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Annual Report & Accounts 2012

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DIRECTORS Christopher J L Moorsom MSI Terence J Fussell Richard D Jenkins MA Kevin A Gray BSc, ACA Anthony Harris LLB Christopher W J Nott FCCA, ACIB Dorothy A Berresford BSc, ACA David Coles BA

Chairman Vice-Chairman Chief Executive Deputy Chief Executive

OFFICERS Tonia Lovell (formerly Smithers) ACIS

Society Secretary

PROFESSIONAL ADVISORS Bankers:

NatWest

Auditor:

Deloitte LLP Bristol

Internal Auditor:

Mutual One Limited The Bailey Skipton North Yorkshire BD23 1DN United Kingdom

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Chairman’s Statement

For the year ended 31 December 2012 Steady growth in turbulent times Market conditions have once again proved challenging, characterised by a stuttering economy, weak demand for housing finance, flat house prices and continued levels of record-low interest rates. The prolonged economic difficulties of the Eurozone and its banking system, to which the fortunes of the UK economy are strongly related, have created a climate of persistent uncertainty which looks set to continue for some years to come. Within this context the Bath Building Society has delivered steady growth and profits close to the record levels achieved in 2011. It is my belief that the Society’s strong financial performance reflects both a prudent approach to managing risk and the quality of the relationships we build with our customers. Group key performance indicators:    

Assets of the Group rose by 6.8% (2011: 2.7%) to £270m (2011: £252.8m); Net lending was £9.6m (2011: £4.4m) taking the total mortgage book up by 5.2% to £193.4m (2011: £183.9m); The Group’s profit on ordinary activities before taxation decreased by 4.5% to £2.2m (2011: £2.3m); The Group’s reserves rose by 9.6% from £17.0m to £18.7m.

A real alternative In the wake of a string of damaging reports about the banking sector, the Society is more determined than ever to demonstrate its fundamentally different ethos to that of the major banks. Decent values and respect for our members have been at the core of the Society’s business for generations (and will remain so) whatever the financial climate. We are committed to developing a relationship with our customers based on flexibility and personal service which is a refreshing contrast to the increasingly impersonal style of larger financial institutions. The Society’s financial results in recent years show that there is a viable and sustainable alternative to the major corporations and that small Building Societies have a valuable place in a diversified Financial Services landscape. Managing risk The Society’s Board continues to be vigilant in identifying and managing emerging risks and much Board time in 2012 has been given over to managing risk and the evolving regulatory agenda. In 2012 the Society has overhauled its management information to ensure that it will continue to provide the Board with a clear understanding of the risk profile of the Society. The establishment of the Financial Conduct Authority as a separate regulatory body has put renewed focus on how fairly banks and Building Societies treat their customers, something we at Bath Building Society have always considered of utmost importance. We have no exposure to the mis-selling of PPI which has damaged the financial performance and reputation of many other financial institutions. The Society adopts a cautious stance when placing its treasury funds and places considerable store in its manual approach to underwriting in terms of managing our mortgage book. The Road ahead 2013 looks set to be another interesting year with the government’s ‘Funding for Lending’ scheme likely to have a major impact in both our core mortgage and savings markets. The impact of this scheme has already been felt in driving mortgage rates down in certain sectors of the market and the effects on savings rates have been equally as dramatic. The Society recognises that the current era of ultralow interest rates is particularly painful for savers, and is likely to become more so if rates fall further. The Society will always seek to balance the interests of savers and mortgage customers in setting rates but market conditions can make this extremely challenging. The Society is keen to take advantage of the Funding for Lending initiative and will seek to use participation in the scheme to develop products which will give more customers – particularly would-be first-time buyers in our West Country heartland - access to mortgage funding. In the longer term, the Society is anticipating a slow and fitful recovery of the UK economy in which the housing market reverts to historical levels of activity rather than the depressed levels of today or the bubble conditions which prevailed immediately prior to the financial crisis. Of major importance to the UK Financial Sector will be the UK’s future relationship to Europe and the degree to which member states of the European Union act in an orchestrated way to bring about financial stability. I would like to extend my thanks to my Board colleagues and to the staff in all parts of the business for their hard work in delivering another good set of results for your Society and I should particularly like to thank Tony Harris who is retiring from the Board at the Society’s AGM after 11 years of dedicated service. But most of all, I would like to thank all of the members of the Society for your continued support Christopher Moorsom Chairman 5 March 2013

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Chief Executive’s Review

For the year ended 31 December 2012 At the start of 2012 the UK faced the probability of a ‘double-dip’ recession and this did in fact materialise with the economy only coming out of recession in the third Quarter of 2012, assisted by the London Olympics. Whilst the economy has recovered from the darker days of 2009, the UK has yet to get back to the levels of output seen before the onset of the financial crisis back in 2007. Further periods of recession remain a distinct possibility as sustained growth in the economy is difficult to achieve when government and personal debt levels are still as high as they are. Unemployment has not risen to the levels reached in the recession of the early 1990s and, with the maintenance of the Bank of England’s base rate, mortgage arrears are at lower levels than some 20 years ago. Even so, confidence on the part of both borrowers and lenders remains fragile and property prices have flattened out since partial recovery during 2010. With capital for many lenders in short supply lenders have effectively rationed lending and are favouring those with the lowest credit risk. The consequence of this behaviour on the part of major lenders is the lack of credit available to the first-time buyer market and commercial loans to businesses. To gain access to mortgage funding many first-time buyers have obtained assistance from parents to fund the deposit and the Society’s Parent Assisted Mortgage and Buy-For-Uni mortgages which facilitate this have become established products in the market. There are few signs that the economy is set for any substantive recovery in the next 2-3 years and most commentators do not expect a rise in interest rates until 2014 at the earliest. In a bid to increase the availability of credit to finance business activity and house purchase, the Government has launched the Funding for Lending Scheme in which significant volumes of discounted funds from the Bank of England are being offered to lenders if they can increase their stock of loans in the period from July 2012 to the end of 2013. Participating lenders have access to these funds for 4 years after being drawn down. In common with most other Building Societies, Bath Building Society will be looking to take advantage of this scheme as we believe it is in the best interests of members to do so. Mortgages The Society’s Mortgage book has grown by 5.2% in 2012 to £193.4m. This growth has largely been achieved through focusing on specialist segments of the market with growth in our parent assisted mortgage products targeted at University students and first-time buyers, our self-build lending and our buy-to-let book. The Society has won a number of awards in recent years for innovation in lending, an accomplishment achieved again in 2012 for an approach to mortgage lending which enables rental income from lodgers to be considered in the Society’s affordability calculation. Despite growing in a sluggish economy, the Society continues to lend cautiously, relying on manual underwriting in which the whole merit of the case can be judged, unlike the majority of the lending market which now relies heavily on computer models to make underwriting decisions. Overall arrears levels have remained broadly static with 14 loans being four or more months in arrears at 31 December 2012 (2011: 19). At the end of 2012 the Society had 4 properties in possession (2011: 4) with no new properties taken into possession during the year. Arrears and potential losses on several long standing problem cases have increased and, as such, the Society has increased its provisions for bad and doubtful debt on mortgages cases from £1.2m to £1.6m over the year. The Society’s handling of arrears is a bespoke process in which the individual circumstances of the case are factored into the search for suitable solutions. A range of approaches has been taken, including allowing letting part or all of the property. In other cases, where appropriate, further money has been lent to borrowers with financial difficulties to enable the completion of works to enable the property to be sold for the best price, thereby benefiting both the borrower and the Society. In fact, a number of forbearance tools are available to the Society and these are deployed according to circumstance, but care is taken that any forbearance measures are likely to be effective and do not put the borrower into a worse position. The Society won the Mortgage Finance Gazette 2012 award for Best Debt and Arrears Strategy for its constructive way of managing arrears. The Financial Services Authority’s Mortgage Market Review came to a conclusion in October 2012 with the confirmation of the standards that will be required of lenders and mortgage brokers in the future. The new rules will take effect from April 2014, although many of the key measures being introduced have long been part of the Society’s approach to lending. An aspect of mortgage lending which has been widely discussed in the press has been the provision of interest-only mortgages. Many lenders have reduced their willingness to offer interest-only lending with some withdrawing from the market. It remains the Society’s view that there are certain borrowers where this is an appropriate type of loan and interest-only loans will still be available where such loans are the best option for the borrower. The Society will continue to ensure that all borrowers with interest-only loans are frequently contacted to be made aware of the risks attaching to these loans and to confirm the obligation on the part of borrowers to have suitable repayment strategies in place. As part of our specialist lending capability, the Society has started to offer shared ownership mortgages in association with a local Housing Association, Curo (formerly Somer Housing Group). Shared ownership schemes - in which borrowers buy a home with an element owned and an element rented from the housing association - have in recent years become an important mechanism for first-time buyers to get onto the property ladder.

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Chief Executive’s Review (continued) For the year ended 31 December 2012

During 2013, the Society will extend the product choices on offer to first-time buyers in other ways, reintroducing a 95% loan-to-value option for borrowers in the local area. Adding this product to our existing range, the Society can confidently claim it is playing its part in responding to the challenge of extending the provision of credit to first-time buyers, a segment that has been poorly served by lenders since the start of the financial crisis. Savings Bath Building Society has increased its savings and investment balances in 2012 from £234.5m to £250.1m, a rise of 6.7%. This growth has come from a wide range of savings channels and customer types, from children’s accounts to pension accounts, and from postal accounts to growth in shares and deposits in our branches and agencies. Over the course of 2012 our e-saver product has grown in popularity, achieving balances of over £4.7m from launch in 2011. The Society plans to invest more in developing internet accounts in the years ahead as customers of all ages become more familiar with transacting online. The Society is offering its members the opportunity to vote online in 2013, and we hope that many members will take up this option. Another area of focus for the Society in recent years has been the provision of children’s accounts. This is being reinforced with a tie-up with Bath Rugby Club, details of which are on the Society’s website, www.bathbuildingsociety.co.uk. As at December 2012, Bath Building Society had less than 1% of its funding sourced from other financial institutions. The Society’s funding activities remain biased towards traditional retail channels. However, the Society has remained active throughout most of 2012 in attracting funds from small businesses in the local area, and this has been both beneficial to maintaining a strong level of funding for the Society and providing reasonable returns to companies at a time when rates available from banks have been particularly low. The Society has maintained relatively high levels of liquidity throughout 2012 and finished the year with the ratio of liquid assets to shares and deposits reaching 29.2%. It is expected that increased mortgage lending in 2013 will lower this figure in the coming year. The Society remains part of the UK Financial Services Compensation Scheme in which savers’ deposits up to £85,000 per person are protected (£170,000 in the case of accounts in two names). All UK banks and Building Societies are still making substantive contributions to cover the interest payable on a loan made by HM Treasury to the Financial Services Compensation Scheme to support the failed Bradford & Bingley, the Icelandic banks and the Dunfermline Building Society. Low rates for savers create real problems for customers, especially those for whom interest from cash savings represents a significant part of their income. It is likely that rates for savers will continue to be squeezed in 2013, partly as an indirect result of Government policy such as the Funding for Lending Scheme. The Society’s Board will be mindful of this concern in its rate-setting in 2013. Property letting and financial advice Our subsidiary businesses continue to make a meaningful contribution to Group performance. Our property letting subsidiary, Bath Property Letting Limited, generated an operating profit of £68,993 (2011: £65,793). Profit before tax reduced to £44,117 (2011: £67,160) after charging £25,000 (2011: £nil) for impairment of the carrying value of purchased goodwill. Bath & City Financial Limited produced a profit before tax of some £19,446 (2011: £20,343). Both companies are trading in highly competitive markets that are subject to substantial change. In the case of Bath Property Letting Limited the market has been affected by Estate Agents diversifying into letting activity to generate income at a time when income from property sales has reduced. Bath & City Financial Limited, as an Independent Financial Advice business, is likely to be impacted by regulatory change affecting the entire financial advice marketplace, although it is likely to be some time before the impact of this - positive or negative - can be firmly established. Notwithstanding these changes, both businesses have performed satisfactorily in 2012. Bath Building Society in the community The Society has continued to engage with local charities and good causes. The Society has continued its long-running involvement in sponsoring the Rotary Fireworks display at Bath Recreation Ground and the associated firework safety poster campaign designed to educate children to the dangers of fireworks. Surpluses from the event enabled Bath Rotary to donate over £10,000 to local charities. The Society has also continued its charity awards with a record number of applications. A number of smaller local charities were supported with the top award made to Reason, a local charity specialising in preventing alcohol addiction. The Society’s Charity of the Year was Wiltshire Air Ambulance for which over £4,000 was raised. Some of this money was raised through sponsorship of a spectacular skydive involving five of the Society’s staff. In 2013, the Society will be supporting Dorothy House. It is gratifying that a Society so well supported by its local community can support local causes such as these.

