Progressive Building Society

Annual Report & Accounts 2015

www.theprogressive.com

Vision

To be the savings and mortgage provider of choice in Northern Ireland. Mission

To provide a top quality service and competitive products to savers and home owners by meeting the needs of our Members. We value ° the support of our Members, ° the transparent and ethical approach in our dealings with Members, ° the commitment, loyalty and development of our staff and agents, ° the choice and diversity that Member ownership brings, ° the financial strength of the Society.

CONTENTS

02

Strategic Report

14

Directors’ Report

16

Directors’ Profiles

19

Directors’ Remuneration Report

22

Corporate Governance

28

Audit Committee Report

32

Corporate Social Responsibility

34

Statement of Directors’ Responsibilities

36

Independent Auditor’s Report to the Members of Progressive Building Society

41

Income Statement

42

Statement of Other Comprehensive Income

43

Statement of Financial Position

44

Statement of Changes In Members’ Interests

45

Cash Flow Statement

46

Notes to the Accounts

80

Annual Business Statement

83

Society Offices

STRATEGIC REPORT For the year ended 31st December 2015

The Directors have pleasure in presenting the Annual Report and Accounts of Progressive Building Society for the year ended 31st December 2015.

BUSINESS OVERVIEW As a member-owned mutual building society our business model is built on providing a safe place for savings and helping more people buy their own homes. We have no external shareholders – we exist for the benefit of our Members - and so there is no requirement to pay dividends. Progressive Building Society has maintained the values of a traditional building society for over 100 years by providing value-for-money products enabling Members’ savings to fund local home ownership in Northern Ireland. The Society has relied on a traditional, sustainable business model providing a strong customerfocus and excellent service standards. In 2015, the Society continued to grow, remained strongly profitable and added significantly to its reserves, thereby protecting Members’ interests and enabling us to provide excellent customer service. The Society has twelve branches and an extensive network of agents in key locations throughout Northern Ireland and continues to invest in its infrastructure.

BUSINESS MODEL The Society borrows from savers through branches, agents and postal channels. Wholesale money markets provide a secondary source of funding to the Society. The Society uses these funds from savers and the wholesale markets to lend to mortgage borrowers in Northern Ireland. These mortgage loans are predominantly secured against prime residential property. The Society is financially stable with strong reserves having been profitable every year of its existence. It is important that the Society returns sufficient profits to sustain and build its capital base to provide security for Members’ funds.

As a mutual organisation, the Society does not have external shareholders or pay dividends. The ownership and governance model of the Society ensures strategic and operational decisions are taken focusing on the needs of our Members. This means that the Society can operate on lower levels of profit than would be required under alternate ownership models, providing better value products to Members. Progressive makes a profit by generating a margin on the difference between the rates paid on Members’ savings and the rates charged on mortgages. This margin, or net interest receivable, covers the cost of running and administering the business, including credit losses. The surplus then increases the Society’s reserves building capital strength and the delivery of value-for-money products to new and existing Members. Not all of the funds we attract from savers and other investors are used to finance home purchases. In order to ensure we can meet all our obligations to savers, and to meet the promises we have made to lend to home buyers, we keep some of the funds in liquid form. Liquid assets are invested with strong financial institutions, primarily the Bank of England. Security and accessibility to liquidity are of key importance to the Society. Progressive strives to improve the products and services offered to new and existing Members by listening to their needs. We continue to invest substantially to ensure that we have the right people and skills, systems and support infrastructures to be able to continue to offer outstanding personal service. Quality of service is key to the Society’s success. Business in Northern Ireland is largely driven by personal recommendations and we work very hard to develop appropriate products and services. At Progressive we do not have call centres, instead we ensure our Members and potential Members have direct access to welltrained and competent staff.

Lending decisions can be made quickly due to our in-depth knowledge of the local housing market. Feedback from Members indicates high levels of satisfaction with the services provided by Progressive staff. We encourage face-to-face contact with our branch staff who can assist with every step of the process whether saving or borrowing. At a time when most of the financial services sector locally continues to reduce their branch locations, we will maintain our presence in each of the key locations served by our branches. However, for Members’ convenience, we also offer postal savings products to make it easier for Members to transact their financial business.

STRATEGY The Society has developed a strategy to deliver its vision to be the savings and mortgage provider of choice in Northern Ireland. This strategy is built on three key pillars of (i) Membership, (ii) Governance, Resources and Community, and (iii) Capital. These strategic pillars act as a roadmap to increase Membership balanced by sustainable asset and capital growth through delivering value-formoney products and services to our Members at a time and place convenient to their needs. We will ensure that we further develop the links with the local communities we serve. The Society made significant progress against last year’s key strategic pillars of growing Membership by providing savings and mortgage products meeting the needs of our Members and those of new Members, further strengthening corporate governance through enhanced Board and management succession and developing an integrated training strategy as well as enhancing the Society’s capital strength by returning record profits.

As a service led provider of mortgage and savings products, face-to-face contact through our branch network remains our primary delivery channel. Our low risk business model coupled with our excellent customer service aims to deliver long term value to Members through strong financial performance which allows us to invest to grow the business whilst maintaining adequate levels of capital to remain financially strong.

MARKETS AND TRENDS Progressive attracts savings primarily from Northern Ireland enabling the Society to encourage and fund home ownership in the region. Eight years ago, as the global economic downturn took hold, Northern Ireland suffered one of the most severe property crashes in economic history. Prices fell by more than 50% from their peak in the Autumn of 2007. It wasn’t until the latter half of 2013 that the local housing market began to show signs of recovery. This recovery continued throughout 2015 with the various local indices recording 7% to 10% house prices increases. The Royal Institution of Chartered Surveyors (RICS) forecasts a further 5% increase in 2016 due to continuing demand and lack of supply of properties.

The savings market continued to feel the effects of the Government’s Funding for Lending Scheme (FLS) during 2015, which meant that savings providers lacked the appetite to aggressively compete for savers’ cash. FLS is a mechanism which provides low cost funding for financial institutions to lend to individuals for mortgages and to small and medium-sized enterprises for business purposes. The savings market was further affected by the uneconomic savings rates offered by National Savings and Investments which no private sector institution could afford to match. Furthermore, the Bank of England base rate continues to remain at its lowest historical rate of 0.50% since early 2009. This has meant that competition for retail savings has reduced and the rates offered to savers have fallen as a consequence across the market. However, the Society was able to offer loyalty rates for ISA savers and fixed rate bond savers throughout the year which were often among the best rates available in the local market.

BUSINESS OBJECTIVES The principal purpose and objective of Progressive Building Society remains that of making loans to Members that are secured on residential property and that are funded substantially by its Members. The Board strongly believes that this purpose is best served by the mutual business model and providing a range of competitive savings and mortgage products tailored to the needs of both new and existing Members, by increasing the strength of our capital base and by continuing the Society’s commitment to improve quality of service and value to Members. The Directors believe that an independent building society provides the right environment and structure for the achievement of the Society’s objectives.

PRINCIPAL RISKS AND UNCERTAINTIES Progressive, like all businesses, faces a number of risks and uncertainties and seeks to actively manage these risks. The Society has a cautious approach to risk, which helps to maintain Member confidence particularly in difficult market conditions. The identification and management of risk is a high priority and is integral to strategy and operations.

Board risk appetite The Board sets high level risk appetite statements and associated measurable limits to provide a framework for business decision making and to identify and articulate the risks that the Board is willing to take in delivering the Strategic Plan. The Society operates as a cautious organisation in the level of risk it is willing to take in order to achieve strategic goals. This approach has been disseminated by the Board throughout the Society, thereby clearly articulating the risk culture. This culture ensures that the tone from the top, set by the Board, is reflected in behaviours and decision making. All Board members also conduct branch and department visits as part of the Society’s integrated culture. Additionally, the Board has set a boundary condition to be able to withstand a severe but plausible stress and continue to report an accounting profit and meet minimum capital requirements. The Society utilises early warning triggers through a variety of Key Performance Indicators, Board limits and regulatory limits to highlight any area of concern or potential breach of risk appetite. The Society’s performance against Board limits and early warning triggers is reviewed on a monthly basis by the Board and on a quarterly basis by the Prudential Risk Committee. The Society has a formal structure for managing risks and operates a ‘three lines of defence’ model which is recognised as an industry standard for risk management. The management of risks is detailed in risk management policies which are set by the Board. Primary responsibility for managing risk and ensuring controls are in place lies with the business units within the Society – the ‘first line of defence.’ Management have a responsibility to understand how risks impact their area of the business and to put in place controls or mitigating activities. The Prudential and Conduct Risk functions provide the ‘second line of defence’ with independent oversight, which includes monitoring and reviewing risk policies, establishing limits, and monitoring and reporting on compliance in relation to those limits. These policies and procedures ensure that compliance with regulations applicable to the Society is embedded into the culture of the organisation to create a strong controls-based environment. The Senior Manager Prudential Risk and the Senior Manager Conduct Risk both report to the Chief Executive and have independent reporting lines directly to the Chairs of the Prudential Risk Committee and the Conduct Risk Committee, respectively. Internal Audit provides the ‘third line of defence’ with independent assurance

regarding the activities of the various business units, including the Prudential and Conduct Risk functions. The Head of Internal Audit, an outsourced function, has an independent reporting line directly to the Chairman of the Audit Committee. The Audit Committee approves the work programme of internal audit and receives reports on the results of the work performed. The principal risks inherent in the Society’s business are:

Credit risk Credit risk is the risk that customers or counterparties will not be able to meet their obligations as they fall due. The Society faces this risk from its lending operations to retail mortgage customers and wholesale counterparties. The Society’s lending has continued to focus on low risk residential mortgage business. All mortgage applications are assessed with reference to the Society’s lending policy, which seeks to ensure borrowers only take on debt they can afford to repay, protecting themselves and the Society. Changes to policy are approved by the Board and the approval of loan applications is mandated. The Society has no exposure to the mortgage sub-prime market and only a small involvement in the buy-to-let and commercial property markets. This has limited the Society’s exposure to higher risk lending. The Board is responsible for approval of treasury counterparties and regular review of their credit risk and it sets limits on wholesale market credit exposures. During 2015 the Society maintained a very prudent approach to liquidity management, placing funds with the Bank of England, in UK Government debt and, for shorter periods, with highly regarded financial institutions. The treasury function operates within a strict control framework and exposures are monitored on a daily basis.

Liquidity risk Liquidity risk is the risk that the Society will not be able to meet its financial obligations as they fall due or can only do so at excessive cost. The Society’s policy is to maintain sufficient funds in a liquid form at all times to cover cash flow imbalances and fluctuations in funding, to retain full public confidence in the solvency of the Society and to ensure that liabilities can be met as they fall due. This is achieved through maintaining a prudent level of liquid assets. The Society’s funding is structured to utilise wholesale markets to complement retail funding flows. At 31st December 2015, 85.7% (2014: 89.5%) of funding was derived from Members’ savings.

The Treasury Manager is responsible for the daily management of liquidity risk within the strict guidelines set by the Board and monitored by the Asset and Liability Committee (ALCO). These strict guidelines reflect the cautious risk appetite of the Society’s Board. At the end of 2015, 86.9% (2014: 87.6%) of the Society’s liquid assets were placed with the Bank of England or highly liquid UK Government Securities. The Society’s Statement of Financial Position is stress tested monthly, with results reported to ALCO, to ensure the Society can withstand extreme cash outflows. The Society conducts an Individual Liquidity Adequacy Assessment Process (ILAAP) at least annually, which is reviewed by the Board. The ILAAP identifies all the major liquidity risks faced by the Society and ensures adequate liquidity is maintained. The ILAAP is used by the Prudential Regulation Authority (PRA) to set the Society’s liquidity requirements as Individual Liquidity Guidance (ILG). The Society has a liquidity surplus above this ILG and maintains a strong liquidity position. The Society also has to adhere to the Liquidity Coverage Ratio (LCR) from 1st January 2016. This new regulatory requirement has been put in place to ensure that all financial institutions have sufficient liquidity to cope with a severe thirty day stressed event. The Society has a LCR far in excess of the regulatory requirements.

Market and interest rate risk Market risk is the risk of changes to the Society’s profit or value due to movements in market rates. The primary market risk faced by the Society is interest rate risk. The Society is exposed to movements in interest rates reflecting the mismatch between the dates on which interest receivable on assets and interest payable on liabilities are next reset to market rates or, if earlier, the dates on which the assets and liabilities mature. Interest rate sensitivity also arises from the potential for different interest rates to move in different ways (e.g. fixed rate mortgages funded by variable rate savings products). This is called basis risk and is reported to and monitored by ALCO on a monthly basis. The Board has also put early warning indicators in place to highlight any potential future basis risk problems and to help ensure the Society can respond appropriately.

Interest rate risk is managed through taking advantage of natural hedging opportunities within the Statement of Financial Position. Furthermore, the Society also uses derivative instruments to manage exposure to changes in interest rates which arise from fixed rate mortgage lending and fixed rate retail savings products. The fair value of these instruments moves throughout their lives. The Society utilises hedge accounting under IAS 39 to reduce the amount of volatility in the Income Statement caused by these movements. The Society has no direct exposure to foreign currency exchange rates.

Operational risk Operational risk is the risk of loss arising from inadequate or failed internal processes or systems, human error or external events. It includes errors, omissions, natural disasters and deliberate acts such as fraud.

Capital management The Society continues to comply with the capital adequacy rules of the Prudential Regulation Authority (PRA) by adopting the Standardised Approach to credit risk and the Basic Indicator Approach to operational risk. The Society conducts an Internal Capital Adequacy Assessment Process (ICAAP) at least annually, which is approved by the Board. The ICAAP identifies all the major risks faced by the Society and allocates capital as appropriate. The ICAAP is reviewed by the PRA in setting the Society’s capital requirements as Individual Capital Guidance (ICG). The Society maintains capital in excess of that required by the regulator.

Conduct risk

The five principal operational risk categories are;

The Board defines conduct risk as the risk of the Society failing to treat its Members fairly, with resulting detriment to those Members. The Society endeavours to achieve good customer outcomes for its Members.

Legal & fines, censure, supervisory regulatory intervention or legal enforcement action due to failure to comply with applicable laws, regulations, codes of conduct or legal obligations.

Examples of poor conduct risk management include, unfair treatment of Members who are in mortgage arrears, indiscriminate high risk selling tactics aimed at high volume sales of certain products and inadequate complaints handling processes.

IT systems failure in the development, delivery and maintenance of effective IT solutions for the Society. Information failure to ensure the security, security confidentiality, availability and completeness of the Society’s data and information. Financial crime

criminal conduct relating to money or to financial services or markets, including offences involving fraud or dishonesty, handling the proceeds of crime and / or the financing of terrorism.

People

an inability to recruit, develop or retain appropriate human resources. This includes failure to ensure the health and safety of colleagues, customers or third parties in the workplace.

These risks are controlled by the Society’s managers who have responsibility for monitoring controls for their areas of business. The Society recognises that operational risks can never be fully eliminated and that the cost of some controls implemented may outweigh the potential benefits. There is regular reporting of risks to the Prudential and Conduct Risk Committees, the Audit Committee and the Board.  

The Society recognises that failure to manage conduct risk can lead to unfair treatment of Members or mishandling of Members’ accounts and adversely affect its business operations, threaten its objectives and strategies and the objectives of the regulator. The Society is committed to the operation of a Conduct Risk Framework (including a Conduct Risk Policy) to facilitate management in the identification and monitoring of conduct risk and in ensuring compliance with regulatory requirements. However, it is not merely an exercise to ensure regulatory compliance as it is considered a key governance and management process and part of the Society’s culture placing Members at the heart of all we do. Development of conduct risk management within the Society is consistent with the aims and strategic goals of the Society. A structured approach to the consideration of conduct risk management enables management and the Board to make fully informed conduct decisions without exposing the Society or its Members to unacceptable levels of risk.

The objective of the Society declaring and implementing a Conduct Risk Policy and strategy is to ensure that appropriate actions will be taken by management throughout the Society to identify and manage effectively the conduct risks to which the Society and its Members may be exposed. This objective is achieved by: ° ensuring widespread awareness of the need to manage the conduct risks facing the Society; ° carrying out risk assessments to identify generic conduct risk and risks specific to the Society; ° improving the management of conduct risk by ensuring that comprehensive controls are in place to prevent and / or detect any conduct risk incidents; ° monitoring and reporting to the Board on the status of conduct risk management. It is the responsibility of the Board to ensure that the Conduct Risk Framework and Appetite Statement are implemented and good conduct and fair treatment of Members is embedded in the Society’s overall philosophy. The Conduct Risk Committee has been established with the ultimate responsibility of overseeing the co-ordination of the framework for managing conduct risks across the Society as delegated by the Board. The Committee will collectively: ° raise awareness of conduct risk, ° assess the adequacy of the Conduct Risk Framework, ° monitor and report on conduct risk, ° oversee improvement and remedial actions. The Society will continue with its aim of putting our Members at the centre of the business.

FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Society’s objective is to minimise the impact of financial risk upon its performance. The Society is exposed to a number of financial risks, specifically credit, liquidity, market and interest rate risks. The Board reviews and agrees policies for managing each of these risks. These are detailed above.

The Society manages the exposure to financial risks continually by using financial instruments, within limits set by the Board. ALCO reviews the results of stress testing the Society’s Statement of Financial Position, on a monthly basis, for movements in interest rates showing the effect on income. The financial instruments currently utilised by the Society in managing its exposures are interest rate swaps, which are used to protect the Society from exposures arising on fixed rate mortgage lending and fixed rate retail deposits. Details of these are contained in Note 25 “Financial Instruments”.

KEY PERFORMANCE INDICATORS The following table sets out a number of key indicators which the Directors use to monitor the development, performance and position of the Society on an ongoing basis. These are included to give Members a more comprehensive understanding of the Society’s progress. 2015

2014 as restated

Profit After Tax for the Year as a % of Mean Total Assets

0.65

0.62

Net Interest Margin as a % of Mean Total Assets

1.65

1.78

Gross Capital as a % of Shares and Deposit Liabilities

6.13

5.51

Management Expenses as a % of Mean Total Assets

0.66

0.63

Mortgage Balance Movement %

2.15

3.57

Savings Balance Movement %

(1.81)

6.20

Funding Ratio as a % of Shares and Deposit Liabilities

14.31

10.53

Liquid Assets as a % of Shares and Deposit Liabilities

20.46

19.99

Profit After Tax for the Year as a % of Mean Total Assets Profit after tax is the net amount earned by the Society after taking into account all expenses and tax charges. The profit after tax ratio measures the proportion that these net earnings bear to the simple average of total assets at the beginning and end of the financial year.

The Society’s profit is its principal source of new capital and is essential in ensuring the long term security of the Society for its Members and meeting the regulators’ capital requirements. The Society’s pre-tax profit for 2015 has increased to £14.0 million from £13.1 million in 2014 (as restated). This improvement in pre-tax profit was driven by strong net interest receivable and a reduction in bad debts as the local housing market improved during the year.

Net Interest Margin as a % of Mean Total Assets Net interest receivable expressed as a percentage of the simple average of the Society’s total assets at the beginning and end of the financial year. Net interest receivable is the Society’s main source of income and the Board continues to balance the need to offer attractive rates for savers and borrowers whilst generating sufficient profit to maintain a financially secure future for the Society. Net interest receivable decreased by £1.2 million to £28.3 million from £29.5 million in 2014 (as restated) and the margin reduced to 1.65% from 1.78% (as restated). Savings rates were retained for most of 2015 at similar levels to the previous year. However, towards the end of the year rates were increased to ensure that no savings balances attracted rates below the Bank of England base rate. The Society’s savings products remained competitive particularly through the Loyalty Bonds for maturing fixed rate bond holders, which were often market leading locally.

