Two Castles Housing Association Limited. Consolidated Financial Statements For the year ended 31 March 2014

Transcription

1 Two Castles Housing Association Limited Consolidated Financial Statements For the year ended 31 March 2014

2 Two Castles Housing Association Limited Board of Directors, Executives and Advisers for the Year Ended 31 st March 2014 Registered Office: 3 Paternoster Row, Carlisle, Cumbria, CA3 8TT Director Details Board Audit Committee Resources Committee Customer Services Committee Staffing and Remuneration Committee Annual salary entitlement Michael Johnson last appointed 2013 Chair - - Chair 7543 Stephen Bennett - last appointed 2011 Chair Ray Bloxham resigned 18 July Chair 1238* Ann Carr last appointed Deputy Chair ** Phil Cottrill last appointed Chair 4161 Rosalind Johnson last appointed Chair 4161 Ian Kitchen last appointed ** Martin Knowles last appointed Fiona Moore last appointed 2011 Deputy Chair Claire Scholfield last appointed Jane Vickers last appointed Executive Officers Stephanie Murphy Gill Boyd David Armstrong Rob Brittain Auditors Chief Executive Finance Director and Company Secretary Housing Services Director Property Services Director Solicitors Bankers Beever & Struthers St George s House Chester Road Manchester M15 4JE *Pro rata **Members waived their entitlement Winckworth Sherwood 35 Great Peter Street Westminster London SW1P 3LR Barclays Bank plc The Association s remuneration policy for the Board is in line with the National Housing Federation Code of Governance good practice.

3 Chairman s introduction 2013/14 sees my fourth year as Chairman of Two Castles Housing Association and I am pleased to say that the organisation continues to grow, shows strong financial viability into the future, is producing healthy operating surpluses and provides excellent services for residents. This is our first year of producing an Operating and Financial Review. Although we fall below the accounting legislation threshold where we are required to do this, we believe it is good practice to do it and, importantly, it is a means of showcasing the organisation s key achievements and strengths to stakeholders. The document which follows this introduction gives more detail about the highlights I briefly touch on below, as does our Value For Money Self Assessment which is on our website. Our residents tell us that it is important that they receive excellent services from us which give value for money, and that we must listen to them when we shape those services. We have done a lot of listening this year and are particularly proud of our re-vamped Customer Services Team that is exceeding its target of resolving 75% of all customer calls at first point of contact. Significant investments in new technology have radically improved the way we communicate with residents. These include the introduction of a unified communications system, texting facilities, improved options for payment and a Resident Portal on our website. Feedback from residents and evidenced Key Performance Indicators show that these have been hugely popular with residents, but, also importantly, are helping us to more effectively meet important targets on gas servicing and improved rent collection. As part of our listening process, residents met with us to help review our mission, values and key corporate objectives last autumn. This then fed into our corporate plan which sets out our plans for the future and how we will achieve them. We also had our Residents Scrutiny Panel up and running. The Board believes that as well as listening to and meeting our current residents aspirations, we must take account of the need for more affordable homes. To help achieve this we have had a strong development programme delivering 80 units in 2013/14 and will continue developing much needed new homes through to We have undertaken a number of departmental reviews during the year to ensure that we are able to meet the challenges and opportunities facing the organisation going forward. Our commitment to developing excellent staff has been rewarded with a number of external awards in 2013.

4 The full effects of welfare reform have yet to be felt in our region, but our residents tell us that fuel poverty is as much of an issue for a lot them financially. The Board has responded to this with a range of financial inclusion and green technology initiatives to try to mitigate hardship. We are very pleased that these initiatives are now showing positive results for residents through reductions in fuel costs, and for the association, in having properties which are more lettable into the future. There is no doubt that the external operating environment continues to be challenging. The Board has reflected upon that with a full review of our approach to identifying, mitigating and monitoring key strategic risks facing the organisation in its delivery of its corporate objectives. We have also fully reviewed our approach to self assessing our performance in delivering value for money. The Board is using best practice to ensure we showcase to all stakeholders our excellent work on delivering efficiencies and re-investing them effectively for the benefit of stakeholders and the business into the future. We have also looked closely at where there have been difficulties in the sector, and what the lessons from those are, to ensure we are ready for future challenges, whatever form they may take. So, on balance, a challenging, but nonetheless very successful year for Two Castles. I am proud to be Chairman of this organisation which puts the needs and aspirations of current and future residents at the heart of all it does, in meeting its mission to Deliver quality homes and services with pride, passion and principles Michael Johnson Chairman