Dick Jenkins Chief Executive 5 March 2013

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Directors’ Report

For the year ended 31 December 2012 The Directors have pleasure in presenting the Report and Accounts for the year ended 31 December 2012. Business objectives The principal objective of the Society is to make loans primarily funded by members, which are secured on residential property. To achieve this objective, the Society’s strategy is to continue to provide a range of competitive mortgage and savings products that will be designed for the benefit of members, to ensure steady levels of growth. The subsidiaries provide property letting and management plus independent financial advice, services considered complementary to the Society’s main business. Business review and future developments The Group’s business for the year and its future plans are reviewed by the Chairman and Chief Executive on pages 1 to 3. The Board of Directors principally monitors financial performance against three key performance indicators as defined below. ‘Total Asset Growth’ is the percentage growth in the Group’s total assets as measured between calendar year-ends, as stated in the Balance Sheets on page 15. ‘Profit Before Tax’ is the Group profit on ordinary activities before taxation as stated in the Income & Expenditure Accounts on page 14. ‘Management Expense Ratio’ is the percentage given by dividing the sum of Administrative Expenses plus Depreciation and Amortisation, as stated in the Income and Expenditure Accounts, by a calculation of the average of the total asset figures between current year-end and the prior year-end.

Key Performance Indicator

2012

Total Asset Growth Profit Before Tax Management Expense Ratio (excluding FSCS Levy)

6.8% £2,192,000 1.35%

2011

2.7% £2,296,000 1.31%

The Board’s budgetary aims for 2012 were to achieve modest growth in the Society’s total asset base, to convert excess liquidity into mortgage asset growth, and to concentrate on strengthening the Society’s capital base. The Board can confirm that the actual increase in total assets was within budgetary tolerances, and that the 5.2% growth in mortgage assets is considered very positive given the difficult position of the housing and credit markets. The Board is of the opinion that the level of 2012 profit performance is appropriate given the requirement to balance the Society’s status as a mutual organisation with the need to achieve sufficient profitability in order to maintain a strong capital position. The management expense ratio increased slightly on the previous year due to further investment in staffing and marketing initiatives plus payment of non-recurring costs to settle a licensing dispute with a software supplier. In 2012, the Society made net provisions against bad and doubtful debts of £393,000 (2011: £320,000) which increased total provisions to £1,566,000 (2011: £1,222,000). Total net specific provisions of £270,000 (2011: £260,000) were made against one new and twelve existing arrears cases. The general provision was increased by a net £74,000 to £212,000 (2011: £138,000). Given the weakness of the economic recovery and the continuing fragile condition of the UK property market, the Board is expecting the Society to have to continue to make new provisions against bad and doubtful debts for some years ahead. As at 31 December 2012, the Society had six mortgage loans that were over twelve months or more in arrears (2011: six). The total balance outstanding on these loans was £1,331,763 (2011: £1,030,686) and the total arrears outstanding was £110,164 (2011: £75,144). The Society has made specific provisions of £333,000 (2011: £359,000) against these loans. The Society uses certain forbearance techniques to help borrowers whose finances are stressed. These techniques include moving loans from a ‘capital and interest’ basis to an ‘interest-only’ basis, moving loans onto fixed rates of interest, acceptance of temporary reductions in mortgage payments and the active management of repossessed properties out of arrears. The Board takes full consideration of the impact of using these forbearance techniques on its arrears position when it considers the level of provisions that is appropriate for the Society. The Board is of the opinion that the use of forbearance techniques has not had a material impact on the scale of the Society’s provisions for bad and doubtful debts. Profit and capital The profit after tax transferred to the General Reserve was £1,636,000 (2011: £1,673,000). Gross capital at 31 December 2012 was £18,716,000 (2011: £17,080,000), representing the aggregate of the General and Revaluation Reserves. At 31 December 2012 the ratios of Gross capital and Free capital, as a percentage of Shares and Borrowings, was 7.5% (2011: 7.3%), and 6.4% (2011: 6.0%) respectively. Principal risks and uncertainties The current banking and economic crises bring a range of risks and uncertainties to a small Building Society. Foremost amongst these are heightened levels of credit risk in the mortgage books and in the Society’s own treasury deposits with other institutions. Credit risk – treasury portfolio Credit risk in the treasury portfolio is primarily managed by limiting the maximum size of investments and by only investing directly with counterparties that are of a predetermined credit quality. The Society does not invest in structured investments. As part of its treasury credit risk control processes, the Board utilises the published data from international credit ratings agencies and also takes professional advice from treasury market experts. The Society limits exposure to individual market counterparties to £1m but will place larger investments with the main UK clearing banks, the UK Government, the Bank of England and the European Investment Bank. The Society has no direct exposure to the Eurozone.

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Directors’ Report (continued)

For the year ended 31 December 2012

Principal risks and uncertainties (continued) Credit risk – residential mortgage book Credit risk in the mortgage book is controlled through stringent lending criteria where a focus is placed on ensuring that the quality of new lending remains high. The Board continuously monitors the level of arrears in the Society’s existing loan book and also how individual arrears cases are progressing. In common with all lenders, arrears levels are negatively impacted by rising unemployment and falling house prices. There remains great uncertainty as to whether the economy will deliver sufficient growth to sustain employment and as to when average property prices will stabilise and the number of housing transactions will increase. The Society regularly communicates with customers whose loans are on an interest-only basis. Customers with interest only loans that are approaching maturity or that are considered to have relatively high loan-to value figures are given appropriate focus. Credit risk – commercial mortgage book The Society engages in commercial lending although it operates a policy of reducing its commercial book as a proportion of total mortgage assets. Commercial risk appetite is regularly reviewed in light of economic and market conditions. Commercial lending is operated within a framework of conservative credit criteria, principally focusing on underlying income streams, debt servicing cover and property values. The Society operates stricter maximum loan-to-value rules for commercial lending than it does for lending on residential property. The Society maintains a preference for lending on commercial properties that have a secondary or alternative residential use. The Society will not lend on certain types of commercial property or fund development projects that are considered to be high risk or where it lacks some form of specialist commercial property knowledge. Commercial lending relationships are subject to regular reviews to ensure that facilities are fully performing and to identify cases of potential cause for concern, in order to facilitate early risk mitigation activity. The Society’s Credit Committee monitors a series of credit exposure limits which are aimed at producing a diversified portfolio with minimal concentration risk. Liquidity risk As a deposit-taking institution, the Society is mindful of the need to maintain a sufficient level of liquid assets to ensure the smooth operation of the Society’s business in normal and stressed economic circumstances. In 2012, the Society increased the proportion of its treasury assets held in highly liquid instruments that qualify towards the Society’s regulatory liquidity buffer. As at 31 December 2012, the Society also had £20m (2011: £nil) on deposit with the Bank of England’s Reserve Account facility. The Board has determined that in these uncertain times the Society should continue to focus on retaining existing funding and that it should seek to maintain relatively high levels of readily accessible liquidity. Interest rate risk The Society holds treasury and mortgage assets that earn a fixed rate of interest to the Society. It also has funding liabilities that require the Society to pay interest on fixed rate terms. The Society is therefore exposed to the risk of market interest rates moving when certain of its assets and liabilities are on fixed rate terms. The Society regularly calculates its net exposure to interest rate risk and purchases interest rate swaps to reduce the Society’s overall exposure to interest rate gap. Conduct risk As a regulated deposit-taker and mortgage lender, the Society risks regulatory censure and fines if its activities were ever deemed to be placing customers in situations which were to their severe detriment, were unfair or were unethical. The Society regularly examines its practices, procedures and processes with the objective of maintaining a business culture that always delivers the intended and most positive outcomes for the Society’s customers. Operational risk The Society is vulnerable to the risk of making losses from inadequate or failed internal processes or systems, human error or external events. Processes and systems are in place to minimise these risks. Uncertainties The future timing and scale of increases in the Bank of England base rate remains uncertain although the Board is of the opinion that the Bank of England’s base rate is likely to remain at 0.5% throughout 2013. A small rise in future interest rates would generally be beneficial to the Society as yield from the treasury portfolio would increase and, in the short term, the relative cost of current fixed rate funding would also fall. Large increases in future interest rates might, however, require the Society to narrow its margins in order to protect its borrowers. The Board also remains uncertain as to the scale of the Society’s future liability towards the Financial Services Compensation Scheme. The final capital shortfall from the bailout of the Bradford & Bingley is not known and neither is the impact from the bailout of the Dunfermline Building Society. Risk management objectives and policies The Board of Directors has the objective of establishing a suitably robust control environment that successfully reduces the potential impact of risks that are present in the Society’s business. The control environment is designed to reduce both the probability of risks actually crystallising, and to reduce the impact of risks when they do crystallise. The Board of Directors has developed a Financial Risk Management Policy that deals with the procedures to reduce interest rate, liquidity and hedging risks; and a Lending Policy that dictates the procedures to reduce credit risk. The Society’s committee structure is specifically designed to monitor and control different aspects of risk on an on-going basis. Furthermore, the Board of Directors conducts a thorough annual appraisal of all risks that are thought to be present in the Society’s operations and the associated controls that are designed to mitigate those risks. A full disclosure of the Society’s policy for managing the risks associated with financial instruments is given in note 25 to the Notes to the Accounts on pages 26 to 28.