Gross Capital as a % of Shares and Deposit Liabilities Gross capital comprises all reserves (General reserves, Revaluation reserve and Available-forsale reserve). Gross capital is expressed as a percentage of total share and deposit liabilities.

Management Expenses as a % of Mean Total Assets Management expenses are the Society’s administrative expenses and represent the ordinary costs of running the organisation. They comprise mainly the costs of employing staff and maintaining the branch network. The management expenses ratio measures the proportion that these expenses bear to the simple average of total assets at the beginning and end of the financial year.

Mortgage Balance Movement % This shows the increase in the Society’s mortgage book.

Savings Balance Movement % This shows the (decrease) / increase in Members’ funds held by the Society.

Funding Ratio as a % of Shares and Deposit Liabilities This ratio shows the level of shares and deposits other than shares held by individuals. The Society has a low level of such borrowings and so minimises its exposure to uncertainties in the money market.

Liquid Assets as a % of Shares and Deposit Liabilities This ratio shows the proportion that the Society’s liquid assets bear to the Society’s liabilities to investors. Liquid assets are by their nature realisable, enabling the Society to meet requests by Members for withdrawals, make new mortgage loans and fund general business activities.

Other indicators Of course financial ratios are just one measure of the Society’s performance. It is important to the Directors that the Society is also successful in terms of the quality of customer service and Member satisfaction. To this end annual surveys are undertaken in order to track service levels in branches and to gain an insight into Members’ views on “fairness” and the competitiveness of products. Results obtained in 2015 were once again excellent and indicate that the Society’s culture and ongoing training programmes for existing and new staff continue to enhance the experience of dealing with the Society.

FINANCIAL PERFORMANCE

Performance overview

FRS 102 adoption

2015 was a mixed year for the Northern Ireland economy with the recovery continuing with modest growth. Unemployment continued downwards and wages showed their first real increase since the downturn which began in 2007. In addition, the construction industry finally bounced off the bottom and started showing signs of improvement.

The results at the end of 2015 have been produced by the Society having implemented FRS 102, the Financial Reporting Standard applicable in the UK and the Republic of Ireland. Entities reporting under FRS 102, which replaces UK GAAP, have an accounting policy choice over which recognition and measurement provisions to apply for all financial instruments. The Society has adopted IAS 39 Financial Instruments: Recognition and Measurement. The main areas of difference between UK GAAP and FRS 102 / IAS 39 are:

Impairment Under IAS 39 impairment provisions are calculated having discounted expected cashflows. This increases individual impairment provisions when compared directly to UK GAAP methodologies. Effective interest rate (EIR)

EIR accounting recognises that the lender is entitled to all cashflows associated with that mortgage on day one. These cashflows include all upfront fees, interest payments and any early redemption charges. EIR accounting adjusts the pattern of income recognition to ensure that interest and relevant fees are recognised on a constant yield basis over the behavioural life of the mortgage, resulting in reduced margin volatility.

Derivatives Under UK GAAP derivatives, which are measured at fair value, are not held on-balance sheet, instead they are held off-balance sheet and included in the disclosure notes. IAS 39 allows portfolio hedging which recognises only the ineffectiveness of hedging in the income statements, thus reducing volatility. Derivatives measured at fair value, are held on the Statement of Financial Position under the requirements of IAS 39. Deferred tax

Unlike UK GAAP, deferred tax is recognised under FRS 102 on all timing differences, including those on revalued properties even in the absence of a binding sale agreement.

However, the manufacturing sector struggled during the year with major job losses announced by a number of employers within that industry. Politically too, Northern Ireland saw a mixed year with public finances remaining under pressure. However, the ‘Fresh Start’ deal meant that Corporation Tax cuts to 12.5% were agreed for 2018 and the local political parties also reached agreement on welfare reform. Despite these mixed trading and economic conditions, the Society performed well producing another year of strong profits and maintaining a well-structured Statement of Financial Position. As a mutual organisation Progressive does not distribute profits to shareholders in the form of dividends. Instead, profit is added to reserves in order to increase our financial strength and provide additional security to Members. The Society’s net interest margin reduced to 1.65% for the year to 31st December 2015 from 1.78% (as restated) in the previous year. This reduction was due to increased mortgage competition but was managed by closely monitoring the savings and mortgage products and rates offered to new and existing Members to ensure value to Members and the overall sustainability of the Society. The Society spent additional money on training and new staff resources due to increasing regulatory requirements. Total expenses (including depreciation and amortisation) amounted to £11.2 million, representing an increase of 7% over the previous year. This resulted in a management expenses ratio of 0.66% (2014: 0.63%). We remain committed to maintaining a management expenses ratio that is amongst the lowest in the building societies’ sector.

The profit before taxation was £14.0 million (2014: £13.1 million as restated). After taxation, the profit for the year amounted to £11.1 million (2014: £10.2 million as restated). The gross capital of the Society amounts to £100.1 million or 6.13% (2014: £88.7 million or 5.51% as restated) of total shares and borrowings. This equates to a leverage ratio of 5.67% (2014: 5.24% as restated). Core tier 1 capital amounts to £100.7 million (2014: £88.3 million as restated) at year end, which provides savings Members with a high level of security.

ASSETS Total assets of £1,737 million shows an increase of £48 million.

Loans and advances to customers The Society’s new mortgage lending amounted to £185 million in 2015 (2014: £153 million). This was achieved in an improving housing market. Lending picked up throughout the year with the Society increasing its market share of the local mortgage market which augurs well for 2016. In the Spring of 2015 we embarked on a Direct Mortgage Campaign, offering a competitively priced mortgage product with reduced fees to encourage first time buyers and home movers to avail of the mortgage service offered in our branch network. This campaign proved to be very successful, helping the Society see a 21% increase in direct mortgage business during 2015. This, together with our focus on providing a personal service to our Members, helped us to increase our total mortgage assets to £1,408 million (2014: £1,378 million). The Society’s exposure to residential properties by way of mortgages remains above 99.5% of total mortgages. The Board remains comfortable with the traditional nature of its loan portfolio which is almost exclusively located in Northern Ireland, a residential property market which the Society knows well, enabling sensible lending decisions to continue to be made.

Forbearance and arrears management The Society applies a prudent lending policy combined with a sympathetic and efficient arrears procedure to ensure that arrears are kept to a minimum.

However, despite our prudent and responsible lending policy, individual borrower’s circumstances can change which occasionally leads to difficulties in meeting their normal monthly mortgage payments. The Society reviews each case individually where borrowers are experiencing difficulties and offers forbearance measures where it is appropriate for the borrower. The aim of such forbearance measures is to reduce the risk of the borrower ultimately losing their home. The principal forbearance measures provided by the Society are as follows: ° arrangements, where monthly payments are maintained and the arrears are repaid over a period of time. ° concessions, where it is agreed to accept reduced monthly payments for a short period of time. ° mortgage term extensions to reduce the amount of the monthly payment may be considered as part of a longer term solution, provided that payments will be sustainable over the life of the mortgage. ° change mortgage to interest only subject to a suitable repayment strategy. Capitalisation of arrears may also be permitted by the Society occasionally subject to strict affordability criteria. Thirty-nine (2014: sixty) mortgage accounts were twelve months or more in arrears at year end. The total amount outstanding on these accounts was £6.3 million (2014: £10.4 million) including arrears of £0.8 million (2014: £1.0 million). There were also sixty-eight (2014: ninety-one) properties in possession at 31st December 2015. We continue to adopt a conservative approach to mortgage provisioning. The provision for losses on all loans and advances to customers at 31st December 2015 was £13.6 million (2014: £18.0 million as restated), which represented 0.96% (2014: 1.31%) of the total mortgage book.

Liquid assets

SYSTEMS

The Society maintains a prudent level of liquid assets and continues to hold liquidity balances well in excess of regulatory requirements, primarily in a Bank of England Reserve Account, which is instantly accessible, and UK Government Securities, which are readily convertible to cash. This provides a buffer in the event of any major funding issues arising. Although the Society has not experienced any difficulties in obtaining funding in the challenging market conditions that have existed in recent years, we fully recognise the importance of maintaining a strong liquidity position.

During 2015 the Society continued with its programme of upgrades to its core systems to ensure compliance with regulatory requirements both from UK and European regulators. The first return under these new requirements was successfully completed in July 2015. The Society also upgraded a number of anciliary systems including the system for submitting reports to the Bank of England and the Financial Conduct Authority (FCA), and its BACS system to ensure compliance with new security requirements coming in June 2016. The Society also upgraded its treasury system. A number of additional core system upgrades will be required in 2016 in order to keep pace with ever changing regulatory requirements.

RETAIL SAVINGS The Society continues to be predominantly funded by retail savings, which remained steady at £1,516 million at 31st December 2015 (2014: £1,517 million). Savings balances from individuals now account for 85.7% (2014: 89.5%) of our total funding. The Society experienced retail flows in line with budgets throughout 2015. Through careful monitoring of rates and cashflows the Society was able to offer loyalty rollover bond rates throughout the year and maintain loyalty rates for ISA savers. Where possible the Society offered savers among the best rates available in the local market, in particular, our longer term bond rates (3 and 5 Year Fixed Rate Bonds). ISA products were also strong in the market. Regular savings products have grown in popularity. During the year the Society amended savings rates to ensure that all products attracted a minimum of Bank of England base rate. We will continue to listen to the needs of our Members and expand or amend the range of accounts and services to meet Members’ requirements.

The Society also launched a new ‘quick quote’ system for use by mortgage advisers during the product switch process. The system is also used to provide quick and easy quotations to potential borrowers who are looking at their new mortgage options. At the end of December the Society rolled out its new KFI+ offer document, three months ahead of the regulatory deadline of March 2016. During 2015 the Society invested in the implementation of further security enhancements, ensuring the continued security of our Members’ information.

CHARITABLE DONATIONS The total of our charitable donations in the year was £85,000 (2014: £74,000). The Corporate Social Responsibility report on pages 32 to 33 provides additional information on our charitable donations and work in the community. No contributions were made for political purposes.

OUTLOOK

COUNTRY BY COUNTRY REPORTING

The rate of growth in the UK economy slowed a little in 2015 but domestic demand remains relatively strong helped by lower oil prices, low inflation and rising wages.

In compliance with the Regulations of Article 89 of the Capital Requirements Directive IV (CRD IV) Country-By-Country Reporting (CBCR) we disclose the following information:

Low inflation is likely to see the Bank of England base rate remain at historic low levels until at least the first half of 2017. Thereafter interest rates are likely to rise gradually.

a) Name, nature of activities and geographical location Progressive Building Society is an individual building society and not part of a group. The principal activities of the Society are outlined in the Strategic Report. The Society operates in the United Kingdom only.

The local housing market is expected to experience sustainable price increases backed by the low interest rate environment and stable employment. We will continue with our prudent business model, offering our Members the products they need with exceptional levels of service. 2016 is likely to see no let up in the continued focus on regulatory change by the FCA and PRA on the financial services industry. Areas of prudential focus will continue with a new liquidity regime and transition towards revised European capital reforms by 2019. Conduct focus will centre on the Mortgage Credit Directive and outcomes of the Cash Savings Market Study. As Northern Ireland’s only locally-owned building society, we will continue to position the Society as a key savings and mortgage provider in Northern Ireland by promoting our products and services to our current and potential Members.

b) Average number of employees The average number of employees is disclosed in Note 7. c) Annual turnover Total income is set out in the Income Statement. d) Pre-tax profit or loss Pre-tax profit is set out in the Income Statement. e) Corporation tax paid Corporation tax paid is set out in the Cash Flow Statement. f) Public subsidies received No public subsidies were received in 2015.

HUMAN RIGHTS The Society operates exclusively in the UK and, as such is subject to the European Convention on Human Rights and the UK Human Rights Act 1998. The Society respects all human rights and, in conducting its business, regards those rights relating to non-discrimination, fair treatment and respect for privacy as the most relevant to its Members, employees and suppliers.

DIVERSITY Human Resources Policies are reviewed regularly to ensure that they are non-discriminatory and promote equality of opportunity. The composition of the Board, management grade and other staff at the end of 2015 is summarised below: Grade

Females

Males

Non-executive Directors

2 (33%)

4 (67%)

Executive Directors

1 (33%)

2 (67%)

Senior Management

2 (40%)

3 (60%)

15 (65%)

8 (35%)

Other Management Staff

117 (84%) 22 (16%)

Total

137 (78%) 39 (22%)

STAFF AND AGENTS The ongoing success of the Society is due to the outstanding contribution of management and staff and the agents who support them. Despite difficult market conditions, changes in systems and procedures and increasing compliance requirements they continued to attract new business in 2015 whilst providing an excellent level of service to Members and business partners. We would like to acknowledge the ability of our staff and agents to adapt to change whilst continuing in their efforts to support the Society and the community we serve and maintain the high standards that our Members have come to expect. We are very proud of the efforts of our staff as they endeavour to maintain the Society’s hardearned reputation in the community.

ACKNOWLEDGEMENT We would like to thank our Members for their continued loyalty and acknowledge that the Society’s success could not be achieved without their support.

John Trethowan Chairman 23rd February 2016

Darina Armstrong Chief Executive 23rd February 2016

DIRECTORS’ REPORT For the year ended 31st December 2015

DIRECTORS The following persons were Directors of the Society during the year:

Non-Executive Directors John Trethowan (Chairman) Michael Parrott (Vice Chairman from 28th April 2015) Edith Gowdy (Senior Independent Director) Adrian Coles Dr Margaret Cullen (co-opted 20th February 2015) Gerard McGinn (co-opted 20th February 2015) John Doran (co-opted 1st September 2015, retired 11th November 2015) James Hunt (Vice Chairman to 28th April 2015)

Executive Directors Darina Armstrong (Chief Executive) Michael Boyd (Deputy Chief Executive and Finance Director) Declan Moore (Operations Director)

BOARD COMPOSITION Mr John Doran was re-appointed to the Board on 1st September 2015 but unfortunately, due to some recent changes in his medical situation, he has, with great reluctance, had to tender his resignation. Mr Doran’s carefully considered comments and challenge in Board and Committee meetings will be greatly missed. The Directors wish to record their gratitude to Mr Doran for his considerable contribution to the Society particularly during his term as Chairman of the Asset and Liability Committee and serving as a member of the Conduct and Prudential Risk Committees, the Marketing Committee and the Audit Committee.

Mr James Hunt retired from the Board at the Annual General Meeting in April 2015. The Directors would like to place on record their appreciation of the notable contribution to the affairs of the Society made by Mr Hunt particularly during his term as Vice Chairman of the Board and Chairman of the Prudential Risk Committee and previously as Chairman of the Audit Committee. Mr Hunt always brought great enthusiasm and insightful challenge to his role. He provided strong leadership through a period of difficult trading conditions and regulatory change. The Society appointed two new non-executive Directors, Dr Margaret Cullen and Mr Gerard McGinn, to the Board following regulatory approval on 20th February 2015. Dr Cullen and Mr McGinn have both held senior positions in various financial institutions and will ensure that the Board’s membership remains independent and continues to have the balance of skills and experience required of a successful building society. Miss Edith Gowdy has decided not to stand for re-election at the Annual General Meeting in April 2016 having served eight years on the Board. During her time as a Director she has served the Society as either a Member or as a Chairman of all the Board Committees and, in addition, has held the position of Senior Independent Director. The experience she has built up on the operations of the Society will be missed and the Directors would like to place on record their thanks for the significant contribution Miss Gowdy has made, particularly in relation to her wise counsel on legal matters considered by the Board. The Society is in the process of recruiting a non-executive Director who has all-round Board experience and who will enhance the balance of skills and experience on the Board.

BUSINESS REVIEW The Directors are pleased that the Society can report another profitable year. A review of the Society’s business performance during 2015 and the future outlook is included in the Strategic Report on pages 2 to 13, which should be read in conjunction with this report.

GOING CONCERN AND VIABILITY STATEMENT The current economic conditions present ongoing risks and uncertainties for all businesses. In response to such conditions, and as required by the Financial Reporting Council for companies operating in the UK, the Directors have carefully considered these risks and the extent to which they might affect the preparation of the Financial Statements on a going concern basis. By way of background, the Society’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report as well as in this report. Information concerning the policies and processes for managing the Society’s capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit risk and liquidity risk are also included in the Strategic Report and in Note 25 to the Accounts. The Directors consider that: ° the Society maintains an appropriate level of liquidity, sufficient to meet both the normal demands of the business and the requirements which might arise in stressed circumstances. It also maintains facilities with the Bank of England providing ready access to liquidity if required; ° the availability and quality of liquid assets are structured so as to ensure funds are available for new advances to borrowers, to repay any maturing wholesale funds and to meet exceptional demand from retail investors;

° the Society’s remaining assets, which are primarily in the form of mortgages on residential property, are fully secured and adequately provided for if the debt is deemed doubtful; and ° reasonable profits have been maintained in order to keep capital at a suitable level to meet regulatory requirements. Having reviewed the Society’s five year plans and forecasts, including related funding and capital needs, the Directors consider that the Society is able to generate adequate profits to enhance its capital position and sufficient liquidity to maintain its solvency. In conclusion, they consider that the Society has adequate resources to continue in operational existence and continue to meet its liabilities over the five year planning period and so they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

POST BALANCE SHEET EVENTS The Directors consider that there have been no events since the year end that have had a significant effect on the financial position of the Society.

AUDITORS The Auditors, Deloitte LLP, have expressed their willingness to continue in office and, in accordance with Section 77 of the Building Societies Act 1986, a resolution for their reappointment as Auditors is to be proposed at the Annual General Meeting.

John Trethowan Chairman 23rd February 2016

DIRECTORS’ PROFILES Non-Executive Directors

Mr John Trethowan Chairman

Mr John Trethowan, age 62, was appointed to the Society’s Board in January 2012. He has extensive banking experience gained from many years service with a local clearing bank. He also brings considerable Board experience from both public and private enterprises throughout Ireland. Mr Trethowan is Chairman of the Board. During 2015 Mr Trethowan also served as Chairman of the Nominations Committee and as a member of the Prudential Risk Committee, the Asset & Liability Committee, the Personnel & Remuneration Committee and the Marketing Committee.

Mr Michael Parrott Vice Chairman

Mr Michael Parrott, age 62, was appointed to the Society’s Board in June 2012. He is a Chartered Public Finance Accountant by profession and, until his retirement, was the Deputy Chief Executive and Finance Director of a regional building society in England. Accordingly, he brings over thirty years relevant building society finance and accounting experience and expertise. Mr Parrott is Vice Chairman of the Board. During the year he also served as Chairman of the Audit Committee and the Prudential Risk Committee and as a member of the Conduct Risk Committee and the Asset & Liability Committee.

Miss Edith Gowdy

Senior Independent Director Miss Edith Gowdy, age 39, was appointed to the Society’s Board in July 2008. She is a Solicitor by profession and a partner in a firm of solicitors. She has expertise in the areas of commercial property, litigation and corporate finance and is involved in residential conveyancing, mortgage and probate services. During the year Miss Gowdy held the position of Senior Independent Director. She also served the Society as Chair of the Personnel and Remuneration Committee and the Audit Committee and as a member of the Conduct Risk Committee, the Nominations Committee, the Marketing Committee and the Asset & Liability Committee. Miss Gowdy has decided not to stand for re-election at the Annual General Meeting in April 2016 after 8 years of service.

