Annual Financial Report - 5 of 6

Independent Auditor’s Report

To the Members of OneSavings Bank plc

Report on the audit of the financial statements

1. Opinion

In our opinion:

the financial statements of OneSavings Bank plc (the ‘parent company’) and its subsidiaries (the ‘Group’) give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2019 and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and,

as regards the group financial statements, Article 4 of the IAS Regulation.

We have audited the financial statements which comprise:
} the consolidated statement of comprehensive income;

the consolidated and parent company statement of financial position;
the consolidated and parent company statements of changes in equity;

} the consolidated and parent company statement of cash flows;
} the statement of accounting policies; and
} the related notes 1 to 52.

The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

2. Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.

We are independent of the Group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

3.
Summary of our audit approach

Key audit matters The key audit matters that we identified in the current year were:
} accounting for the acquisition of Charter Court Financial Services Group;
} classification of exceptional transaction costs and integration costs;
} loan impairment provisions; and

} effective interest rate income recognition.
Materiality The materiality that we used for the Group financial statements was £14m which was determined by reference to normalised profit before tax and net assets. Normalised profit before tax is explained on page 156

Scoping Our Group audit scope focused primarily on three subsidiaries subject to a full scope audit. The subsidiaries selected for a full scope audit were OneSavings Bank plc (company only), Charter Court Financial Services Limited and Interbay ML Ltd. These three subsidiaries account for 98% of the Group’s total assets, 98% of the Group’s total liabilities, 96% of the Group’s interest receivable and similar income and 97% of the Group’s profit before tax

4.
Going concern is the basis of preparation of the financial statements that assumes an entity will remain in operation for a period of at least 12 months from the date of approval of the financial statements. We confirm that we have nothing material to report, add or draw attention to in respect of these matters. Conclusions relating to going concern, principal risks and viability statement

4.1. Going concern
We have reviewed the directors’ statement in note 2 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s and parent company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements.

We considered as part of our risk assessment the nature of the Group, its business model and related risks including where relevant the impact of Brexit and COVID 19, the requirements of the applicable financial reporting framework and the system of internal control. We evaluated the directors’ assessment of the group’s ability to continue as a going concern, including challenging the underlying data and key assumptions used to make the assessment, and evaluated the directors’ plans for future actions in relation to their going concern assessment.

We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit.

4.2. Principal risks and viability statement
Viability means the ability of the group to continue over the time horizon considered appropriate by the directors. We confirm that we have nothing material to report, add or draw attention to in respect of these matters. Based solely on reading the directors’ statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the directors’ assessment of the Group’s and the parent company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to:

the disclosures on pages 58 to 66 that describe the principal risks, procedures to identify emerging risks, and an explanation of how these are being managed or mitigated;
the directors’ confirmation on page 58 that they have carried out a robust assessment of the principal and emerging risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity; or
the directors’ explanation on pages 73 and 74 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

We are also required to report whether the directors’ statement relating to the prospects of the group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.

5. Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Independent Auditor’s Report continued

To the Members of OneSavings Bank plc

5.1. Accounting for the acquisition of Charter Court Financial Services Group (“CCFSG”)

Refer to the key areas of judgements in applying accounting policies and critical accounting estimates on page 180 and Note 4 on page 181

Key audit matter description

How the scope of our audit responded to the key audit matter

As detailed on page 181, the Group completed the acquisition of CCFSG on 4 October 2019. The acquisition resulted in a credit of £11m being recognised in the consolidated income statement in respect of negative goodwill as the amount of total consideration transferred was less than the fair value of the net assets acquired. The acquisition of CCFSG was a significant unusual transaction in the year that could give rise
to material misstatement in the financial statements due to fraud or error.

Accounting for the acquisition gives rise to two key areas of management judgement and estimation uncertainty:
} the valuation of adjustments required to reflect the assets and liabilities of CCFSG at their fair value as at 4 October 2019; and
} the valuation of separately identifiable intangible assets as at 4 October 2019.

The Directors engaged external specialists to support their assessment of the acquisition accounting and the completeness and valuation of intangible assets. In accordance with IFRS 3, the Group has recognised separate intangible assets in the combination of £24m and £187m of net fair value adjustments to assets and liabilities.

The most significant fair value adjustment is a circa £300m uplift to the valuation of loans and advances to customers compared to the carrying amount in the books and records of CCFSG. The fair value adjustment is individually material and is highly sensitive to changes in key assumptions.

The Group has recognised £24m of separately identifiable intangible assets of which the most significant separately identifiable intangible asset is £17m and relates to broker relationships.

We obtained an understanding of the design and implementation of relevant controls relating to the provisional accounting for the acquisition of CCFSG.

To challenge the valuation of the loan book, we:

Tested the accuracy and completeness of data used by management in deriving the fair value of the loan book;
Engaged our own valuation specialists to derive an independent fair value for the two largest portfolios that make up over 90% of the fair value of the loan book acquired and compared this to the fair value derived by management; and
For the key assumptions to which the fair value was most sensitive, such as the discount rate and prepayment rates, where relevant we examined the consistency of those assumptions with other models used within the Group.

To challenge the valuation of the broker relationship intangible assets, we:

Assessed the objectivity and expertise of the Group’s external specialist meeting with them to discuss their approach and the findings within their final report;
Engaged our own valuation specialists to challenge the methodology and assumptions used in the valuation through comparison to industry practice;
Challenged the cash flow forecasts used in the valuation by reference to historical performance and management’s track record of forecasting accuracy; and
Tested the appropriateness of other inputs and significant assumptions used in valuing the broker relationships including the discount rate.

We also challenged whether further fair value adjustments are required to the assets and liabilities of CCFSG or whether additional intangible assets should be recognised by reference to the requirements of IFRS and our understanding of the CCFSG balance sheet.

Key observations For the two loan portfolios that we independently valued, we determined the fair value of the portfolios recognised by management to be within 2% of our independent valuation. We considered management’s valuation to be reasonable.

We considered the identification of the broker relationships and the valuation methodology used to be appropriate and in line with industry practice. We considered the cash flow forecasts, key inputs and assumptions to be reasonable in the context of the known facts and circumstances and historical performance. We did not identify any significant unrecognised fair value adjustments or intangible assets.

5.2. Classification of exceptional transaction costs and integration costs

Refer to the Statement of Comprehensive Income, Note 12 on page 190 and Note 13 on page 190

Key audit matter description

How the scope of our audit responded to the key audit matter

The Directors have presented exceptional transaction costs relating to the acquisition of CCFSG of £15.6m and integration costs of £5.2m relating to the integration of the two businesses as separate line items on the face of the consolidated statement of comprehensive income. Management has also excluded these items from underlying profit before tax disclosed in the front half of the Annual Report.

There is a risk that items that reflect the underlying performance of OSB Group are incorrectly classified as exceptional transaction and integration costs on the face of the income statement due to fraud or error and are therefore inappropriately excluded from the underlying performance of the business.

We obtained an understanding of the design and implementation of management’s controls over the identification and classification of exceptional transaction costs and integration costs.

For a sample of exceptional transaction costs and integration costs we obtained supporting evidence to test whether the items were related to the acquisition of CCFSG or the integration of the two businesses and therefore whether the items were appropriately classified.

Key observations We identified no items within exceptional transaction costs and integration costs that were incorrectly classified.

We reviewed management’s presentation of exceptional transaction costs and integration items and consider it to be fair, balanced and understandable.

5.3. Loan impairment provisions

Refer to the judgements in applying accounting policies and critical accounting estimates on page 179 and Note 23 on page 196

Key audit matter description

IFRS 9 requires impairment losses to be recognised on an expected credit loss (“ECL”) basis. ECL provisions as at 31 December 2019 were £43m (2018: £22m), which represented 0.23% (2018: 0.24%) of loans and advances to customers. ECLs are calculated both for individually significant loans and collectively on a portfolio basis which require the use of statistical models incorporating loss data and assumptions on
the recoverability of customers’ outstanding balances. The ECL provision requires management to make significant judgements and estimates. We therefore consider there to be a significant risk of material misstatement due to fraud or error in respect of the Group’s ECL provision.

We identified five specific areas in relation to the ECL that require significant management judgement or relate to assumptions to which the overall ECL provision is particularly sensitive.

Significant increase in credit risk (“SICR”): The assessment of whether there has been a significant increase in credit risk since origination date of the exposure to the reporting date. Following the acquisition of CCFSG, management aligned the staging criteria across the Group to include both quantitative and qualitative factors in the SICR assessment.
Macroeconomic scenarios: Management has reassessed the macroeconomic scenarios used in the ECL model and the probability weightings applied. As set out on page 173, the Group sources economic forecasts from a third party economics expert and considers a minimum of four probability weighted scenarios, including base, upside, downside and severe downside scenarios.
Propensity to go into possession given default (“PPD”) assumption: The loss given default by loan assumed in the ECL provision calculation is sensitive to the PPD assumption which is based on historical data. PPD measures the likelihood that a defaulted loan will progress to repossession.
Forced sale discount (“FSD”) assumption: The loss given default is also sensitive to the FSD assumption which is based on historical data. FSD measures the difference in sale proceeds between a sale under normal conditions and a sale at auction.
Commercial and individually assessed collateral valuation: Management uses an internally developed index for commercial property valuations. The internally developed commercial property index (“CPI”) is applied annually to adjust management’s commercial collateral valuations to reflect changes

in market prices. Management uses an in-house real estate team to estimate the market value of collateral on a case by case basis for individually assessed loans.

Independent Auditor’s Report continued

To the Members of OneSavings Bank plc

How the scope of our audit responded to the key audit matter

We obtained an understanding of the design and implementation of the key financial controls over the ECL provision with particular focus on controls over significant management assumptions and judgements used in the ECL determination.

To challenge management’s SICR criteria, we:

Assessed the probability of default (“PD”) thresholds used in the SICR assessment by reference to emerging standard validation metrics including the proportion of transfers to stage two driven solely by being 30 days past due, the volatility of loans in stage two and the proportion of loans that spend little or no time in stage two before moving to stage three.
Assessed the transfer criteria methodology applied against best practice and considered whether the Group’s staging judgements have been appropriately implemented in the model design.
Tested whether the PD thresholds set by management had been appropriately applied in practice as at 31 December 2019.
Performed an independent assessment for a sample of loan accounts to determine whether they have been appropriately allocated to the correct stage.

To challenge management’s macro-economic scenarios and the probability weightings applied we:

Reviewed management’s assessment of scenarios considered and the probability weightings assigned to them in light of the economic position as at 31 December 2019.
Agreed the macroeconomics scenarios used in the ECL model to a report prepared by the third party economics expert dated December 2019.
Made specific inquiries of the third party economics expert to understand their approach and modelling assumptions to derive the scenarios.

} Assessed the competence, capability and objectivity of the third party economics expert.

Engaged our economic specialists to challenge the third party economics expert’s outlook by reference to other available economic outlook data.
Performed a peer benchmarking exercise to check the appropriateness of selected macroeconomic variables and weightings. The key economic variables were the house price index (“HPI”), unemployment and base rate.
Engaged our analytics and modelling specialists to review the model methodology and computer code in the macroeconomics overlay model which applies the scenarios to each ECL component.
For a sample of loans, we independently recalculated the ECL using the macroeconomic variables to check they were being applied appropriately.

To challenge management’s PPD and FSD assumptions we:

Involved our analytics and modelling specialists to challenge the model methodology and computer code in the loss given default (“LGD”) models.
Recalculated the PPD rates observed on defaulted cases and compared them with the rates used by management.
Recalculated the FSD observed on recent property sales on defaulted accounts and compared them with the rates used by management.
Assessed the appropriateness of PPD and FSD assumptions adopted by management through benchmarking to industry peers.

We performed the following procedures to challenge management’s internally developed index for commercial property valuations and management’s case by case estimate of the market value of collateral for individually assessed loans:

Engaged our in-house property valuation specialists to examine management’s valuation policies and to challenge a sample of collateral valuations for individually assessed loans by reference to available market data.
Selected a sample of the commercial properties used by management to derive the CPI and worked with our property valuation specialists to challenge the collateral valuations used by reference to available market data.
Selected a sample of other commercial properties not considered by management in determining the CPI to challenge the collateral valuations and assess whether management had applied any bias in their selection of properties.
Tested the mechanical accuracy of management’s CPI calculation and that the indexed valuation was appropriately applied in the ECL determination.

Key observations We determined that the methodology used and the SICR criteria, PPD and FSD assumptions management have made in determining the ECL provision as at 31 December were reasonable.

We determined management’s collateral valuations to be reasonable and the CPI to be appropriately determined and applied.

We did not identify any issues in the competence, capability and objectivity of the third party economic expert. Notwithstanding that estimating the probability and impact of future economic outcomes is inherently judgemental, on balance, we consider that the macroeconomic scenarios selected by the Directors and the probability weightings applied generate an appropriate portfolio loss distribution including a 15% weighting to a relatively severe economic downturn scenario. The Directors have appropriately included sensitivity analysis on page 180 showing the impact on the ECL of a 100% weighting to each scenario.

5.4. Effective interest rate income recognition

Refer to the judgements in applying accounting policies and critical accounting estimates on page 180, the accounting policy on page 168 and Notes 5 and 6 on page 183

Key audit matter description

In accordance with the requirements of IFRS 9, the Group is required to spread directly attributable fees, discounts, incentives and commissions on a constant yield basis (“effective interest rate, EIR”) over the shorter of the expected and contractual life of loan assets. EIR is complex and the Group’s approach to determining the EIR involves the use of models and significant estimation in determining the behavioural life of loan assets. Given the complexity and judgement involved in accounting for EIR, there is an opportunity and incentive for management to potentially manipulate the amount of interest income reported in the financial statements and revenue recognition is an area susceptible to fraud.

The Group’s net interest income for the year ended 31 December 2019 was £345m.

EIR adjustments arise from revisions to estimated cash receipts or payments for loan assets that occur for reasons other than a movement in market interest rates or credit losses. They result in an adjustment to the carrying amount of the loan asset, with the adjustment recognised in the income statement in interest income and similar income. As the EIR adjustments reflect changes to the timing and volume
of forecast customer redemptions, they are inherently judgemental. The level of judgement exercised by management is increased given the limited availability of historical repayment information. For two of the loans portfolios, KRBS and Precise, the EIR adjustments are sensitive to changes in the behavioural life “curves”. We have therefore identified the estimation of the behavioural life for these portfolios as focus area of our audit.

We also identified a significant risk of material misstatement in relation to EIR adjustments on the Group’s legacy acquired portfolios. EIR on acquired loan portfolios is inherently more judgemental than originated loan portfolios as it involves modelling the expected cash flows on acquisition and comparing to actual and forecast cash flows at each balance sheet date. These loan portfolios are also underwritten outside of the Group’s standard processes and therefore may have different profiles than self-originated loans.
As set out on page 168, the Group monitors the actual cash flows for each acquired book and where they diverge significantly from expectation, the future cash flows are “reset”. In assessing whether to adjust future cash flows on an acquired portfolio, the Group considers the cash variance on an absolute and percentage basis. The Group also considers the total variance across all acquired portfolios. Where cash flows for an acquired portfolio are reset, they are discounted at the EIR to derive a new carrying value, with changes taken to profit or loss as interest income.

Independent Auditor’s Report continued

To the Members of OneSavings Bank plc

How the scope of our audit responded to the key audit matter

We obtained an understanding of the design and implementation of key controls over EIR, focusing on the calculation and review of EIR adjustments and the determination of prepayment curves.

For the two portfolios where the EIR adjustments were most significant and sensitive to changes in behavioural life, we involved our in-house modelling specialists to run the Group’s loan data for all products through our own independent EIR model, using the behavioural life curves derived by the Group. We compared our calculation of the EIR adjustment required to the amount recorded by management.

For the same portfolios, we also worked with our in-house modelling specialists to independently derive a behavioural life curve using the Group’s loan data tapes over recent years. We used these curves in our own independent EIR model to derive an independent output showing the EIR adjustments that should have been recorded in 2019. We compared this output to the amounts recorded by management.

We also tested the completeness and accuracy of a sample of inputs into the EIR model for originated loans.

For the legacy acquired portfolios, we tested the completeness and accuracy of actual cash flow data used in the Group’s reset analysis. For a sample of legacy acquired portfolios where the Group’s analysis determined that a reset was required based on variances in actual cash flow data compared to expected cash flows, we challenged the assumptions and modelling approach taken to determine the EIR adjustment by testing a sample of inputs to the analysis, reperforming the discounted cash
flow calculation for a sample of loans and challenging whether forecasts were consistent with historical performance and our understanding of the nature of the cash flows.

Key observations We determined that the EIR models and assumptions used were appropriate and that net interest income for the period is not materially misstated.

6. Our application of materiality

6.1. Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Group financial statements Parent company financial statements

Materiality

£14.0m £10.2m

Basis for determining materiality

We determined materiality for the Group by We determined materiality based on 5% of reference to a range of £11m to £15m based on 5% normalised profit before tax. We excluded
of normalised profit before tax of £219m and 1% of integration costs and exceptional transaction costs net assets of £1,477m as at 31 December 2019. from statutory profit before tax, consistent with our
approach to Group materiality.
Normalised profit before tax is statutory profit before tax of £209m excluding the negative goodwill credit of £11m, integration costs of £5m and the exceptional transaction costs of £16m.

6.2. Performance materiality

As a listed company, we normally consider a profit based measure to be the most relevant benchmark for users of the accounts given the Group’s stakeholder focus on maximising returns. However, we have not used a purely profit based measure to determine materiality as the balance sheet of the consolidated Group has increased significantly as a result of the acquisition of CCFSG but, given the timing of the acquisition, there has not been a commensurate increase

in the consolidated Group’s profit before tax. As a result, we concluded that a materiality based solely on the profit of the consolidated Group is
not appropriate and we therefore also considered the net assets as at 31 December 2019.

Given the volatility expected in statutory profit before tax as a result of the CCFSG acquisition, we consider normalised profit before tax to be a more stable metric for the consolidated Group’s profitability.

We consider a profit based measure to be the most relevant benchmark for users of the accounts given the parent company is publically listed with stakeholder focus on maximising returns.

We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. Group performance materiality of £9.8m was set at 70% of Group materiality for the 2019 audit. In determining performance materiality, we considered a number of factors, including: our understanding of the control environment, including entity-level controls and the degree of centralisation of controls and processes; our understanding of the business through our work performed at the planning stage and as part of the interim review for the six months ended 30 June 2019; and the low number of uncorrected misstatements identified in the prior year.

6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.7m for the Group and £0.5m for the parent company, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

7.An overview of the scope of our audit

Our Group audit was scoped by obtaining an understanding of the Group and its environment, including group-wide controls and assessing the risks of material misstatement at the Group level.

Our Group audit scope focused primarily on three subsidiaries: the two main banking entities OneSavings Bank plc (company only) and Charter Court Financial Services Limited, as well as Interbay ML Ltd, another significant lending subsidiary. These three subsidiaries were significant components and subject to a full scope audit. They represent 96% of the Group’s interest receivable
and similar income, 97% of profit before tax, 98% of total assets and 98% of total liabilities. The subsidiaries were selected to provide an appropriate basis of undertaking audit work to address the risks of material misstatement including those identified as key audit matters above. Our audits of each of the subsidiaries were performed using lower levels of materiality based on their size relative to the Group. The materiality for each subsidiary audit ranged from £5.4m to £10.2m.

Independent Auditor’s Report continued

To the Members of OneSavings Bank plc

Interest receivable and similar income

Profit before tax

Total assets

Total liabilities

Full audit scope 96%
Review at group level 4%
Full audit scope 97%
Review at group level 3%
Full audit scope 98%
Review at group level 2%
Full audit scope 98%
Review at group level 2%

All audit work for the purposes of the Group audit was performed by Deloitte LLP in the UK. The audit team for the Group and the parent company were based in London. There was a separate component audit team for the component audit of Charter Court Financial Services Limited which is based in Wolverhampton. The Senior Statutory Auditor has responsibility for directing and supervising all aspects of the audit work of the component auditor. In discharging this responsibility, he met local management and had regular meetings with the component audit team to oversee the component audit. Members of the Group audit team also visited the component audit team as well as performing a remote file review of their work. The Group audit team maintained dialogue with the component auditor throughout all phases of the audit and received written reports from the component auditor setting out the results of their audit procedures.