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Directors’ Report (continued)

For the year ended 31 December 2012

Creditors’ payment policy The Society’s policy is to pay trade creditors in accordance with agreed terms once such creditors have fulfilled all aspects of the contract. At the end of 2012 trade creditors outstanding represented 19 days of purchases (2011: 21 days). Staff The Directors place on record their sincere appreciation of the commitment and dedication shown by the Group’s staff during the year. The professionalism and skill demonstrated across all aspects of the Group’s operations is a credit to all concerned and cannot be underestimated in the context of the success achieved. The Board maintains the view that the future of the Group will increasingly depend on a partnership between the Board, the staff and the Society members. To ensure that this is promoted, Directors will continue the policy of employing excellent people in all areas of the business. Auditor Deloitte LLP has expressed its willingness to continue in office and, in accordance with Section 77 of the Building Societies Act 1986, a resolution for its re-appointment will be proposed at the Annual General Meeting. Directors’ responsibilities for preparing Annual Accounts The following statement, which should be read in conjunction with the statement of the auditor’s responsibilities on page 13, is made by the Directors to explain their responsibilities in relation to the preparation of the Annual Accounts, Annual Business Statement and Directors’ Report. The Building Societies Act 1986 (‘the Act’) requires the Directors to prepare annual accounts for each financial year which give a true and fair view of the state of affairs of the Society and the Group as at the balance sheet date and of the income and expenditure of the Society and the Group for the year. In preparing those accounts, the Directors are required to: 

Select appropriate accounting policies and apply them consistently;

Make judgements and accounting estimates that are reasonable and prudent;

State whether applicable accounting standards have been followed; and

Prepare the accounts on the going concern basis, unless it is inappropriate to presume that the Group will continue in business.

In addition to the accounts, the Act requires the Directors to prepare, for each financial year, an Annual Business Statement and a Directors’ Report, each containing prescribed information relating to the business of the Society and its subsidiary undertakings. Directors’ responsibilities for Accounting Records and Internal Control The Directors are responsible for ensuring that the Group: 

Keeps accounting records in accordance with the Building Societies Act 1986; and

Takes reasonable care to establish, maintain, document and review such systems and controls as are appropriate to its business in accordance with the rules made by the Financial Services Authority under the Financial Services and Markets Act 2000.

The Directors have general responsibility for safeguarding the assets of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are also responsible for the integrity of the Society’s website www.bathbuildingsociety.co.uk. The work carried out by the auditor does not involve consideration of these matters and, accordingly, the auditor accepts no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Information published on the internet is accessible in many countries with different legal requirements relating to the preparation and dissemination of financial statements. Information in these financial statements is provided under the legislation of the United Kingdom. Going concern In the opinion of the Directors, the Group continues to deliver excellent results despite the uncertainty arising from the severe economic recession and the continuing requirement to make substantial provisions against potential losses on mortgage loans. The core profitability of the Society remains very strong, due to a combination of mortgage asset growth and successful management of margins. Although profits from Bath Property Letting Limited were lower in 2012 than in the previous year, this was entirely due to a charge for impairment relating to the carrying value of purchased goodwill and not to a decrease in trading revenues. The property portfolio managed by Bath Property Letting Limited increased in 2012 and the underlying profitability of the business continues to provide a source of diversified income that remains important to the overall performance of the Group. Bath & City Financial Limited achieved a second year of modest profitability. In 2012, the company repaid the interest-free loans injected by the shareholders in previous years and the company now continues to grow its cash balances. In the coming year, the Society expects to achieve stronger growth in mortgage assets. The Society aims to continue funding its future mortgage commitments from primarily retail channels and from local businesses. It does not expect to have to seek any wholesale funding from the money markets. The Society does aim to join the Bank of England’s Funding for Lending Scheme which is both improving the flow of cheap liquidity to lenders and hence the flow of lending to borrowers.

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Directors’ Report (continued)

For the year ended 31 December 2012 Going concern (continued)

The Board of Directors has conducted a recent review of going concern which has included a review of funding, liquidity and capital projections for a five-year period after the balance sheet date. This review indicates that the Society is likely to generate sufficient liquidity to fund expected mortgage growth whilst maintaining its current high levels of short-term liquidity throughout the period. The Board has established a policy of maintaining the Society’s level of liquid assets above 22% of share and deposit liabilities, a level which is higher than would be the norm in more benign economic conditions. The Board has stress-tested its planned liquidity and capital positions over a five-year period to 31 December 2017 to ensure that adequate capital and liquidity will be available throughout this strategic period. The Board is expecting the Society’s net margin to narrow once the economy starts to grow more rapidly and when competitors feel confident to seek market share via improved product pricing. Despite the prospect of narrower margins and lower profitability in future periods, the Board does, however, expect the Society to continue to deliver profits that will remain relatively strong when compared in a historical context and for the Society’s surplus of capital over the FSA’s Internal Capital Guidance requirement to continue to grow. Short of the negative impacts on the Society’s liquidity and capital positions that might be caused by major economic events such as the collapse of a major UK clearing bank, a ‘run’ on the whole UK banking system, or the occurrence of massive unemployment combined with further very large reductions in property values, the Board is confident that the Society will continue to have sufficient liquidity and capital available in future periods to permit the delivery of the Society’s strategic plan. The Board is of the opinion that measures taken in recent years by national governments and central banks throughout the world have made it unlikely that very serious economic events, of the nature mentioned, will occur. In common with all other banks and building societies, in 2010 the Society incorporated the requirements of the Financial Services Authority’s new regulations on liquidity risk management into its operations. This has involved building a substantial ‘liquidity asset buffer’ of exceptionally liquid assets with very strong institutions such as the UK Treasury. As at 31 December 2012, the Society’s liquidity asset buffer stood at £22.0m (2011: £18.2m). Short of the occurrence of a catastrophic economic event, the Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts. Directors The following persons served as Directors throughout the year: R D Jenkins, A Harris, K A Gray, C J L Moorsom, T J Fussell, C W J Nott, D A Berresford and D Coles (appointed 1 May 2012). A Harris will retire from the Board at the Annual General Meeting on 25 April 2013 and will not seek re-election. In accordance with the Society’s rules, R D Jenkins, D A Berresford, C W J Nott and D Coles will retire from the Board at the Annual General Meeting. Being eligible, they offer themselves for re-election. C Smyth was appointed to the Board on 1 January 2013 and will offer himself for election at the Annual General Meeting. None of the Directors holds any shares in, or debentures of, any connected undertaking of the Group. On behalf of the Board

C J L Moorsom - Chairman 5 March 2013

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Report of the Directors on Corporate Governance For the year ended 31 December 2012

The Directors are committed to best practice in Corporate Governance. This report explains how the Society applies the principles in the UK Corporate Governance Code issued by the Financial Reporting Council in 2011. Although the Code does not directly apply to Mutual organisations, the Board has paid due regard to the Code and believes that the Society complies with all the Code provisions and industry guidelines, unless the contrary is stated. Code Principle: ‘Every company should be headed by an effective Board, which is collectively responsible for the success of the company.’ The principal functions of the Board are to provide leadership and challenge; set the Society’s strategy, policy and internal limits; ensure appropriate resources are available to meet objectives; ensure there are robust systems and controls in place; ensure the Society operates within its constitution, regulation and legislation; consider and if appropriate approve any proposed new initiatives; and review business performance against objectives. The Board Manual describes how decisions relating to these matters are reserved for the Board. The Board meets as often as necessary for the proper conduct of business (usually monthly). The attendance record is detailed at Table 1 on page 10. The Board has a minuted meeting at least once a year without the Executive Directors present and at least once a year without the Chairman being present for the whole meeting. All Directors show clear commitment to the future success of the Society. The Board takes an interest in all aspects of the business but delegates certain decisions and responsibilities to the following Committees: Audit Committee: Constituted by three Non-Executive Directors – C W J Nott (Chairman), A Harris and D A Berresford. Certain staff attend by invitation to report to the Committee and usually representatives from Deloitte LLP and Mutual One Limited (the Society’s external and internal auditors respectively) also attend to report. The Audit Committee has terms of reference that include all aspects of audit, compliance, risk and control. The Committee approves the monitoring plans and assesses the adequacy of the audit and compliance functions. It also formally recommends approval of the Financial Report and Accounts to the Board. In 2012, the Committee reviewed the Society’s internal audit function and, following a tender process, appointed Mutual One Limited to continue for a further 3 years. The Committee also focussed on general high-level controls, treasury management, mortgage processing and governance around Information Technology. Nomination and Remuneration Committee: Constituted by two Non-Executive Directors – T J Fussell (Chairman) and C J L Moorsom. The Nomination and Remuneration Committee has terms of reference that include senior appointment, remuneration, contractual terms of Directors and review of Board performance collectively and individually. The Chief Executive attends meetings by invitation but none that relate to his remuneration. Credit Committee: Constituted by three Non-Executive Directors – A Harris (Chairman), C W J Nott and D Coles, plus Chief Executive – R D Jenkins; Head of Mortgages – S Matthews; Society Secretary – T Lovell, and Senior Underwriter – C Powell. The Credit Committee has terms of reference that include maintaining the quality of the Society’s mortgage book, oversight of the Society’s lending policy and underwriting. The Committee reviews quarterly reports from the Head of Mortgages covering mortgage arrears and the volume and nature of exceptions to the lending policy. The Committee also approves new underwriting mandates and gives approval for certain loans as specified in the Society’s lending policy. Assets and Liabilities Committee (ALCO): Constituted by three Non-Executive Directors – D A Berresford (Chairman), T J Fussell and C J L Moorsom, plus Chief Executive – R D Jenkins; Deputy Chief Executive – K A Gray; Head of Mortgages – S Matthews, and the Society Secretary – T Lovell. The Assets and Liabilities Committee has terms of reference that include financial risk management and liquidity. The Committee reviews monthly reports from the Deputy Chief Executive covering the on-going management of interest rates, treasury investment strategy, and liquidity and hedging. The Committee also recommends changes to the Society’s Financial Risk Management Policy to the Board. Risk Committee: This committee is made up of at least four members of the Board and is chaired by T Fussell (Senior Independent Director). The Society Secretary, T Lovell, is also in attendance. The Committee was established in September 2011 and, as at 31 December 2012, all Non-Executive and Executive Directors are members. The Committee focuses on delivering the Society’s Risk Management Framework including reviewing the Society’s risk register, its risk appetite statement and its reverse stress-testing processes. The Committee also approves the Society’s Recovery and Resolution Plan on an annual basis. All Committees report to the Board and their terms of reference are available on request to members from the Secretary. The Senior Independent Director is T J Fussell, providing an alternative channel of communication for Directors, staff and members; and chairing the meeting where the Chairman’s performance is appraised. The Society maintains liability insurance for all Board members. Board members have access to independent legal advice. Code Principle: ‘There should be a clear division of responsibilities at the head of the Society between the running of the Board and the Executive responsibility for the running of the Society’s business. No individual should have unfettered powers of decision’. The offices of Chairman and Chief Executive are distinct and held by different people. The role of each is set out in their terms of appointment and service contract respectively. The Chairman is responsible for leading the Board, communication with members and ensuring that Directors receive accurate, timely and clear information. The Chairman is independent. The Chief Executive is responsible for managing the Society’s business within the parameters set by the Board.