5 Report of the Board of Directors, Including Operating, Financial and Value for Money Review for Year Ended 31 March 2014 The Board of Directors present their Report, their Statement of Internal Controls and Audited Financial Statements of the Association for the year ended 31 March The Association is registered under the Industrial and Provident Societies Act 1965 (Registered No: 17663R), Section 3 of the Housing Act 1996 (Registered No: LH1534), is a registered Housing Association and a Registered Provider (RP) and has charitable status. The Board of Two Castles is responsible for preparing the Board s Report, Statement of Internal Controls and Audited Financial Statements in accordance with applicable laws and regulations. The Industrial and Provident Societies Acts require the Board to prepare accounts for each financial year which give a true and fair view of the state of affairs of the Association and of the surplus of the Association for that period. In preparing these accounts, the Board is required to: 1. Select suitable accounting policies and then apply them consistently. 2. Make judgements and estimates that are reasonable and prudent. 3. State whether applicable accounting standards have been followed. 4. Prepare the accounts on the going concern basis unless it is inappropriate. The Board is responsible for keeping proper accounting records which disclose with reasonable accuracy at any time, the financial position of the Association, and to enable the Board to ensure that the accounts comply with the Industrial and Provident Societies Acts and Housing Acts. The Board is also responsible for safeguarding the assets of the Association and hence for taking responsible steps for the prevention and detection of fraud and other irregularities, by establishing and maintaining a satisfactory system of control over the Association s accounting records, cash holdings and all its receipts and remittances. As far as the Board and executive officers are aware, there is no relevant audit information of which the auditors are unaware. The Board and executive officers have taken all steps they ought to have taken as Board and executive officers in order to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information.

6 Corporate Governance Board Membership At 31 March 2014 the Board consisted of ten non executive members, of which two members are residents of the Association. The Board has a skills matrix which ensures that it has the appropriate level of skills across the whole Board which is required for the effective running of the organisation. The Board confirms that for the year 2013/14 there are no skills gaps identified. Going forward, the Board will be losing a retiring member with significant financial and strategic skills. The Board can cover these skills across the remaining members, but has agreed to review the position in March There are no executive Board members. Details of serving Board members are listed separately at the beginning of the Consolidated Financial Statements document. Code of Governance The Board has adopted, and is fully compliant with, the National Housing Federation (NHF) Code of Governance Excellence in Governance. Board Performance and Adding Value The Board reviews its performance annually using a range of mechanisms, including individual Board member appraisals, to enable it to demonstrate how it is properly discharging its duties and adding value to the work of the organisation. For the year 2013/14 this whole process, and the outcome, was also externally reviewed and validated. The conclusion of the review was that: We consider that the approach to board member appraisals and the review of board effectiveness is robust, suitably challenging and a sound foundation for the Board s training and development planning in The self-assessment against the NHF code of governance is thorough, open to scrutiny and provides an audit trail of evidence to demonstrate compliance. Board Payment The Board pays its members and details of payments are listed separately at the beginning of the Consolidated Financial Statements document. Two members have elected not to take payment. The Board has its payment amounts subject to external review every two years to ensure that these are in line with good practice in the not-for-profit sector. The next review is due in Payments to Board members do not exceed half a per cent of turnover, in line with good practice. Responsibilities of the Board and Delegation The Board is responsible for the strategic direction of the organisation, for setting its policy framework and for ensuring that its functions are properly performed. The Board has agreed a scheme of delegation to four sub committees of the Board through the relevant Terms of Reference of those committees: Resources Committee Its role is to review and recommend to Board the financial policies and strategy of the Association, ensure regular, timely and accurate financial reporting, review the treasury management function and development finance function.

7 Staffing and Remuneration Committee The committee considers matters relating to salary structure and the organisation s policy on employee remuneration and benefits in order to ensure the organisation can attract and retain high calibre staff. Audit Committee Its role is to independently contribute to the Board s overall process for ensuring that an effective internal control system is maintained and oversee the implementation of the Risk Management Strategy. The committee meets four times per year and, in line with best practice, has an in camera meeting with the auditors without officers present before each meeting. Customer Services Committee This committee has a number of residents who serve on it. Its main duties are to ensure effective engagement with customers and prospective customers about the quality and nature of the Association s services, to monitor key service standards and key performance indicators (KPIs) and to receive reports from the Resident Scrutiny Panel. The Board has a number of Board Champions who take a leadership role for key cross-cutting aspects of the Association s business: Health and Safety Fiona Moore Equality and Diversity Jane Vickers Asset Management Phil Cottrill Value for Money (VFM) Martin Knowles Day-to-day management is delegated to the Chief Executive supported by Directors of Finance, Property Services and Housing Services. The Board meets at least five times per year and has two Board Conferences per year. All Board members serve on at least two sub committees, and the Board retains responsibility for appointing the chair and members of all sub committees. Shareholding Board Members At the date of the AGM (26 August 2014), all Board members are 1 shareholders. Nature of Business Principal Activities Two Castles Housing Association is a traditional RP with just over 3,500 properties across the north of England. The Company s principal activities are the building and management of rented and leasehold housing. Other activities which are undertaken include enabling employment, skills and training opportunities through key development and procurement partnerships across the northern region. The Association also works in partnerships with other associations to develop its Green Technology Strategy, and to provide innovative, cost saving delivery of its responsive repairs to residents.

