Final Results

Nottingham Building Society

Results for the year ended 31 December 2013

2013 was a significant year for The Nottingham, one in which the hard work and focus of recent years to build a strong regional franchise based on service, value, advice and choice was rewarded as more and more people chose The Nottingham to help them achieve their financial ambitions.

Below are some of the key achievements and financial highlights of 2013:

· Asset growth of 10.4%;

· Net interest margin at 1.33%;

· Gross mortgage lending up by 24% to £693m, resulting in mortgage book growth of 17%;

· Third consecutive year of strong retail franchise growth, especially in our heartland with branch balances up by 20%;

· A customer net promoter score of 67%, maintaining our position in the top 10% of firms across all sectors.

· Arrears levels remain very low at around a third of the industry average;

· Successful merger with Shepshed Building Society

· Acquisition of Harrison Murray estate agency to build capability and increase Heartland branch footprint

· Group pre-tax profit up 58% to £12.8m (2012: £8.1m)

Commenting David Marlow, Chief Executive said:

 "2013 was a memorable year for The Nottingham with a number of achievements of which to be proud. We continue to work hard on developing our unique customer proposition based on offering great service and value but increasingly making expert advice and a choice of financial products from across the market, available to our customers throughout the Heartland - something to which they have responded positively to in 2013 We will be seeking to develop this proposition further and make it available to more new customers in our heartland in 2014."

Key developments in 2013

· Last year we highlighted a number of initiatives that we were planning to build the profile and capability of the Society. In January we acquired leading independent estate agency, Harrison Murray, which operates in 18 locations. The acquisition was targeted not only to build our capability as an estate agency but also to provide an opportunity to increase our high street footprint, as we plan to add building society services to a number of these new locations now and in the years ahead.

· On 1 July we completed the successful merger with the Shepshed Building Society and were delighted to welcome their almost 7,000 members. Due to the hard work of those involved all Shepshed customers were successfully transferred onto The Nottingham's system, enabling from the outset all our customers the ability to transact at any branch of their choice in our extended network.

· These two significant steps have enabled us to increase our high street presence from 31 locations in four counties to 52 locations in 10 counties, 36 offering building society services. We believe that this provides us with a stronger regional profile and significantly enhanced opportunities to grow our customer base in the years ahead.

· During the year we have begun to see some more encouraging activity in the housing market and this has been reflected in our lending. In fact in 2013 our mortgage lending increased by 24% to £693m - equal to our record for lending in one year for the Society. In addition we continued to see an increasing number of customers choosing to stay with us at the end of their product term. This strong performance, in terms of both gross lending and retention, led to an increase in our mortgage book of 17%.

· One of the biggest challenges we face in this low interest rate environment is to balance the competing needs of borrowers and savers. Savers especially have found the past four years challenging in terms of returns on their savings. Despite the reduction of funding costs as a consequence of the introduction of the Funding for Lending scheme we have done all we can to continue to offer a range of good value accounts, particularly in our heartland. This has been well received by members, with branch based balances up by 20% in the year, demonstrating the strength and popularity of our offering.

· It is very important that we continue to demonstrate to members that we operate efficiently. It is pleasing to report therefore that the Society's underlying cost income ratio continued to fall reaching 61.6% in 2013.

· Overall this adds up to a very successful year for the Society with the balance sheet increasing by 10.4% to reach £3.0bn, putting us back where we were before the financial crisis hit in 2008. Profit before tax too saw a very good improvement up 58% to £12.8m, a record for the Society.

Quality and strength

The financial crisis has graphically demonstrated the importance of running the Society in a safe, secure and prudent fashion. It is important for us to generate an appropriate amount of profit to build our capital buffers to allow us to grow and provide protection from shocks, to reinvest in the business to improve our products and services to customers, as well as to cover the on-going cost of depositor guarantee protection.