We tested the Group’s consolidation process and carried out analytical procedures to confirm that there were no significant risks of material misstatement in the aggregated financial information of the remaining subsidiaries not subject to a full scope audit or specified audit procedures.

8. Other information

The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that:

Fair, balanced and understandable – the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
Audit committee reporting – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or
Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.

We have nothing to report in respect of these matters.

9. Responsibilities of directors

As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.

10. Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Details of the extent to which the audit was considered capable of detecting irregularities, including fraud and non-compliance with laws and regulations are set out below.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditor’s report.

11. Extent to which the audit was considered capable of detecting irregularities, including fraud

We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion.

11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following:

the nature of the industry and sector, control environment and business performance including the design of the Group’s remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets;
the Group’s own assessment of the risks that irregularities may occur either as a result of fraud or error that was approved by the Board;
results of our enquiries of management, internal audit and the audit committee about their own identification and assessment of the risks of irregularities;

} any matters we identified having obtained and reviewed the Group’s documentation of their policies and procedures relating to:

identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;

the matters discussed among the audit engagement team including the component audit team and involving relevant internal specialists, including tax, valuations, real estate, IT and credit specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud.

As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the following areas which are referred to as key audit matters above: accounting for the acquisition of CCFSG, classification of exceptional transaction costs and integration costs, loan impairment provisions and effective interest rate income recognition. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.

We also obtained an understanding of the legal and regulatory frameworks that the Group operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements.
The key laws and regulations we considered in this context included the relevant provisions of the UK Companies Act 2006, Listing Rules and tax legislation.

In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be fundamental to the Group’s ability to operate or to avoid a material penalty. These included the Group’s prudential regulatory requirements and capital, liquidity and conduct requirements.

Independent Auditor’s Report continued

To the Members of OneSavings Bank plc

11.2. Audit response to risks identified
As a result of performing the above, we identified accounting for the acquisition of CCFSG, classification of exceptional transaction costs and integration costs, loan impairment provisions and revenue recognition using the effective interest rate as key audit matters related to the potential risk of fraud. The key audit matters section of our report explains the matters in more detail and also describes the specific procedures we performed in response to those key audit matters.

In addition to the above, our procedures to respond to risks identified included the following:

reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements;
enquiring of management, the audit committee and in-house and external legal counsel concerning actual and potential litigation and claims;
performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud;
reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with the Prudential Regulation Authority, the Financial Conduct Authority and HMRC;
in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.

We also communicated relevant identified laws, regulations and potential fraud risks to all engagement team members including internal specialists and the component audit team and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.

Report on other legal and regulatory requirements

12. Opinions on other matters prescribed by the Companies Act 2006

13. Opinion on other matter prescribed by the Capital Requirements (Country-by-Country Reporting) Regulations 2013

In our opinion the information given in note 49 to the financial statements for the financial year ended 31 December 2019 has been properly prepared, in all material respects, in accordance with the Capital Requirements (Country-by-Country Reporting) Regulations 2013.

14. Matters on which we are required to report by exception

14.1. Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
} we have not received all the information and explanations we require for our audit; or
} adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
} the parent company financial statements are not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

14.2. Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the directors’ remuneration report to be audited is not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

15. Other matters

15.1. Auditor tenure
Following the recommendation of the audit committee, we were appointed by the shareholders of the Group on 9 May 2019 to audit the financial statements for the year ended 31 December 2019 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is one year, covering the year ended 31 December 2019.

15.2. Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK).

16. Use of our report

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Robert Topley FCA (Senior statutory auditor)

For and on behalf of Deloitte LLP

Statutory Auditor London, United Kingdom 19 March 2020

Statement of Comprehensive Income

For the year ended 31 December 2019

Note		Group 2019 £m	Restated Group1 2018 £m
Interest receivable and similar income Interest payable and similar charges	5 6	539.9 (195.2)	407.9 (121.6)
Net interest income		344.7	286.3
Fair value losses on financial instruments 7		(3.3)	(5.1)
Loss on sale of financial instruments 8		(0.1)	(0.1)
Fees and commissions receivable		3.4	1.7
Fees and commissions payable		(1.2)	(1.1)
External servicing fees		(0.1)	(0.6)
Total income		343.4	281.1
Administrative expenses	9	(108.7)	(79.6)
Provisions	38	–	(0.8)
Impairment losses	24	(15.6)	(8.1)
Gain on Combination with CCFS	4	10.8	–
Integration costs	12	(5.2)	–
Exceptional items	13	(15.6)	(9.8)
Profit before taxation		209.1	182.8
Taxation	14	(50.3)	(43.2)
Profit for the year		158.8	139.6
Other comprehensive expense
Items which may be reclassified to profit or loss:
Fair value changes on financial instruments measured as FVOCI:
		0.8	(0.2)
Arising in the year		0.8	(0.2)
Revaluation of foreign operations		(0.6)	(0.2)
Tax on items in other comprehensive expense		(0.2)	–
Other comprehensive expense		–	(0.4)
Total comprehensive income for the year		158.8	139.2
Dividend, pence per share Earnings per share, pence per share Basic Diluted	16 15 15	16.1 52.6 52.2	14.6 55.5 55.0

1. The Group has restated the prior year comparatives to recognise interest expense and taxation on the £22.0m Perpetual Subordinated Bonds previously classified as equity (see note 1).

The above results are derived wholly from continuing operations. The notes on pages 166 to 258 form part of these accounts.
The financial statements on pages 162 to 258 were approved by the Board of Directors on 19 March 2020.

Statement of Financial Position

As at 31 December 2019

Note	Group 2019 £m	Restated Group1 2018 £m	Bank 2019 £m	Restated Bank1 2018 £m
Assets Cash in hand	0.4	0.4	0.4	0.4
Loans and advances to credit institutions 18	2,204.6	1,347.3	1,196.0	1,340.0
Investment securities 19	635.3	58.9	149.8	58.9
Loans and advances to customers 20	18,446.8	8,983.3	8,394.2	7,208.2
Fair value adjustments on hedged assets 26	16.8	19.8	52.8	19.8
Derivative assets 25	21.1	11.7	8.7	11.7
Other assets 27	14.3	5.7	7.5	5.5
Deferred taxation asset 28	4.8	3.5	2.2	1.6
Property, plant and equipment 29	41.6	21.8	21.2	15.6
Intangible assets 30	31.4	7.8	7.7	7.1
Investments in subsidiaries and intercompany loans 31	–	–	3,629.4	1,900.7
Total assets	21,417.1	10,460.2	13,469.9	10,569.5
Liabilities Amounts owed to credit institutions 32	3,068.8	1,584.0	1,671.1	1,584.0
Amounts owed to retail depositors 33	16,255.0	8,071.9	9,435.7	8,071.9
Fair value adjustments on hedged liabilities 26	(5.1)	–	(0.1)	–
Amounts owed to other customers 34	29.7	32.9	8.9	32.9
Debt securities in issue 35	296.3	–	–	–
Derivative liabilities 25	92.8	24.9	54.3	24.9
Lease liabilities 36	13.3	–	4.3	–
Other liabilities 37	34.9	18.7	17.1	14.7
Provisions 38	1.6	1.8	1.6	1.8
Current taxation liability	41.5	19.2	16.4	15.0
Deferred taxation liability 28	63.1	–	–	–
Deemed loan liabilities 21	–	–	240.2	–
Intercompany loans 31	–	–	643.9	262.4
Subordinated liabilities 39	10.6	10.8	10.6	10.8
Perpetual subordinated bonds 40	37.6	37.6	37.6	37.6
Equity Share capital 42	19,940.1 4.5	9,801.8 2.4	12,141.6 4.5	10,056.0 2.4
Share premium 42	864.2	158.8	864.2	158.8
Retained earnings	553.2	439.3	407.0	296.7
Other reserves 43	55.1	57.9	52.6	55.6
	1,477.0	658.4	1,328.3	513.5
Total equity and liabilities	21,417.1	10,460.2	13,469.9	10,569.5

1. The Group has restated the prior year comparatives to classify the £22.0m Perpetual Subordinated Bonds previously classified as equity as a liability (see note 1).

The profit after tax for the year ended 31 December 2019 of OneSavings Bank plc as a Company was £155.2m (2018: £96.2m).
As permitted by section 408 of the Companies Act 2006, no separate Statement of Comprehensive Income is presented in respect of the Company.

The notes on pages 166 to 258 form part of these accounts. The financial statements on pages 162 to 258 were approved by the Board of Directors on 19 March 2020.

Andy Golding April Talintyre

Chief Executive Officer Chief Financial Officer Company number: 07312896

Statement of Changes in Equity
For the year ended 31 December 2019

Share capital

Share premium

Capital contribution

Transfer reserve

Own shares1

Foreign exchange reserve

FVOCI
reserve

Share- based payment reserve

Retained earnings

Equity bonds2

Total

Group	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 31 December 2017	2.4	158.4	6.4	(12.8)	–	(0.2)	0.1	5.0	334.6	82.0	575.9
PSB restatement	–	–	–	–	–	–	–	–	(0.3)	(22.0)	(22.3)
Restated at 31 December 2017	2.4	158.4	6.4	(12.8)	–	(0.2)	0.1	5.0	334.3	60.0	553.6
Profit for the year	–	–	–	–	–	–	–	–	139.6	–	139.6
Coupon paid on equity bonds	–	–	–	–	–	–	–	–	(5.5)	–	(5.5)
Dividends paid	–	–	–	–	–	–	–	–	(33.2)	–	(33.2)
Other comprehensive income	–	–	–	–	–	(0.2)	(0.2)	–	–	–	(0.4)
Share-based payments	–	0.4	0.1	–	–	–	–	(0.3)	2.6	–	2.8
Tax recognised in equity	–	–	–	–	–	–	–	–	1.5	–	1.5
At 31 December 2018	2.4	158.8	6.5	(12.8)	–	(0.4)	(0.1)	4.7	439.3	60.0	658.4

Profit for the year	–	–	–	–	–	–	–	–	158.8	–	158.8
Shares issued as consideration for CCFS Combination3	2.0	705.1	–	–	–	–	–	–	(6.4)	–	700.7
Own shares1	–	–	–	–	(3.7)	–	–	–	–	–	(3.7)
Coupon paid on equity bonds	–	–	–	–	–	–	–	–	(5.5)	–	(5.5)
Dividends paid	–	–	–	–	–	–	–	–	(37.3)	–	(37.3)
Other comprehensive income	–	–	–	–	–	(0.6)	0.8	–	–	–	0.2
Share-based payments	0.1	0.3	–	–	–	–	–	(0.2)	4.3	–	4.5
Tax recognised in equity	–	–	–	–	–	–	(0.2)	1.1	–	–	0.9
At 31 December 2019	4.5	864.2	6.5	(12.8)	(3.7)	(1.0)	0.5	5.6	553.2	60.0	1,477.0

	Share capital	Share premium	Capital contribution	Transfer reserve	Own shares1	FVOCI reserve	Share- based payment reserve	Retained earnings	Equity bonds2	Total
Bank	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 31 December 2017	2.4	158.4	6.1	(15.2)	–	0.1	4.9	236.1	82.0	474.8
PSB restatement	–	–	–	–	–	–	–	(0.3)	(22.0)	(22.3)
Restated at 31 December 2017	2.4	158.4	6.1	(15.2)	–	0.1	4.9	235.8	60.0	452.5
Profit for the year	–	–	–	–	–	–	–	95.5	–	95.5
Coupon paid on equity bonds	–	–	–	–	–	–	–	(5.5)	–	(5.5)
Dividends paid	–	–	–	–	–	–	–	(33.2)	–	(33.2)
Other comprehensive income	–	–	–	–	–	(0.2)	–	–	–	(0.2)
Share-based payments	–	0.4	0.1	–	–	–	(0.2)	2.6	–	2.9
Tax recognised in equity	–	–	–	–	–	–	–	1.5	–	1.5
At 31 December 2018	2.4	158.8	6.2	(15.2)	–	(0.1)	4.7	296.7	60.0	513.5

Profit for the year	–	–	–	–	–	–	–	155.2	–	155.2
Shares issued as consideration for CCFS Combination3	2.0	705.1	–	–	–	–	–	(6.4)	–	700.7
Own Shares1	–	–	–	–	(3.7)	–	–	–	–	(3.7)
Coupon paid on equity bonds	–	–	–	–	–	–	–	(5.5)	–	(5.5)
Dividends paid	–	–	–	–	–	–	–	(37.3)	–	(37.3)
Other comprehensive income	–	–	–	–	–	0.1	–	–	–	0.1
Share-based payments	0.1	0.3	–	–	–	–	(0.2)	4.3	–	4.5
Tax recognised in equity	–	–	–	–	–	–	0.8	–	–	0.8
At 31 December 2019	4.5	864.2	6.2	(15.2)	(3.7)	–	5.3	407.0	60.0	1,328.3

OSB has adopted look-through accounting and recognised the CCFS Employee Benefit Trust within the Bank.
Equity bonds comprise £60.0m of Additional Tier 1 securities. The Group has restated the prior year comparatives to classify the £22.0m Perpetual Subordinated Bonds previously classified as equity as a liability (see note 1).
Shares issued as consideration for CCFS Combination includes £6.4m of expenses recognised directly in equity relating to the issuance of new shares.

The reserves are further disclosed in note 43.

Statement of Cash Flows

For the year ended 31 December 2019

Note		Group 2019 £m	Restated Group1 2018 £m	Bank 2019 £m	Restated Bank1 2018 £m
Cash flows from operating activities Profit before taxation		209.1	182.8	189.4	128.6
Expenses recognised in equity		(6.4)	–	(6.4)	–
Adjustments for non-cash items2 50		26.2	36.7	33.2	35.1
Changes in operating assets and liabilities2 50		(711.8)	(265.8)	(577.4)	(219.0)
Cash used in operating activities		(482.9)	(46.3)	(361.2)	(55.3)
Provisions		(0.2)	(0.4)	(0.2)	(0.4)
Net tax paid		(53.0)	(39.1)	(32.4)	(30.3)
Net cash used in operating activities		(536.1)	(85.8)	(393.8)	(86.0)
Cash flows from investing activities Unencumbered cash acquired on CCFS Combination		870.4	–	–	–
Maturity and sales of investment securities	19	357.7	39.9	349.0	39.9
Purchases of investment securities	19	(389.9)	(79.9)	(389.9)	(79.9)
Sales of financial instruments	8	–	0.4	–	0.4
Purchases of equipment and intangible assets	30,29	(11.6)	(6.0)	(6.7)	(5.2)
Cash generated from/(used in) investing activities		826.6	(45.6)	(47.6)	(44.8)
Cash flows from financing activities Financing received2 41		872.7	330.7	601.8	330.7
Financing repaid2 41		(338.5)	(0.1)	(275.0)	(0.1)
Interest paid on bonds and subordinated debt		(2.6)	(2.6)	(2.5)	(2.6)
Coupon paid on equity bonds		(5.5)	(5.5)	(5.5)	(5.5)
Dividends paid 16		(37.3)	(33.2)	(37.3)	(33.2)
Proceeds from issuance of shares under employee SAYE schemes 42		0.4	0.4	0.4	0.4
Cash payments on lease liabilities 36		(1.1)	–	(0.8)	–
Cash generated from financing activities		488.1	289.7	281.1	289.7
Net increase/(decrease) in cash and cash equivalents		778.6	158.3	(160.3)	158.9
Cash and cash equivalents at the beginning of the year	17	1,324.2	1,165.9	1,316.9	1,158.0
Cash and cash equivalents at the end of the year	17	2,102.8	1,324.2	1,156.6	1,316.9
Movement in cash and cash equivalents		778.6	158.3	(160.3)	158.9

The Group has restated the prior year comparatives for the interest expense on the £22.0m Perpetual Subordinated Bonds previously classified as equity (see note 1).
The Group has reclassified the prior year comparatives to include all components of amounts owed to credit institutions as financing activities. Previously the Group only classified the Bank of England Term Funding Scheme and Indexed Long-Term Repo scheme as financing activities.

Notes to the Financial Statements

For the year ended 31 December 2019

1. Restatement of prior year
During the year the Group and Bank identified that a clause in the terms of the Group’s £22.0m Perpetual Subordinated Bonds (‘PSB’) relating to the Board’s discretion over the payment of coupons was conditional and hence the PSBs were incorrectly classified as equity. The Group and Bank have restated the 2018 comparatives accordingly to classify the £22.0m PSBs as a financial liability. The impact of adjusting the prior year reported balances is shown in the table below:

	Group	Adjustment	Restated Group	Bank	Adjustment	Restated Bank
1 January 2018	£m	£m	£m	£m	£m	£m
Statement of Financial Position
Liabilities: Perpetual subordinated bonds	15.3	22.3	37.6	15.3	22.3	37.6
Equity: Retained earnings	334.6	(0.3)	334.3	236.1	(0.3)	235.8
Other reserves	82.0	(22.0)	60.0	82.0	(22.0)	60.0
31 December 2018
Statement of Financial Position
Liabilities: Perpetual subordinated bonds	15.3	22.3	37.6	15.3	22.3	37.6
Equity: Retained earnings	439.6	(0.3)	439.3	297.0	(0.3)	296.7
Other reserves	79.9	(22.0)	57.9	77.6	(22.0)	55.6
Statement of Changes in Equity
Retained earnings	439.6	(0.3)	439.3	297.0	(0.3)	296.7
Equity bonds	82.0	(22.0)	60.0	82.0	(22.0)	60.0
Statement of Cash Flows
Profit before taxation	183.8	(1.0)	182.8	129.6	(1.0)	128.6
Adjustments for non-cash items	32.7	1.0	33.7	31.1	1.0	32.1
Interest paid on bonds and subordinated debt	(1.6)	(1.0)	(2.6)	(1.6)	(1.0)	(2.6)
Coupon paid on equity bonds	(6.5)	1.0	(5.5)	(6.5)	1.0	(5.5)
Statement of Comprehensive Income
Interest expense	(120.6)	(1.0)	(121.6)
Profit before taxation	183.8	(1.0)	182.8
Taxation	(43.5)	0.3	(43.2)
Profit for the year	140.3	(0.7)	139.6

2. Accountingpolicies
The principal accounting policies applied in the preparation of the financial statements for the Group and the Bank are set out below.

a) Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union (‘EU’) and interpretations issued by the International Financial Reporting Interpretations Committee (‘IFRIC’).

The financial statements have been prepared on a historical cost basis, as modified by the revaluation of investment securities held at fair value through other comprehensive income (‘FVOCI’) and derivative contracts and other financial assets held at fair value through profit or loss (‘FVTPL’) (see note o(vi)).

As permitted by section 408 of the Companies Act 2006, no Statement of Comprehensive Income is presented for the Bank.

b) Going concern

The Board undertakes regular rigorous assessments of whether the Group is a going concern in the light of current economic conditions and all available information about future risks and uncertainties.

Projections for the Group have been prepared, covering its future performance, capital and liquidity for a period in excess of 12 months from the date of approval of these financial statements including stress scenarios. The stress scenarios include Brexit scenarios, the impact of Bank of England (‘BoE’) Term Funding Scheme (‘TFS’) repayments and the introduction of a COVID-19 pandemic scenario.
These pandemic scenarios may continue to evolve, but at the present time they are less severe across the key macroeconomic

variables than the most severe stress tests run by the Group, including the BoE’s rates down scenarios. The Group’s projections and stress scenarios show that the Group has sufficient capital and liquidity to continue to meet its regulatory requirements as set by the Prudential Regulatory Authority (‘PRA‘).

