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Annual Report & Accounts 2002

Britannia’s mission is to be known


as Britain’s best mutual – a great
organisation to which our Members
and our people are proud to belong.

Contents
Five Year Review 1
Chairman’s Statement 2
Chief Executive’s Report 4
Board of Directors 8
Directors’ Report 10
Independent Auditors’ Report 13
Income and Expenditure Accounts 14
Balance Sheets 16
Consolidated Cash Flow Statement 18
Statement of Accounting Policies 19
Notes to the Accounts 22
Annual Business Statement 51
Annual Report of the Remuneration Committee 57
Britannia Building Society Annual Report & Accounts 2002
FIVE YEAR REVIEW

Total Assets (£bn) Operating Profit (£m)


0 5 10 15 20 0 25 50 75 100 125 150

1998 1998

1999 1999

2000 2000

2001 2001

2002 2002

Cost: Mean Assets (%)


Gross Capital (£bn) 1.3

0 0.2 0.4 0.6 0.8 1.0 1.2 1.4


1.2
1998

1999 1.1

2000 1.0

2001
0.9

2002
0.8
1998 1999 2000 2001 2002

Definitions:
‘Operating profit’ is measured before exceptional items and Britannia Membership Reward
‘Gross capital’ represents general reserve, subordinated liabilities and subscribed capital
‘Cost’ represents administrative expenses and depreciation, and excludes amortisation of goodwill
‘Mean assets’ represents the amount produced by halving the aggregate of total assets at the beginning and end of the financial year
Figures have been restated to exclude the impact of the long term life assurance business, which was disposed of during 1999.
1
Britannia Building Society Annual Report & Accounts 2002

CHAIRMAN’S STATEMENT

2002 was another very successful year for Britannia. We It has been a very difficult period for investment sales, and there
continued to deliver against our ambitious corporate plan are few signs of savers regaining confidence in the equities
targets, with assets under management close to £20 billion market. As a consequence, we have seen strong inflows into our
for the first time and record mortgage sales of £4.9 billion. savings accounts, especially our mini cash and TESSA only ISAs.
Operating profit was held at £132.4 million, reflecting our
commitment to return maximum value to Members whilst Britannia Membership Reward and other Member benefits
maintaining a financially strong organisation. This year £37.3 million was shared with Members through the
Britannia Membership Reward payment. Over £288 million has
We have begun to reap the benefit of our new business model, now been distributed to Members during the seven years since
running our Membership business separately from our Britannia the Scheme was introduced – clear proof of the ongoing
Capital Investment Group (‘BCIG’) subsidiaries. benefits of Mutual ownership.The average amount paid out in
that time now totals £274, with potential maximum payouts
The Membership business is, in effect, the traditional building totalling £3,500.
society, focusing exclusively on offering savings, mortgages
and home services to our Members.The prime aim of the The Britannia Membership Reward is just one way in which
Membership business is to maximise the value it provides to Membership of Britannia is rewarded. Our Mutual status allows
our Members by providing competitively priced products and us to offer competitive rates on our savings and mortgage
excellent customer service while minimising margin and costs. products alike. Britannia products have featured in independently
The Membership business makes only the profit necessary to compiled national newspaper ‘best buy’ tables every week for
fund future growth and maintain solvency. the past four years – we believe this is a unique achievement
among banks and building societies.
The BCIG includes businesses that offer financial services to
both corporate clients and individuals who are not Members Mutuality
of the Society. Capital from the Membership business is invested The Board’s view is that Members’ interests are best served by
in the BCIG subsidiaries, which focus on maximising the profit the Society remaining Mutually owned.
they generate from this capital.This return is used to fund our
unique Britannia Membership Reward. Our ability to continue to compete successfully depends on
maximising the value we offer to our Members. Contrary to the
Business performance views expressed by some commentators, being Mutually owned
The personal finance market remains extremely competitive. As is not a soft option. We must continually show how our Mutual
anticipated, this has led to continued pressure on interest margins structure promotes innovation, high quality service and control
for the core savings and mortgage business, resulting in reduced of costs to create value for the Membership.
profits from this area as we focus on maintaining Member value.
Britannia can succeed in this tough market through careful Britannia’s people
management of our assets, control of costs and ensuring that The Society has a clearly stated diversity policy. A Committee,
Mutual ownership continues to work for Members, old and new. chaired by a senior executive, oversees activity in this area. We
are members of Opportunity Now. We also provide facilities
We continue to prosper through a strategy of prudent lending. for Members whose first language is not English, including
Our focus on quality lending will minimise the risk of increased badges identifying employees who speak other languages and
arrears and bad debts should the economic picture change the publication of some Society literature in languages other
2 going forward. than English.
Britannia Building Society Annual Report & Accounts 2002
Our priority remains to continue to provide
the excellent levels of service and value our
Members expect, even though this is at the
expense of profitability.

The Group recruits and employs people whose skills, ability I would also like to place on record my thanks to all of my
and experience most closely match the needs of the job.The Board colleagues, both for their hard work on behalf of all the
Employment Service has acknowledged Britannia’s practices in Society’s Members and their support for me personally.
employing people with disabilities.
Looking forward
Our people are key to delivering the benefits of Mutuality and We expect the highly competitive low interest rate environment
we strive to ensure that they are motivated to deliver excellent to continue in 2003. Our priority remains to continue to provide
customer service. We invest in training, technology and facilities the excellent levels of service and value our Members expect,
to ensure that the service our Members receive is professional, even though this is at the expense of profitability. It is our
efficient and friendly. intention to maintain profit levels from our core mortgage and
savings business at a level sufficient to sustain our capital strength
On behalf of my Board colleagues I would like to place on and maximise profits from the BCIG for the benefit of Members.
record my sincere thanks to all our people for their contribution
to Britannia’s continued success. We will build on our performance in 2002, maintaining a
competitive position in the mortgage, savings and investment
The Board of Directors markets and we have set ambitious targets to increase sales of
Britannia has a strong and capable Board of Directors who all these products. We will also continue stringently to control
ensure we continue to keep pace with the rapidly changing costs, while investing in those areas of the business where we
economic, legal and statutory framework within which all see potential for growth and Member value.
businesses must operate.

Ian Adam was elected as Deputy Chairman at the end of 2002,


succeeding Rhidian Jones, who will be retiring from the Board
later in 2003. Rhidian has been a source of great strength and
wise counsel to the Board since his appointment in 1993. Barrie Bernstein
Chairman
Neville Richardson succeeded Graham Stow as Group Chief 19 February 2003
Executive in November. Graham became Executive Vice
Chairman, pending his retirement in May 2003 on completion
of his year in office as Chair of the Building Societies
Association. Neville was previously Deputy Chief Executive,
having joined the Board as Group Finance Director in 1998.

Through his inspirational leadership, Graham has transformed


Britannia over the last few years towards a truly modern
Mutual.The industry has seen many challenges during
Graham’s stewardship, and he has been an excellent
ambassador for the building society sector generally, and
Britannia in particular, promoting the benefits of Mutuality
to the widest possible audience.
3
Britannia Building Society Annual Report & Accounts 2002

CHIEF EXECUTIVE’S REPORT

Britannia’s mission is to be known as Britain’s best Mutual – a Being the best Mutual means we will maintain an extensive
great organisation to which our Members and employees are branch network.This does not mean we will never close a
proud to belong. We are dedicated to helping the Society’s branch, but it does mean we will continue to invest in a
Members achieve their goals. network that is larger than many comparably sized organisations.

In the course of developing a new corporate plan, which Values


has set fundamental principles, values and targets for Our values describe the way we will run our business. We may
performance for the next three years, we have reviewed not always fully live up to these values today, but success in
what being a Mutual should mean for our Members in the delivering our corporate plan will mean we will get better and
21st Century. better over the next few years.The success of our business is
dependent on these values underpinning all of our activities.
Fundamental principles
We have confirmed a number of principles, which describe the Being the best Mutual means we will always put our customers
things we will not change in our business. Most are already in first. We are driven by the needs of our customers and this means
place, though some aspects need improving. we will strive to be easy to do business with. We have a passion
for making things easy for our customers when they deal with us.
First and foremost, we will remain a Mutual. Mutual ownership
means we act in the Membership’s best interests at all times. We believe that the success of our business is dependent on
We are owned by our Members and this is reflected in all clarity with our customers and with our people, so we will be
we do. excellent at communications.

In order to safeguard our Members’ interests, we must remain Great service means taking personal responsibility – so every
financially strong – we have a responsibility to the Members Britannia employee will take personal responsibility for his or
of the Society to ensure that their money is in a secure place. her own behaviour and performance.

To be the best Mutual we must be ethical, socially responsible To compete in the savings and mortgages marketplace, we must
and a model of compliance. We aspire to the highest ethical deliver the required level of service in the most efficient way; to
standards to recognise the role we play in the community and thrive, we need to be faster, cheaper, better at all we do.
to comply with all rules and regulations affecting our business.
By delivering against these values, our Members will know that
Great service requires outstanding people, and we will therefore they can trust Britannia to deliver great value and service
be a great place to work, grow and develop. We value the consistently – and a strong financial performance will underpin this.
contribution of our people and are committed to creating a
working environment and investing in development and training Financial performance
to help them give their best. The year saw a strong financial performance from the Group,
enabling us to pay £37.3 million to Members through our
One of the most significant differentiators between Britannia Reward scheme, in addition to the value received through
and shareholder owned banks is that we do not pay shareholder our product pricing. In 2001 the total Reward payment was
dividends. Instead, we will continue to acknowledge Members’ £53.4 million, including a special bonus paid to Members arising
loyalty through our unique Britannia Membership Reward and on the sale of our remaining shareholding in Britannic Asset
4 by providing market leading rates. Management Limited.
Britannia Building Society Annual Report & Accounts 2002
The year saw a strong financial performance
from the Group, enabling us to pay £37.3 million
to Members through our Reward scheme.

Operating profit was on target at £132.4 million We also maintained our cut-price mortgage rates for loyal
(2001: £138.3 million). Of this, £61.9 million came from borrowers. Borrowers who have had their current variable rate
Britannia Capital Investment Group (2001: £50 million). mortgage product for ten years or more receive a discount of
0.40% from our standard variable rate, with five-year borrowers
Group interest margin was reduced to 1.11% (2001: 1.30%). receiving a 0.20% discount.These discounts ensure that
In line with our commitment to deliver the maximum possible borrowers continue to receive good value for money after any
value to Members, the Society margin was reduced to 0.94% introductory offers have expired.
(2001: 1.13%) – among the lowest in the industry.
Savings inflows of £600 million were achieved in 2002,
The Group’s administrative expenses, before one-off reflecting our competitive savings product range, and the
reorganisation costs of £3.8 million, rose by only 0.2%, less impact on investor confidence of the continued turmoil in
than the rate of inflation.This reflects our tight control on global stock markets.
running costs even though we are investing £50 million in new
mortgage and savings systems to improve customer service. The Group’s capital and reserves increased by 13% to £1,387
million (2001: £1,226 million) further increasing the security of
The Group cost/asset ratio (before amortisation of goodwill) Members’ savings.
was reduced to 0.86% (2001: 0.92%).The cost/income ratio
(before amortisation of goodwill) rose slightly to 51.7% Platform/Verso merger
(2001: 49.5%), reflecting the value offered to Members through Britannia has created a one-stop shop for mortgage
lower margins. intermediaries by merging its award-winning Platform Home
Loans and Verso subsidiaries.The new operation, called Platform,
The Society operates a defined contribution scheme for will provide introducers with mortgages to meet virtually all
new employees. However, in common with most businesses, their customer requirements.The product range includes prime,
our pension fund assets in the defined benefits scheme have light-adverse and non-conforming packages, as well as niche
been affected by falling stock markets. As a consequence, the products such as self-certification and buy-to-let.The new business
last valuation (April 2002) resulted in a deficit in the defined is based in London’s Docklands and is run by the previous
benefits scheme.The Society has responded by both making Platform Home Loans management team, led by David Tweedy.
a cash contribution of £14 million and increasing its regular We believe there is a strong and growing demand in the market
contribution rates in 2002. It is our intention to eliminate the for a one-stop shop approach.
deficit over the medium term.
Platform’s new cascade underwriting service means that if an
Gross lending for the Group totalled £4.9 billion – up 26% on applicant does not meet criteria on its prime products they will
2001 (2001: £3.9 billion) – a creditable performance in a highly automatically be considered for one of its many other products
competitive market. according to their credit status. One call is all that will be
required to get Platform’s best offer.
Lending performance would have been even stronger, but we chose
to reduce the flow of new business for part of the year in order Many sales and service outlets, one great standard
to allow new back office systems to be brought on line as part of service
of our core systems replacement programme. Nonetheless, our On the Membership side, our aim is to offer value to our
fixed rate and flexible mortgages featured throughout the year Members through their sales and service outlet of choice.
in independently compiled national newspaper ‘best buy’ tables. During the year we removed virtually all administration from 5
Britannia Building Society Annual Report & Accounts 2002

CHIEF EXECUTIVE’S REPORT

the branches, to leave branch people free to focus all their and the Group’s intranet ensure employees are aware of
energies on customer sales and service. We have significantly the Group’s performance and objectives and the business
increased numbers in our central processing teams in Leek to environment in which it operates.
handle all administration and increased resources in the branch
network to improve customer services.This is both a more Our Leek-based document processing team won the Society’s
efficient and effective way of managing the work. top team title and our Northwich branch team won branch
of the year for an unprecedented second year in a row. Both
Our innovative branch sharing arrangement with Yorkshire teams demonstrated the high standards of customer service,
Building Society has now been in place for a year. More than commitment and innovation we seek to encourage across
500 transactions take place each month. Britannia’s Members the business.
can pay into or withdraw money free of charge from their
savings accounts and conduct business on their mortgage Commitment to diversity
accounts at Yorkshire’s branches, and Yorkshire’s Members The Society’s employment and training and development
can use Britannia’s network. A practical way of enhancing the policies have already won awards recognising our commitment
benefits we offer, the agreement means more than 330 to equality of opportunity for women and for disabled people.
branches are available to our Members. As a business we are constantly striving to improve performance
and there is a clear business case for us to embrace diversity
While branches remain key to our sales and service strategy, as an employer of choice, to improve service for our ethnic
more and more customers are choosing to use our call centre, minority Members and to explore the opportunities that the
our postal service and the internet. Our Leek-based call centre growing ethnic market in the UK provides.
handled more than one million calls during the year. It also sold
4,000 mortgages worth £480 million. To this end, we are committed to fulfilling the membership
requirements of Race for Opportunity and improve cultural
eBusiness at Britannia continues to develop well and in 2002 diversity.The focus is on taking positive action to improve our
there were half a million visitors to our website, with mortgage standards and not positive discrimination.
applications exceeding £110 million.
Awards and achievements
Britannia’s people Our pioneering work on customer relationship management
Employee training and development are key to our success and (‘CRM’) systems, which is about attracting, retaining and
ensure that existing employees are considered first for any new deepening relationships with targeted customer segments, was
opportunities within the Group.This is reflected in our successful awarded ‘Best customer relationship management project for
retention of the Investor in People accreditation.This recognition a large organisation’ by the CRM industry in April.
confirms that our training and development activities remain in
line with best practice nationally, and that we have a sound Our television advertising campaign was shortlisted for the
framework for linking good people management practices to business effectiveness category in the National Business Awards.
the achievement of the business strategy and operational plans.
Platform won ‘Best non standard lender’ from ‘Your Mortgage’
During the financial year Britannia has maintained and developed magazine for the fifth consecutive year – an excellent
systems for the provision of information to employees.The endorsement of the services that they provide. Britannia was
Society has continued to consult actively with the Britannia Staff also highly commended by ‘Your Mortgage’ in the ‘Best Building
6 Union. In addition, meetings, team briefings, circulars, newsletters Society’ category. Mortgage intermediaries vote on who they
Britannia Building Society Annual Report & Accounts 2002
Our Leek-based call centre handled more
than one million calls during the year. It also
sold 4,000 mortgages worth £480 million.