Mr Adrian Coles Mr Adrian Coles, age 61, was appointed to the Board in May 2014. His background is as an economist and until his retirement he was the Director General of the Building Societies Association for 20 years. He was awarded an OBE in the 2011 New Years Honours list for services to financial services. Accordingly, Mr Coles brings relevant building society sector experience. During the year Mr Coles served as Chairman of the Conduct Risk Committee and as a member of the Asset & Liability Committee and the Marketing Committee.

Dr Margaret Cullen Dr Margaret Cullen, age 44, was appointed to the Board in February 2015. She has held senior positions in a number of large financial services organisations including a period working for the Central Bank of Ireland. Dr Cullen is a specialist in the area of corporate governance and is currently an academic leading specialist director programmes. During the year Dr Cullen served as Chairman of the Personnel & Remuneration Committee and as a member of the Asset & Liability Committee, the Audit Committee and the Prudential Risk Committee.

Mr Gerard McGinn Mr Gerard McGinn, age 58, was appointed to the Board in February 2015. He has extensive financial services and banking experience having held senior executive positions with local clearing banks and has a successful track record of developing and implementing strategic plans. In addition he has worked as a senior civil servant within a number of local government departments and brings extensive Board experience from the public sector. During the year Mr McGinn served as a member of the Asset & Liability Committee, the Conduct Risk Committee, the Marketing Committee, the Nominations Committee and the Personnel & Remuneration Committee.

DIRECTORS’ PROFILES CONTINUED Executive Directors

Mrs Darina Armstrong Chief Executive

Mrs Darina Armstrong, age 48, was appointed to the Society’s Board in January 2005. She is a Chartered Accountant and has been employed by the Society for 23 years. Mrs Armstrong was appointed as the Society’s Chief Executive with effect from January 2011, having previously been Finance Director. She has overall responsibility for running the business of Progressive within the strategic framework set by the Board. During the year Mrs Armstrong served as Chairman of the Asset & Liability Committee and as a member of both Risk Committees and the Marketing Committee.

Mr Michael Boyd

Deputy Chief Executive & Finance Director Mr Michael Boyd, age 46, was appointed to the Society’s Board in April 2011 and is the Society’s Deputy Chief Executive and Finance Director. He is a Chartered Accountant and has been employed by the Society for 19 years in various finance and risk roles and served the Board for 5 years as Secretary. During the year Mr Boyd served as a member of the Prudential Risk Committee, the Asset & Liability Committee and the Marketing Committee.

Mr Declan Moore Operations Director

Mr Declan Moore, age 50, was appointed to the Board in July 2014. He has been employed by the Society for 24 years and has worked in the building society sector for over 26 years. His roles have included branch and area management and, more recently, responsibility for sales, marketing and branch operations. During the year Mr Moore served as Chairman of the Marketing Committee and as a member of the Asset & Liability Committee and the Conduct Risk Committee.

DIRECTORS’ REMUNERATION REPORT For the year ended 31st December 2015

This report sets out the Board’s policy on the remuneration of Directors of the Society. The Society has adopted high standards of corporate governance and this includes the provision to its Members of full details of Directors’ remuneration. Members will be asked to vote at the Annual General Meeting on an advisory resolution on the Board’s policy on the remuneration of Directors. The remuneration policy of the Society is set by the Board following recommendations from the Personnel and Remuneration Committee and is described below. The Society had another successful year in 2015, delivering post-tax profits of £11.1 million. In addition, the Society’s strong capital position was preserved and good progress was made against strategic objectives. The Committee has taken these factors into account when considering the appropriateness of remuneration at the Society.

PERSONNEL AND REMUNERATION COMMITTEE The Personnel and Remuneration Committee (the Committee) is a committee of the Board and is composed of three independent, nonexecutive Directors. In 2015 they were Edith Gowdy (Chair up to July 2015), John Trethowan and Margaret Cullen (Chair from July 2015). The Committee makes recommendations to the Board on contractual arrangements of executive Directors and on the performance related pay for all Society staff. This Committee has access to independent advice where it considers it appropriate.

The Personnel and Remuneration Committee seeks input from the Society’s Chief Executive and the Deputy Chief Executive and Finance Director in relation to aspects of the remuneration structure. The Chief Executive and the Deputy Chief Executive and Finance Director provide information, as and when required, and attend meetings at the Committee’s request. The Committee’s Terms of Reference were reviewed and updated in December 2015 and are available upon request in writing to the Society Secretary. In making its decisions and recommendations, the Committee takes into account all relevant factors, including a review of comparative benefit packages of senior staff from similar financial institutions, the achievement of strategic objectives set by the Board, the competitive market for financial services staff in Northern Ireland and macro-economic conditions. The Committee supports linking rewards to Society performance but does not support a culture of incentive-driven remuneration structures. The Committee pays close attention to the performance of the Society and the risks to which it is exposed, external market conditions and its overall responsibility to Members within a framework of good corporate governance.  

POLICY AIMS AND OBJECTIVES The Committee’s decision-making processes take the following into account: ° the need to recruit and retain staff with appropriate skills and experience to make an effective contribution to the Society’s strategy and operations, and so to act in the long-term interests of the Society’s Members. ° the need for a transparent link between Society performance (financial and nonfinancial) and remuneration, particularly variable pay.

° the levels of remuneration (fixed and variable) paid in the UK for equivalent financial services positions and /or levels of experience. ° macro-economic conditions in Northern Ireland, including inflation. ° the need to ensure that the remuneration policy of the Society is consistent with the Society’s overall risk appetite, as determined by the Board, and in no way encourages behaviour inconsistent with the ethos of the Society and /or risk taking outside this risk appetite. ° the application of provisions of the PRA Remuneration Code to building societies. ° the provisions of the UK Corporate Governance Code, as they relate to building societies. The Society seeks to ensure that its remuneration decisions are in line with the Society’s strategy and long term objectives, all of which reflect the Society’s status as a mutual society. The emphasis of the Society’s variable pay policy is on rewarding strategic outcomes, particularly Member-driven outcomes, consistent with our mutuality.

STATUTORY CONSIDERATIONS The Society will ensure that its remuneration decisions are in line with statutory requirements, for example, in relation to equal pay and non-discrimination.

REMUNERATION OF EXECUTIVE DIRECTORS The policy in respect of executive Directors’ remuneration is to set remuneration at a level to secure employment of high quality executive Directors. The Society seeks to establish a balance between the fixed and variable elements of remuneration commensurate with the Society’s mutual ethos. The Committee has been mandated by the Board to ensure that fixed remuneration is in line with the market rate for executive Directors in similar positions at comparable organisations. The main components of the executive Directors’ remuneration are: Fixed Remuneration: Base Salary

Our policy in relation to variable pay takes into account the need to retain a strong Statement of Financial Position, and variable remuneration amounts will not be paid unless they are sustainable within the Society’s current financial condition and future prospects. Variable pay is not guaranteed and all schemes are noncontractual. All staff of the Society are subject to the same performance measures reflecting our ethos of ‘One Society, One team’.

There were three executive Directors in post during 2015. Their duties are carried out in line with formally approved job descriptions. The base pay remuneration of executive Directors is set to take account of the job content and responsibilities involved, year-on-year performance, and the salaries and incentives payable to executives in similar roles within building societies and the wider financial services industry. The base pay of executive Directors for the financial years 2015 and 2014 are in included in Note 8 to the Accounts.

CONFLICTS OF INTEREST

Pension Benefits

The Society seeks to manage conflicts of interest related to remuneration decisions. The Committee is aware of the potential for such conflicts when considering remuneration for Directors, and seeks external professional advice where appropriate.

DIRECTORS’ SERVICE CONTRACTS The Society has a one year rolling service contract with each of the executive Directors which is terminable by the Director on six months’ notice. Provision for compensation for loss of office is included in the contract. The Society will not enter into an employment contract which would compensate any individual for failing to perform his / her duties satisfactorily.

The executive Directors are members of the Society’s Staff Pension Scheme and participate in an unfunded arrangement. They contribute a total of 8% of salaries to the combined defined benefit scheme and the unfunded scheme. Other taxable benefits for which the executive Directors are eligible include a car or car allowance, fuel allowance and private medical insurance. Variable Remuneration The Society operates an annual bonus scheme. It does not operate a long term incentive scheme. However, in considering the targets for the annual bonus scheme, the Committee has regard to the goals set by the Board in the Society’s five-year Corporate Plan. None of the bonus payments are pensionable. The structure of the scheme is considered by the Committee at the beginning of each financial year and recommended to the Board for approval. Since 2012, the scheme has been subject to a cap of 8% of base salary. A matrix of key performance indicators (KPI) are determined and agreed by the Board.

All Society staff are part of this bonus scheme. There is currently no separate remuneration scheme for executive Directors and Senior Management (Senior Manager Prudential Risk, Senior Manager Conduct Risk, Society Secretary & Head of Retail Credit, Chief Information Officer and Head of Personnel & Administration). The objective is to create a ‘One Society, One Team’ culture and not having a separate executive remuneration programme has been deemed consistent with this ethos. The bonus scheme has been designed to fulfil a number of key objectives which provide a link between the Society’s strategy and its values and mission statement. Performance appraisals of the executive Directors are carried out at least annually to assess their success in meeting individual and strategic objectives. The key objectives which drive this scheme are: ° Linking staff efforts to delivering a quality Member service, ° Improving business performance, ° To create the desired culture for the Society. The KPIs established for 2015 (linked to the Society’s Vision, Mission and Values) fall into one of four key areas: ° Conduct, ° People, ° Regulatory, ° Financial Performance. The executive Directors have continued to deliver strong performance in line with the Society’s strategy. The remuneration of the executive Directors in 2015 included an earned bonus element of 7.5% of salary related to the overall performance of the Society versus its strategic objectives and, in particular exceeding targets for Treating Members Fairly, the personal performance of the individual, staff engagement targets, and a component relating to compliance with regulatory matters. The Board agreed, following Committee recommendations, that the current approach to variable pay, whereby all Society staff (including the executive Directors and Senior Management) are subject to the same performance criteria, is retained. It is proposed to increase the maximum bonus payable under the Society bonus scheme (currently 8%) to 12% for 2016.

REMUNERATION POLICY FOR NON-EXECUTIVE DIRECTORS The Board review and consider the remuneration of the Chairman based on his performance and a review of fees paid to chairmen of comparable financial institutions. The remuneration of non-executive Directors is determined by the Board itself having considered information provided by the executives who monitor the Director remuneration conditions at other societies. The Board aims to ensure that fees are in line with the amount paid to non-executive Directors in similar positions at comparable organisations. No additional fees are paid to the Chairs of the Board committees. Non-executive Directors do not have service contracts, are not members of the Society’s pension schemes and have no entitlements under bonus schemes. Their effectiveness is appraised annually by the Chairman, and the Board as a whole, under the leadership of the Senior Independent Director, assesses the Chairman’s performance.

REMUNERATION FOR THE YEAR ENDED 31st DECEMBER 2015 Full details of Directors’ remuneration for 2015 and prior year comparatives, all of which form part of this Report, can be found in Note 8 to the Accounts.

Dr Margaret Cullen Chairman of Personnel and Remuneration Committee 23rd February 2016

CORPORATE GOVERNANCE

INTRODUCTION The Directors are committed to best practice in Corporate Governance. The Financial Reporting Council (FRC) launched a revised UK Corporate Governance Code in September 2014. Although not all of the provisions of the Code are appropriate for a mutual building society the Board believes it is appropriate to adopt its principles and recommendations. Throughout the year ended 31st December 2015, in so far as they relate to building societies, the Society complied with the provisions of the Code. The Code is available from the FRC website at www.frc.org.uk.

THE BOARD Code Principle A.1

“Every company should be headed by an effective Board which is collectively responsible for the success of the company.” The Board’s role is to focus on strategic decisions within a framework of prudent and effective controls, which enable risk to be assessed and managed. The Board has a general duty to take

decisions objectively in the interests of the Society and to ensure that the Society operates within the Rules and Memorandum, regulations and guidance issued by relevant regulatory authorities and all relevant legislation. In addition, it ensures that appropriate systems of control, human resources and risk management are in place to safeguard Members’ interests. The Board normally meets eleven times a year and holds further meetings as and when required. The Board met on twelve occasions during 2015. The additional meeting was held to review the results and recommendations of a Board Effectiveness Review. At least once a year, the non-executive Directors meet without the executive Directors present and on another occasion without the Chairman present. A schedule of retained powers and those delegated by the Board is maintained. The day to day running of the Society is delegated to members of the senior management team and management committees. The Board has appointed a Senior Independent Director, Miss Edith Gowdy, whose role is to attend to any matters requiring to be dealt with independently from the Chairman, Vice Chairman and Chief Executive.

DIRECTORS’ ATTENDANCE RECORDS Directors’ attendance records at Board meetings and relevant Board Committees in the year are as follows: Board

Personnel & Remuneration Committee

J Trethowan

12(12)

3(3)

5(5)**

D Armstrong

12(12)

3(3)**

5(5)**

M S Boyd

12(12)

3(3)**

5(5)**

A Coles

12(12)

*

2(2)**

J Doran

2(2)

*

1(1)

12(12)

2(3)

4(5)

J O Hunt

4(4)

1(1)

D Moore

12(12)

E M Gowdy

*

Audit Committee

2(2) 5(5)**

M W Parrott

12(12)

*

5(5)

M Cullen

11(11)

3(3)

5(5)

G McGinn

11(11)

1(1)

2(2)**

Total scheduled meetings that each Director could have attended are shown in brackets. * Not a member of this Committee ** Attends by invitation

During 2015, the Board undertook a rigorous assessment of the corporate governance frameworks of the Society and specifically the extent to which it is applying best practice governance standards using the UK Corporate Governance Code as a suitable benchmark. The assessment was led by a Board sub-committee comprising Dr Margaret Cullen, Michael Parrott and Gerard McGinn. The assessment examined the following three key areas: (1) Roles and Responsibilities of the Board a. The extent to which Directors understand their roles and responsibilities (including the role of the Board versus the role of Committees). b. The extent to which Directors understand the strategic direction and risk appetite of the Society (as agreed by the Board). c. How the Board executes these roles and responsibilities. (2) Structures, Processes and Procedures a. Whether the Board and its Committees adhere to best practice in their structures, procedures and processes (i.e. UK Corporate Governance Code). b. Whether the provision of management information to the Board / Committees enables the Board / Committees to execute their role effectively. (3) Behaviours a. The extent to which the culture of the Board and its Committees and the behaviour patterns of individual Directors is conducive to the effective functioning of the Board. b. The extent to which the Board and Committee meeting process (including the pivotal role of the Chair) enables the effective execution by the Board of their roles and responsibilities. The assessment involved a desk-top review of key Board documents, consideration of Board processes and procedures, and a questionnaire-

based review of Directors’ perspectives and recommendations on the effectiveness of the overall corporate governance framework within the Society. The questionnaires addressed the following areas: Strategy and Risk Appetite, Leadership of the Chairman, Board Meeting Process (including the role of the Chairman), Informal Governance Process (Outside the Boardroom), Functioning of Committees of the Board, Perception of Board Visibility, Succession Planning, Non-Executive Director Effectiveness (including managing time), Director Induction and Development, Remuneration, Board Evaluations, Member Relations, Role of the Society Secretary. The Board accepted all of the recommendations made to further enhance the Society’s governance structure. These recommendations were made in the context of a very strong current position. The Board’s aim is to bring the governance of the Society towards best-in class with the long-term sustainability and relevance of the Society in mind. It is intended that future assessments will build on the recommendations arising from this assessment as the regulatory, macro-economic and competitive landscape changes. The Board operates several Committees, which cover key policy decision areas of the Society. Each Committee is formally constituted with written Terms of Reference, which are available to Members on request by writing to the Society’s Secretary at the Society’s Head Office. Minutes are formally recorded and reported to the Board. The Principal Committees during the year were: ° Personnel and Remuneration Committee This Committee considers remuneration and contractual arrangements of executive Directors and senior management. Details of the remuneration policy can be found in the Directors’ Remuneration Report on pages 19 to 21.

Nominations Committee

Prudential Risk Committee

Conduct Risk Committee

Asset & Liability Committee

Marketing Committee

2(2)

4(4)

1(1)

12(12)

3(4)

2(2)**

4(4)

4(4)

12(12)

4(4)

2(2)**

4(4)

4(4)

12(12)

4(4)

*

1(1)**

4(4)

11(12)

4(4)

*

1(1)**

*

2(2)

1(1)

1(2)

2(2)**

4(4)

8(12)

4(4)

*

1(1)

1(1)

*

4(4)**

3(4)**

12(12)

3(4)

*

4(4)

4(4)

12(12)

*

*

4(4)

*

9(11)

*

4(4)

10(11)

4(4)

2(2)

1(1)**

4(4)

*

° Audit Committee This Committee considers matters of internal and external audit arrangements, systems of control and financial reporting. Full details of the work of this Committee can be found in the Audit Committee Report on pages 28 to 31. ° Nominations Committee The Nominations Committee is responsible for reviewing the size, composition, skills, knowledge and experience required of the Board. Suitable candidates for membership of the Board are normally identified by independent search consultants for the consideration of the Committee and recommendations are then made to the Board. ° Prudential Risk Committee This Committee is responsible for setting the Society’s prudential risk appetite, for risk monitoring and for its capital and liquidity management frameworks. The Committee is also responsible for reviewing and challenging the Society’s assessment and measurement of key prudential risks, providing oversight and challenge to the design and execution of stress testing. The Prudential Risk Committee discusses the Individual Liquidity Adequacy Assessment Process and Internal Capital Adequacy Assessment Process, evaluates lending and liquidity quality and reviews business continuity arrangements. ° Conduct Risk Committee This Committee is responsible for ensuring that the Society meets its regulatory and legal obligations with regard to delivering business in a clear, transparent and fair manner. It performs its role by defining the components and evidential requirements of the Society’s Conduct of Business regime and by ensuring effective governance and control frameworks are in place, maintained and monitored, which leads to good customer outcomes. ° Asset and Liability Committee The Asset and Liability Committee is responsible for the management and composition of the Society’s Statement of Financial Position, monitoring the Society’s exposure to interest rate variations, and monitoring and managing the operation of the Society’s liquidity, wholesale funding and hedging policies. ° Marketing Committee The Marketing Committee is responsible for the development and monitoring of an overall distribution strategy, the identification of potential initiatives and products and the development of the Society’s brand proposition. These responsibilities are considered within the Society’s Conduct Risk Policy to ensure that any risks of customer detriment are identified and appropriate actions in place to mitigate and monitor such risks.

DIVISION OF RESPONSIBILITIES Code Principle A.2

“There should be a clear division of responsibilities at the head of the company between the running of the Board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.” The offices of Chairman and Chief Executive are distinct with the Chairman responsible for leading the Board and the Chief Executive responsible for managing the Society’s business within the strategic framework set by the Board. Mr John Trethowan is the Society’s Chairman and the post of Chief Executive is held by Mrs Darina Armstrong.

THE CHAIRMAN Code Principle A.3

“The Chairman is responsible for leadership of the Board and ensuring its effectiveness on all aspects of its role.” The Chairman sets the direction of the Board and promotes a culture of openness and debate by facilitating the effective contribution of non-executive Directors and maintaining constructive relations between executive and non-executive Directors. The Chairman also ensures that the Directors receive accurate, timely and clear information.

NON-EXECUTIVE DIRECTORS Code Principle A.4

“As part of their role as members of a unitary Board, non-executive Directors should constructively challenge and help develop proposals on strategy.” The non-executive Directors are responsible for bringing independent judgement to the monitoring of performance and resources and for developing, scrutinising and providing effective challenge to the Board’s discussions on strategic proposals, whilst supporting executive management. Their role requires an understanding of the risks in the business and the provision of leadership within a framework of prudent and effective risk management controls.