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Report of the Directors on Corporate Governance (continued) For the year ended 31 December 2012

Code Principle: ‘The Chairman is responsible for the leadership of the Board and ensuring its effectiveness on all aspects of its role.’ The Chairman sets the Board agenda with the Chief Executive and ensures that adequate time is available for all discussions. The Chairman promotes debate and challenge and ensures that there is contribution from all members of the Board. Code Principle: ‘As part of their role as members of a unitary Board, Non-Executive Directors should constructively challenge and help develop proposals on strategy.’ Non-Executive Directors challenge all strategic proposals and propose amendments where this is thought to be necessary. They regularly monitor management’s progress with delivering the requirements of the annual operating plan. Through the Nominations and Remunerations Committee the Non-Executive Directors consider Executive performance, remuneration and succession planning. Code Principle: ‘The Board and its Committees should have the appropriate balance of skills, experience, independence and knowledge of the Society to enable them to discharge their respective duties and responsibilities effectively.’ At the year-end the Board comprised two Executive Directors and six Non-Executive Directors (including the Chairman). The Board is of an appropriate size, with the necessary balance of skills and experience to meet the business needs. Code Principle: ‘There should be a formal, rigorous and transparent procedure for the appointment of new Directors to the Board.’ The Nomination and Remuneration Committee considers the balance of skills and experience on the Board and the business requirements. Board composition and succession planning are regularly reviewed. Appointments are made on merit, against objective criteria and with due regard to the benefits of diversity on the Board. All Directors meet the tests of fitness and propriety laid down by the FSA and all Directors are registered with the FSA as Approved Persons to fulfil their Controlled Function as a Director. NonExecutive letters of appointment are available for inspection on request from the Secretary. During the year the Society has looked to further increase the skill base of the Board and to also ensure that succession planning is in place for future changes in Board membership. A robust recruitment process took place and the Board increased its membership to 8 by appointing one additional Non-Executive Director in the year and agreed to the appointment of a member commencing January 2013. Both new Non-Executive Directors were approved by the FSA and will be standing for election at the 2013 AGM. Code Principle: ‘All Directors should be able to allocate sufficient time to the Society to discharge their responsibilities effectively.’ The Chairman’s job specification outlines the main role of the Chairman with regard to meetings and commitment. The commitment of Directors is assessed through annual appraisal with the Chairman. Code Principle: ‘All Directors should receive induction on joining the Board and should regularly update and refresh their skills and knowledge.’ New Directors receive induction training including: the nature of Building Societies, responsibilities and duties, interpretation of management information, the Society’s business and local market, overview of regulatory requirements and significant issues for the industry. Training is provided to the Board via management and external courses. Training and development needs are identified during appraisals. Code Provision: ‘The Board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.’ The Chairman ensures that the Board receives information in a timely way which is sufficient to enable it to fulfil its responsibilities. Code Principle: ‘The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its Committees and individual Directors.’ The Chairman follows a formal annual appraisal process for all Directors, using questions recommended by the Higgs Report. The Senior Independent Director evaluates the Chairman, taking into account the views of other Directors. The Nomination and Remuneration Committee reviews the findings of these appraisals. The Board formally considers its overall performance and that of the Committees on an annual basis and performance is also discussed at a meeting of the Non-Executive Directors which is held in August. Code Principle: ‘All Directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.’ All Directors are submitted for election at the Annual General Meeting (AGM) following their first appointment to the Board. If any Director has served for more than nine years or is 70 years or older, they will be submitted for re-election annually at the AGM. One third of Directors retire by rotation and apply for re-election at the AGM. Directors are only submitted for re-election if the appraisal confirms their on-going contribution and the Nomination and Remuneration Committee recommends re-election based on the specialist knowledge, skills, experience and independence of character of the individual Director. Code Principle: ‘The Board should present a balanced and understandable assessment of the company’s position and prospects.’ The responsibilities of the Directors in relation to the preparation of the Society’s accounts and the statement that the Society’s business is a going concern are contained in the Directors’ Report on pages 4 to 7.

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Report of the Directors on Corporate Governance (continued) For the year ended 31 December 2012

Code Principle: ‘The Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The Board should maintain sound risk management and internal control systems.’ The Board is responsible for determining appropriate strategies for risk management and control. The Board recognises compliance as a key part of the business and the Internal Auditor provides independent and objective assurance that processes are appropriate and effectively applied. The Society Secretary is responsible for risk control and provides guidance to the Board on this matter. The Board reviews key documents at least annually. These include the Lending Policy, Arrears Policy, Financial Risk Management Policy; the Risk Management Framework (reflecting the Board’s risk appetite); Corporate Strategy; the Internal Capital Adequacy Assessment Process (ICAAP); the Internal Liquidity Systems Assessment (ILSA); the Board Manual. The Risk Map element of the Risk Management Framework is subject to on-going review by the Board Committees and has been updated during the year to ensure the Board is satisfied that all significant risks are documented in a system of controls, which continues to be effective and appropriate to the nature, scale and complexity of the Society’s business in the current environment. Management takes responsibility for operating within the control framework. The Map reflects the risk categories used in the Basel Capital Requirement Directives, for example, credit risk (risk that a customer or counterparty will fail to meet their obligations to the Society as they fall due); operational risk (risk of a loss arising from inadequate or failed internal processes or systems, human error or external events); business risk (risk that the Society fails to meet the demands of its members as a whole); and liquidity risk (risk that the Society is not able to meet its financial obligations as they fall due, or can do so only at excessive cost). Key controls include segregation of duties and monitoring/reporting against Board approved limits. Code Principle: ‘The Board should establish formal and transparent arrangements for considering how they would apply the corporate reporting and risk management and internal control, and for maintaining an appropriate relationship with the Society’s auditor.’ The Board is satisfied that the Audit Committee includes members that have adequate, recent and relevant financial experience. The Chairman is not a member of the Committee. The Audit Committee meets with the auditor, without the Executives present, after each meeting. Minutes of Committee meetings are distributed to all Board members and the Chairman of the Audit Committee reports to the Board. The Audit Committee meets at least five times a year. The main Audit Committee responsibilities are described above. Engagement of the auditor in any non-audit work would require prior approval by the Audit Committee. The Committee is responsible for whistle-blowing arrangements to enable employees to raise concerns in confidence and ensure they are appropriately investigated. Code Principle: ‘There should be a dialogue with shareholders based on the mutual understanding of objectives. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.’ As a mutual organisation, the Society has a membership composed of individual customers. The Society proactively seeks the views of customers via questionnaires and requests for member feedback. All such feedback is considered at the Management Fairness Committee and contributes to the Society’s drive to improve outcomes for its customers. The Society is seeking ways to increase this dialogue in the future. Code Principle: ‘The Board should use the AGM to communicate with investors and to encourage their participation.’ Each year the Society sends details of the AGM, including the election of the Directors, to all members eligible to vote. Members are encouraged to exercise their right to vote and are sent forms enabling them to appoint a proxy to vote for them if they cannot attend the AGM. A poll is called in relation to each resolution at the AGM, enabling all proxy votes to count. A scrutineer oversees the counting of votes at the AGM. All members of the Board are present at the AGM and available to answer questions from the membership. Table 1: Attendance Record Director

Full Board

Risk

C J L Moorsom (Chairman) T J Fussell (Vice Chairman and Chairman of Risk) A Harris (Chairman of Credit) D A Berresford (Chairman of ALCO) C W J Nott (Chairman of Audit, Acting Chairman of Credit) D Coles R D Jenkins (Chief Executive) K A Gray (Deputy CEO & Finance Director)

11/11 11/11 2/11 11/11 10/11 7/7 11/11 11/11

2/2 2/2 0/2 2/2 2/2 1/1 2/2 2/2

Audit

0/5 4/5 4/5

Credit

1/4 4/4 2/2 4/4

ALCO 5/6 6/6

Nomination and Remuneration 3/3 3/3

6/6 6/6 6/6

(Number of meetings attended / number of meetings eligible to attend)

On behalf of the Board C J L Moorsom – Chairman

5 March 2013

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Report of the Directors on Remuneration For the year ended 31 December 2012 Unaudited information The following Report of the Directors on Remuneration will be put to an advisory vote of the members at the forthcoming Annual General Meeting. The Board is committed to best practice in its remuneration policy for Directors. This report explains how the Society applies the principles in the Combined Code on Corporate Governance relating to remuneration. The Society complies with the Code provisions as far as they are applicable to a mutual organisation unless the contrary is stated. Level and components of remuneration Code Principle: ‘Levels of remuneration should be sufficient to attract, retain and motivate Directors of the quality to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of Executive Directors’ remuneration should be structured so as to link rewards to corporate and individual performance.’ The Society’s remuneration policy is to reward Directors through salary according to their expertise, experience and contribution. The Society also carries out benchmarking against other comparable organisations. Executive Directors’ emoluments The remuneration arrangements for Executive Directors consist only of basic salary, annual bonus, pension and other benefits. The Executive Directors do not hold outside Directorships that provide an income for the benefit of themselves. The Nomination and Remuneration Committee designs the Executive bonus scheme to align the interests of Executive Directors with the interests of members and provide incentives that recognise corporate and personal performance. If a range of challenging personal and operational targets is achieved, R D Jenkins can achieve a maximum of 20% of basic salary as a bonus, and K A Gray can achieve a maximum of 15% of basic salary as a bonus. The Executive Directors benefit from a pension scheme whereby the Society contributes 12% of basic salary per annum to a money purchase scheme. The Society operates no final salary pension arrangements. Executive Directors receive other taxable benefits including a car. The aggregate amount of these benefits is included in Table 2. Executive Directors’ contractual terms Each Executive Director has a service contract with the Society, terminable by either party giving six month’s notice. Non-Executive Directors The level of fees payable to Non-Executive Directors is assessed by the Nomination and Remuneration Committee using information from comparable organisations. These fees are not pensionable. Non-Executive Directors do not participate in any bonus schemes and they do not receive any other benefits. Details of Non-Executive Directors’ emoluments are set out in Table 3. The terms of appointment letter for each Non-Executive Director specifies that either party giving one month’s notice may terminate the agreement. Procedure for determining remuneration Code Principle: ‘There should be a formal and transparent procedure for developing policy on Executive remuneration and for fixing the remuneration packages of individual Directors. No Director should be involved in deciding his or her own remuneration.’ C J L Moorsom and T J Fussell constitute the Nomination and Remuneration Committee. It is responsible for setting Executive Director remuneration. The Committee recommended an approach to Non-Executive Director emoluments and the Board as a whole has approved a 2.5% rise for 2013. The Nomination and Remuneration Committee normally reviews basic salaries, annually, by reference to jobs carrying similar responsibilities in comparable organisations and local market conditions generally.

