OneSavings Bank plc : Annual Financial Report

LEI: 213800WTQKOQI8ELD692

OneSavings Bank plc

(the Company)

2017 Annual Report and Accounts

The following regulated information, disseminated pursuant to DTR6.3.5, comprises the 2017 Annual Report and Accounts which was sent to shareholders of the Company on 29 March 2018. A copy of the Annual Report and Accounts is available at www.osb.co.uk.

Enquiries:
OneSavings Bank plc
Nickesha Graham Burrell
Deputy Company Secretary
t: 01634 835 796

Brunswick t: 020 7404 5959
Robin Wrench / Simone Selzer

Notes to Editors

About OneSavings Bank plc

OneSavings Bank plc began trading as a bank on 1 February 2011 and was admitted to the main market of the London Stock Exchange in June 2014 (OSB.L). OSB joined the FTSE 250 index in June 2015. OSB is a specialist lending and retail savings group authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority.

OSB primarily targets market sub-sectors that offer high growth potential and attractive risk-adjusted returns in which it can take a leading position and where it has established expertise, platforms and capabilities. These include private rented sector Buy-to-Let, commercial and semi-commercial mortgages, residential development finance, bespoke and specialist residential lending and secured funding lines. OSB originates organically through specialist brokers and independent financial advisers. It is differentiated through its use of high skilled, bespoke underwriting and efficient operating model.

OSB is predominantly funded by retail savings originated through the long established Kent Reliance name, which includes online and postal channels, as well as a network of branches in the South East of England. Diversification of funding is currently provided by access to a securitisation programme and the Term Funding Scheme.

OneSavings Bank plc

ANNUAL REPORT AND ACCOUNTS 2017

OneSavings Bank

Annual Report and Accounts 2017

The experts in specialist lending

Highlights

Gross new lending
+14%
2017: £2.6bn
2016: £2.3bn

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Net loan book
+23%
2017: £7.3bn
2016: £5.9bn

Net interest margin
Stable
2017: 316bps
2016: restated 316bps²

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Cost to income ratio
Stable
2017: 27%
2016: 27%²

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Profit before tax
+3%
2017: £167.7m
2016: £163.1m¹

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Underlying profit before tax
+21%
2017: £167.7m
2016: restated £138.2m²

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Basic EPS
+3%
2017: 51.1p
2016: 49.4p

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Underlying basic EPS
+23%
2017: 51.1p
2016: 41.7p

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For more information and definitions,
see Key performance indicators on page 26

1. In 2016, profit before tax included net gain from exceptional items of £24.9m.

2. Prior to 2017, OSB deducted coupons on equity Perpetual Subordinated Bonds ('PSBs') accounted for as dividends from underlying profit before and after tax, net interest margin and cost to income ratio. Following a review of market practice in advance of the Bank's AT1 issue in May 2017, OSB no longer deducts these coupons from the calculation of these key performance indicators. The comparatives have been restated accordingly. Interest payments on AT1 securities classified as dividends are treated in the same way.

Who we are

Our specialist lending is supported by a stable retail savings franchise with over 150 years of heritage.

Full year dividend per share
+22%
2017: 12.8p
2016: 10.5p

Fully-loaded common equity Tier 1 ratio
Strengthened
2017: 13.7%
2016: 13.3%

Customer satisfaction (NPS)
+3
2017: +62
2016: +59

Our investor site gives you direct access to a wide range of information about OSB:

www.osb.co.uk

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Strategic report

I am delighted to welcome you to OneSavings Bank's Annual Report for 2017.

As the new Chairman of the Board, I am delighted to introduce the Annual Report for 2017, which has been an exceptional year of earnings and loan book growth for OneSavings Bank.

In another year of regulatory and tax changes, our clear strategy to be a leading specialist lender continues to be successful. The shift towards professional landlords in the private rental sector plays to our strengths and will continue to provide a solid foundation for our Buy-to-Let business.

Additionally, we believe there to be opportunities in 2018 for the Bank to grow in additional residential and commercial market sub-sectors where we have established capabilities.

There has been significant change in our share register during 2017 and I welcome new investors. I am pleased with the positive reaction of the market and existing investors as the principal shareholder reduced its holding from c.50% to c.10% of share capital.

We continue to generate sustainable returns for investors and develop a healthy and strong business for all stakeholders.

David Weymouth
Non-Executive Chairman

Strategic report
Highlights	IFC
Who we are	01
At a glance	02
Chief Executive Officer's statement	04
Market review	08
Our business model	10
Strategic framework	12
One specialist lender	14
One fair place to save	16
One unique operating model	18
Operating and financial review	20
Key performance indicators	26
Financial review	28
Risk review	32
Principal risks and uncertainties	39
Viability statement	49
Corporate responsibility report	50

Governance
Board of Directors (biographies)	60
Executive team	62
Corporate Governance Report	64
Nomination and Governance Committee Report	72
Audit Committee Report	74
Risk Committee Report	79
Directors' Remuneration Report	81
Directors' Report: Other Information	96
Statement of Directors' responsibilities	98

Financial statements
Independent auditor's report	99
Statement of Profit or Loss	107
Statement of Other Comprehensive Income	108
Statement of Financial Position	109
Statement of Changes in Equity	110
Statement of Cash Flows	111
Notes to the Financial Statements	112
Glossary	178
Company information	179

Key reads

Chief Executive Officer's statement
Continued strong performance
Page 4

Market review
Page 8

Our business model
Page 10

At a glance

Our business

Buy-to-Let and SME lending

2017 Buy-to-Let/SME

Net loans and advances	Gross new lending	Average book LTV at 31 December
£5.6bn	£2.4bn	69%
2016: £4.1bn	2016: £1.9bn	2016: 69%

Buy-to-Let mortgages

We provide loans to limited companies and individuals, secured on residential property held for investment purposes. Our target market is experienced and professional landlords or high net worth individuals with established and extensive property portfolios.

Commercial mortgages

We provide loans to limited companies and individuals, secured on commercial and semi-commercial properties held for investment purposes or for owner occupation.

Residential development

We provide development loans to small and medium sized developers of residential property. Loans are staged, with monitoring surveyors signing off each stage of the development before funds are released.

Funding lines

We provide funding lines (loans) to non-bank finance companies secured against portfolios of financial assets, principally mortgages and leases.

For more information go to the Operating and financial review on page 22

Residential mortgage lending

2017 Residential mortgages

Net loans and advances	Gross new lending	Average book LTV at 31 December
£1.7bn	£0.2bn	56%
2016: £1.9bn	2016: £0.4bn	2016: 58%

First charge

We provide loans to individuals, secured by a first charge against their residential home. Our target market includes high net worth and complex income customers. We are also experts in shared ownership, lending to first-time buyers and key workers buying a property in conjunction with a housing association.

Second charge

We provide loans to individuals seeking to raise additional funds secured by a second charge against their residential home. We predominantly target good credit quality borrowers.

Funding lines

We provide funding lines to non-bank lenders who operate in high yielding, specialist sub-segments such as residential bridge finance.

For more information go to the Operating and financial review on page 24

Retail savings

2017 balance by channel

Direct	Online	Branches
41%	36%	23%
2016: 37%	2016: 32%	2016: 31%

Online

We attract retail savings deposits via the internet.

Direct

The direct channel sources savings products via telephone and post.

High street branches

Our Kent Reliance branded network operates in the South East of England and offers a variety of fixed, notice, easy access and regular savings products, including ISAs.

For more information go to One fair place to save on page 16

Our trading brands

OneSavings Bank is made up of a family of specialist financial services brands.

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Largest lending business in the Group, offering Buy-to-Let and first charge residential loans.

Kent Reliance is also an established, stable and award-winning savings franchise. Its strong customer focus delivers high levels of customer satisfaction, resulting in strong customer loyalty and retention.

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Specialist semi-commercial and commercial mortgage lender providing Buy-to-Let loans, alongside owner-occupied and investor commercial mortgages throughout England and Wales (acquired in August 2012).

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Experienced team providing specialist residential development finance to small and medium sized developers with a proven track record (commenced trading in January 2014).

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Long-standing second charge lender, which offers an award-winning range of specialist secured loans throughout England, Scotland and Wales (acquired in September 2012).

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Based in Bangalore, India, and a wholly-owned subsidiary of OneSavings Bank, OSBI provides primary processing for our Kent Reliance, Jersey and Guernsey brands.

You can find more about us by visiting our website www.osb.co.uk

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Chief Executive Officer's statement

Continued strong performance

Underlying earnings per share
51.1p
+23%
2016: 41.7p

Dividend per share
12.8p
+22%
2016: 10.5p

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I am delighted to report another excellent year for OneSavings Bank ('OSB'). The Group's clear strategy and unique business model have proven robust as we successfully navigated significant regulatory and tax changes during the year. Underlying basic earnings per share grew by 23% to 51.1 pence with underlying pre -tax profit up by 21% to £167.7m. We finished the year with a strong balance sheet, a high quality secured asset portfolio and an excellent reputation for customer service. Our strategy continues to provide the platform for us to grow and develop our business.

The Group grew its loan book by 23% to £7.3bn in 2017, whilst maintaining its strong discipline on understanding and pricing for risk, and delivering a stable net interest margin ('NIM') of 3.16% for the year.

Balance sheet growth was achieved whilst delivering a best in class return on equity of 28% and a low cost to income ratio of 27%. Our Common Equity Tier 1 ('CET1') capital ratio increased to 13.7% from 13.3% in 2016, demonstrating the strength of our organic capital generation capability to support significant growth through profitability. I am very pleased that we further optimised our capital structure through the issuance of £60m of Additional Tier 1 securities ('AT1 securities') in May 2017.

The Board is recommending a final dividend of 9.3 pence per share. Together with the interim dividend of 3.5 pence this gives a total dividend per share for the year of 12.8 pence, in line with our stated dividend policy.

Best specialist lender

OneSavings Bank continued to grow its loan book through its specialist lending brands, with total organic origination up by 14% in 2017 to £2.6bn. Our core Buy-to-Let lending sub-segment grew by 39% to £5.0bn, with our target audience of professional landlords continuing to deliver strong application and completion volumes.

This performance has been achieved despite the overall Buy-to-Let market shrinking in response to tax and regulatory changes. These changes have reduced the attractiveness of the sector to amateur investors, whilst largely maintaining the interest of professional landlords, and have driven the reduction in gross advances from £40.6bn in 2016 to £35.8bn1 in 2017. In this context, the Bank's performance demonstrates the sustainable strength of our proposition targeted at professional landlords, particularly our specialist, manual underwriting, and our deep relationships with mortgage intermediaries.

New Buy-to-Let mortgage origination increased during 2017, reflecting our specialism and expertise in lending to limited companies and large portfolio landlords. Professional/ multi-property landlords accounted for 80% of completions for OSB by value during 2017, up from 75% in 2016.

We have also seen significant growth in the commercial side of our Buy-to- Let/SME segment. Organic origination grew to £176m, as we focused on innovation and building scale in our established InterBay Commercial business. In March, we successfully piloted an entry to the bespoke bridging market, again leveraging the Bank's strengths in asset risk assessment and manual underwriting.

We saw a reduction in originations in the residential segment in 2017. This contributed to the first charge gross loan book reducing to £1,241m from £1,322m in 2016, with new organic lending more than offset by redemptions in the back book and acquired mortgages in run-off. However, we see opportunities for growth in the residential market in 2018 and beyond.

I am pleased that our more cyclical commercial businesses continued to perform strongly. The Bank's Heritable Development Finance business provides development finance to smaller residential developers, with a preference for forging relationships with those active outside prime central London. The business continued to grow in 2017, in spite of new entrants to the market, as customers sought an experienced and pragmatic lender.

In addition, we have also grown the provision of secured funding lines to other lenders that operate in certain high yielding, specialist sub-segments, such as residential bridge finance and asset finance.

Whilst we continue to carefully consider inorganic acquisition opportunities, market pricing did not meet our high return targets during the year.

Our broker net promoter score ('NPS') recovered from the short-term negative NPS of -7 in the first half of the year, the result of a surge in Buy-to-Let volumes. For the second half of the year, our NPS was +25.

We continue to deliver exceptional performance and reinforce our position as a leading specialist lender, supported by our stable, long-standing retail savings franchise and efficient, scalable back office function.

We made significant investment in our sales capability and continued to gain recognition from mortgage customers and intermediaries, winning multiple awards during the year. I am particularly pleased that OSB won the Mortgage Strategy Awards, Best Specialist Lender and The Mortgage Introducer Awards, Specialist Lender of the Year in 2017.

To encourage greater levels of retention amongst borrowers reaching the end of their initial product term, OSB offers a mortgage product transfer scheme ('Choices'). Under this programme, borrowers are encouraged to engage with their broker to receive advice and select from a bespoke product set. Since the implementation of the scheme in mid-2016, we have seen a consistently strong proportion of our borrowers choose a new product within three months of their initial product ending, at around 60% by December 2017. This is driven by success in switching borrowers who were otherwise remaining on standard variable rate ('SVR') and who, by definition, were therefore in the market for other lenders.

Sustainable funding model with award-winning savings

Our stable and award-winning retail funding franchise continues to support lending growth, with retail deposits up 12% to £6.7bn during the year. Over 27,000 new savings customers joined the Bank during 2017 and our successful programme of creating long-term savings relationships by offering market competitive rates to all customers, including those with maturing fixed rate bonds and ISAs, continued to deliver a very strong 90% retention rate. The strength and fairness of our retail savings proposition, coupled with excellent customer service and high retention rates, continues to allow the Bank to raise significant funds without needing to price at the very top of the best buy tables and provides a consistent and stable source of liquidity.

I am delighted that Kent Reliance has been recognised by Moneyfacts in 2017 as the Best Cash ISA Provider for the fifth year running. The Bank also received the ISA Provider of the Year Award from Consumer Moneyfacts for the second consecutive year. These awards are a testament to our savings proposition and to the outstanding customer service delivered by our staff.

1. UK Finance, New and outstanding buy-to-let new mortgages, 2 Feb 2018.

We continue to gain recognition among customers and intermediaries, winning multiple awards during the year.

The Bank remained predominantly retail funded during 2017, with a loan to deposit ratio for the year of 92%2 delivering on our strategy to primarily fund our loan book using retail deposits. We continued to make judicious use of the Bank of England's Funding for Lending Scheme ('FLS') and the Term Funding Scheme ('TFS'), drawing down additional net funding of £624m in the year. The Bank completed its planned transition out of the FLS into the TFS by year end. As at 31 December 2017, TFS drawdowns stood at £1.25bn.

Leveraging our unique business model

As the Group has grown, costs and efficiency have remained a key focus for the business, resulting in a stable cost to income ratio of 27% (2016: 27% 3) despite significant investment during the year. We continued to invest in our risk management and modelling capabilities in preparation for IFRS 9 and our planned internal ratings-based ('IRB') application. We also invested in technology to offer an automated solution to brokers to help the Bank meet the PRA's new specialist underwriting rules in an efficient way.

OSBIndia continues to undertake a range of primary processing services at a significantly lower cost than an equivalent UK-based operation and with very high quality levels. I am especially pleased that we achieved this whilst maintaining our focus on customers, borne out by an increase in customer NPS to an outstanding 62 (2016: 59).

We continue to differentiate ourselves from the competition by offering well-defined propositions in high margin, underserved markets, where we have the experience, as well as the internal and intermediary infrastructure, to successfully develop and service those markets.

Building our business for the future

The Group continued to exercise strong diligence over loan and customer assessment. The loan loss ratio fell to 7bps in the year to 31 December 2017 (2016: 16bps) mainly due to assumption updates that took place in 2016. We remain particularly pleased with the performance of the front book of mortgages. From more than 38,500 loans totalling £8.3bn of new organic originations since the Bank's creation in February 2011, we have only 137 cases of arrears over three months in duration, with an aggregate balance of £18.4m and an average loan to value ('LTV') of 63%, reflecting the continued strength of the Bank's underwriting and lending criteria.

2. Excluding the impact of TFS/FLS drawdowns. The unadjusted ratio was 109% as at 31 December 2017 (2016: 100%).

3. Prior to 2017, OSB deducted coupons on equity Perpetual Subordinated Bonds ('PSBs') accounted for as dividends from underlying profit before and after tax, net interest margin and cost to income ratio. Following a review of market practice in advance of the Bank's AT1 issue in May 2017, OSB no longer deducts these coupons from the calculation of these key performance indicators. The comparatives have been restated accordingly. Interest payments on AT1 securities classified as dividends are treated in the same way.

The weighted average LTV of the overall mortgage book remained low at 64% at the end of 2017, with an average LTV of 69% on new origination during the year.

In 2017 we saw the market adjusting to the new Buy-to-Let underwriting standards, including ensuring that lenders reflect the changes to personal tax on landlords within their affordability assessments. We have seen a clear trend for borrowers to seek to mitigate this by opting to borrow via a limited company during 2016 and 2017, with a continued increase in the proportion of purchase applications via limited companies for our main Buy-to-Let brand, Kent Reliance, to 69% in 2017. The Group has always specialised in lending to limited companies, and given market trends, this gives us a competitive advantage over those lenders without such a capability.

From 1 January 2017, The Prudential Regulation Authority ('PRA') required lenders to adopt more stringent affordability assessments. We have always assessed affordability for borrowers through our specialist underwriting model and applied stringent stress tests, so were well-placed to benefit from these changes. This can be seen in our weighted average interest coverage ratio ('ICR') for Buy-to-Let origination during 2017, which increased to 185%, demonstrating our cautious approach to the assessment of customer affordability.

Further market- wide measures to strengthen underwriting standards were implemented from October 2017. We already substantively met the regulatory requirements for assessment of landlords with four or more mortgaged properties, and sought to enhance this proposition through the use of technology, creating a simple and automated way of providing comprehensive portfolio information. This has been embedded within our underwriting process to create a strong proposition for brokers and borrowers alike.

These measures, and an expectation of further interest rate rises, also caused a shift in the demand amongst our professional landlords towards five-year fixed rate products which accounted for c.43% of our Buy-to-Let completions in 2017. Competition has increased in this area, and the market has not yet fully repriced following the Bank of England base rate rise in November 2017 or for subsequent widening of swap spreads, putting pressure on margins.

Outlook

Trading conditions in our core markets are positive and current application levels are strong. In line with UK Finance forecasts, the overall Buy-to-Let market is expected to contract further in 2018, however, we expect to continue to grow market share through the relevance of our proposition to professional landlords.

The Group's IFRS 9 models and first generation IRB models were delivered on schedule in late 2016 and we ran the models in parallel throughout 2017. We remain pleased with progress towards our IRB application and also welcomed the recalibration of risk weights in the final revisions to the Basel III reforms on standardised capital requirements published in December 2017. We believe that these new calibrations combined with the final IRB output floor will be beneficial to the Bank's capital requirements, however we remain cautious until the final rules are adopted.

The market sub-segments targeted by OSB, principally professional landlords, including limited companies, have remained strong despite the overall slowdown in the Buy-to-Let market in 2017. We remain confident in the underlying strength of the Private Rented Sector and believe that we are well-placed as the Buy-to-Let market continues to professionalise in response to tax and regulatory changes. We will continue to concentrate on what we have proven we do best: using our relationships, manual underwriting expertise and secured lending strategy to lend responsibly to our customers.

We see opportunities for growth in other segments of the lending market where we already have expertise and a platform to build from. In particular, we expect to grow commercial and bridge finance lending through our InterBay Commercial brand and see further opportunities to grow our residential lending franchise.

We will remain predominantly retail funded, aiming to fund our loan book through our Kent Reliance savings brand. In addition, we intend to invest in our online savings platform during 2018 to attract a broader customer base and grow SME and other lower cost deposits in future years. Our additional liquidity will continue to come from wholesale funding, and we intend to return to the securitisation market during 2018 following the closure of the TFS in February. We drew down an additional £250m in 2018 before the scheme closed, bringing the total balance to £1.5bn. Over time we will use these different funding sources to optimise our cost of funds.

The pipeline of regulatory change continues to grow, with GDPR and PSD 2 both going live in 2018 and work continuing on IRB and other smaller regulatory projects. We expect to expense c.£7m on regulatory projects in 2018, around double the total in 2017. In addition, we plan to continue to invest in our technology infrastructure, mortgage origination system and online savings platforms to support our future growth strategy and enable us to broaden our reach into adjacent markets, such as sub-segments of residential mortgages, where we see opportunities, particularly once we transition to IRB. All of these projects are expected to lead to a significant increase in operating costs in 2018. However, we expect to offset this in part, by delivering further efficiencies in the cost of running the Bank on a 'business as usual' basis, by continuing to focus on cost discipline and leveraging our unique operating platform in India.

We are now live with IFRS 9 after a successful parallel run throughout 2017. The day one impact of the implementation of IFRS 9 is an increase in the provisions of c.£4m, representing 9bps on the Bank's CET1 ratio as at 31 December 2017, on an end game basis, reflecting the strength of security underpinning our loan book.

Our achievements in 2017 are a testament to the management and staff of OSB and I would like to thank my colleagues for their hard work and commitment throughout the year.

We are a responsible lender and will continue to manage the business prudently.

Looking forward to 2018

Over the coming year, organic lending through the Buy-to-Let segment will remain the key driver of loan book growth, but we expect to grow our residential lending, and our commercial and bridge finance lending through our InterBay Commercial brand.

We expect to deliver net loan book growth in the mid teens in 2018 and NIM of c.3%, reflecting current asset pricing, in particular for five-year fixed loans and an expectation of a rising cost of retail funds after the end of TFS. We anticipate a cost to income ratio of c.30%, reflecting the significant increase in the cost of regulation and planned additional investment in the business.

We start 2018 with a fully loaded CET1 ratio of 13.7% and a proven organic capital generation capability through profitability. We anticipate maintaining a CET1 ratio at a minimum of 12% going forward. Our dividend policy remains a payout ratio of at least 25% of underlying profit after taxation attributable to ordinary shareholders.

Our primary growth strategy remains organic origination, but we continue to look at inorganic opportunities, including portfolio purchases, where they meet the Bank's return hurdles.

I believe that OneSavings Bank is well placed to take advantage of opportunities that arise and we remain capable of generating attractive returns for our shareholders.

Andy Golding
Chief Executive Officer
15 March 2018

Market review

Economic overview

UK Buy-to-Let gross advances
£35.8bn

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Source: UK Finance

UK house price inflation

5.2%

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Source: ONS, Survey of mortgage lenders

The housing market

The housing market in 2017 continued to reflect the uncertainties that emerged in 2016 after the UK's vote to leave the EU. Transaction volumes remained at much the same levels as they have since 2014¹, reflecting ongoing challenges posed by affordability driven by low wage growth and higher house price inflation ('HPI')². 2017 has seen HPI fall back, particularly in London, and it is possible that we may see a return to a moderate level of growth in transactions.

