ANNUAL REPORT & ACCOUNTS · PAGE 3 ANNUAL REPORT AND ACCOUNTS 2016 Contents Page Performance Summary 4 Chairman’s Report 5 Directors’ Report 8 Statement of Directors’ Responsibilities

ANNUALREPORT &ACCOUNTS

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ANNUAL REPORT AND ACCOUNTS 2016

Contents

Page

Performance Summary 4

Chairman’s Report 5

Directors’ Report 8

Statement of Directors’ Responsibilities 14

The Board of Directors and Secretary 15

Corporate Governance Report 17

Directors’ Remuneration Report 28

Independent Auditor’s Report 33

Statement of Comprehensive Income 34

Statement of Changes in Equity 35

Statement of Financial Position 36

Group Cash Flow Statement 37

Notes to the Accounts 38

Annual Business Statement 69

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Performance Summary

Financial Strength

BusinessPerformance

Profit after Tax

Gross Capital

Mortgage Balances

Retail Share andDeposit Balances

*The Society adopted Financial Reporting Standard 102 for the first time in 2015 and this resulted in the restatementof the financial statements for 2014. Figures for the earlier years are reported under previous UK GAAP.

£1.52m

£2.03m

£3.04m

£2.75m

2012 2013 2014* 2015* 2016*

£1.10m

1 |

8.44%

9.18%

2012 2013 2014* 2015* 2016*

7.83%8.14% 8.10%

|

2012 2013 2014* 2015* 2016*

£806.88m

£738.70m£769.08m £776.16m

£804.40m

|

2012 2013 2014* 2015* 2016*

£687.76m £696.29m

£628.04m£647.08m

£686.48m

|

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Chairman’s ReportIntroduction

I am pleased to present the Society’s 151st Annual Report & Accounts for the year ended 31st December2016. It has been a year of investment and change that leaves the Society financially strong and wellprepared for the future.

A Year of Investment and Change

The Board’s policy is to run the Society conservatively, maintaining a strong financial position with highcapital ratios and a low risk mortgage book. That policy was continued in 2016. The core equity tier 1 ratio ended the yearat 19.25%. Arrears over 90 days were at 0.033% of mortgage book assets and at the end of December the Society had oneproperty in possession. The Society has considerable financial strength.

At the same time, the Society has to move with the times, anticipating developments rather than reacting to them. In 2016the Board took a number of steps to ensure that the Society remains strong and successful well into the future. The Board’sinitiatives fall into three categories: strengthening management capacity and capability, adjusting to members’ changing useof the channels of distribution and reducing costs. It has been a year of investment and change and the Board believes thatmembers will see from this Annual Report that the Society is well positioned to thrive in the years ahead.

The environment in which building societies operate is becoming more challenging. Members’ expectations are rising,competition is tougher and regulatory scrutiny is tightening. In this environment it is essential that the Society employspeople with the skills, experience and motivation to ensure that the Society succeeds. This is achieved by developing talentedindividuals within the Society and by recruiting able and well-qualified people to join us. In 2016, the Society strengthenedits permanent management capability in risk management, programme management and IT and is looking to furtherstrengthen its product development, marketing and human resources management in 2017. The Board believes that thisinvestment in people will be one of the most important building blocks on which the future success of the Society will besecured.

The second area of Board initiative was adjusting to members’ changing use of the channels of distribution. In the savingsmarket, postal and on-line accounts are becoming more important. In the mortgage market, intermediaries’ share ofmortgage lending has been growing for some time. Following the FCA’s Mortgage Market Review in 2014, intermediaries’significance has grown even more. While still committed to offering mortgage advice to direct customers, the Society hasdecided to improve its service to intermediaries. This involved the launch of a number of initiatives, including an easy to useon-line mortgage application facility. This has been very well received by the market with a significant number ofintermediaries signing up to the service within a very short period of time, exceeding our expectations.

One consequence of the switch to on-line and indirect channels of distribution is that our members are using our branchesless. Over the past five years aggregate transactions in our branches have fallen 30%. This decline in branch usage hascalled into question the viability of two of our branches and, with regret, we decided to close our Liverpool and Boltonbranches at the end of the year. Arrangements were made to provide alternative facilities for the members who use the twobranches and we regret any inconvenience that these closures cause them. However the Society has to respond to changesin consumer patterns of behaviour. As a result of the closures, seven staff were made redundant and left the Society’semployment. We were sorry to see these colleagues go and wish them well in their future careers.

The closure of two branches does not mean that the Society is abandoning a direct high street service. In recent years wehave invested in our branch facilities with, in 2015 for example, opening the completely new Kendal branch and the Barrow‘super branch’. In addition, during 2016, we converted all our agencies to provide fully on-line counter facilities so that ourmembers can enjoy the same standard of service in an agency that they enjoy in our branches. We will continue to investin our retail network where we believe we can provide a commercially viable service to our members, particularly in our coreheartland area of the Furness Peninsular, South Cumbria and North Lancashire.

The third area of Board initiative was reducing underlying costs. In recent years the Society has carried excess liquidity. Thisearns limited returns and so depresses profit. This year the Board resolved to correct the position, setting a prudent butlower target operating range for liquidity. At the end of the year liquidity, internally measured to include £30m ofOff-Balance Sheet FLS funding, was 17.66% (29.51%: 2015) of shares, deposits and liabilities.

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Chairman’s Report continuedIn addition, after careful thought and consultation with the staff affected, the Society took the decision to close the definedbenefit pension scheme to future accruals and replace it with a defined contribution scheme. While this does not savesignificant cost in the short term, it reduces the risk of cost escalation in the future. In doing this the Society has followedin the footsteps of the majority of building societies. The reasons for this change were explained to staff and I am pleasedto say that all the affected staff accepted the change. The Board is grateful for their understanding in what was a difficultdecision for the Society.

Lastly, as part of the review of the organisation’s operational capacity, five roles were identified as redundant. Of the fivemembers of staff affected, four left the Society, the other being redeployed within the organisation. We were sorry to losethese four colleagues and wish them well in their future careers.

Improving operating efficiency and reducing costs will continue to be a major area of Board focus in the years ahead. Webelieve we can achieve this while, at the same time, significantly improving the service to our members. In some cases wehave had to invest in the short term to save cost in the long run. For example, we invested heavily in new computer systemsin 2014/2015 and we expect the new systems to deliver both lower cost and improved member service.

Business Strategy

The foundation of our strategy is the provision of high quality products that offer our members good value over the longterm, based on excellent customer service that differentiates the Furness from other financial institutions.

We will aim to source our mortgage lending principally from the intermediary market with product development, marketingsupport and service designed to actively support brokers in meeting the needs of their clients and so developing theirbusinesses. Direct mortgage customers will have access to an advised mortgage service. The Society’s product focus willbe mainstream lending, lending to non-standard customers with more complex needs and underserved markets. We willactively seek to retain customers when their mortgage offers end where those customers have maintained their mortgageswell (the vast majority of our customers).

The Society will aim to fund its lending through retail savings products principally sourced through the branch and agencynetwork with additional funding through postal and internet channels as required. Wholesale funding will be used tacticallyto manage retail shortfalls and costs. The Society aims to participate in the Government’s Term Funding Scheme (TFS).Retention of maturing retail bonds and ISAs will be managed in line with liquidity, margin and funding requirements.

The Society’s current core IT platform, with supplementary systems as required, will provide the functionality the Societyneeds to achieve its strategic objectives. The immediate focus is to derive, in full, the benefits of the system.

The Society will maintain an active people management policy, managing performance and reward, and selectively investingin improved capacity and capability as required.

The overall key strategic objective is to grow the business steadily. The Board believes, a sustainable business model, basedon a higher cost/higher income model, can be maintained through successful delivery of the above strategies. The Board iscommitted to protecting the Society’s capital strength and to securing the Society’s future as an independent mutual buildingsociety.

Business Performance

Mortgage and savings rates started 2016 at a low level and declined during the year. This was particularly hard on saversand, although the Society had to follow the market in reducing rates selectively throughout the year, it did all it could tominimise the impact on members who save with us. It is the Society’s policy to balance the interests of savers and borrowersso as to be fair to both but clearly the Society has no control over the overall level of interest rates in the economy. Towardsthe end of the year there was some upward movement in rates and the Society expects both saving and borrowing rates torise in 2017, albeit slowly, providing us with the opportunity to improve returns to our saver members.

The Board’s decision to invest in re-shaping the organisation and tackling underlying costs meant that, during 2016, businessgrowth was subdued. Our gross mortgage lending at £167m (£133m: 2015) was the best for many years. However, the

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Chairman’s Report continuedSociety saw a high level of in-year maturities and redemptions resulting in only 1.2% growth (0.8%: 2015) in total mortgageassets to £696m (£688m: 2015). Mortgage assets are the core of the business and growth was positive but the Board’sdecision to reduce excess liquidity resulted in Society total assets at the year end of £816m (£883m: 2015), a fall on theprevious year’s figure.

Profit before Tax was £1.099m (£3.497m: 2015). This was lower than the previous year as a result of redundancy costs,one-off write-offs, interim management costs, consultant and advisory costs and additional salary costs. Many of theseadditional costs are non-recurrent and the Board does not expect to incur them in future years. In addition, a low interestrate environment generally squeezes building societies’ profits and as interest rates rise, as the Society believes they will,pressure on profit should relax.

Board of Directors

The Society bases its corporate governance arrangements on the most recent version of the UK Corporate Governance Code.Using guidance provided by the Building Societies Association, the Society has either complied with the Code or explainedthe position in this Annual Report.

There were changes to the composition of the Board during the course of the year. Two Directors left the Board. NigelQuinton, Chief Executive since 2011 and Alan Hunter, Senior Independent Director and a member of the Board since 2008,stood down in March. I should like to thank both Directors for their loyalty and service to the Society. In addition, StevePryer, Operations Director and formerly Deputy Chief Executive of the Society, retired from the Board in February 2017 andwill leave the Society later in the year. Steve worked for the Society for 23 years, thirteen of those years on the Board andcontributed a great deal to the Society in that time. I should like to place on record the Board’s thanks for his loyalty andservice over almost a quarter of a century.

Following Nigel Quinton’s departure, Mike Kirsch joined the Society as Interim Chief Executive. Mike is a highly experiencedfinancial services Interim Chief Executive. His most recent assignment was as Interim Chief Executive of the Saffron BuildingSociety. Mike has dealt effectively with a number of legacy issues and the Society is making good progress under hisleadership. He was supported initially by Paul Gittins, the Society’s Interim Finance Director at the time. When Paul’scontract came to an end in September we were pleased that Richard Jones was able to join us in his place. I should like tothank all three of them for their service to the Society.

Towards the end of the year, Matthew Dobson accepted our invitation to join the Society as permanent Finance Directorand started with the Society in January 2017. Matthew is well qualified for the role. He was Head of Debt Capital Marketsat Williams & Glyn and, before that, Head of Capital & Leverage Management at Barclays Bank PLC. We are pleased towelcome Matthew to the Board. It is well recognised that recruitment into senior posts in financial services is difficult andthe Board is resolved not to compromise on the standard it has set for the new Chief Executive. We hope to have theposition filled in the near future.

Two Non-Executive Directors joined the Board during the course of the year. In March Kim Rebecchi joined as a Non-Executive Director. Kim was formerly the Executive Director responsible for Sales & Marketing at Leeds Building Society.Later in the year, Phillip McLelland also joined as a Non-Executive Director. Phillip is Finance Director of the Consumer CreditDivision of Provident Financial plc, was formerly Finance Director of UK Asset Resolution Limited and, before that, FinanceDirector of Bradford & Bingley plc. Both Directors bring considerable experience of financial services and of building societiesin particular. They joined a strong team and I believe members should have confidence that the Society is led by a capableand well qualified Board.

In conclusion, I should like to thank my fellow Board members, the Society’s staff, our agents and introducers for theircontinued commitment to the Society. They have all made a huge contribution to the success of the Society during a periodof challenge and change. Lastly, I should like to thank our members for their continued support. I hope they believe thatwe are running the Society well on their behalf. I encourage them all to attend the AGM on 25th April 2017 to hear at first-hand what was achieved in 2016 and what is planned for the future.

C S MillarChairman7 March 2017

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Directors’ ReportThe Directors have pleasure in presenting the 151st Directors’ Report for the year ended 31 December 2016.

Business Objectives and Activities

The Chairman’s Report on page 6 includes details of the Society’s business strategy and core objectives for 2017. The activelegal entities within the Group comprise Furness Building Society, Furness Mortgage Services Limited (FMSL) and FurnessFinancial Advisers Limited (FFA).

The Society exists for the benefit of its current and future members, to meet their needs for savings and mortgages. TheSociety is committed to remaining independent and mutual for this purpose.

The Society operates within a legal framework with statutory limits set by the Building Societies Act 1986 to ensure a focuson its prime objectives of deposit taking and mortgage lending. Within this framework the Board operates a simple businessmodel, operating solely within the UK with a robust risk management framework. In order to ensure the business modelremains sustainable, capital generation is required to support growth.

The Society’s focus in 2017, as articulated in the Corporate Plan, will be:

• to continue to help customers buy their own residential properties by providing high quality mortgage products primarilythrough the Intermediary distribution channel but also through our Branch and Agency network; principally fundedthrough retail savings

• to achieve sustainable growth during the Corporate Plan period• to improve operating efficiency and member service

Business Review

The 2016 Chairman’s Report includes a section headed Business Performance which provides a review of the business during2016. In addition, the following matters are considered by the Board:

• Capital/Reserves and Profits

The Board considers that the maintenance of adequate capital (reserves) is of paramount importance to protect theSociety’s members from any unexpected adverse situations. When assessing the adequacy of its capital, the Boardconsiders the material risks to which the Society is exposed and the need for capital to be available to support andgrow the business.

The profit after tax was lower than in the previous year at £1.097m (£2.754m 2015) as a result of redundancy andother additional salary costs, one-off write offs and interim management and consultancy costs in addition to the impactof lower interest rates on income. Many of these costs are non-recurrent and the Board does not expect to incur themin future years. Moreover, a low interest rate environment generally squeezes building societies’ profits and as interestrates rise, as the Society believes they will, pressure on profit should relax.

Although the Group made a profit after tax of £1.097m in 2016, it made a total comprehensive loss for the year of£331k as a result of an actuarial loss on the defined benefit pension scheme, which reduces general reserves.

The Group’s level of capital remains in excess of the minimum required by our regulators and the Society is strongly capitalised.

The Group’s Pillar 3 disclosures, which set out the Society’s capital and risk management policies and objectives, canbe found on the Society’s website www.furnessbs.co.uk. This information is updated annually in conjunction with ourAnnual Report and Accounts.

• Net Interest Margin

The Group’s net interest margin represents the surplus that remains of its interest income (mortgage interest and interestearned on the Group’s investments) after deducting the Group’s funding costs in the form of retail share and depositinterest, non-retail funds interest and subordinated debt interest. The mortgage market remains very competitive andthe Society’s net interest margin is affected largely by the resulting pressures.

The responsibility to produce an appropriate level of net interest margin to maintain the Society’s capital strength was,and continues to be, at the forefront of the Board’s consideration when setting interest rates. A pricing policy was

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Directors’ Report continueddeveloped in 2016 to improve product value and governance. The Board strives to balance the expectations of ourinvesting and borrowing members wherever possible and to act fairly. The low interest rate environment has made thischallenge more difficult. Mortgage and savings rates started 2016 at a low level and continued to decline during theyear. This was particularly hard on savers and although the Society had to follow the market in reducing rates selectivelyduring the year, it did all it could to minimise the impact on members.

During 2016, the return on liquid investments reduced further as the interest rates reduced and the Society achieved aplanned reduction in liquid assets to improve the overall funding costs and ensure the Society’s assets are utilised moreeffectively to generate sustainable growth.

A net interest margin of £13.6m was achieved (£14.4m: 2015). The net interest margin expressed as a percentagemean total assets was 1.61% (1.63%: 2015).

• Other Income, Fees and Commissions

The Group generated Other Income (non-interest) from the provision of services that are related and complementary to itscore activities of mortgage lending and the provision of savings products. This included income from a variety of insurancerelated products (buildings & contents) provided to our members through our partnership with Arthur J Gallagher (UK).

The partnership with Arthur J Gallagher changed on 1 January 2017 when the Society moved to a relationship withUinsure, offering 5* Defaqto insurance products through an introduction service. The Society will not sell insuranceproducts but will ensure our customers have access to competitive products.

After a detailed strategic review of the FFA subsidiary business it was concluded that the direct provision of a fullindependent financial advice service was not affordable for the Group and a service that an insufficient number of ourmembers require. The Board assessed the alternative options available which would ensure overall member value andthe continued provision of a quality service for FFA clients. The decision was made to sell the FFA client base to AspireFinancial Management Ltd (a subsidiary of Tenet Group Ltd) which had extensive resources to provide existing clientsindependent financial advice. A proportion of sales proceeds are reflected in the 2016 results.

• Arrears and Provisions

On occasions borrowers experience difficulties which impact on their ability to meet their mortgage obligations. TheSociety identifies borrowers whose mortgage accounts have gone into arrears and makes contact to ascertain the reasonfor the arrears and to establish what course of action can be taken to bring the accounts up to date.

Despite the Society’s best efforts to help borrowers in such circumstances, occasionally properties have to be takeninto possession and sold, sometimes at a loss to the Society.

At the end of the year, there were 16 cases (18: 2015) where repayments were 12 months or more in arrears. The totalamount of arrears on these cases was £101k (£223k: 2015). Balances on accounts 12 months or more in arrearstotalled £613k (£1.9m: 2015). At 31 December 2016 the Group’s total provisions represented 0.22% of total mortgageassets (0.30%: 2015).

The Group continues to follow prudent lending policies and following the Board’s assessment of the Society’s credit risksand the economic environment, the Group holds impairment allowances of £1.5m (£2m: 2015), based on a conservativeview of the stability of the housing market and economy. In common with all lenders, future changes in house prices,unemployment levels and other economic factors may give rise to the need for additional or reduced provisions.

In certain circumstances the Society uses appropriate forbearance measures to assist borrowers who are experiencingfinancial difficulty. Such measures to reduce the borrowers’ financial pressures include, amongst others, agreeing atemporary transfer to interest only payments or requests to amend terms of the mortgage. The Society expectsborrowers to resume normal payments once they are able. Where the Society expects a loss, a provision is made inaccordance with the Society’s policies.

During 2016, the Society undertook forbearance measures on 230 (341: 2015) mortgage accounts that had balancestotalling £14.3m (£16.9m: 2015) as at 31 December 2016. 92 of these cases were new during 2016 (99: 2015) withtotal balances of £6.6m as at 31 December 2016 (£7m: 2015).

As at 31 December 2016, the Society was still undertaking forbearance measures on 91 (125: 2015) accounts witharrears totalling £186k (£239k: 2015) and balances totalling £5.7m (£7.8m: 2015). Of the accounts still under

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Directors’ Report continuedforbearance as at 31 December 2016, individual provisions totalling £136k (£154k: 2015) were made in relation to 17(10: 2015) accounts that had arrears totalling £39k (£47k: 2015) and balances totalling £2.1m (£1.6m: 2015). TheSociety held one property in possession as at 31 December 2016.

