Onesav. Fix Sub Regulatory News (1SBA)

RNS Announcement

14 March 2014

OneSavings Bank plc

Financial results for the year ended 31 December 2013

OneSavings Bank plc ("OSB"), the specialist lending and retail savings group, announces its results for the year ended 31 December 2013.

 Financial highlights

§ Profit before taxation increased almost four-fold to £31.4m (2012: £8.1m1) despite prior year including one-off gains from negative goodwill

§ Net interest margin2 211bps (2012: 57bps) driven by higher margin new business and reduced funding costs

§ Loans and advances increased by 38% to £3,041m (2012: £2,196m)

§ Total assets £3,764m (2012: £3,009m)

§ Shareholders' equity3 £133.2m (2012: £93.9m1)

§ Return on equity4 more than doubled to 22% (2012: 9%1)

Operational/Corporate highlights

§ Margin improvement and cost discipline drive reduction in cost : income ratio2 to 38% (2012: 133%)

§ Net Promoter Score improved from 10.9% to 32.4%

§ Nine in ten maturing fixed-term savings balances retained

§ Strong loans to deposit ratio of 93% (2012: 79%)

§ Organic mortgage origination up by 121%

§ Purchase of former Northern Rock performing consumer loan pool supported by further £15m capital injection from JC Flowers

1 Restated due to a change in accounting policy for FSCS levies in light of IFRIC 21's interpretation of IAS 37

2 After deduction of coupons on perpetual subordinated bonds ('PSBs') classified as equity

3 Excluding £22m of PSBs classified as equity

4 Profit after taxation, less coupons on PSBs classified as equity, as a percentage of average shareholders' equity

Stephan Wilcke, Executive Chairman of OneSavings Bank, said:

"OneSavings Bank has just celebrated its third anniversary and I am delighted to say we are reporting on another year of growth and improved performance. This is a testament to the hard work of our executive team and all the staff of the business. In light of the progress made, the Board and our shareholders are considering an application to list on the London Stock Exchange. Under the UK Corporate Governance Code my current role is not classed as independent and a search is well-advanced to identify a new independent non-executive chairman".

Andy Golding, Chief Executive of OneSavings Bank plc, said:

"In 2013 we attracted more savers and borrowers whilst keeping costs well controlled and continuing to grow our net interest income. A strong performance in each of these key areas has produced a very significant improvement in the Group's underlying profitability compared with 2012 when our results benefited from a number of one-off items. I am particularly pleased that we have been able to generate a return on equity for our existing shareholders in excess of 20 per cent, which is an objective of the Group going forward. The profitability in 2013 enables us not only to continue to grow in the future as it increases our capital base, but also to ensure that our offering to customers really does provide value for money."

"Trading so far this year has surpassed management expectations. The strong upwards trend in applications and new mortgage completions we witnessed last year has been maintained. At the same time, funding costs have continued to fall, further expanding our net interest margin. We are confident that the Group can make further progress in 2014."

ENDS

Enquiries:

OneSavings Bank plc

Andy Golding, CEO t: 01634 888615

Brunswick Group t: 020 7404 5959

Michael Harrison / Robin Wrench / Craig Breheny / Simone Selzer

About OneSavings Bank plc

OneSavings Bank plc ('OSB') began trading as a bank on 1 February 2011 when the trade and assets of Kent Reliance Building Society ('KRBS') were transferred into the business. OSB is a specialist lending and retail savings group authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority.

OSB focuses on selected sub-sectors of the lending market in which it has established expertise, platforms and capabilities, and where opportunities have been identified for both high returns on a risk-adjusted basis and strong growth. These include Residential Mortgages (comprising first charge, second charge and shared ownership), Buy-to-Let/SME and Personal Loans. OSB originates organically through specialist brokers and independent financial advisors.

OSB is predominantly funded by retail savings originated through the established Kent Reliance franchise, which includes a network of branches in the South East of England, as well as online and postal channels. Diversification of funding is currently provided by a securitisation and OSB joined the Funding for Lending Scheme in early 2014.

Footnote:

The objective referred to above of achieving a return on equity in excess of 20 per cent going forward relates to the current financial planning cycle that lasts until the end of 2016. It does not represent any forecast, target or expectations as to future results or performance and there can be no assurance that the objective will be met.

OneSavings Bank plc

Strategic Report - Performance Highlights

For the year ended 31 December 2013

1 After deduction of coupons on perpetual subordinated bonds ('PSB's') classified as equity

2 Restated due to a change in accounting policy for FSCS levies in light of IFRIC 21's interpretation of IAS 37

3 Profit after taxation, less coupons on PSB's classified as equity, as a percentage of average shareholders' equity (£133.2m excluding £22m of PSB's classified as equity)

Strategic Report - Chairman's Statement

For the year ended 31 December 2013

2013 was an excellent year for OneSavings Bank plc ('OSB', the 'Bank' or the 'Group') as is clear from the greatly improved results with profit after taxation of £26.8m for the year generating a 22% ROE. These results, unlike those of 2012, do not include any one-off negative goodwill. Our organic brands are performing well with strong increases in origination volumes, and our inorganically acquired portfolios continue to perform ahead of expectation, including the Northern Rock consumer loan portfolio acquired in 2013 from UK Asset Resolution Limited.

This year, for the first time, we are providing a segmental breakdown in our annual accounts, as our business has grown. We have chosen to organise our segments around our customers: individuals borrowing against their own home are captured in the Residential Mortgages segment, whereas individuals and SMEs borrowing against property for investment or commercial purposes are classed as Buy-to-Let/SME*. The consumer loans portfolio is reported separately as a third segment, Personal Loans.

OSB celebrated its third anniversary on 1 February, 2014, although our savings franchise has mutual roots going back to the 1800s in Kent. We continue to nurture the longstanding Kent Reliance brand and savings franchise through a product approach which rewards customer loyalty rather than taking advantage of it, and a branch rejuvenation programme. The result is high customer satisfaction, continued customer loyalty and a low level of complaints.

On the lending side our access to capital from JC Flowers** has allowed us to be one of the few banks in the UK to grow rapidly, both organically and inorganically. It is pleasing that we have now reached a level of profitability and therefore organic capital generation that enables OSB to fund its ambitious growth plans without requiring further capital injections from JC Flowers.

The legacy issues of the old Kent Reliance Building Society are now substantially behind us. The accelerated work-out of the small concentrated legacy problem loan book has now reduced this to £43.8m, contributing to relatively high loan loss provisions in our BTL/SME* segment in 2013. The new business being written in this segment is very different in kind to these legacy loans, and their credit performance to date has been very pleasing. The low margin back book has been balanced by the purchase of long duration high margin run-off portfolios, all of which are performing better than expected at acquisition. Our business is now run by a management team led by Andy Golding with many years of operating experience in UK retail and SME lending and deposit taking, complemented by risk, credit, finance and compliance professionals from the likes of Goldman Sachs, Morgan Stanley, Oliver Wyman and the HMT Asset Protection Agency.

Andy Golding and his team should be justly proud of their achievements, and I want to thank all our staff for their valued contribution towards a record year.

Outlook and current trading

All our mortgage lending brands are continuing to grow their new originations as the economy is at last recovering and confidence is returning to our lending segments. While the Board does not expect any adverse economic developments in the near future, it is worth noting that we are entering 2014 with a very strong balance sheet.

The collateral quality of our lending is very high compared to the peers we benchmark ourselves against with a minimal proportion of mortgage assets on our balance sheet not covered 100% by property and very low exposures above 90% LTV.

In addition, the duration of our assets, and therefore our asset margins, is very long. Our profitability therefore has a significant recurring element, subject to our cost of funding. While deposits are still extremely expensive relative to LIBOR by long term historical standards, they have become cheaper over the past year, as the unprecedented deposit price competition between banks during the financial crisis eased once regulators decided that UK banks had amassed enough liquidity and could access cheap marginal liquidity through the Funding for Lending Scheme (FLS). The lowering of deposit pricing seen during 2013 is not yet fully reflected in our 2013 results as significant portions of our balance sheet are one and two year fixed-term deposits with a commensurate lag in re-pricing.

Consensus forecasts and guidance from the Bank of England point towards gently rising interest rates over the coming years. Historically, deposit rates have been above the Bank of England Base Rate when the latter was low, while generally being below the Base Rate when interest rates have been high.

Once interest rates start to rise, we expect history to repeat itself and deposit margins relative to LIBOR to normalise, boosting net interest margins across the banking system.

Stephan Wilcke

Chairman

*Small and medium enterprise**Funds advised by private equity firm J.C. Flowers & Co, LLP

Strategic Report - Chief Executive's Statement

For the year ended 31 December 2013

I am pleased to report on the OneSavings Bank plc group (the 'Group') accounts for 2013.

The performance highlights on page 3 reflect the Group's very strong performance in 2013, with significant improvement in all key measures. The Group is now profitable on a sustainable basis, thanks to the work we have undertaken to grow our balance sheet whilst maintaining rigorous control over our cost base.

In my 2012 report I talked about the recruitment I had undertaken in the year to bolster the senior management of the Bank. The focus on hiring quality people has continued during 2013, further strengthening the business in the areas of credit, technology, risk, compliance and human resources.

In market terms 2013 was without doubt a game of two halves. Less than 12 months ago the industry was discussing mortgage famine and the Government was announcing more and more ways to stimulate the housing market and in turn the economy. By quarter four the conversation had turned to housing market bubbles and a desire to reduce some of that stimulus to prevent the market from overheating.

During the year inflation returned to more acceptable levels, a new Governor at the Bank of England announced forward guidance on future triggers for interest rate rises and the Funding for Lending Scheme (FLS) had a major impact on the cost of retail funding as it pushed significant liquidity into the various mortgage markets.

It is clear that the economic environment will continue to shape the housing market and the landscape for savers, who are suffering with very low rates on all but the longest-term savings accounts. The continuing low interest rate environment, falling unemployment levels and the now evident economic recovery provide a challenging but different context in which to operate than has been present in recent years.

Despite the well-publicised operational, financial and reputational problems that a number of banks have encountered over the past 12 months, there is now evident political and regulatory warmth towards smaller or newer entrants to the financial landscape. This presents an opportunity for "challenger banks" such as OSB to offer quality products, flexibility and, most of all, a personalised service to help re-build trust and confidence in the UK's financial services sector. The Group's Board and I take this responsibility extremely seriously.

In this context the overall performance of the Group, of which financial results are just a part, is even more important. OneSavings Bank has a simple and transparent business model. We pride ourselves on our award winning range of retail savings products and our commitment to providing our depositors with long-term value for money - not the introductory bonus rates that fall away after an initial period, but accounts that can always be compared to current "best buy" offerings and leave our customers feeling reassured.

The funding we attract from savers through the Kent Reliance brand, enables the Bank to lend into a range of markets through the Group's various lending brands, helping homeowners and business customers with their mortgage and secured loan needs.