The Board has therefore concluded that the Group has sufficient resources to continue in operational existence for a period in excess of 12 months and as a result it is appropriate to prepare these financial statements on a going concern basis.

c) Basis of consolidation

The Group accounts include the results of the Bank and its subsidiary undertakings. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are deconsolidated from the date that control ceases. Upon consolidation,
intercompany transactions, balances and unrealised gains on transactions are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Subsidiaries are those entities, including structured entities, over which the Group has control. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the investee. The Group has power over an entity when it has existing rights that give it the current ability to direct the activities that most significantly affect the entity’s returns. Power may be determined on the basis of voting rights or, in the case of structured entities, other contractual arrangements.

The Group manages the administration of its securitised assets and is exposed to the risks and rewards of the underlying mortgage assets through its continued subordinated investment in the securitisation structures. Where the Group does not retain a direct ownership interest in a securitisation entity, but the Directors have determined that the Group controls those entities, they are treated as subsidiaries and are consolidated. Control is determined to exist if the Group has the power to direct the activities of each entity (for example, managing the performance of the underlying mortgage assets and raising debt on those mortgage assets which is used to fund the Group) and in addition to this control is exposed to a variable return (for example, retaining the residual risk on the mortgage assets). Securitisation structures that do not meet these criteria are not treated as subsidiaries and the mortgage assets are derecognised when they are sold. The Bank applies the net approach in accounting for securitisation structures where it retains an interest in the securitisation, netting the loan notes held against the deemed loan balance.

The Group’s Employee Benefit Trusts (‘EBT’) are controlled and recognised by the Bank using the look-through approach.

The Group is not deemed to control an entity when it exercises power over an entity in an agency capacity. In determining whether the Group is acting as an agent, the Directors consider the overall relationship between the Group, the investee and other parties to the arrangement with respect to the following factors: (i) the scope of the Group’s decision-making power; (ii) the rights held by other parties; (iii) the remuneration to which the Group is entitled; and (iv) the Group’s exposure to variability of returns. The determination of control is based on the current facts and circumstances and is continuously assessed. In some circumstances, different factors and conditions may indicate that different parties control an entity depending on whether those factors and conditions are assessed in isolation or in totality. Significant judgement is applied in assessing the relevant factors and conditions in totality when determining whether the Group controls an entity. Specifically, judgement is applied in assessing whether the Group has substantive decision- making rights over the relevant activities and whether it is exercising power as a principal or an agent.

d) Business combinations

The Group uses the acquisition method to account for business combinations. The Group recognises the identifiable assets acquired and liabilities assumed at their acquisition date fair values. The Group recognises deferred tax on the difference between fair value and the acquisition date carrying value in accordance with International Accounting Standard (‘IAS’) 12. The consideration transferred for each business combination is measured at fair value, and comprises the sum of equity interest issued by the Group. Acquisition-related costs are recognised as exceptional items within profit or loss.

The Group recognises goodwill on business combinations when the fair value of consideration transferred exceeds the fair value of identifiable assets acquired and liabilities assumed. The Group recognises a gain within profit or loss when the fair value of consideration transferred is less than the fair value of identifiable assets acquired and liabilities assumed.

The Group reports provisional amounts for business combinations when the accounting is incomplete at the reporting date following the combination. During the measurement period, the Group adjusts provisional amounts recognised at the acquisition date to reflect new information obtained that existed as of the acquisition date and would have affected the measurement of the amounts recognised as at that date. The Group also recognises additional assets or liabilities during the reporting period if new information is obtained that existed as of the acquisition date and would have resulted in the recognition of those assets or liabilities as at that date. The Group adjusts the gain taken to profit or loss where there is negative goodwill, or adjusts goodwill recognised on the balance sheet, when provisional amounts are finalised or additional assets and liabilities are recognised during the measurement period.
The measurement period ends as soon as the Group receives the information it was seeking or learns that more information is unobtainable. The measurement period shall not exceed one year from the acquisition date.

Notes to the Financial Statements continued

For the year ended 31 December 2019

2. Accounting policies continued

e) Foreign currency translation

The consolidated financial statements are presented in Pounds Sterling which is the presentation currency of the Group. The financial statements of each of the Bank’s subsidiaries are measured using the currency of the primary economic environment in which
the subsidiary operates (the ‘functional currency’). Foreign currency transactions are translated into the functional currencies using the exchange rates prevailing at the date of the transactions. Monetary items denominated in foreign currencies are retranslated at the rate prevailing at the period end.

Foreign exchange (‘FX’) gains and losses resulting from the retranslation and settlement of these items are recognised in profit or loss. Non-monetary items measured at cost in the foreign currency are translated using the spot FX rate at the date of the transaction.

The assets and liabilities of foreign operations with functional currencies other than Pounds Sterling are translated into the presentation currency at the exchange rate on the reporting date. The income and expenses of foreign operations are translated at the rates on the dates of transactions. Exchange differences on foreign operations are recognised in other comprehensive income and accumulated
in the foreign exchange reserve within equity.

f) Segmental reporting

IFRS 8 requires operating segments to be identified on the basis of internal reports and components of the Group which are regularly reviewed by the chief operating decision maker to allocate resources to segments and to assess their performance. For this purpose, the chief operating decision maker of the Group is the Board of Directors.

The Group lends within the UK and the Channel Islands.

Following the combination with Charter Court Financial Services Group plc (‘CCFS’) (‘the Combination’), the Group segments its lending business and operates under two segments:

} OneSavings Bank plc (‘OSB’)

} CCFS

In 2018, the Group operated under two segments: Buy-to-Let/SME (‘BTL/SME’) and Residential mortgages.

The Group has disclosed the risk management tables in note 45 at a sub-segment level to provide granular level analysis of the Group’s core lending business.

g) Interest income and expense

Interest income and interest expense for all interest-bearing financial instruments measured at amortised cost are recognised in profit or loss using the effective interest rate (‘EIR’) method. The EIR is the rate which discounts the expected future cash flows, over the expected life of the financial instrument, to the net carrying value of the financial asset or liability.

When calculating the EIR, the Group estimates cash flows considering all contractual terms of the instrument and behavioural aspects (for example, prepayment options) but not considering future credit losses. The calculation of the EIR includes transaction costs and fees paid or received that are an integral part of the interest rate, together with the discounts or premiums arising on the acquisition of loan portfolios. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial instrument.

The Group monitors the actual cash flows for each acquired book and where they diverge significantly from expectation, the future cash flows are reset. In assessing whether to adjust future cash flows on an acquired portfolio, the Group considers the cash variance on an absolute and percentage basis. The Group also considers the total variance across all acquired portfolios. Where cash flows for an acquired portfolio are reset, they are discounted at the EIR to derive a new carrying value, with changes taken to profit or loss as interest income.

The EIR is adjusted where there is a change to the reference interest rate (LIBOR or base rate) affecting portfolios with a variable interest rate which will impact future cash flows. The revised EIR is the rate which exactly discounts the revised cash flows to the net carrying value of the loan portfolio.

Interest income on investment securities is included in interest receivable and similar income. Interest on derivatives is included in interest receivable and similar income or interest expense and similar charges following the underlying instrument it is hedging.

Coupons paid on Additional Tier 1 securities (‘AT1 securities’) are recognised directly in equity in the period in which it is paid.

h) Fees and commissions

Fees and commissions which are an integral part of the EIR of a financial instrument are recognised as an adjustment to the EIR and recorded in interest income. The Group includes early redemption charges within the EIR.

Fees received on mortgage administration services and mortgage origination activities are accounted for in accordance with IFRS 15 Revenue from Contracts with Customers. Income from the rendering of these services and mortgage origination activities is recognised when the services are delivered and the benefits are transferred to clients and customers.

Other fees and commissions are recognised on the accruals basis as services are provided or on the performance of a significant act, net of VAT and similar taxes.

i) Taxation

Income tax comprises current and deferred tax. It is recognised in profit or loss, other comprehensive income or directly in equity, consistently with the recognition of items it relates to. In accordance with IAS 12, from 1 January 2019 the Group recognises tax on the AT1 securities directly in profit or loss (2018: directly in equity).

Current tax is the expected tax charge or credit on the taxable income or loss in the period and any adjustments in respect of previous years.

Deferred tax is the tax expected to be payable or recoverable in respect of temporary differences between the carrying amounts of assets or liabilities for accounting purposes and carrying amounts for tax purposes.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available to utilise the asset. The recognition of deferred tax is mainly dependent on the projections of future taxable profits and future reversals of temporary differences. The current Board projections of future taxable income assume that the Group will utilise its deferred tax asset within the foreseeable future.

The Bank and the OSB UK subsidiaries are in a group payment arrangement for corporation tax and show a net corporation tax liability and deferred tax asset accordingly. The Group’s CCFS subsidiaries are not part of the group payment arrangement at the reporting date and have not been netted.

j) Dividends

Dividends are recognised in equity in the period in which they are paid or, if earlier, approved by shareholders.

k) Cash and cash equivalents

For the purposes of the Statement of Cash Flows, cash and cash equivalents comprise cash, non-restricted balances with central banks and highly liquid financial assets with original maturities of less than three months subject to an insignificant risk of changes in their fair value.

l) Intangible assets

Purchased software and costs directly associated with the development of computer software are capitalised as intangible assets where the software is a unique and identifiable asset controlled by the Group and will generate future economic benefits. Costs to establish technological feasibility or to maintain existing levels of performance are recognised as an expense. The Group only recognises internally-generated intangible assets if all of the following conditions are met:

} an asset is being created that can be identified after establishing the technical and commercial feasibility of the resulting product;
} it is probable that the asset created will generate future economic benefits; and
} the development cost of the asset can be measured reliably.

Subsequent expenditure on an internally-generated intangible asset, after its purchase or completion, is recognised as an expense in the period in which it is incurred. Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.

Upon the Combination, the Group performed a purchase price allocation process to recognise separate identifiable intangible assets acquired. The Group has recognised intangible assets for brand name, broker relationships, technology and banking licence.

Notes to the Financial Statements continued

For the year ended 31 December 2019

2. Accounting policies continued
Intangible assets are reviewed for impairment annually, and if they are considered to be impaired, are written down immediately to their recoverable amounts.

Intangible assets are amortised in profit or loss over their estimated useful lives as follows:

Software and internally generated assets 3–5 years straight line Development costs, brand and technology 4 years straight line Broker relationships 3 year profile
Bank licence 3 years straight line

The Group reviews the amortisation period on an annual basis. If the expected useful life of assets is different from previous assessments, the amortisation period is changed accordingly.

m) Property, plant and equipment

Property, plant and equipment comprise freehold land and buildings, major alterations to office premises, computer equipment and fixtures measured at cost less accumulated depreciation. These assets are reviewed for impairment annually, and if they are considered to be impaired, are written down immediately to their recoverable amounts.
Items of property, plant and equipment are depreciated on a straight-line basis over their estimated useful economic lives as follows: Buildings                                 50 years
Leasehold improvements                                  5–10 years
Equipment and fixtures                                      3–5 years

Land, deemed to be 25% of purchase price of buildings, is not depreciated.

The cost of repairs and renewals is charged to profit or loss in the period in which the expenditure is incurred.

n) Investment in subsidiaries

In the Bank’s financial statements, investments in subsidiary undertakings are stated at cost less provision for any impairment. A full list of the Bank’s subsidiaries consolidated into the Group’s financial statements can be found in note 31.

The Bank performs an annual impairment assessment of it’s investment in subsidiary undertakings, assessing the cost of investment against the subsidiaries’ net asset values at the reporting date for indication of impairment. Where there is indication of impairment, the Bank estimates the subsidiaries value in use by estimating future profitability and the impact on the net assets of the subsidiary. The Bank recognises an impairment directly in profit or loss when the value in use is less than the cost of investment. Impairments are subsequently reversed if future annual impairment assessments show the value in use of the subsidiary has increased.

o) Financial instruments

i. Classification
The Group classifies financial instruments based on the business model and the contractual cash flow characteristics of the financial instruments. Under IFRS 9, the Group classifies financial assets into one of three measurement categories:

Amortised cost – assets held in a business model to hold financial assets in order to collect contractual cash flows, where the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (‘SPPI’) on the principal amount outstanding.
Fair value through other comprehensive income (‘FVOCI’) – assets held in a business model which collects contractual cash flows and sells financial assets where the contractual terms of the financial assets give rise on specified dates to cash flows that are SPPI on the principal amount outstanding.
Fair value through profit or loss (‘FVTPL’) – assets not measured at amortised cost or FVOCI. The Group measures derivatives and an acquired mortgage portfolio under this category.

The Group classifies non-derivative financial liabilities as measured at amortised cost.

The Group has no financial assets nor liabilities classified as held for trading or held to maturity. The Group reassesses its business models each reporting period.

The Group classifies certain financial instruments as equity where they meet the following conditions:

The financial instrument includes no contractual obligation to deliver cash or another financial asset on potentially unfavourable conditions.
The financial instrument is a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or
The financial instrument is a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

Equity financial instruments comprise own shares and AT1 securities. Accordingly, the coupon paid on the AT1 securities is recognised directly in retained earnings when paid.

ii. Recognition
The Group initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities on the date on which they are originated or acquired. All other financial instruments are accounted for on the trade date which is when the Group becomes a party to the contractual provisions of the instrument.

For financial instruments classified as amortised cost, the Group initially recognises financial assets and financial liabilities at fair value plus transaction income or costs that are directly attributable to its origination, acquisition or issue. These financial instruments are subsequently measured at amortised cost using the effective interest.

Transaction costs relating to the acquisition or issue of a financial instrument at FVOCI and FVTPL are recognised in the profit or loss as incurred.

iii. Derecognition
The Group derecognises financial assets when the contractual rights to the cash flows expire or the Group transfers substantially
all risks and rewards of ownership of the financial asset. In assessing the broker-led Choices programme the principles of IFRS 9 and relevant guidance in IAS 8 in respect of debt issuance, results in the original mortgage asset being derecognised with a new financial asset recognised.

The forbearance measures offered by the Group are considered a modification event as the contractual cash flows are renegotiated
or otherwise modified. The Group considers the renegotiated or modified cash flows are not wholly different from the contractual cash flows, and does not consider that forbearance measures give rise to a derecognition event.

Financial liabilities are derecognised only when the obligation is discharged, cancelled or has expired.

iv. Offsetting
Financial assets and financial liabilities are offset and the net amount presented in the Statement of Financial Position when, and only when, the Group currently has a legally enforceable right to offset the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously in accordance with the requirements of IAS 32.

The Group’s derivatives are covered by industry standard master netting agreements. Master netting agreements create a right of set-off that becomes enforceable only following a specified event of default or in other circumstances not expected to arise in the normal course of business. These arrangements do not qualify for offsetting under IAS 32 and as such the Group reports derivatives on a gross basis.

Collateral in respect of derivatives is subject to the standard industry terms of International Swaps and Derivatives Association (‘ISDA’) Credit Support Annex. This means that the cash received or given as collateral can be pledged or used during the term of the transaction but must be returned on maturity of the transaction. The terms also give each counterparty the right to terminate the related transactions upon the counterparty’s failure to post collateral. Collateral paid or received does not qualify for offsetting under IAS 32, and is recognised in loans and advances to credit institutions and amounts owed to credit institutions respectively.

v. Amortised cost measurement
The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, plus or minus the cumulative amortisation using the EIR method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.

Notes to the Financial Statements continued

For the year ended 31 December 2019

2. Accounting policies continued
vi. Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date.

When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument.
A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The Group measures the fair value of its investment securities and PSBs using quoted market prices.

If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs.

The Group uses a combination of LIBOR and SONIA curves to value its derivatives however, using overnight index swap (‘OIS’) curves would not materially change their value. The fair value of the Group’s derivative financial instruments incorporates credit valuation adjustments (‘CVA’) and debit valuation adjustments (‘DVA’). The DVA and CVA take into account the respective credit ratings of the Bank and counterparty and whether the derivative is collateralised or not. Interest rate derivatives are valued using discounted cash flow models and observable market data and will be sensitive to benchmark interest rate curves.

vii. Identification and measurement of impairment of financial assets

The Group assesses all financial assets for impairment.

Loans and advances to customers
The Group uses the IFRS 9 three-stage expected credit loss (‘ECL’) approach for measuring impairment. The three impairment stages under IFRS 9 are as follows:

Stage 1 – entities are required to recognise a 12-month ECL allowance where there is no significant increase in credit risk (‘SICR’) since initial recognition.
Stage 2 – a lifetime loss allowance is held for assets where a SICR is identified since initial recognition. The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period for the life of the loan.

} Stage 3 – requires objective evidence that an asset is credit impaired, at which point a lifetime ECL allowance is required. The Group measures impairment through the use of individual and modelled assessments.
Individual assessment
The Group’s provisioning process requires individual assessment for high exposure or higher risk loans, where Law of Property Act (‘LPA’) receivers have been appointed, the property is taken into possession or there are any other events that suggest a high probability of credit loss. Loans are considered at a connection level, i.e. including all loans belonging to and connected to the customer.

The Group estimates cash flows from these loans, including expected interest and principal payments, rental or sale proceeds, selling and other costs. The Group obtains up-to-date independent valuations for properties put up for sale.

If the present value of estimated future cash flows discounted at the original EIR is less than the carrying value of the loan, a provision is recognised for the difference. Such loans are classified as impaired. If the present value of the estimated future cash flows exceeds the carrying value no provision is recognised.

The Group applies its IFRS 9 models to all loans with no individually assessed provision.

IFRS 9 modelled impairment

Measurement of ECL
The assessment of credit risk and the estimation of ECL are unbiased and probability weighted. ECL is measured on either a 12-month (stage 1) or lifetime basis depending on whether a SICR has occurred since initial recognition (stage 2) or where an account meets the Group’s definition of default (stage 3).

The ECL calculation is a product of an individual loan’s probability of default (‘PD’), exposure at default (‘EAD’) and loss given default (‘LGD’) discounted at the EIR. The ECL drivers of PD, EAD and LGD are modelled at an account level. The assessment of whether
a significant increase in credit risk has occurred is based on quantitative relative PD thresholds and a suite of qualitative triggers.

Significant increase in credit risk (movement to stage 2)
The Group’s transfer criteria determine what constitutes a SICR, which results in an exposure being moved from stage 1 to stage 2.

At the point of recognition a loan is assigned a PD estimate. For each monthly reporting date thereafter, an updated PD estimate is computed for the life of the loan. The Group’s transfer criteria analyses relative changes in PD versus the PD assigned at the point of origination, coupled with qualitative triggers using both internal and external credit bureau information.

IFRS 9 includes a rebuttable presumption that if an account is more than 30 days past due it has experienced a SICR. The Group considers more than 30 days past due to be an appropriate back stop measure and therefore has not rebutted this presumption.

The Group’s Risk function constantly monitors the ongoing appropriateness of the transfer criteria, where any proposed amendments are reviewed and approved by the Group’s Management Committees and the Risk and Audit Committees at least annually or more frequently if required. Post Combination the SICR approaches across both OSB and CCFS were aligned under a common framework including a quantitative PD threshold approach supplemented by a set of qualitative rules, with bespoke thresholds implemented
to reflect the individual portfolio characteristics of each firm.
A borrower will move back into stage 1 where the SICR definition is no longer satisfied. Definition of default (movement to stage 3)
The Group uses a number of quantitative and qualitative criteria to determine whether an account meets the definition of default and therefore moves to stage 3. The criteria currently include:

The rebuttable presumption that more than 90 days past due is an indicator of default. The Group has not rebutted this presumption and therefore deems more than 90 days past due as an indicator of default.
The Group has also deemed it appropriate to classify accounts that have moved into an unlikeliness to pay position, which includes forbearance, bankruptcy, repossession and interest-only term expiry.

A borrower will move out of stage 3 when its credit risk improves such that it no longer meets the 90 days past due and unlikeliness to pay criteria and following this has completed an internally approved probation period. The borrower will move to stage 1 or stage 2 dependent on whether the SICR applies.

Forward-looking macroeconomic scenarios
IFRS 9 requires firms to consider the risk of default and expected credit loss taking into consideration expectations of economic changes that are deemed to be reasonably possible.

The Group conducts analysis to determine the most significant factors which may influence the likelihood of an exposure defaulting in the future. The macroeconomic factors relate to the House Price Index (‘HPI’), unemployment rate (‘UR’), Gross domestic product (‘GDP’), Commercial Real Estate Index (‘CRE’) and the BoE Base Rate (‘BR’).