would personally choose as a mortgage lender. Given that, Britannia in the community
unlike our competitors, we do not pay fees to intermediaries Britannia’s home remains the town where it was founded –
who recommend Britannia mortgages, this shows the high Leek in the Staffordshire Moorlands. As the major employer in
acclaim for our services from people in the market. an area suffering from economic decline, we provide well-paid
jobs and skills training where such opportunities are rare.The
Britannia’s ‘Home’ magazine also won an award in the British value we put into the local area through wages and purchasing
Society for Magazine Editors’ awards.The magazine beat is around £40 million a year.
off stiff competition from Marks and Spencer, British Airways
and Waitrose. We recognise the importance of the community to the quality
of home life for our Members. We support a wide range of
Member Council charities and volunteer groups in our local area, donating nearly
As a Mutual, Britannia’s purpose is to always act in our £500,000 last year to groups working in the areas of
Membership’s best interests. We are owned by our Members homelessness, educational achievement, community safety and
and this must be reflected in all we do. As a result, we will money management.The Britannia Building Society Foundation
always put our customers first, being driven by their needs, continues to support charities working in these areas. More
and we will strive to be easy to do business with. than 150 local charities and community groups have secured
funding from the Foundation.The Foundation is very well served
To help us achieve this, Britannia has established a unique by its trustees, and I am grateful to them for their contribution.
Member Council – a new consultative body that allows us to
discuss policy and service issues in detail with typical Members. Our big-hearted people at Britannia are well on their way to
The Society already carries out regular customer satisfaction reaching their target of £100,000 for our current charity of
research and runs focus groups to get customer views on the year, Macmillan Cancer Relief. Macmillan was one of the
particular issues.The Council supplements this by allowing us beneficiaries from our donation of ten pence for every vote
to discuss matters in depth with a knowledgeable group of received at the 2002 Annual General Meeting.The money
Members. 24 Members from across the UK – 12 men and raised also helped the special care baby units at hospitals in
12 women – were selected at random and invited to join Stoke and Ipswich.
the Council.
Conclusion
The Council has met four times in the last 12 months – twice This year of achievement shows why I am proud to have
in London and twice in Leek. succeeded Graham Stow as Chief Executive of Britannia. We
have a great future ahead of us as long as we remember that
Meetings have included presentations on various issues we must always put the Membership of the Society first in all
from Britannia Directors and managers, tours of different that we do.
departments and working groups discussing particular issues
in detail. Issues discussed so far include the Society’s new
corporate plan, customer service, direct mailing activities, the
role of the Britannia Capital Investment Group and training
for Member Advisors.
Neville Richardson
Feedback from the Council is reported to the Group Executive Chief Executive
Board and informs their decision making. 19 February 2003 7
Britannia Building Society Annual Report & Accounts 2002

BOARD OF DIRECTORS

Barrie Bernstein Gerald Gregory, BA, MA


Chairman Gerald Gregory, 47, joined the Board as Sales and Marketing
Barrie Bernstein, 64, joined the Board in 1994 and became Director in September 1999 and is now Managing Director –
Chairman in May 1999. He is a member of the Audit and Britannia Capital Investment Group. He is a Director of a
Remuneration Committees, and chairs the Nominations number of subsidiary companies including Platform Home
Committee. He is also Chairman of Rochdale Development Loans Limited and Britannia Treasury Services Limited, and he
Agency. Barrie spent his career at Bernstein Group PLC, is a member of the Society’s Assets and Liabilities and Credit
kitchen manufacturers based in Bolton, where he was Committees. He is also a trustee of the Britannia Building
Managing Director and, subsequently, Chairman until his Society Foundation. Gerald joined the Society in 1989 from
retirement in 2002. Girobank PLC. He was formerly Treasurer, Head of Lending
and then Director of Mutuality and Marketing at the Society.
Ian Adam, CA
Deputy Chairman Rhidian Jones, MA, FCIS, FCMI
Ian Adam, 59, joined the Board in 1998, becoming Deputy Rhidian Jones, 59, joined the Board in 1993 and was Deputy
Chairman at the end of 2002. A Chartered Accountant, he Chairman from December 2000 to December 2002. He chairs
chairs the Audit Committee, and is a member of the the Remuneration Committee and is a member of the Audit
Nominations Committee and Remuneration Committee. Committee, taking a special interest in corporate governance
Amongst his other appointments he is Deputy Chairman of and compliance. He was previously a Director of the Mornington
Fishers Holdings Limited and is a member of the Scottish Building Society. Rhidian began his career in finance and property
Higher Education Funding Council. He was formerly Finance management, before qualifying as a solicitor. Until his retirement
Director at Christian Salvesen PLC. in 2002, he was Head of the Corporate Department at
Nabarro Nathanson. He is the senior Non-executive Director
Harry Coe, FCA of Serco Group PLC and a policy advisor on company law to
Harry Coe, 58, joined the Board in 2000. He is a member of the Institute of Chartered Secretaries and Administrators.
Britannia’s Credit Committee and is the former Managing Rhidian will retire from the Society’s Board in 2003.
Director of leading holiday company MyTravel PLC (formerly
Airtours PLC). He chairs the Boards of Travelsphere (Holdings) Phil Lee, BSc, CIPFA, CA
Limited, Jaycare (Holdings) Limited and Leisure Ventures PLC. Phil Lee, 47, joined the Board in September 2002 as Group
Finance Director, with responsibility for Finance, Change
Bill Gordon, FCIB Management, Group Risk Management and Information
Bill Gordon, 63, joined the Board as a Non-executive Director Systems. He is Chairman of the Assets and Liabilities
in September 1999. He has extensive experience in treasury Committee. Formerly he was Finance Director at West
risk management and he is a member of the Assets and Bromwich Building Society, and previously he has held senior
Liabilities Committee. He is the former Chief Executive of UK roles at Bristol & West, Somerfield and Ernst & Young.
Banking Services at Barclays, and he remains Chairman of
Barclays Pension Fund Trustees Limited. During 2002 Bill has
been a member of the Boards of Britannia Treasury Services
Limited, Platform Home Loans Limited and Verso Limited. As
a consequence of the merger of Platform and Verso, and the
introduction of new governance and reporting structures, Bill
8 has retired from the Boards of Platform and Verso.
Britannia Building Society Annual Report & Accounts 2002
Neville Richardson, BA, FCA resources. He is a past President of the Institute of Home
Neville Richardson, 45, joined the Board in 1998 as Group Economics, and a former member of the Council and Court
Finance Director after 21 years with PricewaterhouseCoopers, of Leeds University. He is a Non-executive Director of the
where he was a partner in the financial services practice. He was Department of Work and Pensions and Northern Racing
appointed Deputy Chief Executive in January 2002 and Group Limited and he is the Deputy Chair of Governors of
Chief Executive in November 2002. He is a member of the Staffordshire University.
Assets and Liabilities Committee and the Nominations Committee
and is also a Director of a number of subsidiary companies. John Suffolk, MBA
John Suffolk, 44, joined the Board in June 2001 as Operations
Bridget Rosewell, MA, MPhil Director and in November 2002 he was appointed Managing
Professor Bridget Rosewell, 51, joined the Board as a Director – Member Business. He joined the Society in 1998 as
Non-executive Director in July 1999. She is also a member of Director of Operations, responsible for Information Systems and
the Audit Committee. She is an economist and is a founding Membership Services. He is a Director of MutualPlus Limited,
Director and Executive Chairman of the economic and market the branch sharing services company, and a member of the
analysis firm Volterra Consulting Limited. Bridget is Chief Assets and Liabilities Committee. He worked previously at
Economic Adviser to the British Retail Consortium, consultant Birmingham Midshires Building Society as Director of
Chief Economist to the Greater London Authority and a visiting Information Services and Head of Customer Services.
professor at City University Business School.
Elizabeth Walmsley, BSc, PhD, MBA
Tom Sawyer Dr Elizabeth Walmsley, 50, joined the Board in 2000. She is a
Tom Sawyer, 59, Member of the House of Lords, joined the Trustee of the Britannia Building Society Foundation and a
Board as a Non-executive Director in July 1999. He is a Trustee of the Society’s Pension Scheme. She is a Director of
member of the Remuneration Committee, Chairman of the the Change Partnership, a subsidiary of Whitehead Mann, and
Trustees of the Society’s Pension Scheme and Chairman of has wide experience in the management of modern, complex
the Member Council. He is Chairman of Reed Health Group businesses. She also chairs White Rose Technology Limited and
PLC and Notting Hill Housing Trust and is a consultant to is a member of Council of Sheffield University.
Touchstone Training. He is a visiting professor at Cranfield
Business School, and he chairs the Union Income Benefit
Advisory Board.Tom was General Secretary of the Labour
Party for four years, having previously been Deputy General
Secretary of Unison.

Graham Stow, FCIB, FCIPD


Graham Stow, 58, was appointed to the Board in 1996 as
Retail Operations Director. He became Group Chief Executive
in February 1999 and in November 2002 he was appointed
Executive Vice Chairman, pending his retirement in May 2003
after a year in office as Chairman of the Building Societies
Association. Before joining the Society he was Executive
Vice-President of a Lloyds insurance broker. He has spent most
of his career in retailing, both in line management and in human 9
Britannia Building Society Annual Report & Accounts 2002

DIRECTORS’ REPORT

The Directors are pleased to present the Annual Report and Liquid assets
the Audited Accounts for the year ended 31 December 2002. Liquid assets comprising cash, bank balances and other
authorised investments totalled £5.1 billion (2001: £4.9 billion),
Business objectives and activities representing 30% (2001: 31%) of the assets of Members.This
The reports of the Chairman and Chief Executive review includes asset backed and mortgage backed securities which are
the Group’s business objectives, existing business performance, held for investment purposes. We believe a liquidity holding of
future plans and employee information on pages 2 to 7 of this this size ensures sufficient short-term funds are available. Our
report. No activities of a different nature to those previously financial objective is to maximise returns from liquid asset
engaged in were carried on during 2002. investments while minimising the credit risk by placing funds
with highly rated institutions spread widely across financial
Profit and capital sectors and countries.
The Group’s profit after tax amounted to £84.6 million
(2001: £129.0 million), which was added to reserves (2001 Control of derivatives
included an exceptional profit of £73 million arising from the The Group has a formal structure for managing risk, including
sale of our remaining interest in Britannic Asset Management established risk limits, reporting lines, mandates and other controls.
Limited). At the end of the year, the gross capital ratio was 8.2% The Board reviews this structure regularly in line with new
(2001: 7.7%) and the free capital ratio was 7.4% (2001: 6.8%) requirements from regulators.The Assets and Liabilities Committee
(see Annual Business Statement on page 51 for an explanation monitors compliance and performance against the structure, and
of these ratios). manages and controls the balance sheet exposures of the Group.

Arrears The Board has authorised the use of derivatives under Section
Thanks to our proactive approach to arrears management, 9A of the Building Societies Act 1986.The Financial Services
which includes co-operation with and support for independent Authority agrees an overall limit on the derivatives outstanding
debt counselling services, the number of accounts 12 months at any one time.The Board sets all other limits over the use of
or more in arrears at 31 December 2002 was 236 (2001: 279) derivative products on the recommendation of the Assets and
for the Group, of which 218 (2001: 250) were Society accounts. Liabilities Committee.

The balances on these accounts totalled £7.3 million The Group has no substantial exposure to foreign exchange
(2001: £14.4 million) for the Group, of which £5.1 million or interest rate variations, as a result of the procedures
(2001: £11.3 million) related to Society accounts.The total described above.
arrears outstanding on these accounts was £1.1 million
(2001: £1.6 million) for the Group, of which £0.7 million Impact of the Euro
(2001: £1.1 million) related to Society accounts.This represents The Board continues to consider the requirements,
approximately 0.01% (2001: 0.01%) of total Group mortgage opportunities and threats that the United Kingdom’s potential
accounts and 0.01% (2001: 0.01%) of total Society mortgage entry into the European Monetary System (EMS) could create
accounts.The Society remains committed to the effective for the Group. Britannia continues to plan for the possibility
and fair management of lending and arrears.Through of UK entry into EMS and has plans which can be activated
careful control in these areas we were able to restrict the when entry is more certain.
cost of bad and doubtful debts to £1.8 million
(2001: £0.8 million). Creditor payment policy
The Society discharges a supplier’s invoice for the complete
Fixed assets provision of goods and services (unless there is an express
As part of its commitment to improve service to its provision for stage payments) when in full conformity with the
customers, the Group continues to invest in its infrastructure. terms and conditions of the purchase within agreed payment
A key element of this is our £50 million core systems terms.The Society’s policy is to agree the terms of payment
replacement programme. before trading with the supplier, ensure that suppliers are aware
of the terms of payment and pay in accordance with its
The Directors consider the estimated market value of the contractual and other legal obligations.
Group’s interest in land and buildings to be not less than its
10 net book value at 31 December 2002. Creditor days at 31 December 2002 were 8 days (2001: 14 days).
Britannia Building Society Annual Report & Accounts 2002
Going concern Several sub-committees act for the Board to make sure that
The Directors are satisfied that the Group has adequate Non-executive Directors have a direct role in Britannia’s
resources to continue in business for the foreseeable future corporate governance.
and that it is, therefore, appropriate to adopt the going concern
basis in preparing the Annual Report and Accounts. The membership of the Assets and Liabilities Committee
includes one Non-executive Director, Bill Gordon.The
Post balance sheet events Committee reviews and recommends to the Board changes
The Directors consider that there has been no event since to the Society’s wholesale funding, liquidity and balance sheet
the year end that has had a significant effect on the Society’s risk management policies, and oversees compliance with
position or that of any of its connected undertakings. these policies.

Donations The Nominations Committee consisting of the Chairman,


During the year, the Society and its subsidiaries made donations Deputy Chairman and Chief Executive, meets at least
to charities and other deserving causes of nearly £500,000. three times each year. It reviews and recommends on the
Some £300,000 of this total was allocated through the Britannia Board’s composition, including succession planning and new
Building Society Foundation. No contributions were made for Board appointments.
political purposes.
The Remuneration Committee comprises four Non-executive
Directors Directors. In line with best practice, the Board has prepared an
The Directors of the Society during the year and at Annual Report on Directors’ Remuneration and the role of the
31 December 2002 were: Remuneration Committee; this report is on pages 57 to 58.
Ian Adam *
Barrie Bernstein * The Audit Committee comprises four Non-executive Directors.
Harry Coe * It oversees the Group’s internal controls, accounting policies
Bill Gordon * and financial reports, and monitors compliance with legal and
Gerald Gregory regulatory requirements. It is also responsible for liaison with the
Rhidian Jones * Group’s external auditors.
Phil Lee (appointed 1 September 2002)
Neville Richardson The current membership of the sub-committees is as below:
Bridget Rosewell *
Tom Sawyer * Audit Assets and Remuneration Nominations
Liabilities
Graham Stow
1 1
John Suffolk Ian C Adam Chairman * *
Elizabeth Walmsley * Barrie A W Bernstein * * Chairman
* Non-executive Director Bill J Gordon *
Gerald A Gregory *
2
Under the Building Societies Act 1986 and the Society’s rules, Rhidian H B Jones * Chairman *
Bill Gordon, Gerald Gregory, Neville Richardson and Tom Sawyer Phil A Lee Chairman
are due to retire by rotation at the Annual General Meeting in Neville B Richardson * *
2003.They are eligible and will stand for re-election. Phil Lee has Bridget C Rosewell *
been appointed since last year’s Annual General Meeting and Tom Sawyer *
3
will therefore stand for election. Graham H Stow *
John Suffolk *
None of the Directors has any interest in the share capital
of the Society’s connected undertakings. 1 From 1 January 2003
2 Member until 31 December 2002
Corporate Governance and Board Committees 3 Member until 29 January 2003
The Society complies with the Interim Prudential Sourcebook
for Building Societies implemented by the Financial Services
Authority, which includes guidance for Boards and Management. 11
Britannia Building Society Annual Report & Accounts 2002

DIRECTORS’ REPORT

Several Non-executive Directors occupy unpaid positions on preparation and dissemination of financial statements may differ
the Boards of Britannia subsidiary companies as detailed on from legislation in other jurisdictions.
pages 52 to 54. In addition, Serge Lourie has served as an
independent, Non-executive Director on the Boards of Platform In Respect of Accounting Records and Internal Control
Home Loans Limited, Britannia Treasury Services Limited and The Directors are responsible for ensuring that the Society and
Verso Limited. As a consequence of the merger of Platform and its connected undertakings:
Verso, and the introduction of new governance and reporting • keep accounting records in accordance with the Building
structures, Mr. Lourie is retiring from the Boards of those Societies Act 1986, and
three companies.The Directors would like to thank Mr. Lourie • take reasonable care to establish, maintain, document and
for his contribution to the development and success of review such systems and controls as are appropriate to its
these organisations. business in accordance with the rules made by the Financial
Services Authority under the Financial Services and Markets
Statement of Directors’ responsibilities Act 2000.
In Respect of the Preparation of the Annual Accounts
The following statement, which should be read in conjunction The Directors have general responsibility for safeguarding the
with the statement of respective responsibilities of the Directors assets of the Group and for taking reasonable steps for the
and auditors on page 13, is made by the Directors to explain prevention and detection of fraud and other irregularities.
their responsibilities in relation to the preparation of the
Annual Accounts, the Annual Business Statement and the Appointment of Auditors
Directors’ Report. On 1 January 2003, PricewaterhouseCoopers converted to a
limited liability partnership (LLP), though PricewaterhouseCoopers
The Directors are required by the Building Societies Act 1986 continued to exist for an interim period to hold the office
to prepare, for each financial year, Annual Accounts which give a of auditors.
true and fair view of the income and expenditure of the Society
and the Group for the financial year, of the state of affairs of the On 29 January 2003, PricewaterhouseCoopers resigned as the
Society and the Group as at the end of the financial year and of Society’s auditors and the Society’s Board of Directors
the cash flows of the Group for the financial year. In preparing appointed PricewaterhouseCoopers LLP to fill the casual
those Annual Accounts, the Directors are required to: vacancy created by the resignation. It is a requirement that the
• select appropriate accounting policies and apply them auditors be appointed by the Society at each Annual General
consistently; Meeting and the effect of the resolution to be proposed at
• make judgements and estimates that are reasonable this year’s Annual General Meeting, if passed, would be that
and prudent; PricewaterhouseCoopers LLP will be re-appointed until the
• state whether applicable Accounting Standards have been conclusion of the next Annual General Meeting.
followed, subject to any material departures disclosed and
explained in the Annual Accounts; and
• prepare the Annual Accounts on the going concern basis,
unless it is inappropriate to presume that the Group will
continue in business.
Paul Mills
In addition to the Annual Accounts, the Act requires the Secretary
Directors to prepare, for each financial year, an Annual Business For the Board of Directors
Statement and a Directors’ Report, each containing prescribed 19 February 2003
information relating to the business of the Society and its
connected undertakings.