8 The Association has a broad mix of stock, with its portfolio split between general needs (63%), supported and older persons housing (17%) and leasehold accommodation (20%). The state of the stock has been validated by external consultants and is considered to be good, with all of the relevant stock meeting the Decent Homes Standard. It is mainly of traditional build, with the majority of fairly recent, (post 1980), construction, and with no high rise stock. Of the Association s stock, 59% is held in the North West within the following Local Authorities: Carlisle 24%, Copeland 13%, Eden 12%, South Lakeland 9%, other 1%. The remaining 41% of stock is within the following North East Local Authorities: Gateshead 9%, Northumberland 8%, Sunderland 12%, other 12%. The Association is regulated by the Homes and Communities Agency (HCA) and is required to comply with the HCA s Regulatory Code. For the financial year under review, the Association had a HCA regulatory judgment of V1 for financial viability. The Association s regulatory judgment for governance was, in February 2014, downgraded from G1 to G2 for Governance, because it didn t communicate its VFM self assessment to stakeholders. The Association will be working towards a G1 grading during 2014/15. Two Castles key stakeholders include residents, the HCA, Local Authorities, funders and external partners. Objectives and Strategies The vision of the Association is to Deliver quality homes and services with pride, passion and principles. The Association s Corporate Plan details its key corporate goals, how it will achieve them and how it will monitor achievements. The key corporate goals are as follows: Goal 1 Customer To involve and empower residents to help the Association to deliver a high quality service to residents and prospective residents. Goal 2 Employer To be the preferred employer for both existing and prospective employees. Goal 3 Property To build and maintain safe, secure and sustainable homes and communities. Goal 4 Viable To be a financially viable, well run, organisation.

9 Goal 5 To achieve high standards of corporate governance To ensure that the organisation has effective and accountable leadership and governance to enable it to meet challenges and opportunities. The following cross-cutting themes are considered fundamental to the successful delivery of the Association s corporate goals: Value for Money (VFM) The Association believes that customers and prospective customers should receive first class homes and services. It concentrates resources on service improvements, working with residents, listening to them, and always seeks better VFM in everything it does, and plans to do. This ensures that it should achieve the greatest benefit for its customers. The Association s detailed approach to VFM is contained within the VFM Strategy and in the annual VFM self assessment statement, available on the website. Health and Safety Health and safety is of fundamental importance to the Association. It is an area central to its operations and one which it is not prepared to compromise upon. The Association s detailed commitment to health and safety is contained within its Health and Safety Statement. Equality and Diversity The Association acknowledges, values and respects the diversity of its customers, staff and partners and looks to exceed statutory requirements in this area. It is committed to developing an organisational culture which values people from all sections of the community, along with the contribution each individual can make to the work of the Association. The approach to Equality and Diversity is set, reviewed and monitored by the Board. Risk Management In achieving its corporate goals, the Association recognises the fundamental importance of identifying and effectively managing the risks it and the rest of the sector faces. It also recognises that the risks faced by the business will be subject to change over time, both in terms of their nature and in terms of the likelihood and potential impact. The active management of risk, as an integral aspect of business management, will reflect this. Further details of the Association s approach to risk are covered later in this document in the section headed Dynamics of the Social Landlord. Monitoring Delivery the Balanced Scorecard In monitoring and delivering objectives and strategies, the Association uses a performance management framework, known as the Balanced Scorecard (BSC) (originated by Drs. Robert Kaplan (Harvard Business School) and David Norton). The BSC is used extensively in other sectors, including business and industry, government, and not-for-profit organisations worldwide. Using a BSC approach enables the Association to measure its performance of both strategic non-financial measures and traditional financial measures giving managers and executives a balanced view of the organisation s performance.

10 Resourcing the Delivery of the Corporate Goals The Financial Plan reflects the current and projected financial position for the Association. This is measured over a 30 year time horizon with the budget monitoring annual performance. The Financial Plan is reviewed on a regular basis. It reflects the Association s objectives and long-term affordability along with a careful assessment of the risk associated with the social housing environment, and makes prudent assumptions in all major areas of its operations. In particular, it concentrates on the financially critical areas of major repairs, development and treasury. The Board is responsible for the design, delivery and monitoring of the Association s corporate goals. The table below shows how major initiatives for 2013/14 have been achieved and the indicators used to measure them: Corporate Goals Strategies and Initiatives Indicators Goal 1 Customer To involve and empower residents to help the Association to deliver a high quality service to residents and prospective residents. To increase the communication with, and involvement of, residents in both the current and future service delivery. Implement final stages of the Sheltered Housing Plan. Implementation of Equality and Diversity Strategy and action plan. Embed the new Customer Services team, whose goal is to improve contact for residents and future residents. Annual review of KPIs. Implemented resident involvement action plan. Annual resident report published in December Set up a Residents Scrutiny Panel, whose first objective was to review the Empty Property Management Standards (November 2013 March 2014). Utilised IT in improving the service to residents; in particular, introduced texting and a Residents Portal on the Association s website. Residents involved in the review of the Association s vision, values and key corporate objectives. Potential options for sheltered housing schemes sent to Board. One scheme is in the process of being sold to a developer. Two have been re-modelled. Equality and Diversity Handbook produced for staff and residents.

