Nottingham Building Society
21 September 2005
Nottingham Building Society
Interim results
21 September 2005
Nottingham Building Society today announced its consolidated results for the
six months to 30 June 2005. Comparative figures are for the six months
to June 2004.
• Gross lending £272M (2004: £329M)
• Management expenses ratio 0.81% (2004: 0.92%)
• Asset growth 7.54% (2004: 7.23%)
• Gross capital 6.97% (2004: 7.31%)
Commenting on these results, Stuart Brandreth, managing director of Nottingham
Building Society, said:
'During the first six months of the year, the level of activity within the
housing market was much lower than the same period in 2004. As a result the
lending record achieved in 2004 will not be repeated for the full year. However,
the Society continued to grow healthily in spite of competition that remained
fierce in both the mortgage and savings markets. Whilst maintaining a strong
capital position, the Society further reduced its management expenses to mean
assets ratio, ensuring that optimum value was delivered to members.
'Our results are the first that we have published using the International
Financial Reporting Standards (IFRS) and demonstrate the financial strength of
the Society. It has been necessary to include more information than under the
previous disclosure rules, although much of the additional information is
reconciliations of the old and new accounting approaches. The new accounting
approach, particularly in respect of financial instruments, is likely to add
more volatility to the Society's profitability and that of similar businesses;
however, the Society's policies with regard to managing interest rate risk are
designed to limit that volatility.'
Financial information
International Financial Reporting Standards (IFRS)
Introduction
From 1 January 2005 Nottingham Building Society, in keeping with other European
listed entities, is required to prepare its financial statements in accordance
with International Financial Reporting Standards (IFRS) as adopted for use in
the European Union (EU).
The Group will apply IFRS for the year ended 31 December 2005, and will prepare
comparative figures under IFRS. Accordingly the Group's date of transition to
IFRS is 1 January 2004 and its first reporting period under IFRS is the interim
period ended 30 June 2005. This report therefore contains the consolidated
financial results for the 6 months ended 30 June 2005 on the basis of IFRS, and
comparatives for the 6 months ended 30 June 2004 and for the year ended 31
December 2004 restated under IFRS.
The information for the year ended 31 December 2004 does not constitute
statutory accounts for the purposes of S.81(A) of the Building Societies Act
1986. A copy of the statutory accounts for that year has been delivered to the
Financial Services Authority (FSA). The auditors report on those accounts was
unqualified.
Basis of preparation
The Group's consolidated financial statements have been prepared in accordance
with the recognition and measurement requirements of IFRS in issue that are
either endorsed by the EU and effective, or are expected to be endorsed and
effective at 31 December 2005. In particular the directors have assumed that the
amendment to IAS 19 'Employee Benefits - Actuarial Gains and Losses' issued by
the International Accounting Standards Board (IASB) will be fully adopted by the
EU and therefore available for use in the annual IFRS Financial Statements for
the year ended 31 December 2005.
In respect of financial instruments, the Group's policy has been to adopt IAS 32
'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial
Instruments: Recognition and Measurement' from 1 January 2005. Comparatives for
2004 have not been restated to reflect the requirements of IAS 32 and IAS 39
and, as permitted by IFRS 1, are accounted for under UK Generally Accepted
Accounting Practice (GAAP) in accordance with accounting policies set out in the
annual financial statements for the year ended 31 December 2004.
The preparation of financial statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect the
application of policies and reported amounts of assets and liabilities, income
and expenses. These estimates and assumptions are based on historical experience
and various other factors that are believed to be reasonable under the
circumstances.
To assist in the understanding of the impact of transition from UK GAAP to IFRS,
the Group has presented reconciliations of the 2004 results and balance sheets
in appendix 1.