• Liquidity

At 31 December 2016, the Group’s liquid assets were £114m (£191m: 2015) and as a percentage of share and depositliabilities, liquidity represented 17.66% (29.51%: 2015).

The Society has successfully managed a planned reduction in liquidity to reduce the overall funding costs. The Society’scurrent liquidity risk appetite remains a prudent ratio.

The return on liquid assets totalled £0.8m (£1.3m: 2015). During the year the Group adhered to a conservative riskapproach to the investment of surplus funds, investing these for short periods with the Bank of England, large UK basedreputable banks and other building societies.

Risk Management

The Society has a formal risk management framework including a detailed Board Statement of Risk Appetite overseen bythe Board Risk Committee, to address its objective of managing the risk associated with current and future activities of theGroup. The framework was improved in 2016 to provide a more robust and accountable structure and includes an Assetsand Liabilities Committee (ALCO), Executive Risk Committee, Credit Risk Committee in addition to Conduct and OperationalRisk Committees.

The main uncertainties affecting the Group are considered to relate to the current economic environment which has a directimpact on investing members’ sentiment regarding saving and on borrowers’ ability to meet their mortgage commitments.The Monetary Policy Committee of the Bank of England reduced the base rate to an historical low of 0.25% in August 2016.Although the low interest rate environment has benefitted the Group’s borrowers with lower borrowing costs, this hasadversely affected the income that the Society’s savers received from their savings with the Society.

Towards the end of 2016 there was some upward movement in rates and the Society expects a slow rise in interest ratesfrom 2017, which may provide us with the opportunity to improve returns to our saver members. The Society returned tothe retail bond market early in 2017.

The housing market in our heartland has remained relatively flat whilst some areas, particularly in the South, experiencedsmall rises in house prices. It is expected this position will not change significantly in 2017. The impact of ‘Brexit’ is stillfairly uncertain and there is a risk of a negative impact on the Society’s mortgage arrears position. However, we are confidentthat the Group has sufficient resources to mitigate the wider economic challenges.

The Group faces a variety of risks, which fall into the following categories:

• Credit Risk

This is the risk that borrowers or counterparties to whom the Society has lent money may default on their obligation torepay the Society. The Society manages the risk associated with mortgage borrowers by means of a prudent lendingpolicy that includes both an assessment of the creditworthiness of the borrower and the value of the proposed security.Mortgages are monitored closely on an ongoing basis with timely action being taken for those mortgages that fall intoarrears. The Credit Risk Committee meets regularly to consider the risks associated with this lending and reviews largeand potential default accounts.

In the case of liquid asset investments, the credit risk associated with lending to financial institutions is addressed bythe Society’s Assets and Liabilities Committee (ALCO) which ensures that lending is restricted to Bank of England ReserveAccount, UK Government issued debt instruments, large UK based banks with quality credit ratings or those guaranteedby the UK government and building societies which are all regulated by the PRA and FCA. In addition the Society has alimited supranational exposure with the European Central Bank.

The Society keeps abreast of developments affecting financial sector firms and takes appropriate action to safeguardthe Society’s investments.

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Directors’ Report continued• Liquidity and Funding Risk

The nature of the Society’s business is ‘maturity transformation’ whereby the Society borrows for relatively short termsand lends on mortgages for much longer periods. This mismatch creates liquidity risk whereby the Society could beunable to meet its financial obligations as they fall due.

Funding risk is the inability to access funding markets or to do so at excessive cost. In order to minimise funding riskthe Society ensures there is no over reliance on one source of funds.

The purpose of the Society’s Internal Liquidity Adequacy Assessment Process (ILAAP) is to ensure that thesecommitments can be met in a timely manner and that the Group maintains the confidence of its existing and potentialinvestors and suppliers. On a day to day basis the Group’s liquidity position is managed by the Treasury Function whichis responsible for the liquid asset portfolio and contingency arrangements. Liquidity and funding risk is monitored bythe ALCO which meets on a frequent basis and receives a variety of management information reports which enable itto monitor the amount and composition of the liquid asset portfolio and ensure Group compliance with the regulationscovering liquidity as well as the Risk Appetite Statement of the Group.

• Market Risk

Market risk relates to the potential for loss on the sale of a financial instrument as a result of a change in the price ofthat instrument. The Society does not take aggressive views on future interest rate movements when investing theSociety’s surplus funds. The Society does not actively trade financial investments, other than for regulatory realisationtesting, holding them to maturity.

• Treasury Risk Management and Interest Rate Risk

This refers to the risks associated with the Society’s treasury management activity. This activity covers the investmentof the Society’s surplus funds and the execution of derivative transactions to hedge the Society’s fixed rate products orensures that they are naturally hedged across the Statement of Financial Position. The Society operates a conservativeand risk averse treasury policy that the ALCO monitors to ensure that the interest rate risk to which the Group is exposedis adequately controlled.

• Operational Risk

This relates to the risk of loss as a direct result of failed systems and procedures and includes items such as defectivetitle or money transmission errors. The operational risks faced by the Group, are assessed on a regular basis and anappropriate system of control exists to mitigate these risks. This control system is reviewed by internal audit on anongoing basis. In addition, the Society considers succession planning to mitigate the key personnel risk.

The risk of data loss as a result of cyber security risks is a growing risk which the Society takes extremely seriously. TheBoard will be further investing in IT infrastructure during 2017 in order to ensure our IT systems and infrastructure arefit for purpose and to continue to protect our customers’ data.

• Conduct Risk

Conduct risk can be defined as the risk that the Society’s behaviours fail to deliver good and acceptable customeroutcomes. In recent years the financial services industry as a whole has accrued reputational damage due to the levelof redress which has been necessary to compensate customers for conduct failings and therefore conduct risk andculture are a particular focus for the Financial Conduct Authority (FCA).

The Board has primary responsibility for ensuring that the manner in which the Society conducts dealings with itscustomers is fair and in their interests. Not only does the ethos of “Always with your interest at heart” embed this culturethroughout the Society but a dedicated Committee considers matters that would impact upon treating customers fairly.

• Regulatory Risk

This is the risk that the volume, prescription, complexity and costs of regulatory issues may impact upon the Group’s businessmodel and ability to compete or that the Society is not compliant with relevant regulations which govern our business.

The Society monitors all regulatory developments and industry practices and following assessment of the impact andrequirements for the Society ensures appropriate management action is taken for the Society to remain compliant.

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Directors’ Report continued• Capital Risk

Capital risk refers to a situation where an event(s) occurs that reduce the Society’s capital to an unacceptable orunsustainable level. The Society regularly tests various scenarios to ensure it retains sufficient capital to manageforeseeable and possible events.

The Society’s Internal Capital Adequacy Assessment Process (ICAAP) is the Society’s evaluation of its capital positionand requirements and provides details of the current approaches to manage risk across the Society.

• Pension Risk

The Society operates a pension scheme that provides benefits based upon final pensionable pay. This scheme was closedto new entrants in September 2000 and in 2016 the Board took the decision to close the scheme to future accrual.With effect from 1 January 2017 the active scheme members will instead have the opportunity to contribute to a definedcontribution scheme.

The scheme deficit has increased significantly over recent years predominantly due to falling interest rates and improvingmortality rates. The pension scheme deficit increased during 2016 by £1.2m to a total deficit of £5.7m. There is a riskthat this will increase further and whilst the Group has the financial strength to absorb these deficits, the scheme liabilityremains a significant potential risk to the Group. However, the action taken to close the scheme to future accrual haslimited the risk of a further increase to the existing liabilities.

The Society will look for further ways to reduce the Society’s exposure to this liability during 2017.

• Financial Services Compensation Scheme Risk

In common with all regulated UK deposit takers, the Society has a liability to the Financial Services CompensationScheme (FSCS) which continues to be an uncertain cost. The failure of any other firms covered by the scheme couldalso add to the existing liability. A charge of £168k (£400k: 2015) has been recognised in the Society’s 2016 accountsrelating to the FSCS levy.

• Strategic Risk

This is the risk that circumstances prevent the Society from achieving its long term strategic objectives. Inability to delivera long term strategy threatens the future of the business. Strategic risk can arise from staff making poor decisions,inadequate capacity or capability to manage change, or from a failure to respond to changes in the business environment.

The Society reviews its strategy at least annually to ensure it remains appropriate, deliverable and sustainable and seeksexternal assistance when required to validate decisions. The ongoing management of strategic risk is supported by thebusiness performance and risk reporting data provided to the Board and Risk Committees.

Going Concern

The Directors have reviewed the Group Corporate Plan including related cash flow projections and are satisfied that theGroup has adequate resources to continue in business for the foreseeable future. For this reason, they continue to adoptthe going concern basis in preparing the Annual Report and Accounts.

Long Term Viability

In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have considered the prospects ofthe Society over a longer period than the twelve months required by the ‘Going concern’ provision. The three year periodrepresents the Society’s Corporate planning period.

The Directors’ assessment is based on the Corporate Plan which projects the Society’s ongoing capital, profitability andfunding position to be strong at the end of a three year period (31 December 2019). This assessment is further supportedby the ICAAP and ILAAP and Recovery and Resolution Plan (RRP).

The Corporate Plan has considered adverse sensitivities and although there are inherent uncertainties in the geopolitical,economic and regulatory environments over the planning period, the Society’s reverse stress tests indicate that in plausiblescenarios we could continue to conduct business.

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Directors’ Report continuedBased on the information available and assumptions made in terms of the unknown factors, the Board have a reasonableexpectation that the Society will be able to operate and meet its liabilities over the period to 2019.

People

The Society recognises that talented and dedicated staff are key to the success of the Society and its long term future.

In order to ensure the Society’s long term success, the Board is investing in key skill areas to recruit and retain high calibrestaff and strengthen the management capability and capacity. It is vital that the Society employs and develops people withthe skills and motivation to take the Society forward.

The Board is committed to this investment in people to provide the solid foundations the Society needs to build on andsecure a successful future for the Society and its members.

Events since the Year End / Future Events

The Directors do not consider that any event since the year end has had a material effect on the position of the Group.

Donations

During the year the Society made various donations to a variety of good causes, of which £8k (£14k: 2015) was donatedpurely for charitable purposes. This sum was in addition to affinity account payments totalling £597k (£457k: 2015) andother donation and sponsorship payments totalling £14k (£12k: 2015) to charities and other local community organisations.

Organisations that received donations are detailed on the Society’s website.

The Society allows employees time to support charitable efforts during the year and a number of employees were assistedin this way during 2016.

Supplier Payment Policy

The Group’s policy is to discharge supplier invoices within the agreed payment terms when they fully conform with the termsand conditions of the purchase. The average time to settle invoices over the year was 20 days (20 days: 2015).

Directors

Directors who served during the year are listed on page 27 within the Corporate Governance Report. None of the Directorshad an interest in shares of any associated body of the Society at any time during the financial year.

Approved by the Board of Directors on 7 March 2017.

C S MillarChairman 7 March 2017

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Statement of Directors’ ResponsibilitiesDIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT, THE ANNUAL BUSINESSSTATEMENT, THE DIRECTORS’ REPORT AND THE ANNUAL ACCOUNTS

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

The Building Societies Act 1986 (‘the Act’) requires the Directors to prepare Group and Society Annual Accounts for eachfinancial year. Under that law they have elected to prepare the Group and Society Annual Accounts in accordance with UKAccounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS102 - The FinancialReporting Standard applicable in the UK and Republic of Ireland.

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

In preparing the Group and Society 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 andexplained in the Annual Accounts; and

• prepare the Annual Accounts on the going concern basis unless it is inappropriate to presume that the Group and Societywill continue in business.

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

DIRECTORS’ RESPONSIBILITIES FOR ACCOUNTING RECORDS AND INTERNAL CONTROLS

The Directors are responsible for ensuring that the Group:

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

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

The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of theGroup 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 theSociety’s website. Legislation in the UK governing the preparation and dissemination of Annual Accounts may differ fromlegislation in other jurisdictions.

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The Board of Directors and SecretaryCOLIN STEWART MILLARColin, aged 70, was appointed to the Board in September 2006 as a Non-Executive Director. He was elected Chairman of theBoard following the 2014 AGM and stands for re-election in 2017.

He is Chairman of the Nominations Committee and a member of the Audit Committee.

Colin has a degree in Industrial Economics from the University of Nottingham. His early career was in brand marketing withUnilever, principally in the UK but he also worked for a time in Japan and East Africa. Subsequently he was a General Managerwith Birmingham Midshires and Yorkshire Building Societies and Marketing Director with The Mortgage Corporation. For 14years he then owned and ran a company supplying marketing data to companies and trade organisations throughout the world.

Colin is a Trustee of St Gemma’s Hospice in Leeds.

Colin is a strong supporter of the building society sector and the role it plays in meeting people’s important financial needs.

MICHAEL TERENCE KIRSCHMike, aged 55, joined the Society in March 2016 as Interim Chief Executive and has made a positive impact in many areas ofthe business during his year with the Society.

Mike is Chairman of the Executive Committee and Assets and Liabilities Committee and as the Chief Executive attends all BoardCommittees.

Mike has an MBA from Henley Business School. He is an experienced CEO having held this role with a number of regulatedfinancial services firms including being the CEO of Alico, Origen Financial Services and AWD Chase de Vere, as well as a Directorof Aviva Life. Prior to joining the Society, Mike was the Interim CEO of the Saffron Building Society.

Mike joined the mutual sector early in his career at Britannia Building Society and has over 30 years’ experience in financial services in a range ofdisciplines. He believes strongly in mutuality which underpins the Society’s community values and positive social contribution the Society can make.

PHILLIP ALEXANDER MCLELLANDPhillip, aged 50, was appointed to the Board in November 2016 as a Non-Executive Director and stands for election at the2017 AGM.

Phillip is a member of the Audit Committee and attends ALCO.

Phillip has a BSc (Hons) degree in Economics from Loughborough University and is a member of the Chartered Institute ofManagement Accountants. He is currently the Finance Director of the consumer credit division of Provident Financial. He hasproven commercial, finance and treasury skills and considerable experience in the financial services industry.

Phillip fully appreciates the value of mutuality, having worked in the sector for many years, and firmly believes the Society’sfocus on member value will ensure it continues to be successful in the future.

SUSAN JANE HERONSue, aged 53, was appointed to the Board in 2008 as Group Secretary before a promotion to Executive Director in June 2015to the role of Marketing and Sales Director.

Sue is a member of the Executive Committee and ALCO and a Director of the Society’s subsidiary companies.

Sue holds a Diploma in Financial Services and has held a variety of positions within the Society during her career, within thebranch network, making a success of the Furness Direct distribution channel followed by a number of years as Head of Risk andCompliance.

Sue began her career with the Society in 1995 at Lancaster Branch before moving to Head Office and has seen first-hand therole the Society plays in the communities of the Branch and Agency networks and the commitment of the Board to remain independent and mutual.Sue is keen to ensure the role of the Branches and Agencies in their local communities remains a key focus.

ANDREW JOHN HAIGHAndrew, aged 63, was appointed to the Board in January 2014 as Non-Executive Director. He was elected as Senior IndependentDirector and Chairman of Board Risk Committee following the 2016 AGM. Andrew stands for re-election at the 2017 AGM.

Andrew is also a member of the Society’s Nominations Committee and Remuneration Committee.

Andrew is a Fellow of the Institute of Chartered Accountants and holds a BA (Hons) degree in Economics and Accounting. Hespent most of his career in senior positions at KPMG LLP, specialising in IT, risk management and audit within the retail financialservices industry and extensively in the building society sector. Following 20 years as partner he retired in 2008.

Andrew is also the Chairman of Calderdale and Huddersfield NHS Trust.

Andrew was pleased to join the mutual sector which performed strongly during a challenging period for the financial services industry.

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The Board of Directors and SecretaryNICHOLAS JOHN GOWERNic, aged 57, was appointed to the Board in May 2014 as a Non-Executive Director. He was elected as Chairman of the AuditCommittee following the 2016 AGM.

Nic is also a member of the Society’s Board Risk Committee.

Nic is a Fellow of the Institute of Chartered Accountants and has a BSc (Hons) degree in Chemistry from the University ofManchester. He spent most of his career as a partner with PricewaterhouseCoopers LLP, specialising in audit and risk management.

Nic is also a Director of the Central Manchester University Hospitals NHS Foundation Trust and a Director of Seashell Trust,which is a charity working for the benefit of children and young adults with complex learning disabilities.

Nic believes the Society with its firm commitment to independence and mutuality will continue to be successful for the benefit of its members.

KIM SUSAN KEARNEYKim, aged 60, was appointed to the Board in September 2011 as a Non-Executive Director. She was elected as Vice-Chairmanof the Board following the 2016 AGM.

Kim is also Chairman of the Remuneration Committee and a member of the Nominations Committee.

Kim has a degree in Mathematics and has a wealth of experience following a career in IT. As well as managing major systemsinitiatives for large corporate organisations, Kim has also held senior general management roles in the insurance industry,including a large mutual company. In retirement, Kim enjoys running a small business producing yarns from her small farmin the South Lakes.

Kim fully appreciates the value of mutuality and the Society’s focus on putting members’ interests at the heart of what we do.

MATTHEW JON DOBSONMatthew, aged 40, was appointed to the Board in January 2017 as Finance Director and stands for election at the 2017 AGM.

Matthew is a member of the Executive Committee and ALCO. Matthew also attends Audit Committee and Board RiskCommittee.

Matthew is a qualified accountant and holds a BA Hons (Cantab). He has gained over 15 years’ banking experience in seniorroles across both treasury and finance functions. His previous roles have included Directorships at Barclays and more recentlyhe held the position of Head of Debt Capital with Williams and Glyn Treasury.

Matthew grew up in the Society’s heartland and is delighted to join a Society which is committed to its mutual status.

KIM LOUISE REBECCHIKim, aged 50, was appointed to the Board in March 2016 as a Non-Executive Director and stands for election at the 2017 AGM.

Kim is a member of the Board Risk Committee and Remuneration Committee.

Kim is a Fellow of the Chartered Institute of Bankers and she holds a post graduate Diploma in Financial Services. She workedat the Leeds Building Society for 28 years, most recently as the Sales and Marketing Director and as an Executive member ofthe Board. Kim is also a Director for Redmayne Bentley Stockbrokers LLP and Business and Enterprise Finance Ltd.

Kim joined the mutual sector almost 30 years ago and is a strong supporter of mutuality and the benefits which can be offeredto members and local communities.

PAMELA ADELE MAWSONPam, aged 46, was appointed as Group Secretary to the Board in July 2015 and accepted the role of Chief Risk Officer in July2016.

Pam is a member of the Board Risk Committee, the Executive Committee and ALCO and a Director of the Society’s subsidiarycompanies.

Pam also attends Audit Committee, Nominations Committee and Remuneration Committee.

Pam has a BSc (Hons) degree in Financial Services and Associateship from the University of Manchester and a Diploma in FinancialServices Management.