As I write this in early 2014, there is no doubt that the signs of economic improvement are stronger than they have been for many years now and it is against this backdrop that I present the balance of my report.

Retail Savings

The number of retail savings customers grew by over 9,000 in 2013.

Chart 1

http://www.rns-pdf.londonstockexchange.com/rns/3154C_1-2014-3-14.pdf

Savings balances increased over the year by £507m to £3,252m and the average balance increased by 11% per account.

Chart 2

http://www.rns-pdf.londonstockexchange.com/rns/3154C_1-2014-3-14.pdf

This is particularly pleasing given the backdrop of low rates for savers generally, and is a testament to our strategy of providing long-term value for money products. During the year Kent Reliance has been a regular sight in the national press best buy tables. In addition to our strategy of attracting new savers to the group, we have also worked hard on the retention offering for our existing savers, ensuring that what we offer existing customers is not only comparable with the best rates elsewhere, but in many cases better than our open market offering. During the year, this strategy helped us to retain 88% of maturing fixed term balances. This, together with successful efforts to spread bond maturities throughout the year, has enabled the Bank to manage its liquidity more effectively during the year.

This year more than ever I think it appropriate to refer to the difficult situation faced by many savers reliant on their interest to supplement income.

The Government's initiative the FLS was in existence for the entirety of 2013 with the stated intent of easing borrowing conditions to assist economic growth. The unforeseen consequence of the scheme has been a gradual reduction of retail savings rates across the board at a time of already historically low rates.

Whilst we are not large enough to ignore wider market pricing, we leveraged our strength to ensure that we have continuously offered leading or close to leading rates to our savers. This has resulted in inclusion in national best buy tables 11 out of 12 months during the year. Additionally we won Best ISA provider in the MoneyFacts awards 2013 for the consistency of our ISA offering.

This funding strategy complements our mutual roots, with a commitment to maintain our heartland branch network and, importantly, to play an active role in the communities we serve.

Loans to Customers

The lending performance of the Group and, most importantly, the consistency of this performance, is shown by the growth in overall loan balances year-on-year.

Chart 3

http://www.rns-pdf.londonstockexchange.com/rns/3154C_1-2014-3-14.pdf 

This growth has been achieved through a mixture of organic origination, and inorganically sourced loan portfolios. The Group increased total new lending by 58% during the year to £1,185m. Organic origination through Group brands, forward flow agreements and secured funding lines was up 121% to £794m whereas mortgage portfolio purchases reduced to £133m from £389m. In addition the Bank acquired a portfolio of consumer loans for £258m during the year.

Our Group-branded organic origination in the second half of 2013 generated returns on equity in excess of 40% in our Residential Mortgages and Buy-To-Let/SME segments based on our product pricing tools which take into account full loadings for cost, expected credit losses, CRD IV capital, and taxation.

Inorganically sourced loans represented 26% of the Group's loans and advances as at 31 December 2013 (2012: 23%).

The Group is a specialist mortgage lender focusing on markets often ignored by the larger banks and building societies or serviced by smaller lenders who display an inconsistency in terms of presence and product in such markets.

The Group operates under three segments:

Residential Mortgages

We increased our volume of organic residential lending in 2013 by 30% to £227m. Residential lending includes large mortgages for high net worth individuals, shared ownership loans to help people such as key workers get onto the property ladder and second charge mortgages through Prestige Finance (a platform we acquired in 2012) which offers an award winning range of specialist secured loans in the UK.

In addition we continued to make use of our balance sheet strength to acquire residential mortgage portfolios from other more constrained lenders, purchasing a number of portfolios for a total of £133m. With our experience in this arena we are able to ensure that the risk profile of the loans and the price we pay for them represents a strong contribution towards Group profitability and effectively provides us with an additional lending distribution channel.

Buy-to-Let/SME

Buy-to-let/SME has been a strong area of growth for the Group and will remain so in 2014. Organic origination increased three-fold to £567m during the year.

Demand for housing in the UK continues to increase, however, with the trend towards multiple-location living, coupled with the average age of the first-time home buyer on the increase, the private rented sector plays an important part in the housing supply chain.

Through Kent Reliance we specialise in lending to professional landlords with experience and in many cases extensive property portfolios. Our Interbay Commercial brand also provides buy-to-let loans, specialising in limited company buy-to-let, alongside its broader owner occupied and investor commercial mortgage offerings.

In December 2013 Heritable Development Finance Ltd ('Heritable') became part of the Group. Heritable will specialise in residential development finance for medium sized house builders to fund new developments. New housing starts in the UK are significantly below where they need to be to accommodate population growth and therefore this presents an opportunity to assist house builders and in turn the wider housing market.

Personal Loans

During 2013 the Group acquired the former Northern Rock performing consumer loan portfolio of c. 70,000 customers from UK Asset Resolution Limited. We are currently assessing the potential to offer new loans and further advances to these customers.

Credit Risk

Overall the credit quality of the Group's loan book improved during 2013.

The following graph shows the number of accounts 3 months or over in arrears in the back book inherited from KRBS prior to 2011.

Chart 4

http://www.rns-pdf.londonstockexchange.com/rns/3154C_1-2014-3-14.pdf

Loans written since the creation of the Bank in February 2011 continue to exhibit low arrears with only 19 accounts 90 days past due as at 31 December 2013.

For acquired books, 90 days past due levels are below initial forecasts. This reflects the Group's strong underwriting practices. Furthermore, the Bank is protected against losses by the fact that these assets have been bought at a discount to par.

OSB inherited a back book of loans from KRBS that included a number of legacy problem loans. These have been actively worked out as shown below.

Chart 5

http://www.rns-pdf.londonstockexchange.com/rns/3154C_1-2014-3-14.pdf 

Wholesale funding

Whilst the Group is committed to remaining a majority retail-funded mortgage lender, some diversification of funding is an important part of our overall funding strategy.

This provides longer-term funding than traditional retail savings and therefore enables us to manage our liquidity more efficiently.

Whilst we have demonstrated our ability to fund significant growth through retail deposits we took the decision in 2013 to complement this with some access to wholesale markets.

In October 2013, we successfully issued our first residential mortgage backed securitisation (RMBS), selling AAA and AA+ securities with a nominal value of £273 million which provided the Group with a diversified source of term funding at an attractive price. In January 2014 we also joined the Bank of England FLS and we have recently made our first drawdown of £98m under that scheme.

Financial performance

The Group's profit before tax increased 289% to £31.4m in 2013.

Chart 6

http://www.rns-pdf.londonstockexchange.com/rns/3154C_1-2014-3-14.pdf

The increase in underlying profitability in 2013 was even greater given the one-off negative goodwill of £17.6m in 2012 relating to company acquisitions in that year.

2013 saw the Group attract more savings and borrowing customers whilst keeping costs well controlled and focusing on continuing to grow our net interest income. A strong performance in each of these key areas has resulted in a significant growth in profitability.

This profitability enables us not only to continue to grow in the future as it increases our capital base, but also to ensure that our offering to savers and borrowers really does provide value for money for our customers.

We have maintained rigorous control over our cost base, despite investment in growth and capability. As a result our cost to income ratio has continued to improve and our management expense ratio has remained relatively steady.

Chart 7

http://www.rns-pdf.londonstockexchange.com/rns/3154C_1-2014-3-14.pdf

Chart 8

http://www.rns-pdf.londonstockexchange.com/rns/3154C_1-2014-3-14.pdf

The Group owns an offshore captive in India called EasiProcess. The Group staff based in Bangalore, access our network in the UK via secure links to undertake primary processing for the Kent Reliance and Jersey and Guernsey brands. Plans to extend the coverage to other brands are being developed.

This provides us with significant cost advantages over our competitors whilst giving the flexibility required to grow. Going forward this remains an integral part of our strategy.

Customers and Community

How our customers feel about the Group is something the Board and I take extremely seriously.

The Kent Reliance Provident Society, one of the Bank's parents, plays an important role for the Group. However its principal function is to act as the eyes, ears and voice of the Bank's customers and help us to shape our product and service offering in a way that meets the needs of both savers and borrowers.

The Society commenced this customer engagement process during 2013, recruiting active and interested customers to join management in a series of events, each one focused on learning how we can do a better job for our customer base as a whole. This is something that my entire team is behind, as we recognise that consumers have many choices and that communication is very much a two-way process. We have already started to implement changes recommended by our customers, including an IT project to improve our internet savings offering, which is targeted for launch mid-2014.

We track a number of customer satisfaction metrics including our Net Promoter Scores to understand how well we are doing and help identify areas for change.

We also track data for our key contact points such as our call centre and our branches and monitor trends carefully whilst seeking continuous improvement. I am pleased to say that we are tracking in the right direction, albeit at busy times we are still not perfect and further improvement work is scheduled for 2014.

The industry recognised metric for customer satisfaction is the Net Promoter Score (NPS), which at the year-end was +32.4%, up from 10.9% in 2012 with our branches scoring +47.2%. Our contact centre, based in India, registered an outstanding +17.1% NPS following significant investment in recruitment and staff training. 

The Society also administers a charitable programme including donations to the Kent Community Foundation and the Medway 100 Club. It also runs a monthly draw for members, with a £1,000 prize going to one member each month.

In addition to the Society's charitable efforts, the Bank made charitable donations of £21,330 during the year including support for the Charlton Athletic Community Trust, Kent Football Association County Cup, Demelza Hospice and KMFM Christmas Heroes during the year. On a national level, the Bank has also continued its support for Great Ormond Street Children's Hospital, through a co-branded savings offering under which the Bank has made commission payments to the hospital in excess of £50,000 over the past two years.

Any organisation is only ever as good as its staff. The culture we endeavour to create at OneSavings Bank is one of hard work, customer first, challenge and fun.

Our staff engage in a series of activities outside of work, from running half marathons and wearing "dotty" clothing to raise money for Demelza Hospice to attending children's Christmas parties at Great Ormond Street Hospital and collecting parcels for the Medway Foodbank. These things are important and help connect a business to the community.

We have again taken a lead role in the Kent Excellence in Business Awards, providing a judging team for the award for Business Commitment to the Community in 2013.

Our customers tell us how great our staff are and their feedback is much appreciated and I would like to thank on record all Group staff for their commitment and contribution.

Summary

I noted at the outset that 2013 was a strong year for OneSavings Bank.

We are committed to being a great provider of retail savings products and a specialist mortgage lender providing solutions to borrowers where other lenders either do not have the skill or the capacity to do so.

We want to be seen as specialist, flexible and most of all personal. While we are growing fast we are still small enough to engage with our customers and industry colleagues in a way that the largest providers simply cannot.

As we move into 2014, the economic environment appears to be improving, however we will not be complacent. Competition for business may well intensify and we never forget our customers have choice. Therefore we will maintain our focus on the right products, the right service and the right people, doing the right thing for our markets and our customers.

Andy Golding

Group Chief Executive

Strategic Report - Business Review

For the year ended 31 December 2013

Our Business

OneSavings Bank plc ('OSB', 'the Bank' or 'the Group') began trading as a bank on 1st February 2011 when the trade and assets of Kent Reliance Building Society ('KRBS') were transferred into the business. OSB is a specialist lending and retail savings group, authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority.