THE COMPOSITION OF THE BOARD Code Principle B.1

“The Board and its Committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.” During the year the Board consisted of seven non-executive Directors and three executive Directors. The size and composition of the Board is kept under review to ensure an appropriate balance of skills and experience for the requirements of the business.

The Chairman conducts a thorough review of all nonexecutive Directors to assess their independence and their contribution to the Board. He confirms that all non-executive Directors continue to be effective and independent in character and judgement. In addition, all non-executive Directors are free of any relationships or circumstances that might materially interfere with the exercise of their judgement. Following an assessment led by the Senior Independent Director, the Chairman is also confirmed as being effective and independent in character and judgement. The assessment takes account of the period of time that the Chairman has served on the Board.  

APPOINTMENTS TO THE BOARD Code Principle B.2

“There should be a formal, rigorous and transparent procedure for the appointment of new Directors to the Board.” The Nominations Committee leads the process for Board appointments and makes recommendations to the Board. The Committee comprises the Chairman, the Senior Independent Director and one other non-executive Director. The Chief Executive and Deputy Chief Executive attend by invitation. The Committee evaluates the plans for orderly succession aimed at ensuring an appropriate balance of skills, diversity and experience on the Board. In light of this evaluation, a description of the role and capabilities for a particular appointment is prepared. The Nominations Committee has a rigorous procedure for the appointment of new non-executive Directors to the Board. This procedure ensures appointments to the Board are based on merit and normally includes the use of independent recruitment consultants. Recently this role has been fulfilled by Forde May Consulting. All Directors must meet the tests of fitness and propriety laid down by the PRA and FCA (the Regulators) and are required to be registered with the Regulators as Approved Persons in order to fulfil their controlled function as Directors. They are also subject to election by Members at the Annual General Meeting following their appointment. In terms of diversity the Directors believe that the Board broadly reflects community and cultural diversity within the Society’s regional market. The Chairman is appointed to the position by the Board from among the existing non-executive Directors. This practice is supported by the Regulators.

COMMITMENT Code Principle B.3

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

The Nominations Committee evaluates the ability of Directors to commit the time required for their role prior to appointment. The formal appraisal process carried out by the Chairman each year also assesses whether Directors have demonstrated this ability during the year. The terms and conditions of appointment of non-executive Directors may be obtained by writing to the Society’s Secretary at the Society’s Head Office.

DEVELOPMENT Code Principle B.4

“All Directors should receive induction on joining the Board and should regularly update and refresh their skills and knowledge.” On appointment, the Society requires nonexecutive Directors to attend in-house induction training which includes sessions on Liquidity Risk, Capital Risk, Credit and Interest Rate Risk and Conduct Risk. There are also sessions on Finance and Key Resources. Additionally, new Directors are expected to attend relevant training provided by the Building Societies Association, which covers building society business, Directors’ responsibilities and the regulatory environment. Presentations to the Board by senior management and external courses provide opportunities for non-executive Directors to update their skills and knowledge base. The Chairman ensures that nonexecutive Directors continually update their skills and knowledge to fulfil their role on the Board and any Committees. Training and development needs are identified and individual Director performance and effectiveness evaluated as part of the annual appraisal of the Board. These needs are usually met by internal briefings and via attendance at industry seminars and conferences.

INFORMATION AND SUPPORT Code Principle B.5

“The Board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.” The Chairman ensures the Board receives accurate, timely and clear information to enable Directors to make effective contributions to Board discussions. This information is provided by executive Directors and senior management, who are available to the Board to provide clarification and amplification where necessary. All Directors have access to the advice of the Society’s Secretary and, if necessary, are able to take independent professional advice at the expense of the Society.

PERFORMANCE EVALUATION Code Principle B.6

“The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its Committees and individual Directors.” Each Director has individually completed an assessment of the effectiveness of Corporate Governance procedures in the Society. These have been reviewed and actions taken where appropriate. The Chairman conducts assessments of all Directors individually, reviewing their performance, contribution and commitment to the role. The Chairman is able to confirm that the performance of all Board members continues to be effective and all members are committed to providing sufficient time for Board and Committee meetings and any other necessary duties. Following a formal appraisal of the Chairman led by the Senior Independent Director, the Board can confirm that the performance of Mr Trethowan, as Chairman, is effective and that he devotes sufficient time for Board and Committee meetings and any other necessary duties.

RE-ELECTION Code Principle B.7

“All Directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.” New Directors are subject to election by Members at the Annual General Meeting following the Director’s appointment, in accordance with the Rules of the Society. All other Directors submit themselves annually for re-election.

FINANCIAL AND BUSINESS REPORTING Code Principle C.1

“The Board should present a fair, balanced and understandable assessment of the company’s position and prospects.” The Statement of Directors’ Responsibilities on pages 34 and 35 sets out the Board’s responsibilities in relation to the preparation of the Society’s Annual Accounts and a statement that the Society’s business is a going concern is included in the Directors’ Report. The Directors have evaluated the Society’s performance in the Strategic Report and the Business Review starting on page 2. The outlook for the Society is considered on page 12. The Audit Committee has advised the Board that, after due consideration and review, the Annual Report and Accounts are, in the opinion of the Committee, fair, balanced and understandable.  

RISK MANAGEMENT AND INTERNAL CONTROL Code Principle C.2

“The Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The Board should maintain sound risk management and internal control systems.” The responsibility for implementing, operating and monitoring systems of internal control has been delegated by the Board to Senior Management. The Audit Committee, the Prudential Risk Committee and the Conduct Risk Committee, on behalf of the Board, are responsible for reviewing the adequacy of these processes. The system of internal control is designed to allow the Society to achieve its strategic objectives within a managed risk profile. However, no system of internal control can completely eradicate risk. As such, the internal control system can only provide reasonable and not absolute assurance against material misstatement or loss. There is an established risk management framework which identifies, evaluates and manages significant risks faced by the Society. The Board has ultimate responsibility for ensuring the effectiveness of the Society’s systems of risk management and internal control and, following robust assessments of the principal risks by the Audit Committee, the Prudential Risk Committee and the Conduct Risk Committee, it is satisfied that the Society’s systems are effective and meet the requirements of the Code.

AUDIT COMMITTEE AND AUDITORS Code Principle C.3

“The Board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management internal control principles and for maintaining an appropriate relationship with the company’s auditors.” The membership of the Society’s Audit Committee comprises three non-executive Directors. The Board is satisfied that the members of the Committee have recent and relevant financial experience. The Committee usually meets five times a year. In addition to non-executive Directors, the meetings are also attended by representatives from the Society’s internal and external auditors, its three executive Directors and other members of senior management. At least annually, external auditors meet with the Committee Chairman and with the Committee in the absence of any executive Directors.

The Committee considers the adequacy of internal controls. It also reviews both internal and external audit reports, assesses the effectiveness of the internal and external auditors and agrees the annual internal audit plan. The Committee also has responsibility for ensuring effective whistle-blowing arrangements are in place, which enables any concerns to be raised by employees in confidence. Minutes of the Committee’s meetings are distributed to all Board members and the Chairman of the Committee reports to the Board at each regular meeting of the Board following a meeting of the Committee. The auditors may provide non-audit services on a consultancy basis to the Society. The extent and cost of the work is reported to the Audit Committee for approval in accordance with an agreed policy statement. The Society is of the opinion that auditor objectivity and independence is not challenged by provision of these services.

REMUNERATION Code Principle D.1

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

Code Principle D.2

“There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual Directors. No Director should be involved in deciding his or her own remuneration.” The remuneration policies for executive and non-executive Directors are set out in the Directors’ Remuneration Report on page 19. These policies explain the Society’s application of the Code Principles.

DIALOGUE WITH SHAREHOLDERS Code Principle E.1

“There should be a dialogue with shareholders based on the mutual understanding of objectives. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.” The Society, as a mutual organisation, has Members rather than shareholders. The Board welcomes the views of Members. The Directors, all of whom are Members of the Society, are drawn from a representative cross section of the wider business community, which provides feedback on the activities of the Society.

In addition, the Board receives management information on how the Society is perceived by the Members via customer surveys and complaint returns. The Chairman, Chief Executive and other Directors are available to Members who wish to relay their views to the Board. In particular, the Senior Independent Director is available in circumstances where contact through the normal channels of Chairman, Vice Chairman or Chief Executive has failed to resolve a matter or where such contact might not be appropriate.

CONSTRUCTIVE USE OF THE ANNUAL GENERAL MEETING Code Principle E.2

“The Board should use the AGM to communicate with investors and to encourage their participation.” Each year details of the Society’s AGM and ballot for the election of Directors are sent to Members who are eligible to vote. Members are encouraged to vote either by personal attendance, by voting online or by using voting forms. These online votes and voting forms are part of the ballot entitling Members to vote or to appoint a proxy to vote for them at the AGM if they are unable, or decide not, to attend. All proxy votes are counted by an independent agency. To encourage Member participation the Society makes a donation to a nominated charity for each vote returned. A poll is called in connection with each resolution at the AGM and Members are offered the opportunity at the meeting to raise any issues on the resolutions. If, in the opinion of the Board, a significant proportion of votes has been cast against a resolution at the AGM, the Society will explain to Members what actions it intends to take to understand the reasons behind the vote result. Unless their absence is unavoidable all Directors are present at the AGM each year, and are available to answer questions. The Board believes that the AGM and other communications with its Members provides the opportunity for Members to give feedback to the Society on any aspect of its activities.

John Trethowan Chairman 23rd February 2016

AUDIT COMMITTEE REPORT

The Audit Committee is an essential part of Progressive’s governance framework to which the Board has delegated oversight of the Society’s financial reporting, internal controls, internal audit and external audit. This report provides an overview of the Committee’s work and details of how it has discharged its responsibilities during the year. The responsibilities of the Committee are in line with the provisions of the Financial Reporting Council (FRC) Guidance on Audit Committees. The main function of the Committee is to assist the Board in fulfilling its oversight responsibilities, specifically the ongoing review, monitoring and assessment of: ° the integrity of the financial statements, any formal announcements relating to financial performance and significant financial reporting judgements contained in them; ° the effectiveness of the system of internal control processes; ° the internal audit and external audit processes; ° the appointment, re-appointment and removal of the external auditors and the periodic review of their performance and independence; and ° the policy on the use of external auditor’s for non-audit work.

COMMITTEE COMPOSITION The Committee comprises independent nonexecutive Directors (as detailed on page 26) and meets at least five times during the year. Mr Michael Parrott chaired the Committee at the beginning of the year before Miss Edith Gowdy took the chair. Miss Gowdy is due to stand down from the Board at the AGM in April 2016. In preparation for Miss Gowdy’s departure from the Board and Audit Committee, Mr Parrott resumed the role of Chairman of the Audit Committee from 1st January 2016. The Committee members have been selected to provide the wide range of financial and commercial expertise necessary to fulfil the Committee’s duties. The Board considers that Mr Parrott has recent and relevant expertise as required by the UK Corporate Governance Code 2014 (the Code). Meetings are attended by the non-executive Directors, and, by invitation, the Chief Executive, the Deputy Chief Executive and Finance Director and the Operations Director. Other relevant senior management are also invited to attend certain meetings in order to provide insight and enhance the Committee’s awareness of key issues and developments. The outsourced internal auditor, PricewaterhouseCoopers LLP, and the external auditor, Deloitte LLP, are also invited to each meeting. The Committee meets at least once each year with the external auditor and the internal auditor without management being present. The Committee assists the Board in carrying out its responsibilities in relation to financial reporting requirements and the assessment of internal controls.

KEY AREAS REVIEWED DURING 2015 1. Financial Reporting The primary role of the Committee in relation to financial reporting is to review and assess with management and the external auditor the integrity and appropriateness of the annual financial statements concentrating on amongst other matters: ° the quality and acceptability of accounting policies and practices; ° the clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements including advising the Board on whether the Annual Report and Accounts, when taken as a whole are fair, balanced and understandable and provide information sufficient for Members to assess the Society’s performance, business model and strategy; and ° material areas in which significant judgements have been applied or there has been discussion with the external auditor. To aid its review, the Committee considered reports from the Deputy Chief Executive and Finance Director and reports from the external auditor on the outcomes of their annual audit. The Audit Committee supports Deloitte LLP in displaying the necessary scepticism their role requires. The primary areas of judgement considered by the Committee in relation to the 2015 accounts were: ° effective interest rate (EIR) - review of processes to comply with EIR accounting requirements under IAS 39. ° impairment - review of systems and processes used to calculate impairment provisions under IAS 39. ° hedge accounting - review of systems and processes used to calculate effectiveness of hedges and impact on Income Statements and Statement of Financial Position under IAS 39. going concern ° - areas considered include quality of the mortgage book, liquidity structure, wholesale borrowing requirements, capital adequacy, pension liability, management structure, regulatory requirements and budgets and forecasts. revenue recognition ° - areas considered include interest income and fees and commissions. ° retirement benefits - judgement required as to the assumptions used by the actuary in calculating the scheme’s fair value.

The Committee received regular updates on the progress and preparations of the accounts under FRS 102 and IAS 39 during the year. This enabled the Committee to provide effective oversight of the reporting and disclosures within the year end accounts. The Committee considered whether the 2015 Annual Report and Accounts were fair, balanced and understandable. The Committee did this by satisfying itself that there was a robust process of review and challenge to ensure balance and consistency. The Audit Committee fully discharged its responsibilities in relation to financial reporting of the Annual Report and Accounts 2015.

2. Internal Audit The Committee is responsible for monitoring Internal Audit activities and effectiveness and ensuring that sufficient resources are in place. In order to provide the scalability and flexibility of specialist resources required within internal audit, the Society continues to outsource this work to PricewaterhouseCoopers LLP (PwC). This enables the Society to leverage the skills and expertise of an external specialist provider who has extensive depth of resources. Key reviews were completed through their agreed work programme during the year including areas of internal control significance, (e.g. Treasury, branch, contract management, interest rate risk processes, systems upgrades, loan loss provisioning, management committee effectiveness, cyber crime, health and safety) and compliance with regulatory guidance (e.g. capital, Mortgage Market Review, Treating Customers Fairly, foreign tax compliance, data protection, financial crime, resolution and recovery, conduct risk processes). Internal audit findings and thematic issues identified were considered by the Committee, as well as management’s response and the tracking and completion of outstanding actions.   The Committee considers the guidance from the Institute of Internal Auditors entitled ‘Effective Internal Audit in Financial Services’ when ensuring that the internal auditors and the Committee were fulfilling their obligations in a robust manner. The Committee decided to continue the appointment of PwC as the Society’s internal auditor after carrying out a structured review of their effectiveness.

The Committee also approved the fee for the programme of internal audit work for the year having reviewed the scope of the work programme in detail. PwC operate in accordance with an Internal Audit Charter. This Charter may be found on the Society’s website.

3. System of internal controls The Board recognises the importance of sound systems of internal control in the achievement of its objectives and the safeguarding of Members’ and Society assets. Internal control also facilitates the effectiveness and efficiency of operations, helps to ensure the reliability of internal and external reporting and assists in compliance with applicable laws and regulations. The Society operates in a dynamic business environment and, as a result, the risks it faces are continually changing. The internal control framework has been designed to ensure thorough and regular evaluation of the nature and extent of risk and the Society’s ability to react accordingly. It is the role of management to implement the Board’s policies on risk and control. It is also recognised that all employees have responsibility for internal control as part of their accountability for achieving objectives. Staff training and induction is designed to ensure that they are clear on their accountabilities in this area and are competent to operate and monitor the internal control framework. The internal audit function provided independent assurance to the Board on the effectiveness of the internal control framework through the Audit Committee. The Committee reviewed this aspect through regular reporting from management, the Society’s internal auditor and the external auditor.

The main internal control matters which were reviewed by the Committee in 2015 were: ° conduct related issues. ° prudential related issues. ° internal audit plans. ° the external auditor provides internal control reports in relation to the financial reporting process arising from the external audit. During the year, Deloitte LLP did not highlight any material control weaknesses. ° the status of issues raised in control reports were tracked closely. During the year, the volume and age profile of issues raised remained within appropriate parameters. ° the Committee reviews the use of the confidential reporting channels in the Society each year. Awareness of ‘whistle blowing’ arrangements is maintained in a number of ways including internal communications and training modules. The information received and considered by the Committee provided reasonable assurance that during 2015 there were no material breaches of control or regulatory standards and that, overall, the Society maintained an adequate internal control framework that met the principles of the Code.

4. External Audit The effectiveness of the external audit process is dependent on appropriate audit risk identification and at the start of the audit cycle the Committee receives from Deloitte LLP a detailed audit plan, identifying their assessment of the key risks. The Committee carries out an annual review of the effectiveness of the external auditor based on the competencies of audit staff and the conduct of the year end audit. This was carried out by way of a review completed by the Deputy Chief Executive and Finance Director who had the closest interaction with the audit team. Results of the review and the Committee’s discussions confirm that Deloitte LLP produced a highly effective audit process.

The Committee holds a private meeting with the external auditor at least once per year, usually after the Annual Report and Accounts have been signed. This provides the opportunity for open dialogue and feedback from the Committee and the auditor without management being present. Matters typically discussed include the auditor’s assessment of business risks and management’s activity in relation to these risks, the transparency and openness of interactions with management, confirmation that there has been no restriction in scope placed on them by management, independence of their audit and how they have exercised professional scepticism. The Chairman of the Audit Committee also meets the external audit partner outside the formal Committee process during the year. The Committee considers the reappointment of the external auditor, including rotation of the audit partner, each year and also assesses their independence on an ongoing basis. The external auditor is required to rotate the auditor partner responsible for the Society’s audit at least every 7 years. The audit in relation to the 2015 results was the second for the current audit partner after Deloitte’s partner rotation policies were followed. Deloitte were appointed in 2007 following a competitive tendering process. The Committee considered whether the Society should put the audit out to tender. After extensive review of the effectiveness of the external auditor and related discussion the Committee felt that a tender was not necessary at present and provided the Board with its recommendation to the Society’s Members on the reappointment of Deloitte LLP as external auditor for the year ended 31st December 2016. This position will be kept under annual review. Accordingly, a resolution proposing the reappointment of Deloitte LLP as the Society’s auditor will be put to Members at the AGM in April 2016. There are no contractual obligations restricting the Society’s choice of external auditor.

The Committee approved the fees for audit services for 2015 after a review of the level and nature of the work to be performed and being satisfied that the fees were appropriate for the scope of the work required. These fees included one-off additional audit work required for the new FRS 102 and IAS 39 accounting regulations. As a further safeguard to help avoid the objectivity and the independence of the external auditor becoming compromised, the Committee has a formal policy governing the engagement of the external auditor to provide non-audit services. The Committee reviewed the level of non-audit fees paid to the external auditor throughout the year and was content that these fees have not impaired the objectivity and independence of Deloitte LLP. In addition, the objectivity and independence of the external auditor is protected in the provision of non-audit services by individual terms of engagement for each assignment. The Committee conducts a formal review of its effectiveness annually and concluded that its performance was effective.

Michael Parrott Chairman of the Audit Committee 23rd February 2016

CORPORATE SOCIAL RESPONSIBILITY

The Society has introduced a Corporate Social Responsibility Policy to demonstrate in practical terms how it takes a responsible approach towards all of its stakeholders including its Members, the community and the wider environment and continues to be a leader in the provision of mutual financial services locally. The Society has appointed the Operations Director as having responsibility for the policy. The following is a report on how responsible business practices are integrated in four core areas: ° workplace, ° community, ° environment, and ° marketplace. Corporate Social Responsibility goes far beyond simply donating money to good causes at the end of the financial year. It is instead an all year round responsibility for the environment around us, for the best working practices and for our engagement with local communities. The Society recognises that a good brand name depends not only on quality, price and uniqueness but also on how it interacts with its workforce, community, environment and the marketplace in which it operates.