Pam joined the Society in 1988 and having held a variety of managerial roles, is proud to work for a regional building society where members interestsare central to the culture of the organisation.

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Corporate Governance ReportThe Board is committed to complying with best practice in Corporate Governance.

The Board’s approach is based on the principles and provisions of the 2014 UK Corporate Governance Code (‘the Code’)published by the Financial Reporting Council (the FRC) in October 2014. The FRC updated the Code in April 2016 forfinancial years commencing on or after 17 June 2016 and a copy is available at www.frc.org.uk.

Furness Building Society and its subsidiary companies (‘the Society’) is not required to comply with the Code, as it is not alisted company, however the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) require eachbuilding society to have regard to the Code and to explain in its Annual Report and Accounts whether, and to what extent,it adheres to the Code.

This Report sets out how the Board operates. The Board seeks to comply with the Code and the guidance issued by theBuilding Societies Association on the Code to the extent that is relevant to a building society. The Society does not complywith all aspects of the Code, where the Board considers these to be not relevant to it, or are impractical to implement.

LEADERSHIP

The Role of the Board

The Board is collectively responsible for the sustainable success of the Society. Its primary role is to challenge and approvethe long term strategy and provide leadership to ensure that the Society delivers long-term member value.

The Board has a number of specific responsibilities including:

• Safeguarding the interests of members and ensuring the long-term success of the Society• Setting strategy and providing direction• Driving culture and values• Determining and reviewing the Society’s Risk Appetite• Ensuring adequate resources exist so that the Corporate objectives can be achieved• Ensuring that financial and operational risk management controls are robust and effective• Ensuring the satisfactory performance of the senior management team

The Board operates under Terms of Reference and has established a framework of mandates which specifies those matterswhich are delegated and those which remain the responsibility of the Board. Matters reserved for the Board include settingthe strategic aims, objectives and risk appetite for the Society. The balance and independence of the Board is kept underreview by the Nominations Committee.

Chairman and Chief Executive

The roles of the Chairman (Non-Executive) and Chief Executive are separate and there is a clear division of duties betweenthem that is formally documented and which has been approved by the Board. Following the implementation of theregulatory Senior Manager and Certification Regime in March 2016, certain prescribed responsibilities were allocated toindividual Directors which clearly describe accountabilities of both Non-Executive and Executive Directors.

Board

AuditCommitteeSee page 22

RiskCommitteeSee page 24

NominationsCommitteeSee page 25

RemunerationCommitteeSee page 26

Our Governance Framework

The terms of reference for all the above Committees are available to view at www.furnessbs.co.uk

PAGE 18


Corporate Governance Report continuedThe Chairman is Colin Millar. His other directorships are set out in the Annual Business Statement on page 69. The Boardis satisfied that his other commitments do not prevent him from fulfilling his responsibilities to the Society.

The Board approved a change in the term of office for the Chairman with effect from 2016 and the current Chairman willextend his term from 3 years to 5 years.

As Chairman, Colin is responsible for:

• Leadership and governance of the Board• Ensuring effectiveness of the Board• Setting the agenda, style and tone of Board discussions• Creating a culture of openness and debate• Ensuring the Directors receive accurate and timely information• Maintaining constructive relations between Executive and Non-Executive Directors• Maintaining open and candid relationship with the Regulatory Authorities• Communicating with the Society’s members on behalf of the Board

The Interim Chief Executive is Mike Kirsch, who is primarily responsible for the day-to-day management of the Society andits subsidiaries and for implementing the strategies and policies agreed by the Board.

Vice Chairman

Following the resignation in March 2016 of Alan Hunter, the Board appointed Kim Kearney to the role to provide supportand guidance to the Chairman and deputise as necessary.

Senior Independent Director

Andrew John Haigh accepted the role of Senior Independent Director which carries prescribed responsibility in March 2016.The role provides an intermediary between the Chairman and the other Directors as required and a point of contact formembers should the normal channels of communication with the Chairman, Chief Executive or other Executive Directorsfail or be inappropriate. The Senior Independent Director also acts as the Whistleblowing champion in addition to managingthe appraisal process of the Chairman.

Non-Executive Directors

The role of each Non-Executive Director is to use their own experience and skills to bring independent judgement to Boarddebate and decision-making and to constructively challenge the Executive Management Team.

All Non-Executive Directors are required to fully understand, challenge and assist in the development of the Society’s businessmodel and strategy. They provide commercial leadership within a framework of prudent and effective risk managementcontrols and retain an independent view and monitor performance and resources.

The Non-Executive Directors hold at least one meeting each year in the absence of the Executive Directors.

EFFECTIVENESS

Board Size, Composition and Independence

At the start of 2016, the Board comprised eight members: the Chairman, four Non-Executive Directors and three ExecutiveDirectors. There have been some changes to the composition of the Board during the year.

Alan Hunter, a long standing member of the Board, stood down from the Board in March 2016. After tendering hisresignation in late 2015, Nigel Quinton left the Society in March 2016. Mike Kirsch was appointed as an Interim ChiefExecutive whilst the Society undertakes the recruitment of a permanent successor for the role. The recruitment process isprogressing well and the Board expects to make a formal announcement when an appointment has been made.

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Corporate Governance Report continuedThe Board would like to record its thanks to both Alan and Nigel for their loyalty and service to the Society.

In September 2016, the Interim Finance Director Paul Gittins fulfilled his contract and Richard Jones was appointed toreplace Paul on a short term basis, pending the appointment of a permanent Finance Director. The Board was pleased toappoint Matthew Dobson in the permanent position of Finance Director, effective 30 January 2017.

The Board was pleased to appoint Kim Rebecchi and Phillip McLelland to the Board in March and November 2016,respectively, as a Non-Executive Directors. Phillip adds specialist treasury and financial risk management skills to the Boardand Kim has extensive experience in the Building Society industry and specialist sales and marketing knowledge and expertise.

At the end of 2016 the Board remained comprised of eight members: the Chairman, five Non-Executive and two ExecutiveDirectors. The Interim Executive team members are not Directors of the Society.

The structure of the Board continues to ensure that no individual or group of individuals is able to dominate the decision makingprocess and no undue reliance is placed on any individual. The Board has focussed on strengthening the Senior ManagementTeam to provide greater efficiency and the skills required to meet the complexity of the Society’s business environment.

The Society’s Operations Director, Steve Pryer, retired from the Board in February 2017 after 23 years of service to theSociety and 13 years as a Director. The Board wishes him well in whatever he chooses to pursue following his long andsuccessful career in the finance industry.

Any individual carrying out the role of Director with prescribed responsibilities, requires approval to do so from the PrudentialRegulation Authority and the Society’s relevant Directors are therefore approved to hold Senior Management Functions.Details of the individual Directors and their biographies are set out on pages 15 and 16.

The Board, through the Nominations Committee, has assessed the independence of each of the current Non-ExecutiveDirectors (excluding the Chairman) and is of the opinion that each one of them acts in an independent and objective mannerand therefore, under the Code, is free from any relationship which could affect their judgement.

In reaching this opinion the Board considered:

• Whether each Director is independent in character and judgement;• How each Director conducts themselves in Board and Committee meetings;• Whether the Director has any interests, which may give rise to an actual or perceived conflict of interest; and • Whether the Director acts in the best interest of the Society and its members at all times.

How the Board fulfils its role

The Board applies principles of good governance and some of the ways in which it seeks to do so are explained here:

• The Board meets regularly and holds at least one separate Non-Executive Directors’ meeting;• The Chairman sets the tone of each meeting to ensure there is a culture of openness and constructive challenge;• The Board observes a formal schedule of matters reserved or delegated;• Directors receive accurate and timely information to inform decisions.

Meetings and Attendance

The Board held 12 scheduled meetings in 2016, including one formal strategy meeting. Full details of attendance at Boardmeetings can be found on page 27.

The Directors receive detailed papers in advance of each Board meeting. The agenda is developed by the Chairman and theGroup Secretary in consultation with the Chief Executive.

The annual schedule of Board meetings is decided well in advance to ensure the availability of Directors. All Directors areexpected to attend all meetings, however in the event of any Director being unable to attend a meeting, they receive papersin the usual way and have the opportunity to raise points in advance for consideration at the meeting.

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Corporate Governance Report continuedInduction and Development

The Chairman ensures that, on appointment, all Non-Executive Directors receive a tailored induction programme. Theprogramme is comprehensive and includes site visits, coverage of the regulatory environment, the Society’s systems andcontrols framework and business plans.

All Non-Executive Directors are required to maintain and update their skills and knowledge which they achieve throughattendance at internal and external presentations, courses and seminars. Non-Executive Directors also make ad hoc visitsto branches and Head Office departments.

During 2016, Director training sessions were held covering a number of key Board issues and critical documents in addition tostrategy development sessions. The training included Stress Testing, Treasury Risk Management, Individual Capital AdequacyAssessment Process (ICAAP) and Capital Management, Operational Resilience and Continuity Planning and new regulatorydevelopments such as the Strengthening Accountability regime and Internal Liquidity Adequacy Assessment Process (ILAAP).

Training and development records are maintained by individual Directors and are reviewed by the Chairman during theindividual annual performance and appraisal process.

The Group Secretary is responsible for ensuring that the Board procedures and Society Rules are observed. All Directorshave direct access to the services and advice of the Group Secretary. Directors are also able to take independent externalprofessional advice to assist with the performance of their duties at the Society’s expense.

Board Evaluation

The Board undertakes an annual evaluation of its performance. Actions identified following the 2015 review wereimplemented where appropriate in 2016.

In 2016, the evaluation was undertaken through a survey of individual Directors which assessed the performance of theBoard and Board Committees. The results were independently assessed by the Group Secretary and reported to theNominations Committee for consideration.

Based on the evaluations it is the Board’s opinion that the Board and its Committees continue to be effective. A number ofactions resulting from the findings of the evaluation of the Board effectiveness will be implemented during 2017 as part ofour programme of continuous improvement.

In addition to the Board evaluation process, the Senior Independent Director led a separate performance review of theChairman. The performance review process sought feedback from all Directors by way of a confidential questionnaire. Thefeedback provided was used by the Senior Independent Director to inform a discussion session with the Chairman, who hadself-assessed himself against the same criteria. The Senior Independent Director, in the absence of the Chairman,subsequently reported back to the Board on his performance review, which confirmed his effectiveness.

The annual process for the performance evaluation of individual Directors is undertaken by means of an internal self-assessment questionnaire and a meeting with the Chairman. The evaluation review undertaken on 2016 performanceconcluded that all Directors continue to perform effectively.

Appointments, Elections and Re-election

The appointment of Directors is governed by the Society’s Rules. Under the Rules the Board may appoint a Director to fillany vacancy which occurs during the year. All new Directors, appointed in this way, are subject to election by members at thenext appropriate Annual General Meeting following their appointment. The Board is recommending Kim Rebecchi, PhillipMcLelland and Matthew Dobson to the members for election as Executive Directors at the 2017 Annual General Meeting.

Also under the Society’s Rules, Directors have to submit themselves for re-election at least once every three years. Non-Executive Directors are not usually expected to serve more than three full three-year terms following their first election tothe Board. The Chairman is subject to annual re-election due to his length of service.

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Corporate Governance Report continuedThe Board will only recommend to members that Executive and Non-Executive Directors be proposed for re-election at anAnnual General Meeting after evaluating the performance of the individuals. Following the performance evaluations theBoard is recommending Colin Millar and Andrew Haigh for re-election by the members, having concluded that each individualcontinues to be effective and to demonstrate commitment to the role.

RELATIONS WITH MEMBERS

Member Engagement

The Board seeks to understand the needs of members and wishes to maintain and extend close relations with them.Members are encouraged to attend the Annual General Meeting, where they can ask questions and voice their opinions. In2016, the Society was active in local communities with its ‘150 year charity giveaways’ and continues to provide supportthrough the affinity partnership donations.

Annual General Meeting

At the Annual General Meeting, Board members give presentations on the previous year’s financial performance and on theSociety’s future plans. Members have the opportunity to ask questions of any member of the Board, the Group Secretaryor the External Audit attendee on any aspect of the Society’s business, or on the resolutions proposed at the Meeting.

Each year a notice of the Annual General Meeting is given to all members who are eligible to vote. Members are sent votingforms and are encouraged to vote online, by post, at a local branch or in person or by proxy at the Meeting. All membersof the Board are present at the Annual General Meeting each year (unless their absence is unavoidable).

At the Meeting, separate resolutions are considered for each substantially separate issue and the results of the vote aredisplayed on the Society’s website throughout the year.

ACCOUNTABILITY

Risk Management and Internal Control

The Board has overall responsibility for maintaining a system of internal control to ensure that an effective risk managementand oversight process operates across the Society.

The risk management framework is designed to identify, understand and monitor the risks within the business, including risksto which the Society may become exposed, and manages rather than eliminates risks to meet the Society’s business objectives.

The Board determines the Society’s risk appetite and has a clearly defined Risk Appetite Statement. The Risk AppetiteStatement contains both quantitative and qualitative measures which are integrated into decision making processes.

The risk framework comprises a number of Committees, including the key committees of Risk and Audit. Through the Riskand Audit Committees, the Board receives comprehensive and timely reporting on the Society’s identification, measurementand management of risk.

In 2016 the Society increased the frequency of the Board Risk Committee meetings from quarterly to monthly in order tostrengthen the risk management framework.

The Board’s defined Statement of Risk Appetite is reviewed and adjusted at least annually and forms a key part of theCorporate Planning process. Adherence to the risk appetite is monitored by the Committees in the risk framework andreported to the Board each month against agreed measures.

The Board has undertaken a review of the adequacy and effectiveness of the risk and control framework in place throughout2016, to effectively manage the risks relating to its strategy and business profile.

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Corporate Governance Report continuedIn satisfying itself that the framework of internal controls meets the requirements of the Code, the Board considered:

• The annual reports received from the Chairs of Audit, Risk, Nominations and Remuneration Committees• The quarterly reports received from the Audit Committee covering the work of the Compliance and Internal Audit

functions, the Society’s Money Laundering Reporting and Fraud Officer and the External Auditors• Feedback from the annual supervisory visit from the Prudential Regulation Authority• The monthly reports received from the Risk Committee covering the principal strategic, operational, credit, financial

conduct and regulatory risks facing the Society, together with information on the effectiveness of the controls in placeto manage these risks

• The annual report received on the performance of the subsidiary companies • The monthly financial reports received from the Finance Director covering Statement of Financial Position and treasuryrisks• The monthly Chief Risk Officer’s reports

The risk management framework is proportionate to the scale and complexity of the business and is commensurate withthe degree of risk in the business to support decision making. It ensures the Society deploys a consistent approach to riskmanagement in each of the principal risk areas.

The risk management framework is based on the concept of ‘three lines of defence’, the key principles of which are:

• Business managers own all the risks throughout the Society and are responsible for ensuring that these are managedon a day to day basis

• The Board and Executives promote a culture in which risks are identified, assessed and reported in an open, transparentand objective manner

• The Audit, Risk and Compliance functions are independent of the business and provide oversight and advice on themanagement of risks across the business

More information on the principal risks faced by the Society is set out in the Risk Committee report on page 24.

AUDIT COMMITTEE

Membership and Meetings

The Audit Committee met seven times in 2016.

The composition of the Audit Committee has changed during 2016. Andrew Haigh was the Chairman until March 2016 atwhich point Nic Gower was appointed as Chair of the Audit Committee. Colin Millar remained a member and Phillip McLellandjoined the Committee in November 2016. The membership of the Committee at 31 December 2016 is set out below.

• Nic Gower (Committee Chairman)• Colin Millar (Society Chairman)• Phillip McLelland (Non-Executive Director)

The Audit Committee membership is Non-Executive in order to maintain independence which is crucial in assessing the workof management and the assurance provided by the internal and external audit functions. The Committee invites ExecutiveDirectors, together with representatives from Internal and External Auditors, to attend the meetings and also regularly meetswith the Internal and External Auditors and the Society’s Chief Risk Officer without the Executive being present.

Role and Responsibilities

The Committee’s key roles and responsibilities are to:

• Monitor the integrity of the Society’s external financial reporting, in particular reviewing significant financial reportingjudgements to ensure they are appropriate

• Review the effectiveness of the Society’s internal controls• Monitor and review the activities and performance of both Internal and External Auditors and the Society’s Compliance Function• Ensure that there are satisfactory Whistleblowing arrangements to enable employees to raise any concerns about possible

improprieties and that there are effective arrangements for investigation of any such concerns.

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Corporate Governance Report continuedThe detailed responsibilities of the Audit Committee are set out in its Terms of Reference, which are in line with the FinancialReporting Council Guidance on Audit Committees and available on the Society’s website.

Key Accounting Judgements

The key areas of judgement considered by the Committee in relation to the 2016 accounts related to the:

• Impairment of loans and provisions for potential losses on lending• Hedge accounting• Final salary pension scheme valuation • Effective Interest Rate• Going concern assumptions

Internal Audit

The Society’s Internal Audit Function is provided through an outsourced relationship with Deloitte LLP which is one of thelargest financial services advisory firms in the UK. Deloitte contributes considerable technical knowledge and industryexperience when independently reviewing and reporting on the effectiveness of the internal controls to manage the risksinherent in the business. Deloitte helps to evaluate and improve the effectiveness of the risk management, regulatorycompliance and governance frameworks. Each year the Audit Committee agrees a programme of work for the internal auditfunction and this provides information to the Committee on the effectiveness of the controls. The Audit Committeeundertakes an annual review of the effectiveness of the Internal Audit Function.

Compliance

The Society’s compliance function also submits an annual work plan to the Audit Committee for approval. The Chief RiskOfficer acts as the Society’s Compliance Oversight Officer and gives a regular report to the Audit Committee on regulatoryissues and progress against the compliance plan. Actions arising from issues identified in compliance work are trackedthrough the Audit Committee. Through delivery of the compliance plan, regular reporting and issue tracking, the ComplianceFunction provides assurance to the Board on the Society’s regulatory compliance.

External Audit

The Audit Committee assesses the independence and objectivity, qualifications and effectiveness of the External Auditor onan annual basis. The Committee also concludes on whether to recommend the reappointment of the auditor to the Board.

The annual evaluation of the External Auditor focuses on the quality of expertise, judgement and dialogue with the Committeeand Executives, the independence and objectivity demonstrated by the Audit Team and the quality of service provided. Theevaluation process takes the form of a survey of key stakeholders, with the collated findings discussed by the Committee inthe absence of the External Auditor.

At the start of the annual audit cycle the External Auditor, KPMG LLP, presents to the Audit Committee, a detailed audit strategy,which sets out its identification and assessment of the significant risks that could affect the annual accounts. KPMG LLP alsoprovides to the Committee an assessment of other areas of focus during the audit. For the 2016 audit, significant risks identifiedwere loan loss impairment, derivative valuations and hedge accounting, income recognition and management override of controls.Management provides a response to each of the key audit findings which are assessed by the Audit Committee. The Committeeconcluded that there had been appropriate challenge and mitigating action taken in relation to the findings identified.

