Notts.b/s.7 7/8 Regulatory News (NOTP)

Nottingham Building Society

The Nottingham announces robust financial performance in a year of extraordinary challenge, with continued progress in the delivery of its unique member proposition and its journey into the digital world of financial services; whilst demonstrating its mutual ethos to members, colleagues and its communities.

The Nottingham is pleased to present its results for the year ended 31 December 2020. Below are some of the key achievements and financial highlights of 2020:

· Capital strength maintained with Common Equity Tier 1 at 15.0% and leverage of 5.3%;

· Total assets of £3.8 billion and gross mortgage lending of over £490 million for 2020; up 40%;

· The benefits of mutuality shown with millions of pounds invested supporting members through the pandemic;

· Arrears levels remain very low, at a quarter of the industry average (2020: 0.21% v industry at average of 0.83%);

· Strong retail franchise growth - total branch savings balances of £2.5 billion, up 3% in 2020;

· The Society welcomed over 40,000 new customers in the year and now has over 35,000 Lifetime ISA customers;

· Present in 48 locations across nine counties;

· Achieved a customer Net Promoter Score of 76%; and

· Net interest margin at 1.07%;

Commenting David Marlow, Chief Executive, said:

"2020 was not the year we were expecting, but once we understood the significance of the threat of the virus, we acted quickly on our three key priorities: to ensure the wellbeing of our colleagues; to protect and serve our members; and to support our communities.

In everything we have done in 2020, we have sought to be true to our mutual ethos. In fact, the challenges of the pandemic have enabled us to demonstrate the real benefits of mutuality to our members. Over the years, we have built up a significant capital surplus. The Board was unanimous that we should deploy some of this capital to support our members and communities in a time of crisis, and at the same time, we were determined to, increase the level of investment in the Society, to deliver the required strategic initiatives and respond effectively to the rapidly changing world around us.

These decisions inevitably have impacted our 2020 financial results of the Society, reducing overall income and supressing net interest margin but also increasing investment costs, but position us well for the future.

Protecting and serving our members

Keeping our network of over 50 branches open and protecting our team members throughout the pandemic has been one of our greatest challenges and achievements. We had to move quickly to provide a Covid-secure environment and deal with the ever-changing advice and requirements. Through hard work, perseverance and commitment, we kept our branches open to members and sought to do all that we could to look after our members, particularly the vulnerable.

For mortgage customers having difficulty making their monthly payments, we offered payment deferrals, effectively suspending payments for up to six months and providing some breathing space for their family finances. During the year over 3,000 members have used this facility.

One of the largest contributions of direct support to members we have made, was through our conscious decision to protect savings rates in the face of the cut to bank base rate to 0.1% in March. This commitment was to maintain branch savings rates for at least six months. We felt it was right to protect members at a critical time of crisis and particularly when they were being asked to stay at home. The impact of this decision is that we have paid millions of pounds of additional interest to members during 2020.

At the end of one of the most turbulent years in our history, our Net Promoter Score remained at the incredibly high level of 76%, demonstrating our members response to how we have dealt with the challenges of 2020.

Supporting the wellbeing of our team members

None of the achievements in 2020 would have been possible without the amazing team we have here at The Nottingham. They strive every day to help our members save, plan for and protect their financial futures.

In a year of extraordinary challenge, they have consistently gone over and above normal expectations to find a way to support our members, whatever the circumstances. From the beginning of the pandemic, we acted swiftly to instigate a task team focused on the health, safety and wellbeing of our team members. This cross functional team met regularly to plan and put in place policies, processes and actions in response to government guidelines.

Some of the key decisions and actions taken included an early policy decision to support all team members with full pay for Covid-19 related absences due to a positive test result, a requirement to self-isolate or needing time to care for dependants due to schools' closures and other restrictions. We responded quickly to the need for Personal Protective Equipment. Regular and timely communications to team members ensured we had the support of all parties in helping to keep everyone safe and well.

Our colleagues have responded positively to our approach and in fact our annual employee survey, undertaken in November 2020 reported that 91% of respondents felt that safety and security is taken seriously at The Nottingham. Our engagement score of 82% is a five percentage point increase on the 2019 survey. This is significantly above the financial services benchmark.