OSB focuses on specialist lending activities in selected sub-sectors of the market where it has established expertise, platforms and capabilities, and which offer risk adjusted high returns and strong growth opportunities. OSB's specialist lending segments include Residential Mortgages (comprising first charge, second charge and shared ownership), Buy-to-Let/SME and Personal Loans. Participation in these specialist lending segments requires bespoke underwriting, experienced teams and strong relationships with specialist distributors; capabilities firmly established at OSB.

OSB originates organically through specialist brokers and independent financial advisors (for Group branded products) as well as through forward flow agreements and secured funding lines (for third-party branded products). OSB has also demonstrated its capability and expertise to successfully and profitably source loan portfolios inorganically.

The Bank is predominantly funded by retail savings originated through the established Kent Reliance franchise. Diversification of funding is currently provided by a securitisation.

A robust risk management framework is in place to support OSB's current and envisaged future requirements. Back-office functions are largely performed by the Bank's own staff in India, providing a scalable low-cost operating platform that delivers a high quality of service.

Our Savings Franchise

OSB's savings franchise includes a network of branches in the South East of England, as well as online and postal channels, all supported by a low-cost offshore processing platform.

OSB offers a variety of fixed, notice, easy access and regular savings products, including ISAs, but has made a deliberate decision not to offer current accounts.

Consistent with its mutual heritage, OSB operates a savings product strategy which avoids the use of both 'introductory bonuses' in favour of long-term value for money rates and 'new-customer only' offers that could create barriers to customers moving their money around within the Bank.

Our Lending Franchises

OSB segments its lending by product, focusing on the customer's need and reason for a loan.

Residential Mortgages

The Residential Mortgages segment comprises lending to customers who live in their own homes, secured either via first or second charges against the residential home.

OSB originates organically in the UK and Channel Islands through specialist brokers. The Bank utilises the Kent Reliance brand in the UK for first charge mortgages, the Prestige brand for second charge mortgages and the Jersey Home Loan (JHL) and Guernsey Home Loan (GHL) brands in the Channel Islands for first charge mortgages.

Under the Kent Reliance brand in the UK, OSB distributes specialist first charge mortgages through specialised, typically London-based, brokers. These high margin products include bespoke residential and shared ownership mortgages.

Bespoke residential lending includes lending to high net worth customers, non-UK citizens resident in the UK, near-prime customers (including credit repair) as well as lending to fund self-build and insurance-backed high LTV new build properties, in partnership with builders.

Shared ownership comprises lending to borrowers who are buying a residential property in conjunction with a housing association. Through a mortgage protection clause in the shared ownership lease, the Bank is able to recover losses from the Housing Association's share of equity in the event that there is a shortfall on sale of the property.

The Bank's lending platform for second charge mortgages is Prestige, acquired by OSB in 2012. Prestige operates through broker intermediaries typically specialising in second charge mortgages and other Consumer Credit Act regulated products, and has dedicated interactive broker IT systems and underwriting processes.

Lending in the Channel Islands requires specialist local market knowledge due to the different risk characteristics, tax and legal frameworks. JHL and GHL are separate subsidiaries of OSB with underwriting and liaison with local Channel Island mortgage brokers both staffed out of the UK.

OSB also originates organically through third-party forward flow agreements (under which it agrees to purchase third-party branded mortgages originated to order based on pre-agreed lending criteria) and secured funding lines to other lenders (heavily over-collateralised by third-party branded mortgages and subject to strict criteria for individual underwriting of the underlying loans).

The Bank also sources loans through selective portfolio purchases (where it uses the Reliance Property Loans brand to interact with customers after purchase). These portfolios are serviced by specialist third-party servicers. The Bank also acquired the Prestige and Swingcastle (a sister company of Prestige) mortgage back books through its acquisition of those companies in 2012.

Buy-to-Let / SME

The Buy-to-Let / SME segment comprises secured lending on property for investment and commercial purposes. OSB originates Group brand Buy-to-Let ('BTL') mortgages in the UK and Channel islands via mainstream and specialist intermediaries. The Bank utilises the Kent Reliance brand in the main UK BTL market and the JHL and GHL brands in the Channel Islands BTL market. OSB also lends in the semi-commercial and commercial UK market through the Interbay brand.

BTL lending comprises residential investment property lending to prime credit quality borrowers, often professional landlords with established portfolios, or to high net worth clients looking to diversify their investments. OSB's specialist BTL products also include HMOs (homes in multiple occupation) student accommodation and loans to expatriates.

Interbay, a separate subsidiary group acquired in 2012, focuses on the commercial broker community, lending to customers with investment properties, semi-commercial (part residential and part commercial properties) or small commercial properties.

In December 2013, the Group established Heritable Development Finance Ltd with the former management team of the structured property finance unit of Heritable Bank Plc. OSB will provide development loans to small and medium sized developers of residential property in the UK through the Heritable Development Finance brand.

Personal Loans

This segment covers all of OSB's unsecured lending, which currently comprises the former Northern Rock performing consumer loan portfolio acquired from UK Asset Resolution Limited in 2013. These are seasoned performing unsecured loans serviced by a third-party servicer.

2013 Business highlights

OSB continued to make excellent progress during the year, significantly growing its balance sheet and profitability through a combination of high-margin organic origination and inorganic portfolio purchases. This new origination, together with the reduced cost of retail savings following the introduction of the FLS, further diluted the impact of the lower-yielding back book inherited from KRBS, increasing net interest margin ('NIM') more than three-fold compared to the prior year.

Total new lending was £1,185m in 2013 (2012: £749m).

Organic mortgage origination in 2013 was up 121% to £794m driven by higher volumes in both the Residential Mortgages and Buy-to-Let/SME segments, and ended the year with a very strong pipeline.

During the year the Bank purchased additional mortgage portfolios for £133m with a gross value of £182m (2012: £389m and £472m respectively including books acquired through company acquisitions). The substantial purchase discounts which are recognised through interest income over the life of the mortgages provide the Group with significant credit loss protection.

In addition, the Bank purchased the former Northern Rock performing consumer loan pool from UK Asset Resolution Limited in July 2013 at a discounted price of £258m securing an additional £15m capital injection from OSB Holdco Ltd, one of its shareholders, to help support the purchase. These are high-margin, seasoned, performing unsecured loans which have to date performed better than originally expected.

The Bank completed its inaugural mortgage backed securitisation, Rochester Financing No.1 Plc ('Rochester') in October 2013. The transaction provided funding diversification, reducing the Bank's reliance on retail savings at a comparable cost and established OSB's capability in the securitisation market. The securitised mortgages were originated through portfolio purchases and a forward flow agreement and are serviced by a third party. Rochester issued Investment Grade rated notes corresponding to 86.5% (4.5% cash reserves) of the nominal value of the mortgages, validating the credit quality and performance of the underlying assets. Securities (AAA and AA+ rated notes) with a nominal value of £273m were sold, raising secured term funding for the Group. OSB retained the remaining notes and residual certificate and as such did not transfer substantially all of the risks and rewards of the securitised mortgages. These mortgages therefore remain on the Bank's balance sheet and OSB consolidates Rochester Financing No.1 Plc.

Financial review

Summary financial information and key performance indicators

1 Including depreciation and amortisation

2 Net interest income, less coupons on perpetual subordinated bonds ('PSB's') classified as equity, as a percentage of average interest bearing assets

3 After deduction of coupons on PSB's classified as equity

4 Including full year earnings

5 Restated due to a change in accounting policy for FSCS levies in light of IFRIC 21's interpretation of IAS 37

6 Certain fee income and expense that forms an integral part of the effective interest rate of loans and advances previously reported in fees and commissions receivable and payable in 2012 has been reclassified to interest receivable and similar income

Strong profit growth

The Group reported very strong profit growth with profit before taxation of £31.4m for the year (2012: £8.1m). In comparison to 2012, this did not include any exceptional negative goodwill (2012: £17.6m) or gain on sales of financial instruments (2012: £2.9m).

Profit after taxation for the year of £26.8m also benefited from the recognition of a deferred tax asset of £4.7m in respect of trading losses in the Interbay Group, which resumed lending in late 2012 after its acquisition by the Bank, and which saw rapid growth in pipeline and completed loans during the year.

Net interest margin

The Group showed very strong growth in its net Interest margin ('NIM') during the year reporting net interest income of £70.8m (2012: £16.2m) and NIM of 211bps (2012: 57bps). The NIM improvement reflects the positive impact of organic origination and inorganic portfolio purchases in 2013 and the full year's impact of new lending in the prior year, all of which provided the Group with higher returns than the low yielding back book. In addition, the cost of retail funds continued to fall during the year as competition declined as a result of the Funding for Lending Scheme.

Net fees and commission expense

Net fees and commission expense increased by £0.1m to £1.0m in 2013 primarily due to higher commission payable to one of the Bank's parents, Kent Reliance Provident Society ('KRPS'), for running a number of branches for the Bank on an agency basis, partially offset by the impact of a full year's worth of servicing fee income in the Prestige Group acquired in 2012. The increase in KRPS commission was due to a one-off charge of £0.7m in December 2013 when the Bank bought out the agency agreement. The branches are now directly managed by the Bank and KRPS is focused principally on customer engagement on behalf of the Group.

External servicing fees

External servicing fees increased by £1.9m to £3.5m in 2013 due to the additional portfolio purchases and mortgages originated under forward flow agreements, all of which are serviced by specialist third-party servicers.

Efficient and scalable operating platform

Administrative expenses including depreciation were up 27% to £24.5m for the year (2012: £19.3m) reflecting the growth in the business, the demands of new regulations, enhancements to the resilience of the Bank's IT infrastructure and upgrades to the Bank's mortgage origination technology. Administrative expenses in 2013 also included a full year of costs for the subsidiary groups acquired in 2012. Average headcount for the Group increased to 342 (2012: 291).

The Group's management expense ratio was 0.72% for the year (2012: 0.72%) and its cost: income ratio fell to 38% (2012: 133%) reflecting the Bank's continued focus on cost control as it grows.

Regulatory provisions

Regulatory provisions, which are primarily in respect of FSCS levies, increased to £2.2m for the year (2012 restated: £0.9m) primarily reflecting the new levy to recover the estimated shortfall on capital loans.

The Bank changed its accounting policy for FSCS levies during the year in light of IFRIC 21's interpretation of IAS 37 published on 20 May 2013 resulting in a restatement of FSCS levies for the prior year. Further details are set out in Note 33 to the financial statements.

Impairment losses

Impairment losses increased to £7.3m in the year (2012: £5.3m) reflecting the accelerated workout of the legacy problem loan book inherited from KRBS and prudent collective provisions on the consumer loan pool purchased from UKAR as a performing book during the year which were more than covered by the purchase discount.