Website
As well as our branch network and call centre, Britannia can be
contacted via our website, www.britannia.co.uk.The maintenance
and integrity of the Britannia website is the sole responsibility of
12 the Directors. Legislation in the United Kingdom governing the
Britannia Building Society Annual Report & Accounts 2002
INDEPENDENT AUDITORS’ REPORT

Independent Auditors’ report to the Members of examination, on a test basis, of evidence relevant to the
Britannia Building Society amounts and disclosures in the Annual Accounts and the
We have audited the Annual Accounts which comprise the Annual Business Statement. It also includes an assessment of
income and expenditure accounts, the balance sheets, the cash the significant estimates and judgements made by the Directors
flow statement, the statement of total recognised gains and in the preparation of the Annual Accounts, and of whether the
losses and the related notes which have been prepared under accounting policies are appropriate to the Society’s circumstances,
the historical cost convention and the accounting policies set consistently applied and adequately disclosed.
out in the Statement of Accounting Policies. We have examined
the Annual Business Statement (other than the details of We planned and performed our audit so as to obtain all
Directors and Officers upon which we are not required to the information and explanations which we considered
report) and the Directors’ Report. necessary in order to provide us with sufficient evidence to
give reasonable assurance that the Annual Accounts are free
Respective responsibilities of Directors and Auditors from material misstatement, whether caused by fraud or other
The Directors’ responsibilities for the preparation of the Annual irregularity or error. In forming our opinion we also evaluated
Report include responsibilities for the Annual Accounts, the the overall adequacy of the presentation of information in the
Annual Business Statement and the Directors’ Report and are Annual Accounts.
set out in the Statement of Directors’ Responsibilities. Our
responsibility is to audit the financial statements in accordance Opinion
with relevant legal and regulatory requirements and United In our opinion:
Kingdom Auditing Standards issued by the Auditing Practices (a) the Annual Accounts give a true and fair view of the
Board.This report, including the opinion, has been prepared for state of affairs of the Society and of the Group as at
and only for the Society’s Members as a body in accordance 31 December 2002 and of the income and expenditure
with Section 78 of the Building Societies Act 1986 and for no of the Society and the income and expenditure and cash
other purpose.We do not, in giving this opinion, accept or assume flows of the Group for the year then ended;
responsibility for any other purpose or to any other person to (b) the information given in the Annual Business Statement
whom this report is shown or in to whose hands it may come (other than the information upon which we are not
save where expressly agreed by our prior consent in writing. required to report) gives a true representation of the
matters in respect of which it is given;
We report to you our opinion as to whether the Annual Accounts (c) the information given in the Directors’ Report is consistent
give a true and fair view and are properly prepared in accordance with the accounting records and the Annual Accounts; and
with the Building Societies Act 1986, on certain information (d) the Annual Accounts, the Annual Business Statement and the
included within the Annual Business Statement and on whether, Directors’ Report have each been prepared in accordance
in our opinion, the Directors’ Report is consistent with the with the applicable requirements of Part VIII of the Building
accounting records and the Annual Accounts. We also report to Societies Act 1986 and regulations made under it.
you if in our opinion we have not received all the information
and explanations we require for our audit, or if the Annual
Accounts are not in agreement with the accounting records.

We read the other information contained in the Annual Report


and consider the implications for our report if we become PricewaterhouseCoopers LLP
aware of any apparent misstatements or material inconsistencies Chartered Accountants and Registered Auditors
with the Annual Accounts, the Annual Business Statement or Manchester
the Directors’ Report.The other information comprises only 19 February 2003
the Chairman’s Statement, the Chief Executive’s Report, the
Annual Report of the Remuneration Committee and the Five
Year Review.

Basis of audit opinion


We conducted our audit in accordance with Auditing Standards
issued by the Auditing Practices Board. An audit includes 13
Britannia Building Society Annual Report & Accounts 2002

GROUP INCOME AND EXPENDITURE ACCOUNT for the year ended 31 December 2002

Total Total
2002 2001
Notes £m £m

Interest receivable and similar income 1 807.4 912.9


Interest payable and similar charges 2 (608.0) (702.0)
Net interest receivable 199.4 210.9
Income from discontinued investments 3 – 1.2
Share of operating profit in joint ventures 17 2.0 1.6
Fees and commissions receivable 70.4 72.9
Fees and commissions payable (10.7) (12.0)
Other operating income 4 40.1 26.9
Total income 301.2 301.5
Administrative expenses 5 (131.9) (127.9)
Depreciation and amortisation (25.9) (23.3)
Profit before provisions and Britannia Membership Reward 143.4 150.3
Provisions for bad and doubtful debts 16 (11.0) (12.0)
Profit before Britannia Membership Reward 6 132.4 138.3
Britannia Membership Reward 10 (37.3) (53.4)
Operating profit after provisions and Britannia Membership Reward 95.1 84.9
Profit on disposal of discontinued associated undertaking 3 – 80.0
Profit on ordinary activities before tax 95.1 164.9
Tax on profit on ordinary activities 11 (10.5) (35.9)
Profit for the financial year 31 84.6 129.0

The accounting policies and notes on pages 19 to 50 form part of these Accounts.

All the results in the current year shown above relate to continuing activities.

GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES for the year ended 31 December 2002

2002 2001
Notes £m £m

Profit for the financial year 84.6 129.0


Prior year adjustment arising from requirements of Financial Reporting
Standard No. 19 (Deferred taxation) 31 11.7
Total gains and losses recognised since the previous Annual Accounts 96.3

14
Britannia Building Society Annual Report & Accounts 2002
SOCIETY INCOME AND EXPENDITURE ACCOUNT for the year ended 31 December 2002

Total Total
2002 2001
Notes £m £m

Interest receivable and similar income 1 784.3 896.5


Interest payable and similar charges 2 (614.7) (713.2)
Net interest receivable 169.6 183.3
Income from investments
Continuing 3 8.3 7.4
Exceptional (dividend receivable) 3 – 75.0
8.3 82.4
Fees and commissions receivable 37.7 41.7
Fees and commissions payable (11.7) (15.4)
Other operating income 4 1.5 1.1
Total income 205.4 293.1
Administrative expenses 5 (118.5) (112.5)
Depreciation and amortisation (22.3) (20.1)
Profit before provisions and Britannia Membership Reward 64.6 160.5
Provisions for bad and doubtful debts 16 (5.9) (4.7)
Profit before Britannia Membership Reward 58.7 155.8
Britannia Membership Reward 10 (37.3) (53.4)
Operating profit after provisions and Britannia Membership Reward 21.4 102.4
Loss on disposal of discontinued associated undertaking 3 – (10.1)
Profit on ordinary activities before tax 21.4 92.3
Tax on profit on ordinary activities 11 9.7 (5.0)
Profit for the financial year 31 31.1 87.3

The accounting policies and notes on pages 19 to 50 form part of these Accounts.

All the results in the current year shown above relate to continuing activities.

SOCIETY STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES for the year ended 31 December 2002

2002 2001
Notes £m £m

Profit for the financial year 31.1 87.3


Prior year adjustment arising from requirements of Financial Reporting
Standard No. 19 (Deferred taxation) 31 6.2
Total gains and losses recognised since the previous Annual Accounts 37.3

15
Britannia Building Society Annual Report & Accounts 2002

GROUP BALANCE SHEET at 31 December 2002

Restated
2002 2002 2001 2001
Notes £m £m £m £m
ASSETS
Liquid Assets
Cash in hand and balances with the Bank of England 31.3 33.8
Loans and advances to credit institutions 12 839.2 1,311.6
Debt securities 13 4,234.4 3,548.0
5,104.9 4,893.4
Loans and advances to customers 14
Loans fully secured on residential property 11,717.2 11,008.0
Loans fully secured on residential property subject to non-recourse finance 15 1,352.2 1,216.5
Non-recourse finance (1,302.6) (1,171.8)
15 49.6 44.7
11,766.8 11,052.7
Other loans 14 1,468.7 1,077.9
13,235.5 12,130.6
Investments in joint ventures 17
Share of gross assets 37.8 28.8
Share of gross liabilities (36.1) (27.4)
1.7 1.4
Intangible fixed assets 18 43.5 45.2
Tangible fixed assets 19 136.9 128.0
Other assets 20 49.2 48.6
Prepayments and accrued income 21 98.9 169.7
Total assets 6 18,670.6 17,416.9

LIABILITIES
Shares 22 10,393.8 9,917.7
Amounts owed to credit institutions 23 778.5 892.3
Amounts owed to other customers 24 2,490.7 2,584.0
Debt securities in issue 25 3,222.6 2,471.3
Other liabilities 26 248.7 164.4
Accruals and deferred income 27 140.3 151.7
Provisions for liabilities and charges 28 8.8 9.8
Subordinated liabilities 29 247.3 170.4
17,530.7 16,361.6
Subscribed capital 30 110.0 110.0
Share premium 31 3.1 3.1
General reserve 31 1,026.8 942.2
Total liabilities 18,670.6 17,416.9

MEMORANDUM ITEMS
Commitments 32 587.8 544.9

Certain comparative figures have been restated as explained on page 19.

The accounting policies and notes on pages 19 to 50 form part of these Accounts.

Approved by the Board of Directors on 19 February 2003.

B A W Bernstein N B Richardson P A Lee


16
Chairman Group Chief Executive Group Finance Director
Britannia Building Society Annual Report & Accounts 2002
SOCIETY BALANCE SHEET at 31 December 2002

Restated
2002 2001
Notes £m £m
ASSETS
Liquid assets
Cash in hand and balances with the Bank of England 31.3 32.8
Loans and advances to credit institutions 12 787.6 1,276.9
Debt securities 13 4,182.8 3,483.4
5,001.7 4,793.1
Loans and advances to customers
Loans fully secured on residential property 14 9,757.0 9,628.3
Other loans 14 1,231.1 854.4
10,988.1 10,482.7
Investments 17 2,389.6 1,793.5
Tangible fixed assets 19 118.3 109.9
Other assets 20 23.9 14.6
Prepayments and accrued income 21 95.2 168.2
Total assets 18,616.8 17,362.0

LIABILITIES
Shares 22 10,393.8 9,917.7
Amounts owed to credit institutions 23 768.8 887.8
Amounts owed to other customers 24 2,745.4 2,693.4
Debt securities in issue 25 3,222.6 2,471.3
Other liabilities 26 67.1 83.0
Accruals and deferred income 27 121.4 121.0
Provisions for liabilities and charges 28 6.4 4.5
Subordinated liabilities 29 247.3 170.4
17,572.8 16,349.1
Subscribed capital 30 110.0 110.0
Share premium 31 3.1 3.1
General reserve 31 930.9 899.8
Total liabilities 18,616.8 17,362.0

MEMORANDUM ITEMS
Commitments 32 457.2 475.4

Certain comparative figures have been restated as explained on page 19.

The accounting policies and notes on pages 19 to 50 form part of these Accounts.

Approved by the Board of Directors on 19 February 2003.

B A W Bernstein N B Richardson P A Lee


Chairman Group Chief Executive Group Finance Director 17
Britannia Building Society Annual Report & Accounts 2002

CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 2002

2002 2001
Notes £m £m

Net cash inflow from operating activities 34 697.9 676.4

Returns on investments and servicing of finance


Interest paid on subordinated liabilities (13.5) (12.3)
Interest paid on subscribed capital (14.3) (14.3)

Taxation (26.8) (22.2)

Capital expenditure and financial investment


Purchase of investment securities (20,834.2) (22,693.4)
Sale and maturity of investment securities 20,154.9 22,087.1
Purchase of tangible fixed assets (39.3) (42.9)
Sale of tangible fixed assets 5.2 5.5

Acquisitions and disposals


Acquisition of subsidiary company – (55.0)
Costs of acquisition – (0.9)
Disposal of associated undertaking – 97.5
Costs of disposal – (0.4)

Financing
Repayment of subordinated liabilities (70.9) –
Issue of subordinated liabilities 147.7 –
Increase in cash 6.7 25.1

18
Britannia Building Society Annual Report & Accounts 2002
STATEMENT OF ACCOUNTING POLICIES

Accounting Convention
Advances Subject to Non-recourse Finance
The Accounts are prepared under the historical cost
Loans fully secured on residential properties subject to non-
convention.
recourse finance meeting the conditions specified in Financial
Basis of Preparation and Consolidation Reporting Standard No. 5 are included in the balance sheet
The Accounts have been prepared in accordance with using the linked presentation method. Such balances are stated
the Building Societies (Accounts and Related Provisions) at book value less provisions for impairment.
Regulations 1998 (‘the Regulations’) and applicable Accounting
Standards.The Group Accounts consolidate the state of Statements of Recommended Accounting Practice
affairs, cash flows and results of the Society and its subsidiary The financial statements are prepared in accordance with relevant
undertakings, and other companies which are considered by British Bankers Association Statements of Recommended
the Directors to be quasi-subsidiaries as defined in Financial Accounting Practice (SORP) in all material respects.
Reporting Standard No. 5 (Reporting the substance of
transactions), all of which have accounting periods ended Income Recognition
31 December. Interest is recognised in the income and expenditure account
on an accruals basis. Mortgage arrangement fees are taken to
A Group geographical segmental analysis is not disclosed fees and commissions receivable on a received basis except
as the Group’s business is predominantly United Kingdom for commercial lending fees, where the amount of the fee
based however an analysis has been provided in Note 6 can be increased in exchange for a discounted mortgage rate.
with respect to the different business segments of Such fees are amortised over the period of the discounted
the Group. interest rate.

Restatement of Comparative Figures and Prior The cost of mortgage cashbacks is amortised over the early
Year Adjustments redemption penalty period, and charged against interest
The Group has implemented the requirements of Financial receivable.The cost of discounts is charged as incurred against
Reporting Standard No. 19 (Deferred taxation). Under Financial interest receivable.
Reporting Standard No. 19, full provision is made for timing
differences and, in particular, deferred tax assets can be Goodwill and Premiums on Acquisitions
recognised where it is more likely than not that there will be In accordance with Financial Reporting Standard No. 10
sufficient future taxable profit against which to recover them. (Goodwill and intangible assets), amounts paid for businesses
Previously, they were recognised only where it was probable in excess of the fair value of the net tangible assets acquired
that they would be recovered without replacement in the are amortised on a straight line basis over their estimated useful
foreseeable future. economic lives up to a maximum of twenty years, subject to
any adjustments arising from impairment reviews.
The impact of the change is that previously unrecognised
deferred tax assets of Group £11.7 million and Society £6.2 Premiums paid for mortgage book businesses in excess of
million have been recognised and the general reserve has been the fair value of the net tangible assets acquired are included
increased by the same amounts as at 31 December 2001. Had in other assets and amortised on a level yield basis over five
the previous accounting policy been continued, profit for the years or less if the redemption rate of the mortgages is higher.
financial year ended 31 December 2002 would have been Premium amortisation is included within interest receivable.
Group £0.7 million higher and Society £0.5 million lower. Profit
on ordinary activities before tax is unaffected by the change in Premiums paid for mortgage book businesses before 1999 in
accounting policy. excess of the fair value of the net tangible assets acquired were
deducted from reserves in the year of acquisition.
Previously reported deferred tax assets of Group £5.3 million
and Society £nil have been restated and additional deferred tax Broker Fees
assets of Group £11.7 million and Society £6.2 million Broker fees are capitalised within other assets and written off
recognised (Note 20). Had the previous accounting policy been against fees and commissions payable, on a straight line basis
continued for the financial year ended 31 December 2002, over five years, or less if the redemption rate of the mortgages
deferred tax assets of Group £5.9 million and Society £nil is higher.
would have been reported. 19
Britannia Building Society Annual Report & Accounts 2002

STATEMENT OF ACCOUNTING POLICIES

Interests in Associated Undertakings and Joint Ventures the amount which the Directors consider is likely to be
An associated undertaking is generally one in which the Group’s recoverable.
interest is more than twenty per cent and no more than fifty
per cent and where the Group exercises a significant influence Throughout the year, and at the year end, assessments are made
over the entity’s operating and financial policies. A joint venture of all loans and advances on properties which are in possession
is one where the Group holds an interest on a long term basis or in arrears. Specific provisions are made against those loans
and which is jointly controlled by the Group and other third and advances when, in the opinion of the Directors, their
party entities. Group profit includes income from interests in circumstances make full recovery doubtful. Anticipated losses on
associated undertakings based on accounts made up to the such accounts are calculated as the difference between the
same date. Interests in associated undertakings and joint achievable market value of the security, calculated by applying an
ventures are included in the consolidated balance sheet at the industry recognised national house price index less a forced sale
Group’s share of the book value of the net tangible assets of deduction to valuations, and the outstanding loan balance, after
the undertakings concerned. making appropriate allowance for costs of repossession and
sale. A probability factor is then applied to the shortfall to
Pensions determine the provision required.The probability factor reflects
The expected cost, including variations from the regular cost, the Group’s actual experience of the propensity of the different
of pensions in respect of the Group’s defined benefit pension arrears categories to reach possession status. Allowance is made
scheme is charged to the income and expenditure account so for loss insurance cover where appropriate.The Directors
as to spread the cost of pensions over the expected service recognise that not all accounts in arrears will result in
lives of employees in the scheme.The pension cost is assessed possession and apply a factor based on recent experience and
in accordance with the advice of qualified actuaries. On a other relevant risk considerations to reflect this probability when
triennial basis, a formal actuarial valuation of the Group’s calculating the provision for accounts in arrears.
pension scheme is undertaken.
Once properties have been sold and any shortfall crystallised,
The costs of pensions in respect of the Group’s defined individual cases are reviewed for potential insurance recovery.
contribution scheme are charged to the income and Provision is made for amounts not considered to be recoverable
expenditure account as incurred. and written off when there is no realistic prospect of recovery.