The Committee also oversees the Society’s policy of the provision of non-audit services by the External Auditor. The Committeerecognises the benefits to the Society in engaging the External Auditor where work is closely related to the audit, where a detailedunderstanding of the Society is required and where KPMG LLP is perceived to provide a higher quality and/or better value servicethan other available providers. Under the key principle of the non-audit policy, the Audit Committee will refuse permission toengage the External Auditor when a threat to independence and/or objectivity is perceived.

Non-audit fees in 2016 amounted to £98k and represented 103% of the audit fee. The Committee concluded that thelevel of fees paid in 2016 did not pose a threat to the independence or objectivity of the External Auditor.

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Corporate Governance Report continuedFollowing a satisfactory annual review, the Audit Committee concluded that KPMG LLP remains independent and the auditis effective and has provided the Board with its recommendation to the members on the reappointment of KPMG LLP asExternal Auditor for the year ending 31 December 2017.

KPMG LLP or its predecessor firm has been the Society’s external auditor since 1992. No external audit tender is currentlyplanned given the continuing effectiveness of KPMG LLP however; the Audit Committee intends that an audit tender willtake place no later than 2019. Recent changes to EU legislation will mean that a change of external Auditor is necessary forthe 2021 year end at the latest.

RISK COMMITTEE


The Risk Committee met seven times in 2016.

The composition of the Risk Committee has changed during 2016. In March 2016, following Alan Hunter’s resignation,Andrew Haigh was appointed to Chair of the Risk Committee and Kim Rebecchi also became a member of the RiskCommittee. The membership of the Committee at 31 December 2016 is set out below.

• Andrew Haigh - Senior Independent Director (Committee Chairman)• Nic Gower - Non-Executive Director (Chair of Audit Committee)• Kim Rebecchi - Non-Executive Director • Richard Jones - Interim Finance Director (January to September 2016 - Paul Gittins)• Pamela Mawson - Chief Risk Officer and Group Secretary

The Society’s Assistant Secretary acts as Secretary to the Risk Committee. The Chairman, Chief Executive and other SeniorManagers attend meetings by invitation as required to provide expertise on specific subject matters.


The Committee’s key roles and responsibilities are to:

• Advise the Board on risk appetite, which is the amount of risk the Society is willing to take in pursuit of its strategic objectives• Monitor the risk profile against the prescribed risk appetite• Monitor and review the effectiveness of the risk framework to ensure that key risks are identified and appropriately managed

The detailed responsibilities of the Risk Committee are set out in its Terms of Reference, which are available on the Society’s website.

Activity in 2016

The Risk Committee has focused on strengthening the risk management function and framework during 2016, recruitingkey skills and increasing 2nd line oversight and resource. Pamela Mawson was appointed to the position of Chief Risk Officerand the Society recruited a Head of Credit and Prudential Risk. These appointments will enable the Risk Function toundertake a programme of work to improve risk management and 2nd line oversight across the business.

The Risk Committee framework was strengthened to clarify responsibilities and accountabilities and improve the oversightand reporting to Risk Committee. The framework aims to allow the Chief Risk Officer and the Board to;

• Maintain oversight of the risks and effectiveness of risk management across the Society• Identify emerging risks• Promote effective challenge• Promote individual as well as collective accountabilities• Ensure the Board’s Risk Appetite is integrated in decision making• Ensure corporate objectives are achieved within risk appetite• Enable timely and effective monitoring of risk management measures and triggers

PAGE 25


Corporate Governance Report continuedThe Risk and Compliance function, led by the Chief Risk Officer, is independent from the business operations. The ChiefRisk Officer reports directly to the Chief Executive and is accountable to the Chair of the Risk Committee. A monthly reportis submitted by the Chief Risk Officer to the Board to ensure the Directors have oversight of key risk issues and developments.

Specific activities completed in 2016 include oversight of the Board Risk Appetite and the Society’s Conduct Risk Framework,ongoing review of the key risks facing the Society and input into the Remuneration Committee to ensure that risk behaviourswere appropriately reflected in revised reward schemes.

During 2016 the Risk Committee considered the following principal risks impacting the Society:

• Financial Risks (covering capital, liquidity and funding, market, interest rate, basis and pension risks)• Credit Risk (covering residential and commercial mortgage lending and wholesale credit risk)• Operational Risk (covering cyber, data security, IT and infrastructure, management information, fraud, succession and

project risks)• Conduct and Regulatory Risks (covering legal, regulatory, firm and culture risk)• Strategic Risk (covering business model and reputation risk)

Planned Activity

The key priorities for 2017 include the continued development of management information both into and from theCommittee, further development and monitoring of Prudential, Credit, Conduct and Operational Risk Assurance Plans androbust challenge on risk policies.

Sound risk culture is a key element of effective risk management and the Board Risk Committee, through the Chief RiskOfficer, will seek to continue to improve risk culture throughout the Society in 2017.

NOMINATIONS COMMITTEE


The Nominations Committee met seven times in 2016.

The membership of the Committee at 31 December 2016 is set out below:

• Colin Millar (Committee Chairman)• Andrew Haigh - Senior Independent Director (Chair of Risk Committee)• Kim Kearney - Non-Executive Director (Vice Chairman)

Alan Hunter was a member prior to his resignation in March 2016. The Group Secretary acts as Secretary to the NominationsCommittee and the meetings are also attended by Mike Kirsch, Interim Chief Executive as well as the Head of HR, althoughnot Committee members.

If the Committee were to consider any matters concerning the succession of the Chairman of the Board, the Chairmanwould absent himself from the meeting as required and the Board’s Senior Independent Director would normally take theChair. The Chairman ensures any individual withdraws, as appropriate, from any Committee discussions which would giverise to a personal conflict of interest.


The Committee’s key roles and responsibilities are:

• Considering the appointment or retirement of Directors• Evaluation of the skills, knowledge and experience required for a particular appointment, normally with the assistance

of external advisers used to facilitate the search for suitable candidates• Reviewing the size, composition and structure of the Board• Considering succession planning for Directors and Senior Executives• Assessing the performance of Directors• Reviewing the allocation of prescribed responsibilities

The detailed responsibilities of the Nominations Committee are set out in its Terms of Reference, which are available on theSociety’s website.

PAGE 26


Corporate Governance Report continuedActivity in 2016

The principal activity undertaken by the Nominations Committee in 2016 was completion of the recruitment of Kim Rebecchias a Non-Executive Director with sales and marketing experience, recruitment of Phillip McLelland as a Non-Executive Directorwith experience of treasury and asset and liability management and recruitment of Matthew Dobson as Finance Director.Kim took up her appointment in March, Phillip in November and Matthew at the end of January 2017.

The Committee also pursued a search for a Chief Executive to fill the vacancy left by Nigel Quinton. Initially this wasprogressed quite quickly with an offer made and verbally accepted by a well-qualified candidate in July 2017, four monthsafter Nigel Quinton stood down. However, following receipt of a competing offer from his current employer, the candidatewithdrew his acceptance and the search had to start again. At the end of 2016 the Society had identified a number ofstrong appointable candidates.

In addition, the Committee recruited Mike Kirsch as Interim Chief Executive and Richard Jones as Interim Finance Directorfollowing the completion of Paul Gittins’ contract.

The other principal activity undertaken by the Nominations Committee in 2016 was a review of succession planning forDirectors (Andrew Haigh announced during the year that he proposed to stand down at the AGM in 2018 and move to thesouth of England, recruitment for his replacement will start in autumn 2017), approval of the retirement of Steve Pryer(Operations Director and formerly Deputy Chief Executive), consideration and approval of the promotion of Pam Mawsonfrom Head of Compliance & Risk to Chief Risk Officer, review of the term of office of the Chairman and recommendationto the Board that the normal term of office of the Society Chairman should be extended from three years to five years.

In addition, the Committee reviewed the ‘fit and proper’ declarations of Directors and recommended to the Board theDirectors to be proposed for election and re-election at the Annual General Meeting, reviewed capacity and capability andsuccession planning at senior management level, initiated a review of Board scrutiny of the application of appraisal andobjective-setting at Executive Director level to be conducted jointly with the Remuneration Committee, reviewed ofmembership and chairmanships of Board Sub-Committees and made recommendations to the Board and reviewed Boardeffectiveness (this was an internal review led by the Society’s Secretary with fieldwork for the review undertaken in December2016 and reported to the Board in January 2017.)

Planned Activity

The Committee’s priority for the year ahead is to complete the recruitment of a Chief Executive. It is well recognised thatrecruitment into senior posts in financial services is difficult and the Board is resolved not to compromise on the standardit has set for the appointment. The Committee hopes to have the position filled in the near future. The Committee will alsofocus on succession planning at Board and senior management level, recognising the importance of recruiting and retainingkey skilled and talented people in order to compete in an increasingly challenging competitive environment and achievesustainable success for the Society’s members.

REMUNERATION COMMITTEE


The Remuneration Committee met seven times in 2016.

Kim Kearney was appointed Chair of the Remuneration Committee in March 2016. Andrew Haigh and Kim Rebecchi arealso members of the Committee.

The Head of HR acts as Secretary to the Committee. The Interim Chief Executive and Chief Risk Officer attend meetings byinvitation.

PAGE 27


Corporate Governance Report continuedRole and Responsibilities

The Committee’s key roles and responsibilities are:

• To decide the terms, conditions and remuneration of the Society’s Chairman and the Executive Directors• To approve the terms, conditions and remuneration of the Chief Risk Officer on the recommendation of the Chief Executive• To approve the terms, conditions and remuneration of the Society’s Senior Management Team on the recommendation

of the Chief Executive• To recommend to the Board the terms, conditions and remuneration of the Non-Executive Directors

The detailed responsibilities of the Remuneration Committee are set out in its Terms of Reference, which are available onthe Society’s website.

Activity in 2016

During 2016 the Committee completed a benchmarking exercise of Executive roles and salaries and reviewed and revisedthe reward scheme.

The Society has adopted a Remuneration Policy, which describes how the Society complies with the FCA’s RemunerationCode. A report on Directors’ remuneration is provided on pages 28 to 32 giving details of Remuneration Policy, remunerationlevels and Directors’ service contracts.

Planned Activity

The Committee has a calendar of items for consideration and also discusses emerging regulatory and market practices on remunerationas they arise. The Committee will consider the impact of the new ‘Strengthening Accountability’ regulations on Non-Executive fees.

Board and Committee Attendance Record 2016

The attendance of Directors at scheduled Board, Nominations Committee, Audit Committee, Remuneration Committee andRisk Committee meetings during the year is set out below.

Board Audit Risk Nominations Remuneration

C S Millar (Chairman) 12/12 7/7 7/7 1/1

K S Kearney (Vice Chairman) 12/12 7/7 7/7

A J Haigh 12/12 4/4 7/7 5/5 7/7

N J Gower 12/12 7/7 7/7

K L Rebecchi*** 11/11 7/7 7/7

P A McLelland**** 2/2 1/1

A T F Hunter* 3/3 1/1 1/1 1/1

N A Quinton** 3/3

S L Pryer 12/12

S J Heron 12/12

Number of meetings held 12 7 7 7 7

The composition of the Board and the Committees changed during 2016. Details of the changes are provided elsewherein the Corporate Governance Report. The Interim Chief Executive and Interim Finance Directors have attended Board andCommittee meetings although the interim positions have not held the Office of Director.

*Alan Hunter resigned from the Board in 24 March 2016**Nigel Quinton resigned from the Board in 24 March 2016***Kim Rebecchi became a Director on 3 March 2016****Phillip McLelland became a Director on 23 November 2016

PAGE 28


Directors’ Remuneration ReportThe purpose of this report is to provide information about the Group’s policies on remuneration and how those policies havebeen implemented. The Remuneration Committee comprises solely of Non-Executive Directors as its key responsibility is todetermine overall remuneration policy and set specific levels for Executives.

Summary of the Society’s Remuneration Policy

The Remuneration Committee has reviewed the Remuneration Policy this year to ensure that it continues to support the Society’slong term aims. Our policy is to offer remuneration packages which will attract, retain and motivate performing individuals, butnot to pay more than necessary to attract appropriate candidates. At all times, the Board must balance our members’ interestsby spending money wisely, against developing the Society by attracting and retaining the talent it needs.

The key principles of the Remuneration Policy are to:

• Align to the Corporate Plan objectives for the growth and security of the Society• Provide a clear link to effective risk management consistent with the Society’s risk appetite• Set total remuneration at a competitive level which rewards good performance• Meet the regulatory standards and good corporate governance practices.

Executive Director Remuneration

Executive remuneration consists of basic salary, variable bonus, pension contributions and other benefits. The Committee reviewsthese annually on recommendation from the Chief Executive.

In 2016, the Committee commissioned Hays Executive (the search and selection division of Hays plc) to conduct a benchmarkingexercise against a peer group of building societies. The Committee wanted to ensure that packages offered to a new ChiefExecutive and Finance Director were competitive and would attract suitable candidates. The exercise was then extended to theother executive roles. Hays reported that current salaries and bonuses were significantly below market rates. Considering thisinformation, and other initiatives to update service contracts and close the Final Salary Pension scheme, the Committee undertooka complete review of executive remuneration and service contracts. The main change to service contracts was to reduce noticeperiods from twelve to six months.

Summaries of the 2016 and 2017 Executive remuneration packages are shown on pages 29 and 30.

PAGE 29


Directors’ Remuneration Report continued

Summary of Executive Remuneration 2016

Element Link to Operation Performance Minimum and maximum Strategy measures payable Basic Salary Reflects level Once set, future increases are Annual salary increase Agreed percentage of linked to annual inflation is linked to performance increase as part of accountability. increases. rating. annual pay review.

Ad-hoc adjustments for significant changes in responsibilities.

Bonus Linked to the Challenging, but achievable Corporate measures There is no payout if targets delivery of objectives are aligned with the for 2016 are: are not met. annual corporate plan. business • Profit The payout for on-target plan targets. • Mortgage assets performance is 10% of basic salary. The Chief Risk Officer’s bonus is paid against The maximum payment is achievement of personal 12% for overperformance. objectives. The bonus payment for 2016 is 10% (£8.2k). In 2015, the targets were not met. However, the Remuneration Committee made a discretionary award of £8.6K to two members of the Executive as recognition for their efforts.

Pension Provides Pension contributions are on Not applicable. market membership of either: competitive remuneration. • Defined Benefit Pension Accrual rate of 1/60th or Scheme (closed to new 1/80th (dependent on members) for existing staff contribution). Executives.

• Or the Society’s Defined Matched contributions Contribution scheme for new up to 10% of basic salary. Executives.

Benefits To align The principal benefits are: Not applicable. Executive total • Life assurance remuneration • Private medical insurance broadly with • Company car or allowance the market. • 12 months notice period • Other benefits e.g. limited relocation assistance may be provided based on individual circumstances.



PAGE 30

Summary of Executive Remuneration 2017

Element Link to Operation Performance Minimum and maximum Strategy measures payable Basic Salary Reflects level Once set, future increases are Personal performance Individuals developing in a of linked to personal against the role profile. role may be paid below accountability. performance and peer group market rate until they are Provides benchmarking. fully performing. ability to attract and Adjustments may be made retain if a role changes individuals significantly or moves out through of line with the market. competitive but affordable rates of pay.

Bonus Linked to the Challenging, but achievable Corporate measures There is no payout if less delivery of objectives are aligned with the for 2017 are: than 90% of target is met. annual Corporate Plan. The payout for on-target business • Profit performance is of 20% of plan targets The Chief Risk Officer • Mortgage asset basic salary. The including provides assurance that the growth maximum payment is 40% strategic scheme design does not • Average mortgage for overperformance. objectives incentivise inappropriate margin and personal behaviours. Payment of 50% of the objectives. Personal objectives are award is deferred for three set by the Chief Executive years. Deferred bonus and agreed by the payments may be withdrawn Remuneration in the following Committee. circumstances: • Employee misbehavior or material error • Poor performance leading to regulatory consequences • Failure to manage credit risks causing the Society to become unprofitable.

Pension Provides Pension contributions are on Not applicable. Matched contributions market membership of the Society’s up to 10% of basic salary. competitive defined contributition scheme. remuneration. Benefits To align The principle benefits are: Not applicable. Executive total • Life assurance remuneration • Private medical insurance broadly with • Company car or allowance the market. • 6 months notice period • Other benefits e.g. relocation assistance may be provided based on individual circumstances.



PAGE 31

Non-Executive Director Fees

Non-Executive Directors do not have service contracts and are paid a fixed fee. There is an additional payment for the SocietyChairman, Vice Chairman, Senior Independent Director and Committee Chairmen. Travel expenses are reimbursed for all travelon Society business.

To attract Non-Executive Directors with the necessary skills and experience, the level of fees is benchmarked against those paidby building societies of a similar size and complexity. We also consider the time commitment required from Non-ExecutiveDirectors to be able to adequately discharge their responsibilities in a regulated business environment. In 2016, Non-ExecutiveDirector fees were increased by 2.5%.

Directors’ Remuneration Report Vote

Although building societies are not required to hold an advisory vote on the Directors’ Remuneration Report, the Board considersthis to be best practice and an appropriate resolution will be put to members at this year’s Annual General Meeting. In 2016,93% (92.54%: 2015) of members, who voted, did so in favour of the Society’s Directors’ Remuneration Report.

PAGE 32


Directors’ Remuneration Report continuedEXECUTIVE DIRECTORS

Directors' Remuneration - Audited Executive Directors 2016 Salary Bonus Taxable Sub Increase Increase in Defined Total Benefits Total in accrued accrued pension contribution pension cash lump sum scheme £ £ £ £ £ £ £ £N A Quinton(1) 36,773 - 1,142 37,915 - - 3,652 41,567S L Pryer(2) 112,500 - 9,662 122,162 2,085 10,492 2,747 137,486S J Heron 82,058 8,206 4,508 94,772 1,387 6,265 2,059 104,483

Total 231,331 8,206 15,312 254,849 3,472 16,757 8,458 283,536

2015 Salary Bonus Taxable Sub Increase Increase in Defined Total Benefits Total in accrued accrued pension contribution pension cash lump sum scheme £ £ £ £ £ £ £ £N A Quinton 160,934 - 5,200 166,134 - - 16,093 182,227S L Pryer 109,167 4,500 8,780 122,447 1,782 8,967 2,652 135,848B P Ryninks(3) 79,993 - 9,210 89,203 - - 7,999 97,202S J Heron(4) 38,942 4,076 2,241 45,259 1,107 11,678 1,034 59,078

Total 389,036 8,576 25,431 423,043 2,889 20,645 27,778 474,355

1 Resigned 24.03.16, 2 Resigned 28.02.17, 3 Resigned 13.11.15, 4 Appointed 24.06.15

Steven Pryer retires from the Society on 31 May 2017 and stood down from the Board on 28 February 2017. Under theterms of his settlement agreement the Society shall pay Mr Pryer a sum of £143,000.

Nigel Quinton stood down from the Board on 24 March 2016. Under his settlement agreement, the Society paid a totalof £135,000 to Mr Quinton.

In considering these settlements, the Society sought advice from external advisers to reach agreements that were fair toboth parties and adhered to good remuneration practice.

