limited loss experience, external data, adjusted for current conditions.

In addition the Society applies management judgement based on the previous loss experience for loans that have become impaired and an assessment of future recoverability of the loan book. There is a risk that the overall provision is not reflective of the incurred losses at the end of the period due to the period of time that it takes for incurred losses to emerge, changes in customer credit quality or other market factors not sufficiently incorporated into the judgement, such as house prices.

Our procedures included:

–– Tests of detail: We assessed the excepted recoveries on individually impaired loans;

–– Historical comparison: We assessed the key assumptions used in the collective and individual models, including the probability of default and the forced sale discount, against the Society’s historical experience;

–– Benchmarking: We compared the Society’s key assumptions, e.g. forced sale discount against those of comparable lenders;

–– Sensitivity analysis: We performed sensitivity analysis over the key assumptions in the Society’s collective provision of probability of default and forced sale discounts by performing stress testing to help us assess the reasonableness of the assumptions used; and

–– 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: acceptable).

2. Key audit matters: our assessment of risks of material misstatement (cont.)

28


Effective interest rate (EIR) income recognition

Year end EIR asset £0.2 million, 2017: £0.3 million



Accounting standards require interest receivable on loans and advances to customers to be recognised using the effective interest rate method. This results in all directly attributable interest, fees and costs being recognised on an even yield basis over the expected life of the loans.

The recognition of interest receivable on loans and advances to customers under the effective interest rate method requires the directors to make significant judgements and estimates, with the most critical estimate being the loans’ expected behavioural life. The directors have determined this estimate with reference to historical customer behaviour and the Society’s customer retention strategy.

In addition, the directors apply judgement in determining whether or not fees and costs, including early redemption charges, should be included in the methodology.


–– Historical comparison: We assessed the reasonableness of the Society’s behavioural life assumptions against actual customer behaviour;

–– Benchmarking assumptions: We assessed the key assumptions behind the expected customer lives and profiles of significant loan products against our own knowledge of industry experience and trends, including benchmarking with comparable lenders;

–– Sensitivity analysis: We assessed the models for their sensitivities to changes in the key assumptions by considering alternative behavioural lives to help us assess the criticality of the assumptions used and identify areas for potential additional focus;

–– Test of detail: We assessed the treatment of directly attributable fees and costs included in the effective interest rate against the requirements of the accounting standard; and

–– Assessing 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 (EIR) income recognition to be acceptable (2017: acceptable).


29


Valuation of defined benefit scheme obligation

Defined benefit obligation £6.7 million, 2017: £7.6 million;



The Society operates a defined benefit pension scheme which has been closed to new members for several years. At year-end, the Society holds a net defined benefit pension scheme liability on the statement of financial position, which includes gross pension obligations. Small changes in the assumptions and estimates used to value the Society’s pension obligation (before deducting scheme assets) would have a significant effect on the Society’s net defined benefit obligation.

The effect of these matters is that, as part of our risk assessment, we determined that the defined benefit obligation has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the annual accounts as a whole. The annual accounts (note 1.14) disclose the sensitivity estimated by the Society.


–– Evaluation of actuary: We evaluated the competence, independence and objectivity of the Society’s actuary in assessing management’s reliance upon their expert valuation services;

–– Benchmarking assumptions: We critically assessed, using our own actuarial specialists, the key assumptions applied, such as the discount rate, inflation rate and mortality/life expectancy against externally derived data and internal experience;

–– Evaluation of scheme administrator: We evaluated the operating effectiveness of relevant controls, through an inspection and assessment of the administrator’s internal controls report, to determine the reliance upon this party as a service organisation; and

–– Assessing transparency: We considered the adequacy of the Society’s disclosures in respect of the sensitivity of the obligation to these assumptions.

Our results

–– We found the valuation of defined benefit obligation to be acceptable (2017: acceptable).


30

3. Our application of materiality and an overview of the scope of our audit

Materiality for the annual accounts as a whole was set at £158,000 (2017: £125,000), determined with reference to a benchmark of the Society’s profit before tax of which it represents 4.8% (2017: 4.0%).

We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £8,000 (2017: £6,300), in addition to other identified misstatements that warranted reporting on qualitative grounds.

Our audit of the Society was undertaken to the materiality level specified above and was performed at the Society’s head office in Ipswich.

Profit before tax£3.3m (2017: £3.1m)

Materiality£158,000 (2017: £125,000)

£8,000Misstatements reported to the Audit Committee (2017: £6,000)

Profit before tax

Society materiality

4. We have nothing to report on going concern

The directors have prepared the annual accounts on the going concern basis as they do not intend to liquidate the Society or to cease its operations, and as they have concluded that the Society’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over its ability to continue as a going concern for at least a year from the date of approval of the annual accounts (“the going concern period”).

Our responsibility is to conclude on the appropriateness of the directors’ conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor’s report is not a guarantee that the Society will continue in operation.

In our evaluation of the directors’ conclusions, we considered the inherent risks to the Society’s business model and analysed how those risks might affect the Society’s financial resources or ability to continue operations over the going concern period. The risk that we considered most likely to adversely affect the Society’s available financial resources over this period was the impact of Brexit on the Society’s liquidity and capital resources.

As these were risks that could potentially cast significant doubt on the Society’s ability to continue as a going concern, we considered sensitivities over the level of available financial resources indicated by the Society’s financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively and evaluated the achievability of the actions the directors consider they would take to improve the position should the risks materialise.

Based on this work, we are required to report to you if we have anything material to add or draw attention to in relation to the directors’ statement in Note (1) to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Society’s use of that basis for a period of at least twelve months from the date of approval of the financial statements.

We have nothing to report in these respects, and we did not identify going concern as a key audit matter.

5. We have nothing to report on the other information in the Annual Report

The directors are responsible for the other information presented in the Annual Report together with the annual accounts. Our opinion on the annual accounts does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our annual accounts audit work, the information therein is materially misstated or inconsistent with the annual accounts or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.

Annual Business Statement and Directors’ Report

In our opinion:

–– the Annual Business Statement and the Directors’ Report have each been prepared in accordance with the applicable requirements of the Building Societies Act 1986 and regulations thereunder;

–– the information given in the Directors’ Report for the financial year is consistent with the accounting records and the annual accounts; and

— the information given in the Annual Business Statement (other than the information upon which we are not required to report) gives a true representation of the matters in respect of which it is given.

31

6. We have nothing to report on the other matters on which we are required to report by exception

Under the Building Societies Act 1986, we are required to report to you if, in our opinion:

–– adequate accounting records have not been kept by the Society;

— the annual accounts are not in agreement with the accounting records and returns; or

— we have not received all the information and explanations and access to documents we require for our audit.

We have nothing to report in these respects.

7. Respective responsibilities

Directors’ responsibilities

As explained more fully in their statement set out on page 24, the directors are responsible for: the preparation of the annual accounts including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of annual accounts that are free from material misstatement, whether due to fraud or error; assessing the Society’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Society or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities

Our objectives are to obtain reasonable assurance about whether the annual accounts as a whole are free from material misstatement, whether due to fraud, other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and 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.

Irregularities – ability to detect

We identified areas of laws and regulations that could reasonably be expected to have a material effect on the annual accounts from our general commercial and sector experience, through discussion with the directors (as required by auditing standards), and from inspection of the Society’s regulatory correspondence and discussed with the directors the policies and procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. The potential effect of these laws and regulations on the annual accounts varies considerably.

Firstly, the Society is subject to laws and regulations that directly affect the annual accounts including financial reporting legislation (including related Building Society legislation), taxation legislation, and pension regulation and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related annual account items.

Secondly, the Society is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the annual accounts, for instance through the imposition of fines or litigation or the loss of the Society’s licence to operate. We identified the following areas as those most likely to have such an effect: regulatory capital and liquidity and certain aspects of building society legislation recognising the financial and regulated nature of the Society’s activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and inspection of regulatory and legal correspondence, if any.

These limited procedures did not identify actual or suspected non-compliance.

Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the annual accounts, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the annual accounts, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.

8. The purpose of our audit work and to whom we owe our responsibilities

This report is made solely to the Society’s members, as a body, in accordance with Section 78 of the Building Societies Act 1986. Our audit work has been undertaken so that we might state to the Society’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Society and the Society’s members, as a body, for our audit work, for this report, or for the opinions we have formed.

Simon Clark (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants One SnowhillSnow Hill QueenswayBirminghamB4 6GH8 February 2019

32


Interest receivable and similar incomeInterest payable and similar charges

Net interest income

Defined benefit pension expenseFees and commissions receivableFees and commissions payableGains less (losses) on financial instruments at fair value

Net profit on financial operationsOther operating income

Total income

Administrative expensesDepreciation and amortisationOther operating charges

Operating profit before impairment allowance and provisions

Impairment gains/(losses) on loans and advances to customersRelease/(charge) for customer redress

Operating profit and profit before tax

Tax on profit on ordinary activities

Profit for the financial year

Notes

23

9

4

8

517, 18

1526

10

2018£000

18,621 (5,958)

12,663

(76)370 (530)(127)

12,300 29

12,329

(8,759)(508)(42)

3,020

206 59

3,285

(645)

2,640

2017£000

17,875 (5,389)

12,486

(78)433 (779)

86

12,148 37

12,185

(8,334)(516)(36)

3,299

(136)(40)

3,123

(708)

2,415

Statement of Comprehensive Incomefor the Year ended 30 November 2018

Other Comprehensive Income

Actuarial gain/(loss) recognised in the pension scheme - Movement in related deferred taxMovement in fair value of debt securities - Movement in related deferred taxRevaluation gain on freehold property - Movement in related deferred tax

Total comprehensive income for the year

The Notes to these Accounts are contained on pages 36 to 66.

9

13

17

28

183 (31)(21)

4 1,322 (225)

3,872

(869)148 15 (3)– –

1,706

33

www.ibs.co.uk

Assets Liquid assets Cash in hand and balances with Bank of England Loans and advances to credit institutions Debt securities Total liquid assets Derivative financial instruments Loans and advances to customers Loans fully secured on residential property Loans fully secured on land Total loans and advances to customers Tangible fixed assets Intangible fixed assets Other assets Deferred tax Prepayments and accrued income

Total assets Liabilities SharesAmounts owed to credit institutionsAmounts owed to other customersDerivative financial instrumentsOther liabilitiesAccruals and deferred incomeDeferred taxProvisions for liabilitiesNet pension liabilitySubordinated liabilities Reserves General reserve Revaluation reserve Available for sale reserve Total liabilities The accounting policies and notes on pages 36 to 66 form part of these Accounts.