WORKPLACE The Society is determined to build on the skills and retain the commitment of the people who work within it. It aims to achieve this by the way it rewards, develops and trains employees, thereby earning their trust and ensuring that they contribute in an environment where they feel respected and valued.

The Society is committed to providing and maintaining a working environment that protects the health and safety of our staff, Members and visitors. It provides modern, comfortable premises for staff and attractive branches to offer a high level of customer service for Members. The Society ensures that the physical environment facilitates disabled people in doing business with it and that, in making business decisions, disabled people will not be treated any less favourably. It is in compliance with all relevant Disability Discrimination Act requirements.

COMMUNITY At Progressive we are actively involved in all the communities we serve and are dedicated to contributing to and supporting both local and national charities. Throughout 2015 the Society donated to and fundraised for fourteen charities, for which we requested that all money raised remain in Northern Ireland. The fourteen charities were selected through a staff voting process and were Alzheimer’s Society (UK), MacMillan (UK), Cancer Fund for Children, Chest Heart & Stroke, Cardiac Risk in the Young (C.R.Y) (UK), Marie Curie, Action MS, Leukemia & Lymphoma NI, Tinylife, NI Hospice, P.I.P.S, Simon Community, Royal Belfast Hospital for Sick Children and Down’s Syndrome Association. Staff at Progressive’s twelve branches and head office assisted with raising money and awareness for the charities, with each being assigned their own charity.

Fundraising activities included a sponsored dog walk, a collection day at a local shopping centre, ziplining, abseiling, Run Mucker Run, fun runs, Sober October, quizzes, raffles, tea and coffee mornings, and many more. In total staff raised £26,000 through their efforts. An additional £15,300 was donated by the Society through AGM voting and the Direct Mortgage Campaign. The Society had initially pledged £70,000 to the charities (£5,000 to each) so that, including fundraising, the overall total raised amounted to £111,300. This is a very impressive total and should provide much needed funds towards the good work of the charities. In addition, during 2015 Progressive organised and hosted an educational activity called ‘Work Inspiration Day’ for a group of 17-18 year old students from local Secondary and Grammar schools. The Society staff also supported Bryson Charitable Group and Belfast Central Mission through the donation of toys and gifts in December 2015.

ENVIRONMENT The Society impacts on the environment through its use of energy, purchasing of materials and equipment, creation of waste and pollution arising from the use of motor vehicles. In an effort to reduce this impact, an environmental policy has been agreed by the Society’s Board. The broad objectives of the policy are to: ° minimise waste, ° maximise efficient use of natural resources, ° minimise pollution, ° encourage improved environmental performance from suppliers and contractors, ° communicate, where appropriate, with Members, employees and other interested parties concerning the Society’s environmental policy and performance against environmental objectives, ° comply with relevant environmental legislation and regulations, and ° use local suppliers where possible.

The Society has received guidance from the Arena Network concerning the development of an Environmental Management System. Work has been undertaken to make greater use of renewable energy, to use less energy and to re-cycle paper-based, plastic and aluminium waste produced by the Society. We will continue to make improvements to existing procedures and systems to ensure that the Society’s environmental objectives are achieved.

MARKETPLACE The Society offers investment and mortgage products which are fair and offer good value to Members, complies with all legal and regulatory requirements and operates a robust and effective complaints procedure. It maintains high standards of customer service and supports strongly the concept of Treating Customers Fairly. In addition, it is the Society’s policy to pay invoices to suppliers within the agreed payment terms when in full conformity with the terms and conditions of purchase.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS, THE STRATEGIC REPORT, THE DIRECTORS’ REPORT AND THE ANNUAL BUSINESS STATEMENT The following statement, which should be read in conjunction with the Independent Auditor’s Report on page 36, is made by the Directors to explain their responsibilities in relation to the preparation of the Annual Accounts, Strategic Report, Directors’ Report and the Annual Business Statement. The Directors are responsible for preparing the Annual Accounts, Strategic Report, Directors’ Report and the Annual Business Statement in accordance with applicable laws and regulations. The Building Societies Act (“the Act”) requires the Directors to prepare Annual Accounts for each financial year. Under the Act they have elected to prepare the Annual Accounts in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) including FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’.

The Annual Accounts are required by law to give a true and fair view of the state of affairs of the Society as at the end of the financial year and of the income and expenditure of the Society for the financial year. In preparing these Annual Accounts, the Directors are required to: ° select suitable accounting policies and then apply them consistently, ° make judgements and estimates that are reasonable and prudent, ° state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the Annual Accounts, and ° apply the going concern concept unless it is inappropriate to presume that the Society will continue in business. In addition to the Annual Accounts, the Act requires the Directors to prepare, for each financial year, an Annual Business Statement and a Directors’ Report, each containing prescribed information relating to the business of the Society.

DIRECTORS’ RESPONSIBILITIES FOR ACCOUNTING RECORDS AND INTERNAL CONTROL

The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Society and to prevent and detect fraud and other irregularities.

The Directors confirm that, to the best of their knowledge: ° the Annual Accounts, prepared in accordance with United Kingdom Generally Accepted Accounting Practice including FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’, give a true and fair view of the state of the affairs of the Society as at the end of the financial year and of the income and expenditure of the Society for the financial year; ° the Strategic Report includes a fair review of the developments and performance of the business and the position of the Society taken as a whole, together with a description of the principal risks and uncertainties that it faces; and ° the Annual Report, taken as a whole is fair, balanced and understandable and provides the information necessary for Members to assess the Society’s performance, business model and strategy.

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

John Trethowan Chairman 23rd February 2016

The Directors are responsible for ensuring that the Society: ° keeps proper accounting records that disclose with reasonable accuracy at any time the financial position of the Society, in accordance with the Act; ° takes reasonable care to establish, maintain, document and review such systems and controls as are appropriate to its business in accordance with the rules made under the Financial Services and Markets Act 2000.

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PROGRESSIVE BUILDING SOCIETY

Opinion on financial statements of Progressive Building Society In our opinion the financial statements: ° give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, of the state of the Society’s affairs as at 31st December 2015 and of the Society’s income and expenditure for the year then ended; ° have been prepared in accordance with the requirements of the Building Societies Act 1986. The financial statements comprise the Income Statement, the Statement of Comprehensive Income, the Statement of Financial Position, the Statement of Movements in Members’ Interests, the Cash Flow Statement, and the related Notes 1 to 29. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”.

Going concern and the Directors’ assessment of the principal risks that would threaten the solvency or liquidity of the Society We have reviewed the Directors’ statement regarding the appropriateness of the going concern basis of accounting contained within Note 1 to the financial statements and the Directors’ statement on the longer-term viability of the Society contained within the Strategic Report.

We have nothing material to add or draw attention to in relation to: ° the Directors’ confirmation on page 15 that they have carried out a robust assessment of the principal risks facing the Society, including those that would threaten its business model, future performance, solvency or liquidity; ° the disclosures on pages 4 to 7 that describe those risks and explain how they are being managed or mitigated; ° the Directors’ statement on page 15 of the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Society’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; ° the Director’s explanation on page 15 as to how they have assessed the prospects of the Society, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Society will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We agreed with the Directors’ adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Society’s ability to continue as a going concern.

Independence We are required to comply with the Financial Reporting Council’s Ethical Standards for Auditors and we confirm that we are independent of the Society and we have fulfilled our other ethical responsibilities in accordance with those standards. We also confirm we have not provided any of the prohibited non-audit services referred to in those standards. Risk

Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. At a minimum we performed testing over the design and implementation of the controls around each significant risk area. How the scope of our audit responded to the risk

Loan loss provisions The Society holds £13.6m of impairment provisions at year end (2014: £18m) against total loans and advances to customers of £1,408m (2014: £1,378m). Determining impairment provisions against loans to customers is judgemental, requiring an estimate to be made of the likely loss within the residential mortgage portfolio. This requires the estimation of future customer default rates, discounted cashflow rates (required under FRS 102), house price movements, sales costs, forced sale discounts and likelihood of repossession which may be sensitive to changes in the economic environment, including house price volatility, interest rate expectations and unemployment rates. Loan loss provision balances are detailed within Note 14. Management’s associated accounting policies are detailed on page 48.

We challenged the appropriateness of management’s key assumptions used in the impairment calculations for loans and receivables for both specific and collective provisions. This was achieved through: benchmarking against internal and external data; reviewing historical levels of write-offs; assessing the accuracy and completeness of the provision calculation by testing an extraction of source data from the core lending systems and recalculating the provision in accordance with the approved provisioning policy, and the identification of impaired accounts. We involved our IT specialists to test the general IT controls over the data used in the provisioning model, and performed operating effectiveness testing over manual lending and provisioning controls.

Revenue recognition Total mortgage interest income is £53.7m (2014: £56.8m) and the significance of this amount, coupled with the high volume of existing and new mortgage transactions increases the risk of mortgage revenue recognised (both interest and fees) not being accurately calculated and recorded. Income recognition using the effective interest rate (“EIR”) method requires the exercise of judgement in the assessment of future cash flows and expected product lives. Management’s associated accounting policies are detailed on page 46 with reconciliation of interest receivable in Note 3.

We challenged the appropriateness of management’s processes and systems used in the recognition of revenue by testing data processing accuracy and transaction authorisation controls. We developed an expectation of mortgage interest income from underlying loan book and interest rate data, using substantive analytical techniques. In addition we performed test of details on loan interest and fee income by re-performing the calculation of a sample of income by reference to original transaction documentation and recalculating the correct deferral of fees in line with EIR accounting under FRS 102. We involved our IT specialists to test the general IT controls over the data generated from the mortgage and fee income system, and performed operating effectiveness testing over any associated manual controls.

Risk

How the scope of our audit responded to the risk

Derivative valuations and hedge accounting The Society uses hedge accounting to manage interest rate risk arising on fixed rate mortgage and savings products. At year end the fair value of derivatives (interest rate swaps) held was a liability of £692,000 (2014: £863,000). IAS 39 requires derivatives to be disclosed at fair value, the measurement of which requires an element of judgement in the yield curve applied, interest rates and counterparty credit ratings. Hedge accounting is a complex area and strict criteria relating to the eligibility of hedged items, documentation and testing of effectiveness must be met before hedge accounting may be applied. This is the Society’s first year of disclosing derivatives on its Statement of Financial Position and applying hedge accounting with the introduction of FRS 102. Management’s associated accounting policies are detailed on page 49 and a reconciliation of financial instruments provided on Note 24.

We challenged the valuations provided by management by independently valuing a sample of derivative fair values produced by the Society’s interest rate risk management software, ALMIS, using the assistance of our financial instrument specialists and independent software tool. We assessed the hedge construction (including eligibility) by assessing the Society’s effectiveness testing methodologies and calculations, and tested the accurate measurement of resulting hedge ineffectiveness. We also performed independent procedures on source data extracted from the Society’s core treasury system including assessment of the ALMIS data validation process to identify whether the data was accurate and complete.

Retirement benefit obligations The Society operates a defined benefit scheme. At the year end a retirement benefit obligation deficit of £0.4m was recognised (2014: £3.9m). The calculation of the present value of the retirement benefit obligations requires judgement in the selection of key assumptions and is highly sensitive to such assumptions. Management make judgements in respect of mortality, price inflation, discount rates, pension increases and earnings growth. Of these inputs, discount rate, general price inflation and mortality rates have the most material impact on the pension liability value. The year end pension disclosures are detailed in Note 27. Management’s associated accounting policies are detailed on pages 48 and 49.

We challenged the appropriateness of management’s assumptions in deriving the defined benefit pension balance by assessing the independence of the specialists used by the Society to estimate the liability. We also benchmarked the assumptions in respect of the discount rate, inflation and mortality assumptions to those used in the market at 31st December 2015 using our internal pension specialists.

Last year our report included one other risk which is not included in our report this year: the Financial Services Compensation Scheme (“FSCS”) provision calculation. Given the methodology of the calculation as set out by the FSCS has not changed in the year, and the approach to the calculation of the liability is well established throughout the industry, this has not been included as a significant risk in the current year. The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee discussed on page 29. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. The accumulation of profits is critical to maintaining and building capital for regulatory purposes and allowing the Society to invest in activities for its Members. We have therefore selected profit before tax as the benchmark for determining materiality. This resulted in determined materiality for the Society to be £584,000 (2014: £550,000), which is below 5% of pre-tax profit. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £12,000 (2014: £11,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

An overview of the scope of our audit Our audit was scoped by obtaining an understanding of the Society and its environment, including internal controls, and assessing the risks of material misstatement. Audit work to respond to the risks of material misstatement was performed directly by the audit engagement team.

Opinion on other matters prescribed by the Building Societies Act 1986 In our opinion: ° the Annual Business Statement and the Directors’ Report have been prepared in accordance with the requirements of the Building Societies Act 1986; ° the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the accounting records and the financial statements; and ° the information given in the Annual Business Statement (other than the information upon which we are not required to report) gives a true representation of the matters in respect of which it is given.

Opinion on other matters prescribed by the Capital Requirements (Country-by-Country Reporting) Regulations 2013 In our opinion the information given on page 12 for the financial year ended 31st December 2015 has been properly prepared, in all material respects, in accordance with the Capital Requirements (Country-by-Country Reporting) Regulations 2013. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Building Societies Act 1986 we are required to report to you if, in our opinion: ° proper accounting records have not been kept by the Society; or ° the Society financial statements are not in agreement with the accounting records; or ° we have not received all the information and explanations and access to documents we require for our audit. We have nothing to report in respect of these matters.

Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual Report is: ° materially inconsistent with the information in the audited financial statements; or ° apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Society acquired in the course of performing our audit; or ° otherwise misleading. In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the Directors’ statement that they consider the Annual Report is fair, balanced and understandable and whether the Annual Report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.

Respective responsibilities of Directors and auditor As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of financial statements which give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews. This report is made solely to the Society’s Members, as a body, in accordance with Section 78 of the Building Societies Act 1986. Our audit work has been undertaken so that we might state to the Society’s Members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Society or the Society’s Members as a body, for our audit work, for this report, or for the opinions we have formed.

Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Society’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

David Crawford ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Glasgow, United Kingdom 23rd February 2016

INCOME STATEMENT for the year ended 31st December 2015

Note

2015 £000

2014 £000 as restated

Interest receivable and similar income

3

53,732

56,821

Interest payable and similar charges

4

(25,459)

(27,369)

28,273

29,452

2,127

1,904

(1,717)

(1,531)

Net interest receivable Fees and commissions receivable Fees and commissions payable Other operating income

28

226

265

Other fair value losses

5

(34)

(96)

28,875

29,994

6

(10,513)

(9,864)

16 & 17

(707)

(611)

(50)

(11)

17,605

19,508

Total income Administrative expenses Depreciation and amortisation Other operating charges

Provisions for bad and doubtful debts

15

(2,542)

(5,536)

Provision for FSCS charge

22

(701)

(893)

14,362

13,079

(338)

-

14,024

13,079

9

(2,955)

(2,862)

23

11,069

10,217

Operating profit Loss on disposal of fixed assets

16

Profit for the year before taxation Tax on profit on ordinary activities PROFIT FOR THE FINANCIAL YEAR

All results in the current and prior years were derived from continuing operations. The Notes on pages 46 to 79 form part of these Annual Accounts.

STATEMENT OF OTHER COMPREHENSIVE INCOME for the year ended 31st December 2015

Note

2015 £000

2014 £000 as restated

23

11,069

10,217

Actuarial gain /(loss) recognised in the pension scheme

27

1,723

(3,319)

Movement in deferred tax relating to pension scheme

27

(310)

664

Unrealised deficit on revaluation of land and buildings

24

(193)

-

24

89

-

12,378

7,562

Profit for financial year Items that will not be reclassified subsequently to profit and loss:

Items that may be reclassified subsequently to profit and loss: Valuation gain on available-for-sale assets Total comprehensive income for the year

STATEMENT OF FINANCIAL POSITION as at 31st December 2015

2015 Note

£000

2014 £000

£000 £000 as restated

ASSETS Liquid Assets Cash in hand and balances with the Bank of England

190,257

279,155

Loans and advances to credit institutions

10

43,761

39,279

Debt securities - issued by other borrowers

11

100,101

-

Derivative financial instruments

12

Loans and advances to customers

14

Loans fully secured on residential property

334,119

318,434

-

25

1,388,818

1,354,327

5,334

5,892

Other loans fully secured on land

1,394,152

1,360,219

Tangible fixed assets

16

7,123

7,767

Intangible fixed assets

17

348

309

Other assets

9c

475

1,444

564

577

1,736,781

1,688,775

Prepayments and accrued income TOTAL ASSETS LIABILITIES Shares

18

1,516,269

1,517,254

Amounts owed to credit institutions

19

18,162

8,105

Amounts owed to other customers

20

98,370

67,346

Derivative financial instruments

12

692

863

Other liabilities

21

2,356

3,070

Pension liability

27

415

3,886

Provisions for liabilities and charges

22

408

520

1,636,672

1,601,044

Reserves General reserves

23

100,721

88,271

Other reserves

24

(612)

(540)

1,736,781

1,688,775

TOTAL LIABILITIES

The Notes on pages 46 to 79 form part of these Annual Accounts. The Accounts on pages 41 to 79 were approved by the Board of Directors on 23rd February 2016 and were signed on its behalf by:

John Trethowan Chairman

Michael Parrott Vice-Chairman

Darina Armstrong Chief Executive

STATEMENT OF CHANGES IN MEMBERS’ INTERESTS as at 31st December 2015 General reserves £000

Availablefor-sale reserve £000

Revaluation reserve £000

Total £000

As at 1st January 2015

88,271

-

(540)

87,731

Profit for the year

11,069

-

-

11,069

-

89

-

89

-

-

(193)

(193)

(6)

-

6

-

(26)

-

26

-

1,413

-

-

1,413

12,450

89

(161)

12,378

100,721

89

(701)

100,109

As restated at 1st January 2014

80,007

(382)

(546)

79,079

Profit for the year

10,217

-

-

10,217

-

361

-

361

(6)

-

6

-

(2,655)

-

-

(2,655)

Transfer of realised fair value movement

(21)

21

-

-

Take on balances re City of Derry Building Society merger

729

-

-

729

8,264

382

6

8,652

88,271

-

(540)

87,731

2015

Other comprehensive income for the period Net gains from changes in fair value Movement on revaluation of land and buildings Transfer of amount equivalent to additional depreciation on revalued assets Realisation of previous revaluation losses Remeasurement of defined benefit obligation Total comprehensive income / (expense) for the period At 31st December 2015

2014

Other comprehensive income for the period Net gains from changes in fair value Transfer of amount equivalent to additional depreciation on revalued assets Remeasurement of defined benefit obligation

Total comprehensive income for the period As restated at 31st December 2014

CASH FLOW STATEMENT for the year ended 31st December 2015

Net cash flow from operating activities (see below)

2015 £000

2014 £000 as restated

11,773

22,335

(1,302)

(1,478)

Cash flows from investing activities Purchase of tangible & intangible fixed assets

691

68

(139,784)

-

39,944

22,383

-

3,121

(100,451)

24,094

Net (decrease) / increase in cash and cash equivalents

(88,678)

46,429

Cash and cash equivalents at beginning of year

281,861

235,432

Cash and cash equivalents at end of year

193,183

281,861

14,024

13,079

Movement in prepayments and accrued income

(104)

244

Movement in accruals and deferred income

(644)

(1,687)

(4,426)

(2,745)

707

611

-

75

316

(50)

Disposal of tangible & intangible fixed assets Purchase of debt securities Disposal of debt securities Acquired on transfer of engagements Net cash flows from investing activities

Cashflows from operating activities Profit before tax

Provisions for bad and doubtful debts Depreciation and amortisation Impairment write down Loss / (profit) on disposal of tangible assets Pension charges Pension contributions Movement in derivative financial instruments Movement in fair value adjustments Net cash flow from operating activities before movement in operating assets and liabilites

918

528

(2,666)

(1,928)

(146)

1,204

180

(1,108)

8,159

8,223

(29,698)

(47,495)

Movement in operating assets and liabilities: Loans and advances to customers

(170)

97,834

Amounts owed to credit institutions and other customers

40,921

(37,696)

Loans and advances to credit institutions

(4,294)

3,367

(739)

733

Taxation paid

(2,406)

(2,631)

Net cash flow from operating activities

11,773

22,335

190,257

279,155

2,926

2,706

193,183

281,861

Shares

Other liabilities

Cash and cash equivalents: Cash in hand and balances with Bank of England Loans and advances to credit institutions repayable on demand

The Notes on pages 46 to 79 form part of these Annual Accounts.