11 Corporate Goals Strategies and Initiatives Indicators The Customer Services team answered 75% of all queries at first point of contact. Goal 2 Employer To be the preferred employer for both existing and prospective employees. To provide staff with a training and development framework. Review departments existing staff structures to ensure they are fit for purpose. To enhance terms and conditions of employment. To consider applying for external awards and accreditations. KPI targets for 2013/14 agreed and reported on quarterly. 360 o appraisal system implemented for all staff. Management and development training programme for Extended Management Team. All new starters meet the Chief Executive to discuss the values, vision and ethos, together with how each staff member contributes to this. Completed reviews of Customer Services and Property Services departments. Reviews achieved enhanced skill set and the ability to better deliver on corporate objectives without any additional cost. External review concluded terms and conditions are good and will assist staff retention and attracting high calibre staff. 31 st place in the Sunday Times Top 100 Companies Best Companies Outstanding Company. Investors in People Gold Standard award. CN Business Awards st place award for Training and Development.

12 Corporate Goals Strategies and Initiatives Indicators Goal 3 Property To build and maintain safe, secure and sustainable homes and communities. Introduce a strategy addressing green issues. To continue with the development and supply of new housing whilst meeting statutory and VFM requirements. Delivery of year two of a four year 3.25m investment in new technology reducing fuel poverty. Feed in tariffs from PV solar panels received by the Association. To continue developing an efficient procurement service in terms of cost, IT and staff time. Annual review of KPIs. Evaluated unique partnership with development partner, ESH, demonstrating benefits and VFM. Achieved Constructing Excellence North East Award for Integration and Innovation. Goal 4 Viable To be a financially viable, well run, organisation. Annual review of the Financial Strategy. Continuous monitoring of financial performance. Effective management of treasury risk. Continue to populate annually the Asset Management Matrix tool to measure the Delivered the Affordable Housing Programme targets for the year (80 units). Successful joint procurement of responsive repairs in the North West replicated in the North East with RP partners. Use of procurement frameworks resulted in best cost and also social investment by means of employment and skills opportunities. KPI targets for 2013/14 agreed at March 2013 Board and reported on quarterly during 2013/14. Financial Strategy reviewed and updated. Key benchmark ratios revised. 30 year Financial Plan reviewed by Board quarterly. Management Accounts reviewed by committee quarterly.

13 Corporate Goals Strategies and Initiatives Indicators financial performance of schemes. Annual review of KPIs. Budget approved by Board annually (zero based approach). 30 year Financial Plan tested for future development capacity and welfare reform impact. Full compliance with rent restructuring achieved. Annual review of Treasury Policy and Strategy completed in June Loan covenant compliance reported quarterly to Resources Committee. (No breaches of covenant arose). 99.5% assurance regarding property title deeds and security records. Now in fourth year of trend analysis from data provided by Asset Management Matrix, allowing assessment of stock options - whether to carry out major repairs or whether to retain, transfer or sell stock. KPI targets for 2013/14 agreed at March 2013 Board and reported on quarterly during 2013/14.

14 Corporate Goals Strategies and Initiatives Indicators Goal 5 To achieve high standards of corporate governance To ensure that the organisation has effective and accountable leadership and governance to enable it to meet challenges and opportunities. To improve Board and committee member performance. To review vision and values to ensure relevant and meaningful. Ensure internal policies and procedures are regularly reviewed and meet legal requirements. New format introduced for members appraisals, which included a 360 o review. Annual review of Board effectiveness reported to Board in July Continuous programme of review to ensure good governance standards. Training plan implemented. To implement the latest NHF Model Rules. Implementation of e-governance, paperless Board and Audit Committee papers, Board Members Portal. Review of vision and values completed with the involvement of members, staff and residents. Policies reviewed in accordance with timetable, change in legislation or best practice publications. Full review of health and safety, including the appointment of a Board Champion. Commenced complete VFM review following downgrade. Rules implemented with shareholder approval at the SGM in May 2013.