Strong balance sheet growth

Loans and advances grew by 38% during the year to £3,041m due to the new organic origination and inorganic portfolio purchases during the year. Total assets grew by 25% reflecting the increase in loans and advances, offset by a reduction in liquid assets due to improved efficiencies.

Liquidity

OSB operates under the PRA's Individual Liquidity Adequacy Assessment (ILAA) regime. The Bank operates within a target liquidity runway in excess of the minimum regulatory requirement. The Bank is now able to manage its liquidity more efficiently having successfully spread savings maturities throughout the year and demonstrated a strong retention track record with an average retention rate of 88% on bond maturities during the year. The Group's liquidity ratio as at 31 December 2013 was 17.9% (2012: 25.4%) and was within its current target liquidity range of 17% to 20% of liabilities.

Capital

The Bank's Core Tier 1 and Total Capital ratios as at 31 December 2013 were 9.3% and 13.5% respectively (31 December 2012: 8.5% and 14.3%). Further details on capital management are provided in note 31 to the financial statements.

Impact of CRD IV

The PRA issued Policy Statement PS7/13 in December 2013 containing the final rules and supervisory statements implementing the Capital Requirements Directive (2013/36/EU) (CRD) and the Capital Requirements Regulation (575/2013) (CRR), jointly CRD IV, effective from 1 January 2014.

The primary impact of CRD IV as implemented by PS7/13 on the Bank's current capital position is the requirement to deduct the Bank's deferred tax asset ('DTA') in full from Core Tier 1 ('CT1') capital. The DTA was previously 100% risk weighted.

The Bank has received legal advice that its perpetual subordinated bonds ('PSB's') should remain eligible as Tier 2 capital under CRD IV as there is no incentive to redeem them. This is because at the time of issue in 2011 the interest rate reset included in the conditions attaching to the PSB's implied a step-down on a call.

A portion of the Bank's other subordinated debt is not eligible as Tier 2 capital under CRD IV but is eligible for grandfathering and as such will be phased out at 10% pa under the grandfathering rules.

In addition, CRD IV transitions in a Capital Conservation Buffer ('CCoB') of 2.5% of risk weighted assets ('RWA's') between 2016 and 2019 to replace the current Capital Planning Buffer.

The primary impact of CRD IV on the Bank's risk weighted assets is an increase in the risk weighting for BTL mortgages in the Channel Islands (which are not part of the EU) and a decrease in risk weightings for SME exposures due to the SME support factor introduced by CRD IV to encourage SME lending.

Segmental Business and Financial Review

The following table shows the Group's loans and advances and contribution to profit by segment*:

Residential Mortgages

This segment comprises lending to customers who live in their own homes, secured either via first or second charges against the residential home.

During the year the Group increased its volume of organically-originated residential lending to £227m (2012: £175m). This included completions under Group brands (which ended the year with a very strong pipeline), as well as completions under uncommitted funding lines to two established lenders (a second charge lender and a bridge lender) and two third-party forward flow agreements.

During the year the Bank purchased residential mortgages though a number of portfolio purchases for £133m with a gross value of £182m (2012: £338m and £419m respectively including the mortgages acquired through the Prestige acquisition). The substantial purchase discounts which are recognised through interest income over the life of the mortgages provide significant credit loss protection.

OSB's total residential loan portfolio grew during 2013, ending the year with a net carrying value of £1,761.6m (2012: £1,611.9m).

New organic origination and inorganic portfolio purchases since 2011 have helped dilute the impact of the low-yielding back book and the residential portfolio made a contribution to profit of £37.8m (2012: £8.6m).

The Residential Mortgages segment's contribution to profit on a pro-forma basis, excluding impairment losses of £1.0m (2012: £0.2m) on the ring-fenced legacy problem book inherited from KRBS was £38.8m in 2013 (2012: £8.8m).

Buy-to-Let/SME

This segment comprises secured lending on property for investment and commercial purposes.

During the year, the Group significantly increased its volumes of new lending in this segment originating £567m of new organic lending under its Kent Reliance, Interbay, GHL and JHL brands (2012: £185m). This included strong growth in Buy-to-Let ('BTL') lending in the UK particularly in London and the South East through the Kent Reliance brand.

The Interbay Group, which resumed SME lending in late 2012 after its acquisition by the Bank, also saw rapid growth in pipeline and completed loans during the year. The Group acquired Interbay's back book of loans in 2012 with a fair value of £51m and a gross value of £53m.

OSB acquired the operating infrastructure, systems and staff of Heritable Partners Ltd in December 2013, ending the year with a pipeline of development finance lending for completion in 2014. Heritable Partners Ltd was established in 2012 by the former management team of the structured property finance unit of Heritable Bank Plc to work out and recover the structured property finance loan book of Heritable Bank which went into administration in 2008, following the failure of its Icelandic parent bank, Landsbanki. The team have a long and proven track record in the development finance market.

OSB's BTL/SME loan portfolio grew during 2013, ending the year with a net carrying value of £1,076.5m (2012: £584.1m).

New origination since 2011 has helped dilute the impact of the low-yielding back book and the BTL/SME segment made a contribution to profit of £12.0m in 2013 (2012: loss of £0.8m).

The Buy-to-Let/SME segment's contribution to profit on a pro-forma basis, excluding impairment losses of £3.1m in 2013 (2012: £2.9m) on the ring-fenced legacy problem book inherited from KRBS was £15.1m in 2013 (2012: £2.1m). Loan losses on this book reflect the accelerated workout of the book.

Personal Loans

OSB acquired the performing former Northern Rock consumer loan portfolio from UKAR in July 2013 for £258m. This portfolio of high-margin, seasoned, performing loans currently represents OSB's only unsecured lending. The portfolio which was purchased at a discount has a net carrying value after collective provisions of £203.2m as at 31 December 2013. The portfolio made a contribution to profit of £8.3m in 2013.

Principal risks and uncertainties

The Group considers a range of stress scenarios as part of its business planning and risk management. The principal risks facing the Group include credit, interest rate, liquidity, operational and conduct risk. A more detailed review of these risks and others faced by the Group and the actions taken to mitigate them are set out in the Risk Management Report on pages 26 to 31.

Key market and economic factors affecting the business

The mortgage market showed signs of recovery in 2013 with rising House Price Indices ('HPI') and government stimulus in the form of the FLS and Help-to-Buy Scheme, but is still some way from returning to pre-crisis lending levels. The savings market remains uncertain as household incomes continue to be squeezed due to slow economic growth, government spending cuts and limited wage growth. Competition for retail savings declined following the introduction of the Funding for Lending Scheme, significantly reducing rates, and narrowing the spread between retail savings rates and LIBOR. This tightening helped improve profitability by reducing the strain from the Bank's low-yielding back book. The spread remains high compared to historical levels and should narrow further when interest rates start to rise.

Inflation (CPI) finished the year at the Bank of England's ('BoE') target level of 2%, relieving pressure on the BoE to raise interest rates despite recent increases in HPI. Unemployment levels also fell during the year from a high of 7.9% to 7.2% in December. The market is predicting the first BoE rate rise in the first half of 2015, although the BoE has indicated that it will not raise rates until further spare capacity within the economy is absorbed and even then the rates are expected to rise only gradually.

The economic recovery characterised by strong GDP growth, rising HPI and low inflation and falling unemployment should lessen the impact of rising interest rates on affordability and repossessions. In addition, when underwriting new lending, the Bank uses stressed interest rates when assessing affordability.

The strategic report on pages 3 to 23 was approved by the Board of Directors and signed on behalf of the Board.

Stephan Wilcke

Chairman

13 March 2014

Directors' Report

For the year ended 31 December 2013

The Directors present their report and accounts for the year ended 31 December 2013. The Group made a profit after taxation of £26.8m (2012: £9.1m).

Principal activities

OneSavings Bank plc ('OSB' or 'the Bank' or together with its subsidiaries, the 'Group') began trading as a bank on 1 February 2011 when the trade and assets of Kent Reliance Building Society ('KRBS') were transferred into the business.

OSB is a specialist lending and retail savings group, authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority.

See Business Review on pages 15 to 23 for further details.

Financial risk management objectives and policies

OSB has formal structures in place to monitor, report upon and manage the risks associated with the activities of the Group. Further details are set out in the Risk Management Report on pages 26 to 31. The financial instruments used by the Group to manage the structure of its financial position and to mitigate risks are disclosed in note 29 to the financial statements.

Charitable donations

Charitable donations made during the year amounted to £21,330 (2012: £2,870). The Group has made donations to various Kent charities. No political donations were made during the year (2012: £nil).

Directors

The full list of Directors serving on the Board during the year to 31 December 2013 was as follows:

R Duke (Independent Director and Chair of the Risk Committee)

A Golding (Chief Executive)

T Hanford

M McCaig (Chairman of the Audit Committee)

Sir C McCarthy

D Mills (Senior Independent Director)

Dr D Morgan

A Talintyre (Finance Director)

S Wilcke (Executive Chairman of the Board)

P Williams (Resigned 31 December 2013)

Going concern

In preparing the financial statements the Directors must satisfy themselves that it is reasonable for them to consider whether it is appropriate to adopt the going concern basis.

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Projections for the Group have been prepared covering its future performance, capital and liquidity for a period in excess of 12 months from the date of approval of these accounts including stress scenarios. These projections show that the Group has sufficient capital to continue to meet its regulatory capital requirements as set out by the Prudential Regulation Authority. Therefore, the going concern basis of accounting has been used to prepare the financial statements.

Auditors

Our auditors, KPMG Audit Plc has instigated an orderly wind down of business as part of a simplification of their corporate structure and is not seeking reappointment. The Board has decided to put KPMG LLP forward to be appointed as auditors and resolution concerning their appointment will be put to the forthcoming AGM of the Bank.

On behalf of the Board

Stephan Wilcke

Chairman

13 March 2014

Risk Management Report

For the year ended 31 December 2013

Introduction

A core objective for the Group is the effective management of risk in order to protect depositors, borrowers and shareholders, and to ensure that the Group at all times has adequate capital and liquidity resources.

The principal risks facing the Group are as discussed in this section: credit risk, market risk (including interest rate risk), liquidity risk, operational risk and conduct risk with some ancillary risks including regulatory risk and taxation risk. The Group's Chief Risk Officer is responsible for ensuring each risk is adequately identified, monitored, managed and/or mitigated.

Over the course of 2013 the risk profile of the Group and its ability to control and manage risk has evolved favourably in many aspects. The improved financial performance of the Group is an important factor as it allows the bank to continue along its fast growth trajectory whilst maintaining robust capital levels. Some further highlights are listed below:

·  Balances 3+ months in arrears make up 1.6% of the originated book (excluding legacy problem loans) at end-2013, down from 2.2% at end-2012.

·  Balances 3+ months in arrears make up 7.8% of the acquired books at end-2013, down from 11.0% at end-2012, and with acquired portfolios performing favourably to forecasts made at the time of acquisition. Average LTV (excluding Personal Loans) was 57.8% on a look-through basis (based on carrying value after purchase discount/premium and impairment provisions), providing significant credit protection.