Nottingham Building Society
Summary consolidated income statement
for the period ended 30 June 2005
Unaudited Unaudited Unaudited
Six months Year Six months
ended ended ended
30.06.05 31.12.04 30.06.04
(Restated) (Restated)
£000 £000 £000
Net interest income 11,788 20,599 9,677
Other income and charges 2,238 7,776 4,036
Total income 14,026 28,375 13,713
Administrative expenses 8,401 17,309 8,285
Depreciation and amortisation 682 1,438 741
Profit before provisions 4,943 9,628 4,687
Impairment losses on loans and advances (12) (108) (73)
Profit before tax 4,955 9,736 4,760
Tax expense 1,500 3,058 1,440
Profit for the period 3,455 6,678 3,320
As a percentage of mean total assets
Profit for the period 0.31 0.33 0.34
Management expenses 0.81 0.91 0.92
All comparatives for 2004 have been restated to an adopted IFRS basis (excluding
the impact of IAS 32 and IAS 39, which only came into effect from 1 January 2005).
Nottingham Building Society
Consolidated statement of recognised
income and expense
for the period ended 30 June 2005
Unaudited Unaudited Unaudited
Six months Year Six months
ended ended ended
30.06.05 31.12.04 30.06.04
(Restated) (Restated)
£000 £000 £000
Changes in accounting policy on adoption
of IAS 39 7,775 - -
Available for sale securities - valuation 96 - -
gains taken to equity
Actuarial (loss)/gain on retirement (1,842) (1,066) 1,058
benefits
Tax on items taken directly to or
transferred from equity 524 320 (317)
Net income recognised directly in equity 6,553 (746) 741
Profit for the period 3,455 6,678 3,320
Total recognised income and expense for
the period 10,008 5,932 4,061
Nottingham Building Society
Summary consolidated balance sheet
as at 30 June 2005
Unaudited Unaudited Unaudited
30.06.05 31.12.04 30.06.04
(Restated) (Restated)
£000 £000 £000
Assets
Liquid assets 367,082 342,833 320,199
Loans and advances to customers 1,959,899 1,826,222 1,714,346
Derivative financial instruments 14,264 - -
Intangible assets 918 907 992
Property, plant and equipment 6,282 6,498 6,258
Other assets 8,403 15,058 8,746
Total assets 2,356,848 2,191,518 2,050,541
Liabilities
Shares 1,849,145 1,650,771 1,567,494
Other borrowings 329,364 386,418 329,094
Derivative financial instruments 4,286 - -
Other liabilities 22,281 13,721 15,239
Subscribed capital 25,178 24,022 23,999
Total liabilities 2,230,254 2,074,932 1,935,826
Reserves (equity) 126,594 116,586 114,715
Total liabilities and equity 2,356,848 2,191,518 2,050,541
As a percentage of shares and borrowings
Gross capital 6.97 6.90 7.31
Free capital 6.66 6.64 7.04
Liquid assets 16.85 16.83 16.88
Nottingham Building Society
Summary consolidated cash flow statement
for the period ended 30 June 2005
Unaudited Unaudited Unaudited
Six months Year Six months
ended ended ended
30.06.05 31.12.04 30.06.04
(Restated) (Restated)
£000 £000 £000
Cash flows from operating activities
Operating profit 4,955 9,736 4,760
Movement in prepayments and accrued
income (87) (10,205) 2,795
Movement in accruals and deferred income (13,752) 14,495 (10,888)
Depreciation and amortisation 682 1,438 741
Interest on subscribed capital 985 2,014 1,007
Net increase in loans & advances (123,905) (251,162) (139,486)
Net increase in shares 169,541 216,185 155,259
Net movement in amounts owed to credit
institutions and other customers (23,138) 35,623 58,961
Net movement in loans and advances to
credit institutions (10,150) (5,652) (1,051)
Net movement in debt securities in issue 3,000 8,000 (74,000)
Other movements 4,051 961 (2,035)
Income tax paid (1,558) (2,843) (1,315)
Net cash flows from operating activities 10,624 18,590 (5,252)
Net cash flows from investing activities
Capital expenditure and financial (477) (973) (121)
investment
Cash contribution to defined benefit (378) (744) (372)
scheme
9,769 16,873 (5,745)
Net cash flows from financing activities
Purchase of debt securities (275,001) (548,103) (250,000)
Disposal of debt securities 276,100 505,000 216,000
Interest paid on subscribed capital (985) (1,969) (985)
Increase/(Decrease) in cash and cash
equivalents 9,883 (28,199) (40,730)
Nottingham Building Society
Significant accounting policies
The following is a list of the Group's key accounting policies that have changed
under IFRS. These have been applied consistently in dealing with items that are
considered material to the Group's accounts. As a result of the Directors'
decision to adopt the IFRS 1 exemption not to restate comparatives for IAS 32
and IAS 39, certain accounting policies will only apply from 1 January 2005 and
not to the 2004 comparatives. These policies have been denoted with an asterisk
(*).
