Annual Report & Accounts 2002

Britannia’s mission is to be known

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

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

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

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

1998 1998

1999 1999

2000 2000

2001 2001

2002 2002

Cost: Mean Assets (%)

Gross Capital (£bn) 1.3

0 0.2 0.4 0.6 0.8 1.0 1.2 1.4

1.2
1998

1999 1.1

2000 1.0

2001
0.9

2002
0.8
1998 1999 2000 2001 2002

Definitions:
‘Operating profit’ is measured before exceptional items and Britannia Membership Reward
‘Gross capital’ represents general reserve, subordinated liabilities and subscribed capital
‘Cost’ represents administrative expenses and depreciation, and excludes amortisation of goodwill
‘Mean assets’ represents the amount produced by halving the aggregate of total assets at the beginning and end of the financial year
Figures have been restated to exclude the impact of the long term life assurance business, which was disposed of during 1999.
1
Britannia Building Society Annual Report & Accounts 2002
CHAIRMAN’S STATEMENT
2002 was another very successful year for Britannia. We
continued to deliver against our ambitious corporate plan
targets, with assets under management close to £20 billion
for the first time and record mortgage sales of £4.9 billion.
Operating profit was held at £132.4 million, reflecting our
commitment to return maximum value to Members whilst
maintaining a financially strong organisation.
We have begun to reap the benefit of our new business model,
running our Membership business separately from our Britannia
Capital Investment Group (‘BCIG’) subsidiaries.
The Membership business is, in effect, the traditional building
society, focusing exclusively on offering savings, mortgages
and home services to our Members.The prime aim of the
Membership business is to maximise the value it provides to
our Members by providing competitively priced products and
excellent customer service while minimising margin and costs.
The Membership business makes only the profit necessary to
fund future growth and maintain solvency.
The BCIG includes businesses that offer financial services to
both corporate clients and individuals who are not Members
of the Society. Capital from the Membership business is invested
in the BCIG subsidiaries, which focus on maximising the profit
they generate from this capital.This return is used to fund our
unique Britannia Membership Reward.
Business performance
The personal finance market remains extremely competitive. As
anticipated, this has led to continued pressure on interest margins
for the core savings and mortgage business, resulting in reduced
profits from this area as we focus on maintaining Member value.
Britannia can succeed in this tough market through careful
management of our assets, control of costs and ensuring that
Mutual ownership continues to work for Members, old and new.
We continue to prosper through a strategy of prudent lending.
Our focus on quality lending will minimise the risk of increased
arrears and bad debts should the economic picture change
2 going forward.
It has been a very difficult period for investment sales, and there
are few signs of savers regaining confidence in the equities
market. As a consequence, we have seen strong inflows into our
savings accounts, especially our mini cash and TESSA only ISAs.
Britannia Membership Reward and other Member benefits
This year £37.3 million was shared with Members through the
Britannia Membership Reward payment. Over £288 million has
now been distributed to Members during the seven years since
the Scheme was introduced – clear proof of the ongoing
benefits of Mutual ownership.The average amount paid out in
that time now totals £274, with potential maximum payouts
totalling £3,500.
The Britannia Membership Reward is just one way in which
Membership of Britannia is rewarded. Our Mutual status allows
us to offer competitive rates on our savings and mortgage
products alike. Britannia products have featured in independently
compiled national newspaper ‘best buy’ tables every week for
the past four years – we believe this is a unique achievement
among banks and building societies.
Mutuality
The Board’s view is that Members’ interests are best served by
the Society remaining Mutually owned.
Our ability to continue to compete successfully depends on
maximising the value we offer to our Members. Contrary to the
views expressed by some commentators, being Mutually owned
is not a soft option. We must continually show how our Mutual
structure promotes innovation, high quality service and control
of costs to create value for the Membership.
Britannia’s people
The Society has a clearly stated diversity policy. A Committee,
chaired by a senior executive, oversees activity in this area. We
are members of Opportunity Now. We also provide facilities
for Members whose first language is not English, including
badges identifying employees who speak other languages and
the publication of some Society literature in languages other
than English.
 Britannia Building Society Annual Report & Accounts 2002
Our priority remains to continue to provide
the excellent levels of service and value our
Members expect, even though this is at the
expense of profitability.

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

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

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

Through his inspirational leadership, Graham has transformed

Britannia over the last few years towards a truly modern
Mutual.The industry has seen many challenges during
Graham’s stewardship, and he has been an excellent
ambassador for the building society sector generally, and
Britannia in particular, promoting the benefits of Mutuality
to the widest possible audience.
3
Britannia Building Society Annual Report & Accounts 2002
CHIEF EXECUTIVE’S REPORT
Britannia’s mission is to be known as Britain’s best Mutual – a
great organisation to which our Members and employees are
proud to belong. We are dedicated to helping the Society’s
Members achieve their goals.
In the course of developing a new corporate plan, which
has set fundamental principles, values and targets for
performance for the next three years, we have reviewed
what being a Mutual should mean for our Members in the
21st Century.
Fundamental principles
We have confirmed a number of principles, which describe the
things we will not change in our business. Most are already in
place, though some aspects need improving.
First and foremost, we will remain a Mutual. Mutual ownership
means we act in the Membership’s best interests at all times.
We are owned by our Members and this is reflected in all
we do.
In order to safeguard our Members’ interests, we must remain
financially strong – we have a responsibility to the Members
of the Society to ensure that their money is in a secure place.
To be the best Mutual we must be ethical, socially responsible
and a model of compliance. We aspire to the highest ethical
standards to recognise the role we play in the community and
to comply with all rules and regulations affecting our business.
Great service requires outstanding people, and we will therefore
be a great place to work, grow and develop. We value the
contribution of our people and are committed to creating a
working environment and investing in development and training
to help them give their best.
One of the most significant differentiators between Britannia
and shareholder owned banks is that we do not pay shareholder
dividends. Instead, we will continue to acknowledge Members’
loyalty through our unique Britannia Membership Reward and
4 by providing market leading rates.
Being the best Mutual means we will maintain an extensive
branch network.This does not mean we will never close a
branch, but it does mean we will continue to invest in a
network that is larger than many comparably sized organisations.
Values
Our values describe the way we will run our business. We may
not always fully live up to these values today, but success in
delivering our corporate plan will mean we will get better and
better over the next few years.The success of our business is
dependent on these values underpinning all of our activities.
Being the best Mutual means we will always put our customers
first. We are driven by the needs of our customers and this means
we will strive to be easy to do business with. We have a passion
for making things easy for our customers when they deal with us.
We believe that the success of our business is dependent on
clarity with our customers and with our people, so we will be
excellent at communications.
Great service means taking personal responsibility – so every
Britannia employee will take personal responsibility for his or
her own behaviour and performance.
To compete in the savings and mortgages marketplace, we must
deliver the required level of service in the most efficient way; to
thrive, we need to be faster, cheaper, better at all we do.
By delivering against these values, our Members will know that
they can trust Britannia to deliver great value and service
consistently – and a strong financial performance will underpin this.
Financial performance
The year saw a strong financial performance from the Group,
enabling us to pay £37.3 million to Members through our
Reward scheme, in addition to the value received through
our product pricing. In 2001 the total Reward payment was
£53.4 million, including a special bonus paid to Members arising
on the sale of our remaining shareholding in Britannic Asset
Management Limited.