Non-Executive Directors Fees Fees 2016 2015 £ £C S Millar 43,058 42,008A T F Hunter(5) 6,531 28,037K S Kearney 28,592 26,335A J Haigh 26,993 26,335S C Nickson(6) - 11,041N J Gower 26,630 22,083K L Rebecchi(7) 18,689 -P A McLelland(8) 2,409 -

Total 152,902 155,839

5 Resigned 24.03.16, 6 Resigned 04.06.15, 7 Appointed 03.03.16, 8 Appointed 23.11.16

K S KearneyChairman of Remuneration Committee7 March 2017

PAGE 33


Independent auditor’s report to the members of Furness Building SocietyWe have audited the group and society annual accounts of Furness Building Society for the year ended 31 December 2016set out on pages 34 to 68. The financial reporting framework that has been applied in their preparation is applicable lawand UK Accounting Standards (UK Generally Accepted Accounting Practice), including FRS 102 The Financial ReportingStandard applicable in the UK and Republic of Ireland.

This report is made solely to the society’s members, as a body, in accordance with section 78 of the Building Societies Act1986. Our audit work has been undertaken so that we might state to the society’s members those matters we are requiredto state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not acceptor assume responsibility to anyone other than the society and the society’s members as a body, for our audit work, for thisreport, or for the opinions we have formed.

Respective responsibilities of directors and auditor

As explained more fully in the Directors’ Responsibilities Statement set out on page 14, the directors are responsible for thepreparation of annual accounts which give a true and fair view. Our responsibility is to audit, and express an opinion on,the annual accounts in accordance with applicable law and International Standards on Auditing (UK and Ireland). Thosestandards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of the audit of the annual accounts

A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website atwww.frc.org.uk/auditscopeukprivate.

Opinion on annual accounts

In our opinion the annual accounts:

• give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of affairs of thegroup and of the society as at 31 December 2016 and of the income and expenditure of the group and of the societyfor the year then ended; and

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

Opinion on other matters prescribed by the Building Societies Act 1986

In our opinion:

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

• the information given in the Directors’ Report for the financial year for which the annual accounts are prepared isconsistent 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 requiredto report) gives a true representation of the matters in respect of which it is given.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Building Societies Act 1986 requires us to reportto you if, in our opinion:

• proper accounting records have not been kept by the Society; or

• the annual accounts are not in agreement with the accounting records; or

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

David Allen (Senior Statutory Auditor)for and on behalf of KPMG LLP, Statutory AuditorChartered Accountants1 Sovereign SquareSovereign StreetLeedsLS1 4DA7 March 2017

PAGE 34


STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2016

Group Society Group Society 2016 2016 2015 2015 Notes £000 £000 £000 £000 Interest receivable and similar income 2 22,232 22,079 25,694 25,517Interest payable and similar charges 3 (8,586) (8,586) (11,327) (11,327)Net interest income 13,646 13,493 14,367 14,190 Fee and commissions receivable 4 407 269 395 259Fees and commissions payable (598) (598) (431) (431)Other operating charge (179) (215) (167) (167)Net loss from other financial instruments 5 (50) (50) (33) (33)at fair value through profit and loss Total net income 13,226 12,899 14,131 13,818 Administrative expenses 6 (11,338) (11,237) (9,861) (9,658)Depreciation and amortisation 17/18 (886) (886) (823) (823)Operating profit before impairment losses and provisions 1,002 776 3,447 3,337

Provisions for liabilities – FSCS 26 (168) (168) (400) (400)Impairment credit 15 265 265 450 450on loans and advances Profit before tax 1,099 873 3,497 3,387 Tax (expense)/credit 9 (2) 43 (743) (721) Profit for the financial year 1,097 916 2,754 2,666 OTHER COMPREHENSIVE INCOME Profit for the financial year 1,097 916 2,754 2,666Other comprehensive income Changes in fair value of debt securities and Treasury Bills - realised gains transferred (50) (50) (164) (164)to profit and loss - valuation gains taken to equity 108 108 1 1

Actuarial (loss)/gain recognised 31 (1,589) (1,589) 797 797in the pension scheme Taxation on other comprehensive income 9 103 103 (403) (403) Total comprehensive (loss)/income for the year (331) (512) 2,985 2,897

PAGE 35


GROUP STATEMENT OF CHANGES IN EQUITY General Available-for- Group reserves sale reserves Total

Notes £000 £000 £000

Balance as at 1 January 2015 59,990 167 60,157Profit for the year 2,754 - 2,754Other comprehensive income for the year: Actuarial gain recognised in the pension scheme 797 - 797Movement in deferred tax relating to the pension plan (403) - (403)Changes in fair value of debt securities Recycled to profit and loss - (164) (164)Taken through other comprehensive income - 1 1

Other comprehensive income for the year 394 (163) 231 Balance as at 31 December 2015 63,138 4 63,142 Balance as at 1 January 2016 63,138 4 63,142Profit for the year 1,097 - 1,097Other comprehensive income for the year: Actuarial (loss) recognised in the pension scheme 31 (1,589) - (1,589)Movement in deferred tax relating to the pension plan 103 - 103Changes in fair value of debt securities Recycled to profit and loss - (50) (50)Taken through other comprehensive income - 108 108

Other comprehensive income for the year (1,486) 58 (1,428) Balance as at 31 December 2016 62,749 62 62,811 General Available-for- Society reserves sale reserves Total

Notes £000 £000 £000 Balance as at 1 January 2015 58,473 167 58,640Profit for the year 2,666 - 2,666Other comprehensive income for the year: Actuarial gain recognised in the pension plan 797 - 797Movement in deferred tax relating to the pension plan (403) - (403)Changes in fair value of debt securities Recycled to profit and loss - (164) (164)Taken through other comprehensive income - 1 1

Other comprehensive income for the year 394 (163) 231 Balance as at 31 December 2015 61,533 4 61,537 Balance as at 1 January 2016 61,533 4 61,537Profit for the year 916 - 916Other comprehensive income for the year: Actuarial loss recognised in the pension plan 31 (1,589) - (1,589)Movement in deferred tax relating to the pension plan 103 - 103Changes in fair value of debt securities Recycled to profit and loss - (50) (50)Taken through other comprehensive income - 108 108

Other comprehensive income for the year (1,486) 58 (1,428) Balance as at 31 December 2016 60,963 62 61,025

PAGE 36


STATEMENT OF FINANCIAL POSITION at 31 December 2016 Group Society Group Society 2016 2016 2015 2015 Notes £000 £000 £000 £000Assets Liquid assets Cash in hand and balances with the Bank of England 11 72,590 72,590 129,467 129,222Treasury bills and similar securities 10 14,131 14,131 30,024 30,024Loans and advances to credit institutions 11 10,409 10,158 10,825 10,825Debt securities 12 16,546 16,546 20,227 20,227

Derivative financial instrument assets 13 94 94 23 23Loans and advances to customers Loans fully secured on residential property 14 689,129 684,579 679,921 674,709Loans fully secured on land 14 7,160 7,160 7,842 7,842

Investments in subsidiary undertakings 16 - 2,964 - 3,844Other assets 19 1,840 1,822 925 924Tangible fixed assets 18 1,927 1,927 2,137 2,137Intangible fixed assets 17 1,581 1,581 1,740 1,740Prepayments and accrued income 20 605 605 24 -

Total assets 816,012 814,157 883,155 881,517

Liabilities Shares 21 678,552 678,552 706,809 706,809Amounts owed to credit institutions 22 3,011 3,011 9,546 9,546Amounts owed to other customers 23 57,137 57,137 90,524 90,524Derivative financial instrument liabilities 13 1,870 1,870 1,484 1,484Other liabilities 24 494 440 1,533 1,500Accruals and deferred income 25 759 744 194 194Provisions for liabilities 26 730 730 466 466Retirement benefit obligations 31 5,662 5,662 4,471 4,471Subordinated liabilities 28 4,986 4,986 4,986 4,986

Total liabilities 753,201 753,132 820,013 819,980 Reserves General reserves 62,749 60,963 63,138 61,533Available-for-sale reserves 62 62 4 4Total reserves attributable to members of the Society 62,811 61,025 63,142 61,537 Total reserves and liabilities 816,012 814,157 883,155 881,517

The notes on pages 38 to 69 form an integral part of these annual accounts.

The accounts were approved by the Board of Directors on 7 March 2017 and were signed on its behalf by:

C S Millar K S Kearney M T KirschChairman Vice Chairman Interim Chief Executive

PAGE 37


GROUP CASH FLOW STATEMENT

Group Group 2016 2015 Notes £000 £000Cash flows from operating activities Profit before tax 1,099 3,497

Adjustments for Depreciation and amortisation 886 823Interest on subordinated debt 297 293Net loss from other financial instruments at fair value through profit and loss - 34Net gains on disposal of debt securities and Treasury bills - (164)(Decrease) in impairment of loans and advances (265) (450)

Total 2,017 4,033 Changes in operating assets and liabilities (Increase)/decrease in prepayments, accrued income and other assets (2,816) 191(Decrease) in accruals, deferred income and other liabilities (209) (1,135)(Increase) in loans and advances to customers (7,946) (501)(Decrease)/increase in shares (27,023) 3,067(Decrease)/increase in amounts owed to other credit institutions and other customers (39,791) 215(Increase) in loans and advances to credit institutions (1,241) (144)(Decrease) in retirement benefit obligation (397) (557) Taxation paid (2) (239)

Net cash (used in)/generated by operating activities (79,425) 897 Cash flows from investing activities Purchase of debt securities (18,000) (39,856)Disposal of debt securities 37,689 70,622Purchase of tangible fixed assets (147) (659)Purchase of intangible assets (370) (153)

Net cash generated by/(used in) investing activities 19,172 29,954 Interest paid on subordinated debt (297) (293) Net (decrease)/increase in cash and cash equivalents (58,533) 34,591 Cash and cash equivalents at 1 January 137,686 103,095 Cash and cash equivalents at 31 December 11 79,153 137,686

PAGE 38


PRINCIPAL ACCOUNTING POLICIES

1.1 General informationFurness Building Society is incorporated in the UK under the Building Societies Act 1986. The address of its registered officeis 51-55 Duke Street, Barrow-in-Furness, Cumbria LA14 1RT.

1.2 Basis of preparationThe accounts have been prepared in accordance with Financial Reporting Standard 102, ‘The Financial Reporting Standardapplicable in the UK and Northern Ireland’ (FRS 102), and in accordance with the Building Societies Act 1986 and theBuilding Societies (Accounts and Related Provisions) Regulations 1998. The Society has also chosen to apply the recognitionand measurement provisions of IAS 39, ‘Financial Instruments: Recognition and measurement’ (as adopted for use in theEU).

The accounts have been prepared on the historical cost basis except that the following assets and liabilities are stated attheir fair value: derivative financial instruments and financial instruments classified at fair value through the profit or loss(“FVTPL”) or available-for-sale.

The accounts have been prepared on a going concern basis as set out in the Directors’ Report on page 8. The Directors haveconsidered the risks and uncertainties discussed on pages 8 to 12, and the extent to which they might affect the preparationof the annual accounts on a going concern basis. The Group’s business activities and future plans are reviewed in theChairman’s Statement and Directors’ Report on pages 5 to 13. In addition, note 30 includes the Group’s policies andprocesses for managing financial instrument risk such as liquidity risk, interest rate risk and credit risk.

As with many other financial institutions, the Group looks to meet its day-to-day liquidity requirements through prudentmanagement of its retail and wholesale funding sources. Furthermore the Group’s forecasts and plans, taking account ofcurrent and possible future operating conditions, including stress tests and scenario analysis, indicate that the Group hassufficient operating liquidity and capital for the foreseeable future.

As such, the directors are satisfied that the Group has adequate resources to continue in business and to use the goingconcern basis in preparing the accounts.

1.3 Basis of consolidation The accounting policies below and the Statement of Comprehensive Income and Statement of Financial Position incorporatethe Society and its subsidiary undertakings all of which have year ends of 31 December. Uniform accounting policies areused throughout the Group and are consistent with the prior year. Investments in subsidiary undertakings are stated at costless any provision for impairment.

1.4 Changes in accounting policies Amendments to FRS 102 were issued in July 2015 as a result of changes to the EU-directives and UK Companies Regulations.The amendments are mandatory for periods beginning on or after 1 January 2016, with early adoption permitted for periodsbeginning on or after 1 January 2015. Entities have to adopt and comply with all amendments if they elect to early adoptthe amendments to FRS 102 (issued in July 2015). The amendments to FRS 102 (issued in July 2015) were early adoptedby the Group in the 2015 annual accounts.

1.5 InterestInterest income and expense are recognised in profit or loss using the effective interest rate (EIR) method. The EIR is therate that discounts the estimated future cash payments and receipts through the expected life of the financial asset orfinancial liability 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 creditlosses.

The calculation of the effective interest rate includes transaction costs and fees and percentage points paid or received thatare an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable tothe acquisition or issue of a financial asset or financial liability.

Notes to the Accounts

PAGE 39


1.6 Fees and commissionFees and commission income and expense that are integral to the effective interest rate on a financial asset or financialliability are included in the measurement of the effective interest rate (see 1.5). For mortgages, the effect of this is tospread the impact of discounts, cashbacks, arrangements and valuation fees, together with costs directly attributable tosetting up the loan, over the expected life of the mortgage.

Fees receivable are recognised on the accruals basis when all contractual obligations have been fulfilled.

Other fees payable are recognised on an accruals basis when the service has been provided or on the completion of an actto which the fee relates, and are inclusive of VAT where applicable.

1.7 TaxationTax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the Statement of ComprehensiveIncome except to the extent that it relates to items recognised directly in equity or other comprehensive income, in whichcase it is recognised directly in equity or other comprehensive income.

Current taxation Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enactedor substantively enacted at the Statement of Financial Position date, and any adjustment to tax payable in respect ofprevious years. Corporation tax is charged on the profit on ordinary activities for the year as adjusted for taxation purposes.

Deferred taxation Provision for deferred tax is made on a non-discounted basis in respect of all timing differences that have originated butnot reversed by the Statement of Financial Position date (see note 27). Timing differences represent differences betweengains and losses recognised for tax purposes in periods different from those in which they are recognised in annualaccounts. No deferred tax is recognised on permanent differences between the Group’s taxable gains and losses and itsresults as stated in the annual accounts. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to theextent that it is no longer probable that the related tax benefit will be realised.

Deferred tax is measured at the tax rate that is expected to apply to the reversal of the related difference, using tax ratesenacted or substantively enacted at the Statement of Financial Position date. For non-depreciable assets that are measuredusing the revaluation model, or investment property that is measured at fair value, deferred tax is provided at the ratesand allowances applicable to the sale of the asset.

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

1.8 Financial assetsAt initial recognition the Group classifies non-derivative financial assets either as loans and receivables or as available-for-sale assets. No assets have been classified as held to maturity.

a) Loans and receivables ‘Loans and receivables’ are non-derivative financial assets with fixed or determinable payments that are not quoted in anactive market and that the Group does not intend to sell immediately or in the near term. Loans and receivables areinitially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortisedcost using the effective interest rate method. The Group’s loans and advances to credit institutions and customers areclassified as loans and receivables.

b) Available-for-sale financial assets ‘Available-for-sale’ investments are non-derivative investments that are designated as available-for-sale or are not classifiedas another category of financial assets. Available-for-sale investments comprise treasury bills, gilts and debt securities.All available-for-sale investments are measured at fair value after initial recognition.

Interest income is recognised in profit or loss using the effective interest rate method. Dividend income is recognised inprofit or loss when the Group becomes entitled to the dividend. Impairment losses are recognised in profit or loss.

Notes to the Accounts continued

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c) Financial assets at fair value through profit or loss The Group uses derivative financial instruments only for risk management purposes, and not for trading purposes.Derivatives are recognised at fair value in the Statement of Financial Position with the gain or loss on remeasurementrecognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of anyresultant gain or loss depends on the nature of the item being hedged. All derivatives are carried as assets when fairvalue is positive and as liabilities when fair value is negative.

The Group designates derivatives held for risk management purposes as hedging instruments in qualifying hedgingrelationships. On initial designation of the hedge, the Group formally documents the relationship between the hedginginstrument and hedged items, including the risk management objective and strategy in undertaking the hedge, togetherwith the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment,both at inception of the hedge relationship and on an ongoing basis, of whether the hedging instruments are expected tobe highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the periodfor 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 in d) below.

d) Fair Value Hedges Where a derivative financial instrument is designated as a hedge of the variability in fair value of a recognised asset orliability or an unrecognised firm commitment, all changes in the fair value of the derivative are recognised immediatelyin profit or loss. The carrying value of the hedged item is adjusted by the change in fair value that is attributable to therisk being hedged (even if it is normally carried at cost or amortised cost) and any gains or losses on remeasurement arerecognised immediately in the Statement of Comprehensive Income (even if those gains would normally be recogniseddirectly in reserves). If hedge accounting is discontinued and the hedged financial asset or liability has not beenderecognised, any adjustments to the carrying amount of the hedged item are amortised into profit or loss using theeffective interest method over the remaining life of the previously hedged item.

The Group and Society enters into credit support agreements, which protect against counterparty default in respect ofhedging instruments by means of collateral transactions. Collateral balances are included within ‘liquid assets’ or ‘amountsowed to credit institutions’ as appropriate and interest receivable or payable reflected in the statement of comprehensiveincome within ‘net interest receivable’.

1.9 Funding for Lending Scheme (“FLS”)Loans and advances over which the Group transfers its rights to the collateral thereon to the Bank of England under the FLSare not derecognised from the Statement of Financial Position, as the Group retains substantially all the risks and rewardsof ownership, including all cash flows arising from the loans and advances and exposure to credit risk. The treasury bills thatthe Group borrows against the transferred assets are not recognised in the Statement of Financial Position, but where theyare sold to third parties by the Group under agreements to repurchase, the cash received is recognised as an asset withinthe Statement of Financial Position together with the corresponding obligation to return it which is recognised as a liabilityat amortised cost within “Amounts owed to credit institutions”. Interest is accrued over the life of the agreement on an EIRbasis.

1.10 Financial liabilitiesAll financial liabilities are measured at amortised cost using the effective interest rate method, except for those financialliabilities measured at fair value through income and expenditure.

1.11 Derecognition of financial assets and liabilitiesThe Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or ittransfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewardsof ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of therisks and rewards of ownership and it does not retain control of the financial asset.


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On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amountallocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new assetobtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in Other ComprehensiveIncome is recognised in profit and loss.

Financial liabilities are derecognised when the liability is extinguished, that is when the contractual obligation is discharged,cancelled or expires.

1.12 Impairment of financial assets a) Assets carried at amortised cost

Individual assessments are made of all loans and advances against properties which are in possession, or in arrears bythree months or more, or are subject to forbearance activities or other significant cases of concern. Individualimpairment allowances are made against those loans and advances where there is objective evidence of impairment,which may include:

• significant financial difficulty of the borrower/issuer; • deterioration in payment status; • renegotiation of the terms of an asset due to financial difficulty of the borrower or issuer, including granting a

concession/forbearance to the borrower or issuer; • becoming probable that the borrower or issuer will enter bankruptcy or other financial reorganisation; and • any other information discovered during regular review suggesting that a loss is likely in the short to medium term.