Supporting Our Communities

Through our Doing Good Together programme we placed a strong focus on alleviating food poverty, homelessness and reducing social isolation. We also responded quickly to the challenges of home-schooling and supporting vulnerable families by helping to further develop literacy and numeracy skills.

We provided financial support to The Trussell Trust foodbank network, The SilverLine phone-befriending service, BookTrust and long-term charity partner Framework. This provided aid for thousands of people. We also launched our Scams and Security hub aimed at protecting our members getting online for the first time. We supported "Story Parks at Home" in partnership with Nottingham City Council, digitising literacy and numeracy activity for young children. More than 8,000 families logged on this year, with almost 1,200 visits to our Money Academy virtual classroom. Education has been a key focus in 2020 and our newly launched Career Academy has supported over 1,100 students remotely on their education to employment transition.

In 2020 we have helped thousands of families with the challenges they have faced and have contributed generously to deserving causes who have worked tirelessly to support the weak and vulnerable at a great time of challenges. We have been proud to support these organisations in their work when they needed it most. Their amazing efforts demonstrate how the pandemic has brought out the best in some.

Staying Relevant in the New World

Once we had progressed our three immediate priorities, we turned our attention to the strategic implications of the pandemic. Following a review, we agreed a range of actions to ensure that the Society is well-placed to continue to grow membership and deliver a sustainable performance in the years ahead. The key areas of our focus were:- our role as an estate agent; the future role of branches; and accelerating our digital route map.

Our role as an estate agent

We have operated as an independent estate agent for over 25 years and during that time have offered both members and non-members a high-quality home buying and selling service. However long-term shifts in the level of annual house purchases, how people now choose a mortgage provider and the increasing digitisation of estate agency services have all been medium term considerations for us.

When taking all these factors into account, we determined that to remain a strong force in estate agency would require a level of investment that was difficult to justify. We therefore began to look at how we might adopt a different approach to maintain access for members to estate agency services, continue to utilise branch space effectively, but not to incur the full costs of running an estate agency.

Following this review, we announced our strategic alliance with the Belvoir Group. The establishment of the strategic alliance achieved our objectives of maintaining access to discounted home selling and lettings services for members - now available nationally and utilising our branch space, whilst no longer carrying the cost of running an estate agency. We are very optimistic about the prospects of our strengthening alliance, which provides both organisations with a number of unique opportunities to work together in the future.

The future role of branches

Branches are the cornerstone of serving our members, and we have long been supporters of a strong branch network. This is best demonstrated by the fact that we have doubled the number of branches in the past seven years. This has proven very successful with branch savings balances increasing from £1bn in 2013 to over £2.5bn at the end of 2020 for the first time in our history. The important role of branches, we believe, will remain for many years to come.

However, as part of our decision regarding estate agency, we conducted a review of our network to ensure all of our locations had a good chance of a successful future. There were two clear emerging themes resulting from this review. Firstly, with the removal of estate agency, a small number of locations were no longer viable; and secondly it was difficult, in the current market conditions to justify such a strong concentration of branches in our home city of Nottingham, where we had 13 branches within a five mile radius of our head office. Our review showed that in reducing this to eight branches, Nottingham based members still have access to a branch within 1.5 miles of their home. We therefore regrettably took the decision to close these branches at the end of 2020 and the cost associated with this is included within our strategic costs.

Following this review, we still have a large vibrant branch network of 48 branches, and in a strong demonstration of our confidence and commitment to our network, we have completed five refurbishments rolling out a completely new and fresh branch concept, which is proving popular with members. We plan further refurbishments in key locations in 2021.

Changing digital expectations

A universal impact of the pandemic has been a greater adoption of the use of digital channels. The rate of shift in expectations and level of usage has been significant, in our view accelerating adoption levels by about five years. Whilst we recognised this trend some time ago and began to digitise the Society's operations, it was clear in the summer that we would need to accelerate our plans significantly if we were to be relevant to younger members in the post-Covid world.

We have therefore approved further investment in digital and have been working hard over recent months with our plans to relaunch Beehive Money in the summer of 2021. Through the launch of an innovative savings app, we will look to position ourselves as a digital leader in tax-free savings. We believe this area gives a significant opportunity to grow our membership particularly those under 40 years of age - something which is underpinned by our recent success as a Lifetime ISA (LISA) provider, where we already have over 35,000 members saving with us in a LISA to buy their first home or save for their pension.