In February 2017, the government issued a long-awaited housing white paper. This reflected a shift in sentiment towards a more holistic approach to property tenure and away from an explicit focus on demand side initiatives that promoted home ownership. The political instability that followed the General Election has, however, left most of the proposed measures untouched. With the housing market remaining in the national spotlight, it is likely that the agenda set out in that white paper will re-emerge.

The mortgage market

According to UK Finance, gross mortgage lending reached £257bn in 2017³, ahead of the expected figure of £248bn and 4.4% up on 2016, driven largely by an increase in remortgage activity. The larger house purchase market rose by 9% to £139bn.⁴

First time buyers continued to take advantage of Help to Buy, with overall first time buyer lending up by 11% to £59.2bn (2016: £53.5bn).⁵ The effect of the Stamp Duty Land Tax ('SDLT') change for first time buyers that was announced in the Budget came too late to have any influence on the market in 2017; however, our view is that any impact will be minimal.

OneSavings Bank's lending markets:

UK Buy-to-Let/specialist SME market

The Private Rented Sector ('PRS') accounts for approximately 5.5 million households.⁶ In the year to December 2017, it grew by 2.2%, a figure less than a third of that for the same period in 2014 and less than half of what it was in 2016.

This was, of course, a reaction to a series of regulatory and political interventions aimed at cooling the rate of market growth and improving levels of home ownership. In the year, new Buy-to-Let lending of £ 35.8bn was down 12% on 2016 (£40.6bn).⁷ This is, however, within the context of a continuing shortage of housing supply and mortgage regulation that keeps house prices relatively high and mortgage finance beyond the reach of many, thus underpinning strong and sustained demand for rental property.

The PRA changes to affordability assessment and to underwriting standards for portfolio landlords have driven two significant shifts within the Buy-to-Let market. First, we have seen growth in the professional landlord community, at the expense of the amateur. Second, we have seen these professional landlords increasingly prioritise yield, resulting in an increase in Houses in Multiple Occupation ('HMO') and student let lending, coupled with geographic diversification away from the South East, where yields tend to be lower.

Furthermore, professional landlords continue to mitigate the impact of tax changes by borrowing through limited companies. OSB is a respected lender within the specialist Buy-to-Let sector with a strong reputation for limited company lending and that has been beneficial to date and is expected to continue to be so.

Commercial

The UK commercial property market saw investment demand continue to increase during 2017, driven by overseas investors, who accounted for 60% of the whole market, up from around 50% in 2016.⁸ Uncertainty caused by Brexit continues to present risks, but there are strong underlying factors which mean the UK, and particularly London, remains attractive to investors. Demand has grown in all sectors except retail, with strong growth in offices, and particularly the industrial sector, which has benefited from the same types of shift - towards e-commerce - that has damaged the retail sector.

Research from JLL shows commercial property investment recorded double digit growth in 2017 to £60bn, although the share of that accounted for by properties over £200m is more than twice as high as 2016, and the proportion of smaller lot sizes has dropped.⁹ However, yields in cities across Europe came under more pressure in 2017 compared to London and other regional UK cities, creating the possibility for more activity in the UK during 2018, albeit with growth returning to more 'normal', single digit levels.

The lending market is dominated by the high street banks. Opportunity exists for specialist lenders whose manual underwriting approach, and willingness to engage in a dialogue to ensure robust understanding of customer requirements, can provide a service differential.

Residential development

The UK has experienced a long-term upward trend in real house prices, creating affordability problems as demand for housing continues to outstrip both supply and real wage growth. Furthermore, turnover in the second-hand housing market is subdued.

The housing white paper published in February 2017 refers to a "broken housing market" and identified that "not enough homes are being built" and thus prioritised initiatives that will seek to address this. Notable among the initiatives announced in the white paper were a raft of measures to encourage smaller builders to build more homes, through an improved planning framework. The government also expressed a desire that lenders should "back developers. in building more homes". The white paper represents a holistic assessment of the UK's housing needs, and it is encouraging to note the emphasis placed on supporting the small and medium sized developers who form our core audience for development finance.

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3
Specialist residential lending

OneSavings Bank's manual underwriting and individual case assessment model provides a strong platform for specialist residential lending. Customers with unusual asset and income structures, or complex credit histories as well as those seeking shared ownership mortgages, are ill-served by the commoditised and inflexible decision making processes of mainstream lenders. We have identified strategic opportunities in this market that we will pursue in 2018.

Second charge lending

The second charge market saw approximately £1bn¹⁰ of gross new lending in 2017 (2016: £874m). This market continues to adjust to the changes in regulation that came into effect in March 2016 and the short-term outlook is at best neutral; any significant increase in market size is considered unlikely. In this context, we continue to resist the market trend to aggressively chase business through widespread price reductions or relaxation of credit standards, believing the returns available to be insufficient reward for the risks involved.

Funding lines
There are a number of successful non-bank or alternative providers of finance to retail and SME customers in the UK. These businesses are funded through a variety of means including wholesale finance provided by banks, high net worth investors and market based/peer-to-peer finance. OSB is an active provider of secured funding lines to the non -bank finance market, to date focusing on short-term real estate finance, leasing and development finance. Through these activities the Bank has achieved senior secured exposure at attractive returns to asset classes that it knows well. This financing activity covers a broad range of business sectors and its overall size is thus difficult to quantify. OSB sees a regular flow of opportunities, adopts a very selective approach and has a strong pipeline of new business.

1. UK Finance, Property sale transactions, UK countries, PT2, 21 Feb 2018.

2. UK Finance, House price changes, UK countries and regions, HP14, 13 Feb 2018.

3. 4. UK Finance, New mortgages by purpose of loan, ML1, 1 Feb 2018.

5. UK Finance, First-time buyers, new mortgages and affordability, UK countries and regions, ML2, 1 Feb 2018.

6. Kent Reliance Buy-To-Let Britain Report, edition 7, Dec 2017.

7. UK Finance, New and outstanding buy-to-let new mortgages, 2 Feb 2018.

8. 9. JLL, The UK Commercial Property Market, Jon Neale, Jan 2018.

10. FLA, Second charge mortgage new business volumes grow in 2017, 9 Feb 2018.

Our business model

The Group leverages our unique business model to differentiate ourselves from the competition, offering well-defined propositions in our chosen markets. We apply a specialist, personal and flexible approach to our intermediary and customer relationships, focusing on delivering long-term value.

1. Resources and relationships

Brands and heritage

We have a family of specialist lending brands supported by our savings franchise with a 150-year heritage.

Employees

Our team of highly-skilled employees possess expertise and in-depth knowledge of the property and savings markets.

Infrastructure

We benefit from cost advantages provided by our wholly-owned subsidiary OSBIndia.

Relationships with intermediaries

We have strong and deep relationships with the mortgage intermediaries who distribute our products.

Financial

We have a strong equity Tier 1 capital ratio which can support significant loan book growth.

2. What we do

Attractive retail savings

We deliver straightforward products that meet customer needs for cash savings. We offer good and consistent value to attract and retain a loyal customer base, without having to price at the top of the best buy tables.

Our proven retail savings performance provides a stable, long -term funding platform to grow our loan book.

How we do it

Our channels:

Online

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Direct

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High street branches

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Specialist lending business

We focus on specialist mortgage lending to consumers, entrepreneurs and SMEs in sub-sectors of the UK market where we have identified opportunities for high returns on a risk-adjusted basis and where we can take a leading position.

We adopt an expertise-based, bespoke and manual approach to underwriting in each market sub-sector, specifically geared to each individual customer. We do not use automated or scorecard-based processes for underwriting new loans.

How we do it

Our segments are:

Buy-to-Let/SME lending
77%

Residential lending
23%

Unique operating model

We capitalise on our cross-company expertise, operating under a common operational framework that supports our key lending brands. Distribution, sales, credit and risk processes operate under a simple, coordinated management structure giving us the ability to present our multiple lending brands with great efficiency.

We put customer needs first and drive continuous customer-focused improvement through our flexible and cost-effective operating platform.

How we do it

Our customer service administrative functions are based in our wholly-owned subsidiary OSBIndia.

Cost to income ratio

[Graphic appear here]

3. Outcomes and value creation

For shareholders

We aim for strong EPS growth and a dividend payout of at least 25% of underlying earnings.

EPS
51.1p

DPS
12.8p

For employees

We invest in training and development and employee engagement activities to make OSB the best workplace it can be.

Employees promoted in 2017
76

Employees who attended learning events in 2017
685

For customers

We provide a great customer experience and deliver high levels of customer satisfaction.

Customer NPS
+62

Customer retention²
90%

For communities

We have well-established community services programmes in the UK and India.

Sponsorship and donations
£209k

1. 25% of underlying profit after tax attributable to ordinary shareholders.

2. Retention is defined as monthly average ratio of maturing contractual retail deposits which withdraw their funds on maturity.

Strategic framework

Our strategic objective

To be a leading specialist lender in our chosen sub-sectors, supported by a strong retail savings franchise.

Priorities	Our goals	2017 progress	Looking forward	Key risks	KPI
Be a leading specialist lender in our chosen markets	Grow profitable loan origination in key markets - Deliver strong end-to-end propositions in target markets - Deliver incremental, non-organic business - Invest in highly responsive, customer-focused culture - Innovate to secure sustainable long-term market leadership	- Buy-to-Let/SME origination up 23% to £2.4bn - £176m originations in commercial lending through our InterBay brand - Received multiple awards including Best Specialist Lender (Mortgage Strategy Awards) and Best Specialist Lender of the Year (The Mortgage Introducer Awards)	- Focus on organic growth in underserved sub-sectors - Further develop commercial lending opportunities - Enhance proposition in residential lending in light of progress to IRB - Develop further opportunities in bridge finance - Identify new market sub-sectors with high returns on a risk-adjusted basis	- Market conditions affecting long-term demand - Increased regulatory pressure - Continued political uncertainty - New specialist lenders entering the market	Loan book £7.3bn +23% [Graphic appear here]
Retain focus on bespoke and responsive underwriting	High quality decisions protecting the business - Skilled manual underwriting supported by clever technology - Deliver a high quality, differentiated service supported by highly responsive decision-making - Clear decisions recognised by intermediaries for their quality and fairness - a critical friend - Integrated underwriting across all brands	- More than 38,500 loans totaling £8.3bn originated since the Bank's creation in 2011 with only 137 cases of arrears over 3 months, with an aggregate balance of £18.4m and an average LTV of 63% - New technology solution for assessing multi-property portfolios - Transactional Credit Committee met 103 times to assist with more complex or larger new mortgage applications	- Identify additional technology to support decision making - Continue training and coaching to further strengthen the underwriting expertise of our team - Maintain focus on consistent decision making outcomes - Find ways to be even more responsive to intermediaries and borrowers whilst remaining a critical friend	- Changing regulation for underwriting - More complex underwriting requirements - Difficulty in recruiting experienced staff - Increasing intermediary demands - Demands of ever-changing technology	Loan loss ratio 7bps improved by 9bps [Graphic appear here]
Further deepen relationships and reputation for delivery with intermediaries	Increase partner reach in response to demand - Provide access to specialist products developed by listening to intermediary partners - Be accessible and available to intermediaries - One distribution model across all brands - Gain intermediary recognition for delivering long-term sustainable proposition - Deliver bespoke solutions to meet intermediary and customer needs	- Introduced high tech solution to ease the burden for assessing multiproperty portfolios - Success of Choices programme in increasing retention rates in 2017 - Restructured relationship team to increase levels of engagement - Attended c.150 intermediary events across our target geographies - Enhanced marketing and brand support for intermediaries - Published periodic market leading 'Buy-to-Let Britain' reports	- Develop enhanced intermediary education programme - Continue to deliver direct relationships with high quality intermediaries - Deliver deeper relationships with more of our target intermediaries - Deliver best in class service performance as we grow and enter new market sub-sectors	- Loss of key broker relationships - Competition reducing pricing below OSB's risk-adjusted return appetite - More complex underwriting requirements slowing the process	Gross new lending £2.6bn +14% [Graphic appear here]
Maintain and build upon over 150 years of heritage in savings	Stable, high quality funding platform - Be primarily funded through attracting and retaining a loyal retail savings customer base - Provide access to our service for customers through their channel of choice - Ensure liquidity requirements are met through the economic cycle - Deliver a proposition offering transparent, straightforward savings products, providing long-term value combined with excellent service levels	- Gained c27,000 new savings customers - Achieved 90% customer retention - Received multiple awards for savings products including ISA Provider of the Year and Best Cash ISA Provider - Loan to deposit ratio of 92%¹ 1. Excluding impact of TFS/FLS drawdowns.	- Enhance service proposition by investing in technology for digital transformation - Continue to invest in and diversify distribution channels from branches to digital - Broaden savings propositions further to include wider savings needs	- Increased competition for retail funds - Potential NS&I/government intervention in the market - Increased customer expectation for technology compared to difficulty and cost of delivery - Increased burden of regulatory compliance - for example, Open Banking (which currently does not apply to OSB)	Customer NPS +62 +3 [Graphic appear here]
Leverage unique and cost-efficient operating model	Best in class customer service - Put customer service at the heart of everything that we do - Extend activity in OSBIndia, developing high quality areas of excellence - Create structure-delivering solutions using cross-company expertise - Deliver cost efficiencies through excellent process design and management	- Investments in training and process development contributed to enhanced customer NPS of +62 - Increased OSBI headcount by 33% to 366	- Extend measurement by benchmarking to best in class - Introduce robotics technology and improve workflows to further enhance service in primary servicing - Increase change capacity through enhanced end-to-end project management capability	- Difficulty in continuous service improvement as OSB grows - Global economic uncertainty increasing costs in India - Increasing complexity from compliance with changing regulation - Lack of operational resilience due to rapid growth	Cost to income ratio 27% [Graphic appear here] Stable despite increasing cost of regulation

1. Prior to 2017, OSB deducted coupons on equity Perpetual Subordinated Bonds ('PSBs') accounted for as dividends from underlying profit before and after tax, net interest margin and cost to income ratio. Following a review of market practice in advance of the Bank's AT1 issue in May 2017, OSB no longer deducts these coupons from the calculation of these key performance indicators. The comparatives have been restated accordingly. Interest payments on AT1 securities classified as dividends are treated in the same way.

In focus

One specialist lender

Gross new organic lending

+14%
2017: £2.6bn
2016: £2.3bn

[Graphic appear here]

Sub-sector market specialisation

The markets we focus on are:

- Buy-to-Let

- commercial and semi-commercial

- residential development

- bespoke specialist residential

- second charge residential

- shared ownership, and

- bridging and short-term loans.

OSB also provides funding lines to other lenders. The funding lines business is secured against pools of loan collateral with indirect access to certain high-yielding, specialist sub-segments, such as asset finance and residential bridging finance.

Intermediary relationships

Access to our specialist products and multiple brands is via intermediaries. Relationships are key and partnerships continue to flourish with our panel of selected specialist mortgage intermediaries, who are leaders in their sub-sectors.

We listen to and work with the intermediaries to develop new opportunities and bespoke solutions for our clients. In the year, we developed joint marketing and education campaigns and provided dedicated marketing support.

Our sales team was awarded The Best Business Development Team in 2017 by The Mortgage Strategy Awards.

Inorganic growth

The Group is focused on organic origination as its core growth strategy. In addition, we continue to evaluate selective inorganic opportunities that provide long-term value and meet our strategic objectives. In 2017, the Group made no portfolio acquisitions as market pricing did not meet the Group's stringent return conditions.

Bespoke underwriting

All of our loans are underwritten by experienced and skilled underwriters. At OSB, we do not use automated or scorecard-based processes. We take each loan on its own merits, responding quickly and flexibly to offer the best solution for each of our customers. For this bespoke approach, expertise and going out of our way for our clients, we received the Best Specialist Lender award at The Mortgage Strategy Awards and Specialist Lender of the Year from Mortgage Introducer Awards.

To support this manual and bespoke approach, in 2017 we implemented new technology to reduce administrative burdens on our underwriters and mortgage intermediaries. This provides a simple and speedy solution to enable landlords and brokers to meet the PRA's underwriting standards for portfolio landlords. Implemented in October 2017, the system provides valuations and verifications of entire portfolios in seconds, giving our underwriters high levels of confidence in their valuations.

No case is too complex for us and for those borrowers with more tailored or larger borrowing requirements our Transactional Credit Committee meets twice a week - and in 2017 met 103 times - to demonstrate our responsiveness to broker needs.

What we will do

We will continue to develop our sales and underwriting teams through attracting the top talent and then nurturing it through training and coaching programmes. We will also ensure that our relationships with intermediaries continue to flourish and that we deliver a high quality, differentiated service for our clients.

Our strategy in action

Be a leading specialist lender in our chosen markets

Further deepen relationships and reputation for delivery with intermediaries

EMILY MACHIN
NATIONAL ACCOUNT MANAGER

Our support goes way beyond words

2017 was an important year for me in the newly established role of National Account Manager. Our strategy is to continuously improve our working relationships with our large corporate clients and in 2017 we had a particular focus on the regulatory and market changes that brokers are currently facing.

We were recognised by our intermediaries for being able to assist even in the most complex of cases. One of the things that I am most proud of is how we coordinate our efforts across different parts of the Bank, including marketing and underwriting, to make sure that our support is demonstrated through our service rather than just words.

Of course, this also meant demonstrating how Kent Reliance can help as the Buy-to-Let market becomes more focused on professional landlords and the different demands that this will bring.

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In focus

One fair place to save

New savings customers in 2017:

over 27,000

[Graphic appear here]

We deliver straightforward products that meet customers' needs for cash savings. We offer good and consistent value to attract and retain a loyal customer base.

Stable funding platform

OSB's proposition for savers is simple; we offer consistently good value savings products to attract and retain a loyal customer base, providing a stable funding platform for the business to grow its loan book. Our retail savings franchise has been a valued and recognised brand for over 150 years.

Transparent savings products

We deliver straightforward products that meet customer needs for cash savings. We offer good and consistent value, without having to price at the very top of the best buy tables. We do not offer 'new customer only' products, and existing customers benefit from loyalty rates.

Our clients can access savings products directly via post, online and in our nine branches. The products offered include fixed term bonds, ISAs, easy access and regular savings accounts. We also offer a childrens' account which supports one of our chosen charities, Demelza Hospice for Children.

We attracted over 27,000 new savings customers during 2017, and retained 90% of maturing fixed term deposit balances, demonstrating the strength of our long-term proposition.

The savings proposition to small and medium sized businesses, launched in 2016, has been very well received and continues to grow, with an average balance per account of nearly £78k.

In 2017, we were recognised by Consumer Moneyfacts as the ISA Provider of the Year and by Moneyfacts as Best Cash ISA Provider for the fifth year running.

Customer-focused philosophy

By maintaining our strong customer-centric approach we are rewarded with a loyal customer base that recognises long-term good value.

We reward our people based on the quality of service they provide to customers, further protecting our retail savings franchise. We measure customer satisfaction and net promoter score ('NPS') through regular customer surveys using independent experts. These measures are aligned to our business strategy and the client NPS score increased to +62 for the year, up from +59 in 2016.

We will continue to invest in enhancing our service in 2018, based on using technology and modern practices to support the brand traits customers have told us they prefer - heritage, trustworthy and traditional. We will also use our real-time customer feedback capability to identify and act on ideas for new products and service improvements.

Our strategy in action

Broaden savings propositions further

Provide access to customers through the channel of their choice

AMANDA LUDLOW
BRANCH NETWORK MANAGER

Our customers are voting with their feet, and visiting our branches in ever-increasing numbers

Unlike most banks, we are seeing an increase in the number of customers visiting our branches, meaning some are getting a bit crowded. In Maidstone, we tackled this by moving into much larger premises, regenerating a listed building in a popular location on the busy high street.

We haven't just made it bigger though. Listening to our customers has helped us deliver a much improved service, with additional counter space, a larger team and more meeting rooms for private discussions and longer enquiries.

To match the new space, we have employed more local people, further adding to the community we serve. Results so far are positive. In the first full month after opening, customer service ratings for the branch shot up. And the best news is that we are going to do the same for our Canterbury customers this year.

[Graphic appear here

In focus

One unique operating model

NPS +62
up 3

We work to an overarching risk appetite and single Group lending policy spanning all our brands and deliver our services with the aim of providing an excellent customer experience. We put customers' needs first.

Integrated multi-brand approach

We capitalise on our cross- company expertise, operating under a common operating framework that supports our key lending brands. Distribution, sales and risk processes operate under a simple, coordinated management structure giving us the ability to present our multiple lending brands with great efficiency.

We work to an overarching risk appetite and a single Group lending policy spanning all our brands, using our experience in specialist lending to enhance policy. We ensure that risks are modelled and that the comprehensive risk pricing model reflects latest market conditions and forecasts. This modelling ensures all product pricing goes through the same rigorous analysis, according to core principles set by our Group Assets and Liabilities Committee, comprised of senior management.

Cost-efficient operations

Our administrative functions, based in our wholly-owned subsidiary OSBIndia, support the strategic intent of delivering excellent customer experience. We drive continuous customer-focused improvement through our flexible and cost-effective operating platform, putting customer needs first.

Real-time customer satisfaction surveys inform a programme of continuous improvement.

We benchmark our processes against industry best practice, challenging what we do and eliminating customer pain points as they arise. We continue investing in developing skills that enable highly efficient service management, matching those to business needs both in India and the UK.

Investment in infrastructure and systems

We aim to deliver efficient, scalable and resilient infrastructure to support our business strategy objectives. We invest in complementary systems, both proprietary and industry standard, to deliver excellent service (measured against peers by industry experts), outstanding resilience and strong governance. OSB focuses on being a nimble bank with very few legacy issues.

We continue to invest in IT security, supported by market leading data security and resilience experts.

We will continue to leverage infrastructure investment across the Group in 2018, maximising customer and efficiency benefits. We will also ensure infrastructure and systems are regularly reviewed and tested, focusing on their security and resilience in cooperation with industry experts with particular focus on cyber security.

Our strategy in action

Put customer service at the heart of everything that we do

Extend activity in OSBI, developing high quality areas of excellence

NITIN JOSHI
HEAD OF OPERATIONS OSBI

Not resting on our laurels

We worked hard in 2017 to deliver great customer satisfaction as evidenced in our NPS scores. However, we are not resting on our laurels. We always want to improve customer satisfaction even further.

