Nottingham Building Society

Results for the year ended 31 December 2008

A well established prudent approach delivers stability and security in turbulent times  

'The UK and global markets saw unprecedented levels of change and volatility during 2008 leading to a deepening recession. Our prudent approach to lending and strong capital position are helping us weather the storm. We have continued to make our business more efficient and remain focused on helping our customers through these difficult times'

Achievements and financial highlights include:

• Total assets maintained at £3 billion

• Strong Retail Franchise growth - Retail savings balances up by 4% supported by over 20% growth in branch based account openings

• 94% of mortgage lending funded from retail deposits of our members

• Underlying Profit (defined below) for the Society reduced to £4.2m (2007 £8.1m) with Group profits at £2.9m (2007 £7.6m)

• Total administrative expenses, excluding depreciation, reduced by 0.4% (4% in real terms)

• Average loan to value of residential mortgage loans only 40% using an index valuation basis

• Only 0.43% of loans greater than three months in arrears (less than a quarter of industry average of 1.88%)

• Capital ratios remained strong and well above the Basel II requirements

• No exposure to the sub-prime or self-certified mortgage markets

• No exposure to Icelandic banks

Commenting Ian Rowling, Chief Executive said:

 'Against a background of uncertainty and volatility, our focus has been on ensuring a safe haven for our members' funds and on improving efficiency rather than growth in our total assets which were maintained at £3bn.

New lending was deliberately reduced to £429m with a continuing emphasis on quality. Our asset quality remains strong, for example:

• We have no exposure to sub-prime lending or self-certified mortgages.

• The average loan to value of our residential mortgage book is only 40%, after taking account of declining values. 

• Arrears remain consistently lower than the industry average, with only 0.43% of loans greater than three months in arrears (less than a quarter of the industry average of 1.88%)

In an extremely competitive market we continued to grow our retail savings balances which increased by 4% and thereby reduced the level of wholesale funding balances from 25% of total funding at the end of 2007 to 23%. At year end 77% of our funding came from our members.

Our branch network performed extremely well with strong savings inflows and account openings up over 20% on 2007. This performance really underpins the strength of The Nottingham in our East Midlands and Lincolnshire heartland, as more and more customers chose our Society as a safe home for their savings.

Our latest customer satisfaction survey shows that 94.2% were satisfied with our service throughout the year (93.2% in 2007). Despite the challenges of the market over the last year, there has also been an increase in those rating The Nottingham's performance not just 'good' but 'excellent' (61.6% in 2008 compared to 56.3% in 2007).

The reported profit before tax for the Society reduced to £2.5m (2007 £8.7m) and to £0.5m for the Group (2007 £8.2m). 

A significant impact has been an exceptional £2.4m levy by the Financial Services Compensation Scheme (FSCS) due to the failures of Bradford & Bingley plc, the Icelandic banks and London & Scottish Bank plc.

Additionally in executing our plan to improve the efficiency of the business we have undertaken significant reorganisation of several key areas of the business. This resulted in us incurring exceptional restructuring costs of £1.3m in the year. 

Underlying profit (which excludes the impact of FSCS, exceptional restructuring costs and benefits from hedge accounting (relating to our fixed rate mortgages and savings business) for the Society reduced to £4.2m (2007 £8.1m) with Group profits at £2.9m (2007 £7.6m). The key factors affecting profit include the following:

• Net interest margin reduced due to the increased costs of funding (caused by the ongoing credit crunch) and the additional costs associated with holding higher liquidity levels.

• Reduced house sales activity resulted in a trading loss in our estate agency business (Nottingham Property Services). We have completely restructured our estate agency and now operate with a significantly lower cost base.

• Taking into account current market conditions, we have increased our impairment provisions on a prudent basis

• These factors were to some extent offset by tight control on management expenses excluding depreciation. After excluding the impact of a one off write back of endowment provisions in 2007 the management expenses excluding depreciation decreased by 0.4% in the year. In real terms management expenses reduced by 4% as the savings achieved during the year have been absorbed by the cost of inflation and pay awards.

We obtained a strong credit rating from Moody's during 2008 with a view that The Nottingham is well positioned to withstand a downturn in the housing market. The Nottingham is one of very few banks or building societies with a stable outlook. This has been achieved due to our strong capital and asset quality.

As we move into 2009 market conditions are forecast to remain difficult. The housing market will remain subdued as the recession continues to bite.'