15 Operating Review The operational performance of the Association is monitored through the use of a BSC and by monitoring actual performance against a suite of KPIs. Examples of these are below: Fundamental operational KPIs Target Year end performance Self Assessment Housing Services Rent arrears outstanding as a % of rent debit 4% 3.2% Leasehold arrears outstanding as a % of debit 4% 6% X* Average re-let time for all properties 28 days 29 days = Amount of rent lost through void property 2.1% 2% % of homes vacant and available to let 1% 1.3% = % of homes vacant and unavailable to let 1% 0.1% Rent increases implemented on time (for rented properties) 100% 100% Leasehold rent increase and service charge budgets produced and consulted upon in required time limits 100% 100% Satisfaction with re-sales process 80% 100% % new standing order and payment cards for residents actioned within seven working days of receipt 100% 100% Property Services % of emergency repairs completed in timescale 98% 98.8% % of urgent repairs completed in timescale 95% 96.7% % of routine repairs completed in timescale 95% 97.0% % of non-urgent repairs (90 days) completed in timescales 95% 93.8% = % of residents satisfied with repairs 96% 94.4% = % of homes that are Decent 100% 100% Resident satisfaction with planned maintenance 96% 97.3% Resident satisfaction with cyclical programme 96% 94.5% = % of contractual invoices paid by due date 100% 100% Colour Key Green - Achieved or better than target Amber = - Small improvements required to achieve or better target, progress reported quarterly to Board Red X - Significant improvements required to achieve or better target, progress reported quarterly to Board *Not achieving the leasehold arrears target in 2013/14 was primarily due to the very slow sales of properties where elderly residents have died and charges continue to accrue until sale achieved. This trend started to improve at year end following a significant increase in the sale of leasehold properties; the trend is being closely monitored.

16 Dynamics of the Social Landlord The Association recognises that the social, political and economic environment is rapidly changing and that it needs to have strategies in place to ensure it can identify and meet the challenges and opportunities it faces going forward. During 2013/14, the Board embarked on a thorough review of how the Association identifies and manages risks. This culminated in a report to both Audit Committee and Board in March 2014 laying out: the proposed methodology for identifying risks the key strategic and operational risks faced by the organisation the mitigating actions put in place whether the risk is acceptable once mitigation is in place. Methodology Using a range of methods to help identify what the Association considers to be the key strategic risks it faces, the organisation: reviewed the current strategic risks associated with the Corporate Plan and key business objectives reviewed each department s operational risks consulted the HCA document Sector Risk Profile 2013, and, in particular, the risks arising from: welfare reform, diversification, housing market risk, financial market risk utilised background information arising from external conferences, recent sector problem cases and external auditors publications benchmarked the strategic and operational risks using external consultants. Key Strategic and Operational Risks The review identified seven strategic risks which are subject to a quarterly review by directors, Audit Committee and Board. There are also key operational risk tables covering each department, as follows: Housing Property Corporate HR IT Finance These have not been included in this review, but are delegated for monitoring by Audit Committee.

17 The key strategic risks (for 2013/14) affecting Two Castles are outlined in the table below: Strategic Risk Impact Mitigation Entering into any potentially untried or complex new vehicle for the Association s development partnership to maximise returns. Unacceptable pressure on the Association s income streams as a result of welfare reform and the impact of the new government rent formula. Legal challenge, financial losses, regulatory issues, reputational damage. Possible viability issues, regulatory issues and reputational loss. Specialist legal advice to the Board from a firm experienced in diverse business structures in the sector. Clearly identified risks of any options, with clear mitigation and consequences for Two Castles. A clear report from specialists (legal and financial) indicating to Board exactly what the Association s objectives, charitable status and lending covenants state in relation to the chosen vehicle, with detailed tax advice. A clear report to Board around the legislative requirements for procurement using the chosen vehicle. A due diligence process to be identified to cover any partner arrangements. Should the proposals for a new vehicle for delivering development prove to be an unacceptable risk, or fail for any other reason, the Association will have a Plan B for procuring development the traditional way (i.e. EU Procurement tendered) with timescales for when that would need to commence. Regular reviews with scenario testing in the Financial Plan to Board. Key assumptions in the Financial Plan validated externally. Increased bad debt provision. Key risks of welfare reform separately itemised and monitored. Board has agreed Financial Inclusion Officers to run for a further year. Modelled the impact of RPI versus CPI using historic information. Increased payment method options. Monitoring of rent arrears and bad debts, particularly in relation to increases following on from welfare reform. Invested in measures to tackle fuel poverty and ease pressure on residents household incomes.