· Our arrears performance is now at sector leading levels with only 118 cases out of a mortgage book of 22,675 three months or more in arrears. This is down from already extremely low levels last year at 135 cases and includes a number of cases in arrears inherited as a consequence of our merger with the Shepshed Building Society. Our arrears are about a third of the industry average;

· Repossession at 30 remains very low, although we will reluctantly take the ultimate step if we believe it is in all parties best interest to do so (23 in 2012);

· Our funding and liquidity profiles also contribute to our strength and resilience. As market conditions have improved we have adjusted our liquidity levels closer to the long run average. The levels of liquidity held by the Society remains well in excess of that which we are required to hold by the regulator and remain of the highest quality with a large majority in UK Gilts and Treasury bills. Our retail funding and capital balances continue to fully cover our mortgage assets. And whilst our non-retail funding ratio has increased to 17.2% this year due to our participation in the FLS, it remains well within our Board risk appetite;

The Society

We are aware that our members greatly value the branch network and see it as a cornerstone of our proposition. A branch is seen as a place to receive great service and advice from people they can trust. We have therefore continued to invest in the network, spending over £1m on improving a number of our branches. Where we have done so previously we have seen strong uplifts in activity levels, attracting new customers. This has been the case again in 2013 in locations such as Brigg and Chesterfield, with more planned for 2014.

Also in 2013, to support all of our activity, we have begun to increase our marketing spend to ensure that more people in our heartland hear about and understand our proposition. Although it still remains early in this process, we have achieved good progress in 2013, with unprompted awareness amongst non-customers almost doubling and recall of our advertising in our heartland ranking only behind Halifax, Nationwide, Santander and Lloyds and encouragingly ahead of NatWest, Barclays and HSBC.

We seek to continually develop our range of products and services. We are particularly proud of the launch of our Young Savers offering, which combines excellent interest rates with strong incentives for our youngsters to get into the savings habit. The introduction of the Robin Hood family of locally handmade pottery money boxes underpins our pride in our local heritage but also brings back some traditions of the past, which were successful in helping the younger generation understand the importance of saving.

Customer relationships

The heart of our strategy remains focused on providing our customers with value, choice and expert advice, backed by great service and providing this to more and more customers is what drives us.

In an era when trust in the big banks is at an all-time low and they continue to retreat from the high street, for example providing whole of market advice only to their wealthiest customers, we believe that this provides unique opportunities for strong regional mutuals like The Nottingham.

In recent years, in addition to our core business of deposit taking and mortgage lending, we have developed a unique proposition which includes access to expert advice on estate planning, access to financial planning products which are available across the whole market and a range of home buying services, as well as the financial protection of your home and loved ones. The success we have seen so far has given us the confidence to take our developing proposition to more customers in new locations across the East Midlands.

As we have done so the feedback and response from customers has been excellent. Our customer satisfaction based on independently run telephone conversations held with customers, regarding a specific transaction or activity, continues to provide us with a strong level of feedback for activity across the Society. The results also remain at industry leading levels with 65% of customers surveyed over the year rating us as excellent and achieving a net promoter score over 2013 of 66.9% - a performance maintaining our position in the top 10% of all firms in all sectors. It is crucial to us that we maintain very strong levels of customer service.

Supporting local communities

As a local business firmly rooted in its communities, it is very important that we support worthwhile causes that make our communities better places to live. Through our Doing Good Together initiative we aim to support local causes that improve financial literacy, boost employability, and support the battle against homelessness.

I am pleased to report that we have continued to develop our partnership with Nottingham Community Foundation, The Nottingham Post, radio station Gem106, a number of local newspapers, and our chosen charity partner Framework, to undertake a range of activities and fundraising in support of these causes.

In addition to providing in excess of £80,000 in grants and fundraising, we have launched an innovative philanthropic savings bond with Framework, enabling investors to accept lower rates of interest on their savings in return for reduced interest rate payments on a loan made to Framework by the Society to develop much needed follow-on accommodation. This unique initiative was welcomed with broad national press coverage at its launch. We have also entered an arrangement with Framework to convert one of our branch locations on Friar Lane in Nottingham into a drop-in advice centre, providing a much needed city centre location for service users seeking help. These are two examples of our commitment to developing innovative solutions to long term issues for the benefit of our communities.