·  Legacy problem loans have been reduced to £43.8m at end-2013, which is down from £65.2m at end-2012.

·  Interest rate and basis risk were managed well within Board-approved limits during 2013 with enhanced measurement of interest rate risk implemented to account for non-parallel movements of the yield curve.

·  Liquidity forecasting and management improved enabling the Group to manage liquidity more efficiently, adjusting more quickly to changing liquidity needs and market conditions.

·  The launch of the Group's inaugural securitisation raised £273m of term funding and diversified the Group's sources of funding.

·  A web based operational risk management system was rolled out to all staff improving the Group's ability to capture information about operational incidents and informing process enhancements.

The following section provides an overview of the Group's risk management framework followed by a more detailed discussion of the key risks facing the Group and how these risks are managed.

Risk Management Framework 

The Board is responsible for ensuring that an effective risk management framework is in place. The risk management framework consists of five key components:

1. Strategy and Risk Appetite: The Board's articulation of strategic intent and risk appetite, complemented by targets and risk limits set by executive management.

2. Organisation: Clear roles, responsibilities, reporting lines, committees and mandates.

3. Policies and Procedures: A comprehensive set of risk policies, processes and control procedures.

4. Reporting and Analytics: Comprehensive and timely management reporting of risk exposures.

5. IT, Systems and Data: Robust IT systems and data quality.

To support the risk management framework, the Group operates a "three lines of defence" model:

·  The first line of defence comes through the operational management in the business, which maintains appropriate systems and controls on a day-to-day basis.

·  The second line of defence comprises risk and compliance as well as the governance and oversight carried out by the committees shown in Figure 1.

·  The third line of defence is independent review, challenge and assurance. This is provided by internal audit and the external audit assurance reviews. Assurance reporting is provided to the Audit Committee.

The Group's risk committee structure ensures proper governance and oversight and is illustrated in Figure 1.

Figure 1: Risk oversight and committee structure

* A sub-committee of the Operations Committee

Inorganic growth, through acquisition of both mortgage portfolios and whole secured lending businesses, is an important part of the Group's strategy. Reflecting this and as shown in the preceding diagram the Group has established an Executive Mergers and Acquisitions Committee (EMAC), which meets regularly to coordinate internal stakeholders, ensure due diligence covers all relevant aspects and oversee delivery of integration plans for completed deals. EMAC is chaired by the Chief Risk Officer.

Credit risk

Credit risk is the risk that losses are incurred as a result of the Group's borrowers or market counterparties failing to meet their obligations. The Group's exposure to retail and commercial credit risk is managed by the Credit Committee which reports to the Executive Committee and the Risk Committee. The Group's exposure to wholesale and counterparty credit risk is managed by the Asset and Liability Committee (ALCO) which reports to the Risk Committee and the Board.

Retail and wholesale credit risk

Credit risk is managed within the Group's underwriting process, which seeks to ensure that borrowers only take on debt that they can afford to repay, safeguarding both the borrower and the Group. On occasions, borrowers find themselves in financial difficulties which impact their ability to meet their mortgage or loan service obligations. The Group has established procedures to manage such situations to a satisfactory conclusion, which adhere to the principle of treating customers fairly. Usually this involves working with the borrower to clear arrears or making other arrangements commensurate with the borrower's circumstances. In some cases where the situation deteriorates significantly and irreparably, the Group takes legal action to gain possession or control of the underlying security.

In situations where the Group determines that it is appropriate in order to meet borrower needs, it applies a policy of forbearance and may grant a concession. The Group considers forbearance on a case-by-case basis. This may arise where the Group considers that the financial stress of the customer is temporary and potentially recoverable. Such a concession, which will only be implemented after obtaining the borrower's consent, may involve capitalisation of arrears, temporary or permanent conversion to an interest only repayment basis, a reduced monthly payment or a mortgage term extension. By dealing with arrears at an early stage and monitoring continuously, it is anticipated that a lower level of long-term arrears will be achieved, resulting in a more favourable outcome for both the customer and the business. Forbearance measures are considered in the review of loan impairment provisions. Table 1 summarises forbearance measures taken. There is a total collective provision of £50,164 on these accounts and no specific provisions.

Table 1: Forbearance measures undertaken during the financial year (balances 31 December 2013)

The six accounts on which the group assisted in voluntary sale of property carried a balance of £331,747 before the sale.

Wholesale and counterparty credit risk

Wholesale and counterparty credit risk arises from the risk that counterparties will be unable to repay loans and other financial instruments that the Group holds as part of its liquidity portfolio or for hedging purposes. This risk is managed by restrictions on the type of assets held, assessment of the creditworthiness of counterparties, maintenance of exposure limits with each counterparty, sector limits and collateral posting for derivatives and repo transactions. The Group has no exposure to the countries most affected by the Eurozone crisis (i.e. Portugal, Ireland, Italy, Greece and Spain). The Group has limited exposure to emerging markets (Indian operations) and non-investment grade debt.

The Group's exposure to wholesale and counterparty credit risk is centrally managed by Treasury and overseen by ALCO, which reports to the Risk Committee and the Board. This includes the Group's exposure undertaken by the subsidiary companies and the Rochester Financing No1 PLC securitisation vehicle.

Further analysis of the Group's exposure to credit risk is provided in note 29 to the accounts.

Market risk (including interest rate risk)

Market risk is the risk of an adverse change in Group income or the Group's net worth arising from movement in interest rates, exchange rates or other market prices. Market risk exists, to some extent, in all of the Group's businesses. The Group recognises that the effective management of market risk is essential to the maintenance of stable earnings and preservation of customer value.

The primary market risk faced by the Group is interest rate risk. Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. It is most prevalent in mortgage lending where fixed rate mortgages are not funded by fixed rate deposits of the same duration, or where the fixed rate risk is not hedged by a fully matching interest rate derivative.

The Group 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 Group manages its interest risk exposure on a continuous basis through the use of derivatives within limits set by the ALCO and the Board.

The secondary market risk faced by the Group is basis risk. Basis risk arises when the Group finances an asset with a liability that re-prices from a different interest rate index. The Group manages this exposure on a continuous basis within limits set by the ALCO. The Board-approved risk appetite limits for interest rate and basis risk are reviewed annually through the ICAAP process.

The Group holds Treasury assets that are classified as 'available-for-sale' and valued monthly, with the fair value recognised in the separate Available-for-Sale Reserve Account in accordance with accounting standards.

Further analysis of the Group's exposure to interest rate risk is provided in note 29 to the accounts.

Liquidity risk

Liquidity risk is the risk of having insufficient liquid assets to fulfil obligations as they become due or of the cost of raising liquid funds becoming too expensive.

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

In October 2013 the Group securitised c. £400m of mortgage assets that it had acquired from third parties between 2011 and 2013. The Group retained all but the most senior tranches and therefore continues to bear the economic risk associated with the mortgages and consolidates the securitisation special purpose vehicle onto its balance sheet for Group accounting purposes. At inception the securitisation raised £273m of amortising term funding, which has therefore significantly diversified the Group's sources of funding.

Liquidity management is governed by the Treasury Policy, which is developed, implemented and monitored by the ALCO, which also sets limits over the level and maturity profile of wholesale funding and monitors the composition of the Group balance sheet. A series of liquidity stress tests are performed daily to confirm that the limits are not at risk of being breached. Day-to-day management is delegated to the Treasury function. The Group conducts at least annually a detailed assessment of its liquidity risk known as the Internal Liquidity Adequacy Assessment (ILAA), which is approved by the Board.

Further analysis of the Group's exposure to liquidity risk is provided in note 29 to the accounts.

Operational risk

Operational risk, which is inherent in all business activities, is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, or systems or from external events. It can occur in any of the Group's businesses and includes errors, omissions, natural disasters and deliberate acts such as fraud. The Group manages this risk within an overall governance and control strategy. Within this structure, risk exposures are assessed to determine the appropriate controls to be applied. It is recognised that such risks can never be entirely eliminated and that the cost of controls to minimise these risks may outweigh the potential benefits. However, where appropriate, the Group continues to invest in risk management and mitigation such as business continuity management and incident management. Each business area or function has appointed an operational risk champion who is responsible for the day-to-day identification and reporting of operational incidents and regularly undertaking a forward-looking risk assessment. The Operational Risk Committee is responsible for the development, implementation and monitoring of the Operational Risk Policy.

Conduct risk

Conduct risk relates to the risk that a firm's culture, organisation, behaviours and actions result in poor customer outcomes and customer detriment. Conduct risk can arise across all aspects of the Group's operations including pre-sale, sale processes, post-sale processes and governance and control. The conduct regulatory environment changed significantly during 2013 with the transition to the FCA. Conduct risk has become the subject of increased scrutiny. Firms are expected to demonstrate that their conduct and culture result in appropriate and fair outcomes for their customers.

Conduct risk is a priority for the Group. We seek first to avoid conduct risk by putting customers at the heart of everything we do, and ensuring that the Group's culture reflects this. In addition we seek to manage the conduct risk which is inescapable, and have increased the resources we devote to this.

OSB is developing a robust, group-wide, conduct risk framework consisting of appropriate control, monitoring, policies and standards, which support fair and appropriate outcomes for customers by increasing our ability to manage conduct risks both in terms of identifying and mitigating emerging conduct risks and dealing with any customer detriment that may occur in a timely, fair and proportionate way. The framework is designed to cover all aspects of the product life-cycle, and past, current and future customer groups.

Regulatory risk

Regulatory risk is the risk of regulatory changes and enforcement, with the potential for fines and/or restrictions in business activities. Over recent years the financial services industry has seen increased regulatory scrutiny and supervision around governance, capital, liquidity and remuneration. There has also been focus on conduct and treating customers fairly. The Group regularly engages with the PRA, FCA and other industry bodies to proactively manage this risk.

Taxation risk

Taxation risk is the risk associated with changes in taxation law or in the interpretation of taxation law. It also includes the risk of changes in taxation rates and the risk of failure to comply with procedures required by taxation authorities. Failure to manage taxation risks could lead to an additional taxation charge.

Internal control

The internal control processes and effectiveness are reviewed by the Board, executive management, and the Bank's internal audit team.

Capital management

The Basel Committee on Banking Supervision introduced the Basel II and III framework for determining minimum capital and liquidity requirements, the definition of capital resources and other matters related to improving the resilience of the global financial system and to ensure a level playing field across the industry. The CRD IV package which transposes - via a Regulation and a Directive - the new global standards on bank capital (commonly known as the Basel III agreement) into the EU legal framework, entered into force on 17 July 2013.

The regulatory framework encourages a risk-based approach to determining capital adequacy. By adopting more sophisticated analytical approaches, financial institutions may be able to carry less regulatory capital for credit and operational risk. The Group has calculated its Pillar 1 minimum credit risk capital requirement based on the Standardised Approach and the minimum operational risk capital requirement using the Basic Indicator Approach.