Approved by the Board of Directors on 8 February 2019.

Alan Harris, ChairmanRichard Norrington, Chief ExecutiveTrevor Slater, Finance Director

2018£000

94,616 3,122

17,053

114,791

578

535,200 983

536,183

4,428 1,095

377 313 120

657,885

520,426 45,056 51,238

57 257 825 626 10

431 4,561

623,487

33,282 1,097

19

657,885

2017£000

87,590 441

32,119

120,150

531

519,495 1,111

520,606

3,058 1,306

369 113 163

646,296

511,655 40,019 55,173

1 538 856

– 120

2,888 4,520

615,770

30,490 –

36

646,296

Statement of Financial Positionas at 30 November 2018

Notes

111213

14

1515

15

1718191020

21222314242510269

27

282828

34


Balance at 1 December 2016

Total comprehensive income for the year Profit for the year Other comprehensive income Balance at 30 November 2017

General reserves

2017£000

28,796

2,415 (721)

1,694

30,490

Available for sale reserve

2017£000

24

– 12

12

36

Total reserves

2017£000

28,820

2,415 (709)

1,706

30,526

Revaluation reserve2017£000

–

– –

–

–

Balance at 1 December 2017

Total comprehensive income for the year Profit for the year Valuation gains on freehold property Other comprehensive income Balance at 30 November 2018


General reserves

2018£000

30,490

2,640 –

152

2,792

33,282

Available for sale reserve

2018£000

36

– –

(17)

(17)

19

Total reserves

2018£000

30,526

2,640 1,097

135

3,872

34,398

Revaluation reserve2018£000

–

– 1,097

–

1,097

1,097

Statement of Changes in Members’ Interestsfor the Year ended 30 November 2018

35

www.ibs.co.ukYear ended 30 November 2018

Cash flows from operating activities Profit before tax Adjustments for: Depreciation and amortisation of fixed assets Profit on disposal of tangible fixed assets Impairment (gains)/losses on loans and advances to customers

Changes in operating assets and liabilities Changes in fair values of financial instruments at fair value through the Statement of Comprehensive Income Decrease in prepayments and accrued income Increase/(decrease) in accruals and deferred income Increase in other assets Decrease in other liabilities Increase/(decrease) in other provisions Net pension scheme payment Increase in loans and advances to customers Taxation paid Movement in Shares

Net cash used by operating activities

Cash flow from financing activities Movement in: Amounts owed to credit institutions and other customers

Net cash inflow from financing activities

Cash flows from investing activities Purchase of debt securities Proceeds on maturity of debt securities Purchase of tangible fixed assets Proceeds on disposal of tangible fixed assets Purchase of intangible fixed assets

Net cash generated by investing activities

Net increase in cash and cash equivalents

Cash and cash equivalents At 1 December Movement in the year At 30 November


Notes

17, 181715

4

20251924269

151021

22, 23

1313171718

11, 12

11, 12

2018£000

3,285

508 (2)

(213) 3,578

127

208 (35)(8)

(93)(110)

(2,274)(15,532)

(658)8,771

(9,604)

1,065

1,065

(2,000) 17,000

(500) 192

(35)

14,657

9,696

88,031 9,696

97,727

2017£000

3,123

516 1

89 3,729

(86)

162 173

– (7)

(60)(272)

(44,223)(487)

22,498

(22,302)

37,299

37,299

(27,001) 39,116

(418) – –

11,697

30,423

57,608

30,423

88,031

Statement of Cash Flowsfor the Year ended 30 November 2018

36


Notes to the Accountsfor the Year ended 30 November 2018

General information and basis of preparation

Ipswich Building Society (the “Society”) has prepared these Society 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 Annual Accounts.

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 note 1.14.

The Directors have prepared these Accounts on a going concern basis as set out in the Directors’ Report on pages 8-13.

1.1 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: freehold land and building, derivative financial instruments and financial instruments classified at fair value through profit or loss (“FVTPL”) or available-for-sale.

1.2 Interest

Interest income and expense are recognised in profit or loss using the effective interest method. The ‘effective interest rate’ 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 Group 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. Valuation fees and costs are excluded from the effective interest rate calculation on the basis that they are offsetting and are therefore not considered to be an incremental part of the effective rate.

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;

• interest on available-for-sale investment securities calculated on an effective interest basis; and

• interest on interest rate derivatives.

Fair value changes in derivatives 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 statement of comprehensive income.

1.3 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 (see 1.2).

Other fees and commission income – including account servicing fees, sales commission and other fees are recognised as the related services are performed.

1.4 Expenses

Operating lease

Payments (excluding costs for services and insurance) made under operating leases are recognised in the profit and loss account 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. Lease incentives received are recognised in profit and loss over the term of the lease as an integral part of the total lease expense.

Finance lease

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability using the rate implicit in the lease. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred.

1.5 Taxation

Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the profit or loss account 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 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

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are recognised in the Annual Accounts. The following timing difference is not provided for: 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. 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. For non-depreciable assets that are measured using the revaluation model, or investment property that is measured at fair value, deferred tax is provided at the rates and allowances applicable to the sale of the asset/property. Deferred tax balances are not discounted.

Unrelieved tax losses and other deferred tax assets are recognised only to the extent that is it probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits.

1.6 Financial instruments

Recognition

The Society initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities 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:

• 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 Group 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 (see 1.2). When the Society chooses to designate the loans and advances as measured at fair value through profit or loss, they are measured at fair value with face value changes recognised immediately in profit or loss.

Should the Society purchase 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 would be accounted for as a loan or advance, and the underlying asset would not be recognised in the Society’s Annual Accounts.

• 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 equity securities and debt securities. Unquoted equity securities whose fair value cannot be measured reliably are carried at cost. All other available-for-sale investments are measured at fair value after initial recognition.

Interest income is recognised in profit or loss using the effective interest method (see 1.2). Impairment losses are recognised in profit or loss.

Other fair value changes, other than impairment losses, are recognised in OCI and presented in the fair value reserve within equity. When the investment is sold, the gain or loss accumulated in equity is reclassified to profit or loss.

• At fair value through profit or loss

Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement 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) is(are) expected to be highly effective in offsetting the changes in the fair value of the respective hedged item(s) during the period for which the hedge is designated, and whether the actual results of each hedge are 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

38


Notes to the Accountscontinuedthe risk being hedged (even if it is normally carried at cost or amortised cost) and any gains or losses on remeasurement are recognised immediately in the income statement (even if those gains would normally be recognised directly in reserves). 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 into profit or loss 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.

Derecognition

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 Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.

On derecognition 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 OCI is recognised in profit or loss. Any interest in transferred financial assets that qualify for derecognition 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.

Measurement

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.

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 are ‘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; • default or delinquency by a borrower; • indications that a borrower or issuer will enter

bankruptcy; • the disappearance of an active market for a security; or

• observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group.

The Society considers evidence of impairment for loans and advances and held-to-maturity investment securities at both a specific asset and a collective level. All individually significant loans and advances and held-to-maturity

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investment securities 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 and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together loans and advances and held-to-maturity investment securities with similar risk characteristics.

In assessing collective impairment, the Society uses statistical modelling of historical trends of the 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 historical trends. 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.

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:

• Temporary transfer to an interest only mortgage;

• Reduced monthly payments;

• Extension of 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, statement of assets and liabilities, bank/credit card statements, payslips etc. in order that the request can be properly assessed. If the forbearance request is granted the account is monitored in accordance with our policy and procedures. 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.

Impairment losses are recognised in profit or loss 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 profit or loss.

Impairment losses on available-for-sale investment securities are recognised by reclassifying the losses accumulated in the fair value reserve in equity to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the

difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment attributable to application of the effective interest method are reflected as a component of interest income.

If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed through profit or loss; otherwise, any increase in fair value is recognised through OCI. Any subsequent recovery in the fair value of an impaired available-for-sale equity security is always recognised in OCI.

1.7 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.

1.8 Tangible fixed assets

Freehold land and buildings are stated at revalued amounts, being the fair value, determined by market-based evidence at the date of valuation, less any depreciation subsequently accumulated and subsequent impairment. Full valuations are completed at least every five years followed by interim valuations three years later. The Directors review the valuations to confirm that they remain appropriate in the intervening years. Increases in valuations of freehold properties are credited to the Revaluation Reserve except to the extent that they reverse previous impairment losses recognised in the Income Statement for the same assets, in which case they are credited to the Income Statement. Decreases in valuations are recognised in the Income Statement except to the extent that they reverse amounts previously credited to the Revaluation reserve for the same assets, in which case they are recognised in the Revaluation reserve. Freehold Land and Building’s were previously stated at cost less accumulated depreciation and accumulated impairment losses. Note 17 provides further detail in relation to this change in accounting policy.

All other tangible fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses.

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.

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Notes to the AccountscontinuedLeases in which the entity assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. All other leases are classified as operating leases. Leased assets acquired by way of finance lease are stated on initial recognition at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, including any incremental costs directly attributable to negotiating and arranging the lease. At initial recognition a finance lease liability is recognised equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments. The present value of the minimum lease payments is calculated using the interest rate implicit in the lease. Lease payments are accounted for as described at 1.14 below.

The Society assesses at each reporting date whether tangible fixed assets (including those leased under a finance lease) are impaired.

Depreciation is charged to the profit and loss account 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 50 years• branch fitting out costs 10 - 15 years• equipment, fixtures and vehicles 5 - 10 years• computer equipment 3 - 5 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.

1.9 Intangible assets

Software development

Intangible assets relating to the development of the Society’s core IT system are stated at cost less accumulated amortisation and less accumulated impairment losses. Amortisation is charged to the profit or loss on a straight-line basis from the date the assets are available for use over the life of the IT supply contract, or over a shorter period where it is felt that the Society will not draw value from the systems over the life of the contract. The estimated useful life of the IT system is 10 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. In addition, the assets are assessed for impairment in accordance with Section 27 of FRS 102.