Taxation A general provision is made to cover potential losses


The charge for taxation is based on the profit for the year which, although not yet specifically identified, are known
and takes into account taxation deferred because of timing from experience to exist in the Group’s loan portfolio.
differences between the treatment of certain items for taxation Such provisions are calculated with reference to actuarial
and accounting purposes. assumptions, credit scoring predictions and consistency with
industry levels.These provisions are regularly reviewed against
Deferred tax is provided at current rates on a non-discounted actual experience.
basis, on all timing differences between the recognition of gains and
losses in the accounts and their recognition in a tax computation. The charge to the income and expenditure account represents
new or additional provisions made less any reduction in
Liquid Assets provisions or recoveries of amounts previously provided.
Debt securities intended for use on a continuing basis in the Interest which is considered irrecoverable, where the property
Group’s activities are classified as financial fixed assets and are has been taken into possession or the normal lending
stated at cost less provision for any permanent diminution in relationship has ceased, is suspended. Interest up to that time
value. Premiums and discounts arising on the purchase of is credited to income and provision made as appropriate.
financial fixed assets are amortised over the period to maturity.
Any amounts so amortised are charged or credited to net Shares, Deposits, Subordinated Liabilities and
interest receivable within the income and expenditure account Subscribed Capital
for the relevant financial years. In accordance with Financial Reporting Standard No. 4 (Capital
instruments), issue costs are deducted from debt instruments
Provisions for Bad and Doubtful Debts on the balance sheet, or, in the case of permanent interest
20 Provisions are made to reduce the value of loans and advances to bearing shares, are deducted from the share premium account.
Britannia Building Society Annual Report & Accounts 2002
STATEMENT OF ACCOUNTING POLICIES

Premiums and discounts, together with commissions and other to the income and expenditure account are based on a constant
costs incurred in the issuing of fixed and floating rate notes and periodic rate as applied to the outstanding liabilities.
subordinated liabilities, are amortised over the life
of the instruments. The rentals paid for assets acquired under operating leases are
charged to the income and expenditure account in accordance
Hedging Contracts and Instruments with the terms of the individual lease.
The criteria required for an instrument to be classified as a
hedge are that the transaction must be reasonably expected to Captive Insurance Fund
match or eliminate a significant proportion of the risk inherent The Society has established a wholly owned subsidiary, as a
in the assets, liabilities, other positions or cash flows being captive insurance company, for the purposes of insuring part
hedged and which results from potential movements in interest of the risk upon secured lending and, in certain cases, charges
rates, exchange rates and market indices; and adequate evidence a fee to the customer.
of the intention to hedge and linkage with the underlying risk
inherent in the assets, liabilities, other positions or cash flows The Society uses a fixed earnings pattern to estimate future
being hedged, must be established at the outset of the claims and the amount of premium to be retained against future
transaction. liabilities. Independent actuaries assess future liabilities to ensure
adequacy of reserves.
All interest, exchange rate and market price related contracts
and instruments which are designated as hedges are accounted Premiums charged to borrowers which have not yet been
for on a consistent basis with the underlying assets, liabilities, released to income are included in accruals and deferred
other positions or cash flows.The Group hedges its interest rate income.The captive insurance company’s reserves in respect of
and currency exposures on a portfolio basis. Amounts accrued premiums received from the Society not recharged to
on hedging contracts and instruments are included within borrowers have been included in the Group balance sheet
prepayments, and accruals and deferred income. within mortgage loss provisions.

Tangible Fixed Assets and Depreciation Britannia Membership Reward


The directly attributable cost of additions and alterations to The payment to be made under the Britannia Membership
office premises, including borrowing costs incurred in the Reward is shown as an additional line to the income and
development of major premises, and additions to equipment, expenditure account.This reflects the special nature of the
fixtures, fittings and vehicles is capitalised. payment which was not envisaged when the Regulations were
drawn up prescribing the standard income and expenditure
The cost of tangible fixed assets is written down to their account format.
residual value in equal annual instalments over their estimated
expected useful lives, which are reviewed regularly in the light of Foreign Currency Transactions
technological developments, usage and other relevant factors: All non-sterling assets and liabilities are translated at the
closing rate of exchange unless a currency exchange contract
Land and buildings exists, when the contract rate is applied. All foreign exchange
Freehold properties 50 years differences are taken to the income and expenditure account as
Leasehold properties Life of lease they arise. Interest income and expenses denominated in foreign
Major alterations to existing properties 7 years currencies are included at the average rates of exchange over
the accounting period. Amounts due or receivable under foreign
Vehicles 1 year currency swap contracts are included within prepayments, and
General equipment 3 – 7 years accruals and deferred income.
Computer equipment and software 3 – 5 years

Leases
Assets acquired under finance leases are capitalised at fair value
at the start of the lease, with the corresponding obligations
being included in other liabilities.The finance lease costs charged
21
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS for the year ended 31 December 2002

1. INTEREST RECEIVABLE AND SIMILAR INCOME


Group Group Society Society
2002 2001 2002 2001
£m £m £m £m

On loans fully secured on residential property 495.5 611.5 407.6 537.0

On other loans
Connected undertakings – – 81.7 75.7
Other 113.7 74.4 100.9 60.6

On debt securities
Interest and other income 140.4 162.8 139.8 162.8
Net gains arising on realisation 3.1 4.1 3.1 4.1

On loans and advances to credit institutions


Interest and other income 33.0 46.6 32.8 46.2

Net income on financial instruments 21.7 13.5 18.4 10.1


807.4 912.9 784.3 896.5

Interest receivable on other loans includes Group £17.7 million (2001: £20.3 million), Society £7.3 million (2001: £8.9 million), in respect of loans
advanced prior to 1 October 1998, to corporate bodies, such as Housing Associations, which are fully secured on residential property.The classification
adopted for such amounts is consistent with the balance sheet classification of the related loan in accordance with the Building Societies Act 1997
(see Note 14).

All of the Group’s loan interest receivable arises from loans originated and advanced in the United Kingdom.

Mortgage incentives of Group £0.9 million (2001: £5.4 million), Society £0.9 million (2001: £5.4 million) have been charged against interest receivable.

Unamortised incentives of Group £1.3 million (2001: £0.6 million), Society £1.3 million (2001: £0.6 million) are included in other assets on the
balance sheet.

Interest receivable, as shown above, has been reduced by £0.8 million (2001: £0.8 million) representing interest suspended on non-performing loans in
accordance with the Group’s accounting policy. Movements in the suspended interest account are as follows:

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Balance brought forward 6.1 6.1 4.4 4.4


Interest written off during the year (0.5) (0.8) (0.5) (0.8)
Interest suspended during the year 0.8 0.8 0.8 0.8
Balance carried forward (Note 16) 6.4 6.1 4.7 4.4

2. INTEREST PAYABLE AND SIMILAR CHARGES

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

On shares held by individuals 350.8 443.5 350.8 443.5


On subscribed capital 14.3 14.3 14.3 14.3

On deposits and other borrowings


Subordinated liabilities 13.6 10.9 13.6 10.9
Connected undertakings – – 44.3 54.3
Other 229.3 233.3 191.7 190.2
608.0 702.0 614.7 713.2
22
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

3. INCOME FROM INVESTMENTS

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Income from shares in subsidiaries – – 8.3 7.4


Income from associated undertakings – 1.2 – –
– 1.2 8.3 7.4

Income from associated undertakings in 2001 related to the Group’s investment in Britannic Asset Management Limited (‘BAM’).The investment in
BAM was disposed of during 2001.The Group disclosed a profit on sale of £80.0 million and the Society disclosed an exceptional dividend receivable of
£75.0 million and a loss on disposal of £10.1 million in respect of this transaction.

4. OTHER OPERATING INCOME

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Other operating income includes:

Continuing operations
Rent 1.7 1.1 1.5 1.1
Profit before tax of securitised operations (Note 15) 30.3 19.8 – –
Other 8.1 6.0 – –
40.1 26.9 1.5 1.1

5. ADMINISTRATIVE EXPENSES

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Employee costs
Wages and salaries 62.0 58.3 51.5 47.5
Social security costs 5.1 5.0 4.4 4.2
Other pension costs 8.2 8.3 7.5 7.3
75.3 71.6 63.4 59.0

Other administrative expenses 56.6 56.3 55.1 53.5


131.9 127.9 118.5 112.5

Other administrative expenses include:

Auditors’ remuneration and expenses


Audit fees 0.3 0.2 0.2 0.1
Non audit fees 0.3 0.3 0.3 0.2
Operating lease rentals 8.0 8.2 8.5 8.5

Included in administrative expenses for 2002 are one-off reorganisation costs of £3.8 million (2001: £nil).

23
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

6. SEGMENTAL INFORMATION

The Group reports through two principal business segments: Britannia Capital Investment Group (‘BCIG’) and Membership business. An analysis of the
Group profit before Britannia Membership Reward and Group total and net assets is provided in the table below:

Membership Total Membership Total


BCIG business Group BCIG business Group
2002 2002 2002 2001 2001 2001
£m £m £m £m £m £m

Profit before Britannia Membership Reward 61.9 70.5 132.4 50.0 88.3 138.3
Total assets 5,010.7 13,659.9 18,670.6 3,639.5 13,777.4 17,416.9
Net assets 76.9 1,063.0 1,139.9 60.0 995.3 1,055.3

In order to analyse net interest between the BCIG and Membership business segments it is necessary to apply a transfer price to the internal
funding of the BCIG businesses.

Total and net assets represent the actual assets of the businesses within each of the segments after elimination of balances outstanding between
these businesses.

7. DIRECTORS’ REMUNERATION

Remuneration of the Society’s Directors is detailed below:

Performance Increase in
related accrued
Salary/Fee bonus Benefits pension Total
£000 £000 £000 £000 £000
2002
Executive Directors
Neville B. Richardson (appointed Deputy Chief Executive
1 January 2002 and Chief Executive 1 November 2002) 230 51 21 10 312
Graham H. Stow 290 64 27 14 395
Gerald A. Gregory 184 41 18 5 248
Phil A. Lee (appointed 1 September 2002) 57 13 17 2 89
John Suffolk 185 41 19 10 255
Non-executive Directors
Barrie A.W. Bernstein (Chairman) 90 – – – 90
Ian C. Adam 38 – – – 38
Harry Coe 33 – – – 33
Bill J. Gordon 38 – – – 38
Rhidian H.B. Jones 53 – – – 53
Bridget C. Rosewell 33 – – – 33
Tom Sawyer 33 – – – 33
Elizabeth Walmsley 33 – – – 33
1,297 210 102 41 1,650

2001
Executive Directors
Graham H. Stow 270 61 29 11 371
Gerald A. Gregory 182 41 15 6 244
Neville B. Richardson 200 45 17 8 270
John Suffolk (appointed 28 June 2001) 85 19 8 5 117
Non-executive Directors
Barrie A.W. Bernstein (Chairman) 81 – – – 81
Ian C. Adam 35 – – – 35
Harry Coe 32 – – – 32
Bill J. Gordon 35 – – – 35
Rhidian H.B. Jones 50 – – – 50
Bridget C. Rosewell 32 – – – 32
Tom Sawyer 32 – – – 32
24
Elizabeth Walmsley 32 – – – 32
1,066 166 69 30 1,331
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

7. DIRECTORS’ REMUNERATION (continued)

The following information shows the value of Directors’ pension benefits.The increase in accrued pension represents the change in the annual pension
to which each Director is entitled as the result of changes in pensionable earnings (excluding inflation), increases in pensionable service and investment
return during the year.The transfer value equivalent represents the present capital value of the changes in Directors’ accrued pension entitlements
excluding employees’ contributions for the year and has been calculated in accordance with Actuarial Guidance Note GN 11.

All the Executive Directors will receive benefits from the Society’s approved UK pension arrangements. Certain Directors, who are subject to the
earnings cap, will also receive benefits from an unfunded scheme which does not qualify for certain tax allowances under the Income and Corporation
Taxes Act 1998.
Increase in
transfer
Increase in Accrued value of Transfer Employees’
accrued pension accrued value contributions
pension for entitlement benefits for of accrued for year
year ended at year ended benefits at ended
31 December 31 December 31 December 31 December 31 December
2002 2002 2002 2002 2002
£000 £000 £000 £000 £000

Executive Directors
Neville B. Richardson 10 32 110 295 11
Graham H. Stow 14 67 439 1,232 14
Gerald A. Gregory 5 64 103 664 9
Phil A. Lee 2 2 20 20 3
John Suffolk 10 25 103 225 9

8. EMPLOYEES

The average number of persons employed during the year was:

Group Group Group Group Society Society Society Society


2002 2002 2001 2001 2002 2002 2001 2001
Full-time Part-time Full-time Part-time Full-time Part-time Full-time Part-time

Head and administrative offices 1,230 222 1,139 200 1,230 222 1,139 200
Branch and subsidiary undertakings’ offices 1,470 575 1,515 636 1,023 547 1,135 601
2,700 797 2,654 836 2,253 769 2,274 801

9. PENSIONS

The Britannia Building Society Pension Scheme is funded and operates a defined benefit pension section for the employees of the Society and for
certain employees of subsidiary undertakings who commenced employment prior to 1 September 2001.The costs have been assessed in accordance
with the advice of a qualified actuary using the projected unit valuation method. An actuarial assessment is undertaken every three years.The latest
assessment was at 6 April 2002.The Society has adopted this valuation in its financial statements with effect from 6 April 2002.

The assumptions that have the most significant effect on the results of the valuation are those relating to the long-term rates of yield on funds invested
and of salary increases.These have been taken as 8.0% and 4.0% in respect of past service accrued and future service pension benefits. In addition,
allowances have been made for the age related promotional salary scale and increases in post retirement benefits.

For those eligible employees who commenced employment after 1 September 2001, the Society operates a defined contribution section within the
Britannia Building Society Pension Scheme. During 2002, the Society paid contributions of £0.1 million in respect of this section of the scheme (2001: £nil).

The Society has chosen not to adopt Financial Reporting Standard No.17 (‘FRS 17’) (Retirement benefits) early and has adopted its transitional
arrangements. Accordingly, it complies with the existing Statement of Standard Accounting Practice No. 24 (‘SSAP 24’) (Accounting for pension costs)
and provides the disclosure in respect of the balance sheet and the income and expenditure account which is required by FRS 17.

Statement of Standard Accounting Practice No. 24


At the date of the latest valuation, the market value of the assets of the defined benefit section was £149.9 million.The actuarial value was sufficient to
cover 83% of the accrued benefits that will be due to members, after allowing for future salary increases.The Minimum Funding Requirement funding
25
level as at 6 April 2002 was 96% (1999: 102%).The Society has increased its level of contributions to 16% (2001: 12.5%) in order to meet the ongoing
scheme requirements and satisfy the Minimum Funding Requirement.
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

9. PENSIONS (continued)

During the year ended 31 December 2002, the Society made an advance contribution of £14.0 million to the defined benefit section of the
pension scheme.

Prepayments and accrued income (Note 21) include £14.0 million (2001: £nil) in respect of prepayments into the defined benefit section of the scheme
calculated in accordance with SSAP 24.

Included within other liabilities is a provision for unfunded benefits for employees who are subject to the Inland Revenue earnings cap calculated in
accordance with SSAP 24 of £2.2 million (2001: £1.7 million).

Financial Reporting Standard No. 17


The valuation used for FRS 17 disclosures has been based on the most recent actuarial valuation as at 6 April 2002, updated by Wm. M. Mercer to take
account of the requirements of FRS 17 in order to assess the liabilities of the scheme at 31 December 2002. Scheme assets are stated at their market
value at 31 December 2002.

The financial assumptions used in calculating the liabilities and expected rates of return on assets under the projected unit valuation method were:

31 December 31 December
2002 2001
% %
Rate of increase in salaries 3.75 4.00
Rate of increase in pensions in payment 3.25 3.25
Discount rate 5.60 6.00
Inflation rate 2.50 2.50

The assets in the scheme and the long-term expected rate of return were:

Expected rate Expected rate


of return Fair Value of return Fair Value
31 December 31 December 31December 31 December
2002 2002 2001 2001
% £m % £m

Equities 7.4 96.2 7.5 110.4


Bonds 5.5 28.7 5.9 29.2
Property 6.4 – 6.5 2.4
Cash 3.9 15.4 4.0 –
Total market value of assets 140.3 142.0

31 December 31 December
2002 2001
£m £m

Total market value of scheme assets 140.3 142.0


Present value of scheme liabilities (217.1) (183.4)
Deficit in the scheme (76.8) (41.4)
Related deferred tax 23.0 12.4
Net pension liability (53.8) (29.0)

If the above amounts had been recognised in the financial statements, the Group’s general reserves would be as follows:

Restated
31 December 31 December
2002 2001
£m £m

General reserve excluding pension liability 1,026.8 942.2


SSAP 24 prepayment (14.0) –
Pension liability (53.8) (29.0)
General reserve including pension liability 959.0 913.2

Under FRS 17, there is no significant difference to the provision required in respect of the unfunded benefits.
26
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

9. PENSIONS (continued)

No improvements were made to benefits and the Group paid contributions of £20.5 million and the Society £20.2 million during 2002. Following the
actuarial valuation carried out in April 2002, it was agreed with the Trustees that the Society would increase its contributions from 12.5% to 16%.