Intangible assets
Purchased software and costs directly associated with the development of
computer software are capitalised as intangible assets where the software is a
unique and identifiable asset controlled by the Group and will generate future
economic benefits.
Amortisation is charged to the Income Statement by equal instalments over the
estimated useful life of the software, which is generally 4 years.
Financial instruments (excluding matched derivatives) *
In accordance with IAS 39, Financial Instruments: Recognition and Measurement,
the Society classifies its financial assets as either loans and receivables or
assets available-for-sale. Loans and receivables are carried at amortised cost
less impairment provisions, assets available-for-sale at fair value with value
changes charged/credited to equity. No assets have been classified as held to
maturity. In the event that at a period end there are any unmatched derivatives,
they are classified as held for trading, and any movement in fair value
charged/credited to the income statement.
a) Loans and receivables
The Society's loans and advances to customers are classified as loans and
receivables. These are measured at amortised cost using the effective interest
method. The effective interest method is a method of discounting estimated
future cash payments or receipts through the expected life of the financial
instrument.
The initial value includes certain upfront costs and fees such as cashbacks,
procuration fees, mortgage indemnity guarantee premiums and application fees,
which are amortised over the expected life of mortgage assets. Mortgage
discounts are also amortised over the expected life of mortgage assets.
b) Available-for-sale financial assets
Available-for-sale investments are non-derivative assets. The Society measures
these assets at fair value, with subsequent changes in fair value being
recognised through equity except for impairment losses, which are recognised in
the income statement.
Upon sale or maturity of the asset, the cumulative gains and losses recognised
in equity are removed from equity and recycled to the income statement.
All financial liabilities including wholesale funds held by the Society are
measured at amortised cost using the effective interest method.
Discounts and other costs incurred in the raising of wholesale funds are
amortised over the period to maturity on a straight-line basis, which
approximates to the effective interest method.
Impairment of loans and advances to customers *
Throughout the year and at each year-end, individual assessments are made of all
loans and advances against properties which are in possession or in arrears by
two months or more. Specific provision is made against those loans and advances
which are impaired. In considering the specific provision for impaired loans,
account is taken of: any discount which may be needed against the value of the
property at the balance sheet date thought necessary to achieve sale within
three months of that date; amounts recoverable under mortgage indemnity policies
and anticipated realisation costs.
In addition the Society assesses at each balance sheet date whether there is
objective evidence to suggest a financial asset or group of financial assets is
likely to be impaired.
Where a collective assessment is made of a category or class of financial asset,
the Society measures the amount of impairment loss by applying expected loss
factors based on the Society's experience of default, loss emergence periods,
the effect of movements in house prices and any adjustment for the expected
forced sales value.
The amount of impairment loss is recognised immediately through the income
statement and a corresponding reduction in the value of the financial asset is
recognised by way of a provision.
Derivative financial instruments and hedge accounting *
The Society uses interest rate swaps for the purpose of reducing interest rate
risk. The Society does not hold interest rate swaps for trading purposes.
Interest rate swaps are recognised in the balance sheet at their fair value with
changes in their fair value going through the income statement. Fair values are
obtained from quoted market rates. All swaps are carried as assets when fair
value is positive and as liabilities when fair value is negative.
As part of its risk management process the Society identifies portfolios of
items whose interest rate risk it wishes to hedge. The Society analyses the
portfolios into repricing time periods by scheduling cash flows into the periods
in which they are expected to occur. On the basis of this analysis, the Society
decides the amount it wishes to hedge and designates financial assets and
financial liabilities from the portfolios equal to the amounts it wishes to
designate as being hedged.
Changes in the fair value of the effective portions of interest rate swaps, that
are designated and qualify as fair value hedges, and that prove to be effective
in relation to the hedged risk, are recorded in the income statement. The
corresponding change in fair value of the hedged asset or liability, that is
attributable to that specific hedged risk is also recorded in the income
statement.