This will mark an exciting new chapter for the Society. Our aim is for Beehive Money to become a tax-free savings provider of choice for a new generation of savers.

Financial performance

In trading terms, despite the turmoil in the economy and markets, we delivered broadly in line with our plan and the Society maintains its excellent financial strength.

Following a planned contraction of the balance sheet in 2019, we broadly maintained our asset size in 2020 supported by a 40% increase in new advances to £493m. Our savings franchise remains strong and saw 3% growth in 2020.

The key drivers of the 2020 financial results were;

· A reduction in net interest income and net interest margin compression as a consequence of our conscious decision not to reduce savings rates for branch customers for at least six months in the ultra-low interest rate environment.

· Fall in fee income driven by very low levels of activity in the first half of the year and our decision to exit estate agency in the summer.

· Higher depreciation, amortisation and strategic investment costs driven associated with the Society's reinvention.

· Whilst our lending portfolio continues to be low risk and high credit quality with less than 50 accounts three months of more in arrears, we believe it is appropriate to remain cautious in this area and expect to see some increases in arrears activity over the next year or so as economic uncertainty created by the third national lockdown and the planned cessation of government intervention start to bite. As a result, we have recorded an increased impairment charge of £2.9m.

· Finally, we saw a hedge accounting charge of £2.7m during the year. Reflecting the consequences of rate changes and market expectations that rates are likely to remain low or even negative for a considerable period. This will however, unwind over time.

Overall, these factors led to a significant reduction in underlying profit before tax to £0.4m for the year and a statutory loss after tax of £7.2m.

A second year of losses is not ideal, however the Board believes that the deployment of capital to support members through higher savings rates and continued investment in the Society's future was the right thing to do and a positive reflection on our status as a mutual; particularly as our levels of capital still remain significantly in excess of our regulatory requirements. Our CET 1 ratio remains at 15.0%, with a 5.3% leverage ratio on a transitional basis. Our liquidity position is also very robust with a liquidity coverage ratio of 215% at the year-end.

We believe that the actions we have taken, achieved without taking government subsidy, have been the right thing to do and in the best interests of our members. 2020 was a unique opportunity for us to demonstrate the benefits of being a member of a mutual organisation and we trust that this is appreciated by all our members.

Outlook

As we enter 2021, great uncertainties remain. Against this backdrop, we expect to steer a steady course but continue to reinvent the Society for the post-Covid era. Our investments and decisions taken in 2020 should enable us to grow membership and our balance sheet, supported by the relaunch of Beehive Money in the summer and the ongoing success of our branch network. We also plan to invest in our mortgage capability to ensure we are a more relevant and efficient lender. With interest rates set to remain low and potentially even go negative, we expect margins to remain compressed, but we nonetheless expect to stabilise our margin in 2021, striking the right balance between historically low lending rates and offering our savers a fair return.

Despite the significant challenges of the past year, we remain on track to prepare the Society for a new world of financial services. We expect to end 2021 as a very different Society to the one that ended 2019 - one that is growing its membership base and delivering a sustainable financial performance despite the challenging economic conditions.

We remain confident that your Society is well placed to continue to fulfil its purpose and help a growing membership to save, plan for and protect their financial futures. We have also been pleased to deliver and demonstrate the true benefits of mutuality to our members, against a backdrop of one of the most challenging periods in our history."

David Marlow

Chief Executive

9 March 2021

The Board allocated resources and managed the business on a total Group basis during 2020. The estate agency business generated a £0.4m loss after tax in the year.

Within the consolidated statutory financial statements, the estate agency business is reported as a discontinued operation.