The amounts recognised in the financial statements if FRS17 had been fully adopted would have been as follows:

Analysis of the amount charged to operating profit 31 December


2002
£m

Service cost 5.6


Past service cost –
Total operating charge 5.6

Analysis of net return on pension scheme assets 31 December


2002
£m

Expected return on pension scheme assets 10.4


Interest on pension liabilities (11.1)
Net interest cost (0.7)

Analysis of amount recognised in Statement of Total Recognised Gains and Losses

31 December 31 December
2002 2002
£m %

Actual return less expected return on assets (32.0) 23 % of scheme assets


Experience gains and losses on liabilities 3.8 2 % of scheme liabilities
Changes in assumptions (21.1)
Actuarial loss (49.3) 23 % of scheme liabilities

Movement in deficit in the year 31 December


2002
£m

Deficit in the scheme at the beginning of the year (41.4)


Movement in the year
Current service cost (5.6)
Contributions 20.2
Past service cost –
Net interest cost (0.7)
Actuarial loss (49.3)
Deficit in the scheme at the end of the year (76.8)

Under FRS 17, the disclosures in respect of the unfunded benefits scheme are as follows:

During the year ended 31 December 2002, £0.5 million was charged to operating profit, all of which was in respect of service cost.

During the year ended 31 December 2002 a net loss of £0.2 million was recognised in the statement of total recognised gains and losses, all of which
was in respect of actual return less expected return on assets.

Movement in unfunded benefit reserve in the year 31 December


2002
£m

Reserve at the beginning of the year (1.6)


Movement in the year
Current service cost (0.5)
Actuarial loss (0.2) 27
Reserve at the end of the year (2.3)
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

10. BRITANNIA MEMBERSHIP REWARD

Group and Group and


Society Society
2002 2001
£m £m

Payable to Members 37.3 53.4

The Britannia Membership Reward is designed to reward Members of the Society for the contribution they have made to the continued success of the
Society, by distributing funds which are not required for the continued growth and stability of the Society.

The Directors have decided that the Reward Pool for 2002 is £37.3 million, which has been distributed to registered Members in proportion to the
number of Reward Points earned. Reward Points are calculated on the number and value of products held, and the length of Membership.The Reward
Pool for 2001 included the special Reward paid to Members arising on the sale of the shareholding in Britannic Asset Management Limited.

11.TAX ON PROFIT ON ORDINARY ACTIVITIES

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

UK tax at 30% (2001: 30%)

Corporation tax
Current 3.0 34.9 (8.1) 5.0
Prior year items (3.3) (1.7) (1.1) –

Share of current tax of


Associated undertakings – 0.3 – –
Joint ventures 0.6 0.5 – –
Total corporation tax 0.3 34.0 (9.2) 5.0
Deferred tax 10.2 1.9 (0.5) –
10.5 35.9 (9.7) 5.0

Factors affecting tax charge for the year

The corporation tax assessed for the period is lower than the standard rate of corporation tax in the UK (30%).The differences are explained below.

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Profit on ordinary activities before tax 95.1 164.9 21.4 92.3

Profit before tax multiplied by standard rate of tax 28.5 49.5 6.4 27.7
Effects of
Tax relief arising from foreign exchange contracts (14.4) – (14.4) –
Movements in short term timing differences (8.8) (0.1) 1.3 2.2
Non taxable proportion of capital gains – (13.7) – (0.6)
Dividends from UK companies – – (0.3) (23.5)
Other timing differences (5.0) (1.7) (2.2) (0.8)
Corporation tax charge for year 0.3 34.0 (9.2) 5.0

28
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

12. LOANS AND ADVANCES TO CREDIT INSTITUTIONS

Loans and advances to credit institutions have remaining maturities as follows:

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Accrued interest 2.7 5.5 2.5 5.5


Repayable on demand 42.4 33.2 – 0.3
Other loans and advances by residual maturity repayable
In not more than three months 770.1 1,134.9 761.1 1,133.1
In more than three months but not more than one year 23.0 136.0 23.0 136.0
In more than one year but not more than five years 1.0 2.0 1.0 2.0
839.2 1,311.6 787.6 1,276.9

13. DEBT SECURITIES

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Issued by public bodies 234.2 418.8 201.2 377.3


Issued by other borrowers 4,000.2 3,129.2 3,981.6 3,106.1
4,234.4 3,548.0 4,182.8 3,483.4

Debt securities have remaining maturities as follows:

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Accrued interest 26.7 19.6 26.4 19.2


In not more than one year 2,061.5 1,709.3 2,049.0 1,707.3
In more than one year 2,146.2 1,819.1 2,107.4 1,756.9
4,234.4 3,548.0 4,182.8 3,483.4

Transferable debt securities comprise


Listed 2,278.4 1,888.9 2,242.8 1,826.3
Unlisted 1,956.0 1,659.1 1,940.0 1,657.1
4,234.4 3,548.0 4,182.8 3,483.4

Market value of listed transferable debt securities 2,274.5 1,891.7 2,244.6 1,829.1
Included in debt securities are
Unamortised premiums 14.7 4.2 14.7 4.2
Unamortised discounts 1.0 3.7 1.0 3.7

The Directors of the Society consider that the primary purpose of holding securities is prudential.The securities are held as liquid assets with the
intention of use on a continuing basis in the Group’s activities and are therefore classified as financial fixed assets rather than current assets.

Listed debt securities include £760.3 million (2001: £580.4 million) asset backed and mortgage backed securities which are held for investment
purposes and are not treated as part of the Society’s prudential liquidity.

Debt securities include £106.3 million (2001: £nil) in respect of sale and repurchase agreements.

29
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

13. DEBT SECURITIES (continued)

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

Group Society
£m £m

Adjusted cost and net book value (excluding accrued interest)


At 1 January 2002 3,528.4 3,464.2
Additions 20,834.2 20,727.6
Redemptions and disposals (20,154.9) (20,035.4)
At 31 December 2002 4,207.7 4,156.4

14. LOANS AND ADVANCES TO CUSTOMERS

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Loans fully secured on residential property 11,766.8 11,052.7 9,757.0 9,628.3

Other loans
Loans fully secured on land 1,441.8 1,037.3 1,225.8 850.2
Other loans 26.9 40.6 5.3 4.2
13,235.5 12,130.6 10,988.1 10,482.7

Other loans fully secured on land include Group £319.1 million (2001: £308.9 million), Society £104.2 million (2001: £124.5 million) of loans which are
fully secured on residential property and which were made to corporate bodies, such as Housing Associations, prior to 1 October 1998, the date the
Society adopted the powers of the Building Societies Act 1997.The classification of these assets is not consistent with the treatment of similar loans
made after 1 October 1998, which are included in ‘loans fully secured on residential property’ but is necessary to comply with the requirements of the
Building Societies Act 1997.

Maturity analysis
The remaining maturity of loans and advances to customers from the date of the balance sheet is as follows:

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Repayable on demand 4.6 4.4 – –


Other loans and advances by residual maturity repayable
In not more than three months 38.7 71.7 5.7 10.8
In more than three months but not more than one year 258.8 230.7 40.6 42.4
In more than one year but not more than five years 877.0 1,044.2 426.7 441.0
In more than five years 13,407.6 11,990.9 10,539.4 10,008.1
14,586.7 13,341.9 11,012.4 10,502.3
Less
Provisions for bad and doubtful debts (Note 16) (48.6) (39.5) (24.3) (19.6)
Non-recourse finance (1,302.6) (1,171.8) – –
13,235.5 12,130.6 10,988.1 10,482.7

The maturity analysis is produced on the basis that where a loan is repayable by instalments, each such instalment is treated as a separate repayment.
Arrears are spread across the remaining term of the loan.

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

30
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

15. LOANS FULLY SECURED ON RESIDENTIAL PROPERTY SUBJECT TO NON-RECOURSE FINANCE

Quasi-subsidiaries of the Society, Leek Finance Number One PLC (L1), Leek Finance Number Two PLC (L2), Leek Finance Number Three PLC (L3),
Leek Finance Number Four Limited (L4), Leek Finance Number Five Limited (L5), Leek Finance Number Six Limited (L6), Leek Finance Number Seven
PLC (L7), Leek Finance Number Eight Limited (L8), Platform Home Loans No. 1 PLC (PH1) and Platform Home Loans No. 2 PLC (PH2) have
advances secured on residential properties subject to non-recourse finance.The Society and its subsidiaries are not obliged to support any losses in
respect of these mortgages subject to the non-recourse finance other than to the extent of its subordinated funding, nor do they intend to do so.This
is clearly stated in agreements with the providers of the funding. Repayment of the non-recourse funding facilities and the deferred consideration will be
made solely from the cash flows generated by the underlying mortgage portfolios.

The Society and its subsidiary, Mortgage Agency Services Number Two Limited, have rights to the residual income from the portfolio of mortgages
amounting to £374.4 million in L1, L2 and L3.The Society and its subsidiaries within the Platform Group Holdings Limited group of companies, have
rights to the residual income from the portfolio of mortgages amounting to £977.8 million in L4, L5, L6, L7, L8, PH1 and PH2.

The quasi-subsidiaries were originally funded as follows:

Original
Maximum Funded by Funded
funding Group during
£m £m year

Company
Leek Finance Number One PLC 794.6 13.5 1996
Leek Finance Number Two PLC 58.1 3.7 1998
Leek Finance Number Three PLC 94.7 4.3 1999
115.9 – 2000
312.3 – 2001

522.9 4.3
Leek Finance Number Four Limited 208.8 – 2001
Leek Finance Number Five Limited 193.5 2.3 2001
206.5 2.6 2002

400.0 4.9
Leek Finance Number Six Limited 200.0 3.3 2002
Leek Finance Number Seven PLC 389.1 6.0 2002
Leek Finance Number Eight Limited 200.0 2.4 2002
Platform Home Loans No. 1 PLC 297.0 7.6 1999
Platform Home Loans No. 2 PLC 206.0 3.9 2000
3,276.5 49.6

The rights of the Society are subordinated to all other creditors of L1, L2, L3, L4, L5, L6, L7 and L8.

The rights of the Group subsidiaries, Platform Funding No. 3 Limited and Platform Funding No. 6 Limited, are subordinated to all other creditors of PH1
and PH2.

The non-Group providers of finance have no recourse other than to the assets of the respective quasi-subsidiary.

31
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

15. LOANS FULLY SECURED ON RESIDENTIAL PROPERTY SUBJECT TO NON-RECOURSE FINANCE (continued)

The results of L1, L2, L3, L4, L5, L6, L7, L8, PH1 and PH2 have been incorporated using the linked presentation method as quasi-subsidiaries.
The aggregated, summarised financial statements of L1, L2, L3, L4, L5, L6, L7, L8, PH1 and PH2 at 31 December 2002 are:

2002 2001
£m £m

Income and expenditure account


Interest receivable and similar income 107.9 103.9
Interest payable and similar charges (63.0) (67.1)
Net interest receivable 44.9 36.8
Other income 2.0 –
Administrative expenses (14.4) (13.1)
Provisions for bad and doubtful debts (2.2) (3.9)
Profit on ordinary activities before tax (Note 4) 30.3 19.8
Tax on profit on ordinary activities (9.1) (6.0)
Profit for the financial year 21.2 13.8

Assets
Advances secured on residential property subject to non-recourse finance 1,352.2 1,216.5
Cash at bank and in hand 30.7 25.4
Other debtors 157.5 51.9
Unamortised premium on acquisition of mortgage books 27.9 27.4
Total assets 1,568.3 1,321.2

Capital and liabilities


Non-recourse finance 1,460.9 1,232.3
Deferred consideration 45.5 39.3
Subordinated funding from Britannia Building Society 49.6 44.7
Other creditors 12.0 4.7
Capital and reserves 0.3 0.2
Total liabilities 1,568.3 1,321.2

Non-recourse finance includes £158.3 million (2001: £60.5 million) included within other liabilities in the Group balance sheet.

Cash Flow Statement


Net cash (outflow)/inflow from operating activities (72.3) 13.1
Net increase in mortgage balances (129.4) (630.8)
Net increase in non-recourse funding 228.6 632.2
Net increase in subordinated funding 4.9 24.6
Payment of deferred purchase consideration (26.5) (13.9)
Increase in cash 5.3 25.2

32
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

16. PROVISIONS FOR BAD AND DOUBTFUL DEBTS

Loans fully Loans fully


secured on secured on Other loans
residential residential fully secured
property property on land
Specific General General Total
£m £m £m £m

GROUP
At 1 January 2002 0.9 25.1 7.4 33.4
Amounts written off (1.8) – (0.4) (2.2)
Charge for the year 1.8 6.9 2.3 11.0
At 31 December 2002 0.9 32.0 9.3 42.2
Included within suspended interest account (Note 1) 6.4
48.6
Provisions against non-performing advances at 31 December 2002 were £1.7 million (2001: £1.5 million).

During the year the Group recovered £0.7 million (2001: £1.1 million) against amounts previously written off.

Loans fully Loans fully


secured on secured on Other loans
residential residential fully secured
property property on land
Specific General General Total
£m £m £m £m

SOCIETY
At 1 January 2002 0.3 7.5 7.4 15.2
Amounts written off (1.1) – (0.4) (1.5)
Charge for the year 1.0 2.6 2.3 5.9
At 31 December 2002 0.2 10.1 9.3 19.6
Included within suspended interest account (Note 1) 4.7
24.3

Provisions against non-performing advances at 31 December 2002 were £1.1 million (2001: £1.1 million).

During the year the Society recovered £0.7 million (2001: £1.1 million) against amounts previously written off.

17. INVESTMENTS

Investments in equity shares of subsidiary and associated undertakings are financial fixed assets.

Investments in subsidiary and associated undertakings:


Shares Loans Total
£m £m £m
SOCIETY
Movements during the year are analysed as follows:
At 1 January 2002 65.2 1,728.3 1,793.5
Additions – 5,962.4 5,962.4
Repayments – (5,366.3) (5,366.3)
At 31 December 2002 65.2 2,324.4 2,389.6

33
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

17. INVESTMENTS (continued)

Subsidiary undertakings
The Society has a direct interest in the ordinary share capital of the following principal subsidiary undertakings trading in the businesses indicated. All
subsidiary undertakings are included in the consolidation.

Principal subsidiary undertakings which are wholly owned, registered in England and operating in the United Kingdom:

Britannia Development and Management Company Limited Property investment


Britannia Independent Limited Independent financial advisor
Britannia Treasury Services Limited Mortgage and syndicated lending
Verso Limited Mortgage origination

On 28 March 2002 Britannia Independent Limited sold its future commissions stream and customer database to Thomson’s plc. Britannia Independent
Limited will cease to trade in 2003.The total income of Britannia Independent Limited for 2002 is £0.9 million (2001: £0.7 million) and profit before tax
£0.4 million (2001: £0.1 million).

On 10 July 2002 the Society announced it was to transfer the trade of Verso Limited to the Platform Group with effect from 3 February 2003.

Britannia Treasury Services Limited has the following wholly owned subsidiary undertakings, registered in England, operating in the United Kingdom,
trading in the businesses indicated:

Mortgage Agency Services Number One Limited Mortgage and syndicated lending
Mortgage Agency Services Number Two Limited Mortgage lending
Mortgage Agency Services Number Three Limited Bank account custodian
Mortgage Agency Services Number Four Limited Mortgage lending
Mortgage Agency Services Number Five Limited Mortgage lending
Western Mortgage Services Limited Mortgage book administration
Platform Group Holdings Limited Holding company

Platform Group Holdings Limited has the following wholly owned subsidiary undertakings, registered in England, operating in the United Kingdom,
trading in the businesses indicated:

Platform Consumer Services Limited Mortgage lending


Platform Funding Limited Mortgage origination
Platform Funding No. 2 Limited Finance company
Platform Funding No. 3 Limited Finance company
Platform Funding No. 4 Limited Mortgage origination
Platform Funding No. 5 Limited Mortgage origination
Platform Funding No. 6 Limited Finance company
Platform Home Loans Limited Mortgage origination and servicing
Plum Sterling No. 1 PLC Mortgage lending

Platform Consumer Services Limited is the only direct subsidiary of Platform Group Holdings Limited.