Where a hedge no longer meets the criteria for hedge accounting the realised
gain or loss is included within the income statement with no offset within the
income statement.
Certain interest rate swap transactions, while providing effective economic
hedges under the Society's risk management policies, do not qualify for hedge
accounting under the specific rules of IAS 39, and are therefore treated as
derivatives held for trading with fair value gains and losses reported within
the income statement.
Employee benefits
The Group operates a contributory defined benefit scheme, the assets of which
are held in a separate trustee administered fund. The scheme is closed to new
members. Included within the balance sheet is the Group's net obligation
calculated as the present value of the defined benefit obligation less the fair
value of plan assets. Contributions are transferred to the trustees on a regular
basis to secure the benefits provided under the rules of the scheme. Pension
costs are assessed in accordance with advice of a professionally qualified
actuary.
At the date of transition to IFRS, 1 January 2004, the Group's pension deficit
was recognised in the balance sheet. Any actuarial gains or losses that arise
subsequent to 1 January 2004 are recognised within the statement of recognised
income and expense.
The Group also operates contributory defined contribution schemes. The assets of
these schemes are held separately from those of the Group. For this scheme the
cost is charged to the income statement as contributions become due.
Subscribed capital *
Permanent interest bearing shares (Pibs) are classified as financial liabilities
and are presented separately on the face of the balance sheet. Pibs are
initially recognised at 'cost' being their issue proceeds (fair value of
consideration received) net of transaction costs incurred.
Taxation
Income tax on the profit or loss for the year comprises current and deferred
tax. Income tax is recognised in the income statement except to the extent that
it relates to items recognised directly in reserves, in which case it is
recognised in reserves.
Current tax is the expected tax payable on the taxable income and gains arising
in the accounting period.
Deferred tax is provided using the balance sheet liability method, providing for
temporary differences between the carrying amount of assets and liabilities for
accounting purposes and the amounts used for taxation purposes. Deferred tax
assets and liabilities are recognised gross on the balance sheet and deferred
tax assets are only recognised where it is probable that future taxable profit
will be available against which the temporary differences can be utilised.
Both Current and Deferred taxes are determined using the rates enacted or
substantively enacted at the balance sheet date.
Interest income and expense *
Interest income and interest expense on loans and receivables and liabilities
held at amortised cost are recognised on an effective interest rate basis. This
calculation takes into account interest received or paid, discounts, fees and
commissions and incremental transaction costs over the expected life.
Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise
liquid asset balances with less than three months maturity from the date of
acquisition, including cash and non-restricted balances with central banks.
Appendix 1
Income statement reconciliations for the periods ended in 2004
6 months ended 30 June 2004
Notes
UK GAAP IFRS IFRS
Adjustments
£000 £000 £000
Net interest income 9,677 - 9,677
Other income and charges 1 4,137 (101) 4,036
Total income 13,814 (101) 13,713
Administrative expenses 1 8,559 (274) 8,285
Depreciation and amortisation 741 741
Profit before provisions 4,514 173 4,687
Impairment losses on loans and
advances
(73) - (73)
Profit before tax 4,587 173 4,760
Tax expense 2 1,424 16 1,440
Profit for the period 3,163 157 3,320
Full year ended 31 December 2004
Notes
UK GAAP IFRS IFRS
Adjustments
£000 £000 £000
Net interest income 20,599 - 20,599
Other income and charges 1 7,965 (189) 7,776
Total income 28,564 (189) 28,375
Administrative expenses 1 17,851 (542) 17,309
Depreciation and amortisation 1,438 1,438
Profit before provisions 9,275 353 9,628
Impairment losses on loans and
advances
(108) - (108)
Profit before tax 9,383 353 9,736
Tax expense 2 3,025 33 3,058
Profit for the period 6,358 320 6,678
Notes to the above income statement reconciliations
1. Pension costs
Under UK GAAP in accordance with SSAP 24 the regular pension cost of the defined
benefit plan was charged to the income statement with any variations from this
regular pension cost, arising from experiences of surpluses/deficits, and
changes in actuarial assumptions, spread over a number of years.