So we look at all areas of our business. For example, staff retention is really important to us. We invest a lot in training both new staff members and also longer-serving employees of OSBI, continually refreshing and enhancing their knowledge, skills and capability.

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Operating and financial review

OneSavings Bank

Group overview

OneSavings Bank delivered another year of strong performance in 2017 which reflects the continued successful delivery of our strategy to:

- be a leading specialist lender in our chosen sub-sectors

- retain our focus on bespoke underwriting

- further deepen our relationships and reputation for delivery with the intermediaries who distribute our mortgage products

- leverage our efficient, scalable and cost-effective operating model, and

- maintain and build on our stable retail savings franchise.

Business highlights

2017 was another year of exceptional performance underpinned by organic originations of £2.6bn at attractive margins, strong risk management and cost-efficiency and discipline.

Net loans and advances grew by 23% in 2017 to £7.3bn. The growth was due primarily to an increase in new lending in the Buy-to-Let sub-segment, as the market became increasingly focused on our core audience of professional landlords. Regulatory change, introducing more complex underwriting standards to the Buy-to- Let industry in 2017, has driven additional business flow to specialist lenders resulting in growth in our market share. This growth was achieved whilst improving the Group's CET1 ratio to 13.7% from 13.3% in 2016, demonstrating the strength of the capital generation capability of the business through profitability. The Group's capital position was further strengthened in May 2017 by the issuance of £60m of Additional Tier 1 capital securities ('AT1 securities'), with the total capital ratio strengthening to 16.9% from 15.1% in 2016 and the leverage ratio also increasing to 6% from 5.5%. The successful issuance of AT1 securities highlights OSB's strong balance sheet and attractive investment proposition to debt investors.

The Group remains focused on organic origination as its core growth strategy and gross new organic lending of £2.6bn in 2017 was up 14% compared with £2.3bn in 2016. OSB continued to experience high demand for its products during 2017, particularly in Buy-to-Let where the Group targets professional landlords with larger portfolios. Buy-to-Let/SME is the Group's largest segment comprising 77% of the gross loan book with Residential Mortgages at 23% as at 31 December 2017. New organic originations in our residential book decreased, which, combined with redemptions in the back book and acquired mortgages in run- off contributed to the first charge gross loan book reducing to £1,240.6m from £1,322.1m in 2016.

The Bank made no portfolio acquisitions during 2017 (2016: portfolios of first and second charge residential mortgages for £180.7m). However, we continue to evaluate selective inorganic opportunities that provide long -term value and meet our strategic objectives when they arise. The Group conducts extensive due diligence when considering any portfolio acquisitions and in 2017, market pricing for deals under consideration did not meet the Group's stringent return conditions.

For all our lending segments, we manually underwrite all risks, providing us with a competitive advantage over more automated lenders, as we are able to identify and understand complex cases that others cannot. The weighted average LTV of the mortgage book remained low at 64% at the end of 2017, with an average LTV of 69% on new origination during the year, reflecting the strength of our balance sheet. Both the loan loss ratio and portfolio arrears rate improved in the year to 7bps and 1.2% respectively (2016: 16bps and 1.4% respectively), further demonstrating our disciplined underwriting and lending criteria. We also have limited exposure to high value properties, with only 4% of our total loan book secured on properties valued at greater than £2m and with an LTV above 65%.

The broker-led Choices mortgage product transfer scheme that we introduced in 2016 has encouraged greater levels of retention among those borrowers reaching the end of their initial product term. Since the implementation of the scheme in mid-2016, we have seen a consistently strong proportion of our borrowers choose a new product within three months of their initial product ending, at around 60% by December 2017. This is driven by success in switching borrowers who were otherwise remaining on standard variable rate ('SVR') and who, by definition, were therefore in the market for other lenders.

The Bank continued to offer secured funding lines to non-bank lenders, however kept a cautious approach in light of macroeconomic uncertainty. Total credit approved limits as at 31 December 2017 were £ 336.6m with total loans outstanding of £122.1m (31 December 2016: £330.2m and £122.3m respectively). During the year, two new funding lines in the Buy-to-Let/SME segment were extended.

The Group remained predominantly retail funded during the year with a loan to deposit ratio of 92%¹ as at 31 December 2017 (2016: 90%¹).

Our customer-centric strategy of providing transparent savings products which offer long -term value for money continued to deliver high levels of customer satisfaction and loyalty during the year. Our customer NPS increased to +62 for 2017 and the maturing fixed term bond and ISA balance retention rate remained strong at 90% (2016: +59 and 87% respectively). Retail deposits were up 12% to £6.7bn as at 31 December 2017.

The business savings account, which was introduced in 2016, had a successful year with total deposits constituting just over 1% of the entire savings book, or £69.5m as at 31 December 2017.

Whilst remaining committed to our retail savings franchise, throughout 2017 we complemented it as a funding source by taking advantage of the government funding schemes: Term Funding Scheme ('TFS') and Funding for Lending Scheme ('FLS'). By the end of 2017, the Bank had completed its planned transition out of the FLS into the TFS and as at 31 December 2017, TFS drawdowns stood at £1,250.0m (31 December 2016: TFS at £101.0m and FLS £524.6m). Total funding through the schemes increased by £624.4m in the year.

Financial overview

The Group reported strong profit growth in 2017. Statutory profit before taxation of £167.7m was 3% higher than in 2016 (2016: £163.1m) despite the £24.9m net gain on exceptional items in the prior year. On an underlying basis, profit before taxation increased by 21% to £167.7m (2016: restated £138.2m²). This significant improvement in underlying profitability reflects the strength of our lending and funding franchises and our efficient operating model. Statutory and underlying basic earnings per share ('EPS') strengthened to 51.1p (2016: 49.4p and 41.7p respectively).

Our focus on cost discipline and efficiency continued throughout 2017, helping to deliver a very strong cost to income ratio of 27% (2016: 27%²) despite increased investment in the business and in meeting the growing cost of regulation.

Return on equity remained strong at 28% (2016: 29%) despite our strengthened capital position.

The Board is recommending a final dividend of 9.3 pence per share, which together with the interim dividend of 3.5 pence per share, represents 25% of underlying profit after taxation attributable to ordinary shareholders for the year, in line with the Bank's stated dividend policy.

1. Excluding the impact of TFS/FLS drawdowns. The unadjusted ratio was 109% as at 31 December 2017 (2016: 100%).

2. Prior to 2017, OSB deducted coupons on equity PSBs accounted for as dividends from underlying profit before and after tax, net interest margin and cost to income ratio. Following a review of market practice in advance of the Bank's AT1 issue in May 2017, OSB no longer deducts these coupons from the calculation of these key performance indicators. The comparatives have been restated accordingly. Interest payments on AT1 securities classified as dividends are treated in the same way.

Buy-to-Let/SME

Gross loan book
£5,654.1m
+38%
2016: restated £4,104.3m¹

[Graphic appear here]

Net interest income
£177.1m
+31%
2016: restated £135.2m¹

[Graphic appear here]

Contribution to profit
£174.8m
+32%
2016: restated £132.9m¹

This segment comprises Buy-to-Let mortgages secured on residential property held for investment purposes by experienced and professional landlords, commercial mortgages secured on commercial and semi-commercial properties held for investment purposes or for owner occupation, bridge finance, residential development finance to small and medium sized developers and secured funding lines to other lenders.

Buy-to-Let/SME sub-segments: gross loans

	Group	Group
	31-Dec-2017	31-Dec-2016
	£m	£m
Buy-to-Let	5,033.8	3,613.3
Commercial	370.8	268.3
Residential development	143.9	141.6
Funding lines	104.5	71.7
Personal loans¹	1.1	9.4
Total	5,654.1	4,104.3

The Buy-to-Let market contracted during the year in response to tax and regulatory changes, which led to increased withdrawal of the amateur landlord from the private rented sector. According to UK Finance, Buy-to-Let gross advances in 2017 fell by 12% to £35.8bn2 (2016: £40.6bn) with the decrease also reflecting the spike in lending recorded in March 2016 ahead of the Stamp Duty Land Tax ('SDLT') change. Even though the overall Buy-to-Let market shrank in 2017, the demand from professional landlords with larger portfolios continued its momentum, leading to strong growth in our market share over the year from c.4% of new Buy-to-Let mortgages in 2016 to c.6% in 2017. Professional/multi-property landlords accounted for 80% of completions for OSB by value during 2017, up from 75% in 2016.

The Group significantly increased its volume of new organic lending in this segment in 2017 to £2.4bn, an increase of 23% on 2016 new organic lending of £1.9bn. This included a significant increase in the Buy-to-Let and Commercial sub-segments lending through the Kent Reliance and InterBay brands. We continued to see strong growth opportunities, particularly in Buy-to-Let with gross loans of £5,033.8m at 31 December 2017 (2016: £3,613.3m), weighted average LTV of 69% and average loan size of c.£250,000.

A significant proportion of the Buy-to-Let market comes from refinancing. OSB's Buy-to- Let refinancing percentage was 60% during 2017, up from 58% in 2016.

From 1 October 2017, more comprehensive underwriting rules, including affordability assessment for multi-property landlords, came into effect. We have always assessed affordability for borrowers through our specialist underwriting model and apply stringent stress tests. Our weighted average interest coverage ratio ('ICR') for Buy-to-Let origination during 2017 increased to 185% (2016: 171%). The new underwriting rules and an expectation of further interest rate rises also caused a shift in the demand amongst our professional landlords towards five-year fixed rate products, which accounted for c.43% of Buy-to-Let completions in 2017.

In addition, to aid brokers in complying with the new underwriting rules, OSB partnered with a technology provider to develop a bespoke tool for assessing the health of a landlord's overall property portfolio, the first of its kind in the market.

Recent tax changes also had an impact on how borrowers structure their portfolios. In 2016, we saw a clear trend for borrowers to form limited companies in order to mitigate reductions in yield resulting from changes to personal taxation, and in 2017 OSB saw an increase in applications from limited companies for our main Buy-to-Let brand Kent Reliance, from 42% in 2016 to 69% in 2017.

We invested in sales capability across all of our lending brands and attracted new talent from large lenders during the year.

Through the Kent Reliance and InterBay brands, the Bank distributes via intermediaries throughout England and Wales with a bias towards properties in London and the South East, where the demand-supply gap is widest and most sustainable. We have further extended the geographical coverage of our business through investment in the intermediary sales team, ensuring we are seeing appropriate opportunities in other regions.

We have grown our commercial lending with a gross value of the portfolio at £370.8m as at 31 December 2017 (2016: £268.3m), low weighted average LTV of 63% and average loan size of £330,000. In March, we successfully piloted an entry to the bespoke bridging market, again leveraging the Bank's strengths in asset risk assessment and manual underwriting.

The Bank's Heritable Development Finance business provides development finance to smaller residential developers, with a preference for forging relationships with those active outside prime central London. The business continued to grow in spite of new entrants to the market, as customers sought an experienced and cautious lender. However, in line with our prudent approach given macroeconomic uncertainty, the number of potential development schemes which have withstood the business' stringent stress testing has reduced significantly. The residential development funding gross loan book at the end of 2017 was £143.9m, with a further £78.0m committed (31 December 2016: £141.6m and £70.0m respectively). Gross advances during 2017 totalled £123.7m (31 December 2016: £98.4m). Since inception the business has written £479m of loans.

In addition, the Bank continued to grow the provision of secured funding lines it provides to non-bank lenders which operate in certain high-yielding, specialist sub-segments, such as bridging finance and asset finance. Total credit approved limits as at 31 December 2017 were £303.0m with total loans outstanding of £104.5m (31 December 2016: £244.0m and £71.7m respectively). During 2017, two new funding lines were added. The pipeline remains robust, however given the macroeconomic uncertainties, the Bank continues to adopt a cautious approach.

OSB's combined Buy-to-Let/SME net loan book grew by 38% in 2017 to £5,640.9m (2016: restated £4,087.1m¹) due to the gross new lending in the year, partially offset by back book redemptions, and is the Group's largest segment. Buy-to-Let/ SME made a contribution to profit of £174.8m in 2017, up 32% compared to £132.9m1 in 2016, reflecting the growth in the loan book, and low impairment losses of £0.8m (2016: restated £1.8m¹).

The Group remains highly focused on the credit quality of new lending as demonstrated by the average LTV in the Buy-to-Let/SME segment as at 31 December 2017 of 69% (31 December 2016: 69%) with only 0.7% of loans exceeding 90% LTV (31 December 2016: 0.4%). The average LTV for new Buy-to-Let/SME origination was 70% (2016: 70%).

1. The personal loan portfolio has largely completed its run-off and is therefore no longer considered as a separate segment by the Group. The remaining net loan book of £0.9m (31 December 2016: £9.1m) and negative contribution to profit for the period of £0.8m (2016: contribution to profit of £2.7m) have been reported in the Buy-to-Let/SME segment with comparatives restated accordingly.

2. UK Finance, New and outstanding buy-to-let new mortgages, 2 Feb 2018.

		Residential
	BTL/SME	mortgages	Total
YEAR ENDED 31-DEC-2017	£m	£m	£m
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers	5,654.1	1,673.5	7,327.6
Provision for impairment losses on loans and advances	(13.2)	(8.4)	(21.6)
Loans and advances to customers	5,640.9	1,665.1	7,306.0
Risk weighted assets	2,642.8	705.7	3,348.5
PROFIT OR LOSS FOR THE YEAR
Net interest income	177.1	68.3	245.4
Other income/(expense)	(1.5)	(5.8)	(7.3)
Total income	175.6	62.5	238.1
Impairment (losses)/gains	(0.8)	(3.6)	(4.4)
Contribution to profit	174.8	58.9	233.7

	Restated¹	Residential
	BTL/SME	mortgages	Total
YEAR ENDED 31-DEC-2016	£m	£m	£m
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers	4,104.3	1,859.9	5,964.2
Provision for impairment losses on loans and advances	(17.2)	(7.8)	(25.0)
Loans and advances to customers	4,087.1	1,852.1	5,939.2
Risk weighted assets	1,944.3	798.7	2,743.0
PROFIT OR LOSS FOR THE YEAR
Net interest income	135.2	71.4	206.6
Other income / (expense)	(0.5)	(4.7)	(5.2)
Total income	134.7	66.7	201.4
Impairment losses	(1.8)	(7.2)	(9.0)
Contribution to profit	132.9	59.5	192.4

Residential mortgages

Gross loan book
£1,673.5m
-10%
2016: £1,859.9m

[Graphic appear here]

Net interest income
£68.3m
-4%
2016: £71.4m

[Graphic appear here]

Contribution to profit
£58.9m
-1%
2016: £59.5m

[Graphic appear here]

This segment comprises lending to owner occupiers, secured via either first or second charges against the residential home. The Bank provides funding lines to non-bank lenders who operate in high-yielding, specialist sub-segments such as residential bridge finance.

Residential sub-segments: gross loans

	Group	Group
	31-Dec-2017	31-Dec-2016
	£m	£m
First charge	1,240.6	1,322.1
Second charge	415.3	487.2
Funding lines	17.6	50.6
Total	1,673.5	1,859.9

During the year, the Group organically originated residential lending of £243.9m (2016: £382.1m). We saw a significant reduction in originations in the residential sector in 2017. This contributed to the first charge gross loan book reducing to £1,240.6m from £1,322.1m in 2016, with new organic lending more than offset by redemptions in the back book and acquired mortgages in run-off.

Organic lending remains the Group's core strategy, however we continue to actively consider inorganic opportunities as they arise, particularly where we have in-house servicing expertise. However, in 2017, the Group made no acquisitions of portfolios due to market pricing not meeting our return hurdles (2016: portfolios of first and second charge mortgages for £180.7m).

Our Kent Reliance brand provides bespoke first charge mortgages, typically to prime credit quality borrowers with more complex circumstances, for example high net worth borrowers with multiple income sources and self-employed borrowers. These circumstances often preclude them from the mainstream market, where most lenders favour automated decision making over manual underwriting.

Kent Reliance also operates in the shared ownership market, where borrowers buy a property in conjunction with a housing association.

Our second charge mortgage brand, Prestige Finance, provides secured finance to good credit quality borrowers who are seeking a loan to raise funds rather than refinancing their first charge mortgage. Competitive pressure in the second charge market caused price reductions and we allowed our market share to fall to ensure we continue to appropriately price for risk. The second charge residential loan book had a gross value as at 31 December 2017 of £415.3m (2016: £487.2m).

OSB continued to provide secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, such as residential bridge finance. The Bank continued its cautious approach in the more cyclical businesses given macroeconomic uncertainty. Total credit approved limits at 31 December 2017 were £33.6m with total loans outstanding of £17.6m (2016: £86.2m and £50.6m respectively). During 2017, one facility of £34.4m matured.

Innovative solutions

As the Bank has grown, we have continued to seek innovative solutions to help maintain our market leading efficiency. The finance team is a great example. We provide a 'one finance team' approach across locations in the UK and India, utilising the strengths that each site provides. We have further realised opportunities with an increasing amount of the financial reporting preparation work undertaken by OSBIndia.

We know that it is important for everyone to feel part of the team. So, as well as regular calls and virtual meetings, members of the Bangalore based team come to Chatham for specific projects such as the Annual Report, to work directly with their colleagues in head office. It bonds the finance team and helps build relationships with other functions across the Group.

The understanding formed by these visits makes sure we have a joined up team, and deliver the true efficiencies from working together.

PREETAM NANDA
FINANCIAL REPORTING ASSISTANT MANAGER

Market leading efficiency

OSB's total residential loan portfolio had a net carrying value of £1,665.1m as at 31 December 2017 (2016: £1,852.1m). The average LTV remained low at 56% (2016: 58%) with only 3% of loans by value with LTVs exceeding 90% (2016: 3%). The average LTV of new residential origination during 2017 was 65% (2016: 66%).

Residential mortgages made a contribution to Group profit of £58.9m in 2017, down 1% (2016: £59.5m), reflecting the fall in the loan book, partially offset by the benefit of lower cost of funds and impairment losses. Impairment losses in 2016 included the impact of additional prudence in collectively assessed provision assumptions following the EU referendum result.
Key performance indicators

KPI	Definition	2017 performance
1. Gross new lending Performance £2.6bn +14% [Graphic appear here]	This is defined as gross new organic lending before redemptions.	Gross new lending in 2017 reflects growth in new origination, primarily in the BTL/SME segment.
2. Net interest margin Performance 316bps stable [Graphic appear here]	This is defined as net interest income as a percentage of average interest bearing assets (cash, investment securities, loans and advances to customers and credit institutions), including off balance sheet FLS drawings. It represents the margin earned on loans and advances and liquid assets after swap expense /income and cost of funds.	Net interest margin flat to prior year with lower asset yields in line with the reduced cost of funds.
3. Cost to income ratio Performance 27% Stable [Graphic appear here] * Restated	This is defined as administrative expenses including depreciation and amortisation as a percentage of total income. It is a measure of operational efficiency.	Cost to income ratio stable despite additional cost of meeting regulatory requirements in 2017 and continues to be market leading.
4. Underlying profit before taxation Performance £167.7m +21% [Graphic appear here] * Restated	This is defined as statutory profit before taxation before exceptional items. See reconciliation of statutory profit to underlying profit in Alternative performance measures on page 29.	The increase reflects strong balance sheet growth, stable net interest margin, continued focus on cost discipline and efficiency and low loan losses. Statutory profit before taxation of £167.7m in 2017 increased by 3% compared to £163.1m in 2016.
5. Underlying basic EPS Performance 51.1 pence per share +23% [Graphic appear here]	This is defined as underlying profit attributable to ordinary shareholders, which is profit after taxation before exceptional items less after tax effect of coupons on equity PSBs and AT1 securities, divided by the weighted average number of ordinary shares in issue. See reconciliation of statutory profit to underlying profit in Alternative performance measures on page 29.	The strong growth is in line with the significant increase in underlying profitability of the Bank. On a statutory basis basic EPS increased to 51.1 pence per share in 2017 from 49.4 pence per share in 2016.
6. Return on equity Performance 28% -1% [Graphic appear here]	This is defined as underlying profit after taxation and after deducting the after tax effect of coupons on equity PSBs and AT1 securities as a percentage of average shareholders' equity (excluding equity PSBs of £22m and £60m of AT1 securities). For further information on underlying profit after taxation, see reconciliation of statutory profit to underlying profit in Alternative performance measures on page 29.	Return on equity remained strong at 28% (2016: 29%) despite our strengthened capital position.
7. Dividend per share Performance 12.8 pence per share +22% [Graphic appear here]	This is defined as the sum of the recommended final dividend for 2017 plus the interim dividend divided by the number of ordinary shares in issue at the year end.	The Board will recommend a final dividend of 9.3 pence per share in respect of 2017 at the Bank's AGM on 10 May 2018. This, together with the interim dividend of 3.5 pence per share, represents 25% of underlying profit after tax attributable to ordinary shareholders (after deducting the after tax impact of coupons on equity PSBs and AT1 securities) for 2017, in line with the Bank's target dividend payout ratio.
8. CRD IV fully-loaded Common Equity Tier 1 capital ratio Performance 13.7% +0.4% points [Graphic appear here]	This is defined as Common Equity Tier 1 capital as a percentage of risk-weighted assets (calculated on a standardised basis) and is a measure of the capital strength of the Bank.	The capital ratio of 13.7% reflects the ability of the business to generate capital through profitability to support significant loan book growth.
9. Loan loss ratio Performance 7bps improved 9bps [Graphic appear here]	This is defined as impairment losses expressed as a percentage of average gross loans and advances. It is a measure of the credit performance of the loan book.	The improved ratio of 7bps for 2017 (2016: 16bps) mainly reflects the assumption updates that took place in 2016. It also reflects the continued strong performance from the front book of loans, originated by the Bank since its creation in 2011. From more than 38,500 loans totalling £8.3bn of new organic originations since the Bank's creation in February 2011, we only have 137 cases of arrears over three months in duration, with an aggregate balance of £18.4m and average LTV of 63%.
10. Customer satisfaction - netpromoter score Performance +62 +3 [Graphic appear here]	The net promoter score measures our customers' satisfaction with our service and products. It is based on customer responses to the question of whether they would recommend us to a friend. The question scale is 0 for absolutely not to 10 for definitely yes. Based on the score, a customer is defined as a detractor between 0 and 6, a passive between 7 and 8 and a promoter between 9 and 10. Subtracting the percentage of detractors from the percentage of promoters gives a net promoter score of between -100 and +100.	The Bank's customer NPS across the year for 2017 improved from +59 in 2016 to +62. This demonstrates that our investment in customer service in the UK and India and customer-centric strategy of providing transparent savings products which offer long-term value for money continues to deliver high levels of customer satisfaction.

