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

Nottingham Building Society

Results for the year ended 31 December 2011

We have a clear strategy which the management team have been pursuing vigorously. Our results demonstrate that this strategy is delivering well on a number of levels. We believe that the events of recent years and these results highlight the benefits and attractions of a local, well managed mutual building society.

Below are some of the key achievements and financial highlights of 2011:

·; operating profit before provisions was £10.8m (2010: £5.8m);

·; pre-tax profit was £7.2m (2010: £3.3m);

·; improvement in net interest margin to 1.17% (2010: 0.89%);

·; gross mortgage lending of £436m up by 23%, leading to total asset growth of 3.1%;

·; underlying cost income ratio (before fair value movements) reduced from 76.3% to 66.6%;

·; arrears levels remain significantly below the industry average;

·; the mortgage book is 100% matched by retail funds, reflecting a reduction in our non-retail ratio to 12.6% (16.7% in 2010 and 21.7% in 2009);

·; strong retail franchise growth especially in our heartland - branch balances are up by 5% and total retail balances up by 8%.

Commenting David Marlow, Chief Executive said:

 "2011 was a memorable year for many reasons and one in which global economic events underscored the view that the road to recovery and sustainable economic growth will be a long one presenting challenges along the way. Despite this difficult background the Society achieved a good overall performance, building on the progress achieved in 2010.

The Group's operating profit before provisions was £10.8m in 2011 up from £5.8m in 2010. Reported profit before tax which takes into account impairment losses on loans and advances, other provisions and deductions for on-going Financial Services Compensation Scheme (FSCS) costs, increased to £7.2m, up from £3.3m in 2010.

We remain strongly capitalised with a Tier 1 Capital Ratio of 17.7%, ensuring that we have sufficient buffers to withstand the shocks of a stressed environment."

Key factors

The key factors affecting 2011 performance were:

·; We reported last year that it was important for the Society to return interest margins to a more sustainable level and we have done this in 2011. By careful management of our lending yields and savings flows we have succeeded in raising our interest rate margin from 0.89% to 1.17%;

·; Despite the UK mortgage market showing a very small increase in gross lending in 2011, we increased our gross lending by 23% to £436m. We also recorded a marked reduction in the number of borrowers deciding to leave us at the end of their product term, redemptions in 2011 were down 28% on the previous year. It is pleasing to report that following a structured contraction of our balance sheet the Society is growing once more and has increased its assets in 2011 by 3.1%;

·; We have been pleased to see the continued growth of The Nottingham franchise in our heartland and can report growth in our branch based savings balances of a further 5% in 2011. We have also seen improving market shares in heartland based mortgage balances. In particular, 1 in every 13 (7.7%) of local first time buyers taking their first mortgage with a high street provider, have chosen The Nottingham over the past three years;

·; Nottingham Property Services and Nottingham Mortgage Services added value to the Group, delivering almost £1.4m of income and producing 36% of the direct mortgages written by The Nottingham;

·; It is of great importance to us to seek to improve the efficiency of the Society, ensuring that we minimise costs and invest wisely - we have been pleased therefore to see our efficiency as measured by our underlying cost income ratio, continuing to improve from 90.1% in 2009 to 76.3% in 2010 and now at 66.6% in 2011.

Quality and strength

 The reason that the Society has been able to successfully navigate these turbulent conditions has been due to our focus on the quality of our lending and strength of our balance sheet management.

·; We have continued to adopt a very prudent approach to lending and despite the economic uncertainty we have seen our repossessions fall to 21 in 2011 from 26 in 2010. Also, customers who are three months or more in arrears with their mortgage payments at the end of 2011 have fallen to 153, this is 0.73% of our total account base and is down from 168 and 0.85% at the end of 2010. This places us at less than half of the CML average. We have maintained our conservative approach to loan impairment in 2011 with a charge of £1.8m (2010: £1.9m), which takes into account the continued economic uncertainty and a subdued housing market;

·; We have maintained our presence in the buy-to-let market, which reflects our view of the changing nature of property tenure in the UK, but have upheld our high standards of prudence. In fact at the end of 2011, only 11 accounts were three months or more in arrears out of a buy to let lending book of 3,390;

·; In such a febrile environment it is crucial that we maintain our vigilance when managing our treasury counterparties. We have avoided the fragile areas of the Eurozone such as Greece, Ireland, Italy, Spain and Portugal and continue to manage our credit limits to only invest our liquidity in institutions of the highest standing;

·; Effectively managing our liquidity and ensuring that our funding plans are achievable in the market conditions in which we operate are crucial to our stability. Mindful of tightening conditions in wholesale markets we have reduced our funding requirements, which at the year-end stood at 12.6%. Our mortgage book is fully funded by our retail funding. We have also ensured that our liquidity reserves are held in appropriate instruments for the market conditions. This has resulted in an increasing proportion being held in UK gilts and in our Bank of England reserve account.

