Final Results

Nottingham Building Society

Results for the year ended 31 December 2014

Our long term strategy of seeking to offer customers a unique combination of advice, choice, value and service has resulted in significant franchise growth and record performance in 2014, as more and more customers choose The Nottingham to help them manage their finances.

Below are some of the key achievements and financial highlights of 2014:

· Strong retail franchise - with total branch savings balances up by 16.8% in the year and up over 50% since 2012;

· The Society welcomed 43,000 new customers in 2014 and added Building Society services in 7 new locations;

· Net Promoter Score of 67% placing us in the top decile of all organisations globally. (Average Net Promoter Score for all financial services firms is 28%);

· Record gross mortgage lending of £706m resulting in mortgage book growth of 9.3%;

· Asset growth of 8.3%;

· Record Group pre-tax profit up 36% at £17.4m (£12.8m in 2013);

· Net interest margin at 1.56%;

· Strong capital ratios with Common Equity Tier 1 at 15.1%, gross capital at 6.72% and leverage of 5.4%[1];

· Arrears levels remain very low at, around a quarter of industry average;

· The mortgage book is 100% matched by a combination of capital and retail savings.

Commenting David Marlow, Chief Executive said:

 "Throughout 2014 we have continued to work hard to develop our unique offer - combining service, advice, value and choice to an increasing number of customers across our heartland. This has resulted in a record breaking performance in the year. The response from customers to our proposition and our financial performance in recent years, demonstrates the popularity of a service led advice proposition, based on the High Street, delivered by a local mutual organisation that people can trust. "

Key developments in 2014

· In 2013 we laid out our plans to continue to develop and strengthen the Society and are pleased to report that we have delivered on all elements of our plan. We believe that the role of a modern vibrant Society in the 21st century is to help our customers navigate a steady course through the management of their financial affairs - to do this successfully we believe the majority of people would benefit from receiving expert advice from a trusted source. At a time when access to advice is becoming harder to find and public trust in the big banks is at an all-time low, we are proud to be the only building society in the UK to offer whole of market mortgage advice to all of our customers. In doing so we acknowledge that it is very important for individuals to find the best mortgage for them, one which is tailored to their needs, and that The Nottingham will not always be able to provide the right answer or solution, through our own lending, for all individual circumstances. The response from customers to our new approach has been fantastic as we have already helped thousands of customers with our whole of market offering.

· We firmly view branches as central to our strategy and have continued to develop our branch network in 2014. A key strategic part of our acquisition of Harrison Murray estate agents in 2013 was to add building society services to a number of identified locations, allowing us to take the Nottingham Building Society offering to more new customers across our heartland.

We were delighted therefore to open in five of these locations in 2014: Leicester, Melton Mowbray, Market Harborough, March and Wisbech. In addition we also replaced two Santander agencies when they closed in July with both locations in Leicestershire now offering Building Society and Estate Agency services. The response from customers has been excellent, with activity levels in all our new locations far in excess of our initial forecasts.

· As a result of our new locations and the continued thriving of our existing branch network we have welcomed 43,000 new customers to The Nottingham in the past 12 months - the strong growth of our retail franchise is best demonstrated in our branch savings balances which have increased by 16.8% in the year. In fact having passed the £1bn of branch savings balances during 2012 branch balances are now over 50% higher than that mark just over two years later.

· Another of the key features of our success in recent years has been the increasing number of mortgage customers choosing to switch to a new deal with us once they reach the end of their fixed or discount period. We are delighted that an increasing number of customers decided to stay with us in 2014. In fact our dedicated team secured switches equal to 2 out of 3 of all mortgages coming to an end of their deal in 2014.

· In addition to record levels of mortgage retention we achieved new gross lending in excess of £700m for the first time in the Society's history.

· With our record mortgage lending and retention performance during the year, the Society has continued to grow. In fact we are pleased to report mortgage growth in 2014 of 9.3%. This has taken our balance sheet to a total of £3.27bn - a new record.

· In line with the market trend our interest margin has continued to improve and this has contributed to a strong profit before tax performance of £17.4m - a 36% increase on 2013, another record for the Society.