Financial review

Strong growth in gross new organic lending £2.6bn +14% 2016: £2.3bn	[Graphic appear here]
Net loan book growth 23% 2016: 16% (20% excluding the impact of Rochester disposal	[Graphic appear here]
Cost to income ratio 27% Strong income growth and continued focus on cost discipline and efficiency 2016: 27%²	[Graphic appear here] * Restated

	Group 31-Dec-2017 £m	Group 31-Dec-2016 £m

SUMMARY PROFIT OR LOSS
Net interest income	245.4	206.6
Net losses on financial instruments	(6.3)	(4.3)
Net fees and commissions	0.5	1.7
External servicing fees	(1.5)	(2.6)
Administrative expenses¹	(65.1)	(53.7)
FSCS and other regulatory provisions	(0.9)	(0.5)
Impairment losses	(4.4)	(9.0)
Exceptional items	-	24.9
Profit before taxation	167.7	163.1
Profit after taxation	126.9	120.9
Underlying profit before taxation³	167.7	138.2²
Underlying profit after taxation³	126.9	102.4²
KEY RATIOS
Net interest margin³	316bps	316bps²
Cost to income ratio³	27%	27%2
Management expense ratio⁴	0.86%	0.86%
Loan loss ratio³	0.07%	0.16%
Basic EPS³, pence per share	51.1	49.4
Underlying basic EPS³, pence per share	51.1	41.7
Return on equity³	28%	29%
Dividend per share, pence per share	12.8	10.5
	£m	£m
EXTRACTS FROM THE STATEMENT
OF FINANCIAL POSITION
Loans and advances	7,306.0	5,939.2
Retail deposits	6,650.3	5,952.4
Total assets	8,589.1	6,580.9
KEY RATIOS
Liquidity ratio⁵	15.2%	17.9%
CET1 capital ratio⁶	13.7%	13.3%
Total capital ratio	16.9%	15.1%
Leverage ratio	6.0%	5.5%

1. Including depreciation and amortisation.

3. See definition in Key performance indicators table on pages 26-27.

4. Administrative expenses including depreciation and amortisation as a percentage of average total assets.

5. Liquid assets as a percentage of funding liabilities.

6. Fully-loaded under Basel III/CRD IV.

Alternative performance measures

OSB believes that the use of alternative performance measures ('APMs') for profitability and earnings per share provides valuable information to the readers of the financial statements and presents a more consistent basis for comparing the Group's performance between financial periods, by adjusting for exceptional non-recurring items. APMs also reflect an important aspect of the way in which operating targets are defined and performance is monitored by the Board. However, any APMs in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well.

	Profit before taxation		Profit after taxation
Reconciliation of statutory profit to underlying profit	Group 31-Dec-2017 £m	Restated Group 31-Dec-2016 £m	Group 31-Dec-2017 £m	Restated Group 31-Dec-2016 £m
Statutory profit	167.7	163.1	126.9	120.9
Gain on Rochester 1 disposal	-	(34.7)	-	(25.8)
Exceptional amortisation of fair value adjustments on hedged assets	-	9.8	-	7.3
Underlying profit	167.7	138.2	126.9	102.4

Statutory basic EPS of 51.1 pence per share (2016: 49.4 pence per share) is calculated by dividing profit attributable to ordinary shareholders of £124.2m (2016: £120.0m) which is profit after taxation of £126.9m (2016: £120.9m) less coupons on equity PSBs, including the tax effect of £0.7m (2016: £0.9m) and coupons on AT1 securities, including the tax effect of £2.0m (2016: £nil) by the weighted average number of ordinary shares in issue during the year of 243.2m (2016: 243.1m).

Underlying basic EPS of 51.1 pence per share (2016: 41.7 pence per share) is calculated by dividing underlying profit attributable to ordinary shareholders of £124.2m (2016: £101.5m), which is underlying profit after taxation of £126.9m (2016: restated £102.4m) less coupons on equity PSBs, including the tax effect of £0.7m (2016: £0.9m) and coupons on AT1 securities of £2.0m (2016: £nil) by the weighted average number of ordinary shares in issue during the year of 243.2m (2016: 243.1m). Further information can be found in note 12 to the financial statements.

Prior to 2017, OSB deducted coupons on equity PSBs accounted for as dividends from underlying profit before and after tax. Following a review of market practice in advance of the Bank's issuance of AT1 securities in May 2017, OSB no longer deducts these coupons and underlying profit before and after tax for 2016 have been restated throughout this document accordingly.

The table below illustrates the key ratios under previous and current methods and the impact of the change in calculation methodology.

Change in key ratio calculation	2017 %	2016 %
Cost to income ratio
Previous method	27	27
Add back coupons on equity PSBs	(0)	(0)
Current method	27	27
Net interest margin
Previous method	3.15	3.14
Add back coupons on equity PSBs	0.01	0.02
Current method	3.16	3.16

	2017 £m	2016 £m
Underlying profit before tax
Previous method	166.7	137.0
Add back coupons on equity PSBs	1.0	1.2
Current method	167.7	138.2
Underlying profit after tax
Previous method	126.2	101.5
Add back coupons on equity PSBs	0.7	0.9
Current method	126.9	102.4

Strong profit growth

The Group reported profit growth of 3% in 2017 with profit before taxation of £167.7m (2016: £163.1m including net gain from exceptional items of £24.9m). On an underlying basis, the Bank recorded a 21% increase in underlying profit before taxation to £167.7m (2016: restated £138.2m¹) reflecting strong balance sheet growth and a stable net interest margin combined with continued focus on cost discipline and efficiency.

Profit after taxation in 2017 increased by 5% to £126.9m (2016: £120.9m including the net gain after taxation from exceptional items of £18.5m). On an underlying basis, profit after taxation increased by 24% to £126.9m (2016: restated £102.4m¹). The Group's effective tax rate was 24.1%² in 2017 (2016: 25.6%), with a lower proportion of the Group's profits subject to the Bank Corporation Tax Surcharge.

Net interest margin

The Group reported an increase in net interest income of 19% to £245.4m in 2017 (2016: £206.6m) reflecting the growth in the loan book and a stable NIM of 316bps (2016: restated 316bps¹). The stable NIM in 2017 represents a reduction in asset yields in line with the falling cost of funds.

The average cost of retail funds fell year on year, although market rates started to rise again in 2017.

The Bank benefited from a higher average balance in the Bank of England schemes in 2017 versus the prior year and the transition from FLS into the cheaper TFS. As at December 2017, the TFS drawdowns stood at £1,250.0m (2016: £101.0m) and FLS at £nil (2016: £524.6m).

Margins on the Bank's fixed rate mortgage products, particularly five-year fixed rate Buy-to-Let, declined in the fourth quarter of 2017 as the market did not reprice these products following the Bank of England base rate rise and subsequent widening of swap spreads in anticipation of future increases in interest rates.

Losses on financial instruments

Fair value loss on financial instruments in 2017 of £6.3m (2016: loss £4.9m) includes £7.3m amortisation of fair value adjustments on hedged assets relating to cancelled swaps (2016: £4.9m). The amortisation of fair value adjustments in both years includes the impact of accelerating the amortisation in line with the run-off of the underlying legacy long-term fixed rate mortgages due to faster than expected prepayments.

In 2016, the Group also made a £0.6m gain on disposal of a portion of non-performing personal loans with a gross value of £10.9m.

Net fees and commissions

Net fees and commission income of £0.5m (2016: £1.7m) comprises fees and commission receivable of £1.5m (2016: £2.5m) partially offset by commission expense of £1.0m (2016: £0.8m). Fees and commissions receivable decreased in 2017 due primarily to lower arrangement fees on funding lines.

External servicing fees

External servicing fees decreased to £1.5m in 2017 (2016: £2.6m) due to the transfer of servicing for acquired first charge residential loan book to the Bank's operation in India during the year and the further run-off of the personal loans portfolio.

Efficient and scalable operating platform

Administrative expenses including depreciation were up 21% to £65.1m in 2017 (2016: £53.7m), reflecting the growth in the business and the increased demands of regulation, including projects relating to IFRS 9 and an internal ratings based approach to risk weights ('IRB').

The Group's cost to income ratio of 27% and the management expense ratio of 0.86% remained stable (2016: 27%1 and 0.86% respectively) despite the increased cost of regulation, reflecting the Bank's focus on efficiency and use of its scalable low cost back office based in Bangalore, India.

FSCS and other regulatory provisions

Regulatory provisions expense of £0.9m (2016: £0.5m) includes levies due to the Financial Services Compensation Scheme ('FSCS') which continued to decrease (see note 31 to the financial statements for further details) and other regulatory provisions.

Impairment losses

Impairment losses decreased to £4.4m in 2017 (2016: £9.0m) representing 7bps on average gross loans and advances (2016: 16bps). The decrease was primarily due to increased prudency in assumptions introduced in 2016 following the UK referendum vote to leave the EU, as well as lower underlying loan losses on acquired residential portfolios, and the effect of increasing property values reducing potential loss.

The performance of the front book of mortgages remains strong, reflecting the continued strength of the Bank's underwriting and lending criteria. We kept tight control on credit quality, as seen in our reportable arrears statistics. From more than 38,500 loans totalling £8.3bn of new organic originations since the Bank's creation in February 2011, there were only 137 cases of arrears over three months or more as at 31 December 2017, with an aggregate value of just £18.4m and average LTV of 63%.

IFRS 9

We had a successful parallel run of the IFRS 9 models throughout 2017 and were operating live under the new standard from 1 January 2018. The day one impact of the implementation of IFRS 9 is an increase in the provisions of c.£4m, representing 9bps on the Bank's CET1 ratio as at 31 December 2017 on an end game basis, reflecting the strength of security underpinning our loan book. The Group continues to monitor the performance of the underlying IFRS 9 models whilst assessing the ongoing appropriateness of all key judgement and estimate areas ahead of the full reporting of IFRS 9 impact later in 2018.

Exceptional items

There were no exceptional items in 2017.

Exceptional items in 2016 of £24.9m comprised the gain on disposal of the Bank's entire economic interest in Rochester 1 of £34.7m and an exceptional loss of £9.8m in respect of accelerated amortisation of fair value adjustments on hedged assets relating to legacy back book long- dated swap cancellations, in line with the underlying mortgage asset run-off, due to faster than expected prepayments. The exceptional loss represented the impact of accelerating the amortisation in prior years from 2012 to 2015.

Dividend

The Board recommends a final dividend for 2017 of 9.3 pence per share. Together with the 2017 interim dividend of 3.5 pence per share, this represents 25% of underlying profit after taxation attributable to ordinary shareholders for 2017 in line with the Bank's target dividend payout ratio. The proposed final dividend will be paid on 16 May 2018, subject to approval at the AGM on 10 May 2018, with an ex-dividend date of 22 March 2018 and a record date of 23 March 2018.

Balance sheet growth

Net loans and advances grew by 23% in 2017 to £7,306.0m (31 December 2016: £5,939.2m) attributable primarily to an increase in new lending in the Buy-to-Let/SME segment.

Retail deposits and total assets grew by 12% and 30% respectively in 2017 with additional funding of £624.4m supplied by the FLS and TFS throughout the year. By the end of 2017, the Group had completed its planned transition out of the FLS scheme (31 December 2016: £524.6m) to the TFS with drawings under the scheme of £1,250.0m (31 December 2016: £101.0m).

The TFS drawdowns are offered in the form of collateralised cash loans. The scheme closed to new drawings at the end of February 2018 and the Group has four years from the date of each individual drawing to repay the existing loans.

Liquidity

OneSavings Bank operates under the PRA's liquidity regime. The Bank operates within a target liquidity runway in excess of the minimum regulatory requirement. In addition, the Bank maintains a strong retention track record on fixed term bond and ISA maturities. As at 31 December 2017, our liquidity coverage ratio of 250% (2016: 239%) was significantly in excess of the 2017 regulatory minimum of 90%, including drawings under the Bank of England FLS and TFS funding facilities. The Group's liquidity ratio as at 31 December 2017 was 15.2% (31 December 2016: 17.9%).

Capital

The Bank's fully- loaded CET1 capital ratio under CRD IV strengthened to 13.7% as at 31 December 2017 (31 December 2016: 13.3%), demonstrating the strong organic capital generation capability of the business to support significant growth through profitability.

We further optimised our capital structure through the issuance of £60m of AT1 securities in May 2017.

The Bank had a total capital ratio of 16.9% and a leverage ratio of 6.0% as at 31 December 2017 (31 December 2016: 15.1% and 5.5% respectively).

The Bank had a Pillar 2a requirement of 1.1% of risk weighted assets as at 31 December 2017 (31 December 2016: 1.2%).

Cash flow statement

In 2017, the Group replaced £524.6m of Bank of England FLS off balance sheet securities with cash drawn down under the TFS. This led to cash and cash equivalents increasing by £680.6m during the year to £1,165.9m as at 31 December 2017 (2016: restated £485.3m³).

The Group's loans and advances to customers grew by £1,371.2m during the year, partially funded by an additional £697.9m of deposits from retail customers which mainly contributed to £512.9m of cash used in operating activities. The remaining funding came primarily from additional drawdowns under the TFS, which in conjunction with replacing the FLS securities, totalled £1,149.0m during the year. Together with £59.4m of funding from the issuance of AT1 securities, this generated £1,167.5m of cash from financing activities. Cash generated from investing activities was £26.0m, primarily driven by the sale and maturity of investment securities and the purchase of additional equipment and intangible assets.

In 2016, the Group increased its loans and advances to customers by £1,031.3m. This was partially funded by an additional £588.6m of deposits from retail customers. Collectively, these were the main drivers of the £323.8m (restated3) of cash used in operating activities. The remaining funding came primarily from the Group replacing its maturing on balance sheet available for sale investment securities (£309.4m decrease, restated3) with off balance sheet securities under the FLS (£363.9m increase) in its liquidity portfolio. Together with £80.2m of cash received from the Rochester 1 disposal, this generated £381.9m (restated3) of cash inflows from investing activities. In addition, the Group drew down £101.0m of cash under the TFS which is reflected in the cash generated from financing activities.

Further information can be found in the Statement of Cash Flows on page 111.

1. Prior to 2017, OSB deducted coupons on equity PSBs accounted for as dividends from underlying profit before and after tax, net interest margin and cost to income ratio. Following a review of market practice in advance of the Bank's AT1 issue in May 2017, OSB no longer deducts these coupons from the calculation of these key performance indicators. The comparatives have been restated accordingly. Interest payments on AT1 securities classified as dividends are treated in the same way.

2. Effective tax rate excludes £0.4m of adjustments relating to prior years.

3. The 2016 comparatives have been reclassified to include investment securities with maturity less than three months and to exclude encumbered loans and advances to credit institutions within cash and cash equivalents.

SUMMARY CASH FLOW STATEMENT	Group 31-Dec-2017 £m	Restated³ Group 31-Dec-2016 £m
Profit before tax	167.7	163.1
Net cash generated/(used in):
Operating activities	(512.9)	(323.8)
Investing activities	26.0	381.9
Financing activities	1,167.5	56.7
Net increase/(decrease) in cash and cash equivalents	680.6	114.8
Cash and cash equivalents at the beginning of the period	485.3	370.5
Cash and cash equivalents at the end of the period	1,165.9	485.3

Risk review

Executive summary

During the year, the Group maintained a low and stable risk profile in line with the Board's risk management objectives. The Group continued to invest in its risk management infrastructure and resources to support the Group's growth objectives and to ensure ongoing compliance with the emerging industry good practice and regulatory standards.

By effectively leveraging its risk management framework, the Group actively managed its risk profile in accordance with the Board approved risk appetite. Through continuous monitoring and assessment of the underlying risk drivers, whilst actively engaging the Board and senior management, the Group took appropriate and timely management actions in the context of the changing economic, business and regulatory environment.

Through taking judicious and considered investment decisions, the Group improved its risk assessment and monitoring capabilities. In particular, the Group focused its risk-based investment to enhance its data governance and controls, upgrading its operational resilience assessment and management framework and delivering improvements to its risk analytical capabilities. The Group also expanded its risk management capacity through the recruitment of specialist risk and compliance resources within its UK and Indian operations.

The Group delivered strong and profitable growth whilst maintaining a low and stable risk profile. The underlying asset quality profile has continued to exhibit very strong performance and has continued to maintain sizeable and high quality buffers against minimum prudential solvency and liquidity requirements.

The underlying asset quality profile and the strength of its financial position helped to position the Group favourably in the context of uncertain economic, political and regulatory conditions. In particular, the Group continues to be mindful of the uncertainty surrounding Brexit negotiations and has leveraged its stress testing capabilities to identify potential points of vulnerability.

The new regulatory standards relating to Buy-to-Let underwriting and affordability testing represented an important area of focus for the Risk and Compliance functions. The inherent strength of the Group's underwriting procedures and its continued investment in customer data management enabled the Group to respond effectively to the regulatory changes. The Group also continued to improve its funding and liquidity forecasting procedures and has credible plans for when the Bank of England withdraws its Term Funding Scheme.

The other key regulatory developments to which the Group is responding include the General Data Protection Regulation ('GDPR') and Payment Services Directive ('PSD2'). Both these regulatory initiatives are supported by dedicated resources, structured programmes and engagement of external advisors to ensure that the Group complies effectively with the emerging requirements.

The Group continued to maintain a robust and secure IT infrastructure and remains acutely conscious that the level and sophistication of cyber-risk continues to evolve. Dedicated resources, improved detection capabilities and planning have helped the Group to minimise the risk of cyber-attacks.

Key risk indicators	Commentary
CET1 ratio [Graphic appear here]	The Group further strengthened its fully-loaded CET1 ratio to 13.7% during 2017 (2016: 13.3%) demonstrating the strong organic capital generation capability of the business to support significant growth.
Total capital ration [Graphic appear here]	The Group's total capital ratio increased by 1.8% to 16.9% during 2017 driven by the strengthened CET1 ratio and the issuance of £60m of AT1 securities.
3+ months in arrears* [Graphic appear here]	There was a reduction in the percentage of loans more than three months in arrears during 2017 driven by a strong performance across newly originated loans. *Note: 3+ months in arrears ratio excludes legacy problem loans.
Cost of risk [Graphic appear here]	Improved impairment performance was primarily driven by increased prudence in assumptions introduced in 2016 following the UK referendum vote to leave the EU, as well as lower underlying loan losses on acquired residential portfolios and the effect of increasing property values.
Liquidity ratio [Graphic appear here]	The Group's liquidity ratio remained well above regulatory and risk appetite limits in 2017 finishing the year at 15.2%. The Group managed liquidity levels within its target range in the year and its liquidity coverage ratio was 225% against a regulatory minimum of 90%.

High level key risk indicators

The Group aligns its risk appetite to a select range of key performance indicators that are used to assess the Group's success against strategic, business, operational and regulatory objectives. Actual performance against these indicators is continually assessed and reported. The table above outlines the comparative analysis of the leading risk indicators with supporting commentary.

Key achievements in 2017

The Group further enhanced and integrated its Strategic Risk Management Framework ('SRMF') to inform, guide and support business and strategic decision making. The Group generated shareholder value through the optimisation of its risk and reward profile within the constraints of its risk appetite.

The Group's approach to setting its risk appetite was enhanced through the use of improved borrower and loan level risk assessment, greater alignment with the financial planning process and the use of stress testing. The Board actively guided the process of setting risk appetite, ensuring that the risk appetite is fully reflective of the Board's attitude and tolerance for risks to its objectives.

The IFRS 9 programme continued to progress according to plan with the core processes being subject to a full parallel run throughout 2017. An independent validation of all underlying models, implementation standards and governance arrangements was performed. The Group was fully prepared to begin reporting under the IFRS 9 regime on 1 January 2018, the 'go-live' date.

The Group's secured business model, sensible loan to value profile and strong arrears performance result in a manageable day one impact post adoption of the IFRS 9 standard of c.£4m. For arrears balances purchased via the portfolio acquisition process, the Group conservatively assesses expected loss at the point of acquisition which is offset against the modelled future cash flows to derive the effective interest rate for the book. This incurred loss protection is therefore recognised over the life of the book against the unwind of any purchase discount or premium through interest income providing further protection.

The Internal Ratings Based ('IRB') programme was formally established to enable the Group to transition to the advanced approach to measuring its credit risk-based capital requirements. The programme progressed in accordance with the Board approved plan and the Group is well placed to commence parallel running its IRB models and capital calculation engine. The Group completed an internal self-assessment exercise against the Capital Requirements Regulation ('CRR') to develop detailed plans and a roadmap of key steps towards a formal regulatory application. The Group will be engaging actively with the PRA and external subject matter experts to ensure successful delivery of the programme.

As the Group increased the use of risk-based analytics and models, it also improved model validation, monitoring and back-testing. Appropriate controls were established to assess the ongoing robustness and usage of all risk models. The Group established Board and senior management oversight and governance procedures through a Board approved model risk policy.

A Group-wide programme was established to enhance the Bank's approach to data governance and controls in the context of industry good practice and regulatory standards. The programme is overseen by a senior level Steering Committee with cross-functional executive sponsorship. The programme is designed to deliver improved data controls and models, aggregation capabilities and end user reporting capabilities. The programme will support other strategic and regulatory initiatives including IRB, GDPR and securitisation.

To ensure a holistic and integrated approach to operational resilience, the Group established an Operational Resilience Programme to align its current approach to emerging industry good practice and regulatory standards. The programme will help to deliver an integrated approach to the ongoing assessment of critical operational functions and key dependencies, assessment of potential points of vulnerability and business continuity planning and crisis management.

The Group continued to enhance its Internal Capital Adequacy Assessment Process ('ICAAP'), through improved risk-based capital assessments and the use of stress testing. The Group worked with industry experts and engaged with the PRA to ensure that its ICAAP adheres to regulatory standards and represents an important mechanism by which the Board and senior management assess the adequacy and effectiveness of the Group's business and capital plans under normal and stressed operating conditions. Fully integrated funding and liquidity planning and stress testing analysis is used to support the Internal Liquidity Adequacy Assessment Process ('ILAAP'). The Group also enhanced its Recovery Plan through active assessment of risk drivers, identification of business model vulnerabilities and development of credible and reliable business recovery options.

Risk- based management information has been an important area of continued improvement. Through the use of a broad range of early warning indicators and risk drivers, a more forward-looking approach to risk identification and management was established. In particular, enhancements were made to the credit portfolio risk triggers by leveraging credit bureau data to supplement internal risk assessments. The Group is actively using its early warning risk indicators and risk assessment capabilities to identify and analyse any emerging trends, particularly during the current period of economic and market uncertainty.