1.10 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 or cash-generating unit 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. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”).

An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.

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.

1.11 Employee benefits

The Society operates both a defined benefit pension scheme and a defined contribution pension scheme, which are funded by contributions from the Society and its employees. The defined benefit scheme was closed to new members with effect from 1 January 2001 and was made paid-up at 31 March 2006.

Defined contribution plan

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. Obligations for contributions to defined contribution pension plans are recognised as an expense in the profit and loss account in the periods during which services are rendered by employees.

Defined benefit plan

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Society’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine

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its present value. The fair value of any plan assets are deducted. The Society determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate as determined at the beginning of the annual period to the net defined benefit liability (asset) taking account of changes arising as a result of contributions and benefit payments.

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 tri-annually by a qualified actuary using the projected unit credit method. The entity recognises net defined benefit plan assets to the extent that it is able to recover the surplus either through reduced contributions in the future or through refunds from the plan.

Changes in the net defined benefit liability arising from employee service rendered during the period, net interest on net defined benefit liability, and the cost of plan introductions, benefit changes, curtailments and settlements during the period are recognised in profit or loss.

Remeasurement of the net defined benefit liability/asset is recognised in other comprehensive income in the period in which it occurs.

1.12 Provisions

A provision is recognised in the Balance Sheet when the Society 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.

1.13 Sale and repurchase agreements

Investments and other securities may be lent or sold subject to a commitment to repurchase them (a ‘repo’). Such securities are retained within the Statement of Financial Position when substantially all the risks and rewards of ownership remain within the Society, and the liability associated with the cash advanced is included separately within the Statement of Financial Position.

The difference between the sale and repurchase price is accrued over the life of the agreements and recognised within net interest income.

1.14 Critical estimates and judgements

The Society makes critical estimates and judgements in the following areas:

• Impairment losses on loans and advances to customers

The Society reviews its mortgage portfolio at least quarterly to assess impairment. In determining whether an impairment loss should be recorded the Society is required to exercise a degree of judgement. Impairment provisions are calculated

using externally provided probability of default statistics, historical arrears experience, and expected cash flows. Estimates are applied to determining prevailing market conditions including interest rates and house prices and the length of time expected to complete the sale of properties in possession. The accuracy of the provision would therefore be affected by unexpected changes to these assumptions

Sensitivity analysis has been carried out on the allowance for impairment by i) altering the percentage of collateral that it is estimated would be recovered in the event of repossession by +/-5%, and ii) altering the probability of default by +/-50%. The combined effect of these stresses gave increases in the value of mortgage assets at 30 November 2018 and the profit for the year of £192,000 and £521,000 respectively, and decreases in these values of £406,000 and £268,000 respectively.

• Effective interest rate (EIR)

The effective interest rate will affect the carrying values of loans and receivables. One of the key components of the EIR is the expected life of the asset. In determining the expected life of mortgage assets the Society uses historical and forecast redemption data as well as management judgement. At least annually the expected life of mortgage assets is reassessed for reasonableness. Any variation in the expected life of mortgage assets will change the carrying value in the Statement of Financial Position and the timings of the recognition of interest income.

Sensitivity analysis has been carried out on the expected life of mortgage assets. Doubling the period from the date of maturity of a mortgage product to the point at which the borrower switches to another mortgage product or redeems their mortgage increased the value of mortgage assets at 30 November 2018 by £167,000 and net interest income by £170,000.

• Defined benefit pension scheme

The defined benefit pension scheme exposes the Society to actuarial risks such as investment risk, interest rate risk, inflation risk and longevity risk. In conjunction with its actuaries the Society makes key financial assumptions that are used in the actuarial valuation of the defined benefit pension obligation and therefore changes to these assumptions have an impact on the pension obligation shown within the Statement of Financial Position. The key assumptions include inflation rates, discount rates and life expectancy. See note 9 for further details on these assumptions. A decrease in discount rate of 0.25% per annum would increase liabilities by £292k, an increase in inflation of 0.1% would increase inflation linked liabilities by 2% and a one year increase in life expectancy would increase liabilities by 2%. Each of these sensitivities considers that change in isolation.

42


Interest receivable and similar income

On loans fully secured on residential property On other loans On debt securities Interest and other incomeOn other liquid assets Interest and other incomeNet expense on asset derivatives

2018£000

17,880 60

180

547 (46)

18,621

2017£000

17,608 127

205

205 (270)

17,875

02

Interest payable and similar charges

On shares held by individuals On deposits and other borrowings Subordinated liabilities (aggregate financing costs) OtherNet income on liability derivatives

Net income from other financial instruments at fair value through profit and loss

Derivatives in designated fair value hedge relationshipsAdjustments to hedged items in fair value hedge relationshipsDerivatives not in designated fair value hedge relationships

2018£000

5,522

440 – (4)

5,958

2018£000

90 (118)(99)

(127)

2017£000

4,479

437 515

(42)

5,389

2017£000

544 (454)

(4)

86

03

04

Administrative expenses

Staff costs Wages and salaries Social security costs Other pension costs Other administrative expenses Amounts receivable by the Society’s Auditor and their associates are included within other administrative expenses and comprise fees in respect of: Audit of these financial statements Other Services

These fees are shown exclusive of VAT. Other Services includes an interim review of half year profit for regulatory capital recognition purposes and an assurance report in connection with the Bank of England’s Term Funding Scheme.

2018£000

3,873 395 347

4,615 4,144

8,759

82 25

107

2017£000

3,666 331 323

4,320 4,014

8,334

80 –

80

05

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Table 2 Executive Directors 2018 R Norrington (Chief Executive) T Slater (Finance Director - Appointed 28 June 2018) I Brighton (Operations Director - Appointed 1 May 2018) K F Blackburn (Resigned 25 January 2018)

Total T Slater - remuneration from 2 January 2018 to 27 June 2018

2017 P Winter (Retired 31 Dec 2016) R Norrington (Chief Executive) K F Blackburn (Finance Director)

Total Given that Mr Slater was employed by the Society as a Finance Director Designate prior to his appointment to the Board, his remuneration from 2 January 2018 to 27 June 2018 is also provided.

Mr Norrington and Mr Slater have elected to receive cash payments in respect of pension entitlements. Benefits include health care, car allowance and travel allowance.

Total Directors’ remuneration amounted to £627,300 (2017: £614,500).

Salary

£000

169.248.9

61.7

21.4

301.2

57.2

13.0 166.1 109.5

288.6

Payable now

£000

18.25.7

6.4

–

30.3

6.8

– 22.3 14.7

37.0

Performance related PayDeferred

£000

9.12.8

3.2

–

15.1

3.4

– 11.2

–

11.2

Benefits

£000

25.17.8

7.1

2.4

42.4

9.2

1.5 17.5 11.9

30.9

Sub Total

£000

221.665.2

78.4

23.8

389.0

76.6

14.5 217.1 136.1

367.7

Pension Entitlements

£000

33.88.6

10.8

3.7

56.9

10.0

2.6 48.0 19.2

69.8

Total

£000

255.473.8

89.2

27.5

445.9

86.6

17.1 265.1 155.3

437.5

The average number of persons, including Executive Directors, employed during the year was as follows:

Head OfficeBranch offices

2018Full time

57 23

80

2018Part time

27 30

57

2017Full time

52 27

79

Employees07 2017Part time

28 26

54

Remuneration of Directors

Table 1 Non -Executive Directors D W Bowden (retired 29 March 2017)V Dias (Vice Chairman)P ElcockE S Evans (retired 30 November 2017)A Harris (Chairman)S J ReidM A TennensS Liddell (appointed 30 November 2017)F Ryder (appointed 25 October 2018) Total

06 2017 fees £000

10.4 27.9 22.8 41.6 26.6 22.9 24.8 N/A N/A

177.0

2018 fees £000

N/A 30.0 28.0 N/A 43.0 28.0 26.0 24.0 2.4

181.4

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The Capital Requirements (Country by Country Reporting) Regulation 2013 places certain reporting obligations on financial institutions that are within the scope of EU Capital Requirements Directive (CRD IV).

The objective of the country by country reporting requirements is to provide increased transparency regarding the source of the financial institution’s income and the locations of its operations. Ipswich Building Society is a UK registered entity.

Name, nature of activities and geographical location: Ipswich Building Society is a deposit taker and lender, not part of a group and operates only in the United Kingdom.

Turnover 12,300 12,148 Profit before tax 3,285 3,123Corporation Tax paid (658) (487)Number of Employees on a full time equivalent basis See note 7 See note 7 Turnover is defined as total income (net interest receivable and net fee/commission income) in accordance with guidance from UK Treasury.

During the year the Society has participated in the Bank of England Term Funding Scheme. Details of drawings are at Note 22.

Corporation tax paid in 2018 is in respect of the results for the year ended 30 November 2017.

2018£000

Country by Country Reporting08

2017£000

(a) Defined benefit scheme

The Society operates a defined benefit pension scheme in the UK. This is a separate trustee administered fund holding the pension scheme assets to meet long term pension liabilities. A full actuarial valuation was carried out at 30 November 2015 and updated to 30 November 2018 by a qualified actuary, independent of the scheme’s sponsoring employer. The major assumptions used by the actuary are shown below.

This most recent full actuarial valuation as at 30 November 2015 showed a deficit of £2,817,000. The Society has agreed with the trustees that it will aim to eliminate the deficit over a period of 8 years and 1 month from 1 December 2016 by the payment of annual contributions of £350,000 in respect of the

deficit. In addition and in accordance with the actuarial valuation, the Society has agreed with the trustees that it will meet expenses of the scheme and levies to the Pension Protection Fund. During 2018, the Society paid an additional £2m into the scheme to accelerate repayment of the deficit. This will be recognised in the next full triennial actuarial valuation which is due as at 30 November 2018. The results of the triennial valuation are expected during 2019, at which time an amended schedule of contributions will be agreed with the scheme Trustees.

During the year a number of members chose to leave the scheme. The withdrawal of their interest in the scheme is included within ‘benefits paid’ noted below.

