2022 ANNUAL REPORT
AND ACCOUNTS
Scarlett Palmer – Mortgage Processor
CONTENTS
03 Key highlights
04 Chair’s statement
06 Chief Executive’s review
08 Strategic report
18 Corporate responsibility report
19 Sustainability report
23 Your Board of directors
25 Directors’ report
28 Risk management report
33 Corporate governance report
37 Board Audit Committee report
39 Directors’ remuneration report
44 Independent auditor’s report
52 Income statements
53 Statements of comprehensive income
54 Statements of financial position
55 Statements of changes in members’ interests
56 Cash flow statements
57 Notes to the accounts
114 Annual business statement
116 Glossary
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STRATEGIC REPORT
KEY HIGHLIGHTS
GROSS MORTGAGE LENDING UP
18% TO £659m
RESULTING IN TOTAL ASSETS OF
£3.8 BILLION
GROUP PRE-TAX PROFIT OF
£15.2m ON UNDERLYING BASIS
£23.9m
72%
81%
£1,000
16.8%
PURPOSE & STRATEGY
841 COLLEAGUE HOURS
5.7%
85%
£18.9m
OF INTEREST PAID TO SAVERS
WITH
NET PROMOTER
SCORE OF
EMPLOYEE ENGAGEMENT
SCORE OF:
AND LEVERAGE
RATIO OF:
IN OUR ANNUAL SURVEY
ENTERED KEY STRATEGIC PARTNERSHIP
WITH
GEN H
VOLUNTEERED TO GOOD CAUSES
AND PAY AWARD
FOR OUR
COLLEAGUES
COST OF
LIVING BONUS
NEW
LAUNCHED
STRONG CAPITAL
POSITION WITH
CET 1
RATIO AT:
OF OUR
MEMBERS
‘HIGHLY
SATISFIED’
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Introduction
In last year’s statement I talked about how the Society had made good
progress with positive results in an environment of continued low interest
rates and about the first rate rise we had seen for years in December 2021
belatedly reflecting the emerging inflationary pressures. As expected during
2022 there were significant further interest rate increases to tackle rising
inflation. The year also witnessed political volatility as evidenced by two
changes of Prime Minister. We took appropriate action, with impacts being
felt across our member base. We ended the year with a Bank of England
base rate of 3.5% as the Monetary Policy Committee struggled to bring the
high level of inflation back to its target.
This brings to an end the very low interest environment we have seen over
the past decade reflecting the economic challenges we have all had to cope
with, including the turmoil brought about by the ending of the extraordinary
interventions of lockdown and the invasion of Ukraine by Russia. These
economic challenges are expected to continue and in its Autumn statement,
the Bank of England warned of the longest recession in 100 years, with the
UK economy facing a “very challenging outlook”.
When mutuality matters
As a mutual, we are cognisant of the increasing household bills our
members and communities are facing, whether it be rising energy prices,
food costs or mortgage interest rates. The ramifications of these rises will
undoubtably lead to a significant fall in living standards for the whole
country. Inflation may well take some time to be brought under control, and
whilst some of the short-term factors may reverse, the impact on people’s
living standards is expected to continue for some years.
We are very much aware of the impact this will have on all our saving
members, our borrowers, and our colleagues. We have always aimed to be
prudent in our lending and are not yet seeing the stress of this come
through in missed mortgage payments or significant arrears for the vast
majority of our borrowers. However, we are monitoring this closely to check
that the pressures being faced by individuals do not become overwhelming.
We are always ready to engage with our members, and to have the right
conversations with each of you as you face into these pressures.
Those conversations are not limited to our members. Throughout the course
of the year, we have extended help to our colleagues who are tackling some
of these challenges on a personal level. We felt it was appropriate during
the year to make additional cost-of-living payments to help with the
exceptional increases in daily household costs. These were made in August
and November and were warmly received by our colleagues. Our support
also goes beyond financial assistance and we’re proud of our wellbeing
programmes, which see high levels of engagement from colleagues.
In terms of our savers, the increases in interest rates have allowed us to
improve savings rates. We have passed rate increases on wherever possible,
while balancing this against the need to lend money to mortgage borrowers
at a sufficient margin for the Society to remain sustainable over the long term.
Other decisions that were made in 2022 were taken with the long-term
strength and stability of the Society in mind. Last year we talked to the
changing behaviours of customers that were accelerated throughout the
pandemic with increased use of online and digital channels. In financial
services, we were not immune to that and took the decision to close
branches where the volume and value of transactions were declining and
meant we could no longer serve our members in an economically
sustainable way.
This was a not a decision we took lightly as we understand the impact and
inconvenience this creates for existing members and for those colleagues
who were not in a position to accept redeployment opportunities within the
Society. We worked hard to ensure the impact of this was minimised,
particularly for the most vulnerable customers.