Improved Financial Crime and Compliance team structures were implemented with continued investments made to materially build out specialist capabilities in relation to monitoring, testing and assurance.

Priority areas for 2018

The priority for both the Risk and Compliance functions during 2018 is to further embed the risk management frameworks into the culture and decision making processes at all levels of the organisation. Both functions intend to utilise the enhanced level of specialist risk and compliance resources to deliver on a number of key initiatives including:

- Delivery of an enhanced and integrated data governance and controls framework. Improved data aggregation, analytics and distribution channels to support ongoing business reporting requirements as well as key strategic and regulatory initiatives

- Continued progress against the Group's IRB plan, with particular focus on delivery of second generation credit risk models, improved adherence to emerging regulatory requirements and meeting the 'use-test' requirements. Improved model governance and controls, supported by an extensive training and awareness programme

- Continued improvements to the underlying risk forecasting and stress testing capabilities which supporting the Group ICAAP and ILAAP, including the roll-out of IRB and IFRS 9 compliant stress testing capabilities

- The Group's operational resilience programmes to deliver an integrated approach to operational resilience assessment and improved aligned to Business Continuity Plan ('BCP') development and testing, through the leveraging of an integrated system solution.

The Board and senior management are providing an appropriate level of oversight across all key initiatives. The Group also engages external subject matter experts and consults with supervisory authorities to ensure appropriate levels of transparency and successful outcomes are achieved.

Risk management

Approach to risk management

Ongoing risk identification, assessment, monitoring and reporting are the primary risk disciplines underpinning the Group's growth strategy and adherence to the prudential and conduct regulatory requirements. The Group's approach to risk management is outlined within the SRMF.

The SRMF is the overarching framework which enables the Board and senior management to actively manage and optimise the risk-reward profile within the constraints of the Group risk appetite. Specifically, the SRMF enables the Board and senior management to take informed decisions by appropriately balancing the interests and expectations of the various stakeholders and to manage potential trade-offs within the context of the risk appetite.

The SRMF is a structured approach to aligning the Board's overarching objectives against the risks assumed and the ongoing management of these risks. The SRMF enables the Board to articulate its expectations and tolerance in relation to the nature and level of risks it is willing to assume in pursuit of its strategic and business agenda. The Board also uses the SRMF to outline its expectations with respect to the appropriate level of risk management capabilities and the sophistication needed to actively manage the risk profile.

The modular construct of the SRMF provides for an agile approach to responding effectively to the evolving nature of the business and regulatory environment. The SRMF and its core modular components are subject to periodic review and approval by the Board and its oversight committees.

The following sections describe the key modules of the SRMF structure.

Key modular component 1: Risk principles and culture

The Board adopted a principle-based approach to articulating its expectations and guidance relating to how the Group should frame its risk management approach. The risk management principles are designed to set a clear 'tone from the top' with respect to the Group's risk culture and values. The risk principles also provide the background context in which to articulate the Group's risk management objectives, strategy and appetite.

The risk principles are:

- Customer outcomes: fair treatment and good customer outcomes are core business values which cannot be put at risk

- Proportionate and scalable: the approach to risk management needs to be commensurate with the complexity of the underlying risk profile and appropriately agile to respond to changing business and regulatory needs

Strategic Risk Management Framework (SRMF)

Key elements	Risk principles and culture Risk strategy and appetite Risk governance and function organisation Risk definitions and categorisation
Principal risks	Financial risks		Non-financial risks
	Credit risk Market risk Liquidity risk Solvency risk		Strategic and business risk Reputational risk Regulatory/compliance risk	Operational risk Conduct risk
Capabilities	Risk framework and policies	Risk data and IT	Risk analytics	Risk MI
Risk regulatory submissions	ICAAP	ILAAP	Recovery plan/ Resolution pack

- Actively managed: the risk profile needs to be actively managed within the Board approved risk appetite

- Comprehensive coverage: all risks and their underlying drivers impacting the Group's strategic, business, operational and regulatory objectives should be actively assessed, monitored and reported

- Segregation of duties: risk-taking, oversight and assurance responsibility to be organised in adherence to the 'three lines of defence' principle

- Integration and usage: risk assessment should be a critical feature of decision making processes at all levels of the organisation

- Versatile and progressive: the approach to managing risks should be subject to continuous review and challenge to keep pace with emerging good practice and regulatory standards.

In adherence to the risk management principles, the Group Board and senior management have cultivated a risk culture which encourages a proactive, transparent and analytical approach to risk management. Risks are assumed in a balanced and considered manner, taking into account stakeholder expectations, good customer outcomes, risk management capabilities and controls.

Key modular component 2: Risk strategy and appetite Risk strategy

OSB's risk strategy is to create value through informed risk-based decisions and leveraging the Group's risk data and analytics in a timely and accurate manner to optimise the risk-reward profile. Risks are only to be assumed which can be effectively identified, assessed, measured and controlled across all phases of the risk life cycle.

This risk strategy is based on three key components:

- Creating value through generating returns which sufficiently exceed the cost of risk, funding costs and operating costs

- Risks are only to be assumed where they are subject to a structured and disciplined approach to risk management

- Risk management capabilities are scalable and agile enough to adequately address future evolution of the risk profile.

Risk appetite

The Group effectively aligned its strategic and business objectives with its risk appetite, ensuring that the Board and senior management are able to monitor the underlying risk profile relative to the overarching risk principles, risk strategy and financial performance objectives of the Group. The risk appetite is a critical mechanism though which the Board and senior management are able to identify adverse trends and respond to unexpected developments in a timely and considered manner.

The risk appetite is calibrated to reflect the Group's strategic objectives, business operating plans, as well as external economic, business and regulatory constraints. In particular, the risk appetite is calibrated to ensure that the Bank continues to deliver against its strategic objectives and operates with sufficient financial buffers even when subjected to plausible but extreme stress scenarios. The objective of the Board risk appetite is to ensure that the strategy and business operating model is sufficiently resilient.

The risk appetite is calibrated using statistical analysis and stress testing to inform the process by which the Board set management triggers and limits against key risk indicators. The Board and senior management actively monitor actual performance against Board approved management triggers and limits to respond in a timely manner to adverse trends and breaches.

Overarching risk appetite statement

The Bank has a prudent and proportionate approach to risk taking and management, which is reflective of its straightforward business model. The inherent resilience of the Group's business model is underpinned by the fact that the Bank only lends on a secured basis, has established robust underwriting practices and relies on intermediary based distribution. The Group supports its lending activities by being predominantly reliant on stable retail funding, supported by strong and high quality financial buffers. The highly efficient business operating model is an important source of competitive advantage. The Group also places significant importance on its strong conduct and compliance culture as an important driver of its overall success.

Information and reporting	Information and reporting	Business and risk strategy	Business and risk strategy provide the context within which the Group outlines its business objectives and establishes its SRMF. The risk appetite seeks to articulate the willingness of the Group to take risks in light of its strategic and risk objectives.
		Overarching appetite statement	The overarching risk appetite sets the tone for risk management. It provides a framework to develop and cascade the Group's risk culture and to establish risk policies, controls and limits in a consistent manner.
		Risk types and individual risk level appetite statements	The overarching risk appetite statement is supported by the individual, risk type level appetite statements for all relevant risks.
		Risk metrics	Risk appetite statements are supported by a broad range of qualitative and quantitative metrics.

Key modular component 3: Risk governance and function organisation

Risk governance refers to the processes and structures established by the Board to ensure that risks are assumed and managed within the Board approved risk appetite, with clear delineation between risk-taking, oversight and assurance responsibilities. The Group's risk governance framework is structured to adhere to the 'three lines of defence' model. All risk-taking, oversight and assurance functions are allocated to accountable Executives.

The Group Board has the ultimate responsibility for the oversight of the Group's risk profile and management framework and where it deems it appropriate, it delegates its authority to its nominated Committees. The Board and its Committees are provided with appropriate and timely information relating to the nature and level of the risks to which the Group is exposed and the adequacy of the risk controls and mitigants. The Internal Audit function provides independent assurance to the Board and its Committees as to the effectiveness of the systems and controls and the level of adherence with internal policies and regulatory requirements.

The Executive Committee has day-to-day responsibility for managing the Group's risk profile within the parameters of the Board approved risk appetite. The Executive Committee discharges its risk control and oversight responsibilities through a number of management level risk committees covering all principal risks.

The Chief Risk Officer ('CRO') is the accountable Executive responsible for establishing an effective risk management framework supported by appropriately organised Risk and Compliance functions. In discharging his duties, the CRO has dual reporting lines into the Group CEO and the Chair of the Risk Committee. The CRO ensures that the Risk function is appropriately resourced and capable of identifying, assessing and reporting all principal risks to which the Bank is exposed.

The various management level risk committees have been established to ensure a more focused approach to monitoring and managing the specific risks. Additional sub- committees and working groups have also been established to focus on specific risk initiatives or projects.

The OSB risk governance structure is detailed below:

Risk

Credit

Market

Liquidity

Operational

Regulatory

Conduct

Board
governance

Board

Risk Committee

Management governance

Executive Committee

Credit Committee

Assets and Liabilities Committee

Risk Management Committee

Regulatory Governance Committee

Chief Risk Officer

Frameworks

Strategic Risk Management Framework, Stress Testing Framework

Key policies and documents

Credit Risk Management Framework, Lending Policy, Arrears, Repossession and Forbearance policies

Interest Rate Risk in the Banking Book Policy

Market & Liquidity Risk Management Framework, Treasury Policy, Funding and Liquidity Risk Policy

Operational Risk Management Framework, Operational Resilience Policy, Vulnerable Customer and Suicide Awareness Policy

Compliance Risk Management Framework, Financial Crime Risk Management Framework, Group Anti-Money Laundering and Counter Terrorist Financing Policy, SMR policies

Conduct Risk Management Framework, Conduct Risk Policy

Risk Appetite Statement, ICAAP, Recovery Plan, Resolution pack

ILAAP

Management information

Credit MI pack

ALCO MI pack

Operational
risk MI pack

Compliance and
Financial Crime
MI pack

Conduct risk
MI pack

The OSB risk organisational structure is detailed below:

Board Committees

Board of Directors

Remuneration Committee

Nomination and Governance Committee

Audit Committee

Risk Committee

Executive Committee

Management Committees

Credit Committee

Executive M&A Committee

Operations Committee

Risk Management Committee

Regulatory Governance Committee

Executive Disclosure Committee

Assets and Liabilities Committee

Transactional Credit Committee

Project and Change Committee

Vulnerable Customer Committee

Heritable Transactional Credit Committee

Vendor Management Committee

Data Governance Forum

Model Review Committee

Product and Proposition Management Forum

Business and control functions

First line of defence

Second line of defence

Third line of defence

Ensures that risks are identified, measured, monitored and reported in line with policy in an effective manner.

Key Brands
Finance and HR
Operations
IT and Change
Commercial
Sales and Marketing
Legal and Regulation

Provides an independent review and challenge to the business and control functions to ensure that all aspects of the risk profile are managed in adherence to risk appetite and policies.

Risk and Compliance
Credit Strategy

Provides independent assurance on the effectiveness of the SRMF, compliance with regulations, adherence to policies and effectiveness of controls.

Internal Audit

Executives

Chief Executive Officer

Chief Financial Officer
Group Chief Operating Officer
Chief Information Officer
Group General Counsel
and Company Secretary
Group Commercial Director
Sales & Marketing Director
Brand-Level Senior Management

Chief Risk Officer
Group Chief Credit Officer

Group Head of Internal Audit

Key modular component 4: Risk definitions and categorisation

The Group's business activities, business model and external operating environment result in a unique risk profile. To ensure that the Bank is actively monitoring and responding to the evolving nature of its risk profile, it has established a broad range of early warning indicators and maintains risk registers covering all principal risks. Outlined below are the various financial and non-financial risks which constitute the Group's risk profile.

Business model characteristics
- Specialist, and primarily secured lender to underserved sectors	- Desired levels of credit exposure to key segments (Buy-to-Let/SME, residential) - Potential for concentrations	- Also incurs exposure to potentially riskier sub-sectors (second charge, bridging and development finance)	- Manage infrastructure and operations to support its core business activities - Perform activities to ensure regulatory compliance	- The Bank is subject to variations in the macroeconomic environment and movements in key variables (e.g. Gross Domestic Product, unemployment, interest rates)

Risk profile
Financial risks	Non-financial risks
Portfolio credit risk The risk of losses due to one or more borrowers failing to meet all or part of their obligations towards the Bank. Credit risk also includes other elements such as pre-settlement and settlement risk, residual risk of credit risk mitigation and concentration risk. Market risk (inc. IRRBB) The risk of losses in on and off-balance sheet positions arising from adverse movements in market prices.	Strategic and business risk The risk to the Bank's earnings and profitability arising from its strategic decisions, change in the business conditions, improper implementation of decisions or lack of responsiveness to industry changes.	Reputational risk Refers to the potential adverse effects that can arise from the Bank's reputation being sullied due to factors such as unethical practices, adverse regulatory actions, customer dissatisfaction and complaints or negative/adverse publicity. Reputational risk can arise from a variety of sources and is a second order risk - the crystallisation of a credit risk or operational risk can lead to a reputational risk impact.	Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes legal risk but excludes strategic and reputational risk.
			Conduct risk Conduct risk is the risk that the firm's culture, organisation, behaviours and actions result in poor outcomes and detriment for customers and/or damage to consumer trust and integrity in the markets in which we operate.
			Regulatory/compliance risk The risk of failure due to non-adherence to provisions of the PRA handbook and all relevant prudential and conduct standards in the UK or non-compliance with reporting requirements or submission of incorrect information.
Solvency risk The potential inability of the Bank to ensure that it maintains sufficient capital levels for its business strategy and risk profile under both the base and stress case financial forecasts.
Liquidity and funding risk The potential inability of the Bank to fund increases in assets, manage unplanned changes to funding sources and to meet obligations when required. It primarily arises due to the maturity mismatch associated with the Bank's assets and liabilities and the growth in mortgage lending.

Principal risks and uncertainties

The Board has carried out a robust assessment of the principal risks and uncertainties facing the Group, including those that could threaten its strategic objectives, business operating model, future financial performance and regulatory compliance commitments. The principal risks and uncertainties are outlined in the table below:

Strategic and business risk

Definition - The risk to the Bank's earnings and profitability arising from its strategic decisions, change in the business conditions, improper implementation of decisions or lack of responsiveness to industry changes.

Risk appetite statement	Risk	Mitigation	Direction
The Group's strategic and business risk appetite states that the Group does not intend to undertake any long to medium-term strategic actions that would put at risk its vision of being a leading specialist lender, backed by a strong and dependable saving franchise. The Group adopts a long-term sustainable business model which, while focused on niche sub-sectors, is capable of adapting to growth objectives and external developments.	Performance against targets Performance against strategic and business targets does not meet stakeholder expectations. This has the potential to damage the Group's franchise value and reputation.	Regular monitoring by the Board and the Executive Committee of business and financial performance against strategic agenda and risk appetite. The balanced business scorecard is the primary mechanism to support the Board and assesses management performance against key targets. Use of stress testing to flex core business planning assumptions to assess potential performance under stressed operating conditions.	Increased The Group's strategic and business operating environments are subject to ongoing changes primarily driven by market competition, economic outlook and regulation.
	Regulatory and economic environment The regulatory and economic environment are important factors impacting the strategic and business risk profile. In particular, the emerging regulatory underwriting standards and tax changes impacting the Buy-to-Let sector have resulted in a general slowdown in the sector.	The Group's robust underwriting standards and its focus on professional landlords have helped mitigate the impact of the regulatory changes and enabled to Group to continue to grow its share of the sector. The Group has continued to utilise and enhance its stress testing capabilities to assess and minimise potential areas of macroeconomic vulnerabilities.	Increased The Group's strategic and business risk profile is impacted by the uncertainty surrounding Brexit negotiations and potential future changes to regulatory standards.
	Term Funding Scheme withdrawal The withdrawal of the Term Funding Scheme ('TFS') could potentially increase competition for retail and wholesale savings resulting in increased funding costs. In particular, there is an increased level of risk related to the refinancing of the TFS drawdowns in 4 years time.	The Group's funding plan ensures a diverse funding profile and initiatives have been put in place to replace TFS with a comprehensive Retail Mortgage Backed Securities ('RMBS') programme.	Increased The full impact of the TFS withdrawal remains uncertain.
	Regulatory requirements The potential for emerging regulatory requirements to increase the demands on the Group's operational capacity and increase the cost of compliance.	The Group continues to invest in its IT and data management capabilities to increase the ability to respond to regulatory change. A structured approach to change management and fully leveraging internal and external expertise allows the Group to respond effectively to regulatory change.	Increased Performance against strategic and business targets does not meet stakeholder expectations. This has the potential to damage the Group's franchise value and reputation.

Reputational risk

Definition - The potential risk of adverse effects that can arise from the Bank's reputation being sullied due to factors such as unethical practices, adverse regulatory actions, customer dissatisfaction and complaints or negative/adverse publicity. Reputational risk can arise from a variety of sources and is a second order risk - the crystallisation of a credit risk or operational risk can lead to a reputational risk impact.

Risk appetite statement	Risk	Mitigation	Direction
The Group does not knowingly conduct business or organise its operations to put its reputation and franchise value at risk.	Potential loss of trust and confidence that our stakeholders place in us as a responsible and fair provider of financial services.	Culture and commitment to treating customers fairly and being open and transparent in communication with key stakeholders. Established processes to proactively identify and manage potential sources of reputational risk.	Unchanged The Group has increased the size and capabilities of its Risk and Compliance function to ensure appropriate oversight and challenge to how the Group discharges its responsibilities to the various stakeholders.

Credit risk

Definition - Potential for loss due to the failure of counterparty to meet its contractual obligation to repay a debt in accordance with the agreed terms.

Risk appetite statement	Risk	Mitigation	Direction
The Group seeks to maintain a high quality lending portfolio that generates adequate returns, under normal and stressed periods. The portfolio is actively managed to operate within set criteria and limits based on profit volatility, focusing on key sectors, recoverable values, and affordability and exposure levels. The Group aims to continue to generate sufficient income and control credit losses to a level such that it remains profitable even when subjected to a credit portfolio stress of a 1 in 20 intensity stress scenario.	Individual borrower defaults Borrowers may encounter idiosyncratic problems in repaying their loans, for example loss of a job or execution problems with a development project. While most of the Bank's lending is secured, some borrowers may fail to maintain the value of the security.	All loans are extended only after thorough bespoke and expert underwriting to ensure ability and propensity of borrowers to repay and sufficient security in case of default. Should there be problems with a loan, the collections and recoveries team works with customers unable to meet their loan service obligations to reach a satisfactory conclusion while adhering to the principle of treating customers fairly. Our strategic focus on lending to professional landlords means that properties are likely to be well managed, with income from a diversified portfolio mitigating the impact of rental voids or maintenance costs. Lending to owner-occupiers is subject to a detailed affordability assessment, including the borrower's ability to continue payments if interest rates increase. Lending on commercial property is more based on security, and is scrutinised by the Group's independent Real Estate team as well as by external valuers. Development lending is extended only after a deep investigation of the borrower's track record and stress testing the economics of the specific project. The Group's Transactional Credit Committee actively reviews and approves larger or more complex mortgage applications.	Unchanged The Group continues to observe strong and stable credit profile performance.
	Macroeconomic downturn A broad deterioration in the economy would adversely impact both the ability of borrowers to repay loans and the value of the Group's security. Credit losses would impact across the lending portfolio, so even if individual impacts were to be small, the aggregate impact on the Group could be significant.	The Group works within portfolio limits on LTV, affordability, name, sector and geographic concentration that are approved by the Risk Committee and the Board. These are reviewed on a semi-annual basis. In addition, stress testing is performed to ensure that the Group maintains sufficient capital to absorb losses in an economic downturn and continue to meet its regulatory requirements.	Unchanged Although the UK economy has remained stable during 2017, the economic outlook is uncertain with the final terms of Brexit to be confirmed.
	Wholesale credit risk The Bank has wholesale exposures both through call accounts used for transactional and liquidity purposes and through derivative exposures used for hedging.	The Group transacts only with high quality wholesale counterparties. Derivative exposures include collateral agreements to mitigate credit exposures.	Unchanged The Group continues to utilise a reserve account with the Bank of England, enabling it to eliminate credit risk on most of its liquidity portfolio.

Market risk

Definition - Potential loss due to changes in market prices or values.

Risk appetite statement	Risk	Mitigation	Direction
The Group actively manages market risk arising from structural interest rate positions. The Group does not seek to take a significant interest rate position or a directional view on rates and it limits its mismatched and basis risk exposures.	Interest rate risk An adverse movement in the overall level of interest rates could lead to a loss in value due to mismatches in the duration of assets and liabilities.	The Group's Treasury department actively hedges to match the timing of cash flows from assets and liabilities.	Unchanged The Group continues to assess interest on a monthly basis ensuring that the interest rate risk exposure is limited in the current economic environment.
	Basis risk A divergence in market rates could lead to a loss in value, as assets and liabilities are linked to different rates.	The Group strategically focuses on products linked to administered rates to keep control of yield.	Unchanged Product design and hedging has enabled the Group to maintain the overall level of basis risk through the year.

Liquidity and funding risk

Definition - The risk that the Group will be unable to meet its financial obligations as they fall due.

Risk appetite statement	Risk	Mitigation	Direction
The Group actively maintains stable and efficient access to funding and liquidity to support its ongoing operations. It also maintains an appropriate level and quality of liquid asset buffer so as to withstand market and idiosyncratic liquidityrelated stresses.	Retail funding stress As the Group is primarily funded by retail deposits, a retail run could put it in a position where it could not meet its financial obligations. Increased competition for retail savings driving up funding costs, adversely impacting retention levels and wider damage to OSB franchise.	The Group's funding strategy is focused on a highly stable retail deposit franchise. The large number of depositors provides diversification and a high proportion of balances are covered by the FSCS and so there is no material risk of a retail run. In addition, the Group performs in-depth liquidity stress testing and maintains a liquid asset portfolio sufficient to meet obligations under stress. The Group holds prudential liquidity buffers to manage funding requirements under normal and stressed conditions. The Group proactively manages its savings proposition through both the Liquidity Working Group and the ALCO. Finally, the Group has prepositioned mortgage collateral with the Bank of England which allows it to consider other alternative funding sources to ensure it is not solely reliant on retail savings. The Group's funding plan ensures a diverse funding profile and initiatives have been put in place to replace TFS with a comprehensive Retail Mortgage Backed Securities ('RMBS') programme.	Increased The end of the Bank of England Term Funding Scheme ('TFS') may create increased competition for retail and wholesale funding.
	Term Funding Scheme withdrawal The potential impact of the withdrawal of the TFS programme is uncertain.	The Group's funding plan ensures a diverse funding profile and initiatives have been put in place to replace TFS with a comprehensive Retail Mortgage Backed Securities ('RMBS') programme.	Increased The end of the Bank of England Term Funding Scheme ('TFS') may create increased competition for retail and wholesale funding.