Investment in the Society

It is important that we continue to invest in the Society to improve our offering to members and to support further efficiency. Following customer feedback we replaced all of our customer and intermediary websites in 2011. This was in recognition of the increasing demand from our members and prospective customers for access to information about the Society and its products and services online.

We followed up this overhaul of our websites with the launch of online savings during 2011. The popularity of this new offering, which already accounts for 13% of our total savings balances, reaffirmed our belief in the important role this new service will play in the society's future.

Branches remain important to us and our members and we believe will continue to do so. We were pleased therefore, to recommence our branch refurbishment programme and have refitted 4 offices during 2011.

The Society also took the decision to move to a new head office building in 2011. For a number of years we have been seeking to consolidate our central service and support locations into a single site to enable us to improve the efficiency and effectiveness of our operations. An advantage of the current economic conditions is that we have been able to secure a new freehold head office location that meets all our needs but reduces the overall running costs of our current disparate operations.

Customer relationships

Building long lasting relationships with our customers is a cornerstone of our strategy. In addition to our developments online and branch investment programme, we have sought to add new services to our offering, including more choices on our building and contents insurance policy and a new will writing service, which when accompanied with our whole of market independent financial planning advice is proving to be very popular.

We believe a key way to build relationships and differentiate against the big banks is to deliver excellent levels of customer service. We were delighted to see our overall satisfaction rating increase to 96.1% in 2011. However, more pleasing was the proportion of customers who were not just satisfied with our service but rated us as excellent, which stood at 74% - a marked increase over the strong 2010 performance. We use net promoter scores to compare our service with firms across all sectors in the UK and are pleased to report a score of 75% compared against an all company average of 38%. We know that we will have to work hard throughout 2012 to maintain these market leading service ratings and aim to do so.

Community involvement

Following a review of our support to local communities, we announced that we would be undertaking a range of initiatives aimed at supporting causes that improve financial literacy, boost employability of local people and support the battle against homelessness in our heartland under our "Doing Good Together" banner.

Working closely with the Nottinghamshire Community Foundation, our chosen charity partner - Framework, The Nottingham Post and staff throughout the Society we have undertaken a range of fund raising and support activities. During our first year we have been delighted to contribute well in excess of £50,000 to a range of causes right across our heartland. These included funding employability skills courses for a local charity for the deaf and providing home starter packs for one parent and low income families. To build on this progress we have added further funds to our community endowment with the Nottingham Community Foundation to enable us to support our chosen causes for years to come.

Effective succession planning

Ian Rowling retired in March 2011 after 33 years of dedicated service to the Nottingham and the new executive team of David Marlow, Ashraf Piranie and Simon Taylor have taken the helm.

We have continued our structured approach to succession planning and are pleased to announce the appointment of a further non-executive director to the Board. John Edwards, who joined the Board on 1 February 2012, has extensive experience and knowledge in the insurance and investment industry, having held key executive roles at Clerical Medical, Halifax, HBOS and Lloyds Banking Group. John has a strong commitment to mutuality as demonstrated by his non-executive directorship at LV (Liverpool Victoria) - a leading mutual financial services provider where he is Chair of their Investment Committee.

Looking ahead

The level of growth in the UK economy has been revised downward both by the Office of Budgetary Control and by the IMF. The very survival of the Eurozone remains finely balanced but if it can somehow avoid a hard landing then the UK can expect growth to pick up a little in the second half of 2012. We expect the housing market to remain subdued with a potential for further small reductions in house prices and competition in the savings market to remain strong.

We will face a series of regulatory changes as the dismantling of the Financial Services Authority and the creation of the Financial Policy Committee, Prudential Regulation Authority and Financial Conduct Authority, under the guidance and oversight of the Bank of England, begins to move into the transitionary stage.

We also expect to have to make a series of changes to our lending policies and procedures following the publication of the latest consultation paper of the Mortgage Market Review. Whilst we support the spirit of the proposed measures, which we believe reflect the principles of prudent responsible lending which we have followed for over 160 years, we do expect to have to spend considerable time and money reflecting the exact changes that will be demanded of all lenders.

Another unfortunate outcome of the crisis for prudently run firms is the on-going requirement to finance the government loan to the FSCS to pay for a number of failed Plc banks and firms in 2008/9. In 2011 we have set aside a further contribution of £1.4m for this. The initial arrangements are due to end in 2012 and will be replaced by new measures which will almost certainly be even more costly.

The Nottingham is in good shape. We will continue with our prudent business model and have plans to further develop our product and services to members. We therefore aim to:

·; Continue the development and reach of our unique "all under one roof" home buying service combining traditional mortgage and savings products with a leading estate agency and whole of market expert financial planning advice;

·; Continue our branch refurbishment programme;

·; Invest further in our technology platform, with a new savings system which will enable further improvements in customer service and efficiency; and

·; Support our communities further through our Doing Good Together initiative.

We remain on course to continue to deliver value and a high level of service to our members and to remain a strong, successful and independent Society, safeguarding our members' interest in uncertain times.