Pension arrangements09

Present values of defined benefit obligation, fair value of assets and defined benefit asset (liability)

Fair value of plan assetsPresent value of defined benefit scheme obligation

Deficit in the plan

Defined benefit scheme liability to be recognisedDeferred tax

Net defined benefit liability to be recognised

2016£000

8,187

(10,478)

(2,291)

(2,291) 389

(1,902)

2017£000

4,700 (7,588)

(2,888)

(2,888) 491

(2,397)

2018£000

6,297

(6,728)

(431)

(431) 73

(358)

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Reconciliation of opening and closing balances of the defined benefit obligation

Defined benefit obligation at the start of the period Interest expense Actuarial (gains)/losses Benefits paid Losses due to benefit changes Defined benefit scheme obligation at the end of the period

2017£000

10,478

229 1,160 (4,279)

–

7,588

2018£000

7,588

189 (438)(642) 31

6,728

Reconciliation of opening and closing balances of the fair value of the plan assets

Fair value of plan assets at start of period Interest income Actuarial (losses)/gains Contributions by the Society Benefits paid Fair value of plan assets at end of period

The actual return on the scheme assets over the period ending 30 November 2018 was a loss of £111,000 (2017: gain of £442,000).

2017£000

8,187

151 291 350

(4,279)

4,700

2018£000

4,700

144(255)

2,350(642)

6,297

Pension arrangements (continued)09

Defined benefit scheme costs recognised in profit or loss

Net interest cost Losses due to benefit changes related to guaranteed minimum pension entitlements Defined benefit costs recognised in profit or loss

2017£000

(78)–

(78)

2018£000

(45)(31)

(76)

Defined benefit scheme costs recognised in other comprehensive income

Return on scheme assets (excluding amounts included in net interest cost) - (loss)/gain Experience losses arising on the plan liabilities Gains/(losses) due to effects of changes in the demographic and financial assumptions underlying the present value of the plan liabilities Total gain/(loss) recognised in other comprehensive income

2017£000

291(742)(418)

(869)

2018£000

(255)(22)

460

183

During October 2018 the High Court made a ruling in the Lloyds Banking Group Pension Scheme GMP (Guaranteed Minimum Pension) equalisation case, which effectively directs defined benefit pension schemes to change their rules to equalise the benefits of male and female members for the effects of GMPs for employees who were, at one time, contracted out of state schemes. For the purposes of the accounts of the Society for the year ending 30 November 2018 this has resulted in an additional charge to profit in the year of £31k before tax.

46


Assumptions Rate of discount Inflation (RPI) Allowance for revaluation of deferred pensions of RPI or 5% p.a. if less Allowance for pension in payment increases of RPI or 5% p.a. if less Allowance for pension in payment increases of RPI or 2.5% p.a. if less Allowance for commutation of pension for cash at retirement

The mortality assumptions adopted at 30 November 2018 imply the following life expectancies:

Male retiring in current yearFemale retiring in current yearMale retiring in 2043Female retiring in 2043

The best estimate of contributions to be paid by the Society to the scheme for the period commencing 1 December 2018 is £350,000.

2018 % per annum

3.003.35

3.35

3.20

2.15

90% of Post A Day

2017 % per annum

2.603.25

3.25

3.10

2.15

90% of Post A Day

2016 % per annum

2.903.35

3.35

3.20

2.15

90% of Post A Day

Assets Growth fund Bonds Cash Total assets None of the fair values of the assets shown above include any of the Society’s own financial instruments or any property occupied by, or other assets used by, the Society.

2017£000

2,478 1,888

334

4,700

2016£000

5,706 2,483

(2)

8,187

2018£000

2,326 2,071 1,900

6,297

Pension arrangements (continued)09

(b) Defined contribution pension scheme

For staff previously not eligible to join the defined benefit pension scheme and for all qualifying staff from 1 April 2006 the Society operates a defined contribution scheme. The Society additionally funds the cost of life assurance cover for its staff. Summary of employer’s contributions:

Employer’s contributions included within the Accounts were fully paid to the scheme and were as follows:

Defined contribution scheme

Where applicable, payments into Executive Directors’ personal pension plans after 1 April 2006 are included within employer’s contributions paid in respect of the defined contribution scheme as stated above and are disclosed in Note 6 of these Financial Statements.

2018£000

347

201821.8023.7023.2025.20

2017£000

323

201721.9023.7023.3025.30

47

www.ibs.co.uk

UK corporation tax at 19% (2017: 19.33%)Adjustment for previous periods

Current tax charge for the yearDeferred tax:Origination/reversal of timing differences Adjustments in respect of previous years Total deferred tax

Tax on profit on ordinary activities

The actual current tax charge for the year differs from that calculated using the standardrate of corporation tax in the United Kingdom. The differences are explained as follows:

Profit before tax

Theoretical tax charge at the standard rate of 19% (2017: 19.33%)

Effects of:

Expenses/(reversal) of items not deductible for tax purposesPension movementsFixed asset differencesBusiness asset rollover reliefOther

Current tax charge for the year The Finance (No. 2) Act 2015 reduced the corporation tax rate from 20% to 19% with effect from 1 April 2017, with a further reduction from 19% to 18% for the year beginning 1 April 2020. The Finance Act 2016 reduces the main corporation tax rate by an additional 1% from 1 April 2020. Deferred tax is therefore calculated at 17%.

2017£000

604 –

604

104 –

104

708

3,123

604

15(6)

65 30

–

708

2018£000

477 (7)

470

172 3

175

645

3,285

624

(6) (19)50 – (4)

645

Tax on profit on ordinary activities10

Deferred tax assets and liabilities

Deferred tax assetsRetirement benefit obligationsEmployee benefits

Deferred tax liabilitiesAccelerated capital allowancesProperty revaluationBusiness asset rollover reliefAvailable for sale assetsOther

Net deferred tax (liability)/asset

Deferred tax has been recognised on gains recognised in 2004 on the sale of freehold properties wheretaxable gains have been rolled over into replacement property assets. Such tax would become payableonly if the replacement property were sold without it being possible to claim subsequent rollover relief.

2018£000

29617

313

(355)(225)(30)(4)

(12)(626)

(313)

2017£000

491 10

501

(337) –

(30)(7)

(14)(388)

113

48


Cash and cash equivalents

Balances held with the Bank of EnglandCash in hand

Loans and advances to credit institutions

Accrued interestRepayable on demand

2018£000

94,223 393

94,616

2018£000

11 3,111

3,122

2017£000

87,179 411

87,590

2017£000

– 441

441

11

12

Certificates of depositFloating rate notes

Debt securities have remaining maturities from the date of the Statement of Financial Position as follows:

Accrued interestIn not more than one yearIn more than one year

All debt securities held are issued by borrowers other than public bodies and are unlisted and transferable.

2017£000

17,03415,085

32,119

5316,98715,079

32,119

2018£000

2,008 15,045

17,053

21 7,002

10,030

17,053

Debt securities13

49

www.ibs.co.uk

Loans fully secured on residential propertyLoans fully secured on landFair value adjustment for hedged risk

Less: allowance for impairment (Note 16)

The maturity of loans and advances to customers from the date of the Statement of Financial Position is as follows:

In not more than three monthsIn more than three months but not more than one yearIn more than one year but not more than five yearsIn more than five yearsFair value adjustment for hedged risk

Less: allowance for impairment (Note 16)

Repayments of interest and principal due to the Society where the borrower is in arrears under the terms of the loan contract have been included in the above table on the assumption that the arrears are cleared over a thirty-six month period from the date of the Statement of Financial Position. It is the Society’s experience, in common with most mortgage lenders, that many loans will be repaid earlier than the contractual maturity date.Loans and advances to customers include an amount relating to the effective interest rate adjustment of £248k (2017: £297k)

2017£000

520,639 1,111

(344)

521,406 (800)

520,606

4,027 11,032 75,072

431,619 (344)

521,406 (800)

520,606

2017£000

44,166 27,001 (39,116)

15

32,066

2018£000

536,249 983 (462)

536,770 (587)

536,183

4,619 9,696

75,857 447,060

(462)

536,770 (587)

536,183

2018 £000

32,066 2,000

(17,013)(21)

17,032

Loans and advances to customers

Debt securities (continued)

15

13

The Directors of the Society consider that the primary purpose of holding securities is prudential. All transferable securities held as liquid assets are held with the intention of use on a continuing basis in the Society’s activities and are therefore classified as available for sale financial assets.

Movements during the year of transferable securities classified as available for sale financial assets are analysed as follows:

At 1 DecemberAdditionsDisposalsFair value changes through other comprehensive income

At 30 November

Derivative financial instruments14

The fair values of derivative financial instruments held at 30 November are set out below.

Derivatives designated as fair value hedges Interest rate swaps

Derivatives not designated as fair value hedges Interest rate swaps

Fair value -liabilities

£000

1

–

1

Fair value -liabilities

£000

10

47

57

Fair value -assets£000

475

56

531

Fair value -assets£000

574

4

578

2018 2017

At 30 November 2018 £360,000 (2017: £360,000) of cash has been pledged against derivative contracts.

50


Allowance for impairment16

Provisions for losses on loans and advances fully secured on residential property havebeen made as follows and deducted from the appropriate asset values shown in theStatement of Financial Position:

Individual impairment allowanceAt 1 December 2017Amounts written off during the year, net of recoveriesCharge/Reversal for the yearAt 30 November 2018

Collective impairment allowanceAt 1 December 2017Amounts written off during the year, net of recoveriesCharge/Reversal for the yearAt 30 November 2018

Individual impairment allowanceAt 1 December 2016Amounts written off during the year, net of recoveriesCharge/Reversal for the yearAt 30 November 2017

Collective impairment allowanceAt 1 December 2016Amounts written off during the year, net of recoveriesCharge/Reversal for the yearAt 30 November 2017

Loans fully

securedon land £000

– – – –

– – – –

– – – –

– – – –

Total £000

195(7)

(55)133

605 –

(151)454

404(47)

(162)195

307–

298605

Loans fully secured onresidential

property £000

195

(7)(55)

133

605 –

(151)454

404(47)

(162)195

307–

298605

51

www.ibs.co.uk

Tangible fixed assets17

CostAt 1 December 2017Additions during yearDisposals during yearRevaluationAt 30 November 2018

DepreciationBalance at start of yearCharged in yearDisposals during yearRevaluationAt 30 November 2018

Net book valueAt 30 November 2018

At 30 November 2017

The net book value of land and buildings occupied by the Society for its own activities comprises:

FreeholdShort leasehold

Change in accounting policy

During the year ended 30 November 2018 the Society changed its accounting policy in respect of freehold land and buildings such that they are now held at revalued amounts, less accumulated depreciation and impairment losses, whereas previously they were held at historical cost, less accumulated depreciation and impairment losses (see Note 1 for further details).