NOTES TO THE ACCOUNTS for the year ended 31st December 2015

1. ACCOUNTING POLICIES The financial statements have been prepared in accordance with the following accounting policies which have been applied consistently with the prior year.   Basis of preparation

Interest income on available-for-sale instruments, derivatives and other financial assets accounted for at fair value is included in “Interest receivable and similar income”.   Fees and commissions

The Annual Accounts have been prepared in accordance with Financial Reporting Standard 102, IAS 39 Financial Instruments: Recognition and Measurement and the Building Societies (Accounts and Related Provisions) Regulations 1998 (as amended).   The Annual Accounts have been prepared under the historical cost convention as modified to include the revaluation of financial assets and liabilities held at fair value through profit or loss, available-for-sale financial assets, derivative contracts and certain land and buildings.   The Accounts have been prepared on the going concern basis as outlined in the Directors’ Report on page 15.   The prior year financial statements were restated for material adjustments on adoption of FRS 102 in the current year. For more information see Note 30.   Interest income and interest payable

Fees payable and receivable in relation to the provision of loans, such as loan origination fees, are accounted for on an Effective Interest Rate basis. Other fees and commissions are recognised on an accruals basis when the service has been provided.   Operating leases

Interest receivable and interest payable, for all interest bearing financial instruments held at amortised cost, are recognised in the Income Statement using the Effective Interest Rate (EIR) method. The EIR method calculates the amortised cost of a financial instrument and allocates the interest income / expense over the expected product life.   The EIR is the rate that exactly discounts the estimated future cash flows (excluding credit losses) through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial instrument.   The calculation includes all fees received or paid and costs borne by the Society that are an integral part of the Effective Interest Rate of the financial instrument. The main impact for the Society relates to mortgage advances where fees such as application fees, arrangement fees, survey fees and procuration fees are incorporated in the calculation.  

Costs in respect of operating leases are charged to the Income Statement on a straight line basis over the lease term.   Repairs and renewals The cost of repairs and renewals is charged to revenue in the year in which the expenditure is incurred. Taxation Current tax is provided on the Society’s taxable profits at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted at the date of the Statement of Financial Position. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the financial year end where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the financial year end. Timing differences are differences between the Society’s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements.   Unrelieved tax losses and other deferred tax assets are recognised only to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.    Deferred tax is measured using the tax rates and laws that have been enacted or substantively enacted by the date of the Statement of Financial Position that are expected to apply to the reversal of the timing difference. Deferred tax relating to

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

1. ACCOUNTING POLICIES (CONTINUED) property, plant and equipment measured using the revaluation model is measured using the tax rates and allowances that apply to the sale of the asset. Where items recognised in other comprehensive income or equity are chargeable to or deductible for tax purposes, the resulting current or deferred tax expense or income is presented in the same component of comprehensive income or equity as the transaction or other event that resulted in the tax expense or income.   Current tax assets and liabilities are offset only when there is a legally enforceable right to set off the amounts and the Society intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Deferred tax assets and liabilities are offset only if the Society has a legally enforceable right to set off current tax assets against current tax liabilities.   Tangible fixed assets and depreciation Tangible fixed assets are stated at cost or valuation, net of depreciation and any provision for impairment. Depreciation is provided on all tangible fixed assets, other than freehold or long leasehold land, at rates calculated to write off the cost or valuation, less estimated residual value, of each asset on a straight-line basis over its expected useful life, as follows: freehold and long leasehold buildings

1% to 10%

short leasehold land and buildings                       

over the term of each lease

equipment, fixtures,   fittings and vehicles          

10% to 50%

Residual value represents the estimated amount which would currently be obtained from disposal of an asset, after deducting estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.   Individual freehold and long leasehold properties are revalued to fair value with the surplus or deficit on book value being transferred to the revaluation reserve, except that a deficit which is in excess of any previously recognised surplus over depreciated cost relating to the same property, or the reversal of such a deficit, is charged (or credited) to the Income Statement.  

Financial assets In accordance with IAS 39, Financial Instruments: Recognition and Measurement, the Society classifies its financial assets into the following categories:   (a) Loans and receivables These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Society’s loans and advances to customers and money market advances are classified as loans and receivables and are measured at amortised cost using the Effective Interest Rate method less provisions for impairment.   In accordance with the Effective Interest Rate method, directly attributable upfront costs and fees such as application and arrangement fees, survey fees and procuration fees are deferred and recognised over the expected life of the mortgage assets. Historic data and management judgements are used to estimate the expected lives of mortgage assets and the calculation adjusted when actual experience differs from estimates, with changes in deferred amounts being recognised immediately in the Income Statement. (b) Available-for-sale financial assets These are non-derivative assets, principally debt securities, that are intended to be held for an indefinite period of time and which may be sold in response to changes in interest rate or changes in liquidity requirements. Available-for-sale assets are measured at fair value with fair value gains or losses recognised in Other Comprehensive Income. On sale or impairment of the asset, the cumulative gain or loss previously recognised in Other Comprehensive Income is reclassified to profit or loss as a reclassification adjustment. The fair values of quoted investments in active markets are based on current bid prices. If market data is not available alternative valuation techniques, such as discounted cash flow models or recent arms length transactions, are used to determine fair value. Premiums and discounts arising from the purchase of available-for–sale assets are amortised over the period to the maturity date of the security.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

1. ACCOUNTING POLICIES (CONTINUED) (c) Financial assets at fair value through Profit and Loss These are derivative financial assets initially recognised at fair value on the date on which the derivative contract is entered into. Subsequent measurement is at fair value with movements in value recognised in the Income Statement. Where a hedge is terminated early, the realised gain or loss is recognised in the Income Statement. (d )Held to maturity financial assets The Society has not classified any financial assets as held to maturity. Financial assets are derecognised when the rights to receive cash flows have expired or where substantially all the risks and rewards of ownership have been transferred to another party.  

Financial liabilities

Non-derivative financial liabilities are initially recognised at fair value being the issue proceeds net of premiums, discounts and transaction costs incurred. These are subsequently held at amortised cost using the Effective Interest Rate method. Derivative financial liabilities are recognised at fair value. Movements in fair value are recognised in the Income Statement. Financial liabilities are derecognised when the obligation is discharged, cancelled or has expired.   Financial assets and liabilities are only offset in the Statement of Financial Position when, and only when, there exists a legally enforceable right to set off the recognised amounts and the Society intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.  

Impairment losses on loans and advances to customers and credit institutions

The Society assesses at each year end whether, as a result of one or more events that occurred after initial recognition, there is objective evidence that a financial asset or group of financial assets is impaired. Evidence of impairment may include indications that the borrower or group of borrowers are experiencing significant financial difficulty, default or delinquency in interest or principal payments, the debt being restructured to reduce the burden on the borrower, any breach of contract, and other overall economic conditions.

The Society first assesses whether objective evidence of impairment exists either individually for assets that are separately significant, or collectively for assets that are not separately significant. If there is no objective evidence of impairment for an individually assessed asset it is included in a group of assets with similar credit risk characteristics. For example, accounts subject to forbearance are collectively assessed for forbearance. If there is subjective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the net present value of estimated future cash flows discounted at the assets original effective interest rate. The resultant provisions have been deducted from the appropriate asset values in the Statement of Financial Position.  

Other provisions and contingent liabilities

Provisions are recognised when a legal or constructive obligation exists as a consequence of a past event, it is probable that a transfer of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the settlement. Where it is not probable that the obligation will be settled and / or it cannot be reliably estimated, a contingent liability is disclosed in the Notes to the accounts.

Borrowings Commissions and other costs incurred in the raising of other borrowings are amortised over the period to maturity.  

Retirement benefits

For defined benefit schemes the amounts charged to operating profit are the costs arising from employee services rendered during the period and the cost of plan introductions, benefit changes, settlements and curtailments.  They are included as part of staff costs. The net interest cost on the net defined benefit liability is charged to the Income Statement and included within finance costs. Remeasurement comprising actuarial gains and losses and the return on scheme assets (excluding amounts included in net interest on the net defined benefit liability) are recognised immediately in Other Comprehensive Income.  

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

1. ACCOUNTING POLICIES (CONTINUED) Defined benefit schemes are funded, with the assets of the scheme held separately from those of the Society, in separate trustee administered funds. The Executive Directors also benefit from an unfunded arrangement. Pension scheme assets are measured at fair value and liabilities are measured on an actuarial basis using the projected unit credit method. The actuarial valuations are obtained at least triennially and are updated at each financial year end.    For defined contribution schemes the amount charged to the Income Statement in respect of pension costs and other retirement benefits is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the Statement of Financial Position.  

Derivative financial instruments and hedge accounting

The Society uses derivatives only for risk management purposes. Further information on hedging strategies may be found in Note 25.   (a) Derivative financial instruments Derivatives are initially measured at fair value, at the date the derivative contract is entered into, with subsequent movements in fair value recognised in the Income Statement.   Fair Value Measurement Fair values are calculated by applying yield curves, based on quoted market rates, to a discounted cash flow model. The resulting gain or loss is recognised in the Income Statement immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.   All derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative.   Where collateral is given to mitigate the risk inherent in amounts due from the Society it is recognised as an asset and included within “loans and advances to credit institutions”.   The Society does not hold or issue derivative financial instruments for trading purposes.  

(b) Hedge accounting The Society applies fair value hedge accounting when the transactions meet the criteria specified in IAS 39.   Hedge relationships are formally designated and documented at inception.   Note 25 sets out details of the fair values of the Society’s derivative instruments used for hedging purposes.   Changes in the fair value of the derivatives are recognised in the Income Statement together with changes in the fair value of the hedged item that are attributable to the hedged risk.   Hedge accounting is discontinued when: ° the derivative expires, is sold, is terminated or exercised, ° the hedge no longer meets the criteria for hedge accounting, ° the hedged item matures, is sold or repaid, ° the hedge designation is revoked.  

Intangible assets

Purchased computer software, which is not an integral part of the related hardware, is recognised as an intangible asset at cost and amortised on a straight line basis over the estimated useful life, 3 to 5 years. Provision is made for any impairment. Costs incurred to maintain technical feasibility or to maintain existing levels of performance are recognised as an expense as incurred.

Sale and repurchase agreements Investments and other securities may be lent or sold subject to a commitment to repurchase them at a predetermined price (a repo). Where substantially all the risks and rewards of ownership remain with the Society such securities remain on the Statement of Financial Position and the counterparty liability is recognised separately on the Statement of Financial Position as appropriate. The difference between the sale and repurchase price is accrued over the life of the agreement.  

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

2. JUDGEMENTS IN APPLYING ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES The Society has to make judgements in applying its accounting policies which affect the amounts recognised in the financial statements. In addition, the Society makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors that are considered to be relevant, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.   The most significant areas where estimates, assumptions and judgements are made are as follows:  

Impairment provision on loans and advances

The Society reviews its mortgage advances portfolio at least on a monthly basis to assess impairment. The creation of impairment provisions for a portfolio of mortgage loans is inherently uncertain and requires the exercise of a significant degree of judgement. Provisions are calculated using historic default and loss experience but require judgement to be exercised in predicting future economic conditions (e.g. interest rates and house prices), customer behaviour (e.g. default rates), House Price Index, forced sale discounts and the length of time before impairments are identified (i.e. emergence period). These assumptions are based on observed historical data and updated as management considers appropriate to reflect current and future conditions. The impairment provisions at year end amounted to £13.6 million (2014 : £18.0 million as restated).  

Fair value of derivatives and available-for-sale assets

Derivative financial instruments and available-for-sale assets are recognised at fair value, which is derived from market data, with alternative valuation techniques used if market data is not available.

Derivative financial instruments are valued by discounted cash flow models using yield curves that are based on observable market data. Available-for-sale assets are valued using market prices or, where market prices are not available, using discounted cash flow models or recent arms length transactions. Changes in the assumptions used could affect the fair value calculations.   The fair value of derivatives at year end amounted to £0.7 million (2014 : £0.8 million). The fair value of available-for-sale assets at year end amounted to £100.1 million (2014 : £nil).  

Effective interest rate (EIR)

Under IAS 39, financial instruments carried at amortised cost are accounted for on an EIR basis. The calculation of EIR requires the Society to make assumptions regarding the expected lives of financial instruments and the anticipated level of early repayment fees. Management regularly review these assumptions to ensure they reflect actual performance.

Retirement benefit obligations The calculation of the present value of the retirement benefit obligations requires the Society to make significant judgements in respect of mortality, price inflation, discount rates, pension increases and earnings growth. Further details on the assumptions used in valuing retirement benefit obligations and other sensitivity analysis can be found in Note 27. Changes in assumptions could affect the reported liability, service cost and expected return on pension plan assets.   The fair value of pension liability amounted to £0.4 million at year end (2014 : £3.9 million).  

Financial Services Compensation Scheme (FSCS) Levy At 31st December 2015 the Society has recognised a provision £408,000 in respect of FSCS levies payable in September 2016 which cover the period April 2015 to March 2016. This provision is calculated based on assumptions relating to the expected interest charged by HM Treasury. Changes in interest rates over the period of the levy will affect payments due.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

3. INTEREST RECEIVABLE AND SIMILAR INCOME 2015 £000

2014 £000 as restated

52,453

55,483

279

307

63

139

On other liquid assets

1,585

1,452

Net expenditure on financial instruments used to hedge assets

(648)

(560)

53,732

56,821

2015 £000

2014 £000

22,868

24,876

On deposits and other borrowings

1,376

968

On other shares

1,215

1,525

25,459

27,369

2015 £000

2014 £000

146

(1,205)

(180)

1,109

(34)

(96)

On loans fully secured on residential property On other loans On debt securities

4. INTEREST PAYABLE AND SIMILAR CHARGES

On shares held by individuals

5. OTHER FAIR VALUE GAINS AND LOSSES

Gains / (losses) on derivatives (Losses) / gains on hedged items attributable to the hedged risk

Other fair value gains and losses represent the difference between changes in the fair value excluding interest flows of the hedging derivatives and the changes in fair value excluding interest flows of the underlying hedged items.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

6. ADMINISTRATIVE EXPENSES 2015 £000

2014 £000 as restated

4,445

4,121

387

359

1,043

626

5,875

5,106

4,638

4,758

10,513

9,864

For the audit of the Society's Annual Accounts

69

69

For FRS 102 transition fees

22

-

For tax services

12

12

-

10

103

91

129

116

22

50

Staff costs: ° Wages and salaries ° Social security costs ° Other pension costs (Note 27)

Other administrative expenses

Other administrative expenses include: Fees payable to the Society's auditors:

For other services - City of Derry Building Society Merger Booklet report Total audit and non audit fees (inclusive of VAT) Operating lease charges include: Other than plant and machinery Other administrative expenses are after crediting profit on disposal of tangible fixed assets

7. EMPLOYEES The average number of persons employed by the Society (including the executive Directors) during the year was as follows: Full Time

Part Time

2015

2014

2015

2014

Head office

44

41

28

28

Branch offices

59

56

30

30

103

97

58

58

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

8. DIRECTORS’ EMOLUMENTS AND TRANSACTIONS The total emoluments of the Directors who served during the year were £670,000 (2014: £564,000) analysed as follows:

a To non-executive Directors for services as Directors

Fees 2015 £000

Fees 2014 £000

J Trethowan (Chairman)

41

40

M W Parrott (Vice Chairman from 28th April 2015)

29

25

E M Gowdy (Senior Independent Director)

25

25

A Coles (co-opted from 1st May 2014)

25

17

M Cullen (co-opted from 20th February 2015)

23

-

G McGinn (co-opted from 20th February 2015)

23

-

J Doran (retired 23rd December 2014, served 1st September to 11th November 2015)

6

25

J O Hunt (Vice Chairman until 28th April 2015)

10

30

-

13

182

175

T H B Quin (retired 29th April 2014)

No pension contributions were made in respect of non-executive Directors.

b To executive Directors for services in connection with the management of the Society 2015

Salary £000

Bonus £000

Benefits £000

Total £000

D Armstrong (Chief Executive)

172

13

13

198

M S Boyd (Deputy Chief Executive & Finance Director)

140

10

13

163

D Moore (Operations Director)

109

8

10

127 488

2014 D Armstrong (Chief Executive)

164

7

15

186

M S Boyd (Deputy Chief Executive & Finance Director)

133

6

13

152

44

2

5

51

D Moore (Operations Director - appointed 21st July 2014)

389 The increase in accrued pension for D Armstrong, M S Boyd and D Moore in 2015 was £3,000 (2014: £4,000), £5,000 (2014: £6,000) and £6,000 (2014: £2,000) respectively.

c Directors’ loans and transactions At 31st December 2015, there were two (2014: five) mortgage loans outstanding granted in the ordinary course of business on normal commercial terms to Directors and their connected persons, amounting in aggregate to £313,000 (2014: £1,487,714). A register is maintained at the Head Office of the Society, under Section 68 of the Building Societies Act 1986, which shows details of all loans, transactions and arrangements with Directors and connected persons. A statement of the appropriate details contained in the Register, for the financial year ended 31st December 2015, will be available for inspection at the Society’s Head Office for a period of fifteen days up to and including the Annual General Meeting.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

9. TAXATION a Analysis of taxation charge in the period 2015 £000

2014 £000 as restated

2,336

2,265

(40)

-

2,296

2,265

Origination and reversal of timing differences

579

642

Effect of decrease in tax rate on opening liability

144

-

Impact of future tax changes on current year movement

(64)

(45)

Total deferred tax

659

597

2,955

2,862

Current tax: UK corporation tax on profits of the current year Adjustments in respect of prior periods Total current tax Deferred tax:

Tax charge for the period

b Factors affecting the current tax charge for the period The effective tax rate is 21.07% (2014: 21.88% restated), which is higher (2014: higher) than the standard rate of corporation tax in the UK of 20.25% (2014: 21.50%). The differences are explained below: 2015 £000

2014 £000 as restated

14,024

13,079

2,840

2,812

Expenses not deductible for tax purposes

75

95

Impact of tax changes

80

(45)

(40)

-

2,995

2,862

Current tax reconciliation Profit on ordinary acitivites before tax Profit on ordinary activities multiplied by standard rate of UK corporation tax of 20.25% (2014: 21.50%) Effects of:

Prior period adjustments

Current tax charge for period (see above)

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

9. TAXATION (CONTINUED) c Deferred Taxation 2015 £000

2014 £000 as restated

Deferred tax asset as at 1st January

1,444

1,147

Charged to Income Statement

(659)

(597)

-

302

(310)

664

Charge to Available-for-sale reserve

-

(72)

Deferred tax asset at 31st December

475

1,444

(2)

46

477

1,398

475

1,444

Movement in deferred tax balance in period

Transfer from City of Derry (Note 29) (Charge) / Credit to Other Comprehensive Income

Analysis of deferred tax balance Accelerated capital allowances Other timing differences

Progressive Building Society merged with City of Derry Building Society on 1st July 2014. This resulted in recognition of deferred tax assets of £302,000 in 2014. The deferred tax asset of £475,000 (2014: £1,444,000) is included within “Other assets” on the face of the Statement of Financial Position.

d Factors that may affect future tax charges The Finance Act 2015 provided for the reduction in the main rate of corporation tax to 19% from 1st April 2017 and to 18% from 1st April 2020 which will affect the future taxable profits of the Society. The potential gross deferred tax on revalued assets, after allowing for any indexation allowances which may be available, is estimated to be £nil (2014: £nil).