Under IAS 19, the current service cost and other finance cost are charged to the
income statement, but any actuarial gain/loss is taken to the statement of
recognised income & expense. The adjustment also includes the reversal of a
pension prepayment previously recorded under UK GAAP.
2. Tax expense
This adjustment reflects the tax effects of recognition of the adjustment
described in note 1.
Balance sheet reconciliations at balance sheet dates
1 January 2004 to 1 January 2005
As at 1 January 2004
Notes
UK GAAP IFRS IFRS
Adjustments
£000 £000 £000
Assets
Liquid assets 324,334 - 324,334
Loans and advances to customers 1,574,860 - 1,574,860
Derivative financial instruments - - -
Intangible assets 4 - 1,235 1,235
Property, plant and equipment 5 7,870 (1,235) 6,635
Other assets 6 4,803 494 5,297
Total assets 1,911,867 494 1,912,361
Liabilities
Shares 1,423,164 - 1,423,164
Other borrowings 341,769 - 341,769
Derivative financial instruments - - -
Other liabilities 10 6,637 6,160 12,797
Subscribed capital 23,977 - 23,977
Total liabilities 1,795,547 6,160 1,801,707
Reserves (equity) 116,320 (5,666) 110,654
Total liabilities and equity 1,911,867 494 1,912,361
As at 30 June 2004
Notes
UK GAAP IFRS IFRS
Adjustments
£000 £000 £000
Assets
Liquid assets 320,199 - 320,199
Loans and advances to customers 1,714,346 - 1,714,346
Derivative financial instruments - - -
Intangible assets 4 - 992 992
Property, plant and equipment 5 7,250 (992) 6,258
Other assets 6 8,309 437 8,746
Total assets 2,050,104 437 2,050,541
Liabilities
Shares 1,567,494 - 1,567,494
Other borrowings 329,094 - 329,094
Derivative financial instruments - - -
Other liabilities 10 10,034 5,205 15,239
Subscribed capital 23,999 - 23,999
Total liabilities 1,930,621 5,205 1,935,826
Reserves (equity) 119,483 (4,768) 114,715
Total liabilities and equity 2,050,104 437 2,050,541
As at 31 December 2004
Notes
UK GAAP IFRS IFRS
Adjustments
£000 £000 £000
Assets
Liquid assets 342,833 - 342,833
Loans and advances to customers 1,826,222 - 1,826,222
Derivative financial instruments - - -
Intangible assets 4 - 907 907
Property, plant and equipment 5 7,405 (907) 6,498
Other assets 6 13,726 1,332 15,058
Total assets 2,190,186 1,332 2,191,518
Liabilities
Shares 1,650,771 - 1,650,771
Other borrowings 386,418 - 386,418
Derivative financial instruments - - -
Other liabilities 10 6,297 7,424 13,721
Subscribed capital 24,022 - 24,022
Total liabilities 2,067,508 7,424 2,074,932
Reserves (equity) 122,678 (6,092) 116,586
Total liabilities and equity 2,190,186 1,332 2,191,518
As at 1 January 2005
Notes
IFRS pre IAS 32 IFRS IFRS
/ 39 Adjustments
£000 £000 £000
Assets
Liquid assets 1 342,833 23 342,856
Loans and advances to customers 2 1,826,222 11,127 1,837,349
Derivative financial instruments 3 - 13,179 13,179
Intangible assets 907 - 907
Property, plant and equipment - 6,498
6,498
Other assets 6 15,058 (11,166) 3,892
Total assets 2,191,518 13,163 2,204,681
Liabilities
Shares 7 1,650,771 (148) 1,650,623
Other borrowings 8 386,418 228 386,646
Derivative financial instruments 9 - 2,204 2,204
Other liabilities 10 13,721 2,338 16,059
Subscribed capital 11 24,022 766 24,788
Total liabilities 2,074,932 5,388 2,080,320
Reserves (equity) 116,586 7,775 124,361
Total liabilities and equity 2,191,518 13,163 2,204,681
Notes to the above balance sheet reconciliations
1. Liquid assets
Debt securities included within liquid assets have been classified under IAS 39
as available for sale. Such assets are recognised in the balance sheet at fair
value with any changes in fair value recognised through the statement of
recognised income and expense and shown in a revaluation reserve. The adjustment
relates to the difference between the historical cost and fair value (market
value).