The Group conducts at least annually a detailed assessment of its capital and financial resources, known as its Internal Capital Adequacy Assessment Process (ICAAP), which is approved by the Board. An analysis of the components of the Group's capital is provided in note 31 to the accounts.

Rod Duke

Chairman of the Risk Committee

Corporate Governance Report

For the year ended 31 December 2013

Introduction

OneSavings Bank plc ("the Bank" or "Group") is a specialist lending and retail savings group. The Bank does not have an equity listing on the London Stock Exchange and therefore the UK Code of Corporate Governance does not apply in full to the Bank. However, the Bank remains committed to the achievement of high standards of corporate governance which it considers to be central to the effective management of the Group and to maintaining the confidence of its stakeholders. The Board therefore considers the UK Code on Corporate Governance to be a useful guide to achieving the high standards it aspires to and applies the Code in a proportionate manner, taking into account its various shareholders interests.

The Board of Directors

During the period of these accounts, the Board comprised the Chairman, two Executive Directors (A Directors), two independent Non-Executive Directors, three Non-Executive Directors appointed by OSB Holdco Ltd (B Directors) and two Non-Executive Directors appointed by KRPS (A Directors). P Williams (an A Director) retired from the Board on 31 December 2013.

The structure of the Board ensures that the Board as a whole has a deep understanding of the views of its shareholders.

The Board meets formally monthly (with the exception of July and December in 2013), with ad-hoc meetings called as and when circumstances require. There is an annual calendar of agenda items to ensure that all matters are given due consideration and are reviewed at the appropriate point in the regulatory and financial cycle.

The Board is responsible for setting the strategy for the Bank along with establishing the Bank's risk appetite and balance sheet strategy. The Board is also responsible for ensuring that there are appropriate financial and business systems and controls in place to safeguard the interests of the Bank's stakeholders. The Board is also responsible for ensuring the Bank's continuing commitment to carrying out its business fairly, honestly and openly, with a commitment to zero tolerance towards bribery.

The Board's Terms of Reference include a schedule of Matters Reserved for the Board which has formally delegated authority to a number of committees, which are constituted under Board approved terms of reference. Day-to-day management of the business has been delegated to the Chief Executive Officer through the Executive Committee.

The Board has oversight of how management implements the strategy and retains control through challenge at the Board and committee meetings. All Board members receive accurate, timely and clear information to enable them to make an effective contribution to Board discussions. The scope and nature of such information is reviewed on an ongoing basis to ensure that it remains relevant and concise.

Directors have access to the advice and services of the Company Secretary, whose appointment is a matter for the Board and who is responsible for ensuring Board procedures are followed and for advising the Board, through the Chairman, on matters relating to governance.

Board and Board Committee attendance record

A table showing attendance at scheduled meetings is shown below. Against each Director's name is shown the number of meetings he or she attended in the year to 31 December 2013. The number in brackets is the maximum number of scheduled meetings that the Director was eligible to attend.

Board balance and independence

The Board consists of the Chairman, two Executive Directors and seven Non-Executive Directors, two of which were considered by the Board to be independent in accordance with the criteria of the UK Code on Corporate Governance during the period, R Duke and D Mills. The size and composition of the Board is kept under review to ensure an appropriate balance of skills and experience is represented on the Board. Non-Executive Directors play a vital role in challenging and helping develop strategy, while providing independent judgement, experience and knowledge.

In addition to his responsibilities as Chairman, S Wilcke is the Bank's executive lead on mergers and acquisitions activity.

The Board appointed D Mills to fulfil the role of Senior Independent Director.

Chairman and Chief Executive

The roles of Chairman and Chief Executive are held by different persons and their respective purposes are clear and distinct. The role of each is set out in their contracts and further detailed in the Governance Manual. The Chairman is responsible for leading the Board and ensuring it acts effectively and communicates with shareholders; the Chief Executive has overall responsibility for managing the Group and for implementing the strategies and policies agreed by the Board. The Chairman is elected by the Board and the Board is satisfied that during the period the Chairman was able to commit sufficient time to the Bank.

Appointments to the Board

Page 24 of the Directors' Report details the appointments to and resignations from the Board.

The Board has a Nominations Committee to lead the process for Board appointments and succession planning. At least annually the Committee reviews the structure, size and composition of the Board to ensure that it contains the required balance of skills, knowledge and experience relevant to the business. The Nominations Committee is also responsible for assessing potential Executive candidates identified by the CEO.

When searching for suitable Board candidates, the Nominations Committee will have regard to the existing skills matrix of the Board and look for candidates whose skills complement and enhance those already in place. The Nominations Committee will also have regard to the benefits of having a diverse Board, both in terms of ethnicity and gender. All Directors must meet the PRA's fit and proper standards and be registered with the PRA as an approved person to carry out the Controlled Function of a Director. Candidates for Board positions are identified in a number of ways, including the use of external search consultants and, where appropriate, open advertising.

Re-election

Directors are required to submit themselves for re-election at the first Annual General Meeting after their appointment and at least once in every three years thereafter. Succession planning for both Executive and Non-Executive members is reviewed and updated annually.

Performance evaluation

The Board undertakes an annual evaluation of its own performance and that of its Committees and individual Directors. Individual Non-Executive Directors are assessed on a one to one basis by the Chairman. The Chairman evaluates the Chief Executive's performance and the Senior Independent Director evaluates the Chairman's performance.

Board committees

The Board has established a number of committees with their own terms of reference, which are reviewed at least annually. The principal Board committees are set out below.

• The Audit Committee, chaired by M McCaig, met quarterly to consider all Group audit matters, the systems of internal control, financial reporting and whistle blowing.

• The Risk Committee, chaired by R Duke, met monthly or as required to monitor the Group's overall exposure to risk. It oversaw the identification and management of risks across the Group and the monitoring of operational, credit, liquidity and market risks.

• The Remuneration Committee, chaired by T Hanford, considered the Remuneration Policy and individual awards to Executive Directors and Senior Management.

• The Nominations Committee, chaired by D Mills, was responsible for keeping under review the size, structure and composition of the Board; nominating candidates to fill Board and Executive vacancies, taking into account the balance of skills, knowledge and experience on the Board; and for making appropriate recommendations to the Board.

Each of the newly acquired subsidiaries has monthly management meetings, attended by key members of the Bank's Executive team and quarterly Board meetings. At least one of the Bank's Executive team is a member of each subsidiary Board to ensure appropriate oversight and control.

System of internal controls

The Board is responsible for determining the Group's strategy for managing risk and overseeing its systems of internal control, and is committed to embedding internal control and risk management into the operation of the Bank. The Board has delegated oversight of internal control to the Audit Committee. The Chief Executive Officer and the Executive management are responsible for designing, operating and monitoring risk management and internal controls.

The Board formally approves the Bank's risk appetite and management policy framework. The systems are designed to manage the risk within the Bank's risk appetite rather than eliminate the risk that the Bank does not meet its business objectives. The key risks facing the Bank, and the systems it has in place to manage those risks, are set out in the Risk Management Report on pages 26 to 31.

The Bank has a Chief Risk Officer who heads up the Bank's Risk Function. The Chief Risk Officer provides monthly reports to the Board on key risks within the business and the effectiveness of controls in place to mitigate such risks.

The Bank has a Group General Counsel and Company Secretary who heads up the Bank's Compliance Function, supported by the Head of Compliance. The Group General Counsel and Company Secretary provides monthly reports to the Board on key compliance issues identified through thematic reviews and ongoing monitoring, along with an update on key regulatory developments. The Compliance Department also ensures that there is a framework of key controls within the business and that these are tracked and reported against.

Following a retender process carried out in 2013, Grant Thornton have been appointed to provide an internal audit function to the Group. The internal audit function is responsible for independently reviewing and reporting on the adequacy and effectiveness of internal controls put in place by management. The internal audit function agrees an internal audit plan annually with the Audit Committee. The internal audit reports assist management to evaluate and improve the effectiveness of risk management, regulatory compliance, control and governance processes and assist the Audit Committee to oversee the effectiveness of internal controls. The Board is satisfied that during the period the Group maintained an adequate and appropriate system of internal control.

Audit Committee and auditors

The role of the Audit Committee includes a review of the Group's accounting policies at least annually, a review of the financial statements including any significant financial reporting judgements on which they are based and monitoring the systems of internal control.

The Group has a policy on the use of the external auditors for non-audit work, which has been approved by the Audit Committee. The purpose of this policy, which requires the formal prior approval of the Audit Committee for any ancillary services, is to ensure the continued independence and objectivity of the external auditors. The Audit Committee reviews annually the relationship with external and internal auditors and approves their terms of engagement and remuneration.

In evaluating the Group's financial statements for the year ended 31 December 2013 the Committee considered in particular:

• Changes to accounting policies;

• The levels of impairment provisions against financial assets;

• The calculation of interest receivable and similar income under the Effective Interest Rate method;

• The recoverability of the Group's deferred tax assets; and

• The Group's capital and funding position and forecasts.

The Committee received papers on each of these topics which detailed the position in the Financial Statements, and assumptions and methodologies used. These were reviewed and discussed with executive management and the external auditors in detail. The Committee also considered whether this Annual Report taken as a whole, is fair, balanced and clear and provides the information necessary for a reader to assess the Group's performance, business model and strategy.

The Committee was able to reach satisfactory conclusions on all of the above matters and therefore resolved to recommend the Annual Report to the Board for approval.

Financial reporting

The responsibilities of the Directors in preparing the Group's accounts are set out on pages 40 to 41.

Stephan Wilcke

Chairman

Directors' Remuneration Report

For the year ended 31 December 2013

Introduction

The purpose of this report is to outline the Board's policy for the remuneration of the Group's Executive team and its Non-Executive Directors and explain the process for setting Directors' remuneration. The Remuneration Committee applies the principles of the PRA's Remuneration Code as applicable to Tier III firms.

Remuneration Committee

The Remuneration Committee comprises three Non-Executive Directors, with attendance by the Chief Executive as appropriate. The members of the Committee for the period of these accounts were Tim Hanford (Chairman), David Mills and Peter Williams. Following Peter William's retirement from the Board on 31 December 2013, Malcolm McCaig has been appointed to the Committee from 1 January 2014. The Chief Executive withdraws from the meeting when his own remuneration is considered.

The Remuneration Committee has responsibility for determining and monitoring policy on and setting levels of remuneration, termination, performance-related pay, pension arrangements, reporting and disclosure, share incentive plans for each of the Executive Directors and certain senior executives of the Group, as well as the appointment of remuneration consultants.

The Committee is provided with executive remuneration and benefits data from comparative organisations across the financial services industry and banking sector and procures such other relevant data from independent expert sources as appropriate.

During 2013 the Group implemented all the provisions of the PRA's Remuneration Code as applicable to the Group.