The year saw a strong financial performance
from the Group, enabling us to pay £37.3 million
to Members through our Reward scheme.
Operating profit was on target at £132.4 million
(2001: £138.3 million). Of this, £61.9 million came from
Britannia Capital Investment Group (2001: £50 million).
Group interest margin was reduced to 1.11% (2001: 1.30%).
In line with our commitment to deliver the maximum possible
value to Members, the Society margin was reduced to 0.94%
(2001: 1.13%) – among the lowest in the industry.
The Group’s administrative expenses, before one-off
reorganisation costs of £3.8 million, rose by only 0.2%, less
than the rate of inflation.This reflects our tight control on
running costs even though we are investing £50 million in new
mortgage and savings systems to improve customer service.
The Group cost/asset ratio (before amortisation of goodwill)
was reduced to 0.86% (2001: 0.92%).The cost/income ratio
(before amortisation of goodwill) rose slightly to 51.7%
(2001: 49.5%), reflecting the value offered to Members through
lower margins.
The Society operates a defined contribution scheme for
new employees. However, in common with most businesses,
our pension fund assets in the defined benefits scheme have
been affected by falling stock markets. As a consequence, the
last valuation (April 2002) resulted in a deficit in the defined
benefits scheme.The Society has responded by both making
a cash contribution of £14 million and increasing its regular
contribution rates in 2002. It is our intention to eliminate the
deficit over the medium term.
Gross lending for the Group totalled £4.9 billion – up 26% on
2001 (2001: £3.9 billion) – a creditable performance in a highly
competitive market.
Lending performance would have been even stronger, but we chose
to reduce the flow of new business for part of the year in order
to allow new back office systems to be brought on line as part
of our core systems replacement programme. Nonetheless, our
fixed rate and flexible mortgages featured throughout the year
in independently compiled national newspaper ‘best buy’ tables.
Britannia Building Society Annual Report & Accounts 2002
We also maintained our cut-price mortgage rates for loyal
borrowers. Borrowers who have had their current variable rate
mortgage product for ten years or more receive a discount of
0.40% from our standard variable rate, with five-year borrowers
receiving a 0.20% discount.These discounts ensure that
borrowers continue to receive good value for money after any
introductory offers have expired.
Savings inflows of £600 million were achieved in 2002,
reflecting our competitive savings product range, and the
impact on investor confidence of the continued turmoil in
global stock markets.
The Group’s capital and reserves increased by 13% to £1,387
million (2001: £1,226 million) further increasing the security of
Members’ savings.
Platform/Verso merger
Britannia has created a one-stop shop for mortgage
intermediaries by merging its award-winning Platform Home
Loans and Verso subsidiaries.The new operation, called Platform,
will provide introducers with mortgages to meet virtually all
their customer requirements.The product range includes prime,
light-adverse and non-conforming packages, as well as niche
products such as self-certification and buy-to-let.The new business
is based in London’s Docklands and is run by the previous
Platform Home Loans management team, led by David Tweedy.
We believe there is a strong and growing demand in the market
for a one-stop shop approach.
Platform’s new cascade underwriting service means that if an
applicant does not meet criteria on its prime products they will
automatically be considered for one of its many other products
according to their credit status. One call is all that will be
required to get Platform’s best offer.
Many sales and service outlets, one great standard
of service
On the Membership side, our aim is to offer value to our
Members through their sales and service outlet of choice.
During the year we removed virtually all administration from 5
Britannia Building Society Annual Report & Accounts 2002
CHIEF EXECUTIVE’S REPORT
the branches, to leave branch people free to focus all their
energies on customer sales and service. We have significantly
increased numbers in our central processing teams in Leek to
handle all administration and increased resources in the branch
network to improve customer services.This is both a more
efficient and effective way of managing the work.
Our innovative branch sharing arrangement with Yorkshire
Building Society has now been in place for a year. More than
500 transactions take place each month. Britannia’s Members
can pay into or withdraw money free of charge from their
savings accounts and conduct business on their mortgage
accounts at Yorkshire’s branches, and Yorkshire’s Members
can use Britannia’s network. A practical way of enhancing the
benefits we offer, the agreement means more than 330
branches are available to our Members.
While branches remain key to our sales and service strategy,
more and more customers are choosing to use our call centre,
our postal service and the internet. Our Leek-based call centre
handled more than one million calls during the year. It also sold
4,000 mortgages worth £480 million.
eBusiness at Britannia continues to develop well and in 2002
there were half a million visitors to our website, with mortgage
applications exceeding £110 million.
Britannia’s people
Employee training and development are key to our success and
ensure that existing employees are considered first for any new
opportunities within the Group.This is reflected in our successful
retention of the Investor in People accreditation.This recognition
confirms that our training and development activities remain in
line with best practice nationally, and that we have a sound
framework for linking good people management practices to
the achievement of the business strategy and operational plans.
During the financial year Britannia has maintained and developed
systems for the provision of information to employees.The
Society has continued to consult actively with the Britannia Staff
6 Union. In addition, meetings, team briefings, circulars, newsletters
and the Group’s intranet ensure employees are aware of
the Group’s performance and objectives and the business
environment in which it operates.
Our Leek-based document processing team won the Society’s
top team title and our Northwich branch team won branch
of the year for an unprecedented second year in a row. Both
teams demonstrated the high standards of customer service,
commitment and innovation we seek to encourage across
the business.
Commitment to diversity
The Society’s employment and training and development
policies have already won awards recognising our commitment
to equality of opportunity for women and for disabled people.
As a business we are constantly striving to improve performance
and there is a clear business case for us to embrace diversity
as an employer of choice, to improve service for our ethnic
minority Members and to explore the opportunities that the
growing ethnic market in the UK provides.
To this end, we are committed to fulfilling the membership
requirements of Race for Opportunity and improve cultural
diversity.The focus is on taking positive action to improve our
standards and not positive discrimination.
Awards and achievements
Our pioneering work on customer relationship management
(‘CRM’) systems, which is about attracting, retaining and
deepening relationships with targeted customer segments, was
awarded ‘Best customer relationship management project for
a large organisation’ by the CRM industry in April.
Our television advertising campaign was shortlisted for the
business effectiveness category in the National Business Awards.
Platform won ‘Best non standard lender’ from ‘Your Mortgage’
magazine for the fifth consecutive year – an excellent
endorsement of the services that they provide. Britannia was
also highly commended by ‘Your Mortgage’ in the ‘Best Building
Society’ category. Mortgage intermediaries vote on who they

Our Leek-based call centre handled more
than one million calls during the year. It also
sold 4,000 mortgages worth £480 million.
would personally choose as a mortgage lender. Given that,
unlike our competitors, we do not pay fees to intermediaries
who recommend Britannia mortgages, this shows the high
acclaim for our services from people in the market.
Britannia’s ‘Home’ magazine also won an award in the British
Society for Magazine Editors’ awards.The magazine beat
off stiff competition from Marks and Spencer, British Airways
and Waitrose.
Member Council
As a Mutual, Britannia’s purpose is to always act in our
Membership’s best interests. We are owned by our Members
and this must be reflected in all we do. As a result, we will
always put our customers first, being driven by their needs,
and we will strive to be easy to do business with.
To help us achieve this, Britannia has established a unique
Member Council – a new consultative body that allows us to
discuss policy and service issues in detail with typical Members.
The Society already carries out regular customer satisfaction
research and runs focus groups to get customer views on
particular issues.The Council supplements this by allowing us
to discuss matters in depth with a knowledgeable group of
Members. 24 Members from across the UK – 12 men and
12 women – were selected at random and invited to join
the Council.
The Council has met four times in the last 12 months – twice
in London and twice in Leek.
Meetings have included presentations on various issues
from Britannia Directors and managers, tours of different
departments and working groups discussing particular issues
in detail. Issues discussed so far include the Society’s new
corporate plan, customer service, direct mailing activities, the
role of the Britannia Capital Investment Group and training
for Member Advisors.
Feedback from the Council is reported to the Group Executive
Board and informs their decision making.
Britannia Building Society Annual Report & Accounts 2002
Britannia in the community
Britannia’s home remains the town where it was founded –
Leek in the Staffordshire Moorlands. As the major employer in
an area suffering from economic decline, we provide well-paid
jobs and skills training where such opportunities are rare.The
value we put into the local area through wages and purchasing
is around £40 million a year.
We recognise the importance of the community to the quality
of home life for our Members. We support a wide range of
charities and volunteer groups in our local area, donating nearly
£500,000 last year to groups working in the areas of
homelessness, educational achievement, community safety and
money management.The Britannia Building Society Foundation
continues to support charities working in these areas. More
than 150 local charities and community groups have secured
funding from the Foundation.The Foundation is very well served
by its trustees, and I am grateful to them for their contribution.
Our big-hearted people at Britannia are well on their way to
reaching their target of £100,000 for our current charity of
the year, Macmillan Cancer Relief. Macmillan was one of the
beneficiaries from our donation of ten pence for every vote
received at the 2002 Annual General Meeting.The money
raised also helped the special care baby units at hospitals in
Stoke and Ipswich.
Conclusion
This year of achievement shows why I am proud to have
succeeded Graham Stow as Chief Executive of Britannia. We
have a great future ahead of us as long as we remember that
we must always put the Membership of the Society first in all
that we do.
Neville Richardson
Chief Executive
19 February 2003 7
Britannia Building Society Annual Report & Accounts 2002
BOARD OF DIRECTORS
Barrie Bernstein
Chairman
Barrie Bernstein, 64, joined the Board in 1994 and became
Chairman in May 1999. He is a member of the Audit and
Remuneration Committees, and chairs the Nominations
Committee. He is also Chairman of Rochdale Development
Agency. Barrie spent his career at Bernstein Group PLC,
kitchen manufacturers based in Bolton, where he was
Managing Director and, subsequently, Chairman until his
retirement in 2002.
Ian Adam, CA
Deputy Chairman
Ian Adam, 59, joined the Board in 1998, becoming Deputy
Chairman at the end of 2002. A Chartered Accountant, he
chairs the Audit Committee, and is a member of the
Nominations Committee and Remuneration Committee.
Amongst his other appointments he is Deputy Chairman of
Fishers Holdings Limited and is a member of the Scottish
Higher Education Funding Council. He was formerly Finance
Director at Christian Salvesen PLC.
Harry Coe, FCA
Harry Coe, 58, joined the Board in 2000. He is a member of
Britannia’s Credit Committee and is the former Managing
Director of leading holiday company MyTravel PLC (formerly
Airtours PLC). He chairs the Boards of Travelsphere (Holdings)
Limited, Jaycare (Holdings) Limited and Leisure Ventures PLC.
Bill Gordon, FCIB
Bill Gordon, 63, joined the Board as a Non-executive Director
in September 1999. He has extensive experience in treasury
risk management and he is a member of the Assets and
Liabilities Committee. He is the former Chief Executive of UK
Banking Services at Barclays, and he remains Chairman of
Barclays Pension Fund Trustees Limited. During 2002 Bill has
been a member of the Boards of Britannia Treasury Services
Limited, Platform Home Loans Limited and Verso Limited. As
a consequence of the merger of Platform and Verso, and the
introduction of new governance and reporting structures, Bill
8 has retired from the Boards of Platform and Verso.
Gerald Gregory, BA, MA
Gerald Gregory, 47, joined the Board as Sales and Marketing
Director in September 1999 and is now Managing Director –
Britannia Capital Investment Group. He is a Director of a
number of subsidiary companies including Platform Home
Loans Limited and Britannia Treasury Services Limited, and he
is a member of the Society’s Assets and Liabilities and Credit
Committees. He is also a trustee of the Britannia Building
Society Foundation. Gerald joined the Society in 1989 from
Girobank PLC. He was formerly Treasurer, Head of Lending
and then Director of Mutuality and Marketing at the Society.
Rhidian Jones, MA, FCIS, FCMI
Rhidian Jones, 59, joined the Board in 1993 and was Deputy
Chairman from December 2000 to December 2002. He chairs
the Remuneration Committee and is a member of the Audit
Committee, taking a special interest in corporate governance
and compliance. He was previously a Director of the Mornington
Building Society. Rhidian began his career in finance and property
management, before qualifying as a solicitor. Until his retirement
in 2002, he was Head of the Corporate Department at
Nabarro Nathanson. He is the senior Non-executive Director
of Serco Group PLC and a policy advisor on company law to
the Institute of Chartered Secretaries and Administrators.
Rhidian will retire from the Society’s Board in 2003.
Phil Lee, BSc, CIPFA, CA
Phil Lee, 47, joined the Board in September 2002 as Group
Finance Director, with responsibility for Finance, Change
Management, Group Risk Management and Information
Systems. He is Chairman of the Assets and Liabilities
Committee. Formerly he was Finance Director at West
Bromwich Building Society, and previously he has held senior
roles at Bristol & West, Somerfield and Ernst & Young.