Registered in the Isle of Man and operating overseas:

Britannia International Limited Deposit taking

Registered in Guernsey and operating overseas:

Britsafe Insurance Services (Guernsey) Limited Mortgage insurance company

Registered in Scotland and operating in the United Kingdom:

Britannia Life Direct Limited Direct sales of financial services

Subsidiary undertaking, registered in England and operating in the United Kingdom, where the Society owns half the share capital represented by its
holding of all the ‘A’ class ordinary shares and the majority of voting rights:
34

Britannia New Homes (Scotland) Limited Property development


Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

17. INVESTMENTS (continued)

Joint ventures
The Society owns 49% of the shares in Britannia Personal Lending Limited and 50% of the shares in MutualPlus Limited, which are registered in England,
operating in the United Kingdom, trading in the businesses indicated:

Britannia Personal Lending Limited Unsecured personal lending


MutualPlus Limited Provision of branch sharing services

The total income of Britannia Personal Lending Limited for the year was £7.3 million (2001: £5.7 million). MutualPlus Limited had no income during the
year (2001: £nil).The Society has 50% of the voting rights in the above joint ventures.

Other directly held associated bodies


The Society has membership rights in Link Interchange Network (LINK) and Funds Transfer Sharing Limited (FTS), private companies registered in
England limited by guarantee. LINK provides the Society and others with automated teller machine facilities operating throughout the United Kingdom.
Both FTS and LINK are directly held associated bodies of the Society.Their results have been excluded from the accounts as, in the opinion of the
Directors, they are not material.

Quasi-subsidiaries
The companies considered by the Directors to be quasi-subsidiaries as defined in Financial Reporting Standard No. 5 (Reporting the substance of
transactions) are set out below:

Leek Finance Holdings Limited Holding company


Leek Finance Number One PLC Securitisation company
Leek Finance Holdings Number Two Limited Holding company
Leek Finance Number Two PLC Securitisation company
Leek Finance Holdings Number Three Limited Holding company
Leek Finance Number Three PLC Securitisation company
Leek Finance Holdings Number Four Limited Holding company
Leek Finance Number Four Limited Securitisation company
Leek Finance Holdings Number Five Limited Holding company
Leek Finance Number Five Limited Securitisation company
Leek Finance Holdings Number Six Limited Holding company
Leek Finance Number Six Limited Securitisation company
Leek Finance Holdings Number Seven Limited Holding company
Leek Finance Number Seven PLC Securitisation company
Leek Finance Holdings Number Eight Limited Holding company
Leek Finance Number Eight Limited Securitisation company

The Society holds one non-voting share in Leek Finance Holdings Limited, representing 12.5% of the issued share capital.

In addition, the Directors consider the following companies to be quasi-subsidiaries through its wholly owned subsidiary Platform Group Holdings Limited:

Platform Home Loans Holdings Limited Holding company


Platform Home Loans No. 1 PLC Securitisation company
Platform Home Loans Holdings No. 2 Limited Holding company
Platform Home Loans No. 2 PLC Securitisation company

The Society has no shareholding in any of the quasi-subsidiaries listed above, other than its shareholding in Leek Finance Holdings Limited as
disclosed above.

All quasi-subsidiaries are registered in England and operate in the United Kingdom.

In addition to the above, the Society has interests in a number of minor subsidiary undertakings.

35
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

18. INTANGIBLE FIXED ASSETS

Goodwill
£m

GROUP
Cost:
At 1 January 2002 53.3
Acquired during the year 2.9
At 31 December 2002 56.2
Amortisation:
At 1 January 2002 8.1
Charge for the year
included in depreciation and amortisation 2.1
included in interest receivable and similar income 2.5
At 31 December 2002 12.7
Net book amount:
At 31 December 2002 43.5
At 31 December 2001 45.2
A mortgage portfolio with a provisional fair value of £150.9 million (book value £150.9 million) was acquired from GMAC-RFC Limited on
28 March 2002 for a cash consideration of £153.8 million.

Included in the amount acquired is £0.2 million of costs not included in the fair value.

19.TANGIBLE FIXED ASSETS

Equipment,
fixtures,
Land and fittings and
buildings vehicles Total
£m £m £m

GROUP
Cost:
At 1 January 2002 110.7 200.1 310.8
Additions 2.7 33.0 35.7
Disposals (1.8) (3.6) (5.4)
At 31 December 2002 111.6 229.5 341.1
Depreciation:
At 1 January 2002 48.2 134.6 182.8
Charge for the year 5.1 18.7 23.8
Disposals (0.1) (2.3) (2.4)
At 31 December 2002 53.2 151.0 204.2
Net book amount:
At 31 December 2002 58.4 78.5 136.9
At 31 December 2001 62.5 65.5 128.0

The net book amount of land and buildings occupied by the Group for its own activities is £56.6 million (2001: £57.6 million).

The net book amount of equipment, fixtures, fittings and vehicles includes £nil (2001: £1.3 million) in respect of assets held under finance leases.
Depreciation of £1.3 million (2001: £1.2 million) has been charged against these assets.

36
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

19.TANGIBLE FIXED ASSETS (continued)

Equipment,
fixtures,
Land and fittings and
buildings vehicles Total
£m £m £m

SOCIETY
Cost:
At 1 January 2002 93.7 193.4 287.1
Additions 2.7 30.5 33.2
Disposals (1.4) (1.7) (3.1)
At 31 December 2002 95.0 222.2 317.2
Depreciation:
At 1 January 2002 47.2 130.0 177.2
Charge for the year 4.9 17.4 22.3
Disposals (0.1) (0.5) (0.6)
At 31 December 2002 52.0 146.9 198.9
Net book amount:
At 31 December 2002 43.0 75.3 118.3
At 31 December 2001 46.5 63.4 109.9

The net book amount of land and buildings occupied by the Society for its own activities is £41.6 million (2001: £42.0 million).

The net book amount of equipment, fixtures, fittings and vehicles includes £nil (2001: £1.3 million) in respect of assets held under finance leases.
Depreciation of £1.3 million (2001: £1.2 million) has been charged against these assets.

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Net book amount of land and buildings is represented by:

Freehold 53.8 54.2 38.7 38.4


Long leasehold 3.5 3.9 3.2 3.7
Short leasehold 1.1 4.4 1.1 4.4
58.4 62.5 43.0 46.5

20. OTHER ASSETS

Restated Restated
Group Group Society Society
2002 2001 2002 2001
£m £m £m £m

Deferred tax 6.8 17.0 6.7 6.2


Other 42.4 31.6 17.2 8.4
49.2 48.6 23.9 14.6

37
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

20. OTHER ASSETS (continued)

Restated Restated
Group Group Society Society
2002 2001 2002 2001
£m £m £m £m

The amounts provided for deferred tax, which represent a full potential
deferred asset, comprise:
Accelerated capital allowances (2.7) (1.6) (1.2) –
Other timing differences 9.5 18.6 7.9 6.2
6.8 17.0 6.7 6.2

Group Society
£m £m

Deferred tax asset as previously recognised 5.3 –


Prior year adjustment 11.7 6.2
Deferred tax asset recognised as restated 17.0 6.2

The Group has adopted Financial Reporting Standard No. 19 (Deferred tax), and has restated prior year assets accordingly.The impact of the change is
explained in the Statement of Accounting Policies on page 19 to 21.

21. PREPAYMENTS AND ACCRUED INCOME

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Accrued interest relating to off balance sheet instruments 69.0 157.2 69.0 157.2
Prepayment to defined benefit pension scheme
(in accordance with Statement of Standard Accounting Practice No. 24) 14.0 – 14.0 –
Other 15.9 12.5 12.2 11.0
98.9 169.7 95.2 168.2

22. SHARES

Group Group
and Society and Society
2002 2001
£m £m

Held by individuals 10,393.8 9,917.7

Shares are repayable from the balance sheet date in the ordinary course of business as follows:

Group Group
and Society and Society
2002 2001
£m £m

Accrued interest 254.6 378.7


Repayable on demand 9,075.8 8,410.0
Other shares by residual maturity repayable
In not more than three months 109.4 4.1
In more than three months but not more than one year 233.7 –
In more than one year but not more than five years 720.3 671.4
In more than five years – 453.5
10,393.8 9,917.7

38
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

23. AMOUNTS OWED TO CREDIT INSTITUTIONS

Amounts owed to credit institutions are repayable from the balance sheet date in the ordinary course of business as follows:

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Accrued interest 12.3 12.7 12.3 12.7


Repayable on demand 34.6 52.6 28.0 50.1
Other amounts owed to credit institutions by residual maturity repayable
In not more than three months 605.3 691.1 605.3 691.1
In more than three months but not more than one year 49.5 9.0 49.5 9.0
In more than one year but not more than five years 76.8 126.9 73.7 124.9
778.5 892.3 768.8 887.8

24. AMOUNTS OWED TO OTHER CUSTOMERS

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Amounts owed to subsidiary undertakings – – 1,241.4 1,023.9


Other 2,490.7 2,584.0 1,504.0 1,669.5
2,490.7 2,584.0 2,745.4 2,693.4

Amounts owed to other customers are repayable from the balance sheet date in the ordinary course of business as follows:

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Accrued interest 8.7 12.5 8.6 12.4


Repayable on demand 352.0 318.0 1,307.9 1,093.3
Other amounts owed to other customers by residual maturity repayable
In not more than three months 1,830.9 1,503.4 1,222.4 1,332.6
In more than three months but not more than one year 145.0 689.4 127.5 202.1
In more than one year but not more than five years 154.1 60.7 79.0 53.0
2,490.7 2,584.0 2,745.4 2,693.4

25. DEBT SECURITIES IN ISSUE

Group Group
and Society and Society
2002 2001
£m £m

Certificates of deposit 1,039.0 691.3


Fixed and floating rate notes 1,434.0 1,171.2
Other debt securities 749.6 608.8
3,222.6 2,471.3

39
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

25. DEBT SECURITIES IN ISSUE (continued)

Debt securities in issue are repayable from the balance sheet date in the ordinary course of business as follows:

Group Group
and Society and Society
2002 2001
£m £m

Accrued interest 20.5 21.1


Debt securities in issue by residual maturity repayable
In not more than one year 1,986.8 1,381.5
In more than one year but not more than five years 1,215.3 1,068.7
3,222.6 2,471.3

26. OTHER LIABILITIES

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Amounts falling due within one year


Income tax 1.1 1.8 1.0 1.7
Corporation tax 13.9 30.2 – 10.2
Other creditors 176.2 78.2 66.1 71.1
191.2 110.2 67.1 83.0
Amounts falling due in more than one year
Other creditors 57.5 54.2 – –
248.7 164.4 67.1 83.0

Other creditors for the Group and Society include £37.3 million (2001: £53.4 million) in respect of the Britannia Membership Reward for the year.

27. ACCRUALS AND DEFERRED INCOME

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Accruals relating to off balance sheet instruments 77.1 69.8 77.1 69.8
Interest accrued on subordinated liabilities 4.5 2.6 4.5 2.6
Interest accrued on subscribed capital 6.0 6.0 6.0 6.0
Other 52.7 73.3 33.8 42.6
140.3 151.7 121.4 121.0

Other accruals for the Group include £16.5 million (2001: £23.3 million) in respect of high loan to value advance premiums received.

40
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

28. PROVISIONS FOR LIABILITIES AND CHARGES

Provision
resulting from
the review of
pensions
business Other Total
£m £m £m

GROUP
At 1 January 2002 1.7 8.1 9.8
Amounts (released)/provided during the year (0.3) 2.1 1.8
Amounts paid/utilised during the year (1.1) (1.7) (2.8)
At 31 December 2002 0.3 8.5 8.8

SOCIETY
At 1 January 2002 1.7 2.8 4.5
Amounts (released)/provided during the year (0.3) 4.7 4.4
Amounts paid/utilised during the year (1.1) (1.4) (2.5)
At 31 December 2002 0.3 6.1 6.4

Included within the amounts utilised is £0.4 million paid to the Group’s auditors (2001: £0.5 million).

29. SUBORDINATED LIABILITIES

Group Group
and Society and Society
2002 2001
£m £m

Floating rate subordinated notes 2007 – 70.9


Fixed rate subordinated notes 2011 99.6 99.5
Fixed rate subordinated notes 2033 147.7 –
247.3 170.4

On a winding up, the claims of the noteholders are subordinated in right of payment to depositors and other creditors, and those holding shares where
the Society remains a building society. Interest is payable on the 2011 fixed notes at 8.875% and on the 2033 fixed notes at 5.875%.The fixed rate
notes are repayable at the Society’s option and with the prior consent of the Financial Services Authority, on any interest date within five years of the
maturity date.

41
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

30. SUBSCRIBED CAPITAL

Group Group
and Society and Society
2002 2001
£m £m

Permanent interest bearing shares 110.0 110.0


Interest is paid in arrears at the rate of 13% pa in half yearly instalments.The shares are repayable only in the event of a winding up of the Society or
otherwise with the consent of the Financial Services Authority. Interest may not be paid or credited under certain circumstances. In a winding up or
dissolution of the Society the claims of the holders of permanent interest bearing shares would rank behind all other creditors of the Society and the
claims of Members holding shares as to principal and interest.The holders of permanent interest bearing shares are not entitled to any share in any final
surplus upon a winding up or final dissolution of the Society.

The non-equity interest of the Group and Society comprises permanent interest bearing shares of £110.0 million (2001: £110.0 million) and the share
premium thereon of £3.1 million (2001: £3.1 million).

31. RESERVES

Share General
premium reserve
£m £m

GROUP
At 1 January 2002 as previously reported 3.1 930.5
Prior year adjustment – 11.7
At 1 January 2002 as restated 3.1 942.2
Profit for the financial year – 84.6
At 31 December 2002 3.1 1,026.8

SOCIETY
At 1 January 2002 as previously reported 3.1 893.6
Prior year adjustment – 6.2
At 1 January 2002 as restated 3.1 899.8
Profit for the financial year – 31.1
At 31 December 2002 3.1 930.9

The cumulative amount of goodwill, resulting from acquisitions, after making deductions for disposals, which has been written off to Group general
reserve is £59.5 million (2001: £59.5 million), Society £nil (2001: £nil).

32. MEMORANDUM ITEMS

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Commitments
Irrevocable undrawn loan facilities 579.8 536.9 449.2 467.4
Undrawn formal standby facilities, credit lines and other
commitments to lend greater than one year 8.0 8.0 8.0 8.0
587.8 544.9 457.2 475.4

Credit risk weighted amount 149.0 138.2 116.3 120.9

42
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

33. FINANCIAL COMMITMENTS

Contingent liabilities
In common with other financial institutions, the Society has a contingent liability in respect of contributions to the Financial Services Compensation
Scheme.The Society has not been notified of any claims against the Scheme.

Capital commitments for which no provision has been made in the accounts

Group Group Society Society


2002 2001 2002 2001
£m £m £m £m

Capital expenditure contracted for but not provided in the accounts 4.8 1.5 4.8 1.5

Commitments under operating leases


At the balance sheet date, annual commitments under operating leases relating to land and buildings, and equipment were as follows:

Land and Land and


buildings buildings Equipment Equipment
2002 2001 2002 2001
£m £m £m £m
GROUP
Leases which expire
In not more than one year 0.1 0.2 0.2 2.7
In more than one year but not more than five years 1.0 1.0 0.6 0.6
In more than five years 4.9 4.5 – –
6.0 5.7 0.8 3.3

SOCIETY
Leases which expire
In not more than one year 0.1 0.2 0.2 2.7
In more than one year but not more than five years 0.9 0.7 0.6 0.4
In more than five years 4.3 4.3 – –
5.3 5.2 0.8 3.1

43
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

34. CONSOLIDATED CASH FLOW STATEMENT

Reconciliation of operating profit to net cash inflow from operating activities

2002 2001
£m £m

Operating profit after provisions and Britannia Membership Reward 95.1 84.9

Decrease/(increase) in prepayments and accrued income 66.5 (18.8)


Decrease in accruals and deferred income (136.7) (7.2)
Provisions for bad and doubtful debts 6.3 7.2
Transfer of free mortgage indemnity guarantee insurance to provisions for bad and doubtful debts 4.7 5.6
Loans and advances written off, net of recoveries (2.7) (3.3)
Amortisation 4.6 4.5
Depreciation 23.8 21.4
Interest on subscribed capital 14.3 14.3
Interest on subordinated liabilities 13.6 12.5
Profit on sale of tangible fixed assets (2.2) (1.8)
Decrease in provisions for liabilities and charges (1.0) (33.9)
Net cash inflow from trading activities 86.3 85.4

Net increase in loans and advances to customers (1,113.2) (1,185.8)


Net increase in shares 600.2 146.4
Net (decrease)/increase in amounts owed to credit institutions and other customers (202.9) 990.5
Net increase in debt securities in issue 751.9 851.0
Net decrease/(increase) in loans and advances to credit institutions 478.8 (145.6)
Increase in value of joint ventures (0.3) (0.6)
Net increase in other assets (0.6) (11.2)
Increase in intangible fixed assets (2.9) –
Net decrease/(increase) in other liabilities 100.6 (53.7)
Net cash inflow from operating activities 697.9 676.4

Analysis of changes in financing during the year

Subscribed Subordinated
Capital Liabilities
£m £m

At 1 January 2002 110.0 170.4


Amortisation of deferred issue costs – 0.1
Issue of subordinated liabilities – 147.7
Repayment of subordinated liabilities – (70.9)
At 31 December 2002 110.0 247.3

Analysis of the balances of cash as shown in the balance sheet

2001 Flows 2002


£m £m £m

Cash in hand and balances with the Bank of England 33.8 (2.5) 31.3
Loans and advances to credit institutions repayable on demand 33.2 9.2 42.4
67.0 6.7 73.7

44
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

35. FINANCIAL INSTRUMENTS

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

The Group 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 Assets and Liabilities Committee (ALCO), which is charged with the responsibility for managing and controlling
the balance sheet exposures of the Group. Reports of all ALCO meetings are presented to the Board.