Our unstinting focus will be on:

• Continuing to provide a safe haven for members' funds; and

• Maintaining asset quality 

The building blocks of business efficiency that we have worked hard to lay in 2008 will drive continual improvements in 2009 and beyond across all areas.

We will continue to take opportunities on the lending side by delivering products and services appropriate to the needs of our customers, our risk appetite and funding requirements.

Our offers to members will be focused around providing continued security and safety with the products and services they need in a time of financial turbulence'

Consolidated income statement

for the year ended 31 December 2008

2008

2008

2008

2007

Pre exceptional items

Exceptional items

Total

Total

£m

£m

£m

£m

Interest receivable and similar income

178.2

-

178.2

160.8

Interest payable and similar charges

(154.3)

-

(154.3)

(136.0)

Net interest income

23.9

-

23.9

24.8

Fees and commissions receivable

5.0

-

5.0

7.3

Fees and commissions payable

(0.8)

-

(0.8)

(1.2)

Net gains from derivative financial instruments

1.3

-

1.3

0.6

Total net income

29.4

-

29.4

31.5

Administrative expenses

(21.6)

(1.3)

(22.9)

(21.1)

Depreciation and amortisation

(2.9)

-

(2.9)

(2.4)

Finance income and expense

0.3

-

0.3

0.2

Operating profit before provisions

5.2

(1.3)

3.9

8.2

Impairment losses on loans and advances

(1.0)

-

(1.0)

-

Provisions for liabilities - FSCS levy

-

(2.4)

(2.4)

-

Profit before tax

4.2

(3.7)

0.5

8.2

Tax expense

-

(2.3)

Profit for the financial year

0.5

5.9

Consolidated statement of recognised income and expense

for the year ended 31 December 2008

2008

2007

£m

£m

Valuation gains on available-for-sale securities

1.4

0.6

Actuarial (loss)/gain on retirement benefit obligations

(2.3)

2.7

Tax on items taken directly to or transferred from equity

0.3

(1.0)

Net (loss)/income recognised directly in equity

(0.6)

2.3

Profit for the financial year

0.5

5.9

Total recognised income and expense for the year

(0.1)

8.2

Consolidated balance sheet

as at 31 December 2008

2008

2007

£m

£m

Assets

Liquid assets

657.9

611.7

Derivative financial instruments

34.4

24.9

Loans and advances to customers

2,348.1

2,369.8

Fixed and other assets

20.1

19.4

Total assets

3,060.5

3,025.8

Liabilities

Shares

2,204.8

2,121.1

Borrowings

637.1

719.3

Derivative financial instruments

35.3

6.9

Other liabilities

12.9

9.3

Subscribed capital

26.1

24.8

Total liabilities

2,916.2

2,881.4

Equity

General reserves

143.0

144.1

Available-for-sale reserves

1.3

0.3

Total equity and liabilities

3,060.5

3,025.8

Consolidated cash flow statement

for the year ended 31 December 2008

2008

2007

£m

£m

Cash flows from operating activities

Profit before tax

0.5

8.2

Depreciation and amortisation

2.9

2.4

Interest on subscribed capital

2.0

2.0

Net (gains) on disposal and amortisation of debt securities

(0.1)

(0.1)

Increase in impairment of loans and advances

1.0

-

Taxation

(0.8)

(2.2)

5.5

10.3

Changes in operating assets

(Increase) in other assets

(37.2)

(17.6)

Increase in other liabilities

29.4

26.3

Decrease/(increase) in liquid assets

39.7

(11.5)

Decrease/(increase) in loan and advances to customers

51.3

(217.3)

Increase in shares

87.2

199.8

(Decrease)/increase in borrowings

(82.9)

175.7

93.0

165.7

Capital expenditure and financial investment

43.5

(105.8)

Financing activities

(1.9)

(1.9)

Increase in cash and cash equivalents

134.6

58.0

Cash and cash equivalents at beginning of year

282.0

224.0

Cash and cash equivalents at end of year

416.6

282.0

Summary ratios

2008

2007

%

%

Gross capital as a percentage of shares and borrowings

5.99

5.96

Liquid assets as a percentage of shares and borrowings

23.15

21.54

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

0.02

0.21

Group management expenses as a percentage of mean total assets

0.84

0.83

Society management expenses as a percentage of mean total assets

0.73

0.70

Notes

• The financial information set out above, which was approved by the Board of Directors on 25 February 2009, does not constitute accounts within the meaning of the Building Societies Act 1986.
• The financial information for the years ended 31 December 2008 and 31 December 2007 has been extracted from the Accounts for those years and on which the auditors have given an unqualified opinion.