Consolidated income statement

for the year ended 31 December 2020

2020

2019

£m

£m

Continuing Operations

Interest receivable and similar income

68.8

84.0

Interest payable and similar charges

(28.2)

(37.9)

Net interest income

40.6

46.1

Fees and commissions receivable

3.8

4.2

Fees and commissions payable

(1.0)

(1.1)

Net losses from derivative financial instruments

(2.7)

(0.6)

Total net income

40.7

48.6

Administrative expenses

(36.8)

(33.7)

Depreciation and amortisation

(9.1)

(5.5)

Operating (loss)/profit before impairment and change in EIR accounting estimate

(5.2)

9.4

Impairment charge - loans and advances

(2.9)

(0.4)

Impairment charge - goodwill

-

(4.0)

Change in EIR accounting estimate

-

(12.3)

Profit on disposal of property, plant and equipment

0.1

-

Loss before tax

(8.0)

(7.3)

Tax credit

1.2

0.8

Loss after tax for the financial year for continuing operations

(6.8)

(6.5)

Discontinued operations

Loss after tax for the financial year from discontinued operations

(0.4)

(0.7)

Loss after tax for the financial year

(7.2)

(7.2)

Consolidated statement of comprehensive income

for the year ended 31 December 2020

2020

2019

£m

£m

Loss for the financial year

(7.2)

(7.2)

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

Remeasurements of defined benefit obligations

(3.9)

-

Tax on items that will not be re-classified

0.8

-

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

FVOCI reserve

Valuation gains taken to reserves

0.4

0.7

Tax on items that may subsequently be re-classified

-

(0.1)

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

(2.7)

0.6

Total comprehensive expense for the year

(9.9)

(6.6)

Consolidated statement of financial position

as at 31 December 2020

2020

2019

£m

£m

Assets

Liquid assets

592.2

615.1

Derivative financial instruments

0.8

2.0

Loans and advances to customers

3,128.0

3,161.4

Fixed and other assets

37.4

40.5

Total assets

3,758.4

3,819.0

Liabilities

Shares

2,794.2

2,781.1

Borrowings

685.2

771.3

Derivative financial instruments

32.5

12.8

Other liabilities

16.0

12.9

Subscribed capital

24.2

24.7

Total liabilities

3,552.1

3,602.8

Reserves

General reserves

206.3

216.6

Fair value reserves

-

(0.4)

Total reserves attributable to members of the Society

206.3

216.2

Total reserves and liabilities

3,758.4

3,819.0

Consolidated statement of changes in members' interests as at 31 December 2020

General reserve

FVOCI reserve

Total

£m

£m

£m

Balance as at 1 January 2020

216.6

(0.4)

216.2

Loss for the year

(7.2)

-

(7.2)

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

Net (losses)/gains from changes in fair value

(3.1)

0.4

(2.7)

Total comprehensive (expense)/ income for the period

(10.3)

0.4

(9.9)

Balance as at 31 December 2020

206.3

-

206.3

Balance as at 1 January 2019

223.8

(1.0)

222.8

Loss for the year

(7.2)

-

(7.2)

Other comprehensive income for the period (net of tax)

Net gains from changes in fair value

-

0.6

0.6

Total comprehensive (expense)/income for the period

(7.2)

0.6

(6.6)

Balance as at 31 December 2019

216.6

(0.4)

216.2

Summary consolidated cash flow statement

for the year ended 31 December 2020

2020

2019

£m

£m

Cash flows from operating activities

5.6

4.5

Changes in operating assets and liabilities

(46.0)

109.0

Net cash generated by operating activities

(40.4)

113.5

Cash flows from investing activities

152.6

(104.0)

Cash flows from financing activities

(2.8)

(3.0)

Increase in cash and cash equivalents

109.4

6.5

Cash and cash equivalents at beginning of year

272.6

266.1

Cash and cash equivalents at end of year

382.0

272.6

Summary ratios

2020

2019

%

%

Common Equity Tier 1 ratio

15.0

15.1

Liquid assets as a percentage of shares and borrowings

17.02

17.32

Group (loss)/ profit for the year as a percentage of mean total assets

(0.19)

(0.18)

Total Group management expenses as a percentage of mean total assets

1.25

1.07

Group continuing management expenses as a percentage of mean total assets

1.21

0.99

Society management expenses as a percentage of mean total assets

1.15

0.94

Society interest margin as a percentage of mean assets

1.07

1.17

Notes

· The financial information set out above, which was approved by the Board of Directors on 8 March 2021, does not constitute accounts within the meaning of the Building Societies Act 1986.

· The financial information for the years ended 31 December 2020 and 31 December 2019 has been extracted from the Accounts for those years and on which the auditors have given an unqualified opinion.