18 Strategic Risk Impact Mitigation Unable to meet one of the Board s key objectives, to build new homes. Risk of ineffective Board leadership and governance in the organisation. Failure to deliver on a key objective in the Corporate Plan. Downgrading by the HCA, loss of reputation, failure to meet corporate objectives. Financial Plan monitored by Board including scenario testing. External treasury advice being sought on capacity in financial ratios. Use of unit cost targets. Review the outcome of bid process to identify learning/changes in the Development Strategy. Benchmarking of development costs reported to Board at October 2013 Board Conference. Extensive review of development delivery partnership with external validation. Development finances closely monitored by Board or Resources Committee. Impact of development regularly monitored through the Financial Plan. Financial performance of schemes tracked at all stages of the life cycle. Negative Net Present Values (NPVs) only allowed in accordance with Financial Regulations. Modelling of scheme and Financial Plan level to ensure viability of the Association. Review of any proposed bids to the HCA and their impact to be agreed with Board. Development progress reports regularly to Board identifying cost variations, issues which may impact on the ability to deliver in line with the HCA contract and any exceptional risks in relation to specific schemes. Regular meetings with the HCA discussing potential barriers to achievement, such as delayed planning, site risks too great etc. and agreeing in advance substitutions or variations. Working towards a re-assessment of the Association s G2 status by having an increased focus on VFM. Demonstrating compliance with the HCA relevant Code of Governance using the NHF compliance document and having that externally validated. Skills matrix for Board members and effective recruitment procedures with external overview. Regular appraisal and training. Governance policies and procedures which are regularly reviewed for best practice. Internal audit. Regulatory engagement, including annual meeting with the regulator, self assessments. Effective Board reporting.

19 Strategic Risk Impact Mitigation Failure to meet the Association s obligations under health and safety. Ineffective management of the treasury function. Potential for prosecution of the organisation and individuals, legal claims against the organisation, significant reputational damage and regulatory intervention. Loss of financial viability, breach of loan covenants, loss of reputation, regulatory intervention, failure to deliver on corporate objectives. Auditing and external review. A rigorous Health and Safety Policy, fully reviewed in 2013/14. High quality advice from a qualified competent Health and Safety advisor. Adequate insurance cover, where this can be provided. Ongoing training and the provision of proper health and safety equipment, where required. Commitment by Board and Senior Management Team to following good practice, including resourcing appropriately. Internal audit. Additional specialist audit, e.g. gas safety, Legionella. Health and safety monitoring and reporting of key performance statistics. Overseen on a more detailed level by Audit Committee, but with overall responsibility being clearly retained at Board level. Board Champion appointed. Staff Forum acting as the consultative body. Provision of proper advice to residents, contractors and people who work for the Association. Treasury advisors are appointed on a cyclical basis. 30 year Financial Plan is externally validated on an annual basis and key assumptions are externally validated. Cashflow monitors ongoing requirements on a daily, monthly, 12 month rolling, and 3 year basis. Legal and treasury consultants appointed to advise on new funding requirements. Board approves all new funding. Resources Committee receives quarterly reports on treasury activity, including detailed covenant compliance schedules. Resources Committee receives a quarterly 12 month rolling cashflow as part of Management Accounts. Regular liaison and dialog with funders, including the meeting of covenant requirements and annual review meetings. Database is maintained, recording accurate records for those properties secured against funding. Treasury Policy and annual Treasury Strategy reported to Resources Committee and

20 Strategic Risk Impact Mitigation There is a risk that the Association fails to properly maintain its stock because of: insufficient funds available in the Financial Plan going forward insufficient asset management information available to make well judged decisions. Viability, effect on future income and reputation, high levels of dissatisfaction. to Board. Having a specific skills requirement for Board members with significant financial experience (which is currently met). A detailed Asset Management Strategy regularly reviewed with specialist external advice. Internal audit. Stock Condition Survey information based on regular surveys with reasonable assumptions on life spans etc. (based on specialist external advice and own local knowledge). Financial planning process based on information from detailed Stock Condition Survey. Scenario modelling in the Financial Plan on a regular basis giving what if consequences, such as cost increases above inflation. Sessions with Board (at Board Conference for example) around the financial, health and safety, and end user impact and consequences of investing at specific levels, e.g. Decent Homes versus Decent Homes Plus versus Two Castles high standard. Board Champion for Asset Management with a good understanding of the key issues. Future Investment Looking to the future, the Association s Financial Plan projections for the medium and long term show that it continues to remain a viable business, meeting all key financial ratios and able to deliver on its corporate objectives. This includes maintaining a healthy development programme for new homes to Funding is in place to enable draw down for both the current requirements and for the recent bid made for with the HCA. The full impact of welfare reform is still awaited in the Association s areas of operation with the delay in roll out of the final stages; however, work from the pilot associations has shown a distinct increase in arrears where payments are made directly to residents. Rent collection rates are currently good and have been so through the early stages of welfare reform; however, based on information from the pilots, prudent assumptions are being made in relation to this going forward. The economic forecasts are that interest rates will rise over the coming years, albeit at a slow rate. The Association s Treasury Strategy assumes this and it has, and will continue to have, the majority of loans on fixed rates. In the coming year, it will be reviewing its oldest loan arrangement which was taken out in the early days of mixed funding via the then Housing Corporation. This is the last tranche of funding where the interest rate is well above current rates. It is anticipated the cost of buying out this loan to be high, but the effects will be modelled to see what efficiencies could be made.

