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

Nottingham Building Society

Results for the year ended 31 December 2009

Against a background of uncertainty and fragile market conditions Nottingham Building Society has continued to focus on the safety and security of members' savings, its asset quality and improving efficiency. As a result:

·; capital ratios have improved by over 12%, Tier 1 ratio to 15.7% (2008: 14.0%) and gross capital to 6.82% (2008: 5.99%)

·; underlying profit (defined below) was £0.6m (2008: £2.9m)

·; underlying profit before impairment charges was £2.3m (2008: £3.9m)

·; administrative expenses (exc. restructuring costs) have reduced by over 20% to £17.0m

·; arrears levels remain significantly below the industry average

·; the mortgage book is 100% matched by the combination of retail and own funds.

Commenting Ian Rowling, Chief Executive said:

 "The traditional goals of balance sheet and profit growth were simply not appropriate in 2009. Our focus has been on our existing customers, particularly savers, many of whom rely on their interest to supplement income. Our success here is reflected in the strengthening of our franchise in our regional heartland where our branch retail savings balances continued to grow despite the general turbulence and an industry trend of falling balances. In addition the proportion of customers rating the service provided by the Nottingham as excellent increased to 70% placing the Group in the top quartile of firms benchmarked.

Our business efficiency programme delivered further benefits in the year and our costs are now over 20% lower than in 2008.

Our capital position remains strong with a Tier 1 ratio of 15.7% and our gross capital ratio increasing from 5.99% to 6.82% in the year.

We were one of just two Moody's rated societies to maintain their credit rating in the year.

The Nottingham's financial strength and positive customer satisfaction levels provide an excellent platform on which to build success in 2010 and beyond.

Key factors

The key factors affecting 2009 performance were:-

§ A reduction in net interest margin of 12 basis points to 0.67%. This reflects the adverse impact of lower interest rates which reduced earnings on our own capital, competitive pressures on retail savings rates and the costs associated with holding higher levels of immediately available liquidity.

§ Our focus on delivering value to existing customers and not chasing expensive new retail funding saw our total assets reduce by 15% to £2.6bn.

§ Gross lending was £288m in 2009 (£429m in 2008).

§ A conservative provision charge against impairment of mortgage loans of £1.7m (£1m in 2008), which underscores the quality of our assets.

§ A significant improvement in the financial performance of our estate agency, Nottingham Property Services, which made a positive contribution to the Group compared with a substantial loss in 2008.

§ A reduction in administrative expenses (exc. restructuring) of over 20% (£4.6m) in 2009, from £21.6m in 2008 to £17.0m.

Underlying profit (which excludes the impact of FSCS, restructuring costs and fair value movements from hedge accounting) reduced from £2.9m in 2008 to £0.6m in 2009.

Our reported position shows a loss before tax of £1.9m (2008 £0.5m profit) and includes a fair value adjustment of minus £2.1m (£1.3m positive in 2008). The fair value adjustment is due to the requirement under International Accounting Standards to place a market value on our hedged fixed rate lending and savings balances and the associated financial instruments which the Society has purchased to protect against interest rate risk. The net fall in market value has been recognised and is expected to reverse out over the remaining lives of the products as the Society does not intend to sell the instruments.

We continued to access the wholesale funding market, 21.7% (2008: 22.6%) of funding came from these sources at the year end.

Liquidity levels have been maintained at 22%, with a substantial increase in immediately available liquidity which has impacted on profit. We continue to manage counterparty risk effectively.

Asset quality

Our mortgage arrears and repossessions continue to be much lower than average. At the end of 2009 our arrears were around a third of the Council of Mortgage Lenders average.

During the year we tightened our policies around both buy-to-let and secured business lending. Our residential lending book loan to value level remained low at 46%.

We have no exposure to sub prime and self certified mortgages, or new build buy-to-let apartments, nor have we embarked on large scale commercial lending (our average secured business loan is £167k).

Our mortgage book is 100% matched by a combination of retail savings and our own capital.

Member focus

We continued to balance the needs of savers and borrowers throughout the year. Given that we have seven savers for every borrower, we rely on savers to fund our lending. Many savers rely on their interest to supplement income, we have sheltered them from the full effect of interest rate reductions wherever possible.

We have supported borrowers too. For example, we continued to help borrowers in financial difficulty and our underlying financial strength enabled us to offer a First Time Buyer product to assist purchasers in our heartland.

We continued to strengthen relationships with existing members. A 7% increase in the number of financial reviews carried out with customers in our branches shows the effectiveness of the relationship based approach.

We also improved our financial planning service by entering into an arrangement with Towergate Financial to provide whole of market advice through a team of dedicated advisors.

