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

Nottingham Building Society

Results for the year ended 31 December 2015

In 2015 the Nottingham Building Society has continued to focus on the development of its strategy to offer members a unique brand of advice, service, value and choice and through this is very pleased to announce another year of strong performance. The Society's approach is gathering pace, as it has delivered this unique proposition to more customers in more locations across its heartland and in doing so achieved another year of record balance sheet size and profits.

Below are some of the key achievements and financial highlights of 2015:

· Strong retail franchise growth - with total branch savings balances up by 15% in the year and up over 90% in the last 5 years;

· The Society welcomed 24,000 new customers in 2015 and opened five new branch locations;

· Achieving a Net Promoter Score of 74%; (Average Net Promoter Score for all financial services firms is 30%);

· Gross mortgage lending of £651m resulting in mortgage book growth of 3%;

· Totals assets of £3.3billion;

· Net interest margin at 1.46%;

· Record Group pre-tax profit up 15% at £20.0m;

· Arrears levels remain very low, below a quarter of the industry average (2015: 0.22% v Industry at average of 1.12%);

· Strong capital ratios with Common Equity Tier 1 at 15.3% and leverage of 4.8%;

Commenting David Marlow, Chief Executive said:

 "In the pursuit of our 'all under one roof proposition' there are a number of elements that differentiate us clearly from banks and other building societies. We have a strong commitment to build and develop our branch network, believing firmly that the high street will continue to play a key role in our increasingly omni-channel world, where customers will expect to deal with us how they want, when they want to.

We are the only building society to offer our customers whole-of-market mortgage advice, acknowledging that in a complex world we can be more relevant to many more customers by finding the right mortgage solution for them; something that a Nottingham mortgage cannot always provide.

We also offer a combined home buying, selling, renting and building society service in the majority of our locations; again significantly increasing our relevance to a much broader cross section of customers and we aim to deliver this unique offering with top-class customer service.

In 2015 we have continued to work hard on these elements and have been delighted with the progress we have achieved."

Serving our Customers

· The branch network is the core of our Society, having grown from 31 locations at the beginning of 2013 to 55 today. As we have invested in the network, it has performed even more strongly. Over the past five years, savings balances based in our branches have grown from £0.93 billion to £1.80 billion - a 94% increase and a mark of how our core franchise is growing and strengthening.

· In 2015 we have added a further five new building society locations, in Ashbourne, Matlock, St Albans, Harpenden and Wigston - adding to the seven new locations we opened in 2014. We are significantly ahead of our business case expectations overall for our new locations and in less than two years have built savings balances in excess of £100m in these locations; 

· An important element of our strategy is to increase the number of branches and broaden our footprint to attract new customers and members to the Group ensuring that we have a growing and vibrant membership. We were delighted therefore to welcome 24,000 new customers to the Group in 2015 building on the progress of recent years.

· In an increasingly complex world we believe it is becoming even more important to offer customers advice and choice from a source they can trust. In 2014 we launched our new whole-of-market mortgage advice service to customers and in 2015 have sought to build on what was a very encouraging start. Supported by our first TV advert for many years, customers' response to our unique offering has been excellent. Reflecting the attraction of this service, in 2015 the number of people we have provided advice to has increased by almost 80%. In a further demonstration of the effectiveness of our all-under-one-roof strategy over 50% of customers were referred for mortgage advice by our estate agency.

· In addition we have also continued to see more and more customers taking advantage of our estate planning service, financial-planning offering and home insurance - all underscoring the focus of our strategy around advice, service, value and choice.

· As a member-owned organisation the manner in which we deliver service to our owners and attract new members to the Society is crucial. We therefore place enormous emphasis on delivering great service across the organisation. It is very pleasing to report therefore that this has continued to improve in 2015, with the number of customers rating us as excellent or better rising from 68% to 72%.

· Our net promoter score, which enables us to directly compare our service levels with a range of different companies and sectors across the world measuring customer advocacy levels, also increased and for 2015 stood at 74%( 2014 - 67.5%) - this places us amongst the very best companies across all sectors. In comparison the average net promoter score for all financial services firms in 2015 is 30%.

Financial performance

· The Group delivered a strong financial performance in 2015, with profit before tax up 15.1% to £20.0m, a record for the Group. The Society was supported by good contributions from both our estate agency and mortgage advice subsidiaries.

· Underlying profit performance, which excludes the charge in respect of the Financial Services Compensation Scheme and fair value gains from derivatives and hedge accounting, increased by 6% to £20.2m, key drivers on this being strong cost management, a small reduction in depreciation and lower impairment charges.