The Group has derived an approach for factoring probability-weighted macroeconomic forecasts into ECL calculations, adjusting PD and LGD estimates. The macroeconomic scenarios feed directly into the ECL calculation, as the adjusted PD, lifetime PD and LGD estimates are used within the individual account ECL allowance calculations.

The Group currently does not have an in-house economics function and therefore sources economic forecasts from an appropriately qualified third party. The Group will consider a minimum of four probability-weighted scenarios, including base, upside, downside and severe downside scenarios.

The base case is also utilised within the Group’s impairment forecasting process which in turn feeds the wider business planning processes. This ECL models are also used to set the Group’s credit risk appetite thresholds and limits.

Notes to the Financial Statements continued

For the year ended 31 December 2019

2. Accounting policies continued
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of the asset which is the date at which the loan is originated or the date a loan is purchased and at each balance sheet date thereafter. The maximum period considered when measuring ECL (either 12-month or lifetime ECL) is the maximum contractual period over which the Group is exposed to the credit risk of the asset. For modelling purposes the Group considers the contractual maturity of the loan product and then considers the behavioural trends of the asset.

Purchased or originated credit impaired (‘POCI’)
Acquired loans that meet OSB’s definition of default (90 days past due or an unlikeliness to pay position) at acquisition are treated
as a POCI asset. These assets will attract a lifetime ECL allowance over the full term of the loan, even when the loan no longer meets the definition of default post acquisition. The Group does not originate credit-impaired loans.

Intercompany loans
Intercompany receivables in the parent Company financial statements are assessed for ECL based on an assessment of the PD and LGD, discounted to a net present value.

Other financial assets
Other financial assets comprise cash balances with the BoE and other credit institutions and high grade investment securities. The Group deems the likelihood of default across these counterparties as low, and hence does not recognise a provision against the carrying balances.

p) Loans and receivables

Loans and receivables are predominantly mortgage loans and advances to customers with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell in the near term. They are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised cost using the EIR method, less impairment losses. Where exposures are hedged by derivatives, designated and qualifying as fair value hedges, the fair value adjustment for the hedged risk to the carrying value of the hedged loans and advances is reported in fair value adjustments for hedged assets.

Loans and the related provision are written off when the underlying security is sold. Subsequent recoveries of amounts previously written off are taken through profit or loss.

Loans and advances over which the Group transfers its rights to the collateral thereon to the BoE under the TFS and Indexed Long-Term Repo (‘ILTR’) schemes are not derecognised from the Statement of Financial Position, as the Group retains substantially all the risks and rewards of ownership, including all cash flows arising from the loans and advances and exposure to credit risk. The Group classifies TFS and ILTR as amortised cost under IFRS 9 Financial Instruments.

Loans and advances include a small acquired mortgage portfolio whose contractual cash flows include payments that are not solely payments of principal and interest and as such are measured at fair value through profit or loss. The Group initially recognises these loans at fair value, with direct and incremental costs of acquisition recognised directly in profit or loss, and subsequently measures them at fair value.

Loans and receivables contain the Group’s asset finance lease lending. Finance leases are initially measured at an amount equal to the net investment in the lease, using the interest rate implicit in the finance lease. Direct costs are included in the initial measurement of the net investment in the lease and reduce the amount of income recognised over the lease term. Finance income is recognised over the lease term, based on a pattern reflecting a constant periodic rate of return on the net investment in the lease.

q) Investment securities

Investment securities comprise securities held for liquidity purposes (UK treasury bills, Residential Mortgage-Backed Securities (‘RMBS’) and supranational bonds). These assets are non-derivatives that are designated as FVOCI or classified as amortised cost.

Assets classified as amortised cost are originally recognised at fair value and subsequently measured amortised cost using the EIR method, less impairment losses.

Assets held at FVOCI are measured at fair value with movements taken to other comprehensive income and accumulated in the FVOCI reserve within equity, except for impairment losses which are taken to profit or loss. When the instrument is sold, the gain or loss accumulated in equity is reclassified to profit or loss.

r) Deposits, debt securities in issue and subordinated liabilities

Deposits, debt securities in issue and subordinated liabilities are the Group’s sources of debt funding. They comprise deposits from retail customers and credit institutions, including collateralised loan advances from the BoE under the TFS and ILTR, asset backed loan notes issued through the Group’s securitisation programmes and subordinated liabilities. Subordinated liabilities include the Sterling PSBs where the terms allow no absolute discretion over the payment of interest. These financial liabilities are initially measured at fair value less direct transaction costs, and subsequently held at amortised cost using the EIR method.

Cash received under the TFS and ILTR is recorded in amounts owed to credit institutions. Interest is accrued over the life of the agreements on an EIR basis.

s) Sale and repurchase agreements

Financial assets sold subject to repurchase agreements (‘repo’) are retained in the financial statements if they fail derecognition criteria of IFRS 9 described in paragraph o(iii) above. The financial assets that are retained in the financial statements are reflected as loans and advances to customers or investment securities and the counterparty liability is included in amounts owed to credit
institutions or other customers. Financial assets purchased under agreements to resell at a predetermined price where the transaction is financing in nature (‘reverse repo’) are accounted for as loans and advances to credit institutions. The difference between the sale and repurchase price is treated as interest and accrued over the life of the agreement using the EIR method.

t) Derivative financial instruments

The Group uses derivative financial instruments (interest rate swaps and basis swaps) to manage its exposure to interest rate risk. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for proprietary trading.

Derivative financial instruments are recognised at their fair value with changes in their fair value taken to profit or loss. Fair values are calculated by discounting cash flows at the prevailing interest rates. All derivatives are classified as assets when their fair value is positive and as liabilities when their fair value is negative. If a derivative is cancelled, it is derecognised from the Statement of Financial Position.

The Group also uses derivatives to hedge the interest rate risk inherent in irrevocable offers to lend. This exposes the Group to movements in the fair value of derivatives until the loan is drawn. The changes to fair value are recognised in profit or loss in the period.

The Group is party to a limited number of options and warrants. These are recognised as a derivative financial instruments as applicable where a trigger event takes place and the fair value of the option or warrant can be reliably measured.

u) Hedge accounting

The Group has chosen to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements in Chapter 6 of IFRS 9. The Group uses fair value hedge accounting for a portfolio hedge of interest rate risk.

Portfolio hedge accounting allows for hedge effectiveness testing and accounting over an entire portfolio of financial assets or liabilities. To qualify for hedge accounting at inception, the hedge relationship is clearly documented and the derivative must be expected to be highly effective in offsetting the hedged risk. In addition, effectiveness must be tested throughout the life of the hedge relationship.

The Group applies fair value portfolio hedge accounting to its fixed rate portfolio of mortgages and saving accounts. The hedged portfolio is analysed into repricing time periods based on expected repricing dates, utilising the Group Assets and Liabilities Committee (‘ALCO’) approved prepayment curve. Interest rate swaps are designated against the repricing time periods to establish the hedge relationship. Hedge effectiveness is calculated as a percentage of the fair value movement of the interest rate swap against the fair value movement of the hedged item over the period tested.

The Group considers the following as key sources of hedge ineffectiveness:

} The mismatch in maturity date of the swap and hedged item, as swaps with a given maturity date cover a portfolio of hedged items which may mature throughout the month
} The actual behaviour of the hedged item differing from expectations, such as early repayments or withdrawals and arrears
} Minimal movements in the yield curve leading to ineffectiveness where hedge relationships are sensitive to small value changes, and
} The transition relating to LIBOR reforms whereby some hedged instruments and hedged items are based on different benchmark rates

Where there is an effective hedge relationship for fair value hedges, the Group recognises the change in fair value of each hedged item in profit or loss with the cumulative movement in their value being shown separately in the Statement of Financial Position as fair value adjustments on hedged assets and liabilities. The fair value changes of both the derivative and the hedge substantially offset each other to reduce profit volatility.

Notes to the Financial Statements continued

For the year ended 31 December 2019

2. Accounting policies continued
The Group discontinues hedge accounting when the derivative ceases through expiry, when the derivative is cancelled or the underlying hedged item matures, is sold or is repaid.

If a derivative no longer meets the criteria for hedge accounting or is cancelled whilst still effective, the fair value adjustment relating to the hedged assets or liabilities within the hedge relationship prior to the derivative becoming ineffective or being cancelled remains on the Statement of Financial Position and is amortised over the remaining life of the hedged assets or liabilities. The rate of amortisation over the remaining life is in-line with expected income or cost generated from the hedged assets or liabilities. Each reporting period the expectation is compared to actual with an accelerated run-off applied where the two diverge by more than set parameters.

v) Debit and credit valuation adjustments

The DVA and CVA are included in the fair value of derivative financial instruments. The DVA is based on the expected loss a counterparty faces due to the risk of the Group’s default. The CVA reflects the Group’s risk of the counterparty’s default.

The methodology is based on a standard calculation, taking into account:

} the one-year PD, updated on a regular basis
} the expected exposure at default
} the expected LGD, and
} the average maturity of the swaps

w) Provisions and contingent liabilities

A provision is recognised when there is a present obligation as a result of a past event, it is probable that the obligation will be settled and the amount can be estimated reliably.

Provisions include ECLs on the Group’s undrawn loan commitments.

Contingent liabilities are possible obligations arising from past events, whose existence will be confirmed only by uncertain future events, or present obligations arising from past events which are either not probable or the amount of the obligation cannot be reliably measured. Contingent liabilities are not recognised but disclosed unless they are not material or their probability is remote.

x) Employee benefits – defined contribution scheme

The Bank and the OSB subsidiaries contribute to personal pension plans for eligible employees. The Group’s CCFS subsidiaries operate defined contribution retirement benefit schemes for all qualifying employees who subscribe to the terms and conditions of the schemes’ policies.

Obligations for contributions to defined contribution pension arrangements are recognised as an expense in profit or loss as incurred.

y) Share-based payments

In accordance with IFRS 2 Share-based Payments, equity-settled options and awards granted to employees over the Bank’s shares under the Group’s share-based incentive schemes are measured at fair value at grant and are charged on a straight-line basis to profit or loss (with a corresponding increase in the share-based payment reserve within equity) over the vesting period in which the employees become unconditionally entitled to the awards. The cumulative expense within the share-based payment reserve is reclassified to retained earnings upon vesting.

The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related conditions at the vesting date. The amount recognised as an expense for awards subject to market conditions is based on the proportion that is expected to meet the condition as assessed at the grant date. No adjustment is made for the actual proportion that meets the market condition at vesting. Share-based payments that vest on grant are expensed in the year services are received with a corresponding increase in equity.

The grant date fair value of a nil price award over the Bank’s shares which vests at grant or which carries the right to dividends or dividend equivalents during the vesting period (IPO share awards) is the share price at the grant date. The grant date fair value of awards of the Bank’s shares that do not carry automatic rights to dividends or dividend equivalents (the Deferred Share Bonus Plan (‘DSBP’)) is based on the Bank’s share price at the grant date adjusted for the impact of the expected dividend yield. The fair value at grant date of awards made under the Sharesave Schemes is determined using a Black-Scholes model.

The grant date fair value of awards that are subject to non-market conditions and which do not carry automatic rights to dividends or dividend equivalents (the earnings per share (‘EPS’) and return on equity (‘ROE’) elements of the Performance Share Plan (‘PSP’))
is based on the share price at the grant date adjusted for the impact of the expected dividend yield. An assessment is made at each reporting date on the proportion of the awards expected to meet the related non-market vesting conditions.

The fair value of an award that is subject to market conditions (the relative share price element of the PSP) is determined at grant date using a Monte Carlo model. No adjustment is made for the actual proportion that meets the market condition at vesting.

Where the allowable cost of share-based options or awards for tax purposes is greater than the cost determined in accordance with IFRS 2, the tax effect of the excess is taken to the share-based payment reserve within equity. The tax effect is reclassified to retained earnings upon vesting.

Employer’s national insurance is charged to profit or loss at the share price at the reporting date on the same vesting schedule as the underlying options and awards.

z) Leases

The Group recognises right-of-use assets and lease liabilities for most leases over 12 months long. Right-of-use assets and lease liabilities are initially recognised at the net present value of future lease payments, discounted at the rate implicit in the lease or, where not available, the Group’s incremental borrowing cost. Subsequent to initial recognition, the right-of-use asset is depreciated on a straight-line basis over the term of the lease. Future rental payments are deducted from the lease liability, with interest charged on the lease liability using the incremental borrowing cost at the time of initial recognition. The Group recognises lease liability payments within financing activities on the Statement of Cash Flows.

The Group assesses the likely impact of early terminations in recognising the right-of-use asset and lease liability where an option to terminate early exists.

Leases with low future payments or terms less than 12 months are recognised on an accruals basis directly to profit or loss.

aa) Adoption of new standards

In 2019 the Group adopted IFRS 16 Leases and amendments to IAS 12 Income Taxes. The Group also early adopted the amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform.

IFRS 16: Leases
The Group adopted IFRS 16: Leases effective from 1 January 2019. The Group elected to apply the requirements of IFRS 16 retrospectively with the cumulative effect of initial application recognised directly in equity. The Group applied the practical expedients of IFRS 16 in applying a single discount rate of 1.99% to a portfolio of leases over property in calculating the initial lease liability and for not applying the requirements of IFRS 16 to leases for which the lease term ended within 12 months of the date of initial application.

The adoption of IFRS 16 resulted in the Group recognising £3.7m (Bank: £2.3m) of right-of-use assets and £3.7m (Bank: £2.3m) of lease liabilities. There was no cumulative effect of initial application recognised directly in equity.

The table below shows a reconciliation of the Group’s and Bank’s minimum lease commitments under operating leases to the initial lease liability recognised on adoption of IFRS 16:

	Group £m	Bank £m
Operating lease commitments at 31 December 2018	4.5	2.5
Short leases not subject to IFRS 16	(0.1)	–
OSBI leases outside the scope	(0.2)	–
Reassessment of lease term	(0.1)	(0.1)
Lease commitments subject to IFRS 16	4.1	2.4
Net present value adjustment @ 1.99%	(0.3)	(0.1)
Lease liability at 1 January 2019	3.8	2.3

Notes to the Financial Statements continued

For the year ended 31 December 2019

2. Accounting policies continued
IAS 12: Income Taxes
Effective from 1 January 2019 IAS 12 required the tax effect of interest recognised directly in equity to be recognised in profit or loss. This has resulted in £1.2m of additional tax credits being recognised in the Statement of Comprehensive Income.

IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform
The Group has elected to early adopt the amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform issued in September 2019. In accordance with the transition provisions, the amendments have been adopted retrospectively to hedging relationships that existed at the start of the reporting period or were designated thereafter.

The amendments provide temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by IBOR (Interbank Offered Rates) reform. The reliefs have the effect that IBOR reform should not generally cause hedge accounting to terminate. However, any hedge ineffectiveness continues to be recorded in the income statement. Furthermore, the amendments set out triggers for when the reliefs will end, which include the uncertainty arising from interest rate benchmark reform no longer being present.

In summary, the reliefs provided by the amendments that apply to the Group are:

When considering the ‘highly probable’ requirement, the Group has assumed that the IBOR interest rates upon which our hedged items are based do not change as a result of IBOR reform
In assessing whether the hedge is expected to be highly effective on a forward-looking basis the Group has assumed that the IBOR interest rates upon which the cash flows of the hedged items and the interest rate swaps that hedge them are based are not altered by IBOR reform
The Group will not discontinue hedge accounting during the period of IBOR-related uncertainty solely because the retrospective effectiveness falls outside the required 80–125% range
The Group has assessed whether the hedged IBOR risk component is a separately identifiable risk only when it first designates a hedged item in a fair value hedge and not on an ongoing basis

Further amendments are expected for future accounting periods following completion of the second part of the IASB’s two-phased project which focuses on the impacts of IBOR reform on financial reporting.

Standards in issue but not yet effected

Included below are standards and amendments which are being considered for future reporting periods which have not been applied in preparing these financial statements.

} Amendments to the Conceptual Framework for Financial reporting, including amendments to references to the Conceptual Framework in IFRS Standards
} Amendments to IFRS 3 – Definition of a business
} Amendments to IAS 1 and IAS 8 – Definition of material

The Directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Company in future periods.

3. Judgements in applying accounting policies and critical accountingestimates
In preparing these financial statements, the Group has made judgements, estimates and assumptions which affect the reported amounts within the current and next financial year. Actual results may differ from these estimates.

Estimates and judgements are regularly reviewed based on past experience, expectations of future events and other factors.

Judgements

The Group has made the following judgements in applying the accounting policies:

(i) Loan book impairments
Significant increase in credit risk for classification in stage 2
The Group’s transfer criteria determines what constitutes a significant increase in credit risk, which results in an exposure being moved from stage 1 to stage 2. The transfer criteria analyses relative changes in PD versus the origination PD, where if prescribed thresholds are met, an account will be transferred from stage 1 to stage 2. The Group’s transfer logic also includes a qualitative set of rules using both internal and external credit bureau information, which if triggered results in an account being moved to stage 2 from stage 1.
Setting the appropriate thresholds to determine what is a ‘significant’ increase is a key area of judgement.

(ii) IFRS 9 classification
The Group has applied judgement in determining whether the contractual terms of a financial asset give rise on specified dates to cash flows that are SPPI on the principal amount outstanding when applying the classification criteria of IFRS 9. The main area of judgement is over the Group’s loans and advances to customers which have been accounted for under amortised cost with the exception of one acquired book of £22.1m that is recognised at FVTPL.

Estimates
The Group has made the following estimates in the application of the accounting policies that have a significant risk of material adjustment to the carrying amount of assets and liabilities within the next financial year:

(i) Loan book impairments
This section provides details of the critical accounting estimates which underpin loan impairment calculations. Less significant estimates are not disclosed. The Group has recognised total impairments of £42.9m (2018: £21.9m) at the reporting date as disclosed in note 23.

Modelled impairment
Modelled provision assessments are also subject to estimation uncertainty, underpinned by a number of estimates being made by management which are utilised within impairment calculations. Key areas of estimation within modelled provisioning calculations include those regarding the PD, the LGD and forward-looking macroeconomic scenarios.

Loss given default model
The Group has a number of LGD models, which include a number of estimated inputs including propensity to go to possession given default (‘PPD’), forced sale discount (‘FSD’), time to sale (‘TTS’) and sale cost estimates. The LGD is sensitive to the application of the HPI. For the OSB segment at 31 December 2019 a 10% fall in house prices would result in an incremental £13.6m (2018: £11.0m) of provision being required. The combined impact across both OSB and CCFS businesses of a 10% fall in house prices would result in an increase in total provisions of £17.4m as at 31 December 2019.

Forward-looking macroeconomic scenarios
The forward-looking macroeconomic scenarios affect both the PD and LGD estimates. Therefore the expected credit losses calculations are sensitive to both the scenarios utilised and their associated probability weightings.

As the Group does not have an in-house economics function it sources economic forecasts from an appropriately qualified third party. The Group will consider a minimum of four probability-weighted scenarios, including base, upside, downside and severe downside scenarios. Due to the current uncertainty regarding the Brexit trade agreement negotiations the choice of scenarios and weightings are subject to a significant degree of estimation.

Post the Combination the Group aligned the macro-economic scenarios and probability weightings utilised across both the individual OSB and CCFS businesses.

Notes to the Financial Statements continued

For the year ended 31 December 2019

3. Judgements in applying accounting policies and critical accounting estimates continued
The following tables disclose the ECL scenario sensitivity analysis with each scenario weighted at 100% probability. The purpose of using multiple economic scenarios is to model the non-linear impact of assumptions surrounding macro economic factors and ECL calculated:

As at 31-Dec-19	Weighted	100% Base case scenario	100% Upside scenario	100% Downside scenario	100% Severe downside scenario
Total mortgages before provisions, £m	18,419.9	18,419.9	18,419.9	18,419.9	18,419.9
ECL, £m	42.9	29.9	20.0	53.6	67.9
ECL coverage, %	0.23	0.16	0.11	0.29	0.37

As at 31-Dec-18	Weighted	100% Base case scenario	100% Upside scenario	100% Downside scenario	100% Severe downside scenario
Total mortgages before provisions, £m	8,998.0	8,998.0	8,998.0	8,998.0	8,998.0
ECL, £m	21.9	15.7	15.1	19.3	62.7
ECL coverage, %	0.24	0.17	0.17	0.21	0.70

The above tables cover modelled provisions only. Individually assessed provision or provisions calculated under a bespoke approach are not included. Post model adjustments or incurred loss remaining provisions have also not been included in the above analysis.