Board changes

As the Society evolves so too does our Board of Directors; Bob Marchant our Senior Independent Director and Board Audit Chairman retired on 31 December, after 10 very successful years as a Board member - he has also been vice-chairman since 2008. We would like to thank Bob for his outstanding contribution and wise counsel to the Board over many years, particularly through the challenges of the financial crisis.  Following our AGM in April our Chairman David Thompson will be stepping down. David has been a member of the Board since 2002 and Chairman for almost 10 years. During that period of significant change and challenge he has led the society and its Board with great skill and wisdom, continually focusing on ensuring that we serve the best interests of members now and in the future. On behalf of the Board, staff and members, we would like to offer David our heartfelt thanks and gratitude for his wise stewardship and service to the society over that period. John Edwards will succeed David as the Chairman of the Society. Since joining the Board in early 2012 John has brought his vast experience in financial services to the Board, making a strong contribution to our development over that period. John is the ideal person, as Chairman, to continue our progress and strategic development in the years ahead.  

Looking ahead

As you will see from this review, we began a number of developments in 2013 which should serve the Society well in the years ahead. In 2014 we will be seeking to build on our progress:

· During the course of the year we expect to add building society services to at least five further Harrison Murray locations. This will include a new branch location in Melton Mowbray which is scheduled to open in the first quarter;

· We will continue our work to integrate our estate agency operations - including the rollout of a single system platform across all estate agency offices scheduled for the first three months of the year;

· April will bring further regulatory change in the form of the mortgage market review. Following a detailed review of the market place, our business model and the regulatory environment, we have decided to fundamentally change our mortgage advice proposition. From April all customers coming to The Nottingham will be offered a whole of market mortgage advice service. With our strategy to provide value, choice, advice and service, and acknowledging that we cannot provide everybody who comes to us with a Nottingham mortgage, we have decided to introduce this enhancement. We believe that this will be unique amongst building societies but give consumers dealing with The Nottingham, whether in branch or on the phone, the confidence that we will consider all market wide available products and recommend the one that is most suitable for them. This is an important step in the development of our proposition, one which we have undertaken in our estate agency for a number of years. We will be offering, for the first time, whole of market advice for mortgage and financial planning from a trusted high street based mutual;

· Despite this new offering we will remain a strong manufacturer of mortgage loans and expect 2014 to be a record year for our mortgage lending, driven by strong support from our intermediary partners;

· We will continue to invest in our infrastructure to make us more efficient and ensure that we can continue to grow without increasing costs significantly, as well as continue our branch investment programme, with a number of branches set to be refurbished this year;

· We will also continue to raise our profile through increased levels of marketing and community involvement under our Doing Good Together initiative - which encompasses fundraising and grant giving to local groups, our continued partnership with Framework, and further sponsorship with Sports Aid of promising local young sport stars hoping to follow in the footsteps of the 2012 Olympians.

It has been another busy but successful year with a number of records achieved and the delivery of strong growth and excellent financial performance. This has only been possible due to the extraordinary commitment, enthusiasm and hard work of all team members within The Nottingham family, who as always strive hard to serve customers in a way which they themselves would wish to be served.

Consolidated statement of comprehensive income

for the year ended 31 December 2013

2013

2012*

£m

£m

Interest receivable and similar income

98.6

97.1

Interest payable and similar charges

(60.5)

(66.5)

Net interest income

38.1

30.6

Fees and commissions receivable

10.1

4.6

Fees and commissions payable

(0.5)

(0.4)

Other income

0.5

-

Net gains from derivative financial instruments

1.2

-

Total net income

49.4

34.8

Administrative expenses

(28.7)

(19.7)

Acquisition and merger costs

(0.8)

-

Depreciation and amortisation

(3.8)

(2.9)

Finance (cost)

(0.2)

(0.3)

Operating profit before provisions

15.9

11.9

Impairment losses on loans and advances

(0.9)

(1.4)

Provisions for liabilities - FSCS levy

(1.8)

(2.0)

Provisions for liabilities - Other

(0.3)

(0.4)

Loss on disposal of property, plant and equipment

(0.3)

-

Negative goodwill

0.2

-

Profit before tax

12.8

8.1

Tax expense

(2.6)

(1.7)

Profit for the financial year

10.2

6.4

Other comprehensive income:

Items that will not be re-classified to the income statement

Remeasurements of the net defined benefit liability

0.1

(0.6)