Quality and strength

The Board has an overriding responsibility to ensure that we operate the Society in a safe and secure manner and in doing so ensure we meet all of the regulatory requirements we are expected to meet.

· The Prudential regulator sets exacting standards for us to meet in terms of our capital adequacy and liquidity and we are delighted to report that we continue to comfortably exceed those requirements. In fact, driven by our strong performance in 2014, our capital ratios continue to strengthen with our Common Equity Tier 1 Capital ratio improving to 15.1% and the Society comfortably exceeding the new leverage ratio requirements laid down by the Bank of England at 5.4%, which reduces slightly to 4.9% under the final rules;

· Our arrears performance remains at sector leading levels with only 88 accounts out of a total of over 22,000, being 3 months or more in arrears. This is around a quarter of the CML industry average. Repossessions too fell in the year to 15 (2013: 30);

· At the end of 2014 we had 166 customers receiving some form of forbearance, compared to 237 in 2013. This represents less than 1% of the total number of mortgage customer accounts and includes the cases reported in our arrears figures;

The Society

The essence of a Building Society is to successfully balance the conflicting needs of its savings and mortgage customers, whilst delivering value to all its members. Our ability to strike this balance effectively in recent years has been a foundation of our success. In mortgages the significant growth of our mortgage book since 2011 and the fact that we are now seeing record levels of retention, alongside excellent credit quality, we believe demonstrates our responsible approach to lending and that our mortgage customers see us as offering them good value.

A great deal of press coverage has focussed on the difficulties that savers have faced over the many years of the low interest rate environment. Over that period we have worked hard to ensure that we offer good value and attractive rates to our savers. In fact our average cost of retail funding in 2014 was 1.90% - a multiple of 3.8 times the current bank base rate. In addition the extraordinary growth of our branch based balances in recent years demonstrates that savers see our proposition and the accounts we offer as good value.

It is essential for us to generate a surplus to enable us to continue to grow the Society in a safe and secure manner and one which meets the new high levels of capital required by our regulators. We also must continue to invest in the Society's capability and infrastructure, as well as meet the increasing regulatory overheads required to remain successful in today's market place.

The Board is pleased that we are now achieving a level of profitability that can comfortably achieve all of those requirements and therefore expects much smaller marginal improvements in profitability moving forward. In fact we do expect our interest rate margin to reduce from its current relatively high level over the next few years as interest rates begin to rise and government stimulus, in the form of the funding for lending scheme, reduces.

However, the Board is very confident that our strength will enable us to continue to develop the Society strongly and provide members with one of the highest levels of security and protection in the sector in the years ahead.

Customers

Our strategy remains focused on providing our customers with value, advice and choice backed by first class service, with an objective of taking this unique proposition to more and more customers across our heartland.

We now uniquely offer our customers access to expert advice based on a choice of those products available across the whole of the market for mortgages and broader financial planning. This is supported by a range of services and products which help our customers for all eventualities in the future and to protect what is most dear and valuable to them. We firmly believe that this unique combination, allied with great service, clearly differentiates us from the banks and makes us far more relevant to a much larger number of potential new customers. In fact, in 2014, we were delighted to welcome over 43,000 new customers to the Society, which clearly demonstrates the increasing popularity of our proposition.

It remains of crucial importance that we ensure that our customer service meets the standards we set and exceeds our customers expectation and therefore in 2014 we more than doubled the number of customers that we contact to conduct our independently run customer service satisfaction survey. These surveys focus on specific transactions and activity and are vital in providing us with direct feedback on what we are doing well and where we need to improve. We are delighted to report that the proportion of customers who rated us as excellent increased during the year from 65% to 68%. In fact our Net Promoter Score, which enables us to directly compare our performance against a range of different companies and sectors across the globe, increased to 67% placing us amongst the very best organisations. Average net promoter score for all financial service firms is 28% in comparison.

Supporting local communities

We recognise our responsibility as a local organisation to support the communities in which we operate, ensuring that we play our part in making our communities better places in which to live.

Under our Doing Good Together banner we support local causes, especially those that seek to improve financial literacy, boost employability and battle homelessness.