The Board considers that the revised accounting policy provides the user of the accounts with more reliable and relevant information regarding the Society’s overall financial position through the provision of an up-to-date and accurate view of the true value of its freehold land and buildings. Under the previous accounting policy these assets were held at a value which was materially different to their market value.

The effect of this change in accounting policy has been to increase the net book value of Freehold Land and Buildings by £1,322,000 and to generate a revaluation reserve totalling £1,097,000 as at 30 November 2018, net of a deferred tax liability.

The Society has not restated its financial statements for the year ended 30 November 2017 to reflect the revised accounting policy, on the grounds that the lack of earlier professional valuations upon which to base depreciation charges and gains or losses upon disposal in the income statement mean that it would not be practicable to do so.

Freehold land and buildings were professionally valued by Akermans, Chartered Surveyors, on an existing use basis as at September 2018. This valuation was £4,115,000 compared to a previous net book value on a historic cost basis of £2,793,000.

Freeholdbuildings

£000

3,903 248 (217) 181

4,115

1,070 107

(28)(1,141)

8

4,107

2,833

Shortleaseholdbuildings

£000

654 163

– –

817

602 40

– –

642

175

52

Equipment,fixtures,vehicles

£000

508 41

(5) –

544

418 33

(4) –

447

97

90

Computer equipment

£000

492 48

– –

540

409 82

– –

491

49

83

Total£000

5,557500(222)181

6,016

2,499262(32)

(1,141)1,588

4,428

3,058

2017£000

2,643 52

2,695

2018£000

4,107

175

4,282

52


Held by individualsOther sharesFair value adjustment for hedged risk

Shares are repayable from the date of the Statement of Financial Position in the ordinary course of business as follows:

Accrued interestFair value adjustment for hedged riskRepayable on demandIn not more than three monthsIn more than three months but not more than one year

2018£000

520,426 – –

520,426

1,229 –

517,761 –

1,436

520,426

2017£000

511,612 42 1

511,655

1,286 1

508,705 47

1,616

511,655

Shares21

Cash collateral pledged against derivative financial instrumentsOther

Other assets19 2018£000

360 17

377

2017£000

360 9

369

Derivative interest accrualsOther

2018£000

2 118

120

2017£000

1 162

163

Prepayments and accrued income20

Cost

At 1 December 2017Additions during year

At 30 November 2018

Amortisation

At 1 December 2017Charged in year

At 30 November 2018

Net book value

At 30 November 2018

At 30 November 2017

Software development costs

£000

1,976 35

2,011

670 246

916

1,095

1,306

Intangible assets18

53

www.ibs.co.uk

Accrued interestAmounts owed under repurchase agreementsBank of England Term Funding Scheme

All sale and repurchase transactions are conducted in line with market standard terms and conditions as defined in ISMA PSA Global Master Repurchase Agreements.

Amounts owed to credit institutions are repayable from the date of the Statement of Financial Position in the ordinary course of business as follows:

Accrued interestIn not more than three monthsIn more than three months but not more than one yearIn more than one year but not more than five yearsIn more than five years

The Term Funding Scheme is a Bank of England scheme where funds are lent to firms on a four year term secured by retail mortgages. At 30 November 2018 the Society had £76m of mortgages pledged as collateral within this scheme.

2018£000

56 –

45,000

45,056

2018£000

56 – –

45,000 –

45,056

2017£000

19 –

40,000

40,019

2017£000

19 – –

40,000 –

40,019

Amounts owed to credit institutions22

Amounts owed to non member depositors are repayable from the date of the Statement of Financial Position in the ordinary course of business as follows:

Accrued interestOn demandIn not more than three monthsIn more than three months but not more than one yearIn more than one year but not more than five years

Accruals relating to derivativesOther

2018£000

– 825

825

2017£000

26 830

856

Accruals and deferred income25

2018£000

104 51,134

– – –

51,238

2017£000

106 55,067

– – –

55,173

Amounts owed to other customers23

Corporation taxOther taxation and social security costsOther creditors

2018£000

72 109 76

257

2017£000

260 94

184

538

Other liabilities24

54


At 1 December 2017Settlements made in the yearReleased in the year

At 30 November 2018

At 1 December 2016Settlements made in the yearCharge for the year

At 30 November 2017

These provisions have been made in respect of the amounts which are expected to be required to settle liabilities in relation to customer redress and the Financial Services Scheme Compensation Levy, which are described in Note 29.

Customer

redress

60 (1)

(59)

–

20 –

40

60

Total

120(22)(88)

10

180 (95)35

120

FSCS levy

60 (21)(29)

10

160 (95)(5)

60

Provisions for liabilities26

At 1 DecemberTotal recognised gains/(losses) relating to the financial yearAt 30 November

Reserves excluding pension liabilityNet pension liability (Note 9)

Available for Sale Reserve2017£000

24 12

36

36 –

36

Revaluation

Reserve 2018£000

– 1,097

1,097

1,097 –

1,097

General Reserve

2018£000

30,490 2,792

33,282

33,713 (431)

33,282

Revaluation

Reserve 2017£000

N/A N/A

N/A

N/A N/A

N/A

GeneralReserve2017£000

28,7961,694

30,490

33,378(2,888)

30,490

Available for Sale Reserve

2018£000

36 (17)

19

19 –

19

Reserves28

Subordinated liabilities27

Floating rate subordinated loan repayable 6 November 2019Floating rate subordinated loan repayable 16 March 2020Floating rate subordinated loan repayable 1 December 2019Fixed rate 10.25% subordinated loan repayable 17 October 2024

Unamortised issuance costs

Net carrying valueAccrued interest

The Society’s subordinated loans are unsecured and denominated in Sterling.

The rights of repayment of the holders of subordinated debt, which rank pari passu with each other, are subordinatedto the claims of all depositors, creditors and investing members of the Society.

Interest payments are made on the floating rate loans at a rate set with reference to an external market rate.

Interest accrued but unpaid on the loans is subject to subordination.

The Society may, with the prior consent of the Prudential Regulation Authority, prepay each loan at the fifth anniversarydate prior to the scheduled maturity date.

Capital Requirement Regulations issued by European Parliament and Council allow subordinated debt to be included within the Society’s regulatory capital, subject to meeting eligibility requirements. Of the subordinated liabilities held by the Society, £3,731,342 (2017: £3,941,342) is eligible to be included as regulatory capital at 30 November 2018.

2018£000

500 500 50

3,500

4,550 (41)

4,509 52

4,561

2017£000

500 500 50

3,500

4,550 (82)

4,468 52

4,520

55

www.ibs.co.uk

Directors’ loans and related party transactions30

There were no loans or similar arrangements between Directors and the Society falling due to be reported in the financial statements at either 30 November 2018 or 30 November 2017.

A register is maintained at the Society’s Head Office containing details of loans, transactions and arrangements made between the Society and Directors of the Society or persons connected with Directors of the Society. The register will be available for inspection by members at the Head Office for a period of 15 days up to and including the Annual General Meeting.

Capital commitmentsCapital expenditure contracted for at 30 November but not provided for in these accounts

Leasing commitmentsAt the date of the Statement of Financial Position, annual commitments under operating leases relating to land, buildings and equipment were as follows:

Leases which expire:

In not more than one yearIn more than one but not more than five yearsAfter five years

Contingent liabilities and financial commitmentsFinancial Services Compensation Scheme (FSCS)

In common with all regulated UK deposit takers, the Society pays levies to the FSCS to enable the FSCS to meet claims against it. The Society’s FSCS provision reflects market participation on 1 April (the start of each scheme year). The year end provision relates to the estimated levy for the scheme year 2018/19. This amount was calculated on the basis of the Society’s share of protected deposits taking into account latest information provided by the FSCS.

Customer redress claimsIpswich Building Society, like many other distributors of insurance and investment products to retail customers, has experienced customer concerns regarding whether the products were completely appropriate for the customer. A number of these concerns convert to formal complaints on the grounds that the customer has been sold an inappropriate investment or insurance product or has otherwise been misadvised. The Society reviews all such complaints on a case-by-case basis in accordance with its published procedures. Where it is established that a valid claim exists corrective action is taken, which may include the payment of compensation to the customer. The provision previously included in the Accounts was based on the anticipated profile of future claims. In addition, the FCA identified following Bank of Scotland v. Rea, that some mortgage firms (lenders and administrators) had automatically included customers’ arrears balances within their monthly mortgage payments which are recalculated from time to time, for example when an interest rate changes. The FCA considers this practice to be ‘automatic capitalisation’ and a likely breach of the FCA’s rules. As a result firms were asked to review their practices and provide redress where appropriate.

The provision included in the Accounts for 2017 was based on an estimate of potential liability for customer redress. During 2018, work has been completed which resulted in a provision utilisation of £1k and a release of £59k. No further liability is expected.

Contingent liabilities and commitments29 2018£000

–

2017Equipment

£000

– 2 – 2

2017£000

–

2017Land andbuildings

£000

13 51

110

174

2018Land andbuildings

£000

– 52

117

169

2018Equipment

£000

– 2 – 2

56


A financial instrument is a contract that gives rise to a financial asset or a financial liability. The Society is a retailer of financial instruments, mainly in the form of mortgage and savings products. However, the Society also uses other financial instruments to invest liquid asset balances and raise wholesale funding. In addition, the Society uses derivative financial instruments (‘derivatives’) to manage the risks arising from its operations.The financial risks arising from the Society’s activities include liquidity, interest rate and credit risk. The Board reviews and agrees policies for managing each of these risks, which include the establishment of the Society’s risk appetite, risk limits, clear reporting lines and other controls. Additionally, the Society’s Assets and Liabilities Committee (ALCO) monitors the financial risks relating to the financial instruments held as well as funding and liquidity, in line with the Society’s prudent policy statements. The Retail Credit Risk Committee will also ensure that the management of retail credit risk is consistent with the credit risk appetite.The Society does not hold derivatives for trading or speculative purposes but uses them for hedging purposes only in accordance with the Building Societies Act 1986, specifically to limit the interest rate exposure that arises with the provision of fixed rate mortgage and savings products. The Society employs interest rate swap contracts to manage the interest rate risks as summarised below.