Neville Richardson, BA, FCA
Neville Richardson, 45, joined the Board in 1998 as Group
Finance Director after 21 years with PricewaterhouseCoopers,
where he was a partner in the financial services practice. He was
appointed Deputy Chief Executive in January 2002 and Group
Chief Executive in November 2002. He is a member of the
Assets and Liabilities Committee and the Nominations Committee
and is also a Director of a number of subsidiary companies.
Bridget Rosewell, MA, MPhil
Professor Bridget Rosewell, 51, joined the Board as a
Non-executive Director in July 1999. She is also a member of
the Audit Committee. She is an economist and is a founding
Director and Executive Chairman of the economic and market
analysis firm Volterra Consulting Limited. Bridget is Chief
Economic Adviser to the British Retail Consortium, consultant
Chief Economist to the Greater London Authority and a visiting
professor at City University Business School.
Tom Sawyer
Tom Sawyer, 59, Member of the House of Lords, joined the
Board as a Non-executive Director in July 1999. He is a
member of the Remuneration Committee, Chairman of the
Trustees of the Society’s Pension Scheme and Chairman of
the Member Council. He is Chairman of Reed Health Group
PLC and Notting Hill Housing Trust and is a consultant to
Touchstone Training. He is a visiting professor at Cranfield
Business School, and he chairs the Union Income Benefit
Advisory Board.Tom was General Secretary of the Labour
Party for four years, having previously been Deputy General
Secretary of Unison.
Graham Stow, FCIB, FCIPD
Graham Stow, 58, was appointed to the Board in 1996 as
Retail Operations Director. He became Group Chief Executive
in February 1999 and in November 2002 he was appointed
Executive Vice Chairman, pending his retirement in May 2003
after a year in office as Chairman of the Building Societies
Association. Before joining the Society he was Executive
Vice-President of a Lloyds insurance broker. He has spent most
of his career in retailing, both in line management and in human
Britannia Building Society Annual Report & Accounts 2002
resources. He is a past President of the Institute of Home
Economics, and a former member of the Council and Court
of Leeds University. He is a Non-executive Director of the
Department of Work and Pensions and Northern Racing
Limited and he is the Deputy Chair of Governors of
Staffordshire University.
John Suffolk, MBA
John Suffolk, 44, joined the Board in June 2001 as Operations
Director and in November 2002 he was appointed Managing
Director – Member Business. He joined the Society in 1998 as
Director of Operations, responsible for Information Systems and
Membership Services. He is a Director of MutualPlus Limited,
the branch sharing services company, and a member of the
Assets and Liabilities Committee. He worked previously at
Birmingham Midshires Building Society as Director of
Information Services and Head of Customer Services.
Elizabeth Walmsley, BSc, PhD, MBA
Dr Elizabeth Walmsley, 50, joined the Board in 2000. She is a
Trustee of the Britannia Building Society Foundation and a
Trustee of the Society’s Pension Scheme. She is a Director of
the Change Partnership, a subsidiary of Whitehead Mann, and
has wide experience in the management of modern, complex
businesses. She also chairs White Rose Technology Limited and
is a member of Council of Sheffield University.
9
Britannia Building Society Annual Report & Accounts 2002
DIRECTORS’ REPORT
The Directors are pleased to present the Annual Report and
the Audited Accounts for the year ended 31 December 2002.
Business objectives and activities
The reports of the Chairman and Chief Executive review
the Group’s business objectives, existing business performance,
future plans and employee information on pages 2 to 7 of this
report. No activities of a different nature to those previously
engaged in were carried on during 2002.
Profit and capital
The Group’s profit after tax amounted to £84.6 million
(2001: £129.0 million), which was added to reserves (2001
included an exceptional profit of £73 million arising from the
sale of our remaining interest in Britannic Asset Management
Limited). At the end of the year, the gross capital ratio was 8.2%
(2001: 7.7%) and the free capital ratio was 7.4% (2001: 6.8%)
(see Annual Business Statement on page 51 for an explanation
of these ratios).
Arrears
Thanks to our proactive approach to arrears management,
which includes co-operation with and support for independent
debt counselling services, the number of accounts 12 months
or more in arrears at 31 December 2002 was 236 (2001: 279)
for the Group, of which 218 (2001: 250) were Society accounts.
The balances on these accounts totalled £7.3 million
(2001: £14.4 million) for the Group, of which £5.1 million
(2001: £11.3 million) related to Society accounts.The total
arrears outstanding on these accounts was £1.1 million
(2001: £1.6 million) for the Group, of which £0.7 million
(2001: £1.1 million) related to Society accounts.This represents
approximately 0.01% (2001: 0.01%) of total Group mortgage
accounts and 0.01% (2001: 0.01%) of total Society mortgage
accounts.The Society remains committed to the effective
and fair management of lending and arrears.Through
careful control in these areas we were able to restrict the
cost of bad and doubtful debts to £1.8 million
(2001: £0.8 million).
Fixed assets
As part of its commitment to improve service to its
customers, the Group continues to invest in its infrastructure.
A key element of this is our £50 million core systems
replacement programme.
The Directors consider the estimated market value of the
Group’s interest in land and buildings to be not less than its
10 net book value at 31 December 2002.
Liquid assets
Liquid assets comprising cash, bank balances and other
authorised investments totalled £5.1 billion (2001: £4.9 billion),
representing 30% (2001: 31%) of the assets of Members.This
includes asset backed and mortgage backed securities which are
held for investment purposes. We believe a liquidity holding of
this size ensures sufficient short-term funds are available. Our
financial objective is to maximise returns from liquid asset
investments while minimising the credit risk by placing funds
with highly rated institutions spread widely across financial
sectors and countries.
Control of derivatives
The Group has a formal structure for managing risk, including
established risk limits, reporting lines, mandates and other controls.
The Board reviews this structure regularly in line with new
requirements from regulators.The Assets and Liabilities Committee
monitors compliance and performance against the structure, and
manages and controls the balance sheet exposures of the Group.
The Board has authorised the use of derivatives under Section
9A of the Building Societies Act 1986.The Financial Services
Authority agrees an overall limit on the derivatives outstanding
at any one time.The Board sets all other limits over the use of
derivative products on the recommendation of the Assets and
Liabilities Committee.
The Group has no substantial exposure to foreign exchange
or interest rate variations, as a result of the procedures
described above.
Impact of the Euro
The Board continues to consider the requirements,
opportunities and threats that the United Kingdom’s potential
entry into the European Monetary System (EMS) could create
for the Group. Britannia continues to plan for the possibility
of UK entry into EMS and has plans which can be activated
when entry is more certain.
Creditor payment policy
The Society discharges a supplier’s invoice for the complete
provision of goods and services (unless there is an express
provision for stage payments) when in full conformity with the
terms and conditions of the purchase within agreed payment
terms.The Society’s policy is to agree the terms of payment
before trading with the supplier, ensure that suppliers are aware
of the terms of payment and pay in accordance with its
contractual and other legal obligations.
Creditor days at 31 December 2002 were 8 days (2001: 14 days).