If there is objective evidence of impairment, the amount of loss is measured as the difference between the asset’scarrying amount and the present value of estimated future cash flows discounted at the financial asset’s originaleffective interest rate. In considering expected future cash flows, account is taken of any discount which may beneeded against the value of the property at the statement of financial position date thought necessary to achieve asale and anticipated realisation costs.

In addition the Group assesses quarterly whether there is objective evidence to suggest a financial asset or group offinancial assets is likely to be impaired. Where a collective assessment is made, each category or class of financialasset is split into groups of assets with similar credit risk characteristics. The Group measures the amount ofimpairment loss by applying estimated loss factors based on the Group’s experience of default, loss emergenceperiods, the effect of movements in house prices and any adjustment for the expected forced sales value.

Where certain emerging impairment characteristics are considered significant but not assessed as part of the impairmentcalculation, management may elect to apply an overlay to the impairment allowance. The amount of impairment lossis recognised immediately through the income statement and a corresponding reduction in the value of the financialasset is recognised.

b) Available-for-sale assets

The Group assesses at each statement of financial position date whether there is objective evidence that an available-for-sale asset or group of available-for-sale assets is impaired.

Available-for-sale assets are impaired and impairment losses incurred if there is objective evidence of impairment asa result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that lossevent has an impact on the estimated future cash flows of those assets. Loss events may include default of acounterparty or disappearance of an active market for the assets. Impairment is measured as the difference betweenthe current amortised cost and the current fair value, less any impairment loss on that asset previously recognised.


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1.13 Offsetting Financial assets and liabilities are offset and the net amounts presented in the annual accounts when there is a legallyenforceable right to set off the recognised amounts and there is an intention to settle on a net basis or to realise the assetand settle the liability simultaneously.

1.14 Cash and cash equivalents Cash and cash equivalents includes cash in hand and balances with the Bank of England plus loans and advances to creditinstitutions repayable within three months or less. Cash pledged with credit institutions as collateral in respect of derivativecontracts is not included in these balances.

1.15 Tangible fixed assetsTangible fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includesthe original purchase price of the asset and the costs attributable to bringing the asset to working condition for its intendeduse.

The Group capitalises the cost of additions and major alterations to office premises and equipment. In the case of freeholdpremises and leasehold premises with a term remaining in excess of fifty years, depreciation of the original cost of theseitems is charged to the statement of comprehensive income at a rate of two per cent per annum. The cost of other fixedassets is written off on a straight line basis over their estimated useful lives as follows:

• Equipment, fixtures, fittings and vehicles are written off over periods between 2 and 10 years. • Leasehold premises with less than 50 years unexpired are written off over the unexpired period of the lease.

The assets’ residual values and useful lives are reviewed and adjusted, if appropriate, at the end of each reporting period.The effect of any change is accounted for prospectively.

Tangible assets are derecognised on disposal or when no future economic benefits are expected. On disposal, the differencebetween the net disposal proceeds and the carrying amount is recognised in profit or loss and included in ‘Other operatinglosses’.

1.16 Intangible assetsPurchased software and costs directly associated with the development of computer software are capitalised as intangibleassets where the software is an identifiable asset controlled by the Group which will generate future economic benefits andwhere costs can be reliably measured. Costs incurred to establish technological feasibility or to maintain existing levels ofperformance are recognised as an expense as incurred.

Intangible assets are stated at cost less accumulated amortisation and accumulated impairment losses. Amortisation iscalculated, using the straight-line method, to allocate the depreciable amount of the assets to their residual values over theestimated useful lives of the software, which are between 3 and 5 years.

Amortisation is charged to administrative expenses in the statement of comprehensive income. Where factors, such astechnological advancement or changes in market price, indicate that residual value or useful life have changed, the residualvalue, useful life or amortisation rate are amended prospectively to reflect the new circumstances. The assets are reviewedfor impairment if the above factors indicate that the carrying amount may be impaired.

Costs associated with maintaining computer software are recognised as an expense as incurred. Other developmentexpenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previouslyrecognised as an expense are not recognised as an asset in a subsequent period.

1.17 LeasingAll payments under operating lease contracts are charged to the Statement of Comprehensive Income on a straight linebasis over the life of the lease.


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1.18 Liquid assetsDebt securities are initially measured at fair value, which is normally the transaction price to the Society, adjusted to excludeinterest accrued at the date of purchase. Such assets are subsequently carried at fair value and the changes in fair value arerecognised through the available-for-sale reserve. Provision is made for any potential impairment in value if necessary. Wherethere is a permanent impairment of a liquid asset, a provision is made so as to write down the cost of the security to itsrecoverable amount. Other liquid assets are stated at the lower of the cost and net realisable value.

1.19 Employee benefitsThe Group and Society provides a range of benefits to employees, including paid holiday arrangements and defined benefitand defined contribution pension plans.

a) Short term benefits

Short term benefits, including holiday pay and other similar non-monetary benefits, are recognised as an expense inthe period in which the service is received.

b) Pension costs

i. Defined Benefit Plan The Group operates a defined benefit pension scheme and the assets are held in a separate trustee administered

fund. Included within the Statement of Financial Position is the Group’s net obligation calculated as the presentvalue of the defined benefit obligation less the fair value of plan assets less any unrecognised past service costs.Any remeasurements that arise are recognised immediately in other comprehensive income through the Statementof Comprehensive Income. The finance cost is recognised within finance income and expense in OtherComprehensive Income. The finance cost is the increase in the defined benefit obligation which arises because thebenefits are one period closer to settlement. Contributions are transferred to the trustee administered fund on aregular basis to secure the benefits provided under the rules of the scheme. Pension costs are assessed inaccordance with the advice of a professionally qualified actuary.

ii. Defined Contribution Scheme The Group also operates a contributory defined contribution pension scheme. The assets of which are held

separately from those of the Group. For this scheme the cost is charged to the income statement as contributionsbecome due. The amount charged to the Statement of Comprehensive Income represents the contributions payableto the scheme in respect of the accounting period.

1.20 Provisions A provision is recognised in the Statement of Financial Position when the entity has a present legal or constructive obligationas a result of a past event, that can be reliably measured and it is probable that an outflow of economic benefits will berequired to settle the obligation. Provisions are recognised at the best estimate of the amount required to settle the obligationat the reporting date.

1.21 Dividends On occasions the Society’s wholly owned subsidiaries may make dividend payments to their parent. Such dividends aredecided at the discretion of the companies’ Boards of Directors and are reflected in the Annual Report and Accounts of therespective entities when this occurs. Dividends are only recognised when approved and paid.

1.22 Critical judgements and estimates in applying the accounting policy The Group makes estimates and judgements that affect the reported amounts of assets and liabilities. These are regularlyevaluated and are based on historical experience and other factors, including expectations of future events that are believedto be reasonable under the circumstances. These are described below:


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a) Impairment losses on loans and advances to customers The Group reviews its mortgage advances portfolio at least on a quarterly basis to assess impairment. In determining

whether an impairment loss should be recorded, the Group is required to exercise a degree of judgement. Impairmentallowances are calculated using historical arrears experience, modelled credit risk characteristics and expected cashflows. Estimates are applied to determine prevailing market conditions (e.g. interest rates and house prices), customerbehaviour (for example, default rates) and the length of time expected to complete the sale of properties in possession.The accuracy of the allowances would therefore be affected by unexpected changes to these assumptions.

The key assumption is the expected level of defaults in each category of impairment – the propensities for default.The Group has calculated these default rates from its experience over recent years. During that period the Group hashad a low number of possessions, and in addition the default rates may have been depressed by the Group’sforbearance policy. As a result management has applied an uplift to the default rates on the lowest arrears categories.If the default rates in these categories are 1% higher or lower than those adopted the impairment allowances forloans and advances would change by an estimated £0.3m.

b) Expected mortgage lives In determining the expected lives of mortgage assets, the Group uses historical and forecast redemption data as well

as management judgement. The expected lives of mortgage assets are periodically reassessed for reasonableness asany variation in the expected lives will change the carrying value in the Statement of Financial Position and the timingof the recognition of interest income.

The expected lives of mortgage assets have been estimated as being the life of the initial period of the loan, thistypically being the fixed or discounted rate period, plus two months. If this were to increase by one month this wouldresult in an increase in the value of loans on the Statement of Financial Position by approximately £0.4m.

c) Employee benefits The Group operates a defined benefit pension scheme. Significant judgements have to be exercised in estimating the

value of the assets and liabilities of the scheme, and hence of its net deficit. The assumptions are outlined in Note31 to the Accounts.

Of these assumptions, the key impact on the net liability is the discount rate. A variation of 0.1% in the discount ratewill change the liability by around £0.5m.

d) Fair value of derivatives and financial assets The Group employs the following techniques in determining the fair value of its derivatives and financial assets:

• Available-for-sale – measured at fair value using market prices or, where markets have become inactive or there is no readily available traded price, the present value of estimated future cash flows is used. • Derivative financial instruments – calculated by discounted cash flow models using yield curves that are based on observable market data.

The key judgement in this area is around selecting the most appropriate yield curve for use in the calculation ofderivative financial instruments.

The classification of these fair value techniques is in line with the fair value hierarchy detailed in FRS102: ‘Fair ValueHierarchy’ which splits the source of input when deriving fair values into three levels, as follows:

• Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability either

directly or indirectly. • Level 3 – inputs for the asset or liability that are not based on observable market data.


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1.23 Country by Country information The Group operates entirely in the UK and so no Country by Country information has been presented. Information for theyears ended 31 December 2015 and 31 December 2016 has been prepared on the following basis:

• The number of employees has been calculated as the average number of full and part-time employees, on amonthly basis, as disclosed in note 7.

• Turnover represents total operating income as disclosed in the Group Income Statement. Total operating incomecomprises net interest, fees and commissions receivable and other operating income.

• Pre-tax profit or loss represents the Group profit or loss before tax, as reported in the Group Income Statement. • Corporation tax paid represents the cash amount of corporate income tax paid during the year, as disclosed in the

Group Cash Flow Statement.


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2. INTEREST RECEIVABLE AND SIMILAR INCOME

Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000

On loans fully secured on residential property 22,171 21,982 24,754 24,532On other loans: Fully secured on land 368 368 416 416To subsidiary undertakings - 36 - 45

On debt securities: Interest and other income 118 118 558 558(Loss)/profit on disposal (13) (13) 185 185

On treasury bills and similar incomeInterest and other income 101 101 - -Profit on disposal 62 62 - -

On other liquid assets: Interest and other income 495 495 678 678Net expense on financial instruments (1,070) (1,070) (897) (897)

22,232 22,079 25,694 25,517

Interest on loans fully secured on residential property and on other loans includes £26k (£76k: 2015) in respect of interestincome accrued on non-performing loans.

3. INTEREST PAYABLE AND SIMILAR CHARGES

On shares held by individuals 7,398 7,398 9,707 9,707On other shares 3 3 4 4On subordinated liabilities 297 297 293 293On deposits and other borrowings 888 888 1,323 1,323 8,586 8,586 11,327 11,327

4. FEES AND COMMISSIONS RECEIVABLE

Commission 269 269 259 259Other 138 - 136 - 407 269 395 259

5. NET LOSS FROM OTHER FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT AND LOSS

Derivatives in designated fair value hedge relationships (183) (183) (363) (363)Adjustments to hedged items in fair value 190 190 330 330hedge accounting relationships Derivatives not in designated fair (57) (57) - -value hedge relationships (50) (50) (33) (33)

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6. ADMINISTRATIVE EXPENSES Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000 Staff costs (note 7) 6,726 6,694 4,897 4,713Other expenses 4,612 4,543 4,964 4,945 11,338 11,237 9,861 9,658

Other expenses include: Auditor’s remuneration: Audit fees: Audit of parent and Group by parent company auditors 86 86 147 139Audit of subsidiaries 10 - 10 -Non-audit fees: Tax services - - 12 12Other services 98 98 43 43

Amounts payable under operating leases 152 152 214 202

7. STAFF NUMBERS AND COSTS

The average number of persons employed by the Group and Society (including Executive Directors) during the year was asfollows: Number Number Number NumberFull time: Principal office and administration centre 74 73 72 68Branch offices 34 34 44 44

108 107 116 112Part time: Principal office and administration centre 31 31 29 29Branch offices 38 38 35 35

69 69 64 64 £000 £000 £000 £000The aggregated costs of these persons were as follows: Wages and salaries 5,960 5,930 4,143 3,984Social security costs 356 354 359 341Other pension costs 410 410 395 388 6,726 6,694 4,897 4,713

8. EMOLUMENTS OF AND TRANSACTIONS WITH DIRECTORS

Total directors’ emoluments amounted to £579k (£828k: 2015) including £143k (£198k: 2015) in respect of compensationfor loss of office. Full details are given in the Directors’ Remuneration Report on pages 28 to 32.

The role of Chief Executive is held by Mike Kirsch on an interim basis. Mike is not a director of the Society and his services wereprovided by Odgers Berndtson, who invoiced £290k exclusive of VAT during 2016. During the year the role of Finance Directorwas held by Paul Gittins and latterly Richard Jones on an interim basis. Paul was not a Director of the Society and his serviceswere provided by Four Winds Consulting Limited, who invoiced £133k exclusive of VAT during 2016. Richard was not a Directorof the Society and his services were provided by Odgers Berndtson, who invoiced £79k exclusive of VAT during 2016.

At 31 December 2016 there were 2 (2: 2015) outstanding loans granted in the ordinary course of business to Directors amountingto £147k (£124k: 2015). A register is maintained at the Head Office of the Society which shows details of all loans, transactionsand arrangements with connected persons. A statement for the current financial year of the appropriate details contained in theregister will be available for inspection at the Head Office for a period of 15 days up to and including the Annual General Meeting.

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9. TAX ON PROFIT ON ORDINARY ACTIVITIES

Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000Current tax: Current tax on income for the period 182 137 596 574Adjustments in respect of prior periods (43) (43) - -Total current tax 139 94 596 574 Deferred tax: Origination and reversal of timing differences (216) (216) 596 596Effect of decreased tax rate 132 132 (46) (46)Adjustment in respect of previous years (156) (156) - -Total deferred tax (240) (240) 550 550Tax on profit on ordinary activities (101) (146) 1,146 1,124

2016 2015 Current tax Deferred tax Total tax Current tax Deferred tax Total taxGroup £000 £000 £000 £000 £000 £000 Recognised in profit and loss 139 (137) 2 596 147 743Recognised in other comprehensive income - (103) (103) - 403 403

Total tax 139 (240) (101) 596 550 1,146 2016 2015 Current tax Deferred tax Total tax Current tax Deferred tax Total taxSociety £000 £000 £000 £000 £000 £000 Recognised in profit and loss 94 (137) (43) 574 147 721Recognised in other comprehensive income - (103) (103) - 403 403

Total tax 94 (240) (146) 574 550 1,124

Factors affecting tax charge for the year The tax assessed for the year differs to the standard rate of corporation tax in the UK 20% (20.25%: 2015) The differences are explained below:

Total tax reconciliation Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000

Profit on ordinary activities before tax 1,099 873 3,497 3,387

Corporation tax at 20% (20.25%: 2015) 220 175 708 686Effects of: Adjustment to tax charge in respect of previous periods (199) (199) - -Other differences (19) (19) 35 35

Total tax expense on profit on ordinary activities 2 (43) 743 721

The Group expects its effective tax rate in future years to be broadly in line with the standard rate of corporation tax in UK.

The movements in deferred taxation are disclosed in note 27.

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10. TREASURY BILLS AND SIMILAR SECURITIES

Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000 Treasury Bills 10,002 10,002 19,959 19,959Gilts 4,129 4,129 10,065 10,065 14,131 14,131 30,024 30,024

Treasury Bills and Gilts have remaining maturities as follows: In not more than one year 10,002 10,002 19,959 19,959In more than one year 4,129 4,129 10,065 10,065 14,131 14,131 30,024 30,024

Movements during the year of debt are analysed as follows:

At 1 January 30,024 30,024 - -Additions 10,000 10,000 30,000 30,000Disposals (26,000) (26,000) - -Net gains from changes in fair value recognised in other comprehensive income 107 107 24 24At 31 December 14,131 14,131 30,024 30,024

The Society has accessed £30m of funding under the Funding for Lending Scheme of the Bank of England in the form of 9month Treasury Bills that are held off Statement of Financial Position that had a maturity of 26 weeks at 31 December 2016.

11. LOANS AND ADVANCES TO CREDIT INSTITUTIONS

Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000 Repayable on demand 6,563 6,312 8,219 8,219Cash pledged as collateral against derivative contracts 3,612 3,612 2,383 2,383Other loans and advances by remaining maturity repayable: In more than three months, but less than one year 234 234 223 223

10,409 10,158 10,825 10,825

The totals for cash and cash equivalents included in the cash flow statements for each year comprise the following balances:

Group Group 2016 2015 £000 £000Cash in hand and balances with the Bank of England 72,590 129,467Loans and advances to credit institutions Repayable on demand 6,563 8,219

79,153 137,686

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12. DEBT SECURITIES Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000

Issued by UK banks and building societies 16,546 16,546 20,227 20,227 Debt securities have remaining maturities as follows: Accrued interest 12 12 26 26In not more than one year 4,502 4,502 - -In more than one year 12,032 12,032 20,201 20,201

16,546 16,546 20,227 20,227

Transferable debt securities comprise: Unlisted Certificates of Deposit 16,546 16,546 20,227 20,227

Transferable securities held as financial fixed assets at fair value 16,546 16,546 20,227 20,227

Movements during the year of debt securities held as financial fixed assets are analysed as follows:

At 1 January 20,201 20,201 80,966 80,966Additions 8,000 8,000 9,856 9,856Disposals and maturities (11,689) (11,689) (70,622) (70,622)Net gains from changes in fair value recognised in other comprehensive income 22 22 1 1At 31 December 16,534 16,534 20,201 20,201

Liquid assets classified as financial fixed assets are held with the intention of use on a continuing basis in the Group’s activitiesexcept where sale is required for regulatory realisation testing. The Group holds no securities for trading purposes.

13. DERIVATIVE FINANCIAL INSTRUMENTS

Group and Society Contractual Fair value – Fair value – amount assets liabilities £m £000 £000At 31 December 2016 Derivatives designated as fair value hedges – interest rate swaps 165 94 (1,870)

At 31 December 2015 Derivatives designated as fair value hedges – interest rate swaps 147 23 (1,484)

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14. LOANS AND ADVANCES TO CUSTOMERS

Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000Loans fully secured on residential property 689,129 684,579 679,921 674,709Loans fully secured on land 7,160 7,160 7,842 7,842 696,289 691,739 687,763 682,551 The remaining maturity of loans and advances to customers from the date of the Statement of Financial Position is as follows: Loans and advances by remaining maturity repayable: In not more than three months 7,005 7,005 1,929 1,919In more than three months but not more than one year 3,540 3,540 8,459 8,402In more than one year but not more than five years 37,672 37,513 41,444 40,910In more than five years 648,070 643,659 636,612 631,981 696,287 691,717 688,444 683,212AddFair value adjustment for hedge risk 1,509 1,509 1,318 1,318Less Provisions (1,507) (1,487) (1,999) (1,979) 696,289 691,739 687,763 682,551

The actual experience of repayments may differ from the above since many loans and advances are repaid early.