Remuneration Policy

The Remuneration Policy of the Group seeks to attract and retain employees of appropriate calibre to execute its strategy, while benchmarking ensures that fixed remuneration is within market levels, given the size, nature, location and complexity of the business. The Policy aligns discretionary rewards with the performance of the business against Board approved budget and objectives, and the individual performance that is measured on a balanced business scorecard basis, including consideration of the Bank's stated values. The Remuneration Policy ensures that remuneration practices promote effective and sound risk management.

The Executive Remuneration package can comprise the following elements:

Basic salary

·  Basic salary is determined by levels of responsibility, external market competitiveness and individual performance in the role. The Group's policy is to position salaries so that, on average, they are in line with salary packages for comparable positions in similarly performing financial institutions, taking account of the level of other benefits provided;

Medium Term Incentive Plan

·  The Executive Directors, Chairman (in his role as the Bank's executive lead on merger and acquisition activity) and other Executives participate in a non-pensionable medium term incentive plan under which cash bonuses are awarded at the discretion of the Board, when determined appropriate, according to success in the delivery of corporate and individual objectives. Cash bonuses are all capped at less than 100% of basic salary. A proportion of the cash bonuses are deferred over a three-year period and are subject to claw back in the event that financial targets are not met or if there is a material financial downturn or failure of risk management before the end of the deferral period.

·  Long Term Incentive Plan

The purpose of the scheme is to reward execution of the Bank's strategy and growth in shareholder value over a multi year period. The participants include the Executive Directors, the Chairman and executive management of the Group who make a co-investment in the B Shareholder of the Bank (OSB Holdco Limited) and, subject to vesting conditions, receive Growth Shares in the B Shareholder that entitle the participants to share in the profit realised by funds advised by JC Flowers, but carry no dividend rights.

There are no performance conditions attached to the vesting or participation of the Shares, however there are leaver provisions which dictate what proportion of vested or unvested shares will be forfeited.

The terms of the Scheme have been approved by the Remuneration Committee and by the Shareholders.

·  Benefits

All of the executive management team receive car allowances and are members of a contributory defined contribution pension scheme. Some Executives also received relocation allowances when taking up their appointments.

Directors Service Contracts

Standard contractual terms for Executive level appointments include notice periods of between 3 and 12 months. The remuneration of each Executive Director is set out in note 7 to the report and accounts.

Non-Executive Directors' fees

Fees for each Non-Executive Director are set out in note 7 to the report and accounts. Non-Executive Directors are remunerated solely by fees. They do not receive any salary, performance incentive, pension contribution or other taxable benefit for their services as non-Executive Directors. S Wilcke received a salary, performance incentive and pension contribution in respect of his role as the Bank's lead on merger and acquisition activity, as set out in note 7 to the report and accounts.

The Group's policy is to position fees so that they are in line with fees paid by similarly performing financial services organisations. Enhanced fees are paid to the chairmen of the Audit and Risk Committees commensurate with the additional responsibilities inherent in these roles.

Fees are determined annually by the Board on the basis of recommendations by the Remuneration Committee. The Committee is provided with fee data from comparative organisations across the financial services industry and banking sector and procures such other relevant data from independent expert sources as appropriate.

Summary

This report, together with the disclosures in note 7 to the Report and Accounts, is provided to give members a full explanation of the policy and application of Directors' remuneration.

Tim Hanford

Chairman of the Remuneration Committee

Statement of Directors' Responsibilities

For the year ended 31 December 2013

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law they have elected to prepare both the Group and the parent company financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and applicable law.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the Directors are required to:

·  select suitable accounting policies and then apply them consistently;

·  make judgements and estimates that are reasonable and prudent;

·  state whether they have been prepared in accordance with IFRSs as adopted by the EU; and

·  prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and the Bank's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Bank and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

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

Responsibility statement of the Directors in respect of the Annual Report and Financial Statements

We confirm that to the best of our knowledge:

• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and

• The Directors' report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Disclosure of information to Auditors

The Directors who held office at the date of approval of this Report and Financial Statements confirm that:

• so far as they are aware, there is no relevant audit information of which the Company's Auditors are unaware and

• each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's Auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006.

Stephan Wilcke

Chairman

Independent Auditor's Report

For the year ended 31 December 2013

Independent Auditor's Report to the Members of OneSavings Bank Plc

We have audited the financial statements of OneSavings Bank Plc for the year ended 31 December 2013 set out on pages 44 to 106. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

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

As explained more fully in the Directors' Responsibilities Statement set out on pages 40 and 41, the directors are responsible for the preparation of the financial statements and for being satisfied that they 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

A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate.

In our opinion:

• the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 31 December 2013 and of the group's profit for the year then ended;

• the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;

• the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

• the parent company financial statements are not in agreement with the accounting records and returns; or

• certain disclosures of directors' remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

Richard Gabbertas (Senior Statutory Auditor)

for and on behalf of KPMG LLP, Statutory Auditor

Chartered Accountants

1 The Embankment

Neville Street

Leeds LS1 4DW

13 March 2014

Statement of Profit or Loss

For the year ended 31 December 2013

The above results are derived wholly from continuing operations.

The notes on pages 50 to 106 form part of these accounts.

The financial statements on pages 44 to 106 were approved by the Board of Directors on 13 March 2014.

Statement of Other Comprehensive Income

For the year ended 31 December 2013

The notes on pages 50 to 106 form part of these accounts.

Statement of Financial Position

As at 31 December 2013

The notes on pages 50 to 106 form part of these accounts.

The financial statements on pages 44 to 106 were approved by the Board of Directors on 13 March 2014.

Andy Golding April Talintyre

Chief Executive Finance Director

13 March 2014 13 March 2014

Statement of Changes in Equity

For the year ended 31 December 2013

* Equity bonds comprise £22m of 6.591% perpetual subordinated bonds. See note 26 for more detail.

The reserves are further disclosed in note 26.

* Equity bonds comprise £22m of 6.591% perpetual subordinated bonds. See note 26 for more detail.

The reserves are further disclosed in note 26.

Statement of Cash Flows

For the year ended 31 December 2013

Notes to the Financial Statements

For the year ended 31 December 2013

1. Accounting Policies

The principal accounting policies applied in the preparation of the accounts for the Group and the Bank are set out below.

a) Basis of preparation

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

The financial statements have been prepared on historical cost basis, as modified by the revaluation of available for sale financial assets, derivative contracts and financial assets held at fair value through profit or loss.

During the year the Bank changed its accounting policy for FSCS levies based on IFRIC 21's interpretation of IAS 37. This has caused the trigger date for the FSCS levy to change from 31 December each year to the following 1 April. IFRIC 21 requires the total liability to be recognised at the trigger date, therefore the change has resulted in a restatement of the comparatives for 2012. Details of the restatement are included in note 33.

As permitted by section 408 of the Companies Act 2006, no statement of profit or loss is presented for the Bank.

b) Going concern

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

Projections for OneSavings Bank plc have been prepared, covering its future performance, capital and liquidity, for a period in excess of 12 months from the date of approval of these financial statements including stress scenarios. These projections show that the Group has sufficient capital to continue to meet its regulatory capital requirements as set out by the Prudential Regulation Authority.

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

c) Basis of consolidation

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

In the Bank's financial statements investments in subsidiary undertakings are stated at cost less provision for any impairment.

d) Foreign currency translation

The consolidated financial statements are presented in pounds sterling which is the presentation currency of the Group. The financial statements of each of the Bank's subsidiaries are measured using the currency of the primary economic environment in which the subsidiary operates (the "functional currency"). Foreign currency transactions are translated into the functional currencies using the exchange rates prevailing at the date of the transactions. Monetary items denominated in foreign currencies are re-translated at the rate prevailing at the period end. Foreign exchange gains and losses resulting from the re-translation and settlement of these items are recognised in profit or loss.

The assets and liabilities of foreign operations with functional currencies other than sterling, including goodwill and consolidation fair value adjustments, are translated into the presentation currency at the exchange rate on the reporting date. The income and expenses of foreign operations are translated at the rates on the dates of transactions. Exchange differences on foreign operations are recognised in other comprehensive income and accumulated in the foreign exchange reserve within equity. When a foreign operation is wholly or partly disposed of with loss of control, the relevant accumulated exchange differences are reclassified to profit or loss as part of gain or loss on disposal. In a partial disposal without loss of control, the proportionate share of cumulative exchange differences is reattributed to non-controlling interest.

e) Segmental reporting

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

The Group operates solely within the UK and the Channel Islands and as such no geographical analysis is required.

The Group has historically assessed the performance of the Group as a whole, but segmented its business for the first time in 2013.

The Group segments its lending by product, focusing on the customer need and reason for a loan. It operates under three segments; Residential Mortgages, Buy-to-Let/SME and Personal Loans.

f) Taxation

Income tax comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is correspondingly recognised in other comprehensive income.

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

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

Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that future taxable profits will be available to utilise them. Deferred tax assets are reviewed at each reporting date and reduced where it is no longer probable that the tax benefit will be realised.

Deferred tax is determined using the taxation rates and laws that have been enacted or substantively enacted at the reporting date and are expected to apply when the related temporary differences reverse.

Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to offset and where they relate to income taxes levied by the same taxation authority either on an individual Group company or on Group companies in the same tax group that intend, in future periods, to settle current tax liabilities and assets on a net basis or on a gross basis simultaneously.

g) Interest income and expense

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

In calculating the EIR the Group estimates the cash flows considering all contractual terms but not future credit losses. Potential early repayment charges, origination fees received and paid on loans to customers, together with premium / discount paid on / received on acquired loan books and acquisition costs on loan books are included within loans and advances to customers and are amortised over the expected life of those assets using the EIR method.

Interest income on available for sale investments is included in interest receivable and similar income. Interest on derivatives is included in interest receivable and similar income or interest expense and similar charges following the underlying instrument it is hedging.

h) Fees and commissions

Fees and commissions which are an integral part of the EIR of a financial instrument are recognised as an adjustment to the EIR and recorded in interest income. Other fees and commissions are recognised on the accruals basis as services are provided or on the performance of a significant act, net of VAT and similar taxes.

Certain fees that form an integral part of the EIR of loans and advances previously reported as fees and commissions receivable and payable in 2012 have been reclassified to interest receivable and similar income.

i) Cash and cash equivalents

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

j) Intangible assets

Purchased software and costs directly associated with the development of computer software are capitalised as intangible assets where the software is a unique and identifiable asset controlled by the Group and will generate future economic benefits.

Costs to establish technological feasibility or to maintain existing levels of performance are recognised as an expense.

Software is amortised on a straight-line basis in profit or loss over its estimated useful life, which is generally five years. Intangible assets are reviewed for impairment on an annual basis.

k) Property, plant and equipment

Property, plant and equipment comprise freehold land and buildings, major alterations to office premises, computer equipment, motor vehicles and fixtures measured at cost less accumulated depreciation. These assets are reviewed for impairment annually and if they are considered to be impaired are written down immediately to their recoverable amounts.

Gains and losses on disposals calculated as the difference between the net disposal proceeds with the carrying amount of the asset are included in profit or loss.