21 Financial Review The accounting policies for the year are disclosed in Notes to the Financial Statements for the year ended 31 March 2014, later in this document, and the Board confirms that there have been no substantial changes during the year. The Association has opted not to take early adoption of the proposed changes to the Statement of Recommended Accounting Practice (SORP). At 31 March 2014, the Group had an operating surplus of 3,930,000 (2013 3,477,000). The Association continues to have strong financial performance which compares well to that of its peers. In particular, the treasury function (as discussed further below) outperforms the sector when compared to the HCA global accounts data. The key financial highlights over the last five years are shown below: Consolidated Results 2013/14 000s 2012/13 000s 2011/12 000s 2010/11(re-stated) 000s 2009/10 000s Turnover 13,723 13,084 12,372 12,296 11,853 Operating surplus 3,930 3,477 2,813 2,729 2,367 Other income Interest payable 1,480 1,314 1,260 1,238 1,172 Surplus for the year 2,671 2,338 1,605 1,520 1,547 Operating margin 28.6% 26.6% 22.7% 22.2% 20.0% Interest cover (including major repairs capitalisation) Housing properties at cost less 154, , , , ,683 depreciation Grant 89,887 87,862 86,752 85,759 84,185 Net current assets 1, ,335 5,241 Short and long term debt 38,343 33,129 26,772 25,304 24,568 Revenue reserve 29,166 26,495 24,157 22,552 23,407 Gearing (parent) 32.0% 28.7% 23.5% 22.7% 22.5% Net capital expenditure 9,030 10,277 6,543 5, Loans drawn down 6,000 7,000 2,000 3,000 6,000

22 The Association s turnover has grown from 11.9m in 2009/10 to 13.7m in 2013/14, a total growth rate of 15.8%. The Association has had an active policy of controlling operating costs which has contributed to the operating surplus increasing by 66% from 2.4m to 3.9m over the five years. This is shown by the operating margin which, over the five years, has increased from 20.0% to 28.6%. The Association is not reliant upon the sale of property in order to produce a surplus for the year, nor does it have any off balance sheet financing or complex leasing arrangements. The loan portfolio has increased from 24.6m in 2009/10 to 38.3m in 2013/14, which is an increase of some 56%. Against this, the interest payable has increased from 1.2m to 1.5m or 26%. The Association has managed to grow the loan portfolio in line with the growth in operating surplus resulting in a stable interest cover ratio. This is been achieved despite the government cuts in grant rate as shown by the grant over the five years increasing by only 6.8%. Changes in the political and economic environment are reflected in how, over time, the Association has funded its properties as shown by the table below: 2013/14 000s 2009/10 000s Housing properties at cost less depreciation 154, ,683 As funded by: Grant Loans Internal subsidy 89,887 58% 38,343 25% 26,152 17% 84,185 67% 24,568 19% 17,930 14% In effect, the Association is bearing more of the cost, with grant subsidy reducing. This continues to be the case with more significant reduction in grant expected from 2014/15 onwards. Capital Structure and Treasury Policy Borrowings as at 31 March 2014 were 38.3m, with a further 27m facility available; the undrawn facility must be drawn down no later than 31 March The Association has sufficient funding in place to complete its existing development programme to 31 March 2015 with a substantial funding contribution to the future three year development programme. Debt is borrowed wholly from banks within the UK.

23 The management of treasury is the responsibility of the Finance Director. The Treasury Strategy is reviewed annually by the Board and Resources Committee. The Association does not use derivatives but it does have in place a 15m fix maturing on 31 January The Association is currently benefitting from the low interest rates within the UK, and, as at 31 March 2014, 46% of the portfolio is on a variable debt. The split between variable and fixed debt will be reviewed by external advisers when the above interest rate fix finishes and as additional debt is drawn down during 2014/15. On treasury, the Association is generally risk averse, which is reflected in its loan portfolio having a mix of fixed and variable debt. The optimum mix is determined in the annual Treasury Management Strategy taking into account hedging arrangements, forecasted drawings and the current interest rate and economic environment. The table below shows the repayment profile of the existing debt drawn: Repayment bands Amount repayable 000 < 1yr 1-3 yrs 3-5 yrs 5-10 yrs yrs yrs yrs yrs 800 1,931 1,790 7,879 13,168 8,242 4, ,343 Of the outstanding facility, 7m is repayable on an amortising basis, with the remaining 20m being repayable as a bullet in 2022/23. Cashflow The cashflow for the period is set out in the financial results. Net cash inflows from operating activities are from the management of housing stock. Returns on investment and servicing finance are due to interest income and interest charges. The net cash outflow from capital expenditure is primarily the spend on new and existing properties which is being capitalised, less any grant and sales proceeds. The net movement on financing is the difference between facilities drawn down and facilities repaid. Current Liquidity As at 31 March 2014, the cash and investments amounted to 3m. Of this figure, 0.8m was held in a bank account in trust for leaseholders. In addition to the as yet undrawn loan facility of 27m noted above, the Association has a 1m overdraft facility with its principal bank. The Association funds its day-to-day activities, including the major repairs programme, out of the income generated from renting or leasing its properties and consequently only holds debt in order to fund its development programme. The Association s gearing at the year end was 32%, with the tightest gearing ratio within the financial covenants capped at 60%. The Association s cashflow is not affected by seasonal movements.