The Society has pledged as collateral £58m of mortgages to the Bank of England under the Funding for Lending Scheme.

15. ALLOWANCE FOR IMPAIRMENT

Loans fully secured on Loans fully securedresidential property on Land Total

Individual Collective Individual Collective Individual CollectiveGroup £000 £000 £000 £000 £000 £000At 1 January 2016 755 891 276 77 1,031 968Net of write-offs and recoveries (227) - - - (227) - 528 891 276 77 804 968 Impairment allowancenet of recoveries (417) 59 151 (58) (266) 1 At 31 December 2016 111 950 427 19 538 969 Society At 1 January 2016 755 871 276 77 1,031 948Net of write-offs and recoveries (227) - - - (227) - 528 871 276 77 804 948 Impairment allowancenet of recoveries (417) 59 151 (58) (266) 1 At 31 December 2016 111 930 427 19 538 949

These provisions have been deducted from the appropriate loans in the Statement of Financial Position.

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16. INVESTMENT IN SUBSIDIARY UNDERTAKINGS Society Society 2016 2015 £000 £000 Loan to subsidiary undertaking 2,964 3,844 Movements at cost, in the above loan during the year are as follows: At 1 January 2016 3,844 4,753Repayments (880) (909)At 31 December 2016 2,964 3,844

The Society has the following subsidiary undertakings in which it directly holds all of the issued shares at a total cost of £6.Each is a company within the meaning of the Companies Act 2006 and is incorporated in the United Kingdom.

Company Name Class of Society’s Cost Share Held Interest SharesFurness Mortgage Services Limited Ordinary 100% £1Furness Independent Financial Advisers Limited Ordinary 100% £1Furness Authorised Financial Advisers Limited Ordinary 100% £1Furness Financial Advisers Limited Ordinary 100% £1Furness Financial Services Limited Ordinary 100% £1Ultimate Mortgages Limited Ordinary 100% £1

With the exception of Furness Mortgage Services Limited and Furness Financial Advisers Limited, none of the subsidiaryundertakings carried on business during the year. The principal activities of each of the operating subsidiaries was asfollows:

Furness Mortgage Services Limited: Management of secondary mortgage portfolios and to make advances secured on land in the United Kingdom

Furness Financial Advisers Limited: Provision of financial advice and mortgage broking services

On 1 April 2016 the directors of Furness Financial Advisers Limited took the decision to cease trading following the sale ofthe company’s trade to Aspire Financial Management Limited.

All of the Society’s subsidiary companies share the same registered address as the Society.

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17. INTANGIBLE ASSETS

Software £000Group and SocietyCost At 1 January 2016 3,082Additions 370At 31 December 2016 3,452

Depreciation At 1 January 2016 1,342Reclassified from tangible fixed assets 157Charges in year 372At 31 December 2016 1,871

Net book value At 31 December 2016 1,581At 31 December 2015 1,740

The directors have assessed the software at the Statement of Financial Position date and are of the opinion that there is noimpairment at that date.

18. TANGIBLE FIXED ASSETS Equipment, Fixtures,

Land & Fittings and Buildings Vehicles Total £000 £000 £000Group and Society Cost At 1 January 2016 1,427 5,547 6,974Additions - 147 147Disposals - (11) (11)At 31 December 2016 1,427 5,683 7,110

Depreciation At 1 January 2016 631 4,206 4,837Charges in year 24 490 514Reclassified to intangible fixed assets - (157) (157)Disposals - (11) (11)At 31 December 2016 655 4,528 5,183

Net book value At 31 December 2016 772 1,155 1,927At 31 December 2015 796 1,341 2,137

The net book value of land and buildings Group Society Group Societycomprises: 2016 2016 2015 2015 £000 £000 £000 £000Freehold 772 772 775 775Short lease (less than 50 years unexpired) - - 21 21

772 772 796 796Land and buildings occupied by the Group/Society for its own activities 692 692 709 709

19. OTHER ASSETS Due within one year: Others 713 699 40 42Due after one year: Deferred tax asset (Note 27) 1,127 1,123 885 882

1,840 1,822 925 924

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20. PREPAYMENTS AND ACCRUED INCOME Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000Rents paid in advance 60 60 23 -Fees and subscriptions paid in advance 248 248 - -IT support fees paid in advance 248 248 - -Other 49 49 1 - 605 605 24 -

21. SHARES

Held by individuals 678,252 678,252 706,544 706,544Other shares 300 300 265 265 678,552 678,552 706,809 706,809 Shares are repayable from the Statement of Financial Position date in the ordinary course of business as follows: Accrued interest 3,244 3,244 4,478 4,478Repayable on demand 652,116 652,116 661,306 661,306Shares by remaining maturity repayable: In not more than three months 4,508 4,508 9,736 9,736In more than three months but not more than one year 18,526 18,526 31,091 31,091In more than one year but not more than five years 158 158 198 198 678,552 678,552 706,809 706,809

22. AMOUNTS OWED TO CREDIT INSTITUTIONS

Amounts owed to credit institutions are repayable from the Statement of Financial Position date in the ordinary course ofbusiness as follows: Accrued interest 11 11 46 46Other amounts owed to credit institutions by remaining maturity repayable: In not more than three months 2,000 2,000 5,000 5,000In more than three months but not more than one year 1,000 1,000 4,500 4,500

3,011 3,011 9,546 9,546

23. AMOUNTS OWED TO OTHER CUSTOMERS

Amounts owed to other customers are repayable from the Statement of Financial Position date in the ordinary course ofbusiness as follows: Accrued interest 315 315 411 411Repayable on demand 24,859 24,979 39,360 39,360Other amounts owed to other customers with remaining maturity repayable: In not more than three months 5,516 5,396 8,440 8,440In more than three months but not more than one year 18,909 18,909 26,606 26,606In more than one year but not more than five years 7,538 7,538 15,707 15,707 57,137 57,137 90,524 90,524

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24. OTHER LIABILITIES Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000Other liabilities comprise: Corporation tax 25 - 295 275Income tax - - 149 149Other creditors 469 440 1,089 1,076 494 440 1,533 1,500

25. ACCRUALS AND DEFERRED INCOME

Staff related costs 72 72 92 92Audit fees 79 67 - -Other admininistrative costs 277 277 - -Other operating charges 276 276 - -Others 55 52 102 102 759 744 194 194

26. PROVISIONS FOR LIABILITIES

Group and Society: FSCS Loss of Onerous Levy Regulatory Office Leases Total £000 £000 £000 £000 £000 At 1 January 2016 228 57 181 - 466Amounts charged in the year 168 5 160 354 687Amounts paid in the year (211) (31) (181) - (423)At 31 December 2016 185 31 160 354 730

Financial Services Compensation Scheme (FSCS) levy

The levy represents the estimated amount of interest payable under the FSCS for the 2016/17 scheme year, which runs fromApril 2016 to March 2017, and is calculated with reference to the protected deposits held at 31 December 2015. Based onIFRIC 21 this amount was recognised in full at the trigger date, 1 April 2016.

At 31 December 2016 the Society has provided £185k in respect of the 2016/17 scheme year. This has resulted in a netcharge for the statement of comprehensive income of £168k (£400k: 2015). No provision is made in Furness FinancialAdvisers Limited as amounts are charged as incurred as part of the cost of support services received by Furness FinancialAdvisers Limited from its compliance network.

Regulatory

This provision relates to compensation that may be payable to customers as a result of previous business activity.

Compensation for loss of office

This provision relates to compensation payable to a Director who announced his retirement from the Society in 2016, andwith whom a settlement was agreed between the Society and the Director as noted in the Directors’ Remuneration Report.This provision includes Employer's National Insurance.

Onerous Leases

This provision relates to onerous lease costs associated with the closure of two branches in 2016.

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27. DEFERRED TAXATION ASSET The elements of deferred taxation are as follows: Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000Difference between accumulated depreciation and amortisation and capital allowances (135) (139) (122) (122)Deferred tax asset relating to general provision - - 185 182Deferred tax asset/(liability) relating to FRS102 transition 268 268 (27) (27)Deferred tax asset relating to pension liabilities 994 994 849 849 1,127 1,123 885 882 At 1 January 885 882 1,436 1,433Amount charged/(released) to statement of comprehensive income 242 241 (551) (551)At 31 December 1,127 1,123 885 882

The deferred tax asset as at 31 December 2016 has been calculated using the rates substantively enacted for the expectedperiods of utilisation of 17%.

28. SUBORDINATED LIABILITIES Sterling subordinated loan repayable 25 June 2022 5,000 5,000 5,000 5,000Less unamortised issuance costs (14) (14) (14) (14) 4,986 4,986 4,986 4,986

With the prior consent of the Prudential Regulation Authority the Society can prepay all outstanding drawings five yearsbefore the final repayment date. Subordinated liabilities are unsecured and denominated in sterling. Interest rate paymentsare made at an agreed margin above the standard variable mortgage rate of the top five building societies ranked by assetsize. The rights of repayment of the holders of subordinated debt are subordinated to the claims of all depositors,creditors and investing members of the Society.

29. FINANCIAL COMMITMENTS

Future minimum lease payments under non-cancellable operating leases:

Land and Buildings Which expire within one year 111 111 152 152Which expire within one to five years 260 260 326 326Which expire after five years 119 119 161 161 490 490 639 63930. FINANCIAL INSTRUMENTS

A financial instrument is a contract which gives rise to a financial asset of one entity and a financial liability of another entity. TheGroup is a retailer of financial instruments in the form of mortgages and savings. The Group also uses wholesale financialinstruments to invest liquid asset balances, raise wholesale funding and to manage the risks arising from its operations.

The Group has a formal structure for managing risk, including establishing risk limits, reporting lines, mandates and othercontrol procedures. The structure is reviewed regularly by the Society’s Assets and Liabilities Committee, which is chargedwith the responsibility for managing the Group’s Statement of Financial Position exposure and the use of financial instrumentsfor risk management purposes.

Instruments used for risk management purposes include derivative financial instruments (‘derivatives’), which are contractsor agreements whose value is derived from one or more underlying price, rate or index inherent in the contract or agreement,such as interest rates.

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Derivatives

Derivatives used by the Group are exclusively interest rate swaps used to hedge Group Statement of Financial Positionexposures arising from fixed rate mortgage lending and savings products. The Board of Directors has authorised the use ofderivatives in accordance with the Building Societies Act 1986. Derivatives are not used in trading activity or for speculativepurposes and all derivatives are therefore designated as hedging instruments. The accounting policies for hedging contractsare described in the accounting policies in note 1. The derivative instruments used by the Group in managing its statementof financial position risk exposures are interest rate swaps. These are used to protect the Group from exposures arisingprincipally from fixed rate mortgage lending, fixed rate savings products and fixed rate wholesale funding. An interest rateswap is a contract to exchange one set of interest rate cash flows for another. Such swaps result in the economic exchangeof interest rates. No exchange of principal takes place. Instead interest payments are based on notional principal amountsagreed at inception of the swap. The duration of the interest rate swap is generally short to medium term and their maturityprofile reflects the nature of the exposures arising from the underlying business activities.

The recognition and measurement of financial instruments is set out in the accounting policies (note 1). The table belowshows the assets and liabilities of the Group assigned to the categories by which they are recognised and measured. Thedifferences between Group and Society are immaterial.

Derivatives Financial designated Loans and liabilities at Available- as FVTPL Unmatched receivables amortised cost for-sale hedges derivatives Total £000 £000 £000 £000 £000 £000At 31 December 2016

Financial assets Cash in hand - 72,590 - - - 72,590Treasury Bills and Gilts - - 14,131 - - 14,131Loans and advances to credit institutions 10,409 - - - - 10,409Debt securities - - 16,546 - - 16,546Derivative financial instruments - - - 91 3 94Loans and advances to customers 696,289 - - - - 696,289Total financial assets 706,698 72,590 30,677 91 3 810,059Non-financial assets - 5,953 - - - 5,953Total assets 706,698 78,543 30,677 91 3 816,012 Financial liabilities Shares - 678,552 - - - 678,552Amounts owed to credit institutions - 3,011 - - - 3,011Amounts owed to other customers - 57,137 - - - 57,137Derivative financial instruments - - - 1,810 60 1,870Subordinated Liabilities - 4,986 - - - 4,986Total financial liabilities - 743,686 - 1,810 60 745,556Non-financial liabilities - 7,645 - - - 7,645Total liabilities - 751,331 - 1,810 60 753,201

Measured at amortised cost Measured at Fair Value

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Financial Derivatives assets and designated Loans and liabilities at Available- as fair value Unmatched receivables amortised cost for-sale hedges derivatives Total £000 £000 £000 £000 £000 £000At 31 December 2015

Financial assets Cash in hand - 129,467 - - - 129,467Treasury Bills and Gilts - - 30,024 - - 30,024Loans and advances to credit institutions 10,825 - - - - 10,825Debt securities - - 20,227 - - 20,227Derivative financial instruments - - - 23 - 23Loans and advances to customers 687,763 - - - - 687,763Total financial assets 698,588 129,467 50,251 23 878,329Non-financial assets - 4,826 - - - 4,826Total assets 698,588 134,293 50,251 23 - 883,155 Financial liabilities Shares - 706,809 - - - 706,809Amounts owed to credit institutions - 9,546 - - - 9,546Amounts owed to other customers - 90,524 - - - 90,524Derivative financial instruments - - - 1,484 - 1,484Subordinated Liabilities - 4,986 - - - 4,986Total financial liabilities - 811,865 - 1,484 - 813,349Non-financial liabilities - 6,664 - - - 6,664Total liabilities - 818,529 - 1,484 - 820,013

Valuation of financial instruments carried at fair value

The Group holds certain financial assets and liabilities at fair value, grouped into Levels 1 to 3 of the fair value hierarchy asoutlined below.

Fair values are determined using the following fair value hierarchy that reflects the significance of the inputs in measuring fairvalue:

Level 1 The most reliable fair values of financial instruments are quoted market prices in an actively traded market. TheGroup’s Level 1 portfolio consists principally of debt securities and treasury bills for which traded prices are readilyavailable.

Level 2 These are valuation techniques for which all significant inputs are taken from observable market data. These includevaluation models used to calculate the present value of expected future cash flows and may be employed whenno active market exists and quoted prices are available for similar instruments in active markets. We have evaluatedthese using estimated credit losses, interest rates and discount rates (eg yield curves). The Group’s Level 2 portfolioconsists of interest rate swaps for which traded prices are readily available.

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. We have no assets of thistype.

Measured at amortised cost Measured at Fair Value

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Level 1 Level 2 Level 3 Total £000 £000 £000 £00031 December 2016 Financial assets Available for sale Debt Securities 16,546 - - 16,546Treasury Bills & Similar 14,131 - - 14,131

Fair value through profit and loss Derivative financial instrument assets - 94 - 94 30,677 94 - 30,771Financial liabilities Fair value through profit and loss Derivative financial instrument assets - 1,870 - 1,870

- 1,870 - 1,870

31 December 2015 Financial assets Available for sale Debt Securities 20,227 - - 20,227Treasury Bills & Similar 30,024 - - 30,024

Fair value through profit and loss Derivative financial instrument assets - 23 - 23 50,251 23 - 50,274Financial liabilities Fair value through profit and loss Derivative financial instrument assets - 1,484 - 1,484

- 1,484 - 1,484

Financial assets pledged as collateral

The total financial assets recognised in the statement of financial position that had been pledged as collateral for liabilities at31 December 2016 and 2015 is shown in the following table. Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000 Treasury Bills 5,000 5,000 - -Loans and advances to credit institutions 3,613 3,613 2,383 2,383Loans and advances to customers 57,504 57,504 75,058 75,058 66,117 66,117 77,441 77,441

Financial assets are pledged as collateral as part of the Government’s Funding for Lending Scheme and for Mark To MarketMovement Cash Flow obligations for Interest Rate Derivative Swap Contracts under terms that are usual and customary forsuch activities. In addition, as part of the Funding For Lending Scheme, the Group has received collateral that it is permittedto sell or repledge in the absence of default.

The table below summarises the fair values of the Group’s financial assets and liabilities that are accounted for at fair value,analysed by the valuation methodology used by the Group to derive the financial instruments fair value:

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Credit risk

‘Credit risk’ is the risk that a borrower or counterparty of the Group will cause a financial loss for the Group by failing todischarge an obligation.

All loan applications are assessed with reference to the Group’s lending policy. Changes to policy are approved by the Boardand the approval of loan applications is mandated. The Board is responsible for approving treasury counterparties.

The Group and Society enters into credit support agreements, which protect against counterparty default in respect to hedginginstruments by means of collateral transactions. Collateral balances are included within ‘liquid assets’ or ‘amounts owed tocredit institutions’ as appropriate and interest receivable or payable reflected on the Statement of Comprehensive Incomewithin ‘net interest receivable’.

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

Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000

Cash in hand and balances with Bank of England 72,590 72,590 129,467 129,222Treasury Bills 14,131 14,131 30,024 30,024Loans and advances to credit institutions 10,409 10,158 10,825 10,825Debt securities 16,546 16,546 20,227 20,227Derivative financial instruments 94 94 23 23Loans and advances to customers 696,289 691,739 687,763 682,551Loans to Subsidiaries - 2,964 - 3,844Total Statement of Financial Position exposure 810,059 808,222 878,329 876,716Off Statement of Financial Position exposure – mortgage commitments 37,835 37,835 37,660 37,660 847,894 846,057 915,989 914,376

Credit quality analysis of loans and advances to customers

The tables below set out information about the credit quality of financial assets and the allowance for impairment/loss heldby the Group against those assets.

2016 2015 Loans fully Loans fully secured on Loans fully secured on Loans fully residential secured on residential secured on property land property land £000 £000 £000 £000 Neither past due nor impaired 633,943 5,280 616,270 5,200 Past due but not impaired 30 – 60 days 47,941 1,488 52,310 1,94260 – 90 days 2,368 318 3,364 -90 – 180 days 2,130 - 2,100 100180 days+ 952 - 1,222 - Impaired Not past due 476 74 1,226 23830 – 60 days - - - -60 – 90 days - - - 36290 – 180 days 860 - 1,111 -180 days+ 383 - 1,624 -Possession 76 - 694 - 689,129 7,160 679,921 7,842 Allowance for impairment Individual 111 427 755 276Collective 930 19 891 77Total allowance for impairment 1,041 446 1,646 353

The status ‘past due but not impaired’ includes any asset where a payment due is received late or missed but no individual provisionhas been made against that asset. The amount included is the entire loan amount and not just the overdue amount.

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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 againstloans and advances as well as calls made on credit enhancements and held at the year end are shown below.

Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000 Property 60 60 596 596

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

Collateral held and other credit enhancements

The Group and Society hold collateral and other credit enhancements against certain of its credit exposures. The table belowsets out the principal types of collateral held against different types of financial assets.