Categories of financial instrumentsFinancial assets and liabilities are measured on an on-going basis either at fair value or at amortised cost. This note to the financial statements 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:

At 30 November 2018

Financial assets Cash in hand and balances with Bank of England Loans and advances to credit institutions Debt securities Derivative financial instruments Loans and advances to customers Other assets Total financial assets Non-financial assets Total assets

Financial liabilities Shares Amounts owed to credit institutions Amounts owed to other customers Subordinated liabilities Pension liability Derivative financial instruments Accruals Other liabilities

Total financial liabilities Non-financial liabilities

Total liabilities

Financial instruments31

Fair value through profit or

loss £000

– – –

578 (462)

–

116

Fair value through

profit and loss

£000

– – – – –

57 – –

57

Loans and receivables

£000

94,616

3,122 – –

536,645 378

634,761

Total £000

94,616

3,122 17,053

578 536,183

378

651,930 5,955

657,885

Total £000

520,426

45,056 51,238 4,561

431 57

825 76

622,670 35,215

657,885

Available for sale

£000

– –

17,053 – – –

17,053

Other

financial liabilities

£000

520,426

45,056 51,238 4,561

431 –

825 76

622,613

57

www.ibs.co.uk

Financial instruments (continued)31

At 30 November 2017

Financial assets Cash in hand and balances with Bank of England Loans and advances to credit institutions Debt securities Derivative financial instruments Loans and advances to customers Other assets

Total financial assets Non-financial assets

Total assets

Financial liabilities Shares Amounts owed to credit institutions Amounts owed to other customers Subordinated liabilities Pension liability Derivative financial instruments Accruals Other liabilities

Total financial liabilities Non-financial liabilities

Total liabilities

Fair value through

profit and loss

£000

– – –

531 (344)

–

187

Fair value through profit or

loss £000

– – – – – 1 – –

1

Loans and receivables

£000

87,590

441 – –

520,950 371

609,352

Total £000

87,590

441 32,119

531 520,606

371

641,658 4,638

646,296

Total £000

511,655

40,019 55,173 4,520 2,888

1 856 184

615,296 31,000

646,296

Available for sale

£000

– –

32,119 – – –

32,119

Other

financial liabilities

£000

511,655

40,019 55,173 4,520 2,888

– 856 184

615,295

Fair value disclosure 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 most reliable fair values of financial instruments are quoted market prices in an actively traded market.

Level 2 These are valuation techniques for which all significant inputs are taken from observable market data.

These include valuation models used to calculate the present value of expected future cash flows and may be employed when no active market exists and quoted prices are available for similar instruments in active markets. Valuations are based on 3 month LIBOR yield curves in line with the terms of the underlying instruments. No adjustment is made for credit risk.

Level 3 These are valuation techniques for which one or more significant input is not based on observable market

data. Valuation techniques include net present value by way of discounted cash flow models.

58



As at 30 November 2018

Financial assets Available for sale Debt securities (excluding accrued interest) Fair value through profit or loss Interest rate swaps Financial liabilities Fair value through profit or loss Interest rate swaps

As at 30 November 2017

Financial assets Available for sale Debt securities (excluding accrued interest) Fair value through comprehensive income Interest rate swaps Financial liabilities Fair value through comprehensive income Interest rate swaps

Financial assets pledged as collateralThe total financial assets recognised in the Statement of Financial Position that had been pledged as collateral for liabilities at 30 November are shown below:


Credit risk

Credit risk is the risk that counterparties will not meet their obligations as they fall due. All loan applications are assessed with reference to the Society’s lending policy.Treasury counterparties are approved and monitored by the Assets and Liabilities Committee.The Society operates an experienced credit risk function, driven by the need to manage potential and actual risk both currently and in the future. Through this, any variations in risk resulting from market, economic or competitive changes are identified and appropriate controls and strategies are implemented.

The Society’s maximum credit risk exposure is detailed in the table below:

Balance held with the Bank of EnglandLoans and advances to credit institutionsDebt securitiesDerivative financial instrumentsLoans and advances to customersFair value adjustment for hedged riskOtherTotal statement of financial position exposureOff-balance sheet exposure – mortgage commitments

Level 3£000

–

– –

– –

Level 3 £000

–

– –

– –

Level 1£000

17,032

– 17,032

– –

Level 1 £000

32,066

– 32,066

– –

Total£000

17,032

578 17,610

5757

Total £000

32,066

531 32,597

1 1

Level 2£000

–

578 578

5757

Level 2 £000

–

531 531

1 1

2018£000

76,263

2018£000

94,223 3,122

17,053 578

536,183 462 360

651,981 34,794

686,775

2017£000

52,976

2017£000

87,179 441

32,119 531

520,606 344 360

641,580 29,337

670,917

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:

59

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The Society is committed to mitigating risk through all stages of the lending cycle. The Society monitors customer affordability and the loan-to-value (LTV) percentages of all loans at the application stage. Additionally, the Society employs underwriting and fraud detection policies to minimise losses once loans have been approved as well as taking a proactive approach to the monitoring and treatment of impaired loans through the collections and recovery functions.The Society maintains comprehensive management information on the performance and movements within the various loan portfolios to ensure that credit risk is adequately controlled, and any adverse trends are identified before they impact on performance. Society performance is benchmarked against the industry when appropriate to identify any outlying trends. This management information is distributed throughout the Society and monitored at a Board committee level.

The table below provides further information on the Society’s loans and advances to customers by payment due status as at 30 November, and the allowance for impairment held by the Society against those assets. The balances exclude the fair value adjustment for hedge risk and are stated before allowance for impairment losses.

Credit quality analysis of loans and advances to customers

Neither past due nor impaired

Past due but not impairedUp to 1 monthMore than 1 month but less than 3 monthsMore than 3 months but less than 6 monthsMore than 6 months but less than 12 monthsMore than 12 months

Individually impairedNot past dueUp to 1 monthMore than 1 month but less than 3 monthsMore than 3 months but less than 6 monthsMore than 6 months but less than 12 monthsMore than 12 monthsIn possession

Allowance for impairmentIndividualCollective Total allowance for impairment

Individual assessments are made of all mortgage loans where objective evidence indicates that losses are likely, for example, when loans are past due, the account is in forbearance or the property is in possession, or where fraud or negligence has been identified. Further consideration is given in accounting policy 1.6 to the Accounts.

Assets obtained by taking possession of collateral

Details of financial and non-financial assets obtained during the year by taking possession of collateral held as security against loans and advances as well as calls made on credit enhancements and held at the year end are shown below. The amounts stated are the most recent valuations adjusted to take account of changes in the Halifax House Price Index published by Lloyds Banking Group Plc.

Loans fullysecured onresidential

property £000

507,193

4,400 – – – –

4,400

2,600 1,160 1,556 1,975

697 573 485

9,046

195 605 800

Loans fullysecured onresidential

property £000

523,306

3,624 – – – –

3,624

2,278 1,123 1,436 1,814 1,514

830 324

9,319

133 454 587

Loans fully

secured on land

£000

1,111

– – – – – –

– – – – – – – –

– – –

Loans fully

secured on land

£000

983

– – – – – –

– – – – – – – –

– – –

20172018

60



Property

The Society’s policy is to pursue timely realisation of the collateral in an orderly manner. The Society does not generally use the non-cash collateral for its own operations.

Collateral held and other credit enhancements

The Society holds collateral against its retail credit exposures in the form of residential property. This collateral is valued by adjusting the valuation at inception of the loan for changes in the Halifax House Price Index published by Lloyds Banking Group Plc. Values are updated on a quarterly basis. No allowance is made for the costs of realising the collateral.

The table below sets out the value of collateral held against the loan portfolio.

Estimated full value of collateral held

Value of collateral limited to the amount of debt outstanding

Percentage of collateral to Loans and advances to customers

In addition to holding residential property as collateral, the Society holds mortgage indemnity insurance where the ratio of the loan at application to the value of the property is more than 80% (2017: 80%).

Loan to value The tables below stratify credit exposures from mortgage loans and advances to retail customers by ranges of loan-to-value (LTV) ratio. LTV is calculated as the ratio of the gross amount of the loan – or the amount committed for loan commitments – to the value of the collateral. The gross amounts exclude any impairment allowance. The valuation of the collateral excludes any adjustments for obtaining and selling the collateral. The value of the collateral for residential mortgage loans is based on the collateral value at origination updated based on changes in house price indices.

LTV ratioUp to 50%More than 50% and up to 70%More than 70% and up to 90%More than 90% and up to 100%More than 100%

Forbearance In certain circumstances the Society uses forbearance measures to assist those borrowers who are experiencing financial difficulty. These measures can take several different forms and in each case an individual assessment is made to ensure forbearance is in the best interests of both the borrower and the Society. It is expected that the borrowers will resume normal payments once they are able. Accounts in forbearance are included in the individual assessment for impairment.