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, exchange rates or stock
market indices.

Derivatives are only used by the Group in accordance with the Building Societies Act 1986, to limit the extent to which the Group will be affected by
changes in interest rates, exchange rates or other factors specified in the legislation.

Derivatives are not used in trading activity or for speculative purposes.

Types of derivatives
The principal derivatives used in balance sheet risk management are interest rate swaps, interest rate options, cross currency interest rate swaps and
foreign exchange contracts, which are used to hedge Group balance sheet exposures arising from fixed rate mortgage lending and savings products,
funding and investment activities.

The following table describes the significant activities undertaken by the Group, the related risks associated with such activities and the types of
derivatives which are typically used in managing such risks. Such risks may alternatively be managed using on balance sheet instruments as part of an
integrated approach to risk management.

Activity Risk Type of hedge


Management of the investment of reserves Sensitivity to changes in interest rates Interest rate swaps
and other net non-interest bearing liabilities

Fixed rate savings products and fixed Sensitivity to falls in interest rates Receive fixed interest rate swaps
rate funding

Fixed rate mortgage lending and fixed Sensitivity to increases in interest rates Pay fixed interest rate swaps
rate investments

Investment and funding in foreign currencies Sensitivity to changes in foreign exchange rates Cross currency interest rate swaps and foreign
exchange contracts

Equity linked investment products Sensitivity to changes in equity indices Equity linked futures and interest rate swaps

Derivative products which are combinations of more basic derivatives are used only in circumstances where the underlying position being hedged
contains the same risk features. For example, guaranteed equity bonds issued by the Group may be hedged with a single contract incorporating both
the interest rate and equity index risk incurred. In such cases the derivatives used will be designed to match exactly the risks of the underlying asset or
liability. Exposure to market risk on such contracts is therefore fully hedged.

45
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

35. FINANCIAL INSTRUMENTS (continued)

Control of derivatives
The Board has authorised the use of derivatives in accordance with the Building Societies Act 1986 and sets a prudential limit for the Group on the
amount of derivatives outstanding at any one time. All other limits over the use of derivative products are the responsibility of ALCO with the
exception of the monitoring and review of lending exposures arising in all aspects of the Group’s operations which is the responsibility of the Credit
Committee, which works within Board approved Group credit policies.

All exchange-traded instruments are subject to cash requirements under the standard margin arrangements applied by the individual exchanges. Other
derivatives contracts are not subject to the cash requirements.The accounting policies for derivatives are described in the Statement of Accounting
Policies on pages 19 to 21.

The table below analyses the derivatives by type of contract and maturity and shows the nominal principal amounts, credit risk weighted amount and
replacement costs of contracts. Nominal principal amounts indicate the volume of business outstanding at the balance sheet date and do not represent
amounts at risk.The replacement cost represents the cost of replacing contracts with positive values, calculated at market rates current at the balance
sheet date reflecting the Group’s exposure should the counterparties default.The credit risk weighted amount, which is calculated according to rules
specified by the Financial Services Authority, is based on the replacement cost, but also takes into account measures of the extent of potential future
exposure and the nature of the counterparty.
Nominal Credit risk Nominal Credit risk
principal weighted Replacement principal weighted Replacement
amount amount cost amount amount cost
2002 2002 2002 2001 2001 2001
£m £m £m £m £m £m

GROUP AND SOCIETY


Exchange rate contracts
Cross currency interest rate swaps 566.0 1.9 3.5 723.0 4.9 17.4
Forward foreign exchange 241.6 2.9 2.6 437.7 4.4 –
807.6 4.8 6.1 1,160.7 9.3 17.4
Under one year 566.0 1.9 3.5 723.0 4.9 17.4
Between one and five years 241.6 2.9 2.6 437.7 4.4 –
807.6 4.8 6.1 1,160.7 9.3 17.4

Interest rate contracts


Interest rate swaps 8,161.2 36.4 136.0 7,641.8 32.3 121.1
Swaptions – – – 72.0 0.1 0.3
Forward rate agreements 875.0 0.5 0.5 450.0 0.2 0.9
Futures (exchange traded) 121.7 – – 400.0 0.2 0.8
Caps, collars and floors 609.4 0.4 0.6 902.8 1.6 6.0
9,767.3 37.3 137.1 9,466.6 34.4 129.1
Under one year 3,701.2 9.4 46.8 3,669.3 8.9 44.5
Between one and five years 4,166.8 19.3 75.5 4,384.7 20.0 78.1
Over five years 1,899.3 8.6 14.8 1,412.6 5.5 6.5
9,767.3 37.3 137.1 9,466.6 34.4 129.1

Equity contracts
Under one year 41.2 0.5 – 109.6 7.6 38.1
Between one and five years 221.5 3.5 – 159.7 7.3 35.9
262.7 4.0 – 269.3 14.9 74.0

All of the Group’s derivatives activity is contracted with OECD financial institutions.

The financial risks faced by the Group include credit risk, liquidity risk, interest rate risk and currency rate risk.

46
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

35. FINANCIAL INSTRUMENTS (continued)

Credit risk
Credit risk is the risk that counterparties will not be able to meet their obligations as they fall due.The Credit Committee is responsible for approving
and monitoring the Group’s credit exposures for lending which it does through reviewing and approving the Group’s lending policy and credit scoring
systems and through setting limits on credit exposures to individual counterparties and industrial sectors.The ALCO is responsible for approving limits
on Treasury counterparties and country exposures.The minutes of the Credit Committee and ALCO are presented to the Board.

Liquidity risk
The Group’s liquidity policy is to maintain sufficient liquid resources to cover cash flow imbalances and fluctuations in funding, to retain full public
confidence in the solvency of the Group and to enable the Group to meet its financial obligations.This is achieved through maintaining a prudent level
of liquid assets, through wholesale funding facilities and through management control of the growth of the business.

Interest rate risk


The Group is exposed to movements in interest rates, and manages this exposure on a continuous basis, within limits set by the Board, using a
combination of on and off balance sheet instruments.The Group monitors risk daily using a Risk Management system and operates within limits set
down by ALCO.The Group adopts a prudent approach to risk management, monitored by the Financial Services Authority and uses a varied amount of
on and off balance sheet instruments to limit the Group’s exposure to market risk. After taking into account the various derivatives entered into by the
Group, the interest rate sensitivity exposure of the Group was:
More than More than More than
three months six months one year
Not more but not more but not more but not more
than three than six than one than five More than Non-interest
months months year years five years bearing Total
£m £m £m £m £m £m £m

At 31 December 2002
ASSETS
Liquid assets 4,512.9 149.4 147.1 183.0 55.7 56.8 5,104.9
Loans fully secured on residential property
and other loans 8,917.0 448.6 451.4 1,552.6 1,860.6 5.3 13,235.5
Tangible and intangible fixed assets – – – – – 180.4 180.4
Other assets – – – – – 149.8 149.8
Total assets 13,429.9 598.0 598.5 1,735.6 1,916.3 392.3 18,670.6

LIABILITIES
Shares 9,185.2 170.0 63.7 720.3 – 254.6 10,393.8
Amounts owed to credit institutions, other
customers and debt securities in issue 5,858.0 397.1 119.5 75.7 – 41.5 6,491.8
Other liabilities – – – – – 397.8 397.8
Subordinated liabilities and subscribed capital – – – 99.6 257.7 – 357.3
Reserves – – – – – 1,029.9 1,029.9
Total liabilities 15,043.2 567.1 183.2 895.6 257.7 1,723.8 18,670.6
Off balance sheet items 804.9 1,141.2 (412.8) 10.2 (1,543.5) – –
Interest rate sensitivity gap (808.4) 1,172.1 (2.5) 850.2 115.1 (1,331.5) –

47
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

35. FINANCIAL INSTRUMENTS (continued)

More than More than More than


three months six months one year
Not more but not more but not more but not more Restated
than three than six than one than five More than Non-interest Restated
months months year years five years bearing Total
£m £m £m £m £m £m £m

At 31 December 2001
ASSETS
Liquid assets 3,967.7 323.0 112.5 327.1 104.3 58.8 4,893.4
Loans fully secured on residential property and
other loans 7,892.8 345.0 560.6 2,274.3 1,009.0 48.9 12,130.6
Tangible and intangible fixed assets – – – – – 173.2 173.2
Other assets – – – – – 219.7 219.7
Total assets 11,860.5 668.0 673.1 2,601.4 1,113.3 500.6 17,416.9

LIABILITIES
Shares 9,077.7 152.1 201.6 471.2 15.1 – 9,917.7
Amounts owed to credit institutions, other customers
and debt securities in issue 5,213.4 162.2 220.5 305.3 – 46.2 5,947.6
Other liabilities – – – – – 325.9 325.9
Subordinated liabilities and subscribed capital 70.4 – – – 210.0 – 280.4
Reserves – – – – – 945.3 945.3
Total liabilities 14,361.5 314.3 422.1 776.5 225.1 1,317.4 17,416.9
Off balance sheet items 311.2 1,326.0 284.4 (628.8) (1,292.8) – –
Interest rate sensitivity gap (2,189.8) 1,679.7 535.4 1,196.1 (404.6) (816.8) –
Liquid assets comprise cash in hand and balances with the Bank of England, loans and advances to credit institutions and debt securities.

Other assets comprise investments, other assets and prepayments, and accrued income.

Other liabilities comprise other liabilities, accruals and deferred income, and provisions for liabilities and charges.

Currency rate risk


The Group has no significant net exposure to foreign exchange rate fluctuations or changes in foreign currency interest rates.

Hedges of transactions
The Society will hedge fixed rate savings products and fixed rate mortgage products based on the impact of these products on the overall balance
sheet position and net interest margin. Products relating to specific markets such as equity linked growth bonds are hedged specifically based on the
expected sales levels. Foreign currency transactions are hedged at the time of the transaction which removes the Group’s foreign currency exposure.

Fair values of financial instruments


Set out overleaf is a comparison of book and fair values of some of the Group’s financial instruments by category as at 31 December 2002. Where
available, market values have been used to determine fair values. Where market values are not available, fair values have been calculated for options
by using option-pricing models and for other financial instruments by discounting cash flows at prevailing interest and exchange 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. It therefore excludes mortgages, retail savings accounts and other balance sheet items. Book and fair values of those items would differ at
31 December 2002.

48
Britannia Building Society Annual Report & Accounts 2002
NOTES TO THE ACCOUNTS

35. FINANCIAL INSTRUMENTS (continued)

Book Fair Book Fair


value value value value
2002 2002 2001 2001
£m £m £m £m
ASSETS/(LIABILITIES)
On balance sheet instruments
Liquid assets 5,104.9 5,108.1 4,893.4 4,910.1
Wholesale liabilities (6,491.8) (6,531.2) (5,947.6) (5,973.3)
Subordinated liabilities (247.3) (255.7) (170.4) (180.8)
Subscribed capital (110.0) (200.2) (110.0) (185.1)

Off balance sheet and similar instruments (10.5) (205.5) 79.5 26.5

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 certain financial liabilities reported within amounts owed to credit institutions, amounts owed to other customers and
debt securities in issue for which an active and liquid market exists.

Off balance sheet and similar instruments comprise derivative instruments used to hedge liquid assets and wholesale liabilities.

Gains and losses on hedges carried forward in the balance sheet as at 31 December 2002 are as follows:

Net gain/
Gains Losses (loss)
£m £m £m

Gains/(losses) carried forward in the balance sheet as at 31 December 2001 0.1 (7.9) (7.8)
Of which recognised in the year to 31 December 2002 (0.1) 5.5 5.4
Gains/(losses) carried forward in the balance sheet as at 31 December 2002 – (2.4) (2.4)
Of which expected to be recognised in the year to 31 December 2003 – (2.1) (2.1)

The Group pays/receives a premium relating to certain types of derivatives which are amortised in line with the underlying assets/liabilities.The
cost/income from these derivatives is fully reflected in the pricing of the Group’s products.

Unrecognised gains and losses on hedges are as follows:

Net gain/
Gains Losses (loss)
£m £m £m

Unrecognised gains/(losses) on hedges at 31 December 2001 71.3 (124.3) (53.0)


Of which recognised in the year to 31 December 2002 (28.3) 15.2 (13.1)
Gains/(losses) before 31 December 2001 that were
not recognised in the year to 31 December 2002 43.0 (109.1) (66.1)
Gains/(losses) arising in the year to 31 December 2002
that were not recognised in that year 28.9 (157.8) (128.9)
Unrecognised gains/(losses) on hedges at 31 December 2002 71.9 (266.9) (195.0)
Of which expected to be recognised in the year to 31 December 2003 8.2 (40.9) (32.7)

The Group enters into derivative contracts to reduce the Group’s overall exposure to interest rate/currency risk.The gains/(losses) on derivatives
shown within this note are generally matched by equal and opposite unrecognised gains/(losses) from on balance sheet positions.

Gains/(losses) recognised within the year to 31 December 2002, consist of maturing contracts and a reduction in gain/(loss) on those contracts during
2002 to a maximum of that reported as at 31 December 2001.

Gains/(losses) arising during the year consist of new deals and any increase in the gain/(loss) for the year from that reported as at 31 December 2001.

The amount to be recognised in the year to 31 December 2003 relates to maturing contracts.
49
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

36. NON-STERLING ASSETS AND LIABILITIES

The aggregate amount of assets and liabilities included in the balance sheet denominated in a currency other than sterling was as follows:

Group Group
and Society and Society
2002 2001
£m £m

Assets 1,125.5 998.9


Liabilities 1,424.7 1,121.7

The Group’s non-sterling assets and liabilities are hedged on balance sheet or by using derivatives to eliminate material currency exposures.

37. DIRECTORS’ LOANS AND RELATED PARTY TRANSACTIONS

Society Society
2002 2001
£000 £000

Investments and deposits held by 13 Directors (2001: 11 Directors) 1,505 2,530


Loans outstanding to 4 Directors (2001: 3 Directors) 885 562

A register is maintained by the Society containing details of loans, transactions and arrangements made between the Society or its subsidiary companies
and Directors of the Society or persons connected with Directors of the Society.

The register will be available for inspection by Members at the Annual General Meeting and during normal office hours at the Society’s Principal Office
(Britannia House, Leek, Staffordshire) during the period of 15 days prior to the meeting.

The Society has taken advantage of the exemptions in Financial Reporting Standard No. 8 (Related party disclosures) and does not therefore disclose
transactions with wholly owned subsidiaries.

The Directors consider the following companies to be related parties of the Society and therefore under Financial Reporting Standard No. 8 (Related
party disclosures) transactions between the Society and these companies require disclosure.

Britannic plc and its subsidiaries


A Society subsidiary, Britannia Life Direct Limited is a tied agent of the Britannic Marketing Group and received commissions of £11.9 million during
the year (2001: £10.6 million) in relation to sales of unit trusts, PEPs and ISAs. At 31 December 2002, Britannic plc owed £2.1 million to Britannia Life
Direct Limited (2001: £0.3 million).

Britannic Asset Management Limited (BAM)


BAM was an associated undertaking of the Society until 7 March 2001.The only related party transaction during the period 1 January 2001 to
7 March 2001 between the Society and BAM was a dividend of £2.4 million.There were no material balances outstanding between the parties at the
year end.

Britannia Personal Lending Limited (BPL)


BPL is a joint venture company and paid commissions to the Society of £0.3 million during the year (2001: £0.2 million).There were no material
balances outstanding between the parties at the year end.

MutualPlus Limited
MutualPlus Limited is a joint venture company created in 2001. At 31 December 2002 it owed £0.1 million to the Society (2001: £0.1 million).

50
Britannia Building Society Annual Report & Accounts 2002
ANNUAL BUSINESS STATEMENT

1. STATUTORY PERCENTAGES

Statutory
2002 Limit
% %

Proportion of business assets not in the form of loans fully secured on residential property (the ‘lending limit’) 12.2 25.0

Proportion of shares and borrowings not in the form of shares held by individuals (the ‘funding limit’) 38.5 50.0

The above percentages have been calculated in accordance with, and the statutory limits are those prescribed by, sections 6 and 7 of the Building
Societies Act 1986 as amended by the Building Societies Act 1997.

• Business assets are the total assets of the Group as shown in the balance sheet, plus provisions for bad and doubtful debts, less 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 balance sheet, plus provisions and bad debts, less unamortised premiums on the acquisition of loans.
• Shares and borrowings represent the total of shares, amounts owed to credit institutions, amounts owed to other customers and debt
securities in issue.

2. OTHER PERCENTAGES

Restated
2002 2001
% %

As percentage of shares and borrowings:


Gross capital 8.2 7.7
Free capital 7.4 6.8
Liquid assets 30.2 30.8
Profit after taxation as a percentage of mean total assets 0.47 0.79
Management expenses as a percentage of mean total assets 0.87 0.93

The above percentages have been prepared from the Society’s consolidated accounts and in particular:

• ‘Gross capital’ represents the aggregate of general reserve, subordinated liabilities and subscribed capital;

• ‘Free capital’ represents the aggregate of gross capital and general loss provisions for bad and doubtful debts less tangible and intangible fixed assets;

• ‘Liquid assets’ represent the total of cash in hand and balances with the Bank of England, loans and advances to credit institutions and debt securities;

• ‘Mean total assets’ represent the amount produced by halving the aggregate of total assets at the beginning and end of the financial year;

• ‘Management expenses’ represent the aggregate of administrative expenses, depreciation and amortisation;

• Comparative ratios have been restated for changes in accounting policies as explained in the Statement of Accounting Policies on pages 19 to 21; and

• Group profit for 2001 includes £80 million profit on the sale of the shareholding in Britannic Asset Management Limited.