24 Value for Money The organisation received a G2 assessment during 2013/14, (it previously held a G1). The Board recognises that it needs to improve how it communicates its story and achievements on VFM (transparency). The Board has reviewed its VFM self assessment statement going forward and this will help the organisation to ensure it can show to its various stakeholders a clear, evidence based, benchmarked picture of its track record, where it is now and what are its future expectations. In line with the HCA VFM standard, this will enable stakeholders to make their own judgement as to whether they believe the Association is committed to, and delivering, VFM. The information contained within this section on VFM is a condensed version, suitable for the OFR, of the Association s full VFM self assessment. The full self assessment is available on the Association s website As well as cost savings and cost benchmarks, quality indicators have been used in the assessment. The Association has done this because VFM is not just about services at their lowest cost stakeholders have to be satisfied with the standards of services as well as the cost, otherwise they will seek to go elsewhere. The Association understands that a healthy and increasing operating surplus for its size and type of organisation is not necessarily of itself an indicator that it is delivering VFM. However, it believes it does reflect that the organisation is balancing income and expenditure in a way which will enable future investment to be directed into achieving its five key corporate goals. VFM Strategy The Board is responsible for ensuring that it has a comprehensive and strategic approach to achieving VFM with initiatives being in line with the Association s corporate objectives. The current VFM Strategy seeks to achieve the following: In making decisions on how resources are used to deliver objectives, consider the trade offs and opportunity costs of such decisions Instil an understanding of the return on assets and have a strategy for optimising the future return on assets. This includes a rigorous appraisal of the potential options for improving VFM, including the potential benefits of alternative delivery models Have a process of scrutinising performance management. The process should be effective in driving and delivering improved VFM performance Have a process for understanding costs and outcomes of delivering specific services, to understand, why and how, the underlying factors influence these costs Deliver the regulatory requirements of the HCA in relation to VFM The Board is reviewing the organisation s VFM Strategy in 2014/15; however, it anticipates the above fundamental principles will still be valid.

25 The Association interprets VFM as being a review of existing business and its practices together with future opportunities in order to look for efficiencies in either qualitative or quantitative terms. VFM is a balanced approach between the need to provide efficiencies whilst maintaining or enhancing service standards. It is a core business driver of the Association s VFM Strategy to deliver VFM in all that it does. VFM must be embedded in the behaviours of its customers, staff and Board as this is a major contributor to its successful delivery. To achieve this, the organisation has had a number of externally facilitated training sessions with customers, staff and Board. Return on Assets on New and Existing Stock As part of the VFM Strategy, it is the Board s role to ensure robust assessment of the performance of the Association s assets and resources including financial, social and environmental returns. The Association recognises that asset management is by far and away the largest area for expenditure at any one time and, as such, is capable of delivering major efficiencies and drives investment decisions. The Association, in 2010, carried out an extensive review of its organisational objective to build and maintain safe, secure and sustainable homes and communities. The resulting Asset Management Strategy sets out an aspirational, but in the Board s view achievable, programme of initiatives over a five year period. Throughout the strategy a key driver has been to achieve better VFM and improve satisfaction and performance. A summary of the actual performance is shown below: The Association is on target to deliver around 249 new homes for the period For 2013/14 the average build cost was 124,143 with an average grant rate of 15%. This compares favourably with the previous development period , which delivered 132 homes (with an average build cost of 133,464 and an average grant rate of 46% in 2010/11). The growth in development has been achieved by re-investing efficiencies from all areas of the Association which results in: Average unit grant between 2010/11 and 2013/14 decreased by 42k (69%). A unique partnership arrangement with a developer which reduces risk and waste while streamlining processes. For example, early identification of site specific risks and constraints minimises aborted costs. Average unit cost between 2010/11 and 2013/14 decreased by 9k (7%) against a BICS increase of 11%. Provided affordable housing in Local Authority areas where the housing need is high and earnings are low. For example, South Lakeland District Council, which includes two national parks, where the average house price is 8.12 times the average salary (national average 6.72). Implemented a Green Strategy: e.g. in 2013/14 we installed, in excess of the Code Level 3 requirements, PV solar panels on 45 new properties resulting in an estimated 158 of free electricity per home or 7,124 in total. This equates to a saving of 25 tonnes of CO 2.