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

10. LOANS AND ADVANCES TO CREDIT INSTITUTIONS 2015 £000

2014 £000 as restated

2,926

2,706

In not more than three months

30,000

20,000

In more than three months but not more than one year

10,722

16,428

43,648

39,134

113

145

43,761

39,279

Loans and advances to credit institutions have remaining maturities as follows: Repayable on demand Other loans and advances by residual maturity repayable:

Accrued interest

11. DEBT SECURITIES - ISSUED BY OTHER BORROWERS 2015 £000

2014 £000

100,101

-

100,101

-

In not more than one year

89,875

-

In more than one year

10,077

-

99,952

-

149

-

100,101

-

99,952

-

99,952

-

Issued by public bodies

Debt securities are held as available-for-sale assets and carried at their fair value.

Debt securities have remaining maturities as follows:

Accrued interest

Analysis of debt securities (excluding accrued interest): Transferable securities Listed

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

11. DEBT SECURITIES - ISSUED BY OTHER BORROWERS (CONTINUED) The movement in available-for-sale debt securities is summarised as follows: 2015 £000

2014 £000 as restated

-

22,022

Additions

139,784

-

Disposals and maturities

(39,944)

(22,383)

Changes in fair value

112

361

As at 31st December

99,952

-

As at 1st January

12. DERIVATIVE FINANCIAL INSTRUMENTS Interest rate swaps are used by the Society for hedging purposes. These are commitments to exchange one set of cash flows for another. No exchange of principal takes place. Contract / Notional Amount

Fair Value

2015 £000

2014 £000

2015 £000

2014 £000

Interest rate swaps

-

5,000

-

25

Total recognised derivative assets

-

5,000

-

25

Interest rate swaps

81,500

166,500

692

863

Total recognised derivative liabilities

81,500

166,500

692

863

Derivative assets held for hedging purposes and designated fair value hedges

Derivative liabilities held for hedging purposes and designated fair value hedges

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

13. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE 2015 £000

Level 1 £000

Level 2 £000

100,101

100,101

-

100,101

100,101

-

692

-

692

692

-

692

Level 1 £000

Level 2 £000

25

-

25

25

-

25

863

-

863

863

-

863

Available-for-sale financial assets: Debt securities

Financial liabilities at fair value through profit or loss: Derivative financial instruments

2014 £000 Financial assets at fair value through profit or loss: Derivative financial instruments

Financial liabilities at fair value through profit or loss: Derivative financial instruments

The tables above provide an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which fair value is observable. Level Hierarchy for fair value disclosures 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities. 2

Inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly (i.e. derived from prices).

3

Inputs for the asset or liability that are not based on observable market data. There are no instruments classified as level 3 in 2015 (2014: none).

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

14. LOANS AND ADVANCES TO CUSTOMERS 2015 £000

2014 £000 as restated

360

1,734

In not more than three months

14,139

11,699

In more than three months but not more than one year

41,396

36,083

238,806

222,517

1,113,059

1,106,029

1,407,760

1,378,062

(630)

(624)

(13,581)

(18,007)

603

788

1,394,152

1,360,219

The maturity of loans and advances to customers from the date of the Statement of Financial Position is as follows: On call and at short notice Other loans and advances by residual maturity repayable:

In more than one year but not more than five years In more than five years

Unamortised loan origination fees Provisions for bad and doubtful debts (Note 15) Fair value adjustment for hedged risk Total loans and advances to customers

Past experience would indicate that mortgages are often redeemed before their natural maturity date. This maturity analysis may therefore not reflect actual experience. Forbearance The Society offers a range of forbearance options to support borrowers who are in financial difficulty with the aim of minimising the risk of the customer ultimately losing their home and to ensure the right customer outcome. The Society embraces industry guidance. Accordingly, the individual circumstances of the borrower are considered in determining the most appropriate forbearance measure and the Society will continue to work with the borrower to bring the mortgage back to sustainable terms within a timeframe appropriate to the borrower’s circumstances. The Society provided to customers the following forbearance measures during 2015: ° An extension of the mortgage term - 4 cases (2014 : 1 case) ° A temporary change of repayment type from Repayment to Interest Only - 60 cases (2014 : 46 cases) ° A payment concession of less than the normal monthly payment due - 2 cases (2014 : 3 cases) ° Capitalisation - i.e. adding the arrears outstanding to the capital balance - 0 cases (2014 : 0 cases) The majority of forbearance measures granted before and during 2015 remain in place at the end of the year. No extra provisions for forbearance cases have been required in addition to provisions calculated under the Society’s normal accounting policies as detailed in Note 1.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

15. PROVISIONS FOR BAD AND DOUBTFUL DEBTS Provisions against loans and advances have been made as follows: Loans fully secured on residential property £000

Loans fully secured on land £000

1,476

-

1,476

16,531

-

16,531

18,007

-

18,007

Total £000

At 1st January 2015 as restated Collective provision Specific provision

Amounts written off during the year Collective provision Specific provision

227

254

481

7,350

-

7,350

7,577

254

7,831

769

254

1,023

2,382

-

2,382

3,151

254

3,405

2,018

-

2,018

11,563

-

11,563

13,581

-

13,581

Income Statement Collective provision Specific provision

At 31st December 2015 Collective provision Specific provision

The charge of £2,542,000 in the Income Statement consists of the charge of £3,405,000 above and credits of £863,000 in respect of recoveries against loans which have been written off in prior periods and the write back of amounts overprovided on properties in possession when sold.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

16. TANGIBLE FIXED ASSETS Land and buildings £000

Equipment, fixtures, fittings and vehicles £000

Total £000

7,659

4,422

12,081

Additions

489

607

1,096

Disposals

(1,050)

(321)

(1,371)

Revaluation

(206)

-

(206)

At 31st December 2015

6,892

4,708

11,600

At 1st January 2015 as restated

887

3,427

4,314

Charge for the year

112

429

541

Disposals

(48)

(317)

(365)

Revaluation

(13)

-

(13)

At 31st December 2015

938

3,539

4,477

At 31st December 2015

5,954

1,169

7,123

At 31st December 2014 as restated

6,772

995

7,767

Cost or valuation At 1st January 2015 as restated

Depreciation

Net book value

A net loss of £316,000 arose on the disposal of fixed assets, comprising a loss of £338,000 (reflected in the Income Statement) on the disposal of properties in Derry, offset by a £22,000 profit on the disposal of other tangible and intangible fixed assets.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

16. TANGIBLE FIXED ASSETS (CONTINUED) The net book value of land and buildings comprises: 2015 £000

2014 £000

Freehold

4,680

4,627

Long leasehold

1,030

1,975

Short leasehold

244

170

5,954

6,772

Land

1,850

2,250

Buildings

4,104

4,522

5,954

6,772

4,691

5,277

7,853

8,909

(1,095)

(1,030)

6,758

7,879

Analysed as follows:

The net book value of land and buildings occupied by the Society for its own activities: At 31st December If land and buildings had not been revalued they would have been included at the following amounts: Cost Aggregate depreciation based on cost Net book value based on cost

Freehold and long leasehold land and buildings were revalued, on market value basis, by O’Connor Kennedy Turtle, a firm of independent chartered surveyors, in December 2015.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

17. INTANGIBLE ASSETS

Total £000

Cost At 1st January 2015

2,853

Additions

206

Disposals

(185)

At 31st December 2015

2,874

Amortisation At 1st January 2015

2,544

Charge for the year

166

Disposals

(184)

At 31st December 2015

2,526

Net book value At 31st December 2015

348

At 31st December 2014

309

18. SHARES

2015 £000

2014 £000 as restated

1,399,196

1,425,013

117,073

92,236

-

5

1,516,269

1,517,254

15,591

16,401

760,970

738,317

73,554

100,472

In more than three months but not more than one year

338,825

407,742

In more than one year but not more than five years

327,329

254,317

-

5

1,516,269

1,517,254

Held by individuals Other shares Fair value adjustment for hedged risk

Shares are repayable from the date of the Statement of Financial Position in the ordinary course of business as follows: Accrued interest Repayable on demand Other shares by residual maturity repayable: In not more than three months

Fair value adjustment for hedged risk

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

19. AMOUNTS OWED TO CREDIT INSTITUTIONS 2015 £000

2014 £000

162

105

6,000

2,000

12,000

6,000

18,162

8,105

Amounts owed to credit institutions are repayable from the date of the Statement of Financial Position in the ordinary course of business as follows: Accrued interest Other amounts owed to credit institutions by residual maturity repayable: In not more than three months In more than three months but not more than one year

20. AMOUNTS OWED TO OTHER CUSTOMERS 2015 £000

2014 £000

457

354

In not more than three months

29,781

18,623

In more than three months but not more than one year

60,632

35,948

7,500

12,421

98,370

67,346

Amounts owed to other customers are repayable from the date of the Statement of Financial Position in the ordinary course of business as follows: Accrued interest Other amounts owed to other customers by residual maturity repayable:

In more than one year but not more than five years

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

21. OTHER LIABILITIES 2015 £000

2014 £000

Corporation tax

788

875

Income tax

449

497

Social security

93

88

Other creditors

1,026

1,610

2,356

3,070

22. PROVISIONS FOR LIABILITIES AND CHARGES 2015 £000

2014 £000

At 1st January

520

518

Charge for the year

701

893

(813)

(891)

408

520

Utilisation of provision At 31st December

As a result of the notifications it has received this year from the Financial Conduct Authority, the Society has recognised in this year’s results a provision for the Financial Services Compensation Scheme (FSCS) levy of £408,000 (2014: £520,000) which is the expected interest charge for scheme year April 2015 to March 2016 and is payable in September 2016. Based on its share of protected deposits, the Society pays levies to the FSCS to enable the FSCS to meet claims against it. Claims against the FSCS were triggered by failures in the banking sector. The FSCS will have a further liability because there may be insufficient funds available from the realisation of the assets of the failed banks to fully repay the respective HM Treasury loans. Due to the inherent uncertainty in respect of this matter, the further ultimate liability of the Society is presently unknown. This matter is therefore considered by the Directors to be a contingent liability for the Society.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

23. GENERAL RESERVES 2015 £000

2014 £000 as restated

At 1st January

88,271

80,007

Profit for the financial year

11,069

10,217

(6)

(6)

(26)

(21)

1,413

(2,655)

-

729

100,721

88,271

(415)

(3,886)

101,136

92,157

100,721

88,271

Transfer of amount equivalent to additional depreciation on revalued assets Transfer of realised losses Net pension scheme movement in Statement of Other Comprehensive Income Take on balances re City of Derry Building Society merger (see Note 29) At 31st December The general reserves can be analysed into the following components: Relating to defined benefit pension liability Other elements

24. OTHER RESERVES Revaluation reserve

At 1st January - pre taxation Taxation

Transfer of amount equivalent to additonal depreciation on revalued assets Movement on revaluation / fair value Transfer of realised gains / losses Taxation on current year movements At 31st December

Available-for-sale reserve

2015 £000

2014 £000

2015 £000

2014 £000

(540)

(546)

-

(382)

-

-

-

76

(540)

(546)

-

(306)

6

6

-

-

(193)

-

112

361

26

-

-

21

-

-

(23)

(76)

(701)

(540)

89

-

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

25. FINANCIAL INSTRUMENTS A financial instrument is a contract which gives rise to a financial asset of one entity and a financial liability of another entity. The Society is a retailer of financial instruments in the form of mortgage and savings products, and also uses wholesale financial instruments to invest liquid asset balances, raise wholesale funding and manage the risks arising from its operations. The Society has a formal structure for managing risk, including established risk limits, reporting lines, mandates and other control procedures. This structure is reviewed regularly by the Asset and Liability Committee (ALCO), which is charged with the responsibility for managing and controlling the exposures of the Statement of Financial Position and the use of financial instruments for risk management purposes. Instruments used for risk management purposes include derivative financial instruments (‘derivatives’), which are contracts or agreements whose value is derived from one or more underlying price, rate or index inherent in the contract or agreement, such as interest rates. Derivatives are only used by the Society, in accordance with the Buildings Societies Act 1986, to reduce the risk of loss arising from changes in interest rates or other factors specified in the legislation. Derivatives are not used in trading activity or for speculative purposes. The type of derivative instrument used by the Society in the management and control of Statement of Financial Position risk is the interest rate swap. This is used to reduce the interest rate risk inherent in fixed rate loans and savings products by effectively converting the fixed rate into a variable market rate. The Society, as with most other building societies moving from UK GAAP, has decided to opt for IAS 39 which allows for macro hedging which reduces the volatility in the income statements. IAS 39 Financial Instruments: Recognition and Measurement outlines the requirements for the recognition and measurement of financial assets, financial liabilities, and some contracts to buy or sell non-financial items. Financial instruments are initially recognised when an entity becomes a party to the contractual provisions of the instrument, and are classified into various categories depending upon the type of instrument, which then determines the subsequent measurement of the instrument (typically amortised cost or fair value).   Under IAS 39, exposures to interest rate risk arise from loans, deposits and interest rate derivatives. However under this standard, loans and deposits are accounted for at amortised cost while interest rate derivatives are required to be accounted for at fair value through profit or loss. Consequently, risk management using derivatives may result in volatility in profit or loss even if the purpose of initial risk management using the derivative is to reduce the risk faced by the Society. In order to address this problem, hedge accounting under IAS 39 allows entities to address such recognition and measurement mismatches by either changing the measurement of the items that give rise to the risk exposure (a fair value hedge) or deferring gains or losses on the hedging instrument to a later period (a cash flow hedge). The Society will be using the fair value hedge option to apply the standard. In order to apply hedge accounting it is also necessary to identify specific hedged item(s) and hedging instrument(s) and link them via designation in individual hedging relationships. 2015 £000

2014 £000

81,500

171,500

Credit risk weighted amounts

67

131

Replacement costs

nil

nil

Nominal principal amounts

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

25. FINANCIAL INSTRUMENTS (Continued) Market risk is the risk of changes to the Society’s financial condition caused by market interest rates. The Society is exposed to market risk in the form of changes in the relationship between short and long term interest rates and the divergence of interest rates for different Statement of Financial Position elements (basis risk). The Society has adopted the ‘Extended’ approach to interest rate risk, as defined by the PRA, which aims to undertake the hedging of individual transactions within an overall strategy for structural hedging based on a detailed analysis of the Statement of Financial Position. The table below summarises the repricing mismatches as at 31st December 2015. Items are allocated to time bands by reference to the earlier of the next interest rate repricing date and the maturity date.

Not more than three months £000

More than three months but not more than six months £000

More than six months but not more than one year £000

More than one year but not more than five years £000

Non interestbearing £000

Total £000

Liquid assets

253,185

61,338

7,500

10,000

2,096

334,119

Loans and advances to customers

886,489

59,284

94,385

367,602

(13,608)

1,394,152

Tangible fixed assets

-

-

-

-

7,123

7,123

Intangible fixed assets

-

-

-

-

348

348

Other assets

-

-

-

-

475

475

Prepayments and accrued income

-

-

-

-

564

564

1,139,674

120,622

101,885

377,602

(3,002)

1,736,781

950,135

84,694

195,604

285,371

465

1,516,269

Amounts owed to credit institutions

7,000

9,000

2,000

-

162

18,162

Amounts owed to other customers

29,781

25,100

35,532

7,500

457

98,370

Derivative financial instruments

-

-

-

-

692

692

Other liabilities

-

-

-

-

2,356

2,356

Pension liability

-

-

-

-

415

415

Provisions for liabilities and charges

-

-

-

-

408

408

Reserves

-

-

-

-

100,109

100,109

986,916

118,794

233,136

292,871

105,064

1,736,781

81,500

(5,000)

(10,000)

(66,500)

-

-

Interest rate sensitivity gap

234,258

(3,172)

(141,251)

18,231

(108,066)

-

Cumulative gap

234,258

231,086

89,835

108,066

-

-

Assets

Total assets Liabilities Shares

Total liabilities Impact of derivative instruments

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

25. FINANCIAL INSTRUMENTS (CONTINUED) The repricing mismatch comparatives as at 31st December 2014 (as restated) were as follows:

Not more than three months £000

More than three months but not more than six months £000

More than six months but not more than one year £000

More than one year but not more than five years £000

Non interestbearing £000

Total £000

301,887

4,429

12,002

-

116

318,434

-

-

-

-

25

25

Loans and advances to customers

834,916

74,206

108,639

359,441

(16,983)

1,360,219

Tangible fixed assets

-

-

-

-

7,767

7,767

Intangible fixed assets

-

-

-

-

309

309

Other assets

-

-

-

-

1,444

1,444

Prepayments and accrued income

-

-

-

-

577

577

1,136,803

78,635

120,641

359,441

(6,745)

1,688,775

997,370

80,570

196,556

226,352

16,406

1,517,254

Amounts owed to credit institutions

2,000

2,500

3,500

-

105

8,105

Amounts owed to other customers

18,623

11,000

24,948

12,421

354

67,346

Derivative financial instruments

-

-

-

-

863

863

Other liabilities

-

-

-

-

3,070

3,070

Pension liability

-

-

-

-

3,886

3,886

Provisions for liabilities and charges

-

-

-

-

520

520

Reserves

-

-

-

-

87,731

87,731

1,017,993

94,070

225,004

238,773

112,935

1,688,775

Impact of derivative instruments

141,500

(40,000)

(25,000)

(76,500)

-

-

Interest rate sensitivity gap

260,310

(55,435)

(129,363)

44,168

(119,680)

-

Cumulative gap

260,310

204,875

75,512

119,680

-

-

Assets Liquid assets Derivative financial instruments

Total assets Liabilities Shares

Total liabilities

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

25. FINANCIAL INSTRUMENTS (CONTINUED) Fair values of financial instruments  Set out below is a comparison of book and fair values of the Society’s financial instruments by category as at 31st December 2015. All activities are non-trading book. Where available, market values have been used to calculate fair values. Where market values are not available, fair values have been calculated by discounting cash flows at prevailing interest rates.   The table excludes certain financial assets and liabilities which are not listed or publicly traded, or for which a liquid and active market does not exist.