Brokerage and discounts are spread over the life of the instrument on an
effective interest basis.
2. Loans and advances to customers
Under UK GAAP, the carrying amount of mortgages with a discounted interest rate
from the Standard Variable Rate (SVR) are carried at cost with interest being
accrued at the discounted rate during the discount/fixed period and then at SVR
thereafter.
Under IAS 39, mortgages are categorised as loans and receivables and measured on
an amortised cost basis, whereby the principal balance includes unamortised fees
and discounts and interest income is recognised on an effective interest basis
over the expected life of the mortgage.
The impact upon transition to IFRS is to create an asset for previously
recognised discounts and fees, which will be taken to the income statement over
the remaining life of the mortgage.
In addition there is a fair value adjustment relating to the changes in fair
value of the hedged item that arises from the application of fair value hedge
accounting to certain loans and advances.
3. Derivative financial instruments - Assets
In accordance with IAS 39, Financial Instruments: Recognition and Measurement,
all derivative instruments are now recognised on the balance sheet at fair
value. Previously under UK GAAP derivatives were disclosed in the notes to the
financial statements but not recognised. The IFRS adjustment brings those
derivative instruments held at 1 January 2005 onto the balance sheet at fair
value.
Accrued interest relating to the derivative financial instruments has been
reclassified from prepayments to the derivative line.
4. Intangible assets
Under UK GAAP, capitalised software was included within tangible assets. Under
IAS 38: Intangible Assets, software is now classified as an intangible asset
unless it is an integral part of the associated hardware.
The IFRS adjustment is the transfer of capitalised software items from property,
plant and equipment.
5. Property, plant and equipment
The IFRS adjustment relates to the reclassification of capitalised software from
property, plant and equipment to intangible assets.
6. Other assets
The IFRS adjustments shown in the period 1 January 2004 to 31 December 2004
relate to the recognition of the deferred tax that is associated with the
pension deficit, and the release of the pension prepayment.
The IFRS adjustment as at 1 January 2005 is the transfer of derivative accrued
swap interest to the derivative line.
7. Shares
Under UK GAAP, savings accounts with an interest bonus are carried at historical
cost with interest being accrued at the bonus rate during the bonus period and
then at the products standard rate thereafter.
Under IAS 39, bonus savings accounts are recognised on an amortised cost basis,
whereby the bonus interest is recognised on an effective interest basis over its
expected life.
The IAS adjustment reflects the change from historical cost to an amortised cost
basis.
In addition there is a fair value adjustment relating to the changes in fair
value of the hedged item that arises from the application of fair value hedge
accounting to certain share liabilities.
8. Other borrowings
Deposits and debt securities are recognised in the balance sheet at amortised
cost using the effective interest rate to spread any discounts and costs
incurred in the raising of the debt. The IFRS adjustments reflect the change
between a historical cost and an amortised cost basis.
In addition there is a fair value adjustment relating to the changes in fair
value of the hedged item that arises from the application of fair value hedge
accounting to certain deposits and debt securities.
9. Derivative financial instruments - liabilities
In accordance with IAS 39, Financial Instruments: Recognition and Measurement,
all derivative instruments are now recognised on the balance sheet at fair
value. Previously under UK GAAP derivatives were disclosed in the notes to the
financial statements but not recognised. The IFRS adjustment brings those
derivative instruments held at 1 January 2005 by the Society onto the balance
sheet at fair value.
10. Other liabilities
IAS 19: Employee Benefits, requires the recognition of pension deficits on the
balance sheet. The deficit is calculated as the difference between the fair
value of the plan assets and the present value of the defined obligation at the
balance sheet date.
The IFRS adjustment also includes the recognition of a tax liability associated
with the transitional adjustments to IFRS. Also shown with the 1 January 2005
reconciliation is the transfer of derivative accrued swap interest to the
derivative line.
11. Subscribed capital
The IFRS adjustment relates to the reinstatement of the initial discount and
issue costs that were previously being amortised over a 25 year period.
In addition there is a fair value adjustment relating to the changes in fair
value of the hedged item that arises from the application of fair value hedge
accounting to part of the balance.
This information is provided by RNS
The company news service from the London Stock Exchange