Solvency risk

Definition - The potential inability of the Bank to ensure that it maintains sufficient capital levels for its business strategy and risk profile under both the base and stress case financial forecasts.

Risk appetite statement	Risk	Mitigation	Direction
OSB seeks to ensure that it is able to meet its Board level capital buffer requirements under a 1 in 20 stress scenario. The Group's solvency risk appetite is constrained within the leverage ratio related requirements. We manage our capital resources in a manner which avoids excessive leverage and allows us flexibility in raising capital.	Key risks to solvency arise from balance sheet growth and unexpected losses which can result in the Bank's capital requirements increasing or capital resources being depleted such that it no longer meets the solvency ratios as mandated by the PRA and Board risk appetite. The regulatory capital regime is subject to change and could lead to increases in the level and quality of capital that the Group needs to hold to meet regulatory requirements.	Currently the Bank operates from a strong capital position and has a consistent record of strong profitability. The Bank actively monitors its capital requirements and resources against financial forecasts and plans and undertakes stress testing analysis to subject its solvency ratios to extreme but plausible scenarios. The Bank also holds prudent levels of capital buffers based on CRD IV requirements and expected balance sheet growth. The Group engages actively with regulators, industry bodies, and advisers to keep abreast of potential changes and provide feedback through the consultation process.	Decreased The Group has improved both its CET1 capital and total capital position increasing its resilience against unexpected losses. In particular, the Group's capital position was strengthened in May 2017 by the issuance of £60m of Additional Tier 1 securities ('AT1 securities').

Operational risk

Definition - The risk of loss or negative impact to the Group resulting from inadequate or failed internal processes, people, or systems or from external events.

Risk appetite statement	Risk	Mitigation	Direction
The Group's operational processes, systems and controls are designed to minimise disruption to customers, damage to the Bank's reputation and any detrimental impact on financial performance. The Bank actively promotes the continual evolution of its operating environment through the identification, evaluation and mitigation of risks, whilst recognising that the complete elimination of operational risk is not possible.	Cyber/data security risk The risk of a loss of customer or proprietary data as a result of theft or through ineffective data management.	A series of tools designed to identify and prevent network/system intrusions are deployed across the Group. The effectiveness of the controls is overseen by a dedicated IT Security Governance Committee, with specialist IT security staff employed by the Bank.	Increased Whilst the Bank has made a series of enhancements to its defences with respect to IT security threats during 2017, it recognises that the threats to the industry continue to grow both in respect of the volume and the level of sophistication.
	Data risk The use of inaccurate, incomplete or outdated data may result in a range of risks impacting risk management and reporting services.	The Bank continues to invest in and enhance its data management architecture, systems, governance and controls.	Increased The increase in data risk has been primarily driven by the increased scale of operations and the multiple sources from which data is derived.
	Regulatory risk The operational risks arising from the management of a significant volume of regulatory change.	The Bank operates a series of controls to identify any relevant regulatory change at an early stage. Regulatory related changes are appropriately prioritised and resourced in order to ensure the timely implementation of any operational changes required.	Increased The increase in regulatory change has to date been offset by the increase in the Bank's change management capacity. Regulatory change continues to be well managed with the appropriate level of focus and oversight.
	Operational and IT resilience Banks should have business resiliency, continuity monitoring and plans in place to ensure an ability to operate on an ongoing basis and limit losses in the event of severe business disruption. Technical failures (including bugs, network or data) resulting in critical system outage. These would include OSB's primary mortgage origination and servicing systems, savings processing system and core reporting and data management systems leading to loss of service, revenue, business performance and potential customer detriment.	The Bank has established an Operational Resilience Programme that is delivering a Group-wide approach in respect to planning and testing. In addition, the programme is designed to highlight any areas of specific vulnerability. A range of back-up technologies employed to provide real-time replication on various critical systems while disaster recovery capabilities are tested annually. Real-time system performance monitoring established and a dedicated testing team in place.	Increased The increasing scale and globalisation of operations together with dependencies on a number of third party service and network providers. The sophistication of cyber-crime continues to evolve.
	Operational execution and scalability The inability of the Bank to automate current operational processes at the speed the business requires in order to successfully meet future growth.	In order to mitigate incidents materialising from manual processes an established two-tier (dependent and independent within the first line) risk-based quality control programme is in place.	Increased The ongoing growth of the Bank has challenged its automation programmes and resulted in an increase in the number of manual processes. Whilst key manual processes are well managed and there is continuing investment in automation, the challenges presented by the pace of growth remain a key area of management focus.

Conduct risk

Definition - The risk that the Group's behaviours or actions result in customer detriment or negative impact on the integrity of the markets in which it operates.

Risk appetite statement	Risk	Mitigation	Direction
The Bank considers its culture and behaviours in ensuring the fair treatment of customers and in maintaining the integrity of the markets in which it operates a fundamental part of its strategy and a key driver to sustainable profitability and growth. OSB does not tolerate any systemic failure to deliver fair customer outcomes. On an isolated basis incidents can result in detriment owing to human and / or operational failures. Where such incidents occur they are thoroughly investigated, and the appropriate remedial actions are taken to address any customer detriment and to prevent recurrence.	Product suitability Whilst the Group originates relatively simple products, there remains a risk that (primarily legacy) products may be deemed to be unfit for their original purpose in line with the current regulatory definitions.	The Group has a strategic commitment to provide simple, customer-focused products. In addition, a Product Governance framework is established to oversee both the origination of new products and to revisit the ongoing suitability of the existing product suite. A dedicated Product Governance team - which is part of an independent Conduct Risk team - serves to effectively manage this risk.	Decreased Whilst this risk has further reduced in 2017 as a result of increased awareness and dedicated oversight, the Bank remains aware of the changes to the regulatory environment and their possible impact on product suitability.
	Data protection The risk that customer data is accessed inappropriately either as a consequence of network/system intrusion or through operational errors in the management of the data.	In addition to a series of network/ system controls (documented within as part of the operational risks) the Bank performs extensive root cause analysis of any data leaks in order to ensure that the appropriate mitigating actions are taken.	Unchanged Despite a number of additional controls being introduced in 2017 the network/system threats continue to evolve in both volume and sophistication.

Compliance/regulatory risk

Definition - The risk that a change in legislation or regulation or an interpretation that differs from the Group's will adversely impact the Group.

Risk appetite statement	Risk	Mitigation	Direction
The Group views ongoing conformance with regulatory rules and standards across all the jurisdictions in which it operates as a critical facet of its risk culture. The Group does not knowingly accept compliance risk which could result in regulatory sanctions, financial loss or damage to its reputation. The Group will not tolerate any systemic failure to comply with applicable laws, regulations or codes of conduct relevant given its business operating model.	Key compliance regulatory changes that impacted the Bank included PRA's Buy-to-Let underwriting standards, certification regime under the SM&CR, PSD2, GDPR, Criminal Finances Act, European Fourth Money Laundering Directive, FCA guidance on automatic capitalisation for residential mortgage customers.	The Bank has an effective horizon scanning process to identify regulatory change. All significant regulatory initiatives are managed by structured programmes overseen by the change management team and sponsored at Executive management level. The Bank has proactively sought external expert opinions to support interpretation of the requirements and validation of its response.	Increased The Bank has historically responded effectively to regulatory changes however, the level and sophistication of emerging regulation continues to increase.
	Conduct regulation Regulatory changes focused on the conduct of business could force changes in the way the Group carries out business and impose substantial compliance costs. For example, the Financial Policy Committee's increased focus on Buy-to-Let lending or tax changes such as the Bank profits surcharge must be considered.	The Group has a programme of regulatory horizon scanning linking into a formal regulatory change management programme. In addition, the focus on simple products and customer oriented culture means that current practice may not have to change significantly to meet new conduct regulations.	Increased The regulatory environment has tightened and this is likely to continue, exposing the Group to increased risk.

The Group proactively scans for emerging risks which may have an impact on its ongoing operations and strategy. The Group considers its top emerging risks to be:

Emerging risks	Description	Mitigation action
Political and macroeconomic uncertainty	As a result of the UK government triggering Article 50 and the subsequent general election result, there is an increased likelihood of a period of macroeconomic uncertainty. The Group's lending activity is solely focused in the United Kingdom and, as such, will be impacted by any risks emerging from changes in the macroeconomic environment.	The Group has implemented robust monitoring processes and via various stress testing activity (i.e. ad hoc, risk appetite and ICAAP) understands how the Group performs over a variety of macroeconomic stress scenarios and has subsequently developed a suite of early warning indicators which are closely monitored to identify changes in the economic environment.
General data usage	From 25 May 2018, the Group will comply with GDPR. This will result in increased regulatory requirements with respect to processing customer and employee personal and other data in the course of day-to-day business activities.	The Group has mobilised a project (with dedicated resources) to implement the GDPR as required.

RISK PROFILE PERFORMANCE OVERVIEW

Credit risk

Credit profile performance

The Group's credit profile performed strongly in 2017, driven by deep market knowledge of the specialist markets in which it operates, prudent lending policies and sound credit risk management.

During the year, the Group's portfolio composition mix continued to evolve with pre-2011 lending (prior to OneSavings Bank PLC being established) continuing to run off. Legacy problem loans reduced further in 2017 from £13.8m to £8.6m, following careful management by our experienced collections team. The Group's acquired portfolios also continued to perform in line with expectations in terms of run-off rates and credit profile performance.

The Group's funding lines and development finance businesses delivered a strong performance in 2017, with no impairment recognised across either segment.

Strong Group originations performance was observed in 2017, driven by performance across the Buy-to-Let/SME segment. Importantly, this lending was underwritten at sensible LTV levels, where tightened underwriting policy, following the United Kingdom's decision to leave the European Union, resulted in a greater clustering of LTV levels against the portfolio average. Post-2011 lending, incorporating enhanced lending criteria, continued to make up an increasing proportion of the Group's total loans and advances to customers, where 38,500 loans have been underwritten with only 137 loans being greater than three months arrears with aggregate loans totalling £18.4m with aggregate weighted average LTV of 63%.

This portfolio mix shift, coupled with strong credit risk management and continuing favourable economic conditions, supported the portfolio arrears rate reducing to 1.2% as at 31 December 2017 excluding legacy problem loans (31 December 2016: 1.4%).

Segment	Measure	31-Dec-2017	31-Dec-2016	Variance	Commentary
BTL/SME	New origination average LTV	70%	70%	-	New lending average LTV remained stable
	Weighted average Interest Coverage Ratio for new lending	185%	171%	+14%	Resulting from a tightening of affordability rules
Residential lending	New origination average LTV	65%	66%	-1%	New lending average LTV reduced
	Percentage of new residential lending with a loan to income (LTI) greater than 4.5	3.2%	2.6%	+0.6%	Increase in cases with LTI > 4.5

Other key risk measures also performed strongly within the period:

- Gross exposure to semi-commercial/commercial lending remains low at £370.8m with weighted average LTV of 63%

- Gross exposure to residential development finance remains low at £143.8m with a further £78.0m committed with a weighted average LTV of 37.7%

- The Group has limited exposure to high LTV loans on properties worth more than £2m. In total only 4% of the Group's loan portfolio is secured on properties valued at greater than £2m with a LTV greater than 65%.

Forbearance

Where borrowers experience financial difficulties which impacts their ability to service their financial commitments under the loan agreement, forbearance may be used to achieve an outcome which is mutually beneficial to both the borrower and the Bank.

By identifying borrowers who are experiencing financial difficulties pre-arrears or in arrears, a consultative process is initiated to ascertain the underlying reasons and to establish the best course of action to enable the borrower to develop credible repayment plans and to see them through the period of financial stress.

The specific tools available to assist customers vary by product and the customers' status. The various treatments considered for customers are as follows:

- Temporary switch to interest only: a temporary account change to assist customers through periods of financial difficulty where arrears do not accrue at the original contractual payment. Any arrears existing at the commencement of the arrangement are retained.

- Interest rate reduction: the Group may, in certain circumstances, where the borrower meets the required eligibility criteria, transfer the mortgages to a lower contractual rate. Where this is a formal contractual change the borrower will be requested to obtain independent financial advice as part of the process.

- Loan term extension: a permanent account change for customers in financial distress where the overall term of the mortgage is extended, resulting in a lower contractual monthly payment.

- Payment holiday: a temporary account change to assist customers through periods of financial difficulty where arrears accrue at the original contractual payment. Any arrears existing at the commencement of the arrangement are retained.

- Voluntary assisted sale: a period of time is given to allow borrowers to sell the property and arrears accrue based on the contractual payment.

- Reduced monthly payments: a temporary arrangement for customers in financial distress. For example, a short-term arrangement to pay less that the contractual payment. Arrears continue to accrue based on the contractual payment.

- Capitalisation of interest: arrears are added to the loan balance and are repaid over the remaining term of the facility or at maturity for interest only products. A new payment is calculated which will be higher than the previous payment.

- Full or partial debt forgiveness: where considered appropriate, the Group will consider writing off part of the debt. This may occur where the borrower has an agreed sale and there will be a shortfall in the amount required to redeem the Group's charge, in which case repayment of the shortfall may be agreed over a period of time subject to an affordability assessment or where possession has been taken by the Group, and on the subsequent sale where there has been a shortfall loss.

The Group aims to proactively identify and manage forborne accounts, utilising external credit reference bureau information to analyse probability of default and customer indebtedness trends over time, feeding pre-arrears watch list reports. Watch list cases are in turn carefully monitored and managed as appropriate.

Throughout 2017, the Group continued to observe low levels of accounts in forbearance.

Analysis of forbearance measures undertaken in 2017 by forbearance type:

Forbearance type	Number of accounts 2017	2017 year- end balance £m	Number of accounts 2016	2016 year- end balance £m (restated)	'17 vs. '16 variance number of accounts	'17 vs. '16 variance of balances £m
Interest only switch	35	3.8	60	6.3	-25	-2.5
Interest rate reduction	-	-	3	2.2	-3	-2.2
Term extension	29	4.9	31	5.9	-2	-1.0
Payment holiday	50	1.5	37	1.6	13	-0.1
Voluntary assisted sale	2	0.7	-	-	2	0.7
Payment concession (reduced monthly payments)	42	0.8	58	3.5	-16	-2.7
Capitalisation	-	-	3	0.1	-3	-0.1
Total	158	11.7	192	19.6	-34	-7.9

Analysis of forbearance measures undertaken in 2017 by loan type:

Loan type	Number of accounts 2017	2017 year- end balance £m	Number of accounts 2016	2016 year- end balances £m (restated)	'17 vs. '16 variance number of accounts	'17 vs. '16 variance of balances £m
First charge owner-occupier	55	4.5	117	12.4	-62	-7.9
Second charge owner-occupier	77	1.6	60	1.3	17	0.3
Buy-to-Let	26	5.6	14	5.5	12	0.1
Commercial	-	-	1	0.4	-1	-0.4
Total	158	11.7	192	19.6	-34	-7.9

Note: The 2016 year end forbearance balances have been restated for second charge owner occupier to remove the related first charge balance, to align to the enhanced approach adopted for 2017.

Fair value of collateral methodology

The Group ensures that security valuations are reviewed on an ongoing basis for accuracy and appropriateness. Commercial properties are subject to annual indexing, whereas residential properties are indexed against monthly house price index ('HPI') data. Where the Group identifies that an index is not representative, a formal review is carried out by the Group Real Estate function to ensure that property valuations remain appropriate.

The Group Real Estate function ensures that newly underwritten lending cases are written to appropriate valuations, where an independent assessment is carried out by an appointed, qualified surveyor accredited by RICS.

Impairment performance

Low arrears, sensible loan to values and growth in loans and advances to customers resulted in the Group observing a historically low impairment performance with a loan loss ratio of 0.07% (31 December 2016: 0.16%). Improved impairment performance was primarily driven by increased prudence in assumptions introduced in 2016 following the UK referendum vote to leave the EU, as well as lower underlying loan losses on acquired residential portfolios and the effect of increasing property values.

During the year, the Group made no changes to provisioning policy or methodologies utilised, however a number of key inputs and estimates used within the collectively assessed provisioning calculations were refreshed utilising the most recently available data and as per the standard governance process. This drove an increase in impairment provision during the six months from 30 June 2017 to 31 December 2017 of 0.09%, versus the annualised loan loss reported for the period 30 June 2017 of 0.04%.

The Group continues to closely monitor impairment coverage levels:

Impairment coverage review	31 December 2017	31 December 2016
Gross loans and advances to customers £m	7,327.6	5,964.2
Provisions for impairment losses £m	21.6	25.0
Incurred loss remaining £m¹	7.9	8.4
Coverage ratio versus loans and advances %²	0.40	0.56
Coverage ratio versus impaired balances %³	36.2	41.5

1. Incurred loss is the expected loss of the portfolio at the point of acquisition and is offset against the modelled future cash flows to derive the effective interest rate for the book. The incurred loss protection is therefore recognised over the life of the book against the unwind of any purchase discount or premium through interest income. Incurred loss remaining is this protection reduced by the cumulative losses observed since acquisition.

2. Coverage ratio versus loans and advances is the total collective and specific provisions plus incurred losses remaining versus gross loans and advances.

3. Coverage ratio versus impaired balances is the total collective and specific provisions plus incurred losses remaining versus impaired balances. Impaired balances are defined as loans where a specific provision has been raised. Personal loans are not included in impaired balances.

The coverage ratio with respect to loans and advances to customers reduced to 0.40% from 0.56% as at 31 December 2016 driven by strong loans and advances growth. Coverage versus impaired balances remained strong at 36.2%. The reduction in provision balances was primarily driven by the resolution of a number of individually assessed legacy problem loans within the year.

Solvency risk

The Bank has maintained an appropriate level and quality of capital to support its prudential requirements with sufficient contingency to withstand a severe but plausible stress scenario. The solvency risk appetite is based on a stacking approach, whereby the various capital requirements (Pillar 1, ICG, CRD IV buffers and Board and management buffers) are incrementally aggregated as a percentage of available capital (CET1 and total capital).

Solvency risk is a function of balance sheet growth, profitability, access to capital markets and regulatory changes. The Bank actively monitors all key drivers of solvency risk and takes prompt action to maintain its solvency ratios at acceptable levels. The Board and management also assess solvency when reviewing the Bank's business plans and inorganic growth opportunities.

In 2017, the Bank strengthened its CET1 ratio by 0.4% to 13.7% and total capital ratio by 1.8% to 16.9% despite strong organic growth, demonstrating both the strength of internal capital generation capabilities through profitability and the ability to raise additional capital in the market.

Liquidity and funding risk

The Bank has a prudent approach to liquidity management through maintaining sufficient liquidity resources to cover cash flow imbalances and fluctuations in funding under both normal and stressed conditions arising from market-wide and Bank specific events. The Bank's liquidity risk appetite has been calibrated to ensure that the Bank always operates above the minimum prudential requirements with sufficient contingency for unexpected stresses whilst actively minimising the risk of holding excessive liquidity which would adversely impact the financial efficiency of the business model.

The Bank has successfully utilised the Bank of England FLS and TFS secured funding facilities to manage its liquidity throughout 2017, and continues to attract new retail savers and retain existing customers through loyalty-based product offerings.

In 2017 the Bank actively managed its liquidity and funding profile within the confines of its risk appetite as set out in the ILAAP. Its liquidity ratio at 15.2% and liquidity coverage ratio ('LCR') at 250% remain well above risk appetite and regulatory minimums.

Market risk

The Bank proactively manages its risk profile in respect of adverse movements in interest rates, foreign exchange rates and counterparty exposures. The Bank accepts interest rate risk and basis risk as a consequence of structural mismatches between fixed rate mortgage lending, sight and fixed term savings and the maintenance of a portfolio of high quality liquid assets. Interest rate exposure is mitigated on a continuous basis through portfolio diversification, reserve allocation and the use of financial derivatives within limits set by ALCO and approved by the Board.

Interest rate risk

The Bank does not actively assume interest rate risk, does not execute client or speculative securities transactions for its own account, and does not seek to take a significant directional interest rate position. Limits have been set to allow management to run occasional unhedged positions in response to balance sheet dynamics and capital has been allocated for this. Exposure limits are calibrated in accordance with a statistically-derived risk appetite, and are calibrated in proportion to available CET1 capital in order to accommodate balance sheet growth.

The Group sets limits on the tenor and rate reset mismatches between fixed rate assets and liabilities, including derivatives hedges, with exposure and risk appetite assessed with reference to historic and potential stress scenarios cast at consistent levels of modelled severity.

Throughout 2017 the Bank managed its interest rate risk exposure within its risk appetite limits. The Bank has also made significant progress in a project to replace its current interest rate risk management system with a new system allowing greater functionality which will enhance the management of interest rate risk. Implementation of the new system is scheduled to be completed during the first half of 2018.

Basis risk

Basis risk arises from assets and liabilities repricing with reference to different interest rate indices, including positions which reference variable market, policy and managed rates. As with structural interest rate risk, the Bank does not seek to take a significant basis risk position, but maintains defined limits to allow operational flexibility.

As with structural interest rate risk, capital allocation has been set in proportion to Common Equity Tier 1 capital, with exposure assessed and monitored monthly across a range of 'business as usual' and stressed scenarios.

Throughout 2017 the Bank managed its basis risk exposure within its risk appetite limits.

Operational risk

OSB continues to adopt a proactive approach to the management of operational risks. The operational risk management framework has been designed to ensure a robust approach to the identification, measurement and mitigation of operational risks, utilising a combination of both qualitative and quantitative evaluations in order to promote an environment of progressive operational risk management. The Group's operational processes, systems and controls are designed to minimise disruption to customers, damage to the Bank's reputation and any detrimental impact on financial performance. The Bank actively promotes the continual evolution of its operating environment through the identification, evaluation and mitigation of risks, whilst recognising that the complete elimination of operational risk is not possible.

Where risks continue to exist, there are established processes to provide the appropriate levels of governance and oversight, together with an alignment to the level of risk appetite stated by the OSB Board.