· It is crucial that we run the Society in an efficient and robust manner and naturally as the Society has grown markedly over recent years costs have risen too. It is particularly pleasing therefore to report in 2015 our total Group costs remained flat at £36.9m. In real terms they have actually reduced - this is particularly impressive when viewed in the context of a society increasing the number of branches it operates. This reflects our strong management focus and reward for our long term investment in the business over a number of years to make us scalable at lower marginal cost. Our cost income ratios were broadly flat with the Group at 64.6 % and the Society below the 60% mark at 59.8% - this compares favourably with the UK major banks despite our much smaller scale.

· We have continued to grow the assets of the Society, however as stated last year we have moderated this growth somewhat in 2015, reflecting the increased mortgage competition, in a market where housing transactions and remortgage demand remained someway below the long term average, whereas higher appetite for lending from existing market players and new entrants saw yields achievable on new mortgage lending fall by approximately 0.35% in the year1. This meant that whilst higher growth would have been achievable, the Board determined that this would have had the undesirable impact of unacceptable reductions in savings rates to customers. We believe we struck the appropriate balance in 2015, with gross lending of £651m (2014: £704m) increasing our mortgage book by 3.0%.

· As anticipated, net interest income reduced by £0.9m in the year to £48.0m representing a reduction in our net interest margin which was 10 basis points lower at 1.46%. The Society, along with the rest of the market saw a reduction in asset yields reflecting the reduction in mortgage rates in a highly competitive mortgage market. This was partially offset by the continued fall in retail savings rates across the industry. However in keeping with our commitment to best balance the conflicting needs of our savers and mortgage customers we have tried to ensure our branch retail savings rates continue to be competitively positioned in the market, as we continue to protect our members as best we can from the low interest rate environment. In fact our average savings rate in 2015 was 1.57% more than 3 times bank base rate.

Quality & strength

· Whilst strong annual performance is crucial to our on-going success, it is vitally important that the Society has strong financial foundations and lends it members' money prudently, minimizing losses. At the end of the year out of a total mortgage book of £2.8 billion and over 23,000 mortgage accounts, only 51 accounts were three months or more in arrears, a further reduction from our excellent performance the previous year with only 0.22% of accounts in arrears at the end of 2015, compared to the industry average at 1.12%;

· In July, Moody's credit rating agency undertook an in-depth review of the UK banking sector whilst introducing their new enhanced rating methodology. Following this review, The Nottingham was one of only three rated institutions to receive a credit rating upgrade. This review highlighted the high quality asset metrics and extremely low level of problem loans relative to its peers. The sustainable franchise and business model as well as strength of the Society's funding profile were also noted.

· Overall financial strength is most clearly highlighted by our leverage ratio which at 4.8% is 1.8% higher than the minimum requirement.

Supporting local communities

· As a local mutual organisation, we believe it is very important for us to play our full part in making our communities better places to live.

· In 2015, the Board has been delighted by the enthusiasm and commitment of our staff to get involved in a wide range of community based activities.

· During 2015 the Nottingham team has raised or donated over £100,000 for local causes who support our themes of homelessness, employability and raising financial awareness. Our staff have walked, run, jumped, painted, cleaned, baked and sung all in support of building stronger communities and the Board is proud to support all of these efforts and achievements.

Summary and outlook

We have been very pleased with our continued progress in 2015 and remain committed to further development. However, the Society is expecting to operate in an uncertain and challenging environment over the next year or so. Low growth, low inflation and low interest rates, against a backdrop of increasing lending capacity in the economy, has benefitted borrowers with ever decreasing mortgage interest costs. Whilst the Society is able to compete actively in this market we must also ensure that we strike an appropriate and fair balance with our savers in light of these conditions. During 2015 the Society adjusted our financial plans accordingly and accept that we will need to remain vigilant and agile to changes in market conditions, if current uncertainties remain.

In order to continue to grow our balance sheet in a prudent manner, we expect our income profile over the next three years to trend slightly downwards - this will inevitably lead to lower levels of profitability than we have achieved in recent record years. However our strong financial platform, continued focus on striking a fair balance between the needs of our saving and mortgage customers and forecast performance means we will be able to continue delivering our strategy of investing in our member and customer proposition, whilst maintaining sector leading financial strength.

We therefore expect to:

· Continue to further increase the number of locations we offer our 'all under one roof' proposition across our heartland;

· Continue to focus on how we can be easier to deal with. For example, we are currently piloting the provision of advice by video in our branches. This will enable us to provide greater availability of advice in more branches and locations than we are currently able to offer;

· Develop our advice proposition further. Encouraged by the enthusiastic response from customers for whole-of-market mortgage advice, we expect to increase our capacity to meet this demand;

· Continue to develop our infrastructure and technology to support the efficient delivery of our unique proposition - this will include continuing work on how we can utilize the benefits of the digital age to make us more accessible to our members;

· Continue to raise the profile and awareness of the Society, making more local people aware of our unique offering and demonstrating how as a successful local mutual organisation we are committed to playing our part in strengthening the communities in which we operate;

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 our customers and to ensure that we are best placed to help them manage their finances and achieve their financial ambitions.