Assets / (Liabilities)

2015 Book value £000

2015 Fair value £000

2014 Book value £000

2014 Fair value £000

Assets Liquid assets Loans and advances to customers Derivative financial instruments Total

334,119

333,579

318,434

318,181

1,394,152

1,385,197

1,360,219

1,351,340

-

-

25

25

1,728,271

1,718,776

1,678,678

1,669,546

1,516,269

1,516,269

1,517,254

1,517,254

116,532

116,070

75,451

74,980

692

692

863

863

1,633,493

1,633,031

1,593,568

1,593,097

Liabilities Shares Wholesale liabilities Derivative financial instruments Total

Liquid assets comprise cash in hand and balances with the Bank of England, loans and advances to credit institutions and debt securities. Wholesale liabilities comprise all financial liabilities reported within ‘Amounts owed to credit institutions’ and ‘Amounts owed to other customers’.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

25. FINANCIAL INSTRUMENTS (CONTINUED) The categories of financial instruments as at 31st December 2015 were as follows:

Assets / (Liabilities)

At amortised cost £000

Loans and receivables £000

Availablefor-sale £000

Fair value through profit and loss £000

Total £000

Assets Cash in hand and balances with Bank of England

190,257

-

-

-

190,257

Loans and advances to credit institutions

-

43,761

-

-

43,761

Debt securities

-

-

100,101

-

100,101

Loans and advances to customers

-

1,394,152

-

-

1,394,152

190,257

1,437,913

100,101

-

1,728,271

Total financial assets Total non financial assets

8,510

Total Assets

1,736,781

Liabilities Shares

1,516,269

-

-

-

1,516,269

Amounts owed to credit institutions

18,162

-

-

-

18,162

Amounts owed to other customers

98,370

-

-

-

98,370

Derivative financial instruments

-

-

-

692

692

1,632,801

-

-

692

1,633,493

Total financial liabilities Total non financial liabilities Reserves Total Liabilities

3,179 100,109 1,736,781

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

25. FINANCIAL INSTRUMENTS (CONTINUED) The categories of financial instruments as at 31st December 2014 were as follows:

Assets / (Liabilities)

At amortised cost £000

Loans and receivables £000

Availablefor-sale £000

Fair value through profit and loss £000

Total £000

Assets Cash in hand and balances with Bank of England

279,155

-

-

-

279,155

Loans and advances to credit institutions

-

39,279

-

-

39,279

Derivative financial instruments

-

-

-

25

25

Loans and advances to customers

-

1,360,219

-

-

1,360,219

279,155

1,399,498

-

25

1,678,678

Total financial assets Total non financial assets

10,097

Total Assets

1,688,775

Liabilities Shares

1,517,254

-

-

-

1,517,254

Amounts owed to credit institutions

8,105

-

-

-

8,105

Amounts owed to other customers

67,346

-

-

-

67,346

Derivative financial instruments

-

-

-

863

863

1,592,705

-

-

863

1,593,568

Total financial liabilities Total non financial liabilities Reserves Total Liabilities

7,476 87,731 1,688,775

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

26. FINANCIAL COMMITMENTS 2015 £000

2014 £000

12

165

6

6

188

33

1,031

1,179

1,225

1,218

58,645

53,773

Capital commitments Capital commitments at 31st December for which no provision has been made: Contracted but not provided for

Lease commitments Total future minimum lease commitments in respect of land and buildings under non-cancellable operating leases which expire: Within one year Between one to five years After five years

Contingent liabilities The Society has a contingent liability in respect of contributions to the Financial Services Compensation Scheme as outlined in Note 22. Memorandum items Irrevocable undrawn mortgage loan facilities

27. PENSION SCHEME Defined contribution scheme The Society operates a defined contribution scheme which is open to all employees who are not in the defined benefit scheme and the assets of which are vested with independent trustees for the benefit of members and their dependants. The contributions for the year amounted to £125,000 (2014: £98,000) and have been charged to ‘Administrative expenses’.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

27. PENSION SCHEME (CONTINUED) Defined benefit scheme The Society operates a funded pension scheme, which provides benefits on a defined benefit basis. There is also an unfunded arrangement in respect of the executive Directors. The defined benefit scheme has been closed to new employees from April 2001. The valuation used for FRS 102 disclosures has been based on the most recent full actuarial valuation of 13th April 2015 and updated to 31st December 2015 by a qualified independent actuary in order to assess the liabilities of the scheme at 31st December 2015 using the Projected Unit Method. A full actuarial valuation is carried out every three years. Pension scheme assets were restated at their market value at 31st December 2015. The major assumptions used by the actuary were: At 31st Dec 2015 %

At 31st Dec 2014 %

Rate of increase of pensions in payment

3.00

2.90

Discount rate

4.00

3.60

Inflation

3.00

3.00

2015 £000

2014 £000

656

590

The following amount has been recognised in the performance statements under the requirements of FRS 102

The amount relating to operating costs was as follows:

Current service cost (included within ‘Administrative expenses’)

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

27. PENSION SCHEME (CONTINUED) 2015 £000

2014 £000

Current service cost

656

590

Net finance charge / (income)

262

(62)

Defined contribution scheme charge

125

98

1,043

626

1,044

1,272

(1,181)

(1,210)

Administrative expenses

(125)

-

Net (charge) / income (included within ‘Administrative expenses’)

(262)

62

Actuarial gain / (loss) recognised in pension scheme

1,723

(3,319)

Movement in deferred tax relating to pension scheme

(310)

664

Actuarial gain / (loss) recognised in the Statement of Other Comprehensive Income

1,413

(2,655)

The amount relating to other pension costs within staff costs (Note 6) was as follows:

The amount relating to the finance charge was as follows: Expected return on pension scheme assets Interest on pension scheme liabilities

Actuarial gains and losses have been reported in the Statement of Other Comprehensive Income as follows:

The amount included in the Statement of Financial Position arising from the Society’s obligations in respect of the defined benefit pension scheme and the unfunded arrangement is as follows:

Fair value of pension scheme assets Present value of pension scheme liabilites Deficit in pension scheme

Value at 31st Dec 2015 £000

Value at 31st Dec 2014 £000

31,311

28,757

(31,726)

(32,643)

(415)

(3,886)

The pension liability of £415,000 comprises £150,000 surplus for the funded pension scheme and £565,000 liability for the unfunded arrangement.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

27. PENSION SCHEME (CONTINUED) 2015 £000

2014 £000

Movements in the present value of scheme liabilites in the current period were as follows: 32,643

26,879

656

590

1,181

1,210

184

155

(2,356)

4,423

(582)

(614)

31,726

32,643

28,757

24,915

Expected return on scheme assets

1,044

1,272

Actuarial (loss) / gain

(633)

1,119

Contributions from the Society

2,666

1,910

184

155

Administrative expenses

(125)

-

Benefits paid

(582)

(614)

31,311

28,757

At 1st January Current service cost Interest cost Contributions from scheme members Actuarial (gain) / loss Benefits paid At 31st December Movements in the present value of scheme assets in the current period were as follows: At 1st January

Contributions from scheme members

At 31st December The analysis of the scheme assets and the expected rate of return at the date of the Statement of Financial Position were as follows:

Expected return

Fair value of assets

2015 %

2014 %

2015 £000

2014 £000

Equity instruments

4.00

3.60

13,110

13,109

Debt instruments

4.00

3.60

13,440

13,466

Property instruments

4.00

3.60

1,654

1,073

Other assets

4.00

3.60

3,107

1,109

4.00

3.60

31,311

28,757

To develop the expected long term rate of return on assets assumption, the Society considered the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted, based on the target asset allocation, to develop the expected long-term rate of return on assets assumption for the portfolio. This resulted in the selection of the 4.00% assumption. The scheme’s assets are not intended to be realised in the short term and their fair values may be subject to significant change before the assets are realised. The present values of the scheme’s liabilities are derived from cash flow projections over long periods and thus are inherently uncertain.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

27. PENSION SCHEME (CONTINUED) Details of experience gains and losses for the year to 31st December

Fair value of scheme assets Present value of defined benefit obligations Deficit in the scheme

2015 £000

2014 £000

2013 £000

31,311

28,757

24,915

22,483

19,885

(31,726)

(32,643)

(26,879)

(24,095)

(21,116)

(415)

(3,886)

(1,964)

(1,612)

(1,231)

2015

2014

2013

2012

2011

-

1,119

891

738

(332)

0%

4%

4%

3%

(2)%

-

(846)

-

-

517

0%

(3)%

0%

0%

2%

2012 £000

2011 £000

Experience adjustments on scheme assets Amount (£000) Percentage of scheme assets

Experience adjustments on scheme liabilites Amount (£000) Percentage of scheme liabilities

The estimated values of contributions expected to be paid to the scheme during the current financial year, 2016, is £848,000 consisting of £649,000 from the Society and £199,000 from the members.

28. OTHER OPERATING INCOME Included within Other Operating Income is £nil (2014 as restated: £88,000) relating to the sale of gilts during the year.

29. TRANSFER OF ENGAGEMENTS On 1st July 2014 the Society merged with City of Derry Building Society (City of Derry) following the approval of the shareholding and borrowing members of City of Derry. Following the transfer of engagements the City of Derry Building Society ceased to exist and was subsumed in Progressive Building Society.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

30. TRANSITION TO FRS 102 AND IAS 39 This is the first year that the Society has presented its financial statements under Financial Reporting Standard 102 (FRS 102) and IAS 39. The last financial statements prepared under UK GAAP were for the year ended 31st December 2014. The date of transition to FRS 102 and IAS 39 was 1st January 2015, with 2014 comparative figures being re-stated as applicable. Set out below are the changes which reconcile profit for the financial year ended 31st December 2014 and the total equity as at 1st January 2014 and 31st December 2014 between UK GAAP as previously reported and FRS 102 plus IAS 39. Reconciliation of Profit for 2014 2014 £000 Profit for year ended 31st December 2014 under UK GAAP as previously reported

9,851

Derivative financial instruments

(a)

(96)

Available-for-sale assets

(b)

21

Effective interest rate

(c)

654

Loan impairment

(d)

(122)

Tax impact of above adjustments

(91)

Profit for year ended 31st December 2014 under FRS 102 and IAS 39

10,217

Reconciliation of Equity for 2014

Total reserves under UK GAAP as previously reported

As at 1st Jan 2014

As at 31st Dec 2014

80,808

88,733

Derivative financial instruments

(a)

41

(55)

Available-for-sale assets

(b)

(382)

-

Effective interest rate

(c)

(560)

(172)

Loan impairment

(d)

(1,169)

(1,025)

414

250

79,152

87,731

Tax impact of above adjustments Total reserves under FRS 102 and IAS 39

(a) Under IAS 39 derivatives are measured at fair value. When certain criteria specied in IAS 39 are fulfilled, the Society applies fair value hedge accounting, whereby changes in the fair value of the derivatives are recognised in the Income Statement together with changes in the fair value of the hedged item that are attributable to the hedged risk. (b) Under IAS 39 debt securities are classified as available-for-sale assets and measured at fair value with fair value gains or losses on realisation recognised in the Income Statement. (c) The primary impact for the Society of EIR methodology is in relation to mortgage loans. Under FRS 102 directly attributable upfront costs and fees such as application and arrangement fees, survey fees and procuration fees are deferred and recognised over the expected life of the mortgage asset. (d) The main change under FRS 102 to the residential mortgage model provisioning methodology relates to the introduction of discounted cash flows over the market value of the properties.

NOTES TO THE ACCOUNTS (CONTINUED) for the year ended 31st December 2015

31. CAPITAL STRUCTURES The Society’s policy is to maintain a strong capital base to maintain Member and market confidence and to sustain future development of the Society. The formal Internal Capital Adequacy Assessment Process (ICAAP) assists the Society with its management of capital. Through its monthly reporting, the Board monitors the Society’s capital position to assess whether adequate capital is held to mitigate the risks it faces in the course of its business activities. The Society’s actual and expected capital position is reviewed to ensure it is maintained at a level above its Internal Capital Guidance (ICG). The Board manages the Society’s capital and risk exposures to maintain capital in line with regulatory requirements which includes monitoring of: a. Lending and Business Decisions - the Society uses strict underwriting criteria to help it assess whether mortgage applications fit within its appetite for credit risk. b. Pricing - pricing models are utilised for all mortgage product launches. c. Concentration risk - the design of retail products takes into account the overall mix of products to ensure that exposure to market risk remains within permitted parameters. d. Counterparty risk - wholesale lending is only carried out with approved counterparties in line with the Society’s lending criteria and is subject to a range of limits. The limits are monitored daily to ensure the Society remains within risk appetite. This is subject to regular stress tests to ensure the Society maintains sufficient capital for future possible events. The Society’s capital requirements are set and monitored by the Prudential Regulatory Authority (PRA). During 2015 the Society has complied with the new requirements included within the EU Capital Requirements Directive IV (Basel III). There were no reported breaches of capital requirements during the year. There have been no material changes in the Society’s management of capital during the year. Under Basel III Pillar 3 the Society is required to publish further information regarding its capital position and exposures. The Society’s Pillar 3 disclosures are available on our website www.theprogressive.com.

ANNUAL BUSINESS STATEMENT for the year ended 31st December 2015

1. STATUTORY RATIOS AND PERCENTAGES

Proportion of business assets not in the form of loans fully secured on residential property (lending limit) Proportion of shares and borrowings not in the form of shares held by individuals (funding limit)

31st Dec 2015 %

Statutory Limit %

0.45

25

14.31

50

The percentages are calculated in accordance with, and the statutory limits are those prescribed by, Sections 6 and 7 of the Building Societies Act 1986.   Business assets are the total assets of the Society as shown in the Statement of Financial Position plus provisions for bad and doubtful debts, less tangible and intangible fixed assets and liquid assets.   Loans fully secured on residential property are the amount of principal owing by borrowers and interest accrued not yet payable. This is the amount shown in the Statement of Financial Position plus provisions for bad and doubtful debts.

2. OTHER PERCENTAGES 31st Dec 2015 %

31st Dec 2014 % as restated

As a percentage of shares and borrowings: Gross capital

6.13

5.51

Free capital

5.80

5.09

20.46

19.99

Liquid assets

As a percentage of mean total assets:

For 2015

For 2014 as restated

Profit after taxation

0.65

0.62

Management expenses

0.66

0.63

Definitions ° ‘Shares and borrowings’ represent the aggregate of shares, amounts owed to credit institutions and amounts owed to other customers. ° ‘Gross capital’ represents the aggregate of the general reserves, revaluation reserve and available-for-sale reserve. ‘Free capital’ comprises gross capital and collective provisions for bad and doubtful debts less ° tangible and intangible fixed assets as shown in the Statement of Financial Position. ° ‘Liquid assets’ represent the total of cash in hand, loans and advances to credit institutions, debt securities and other liquid assets. ° ‘Mean total assets’ represent the simple average of the total assets at the beginning and end of the financial year. ° ‘Management expenses’ represent the aggregate of administrative expenses, depreciation and amortisation.

ANNUAL BUSINESS STATEMENT (CONTINUED) for the year ended 31st December 2015

3. INFORMATION RELATING TO DIRECTORS AND OTHER OFFICERS AT 31st DECEMBER 2015 DIRECTORS Name and Date of Birth

Date of Business Appointment Occupation

Other Directorships

John Trethowan MBA FIB (24/07/53)

17/01/12

The Foundation for Investing in Communities Irish Association for the Integration and Settlement of Offenders South Eastern Health & Social Care Trust None

Retired Banker

Darina Armstrong 01/01/05 BA (Hons) MSc FIB FCA (07/05/67)

Building Society Chief Executive

Michael S Boyd BSc (Hons) FCA (01/10/69)

01/04/11

Building Society None Deputy Chief Executive & Finance Director

Declan Moore BA MBA (02/03/65)

21/07/14

Building Society Operations Director

None

Adrian Coles OBE MA (19/04/54)

01/05/14

Retired DirectorGeneral of Building Societies Association

Margaret Cullen BA MSc PhD (08/01/72)

20/02/15

Academic

Reclaim Fund Ltd Financial Services Commission (Gibraltar) Housing Securities Ltd Housing Securities (40) Ltd BSA Pension Trustees Ltd None

Edith M Gowdy MA (Hons) Oxon (03/09/76)

01/07/08

Solicitor

None

Gerard McGinn BA (Hons) FIB (04/05/57)

20/02/15

Company Director

Michael W Parrott CPFA (09/12/53)

01/06/12

Retired Chartered Public Finance Accountant

Capita Asset Services (Ireland) Ltd Capita International Financial Services (Ireland) Ltd Strategic Investment Board Loughborough Building Society Garafin Management Company Limited by Guarantee

ANNUAL BUSINESS STATEMENT (CONTINUED) for the year ended 31st December 2015 Documents may be served on the Directors at the offices of the Society’s principal solicitors, Peden & Reid, 22 Callender Street, Belfast BT1 5BU. Mrs Darina Armstrong, Mr Michael Boyd and Mr Declan Moore each have a one-year rolling service contract, which is terminable by the Director on six months notice. Mrs Armstrong’s contract was entered into in January 2005 and subsequently amended in February 2012. Mr Boyd’s contract was entered into in February 2012 and Mr Moore’s contract was entered into in July 2014. No other Directors have a service contract.

OFFICERS Name

Business Occupation

Directorships

Mairead King BA (Hons)

Senior Manager - Conduct Risk

None

Peter G Lyttle BA

Head of Retail Credit & Society Secretary

None

Pamela M Martin MA MCIPD

Head of Personnel & Administration

None

Tommy F O’Neill BSc (Hons)

Chief Information Officer

None

Gareth T J Robinson BSc (Hons) CGMA Senior Manager - Prudential Risk

None

SOCIETY OFFICES Head Office - Progressive House,

33 / 37 Wellington Place, Belfast BT1 6HH

028 9024 4926

BRANCH NETWORK Ballymena - 79 / 81 Wellington Street

William Burgess (Area Manager - North & West)

Bangor - 6 Castle Street

Elaine Molyneaux (Branch Manager)

Belfast - 7 Arthur Square

Kevin Flannery (Branch Manager) Belfast - 33 / 37 Wellington Place Graeme Norris (Area Manager - Greater Belfast)

Coleraine - 17 The Diamond

Lorraine Johnston (Branch Manager)

Enniskillen - 24 High Street

Brenda Robinson (Branch Manager)

Glengormley - 323 Antrim Road

Kerry MacDougall (Branch Manager)

Lisburn - 3 Market Place

Ian Nelson (Branch Manager)

Londonderry - 3 Millennium Forum

Noel Murray (Branch Manager)

Newtownards - 4 Conway Square

Lyn Crawford (Branch Manager)

Omagh - 40 High Street

Amanda Wilson (Branch Manager)

Portadown - 12 Market Street

Lynne Lyness (Branch Manager)

WEB ADDRESS

www.theprogressive.com

028 2564 2845

028 9127 0348

028 9032 0573

028 9082 1821

028 7032 9999

028 6632 2470

028 9083 9329

028 9260 2802

028 7137 2277

028 9181 9709

028 8225 0989

028 3833 0103

Founded in 1914 Progressive Building Society is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register Number 161841. The Society is a member of the Building Societies Association and the Council of Mortgage Lenders.

Financial Services Compensation Scheme Progressive Building Society is a participant in the Financial Services Compensation Scheme established under the Financial Services and Markets Act 2000. The key areas covered are as follows:

Deposits (Savings) Payments under the scheme are limited to a maximum of £75,000. Most investors are covered, including individuals and small firms. A small number of categories of shares and deposits are not covered. From 3rd July 2015, the FSCS provides a £1,000,000 protection limit for temporary high balances held.

Mortgages Mortgage advising and arranging is covered for 100% of the claim, up to a limit of £50,000.

Insurance Insurance advising and arranging is covered for 90% of the claim, without any upper limit.

Complaints The Society has an internal complaints procedure which sets out timescales for dealing with complaints. Those we cannot settle may be referred to the Financial Ombudsman Service for a decision. Further details on all of the above are available on request from the Society.