A strong culture of transparency and escalation has been cultivated throughout the organisation, with the operational risk function having a Group -wide remit, ensuring a risk management model that is well embedded and consistently applied. In addition, a community of Risk Champions representing each business line and location have been identified. Operational Risk Champions ensure that the operational risk identification and assessment processes are established across the Group in a consistent manner. Risk Champions are provided with appropriate support and training by the Operational Risk function.

Regulatory and compliance risk

The Bank is committed to the highest standards of regulatory conduct and aims to minimise breaches, financial costs and reputational damage associated with non-compliance. However, given the growing scale and complexity of regulatory changes, it is acknowledged that there may be isolated instances whereby the Bank's interpretation and response to new regulatory requirements reflects the Bank's specific circumstances and its desire to give the best customer outcomes.

The Bank has an established Compliance function which actively identifies, assesses and monitors adherence with current regulation and the impact of emerging regulation.

In order to minimise regulatory risk, OSB maintains a proactive relationship with key regulators, engages with industry bodies such as UK Finance, and seeks external advice from our auditors and/or other third parties. The Group also assesses the impact of upstream regulation on OSB and the wider market in which we operate, and undertakes robust assurance assessments from within the Risk and Compliance functions.

Conduct risk

The Bank considers its culture and behaviour in ensuring the fair treatment of customers and in maintaining the integrity of the markets in which it operates to be a fundamental part of its strategy and a key driver to sustainable profitability and growth. OSB does not tolerate any systemic failure to deliver fair customer outcomes.

On an isolated basis, incidents can result in detriment owing to human and/or operational failures. Where such incidents occur they are thoroughly investigated, and the appropriate remedial actions are taken to address any customer detriment and to prevent recurrence.

OSB considers effective conduct risk management to be a product of the positive behaviour of all employees, influenced by the culture throughout the organisation and therefore continues to promote a strong sense of awareness and accountability.

Strategic and business risk

The Board has clearly articulated the Bank's strategic vision and business objectives supported by performance targets. The Bank does not intend to undertake any medium to long-term strategic actions which would put at risk the Bank's vision of being a leading specialist lender in its chosen markets and being backed by a strong and dependable saving franchise.

To deliver against its strategic objectives and business plan, the Bank has adopted a sustainable business model based on a focused approach to core niche markets where its experience and capabilities give it a clear competitive advantage.

The Bank remains highly focused on delivering against its core strategic objectives and strengthening its market position further through strong and sustainable financial performance.

Reputational risk

The Bank considers reputational risk to be a second order risk which is likely to be the result of a failure related to one of its other principal risks. The Bank monitors reputational risk through tracking media coverage, customer satisfaction scores, the share price and net promoter scores provided by brokers.

Viability statement

In accordance with provision C.2.2 of the UK Corporate Governance Code, the Board of Directors have assessed the prospects and viability of the Group over a three -year period by comprehensively assessing the principal risks and uncertainties to which it is exposed and have concluded that they have a reasonable expectation that the Group will be able to continue to operate and meet its liabilities as they fall due over that period.

The three -year time period was selected for the following reasons:

- The Group's operating and financial plan covers a three-year period

- The three-year operating and financial plan considers, among other matters: the Board's risk appetite; macro-economic outlook; market opportunity; the competitive landscape; and sensitivity of the financial plan to volumes, margin pressures and capital requirements

- The Board believes that there is sufficient visibility over the economic and regulatory landscape and the market outlook offered by the three-year time horizon to make a reasonable assessment of viability; and

- Uncertainty in the UK economic outlook over the medium to long term following the EU referendum outcome.

The Company is authorised by the PRA, and regulated by the FCA and PRA, and undertakes regular analysis of its risk profile and assumptions. It has a robust set of policies, procedures and systems to undertake a comprehensive assessment of all the principal risks and uncertainties to which it is exposed on a current and forward- looking basis (as described in Principal risks and uncertainties on pages 39 to 44).

The Group manages and monitors its risk profile through its strategic risk management framework, in particular through its risk appetite statement and risk limits (as described in the Risk review on pages 32 to 38). Potential changes in its risk profile are assessed across the business planning horizon by subjecting the operating and financial plan to severe but plausible macroeconomic and idiosyncratic scenarios.

Stress testing is a vital discipline, which underpins the Group's ICAAP and ILAAP. The Group has developed a bespoke macroeconomic model which identifies the most predictive macroeconomic variables and their relative relationship to arrears, collateral valuations and loan losses. As a secured mortgage lender, the Group is most sensitive to changes in house price movements, unemployment and Bank of England base rate changes. The Group's stress testing capability then leverages the developed macroeconomic variable relationships to conduct detailed scenario analysis over a range of stress scenarios which feed key risk processes such as the setting of risk appetite, loan loss forecasts and ICAAP and ILAAP stress testing activity.

In addition, the Company identified a suite of credible management actions that would mitigate the impact of the stress scenarios. The Board and executive management use the outcome of the stress test analysis to evaluate the Company's management options and adequacy of the Company's capital and liquidity resources to withstand an extreme but plausible stress scenario. The Company holds sufficient capital to withstand such a stress scenario.

In addition, the Group identifies a range of catastrophic stress scenarios, which could result in the failure of its current business model. Business model failure scenarios (reverse stress tests) are primarily used to inform the Board and executive management of the outer limits of the Group's risk profile. Reverse stress tests play an important role in helping the Board and its executives to identify potential recovery options under a business model failure scenario, and form an important aspect of the Company's recovery and resolution plans prescribed by the regulator. During the year a number of reverse stress test scenarios were analysed including an extreme macroeconomic downturn (1 in 200 severity), a cyber-attack leading to a loss of customer data which is used for fraudulent activities, extreme regulatory and taxation changes impacting Buy-to-Let lending volumes and a liquidity crisis caused by severe market conditions combined with idiosyncratic consequences.

The ongoing monitoring of all principal risks and uncertainties that could impact the operating and financial plan, together with the use of stress testing to ensure that the Group could survive a severe but plausible stress, enables the Board to reasonably assess the viability of the business model over a three-year period.

Corporate responsibility report

Operating sustainably and responsibly is integral to our business model and strategy, and builds on OneSavings Bank's long tradition of putting the customer at the heart of everything we do.

Our Core Values: Specialist, Personal and Flexible reflect our commitment to interact ethically, responsibly and with integrity with all our stakeholders and the wider community in which we operate:

- We take a SPECIALIST approach to everything we do - we ensure we understand our stakeholders' requirements and use our creativity, skill and expertise to fulfil their requirements with honesty and integrity

- We take a PERSONAL approach to everything we do - we treat everyone with respect and take accountability for our actions

- We take a FLEXIBLE approach to everything we do - we ensure that we work collaboratively with our colleagues, customers and other stakeholders to achieve shared positive outcomes

What we achieved in 2017

In 2017, we successfully delivered on a number of initiatives across the business aimed at improving our relationships with key stakeholders and achieving strong results, including:

- Customers - consistently high consumer net promoter score, +62

- Employees - significantly improved employee engagement survey results

- Communities - donated over £209,000 to community and charitable causes

Focused on our customers

OneSavings Bank ('OSB') encourages a culture that aims to:

- Communicate and deal with each customer on an individual basis

- Act with consistency across all channels

- Be a confident, open and trustworthy workforce

- Offer simplicity and ease of business

- Offer long-term value for money, and

- Offer transparent products without the use of short-term bonus rates, and to offer existing customers the benefit of loyalty rates.

Our customers are part of our success and we aim to become a financial services provider of choice. To achieve that, the Group established a governance framework for consistent best practice across the Group to ensure there are robust policies and procedures to minimise the risk of failure to deliver the service our customers have come to expect from us.

The relevant policies include:

- Conduct Risk Policy, including treating customers fairly to ensure the Group conducts its business fairly and without causing customer detriment

- Responsible Lending Policy to ensure that the Group lends money responsibly

- Complaints Handling Policy to ensure the Group responds to complaints swiftly, fairly and consistently

- Vulnerable Customer and Suicide Awareness Policy to ensure that employees can identify vulnerability and potential suicide risks in our customers and put in place appropriate actions to deal with such issues as effectively as possible

- Anti-Money Laundering and Counter Terrorist Financing Policy to ensure the Group is not used to further criminal activities

- Anti-Bribery and Corruption Policy to ensure the Group carries out its business honestly

- A Conflicts of Interest Policy to ensure the Group can identify and, if possible, avoid conflicts, and where this is not possible to manage conflicts fairly

- Data Protection and Retention Policies to ensure the Group protects its customer data, manages and retains it fairly and appropriately

- Whistleblowing Policy to ensure that any employee who raises concerns around misconduct is protected

- Environmental Policy to conduct our business in an environmentally aware manner, and

- Diversity and Equality Policy to promote diversity and equality in our workforce.

Employees have mandatory training on all the key policies, with a completion rate of 100% in 2017.

Customer engagement

We take a personal approach to our customers, treating each customer as an individual and listening to their needs. Many of our customers are also members of the Kent Reliance Provident Society, the Society that took over the management of the membership of the former Kent Reliance Building Society. The Bank and the Society have benefited from member engagement through the online 'portal' launched late in 2015 enabling input from a geographically broader range of members. Topics of engagement have included key areas of customer literature, working with saving and borrowing members helping the Bank to maximise clarity and understanding, and product retention process enhancement. Each year we hold an AGM at which members can engage with senior management and discuss their ideas for improving our customer experience.

Our commitment to our customers is evidenced in the strong net promoter score (a measure of how likely a customer is to recommend a business on a scale of -100 to +100) we achieve across our lending and saving franchises, which in 2017 has improved to +62. In addition, we won numerous awards for being the best provider for a range of services from cash ISAs to Buy-to-Let mortgages.

Customer complaints

Whilst we concentrate on providing an excellent service, when things have gone wrong, we aim to put this right and learn from any mistakes made. We have a comprehensive, Group-wide complaints handling system and our staff complete rigorous training programmes to ensure a compliant and fair process is followed.

Kent Reliance savings

WINNER

Best Cash ISA Provider

Moneyfacts Awards 2017 (for the fifth year running)

WINNER

ISA Provider of the Year

Consumer Moneyfacts 2017 (for the second year running)

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Kent Reliance for intermediaries

WINNER

Best Specialist Lender

The Mortgage Strategy Awards 2017

WINNER

Best Business Development Managers Team

The Mortgage Strategy Awards 2017

WINNER

Specialist Lender of the Year

The Mortgage Introducer Awards 2017

[Graphic appear here]

Focused on our employees

Our employees are our key asset. Their skills, expertise and enthusiasm are central to achieving our strategic goals, and we continue to invest in their training, development and employee engagement activities to make OSB the best work-place it can be.

In 2017, the Group established a Talent Acquisition team in order to introduce an appropriate level of recruitment specialism within the HR function to better support business growth and implement a formalised, competency-based interview and selection process. Our recruitment procedures are fair and inclusive, with shortlisting, interviewing and selection always carried out without regard to gender reassignment, sexual orientation, marital or civil partnership status, colour, race, caste, nationality, ethnic or national origin, religion or belief, age, pregnancy or maternity leave or trade union membership.

No candidate with a disability is excluded unless it is clear that the candidate is unable to perform a duty that is intrinsic to the role, having taken into account reasonable adjustments. Reasonable adjustments to the recruitment process are made to ensure that no applicant is disadvantaged because of their disability and questions asked during the process are not in any way discriminatory or unnecessarily intrusive. To that end, the Group achieved Disability Confident Committed (Level One) status in 2017 (for more details, see below).

We welcomed 177 new employees in the UK and 173 new employees in India in 2017, and in line with the continued growth of the business, OSB has acquired a third office in Chatham to accommodate our expanding workforce.

Training and development

We encourage employees to carry out their work to the best of their ability and promote learning and development opportunities across the organisation. Our newly created and consolidated People Development function manages the allocation and completion of monthly mandatory e-learning modules, the delivery of in- house workshops, programmes and coaching in addition to coordinating employees attending external or in-sourced training activities. In 2017, 685 employees attended 149 separate internal and external workshops or learning events. The completion rate for our mandatory monthly online compliance training throughout the year was 100%; demonstrating the importance we continue to place on ensuring our employees are suitably aware of key requirements.

The Group is also committed to supporting employees undertaking professional development and in 2017, ten employees received financial support in pursuit of their professional qualifications.

In 2018, the Group intends to extend its commitment to widening accessibility of employment opportunities at the Bank by implementing an Apprenticeship Scheme.

Talent management and leadership programmes

Following a robust talent mapping exercise, we have identified employees who constitute our Primary Talent Group, based on their respective performance and potential. Throughout 2017, a range of associated talent management activities have been undertaken.

At the end of 2017, all members of the Primary Talent Group had been retained, 60% were undertaking different or expanded roles and 27% had been formally promoted.

We are constantly seeking to identify outstanding employees and in line with this, talent mapping will be undertaken as an annual process in order to support the progression of those who are identified as potential senior leaders of the future.

While we are still a relatively small business in terms of employee numbers, we advertise vacancies internally on a weekly basis in order to provide career development opportunities for existing employees. In 2017, we filled 36% (84 of 233) of vacancies with internal candidates.

OSB has a genuine desire to retain, support and develop its employee base. During 2017, 66 employees in the UK and ten employees in India were formally promoted to a more senior grade. Our regretted attrition rate for 2017 was 12% for UK employees and 18% for our employees in India.

Remuneration and benefits

We believe in rewarding our employees fairly and transparently, enabling them to share in the success of the business. Details of the Group's remuneration policies can be found in the Remuneration Report on pages 81 to 95.

We offer our employees a comprehensive range of benefits, and continue to review these to ensure they are in line with market practice. Although the list is not exhaustive, our benefits include pension contributions, medical insurance, life cover, a childcare voucher scheme, interest free season ticket loan and a cycle purchase scheme. In 2017, we introduced a casual dress code throughout our offices following an employee vote.

We also encourage our employees to hold shares in the Bank for the long term, via an annual Sharesave Scheme. The scheme is open to all UK-based employees and allows them to save a fixed amount of between £5 and £500 per month over either three or five years in order to use these savings at the end of the qualifying period to buy the Company's shares at a fixed price established when the scheme was announced. The Group first launched its annual Sharesave Scheme in June 2014 and over 250 employees are members the scheme.

In 2017, 100 employees saw their 2014 Sharesave Scheme mature, with the total value of their respective individual plans increasing by around 300%.

Employee engagement

In 2017, OSB participated in the 2018 Sunday Times Best Companies Employee Engagement survey, with 83% of UK employees completing the survey.

The survey results demonstrated an overall increase of 4.8% and the achievement of a 1 Star Accreditation Rating, signifying very good levels of workplace engagement and represented a significant improvement when compared to the previous two annual surveys when the Bank achieved a 'One to Watch' rating.

As part of the continuing commitment to employee engagement, OSB also participated for the first time in the Banking Standards Board survey, which aims to influence positive change throughout the banking sector. The survey provided an insight into employees' perception of the application of their company's values, potential barriers to challenge and to speak up along with their observations of unethical or inappropriate behaviour. The results from this survey will help to shape the Group's agenda and commitment to a shared purpose and values for all employees in 2018.

OSBIndia ('OSBI') takes part in its own survey, run by the Great Place to Work Institute. In 2017, OSBI was officially certified as a 'Great place to work', with a strong performance in all indicators, including organisation trust, credibility of management, respect for people, fairness at the workplace, camaraderie and culture. OSBI's overall Trust index score improved significantly in 2017 to 75, up from 66 in 2016, and it received the highest score in Pride, reflecting the strong brand and culture that has been created.

Throughout 2018, OSB will be using the results of all of the surveys to establish opportunities to deepen employee engagement on both Group-wide and department levels. We will also be engaging with external consultants in order to define our Vision, Mission and Values and establish a range of related actions that will enable us to fully embed these and proactively drive positive cultural change throughout the business.

Employee recognition and awards

Through our Long Service Award programme, the significant tenure of 41 employees was recognised in 2017, each of whom reached a 5, 10, 15, 20 or 25 year milestone and one other employee who reached 30 years' service.

Every quarter, all of our employees have an opportunity to nominate their colleagues as part of OSB's Quarterly Employee Recognition Programme. In 2017, 306 separate nominations were received and each quarter, an Employee of the Quarter was selected along with two runners-up. Over the year, 12 employees received an award.

Our employees are valued for their expertise, not only by the Bank, but also by the wider industry. In 2017 Adrian Moloney, OSB's Sales Director was recognised by The British Specialist Lending Awards in the category Complex Buy-to-Let Lender.

Health and safety

We have a duty of care to all of our employees, and a safe and healthy work environment is paramount to OneSavings Bank. We are committed to fostering and maintaining a working environment in which our employees can flourish, and our customers can safely transact with us.

We operate a Group Health and Safety Policy and we review our employee and customer environment regularly.

Activities in 2017

- Undertaking mandatory Company-wide health and safety training with 100% completion

- Undertaking a full review and continuing to make improvements where necessary on recently acquired corporate real estate to ensure statutory health and safety compliance for all sites

- As part of achieving Level 1 of Disability Confident Scheme we have ensured that our office locations are accessible to disabled employees.

Diversity and inclusion

At OSB, we recognise the benefits that diversity of our people brings to the business and we actively promote and encourage a culture and environment which values and celebrates our differences. In 2017 we continued our journey to become a truly diverse and inclusive organisation, which is committed to providing equal opportunities through the recruitment, training and development of our employees. Some of our achievements included:

- Formalising our Diversity and Inclusion Policy and establishing a range of diversity initiatives including unconscious bias training for the Board and Executive Committee

- Attaining Disability Confident Committed (Level One) status, with an aim to achieve Level Two status in 2018. By becoming Disability Confident, the Group is committed to employing, supporting and retaining those with disabilities and health conditions and we will be partnering with Kent Council's Employability Advisor to ensure a proactive approach is taken in seeking to increase the current number of disabled staff who are employed within the Group.

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- Implementing the requirement to seek to interview equal numbers of male and female candidates at the first round interview stage for more senior roles

- Including a set of diversity specific questions in the exit interview process to enable ongoing identification of potential issues and opportunities for further enhancements, and

- Becoming a signatory to HM Treasury's Women in Finance Charter, which is formally published on the Group's website and details our commitment that by 2020, 30% of our senior management roles will be undertaken by female employees. The Group has also implemented the requirement to ensure that the pay of members of the Executive Committee is linked to the delivery of the Group's gender diversity targets (see the Remuneration Report on page 81).

We recently published our gender pay gap in line with new legislation which requires UK companies with more than 250 employees to report their gender pay gap - the difference between the average amount that women and men are paid across the whole workforce. As at April 2017, the mean pay gap at OSB was 47%. Gender pay is not the same as equal pay and we are confident that we do not have any issue in respect of equal pay. Our gender pay gap relates directly to the structure of our workforce and reflects the fact that we have more men than women in senior roles.

We recognise that we need to focus on improving our gender balance and have a number of initiatives in place to do so:

- Aside from our existing aim of seeking to interview equal numbers of male and female candidates for roles at management level, we will be implementing a requirement that with senior management vacancies, a first round face to face interview with a female candidate must be undertaken before the recruitment process can proceed, with all exceptions to this requiring Executive approval. The same requirement will apply to vacancies at clerical level in respect of male candidates.

- We are in the process of establishing a broader suite of gender related management information. We will track monthly progress in respect of gender diversity and gender pay gap initiatives and share this openly and transparently with our employees.

- We have established a Women's Networking Forum to assist the internal progression of our existing female employees. This provides a forum for guest speakers and aims to provide practical development tips and encouragement for career progression.

Our full gender pay gap report can be found on our website: www.osb.co.uk.

Over 58% of our UK workforce is female, we have three female Directors (33% of the Board) and two female members of the Executive Committee (20%).

In our office in India, women constitute 36% of the total workforce.

	Male	Female
Number of Board Directors	7	3
Number of Directors of subsidiaries	13	1
Number of senior managers (not Directors)	58	17
All other employees¹	318	517

1. Includes OSBIndia.

We already have 13% of our UK employees working under flexible working arrangements, with the majority of these employees working part-time hours and we will be seeking to further develop this by revising our Flexible Working Policy to provide increased support to those employees with parental and carer responsibilities.

Human rights

We want each member of our workforce and other stakeholders to be treated with dignity and respect. OSB endorses the UN Declaration of Human Rights and supports the UN Guiding Principles of Business and Human Rights. The Group adheres to the International Labour Organisation Fundamental Conventions. We seek to engage with stakeholders with fairness, dignity and respect. The Company does not tolerate child labour or forced labour. OSB respects freedom of association and the rights of employees to be represented by trade unions or works councils. The Group is a fair employer and does not discriminate on the basis of gender, religion, age, caste, disability or ethnicity. Our policy applies throughout the Group and is communicated to our employees during induction training.

In 2015, the Modern Slavery Act came into force and it encompasses slavery, human trafficking, forced labour and domestic servitude, and applies not only to OSB as a Group but also to our supply chain. The Group's Modern Slavery Statement was published on 30 June 2017. Coupled with the statement, the completion rate for the mandatory monthly online training on modern slavery was 100% with more focused training due to be implemented in 2018. As part of the Bank's continuing commitment to eliminating abuse and exploitation not just in our workplace but in that of our suppliers, the Bank has produced and is implementing a Vendor Code of Conduct by which all our suppliers will be expected to comply.

OSBIndia

OSBI is a wholly- owned subsidiary of the Group. OSBI operates from an office in Bangalore and currently employs 366 people. OSBI supports the Bank across various functions such as Customer Service, Operations, IT and other support services. We actively promote integration between our colleagues in the UK and India with frequent employee exchanges, transfers, overseas training and management visits. The state-of-the-art Bangalore office has been extended in the year to accommodate the growing number of our Indian colleagues and a new business continuity site in Hyderabad was opened. We have also completed ISO 9001 and 27001 certifications in 2017, a testament to the Group's commitment to information security at the highest level.

As part of the Group, OSBI falls under the same Group policies that are in force in the UK offices, most importantly, equal opportunities, non-discrimination and harassment, whistleblowing, information security and clear desk policies. There are only very slight differences in the Group's main HR policies due to local legislation.

In compliance with the Modern Slavery Act, we do not support excessive overtime and our employees in India are encouraged to work in accordance with local legislation. Employees in our Bangalore office enjoy a range of benefits which includes 21 days of annual leave, 10 days' sick leave and cafeteria services.

Focused on the environment

This year, we continued to implement the objectives set out in our Environmental Policy and as a result, the Bank has introduced many initiatives to enhance our commitment to conducting our business in an environmentally responsible way.