Percentage of exposure that is subject to collateral requirements Group Society Group Society 2016 2016 2015 2015 Principal type of % % % % collateral held Loans and advances to customers 41.5% 41.5% 40.0% 39.9% Property

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 excludesany adjustments for obtaining and selling the collateral. The value of the collateral for residential mortgage loans is based onthe collateral value at origination updated based on changes in house price indices.

Group Society Group Society 2016 2016 2015 2015 £000 £000 £000 £000LTV ratio Less than 50% 277,798 273,882 259,087 255,19751 – 70% 237,122 236,708 256,995 255,97071 – 90% 152,893 152,681 162,538 162,22091 – 100% 28,212 28,204 11,001 11,001More than 100% 264 264 142 142 696,289 691,739 689,763 684,530

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Forbearance

A range of forbearance options are available to support customers who are in financial difficulty. The purpose of forbearanceis to support customers who have temporary financial difficulties and help them get back on track. The main options offeredby the Society include reduced monthly payment, an arrangement to clear outstanding arrears, capitalisation of arrears orextension of the mortgage term.

The table below analyses residential mortgage borrowers with renegotiated terms at the year end date:

Group Society Group Society 2016 2016 2015 2015

Number Number Number Number Arrangement 62 62 100 100Concession 4 4 12 12Interest Only 1 1 2 2Extension of Term 11 11 10 10Transfer to Repayment - - 1 1Others 13 13 - - 91 91 125 125

The cases above represent total mortgage balances of £5.67m (£7.79m: 2015).

Impairment provisions of £136k in 2016 (£154k: 2015) are held in respect of these mortgages.

Liquidity risk

Liquidity risk is the risk that the Society will not have sufficient financial resources available to meet its obligations as they falldue under either normal business conditions or a stressed environment. It is the Society’s policy that a significant amount ofits total assets are carried in the form of cash and other readily realisable assets in order to:

i) meet day-to-day business needs; ii) meet any unexpected cash needs; iii) maintain public confidence; and iv) ensure maturity mismatches are provided for.

Monitoring of liquidity, in line with the Society’s prudent policy framework, is performed daily. Compliance with these policiesis reported monthly to the Board Risk Committee. The Society’s liquidity policy is designed to ensure the Society has sufficientliquid resources to withstand a range of stressed scenarios. A series of liquidity stress tests have been developed as part ofthe Individual Liquidity Adequacy Assessment (ILAA) process. They include scenarios that fulfil the specific requirements ofthe PRA and scenarios identified by the Society which are specific to its business model. The stress tests are performedmonthly to confirm that liquidity policy remains appropriate.

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More than three More than months but one year Not more not more but not Group On than three than one more than More than 31 December 2016 demand months year five years five years Total £000 £000 £000 £000 £000 £000Financial assetsCash in hand and balances with Bank of England 72,590 - - - - 72,590Treasury Bills - 10,002 - 4,129 - 14,131Loans and advances to credit institutions 6,563 - - 3,612 234 10,409Debt securities - 4,502 - 12,044 - 16,546Derivative financial instruments - - - 91 3 94Loans and advances to customers - 7,005 3,540 37,672 648,072 696,289Total financial assets 79,153 21,509 3,540 57,548 648,309 810,059 Financial liabilities Shares 655,249 4,530 18,615 158 - 678,552Amounts owed to credit institutions - 2,011 1,000 - - 3,011Amounts owed to other customers 24,910 5,556 19,131 7,540 - 57,137Subordinated debt - - - - 4,986 4,986Derivative financial instruments - 90 193 1,587 - 1,870Total financial liabilities 680,159 12,187 38,939 9,285 4,986 745,556

Group31 December 2015 Financial assets Cash in hand and balances with Bank of England 129,467 - - - - 129,467Treasury Bills - 4,998 14,961 10,065 - 30,024Loans and advances to credit institutions 10,602 - 223 - - 10,825Debt securities - - - 20,227 - 20,227Derivative financial instruments - - 9 14 - 23Loans and advances to customers - 1,923 8,434 41,324 636,082 687,763Total financial assets 140,069 6,921 23,627 71,630 636,082 878,329 Financial liabilities Shares 665,523 9,798 31,289 199 - 706,809Amounts owed to credit institutions - 5,039 - 4,507 - 9,546Amounts owed to other customers 39,491 8,474 26,798 15,761 - 90,524Subordinated debt - - - - 4,986 4,986Derivative financial instruments - - 116 1,368 - 1,484Total financial liabilities 705,014 23,311 58,203 21,835 4,986 813,349

Maturity analysis for financial assets and financial liabilities

The tables below set out the remaining contractual maturities of the Group’s financial liabilities and financial assets. Inpractice, contractual maturities are not always reflected in actual experience. For example loans and advances to customerstend to repay ahead of contractual maturity and customer deposits (for example shares) are likely to be repaid later than onthe earliest date on which repayment can be required.

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The table below sets out maturity analysis for financial liabilities that shows the remaining contractual maturities atundiscounted amounts. The analysis of gross contractual cash flows differs from the analysis of residual maturity due to theinclusion of interest accrued at current rates, for the average period until maturity on the amounts outstanding at thestatement of financial position date.

More than three More than months but one year Not more not more but not Group On than three than one more than More than 31 December 2016 demand months year five years five years Total £000 £000 £000 £000 £000 £000 Financial liabilities Shares 655,360 4,513 18,637 160 - 678,670Amounts owed to credit institutions - 2,012 1,003 - - 3,015Amounts owed to other customers 25,174 5,521 24,444 2,162 - 57,301Subordinated debt - - - - 6,554 6,554Derivative financial instruments - 90 193 1,587 - 1,870 680,534 12,136 44,277 3,909 6,554 747,410Other liabilities - 13 1,970 - 5,662 7,645Total financial liabilities 680,534 12,149 46,247 3,909 12,216 755,055

Market risk

Market risk is the risk of changes to the Society’s financial condition caused by market interest rates. The Society is exposedto market risk in the form of changes (or potential changes) in the general level of interest rates, changes in the relationshipbetween short and long-term interest rates and interest rates for different Statement of Financial Position elements (basisrisk).

The management of interest rate risk is based on a full statement of financial position gap analysis. In addition managementreview interest rate basis risk. Both sets of results are measured against the risk appetite for market risk these are in turnreviewed monthly and reported to the Board Risk Committee.

The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of theGroup’s financial assets and financial liabilities to various standard and non-standard interest rate scenarios. The key scenariothat is considered on a monthly basis is that of a 200 basis point (bps) parallel fall or rise in the LIBOR yield curve.

The following is an analysis of the annualised impact of the Group’s sensitivity to an increase or decrease in market interestrates, assuming no asymmetrical movement in yield curves and a constant financial position.

200bps parallel 200bps parallelMarket risk increase decrease

Group£000 £000

31 December 2016sensitivity of projected net interest income 867 (867)

31 December 2015sensitivity of projected net interest income 1,618 (1,618)

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Capital

The Society’s policy is to maintain a strong capital base to maintain member, creditor and market confidence and to sustainfuture development of the business. The Society’s actual and expected capital position is reviewed against stated risk appetitewhich aims to maintain capital at a specific level above its Internal Capital Guidance.

The Board manages the Society’s capital and risk exposures to maintain capital in line with regulatory requirements whichincludes monitoring of:

Lending and Business Decisions - The Society does not use an application scorecard and underwrites each mortgageapplication manually, making use of an internal credit risk assessment model as part of the decision making process.Once loan funds have been advanced behavioural scorecards are used to review the ongoing risk profile of both theportfolio’s and individual customers. In addition, for residential and buy-to-let mortgages property values are updatedon a quarterly basis.

Pricing - Pricing models are utilised for all mortgage product launches.

Concentration risk - The design of retail products takes into account the overall mix of products to ensure that exposureto market risk remains within permitted parameters.

Counterparty risk - Wholesale lending is only carried out with approved counterparties in line with the Society’s lendingcriteria and is subject to a range of limits. The limits are monitored daily to ensure the Society remains within risk appetite.

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31. PENSIONS

The Society operates a pension scheme providing benefits based on final pensionable pay and recognises any gains and lossesin each period in Other Comprehensive Income (OCI). The contributions are determined by a qualified actuary on the basisof triennial valuations using the projected unit method. The most recent triennial valuation was at 6 April 2014 and thisidentified a scheme deficit of £5.516m.

The Society’s Board and the Trustees of the defined benefit scheme have agreed a schedule of payments designed to eliminatethe triennial valuation deficit calculated by the Actuary.

The Society’s defined benefit scheme was closed to new entrants in September 2000 and to further accrual in December2016. Eligible employees can join a Group Personal Pension Scheme under which the Society assists with contributions. In2016, the Society contributed £165k to this scheme (£255k: 2015).

The Society has implemented Section 28 of FRS 102 ‘Employee Benefits’ which covers the accounting and disclosurerequirements for employee pensions. In accordance with Section 28 of FRS 102 the pension liability has been shown grossof related deferred tax in the Statement of Financial Position. The scheme deficit at 31 December 2016 is £5.662m (£4.471m:2015) before related deferred tax of £0.994m (£0.849m: 2015) is shown in the Statement of Financial Position.

The most recent interim valuation showed that the market value of the scheme’s assets was £28.307m at 31 December2016.

The Scheme’s assets include no assets from the Society’s own financial instruments and do not include any property occupiedby, or other assets used by the Society.

The key assumptions used in this valuation are: Discount rate 2.8% Inflation assumption-CPI 2.3%

In determining the expected return on the pension scheme assets the following has been assumed:

Bonds: the weighted average of government and corporate bond yields according to the level of the relevant holdingson the portfolio;Equities: Government bond yield plus 3%;Cash: a minimal rate due to the very small amount of cash;Secured pensions: the discount rate of liabilities.

The post retirement mortality assumptions are based on the mortality table known as S2PMA for males and S2PFA for femaleswith reference to members’ years of birth. Allowances have been made for improvements in mortality in the recent past andcurrently expected in the future. The assumptions are equivalent to expecting a 62-year old to live for a number of years asfollows:

• Current pensioner aged 62: 25.7 years male, 27.1 years female.• Future retiree upon reaching 62: 28 years male, 28.6 years female.

.

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2016Net pension (liability) £000Defined benefit obligation (33,969)Plan assets 28,307Deficit in the scheme (5,662)

Movement in deficit during the Year Deficit in the scheme at beginning of year (4,471)Current service cost (142)Interest cost (167)Loss on settlements and curtailments (61)Actuarial loss (1,589)Employer contributions paid (gross of charges) 844Expenses paid by the scheme (76)Deficit in the scheme at end of year (5,662)

The fair value of the scheme’s assets, which are not intended to be realised in the short term and may be subject tosignificant change before they are realised, and the present value of the scheme’s liabilities, which are derived from cashflow projections over long periods and thus inherently uncertain, are shown in the following tables:

Changes in the fair value of scheme assets: Opening fair value of scheme assets 23,390Interest on assets 855Gain on asset return 4,010Contributions by employer (gross) 844Contributions by scheme members 81Change in secured pensioner value due to scheme experience 69Expenses paid by Scheme (76)Benefits paid (866)Closing fair value of scheme assets 28,307

Changes in the present value of the defined benefit obligation:Opening defined benefit obligation 27,861Service cost 223Interest cost 1,022Loss on changes in assumptions 5,685Loss on settlements and curtailments 62Benefits paid (866)Experience gain on liabilities (86)Change in secured pensioners’ value due to scheme experience 68Closing defined benefit obligation 33,969

The pension costs for the defined benefit scheme in the annual accounts were as follows:

Analysis of other pension costs credited/(charged) in arriving at operating profit: Current service cost (142)Scheme expenses (76)Interest on pension scheme liabilities (167)Loss on settlements and curtailments (61)

Net charge to operating profit (446)

Analysis of amount credited/(charged) through the Other Comprehensive Income:Return on assets 4,010Experience gain on liabilities 86Changes in assumptions (5,685)Net charge through Other Comprehensive Income (1,589) The fair values of the plan assets and the return on those assets were as follows:

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2016 2015 Fair value Fair value £000 £000Equities 14,475 13,349Bonds 11,526 7,839Other 2,306 2,202 28,307 23,390

Principal actuarial assumptions (expressed as weighted averages) at the year end were as follows:

2016 2015 % %

Discount rate 2.8 3.7Mortality rates change - Male (0.2) 1.5Mortality rates change - Female (0.2) 1.0Inflation - RPI 3.3 3.1Inflation - CPI 2.3 2.1 The return on the scheme’s invested assets over the year was 22.2%, equivalent to £4.812m in monetary terms.

The total actuarial loss recognised in Other Comprehensive Income in 2016 was £1.589m (gain of £0.797m: 2015).

32. RELATED PARTY TRANSACTIONS

The Group has taken exemption as provided in section 33.1A of FRS 102 and does not disclose transactions with membersof the same Group that are wholly owned. The Group would disclose transactions with related parties which are not whollyowned with the same Group; however, during the year under consideration, there have been no such related party transactionwhich needs to be disclosed.

As at 31 December 2016 the Society had a loan outstanding to its subsidiary, Furness Mortgage Services Limited, of £2.868m(£3.656m: 2015).

The Society was owed £0.096m by its subsidiary Furness Financial Advisers Limited (£0.188m: 2015).

See note 8 for disclosure of Directors’ emoluments and details of transactions with Directors.

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Statutory At 31.12.2016 At 31.12.2015 Limit1. STATUTORY PERCENTAGES

Proportion of business assets not in theform of loans fully secured onresidential property (the ‘lending limit’) 1% 1% 25%

Proportion of shares and borrowings notin the form of shares held by individuals(the ‘funding limit’) 8% 12% 50%

The above percentages have been prepared from the group’s accounts.

The percentages are calculated in accordance with, and the statutory limits are those prescribed by, sections 6 and 7 of theBuilding Societies Act 1986. Business assets are the total assets of the Group as shown in the Statement of Financial Position plus impairment allowanceon loans and advances to customers, less fixed assets and liquid assets.

Loans fully secured on residential property are the amount of principal owing by borrowers and interest accrued not yetpayable. This is the amount shown in the Statement of Financial Position plus impairment allowance on loans and advancesto customers.

2. OTHER PERCENTAGES

Summary of Key Financial Ratios 2016 2015 % %

Gross capital as a percentage of shares and borrowings 9.18 8.44

Free capital as a percentage of shares and borrowings 8.83 8.08

Liquid assets as a percentage of shares and borrowings 15.39 23.61

Profit for the year as a percentage of mean total assets 0.13 0.31

Management expenses as a percentage of mean total assets 1.44 1.21

The above percentages have been prepared from the Group’s accounts. ‘Shares and borrowings’ represent the total of shares, amounts owed to credit institutions and amounts owed to othercustomers. ‘Gross capital’ represents aggregated reserves and subordinated liabilities as shown in the Group Statement of FinancialPosition. ‘Free capital’ is gross capital plus collective impairment on loans and advances less tangible and intangible fixed assets inthe Group Statement of Financial Position.

‘Mean total assets’ represent the average of total assets at the beginning and end of the financial year for the Group. ‘Liquid assets’ represent the total of cash in hand and balances with the Bank of England, loans and advances to creditinstitutions, debt securities and Treasury bills.

‘Management expenses’ are the aggregate of administrative expenses and depreciation and amortisation taken from theGroup Statement of Comprehensive Income.

Annual Business StatementFor the year ended 31 December 2016

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Annual Business Statement continued

3. DIRECTORS AS AT 31 DECEMBER 2016

Name Age Date of Business Other directorships appointment occupation C S Millar 70 19/09/06 Company Director St Gemma’s Hospice St Gemma’s Hospice Services Ltd

K S Kearney 60 27/09/11 Company Director Partner in Town End Yarns

A J Haigh 63 10/01/14 Company Director Calderdale and Huddersfield NHS Trust

N J Gower 57 20/05/14 Company Director Seashell Trust Ltd Central Manchester University Hospitals NHS Foundation Trust

K L Rebecchi 50 05/01/16 Company Director Business Enterprise Fund Ltd Redmayne-Bentley Stockbrokers LLP KLR Advisory Services Ltd

P A McLelland 50 26/10/16 Finance Director Cheque Exchange Limited Provident Financial Management Services Limited Greenwood Personal Credit Limited N&N Simple Financial Solutions Limited Provident Personal Credit Limited

S L Pryer 55 20/01/04 Operations Director Furness Authorised Financial Advisers Ltd Furness Financial Advisers Ltd Furness Financial Services Ltd Furness Independent Financial Advisers Ltd Furness Mortgage Services Ltd Marsh Street Arches and Garden Community Interest Company Ultimate Mortgages Ltd

S J Heron 53 24/06/15 Marketing & Sales Furness Authorised Financial Advisers Ltd Director Furness Financial Advisers Ltd Furness Financial Services Ltd Furness Independent Financial Advisers Ltd Furness Mortgage Services Ltd Ultimate Mortgages Ltd

4. OTHER OFFICERS

P A Mawson 46 03/07/15 Group Secretary Furness Authorised Financial Advisers Ltd Furness Financial Advisers Ltd Furness Financial Services Ltd Furness Independent Financial Advisers Ltd Furness Mortgage Services Ltd Ultimate Mortgages Ltd

R A Jones 50 26/09/16 Company Director Empyrean Outsourcing Limited

M T Kirsch 55 29/03/16 Chief Executive Cherry Lakes Limited

5. PARTICULARS OF DIRECTORS’ SERVICE CONTRACTS

Details of Directors’ service contracts can be found in the Directors’ Remuneration Report on pages 28 to 32.

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Head Office:51-55 Duke Street, Barrow-in-Furness, Cumbria LA14 1RT

Telephone: (01229) 824560Fax: (01229) 837043

E-mail: [email protected]: www.furnessbs.co.uk

Authorised by the Prudential Regulation Authority and regulated by the Prudential Regulation Authority

and the Financial Conduct Authority and entered in the Financial Services Register under number 159624

AUDITOR KPMG LLP 1 Sovereign Square, Sovereign Street, Leeds LS1 4DABANKERS National Westminster Bank plc & The Royal Bank of Scotland plc

Furness Building Society Reg. No. 221 B; Registered Office: 51-55 Duke Street, Barrow-in-Furness, Cumbria LA14 1RT

Always with your interest at heart

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGEHead Office: 51-55 Duke Street, Barrow in Furness, Cumbria. LA14 1RT. Furness Building Society is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Furness Building Society is on the Financial Services Register under registration number 159624. The Society is covered by the Financial Ombudsman Service and has a complaints handling procedure. A copy of the complaints handling procedure is available on request. Complaints we cannot settle may be referred to the Financial Ombudsman Service. Your call may be monitored or recorded to maintain a quality service.

Freephone Helpline: 0800 83 43 12Website: www.furnessbs.co.ukE-mail: [email protected]

Documents

ANNUAL REPORT & ACCOUNTS · PAGE 3 ANNUAL REPORT AND ACCOUNTS 2016 Contents Page Performance Summary 4 Chairman’s Report 5 Directors’ Report 8 Statement of Directors’ Responsibilities