The table below analyses residential mortgages with renegotiated terms as at the year end:

Account restructured and arrears capitalisedTemporary transfer to interest onlyTerm extensionPayment arrangement in placeMultiple forbearance actions

2018£000

1,277

2017£000

1,329

2018£000

1,425,365

536,971

100%

2017£000

1,384,745

521,231

100%

2018£000

247,968 126,291 139,033 23,499

441

537,232

2017£000

246,679 124,801 130,215 19,274

781

521,750

2018£000

83

1,593 153

2,971 1,390

6,190

2017£000

86

2,645 171

2,416 1,047

6,365

Number ofaccounts

2

37 3

28 15

85

Number ofaccounts

2

24 3

35 19 83

61

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Liquidity risk Liquidity risk is the risk that the Society will encounter difficulty in meeting the obligations associated with its financial liabilities that are to be settled by delivering cash or another financial asset. The Society’s liquidity policy is to maintain sufficient funds in a liquid form at all times to ensure that it can meet its liabilities as they fall due. The objective of liquidity is to help smooth mismatches between maturing assets and liabilities and to provide protection against any unexpected events that may occur. Liquidity is monitored daily and reported to the ALCO on a monthly basis. The Society’s liquidity policy is designed to provide the Society with the resources to withstand a range of stressed scenarios. A number of appropriate stressed scenarios have been identified as part of the Society’s liquidity risk management. The scenarios developed include idiosyncratic, market-wide and combination stress tests, fulfilling the specific requirements of the Prudential Regulation Authority (‘PRA’). The Society’s high quality liquid assets comprise deposits with the Bank of England and investment grade fixed and floating notes issued by highly rated Multinational Development Banks. A further £5m has been drawn under the Term Funding Scheme this year, bringing the total amount of funding to £45m. At the year end the percentage of total shares and deposit liabilities held in these high quality liquid assets was 17.8% (2017: 16.9%). In addition the Society also holds deposits with UK banks and portfolios of certificates of deposits (‘CDs’) and time deposits (‘TDs’) with other financial institutions. When taking the bank deposits, CDs and TDs into account, the percentage of total shares and deposit liabilities held in liquidity resources was 18.6% (2017: 19.8%). Maturity analysis for financial assets and financial liabilitiesThe tables below set out the remaining contractual maturities of the Society’s financial assets and financial liabilities. In practice, contractual maturities are not a reflection of actual experience and therefore the information is not representative of the Society’s management of liquidity. For example, the contractual term for the majority of the loans and advances to customers range from 10-30 years, however borrowers tend to repay ahead of contractual maturity, with the average life of a loan under seven years. Conversely, customer deposits (for example, shares) repayable on demand are likely to remain on the Statement of Financial Position much longer. With regard to the net pension deficit, this has been analysed across time periods in accordance with the payment of the annual contributions agreed with the Trustees to eliminate the deficit.

Financial assetsCash in handLoans and advances to credit institutionsDebt securitiesDerivative financial instrumentsLoans and advances to customersOther financial assetsTotal financial assetsNon-Financial assetsTotal assets

Financial liabilitiesSharesAmounts owed to credit institutionsAmounts owed to other customersSubordinated liabilitiesPension liabilityDerivative financial instrumentsAccrualsOther liabilitiesTotal financial liabilitiesNon-Financial liabilities and ReservesTotal liabilities

On demand

£000

94,616

1,111 – – – –

95,727 –

95,727

517,761 –

51,134 –

431 –

– 76

569,402 –

569,402

Not more

than three

months £000

–

– – 4

4,619 378

5,001 –

5,001

– – –

(12) – –

825 –

813 –

813

More than three months

but notmore thanone year

£000

–

2,000 7,002

180 9,696

– 18,878

– 18,878

1,436 – –

471 – – – –

1,907 –

1,907

More

than five years

£000

– –

––

447,060 –

447,060 –

447,060

– – –

3,500 – – – –

3,500 –

3,500

More than one year

but not more than five years

£000

– –

10,030 394

75,857 –

86,281 –

86,281

– 45,000

– 550

– 57 – –

45,607 –

45,607

Non-

definedmaturity £000

– 11 21 –

(1,049) –

(1,017) 5,955 4,938

1,229 56

104 52

– – – –

1,441 35,215

36,656

Total £000

94,616

3,122

17,053 578

536,183 378

651,930 5,955

657,885

520,426 45,056 51,238 4,561

431 57

825 76

622,670 35,215

657,885

Contractual maturities of financial assets and liabilities

For the Year ended 30 November 2018

62



Financial assetsCash in handLoans and advances to credit institutionsDebt securitiesDerivative financial instrumentsLoans and advances to customersOther financial assetsTotal financial assetsNon-Financial assetsTotal assets

Financial liabilitiesSharesAmounts owed to credit institutionsAmounts owed to other customersSubordinated liabilitiesPension liabilityDerivative financial instrumentsAccrualsOther liabilitiesTotal financial liabilitiesNon-Financial liabilities and ReservesTotal liabilities

Financial liabilitiesSharesAmounts owed to credit institutionsAmounts owed to other customersSubordinated liabilitiesPension liabilityDerivative financial instrumentsAccrualsOther liabilitiesTotal financial liabilities

On demand

£000

517,761 –

51,134 – – – –

76 568,971

Not more

than three

months £000

952 83

129 10

350 (49)

825 –

2,300



£000

4,084 254 394 345

– (60)

– –

5,017

More

than five years

£000

– – – – – – – – –

More than one year


£000

536 45,626

– 4,556

81 339

– –

51,138

Non-


1,229 56

104 52

– – – –

1,441

Total

£000

524,562

46,019 51,761

4,963 431

230 825 76

628,867

Non defined maturity items principally comprises loan loss provisions, accrued interest and hedge accounting adjustments.

Grossed up financial liability exposure table

The following is an analysis of the total gross cash flows (including all interest due) payable over the lives of the Society’s financial liabilities.

For the Year ended 30 November 2018

For the year ended 30 November 2017

On demand

£000

87,590

441 – – – –

88,031 –

88,031

508,705 –

55,067 –

2,888 – –

184 566,844

–

566,844

Not more

than three

months £000

–

– 1,999

– 4,027

371 6,397

– 6,397

47 – –

(10) – –

856 –

893 –

893



£000

–

– 14,988

8 11,032

– 26,028

– 26,028

1,616 – –

(31) – – – –

1,585 –

1,585

More

than five years

£000

–

– – 7

431,619 –

431,626 –

431,626

– – –

3,500 – – – –

3,500 –

3,500

More than one year


£000

–

– 15,079

516 75,072

– 90,667

– 90,667

– 40,000

– 1,009

– 1 – –

41,010 –

41,010

Non-


–

– 53

– (1,144)

– (1,091) 4,638 3,547

1,287 19

106 52

– – – –

1,464 31,000

32,464

Total £000

87,590

441

32,119 531

520,606 371

641,658 4,638

646,296

511,655 40,019 55,173 4,520 2,888

1 856 184

615,296 31,000

646,296

63

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For the year ended 30 November 2017

Financial liabilitiesSharesAmounts owed to credit institutionsAmounts owed to other customersSubordinated liabilitiesPension liabilityDerivative financial instrumentsAccrualsOther liabilitiesTotal financial liabilities

On demand

£000

508,705 –

55,067 – – – –

184 563,956

Not more

than three

months £000

610 49 93 9

350 56

856 –

2,023



£000

2,760 151 283 388

– 109

– –

3,691

More

than five years

£000

– – – –

1,400 6 – –

1,406

More than one year


£000

190 40,561

– 4,910 1,400

520 – –

47,581

Non-


1,287 19

106 52

– – – –

1,464

Total

£000

513,552 40,780 55,549 5,359 3,150

691 856 184

620,121

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. Market prices comprise three types of risk: currency risk, interest rate risk and other price risk. As the Society is not exposed to foreign currencies the primary risk associated with market prices comes from interest rate risk. The Society is exposed to movements in interest rates, either due to them being referenced to different bases or due to the mismatch between the dates on which interest receivable on assets and interest payable on liabilities are next reset to market rates or, if earlier, the dates on which the instruments mature. The Society manages this exposure continually within approved limits and, where necessary, by using derivative financial instruments. Interest rate risk The Society has adopted the ‘Matched’ approach to interest rate risk, as defined by the PRA, operating within the exemptions permitted within section 9A of the Building Societies Act 1986. The ‘Matched’ approach aims to use ‘standard’ hedging instruments to manage the interest rate risks associated with offering fixed rate retail products, as detailed below. ‘Standard’ instruments include interest rate swaps. The Society’s interest risk management includes a regular review of the products used for hedging purposes by senior management, supported by monthly review by the ALCO and the Board. In addition interest rate gap and basis risk analysis is performed on a monthly basis and presented to the ALCO and Board for review. The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Society’s financial assets and financial liabilities to various standard and non-standard interest rate scenarios. The analysis below, also an interest rate sensitivity assessment, represents market value movement, calculated using a discounted cash flow basis on all of the Society’s financial assets and liabilities. The sensitivity analysis is based on immediate 200 basis point parallel shifts in interest rates. All exposures include investments of the Society’s reserves. Other interest rate risk exposures, such as basis risk (the risk of loss arising from changes in the relationship between interest rates which have similar but not identical characteristics; for example LIBOR and Bank of England Base Rate) and prepayment risk (the risk of loss arising from early repayments of fixed rate mortgages and loans) are also monitored closely and regularly reported to the ALCO. The analysis below summarises the Society’s exposure to interest rate risk. The tables present the Society’s assets and liabilities by repricing date, along with the derivative financial instruments that are used to reduce the exposure to interest rate risk.

64



Interest rate risk at 30 November 2018

AssetsCash in hand and central bank balancesLoans and advances to credit institutionsDebt securitiesDerivative financial instrumentsLoans and advances to customersOther assetsTotal assets before derivativesDerivatives - Interest rate swaps

Total assets after derivatives

Liabilities and reservesSharesAmounts owed to credit institutionsAmounts owed to other customersSubordinated liabilitiesDerivative financial instrumentsOther liabilitiesReservesTotal liabilities before derivativesDerivatives - Interest rate swaps

Total liabilities after derivatives

Interest rate sensitivity gap

Off-balance sheet exposures

Total interest rate sensitivity gap

Sensitivity to general reservesParallel shift of +2%Parallel shift of -2%

Not more

than three

months £000

94,556 1,111

15,034 –

260,407 –

371,108 188,500

559,608

391,884 45,000 51,238

50 –- – –

488,172 12,500

500,672

58,936

(16,041)

42,895

(535)535



£000

– 2,000 1,998

– 151,721

– 155,719

–

155,719

52,578 – –

4,500 – – –

57,078 104,000

161,078

(5,359)

322

(5,037)

82(82)

More

than five years

£000

– – – – – – – –

–

– – – – – – – – –

–

–

–

–

– –

More than one year


£000

– – – –

125,248 –

125,248 –

125,248

74,631 – – – – – –

74,631 72,000

146,631

(21,383)

15,719

(5,664)

198(198)

Non-

interestbearing £000

60 11 21

578 (1,193) 6,333 5,810

-

5,810

1,333 56

– 11 57

2,149 34,398 38,004

–

38,004

(32,194)