(ii) Loan book acquisition accounting and income recognition
Acquired loan books are initially recognised at fair value. Significant estimation is exercised in calculating their EIR using cash flow models which include assumptions on the likely macroeconomic environment, including HPI, unemployment levels and interest rates, as well as loan level and portfolio attributes and history used to derive prepayment rates, the probability and timing of defaults and the amount of incurred losses which are discounted for the market rate for these loans. Through the Combination in 2019 the Precise book is treated as an acquisition book with a fair value uplift of £301.0m being the premium applied to the book. Sensitivities have been completed on the Precise book including the market rate applied to the discounted cash flows being one month LIBOR plus a margin (margin blended average used 2.91%). Where the margin applied is increased/decreased by 25bps the premium recognised on the book increases/decreases by £66.0m/£67.0m.

The EIR on loan books purchased at significant discounts or premiums is particularly sensitive to the weighted average life of the book through cumulative prepayment rate (‘CPR’) and cumulative default rate (‘CDR’) derived, as the purchase discount or premium is
recognised over the expected life of the loan book through the EIR. New defaults are modelled at zero loss (as losses will be recognised in profit or loss as impairment losses) and therefore have the same impact on the EIR as prepayments.

Incurred losses at acquisition are calculated using the Group’s modelled provision assessment (see (i) Loan book impairments above for further details).

The EIR calculated at acquisition is not changed for subsequent variances in actual to expected cash flows. The Group monitors the actual cash flows for each acquired book and where they diverge significantly from expectation, the future cash flows are updated with a reset gain or loss taken. In assessing whether to adjust future cash flows on an acquired portfolio, the Group considers the cash variance on an absolute and percentage basis. The Group also considers the total variance across all acquired portfolios and
the economic outlook. Where cash flows for an acquired portfolio are reset, they are discounted at the EIR calculated at acquisition to derive a new carrying value, with changes taken to the Statement of Comprehensive Income as interest income. The Group recognised
£0.5m gain in 2019 as a result of resetting cash flows on acquired books (2018: gain of £2.0m). The largest acquired book is Precise with sensitivities completed on increasing/reducing the life of the book by six months which results in a reset gain/loss of c.£48.0m/£50.0m.

(iii) Effective interest rate on organic lending
A number of estimates are made when calculating the EIR for newly originated loan assets. These include their expected lives, likely redemption profiles and the anticipated level of any early redemption charges.

Mortgage products offered by the Group include directly attributable net fee income and a period on reversion rates after the fixed/ discount period. Products revert to the standard variable rate (‘SVR’) for the Kent Reliance book or a LIBOR/Base plus a margin for the Precise brand. The Group uses historical experience in its assessment of prepayment rates.

Estimation is used in assessing whether and for how long mortgages that reach the end of the product term stay on reversion rates. The most significant area of judgement is the period spent on SVR or LIBOR/Base plus a margin. In 2018 Kent Reliance recognised a period on SVR for two-year products only as behavioural data emerged and this has been extended to three and five year products in 2019. On the Kent Reliance brand estimates were used to assess planned enhancements to and automation of the Choices programme (in 2018 only) and the potential for changes in regulation on SVR might impact future behaviour.

Sensitivity is completed through increasing and decreasing the weighted average life of the Kent Reliance and Precise Mortgages book (for originations from 4 October 2019) which results in a reset gain/loss of c.£24.0m/£5.0m.

4. Acquisition of Chartered Court Financial Services Group plc
On 14 March 2019, the OSB Board and the CCFS Board jointly announced that they had reached agreement on the terms of a recommended all-share combination pursuant to which OSB would acquire the entire issued and to be issued ordinary share capital of CCFS to form the combined Group.

Under the terms of the Combination, which was subject to terms and conditions which were set out in the Scheme Document, each CCFS shareholder was entitled to receive 0.8253 new OSB shares for each CCFS share.

Immediately following completion of the Combination, CCFS shareholders owned approximately 45% of the share capital of the combined Group (based on the existing ordinary issued share capital of OSB and the fully diluted share capital of CCFS).

The Combination completed on 4 October 2019, following approvals from the Shareholders, Competition and Markets Authority, PRA, Financial Conduct Authority (‘FCA’) and the final court sanction.

CCFS targets underserved specialist mortgage market segments with a focus on specialist Buy-to-Let, residential, bridging and second charge lending. The Combination with CCFS brings increased scale, diversification and product capabilities to the Group.

Consideration and goodwill

On 4 October 2019, OSB issued 199,643,055 new £0.01 nominal value shares as consideration for the acquisition of the entire CCFS share capital. The fair value of the OSB share price on 4 October 2019 was £3.542 per share, equating to a total consideration of £707.1m. Included within this amount is £3.7m in relation to shares OSB now holds through the CCFS Employee Benefit Trust, bringing total external consideration to £703.4m.

The carrying value of the CCFS tangible assets acquired and liabilities assumed on 4 October 2019 was £504.0m. In accordance with IFRS 3, the Group has recognised separate intangible assets in the Combination of £23.6m and fair value adjustments on assets and liabilities of £256.7m and associated deferred tax liabilities of £70.1m. In total, the Group has recognised net assets of £714.2m in the Combination.

The Group has recognised £10.8m of negative goodwill generated in the Combination directly in profit or loss within Gain on Combination with CCFS. The negative goodwill was generated through a combination of a decrease in the OSB share price between announcement and completion and an increase in fair value gains on the loan book acquired due to movements in the LIBOR curve between announcement and completion.

The Group continues to assess the acquisition date fair values of the assets acquired and liabilities assumed to determine if any additional information existed, at the date of acquisition, that would alter the fair values of the assets and liabilities recognised as at 31 December 2019. This assessment will be completed no later than 3 October 2020.

Transaction costs

The Group has recognised £15.6m of transaction costs as an exceptional item in profit or loss. In addition, the Group has recognised

£6.4m of costs directly in equity, net of corporation tax. Additional information is provided in note 13.

Notes to the Financial Statements continued

For the year ended 31 December 2019

4. Acquisition of Chartered Court Financial Services Group plc continued

Identifiable assets acquired and liabilities assumed

The table below sets out the fair value of the identifiable assets acquired and liabilities assumed as at the acquisition date:

	Provisional Fair Value £m
Assets Loans and advances to credit institutions	962.2
Investment securities	493.5
Loans and advances to customers	7,248.3
Derivative assets	11.4
Deferred taxation asset	1.9
Intangible assets	23.6
Property, plant and equipment	10.0
Other assets	3.6
Total assets	8,754.5
Liabilities Amounts owed to retail depositors	6,545.3
Amounts owed to credit institutions	1,168.4
Amounts owed to other customers	16.0
Derivative liabilities	84.6
Debt securities in issue	75.1
Deferred taxation liability	70.1
Current taxation liability	19.4
Lease liabilities	7.7
Other liabilities	53.7
Total liabilities	8,040.3
Net assets	714.2

The following table shows the acquisition accounting adjustments made on Combination together with the associated amortisation periods:

	£m	Amortisation period
Carry value of net tangible assets acquired	503.8
Fair value adjustments: Fair value asset of mortgage book	300.6	c.4 years in line with mortgage book run-off
Fair value asset of undrawn loan commitments	16.4	c.4 years in line with mortgage book run-off
Fair value liability of savings book	(7.5)	c.1.5 years in line with savings book run-off
Offset by: EIR balance	(0.4)	n/a
Loss provision reset – reduce provision to nil	7.7	n/a
Loss provision reset – POCI loan provision	(3.6)	n/a
Hedge item adjustments	(56.3)	Unwind over life of swaps
Fair value of net tangible assets acquired	760.7
Intangible assets	23.6	4–5 years
Deferred taxation liability	(70.1)	In line with fair value unwinds
Total net assets acquired	714.2

Contribution to profit or loss

Since the acquisition date, CCFS has contributed £40.1m to Group total income and £24.8m to Group profit. If the acquisition of CCFS had been completed on 1 January 2019, Group total income for the year would have been £504.1m and Group profit before taxation would have been £308.6m.

Acquired receivables

The table below sets out additional information on the receivables acquired through the Combination as at 4 October 2019.

	Contractual receivable £m	Fair value £m	Expected credit losses £m
Receivables: Loans and advances to credit institutions Loans and advances to customers Other receivables	962.2 6,937.7 2.4	962.2 7,248.3 2.4	– 9.0 –
	7,902.3	8,212.9	9.0

5. Interest receivable and similarincome

	Group 2019 £m	Group 2018 £m
At amortised cost: On OSB mortgages	480.5	408.1
On CCFS mortgages	80.2	–
On investment securities	0.6	–
On other liquid assets	12.2	7.6
Amortisation of fair value adjustments on CCFS Combination1	(22.6)	–
At fair value through profit or loss: Net expense on derivative financial instruments – lending activities	(14.0)	(8.1)
On CCFS mortgages	0.3	–
At FVOCI: On investment securities	2.7	0.3
	539.9	407.9

1. Amortisation of fair value adjustments on CCFS loan book at Combination.

6. Interest payable and similar charges

	Group 2019 £m	Restated Group2 2018 £m
On retail deposits	177.3	109.6
On BoE borrowings	13.3	8.7
On perpetual subordinated bonds2	1.8	1.9
On subordinated liabilities	0.7	0.7
On wholesale borrowings	1.9	0.4
On debt securities in issue	3.7	–
On lease liabilities	0.1	–
Amortisation of fair value adjustments on CCFS Combination1	(1.0)	–
Net (income)/expense on derivative financial instruments – savings activities	(2.6)	0.3
	195.2	121.6

Amortisation of fair value adjustments on CCFS customer deposits at Combination.
The Group has restated the prior year comparatives to include the interest expense on the £22.0m PSBs previously classified as equity (see note 1).

Notes to the Financial Statements continued

For the year ended 31 December 2019

7. Fair value losses on financial instruments

	Group 2019 £m	Reclassified Group1 2018 £m
Fair value changes in hedged assets	70.1	(13.8)
Hedging of assets	(75.1)	11.0
Fair value changes in hedged liabilities	(4.6)	0.4
Hedging of liabilities	4.8	(0.3)
Ineffective portion of hedges	(4.8)	(2.7)
Net gains on unmatched swaps	3.5	2.4
Amortisation of inception adjustment	3.3	–
Amortisation of fair value adjustments on hedged assets	(5.5)	(4.6)
Debit and credit valuation adjustment	0.2	(0.2)
	(3.3)	(5.1)

1. The Group has reclassified the 2018 comparatives as the fair value changes in hedged assets/liabilities had been incorrectly disclosed as hedging of assets/liabilities and vice versa.

Amortisation of inception adjustment relates to hedged assets and liabilities recognised on the Combination where pre-existing hedge relationships ceased on the date of Combination. The inception adjustment is being amortised over the life of the derivative instruments acquired on Combination and recognises an offsetting asset or liability to the fair value of the derivative instruments on the date of Combination.

Amortisation of fair value adjustments on hedged assets relates to hedged assets and liabilities where the hedges were terminated before maturity and were effective at the point of termination. The amortisation includes £2.8m (2018: £3.0m) of accelerated unwind due to faster run-off on the previously hedged long-dated fixed rate mortgages compared to the run-off profile at cancellation date.

8. Loss on sales of financial instruments
During 2018, OSB disposed of its final portion of the personal loan portfolio. OSB sold personal loans with a gross value of £0.9m for proceeds of £0.4m. Adjusting for loan loss provisions of £0.3m and recovering servicing costs of £0.1m, the Group made a £0.1m loss on disposal.

During 2019 the Group identified that an additional £0.1m of customer receipts was due to the purchaser of the personal loan portfolio, recognising an additional loss on sale of £0.1m.

9. Administrative expenses

	Group 2019 £m	Group 2018 £m
Staff costs	60.5	43.6
Facilities costs	3.6	3.3
Marketing costs	4.0	3.2
Support costs	12.7	9.2
Professional fees	10.4	7.7
Other costs1	9.3	7.9
Depreciation (see note 29)	3.9	2.2
Amortisation (see note 30)	4.3	2.5
	108.7	79.6

1. Other costs mainly consist of irrecoverable VAT expense.

Included in professional fees are amounts paid to the auditor of the Group as follows:

	Group 2019 £’000	Group 2018 £’000
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts Fees payable to the Company's auditor for the audit of the accounts of subsidiaries	1,269 846	626 188
Total audit fees	2,115	814
Audit-related assurance services	187	95
Other assurance services	142	31
Tax compliance services	–	9
Total non-audit fees	329	135
Total fees payable to the Group’s Auditor	2,444	949

Included within the audit of the accounts of subsidiaries is £592k in relation to CCFS entities and £65k in relation to Canterbury Finance No.1 plc.

Staff costs comprise the following:

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Salaries, incentive pay and other benefits	49.1	36.0	31.4	27.7
Share-based payments	4.0	2.5	4.0	2.6
Social security costs	4.4	3.4	3.4	3.0
Other pension costs	3.0	1.7	2.3	1.5
	60.5	43.6	41.1	34.8

The average number of people employed by the Group (including Executive Directors) during the year is analysed below. The average for CCFS is based on the post acquisition period.

	Group 2019	Reclassified Group1 2018	Bank 2019	Bank 2018
OSB Operations	812	744	325	307
Support functions	286	245	204	172
CCFS Operations	530	–	–	–
Support functions	161	–	–	–
	1,789	989	529	479

1. During the year, there was reclassification of the sales department from Operations to Support functions.

Notes to the Financial Statements continued

For the year ended 31 December 2019

10. Directors’ emoluments and transactions

	Bank 2019 £’000	Restated Bank1 2018 £’000
Short-term employee benefits2 Post-employment benefits Share-based payments3	2,334 112 632	2,116 109 500
	3,078	2,725

The prior year comparatives have been restated to include the amounts received by Directors upon vesting of share-based payment schemes.
Short-term employee benefits comprise salary costs, Non-Executive Directors’ fees and other short-term incentive benefits are disclosed in the Annual Report on Remuneration.
Share-based payments represent the amounts received by Directors for schemes that vested during the year.

In addition to the total Directors’ emoluments above, the Executive Directors were granted a deferred bonus of £511k (2018: £579k) in the form of shares deferred for three years under the DSBP. The DSBP does not have any further performance conditions attached. However, it is subject to clawback and is forfeited if the Executive Director leaves prior to vesting unless a good leaver reason applies such as redundancy, retirement or ill-health.

The Executive Directors received a further share award under the PSP with a grant date face value of £1,305k (2018: £1,265k) using a share price of £3.90 (2018: £4.20) (the average mid-market quotation for the preceding five days before grant). These shares vest in three years subject to performance conditions discussed in note 11 and the Annual Report on Remuneration.

There was no compensation for loss of office during either 2019 or 2018.

There were no outstanding loans granted in the ordinary course of business to Directors and their connected persons as at 31 December 2019 and 2018.

The Annual Report on Remuneration and note 11 Share-based payments provide further details on Directors’ emoluments.

11. Share-based payments
The Group operates the following share-based schemes:

IPO Share Awards

Certain Directors, senior managers and other employees of the Bank received one-off share awards in the form of nil price awards
of shares in the Bank on its admission to the London Stock Exchange in June 2014. A proportion of these awards vested on admission with the remainder vesting over a 12, 24 or 48-month period. The cost of IPO Share Awards is reported within administrative expenses in profit or loss and is offset fully by an additional capital contribution as the awards were granted by OSB Holdco Limited, the Bank’s major shareholder at the time of the IPO. The Group’s IPO awards were fully vested by the end of 2018.

Sharesave Scheme

The Save As You Earn (‘SAYE’) or Sharesave Scheme is an all-employee share option scheme which is open to all UK-based employees. The Sharesave Scheme allows employees to purchase options by saving a fixed amount of between £5 and £500 per month over a period of either three or five years at the end of which the options, subject to leaver provisions, are usually exercisable. The Sharesave Scheme has been in operation since 2014 and is granted annually, with the exercise price set at a 20% discount of the share price on the date of grant.

As part of the Combination, CCFS employees were given three choices in relation to their Sharesave Schemes: (i) roll their CCFS 2017 and 2018 Sharesave options into the OSB schemes; (ii) exercise the options available from contributions made to date through an early exercise; or (iii) continue to contribute to the CCFS 2017 and 2018 schemes and exercise the options available from contributions made to date within six months of the date of the Combination. Those participants that chose to roll-over their options are included in the table below. The options that were not rolled over will convert into OSB shares on exercise.

Deferred Share Bonus Plan

The DSBP applies to Executive Directors and certain senior managers and requires 50% of their performance bonuses to be deferred in shares for three or five years. There are no further performance conditions attached, but the share awards are subject to clawback provisions. The DSBP is a share-based award and as such is expensed over its vesting period. The first DSBP relating to 2014 bonuses was granted in March 2015.

During the year the Group accelerated the vesting date of the DSBP for certain senior managers, with the 2017 and 2018 schemes vesting in December 2019. The 2019 scheme is anticipated to vest in March 2020. There were no changes to the DSBP relating to Executive Directors. The 2020 scheme awards for certain senior managers will no longer be deferred with only a one year holding period applied from grant date.

Performance Share Plan

Executive Directors and certain senior managers are also eligible for a PSP based on performance conditions linked to EPS, total shareholder return (‘TSR’) and return on equity (‘ROE’) over a three-year vesting period. The first award was issued in March 2015.

The performance conditions applying to PSP awards since 2017 are based on a combination of EPS (40%), TSR (40%) and ROE (20%). Prior to 2017 PSP awards were equally weighted between EPS and TSR. The PSP conditions are assessed independently. For the EPS element, growth targets are linked to the Company’s three-year growth plan, measuring growth from the base figure for the prior year. For the TSR element, OSB share’s relative performance is measured against the FTSE All-Share Index excluding investment trusts. For the ROE element, growth rates are assessed against OSB’s underlying profit after taxation as percentage of average shareholders’ equity.

As part of the Combination, OSB granted mirror PSP awards for the 2018 and 2019 CCFS schemes that terminated upon the Combination. The mirror PSP schemes follow the same performance conditions as the OSB 2018 and 2019 PSP awards.

The share-based expense for the year includes a charge in respect of the Sharesave Scheme, DSBP and PSP. All charges are included in employee expenses within note 9 Administrative expenses. The IPO Award Scheme fully vested in 2018.

The share-based payment expense during the year comprised the following:

	Group 2019 £m	Group 2018 £m
IPO Share Award	–	0.1
Sharesave Scheme	0.2	0.3
Deferred Share Bonus Plan	1.3	1.1
Performance Share Plan	2.5	1.0
	4.0	2.5

Notes to the Financial Statements continued

For the year ended 31 December 2019

11. Share-based payments continued
Movements in the number of share awards and their weighted average exercise prices are presented below:

	Sharesave Scheme	Deferred Share Bonus Performance Plan Share Plan
	Weighted average exercise Number price, £ Number Number
At 1 January 2019 Granted CCFS mirror/roll over schemes Exercised Forfeited	841,629 2.93 1,258,712 1,737,997 1,261,307 2.65 476,933 1,079,392 1,183,475 2.42 – 931,853 (154,963) 1.96 (920,891) (235,241) (262,302) 3.23 (76,281) (417,630)
At 31 December 2019	2,869,146 2.63 738,473 3,096,371
Exercisable at:
31 December 2019	– – – –

IPO Share
Awards Sharesave Scheme

Deferred Share Bonus
Plan

Performance Share Plan

	Number	Number	Weighted average exercise price, £	Number	Number
At 1 January 2018	652,198	732,341	2.60	1,186,762	1,589,030
Granted	–	313,443	3.35	376,231	708,146
Exercised	(652,198)	(162,093)	2.25	(301,575)	(559,179)
Forfeited	–	(42,062)	2.86	(2,706)	–
At 31 December 2018	–	841,629	2.93	1,258,712	1,737,997
Exercisable at:
31 December 2018	–	2,861	3.15	–	–

For the share-based awards granted during the year, the weighted average grant date fair value was 208 pence (2018 restated: 276 pence).