As an office-based financial services provider, we have a relatively low impact on the environment. However, we aim to further promote awareness of the environmental issues amongst our employees in order to reduce consumption of resources and take measures to minimise our negative impact on the environment in which we operate.

In 2017, we appointed an independent consultant to undertake an environmental audit which, once complete, will highlight areas where we can improve and assist us in setting more effective objectives for becoming a greener organisation in 2018.

Activities in 2017

Some of the activities that we implemented during the year include:

- Pro-active energy management and measures undertaken across our corporate real estate which resulted in a reduction of electricity and gas consumption in 2017

- We now source all of our energy from green energy providers

- Installation of a charging point for electric vehicles in our head office.

Greenhouse gas emissions

Emission type	CO₂e tonnes
Emission type	Location- based method	Market- based method
Scope 1: Operation of facilities	12	-
Scope 1: Combustion	101	-
TOTAL SCOPE 1 EMISSIONS	113	_
Scope 2: Purchased energy (UK)	458	264
Scope 2: Purchased energy
(rest of world)	452
TOTAL SCOPE 2 EMISSIONS	910	264
Total emissions	1,023	264

1. Location-based figure used where market-based not available.

Greenhouse gas emissions intensity ratio:

	Total footprint (Scope 1 and Scope 2) - CO₂e
	Previous year	Current year	Year on year
	(2016)	(2017)	variance
Turnover (£m)	201.4	238.1	18%
Intensity ratio - Scope 2 location-based method (tCO₂e/£100,000)	0.004	0.004	-
Intensity ratio - Scope 2 market-based method (tCO₂e/£100,000)	0.003	0.003	-

Emissions breakdown by source (tCO₂e)

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Emissions breakdown by category (tCO₂e)

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Notes:

- Our methodology has been based on the principles of the Greenhouse Gas Protocol, taking account of the 2015 amendment which sets out a 'dual reporting' methodology for the reporting of Scope 2 emissions. This means that UK electricity is reported using two methods

- We have reported on all the measured emissions sources required under The Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013, except where stated

- The period of our report is 1 January 2017 to 31 December 2017

- This includes emissions under Scope 1 and 2, except where stated, but excludes any emissions from Scope 3

- Conversion factors for UK electricity (location-based methodology), gas and other emissions are those published by the Department for Environment, Food and Rural Affairs for 2017/18

- Conversion factors for UK electricity (market-based methodology) are published by electricityinfo.org

- The market-based methodology has only been applied to UK electricity supplies

- Conversion factors for overseas electricity, gas and other emissions are those published by the International Energy Agency for 2016

- Conversion factor used for R417A (F-Gas) is published by Linde Gas

- Conversion factor used for R22 (F-Gas) is published by Department for Environment, Food and Rural Affairs for 2016/17

- As the old office in India closed during the 2016 year, the following site and associated emission IDs have been retired and are not included within the 2017 report: India (Old Office)

- The following sites have been added to the portfolio during the 2017 year: India Disaster Recovery Site (Hyderabad) and The Observatory

- The addition of these two new sites into the portfolio has resulted in an increase in electricity usage and the associated Scope 2 Purchased Energy carbon figures

- There has been a significant reduction in both diesel fuel usage and F-Gas recharges between 2016 and 2017

- The reduction of reported diesel usage in 2017 is the result of increased usage in 2016 at the new India site where fuel purchased by OSB was used by contractors during the construction/refurbishment process

- The reduction in F-Gas recharges is the result of no UK F-Gas refills occurring during the 2017 year.

Statement of exclusions

- Global diesel/petrol use (for vehicles) has been excluded from the report on the basis that it is not material to our carbon footprint

- It has been confirmed there is no LPG use within the estate either in the UK or overseas

- It has been confirmed that there is no mains gas supply in relation to the India operations

- Two UK sites: Heritable and InterBay, have been excluded from reporting as it has been confirmed that these are managed rented properties and are therefore considered to be Scope 3 emissions and are not readily available. An additional managed rented site has been added in the 2017 year - Newman Street. This has been treated as an exclusion in order to be consistent with the methodology applied to the Heritage and Interbay sites. We intend to collect data relating to managed rented properties during the 2018 year so that they can be reported as Scope 3 emissions in the 2018 report.

Focused on our community

OSB has very strong links with the community in which it operates, especially through its Kent Reliance brand which has been synonymous with the county of Kent and has been a passionate supporter of its local community for over 150 years.

As we are one of the largest employers in the region, many of our employees live within the local community and therefore have a personal affinity with local causes and projects. Employee feedback is vital in helping to decide where support can be best placed within the community.

Our diverse community services programme includes being a major sponsor of South-East-based 'Demelza Hospice Care for Children' and staff-nominated national charity 'Winston's Wish'. We also donate to local Kent-based charitable causes through our 'Kent Reliance Community Fund' ('KRCF'). KRCF is the key sponsor of the 'Kent County Football Association' (which includes 24 County Cup competitions and player development centres for under-represented groups) and 'Kent County Cricket Club', and provides sponsorship for the disability squads and academy programme which helps to develop new talent. Our 'Project Kent' and 'Make Someone's Christmas' campaigns are undertaken with a local media partner to highlight and support local people and projects in need. For the fifth year running, we have supported a key reading initiative, called 'Buster's Book Club' at Medway primary schools, which focuses on fun and innovative ways to help develop literacy levels.

In 2017, we refocused our community services programme to provide more of a 'hands on' approach by encouraging our employees to take an active role with all fundraising and volunteering opportunities. Each employee is given one day's annual leave for volunteering which they can use to actively support any registered charity of their choosing, or to support the Bank's charity partnerships. Furthermore, if employees choose to undertake additional fundraising activities then the Bank will match any funds raised up to a specific amount. During the year, employees carried out over 300 volunteering hours, which in monetary terms equates to nearly £7,000.

Overall, the Bank has contributed a total of over £209,000 to community and charitable causes in 2017 through sponsorship programmes, activities and donations.

Demelza Hospice Care for Children

Demelza is a children's hospice charity in the South-East, providing compassionate and expert care for babies, children, young people and their families. As a registered charity, Demelza offers bespoke support, free of charge, to families and is available 24 hours a day, 365 days a year. In order to provide these vital services, it needs to raise over £10m a year.

As a locally-based charity, employees from Kent Reliance are hugely aware of and are keen supporters of Demelza. They participated in a number of fundraising events throughout the year including being headline sponsors and participants of the annual Kent Messenger Dragon Boat Race, which helped raise over £150,000 in sponsorship for local charities and good causes across the county in 2017. The event continues to be one of the biggest charity fundraising events staged in Kent and the Kent Reliance teams helped raise donations for Demelza through their efforts on the day and subsequent promotion.

Kent Reliance also takes huge pride in raising money for Demelza through a range of annual fundraising events involving quizzes and bake-off challenges. Aside from straightforward fundraising, we also engage with the local community by gifting our branch network as collection and promotion outlets for the charity. Engagement with the charity doesn't end with our sponsorship. Employees actively welcome opportunities to get hands-on with Demelza, with many visiting the Hospice on volunteer days to help clear and maintain the grounds, create a new sensory garden for families and any other tasks that may arise during the year.

Winston's Wish

Throughout 2017, we continued to support our nominated corporate charity, Winston's Wish, which was the first charity to establish child bereavement support services across the UK. Winston's Wish provides specialist support programmes for children affected by deaths related to homicide and suicide, as well as military families who have been bereaved.

The highlight of this year's fundraising activity took place in June as eight intrepid employees from across the Group cycled a 270-mile route, stopping at each of our UK branches and offices in three days. Fortunately, the team was blessed with great weather, no major mechanical incidents and only a few map reading glitches. 270 miles in three days was an ambitious target but, ably supported by huge helpings of food and encouragement at each of our branches and offices, the team managed to raise a grand total of £11,155 for Winston's Wish, bringing the total amount raised throughout 2017 to £17,700.

Project Kent

Project Kent was a new initiative that launched in 2017 in conjunction with the KM Media Group, led by KMFM. This community initiative was powered by nominations from local people who were asked to nominate a local scheme they thought was of benefit to the local community. Nominations received varied, including a community centre that had fallen into disrepair, a neighbourhood group that needed equipment for an afterschool club and a small local charity struggling to promote their services.

Throughout the selection process, it was clear that there were two schemes that fully deserved a helping hand as each presented a wonderful asset to their local communities. Both Farthing Corner Community Centre and Beltinge Nursery were integral assets within their community but due to lack of funds they were unable to make vital repairs or make improvements to their existing services.

The projects offered employees an opportunity to provide hands-on support through internal decorating, grounds clearance and general cleaning once building works had been carried out. Both projects have benefitted greatly from the improvements and are now better equipped to serve their local communities for many more years to come.

Kent County Football Association

The partnership between Kent FA and Kent Reliance has grown over the last five years and now covers all 24 Kent County Cup competitions. Kent Reliance is also a key sponsor of the Kent Girls and Disability Player Development Centre, resulting in us being named Kent FA's first official 'Community Partner'.

The Kent Reliance Girls and Disability Player Development Centres provide professional coaching to improve the standards of girls and disability grassroots football in Kent. The support from Kent Reliance will enable the transition of young players to elite football as well as providing a community exit route for players leaving the elite talent pathway.

Paul Dolan, Kent FA's Chief Executive, is delighted to have the continued support from Kent Reliance,

"We are now in the fifth and final season of the partnership between Kent Reliance and the Kent FA, which has always been about supporting and promoting our local community. Both organisations are totally committed to being inclusive and our innovative partnership has reflected this by engaging, developing and rewarding all areas of our diverse community.

The Kent Reliance Girls and Disability Player Development Centres have provided a unique opportunity for talented players in Kent to gain additional football coaching and the 24 Kent Reliance County Cup competitions have catered for over 1,000 community-based teams each season of all standards and ages to play competitive football. This community-based partnership between Kent Reliance and the Kent FA has been used as a model of best practice for other County Football Associations across the country to emulate in order to further the development of grassroots football."

This partnership also sees the continuation of the highly successful #MagicOfTheCup competition which is run on a monthly basis during the football season and encourages local teams to enter a submission which illustrates sportsmanship, goodwill and skilled play. In return, the winning team receives football equipment and is put forward to compete as overall winner. Over 15 teams won football equipment during the competition last season and this year the overall winner was Ramsgate Football Club Senior Team. The team won 16 tickets for the England vs Slovakia international match at Wembley on 4 September 2017.

Kent Charity Awards

The Kent Charity Awards ('KCA') showcase the hard work that charities and voluntary groups from around the county undertake to make the lives of others better. Celebrating and supporting the county at a grassroots level is key to Kent Reliance's charitable endeavours and our sponsorship of KCA reflects that.

Kent County Cricket Club

In 2017, Kent Reliance continued its partnership with KCCC, by supporting the Club's community programme. As with our commitment to Kent FA, this relationship is another opportunity to really support grassroots activity within the county and encourage people of all abilities to get involved and enjoy sport. Our sponsorship activity provides for funding for the Disability Performance Squads who currently operate two teams:

- The Kent Reliance Learning & Physically Disabled ('LDPD') Performance Squad

- The Kent Reliance Visually Impaired ('VI') Performance Squad

- Both squads train during the winter months and represent Kent in national competitions against other counties during the summer months. This is the first step to representing the national team managed by the England and Wales Cricket Board. The LDPD squad currently plays in two formats of cricket, both softball, and for the more experienced players, full cricket balls (hardball). The VI team play with size three footballs which have been adapted to contain beads which rattle, although the national team play with regular cricket ball size hardball, again adapted to rattle and the squad trains throughout the year at a number of venues around the county.

Jamie Clifford, CEO, KCCC, says "We have been delighted to once again enjoy the support of Kent Reliance in 2017. With Kent Reliance we have continued to develop the Academy programme. The partnership has enabled us to bring in specialist coaches and further develop players' life skills, which helps the preparation for a professional career. Our disability cricket programmes have also been boosted by the support of Kent Reliance which allows us to provide kit, coaching and facilities for our players. Thank you Kent Reliance for the difference you make."

Make Someone's Christmas

The Make Someone's Christmas campaign encourages listeners and readers of KMFM and KM Media Group and customers of Kent Reliance branches, to nominate those people they feel deserve an extra special treat during the festive season. Following the big success of the programme in previous years, this year had a hard act to follow but achieved as many nominations for the well-deserving and those in need. In 2017, we helped ten special people in Kent with ten bespoke prizes that really helped make their Christmas. Nominations were varied and included a father and daughter that had lost their wife and mum just before Christmas, an eight-year old boy who wanted to nominate his parents for their hard work in the community and a woman who annually put her Christmas Day on hold so that she could provide a Christmas lunch for the elderly. Each winner was announced live on the radio during a two -week period and received well-deserved prizes ranging from holiday vouchers to a spa day.

Kent Literacy Scheme

In 2017, Kent Reliance continued to support this educational charity to develop its new home reading initiative - Buster's Book Club - in ten Medway schools. The scheme was extremely successful across the county with more than 7.5 million minutes of reading achieved and making the 26,000 children involved official members of the Millionaire Reading Club.

OSBI fundraising

Corporate social responsibility ('CSR') is extremely important to OSBI. The concept of helping society is embedded in its corporate governance structure through the CSR policy and also through employee engagement.

As part of the OSBI CSR policy, funds are kept aside each year to spend on social causes. This is governed by a CSR Committee and implemented by the Corporate and Social Responsibility Group.

The focus is to help and contribute in areas where there is critical need and within the office locality so they are also able to contribute their time.

In 2017, the CSR Group agreed to support the areas of child welfare, education and healthcare.

Child welfare

OSBI has partnered with the SOS Children's Village, located in Bangalore, to fund education, food, clothing and housing for 20 orphans. Working together with SOS, OSBI employees helped to provide support for the holistic development of orphans, women and children belonging to vulnerable families. OSBI also hosted a couple of events at SOS for their staff to engage with the children, which was highly appreciated by both children and the employees.

Healthcare

OSBI is currently supporting affordable healthcare through a local government-run hospital called CV Raman General Hospital. The hospital provides subsidised medical facilities to the financially challenged members of the community in and around east Bangalore. OSBI has contributed various surgical and arthroscopy equipment that has enabled the hospital to conduct complex surgeries at a fraction of the price charged by private hospitals; for example, they are able to carry out keyhole surgery for ligament tears at under £5!

OSBI are now working with the hospital administration to provide employee volunteers to redo the gardens around the hospital which are currently in a poor state. OSBI plans to complete landscaping work with flowering trees and sprawling lawns along with a children's play area and believes that this will aid in the emotional recovery of the patients.

Portfolio landlord

We needed to verify the wider portfolio of a new customer to the Group who was applying for a Buy-to-Let purchase.

The applicant completed the cash flow statement, business plan and asset and liability statement, demonstrating their overall strategy, profit position and ability to cover rental voids. We then validated the existing portfolio via our new technology.

This showed up some anomalies so the underwriter reviewed the applicant's wider portfolio, confirming that the existing mortgage loans were on long-term fixed rates.

The underwriter re-verified the portfolio and the ICR threshold was met. Due to an experienced manual underwriter adopting a flexible approach, the case was approved quickly. Automated systems simply don't do this.

CRAIG RICHARDSON
HEAD OF UNDERWRITING

Automated systems just don't do this

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Animal welfare

OSBI contributed to the movement and construction of a pet shelter run by Compassion Unlimited Plus Action ('CUPA'). CUPA provides rescue and relief to thousands of injured, ill and needy street animals in Bangalore, Karnataka. Animals that come hurt, sick or abandoned are given the care and treatment they need to recover and then are re-homed or rehabilitated.

Looking forward to 2018

The activities undertaken in 2017 delivered a stronger emphasis on staff engagement within the local community to deliver real, tangible benefits and lasting value and we want to build on that in 2018.

As the sponsorship deals with Kent County Cricket Club and the Kent County Football Association come to an end this year, there is an opportunity to build on the community-based projects and initiatives that have been trialled in 2017 including:

- Increased community involvement

- Greater staff engagement, and

- Activities that bring KR branches into the mix as 'community hubs'.

The Strategic report is approved by the Board and signed on its behalf by:

Jason Elphick
Group General Counsel and Company Secretary
15 March 2018

Directors' Report

Board of Directors (Biographies)

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David Weymouth* Non-Executive Chairman	Andy Golding Chief Executive Officer	April Talintyre Chief Financial Officer	Graham Allatt* Non-Executive Director	Eric Anstee* Non-Executive Director
Appointment David was appointed to the Board in September 2017.	Appointment Andy was appointed to the Board in December 2011.	Appointment April joined the Bank in May 2012 and was appointed to the Board in June 2012.	Appointment Graham was appointed to the Board in May 2014.	Appointment Eric was appointed to the Board in December 2015.
Committee membership Member of the Nomination and Governance Committee.	Committee membership None.	Committee membership Member of the Risk Committee.	Committee membership Chair of the Risk Committee and member of the Audit Committee.	Committee membership Chair of the Audit Committee and member of the Risk Committee.
Key skills David has nearly 40 years' experience in the financial services industry and has a degree in modern languages from University College London and an MBA from the University of Exeter.	Key skills Andy has over 30 years' experience in financial services.	Key skills April has broad financial services experience. She has been a member of the Institute of Chartered Accountants in England and Wales since 1992.	Key skills Graham has significant banking, credit risk experience and financial services experience.	Key skills Eric has extensive corporate finance and Mergers & Acquisitions experience over a broad range of business sectors. He is a member of the Takeover Panel Appeals Board and Visiting Professor, London Metropolitan University Business School.
Experience & qualifications David was previously Chief Information Officer at Barclays Bank plc and Chief Risk Officer at RSA Insurance Group plc. He sat on the Executive Committee of both companies. His experience as an executive includes a wide range of senior roles in operations, technology, risk and leadership. David is also Chairman of Mizuho International Plc and his other current Non-Executive directorships include Fidelity International Holdings (UK) Limited and The Royal London Mutual Insurance Society. He also served on the Board of the Bank of Ireland (UK) plc until November 2017.	Experience & qualifications Andy was previously CEO of Saffron Building Society, where he had been since 2004. Prior to that he held senior positions at NatWest, John Charcol and Bradford & Bingley. He was a Non- Executive Director of Kreditech until 1 November 2017. He currently holds a number of posts with industry institutions including membership of the Council of Mortgage Lenders Executive Committee. He is also a Director of the Building Societies Trust and has also served as a Non-Executive Director for Northamptonshire NHS.	Experience & qualifications April was previously an Executive Director in the Rothesay Life pensions insurance business of Goldman Sachs and worked for Goldman Sachs International for over 16 years, including as an Executive Director in the Controllers division in London and New York. April began her career at KPMG in a general audit department.	Experience & qualifications Graham was previously Acting Group Credit Director at Lloyds TSB and Chief Credit Officer at Abbey National. Prior to this he spent 18 years in the NatWest Group culminating in the role of Managing Director, Credit Risk at NatWest Markets. A Fellow of the Institute of Chartered Accountants, Graham is Deputy Chairman of the Friends of the British Library and was involved in housing associations for nearly 30 years as Treasurer and Board member in the North of England and in London.	Experience & qualifications Eric was Chairman of CPP Group plc from 2014 to 2015. Prior to this he was Chief Executive of the City of London Group plc, the first Chief Executive of the Institute of Chartered Accountants in England and Wales and Group Finance Director of Old Mutual plc. Eric was also Group Finance Director at The Energy Group plc and advisor to Lord Hanson on the demerger of Hanson plc. Prior to this Eric spent 17 years at Ernst & Young. Eric is also a Non-Executive Director of Sun Life Financial of Canada Limited and Insight Asset Management Limited.

* Independent Non-Executive Director

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Andrew Doman* Non-Executive Directora	Rod Duke* Senior Independent Director	Margaret Hassall* Non-Executive Director	Mary McNamara* Non-Executive Director
Appointment Andrew was appointed to the Board in July 2016.	Appointment Rod was appointed to the Board in July 2012 and was appointed Senior Independent Director in 2014.	Appointment Margaret was appointed to the Board in July 2016.	Appointment Mary was appointed to the Board in May 2014.
Committee membership Member of Audit, Nomination and Governance, Remuneration and Risk Committees.	Committee membership Chair of the Nomination and Governance Committee and member of the Remuneration Committee.	Committee membership Member of Audit and Risk Committees.	Committee membership Chair of Remuneration and member of Risk and Nomination and Governance Committees.
Key skills Andrew is an experienced financial services executive.	Key skills Rod has extensive experience in operations, investments, risk management and corporate finance across retail and commercial banking.	Key skills Margaret brings a broad range of experience developed across various industry sectors including manufacturing, utilities and financial services.	Key skills Mary has broad senior management experience in the banking and finance sectors.
Experience & qualifications Andrew is currently Chairman at Castle Trust Capital plc and was previously CEO of Premium Credit Limited and CEO, President and later Chairman of Frank Russell Company. He was also a Senior Director of McKinsey & Company, management consultants, based in the London office. He focused on the financial services sector, serving a number of leading banks, insurance companies and asset managers across a wide range of topics including strategy, performance improvement and risk. He was formerly a Non-Executive Director of The Wesleyan.	Experience & qualifications Rod was previously Group General Manager, HSBC with responsibility for UK distribution - branches, call centres and internet banking - for both personal and commercial customers. Rod was with HSBC for 33 years. Previous directorships include VISA (UK), HFC Bank plc and HSBC Life. He also served on the Board of Alliance & Leicester plc until its takeover by Santander. Rod is a Fellow of the Institute of Financial Services.	Experience & qualifications Margaret spent seven years working for Deloitte and Touche as a consultant and led the financial services consulting business for Charteris Plc. More latterly Margaret has been engaged as Chief Operations Officer or Chief Information Officer for divisions within some of the world's largest banks, namely Bank of America Merrill Lynch, Barclays and RBS. Margaret is a Non-Executive Director for Ascension Trust (Scotland).	Experience & qualifications Mary is a Non-Executive Director of Dignity plc and Motorpoint plc. She was previously CEO of the Commercial Division and Board Director of the Banking Division at Close Brothers Group PLC. Prior to that, Mary was Chief Operating Officer of Skandia, the European arm of Old Mutual Group and prior to that, Mary spent 17 years at GE Capital, running a number of businesses including GE Fleet Services Europe and GE Equipment Finance.

Executive team

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Top row from left to right: Jason Elphick; Jens Bech; Hasan Kazmi; Richard Davis; John Eastgate.

Bottom row from left to right: Richard Wilson; Lisa Odendaal; Clive Kornitzer.

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Jason Elphick

Group General Counsel and Company Secretary