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Report of the Directors on Remuneration (continued) Report of the Directors on Remuneration (continued)

For the year ended 31 December 2012 For the year ended 31 December 2012

Audited information Audited information Table Emoluments Table2:2: Executive Executive Directors’ Directors’ Emoluments Salary Salary 2012 2012 RRDDJenkins Jenkins Gray KKAAGray TOTALS2012 2012 TOTALS

££ 108,850 108,850 82,933 82,933 191,783 191,783 Salary Salary

2011 2011 R D Jenkins R D Jenkins K A Gray K A Gray TOTALS 2011 TOTALS 2011

££ 104,666 104,666 79,792 79,792 184,458

184,458

Annual Annual Bonus Bonus £ £ 19,711 19,711 11,045 11,045 30,756 30,756

Benefits Benefits

Annual Annual Bonus Bonus £ £ 20,895 20,895 12,000 12,000 32,895

Benefits Benefits

32,895

£ £ 5,104 5,104 6,172 6,172 11,276 11,276

£ £ 4,168 4,168 7,940 7,940 12,108

12,108

Pension Pension Contributions Contributions £ £ 13,062 13,062 9,952 9,952 23,014 23,014

TOTAL TOTAL 2012 2012 £ £ 146,727 146,727 110,102 110,102 256,829 256,829

Pension Pension Contributions Contributions £ £ 12,560 12,560 9,575 9,575 22,135

TOTAL TOTAL 2011 2011 £ £ 142,289 142,289 109,307 109,307 251,596

2012 £2012 28,929 £ 28,929 20,429 20,429 20,112 20,112 20,112 20,112 20,112 16,116 20,112 125,810 16,116

2011 £ 2011 £ 28,317 28,317 19,997 19,997 17,896 17,896 17,896 17,896 17,896 17,896 102,002 -

22,135

251,596

Table 3: Non-Executive Directors’ Emoluments (comprising fees only)

Table 3: Non-Executive Directors’ Emoluments (comprising fees only) C J L Moorsom (Chairman)

CTJJLFussell Moorsom (Vice(Chairman) Chairman and Chairman of Risk) TAJ Harris Fussell(Chairman (Vice Chairman and Chairman of Risk) of Credit) ACHarris (Chairman of of Credit) W J Nott (Chairman Audit) (Chairman of ALCO) CDWAJBerresford Nott (Chairman of Audit) DDAColes Berresford (Chairman of ALCO) DTOTALS Coles TOTALS

125,810

102,002

On behalf of the Nomination and Remuneration Committee C J L Moorsom – Society Chairman On behalf2013 of the Nomination and Remuneration Committee 5 March

C J L Moorsom – Society Chairman 5 March 2013

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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BATH INVESTMENT & BUILDING SOCIETY We have audited the Group and Society financial statements of Bath Investment & Building Society for the year ended 31 December 2012 which comprise the Group and Society Income and Expenditure Accounts, the Group and Society Statements of Total Recognised Gains and Losses, the Group and Society Note of Historical Cost Profits and Losses, the Group and Society Balance Sheets, the Group Cash Flow Statement and the related notes 1 to 26. We have examined the Annual Business Statement (other than the details of the Directors and officers upon which we are not required to report) and the Directors’ Report. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Society’s members, as a body, in accordance with section 78 of the Building Societies Act 1986. Our audit work has been undertaken so that we might state to the Society’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Society or the Society’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of financial statements which give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and Society’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements:  give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Group’s and the Society’s affairs as at 31 December 2012 and of the Group’s and the Society’s income and expenditure for the year then ended; and  have been prepared in accordance with the requirements of the Building Societies Act 1986. Opinion on other matters prescribed by the Building Societies Act 1986 In our opinion:  the Annual Business Statement and the Directors’ Report have been prepared in accordance with the requirements of the Building Societies Act 1986;  the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the accounting records and the financial statements; and  the information given in the Annual Business Statement (other than the information upon which we are not required to report) gives a true representation of the matters in respect of which it is given. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Building Societies Act 1986 requires us to report to you if, in our opinion:  proper accounting records have not been kept by the Society; or  the financial statements are not in agreement with the accounting records; or  we have not received all the information and explanations and access to documents we require for our audit.

Simon Cleveland (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Bristol, United Kingdom 6 March 2013

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INCOME & EXPENDITURE ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2012 Group 2012 £000

Notes Interest receivable and similar income Interest payable and similar charges Net interest receivable

Movement in provisions for bad and doubtful debts Impairment loss on purchased goodwill in subsidiary Movement in provisions for liabilities - dilapidations Movement in provisions for liabilities - FSCS Levy charge Operating profit and profit on ordinary activities before tax

2011 £000

9,396 (3,933) 5,463

10,054 (4,422) 5,632

9,394 (3,933) 5,461

438 (155) 375 6,290

438 (173) 311 6,039

11 (155) 378 5,866

13 (173) 330 5,631

5

(3,170) (349) (8) 2,763

(2,917) (339) (7) 2,776

(2,866) (318) (7) 2,675

(2,624) (308) (6) 2,693

9 14 19 19,24

(393) (25) (3) (150) 2,192

(320) (50) (110) 2,296

(393) (3) (150) 2,129

(320) (50) (110) 2,213

4

Administrative expenses Depreciation and amortisation Other operating charges Operating profit before provisions

Society 2012 £000

10,054 (4,422) 5,632

2 3

Fees and commissions receivable Fees and commissions payable Other operating income Total income

2011 £000

Tax on profit on ordinary activities 8 (547) (615) (537) (601) Equity minority interest 21 (9) (8) Profit for the financial year 20 1,636 1,673 1,592 1,612 The above results are all derived from continuing operations. Profit on ordinary activities before tax represents operating profit as defined by FRS3 Reporting The above results all arise from the Group's principal activities in the United Kingdom and are all derived from continuing operations.

STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Group Notes 2012 £000 Profit for the financial year 1,636 Unrealised deficit on revaluation of fixed assets 20 Total gains recognised since last annual report and accounts 1,636

2011 £000 1,673 (34) 1,639

Society 2012 £000 1,592 1,592

2011 £000 1,612 (34) 1,578

NOTE OF HISTORICAL COST PROFITS AND LOSSES Group Notes 2012 £000

2011 £000

Society 2012 £000

2011 £000

Profit for the financial year before taxation Deficit on revaluation of fixed asset Gain on fixed asset revaluation written back against revaluation deficit of previous years Depreciation on revalued element of fixed assets Historical cost profit for the financial year before taxation and minority interest

20

2,192 8 2,200

2,296 8 (14) 8 2,298

2,129 8 2,137

2,213 8 (14) 8 2,215

The notes on pages 17 to 29 form part of these accounts

14

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BALANCE SHEETS AS AT 31 DECEMBER 2012

Notes ASSETS Liquid Assets Cash in hand Balances with the Bank of England Loans and advances to credit institutions Debt securities issued by other borrowers

LIABILITIES Shares Amounts owed to other customers Other liabilities Deferred tax liability Accruals and deferred income Provisions for liabilities

2011 £000

159 20,000 50,694 2,004 72,857

130 46,774 18,147 65,051

172,999 20,420 193,419

162,920 20,941 183,861

172,999 20,420 193,419

162,920 20,941 183,861

13 14 14 15

3,038 239 15 221 270,002

3,250 281 226 252,836

252 3,009 13 202 269,752

266 3,231 208 252,617

16 17 18 15

180,899 69,240 730 133 277 251,279

165,456 69,029 846 32 159 236 235,758

180,899 69,240 603 118 277 251,137

165,456 69,029 702 34 137 236 235,594

371 18,345 7 270,002

379 16,701 (2) 252,836

371 18,244 269,752

379 16,644 252,617

19

Revaluation reserve General reserves Minority interests Total Liabilities

Society 2012 £000

130 46,941 18,147 65,218

12

Investments Investments in subsidiary undertakings Tangible fixed assets Intangible fixed assets Deferred tax asset Prepayments and accrued income Total Assets

2011 £000

159 20,000 50,907 2,004 73,070

10 11

Loans and advances to customers Loans fully secured on residential property Loans fully secured on land

Group 2012 £000

20 20 21

Approved by the Board of Directors on 5 March 2013 and signed on its behalf by:

C J L Moorsom Chairman

T J Fussell Vice Chairman

R D Jenkins

The notes on pages 17 to 29 form part of these accounts

15

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GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2012

Net cash inflow from operating activities (see below) Taxation Capital expenditure Purchase of fixed assets Sale of fixed assets Net disposal of debt securities Increase in cash

2012 £000

Reconciliation of operating profit to net cash inflow from operating activities Operating profit Increase/(decrease) in prepayments and accrued income Decrease in accruals and deferred income Increase in provisions for liabilities Goodwill impairment Charge for provisions for bad and doubtful debts Depreciation and amortisation Net cash inflow from trading activities

2012 £000

2011 £000

14,172 (622)

5,800 (556)

(129) 9 16,077 29,507

(107) 19 (4,035) 1,121

2012 £000

2011 £000

2,192 83 (26) 41 25 393 349 3,057

Net increase in loans and advances to customers Net increase/(decrease) in shares Net increase in amounts owed to other customers Net decrease in loans and advances to credit institutions Net (decrease)/increase in other liabilities Net cash inflow from operating activities

2,296 (1) (73) 83 320 339 2,964

(9,951) 15,443 211

(4,674) (1,929) 6,847

5,500 (88)

2,500 92

11,115 14,172

2011 £000

2,836 5,800

Reconciliation of cash balances

2011 £000

Cash flow £000

2012 £000

Cash in hand and balances with the Bank of England Loans and advances to credit institutions - repayable on demand

130

20,029

20,159

28,362 28,492

9,478 29,507

37,840 57,999

The Society has taken advantage of the exemption in FRS1, “Cash Flow Statements”, which provides that where an entity is a member of a group and a Consolidated Cash Flow Statement is published, the entity does not have to prepare a Cash Flow Statement.

16

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NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2012 1.

Accounting policies

The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the accounts. Basis of preparation The accounts are prepared under the historical cost convention as modified by the revaluation of certain fixed assets and in accordance with the Building Societies (Accounts and Related Provisions) Regulations 1998, and applicable United Kingdom accounting standards issued by the Accounting Standards Board. As noted in the Directors’ Report on page 6, the Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts. Basis of consolidation The Group accounts consolidate the accounts of the Society and its subsidiary undertakings, Bath Property Letting Limited and Bath & City Financial Limited, which both also have 31 December year-ends. In the Society’s accounts the investments in subsidiary undertakings are stated at cost, less any provisions for impairment. Tangible fixed assets Tangible fixed assets are stated at cost or valuation, less accumulated depreciation and any provision for impairment. Depreciation is provided on all tangible fixed assets, other than freehold land, at rates calculated to write off the cost or valuation, less estimated residual value, of each asset on a straight-line basis over its useful life, as follows: Freehold buildings Leasehold improvements Fixtures and fittings Computer equipment Motor vehicles Summit computer system implementation costs

1% per annum term of lease 10% - 20% per annum 25% per annum 25% per annum 16.7% per annum

Goodwill The amount attributed to goodwill is calculated as the difference between the fair value of consideration given and the fair values of the separable net assets acquired. Goodwill is amortised over a period of twenty years. An impairment review of goodwill is undertaken and deficits are taken to the income and expenditure account where events or changes in circumstances indicate that its carrying value may not be recoverable in full. Revaluation of properties A revaluation of individual freehold and leasehold properties is performed every five years with an interim revaluation carried out in the third year after the full revaluation. Properties used in the Group businesses are valued using an existing use value basis. Properties that are surplus to the Group businesses are valued using a market value basis. An annual impairment test is also performed on tangible fixed assets that have an estimated remaining useful life exceeding 50 years. The surplus or deficit on revaluation is transferred to the revaluation reserve, except where a deficit is in excess of any previously recognised surplus over depreciated cost relating to the same property, or the reversal of such a deficit, when the amount is charged (or credited) to the income and expenditure account. Liquid assets Debt securities intended for use on a continuing basis in the Society’s activities are classified as financial fixed assets and are stated at cost. Premiums and discounts arising on the purchase of a financial fixed asset are amortised over the period to the maturity date of the security. Any amounts so amortised are charged/(credited) to the income and expenditure account for the relevant financial years. Where there is an impairment in value of a financial fixed asset, a provision is made to write down the cost of the security to its recoverable amount. Provisions for bad and doubtful debts The creation of impairment provisions for a portfolio of mortgage loans is inherently uncertain and requires the exercise of a significant degree of judgement. The calculation requires significant judgement to be exercised in predicting future economic conditions (e.g. interest rates and house prices) and customer behaviour (e.g. likelihood of default). Provisions are made to reduce the value of loans and advances to the amount that the Directors consider is likely to be recoverable based on formal valuations where they are considered relevant. Specific provisions are made based on calculations of the irrecoverable amount of individual loans and advances that are four months or more in arrears at the balance sheet date. General provisions are made based on the overall level of arrears in the Society’s mortgage book. The Society’s policy is to initially provide 1% against the total redemption value of loans that are three months or less in arrears, plus 0.5% against the total redemption value of loans that are four months or more in arrears at the balance sheet date. The level of general provisions may then be increased to reflect the Board’s estimation of future arrears that could arise as a result of worsening economic conditions.