Going concern
The Directors are satisfied that the Group has adequate
resources to continue in business for the foreseeable future
and that it is, therefore, appropriate to adopt the going concern
basis in preparing the Annual Report and Accounts.
Post balance sheet events
The Directors consider that there has been no event since
the year end that has had a significant effect on the Society’s
position or that of any of its connected undertakings.
Britannia Building Society Annual Report & Accounts 2002
Several sub-committees act for the Board to make sure that
Non-executive Directors have a direct role in Britannia’s
corporate governance.
The membership of the Assets and Liabilities Committee
includes one Non-executive Director, Bill Gordon.The
Committee reviews and recommends to the Board changes
to the Society’s wholesale funding, liquidity and balance sheet
risk management policies, and oversees compliance with
these policies.

Donations The Nominations Committee consisting of the Chairman,

During the year, the Society and its subsidiaries made donations Deputy Chairman and Chief Executive, meets at least
to charities and other deserving causes of nearly £500,000. three times each year. It reviews and recommends on the
Some £300,000 of this total was allocated through the Britannia Board’s composition, including succession planning and new
Building Society Foundation. No contributions were made for Board appointments.
political purposes.
The Remuneration Committee comprises four Non-executive
Directors Directors. In line with best practice, the Board has prepared an
The Directors of the Society during the year and at Annual Report on Directors’ Remuneration and the role of the
31 December 2002 were: Remuneration Committee; this report is on pages 57 to 58.
Ian Adam *
Barrie Bernstein * The Audit Committee comprises four Non-executive Directors.
Harry Coe * It oversees the Group’s internal controls, accounting policies
Bill Gordon * and financial reports, and monitors compliance with legal and
Gerald Gregory regulatory requirements. It is also responsible for liaison with the
Rhidian Jones * Group’s external auditors.
Phil Lee (appointed 1 September 2002)
Neville Richardson The current membership of the sub-committees is as below:
Bridget Rosewell *
Tom Sawyer * Audit Assets and Remuneration Nominations
Liabilities
Graham Stow
1 1
John Suffolk Ian C Adam Chairman * *
Elizabeth Walmsley * Barrie A W Bernstein * * Chairman
* Non-executive Director Bill J Gordon *
Gerald A Gregory *
2
Under the Building Societies Act 1986 and the Society’s rules, Rhidian H B Jones * Chairman *
Bill Gordon, Gerald Gregory, Neville Richardson and Tom Sawyer Phil A Lee Chairman
are due to retire by rotation at the Annual General Meeting in Neville B Richardson * *
2003.They are eligible and will stand for re-election. Phil Lee has Bridget C Rosewell *
been appointed since last year’s Annual General Meeting and Tom Sawyer *
3
will therefore stand for election. Graham H Stow *
John Suffolk *
None of the Directors has any interest in the share capital
of the Society’s connected undertakings. 1 From 1 January 2003
2 Member until 31 December 2002
Corporate Governance and Board Committees 3 Member until 29 January 2003
The Society complies with the Interim Prudential Sourcebook
for Building Societies implemented by the Financial Services
Authority, which includes guidance for Boards and Management. 11
Britannia Building Society Annual Report & Accounts 2002
DIRECTORS’ REPORT
Several Non-executive Directors occupy unpaid positions on
the Boards of Britannia subsidiary companies as detailed on
pages 52 to 54. In addition, Serge Lourie has served as an
independent, Non-executive Director on the Boards of Platform
Home Loans Limited, Britannia Treasury Services Limited and
Verso Limited. As a consequence of the merger of Platform and
Verso, and the introduction of new governance and reporting
structures, Mr. Lourie is retiring from the Boards of those
three companies.The Directors would like to thank Mr. Lourie
for his contribution to the development and success of
these organisations.
Statement of Directors’ responsibilities
In Respect of the Preparation of the Annual Accounts
The following statement, which should be read in conjunction
with the statement of respective responsibilities of the Directors
and auditors on page 13, is made by the Directors to explain
their responsibilities in relation to the preparation of the
Annual Accounts, the Annual Business Statement and the
Directors’ Report.
The Directors are required by the Building Societies Act 1986
to prepare, for each financial year, Annual Accounts which give a
true and fair view of the income and expenditure of the Society
and the Group for the financial year, of the state of affairs of the
Society and the Group as at the end of the financial year and of
the cash flows of the Group for the financial year. In preparing
those Annual Accounts, the Directors are required to:
• select appropriate accounting policies and apply them
consistently;
• make judgements and estimates that are reasonable
and prudent;
• state whether applicable Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the Annual Accounts; and
• prepare the Annual Accounts on the going concern basis,
unless it is inappropriate to presume that the Group will
continue in business.
In addition to the Annual Accounts, the Act requires the
Directors to prepare, for each financial year, an Annual Business
Statement and a Directors’ Report, each containing prescribed
information relating to the business of the Society and its
connected undertakings.
Website
As well as our branch network and call centre, Britannia can be
contacted via our website, www.britannia.co.uk.The maintenance
and integrity of the Britannia website is the sole responsibility of
12 the Directors. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
In Respect of Accounting Records and Internal Control
The Directors are responsible for ensuring that the Society and
its connected undertakings:
• keep accounting records in accordance with the Building
Societies Act 1986, and
• take reasonable care to establish, maintain, document and
review such systems and controls as are appropriate to its
business in accordance with the rules made by the Financial
Services Authority under the Financial Services and Markets
Act 2000.
The Directors have general responsibility for safeguarding the
assets of the Group and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
Appointment of Auditors
On 1 January 2003, PricewaterhouseCoopers converted to a
limited liability partnership (LLP), though PricewaterhouseCoopers
continued to exist for an interim period to hold the office
of auditors.
On 29 January 2003, PricewaterhouseCoopers resigned as the
Society’s auditors and the Society’s Board of Directors
appointed PricewaterhouseCoopers LLP to fill the casual
vacancy created by the resignation. It is a requirement that the
auditors be appointed by the Society at each Annual General
Meeting and the effect of the resolution to be proposed at
this year’s Annual General Meeting, if passed, would be that
PricewaterhouseCoopers LLP will be re-appointed until the
conclusion of the next Annual General Meeting.
Paul Mills
Secretary
For the Board of Directors
19 February 2003

INDEPENDENT AUDITORS’ REPORT
Independent Auditors’ report to the Members of
Britannia Building Society
We have audited the Annual Accounts which comprise the
income and expenditure accounts, the balance sheets, the cash
flow statement, the statement of total recognised gains and
losses and the related notes which have been prepared under
the historical cost convention and the accounting policies set
out in the Statement of Accounting Policies. We have examined
the Annual Business Statement (other than the details of
Directors and Officers upon which we are not required to
report) and the Directors’ Report.
Respective responsibilities of Directors and Auditors
The Directors’ responsibilities for the preparation of the Annual
Report include responsibilities for the Annual Accounts, the
Annual Business Statement and the Directors’ Report and are
set out in the Statement of Directors’ Responsibilities. Our
responsibility is to audit the financial statements in accordance
with relevant legal and regulatory requirements and United
Kingdom Auditing Standards issued by the Auditing Practices
Board.This report, including the opinion, has been prepared for
and only for the Society’s Members as a body in accordance
with Section 78 of the Building Societies Act 1986 and for no
other purpose.We do not, in giving this opinion, accept or assume
responsibility for any other purpose or to any other person to
whom this report is shown or in to whose hands it may come
save where expressly agreed by our prior consent in writing.
We report to you our opinion as to whether the Annual Accounts
give a true and fair view and are properly prepared in accordance
with the Building Societies Act 1986, on certain information
included within the Annual Business Statement and on whether,
in our opinion, the Directors’ Report is consistent with the
accounting records and the Annual Accounts. We also report to
you if in our opinion we have not received all the information
and explanations we require for our audit, or if the Annual
Accounts are not in agreement with the accounting records.
We read the other information contained in the Annual Report
and consider the implications for our report if we become
aware of any apparent misstatements or material inconsistencies
with the Annual Accounts, the Annual Business Statement or
the Directors’ Report.The other information comprises only
the Chairman’s Statement, the Chief Executive’s Report, the
Annual Report of the Remuneration Committee and the Five
Year Review.
Basis of audit opinion
We conducted our audit in accordance with Auditing Standards
issued by the Auditing Practices Board. An audit includes
Britannia Building Society Annual Report & Accounts 2002
examination, on a test basis, of evidence relevant to the
amounts and disclosures in the Annual Accounts and the
Annual Business Statement. It also includes an assessment of
the significant estimates and judgements made by the Directors
in the preparation of the Annual Accounts, and of whether the
accounting policies are appropriate to the Society’s circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all
the information and explanations which we considered
necessary in order to provide us with sufficient evidence to
give reasonable assurance that the Annual Accounts are free
from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated
the overall adequacy of the presentation of information in the
Annual Accounts.
Opinion
In our opinion:
(a) the Annual Accounts give a true and fair view of the
state of affairs of the Society and of the Group as at
31 December 2002 and of the income and expenditure
of the Society and the income and expenditure and cash
flows of the Group for the year then ended;
(b) the information given in the Annual Business Statement
(other than the information upon which we are not
required to report) gives a true representation of the
matters in respect of which it is given;
(c) the information given in the Directors’ Report is consistent
with the accounting records and the Annual Accounts; and
(d) the Annual Accounts, the Annual Business Statement and the
Directors’ Report have each been prepared in accordance
with the applicable requirements of Part VIII of the Building
Societies Act 1986 and regulations made under it.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
Manchester
19 February 2003
13
Britannia Building Society Annual Report & Accounts 2002