Consolidated income statement

for the year ended 31 December 2015

2015

2014

£m

£m

Interest receivable and similar income

94.6

100.7

Interest payable and similar charges

(46.6)

(51.8)

Net interest income

48.0

48.9

Fees and commissions receivable

9.9

10.7

Fees and commissions payable

(0.5)

(0.4)

Net gains from derivative financial instruments

1.2

0.2

Total net income

58.6

59.4

Administrative expenses

(33.6)

(33.0)

Depreciation and amortisation

(3.3)

(3.9)

Finance cost

(0.2)

(0.2)

Impairment losses on loans and advances

(0.2)

(1.3)

Provisions for liabilities - FSCS levy

(1.4)

(1.8)

Provisions for liabilities - Other

-

(1.2)

Profit/(loss) on disposal of property, plant and equipment

0.1

(0.6)

Profit before tax

20.0

17.4

Tax expense

(4.6)

(3.5)

Profit for the financial year

15.4

13.9

Consolidated statement of comprehensive income

for the year ended 31 December 2015

2015

2014

£m

£m

Profit for the financial year

15.4

13.9

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

Remeasurements of the net defined benefit liability

0.3

(2.5)

Tax on items that will not be re-classified

(0.1)

0.5

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

Available-for-sale reserve

Valuation (losses)/gains taken to reserves

(0.2)

0.8

Tax on items that may subsequently be re-classified

-

(0.2)

Other comprehensive expense for the period net of income tax

-

(1.4)

Total comprehensive income for the period

15.4

12.5

Consolidated statement of financial position

as at 31 December 2015

2015

2014

£m

£m

Assets

Liquid assets

491.6

510.7

Derivative financial instruments

3.8

9.9

Loans and advances to customers

2,796.5

2,718.3

Fixed and other assets

26.5

26.9

Total assets

3,318.4

3,265.8

Liabilities

Shares

2,433.2

2,575.4

Borrowings

643.0

456.9

Derivative financial instruments

9.3

13.6

Other liabilities

14.2

16.2

Subscribed capital

26.2

26.6

Total liabilities

3,125.9

3,088.7

Reserves

General reserves

192.3

176.7

Available-for-sale reserves

0.2

0.4

Total reserves and liabilities

3,318.4

3,265.8

Consolidated statement of changes in members' interests as at 31 December 2015

General reserve

Available-for-sale reserve

Total

£m

£m

£m

Balance as at 1 January 2015

176.7

0.4

177.1

Profit for the year

15.4

-

15.4

Other comprehensive income for the period (net of tax)

Net losses from changes in fair value

-

(0.2)

(0.2)

Remeasurement of defined benefit obligation

0.2

-

0.2

Total comprehensive income/(expense) for the period

15.6

(0.2)

15.4

Balance as at 31 December 2015

192.3

0.2

192.5

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 for the period

11.9

0.6

12.5

Balance as at 31 December 2014

176.7

0.4

177.1

Consolidated cash flow statement

for the year ended 31 December 2015

2015

2014

£m

£m

Cash flows from operating activities

Profit before tax

20.0

17.4

Depreciation and amortisation

3.3

3.9

(Profit)/loss on disposal of property, plant and equipment

(0.1)

0.6

Interest on subscribed capital

2.0

2.0

Net (gains) on disposal and amortisation of debt securities

(0.6)

(1.2)

Increase in impairment of loans and advances

0.2

0.9

24.8

23.6

Changes in operating assets and liabilities

Decrease/(increase) in other assets

5.4

(4.3)

(Decrease)/increase in other liabilities

(7.0)

5.0

Decrease/(increase) in liquid assets

11.7

(26.0)

(Increase) in loan and advances to customers

(78.4)

(234.0)

(Decrease)/increase in shares

(142.2)

256.8

Increase/(decrease) in borrowings

180.6

(15.9)

Taxation paid

(3.6)

(3.8)

(8.7)

1.4

Capital expenditure and financial investment

61.2

(18.8)

Financing activities

(1.9)

(1.9)

Increase in cash and cash equivalents

50.6

(19.3)

Cash and cash equivalents at beginning of year

318.6

337.9

Cash and cash equivalents at end of year

369.2

318.6

Summary ratios

2015

2014

%

%

Common Equity Tier 1 ratio

15.3

15.1

Liquid assets as a percentage of shares and borrowings

15.98

16.84

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

0.47

0.44

Group management expenses as a percentage of mean total assets

1.12

1.17

Society management expenses as a percentage of mean total assets

0.90

0.93

Society interest margin as a percentage of mean assets

1.46

1.56

Notes

· The financial information set out above, which was approved by the Board of Directors on 17 February 2016, does not constitute accounts within the meaning of the Building Societies Act 1986.

· The financial information for the years ended 31 December 2015 and 31 December 2014 has been extracted from the Accounts for those years and on which the auditors have given an unqualified opinion.