17 17

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012 1.

Accounting policies (continued)

Forbearance The Society uses forbearance techniques to help some borrowers through periods where their finances have become stressed and where the servicing of their normal mortgage commitments has become difficult. Definitions of forbearance are consistent with the FSA’s paper entitled ‘Forbearance and Impairment Provisions - Mortgages’ issued in October 2011. As a result of this paper, the arrears management section of the Society’s Mortgage Department now maintains forbearance information which is reported regularly to the Society’s Credit Committee. In 2012, twenty seven accounts (2011: twenty seven) with balances totalling £4,707,452 (2011: £4,178,130) in value were granted forbearance concessions. As at 31 December 2012, twelve accounts with balances totalling £2,316,296 remained on special payment arrangements plus a further three accounts with balances totalling £362,056 remained on concessionary interest only terms. The Society takes full consideration of the impact on its arrears position from using these forbearance techniques and the potential for losses on these accounts is assessed and considered in the level of overall provisions held against the mortgage portfolio. Taxation Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. In accordance with FRS19, deferred taxation is provided in full on timing differences which represent an asset or liability at the balance sheet date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely that not that they will be recovered. Deferred tax assets and liabilities are not discounted. Pension costs The Society operates an externally managed, defined contribution Group personal pension scheme in respect of staff, under which the costs of the Society’s contributions are charged to the income and expenditure account in the year in which the pensionable salary is earned. Leasing All payments under operating lease contracts are charged to the income and expenditure account on a straight-line basis over the period of the lease. Incentives to borrowers The Society operates schemes under which, as an incentive to borrowers, discounts in the form of cashback and interest are given. It is the Society’s policy that all such sums given as cashbacks under this scheme are written off to other operating charges when incurred. Sums given in the form of interest discount are recognised against interest receivable as incurred. Derivative financial instruments Derivatives are only utilised in non-trading activities and profits or losses arising on such investments are recognised on an accruals basis in interest receivable and similar income for asset hedges, and in interest payable and similar charges for liability hedges. Loans to and from credit institutions Loans to and from credit institutions are stated in the balance sheet at the lower of cost and net realisable value. Interest receivable The Society’s main business is to advance mortgage loans that are fully secured on residential property and on land. Interest is charged on individual loans using either an ‘annual rest’ or ‘daily balance’ methodology. Early release charges are recognised as interest receivable on receipt. The Society also receives interest from its liquid asset portfolio. Interest from this source is recognised on an accruals basis. Interest payable The Society takes in deposits from retail customers and corporate investors in order to fund its mortgage activities. Interest payable on deposits is accrued on a daily basis and capitalised to customers’ balances on either 31 December each year or on the date of maturity for fixed rate bond products. Income from subsidiary businesses Trading and non-trading income generated within Bath Property Letting Limited is recognised when rents and charges are collected from tenants and landlords, and when commissions are collected from service suppliers. Trading income generated within Bath & City Financial Limited is recognised on an accruals basis when business is placed on cover with product providers. The trading income from both subsidiary companies is recognised within the ‘fees and commissions receivable’ caption within the Group accounts. All non trading income is recognised within the ‘other operating income’ caption.

18

18

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012

2

Interest receivable and similar income On loans fully secured on residential property On loans fully secured on land On debt securities: Interest and similar income On other liquid assets: Interest and similar income Net expenses on financial instruments

2011 £000

Society 2012 £000

2011 £000

8,534 1,105

8,025 1,128

8,534 1,105

8,025 1,128

86

93

86

93

511 (182) 10,054

429 (279) 9,396

511 (182) 10,054

427 (279) 9,394

3,093 1,329 4,422

2,851 1,082 3,933

3,093 1,329 4,422

2,851 1,082 3,933

62 47

56 60

62 67

56 80

1,559 175 76 1,810

1,475 158 78 1,711

1,403 160 70 1,633

1,304 142 71 1,517

Other administrative expenses:

1,360

1,206

1,233

1,107

Total administrative expenses

3,170

2,917

2,866

2,624

2012 £000 36

2011 £000 37

8 5 49

8 4 49

3

Interest payable and similar charges On shares held by individuals On deposits and other borrowings

4

Other operating income Other operating income includes: Valuation fees Rental income

5

Group 2012 £000

Administrative expenses Staff costs: Wages and salaries Social security costs Other pension costs

Other administrative expenses include the following: Remuneration paid to the auditor: For audit of the Society's annual accounts For audit of the Society's subsidiary companies For tax advisory work

Operating lease charges relating to land and buildings Profit on disposal of fixed assets

121

124

106

124

7

2

5

2

19

19

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012

6

Employees The average number of staff employed during the year was:

2012 Full-time 30 7 37 7 44

Head Office Branches Total Society Subsidiary undertakings Total Group 7

2011 Full-time 27 7 34 8 42

Directors' emoluments and transactions with Directors a) Remuneration of Directors For services as Non-executive Directors For Executive services

2012 Part-time 3 3 6 6

2011 Part-time 4 4 8 8

2012 £

2011 £

125,810 256,829 382,639

102,002 251,596 353,598

Full details are given in the Report of the Directors on Remuneration on pages 11 and 12. b) Transactions with Directors and connected persons Mortgage Loans At 31 December 2012 there were no outstanding mortgage loans to Directors (2011: £nil). The register, required to be maintained under Section 68 of the Building Societies Act 1986 detailing all loans, transactions and arrangements with Directors and their connected persons, is held at the Society's Head Office. It is available for inspection, by members, in normal office hours by arrangement with the Society's Secretary, during the period of 15 days prior to the Annual General Meeting and at the Annual General Meeting. Related Party Transactions There were no transactions with Directors that constituted related party transactions.

20 20

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012 8

Taxation a) Analysis of charge in the year

Group 2012 £000

2011 £000

Society 2012 £000

2011 £000

594

647

584

633

(47) 547

(3) (29) 615

(47) 537

(3) (29) 601

2,192

2,296

2,129

2,213

537

608

522

586

16 (4) (2) 29 18 594

19 (5) (4) 13 16 647

15 29 18 584

19 (1) 13 16 633

Current Tax: Corporation tax at 24.5% (2011: 26.5%) Deferred Tax: Effect of changes in tax rates Origination and reversal of timing differences Tax on profit on ordinary activities The standard rate of corporation tax reduced from 26% to 24% as from 6 April 2012. b) Factors affecting tax charge for the year Profit on ordinary activities before tax Profit on ordinary activities multiplied by effective rate of corporation tax of 24.5% (2011: 26.5%) Effects of: Expenses not deductible for tax purposes Income not taxable Other rates /credits Difference between capital allowances and depreciation Short-term timing differences Current tax charge for the year c)

Factors that may affect future tax charges No provision has been made for deferred taxation on gains recognised on revaluing property to its market value. Such tax would become payable only if the property were sold without it being possible to claim rollover relief. The total amount payable is £18,000 (2011: £26,000). At present, it is not envisaged that any tax will become payable in the foreseeable future. The standard rate of corporation tax will reduce to 23% as from 1 April 2013. No material impact will arise from the planned future reduction in the standard rate of corporation tax to 21% (not yet enacted).

9

Provisions for bad and doubtful debts

Group & Society

Specific £000 1,084 (47) 317 1,354

At 1 January 2012 Provisions utilised against crystallised losses Provisions for loan impairments charged to Income and Expenditure Account At 31 December 2012

General £000 138 (2) 76 212

Total £000 1,222 (49) 393 1,566

The movement in the total provisions figure, excluding utilised provisions, for bad and doubtful debts of £393,000 (2011: £320,000) has been charged to the Income and Expenditure Account. 10 Loans and advances to credit institutions Group

Accrued interest Repayable on demand Repayable within three months Repayable in more than three months and less than one year

Society

2012 £000

2011 £000

2012 £000

2011 £000

67 37,840 8,500 4,500 50,907

79 28,362 12,500 6,000 46,941

67 37,627 8,500 4,500 50,694

79 28,195 12,500 6,000 46,774

21

21

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012 11

Debt securities issued by other borrowers

Group 2012 £000

Analysis of other debt securities: Issued by public bodies

Debt securities have remaining maturities as follows: Accrued interest Repayable within three months Repayable in more than three months and less than one year Repayable in more than one year and less than five years

12

2011 £000

2012 £000

Society

2011 £000

2,004 2,004

18,147 18,147

2,004 2,004

18,147 18,147

2 2,002 2,004

68 5,054 11,023 2,002 18,147

2 2,002 2,004

68 5,054 11,023 2,002 18,147

Loans and advances to customers

Group & Society 2012 2011 £000 £000 933 214 520 488 1,720 1,879 21,722 17,138 170,090 165,364 194,985 185,083 (1,566) (1,222) 193,419 183,861

The remaining contractual maturity of loans and advances secured on residential property and other advances fully secured on land, from the date of the balance sheet, is as follows: On call and at short notice In not more than three months In more than three months but not more than one year In more than one year but not more than five years In more than five years Less: Provisions (see note 9)

The above table may not reflect actual experience of repayments since many mortgage loans are repaid early.

The Society continues to invest in developing and enhancing its arrears management strategies to minimise credit risk losses whilst ensuring customers are treated fairly. These forbearance arrangements (see note 1) are undertaken in line with the Society’s credit policy, and include the conversion of loan payments to an interest-only basis, capitalisation of property management charges, conversion of loans onto fixed rate interest and other special arrangements agreed on a case-by-case basis. As at 31 December 2012, the Society had no loans where interest relating to previous arrears balances had been capitalised or suspended.

13

Investments in subsidiary undertakings

a) Investment in Bath Property Letting Limited Bath Property Letting Limited is a 100% subsidiary of the Society and is registered in England and Wales. The principal business activity of the subsidiary is that of property management operating wholly in the United Kingdom.