The range of exercise prices and weighted average remaining contractual life of outstanding awards are as follows:

Exercise price	2019		2018
Exercise price	Number	Weighted average remaining contractual life (years)	Number	Weighted average remaining contractual life (years)
Sharesave Scheme 134–335 pence Deferred Share Bonus Plan Nil Performance Share Plan Nil	2,869,146 738,473 3,096,371	2.0 0.6 1.7	841,629 1,258,712 1,737,997	2.1 1.3 1.4
	6,703,990	1.7	3,838,338	1.5

The grant date fair values of options/awards under the Group’s share-based payment schemes are determined using a Black-Scholes model. The share price at the grant date for all schemes is adjusted for the impact of dividends as the options/awards do not carry automatic rights to dividends. The valuation of share options/awards is based on the following input assumptions:

} Expected volatility –based on the Bank’s share price volatility
} Attrition rate – based on the attrition rate of eligible employees and updated annually for the DSBP and PSP awards
} Dividend yield – based on the average dividend yield across external analysts’ reports for the quarter prior to scheme grant date

Sharesave Scheme

	2019		2018		2017		2016		2015
Contractual life, years	3	5	3	5	3	5	3	5	3	5
Share price at issue, £	3.32	3.32	4.19	4.19	3.93	3.93	3.00	3.00	2.84	2.84
Exercise price, £	2.65	2.65	3.35	3.35	3.15	3.15	2.40	2.40	2.27	2.27
Expected volatility, %	31.9	31.9	16.1	16.5	18.0	17.3	18.4	20.1	16.6	19.4
Dividend yield, %	4.8	4.8	4.4	4.4	4.1	4.1	4.6	4.6	3.6	3.6
Grant date fair value, £	0.90	0.91	0.40	0.43	0.75	0.70	0.10	0.15	0.75	0.79

Deferred Share Bonus Plan

	2019	2018	2017		2016
Contractual life, years	3	3	3	5	3
Mid-market share price, £	3.96	3.80	4.04	4.04	3.09
Expected volatility, %	26.8	33.8	63.7	63.7	43.9
Attrition rate, %	8.4	9.7	11.8	11.8	12.0
Dividend yield, %	4.7	4.6	4.0	4.0	4.6
Grant date fair value, £	3.47	3.34	3.61	3.37	2.71

Performance Share Plan

	2019	2018	2017	2016
Contractual life, years	3	3	3	3
Mid-market share price, £	3.96	4.11	4.04	3.09
Expected volatility, %	26.8	29.1	63.7	43.9
Attrition rate, %	8.4	9.7	11.8	12.0
Dividend yield, %	4.7	4.6	4.0	4.6
Vesting rate – EPS, %	35.0	55.0	75.0	79.0
Vesting rate – TSR, %	44.9	54.0	60.0	60.0
Vesting rate – ROE, %	39.0	–	–	–
Grant date fair value, £	3.47	3.61	3.61	2.71

Notes to the Financial Statements continued
For the year ended 31 December 2019

11. Share-based payments continued

CCFS PSP Mirror Schemes

	2019	2018
Contractual life, years	3	2
Mid-market share price, £	3.54	3.54
Expected volatility, %	28.6	28.6
Attrition rate, %	–	–
Dividend yield, %	4.8	4.8
Vesting rate – EPS, %	35.0	56.0
Vesting rate – TSR, %	37.4	37.4
Vesting rate – ROE, %	39.0	73.0
Grant date fair value, £	3.29	3.17

IPO Share Awards
The grant date fair value of the IPO Share Awards was the issue price of £1.70 as they are in the form of nil price awards which carry rights to dividends during the vesting period. The charge in respect of awards with future vesting provisions assumed a weighted average attrition of nil (2018: nil) per annum. This is lower than the overall expected employee attrition rate as nil attrition was assumed for certain senior managers who received larger awards. All IPO Share Awards were fully vested at 31 December 2018.

12. Integrationcosts

	Group 2019 £m	Group 2018 £m
Consultant fees Staff costs	3.0 2.2	– –
	5.2	–

Consultant fees relate to advice on the Group’s future operating structure.

Staff costs relate to key personnel who will leave the Group under the new operating model, but have been retained to assist in the integration for a fixed period.

13. Exceptional items

	Group 2019 £m	Group 2018 £m
Consultant fees	4.0	–
Legal and professional fees	4.6	–
Success fees	7.0	–
Heritable option	–	9.8
	15.6	9.8

Consultant, legal and professional and success fees relate to the all-share Combination with CCFS.

The Heritable option recognised in 2018 was surrendered for a one-off payment of £9.8m in 2019, with the Bank acquiring the joint ventures (‘JV’) partners’ interest in the business. At the same time a new revenue sharing arrangement was signed allowing the
JV partners to continue to lend alongside the Bank, sharing revenues in accordance with a profit waterfall.

14. Taxation

The Group publishes its tax policy on its corporate website. The table below shows the components of the Group’s tax charge for the year:

	Group 2019 £m	Restated Group1 2018 £m
Corporation taxation Deferred taxation Release of deferred taxation on CCFS Combination2	(57.1) (0.2) 7.0	(42.5) (0.7) –
Total taxation	(50.3)	(43.2)

The Group has restated the prior year comparatives for the taxation on the interest expense on the £22.0m PSBs previously classified as equity (see note 1).
Release of deferred taxation on CCFS Combination relates to the unwind of the deferred tax asset recognised on the fair value adjustment of the CCFS assets and liabilities at the acquisition date.

The charge for taxation on the Group’s profit before taxation differs from the charge based on the standard rate of UK Corporation Tax of 19% (2018: 19%) as follows:

	Group 2019 £m	Restated Group1 2018 £m
Profit before taxation	209.1	182.8
Profit multiplied by the standard rate of UK Corporation Tax Bank surcharge Taxation effects of: Expenses not deductible for taxation purposes Negative goodwill on acquisition not taxable Rate difference on unwind of deferred tax arising on acquisition Adjustments in respect of earlier years Tax adjustments in respect of share-based payments Impact of tax losses carried forward Tax on AT1 securities Timing differences on capital items Other	(39.7) (10.4) (3.0) 2.0 1.9 (2.7) (0.7) 0.5 1.0 0.2 0.6	(34.6) (8.6) 0.1 – – 0.1 0.2 – – (0.4) –
Total taxation charge	(50.3)	(43.2)

1. The Group has restated the prior year comparatives for the taxation on the interest expense on the £22.0m PSBs previously classified as equity (see note 1).

The effective tax rate for the year ended 31 December 2019, excluding the impact of adjustments in respect of earlier years, was 22.8% (2018: 23.4%).

During the year £1.1m (2018: nil) of tax has been recognised directly within equity relating to the Group’s share-based payment schemes. Following the amendments to IAS 12, the tax on AT1 securities has been recognised directly in profit or loss (2018: £1.5m directly in equity).

During the year a tax credit of £0.2m (2018: nil) has been recognised within other comprehensive income relating to investment securities classified as FVOCI.

A reduction in the UK corporation tax rate from 19% to 18% (effective from 1 April 2020) was enacted on 26 October 2015. A further reduction to 17% (effective from 1 April 2020) was substantively enacted on 6 September 2016. In the March 2020 Budget it was announced that the cut in the rate to 17% will now not occur and the corporation tax rate will be held at 19%. As this has not been enacted by the balance sheet date, deferred tax balances as at 31 December 2019 continue to be measured at 17%.

Notes to the Financial Statements continued

For the year ended 31 December 2019

15. Earnings pershare
Earnings per share (‘EPS’) are based on the profit for the period and the weighted average number of ordinary shares in issue. Basic EPS are calculated by dividing profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year. Diluted EPS take into account share options and awards which can be converted to ordinary shares.

For the purpose of calculating EPS, profit attributable to ordinary shareholders is arrived at by adjusting profit for the year for the coupons on AT1 securities classified as equity. The tax on coupons for the current period is included within the profit for the period, in line with the changes to IAS 12 Income Taxes. The tax on coupons for the prior period is based on the rate of taxation applicable to the Bank, including the bank surcharge:

	Group 2019 £m	Restated Group1 2018 £m
Profit for the year Adjustments: Coupon on AT1 securities classified as equity Tax on coupons	158.8 (5.5) –	139.6 (5.5) 1.5
Profit attributable to ordinary shareholders	153.3	135.6

	Group 2019	Group 2018
Weighted average number of shares, millions Basic Dilutive impact of share-based payment schemes	291.6 1.8	244.2 2.0
Diluted Earnings per share, pence per share Basic Diluted	293.4 52.6 52.2	246.2 55.5 55.0

1. The Group has restated the prior year comparatives for the interest expense and tax on the £22.0m PSBs previously classified as equity (see note 1).

16. Dividends
During the year, the Bank paid the following dividends:

	Bank 2019	Bank 2018
	Pence per £m share	Pence per £m share
Final dividend for the prior year Interim dividend for the current year	25.3 10.3 12.0 4.9	22.7 9.3 10.5 4.3
	37.3	33.2

The Directors propose a final dividend of £49.9m, 11.2 pence per share (2018: £25.2m, 10.3 pence) payable on 13 May 2020 with an ex-dividend date of 26 March 2020 and a record date of 27 March 2020. This dividend is not reflected in these financial statements as it is subject to approval by shareholders at the AGM on 7 May 2020. Together with the interim dividend of £12.0m, 4.9 pence (2018: £10.5m, 4.3 pence) per share, the total dividend for 2019 is £61.9m, 16.1 pence (2018: £35.8m, 14.6 pence) per share.

A summary of the Bank’s distributable reserves from which dividends can be paid is shown below:

	Bank 2019 £m	Restated Bank1 2018 £m
Retained earnings	407.0	296.7
Unrealised gains2	(52.8)	(19.8)
Other distributable reserves (see note 43)	5.3	4.7
Distributable reserves	359.5	281.6

The Bank has restated the prior year comparatives to classify the transfer reserve as non-distributable.
Unrealised gains relate to the Bank’s fair value adjustments on hedged assets.

17. Cash and cash equivalents

The following table analyses the cash and cash equivalents disclosed in the Statement of Cash Flows:

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Cash in hand Unencumbered loans and advances to credit institutions Investment securities with original maturity less than 3 months	0.4 2,052.5 49.9	0.4 1,323.8 –	0.4 1,106.3 49.9	0.4 1,316.5 –
	2,102.8	1,324.2	1,156.6	1,316.9

18. Loans and advances to credit institutions

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Unencumbered: BoE call account	1,916.2	1,295.2	1,081.8	1,295.2
Call accounts	81.7	28.6	24.0	21.3
Cash held in special purpose vehicles1	44.0	–	0.5	–
Term deposits	10.6	–	–	–
Encumbered: BoE cash ratio deposit	41.7	20.0	27.5	20.0
Swap margin given	110.4	3.5	62.2	3.5
	2,204.6	1,347.3	1,196.0	1,340.0

1. Cash held in special purpose vehicle is ring-fenced for the use in managing the Group’s securitised debt facilities under the terms of securitisation agreements.

19. Investment securities

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Held at FVOCI: UK and EU Sovereign debt RMBS loan notes	149.8 358.9	58.9 –	149.8 –	58.9 –
Held at amortised cost: RMBS loan notes	508.7 126.6	58.9 –	149.8 –	58.9 –
	635.3	58.9	149.8	58.9

At 31 December 2019 the Group had £173.0m of FVOCI RMBS loan notes sold under repos. The Group had no investment securities sold under repos or pledged as at 31 December 2018. The Bank had no investment securities sold under repos or pledged as collateral as at the 2019 and 2018 reporting dates.

The Directors consider that the primary purpose of holding investment securities is prudential. These securities are held as liquid assets with the intention of use on a continuing basis in the Group’s activities and are classified as FVOCI and amortised cost in accordance with the Group’s business model for each security (2018: FVOCI).

Movements during the year of investment securities held by the Group and Bank are analysed as follows:

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
At 1 January	58.9	19.1	58.9	19.1
Additions1	439.8	79.9	439.8	79.9
CCFS Combination	493.5	–	–	–
Disposals and maturities	(357.7)	(39.9)	(349.0)	(39.9)
Changes in fair value	0.8	(0.2)	0.1	(0.2)
At 31 December	635.3	58.9	149.8	58.9

1. Additions include £49.9m of investment securities with an original maturity of less than three months, as disclosed in note 17 (2018: nil).

Notes to the Financial Statements continued

For the year ended 31 December 2019

20. Loans and advances tocustomers

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Held at amortised cost: Loans and advances (see note 21)	18,419.9	8,998.0	8,420.8	7,224.3
Finance leases (see note 22)	47.7	7.2	–	–
	18,467.6	9,005.2	8,420.8	7,224.3
Less: Expected credit losses (see note 23)	(42.9)	(21.9)	(26.6)	(16.1)
	18,424.7	8,983.3	8,394.2	7,208.2
Residential mortgages held at fair value	22.1	–	–	–
	18,446.8	8,983.3	8,394.2	7,208.2

21. Loans andadvances

Group	2019			2018
Group	OSB £m	CCFS £m	Total £m	OSB £m
Gross carrying amount Stage 1	9,999.2	7,240.0	17,239.2	8,279.6
Stage 2	442.4	307.1	749.5	436.8
Stage 3	277.7	16.7	294.4	225.4
Stage 3 (POCI)	53.6	83.2	136.8	56.2
	10,772.9	7,647.0	18,419.9	8,998.0

Bank	2019 £m	2018 £m
Gross carrying amount Stage 1	7,785.0	6,657.0
Stage 2	371.3	346.6
Stage 3	211.1	164.8
Stage 3 (POCI)	53.4	55.9
	8,420.8	7,224.3

The mortgage loan balances pledged as collateral for liabilities are:

	Group 2019 £m	Restated Group1 2018 £m	Bank 2019 £m	Restated Bank1 2018 £m
BoE under TFS and ILTR	4,458.3	2,552.5	2,775.7	2,552.5
Securitisation	366.7	–	234.3	–
Warehouse funding	97.4	–	–	–
Master servicer for securitisation vehicle	40.4	16.0	40.4	16.0
	4,962.8	2,568.5	3,050.4	2,568.5

1. The Group and Bank have restated the 2018 comparatives to show excess collateral with the BoE under TFS and ILTR as unencumbered in line with guidance from the PRA.

The Group’s securitisation programmes, use of TFS and ILTR and Warehouse funding arrangements result in certain assets being encumbered as collateral against such funding. Assets that are encumbered cannot be used for any other purposes. As at 31 December 2019 the percentage of the Group’s gross customer loans and receivables that are encumbered is 27% (2018: 28%) and the Bank’s 36% (2018: 36%).

The Bank’s deemed loan liability of £240.2m is comprised of £464.3m of mortgage loans sold by the Bank to Canterbury Finance No.1 plc and £6.5m of deemed loan premium, offset by retained notes issued by Canterbury Finance No.1 plc of £230.6m as the bank adopts the net accounting approach for retained interests.

The tables below show the movement in loans and advances to customers by IFRS 9 stage during the year, based on the following assumptions:

Stage 3

Group	Stage 1 £m	Stage 2 £m	Stage 3 £m	(POCI) £m	Total £m
At 31 December 2017	6,782.5	292.4	183.0	69.7	7,327.6
Originations1	3,043.4	–	–	–	3,043.4
Repayments and write–offs2	(1,265.3)	(50.8)	(43.4)	(13.5)	(1,373.0)
Transfers:
– To Stage 1	170.5	(150.0)	(20.5)	–	–
– To Stage 2	(353.8)	375.1	(21.3)	–	–
– To Stage 3	(97.7)	(29.9)	127.6	–	–
At 31 December 2018	8,279.6	436.8	225.4	56.2	8,998.0

Originations¹ CCFS Combination3 Repayments and write–offs² Transfers: – To Stage 1 – To Stage 2 – To Stage 3 Incurred loss protection4	4,098.6 – – – 4,098.6 7,091.1 43.5 – 94.4 7,229.0 (1,825.2) (21.6) (47.5) (17.3) (1,911.6) 176.9 (162.7) (14.2) – – (495.9) 517.7 (21.8) – – (86.1) (64.5) 150.6 – – 0.2 0.3 1.9 3.5 5.9
At 31 December 2019	17,239.2 749.5 294.4 136.8 18,419.9

Originations include further advances and drawdowns on existing commitments.
Repayments and write-offs include customer redemptions.
The mortgages acquired in the all-share Combination with CCFS are shown at the acquisition date fair value.
During the period the Group reclassified £5.9m of incurred loss protection on acquired portfolios from loans and advances to ECL to reflect the Group’s total ECL position. The Group has not reclassified the comparative information where the incurred loss balance included within loans and advances was £7.2m.

The Group did not purchase any external mortgage books during 2019 (2018: nil) other than those acquired in the Combination.

	Stage 1	Stage 2	Stage 3	Stage 3 (POCI)	Total
Bank	£m	£m	£m	£m	£m
At 31 December 2017	5,679.0	185.8	131.6	69.1	6,065.5
Originations¹	2,276.2	–	–	–	2,276.2
Repayments and write–offs²	(1,049.4)	(28.7)	(26.1)	(13.2)	(1,117.4)
Transfers: – To Stage 1	101.0	(83.6)	(17.4)	–	–
– To Stage 2	(279.0)	297.5	(18.5)	–	–
– To Stage 3	(70.8)	(24.4)	95.2	–	–
At 31 December 2018	6,657.0	346.6	164.8	55.9	7,224.3

Originations¹ Repayments and write–offs² Transfers: To Stage 1 To Stage 2 To Stage 3 Incurred loss protection3	2,395.3 – – – 2,395.3 (1,153.2) (19.1) (26.4) (6.0) (1,204.7) 117.8 (106.8) (11.0) – – (178.7) 196.4 (17.7) – – (53.4) (46.1) 99.5 – – 0.2 0.3 1.9 3.5 5.9
At 31 December 2019	7,785.0 371.3 211.1 53.4 8,420.8

Originations include further advances and drawdowns on existing commitments.
Repayments and write-offs include customer redemptions.
During the period the Bank reclassified £5.9m of incurred loss protection on acquired portfolios from loans and advances to ECL to reflect the Bank’s total ECL position. The Bank has not reclassified the comparative information where the incurred loss balance included within loans and advances was £7.2m.

Notes to the Financial Statements continued

For the year ended 31 December 2019

22. Financeleases
The Group commenced asset finance lending in October 2018 through an existing subsidiary in the Group, InterBay Asset Finance Limited.

	Group 2019 £m	Group 2018 £m
Net investment in finance leases, receivable Less than one year Between one and five years More than five years	11.5 35.0 1.2	2.2 4.9 0.1
	47.7	7.2

The Group has recognised £0.3m of ECLs on finance leases as at 31 December 2019 (2018: £0.1m).