Items of property, plant and equipment are depreciated on a straight-line basis over their estimated useful economic lives as follows:

Buildings 50 years

Equipment, fixtures and 5 years

vehicles

Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated.

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

l) Financial assets and liabilities

The Group initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities on the date on which they originated. All other financial instruments are accounted for on trade date which is when the Group becomes a party to the contractual provisions of the instrument. Financial assets are de-recognised when the rights to receive the cash flows have expired or the Group has transferred substantially all the risks and rewards of the ownership and does not retain control. Financial liabilities are de-recognised when the contractual obligations are discharged or cancelled, or expire.

The Group classifies its financial assets and liabilities in accordance with IAS 39 into the following categories:

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

(ii) Financial assets at fair value through profit or loss: are instruments:

·  which upon initial recognition are designated at fair value through profit or loss to eliminate or significantly reduce a measurement recognition inconsistency or;

·  which are acquired principally for the purpose of selling in the near term or forming part of the portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking.

Financial assets in this category are initially recognised and subsequently measured at fair value in the statement of financial position, with transaction costs recognised in profit or loss. All changes in fair value are recognised as part of net income in profit or loss. The fair values are quoted market prices (where there is an active market) or are based on valuation techniques (where there is no active market or the securities are unlisted). Valuation techniques include the use of recent arm's length transactions, discounted cash flow analysis and other commonly used valuation methods. During the current and prior year no financial assets were designated at fair value through profit or loss.

(iii) Available-for-sale financial assets: comprise securities held for liquidity purposes (certificates of deposit, treasury bills and money market instruments in the nature of loans and advances to credit institutions). These assets are non-derivatives that are designated as available-for-sale and not categorised in any other financial asset categories. These are held at fair value with movements being taken to other comprehensive income and subsequently the AFS reserve within equity, except for impairment losses which are taken to profit or loss. When the instrument is sold, the gain or loss accumulated in equity is reclassified to profit or loss.

(iv) Held-to-maturity investments: are non-derivative financial assets with fixed or determinable payments and fixed maturity where the Group intends to hold to maturity. These assets are held at amortised cost using the EIR method less any impairment.

(v) Financial liabilities: comprise deposits, debt securities and subordinated liabilities used as sources of funding. They include the 7.875% Perpetual Subordinated Bond where the terms allow no discretion over the payment of interest. The Group has no financial liabilities held for trading or designated at fair value through profit or loss.

Financial liabilities are initially measured at fair value less direct transaction costs, and subsequently held at amortised cost using the EIR method.

The 6.591% Perpetual Subordinated Bond is classified as equity as it was issued with terms that include discretion over the payment of interest.

(vi) Derecognition of financial assets and liabilities: Financial assets are derecognised when the contractual rights to receive cash flows have expired or where substantially all the risks and rewards of ownership have been transferred.

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

(vii) Sale and repurchase agreements: Securities sold subject to repurchase agreements are retained in the financial statements when required under the de-recognition criteria of IAS 39. The securities that are retained in the financial statements are reflected as loans or investment securities and the counterparty liability is included in amounts owed to depositors, credit institutions or other customers. Securities purchased under agreements to resell at a pre-determined price are accounted for as loans and receivables. The difference between the sale and repurchase price is treated as interest and accrued over the lives of agreements using the EIR method.

m) Derivative financial instruments and hedge accounting

The Group uses derivative financial instruments (interest rate swaps) for the purpose of reducing fair value interest rate risk to hedge its exposure to the interest rate risk arising from financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading.

Derivative financial instruments are recognised at their fair value with changes in their fair value going through profit or loss. Fair values are calculated by discounting cash flows at the prevailing interest rates.

All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative.

Certain derivatives embedded in financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value. These embedded derivatives are separately measured at fair value with changes in fair value recognised in profit or loss.

The Group designates certain derivatives as a hedge of fair value of a portfolio of recognised assets or liabilities (macro fair value hedge). Hedge accounting is used for derivatives designated in this way provided the criteria specified in IAS 39 are met.

Where there is an effective hedge relationship for fair value hedges, the changes in fair value of the hedged item arising from the hedged risk are taken to profit or loss. The fair value changes of both the hedged item and the derivative substantially offset each other to reduce profit volatility. To qualify for hedge accounting at inception, the hedge relationship must be clearly documented and the derivative must be expected to be highly effective in offsetting the hedged risk.

In addition, effectiveness must be tested throughout the life of the hedge relationship.

The Group discontinues hedge accounting when testing demonstrates that a derivative is not or has ceased to be highly effective as a hedge, the derivative ceases through expiry or sale or the underlying hedged item matures, is sold or is repaid.

If a derivative no longer meets the criteria for hedge accounting the cumulative fair value hedging adjustment is amortised over a period up to the maturity of the previously designated hedge relationship. If the underlying item is sold or repaid the unamortised fair value adjustment is immediately reflected in profit or loss.

n) Impairment of financial assets

The Group regularly assesses whether there is evidence that a financial asset or a portfolio of financial assets not carried at fair value through profit or loss is impaired. A financial asset or portfolio of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the asset and prior to the reporting date ('a loss event'), and that loss event or events has / or have had an impact on the estimated future cash flows of the financial asset that can be reliably estimated.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. An individual provision is also made where an account is not in arrears but the Group has exercised forbearance in the conduct of the account. Any provision is based on a management assessment of the propensity for the account to realise a loss had forbearance not been shown taking account of the amount recoverable on mortgage indemnity cover and additional security.

For financial assets carried at amortised cost, the amount of impairment loss is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows discounted at the asset's original EIR.

Impairment losses on available-for-sale assets are recognised by transferring the cumulative loss that has been recognised directly in equity to the Income Statement. The cumulative loss that is removed from equity and recognised in the Income Statement is measured as the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss on that asset previously recognised in the Income Statement.

If, in a subsequent period, the fair value of the debt security classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the Income Statement, the impairment loss is reversed through the Income Statement.

The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure and any costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar risk characteristics, taking into account asset type, industry, geographical location, collateral type, past-due status and other relevant factors. These characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the counterparty's ability to pay all amounts due according to the contractual terms of the assets being evaluated.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Group and historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. In addition, the Group uses its experienced judgement to estimate the amount of an impairment loss. This incorporates amounts calculated to overcome model deficiencies and systemic risks where appropriate and supported by historic loss experience data. The use of such judgements and reasonable estimates is considered by management to be an essential part of the process and does not impact reliability.

Impairment losses and any subsequent reversals are recognised in profit or loss. Following impairment, interest income is recognised using the original EIR which was used to discount the future cash flows for the purpose of measuring the impairment loss.

When a loan is uncollectible, it is written off against the related provision. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are taken through profit or loss.

The Bank's objective in restructuring a loan will primarily be to maximise the potential recovery of its outstanding debt. A loan restructuring is the modification or elimination of a loan prior to or at its maturity date by means other than those prescribed under the contractual terms of the loan agreement. This may involve extending the payment arrangements and the agreement of new loan conditions. When the terms of the loan have been re-negotiated, the loan is no longer considered past due. The Bank continually reviews re-negotiated loans to ensure that all criteria are met and future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan's original EIR.

o) Debt valuation adjustment

The debt valuation adjustment (DVA) is based on the expected loss (EL) a counterparty faces due to the risk of the Group's default. The methodology is based on a standard calculation, taking into account

·  the one-year probability of default,

·  the expected exposure at default,

·  the expected loss given default, and

·  the average maturity of the swaps.

p) Provisions and contingent liabilities

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

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

q) Employee benefits - defined contribution scheme

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

r) Business combinations and goodwill

Business combinations are accounted for using the purchase method of accounting. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated accounts at their fair values. Any excess of the cost of acquisition over the fair values of the identifiable net assets is recognised as goodwill. If the cost of acquisition is less than the fair values of the identifiable net assets, the difference is treated as negative goodwill which is recognised directly in profit or loss in the year of acquisition.

Changes in ownership that do not result in loss of control are accounted for as equity transactions.

s) Securitisation

Special purpose entities (SPEs) used to raise funds through securitisation transactions are consolidated into the Group's operations under SIC 12 and IAS 27 as if they were wholly owned subsidiaries. Loans transferred to SPEs under securitisation agreements are not derecognised by the Bank because it retains risks and rewards of ownership.

t) Judgements in applying accounting policies and critical accounting estimates

In preparing these financial statements, the Group has made judgements, estimates and assumptions which affect the reported amounts within the current and next financial year. Actual results may differ from these estimates.

Estimates and judgements are regularly reviewed based on past experience, expectations of future events and other factors. The key areas where estimates and judgements are made are as follows:

(i) Impairment of financial assets: Financial assets held at amortised cost are assessed for impairment as described above. Specific provision assessment involves judgement in relation to future cash flows including the cost of obtaining and selling the collateral, the likely sale proceeds and any rental income prior to sale. The most critical estimate is of the level of house prices where a variance of 10% equates to a change of £4.2m (2012: £5.4m) in the provision.

Collective provisions are calculated using twelve month delinquency roll rates and one year probability of defaults on different segments of the mortgage book. These rates, along with forced sale discounts, are applied to calculate the expected losses. Judgement needs to be exercised in deciding how to apply historic experience to current market conditions. The most critical estimate is of the level of house prices where a variance of 10% equates to a change of £1.9m (2012: £2.3m) in the provision.

(ii) Fair values: The fair values used in the financial statements, including those for financial instruments, are, where market values are not available, calculated using valuation techniques utilising discounted cash flow models using yield curves based on observable market data. The fair values of mortgage assets acquired through company acquisitions are calculated utilising techniques including discounted cash flow models, which include assumptions based on loan and portfolio level attributes as well as macroeconomic assumptions, including HPI, unemployment levels and interest rates, to derive prepayment rates, the probability and timing of defaults and amount of expected losses.

(iii) Effective interest rate: To calculate the appropriate EIR the Group makes a number of assumptions relating to the expected lives of financial instruments, likely redemption profiles and the anticipated level of early repayment charges. For acquired mortgage books EIRs are calculated utilising cash flow models which include assumptions on the likely macroeconomic environment, including HPI, unemployment levels and interest rates, as well as loan level and portfolio attributes and history to derive prepayment rates, the probability and timing of defaults and the amount of incurred losses. Estimates are reviewed in each reporting period to ensure they reflect current and expected future performance.

(iv) Deferred taxation: Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available to utilise the asset. The recognition of deferred tax is mainly dependent on the projections of future taxable profits and future reversals of temporary differences.

The Board's projections of future taxable income are based on business plans, future capital requirements and ongoing tax planning strategies. These assumptions include the impact of credit losses, capital requirements and assumptions about the UK macroeconomic environment. The assumptions surrounding future expected credit losses represent the most subjective areas of judgement in the Board's projections of future taxable income. The Board's forecast supports the assumption that it is probable that the results of future operations will generate sufficient taxable income to utilise the deferred tax asset. The current estimates assume that the Group will utilise its deferred tax asset within the next 5 years.

2. Interest receivable and similar income