Over the year we have given grants for over £70,000 to 400 groups in Leicestershire and Nottinghamshire as part of our Cash for your Community initiative. We have invested a further £100,000 in our philanthropic endowment fund with Nottinghamshire Community Foundation, where we now have £350,000 being held to be vested in local good causes in the years ahead. We have also sponsored 25 local up and coming young athletes through our partnership with Sportsaid. Our staff have volunteered hundreds of hours; gardening, decorating, and helping with child literacy and CV support and have also raised over £15,000 in fundraising for a range of causes. And of course we have continued to support our charity partner Framework in their battle against homelessness.

Board changes

2014 has been a period of some change in personnel on the Board. In addition to David Thompson retiring from the Board in May and being succeeded by John Edwards, Richard Fiddis also stepped down from the Board in September, as he took up an exciting new Executive role in Sydney, Australia. Richard served on the Board since 2007 and throughout offered his wise counsel and global market perspective to the Board. We wish him well in his new adventure.

As the Society develops, it is important that the Board evolves and strengthens to ensure that it has the right blend of skills, experience and advice to continue to prosper. We were delighted therefore to announce the appointment of two new Directors to the Board in 2014.

Andrew Neden joined the Board in September. Andrew has just completed a 30 year career at KPMG where he was a partner for 18 years. In his time with them he has carried out roles in audit, consulting, transaction services and latterly was Global Chief Operating Officer - KPMG Financial Services. Andrew is a strong supporter of mutuality and is also the Chair of the Audit Committee at the Wesleyan Assurance Society.

Guy Thomas joined the Board in December following a successful career spent in the building society sector. Guy recently retired from the Principality Building Society, having held a number of Executive roles including Group Finance Director, Group Chief Operating Officer and Chairman of Peter Alan Estate Agency. Prior to his time at The Principality, Guy held senior roles at Birmingham Midshires and Staffordshire Building Society.

Looking ahead

2014 has been another year of good progress and development for the Society and we aim to continue this in 2015.

· We will be working hard to continue to grow and develop our whole of market mortgage advice service to build on a successful launch,

· Building on the success we have seen in 2014 we plan to add building society services to a further four locations in 2015; including brand new locations in Ashbourne and Matlock

· Increase our focus on "being easy to deal with" - we have already identified a number of areas where we feel we can further improve the efficiency and effectiveness of our service, for example through the introduction of electronic identification and verification for all savings and mortgage customers. This will lead to a dramatic reduction in the number of times our new and existing customers will have to produce several forms of identification to open an account. An area that we know can cause frustration;

· In terms of lending, we would expect to continue to organically grow our mortgage book but probably at a slightly slower rate than we have seen in recent years. However, we are exploring some new areas of activity, one of which is how we can take our unique business model and support the building of new homes in our heartland, particularly helping people buy their first new home;

· Acknowledge that there is a significant change in customer behaviour and expectations around digital access to service. We have successfully run online savings accounts for a number of years but currently customers must choose between online or branch to access our service and their money. We will commence a project this year to look at how we can give our customers choice of access to their accounts, so that they can combine the high service experience of the branch, with the convenience of online when they would like. We expect this to be a continuing feature of our development plans in the coming years;

· Continue to develop and strengthen our links within our communities with a number of new initiatives and increased support for our existing community partners

As always, we will also continue to look at ways in which we can improve and enhance our product offering to make us more relevant to customers and to ensure that we are best placed to help them manage their finances and achieve their financial ambitions.

Consolidated statement of comprehensive income

for the year ended 31 December 2014

2014

2013

£m

£m

Interest receivable and similar income

100.7

98.6

Interest payable and similar charges

(51.8)

(60.5)

Net interest income

48.9

38.1

Fees and commissions receivable

10.7

10.1

Fees and commissions payable

(0.4)

(0.5)

Other income

-

0.5

Net gains from derivative financial instruments

0.2

1.2

Total net income

59.4

49.4

Administrative expenses

(33.0)

(28.7)

Acquisition and merger costs

-

(0.8)

Depreciation and amortisation

(3.9)

(3.8)

Finance (cost)

(0.2)

(0.2)

Operating profit before provisions

22.3

15.9

Impairment losses on loans and advances

(1.3)

(0.9)

Provisions for liabilities - FSCS levy

(1.8)