23. Expected creditloss
The ECL has been calculated based on various scenarios as set out below:

Group At 31 December	ECL provision Weighting 2019 2019 £m %		Weighted ECL provision 2019 £m	ECL provision 2018 £m	Weighting 2018 %	Weighted ECL provision 2018 £m
Scenarios Upside	14.6	10	1.5	8.6	–	–
Base case	24.4	40	9.7	9.2	50	4.6
Downside scenario	48.1	35	16.8	12.8	40	5.1
Severe downside scenario	62.5	15	9.4	56.2	10	5.6
Total weighted provisions			37.4			15.3
Non-modelled Provisions: Individually assessed provisions	–	–	4.2	–	–	5.4
Post model adjustments1	–	–	1.3	–	–	1.0
Undrawn loan facilities	–	–	–	–	–	0.2
Total provision	42.9			21.9

Bank At 31 December	ECL provision Weighting 2019 2019 £m %		Weighted ECL provision 2019 £m	ECL provision 2018 £m	Weighting 2018 %	Weighted ECL provision 2018 £m
Scenarios Upside	9.9	10	1.0	7.0	–	–
Base case	17.2	40	6.9	7.6	50	3.8
Downside scenario	31.1	35	10.9	11.2	40	4.5
Severe downside scenario	39.1	15	5.9	54.6	10	5.4
Total weighted provisions			24.7			13.7
Non-modelled Provisions: Individually assessed provisions	–	–	0.8	–	–	1.3
Post model adjustments1	–	–	1.1	–	–	0.9
Undrawn loan facilities	–	–	–	–	–	0.2
Total provision	26.6			16.1

1. Post model adjustments have been made to a number of probability of default models and the OSB segment mortgage loss given default model to ensure predicted estimates are aligned to recently observed actual performance. Where model predictions more closely align with actual performance these post model adjustments will be reduced or removed over time. The Group is currently developing second generation models which will replace existing models, with a target implementation date within 2020.

The Group’s ECL by segment and IFRS 9 stage is shown below:

Group	2019			2018
Group	OSB £m	CCFS £m	Total £m	OSB £m
Stage 1	3.5	2.1	5.6	4.3
Stage 2	3.6	2.0	5.6	5.6
Stage 3	23.4	0.4	23.8	10.2
Stage 3 (POCI)	5.1	2.8	7.9	1.6
Undrawn loan facilities1	–	–	–	0.2
	35.6	7.3	42.9	21.9

Bank	2019 £m	2018 £m
Stage 1	2.8	3.4
Stage 2	3.3	4.7
Stage 3	15.4	6.2
Stage 3 (POCI)	5.1	1.6
Undrawn loan facilities1	–	0.2
	26.6	16.1

1. Following the Combination, the Group has adopted a consistent approach in recognising ECL on undrawn loan facilities within provisions (see note 38). The ECL on undrawn loan facilities was previously classified as Stage 1.

The tables below show the movement in the ECL by IFRS 9 stage during the year. ECLs on originations reflect the IFRS 9 stage of loans originated during the year as at 31 December and not the date of origination. Remeasurement of loss allowance relates to existing loans which did not redeem during the year and includes the impact of loans moving between IFRS 9 stages.

Stage 3

Group	Stage 1 £m	Stage 2 £m	Stage 3 £m	(POCI) £m	Total £m
At 31 December 2017	7.8	2.3	13.3	1.8	25.2
Originations	2.1	–	–	–	2.1
Repayments and write-offs	(0.3)	(0.2)	(7.0)	(0.2)	(7.7)
Remeasurement of loss allowance	(6.1)	6.9	4.0	–	4.8
Transfers:
– To Stage 1	1.4	(0.8)	(0.6)	–	–
– To Stage 2	(0.8)	1.3	(0.5)	–	–
– To Stage 3	(5.8)	(0.4)	6.2	–	–
Changes in assumptions and model parameters	6.2	(3.5)	(5.2)	–	(2.5)
At 31 December 2018	4.5	5.6	10.2	1.6	21.9

Originations CCFS Combination Repayments and write-offs Remeasurement of loss allowance Transfers: – To Stage 1 – To Stage 2 – To Stage 3 Changes in assumptions and model parameters Incurred loss protection1	1.9 – – – 1.9 – – – 3.6 3.6 (0.6) (0.4) (4.3) (0.2) (5.5) (3.4) (0.5) 18.8 (0.6) 14.3 1.9 (1.6) (0.3) – – (0.2) 0.6 (0.4) – – (0.1) (1.0) 1.1 – – 1.4 2.6 (3.2) – 0.8 0.2 0.3 1.9 3.5 5.9
At 31 December 2019	5.6 5.6 23.8 7.9 42.9

1. During the period the Group reclassified £5.9m of incurred loss protection on acquired portfolios from loans and advances to ECL to reflect the Group’s total ECL position. The Group has not reclassified the comparative information where the incurred loss balance included within loans and advances was £7.2m.

Notes to the Financial Statements continued

For the year ended 31 December 2019

23. Expected credit loss continued

					Stage 3
	Stage 1		Stage 2	Stage 3	(POCI)	Total
Bank	£m		£m	£m	£m	£m
At 31 December 2017	5.1		1.4	8.6	1.8	16.9
Originations	1.8		–	–	–	1.8
Repayments and write-offs	(0.1)		(0.1)	(4.1)	(0.2)	(4.5)
Remeasurement of loss allowance	(1.7)		6.8	1.6	–	6.7
Transfers:
– To Stage 1	0.9		(0.4)	(0.5)	–	–
– To Stage 2	(0.6)		1.0	(0.4)	–	–
– To Stage 3	(4.4)		(0.3)	4.7	–	–
Changes in assumptions and model parameters	2.6		(3.7)	(3.7)	–	(4.8)
At 31 December 2018	3.6		4.7	6.2	1.6	16.1
Originations Repayments and write-offs Remeasurement of loss allowance Transfers: – To Stage 1 – To Stage 2 – To Stage 3 Changes in assumptions and model parameters Incurred loss protection1		1.3 – – – 1.3 (0.3) (0.4) (2.8) (0.1) (3.6) (4.5) (2.3) 12.8 0.1 6.1 1.4 (1.2) (0.2) – – (0.2) 0.5 (0.3) – – (0.1) (0.9) 1.0 – – 1.4 2.6 (3.2) – 0.8 0.2 0.3 1.9 3.5 5.9
At 31 December 2019		2.8 3.3 15.4 5.1 26.6

1. During the period the Bank reclassified £5.9m of incurred loss protection on acquired portfolios from loans and advances to ECL to reflect the Bank’s total ECL position. The Bank has not reclassified the comparative information where the incurred loss balance included within loans and advances was £7.2m.

The tables below show the stage 2 ECL balances by transfer criteria:

Group	Carrying value 2019 £m	ECL Coverage 2019 2019 £m %		Carrying value 2018 £m	ECL Coverage 2018 2018 £m %
Criteria: Relative PD movement	588.2	4.8	0.82	414.4	5.4	1.28
Qualitative measures	79.8	0.4	0.44	–	–	–
30 days past due backstop	81.5	0.4	0.54	22.4	0.2	1.09
Total	749.5	5.6	0.75	436.8	5.6	1.27

Bank	Carrying value 2019 £m	ECL Coverage 2019 2019 £m %		Carrying value 2018 £m	ECL Coverage 2018 2018 £m %
Criteria: Relative PD movement	306.8	3.0	0.98	325.7	4.5	1.37
Qualitative measures	35.2	0.1	0.32	–	–	–
30 days past due backstop	29.3	0.2	0.80	20.9	0.2	1.13
Total	371.3	3.3	0.90	346.6	4.7	1.35

The Group has a number of qualitative measures to determine whether a SICR has taken place. These triggers utilise both internal performance information, to analyse whether an account is in distress but not yet in arrears, and external credit bureau information, to determine whether the customer is experiencing financial difficulty with an external credit obligation.

24. Impairmentlosses

	Group 2019 £m	Group 2018 £m
Write-offs in year	4.1	11.1
Disposals	–	0.3
CCFS Combination	3.6	–
Increase/(decrease) in provision	7.9	(3.3)
	15.6	8.1

The CCFS Combination losses relate to the initial ECL recognised on the CCFS loan book following Combination in October 2019.

25. Derivatives

The table below reconciles the gross amount of derivative contracts to the carrying balance shown in the Statement of Financial Position:

Group	Gross amount of recognised financial assets/ (liabilities) £m	Net amount of financial assets/ (liabilities) presented in the Statement of Financial Position £m	Contracts subject to master netting agreements not offset in the Statement of Financial Position £m	Cash collateral paid/(received) not offset in the Statement of Financial Position £m	Net amount £m
At 31 December 2019 Derivative assets: Interest rate risk hedging Derivative liabilities: Interest rate risk hedging	21.1 (92.8)	21.1 (92.8)	(9.8) 9.8	(8.0) 110.4	3.3 27.4

At 31 December 2018

Derivative assets:
Interest rate risk hedging	11.7	11.7	(10.3)	(1.0)	0.4
Derivative liabilities:
Interest rate risk hedging	(15.1)	(15.1)	10.3	3.5	(1.3)
Heritable option¹	(9.8)	(9.8)	–	–	(9.8)
	(24.9)	(24.9)	10.3	3.5	(11.1)

Included within the Group’s derivative liabilities £3.4m (2018: £3.0m) of derivative contracts not covered by master netting agreements and therefore no cash collateral has been paid.

Bank	Gross amount of recognised financial assets/ (liabilities) £m	Net amount of financial assets/ (liabilities) presented in the Statement of Financial Position £m	Contracts subject to master netting agreements not offset in the Statement of Financial Position £m	Cash collateral paid/(received) not offset in the Statement of Financial Position £m	Net amount £m
At 31 December 2019 Derivative assets: Interest rate risk hedging Derivative liabilities: Interest rate risk hedging	8.7 (54.3)	8.7 (54.3)	(2.5) 2.5	(7.8) 62.2	(1.6) 10.4

At 31 December 2018
Derivative assets:

Interest rate risk hedging	11.7	11.7	(10.3)	(1.0)	0.4
Derivative liabilities:
Interest rate risk hedging	(15.1)	(15.1)	10.3	3.5	(1.3)
Heritable option¹	(9.8)	(9.8)	–	–	(9.8)
	(24.9)	(24.9)	10.3	3.5	(11.1)

1. The Group had a put/call option over Heritable Capital Limited (‘HCL’) as part of the development finance joint venture, as further discussed in note 13.

Included within the Bank’s derivative liabilities is £3.4m (2018: £3.0m) of derivative contracts not covered by master netting agreements and therefore no cash collateral has been paid.

Notes to the Financial Statements continued

For the year ended 31 December 2019

25. Derivatives continued
The tables below profile the timing of nominal amounts for interest rate risk hedging derivatives based on contractual maturity:

Group	Total nominal £m	Less than 3 months £m	3–12 months £m	1–5 years £m	More than 5 years £m
At 31 December 2019 Derivative assets	7,795.4	1,110.8	2,608.2	3,760.9	315.5
Derivative liabilities	9,982.4	144.3	2,528.6	7,155.5	154.0
	17,777.8	1,255.1	5,136.8	10,916.4	469.5
At 31 December 2018 Derivative assets	1,999.0	106.0	330.0	1,563.0	–
Derivative liabilities	4,532.2	195.0	2,090.0	1,966.2	281.0
	6,531.2	301.0	2,420.0	3,529.2	281.0

The Group has 1,175 (2018: 206) derivative contracts with an average fixed rate of 0.91% (2018: 1.23%).

Bank	Total nominal £m	Less than 3 months £m	3–12 months £m	1–5 years £m	More than 5 years £m
At 31 December 2019 Derivative assets	3,080.0	475.0	1,395.0	1,110.0	100.0
Derivative liabilities	4,462.9	8.3	789.6	3,549.0	116.0
	7,542.9	483.3	2,184.6	4,659.0	216.0
At 31 December 2018 Derivative assets	1,999.0	106.0	330.0	1,563.0	–
Derivative liabilities	4,532.2	195.0	2,090.0	1,966.2	281.0
	6,531.2	301.0	2,420.0	3,529.2	281.0

The Bank has 205 (2018: 206) derivative contracts with an average fixed rate of 1.17% (2018: 1.23%).

26. Hedgeaccounting
The tables below analyse the Group’s and Bank’s portfolio hedge accounting for fixed rate loans and advances to customers:

Loans and advances to customers	Group 2019	Group 2018
Loans and advances to customers	Hedged Hedging item instrument £m £m	Hedged Hedging item instrument £m £m
Carrying amount of hedged item/nominal value of hedging instrument	10,312.5 10,248.3	3,168.7 3,166.2
Cumulative fair value adjustments	64.2 (75.6)	2.5 (2.2)
Fair value adjustments for the period	70.1 (75.1)	(13.8) 11.0
Cumulative fair value on cancelled hedge relationships	20.4 –	17.3 –

The cumulative fair value adjustments of the hedging instrument comprise £13.2m (2018: £11.7m) recognised within derivative assets and £88.8m (2018: £13.9m) recognised within derivative liabilities.

Loans and advances to customers	Bank 2019	Bank 2018
Loans and advances to customers	Hedged Hedging item instrument £m £m	Hedged Hedging item instrument £m £m
Carrying amount of hedged item/nominal value of hedging instrument	4,574.0 4,537.9	3,168.7 3,166.2
Cumulative fair value adjustments	36.1 (45.5)	2.5 (2.2)
Fair value adjustments for the period	39.8 (43.7)	(13.8) 11.0
Cumulative fair value on cancelled hedge relationships	16.7 –	17.3 –

The cumulative fair value adjustments of the hedging instrument comprise £6.8m (2018: £11.7m) recognised within derivative assets and £52.3m (2018: £13.9m) recognised within derivative liabilities.

The cumulative fair value adjustments on cancelled hedge relationships represent the fair value adjustment for interest rate risk predominantly on the legacy long-term fixed rate mortgages (c. 25 years at origination) where the interest rate swap hedges were terminated before maturity and were effective at the point of termination.

The movement in cancelled hedge relationships is as follows:

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
At 1 January	17.3	16.0	17.3	16.0
New cancellations¹	8.6	5.9	4.9	5.9
Amortisation	(5.5)	(4.6)	(5.5)	(4.6)
At 31 December	20.4	17.3	16.7	17.3

1. Following the securitisation of mortgages during the year, the Group cancelled swaps which were effective prior to the securitisation, with the designated hedge moved to cancelled hedge relationships to be amortised over the original life of the swap.

The tables below analyse the Group’s and Bank’s portfolio hedge accounting for fixed rate amounts owed to retail depositors:

Customer deposits	Group 2019		Group 2018
Customer deposits	Hedged item £m	Hedging instrument £m	Hedged item £m	Hedging instrument £m
Carrying amount of hedged item/nominal value of hedging instrument	6,684.6	6,687.5	3,250.0	3,250.0
Cumulative fair value adjustments	(2.9)	3.5	–	(1.5)
Fair value adjustments for the period	(4.6)	4.8	0.4	(0.3)

The cumulative fair value adjustments of the hedging instrument comprise £5.9m (2018: £0.1m) recognised within derivative assets and £2.4m (2018: £1.6m) recognised within derivative liabilities.

Customer deposits	Bank 2019		Bank 2018
Customer deposits	Hedged item £m	Hedging instrument £m	Hedged item £m	Hedging instrument £m
Carrying amount of hedged item/nominal value of hedging instrument	2,804.9	2,805.0	3,250.0	3,250.0
Cumulative fair value adjustments	(0.1)	0.5	–	(1.5)
Fair value adjustments for the period	(1.8)	2.2	0.4	(0.3)

The cumulative fair value adjustments of the hedging instrument comprise £1.0m (2018: £0.1m) recognised within derivative assets and £0.5m (2018: £1.4m) recognised within derivative liabilities.

27. Other assets

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Prepayments	9.3	2.3	3.2	2.1
Other assets	5.0	3.4	4.3	3.4
	14.3	5.7	7.5	5.5

Notes to the Financial Statements continued

For the year ended 31 December 2019

28. Deferred taxation
Group	Losses carried forward £m	Accelerated depreciation £m	Share–based payments £m	IFRS 9 transitional adjustments £m	Others 1 £m	Total £m
At 31 December 2017	2.5	0.1	2.5	0.7	–	5.8
Profit or loss (charge)/credit	(1.1)	(0.2)	0.6	–	–	(0.7)
Transferred to corporation tax liability	–	–	(1.6)	–	–	(1.6)
At 31 December 2018	1.4	(0.1)	1.5	0.7	–	3.5

Deferred taxation asset:

Profit or loss (charge)/credit	(0.5)	0.3	0.8	(0.1)	(0.7)	(0.2)
CCFS Combination	–	(0.1)	0.5	0.1	1.4	1.9
Transferred to corporation tax liability	–	–	(1.3)	–	–	(1.3)
Tax taken directly to OCI	–	–	–	–	(0.2)	(0.2)
Tax taken directly to equity	–	–	1.1	–	–	1.1
At 31 December 2019	0.9	0.1	2.6	0.7	0.5	4.8

1. Others include deferred taxation assets recognised on financial assets classified as FVOCI, derivatives and short-term timing differences.

As at 31 December 2019, the Group had £3.5m (2018: £3.5m) of losses for which a deferred tax asset has not been recognised as the Group does not expect sufficient future profits to be available to utilise the losses.

Bank	Accelerated depreciation £m	Share–based payments £m	IFRS 9 transitional adjustments £m	Total £m
At 31 December 2017	–	2.5	0.3	2.8
Profit or loss (charge)/credit	(0.2)	0.6	–	0.4
Transferred to corporation tax liability	–	(1.6)	–	(1.6)
At 31 December 2018	(0.2)	1.5	0.3	1.6

Profit or loss credit Transferred to corporation tax liability Tax taken directly to equity	0.3 – –	0.8 (1.3) 0.8	– – –	1.1 (1.3) 0.8
At 31 December 2019	0.1	1.8	0.3	2.2

ii) Deferred taxation liability:

The deferred tax liability recognised on the Combination relates to the timing differences of the recognition of assets and liabilities at fair value, where the fair values will unwind in future periods in-line with the underlying asset or liability. The deferred tax liability has been measured using the relevant rates for the expected periods of utilisation.

Group

CCFS
Combination
£m

At 31 December 2018 –

CCFS Combination Profit or loss credit	70.1 (7.0)
At 31 December 2019	63.1

29. Property, plant and equipment

Group	Freehold land and buildings £m	Leasehold improvements £m	Equipment and fixtures £m	Right of use assets Property Other leases leases £m £m	Total £m
Cost
At 1 January 2018	16.2	0.6	9.9	– –	26.7
Additions	–	0.3	2.5	– –	2.8
Disposals and write-offs	–	–	(1.3)	– –	(1.3)
Foreign exchange difference	(0.2)	–	(0.1)	– –	(0.3)
At 31 December 2018	16.0	0.9	11.0	– –	27.9

Adoption of IFRS 16 (see note 2)		–	–	–		3.8		–	3.8
At 1 January 2019		16.0	0.9	11.0		3.8		–	31.7
Additions		3.1	1.5	2.4		2.5		0.1	9.6
CCFS Combination		–	0.3	2.1		6.4		1.2	10.0
Disposals and write-offs¹		–	–	(1.2)		–		–	(1.2)
Foreign exchange difference		0.2	–	0.1		–		–	0.3
At 31 December 2019		19.3	2.7	14.4		12.7		1.3	50.4
Depreciation
At 1 January 2018	0.6		0.2		4.4		– –			5.2
Charged in year	0.2		0.1		1.9		– –			2.2
Disposals and write-offs	–		–		(1.3)		– –			(1.3)
At 31 December 2018	0.8		0.3		5.0		– –			6.1

Charged in year CCFS Combination Disposals and write-offs¹	0.3 – –	0.2 – –	2.3 – (1.2)	1.0 – –	0.1 – –	3.9 – (1.2)
At 31 December 2019	1.1	0.5	6.1	1.0	0.1	8.8

At 31 December 2019

18.2

2.2

8.3

11.7

1.2

41.6

Net book value

At 31 December 2018 15.2 0.6 6.0 – – 21.8

1. During the year the Group wrote off fully depreciated assets.

Notes to the Financial Statements continued

For the year ended 31 December 2019

29. Property, plant and equipment continued

Right of use assets

	Freehold land and buildings	Leasehold improvements	Equipment and fixtures	Property leases	Other leases	Total
Bank	£m	£m	£m	£m	£m	£m
Cost At 1 January 2018	11.5	0.6	7.4	–	–	19.5
Additions	–	0.1	1.8	–	–	1.9
Disposals and write-offs	–	–	(1.0)	–	–	(1.0)
At 31 December 2018	11.5	0.7	8.2	–	–	20.4

Adoption of IFRS 16 (see note 2)		–	–	–	2.3		–	2.3
At 1 January 2019		11.5	0.7	8.2	2.3		–	22.7
Additions		–	1.5	1.9	2.6		0.1	6.1
Disposals and write-offs 1		–	–	(0.9)	–		–	(0.9)
At 31 December 2019		11.5	2.2	9.2	4.9		0.1	27.9
Depreciation
At 1 January 2018	0.6		0.2	3.3		– –			4.1
Charged in year	0.1		0.1	1.5		– –			1.7
Disposals and write-offs	–		–	(1.0)		– –			(1.0)
At 31 December 2018	0.7		0.3	3.8		– –			4.8

Charged in year Disposals and write-offs 1	0.2 –	0.1 –	1.8 (0.9)	0.7 –	– –	2.8 (0.9)
At 31 December 2019	0.9	0.4	4.7	0.7	–	6.7

At 31 December 2019

10.6

1.8

4.5

4.2

0.1

21.2

Net book value

At 31 December 2018 10.8 0.4 4.4 – – 15.6

1. During the year the Bank wrote off fully depreciated assets.

Group	Development costs £m	Computer software and licences £m	Assets arising on consolidation 2 £m	Total £m
Cost At 1 January 2018	–	12.4	–	12.4
Additions	–	3.5	–	3.5
Disposals and write-offs	–	(2.3)	–	(2.3)
At 31 December 2018	–	13.6	–	13.6

30. Intangible assets

Additions CCFS Combination Disposals and write-offs 1	0.5 – –	3.8 – (2.0)	– 23.6 –	4.3 23.6 (2.0)
At 31 December 2019	0.5	15.4	23.6	39.5
Amortisation
At 1 January 2018	–	5.6	–	5.6
Charged in year	–	2.5	–	2.5
Disposals and write-offs	–	(2.3)	–	(2.3)
At 31 December 2018	–	5.8	–	5.8

CCFS Combination Charged in year Disposals and write-offs 1	– – –	– 3.0 (2.0)	– 1.3 –	– 4.3 (2.0)
At 31 December 2019	–	6.8	1.3	8.1

Net book value

At 31 December 2019

0.5

8.6

22.3

31.4

At 31 December 2018 – 7.8 – 7.8

During the year the Group wrote off fully amortised assets.
Assets arising on consolidation comprise broker relationships of £17.1m, technology of £3.2m, brand name of £1.8m and banking licence of £1.5m.