–

(32,194)

––

Total

£000

94,616 3,122

17,053 578

536,183 6,333

657,885 188,500

846,385

520,42645,05651,2384,561

572,149

34,398657,885188,500

846,385

–

–

–

(255)255

65

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Interest rate risk at 30 November 2017

AssetsCash in hand and balances with central bankLoans and advances to credit institutionsDebt securitiesDerivative financial instruments Loans and advances to customersOther assetsTotal assets before derivativesDerivatives - Interest rate swaps

Total assets after derivatives

Liabilities and reservesSharesAmounts owed to credit institutionsAmounts owed to other customersSubordinated liabilitiesDerivative financial instrumentsOther liabilitiesReservesTotal liabilities before derivativesDerivatives - Interest rate swaps

Total liabilities after derivatives

Interest rate sensitivity gap

Off-balance sheet exposures

Total interest rate sensitivity gap

Sensitivity to general reservesParallel shift of +2%Parallel shift of -2%

Not more

than three

months £000

87,590 441

1,999 –

281,129 –

371,159 145,500

516,659

366,729 40,000 55,067

50 – – –

461,846 10,000

471,846

44,813

(17,361)

27,452

(538) 538



£000

– –

14,988 –

65,762 –

80,750 10,000

90,750

102,308 – –

1,000 – – –

103,308 9,000

112,308

(21,558)

143

(21,415)

367 (367)

More

than five years

£000

– – – –

256 –

256 –

256

– – – – – – – –

12,000

12,000

(11,744)

2,031

(9,713)

927 (927)

More than one year


£000

– –

15,079 –

174,603 –

189,682 –

189,682

41,331 – –

3,500 – – –

44,831 124,500

169,331

20,351

15,187

35,538

(1,126) 1,126

Non-

interestbearing £000

– –

53 531

(1,144) 5,009 4,449

–

4,449

1,287 19

106 (30) 1

4,402 30,526 36,311

–

36,311

(31,862)

–

(31,862)

– –

Total

£000

87,590441

32,119531

520,6065,009

646,296155,500

801,796

511,65540,01955,1734,520

14,402

30,526646,296155,500

801,796

–

–

–

(370) 370

66


Derivatives held for risk management

Fair value hedges of interest rate risk

The Society uses derivatives designated to manage certain risks it faces in accordance with Section 9A of the Building Societies Act 1986. In particular, the Society employs ‘fair value hedges’ in the form of interest rate swaps to manage the exposure to interest rate risk inherent when providing fixed rate retail products. The interest rate swaps essentially hedge the exposure to changes in the fair values of the fixed products.The Society does not hold derivatives for trading or speculative purposes but uses them for hedging purposes only.The interest rate swap contracts used to manage the interest rate risks are summarised below:

The fair values of derivatives designated as fair value hedges are as follows.

Interest rate swaps

Interest rate swaps are matched to specific issuances of fixed rate retail shares or loans or acquisitions of debt securities. All hedges are supported by comprehensive hedging documentation as per the requirement in FRS 102 with the adoption of IAS 39. The Society utilises the derivative instruments for hedging purposes only and no such instruments are used for trading activity or speculative purposes. All fair value hedges are against 3 month LIBOR.

ActivityFixed rate mortgageFixed rate savingsDebt securities - fixed rate

RiskIncrease in interest rates Decrease in interest rates Increase in interest rates

Fair value interest rate hedge Society pays fixed, receives variable Society receives fixed, pays variable Society pays fixed, receives variable


Assets £000

578

Liabilities £000

57

Liabilities £000

1

Assets £000

475

2018 2017

Capital structureThe Society’s policy is to maintain a strong capital base to secure member, creditor and market confidence and to sustain the Society’s plans for the future. Regulatory capital consists of the Society’s general reserves, which are the profits of the Society accumulated over the last 169 years, together with an amount of capital raised in the form of allowable subordinated debt. Society capital provides a financial buffer.

The Society manages its capital requirements through the annual ICAAP (Internal Capital Adequacy Assessment Process). This is carried out in conjunction with the PRA. The ICAAP is closely monitored by the Board and the Board receive regular updates on the amount of capital held and the amount of headroom the Society has over its required level of capital. The required level of capital is set by the PRA through the Society’s Internal Capital Guidance (ICG). This allows the Board to ensure that the quantity and quality of capital held is both sufficient and appropriate to mitigate the risks the Society faces and to safeguard members’ interests.

There were no breaches of capital requirements during the year, and there have been no material changes in the Society’s management of capital during the year. The Directors are considering the early repayment of subordinated debt towards the end of 2019 (subject to regulatory approval). The cost of subordinated debt in 2018 was £440k and early repayment is considered to improve the longer term sustainability of the Society.

Under Basel III Pillar 3 the Society is required to publish further information regarding its capital structure and exposures. The Society’s Pillar 3 disclosures can be obtained on our website or by writing to the Society Secretary at our Head Office. Regulatory capital

Common equity tier 1 capitalGeneral reserveRevaluation reserveAFS reserveIntangible assets

Total common equity tier 1 capital

Tier 2 capitalEligible subordinated debtCollective impairment allowance

Total tier 2 capital

Total capital

2018£000

33,282 1,097

19 (1,095)

33,303

3,731 454

4,185

37,488

2017£000

30,490 –

36 (1,306)

29,220

3,941 605

4,546

33,766

67

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Statutory percentages01

Lending limitFunding limit

The above percentages have been calculated in accordance with the provisions of the Building Societies Act 1986.

The statutory limits are as laid down under the Building Societies Act 1986 and ensure that the principal purpose of a building society is that of making loans which are secured on residential property and are funded substantially by its shareholding members.

The lending limit represents the proportion of business assets not in the form of loans fully secured on residential property.

Business assets are defined as total Society assets plus impairment allowance less liquid assets, tangible and intangible fixed assets.

The funding limit represents the proportion of shares and borrowings not in the form of shares held by individuals. Shares and borrowings represent the total of shares, amounts owed to credit institutions and amounts owed to other customers.

2018%

0.415.6

Statutorylimit

%

25.050.0

Other percentages02As a percentage of shares and borrowings:

- Gross capital - Free capital - Liquid assets

As a percentage of mean total assets:

- Profit after tax for the financial year - Management expenses

“Shares and borrowings” represent the total of shares, amounts owed to credit institutions, and amountsowed to other customers.

“Gross capital” represents the aggregate of general reserves and subordinated liabilities.

“Free capital” represents the aggregate of gross capital and collective allowances on loans and advancesto customers, less tangible and intangible fixed assets.

“Mean total assets” represent the average of total assets as stated in the Statement of Financial Positionat 30 November 2018 and 30 November 2017.

“Liquid assets” represent the aggregate of cash in hand, loans and advances to credit institutions, debtsecurities, treasury bills and other liquid assets.

“Management expenses” represent the aggregate of administrative expenses and depreciation and amortisation. The Notes to these Accounts are contained on pages 36 to 66.

2018 %

6.185.35

18.61

0.411.42

2017 %

5.685.05

19.80

0.331.44

Annual Business Statementfor the Year ended 30 November 2018

68


Date of Date of Name Occupation birth appointment Other Directorships I Brighton CeMAP, CeRGI, Operations Director 22/09/68 01/05/18 Trustee of the Ipswich Building Society CeRCC, CeRCH, AdvCeMAP Charitable Foundation Trustee of the Ipswich Building Society Pension and Life Assurance Scheme

V M Dias FCCA, CCMI Non-Executive Director 18/10/59 26/03/15 Non-Executive Director on the Board of Aston Lark, Insurance Broker Member of the Board of Trustees of the Chartered Management Institute (CMI) and of UFI (University for Industry) Non-Executive Director on the Board of Hastings Insurance Ltd

P Elcock ACIB, DipFS, MBA Executive Director and Chief 28/08/63 01/06/15 Exact Mortgage Experts Ltd Risk Officer, Charter Court Charter Mortgages Ltd Financial Services Group PLC Charter Court Financial Services Group plc (CCFS) Broadlands Finance Ltd Cornhill Consulting Ltd

A Harris MBA, FCII Non-Executive Director 22/08/56 01/07/11 Stonebridge International Insurance Ltd Cornerstone International Holdings Ltd The Prince Henry’s High School Academy Trust PHHS Trading Company Ltd

S A Liddell BSc, FCA Partner, Mazars LLP 05/11/63 30/11/17 –

R H B Norrington MA (Hons) Chief Executive Officer 18/09/65 30/11/16 –

S J K Reid MA Non-Executive Director 29/07/63 01/11/16 Wyelands Bank

F Ryder FRSA Company Director 05/05/67 25/10/18 Fiona Ryder Limited Norfolk Chamber of Commerce and Industry TCD Media Limited

T Slater ACMA, ACIB Finance Director 28/09/63 28/06/18 –

M A Tennens Company Director 14/03/67 30/11/06 redPepper Marketing Ltd FCIM, DipM, DipTh Tillwicks Close Management Ltd

Information relating to Directors at 30 November 2018tinued03

Directors’ service contracts At 30 November 2018 the Executive Directors are employed on open ended service contracts under which notice periods of one year and six months are required to be given by the Society and Director respectively in circumstances in which the contract is to be terminated.

Trevor Slater’s contract was entered into on 2 January 2018 and Ian Brighton’s contract was entered into on 21 May 2018.

Correspondence and documentsCorrespondence to Directors, jointly or individually, should be addressed “Private and Confidential” and c/o KPMG LLP,One Snowhill, Snowhill Queensway, Birmingham, B4 6GH.

Information relating to other Officers at 30 November 201804

Name Occupation Other Directorships

J Leah MCIM General Manager (Retail and Distribution) –

M Nash MCIB General Manager (Risk and Compliance) –

R J Newman LLB (Hons) Law Society Secretary and General Manager (Legal and HR) –

69

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INVL21 (01/19)

PO Box 547 Ipswich IP3 9WZ0330 123 0723

[email protected] www.ibs.co.uk

Established 1849. Member of The Building Societies Association.Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential

Regulation Authority. Registered on the Financial Services Register, Firm Registration Number (FRN) 104875.

ANNUAL REPORT - Ipswich Building Society · 2019. 3. 4. · may impact arrears on mortgages....

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