At 1 January 2012 Repayments Net book value at 31 December 2012

Shares £ 250,000 250,000

Society Loans £ 5,600 (4,265) 1,335

Total £ 255,600 (4,265) 251,335

Net book value at 31 December 2011

250,000

5,600

255,600

Movements during the year were as follows:

b) Investment in Bath & City Financial Limited Bath & City Financial Limited is a 51% subsidiary of Bath Building Society and is registered in England and Wales. The principal business activity of the subsidiary is to provide independent financial advice to the members of the Society. In 2009, the Society established an impairment provision of £25,500 against the Society’s equity investment in the company. Movements during the year were as follows:

Shares £ 25,500 25,500

At 1 January 2012 Repayments

Impairment provision as at 1 January and 31 December 2012 Net book value at 31 December 2012

Loans £ 10,541 (10,301) 240

Total £ 36,041 (10,301) 25,740 (25,500) 240

Net book value at 31 December 2011

10,541

22

22

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012

14 Fixed assets Tangible fixed assets a) Group Freehold premises

Leasehold premises (short)

Office and computer equipment

Furniture, fittings and cars

Total

£000

£000

£000

£000

£000

At cost or valuation At 1 January 2012

2,491

67

2,484

658

5,700

Additions

-

-

72

57

129

Disposals

-

(2)

(2)

(35)

(39)

2,491

65

2,554

680

5,790

At 31 December 2012 Accumulated depreciation At 1 January 2012

-

-

1,986

464

2,450

33

19

227

60

339

-

(2)

-

(35)

(37)

33

17

2,213

489

2,752

At 31 December 2012

2,458

48

341

191

3,038

At 31 December 2011

2,491

67

498

194

3,250

Charge Disposals At 31 December 2012 Net book value

b) Society At cost or valuation At 1 January 2012

2,491

67

2,408

613

5,579

Additions

-

-

65

38

103

Disposals

-

(2)

-

(19)

(21)

2,491

65

2,473

632

5,661

At 31 December 2012 Accumulated depreciation At 1 January 2012

-

-

1,922

426

2,348

33

19

219

52

323

-

(2)

-

(17)

(19)

33

17

2,141

461

2,652

At 31 December 2012

2,458

48

332

171

3,009

At 31 December 2011

2,491

67

486

187

3,231

Charge Disposals At 31 December 2012 Net book value

c) The depreciated historical cost of revalued freehold and leasehold premises at 31 December 2012 was £2,248,890 (2011: £2,302,612); the premises are stated above at their revalued amounts totalling £2,506,000, (2011: £2,558,000).

d) During the year the Society and Group occupied for its own use freehold and leasehold property with a net book value of £2,008,134 (2011: £2,036,477). e) An external revaluation of all the Group's freehold and leasehold land and buildings was last conducted as at 30 November 2011 by Brooks Chartered Surveyors. The valuation of properties used in Group businesses was

prepared on 'existing use value' as defined in Practice Statement 4.3 of the RICS Manual of Valuation. Properties not used in Group businesses were valued using a market value basis. The different bases used in the revaluation process made no material difference to the valuations obtained.

Intangible fixed assets Group

Purchased goodwill £000

At cost or valuation At 1 January 2012 and 31 December 2012

344

Amortisation At 1 January 2012 Charge At 31 December 2012

63 17 80

Impairment Impairment loss recognised during the year

(25)

Net book value At 31 December 2012

239

At 31 December 2011

281

23

23

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012 15 Deferred taxation

Group 2012 £000 (32) 47 15

Deferred tax liability at 1 January Movement during the year Deferred tax asset/(liability) at 31 December The elements of deferred taxation are as follows: Capital allowances in excess of depreciation Short-term timing differences Deferred tax liability

(35) 50 15

Society 2012 £000 (34) 47 13

2011 £000 (64) 32 (32)

(37) 50 13

(68) 36 (32)

16 Shares

2011 £000 (66) 32 (34)

(70) 36 (34)

Group & Society 2012 2011 £000 £000 846 799 180,053 164,657 180,899 165,456

Repayable on demand: Accrued interest Held by individuals

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

Group & Society 2012 2011 £000 £000 72 29,820 5,723 33,625 69,240

Accrued interest Repayable on demand In not more than three months In more than three months but not more than one year In more than one year

18 Other liabilities

Amounts falling due within one year: Income tax Corporation tax Other taxation and social security Other creditors

103 39,702 3,326 12,685 13,213 69,029

Group 2012 £000

2011 £000

Society 2012 £000

2011 £000

191 289 64 186 730

270 317 57 202 846

191 279 49 84 603

270 303 44 85 702

Provision for customer redress

Total

£000

Provision for Financial Services Compensation Scheme levy £000

£000

£000

50 3 (41) 12

185 150 (71) 264

1 1

236 153 (112) 277

19 Provisions for liabilities

Group & Society Provision for dilapidations

At 1 January 2012 Charge for the year Paid in the year At 31 December 2012

The provision for dilapidations will likely be utilised in 2015 if Bath Property Letting Limited exits its leased business premises at Southgate, Bath. The provision for the Financial Services Compensation Scheme Levy will be utilised in 2013 and 2014. The provision for customer redress will be utilised over 2013.

24 24

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012 20 Reserves

Balance at 1 January Profit for the year Revaluation of fixed assets in the year Transfer in respect of revalued fixed assets Taxation Balance at 31 December

Revaluation

General Group 2012 £000 16,701 1,636 8 18,345

Society 2012 £000 16,644 1,592 8 18,244

21 Minority interests Balance at 1 January Profit on ordinary activities after taxation Balance at 31 December

22 Commitments

Operating leases The Group and the Society have the following annual commitments under operating leases relating to land and buildings that expire as follows:

Group 2011 £000 15,020 1,673 8 16,701

Group 2012 £000 (2) 9 7

2011 £000 (10) 8 (2)

Group 2012 £000

2011 £000

117

Less than one year Between two and five years

Society 2011 £000 15,024 1,612 8 16,644

37 87

Group & Society 2012 2011 £000 £000 379 421 (34) (8) (8) 371 379

Society 2012 £000

87

2011 £000

37 87

23 Pension schemes During the year ended 31 December 2012 the Group operated a defined contribution Group personal pension scheme in respect of staff, and the charge for the year was £76,066 (2011: £78,295). As at 31 December 2012 there were outstanding contributions of £6,104 (2011: £6,197).

24 Contingent liabilities a) Financial Services Compensation Scheme Payments in respect of levies to the Financial Services Compensation Scheme are made in each fiscal year, based on the Society's share of protected Scheme deposits at the preceding calendar year-end. As a result of notifications it received from the Financial Services Authority, in previous periods the Society had recognised provisions for a total management levy of £413,824. As at 31 December 2012, the Society had paid over £300,193 to the Scheme relating to the period covered by fiscal years 2007/08 through to 2011/12 based on an applicable interest rate of twelve month LIBOR plus 30 basis points. It estimates that it will be liable for future management levy commitments covering fiscal years 2012/13 and 2013/14 totalling £189,153, these being triggered by the Society's holdings of protected deposits at 31 December 2011 and 31 December 2012 respectively and using an applicable interest rate for these fiscal years of twelve month LIBOR plus one hundred basis points. In addition to the management levies, the FSCS has now indicated that a capital shortfalls levy is likely to be charged over three years commencing scheme year 2013/14. The Society estimates that it is currently liable for a capital shortfalls levy of £74,478. A further provision of £150,000 has been made in the current year to ensure that the Society is fully provided against all estimates of current levy liabilities. The Society has provided against liabilities to the Scheme using best estimates of the level of its current expected exposure. There exists a level of uncertainty as to the Society's precise exposure to the scheme for fiscal year 2013/14. Furthermore, there is uncertainty over the future duration of the current Scheme and as to the level of future interest rates that would apply. There is also uncertainty as to whether the Society will have any further liability to the Scheme if projected capital shortfalls should increase and what the scale of those liabilities would likely be.

b) Other liabilities

Section 22 of the Building Societies Act 1986 was repealed with effect from 11 June 1996 and the Society therefore has no obligation to stand by its subsidiaries in respect of liabilities incurred after this date. However, it is the intention of the Board to continue to support its subsidiary undertakings if support is required.

25

25

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012 25 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. The Group is a retailer of financial instruments, mainly in the form of mortgages and savings products. The Group uses wholesale financial instruments to invest liquid asset balances, raise wholesale funds and to manage the financial risks arising from its operations. The Board committee structure is designed such that each committee concentrates on monitoring one of the Society's key risk areas such as credit risk, operational risk and financial risk. Each committee establishes risk limits, reporting lines, mandates and other control procedures and these are reviewed by the Board on a regular basis. Instruments used for risk management purposes include derivative financial instruments ('derivatives'), which are contracts or agreements whose value is derived from one or more of underlying price, rate or index inherent in the contracts or agreement, such as interest rates or stock market indices. All transactions in derivatives are undertaken to manage the risks arising from underlying business activities. These derivatives are only used by the Society in accordance with the Building Societies Act 1986 to limit the extent to which the Society will be affected by changes in interest rates or other factors specified in the legislation. Derivatives are not used in trading activity for speculative purposes, and consequently all such instruments are classified as hedging contracts. The derivative instruments used by the Society in managing its balance sheet exposures are interest rate swaps. These are used to protect the Society from exposures arising principally from fixed rate mortgage lending. The durations of the off balance sheet contracts are generally short to medium term and their maturity profile reflects the nature of the exposures arising from the underlying business activities. Outstanding derivative contracts The table below shows the notional principal amounts, credit weighted amounts and replacement costs of derivatives. Notional principal amounts indicate the volume of business outstanding at the balance sheet date and do not represent amounts of risk. The credit risk weighted amount is calculated according to the rules specified by the Financial Services Authority that takes into account the residual maturity of derivative contracts and the nature of each counterparty. The replacement cost represents the cost of replacing contracts with a positive value, calculated at market rates current at the balance sheet date, and reflects the Society's maximum exposure should all counterparties default.

Notional principal amount Credit risk weighted amount Replacement cost

2012 ÂŁ000

2011 ÂŁ000

9,200 9 -

10,100 -

26

26

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012 25 Financial instruments (continued) Fair values of financial instruments Set out below is a comparison of book and fair values of some of the Group's financial assets and financial liabilities as at 31 December 2012 and 2011. Market values have been used to determine fair values. The table excludes certain financial assets and financial liabilities which are not listed or publicly traded, or for which a liquid and active market does not exist. It therefore excludes items such as mortgages, share accounts and bank deposits. 2012 Book value £000

2011 2012 Fair value Book value £000 £000

2011 Fair value £000

On balance sheet instruments Debt securities

2,002

2,000

18,079

18,021

Off balance sheet instruments Interest rate swaps

-

(281)

-

(282)

Hedges Hedges which comprise the 'derivatives' referred to above are used to reduce the risk of loss arising from changes in interest rates. Gains and losses on instruments used for hedging are recognised in line with the item being hedged and are only recognised in the event of the underlying exposure itself being unwound. The following table sets out the movements in unrecognised gains and losses in the year to 31 December 2012. 2012 Unrecognised gains £000

2012 Unrecognised losses £000

2012 Net gain/ (loss) £000

Gains and losses arising in the year ended 31 December 2012 that were not recognised in the same year

-

(281)

(281)

Gains and losses to be realised in the year to 31 December 2013

-

-

-

Gains and losses to be realised after 31 December 2013

-

(281)

(281)

Risk management The main risks arising from the Group's activities are credit risk, liquidity risk and interest rate risk. The Board reviews and agrees policies for managing each of these risks, as summarised below. Credit risk The Group's credit risk arises from its loan portfolio and from potential losses that could result from the failure of counterparties to observe the terms of the contract entered into. All loan applications are assessed with reference to lending policy. Changes to the policy are approved by the Board. The Assets and Liabilities Committee is responsible for approving treasury counterparties. The Society holds security against all loans made to customers by way of first charge mortgages made against residential property and land. 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 and through management control of asset growth in the business. The Group has £nil (2011: £nil) of its liquid assets encumbered as part of credit support agreements attached to interest rate swap contracts.