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

Total Total
2002 2001
Notes £m £m

Interest receivable and similar income 1 807.4 912.9

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

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

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

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

2002 2001
Notes £m £m

Profit for the financial year 84.6 129.0

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

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

Total Total
2002 2001
Notes £m £m

Interest receivable and similar income 1 784.3 896.5

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

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

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

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

2002 2001
Notes £m £m

Profit for the financial year 31.1 87.3

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

15
Britannia Building Society Annual Report & Accounts 2002

GROUP BALANCE SHEET at 31 December 2002

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

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

MEMORANDUM ITEMS
Commitments 32 587.8 544.9

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

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

Approved by the Board of Directors on 19 February 2003.

B A W Bernstein N B Richardson P A Lee

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

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

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

MEMORANDUM ITEMS
Commitments 32 457.2 475.4

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

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

Approved by the Board of Directors on 19 February 2003.

B A W Bernstein N B Richardson P A Lee

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

CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 2002

2002 2001
Notes £m £m

Net cash inflow from operating activities 34 697.9 676.4

Returns on investments and servicing of finance

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

Taxation (26.8) (22.2)

Capital expenditure and financial investment

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

Acquisitions and disposals

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

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

18

STATEMENT OF ACCOUNTING POLICIES
Accounting Convention
The Accounts are prepared under the historical cost
convention.
Basis of Preparation and Consolidation
The Accounts have been prepared in accordance with
the Building Societies (Accounts and Related Provisions)
Regulations 1998 (‘the Regulations’) and applicable Accounting
Standards.The Group Accounts consolidate the state of
affairs, cash flows and results of the Society and its subsidiary
undertakings, and other companies which are considered by
the Directors to be quasi-subsidiaries as defined in Financial
Reporting Standard No. 5 (Reporting the substance of
transactions), all of which have accounting periods ended
31 December.
A Group geographical segmental analysis is not disclosed
as the Group’s business is predominantly United Kingdom
based however an analysis has been provided in Note 6
with respect to the different business segments of
the Group.
Restatement of Comparative Figures and Prior
Year Adjustments
The Group has implemented the requirements of Financial
Reporting Standard No. 19 (Deferred taxation). Under Financial
Reporting Standard No. 19, full provision is made for timing
differences and, in particular, deferred tax assets can be
recognised where it is more likely than not that there will be
sufficient future taxable profit against which to recover them.
Previously, they were recognised only where it was probable
that they would be recovered without replacement in the
foreseeable future.
The impact of the change is that previously unrecognised
deferred tax assets of Group £11.7 million and Society £6.2
million have been recognised and the general reserve has been
increased by the same amounts as at 31 December 2001. Had
the previous accounting policy been continued, profit for the
financial year ended 31 December 2002 would have been
Group £0.7 million higher and Society £0.5 million lower. Profit
on ordinary activities before tax is unaffected by the change in
accounting policy.
Previously reported deferred tax assets of Group £5.3 million
and Society £nil have been restated and additional deferred tax
assets of Group £11.7 million and Society £6.2 million
recognised (Note 20). Had the previous accounting policy been
continued for the financial year ended 31 December 2002,
deferred tax assets of Group £5.9 million and Society £nil
would have been reported.
Britannia Building Society Annual Report & Accounts 2002
Advances Subject to Non-recourse Finance
Loans fully secured on residential properties subject to non-
recourse finance meeting the conditions specified in Financial
Reporting Standard No. 5 are included in the balance sheet
using the linked presentation method. Such balances are stated
at book value less provisions for impairment.
Statements of Recommended Accounting Practice
The financial statements are prepared in accordance with relevant
British Bankers Association Statements of Recommended
Accounting Practice (SORP) in all material respects.
Income Recognition
Interest is recognised in the income and expenditure account
on an accruals basis. Mortgage arrangement fees are taken to
fees and commissions receivable on a received basis except
for commercial lending fees, where the amount of the fee
can be increased in exchange for a discounted mortgage rate.
Such fees are amortised over the period of the discounted
interest rate.
The cost of mortgage cashbacks is amortised over the early
redemption penalty period, and charged against interest
receivable.The cost of discounts is charged as incurred against
interest receivable.
Goodwill and Premiums on Acquisitions
In accordance with Financial Reporting Standard No. 10
(Goodwill and intangible assets), amounts paid for businesses
in excess of the fair value of the net tangible assets acquired
are amortised on a straight line basis over their estimated useful
economic lives up to a maximum of twenty years, subject to
any adjustments arising from impairment reviews.
Premiums paid for mortgage book businesses in excess of
the fair value of the net tangible assets acquired are included
in other assets and amortised on a level yield basis over five
years or less if the redemption rate of the mortgages is higher.
Premium amortisation is included within interest receivable.
Premiums paid for mortgage book businesses before 1999 in
excess of the fair value of the net tangible assets acquired were
deducted from reserves in the year of acquisition.
Broker Fees
Broker fees are capitalised within other assets and written off
against fees and commissions payable, on a straight line basis
over five years, or less if the redemption rate of the mortgages
is higher.
19
Britannia Building Society Annual Report & Accounts 2002
STATEMENT OF ACCOUNTING POLICIES
Interests in Associated Undertakings and Joint Ventures
An associated undertaking is generally one in which the Group’s
interest is more than twenty per cent and no more than fifty
per cent and where the Group exercises a significant influence
over the entity’s operating and financial policies. A joint venture
is one where the Group holds an interest on a long term basis
and which is jointly controlled by the Group and other third
party entities. Group profit includes income from interests in
associated undertakings based on accounts made up to the
same date. Interests in associated undertakings and joint
ventures are included in the consolidated balance sheet at the
Group’s share of the book value of the net tangible assets of
the undertakings concerned.
Pensions
The expected cost, including variations from the regular cost,
of pensions in respect of the Group’s defined benefit pension
scheme is charged to the income and expenditure account so
as to spread the cost of pensions over the expected service
lives of employees in the scheme.The pension cost is assessed
in accordance with the advice of qualified actuaries. On a
triennial basis, a formal actuarial valuation of the Group’s
pension scheme is undertaken.
The costs of pensions in respect of the Group’s defined
contribution scheme are charged to the income and
expenditure account as incurred.
Taxation
The charge for taxation is based on the profit for the year
and takes into account taxation deferred because of timing
differences between the treatment of certain items for taxation
and accounting purposes.
Deferred tax is provided at current rates on a non-discounted
basis, on all timing differences between the recognition of gains and
losses in the accounts and their recognition in a tax computation.
Liquid Assets
Debt securities intended for use on a continuing basis in the
Group’s activities are classified as financial fixed assets and are
stated at cost less provision for any permanent diminution in
value. Premiums and discounts arising on the purchase of
financial fixed assets are amortised over the period to maturity.
Any amounts so amortised are charged or credited to net
interest receivable within the income and expenditure account
for the relevant financial years.
Provisions for Bad and Doubtful Debts
20 Provisions are made to reduce the value of loans and advances to
the amount which the Directors consider is likely to be
recoverable.
Throughout the year, and at the year end, assessments are made
of all loans and advances on properties which are in possession
or in arrears. Specific provisions are made against those loans
and advances when, in the opinion of the Directors, their
circumstances make full recovery doubtful. Anticipated losses on
such accounts are calculated as the difference between the
achievable market value of the security, calculated by applying an
industry recognised national house price index less a forced sale
deduction to valuations, and the outstanding loan balance, after
making appropriate allowance for costs of repossession and
sale. A probability factor is then applied to the shortfall to
determine the provision required.The probability factor reflects
the Group’s actual experience of the propensity of the different
arrears categories to reach possession status. Allowance is made
for loss insurance cover where appropriate.The Directors
recognise that not all accounts in arrears will result in
possession and apply a factor based on recent experience and
other relevant risk considerations to reflect this probability when
calculating the provision for accounts in arrears.
Once properties have been sold and any shortfall crystallised,
individual cases are reviewed for potential insurance recovery.
Provision is made for amounts not considered to be recoverable
and written off when there is no realistic prospect of recovery.
A general provision is made to cover potential losses
which, although not yet specifically identified, are known
from experience to exist in the Group’s loan portfolio.
Such provisions are calculated with reference to actuarial
assumptions, credit scoring predictions and consistency with
industry levels.These provisions are regularly reviewed against
actual experience.
The charge to the income and expenditure account represents
new or additional provisions made less any reduction in
provisions or recoveries of amounts previously provided.
Interest which is considered irrecoverable, where the property
has been taken into possession or the normal lending
relationship has ceased, is suspended. Interest up to that time
is credited to income and provision made as appropriate.
Shares, Deposits, Subordinated Liabilities and
Subscribed Capital
In accordance with Financial Reporting Standard No. 4 (Capital
instruments), issue costs are deducted from debt instruments
on the balance sheet, or, in the case of permanent interest
bearing shares, are deducted from the share premium account.