(1.8)

Provisions for liabilities - Other

(1.2)

(0.3)

Loss on disposal of property, plant and equipment

(0.6)

(0.3)

Negative goodwill

-

0.2

Profit before tax

17.4

12.8

Tax expense

(3.5)

(2.6)

Profit for the financial year

13.9

10.2

Other comprehensive income:

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

Remeasurements of the net defined benefit liability

(2.5)

0.1

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

0.5

-

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

Available-for-sale reserve

Valuation gains/(losses) taken to reserves

0.8

(0.4)

Amount transferred to income statement

-

0.2

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

(0.2)

0.1

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

(1.4)

-

Total comprehensive income for the period

12.5

10.2

Consolidated statement of financial position

as at 31 December 2014

2014

2013

£m

£m

Assets

Liquid assets

510.7

495.7

Derivative financial instruments

9.9

20.1

Loans and advances to customers

2,718.3

2,471.4

Fixed and other assets

26.9

28.7

Total assets

3,265.8

3,015.9

Liabilities

Shares

2,575.4

2,319.4

Borrowings

456.9

483.3

Derivative financial instruments

13.6

8.9

Other liabilities

16.2

13.5

Subscribed capital

26.6

26.2

Total liabilities

3,088.7

2,851.3

Reserves

General reserves

176.7

164.8

Available-for-sale reserves

0.4

(0.2)

Total reserves and liabilities

3,265.8

3,015.9

Consolidated statement of changes in members' interests as at 31 December 2014

General reserve

Available-for-sale reserve

Total

£m

£m

£m

Balance as at 1 January 2014

164.8

(0.2)

164.6

Profit for the year

13.9

-

13.9

Other comprehensive income for the period (net of tax)

Net gains from changes in fair value

-

0.6

0.6

Remeasurement of defined benefit obligation

(2.0)

-

(2.0)

Total comprehensive income/(expense) for the period

11.9

0.6

12.5

Balance as at 31 December 2014

176.7

0.4

177.1

Balance as at 1 January 2013 *

151.9

(0.1)

151.8

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 for the period

10.3

(0.1)

10.2

Balance as at 31 December 2013

164.8

(0.2)

164.6

Consolidated cash flow statement

for the year ended 31 December 2014

2014

2013*

£m

£m

Cash flows from operating activities

Profit before tax

17.4

12.8

Depreciation and amortisation

3.9

3.8

Loss on disposal of property, plant and equipment

0.6

0.3

Interest on subscribed capital

2.0

2.0

Net (gains)/losses on disposal and amortisation of debt securities

(1.2)

0.1

Increase in impairment of loans and advances

0.9

0.9

23.6

19.9

Changes in operating assets and liabilities

(Increase)/decrease/in other assets

(4.3)

23.2

Increase/(decrease) in other liabilities

5.0

(21.2)

(Increase)/decrease in liquid assets

(26.0)

7.9

(Increase) in loan and advances to customers

(234.0)

(363.1)

Increase in shares

256.8

59.9

(Decrease)/increase in borrowings

(15.9)

238.6

Taxation paid

(3.8)

(1.8)

1.4

(36.6)

Capital expenditure and financial investment

(18.8)

25.6

Financing activities

(1.9)

(1.9)

Increase in cash and cash equivalents

(19.3)

(12.9)

Cash and cash equivalents at beginning of year

337.9

350.8

Cash and cash equivalents at end of year

318.6

337.9

Summary ratios

2014

2013*

%

%

Gross capital as a percentage of shares and borrowings

6.72

6.81

Liquid assets as a percentage of shares and borrowings

16.84

17.69

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

0.44

0.35

Group management expenses as a percentage of mean total assets

1.17

1.13

Society management expenses as a percentage of mean total assets

0.93

0.88

Society interest margin as a percentage of mean assets

1.56

1.33

Notes

· The financial information set out above, which was approved by the Board of Directors on 18 February 2015, does not constitute accounts within the meaning of the Building Societies Act 1986.

· The financial information for the years ended 31 December 2014 and 31 December 2013 has been extracted from the Accounts for those years and on which the auditors have given an unqualified opinion.

* Restated following the implementation of IFRIC 21 - Levies