27

27

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012 25 Financial instruments (continued) Interest rate risk The Society is exposed to movements in interest rates reflecting the mismatch between the dates on which interest receivable on assets and interest payable on liabilities are next reset to market rates, or, if earlier, the dates on which the instruments mature. The Society manages this exposure by using both on and off balance sheet instruments. After taking into account the derivatives entered into by the Society, the interest rate exposure at 31 December 2012 and 31 December 2011 was:

31 December 2012 Assets Liquid assets Loans and advances to customers Tangible fixed assets Other assets Total assets

Not more than three months £000

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

More than six months but not more than one year

More than one year but not more than five years

£000

£000

Non-interest bearing £000

Total £000

68,501 185,626

3,500

1,000

254,127

3,500

1,000

9,359 9,359

69 (1,566) 3,038 475 2,016

73,070 193,419 3,038 475 270,002

134,978 67,032 202,010

20,659 1,228 21,887

24,416 908 25,324

-

846 72 133 1,007 18,716 7 20,781

180,899 69,240 133 1,007 18,716 7 270,002

Net assets/(liabilities) Off balance sheet items

52,117 -

(18,387) -

(24,324) -

9,359 (9,200)

(18,765) 9,200

-

Interest rate sensitivity gap

52,117

(18,387)

(24,324)

159

(9,565)

-

31 December 2011 Assets Liquid assets Loans and advances to customers Tangible fixed assets Other assets Total assets

48,044 173,382 221,426

16,027 1,170 17,197

1,000 4,715 5,715

5,816 5,816

147 (1,222) 3,250 507 2,682

65,218 183,861 3,250 507 252,836

Liabilities Shares Amounts owed to customers Accruals and deferred income Other liabilities Reserves Minority interest Total liabilities

121,697 61,617 183,314

32,876 2,092 34,968

10,084 5,217 15,301

-

799 103 159 1,114 17,080 (2) 19,253

165,456 69,029 159 1,114 17,080 (2) 252,836

Net assets/(liabilities) Off balance sheet items

38,112 -

(17,771) (500)

(9,586) (4,000)

5,816 (5,600)

(16,571) 10,100

-

Interest rate sensitivity gap

38,112

(18,271)

(13,586)

216

(6,471)

-

Liabilities Shares Amounts owed to customers Accruals and deferred income Other liabilities Reserves Minority interest Total liabilities

As at balance sheet date, the Society estimates that the positive impact on the Society’s profitability from a parallel shift of 3% in the gilt yield curve would be £527,000 (2011: £320,000).

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NOTES TO THE ACCOUNTS - continued FOR THE YEAR ENDED 31 DECEMBER 2012 26 Related party transactions

Bath & City Financial Limited is a 51% subsidiary of Bath Building Society. Bath Building Society charges management fees to Bath & City Financial Limited for provision of office space and accountancy services; as at 31 December 2012, a balance of £Nil (2011: £Nil) was outstanding to the Society from Bath & City Financial Limited. The Society also provides interest-free finance to the company; as at 31 December 2012, a balance of £240 (2011: £10,541) was due from Bath & City Financial Limited in respect of this financial support.

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ANNUAL BUSINESS STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2012

1 Statutory percentages

Lending Limit Funding Limit

2012 %

Statutory Limit %

10.7 27.7

25.0 50.0

The above percentages have been calculated in accordance with the provisions of the Building Societies Act 1986. The Lending Limit measures the proportion of business assets not in the form of loans fully secured on residential property and is calculated as (X-Y)/X where: X=

business assets, being the total assets of the Group, plus provisions for bad and doubtful debts, less liquid assets and tangible fixed assets as shown in the Group Balance Sheet.

Y=

the principal of, and interest accrued on, loans owed to the Group, as shown in the Group Balance Sheet, gross of mortgage loss provisions, which are fully secured on residential property.

The Funding Limit measures the proportion of shares and borrowings not in the form of shares held by individuals and is calculated as (X-Y)/X where: X=

Y=

shares and borrowings, being the aggregate of1

the principal value of, and interest accrued on, shares in the Society; and

2

the principal of, and interest accrued on, sums deposited with the Society or any subsidiary undertaking of the Society; and

3

the principal value of, and interest accrued under, instruments or agreements creating or acknowledging indebtedness and accepted, made, issued or entered into by the Society or any such undertaking less any amounts qualifying as own funds. the principal value of, and interest accrued on, shares in the Society held by individuals otherwise than as bare trustees for bodies corporate or for persons who include bodies corporate.

The statutory limits are as laid down under the Building Societies Act 1986, and ensure that the principal purpose of a building society is that of making loans which are secured on residential property and are funded substantially by its members.

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ANNUAL BUSINESS STATEMENT - continued FOR THE YEAR ENDED 31 DECEMBER 2012 2 Other percentages (Group)

2012 %

2011 %

Gross capital Free capital Liquid assets

7.5 6.4 29.2

7.3 6.0 27.8

Profit for the year as a percentage of mean total assets Management expenses as a percentage of mean total assets:

0.63 1.35

0.67 1.31

As percentage of shares and borrowings:

The above percentages have been prepared from the Group accounts and in particular: *

'Shares and borrowings' represent the total of shares and amounts owed to other customers.

*

'Gross capital' represents the aggregate of general reserves and revaluation reserve.

*

'Free capital' represents the aggregate of gross capital and general loss provisions for bad and doubtful debts less tangible fixed assets.

*

'Liquid assets' represents the total of cash in hand, loans and advances to credit institutions and debt securities issued by other borrowers as shown in the balance sheet.

*

'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 and excludes the Levy to the Financial Services Compensation Scheme.

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ANNUAL BUSINESS STATEMENT - continued FOR THE YEAR ENDED 31 DECEMBER 2012 3.

Directors and Officers

The Directors and Officers of the Society at 31 December 2012 together with their further particulars were as follows: Name and Date of Birth

Occupation

Appointment

Other Directorships

C J L Moorsom 15 May 1943

Professional Director

01 October 2005

Amati VCT 2 Plc RWMCD Ltd

T J Fussell 22 January 1948

Professional Director

01 October 2005

Bath & City Financial Ltd

A Harris 14 May 1946

Solicitor

01 May 2001

Bart Management Ltd Bart Secretaries Ltd 10 Portland Place (Bath) Ltd Iford Arts Ltd Jane Secretarial Services Ltd Lee & Pembertons Ltd Life Rocks Ltd Lexicon Software Ltd

C W J Nott 22 October 1947

Accountant

01 December 2006

Bath Property Letting Ltd

D A Berresford 28 September 1960

Accountant

01 February 2008

Pension Protection Fund Triodos Renewables Plc

D Coles 13 January 1952

Management Consultant

01 May 2012

Ceuta Capability Ltd Avicenna Plc Bewdley Commercial Consulting Ltd

R D Jenkins 25 September 1957

Building Society CEO

01 December 2003

Bath Property Letting Ltd

K A Gray 21 March 1965

Building Society Finance Director and Deputy CEO

01 September 2002

Bath & City Financial Ltd

Documents may be served on the above named Directors c/o The Society Secretary, Bath Building Society, 15 Queen Square, Bath, BA1 2HN. Details of Directors’ service contracts are shown in the Directors’ Remuneration Report. Other Officers Name

Business Occupation

Directorships

T Lovell Mark Wiltshaw

Society Secretary Head of Savings and Investments

Bath Property Letting Limited

No Director or other Officer has any rights to subscribe for shares in the Society’s subsidiary undertaking.

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YOUR LOCAL SOCIETY

REGISTERED NAME AND OFFICE Bath Investment & Building Society 15 Queen Square, Bath, BA1 2HN, Tel Bath (01225) 423271 Registered No. 30B BRANCH OFFICES Bath - 3 Wood Street, BA1 2JQ Oldfield Park - 12/13 Moorland Road, Oldfield Park, Bath, BA2 3PL Twerton - 88 The Parade, High Street, Bath BA2 1DE Larkhall - 1 Beaufort Place, Bath BA1 6RP

(01225) 330837 (01225) 445271 (01225) 446782 (01225) 464565

BATH PROPERTY LETTING Bath - 34 Southgate, BA1 1TP

(01225) 314055 BATH & CITY FINANCIAL

Bath - 3 Wood Street, BA1 2JQ

(01225) 475700 AGENCY OFFICES

Ilminster - Harper Dolman & West, 20 East Street, TA19 0AJ Midsomer Norton - Waterhouse Financial Advisers, 23 High Street, BA3 2DR Shaftesbury - Chaffers Estate Agents, 48 High Street, SP78AA South Petherton - Hamdon Financial Services, 36 St James Street, TA13 5BT Staple Hill - Mark Richard Insurance, 141 High Street, BS16 5HQ Sturminster Newton - Sutcliffe & Co, Market Cross, DT10 1AN Wellington - MJC Financial Planning, 22 South Street, TA21 8NS

(01460) 53095 (01761) 412980 (01747) 852301 (01460) 240000 (01179) 575008 (01258) 472344 (01823) 663174

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Your local Society Head Office: 15 Queen Square, Bath, BA1 2HN Investment enquiries: 01225 423 271 Mortgage enquiries: 01225 475 702 E-mail: bsoc@bibs.co.uk www.bathbuildingsociety.co.uk

Branch Offices Bath 3 Wood Street

BA1 2JQ (01225) 330837 Oldfield Park 12/13 Moorland Road Bath BA2 3PL (01225) 445271 Twerton 88 The Parade High Street Bath BA2 1DE (01225) 446782

Agency Offices Ilminster

Harper Dolman & West 20 East Street TA19 0AJ (01460) 53095 Midsomer Norton

Waterhouse Financial Advisers 23 High Street BA3 2DR (01761) 412980

South Petherton Hamdon Financial Services

(01225) 464565

(01460) 240000

Bath Property Letting

Staple Hill

Bath BA1 1TP (01225) 314055

Market Cross DT10 1AN (01258) 472344 Wellington MJC Financial Planning 22 South Street TA21 8NS (01823) 663174

Shaftesbury Chaffers Estate Agents 48 High Street SP7 8AA (01747) 852301

Larkhall 1 Beaufort Place Bath BA1 6RP

34 Southgate

Sturminster Newton Sutcliffe & Co Old Bank House

36 St James Street TA13 5BT

Mark Richard Insurance 141 High Street BS16 5HQ (01179) 575008

Bath & City Financial 3 Wood Street Bath BA1 2JQ (01225) 475700

Bath Investment & Building Society is authorised and regulated by the Financial Services Authority. Our FSA Registration Number is 206026. The Bath Building Society Group includes Bath Property Letting Ltd and Bath & City Financial Ltd. Bath Investment & Building Society introduces business only to Bath & City Financial Ltd. Bath & City Financial Ltd is an Appointed Representative of City Financial Planning Ltd which is authorised and regulated by the Financial Services Authority.

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Bath Building Society - Annual Report & Accounts 2012  

The prolonged economic difficulties of the Eurozone and its banking system, to which the fortunes of the UK economy are strongly related, ha...