Consolidated statement of comprehensive income

for the year ended 31 December 2011

2011

2010

£m

£m

Interest receivable and similar income

81.7

68.9

Interest payable and similar charges

(53.1)

(46.6)

Net interest income

28.6

22.3

Fees and commissions receivable

4.0

4.4

Fees and commissions payable

(0.3)

(0.2)

Net gains/(losses) from derivative financial instruments

-

(0.5)

Total net income

32.3

26.0

Administrative expenses

(18.9)

(17.1)

Depreciation and amortisation

(2.9)

(3.1)

Finance income

0.3

-

Operating profit before provisions

10.8

5.8

Impairment losses on loans and advances

(1.8)

(1.9)

Provisions for liabilities - FSCS levy

(1.4)

(0.6)

Provisions for liabilities - Other

(0.2)

-

Loss on disposal of property, plant and equipment

(0.2)

-

Profit before tax

7.2

3.3

Tax expense

(1.9)

(0.9)

Profit for the financial year

5.3

2.4

Other comprehensive income:

Available-for-sale reserve

Valuation gains taken to reserves

1.2

0.1

Amount transferred to income statement

-

(0.1)

Actuarial (loss)/gain on retirement benefit obligations

(3.1)

1.0

Tax on other comprehensive expense/(income)

0.4

(0.3)

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

(1.5)

0.7

Total comprehensive income for the period

3.8

3.1

Consolidated statement of financial position

as at 31 December 2011

2011

2010

£m

£m

Assets

Liquid assets

516.1

502.9

Derivative financial instruments

13.3

22.8

Loans and advances to customers

1,927.8

1,861.3

Fixed and other assets

21.0

16.5

Total assets

2,478.2

2,403.5

Liabilities

Shares

1,989.8

1,840.7

Borrowings

285.9

369.2

Derivative financial instruments

17.4

17.6

Other liabilities

13.4

9.3

Subscribed capital

27.0

25.8

Total liabilities

2,333.5

2,262.6

Reserves

General reserves

143.6

140.7

Available-for-sale reserves

1.1

0.2

Total reserves and liabilities

2,478.2

2,403.5

Consolidated statement of changes in members' interests as at 31 December 2011

General reserve

Available-for-sale reserve

Total

£m

£m

£m

Balance as at 1 January 2011

140.7

0.2

140.9

Profit for the year

5.3

-

5.3

Other comprehensive income for the period (net of tax)

Net gains from changes in fair value

-

0.9

0.9

Actuarial loss on retirement benefit obligations

(2.4)

-

(2.4)

Total comprehensive income for the period

2.9

0.9

3.8

Balance as at 31 December 2011

143.6

1.1

144.7

Balance as at 1 January 2010

137.6

0.2

137.8

Profit for the year

2.4

-

2.4

Other comprehensive income for the period (net of tax)

Actuarial gain on retirement benefit obligations

0.7

-

0.7

Total comprehensive income for the period

3.1

-

3.1

Balance as at 31 December 2010

140.7

0.2

140.9

Consolidated cash flow statement

for the year ended 31 December 2011

2011

2010

£m

£m

Cash flows from operating activities

Profit before tax

7.2

3.3

Depreciation and amortisation

2.9

3.1

Loss on disposal of property, plant and equipment

0.2

-

Interest on subscribed capital

2.0

2.0

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

(1.8)

2.2

Increase in impairment of loans and advances

2.0

0.9

12.5

11.5

Changes in operating assets and liabilities

Decrease/(increase) in other assets

7.1

(0.6)

(Decrease) in other liabilities

(0.1)

(16.3)

(Increase) in liquid assets

(3.2)

(35.2)

(Increase)/decrease in loan and advances to customers

(65.4)

165.4

Increase/(decrease) in shares

151.2

(33.4)

(Decrease) in borrowings

(83.1)

(147.6)

Taxation paid

(1.1)

(0.3)

17.9

(56.5)

Capital expenditure and financial investment

(7.1)

(73.4)

Financing activities

(1.9)

(1.9)

Decrease in cash and cash equivalents

8.9

(131.8)

Cash and cash equivalents at beginning of year

181.5

313.3

Cash and cash equivalents at end of year

190.4

181.5

Summary ratios

2011

2010

%

%

Gross capital as a percentage of shares and borrowings

7.54

7.54

Liquid assets as a percentage of shares and borrowings

22.68

22.76

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

0.22

0.10

Group management expenses as a percentage of mean total assets

0.89

0.81

Society management expenses as a percentage of mean total assets

0.84

0.76

Society interest margin as a percentage of mean assets

1.17

0.89

Notes

·; The financial information set out above, which was approved by the Board of Directors on 22 February 2012, does not constitute accounts within the meaning of the Building Societies Act 1986.

·; The financial information for the years ended 31 December 2011 and 31 December 2010 has been extracted from the Accounts for those years and on which the auditors have given an unqualified opinion.