STATEMENT OF ACCOUNTING POLICIES
Premiums and discounts, together with commissions and other
costs incurred in the issuing of fixed and floating rate notes and
subordinated liabilities, are amortised over the life
of the instruments.
Hedging Contracts and Instruments
The criteria required for an instrument to be classified as a
hedge are that the transaction must be reasonably expected to
match or eliminate a significant proportion of the risk inherent
in the assets, liabilities, other positions or cash flows being
hedged and which results from potential movements in interest
rates, exchange rates and market indices; and adequate evidence
of the intention to hedge and linkage with the underlying risk
inherent in the assets, liabilities, other positions or cash flows
being hedged, must be established at the outset of the
transaction.
All interest, exchange rate and market price related contracts
and instruments which are designated as hedges are accounted
for on a consistent basis with the underlying assets, liabilities,
other positions or cash flows.The Group hedges its interest rate
and currency exposures on a portfolio basis. Amounts accrued
on hedging contracts and instruments are included within
prepayments, and accruals and deferred income.
Tangible Fixed Assets and Depreciation
The directly attributable cost of additions and alterations to
office premises, including borrowing costs incurred in the
development of major premises, and additions to equipment,
fixtures, fittings and vehicles is capitalised.
The cost of tangible fixed assets is written down to their
residual value in equal annual instalments over their estimated
expected useful lives, which are reviewed regularly in the light of
technological developments, usage and other relevant factors:
Land and buildings
Freehold properties 50 years
Leasehold properties Life of lease
Major alterations to existing properties 7 years
Vehicles 1 year
General equipment 3 – 7 years
Computer equipment and software 3 – 5 years
Leases
Assets acquired under finance leases are capitalised at fair value
at the start of the lease, with the corresponding obligations
being included in other liabilities.The finance lease costs charged
Britannia Building Society Annual Report & Accounts 2002
to the income and expenditure account are based on a constant
periodic rate as applied to the outstanding liabilities.
The rentals paid for assets acquired under operating leases are
charged to the income and expenditure account in accordance
with the terms of the individual lease.
Captive Insurance Fund
The Society has established a wholly owned subsidiary, as a
captive insurance company, for the purposes of insuring part
of the risk upon secured lending and, in certain cases, charges
a fee to the customer.
The Society uses a fixed earnings pattern to estimate future
claims and the amount of premium to be retained against future
liabilities. Independent actuaries assess future liabilities to ensure
adequacy of reserves.
Premiums charged to borrowers which have not yet been
released to income are included in accruals and deferred
income.The captive insurance company’s reserves in respect of
premiums received from the Society not recharged to
borrowers have been included in the Group balance sheet
within mortgage loss provisions.
Britannia Membership Reward
The payment to be made under the Britannia Membership
Reward is shown as an additional line to the income and
expenditure account.This reflects the special nature of the
payment which was not envisaged when the Regulations were
drawn up prescribing the standard income and expenditure
account format.
Foreign Currency Transactions
All non-sterling assets and liabilities are translated at the
closing rate of exchange unless a currency exchange contract
exists, when the contract rate is applied. All foreign exchange
differences are taken to the income and expenditure account as
they arise. Interest income and expenses denominated in foreign
currencies are included at the average rates of exchange over
the accounting period. Amounts due or receivable under foreign
currency swap contracts are included within prepayments, and
accruals and deferred income.
21
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS for the year ended 31 December 2002

1. INTEREST RECEIVABLE AND SIMILAR INCOME

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

On loans fully secured on residential property 495.5 611.5 407.6 537.0

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

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

On loans and advances to credit institutions

Interest and other income 33.0 46.6 32.8 46.2

Net income on financial instruments 21.7 13.5 18.4 10.1

807.4 912.9 784.3 896.5

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

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

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

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

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

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Balance brought forward 6.1 6.1 4.4 4.4

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

2. INTEREST PAYABLE AND SIMILAR CHARGES

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

On shares held by individuals 350.8 443.5 350.8 443.5

On subscribed capital 14.3 14.3 14.3 14.3

On deposits and other borrowings

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

3. INCOME FROM INVESTMENTS

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Income from shares in subsidiaries – – 8.3 7.4

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

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

4. OTHER OPERATING INCOME

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Other operating income includes:

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

5. ADMINISTRATIVE EXPENSES

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

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

Other administrative expenses 56.6 56.3 55.1 53.5

131.9 127.9 118.5 112.5

Other administrative expenses include:

Auditors’ remuneration and expenses

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

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

23
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

6. SEGMENTAL INFORMATION

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

Membership Total Membership Total

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

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

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

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

7. DIRECTORS’ REMUNERATION

Remuneration of the Society’s Directors is detailed below:

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

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

7. DIRECTORS’ REMUNERATION (continued)

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

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

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

8. EMPLOYEES

The average number of persons employed during the year was:

Group Group Group Group Society Society Society Society

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

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

9. PENSIONS

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

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

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

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

Statement of Standard Accounting Practice No. 24

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

NOTES TO THE ACCOUNTS

9. PENSIONS (continued)

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

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

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

Financial Reporting Standard No. 17

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

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

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

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

Expected rate Expected rate

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

Equities 7.4 96.2 7.5 110.4

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

31 December 31 December
2002 2001
£m £m

Total market value of scheme assets 140.3 142.0

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

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

Restated
31 December 31 December
2002 2001
£m £m

General reserve excluding pension liability 1,026.8 942.2

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

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

9. PENSIONS (continued)

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

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

Analysis of the amount charged to operating profit 31 December

2002
£m

Service cost 5.6

Past service cost –
Total operating charge 5.6

Analysis of net return on pension scheme assets 31 December

2002
£m

Expected return on pension scheme assets 10.4

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

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

31 December 31 December
2002 2002
£m %

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

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

Movement in deficit in the year 31 December

2002
£m

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

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

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

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

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

Movement in unfunded benefit reserve in the year 31 December

2002
£m

Reserve at the beginning of the year (1.6)

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

NOTES TO THE ACCOUNTS

10. BRITANNIA MEMBERSHIP REWARD

Group and Group and

Society Society
2002 2001
£m £m

Payable to Members 37.3 53.4

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

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

11.TAX ON PROFIT ON ORDINARY ACTIVITIES

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

UK tax at 30% (2001: 30%)

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

Share of current tax of

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

Factors affecting tax charge for the year

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

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Profit on ordinary activities before tax 95.1 164.9 21.4 92.3

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

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

12. LOANS AND ADVANCES TO CREDIT INSTITUTIONS

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

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Accrued interest 2.7 5.5 2.5 5.5

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

13. DEBT SECURITIES

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Issued by public bodies 234.2 418.8 201.2 377.3

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

Debt securities have remaining maturities as follows:

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Accrued interest 26.7 19.6 26.4 19.2

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

Transferable debt securities comprise

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

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

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

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

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

29
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

13. DEBT SECURITIES (continued)

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

Group Society
£m £m

Adjusted cost and net book value (excluding accrued interest)

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

14. LOANS AND ADVANCES TO CUSTOMERS

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

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

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

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

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

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Repayable on demand 4.6 4.4 – –

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

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

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

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

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

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

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

The quasi-subsidiaries were originally funded as follows:

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

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

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

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

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

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

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

31
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

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

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

2002 2001
£m £m

Income and expenditure account

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

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

Capital and liabilities

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

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

Cash Flow Statement

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

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

16. PROVISIONS FOR BAD AND DOUBTFUL DEBTS

Loans fully Loans fully

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

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

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

Loans fully Loans fully

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

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

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

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

17. INVESTMENTS

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

Investments in subsidiary and associated undertakings:

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

33
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

17. INVESTMENTS (continued)

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

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

Britannia Development and Management Company Limited Property investment

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

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

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

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

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

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

Platform Consumer Services Limited Mortgage lending

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

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

Registered in the Isle of Man and operating overseas:

Britannia International Limited Deposit taking

Registered in Guernsey and operating overseas:

Britsafe Insurance Services (Guernsey) Limited Mortgage insurance company

Registered in Scotland and operating in the United Kingdom:

Britannia Life Direct Limited Direct sales of financial services

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

Britannia New Homes (Scotland) Limited Property development

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

17. INVESTMENTS (continued)

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

Britannia Personal Lending Limited Unsecured personal lending

MutualPlus Limited Provision of branch sharing services

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

Other directly held associated bodies

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

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

Leek Finance Holdings Limited Holding company

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

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

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

Platform Home Loans Holdings Limited Holding company

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

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

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

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

35
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

18. INTANGIBLE FIXED ASSETS

Goodwill
£m

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

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

19.TANGIBLE FIXED ASSETS

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

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

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

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

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

19.TANGIBLE FIXED ASSETS (continued)

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

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

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

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

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Net book amount of land and buildings is represented by:

Freehold 53.8 54.2 38.7 38.4

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

20. OTHER ASSETS

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

Deferred tax 6.8 17.0 6.7 6.2

Other 42.4 31.6 17.2 8.4
49.2 48.6 23.9 14.6

37
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

20. OTHER ASSETS (continued)

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

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

Group Society
£m £m

Deferred tax asset as previously recognised 5.3 –

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

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

21. PREPAYMENTS AND ACCRUED INCOME

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

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

22. SHARES

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

Held by individuals 10,393.8 9,917.7

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

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

Accrued interest 254.6 378.7

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

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

23. AMOUNTS OWED TO CREDIT INSTITUTIONS

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

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Accrued interest 12.3 12.7 12.3 12.7

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

24. AMOUNTS OWED TO OTHER CUSTOMERS

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

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

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

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

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Accrued interest 8.7 12.5 8.6 12.4

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

25. DEBT SECURITIES IN ISSUE

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

Certificates of deposit 1,039.0 691.3

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

39
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

25. DEBT SECURITIES IN ISSUE (continued)

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

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

Accrued interest 20.5 21.1

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

26. OTHER LIABILITIES

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

Amounts falling due within one year

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

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

27. ACCRUALS AND DEFERRED INCOME

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

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

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

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

28. PROVISIONS FOR LIABILITIES AND CHARGES

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

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

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

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

29. SUBORDINATED LIABILITIES

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

Floating rate subordinated notes 2007 – 70.9

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

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

41
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

30. SUBSCRIBED CAPITAL

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

Permanent interest bearing shares 110.0 110.0

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

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

31. RESERVES

Share General
premium reserve
£m £m

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

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

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

32. MEMORANDUM ITEMS

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

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

Credit risk weighted amount 149.0 138.2 116.3 120.9

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

33. FINANCIAL COMMITMENTS

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

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

Group Group Society Society

2002 2001 2002 2001
£m £m £m £m

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

Commitments under operating leases

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

Land and Land and

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

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

43
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

34. CONSOLIDATED CASH FLOW STATEMENT

Reconciliation of operating profit to net cash inflow from operating activities

2002 2001
£m £m

Operating profit after provisions and Britannia Membership Reward 95.1 84.9

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

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

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

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

Analysis of changes in financing during the year

Subscribed Subordinated
Capital Liabilities
£m £m

At 1 January 2002 110.0 170.4

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

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

2001 Flows 2002

£m £m £m

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

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

35. FINANCIAL INSTRUMENTS

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

The Group has a formal structure for managing risk, including established risk limits, reporting lines, mandates and other control procedures.This
structure is reviewed regularly by the Assets and Liabilities Committee (ALCO), which is charged with the responsibility for managing and controlling
the balance sheet exposures of the Group. Reports of all ALCO meetings are presented to the Board.

Instruments used for risk management purposes include derivative financial instruments (derivatives), which are contracts or agreements whose
value is derived from one or more underlying price, rate or index inherent in the contract or agreement, such as interest rates, exchange rates or stock
market indices.

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

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

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

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

Activity Risk Type of hedge

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

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

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

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

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

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

45
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

35. FINANCIAL INSTRUMENTS (continued)

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

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

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

GROUP AND SOCIETY

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

Interest rate contracts

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

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

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

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

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

35. FINANCIAL INSTRUMENTS (continued)

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

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

Interest rate risk

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

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

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

47
Britannia Building Society Annual Report & Accounts 2002

NOTES TO THE ACCOUNTS

35. FINANCIAL INSTRUMENTS (continued)

More than More than More than

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

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

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

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

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

Currency rate risk

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

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

Fair values of financial instruments

Set out overleaf is a comparison of book and fair values of some of the Group’s financial instruments by category as at 31 December 2002. Where
available, market values have been used to determine fair values. Where market values are not available, fair values have been calculated for options
by using option-pricing models and for other financial instruments by discounting cash flows at prevailing interest and exchange rates.

The table excludes certain financial assets and liabilities which are not listed or publicly traded, or for which a liquid and active market does not
exist. It therefore excludes mortgages, retail savings accounts and other balance sheet items. Book and fair values of those items would differ at
31 December 2002.

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

35. FINANCIAL INSTRUMENTS (continued)

Book Fair Book Fair

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

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

Liquid assets comprise cash in hand and balances with the Bank of England, loans and advances to credit institutions and debt securities.

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

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

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

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

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

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

Unrecognised gains and losses on hedges are as follows:

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

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

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

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

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

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

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

NOTES TO THE ACCOUNTS

36. NON-STERLING ASSETS AND LIABILITIES

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

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

Assets 1,125.5 998.9

Liabilities 1,424.7 1,121.7

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

37. DIRECTORS’ LOANS AND RELATED PARTY TRANSACTIONS

Society Society
2002 2001
£000 £000

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

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

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

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

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

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

Britannic plc and its subsidiaries

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

Britannic Asset Management Limited (BAM)

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

Britannia Personal Lending Limited (BPL)

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

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

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

1. STATUTORY PERCENTAGES

Statutory
2002 Limit
% %

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

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

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

• Business assets are the total assets of the Group as shown in the balance sheet, plus provisions for bad and doubtful debts, less fixed assets and
liquid assets.
• Loans fully secured on residential property are the amount of principal owing by borrowers and interest accrued not yet payable.This is the amount
shown in the balance sheet, plus provisions and bad debts, less unamortised premiums on the acquisition of loans.
• Shares and borrowings represent the total of shares, amounts owed to credit institutions, amounts owed to other customers and debt
securities in issue.

2. OTHER PERCENTAGES

Restated
2002 2001
% %

As percentage of shares and borrowings:

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

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

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

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

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

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

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

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

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

51
Britannia Building Society Annual Report & Accounts 2002

ANNUAL BUSINESS STATEMENT

3. DIRECTORS’ RESPONSIBILITIES

Directors

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

B A W Bernstein Company Director 1.5.1994

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

I C Adam, CA Company Director 22.6.1998

2.9.1943
Fishers Holdings Limited
Fishers Services Limited

A H Coe, FCA Company Director 11.4.2000

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

W J Gordon, FCIB Company Director 22.9.1999

24.4.1939
Barclays Pension Fund Trustees Limited
Britannia Treasury Services Limited

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

3. DIRECTORS’ RESPONSIBILITIES (continued)

Directors

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

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

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

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

13.7.1943
Serco Group PLC
The Second World War Experience Centre

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

25.5.1955
Britannia Treasury Services Limited

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

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

B C Rosewell, MA, MPhil Economist 28.7.1999

19.9.1951
The Environment Business Limited
Volterra Consulting Limited

53
Britannia Building Society Annual Report & Accounts 2002

ANNUAL BUSINESS STATEMENT

3. DIRECTORS’ RESPONSIBILITIES (continued)

Directors

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

L Sawyer Member of the House of Lords 28.7.1999

12.5.1943 Management and Training Consultant

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

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

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

J Suffolk, MBA Building Society Executive Director 28.6.2001

25.2.1958
Britannia Development and Management Company Limited
MutualPlus Limited

E Walmsley, BSc, PhD, MBA Company Director 13.3.2000

28.2.1953
Sheffield University Enterprises Limited
White Rose Technology Limited

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

Officers

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

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

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

I M Dale, ACA Head of Group Finance

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

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

T A Franklin, ACIB Head of eBusiness

Director – Britannia Personal Lending Limited

S A Goldstraw Head of Commercial Lending

Director – Britannia New Homes (Scotland) Limited

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

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

3. DIRECTORS’ RESPONSIBILITIES (continued)

Officers (continued)