Bank

Cost

Computer software and
licences
£m

At 1 January 2018                                                                                                                                                                                              10.4
Additions                                                                                                                                                                                                             3.2
Disposals and write-offs                                                                                                                                                                                                                                 (1.5)

At 31 December 2018 12.1

Additions Disposals and write-offs 1	3.3 (1.9)
At 31 December 2019	13.5
Amortisation
At 1 January 2018	4.3
Charged in year	2.2
Disposals and write-offs	(1.5)
At 31 December 2018	5.0

Charged in year Disposals and write-offs 1			2.7 (1.9)
At 31 December 2019			5.8
Net book value
At 31 December 2019		7.7
At 31 December 2018		7.1
1. During the year the Bank wrote off fully amortised assets.
31. Investments in subsidiaries, intercompany loans and transactions with related parties The balances between the Bank and its subsidiaries at the reporting date are summarised in the table below:
Shares in	Intercompany	Intercompany
subsidiary	loans	loans
undertakings	receivable	payable
£m	£m	£m
At 1 January 2018 1.8	1,192.5	(31.2)
Additions –	782.4	(231.4)
Repayments –	(76.0)	0.2
At 31 December 2018 1.8	1,898.9	(262.4)

Additions CCFS Combination Repayments	– 707.1 –	1,062.2 – (40.6)	(378.9) (3.6) 1.0
At 31 December 2019	708.9	2,920.5	(643.9)

The Bank assesses intercompany loans receivable for impairment.

Notes to the Financial Statements continued

For the year ended 31 December 2019

31. Investments in subsidiaries, intercompany loans and transactions with related parties continued
A list of the Bank’s direct subsidiaries is shown below:

At 31 December 2019 Direct investments	Activity	Registered office	Ownership
Charter Court Financial Services Group plc	Holding company	Charter Court	100%
Easioption Limited	Holding company	Reliance House	100%
Guernsey Home Loans Limited	Mortgage provider	Reliance House	100%
Guernsey Home Loans Limited (Guernsey)	Mortgage provider	Guernsey	100%
Heritable Development Finance Limited	Mortgage originator and servicer	Reliance House	100%
Interbay Group Holdings Limited	Holding company	Reliance House	100%
Jersey Home Loans Limited	Mortgage provider	Reliance House	100%
Jersey Home Loans Limited (Jersey)	Mortgage provider	Jersey	100%
OSB India Private Limited	Back office processing	India	100%
Prestige Finance Limited	Mortgage originator and servicer	Reliance House	100%
Reliance Property Loans Limited	Mortgage provider	Reliance House	100%
Rochester Mortgages Limited	Mortgage provider	Reliance House	100%

The Company holds ordinary shares in all its direct subsidiaries.

OSB India Private Limited is owned 70.28% by the Bank, 29.72% by Easioption Limited and 0.001% by Reliance Property Loans Limited. A list of the Bank’s indirect subsidiaries is shown below:

At 31 December 2019 Indirect investments	Activity	Registered office	Ownership
5D Finance Limited Broadlands Finance Limited Canterbury Finance No.1 plc Charter Court Financial Services Limited Charter Mortgages Limited CMF 2020-1 plc1 CML Warehouse Number 1 Limited CML Warehouse Number 2 Limited Exact Mortgage Experts Limited Inter Bay Financial I Limited Inter Bay Financial II Limited InterBay Asset Finance Limited Interbay Funding, Ltd InterBay Holdings Ltd Interbay ML, Ltd Precise Mortgage Funding 2014-1 plc Precise Mortgage Funding 2014-2 plc Precise Mortgage Funding 2015-1 plc Precise Mortgage Funding 2015-3R plc Precise Mortgage Funding 2020-1B plc2	Mortgage servicer Mortgage administration services Special purpose vehicle Mortgage lending and deposit taking Mortgage administration and analytical services Special purpose vehicle Special purpose vehicle Special purpose vehicle Group service company Holding company Holding company Asset finance and mortgage provider Mortgage servicer Holding company Mortgage provider Special purpose vehicle Special purpose vehicle Special purpose vehicle Special purpose vehicle Special purpose vehicle	Reliance House Charter Court Reliance House Charter Court Charter Court Canada Square, London Great St. Helen's, London Great St. Helen's, London Charter Court Reliance House Reliance House Reliance House Reliance House Reliance House Reliance House Great St. Helen's, London Great St. Helen's, London Great St. Helen's, London Great St. Helen's, London Canada Square, London	100% 100% – 100% 100% – – – 100% 100% 100% 100% 100% 100% 100% – – – – –

Incorporated on 4 November 2019.
Incorporated on 22 November 2019.

Special purpose vehicles which the Group controls are treated as subsidiaries for accounting purposes.

All of the entities listed above have been consolidated into the Group’s consolidated financial statements.

All of the above investments are reviewed annually for impairment. Based on assessment of the future cash flows of each entity no impairment has been recognised.

At 31 December 2018 Direct investments	Activity	Registered Office	Ownership
Easioption Limited	Holding company	Reliance House	100%
Guernsey Home Loans Limited	Mortgage provider	Reliance House	100%
Guernsey Home Loans Limited (Guernsey)	Mortgage provider	Guernsey	100%
Heritable Development Finance Limited	Mortgage originator and servicer	Reliance House	85%
Interbay Group Holdings Limited	Holding company	Reliance House	100%
Jersey Home Loans Limited	Mortgage provider	Reliance House	100%
Jersey Home Loans Limited (Jersey)	Mortgage provider	Jersey	100%
OSB India Private Limited	Back office processing	India	100%
Prestige Finance Limited	Mortgage originator and servicer	Reliance House	100%
Reliance Property Loans Limited	Mortgage provider	Reliance House	100%
Rochester Mortgages Limited	Mortgage provider	Reliance House	100%
Indirect investments
Inter Bay Financial I Limited	Holding company	Reliance House	100%
Inter Bay Financial II Limited	Holding company	Reliance House	100%
Interbay Funding, Ltd	Mortgage servicer	Reliance House	100%
Interbay ML, Ltd	Mortgage provider	Reliance House	100%
InterBay Holdings Ltd	Holding company	Reliance House	100%
5D Finance Limited	Mortgage servicer	Reliance House	100%
InterBay Asset Finance Limited (formerly: 5D Lending Ltd)	Asset finance and mortgage provider	Reliance House	100%

The following are the registered offices of the subsidiaries:

Charter Court – 2 Charter Court, Broadlands, Wolverhampton WV10 6TD, United Kingdom Guernsey – 1st Floor, Tudor House, Le Bordage, St Peter Port, Guernsey, GY1 1DB
Great St. Helen’s, London – 35 Great St. Helen’s, London, EC3A 6AP
India – Salarpuria Magnificia, 9th & 10th floor, 78 Old Madras Road, Bangalore, India, 560016. Jersey – 26 New Street, St Helier, Jersey, JE2 3RA
Reliance House – Reliance House, Sun Pier, Chatham, Kent, ME4 4ET, United Kingdom Canada Square, London – Level 37, 25 Canada Square, London, E14 5LQ

Notes to the Financial Statements continued

For the year ended 31 December 2019

31. Investmentsinsubsidiaries,intercompanyloansandtransactionswithrelatedparties continued
The transactions between the Bank and its subsidiaries are disclosed below:

	2019		2018
	Charged by/		Charged by/
	(to) the Bank	Balance due	(to) the Bank	Balance due
	during the	to/(by) the	during the	to/(by) the
	year	Bank	year	Bank
Direct investments	£m	£m	£m	£m
Charter Court Financial Services Group plc	–	(3.6)	–	–
Easioption Limited	–	0.5	–	0.5
Guernsey Home Loans Limited	0.2	9.6	0.3	13.0
Guernsey Home Loans Limited (Guernsey)	0.7	29.9	0.8	36.8
Heritable Development Finance Limited	(1.8)	(0.9)	(1.5)	(0.8)
Interbay Group Holdings Limited	–	–	–	–
Jersey Home Loans Limited	–	2.5	0.1	2.0
Jersey Home Loans Limited (Jersey)	2.9	123.2	3.3	152.3
OSB India Private Limited	(8.9)	9.0	(6.8)	5.7
Prestige Finance Limited	(2.8)	(0.2)	(2.7)	(1.2)
Reliance Property Loans Limited	0.1	3.4	0.1	3.8
Rochester Mortgages Limited	–	–	–	–
Indirect investments
5D Finance Limited	–	0.5	–	0.4
Canterbury Finance No.1 plc	–	3.7	–	–
Inter Bay Financial I Limited	0.4	19.3	0.3	20.1
Inter Bay Financial II Limited	0.4	125.7	0.2	6.8
InterBay Asset Finance Limited	0.5	46.0	0.1	6.2
Interbay Funding, Ltd	(7.6)	(639.2)	(2.1)	(260.3)
InterBay Holdings Ltd	–	–	–	–
Interbay ML, Ltd	37.5	2,547.2	19.3	1,651.2
	21.6	2,276.6	11.4	1,636.5

In addition to the above subsidiaries, the Bank has transactions with Kent Reliance Provident Society (‘KRPS’), one of its founding shareholders. KRPS runs member engagement forums for the Bank. In exchange, the Bank provides KRPS with various services including IT, finance and other support functions. During the year the Bank was charged for services provided by KRPS amounting to £0.2m (2018: £0.2m). As at 31 December 2019, KRPS had £0.3m (2018: £0.3m) deposited with OSB.

All related party transactions were made on terms equivalent to those that prevail in arm’s length transactions. During the year there were no related party transactions between the key management personnel and the Bank other than as described below.

Transactions with key management personnel

During the year the Board extended the definition of key management personnel to comprise the Directors and Executive team, previously Directors only. Directors’ remuneration is disclosed in note 10 and in the Annual Report on Remuneration. The table below shows the Executive team’s aggregate remuneration:

	Group 2019 £'000	Group 2018 £'000
Short-term employee benefits Post-employment benefits Share-based payments	4,282 45 1,888	3,844 76 3,080
	6,215	7,000

No loans were issued to related parties during 2019 (2018: nil).

Key management personnel and connected persons held deposits with the Group of £1.8m (2018 restated: £1.9m).

32. Amounts owed to creditinstitutions

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
BoE TFS	2,632.8	1,502.9	1,502.8	1,502.9
BoE ILTR	290.6	80.1	160.5	80.1
Warehouse funding	93.6	–	–	–
Commercial repo	41.4	–	–	–
Swap margin received	8.0	1.0	7.8	1.0
Loans from credit institutions	2.4	–	–	–
	3,068.8	1,584.0	1,671.1	1,584.0

33. Amounts owed to retaildepositors

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Fixed rate deposits	10,525.5	5,155.5	5,617.9	5,155.5
Variable rate deposits	5,729.5	2,916.4	3,817.8	2,916.4
	16,255.0	8,071.9	9,435.7	8,071.9

34. Amounts owed to othercustomers

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Fixed rate deposits Variable rate deposits	26.0 3.7	32.9 –	8.9 –	32.9 –
	29.7	32.9	8.9	32.9

35. Debt securities inissue

	Group 2019 £m	Group 2018 £m
Asset backed loan notes at amortised cost	296.3	–
Amount due for settlement within 12 months Amount due for settlement after 12 months	40.1 256.2	– –
	296.3	–

The asset backed loan notes are secured on fixed and variable rate mortgages and are redeemable in part from time to time, but such redemptions are limited to the net principal received from borrowers in respect of underlying mortgage assets. The maturity date of the funds matches the maturity date of the underlying mortgage assets. It is likely that a large proportion of the underlying mortgage assets, and therefore these notes, will be repaid within five years.

Asset backed loan notes may all be repurchased by the Group at any interest payment date on or after the call dates (see below),
or at any interest payment date when the current balance of the mortgages outstanding is less than or equal to 10% of the principal amount outstanding on the loan notes on the date they were issued.

Interest is payable at fixed margins above LIBOR or SONIA.

As at 31 December 2019, notes were issued through the following funding vehicles:

	Group 2019 £m	Group 2018 £m
Canterbury Finance No.1 plc Precise Mortgage Funding 2015-1 plc	256.2 40.1	– –
	296.3	–

Notes to the Financial Statements continued

For the year ended 31 December 2019

36. Leaseliabilities

Group
£m

Bank
£m

IFRS 16 Adjustment	3.8	2.3
At 1 January 2019	3.8	2.3
CCFS Combination	7.7	–
New Leases	3.6	3.5
Lease terminated	(0.8)	(0.8)
Lease repayments	(1.1)	(0.8)
Interest accruals	0.1	0.1
At 31 December 2019	13.3	4.3

At 31 December 2018 – –

During the year the Group incurred expenses of £0.7m in relation to short-term leases and £0.1m in relation to low-value assets.

37. Otherliabilities

	Group 2019 £m	Group 2018 £m	Bank 2019 £m	Bank 2018 £m
Falling due within one year:
Falling due within one year:	23.1	11.0	11.7	9.5
Accruals	23.1	11.0	11.7	9.5
Deferred income	1.1	2.0	1.0	0.9
Other creditors	10.7	5.7	4.4	4.3
	34.9	18.7	17.1	14.7

38. Provisions and contingentliabilities
The Financial Services Compensation Scheme (‘FSCS’) provides protection of deposits for the customers of authorised financial services firms, should a firm collapse. FSCS protects retail deposits of up to £85k for single account holders and £170k for joint holders. As OSB and CCFS both hold banking licences, the full FSCS protection is available to customers of each bank.

The compensation paid out to consumers is initially funded through loans from the BoE and HM Treasury. In order to repay the loans and cover its costs, the FSCS charges levies on firms regulated by the PRA and the FCA. The Group is among those firms and pays the FSCS a levy based on its share of total UK deposits.

The Group has reviewed its current exposure to Payment Protection Insurance (‘PPI’) claims, following the FCA deadline for PPI claims on 29 August 2019, and has recognised a provision of £0.3m as at 31 December 2019 (2018: £0.4m). The Group has maintained its provision for FCA conduct rules exposures and has recognised a provision of £1.3m (2018: £1.3m) to cover potential future claims.

Following the Combination, the Group recognises ECLs on undrawn loan facilities within provisions (2018: within loans and advances to customers) (see note 23).

An analysis of the Group’s and Bank’s FSCS and other provisions is presented below:

Group	2019				2018
Group	FSCS £m	Other regulatory provisions £m	ECL on undrawn loan facilities £m	Total £m	FSCS £m	Other regulatory provisions £m	Total £m
At 1 January	0.1	1.7	–	1.8	0.5	0.9	1.4
Paid during the year	(0.1)	(0.1)	–	(0.2)	(0.3)	(0.1)	(0.4)
(Credit)/charge	(0.2)	–	0.2	–	(0.1)	0.9	0.8
At 31 December	(0.2)	1.6	0.2	1.6	0.1	1.7	1.8

Bank	2019				2018
Bank	FSCS £m	Other regulatory provisions £m	ECL on undrawn loan facilities £m	Total £m	FSCS £m	Other regulatory provisions £m	Total £m
At 1 January	0.1	1.7	–	1.8	0.5	0.9	1.4
Paid during the year	(0.1)	(0.1)	–	(0.2)	(0.3)	(0.1)	(0.4)
(Credit)/charge	(0.1)	–	0.1	–	(0.1)	0.9	0.8
At 31 December	(0.1)	1.6	0.1	1.6	0.1	1.7	1.8

In January 2020 the Group was contacted by the FCA in connection with a multi-firm thematic review into forbearance measures adopted by lenders in respect of a portion of the mortgage market. The Group is responding to information requests from the FCA. It is not possible to reliably predict or estimate the outcome of the review, if any, on the Group.

39. Subordinated liabilities

	Group and Bank 2019 £m	Group and Bank 2018 £m
At 1 January	10.8	10.9
Repayment of debt at maturity	(0.2)	(0.1)
At 31 December	10.6	10.8

The Group’s outstanding subordinated liabilities are summarised below:

	Group and Bank 2019 £m	Group and Bank 2018 £m
Linked to LIBOR: Floating rate subordinated loans 2022 (LIBOR +5%) Floating rate subordinated loans 2022 (LIBOR +2%) Fixed rate: Subordinated liabilities 2024 (7.45%)¹ Subordinated liabilities 2024 (7.45%)	0.2 0.2 5.1 5.1	0.3 0.3 5.1 5.1
	10.6	10.8

1. On 27 September 2019, the Group decided not to call the £5.0m second tranche of the subordinated debt with original maturity of 27 September 2024. As the debt was not called, the coupon rate reset to 7.45% until maturity.

The fixed rate subordinated liabilities are repayable at the dates stated or earlier, in full, at the option of the Group with the prior consent of the PRA. All subordinated liabilities are denominated in Pounds Sterling and are unlisted.

The rights of repayment of the holders of these subordinated liabilities are subordinated to the claims of all depositors and all creditors.

Notes to the Financial Statements continued

For the year ended 31 December 2019

40. Perpetual SubordinatedBonds

	Group and Bank 2019 £m	Restated Group and Bank1 2018 £m
Sterling Perpetual Subordinated Bonds (4.5991%)	22.3	22.3
Sterling Perpetual Subordinated Bonds (4.6007%)	15.3	15.3
	37.6	37.6

1. The Group has restated the prior year comparatives to include the £22.0m PSBs previously classified as equity (see note 1).

The bonds are listed on the London Stock Exchange. The 4.6007% bonds were issued with no discretion over the payment of interest and may not be settled in the Group’s own equity. They are therefore classified as financial liabilities. The coupon rate was 5.9884% until the reset date on 27 August 2019. Subsequent to this, the coupon rate is 4.6007% until the next reset date on 27 August 2024.

The 4.5991% bonds were issued with discretion over the payment of interest which is not conditional. They are therefore classified as financial liabilities. The coupon rate is 4.5991% until the next reset date on 7 March 2021.

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