Looking ahead

We expect conditions in 2010 to remain challenging. However, the Society is well capitalised, has good asset quality and plans are in place to improve profitability. We firmly believe that the mutual sector and particularly The Nottingham remain as relevant today as when we first supported people to buy their own homes over 160 years ago.

Consolidated statement of comprehensive income

for the year ended 31 December 2009

2009

2008

£m

£m

Interest receivable and similar income

83.9

178.2

Interest payable and similar charges

(65.0)

(154.3)

Net interest income

18.9

23.9

Fees and commissions receivable

4.6

5.0

Fees and commissions payable

(0.7)

(0.8)

Net (losses)/gains from derivative financial instruments

(2.1)

1.3

Total net income

20.7

29.4

Administrative expenses *

(17.3)

(22.9)

Depreciation and amortisation

(3.4)

(2.9)

Finance income and expense

(0.1)

0.3

Operating (loss)/profit before provisions

(0.1)

3.9

Impairment losses on loans and advances

(1.7)

(1.0)

Provisions for liabilities - FSCS levy

(0.1)

(2.4)

(Loss)/profit before tax

(1.9)

0.5

Tax expense

0.5

-

(Loss)/profit for the financial year

(1.4)

0.5

Other comprehensive income/(expense):

Available-for-sale reserve

Valuation gains taken to equity

0.1

1.4

Amount transferred to income statement

(1.5)

-

Actuarial (loss) on retirement benefit obligations

(5.6)

(2.3)

Tax on other comprehensive (expense)/income

1.9

0.3

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

(5.1)

(0.6)

Total comprehensive (expense) for the period

(6.5)

(0.1)

Consolidated balance sheet

as at 31 December 2009

2009

2008

£m

£m

Assets

Liquid assets

528.8

657.9

Derivative financial instruments

9.6

34.4

Loans and advances to customers

2,041.8

2,348.1

Fixed and other assets

19.6

20.1

Total assets

2,599.8

3,060.5

Liabilities

Shares

1,874.9

2,204.8

Borrowings

516.8

637.1

Derivative financial instruments

31.8

35.3

Other liabilities

13.1

12.9

Subscribed capital

25.4

26.1

Total liabilities

2,462.0

2,916.2

Equity

General reserves

137.6

143.0

Available-for-sale reserves

0.2

1.3

Total equity and liabilities

2,599.8

3,060.5

Consolidated statement of changes in equity

as at 31 December 2009

General reserve

Available-for-sale reserve

Total

£m

£m

£m

Balance as at 1 January 2009

143.0

1.3

144.3

Comprehensive (expense) for the period

(5.4)

(1.1)

(6.5)

Balance as at 31 December 2009

137.6

0.2

137.8

Balance as at 1 January 2008

144.1

0.3

144.4

Comprehensive (expense)/income for the period

(1.1)

1.0

(0.1)

Balance as at 31 December 2008

143.0

1.3

144.3

Consolidated cash flow statement

for the year ended 31 December 2009

2009

2008

£m

£m

Cash flows from operating activities

(Loss)/profit before tax

(1.9)

0.5

Depreciation and amortisation

3.4

2.9

Interest on subscribed capital

2.0

2.0

Net loss/(gains) on disposal and amortisation of debt securities

1.5

(0.1)

Increase in impairment of loans and advances

1.4

1.0

Taxation

0.1

(0.8)

6.5

5.5

Changes in operating assets and liabilities

Decrease/(increase) in other assets

39.4

(37.2)

(Decrease)/increase in other liabilities

(48.7)

29.4

Decrease in liquid assets

13.3

39.7

Decrease in loan and advances to customers

294.1

51.3

(Decrease)/increase in shares

(302.1)

87.2

(Decrease) in borrowings

(107.8)

(82.9)

(105.3)

93.0

Capital expenditure and financial investment

3.9

43.5

Financing activities

(1.9)

(1.9)

Decrease/)(increase) in cash and cash equivalents

(103.3)

134.6

Cash and cash equivalents at beginning of year

416.6

282.0

Cash and cash equivalents at end of year

313.3

416.6

Summary ratios

2009

2008

%

%

Gross capital as a percentage of shares and borrowings

6.82

5.99

Liquid assets as a percentage of shares and borrowings

22.11

23.15

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

(0.06)

0.02

Group management expenses as a percentage of mean total assets

0.73

0.84

Society management expenses as a percentage of mean total assets

0.67

0.73

Notes

·; The financial information set out above, which was approved by the Board of Directors on 24 February 2010, does not constitute accounts within the meaning of the Building Societies Act 1986.

·; The financial information for the years ended 31 December 20099 and 31 December 2008 has been extracted from the Accounts for those years and on which the auditors have given an unqualified opinion.