Tax on items that will not be re-classified to the income statement

-

0.2

Items that may subsequently be re-classified to the income statement

Available-for-sale reserve

Valuation (losses) taken to reserves

(0.4)

(1.8)

Amount transferred to income statement

0.2

0.2

Tax on items that may subsequently be re-classified to the income statement

0.1

0.4

Other comprehensive (expense) for the period net of income tax

-

(1.6)

Total comprehensive income for the period

10.2

4.8

Consolidated statement of financial position

as at 31 December 2013

2013

2012

£m

£m

Assets

Liquid assets

495.7

556.3

Derivative financial instruments

20.1

23.3

Loans and advances to customers

2,471.4

2,129.9

Fixed and other assets

28.7

22.4

Total assets

3,015.9

2,731.9

Liabilities

Shares

2,319.4

2,268.0

Borrowings

483.3

251.5

Derivative financial instruments

8.9

21.8

Other liabilities

15.8

13.7

Subscribed capital

26.2

27.4

Total liabilities

2,853.6

2,582.4

Reserves

General reserves

162.5

149.6

Available-for-sale reserves

(0.2)

(0.1)

Total reserves and liabilities

3,015.9

2,731.9

Consolidated statement of changes in members' interests as at 31 December 2013

General reserve

Available-for-sale reserve

Total

£m

£m

£m

Balance as at 1 January 2013

149.6

(0.1)

149.5

Acquired on transfer of engagements

2.6

-

2.6

Profit for the year

10.2

-

10.2

Other comprehensive income for the period (net of tax)

Net losses from changes in fair value

-

(0.1)

(0.1)

Remeasurement of defined benefit obligation

0.1

-

0.1

Total comprehensive income/(expense) for the period

10.3

(0.1)

10.2

Balance as at 31 December 2013

162.5

(0.2)

162.3

Balance as at 1 January 2012 *

143.6

1.1

144.7

Profit for the year

6.4

-

6.4

Other comprehensive income for the period (net of tax)

Net losses from changes in fair value

-

(1.2)

(1.2)

Remeasurement of defined benefit obligation

(0.4)

-

(0.4)

Total comprehensive income for the period

6.0

(1.2)

4.8

Balance as at 31 December 2012

149.6

(0.1)

149.5

Consolidated cash flow statement

for the year ended 31 December 2013

2013

2012*

£m

£m

Cash flows from operating activities

Profit before tax

12.8

8.1

Depreciation and amortisation

3.8

2.9

Loss on disposal of property, plant and equipment

0.3

-

Interest on subscribed capital

2.0

2.0

Net losses on disposal and amortisation of debt securities

0.1

0.8

Increase in impairment of loans and advances

0.9

1.4

19.9

15.2

Changes in operating assets and liabilities

Decrease/(increase) in other assets

23.2

(13.8)

(Decrease)/increase in other liabilities

(21.2)

11.3

Decrease in liquid assets

7.9

16.3

(Increase) in loan and advances to customers

(363.1)

(198.8)

Increase in shares

59.9

270.7

Increase/(decrease) in borrowings

238.6

(35.0)

Taxation paid

(1.8)

(1.6)

(36.6)

64.3

Capital expenditure and financial investment

25.6

98.0

Financing activities

(1.9)

(1.9)

Increase in cash and cash equivalents

(12.9)

160.4

Cash and cash equivalents at beginning of year

350.8

190.4

Cash and cash equivalents at end of year

337.9

350.8

Summary ratios

2013

2012*

%

%

Gross capital as a percentage of shares and borrowings

6.73

7.02

Liquid assets as a percentage of shares and borrowings

17.69

22.08

Group profit for the year as a percentage of mean total assets

0.35

0.25

Group management expenses as a percentage of mean total assets

1.13

0.87

Society management expenses as a percentage of mean total assets

0.88

0.81

Society interest margin as a percentage of mean assets

1.33

1.17

Notes

· The financial information set out above, which was approved by the Board of Directors on 19 February 2014, does not constitute accounts within the meaning of the Building Societies Act 1986.

· The financial information for the years ended 31 December 2013 and 31 December 2012 has been extracted from the Accounts for those years and on which the auditors have given an unqualified opinion.

* Restated following the implementation of International Accounting Standard (IAS) 19 Employee Benefits