51
Britannia Building Society Annual Report & Accounts 2002

ANNUAL BUSINESS STATEMENT

3. DIRECTORS’ RESPONSIBILITIES

Directors

Name and Date of Birth Business Occupation and Other Directorships Date of Appointment as a Director
of the Society

B A W Bernstein Company Director 1.5.1994


22.9.1938
B.A. Management Limited
Britannia Asset Management Limited
Britannia Pension Investments Limited
Elizabeth Ann Kitchens Limited
Elizabeth Ann Woodcraft Limited
Grovewood Products Limited
Homark International Limited
Homecharm Furniture Limited
Park Road Developments Limited
Rochdale Development Agency
Wrighton International Limited

I C Adam, CA Company Director 22.6.1998


2.9.1943
Fishers Holdings Limited
Fishers Services Limited

A H Coe, FCA Company Director 11.4.2000


28.5.1944
Blue Chip Travel Limited
International Academy PLC
Jaycare (Holdings) Limited
Jaycare Limited
Johnson and Jorgensen Packaging Limited
Leisure Ventures Limited
Leisure Ventures PLC
Travelsphere (Holdings) Limited
Travelsphere Limited

W J Gordon, FCIB Company Director 22.9.1999


24.4.1939
Barclays Pension Fund Trustees Limited
Britannia Treasury Services Limited

52
Britannia Building Society Annual Report & Accounts 2002
ANNUAL BUSINESS STATEMENT

3. DIRECTORS’ RESPONSIBILITIES (continued)

Directors

Name and Date of Birth Business Occupation and Other Directorships Date of Appointment as a Director
of the Society

G A Gregory, BA, MA Building Society Executive Director 22.9.1999


26.4.1955
Britannia Asset Management Limited
Britannia Building Society Land and Development
Company (Midlands) Limited
Britannia Independent Limited
Britannia International Limited
Britannia Lending Company Limited
Britannia New Homes Limited
Britannia Personal Lending Limited
Britannia Treasury Services Limited
Mortgage Agency Services Number One Limited
Mortgage Agency Services Number Two Limited
Mortgage Agency Services Number Three Limited
Mortgage Agency Services Number Four Limited
Mortgage Agency Services Number Five Limited
MutualPlus Limited
PCSL Services No. 1 Limited
PCSL Services No. 2 Limited
Platform Consumer Services Limited
Platform Group Holdings Limited
Platform Funding Limited
Platform Funding No. 2 Limited
Platform Funding No. 3 Limited
Platform Funding No. 4 Limited
Platform Funding No. 5 Limited
Platform Funding No. 6 Limited
Platform Home Loans Limited
Verso Limited
Western Mortgage Services Limited

R H B Jones, MA, FCIS, FCMI Solicitor and Company Director 22.9.1993


13.7.1943
Serco Group PLC
The Second World War Experience Centre

P A Lee, BSc, CIPFA, CA Building Society Executive Director 1.9.2002


25.5.1955
Britannia Treasury Services Limited

N B Richardson, BA, FCA Building Society Executive Director 28.9.1998


2.6.1957
Britannia Asset Management Limited
Britannia LAS Direct Limited
Britannia Life Direct Limited
Britannia Treasury Services Limited

B C Rosewell, MA, MPhil Economist 28.7.1999


19.9.1951
The Environment Business Limited
Volterra Consulting Limited

53
Britannia Building Society Annual Report & Accounts 2002

ANNUAL BUSINESS STATEMENT

3. DIRECTORS’ RESPONSIBILITIES (continued)

Directors

Name and Date of Birth Business Occupation and Other Directorships Date of Appointment as a Director
of the Society

L Sawyer Member of the House of Lords 28.7.1999


12.5.1943 Management and Training Consultant

Investors in People UK
Notting Hill Housing Trust
Reed Health Group PLC

G H Stow, FCIB, FCIPD Building Society Executive Director 4.3.1996


29.4.1944
Britannia Development and Management Company Limited
Britannia LAS Direct Limited
Britannia Life Direct Limited
Britannia Treasury Services Limited
Department of Work and Pensions
Northern Racing Limited
Verso Limited

J Suffolk, MBA Building Society Executive Director 28.6.2001


25.2.1958
Britannia Development and Management Company Limited
MutualPlus Limited

E Walmsley, BSc, PhD, MBA Company Director 13.3.2000


28.2.1953
Sheffield University Enterprises Limited
White Rose Technology Limited

Documents may be served on the above named Directors at the following address: Howsons, 50 Broad Street, Leek, Staffordshire Moorlands, ST13 5NS.

Officers

H R Booth, ACIB Managing Director, Western Mortgage Services Limited

P M Buckley, BSc (Hons) Strategy Manager, Customer Contact Centre

D T Crawshaw, BSc (Hons) Strategy Manager, Customer Relationship Management

I M Dale, ACA Head of Group Finance


Director – Britsafe Insurance Services (Guernsey) Limited
Director – Verso Limited

M A Ellison, BA (Hons), MA Head of Information Systems

T A Franklin, ACIB Head of eBusiness


Director – Britannia Personal Lending Limited

S A Goldstraw Head of Commercial Lending


Director – Britannia New Homes (Scotland) Limited

J Katovsky, BA, MA Managing Director, Britannia Treasury Services Limited


Director – Western Mortgage Services Limited
54
Britannia Building Society Annual Report & Accounts 2002
ANNUAL BUSINESS STATEMENT

3. DIRECTORS’ RESPONSIBILITIES (continued)

Officers (continued)

G C Leftwich, BSc (Hons), MA Head of Corporate Communications

A M Long, BSc (Hons) Head of Marketing

I G McKilligan, CA Head of Group Risk

P A Mills, BSc (Hons), ACA Group Secretary


Director – Britannia Asset Management Limited
Director – Britannia Building Society Land and Development Company (Midlands) Limited
Director – Britannia International Limited
Director – Britannia (Isle of Man) Limited
Director – Britannia Motor Insurance Services Limited
Director – Britannia New Homes Limited
Director – Britannia Personal Lending Limited
Director – Britsafe Insurance Services (Guernsey) Limited
Director – Mornington Information Technology Services Limited
Director – Mortgage Agency Services Number Four Limited
Director – Mortgage Agency Services Number Five Limited
Director – PCSL Services No. 1 Limited
Director – PCSL Services No. 2 Limited
Director – Platform Consumer Services Limited
Director – Platform Funding Limited
Director – Platform Funding No. 2 Limited
Director – Platform Funding No. 3 Limited
Director – Platform Funding No. 6 Limited
Director – Platform Group Holdings Limited
Director – Platform Home Loans Limited

K Moir, BA (Hons) Director of Organisational Development

S Nichols, ACIB, MCT, ACIS Head of Treasury

D R Preece, ACIB Head of Membership Services


Director – Western Mortgage Services Limited

A J Thompson Strategy Manager, Change Management

A S Thompson, FCIB Head of Retail Operations


Director – Britannia Estate Agents Limited
Director – Britannia Estate Agents (London) Limited
Director – Britannia (Isle of Man) Limited
Director – Britannia Personal Lending Limited
Director – Britannia Shield Property Services Limited
Director – Mornington Information Technology Services Limited
Director – The Mortgage Agency PLC

D Tweedy, BA, MBA Managing Director, Platform Home Loans Limited


Director – Platform Funding Limited
Director – Platform Consumer Services Limited
Director – PCSL Services No. 1 Limited
Director – PCSL Services No. 2 Limited
Director – Western Mortgage Services Limited

D P Waddingham, Managing Director, Britannia International Limited


MBA, FCIB, MCIM, MCMI, C.Dir. Director – The Derbyshire (Isle of Man) Limited
55
Britannia Building Society Annual Report & Accounts 2002

ANNUAL BUSINESS STATEMENT

4. DIRECTORS’ SERVICE CONTRACTS

The following Directors have service contracts with the Society, entered into on the dates mentioned below:

G H Stow 4 March 1996


N B Richardson 1 November 2002
G A Gregory 22 September 1999
J Suffolk 28 June 2001
P A Lee 1 September 2002

All new Executive Director appointments (including promotions) will be on a rolling one year contract of employment. Mr. Stow, who had a
rolling 2 year contract, retires in May 2003. Mr. Gregory has a rolling 2 year contract, and Mr. Lee and Mr. Suffolk have rolling one year contracts.
Mr. Richardson’s rolling 2 year contract is being reduced over 12 months from 1 November 2002 to one year.

56
Britannia Building Society Annual Report & Accounts 2002
ANNUAL REPORT OF THE REMUNERATION COMMITTEE

This report has been produced to inform Members of the Executive Directors on three principal factors – level of
Board’s policy on the remuneration of the Society's Directors. responsibility, external market competitiveness and individual
Clearly an organisation such as Britannia where assets under performance in the role. All the Executive Directors have a job
management are close to £20 billion must be well managed, description prepared in a standard format, which is independently
to safeguard Members’ savings and give good returns. evaluated.The Committee analyses the external market
Consequently the Board must comprise high calibre Directors competitiveness of the Britannia salaries and benefits against
with extensive relevant experience and expertise. those of comparable positions elsewhere in industry.The
Committee takes advice from a number of external advisors,
Remuneration Committee including Watson Wyatt and Hay.
The role of the Remuneration Committee is to determine
the terms and conditions of employment of the Executive The Society’s salary policy is to position salaries so that, on
and Non-executive Directors of the Society, ensuring those average, they are in line with the median salaries paid for
terms and conditions remain appropriate to attract and retain comparable positions amongst peer group financial services
Directors with relevant experience and skills. organisations. Allowance is made for individual circumstances,
primarily concerning performance.
Composition
During 2002 the Committee comprised three Non-executive Individual Performance
Directors (Rhidian Jones, Barrie Bernstein and Tom Sawyer) and Comparison of senior executive responsibilities and market
was chaired by Rhidian Jones. On 1 January 2003, Ian Adam analysis will provide an appropriate market salary indicator for
joined the Committee.The Society’s Secretary, Paul Mills, attends a particular position.These alone, however, are not sufficient
as Secretary to the Committee. to enable a full, reasoned judgement to be made about the
appropriate salary level for the particular incumbent.This also
Meetings of the Committee are also attended, as necessary, requires an assessment of individual performance.
by Neville Richardson (Group Chief Executive) and Karen Moir
(Director of Organisational Development). To this end, all of the Executive Directors are subject to an annual
performance appraisal by the Chief Executive.The Chief Executive
Frequency of Meetings is appraised by the Chairman. All Non-executive Directors
The Committee normally meets three times a year, with special receive an annual appraisal conducted by the Chairman, who in
meetings when needed. turn receives an appraisal conducted by the Deputy Chairman.

Scope Bonus Scheme


The guiding principle underpinning the operation of the The Remuneration Committee reviews and authorises all
Committee is that members will have no direct financial interest variable pay arrangements (i.e. the bonus schemes) for
in the decisions that they make and will withdraw from the Executive Directors.This includes both the approval of the
meeting when their own remuneration is being considered. design of such schemes and the verification of the intended
payout against the performance measures and targets laid down.
Key Activities in 2002
During 2002, the Committee met six times. Some of the key The selection of performance measures is reviewed annually to
issues considered by the Committee included reviews of the ensure that the measures are linked to the achievement of the
remuneration of the Executive and Non-executive Directors Group corporate plan and that they support the priorities of
and the design of the 2003 Executive Bonus Scheme. the business for the forthcoming year. All annual schemes are
constructed around the achievement of target levels of
Directors’ Remuneration performance in the selected measures. A threshold level of
The remuneration of each Director is analysed in Note 7 performance is laid down, below which no payment will be
of the Annual Report and Accounts. Non-executive Directors made, and a maximum level is also specified to avoid any
are remunerated solely by fees and do not receive any salary, excessive bonuses.The results of the incentive scheme, and the
pension, benefits or the benefit of any incentive schemes. attendant bonus payments which are produced, are subject to
external review. As a Mutual the Society does not have share
Mechanisms for Determination of Base Salary capital and there are therefore no share options for the
The Committee bases its decisions about the base salary of the Directors or employees. 57
Britannia Building Society Annual Report & Accounts 2002

ANNUAL REPORT OF THE REMUNERATION COMMITTEE

For the year ended 31 December 2002, the bonus was linked • membership of the contributory Britannia Building Society
to three performance measures – Group profit (defined as Pension and Life Assurance Scheme which includes an
‘profit before Britannia Membership Reward and tax’ and accrual rate of up to 1/30th of final pensionable salary per
excluding exceptional items), cost to income ratio and cost to year of service to a maximum of 2/3rds of final pensionable
asset ratio.The on-target bonus was 18% of salary and the bonus salary, plus a supplementary scheme to provide pension
was capped at a maximum of 30%.The actual bonus was 22.24%. benefits in accordance with the individual’s contract of
Full payment of the bonus to each individual Director was subject employment in respect of basic salary in excess of the
to them achieving their personal objectives during the year. Earnings Cap. A new Money Purchase Pension and Life
Assurance Scheme was introduced in 2001.
The Remuneration Committee also approved the Directors’
bonus arrangements for the year ending 31 December 2003. Pensions information in respect of each Director is shown in
The scheme again provides for payments to be linked to the Note 7 of the Annual Report and Accounts.
same financial measures used in 2002, together with a new
measure linked to customer satisfaction. Based on independent Period of Notice
advice concerning market comparators, which showed the The Remuneration Committee has agreed a policy for
previous scheme to have a significant shortfall in bonus entitlement, mitigation of Executive Contracts. All Executive Directors are
in 2003 the Scheme will pay a total bonus of 35% of salary for entitled to a notice payment on termination subject to the
the achievement of target levels across all four measures. Group policy. Additionally the payment should take into account the
profits in excess of target produce no additional payment, since amount due in relation to other contractual benefits.
we give value to Members rather than make greater profits.
However, exceptional performance in the other three measures, All new Executive Director appointments (including promotions)
and full achievement of personal objectives, can enhance the will be on a rolling one year contract of employment. Mr. Stow,
bonus up to an overall maximum payment of 70%.To ensure who had a rolling 2 year contract, retires in May 2003. Mr. Gregory
Executive focus on long term objectives, and to act as a retention has a rolling 2 year contract, and Mr. Lee and Mr. Suffolk have rolling
tool, 3/7th of the payment will be deferred for two years. one year contracts. Mr. Richardson’s rolling 2 year contract is being
reduced over 12 months from 1 November 2002 to one year.
The four target performance levels, on which the 2003 bonuses
will be paid have been set by the Committee based on the Request for Feedback from Members
Group’s forecasts for 2003. The Board is committed to implementing the requirements of the
relevant Codes of Practice on Governance and to following best
Benefits practice in the disclosure of information on Directors’ remuneration.
Whilst it can be more difficult to compare the exact monetary
value of benefits between organisations, it is the policy of the This report, together with the details in the Notes to the
Society to pursue a similar market position on benefits as on salary, Accounts, has been prepared with the aim of disclosing to
i.e. median amongst the peer group financial services organisations. Members the remuneration of the Directors and giving an
insight into how the decisions about remuneration are taken.
The main benefits are described below:
• Society car of the Director’s choice up to the monthly lease The Committee would welcome any comments or suggestions
cost of a stipulated benchmark model; from Members as to whether the information contained in the
• private mileage fuel; 2002 report has been helpful and what information could
• a Group Healthcare Scheme which provides private usefully be provided in future years to further enhance
medical insurance cover for the Directors and their families. Members’ understanding of this subject.These should be
(Non-executive Directors may obtain cover under the addressed to the Society’s Secretary, Paul Mills.
Scheme but must pay the annual subscription themselves);
• a concessionary mortgage up to £35,000 borrowed at 3.8%;
• membership (after two years of employment) of a
Permanent Health Insurance Scheme which provides income
in the event of being unable to continue working due to R H B Jones
disability or prolonged illness; and Chairman of the Remuneration Committee
58 19 February 2003
Britannia Building Society is authorised and regulated by the Financial Services Authority and advises on and
sells the life assurance, pension and unit trust products provided only by the Britannic marketing group.
Mortgages are not regulated by the Financial Services Authority. Security is required for all secured loans.
Written quotations available on request. All loans are subject to status, valution and Rules of the Society,
copies of which are available on request. Britannia undertakes to comply with The Mortgage Code and The
Banking Code. Copies of these Codes are available on request. Calls may be recorded and/or monitored.
Britannia Building Society is a member of the General Insurance Standards Council.

YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR


OTHER LOAN SECURED ON IT.

Britannia Building Society


Britannia House, Leek, Staffordshire Moorlands, ST13 5RG
www.britannia.co.uk

The papers used in this report are derived from sustainable forests.They are recyclable and
bio-degradable. Pulps used in the production contain a percentage of recycled fibre and are
acid free and Elemental Chlorine Free (ECF).

4848/02