Newcastle 125/8 Regulatory News (NBSR)

NEWCASTLE BUILDING SOCIETY ANNOUNCES FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2012

Newcastle Building Society today announces its 2012 results, which reflect the further success of its strategy, with an operating profit before impairments, provisions and exceptional items of £10.4m and a profit before tax of £1.5m.

Chief Executive's Statement

"As expected, 2012 was a year where further challenges emerged and it is against this backdrop that I am pleased to report the Society continued to deliver against its strategy.

In 2010, we changed our strategic focus to returning the Society to a traditional building society model with a diversified income stream via our Solutions business; built on core building society competencies. At the heart of this strategy are our members, our staff and the communities within which we operate and ensuring we provide a good range of products and excellent service, underpinned by the Society's Values.

The Society continues to show steady year-on-year positive trends in all its Corporate Key Performance Indicators, which are fully aligned with the Society's strategy. From a financial perspective, profitability, capital and liquidity ratios continue to strengthen further, and our key non-financial measures; the satisfaction of both our members and employees, increased. We exceeded our targets for business simplification and delivered on schedule on key regulatory projects. Overall, we have had a very positive year of progress.

Financial Performance - consistent improvements

Profit before tax improved from £0.1m to £1.5m reflecting increased mortgage lending activity, higher income from financial advice services and a strong performance from the Solutions business. Our operating profit (before provisions and Financial Services Compensation Scheme levy) improved by 13% from £9.2m to £10.4m. This was a pleasing performance as operating profit for 2011 included £1.4m in relation to the Prepaid Cards business ("PPC"), which was sold at the end of 2011, and the 2012 figure is affected by a £1m charge on the revaluation of the investment property portfolio. Adjusting for these factors gives a year-on-year improvement in operating profit of 46%. Our cost-to-income ratio improved from 80% to 77%.

Our Solutions business continues to go from strength to strength with growth in savings balances under management of 22% including the launch of a new savings management contract in May 2012. Solutions operating profit (before provisions and gain from the disposal of PPC) increased from £6.2m to £6.7m an increase of 8%, with the underlying increase being much higher at 40%, after adjusting for the impact of the sale of PPC.

The Society's capital ratios continued to improve with the Solvency Ratio improving from 15.0% to 16.4% and the Core Tier 1 ratio, the key measure of focus under new proposed capital regulations, improving from 10.0% to 10.7%. The Tier 1 ratio improved from 11.7% to 12.6%.

In 2012 the Society continued to unwind legacy portfolios with higher risk or lower margin which do not fit the traditional building society model. A reduction of £180m was achieved including £75m on commercial investment loans and £68m on loans to housing associations. Since the start of 2010 we have reduced legacy portfolios by £430m with the largest element of this reduction relating to commercial investment loans, falling by £241m or 43%. This significantly improves the overall risk profile of our balance sheet. However while the commercial investment portfolio reduces we continue to experience an increased level of provisions on this portfolio with the majority of the provisions charge for the year reflecting the challenging backdrop for commercial given falling property prices and rising tenant failure, particularly in the retail sector. The number of mortgage loans in arrears of 3 months or more, across the whole mortgage portfolio, remained broadly unchanged at 0.76%; well below industry averages.

Our liquidity at the end of the year was strong at 30%, due mainly to the success of unwinding legacy portfolios. We expect liquidity to reduce as we expand new residential lending and it is pleasing that we already have the necessary liquidity in place to fund our lending plans for 2013.

Members - Supporting through products

Thanks to the launch of products, such as our hugely popular charity linked accounts - the Sir Bobby Robson Foundation ISA and Saver - we have enjoyed great support from both new and existing members. This helped us open 40,000 new savings accounts for members in 2012. Additionally, we supported first time buyers (FTBs) throughout the year, with the launch of a range of competitive 90-95% LTV products, which were well received. Our lending to FTBs increased by more than 210% in 2012 in comparison to 2011 and helped support a group that is key to the success of the wider housing market. Our total gross mortgage lending in 2012 was double that of 2011 and we expect it to be double again in 2013. This all flows from our strategy of simplification and our focus on being a traditional building society with a diversified Solutions business built on the core competencies of being a building society.

Following the devastating floods the North East of England experienced in July, our Alnwick branch was badly damaged. We took the opportunity to reassess the needs of the branch and have redeveloped it to become one of the beacons for our new style of branches within the network.

Our annual customer satisfaction survey results improved from overall satisfaction of 90% in 2011 to 92% in 2012. This has in part been due to an ongoing desire to develop not only our staff but also our proposition and processes ensuring that we take all feedback from customers, whether positive or negative, and use it constructively.

Staff Engagement - rewarding and inspiring

In 2010, we formed a staff representative group, which has helped us define many of the positive staff-related changes that have taken place within our organisation. This includes our annual staff survey; now an intrinsic part of our employee strategy. We have just completed our third survey and again the results are very positive with the Staff Satisfaction Index rising to 85%.

We launched the Society's values to staff this year, which were also developed by our staff representative group. The process of agreeing values was comprehensive, with both challenge and support, which in turn has helped develop a framework that supports both our employee and member strategies going forward.

In 2012 we introduced our new S.T.A.R. (Staff to Achieve Recognition) awards for staff which aim to celebrate work well done across all areas of the Society's business, particularly where departments have had positive feedback from customers.

We also launched our graduate training scheme where we took on local graduates in a number of key business areas. Combined with the second year of our undergraduate student placement programme then we're quite excited about the support we're providing to the next generation of finance sector employees.

In April, we were also able to deliver an annual pay review and in December we paid a staff corporate bonus equivalent to 2.5% of staff's salaries.

Communities - celebrating through support

It has been a fantastic year for working with local communities with the launch of our "Cornerstone of the Community" initiative within our branch network. Through activities including volunteering, charity fundraising and local hero awards, we were able to support local charities in need and reward unsung heroes for the tireless work and support they give in their areas.

We also launched a financial education project called the Boardroom Challenge. This was a six-week long curriculum based learning package that taught core numeracy and literacy skills to pupils. The project involved more than 500 nine and ten-year-olds.

As well as this, we have continued to provide support to our corporate Charity of the Year. For 2011/2012 this was Macmillan Cancer Support for whom we raised a record £31k. For 2012/2013, our Charity of the Year is Help for Heroes.

Summary

The Society continued to make excellent progress in 2012 towards achieving our long-term objectives. While there is some evidence that the UK economy is moving in a positive direction it may take years for a sustained recovery to be fully established. We see the next three years as an opportunity to show that building societies can continue to thrive, with an increased focus on mortgage lending and good long-term value savings products, a commitment to our financial advice service and our pursuit of excellent customer service.

In 2013 we celebrate the Society's 150th anniversary, that's 150 years of providing mortgages and savings products, supported by a range of services, to our members. We wouldn't be here without our members and we thank them for their support - we look forward to another 150 years.

I would like to take this opportunity to thank the staff and Executive team, who have shown exceptional commitment and support both this year and over the last three years.

Finally, on behalf of the Board I wish to place on record our sincere thanks to our Chairman, David Holborn, who has served the Society with distinction for the past 10 years, the last 2 as Chairman. We will miss his wise counsel and guidance. Following careful and timely planning the Society has secured an equally impressive replacement in Phil Moorhouse under whose guidance we look forward to building further on our successes to date. This new appointment will commence after our AGM on 24th April.

Jim Willens

Chief Executive