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

A M Long, BSc (Hons) Head of Marketing

I G McKilligan, CA Head of Group Risk

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

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

K Moir, BA (Hons) Director of Organisational Development

S Nichols, ACIB, MCT, ACIS Head of Treasury

D R Preece, ACIB Head of Membership Services

Director – Western Mortgage Services Limited

A J Thompson Strategy Manager, Change Management

A S Thompson, FCIB Head of Retail Operations

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

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

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

D P Waddingham, Managing Director, Britannia International Limited

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

ANNUAL BUSINESS STATEMENT

4. DIRECTORS’ SERVICE CONTRACTS

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

G H Stow 4 March 1996

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

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

56

ANNUAL REPORT OF THE REMUNERATION COMMITTEE
This report has been produced to inform Members of the
Board’s policy on the remuneration of the Society's Directors.
Clearly an organisation such as Britannia where assets under
management are close to £20 billion must be well managed,
to safeguard Members’ savings and give good returns.
Consequently the Board must comprise high calibre Directors
with extensive relevant experience and expertise.
Remuneration Committee
The role of the Remuneration Committee is to determine
the terms and conditions of employment of the Executive
and Non-executive Directors of the Society, ensuring those
terms and conditions remain appropriate to attract and retain
Directors with relevant experience and skills.
Composition
During 2002 the Committee comprised three Non-executive
Directors (Rhidian Jones, Barrie Bernstein and Tom Sawyer) and
was chaired by Rhidian Jones. On 1 January 2003, Ian Adam
joined the Committee.The Society’s Secretary, Paul Mills, attends
as Secretary to the Committee.
Meetings of the Committee are also attended, as necessary,
by Neville Richardson (Group Chief Executive) and Karen Moir
(Director of Organisational Development).
Frequency of Meetings
The Committee normally meets three times a year, with special
meetings when needed.
Scope
The guiding principle underpinning the operation of the
Committee is that members will have no direct financial interest
in the decisions that they make and will withdraw from the
meeting when their own remuneration is being considered.
Key Activities in 2002
During 2002, the Committee met six times. Some of the key
issues considered by the Committee included reviews of the
remuneration of the Executive and Non-executive Directors
and the design of the 2003 Executive Bonus Scheme.
Directors’ Remuneration
The remuneration of each Director is analysed in Note 7
of the Annual Report and Accounts. Non-executive Directors
are remunerated solely by fees and do not receive any salary,
pension, benefits or the benefit of any incentive schemes.
Mechanisms for Determination of Base Salary
The Committee bases its decisions about the base salary of the
Britannia Building Society Annual Report & Accounts 2002
Executive Directors on three principal factors – level of
responsibility, external market competitiveness and individual
performance in the role. All the Executive Directors have a job
description prepared in a standard format, which is independently
evaluated.The Committee analyses the external market
competitiveness of the Britannia salaries and benefits against
those of comparable positions elsewhere in industry.The
Committee takes advice from a number of external advisors,
including Watson Wyatt and Hay.
The Society’s salary policy is to position salaries so that, on
average, they are in line with the median salaries paid for
comparable positions amongst peer group financial services
organisations. Allowance is made for individual circumstances,
primarily concerning performance.
Individual Performance
Comparison of senior executive responsibilities and market
analysis will provide an appropriate market salary indicator for
a particular position.These alone, however, are not sufficient
to enable a full, reasoned judgement to be made about the
appropriate salary level for the particular incumbent.This also
requires an assessment of individual performance.
To this end, all of the Executive Directors are subject to an annual
performance appraisal by the Chief Executive.The Chief Executive
is appraised by the Chairman. All Non-executive Directors
receive an annual appraisal conducted by the Chairman, who in
turn receives an appraisal conducted by the Deputy Chairman.
Bonus Scheme
The Remuneration Committee reviews and authorises all
variable pay arrangements (i.e. the bonus schemes) for
Executive Directors.This includes both the approval of the
design of such schemes and the verification of the intended
payout against the performance measures and targets laid down.
The selection of performance measures is reviewed annually to
ensure that the measures are linked to the achievement of the
Group corporate plan and that they support the priorities of
the business for the forthcoming year. All annual schemes are
constructed around the achievement of target levels of
performance in the selected measures. A threshold level of
performance is laid down, below which no payment will be
made, and a maximum level is also specified to avoid any
excessive bonuses.The results of the incentive scheme, and the
attendant bonus payments which are produced, are subject to
external review. As a Mutual the Society does not have share
capital and there are therefore no share options for the
Directors or employees. 57
Britannia Building Society Annual Report & Accounts 2002
ANNUAL REPORT OF THE REMUNERATION COMMITTEE
For the year ended 31 December 2002, the bonus was linked
to three performance measures – Group profit (defined as
‘profit before Britannia Membership Reward and tax’ and
excluding exceptional items), cost to income ratio and cost to
asset ratio.The on-target bonus was 18% of salary and the bonus
was capped at a maximum of 30%.The actual bonus was 22.24%.
Full payment of the bonus to each individual Director was subject
to them achieving their personal objectives during the year.
The Remuneration Committee also approved the Directors’
bonus arrangements for the year ending 31 December 2003.
The scheme again provides for payments to be linked to the
same financial measures used in 2002, together with a new
measure linked to customer satisfaction. Based on independent
advice concerning market comparators, which showed the
previous scheme to have a significant shortfall in bonus entitlement,
in 2003 the Scheme will pay a total bonus of 35% of salary for
the achievement of target levels across all four measures. Group
profits in excess of target produce no additional payment, since
we give value to Members rather than make greater profits.
However, exceptional performance in the other three measures,
and full achievement of personal objectives, can enhance the
bonus up to an overall maximum payment of 70%.To ensure
Executive focus on long term objectives, and to act as a retention
tool, 3/7th of the payment will be deferred for two years.
The four target performance levels, on which the 2003 bonuses
will be paid have been set by the Committee based on the
Group’s forecasts for 2003.
Benefits
Whilst it can be more difficult to compare the exact monetary
value of benefits between organisations, it is the policy of the
Society to pursue a similar market position on benefits as on salary,
i.e. median amongst the peer group financial services organisations.
The main benefits are described below:
• Society car of the Director’s choice up to the monthly lease
cost of a stipulated benchmark model;
• private mileage fuel;
• a Group Healthcare Scheme which provides private
medical insurance cover for the Directors and their families.
(Non-executive Directors may obtain cover under the
Scheme but must pay the annual subscription themselves);
• a concessionary mortgage up to £35,000 borrowed at 3.8%;
• membership (after two years of employment) of a
Permanent Health Insurance Scheme which provides income
in the event of being unable to continue working due to
disability or prolonged illness; and
58
• membership of the contributory Britannia Building Society
Pension and Life Assurance Scheme which includes an
accrual rate of up to 1/30th of final pensionable salary per
year of service to a maximum of 2/3rds of final pensionable
salary, plus a supplementary scheme to provide pension
benefits in accordance with the individual’s contract of
employment in respect of basic salary in excess of the
Earnings Cap. A new Money Purchase Pension and Life
Assurance Scheme was introduced in 2001.
Pensions information in respect of each Director is shown in
Note 7 of the Annual Report and Accounts.
Period of Notice
The Remuneration Committee has agreed a policy for
mitigation of Executive Contracts. All Executive Directors are
entitled to a notice payment on termination subject to the
policy. Additionally the payment should take into account the
amount due in relation to other contractual benefits.
All new Executive Director appointments (including promotions)
will be on a rolling one year contract of employment. Mr. Stow,
who had a rolling 2 year contract, retires in May 2003. Mr. Gregory
has a rolling 2 year contract, and Mr. Lee and Mr. Suffolk have rolling
one year contracts. Mr. Richardson’s rolling 2 year contract is being
reduced over 12 months from 1 November 2002 to one year.
Request for Feedback from Members
The Board is committed to implementing the requirements of the
relevant Codes of Practice on Governance and to following best
practice in the disclosure of information on Directors’ remuneration.
This report, together with the details in the Notes to the
Accounts, has been prepared with the aim of disclosing to
Members the remuneration of the Directors and giving an
insight into how the decisions about remuneration are taken.
The Committee would welcome any comments or suggestions
from Members as to whether the information contained in the
2002 report has been helpful and what information could
usefully be provided in future years to further enhance
Members’ understanding of this subject.These should be
addressed to the Society’s Secretary, Paul Mills.
R H B Jones
Chairman of the Remuneration Committee
19 February 2003
Britannia Building Society is authorised and regulated by the Financial Services Authority and advises on and
sells the life assurance, pension and unit trust products provided only by the Britannic marketing group.
Mortgages are not regulated by the Financial Services Authority. Security is required for all secured loans.
Written quotations available on request. All loans are subject to status, valution and Rules of the Society,
copies of which are available on request. Britannia undertakes to comply with The Mortgage Code and The
Banking Code. Copies of these Codes are available on request. Calls may be recorded and/or monitored.
Britannia Building Society is a member of the General Insurance Standards Council.

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

OTHER LOAN SECURED ON IT.

Britannia Building Society

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

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

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