It would be remiss of me at this point not to thank the entire team
throughout the Society that supported members and colleagues through
the branch changes announced in September. The same team have also
been integral in allowing the Society to adapt to rapidly changing external
circumstances on a day-to-day basis. We as a Board are very grateful for
that cohesion, energy, and hard work, as we all aim to keep the Society
on a secure footing for both existing and future members, colleagues, and
our communities.
Our board and leadership
Following our Annual General Meeting, Mike Brierley stepped down as a
Non-Executive Director, Peter O’Donnell took over as Chair of the Audit
Committee, and David Marlow stepped down as CEO. We are grateful to
Mike for his experience and advice in turbulent times and particularly to
David for his leadership throughout his tenure – maintaining stability during
that exceptional decade of artificially low interest rates.
We are pleased to have added Paul Astruc, our CFO, formally to the Board of
Directors in June.
The Board and I were delighted to welcome Sue Hayes to the Society in
January and as CEO from March. Sue has made significant strides
throughout 2022 in continuing to take the Society forward, whilst
developing the team to support her. Sue took over at time of rapid change
in our external trading environment and an ever-evolving competitive
landscape. She has led a thorough strategic review process with
consideration, enthusiasm, and flair to ensure our foundations for future
sustainable growth are built in the right way.
CHAIR’S STATEMENT
STRATEGIC REPORT
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As a Board, we continue to provide oversight of the strategy, which has had to
adapt in the light of the changing landscape. The Board gave its full support to
the strategic review and the development of a compelling new purpose, which
Sue has done a sterling job leading, and of which she will share in more detail
in her CEO review. The review has reinforced and refocused us on the purpose
of the building society movement – to enable those who find it difficult to
access funds easily to buy their own homes. It will involve us in looking hard
at the detailed design and flexibility of our mortgages and the journey our
borrowers go through. It will involve continuing investment in systems and
data analytics underpinning our risk analysis, but not any fundamental shift in
our risk appetite.
Looking ahead to 2023, it will continue to be a difficult time for many as the
recession bites, and the cost-of-living pressures show no sign of easing. This
will inevitably impact the housing market and the savings market. As a mutual
we will be seeking to adapt to these changes with the long-term strength and
stability of the Society at the heart of our thinking.
Thank you
Thank you to the Board for its support of Sue and me as we have navigated
through all that 2022 challenged us with. We have delivered a robust
performance and paved the way for future growth. Finally, and most
importantly, I would like to offer my heartfelt thanks to you, our members,
for your loyalty and support throughout 2022 and beyond.
Andrew Neden
Chair
2 March 2023
CHAIR’S STATEMENT (CONTINUED)
STRATEGIC REPORT
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Introduction
Firstly, a huge thank you to all our members for continuing to support
Nottingham Building Society.
When I joined The Nottingham in January of 2022, I was immediately struck
by the huge sense of pride that exists in our strong legacy. I was equally
motivated by the significant opportunity we had to shape our future plans,
aligned to a guiding purpose the whole Society could get behind.
I met with many colleagues and some members, and we carried out a great
deal of analysis. We then set about mapping out the journey required to
thoroughly review our strategic direction. I wanted to ensure it was designed
to serve our members today, as well as ensuring that we have sufficient
ambition and stretch to deliver future growth and sustainability.
A purpose to be proud of
Throughout 2022 the leadership team and I reflected deeply to truly
understand where we are now, what was working well and what not so well,
and where our efforts should be focused for the future. We looked at our
heritage, the mutual sector, and the changing environment in great depth.
One of the questions the regulators have been asking the sector more broadly,
is how we will be relevant and sustainable for the future, whilst not losing
sight of our existing members.
We took over six months to get it right, and we have developed a new
strategic blueprint, which is the cornerstone of our strategy, and which we will
use to focus our energy, drive decision making and form the bedrock of our
culture. It sets out our purpose, our strategic drivers (the core things we need
to do), and the behaviours we need to build for the future. At its heart, our
purpose is the concept our Society was born from, evolved to reflect the
challenges of the modern world.
Our Strategic Purpose is:
‘Together we fight for the Extra Ordinary to own their own home.’
Providing a safe place for people’s savings is the first step in enabling this. And
with our mutual ethos, using those savings entrusted to us to help people fulfil
the dream of owning their own home. It sounds simple, but the reality is that
it is a significant challenge for so many ordinary, hard-working members of
society to take that first, or next, step on the ladder.
The Extra Ordinary we are referring to are fast becoming the norm. They are
people who don’t fit the mould of what a ‘standard borrower’ looks like.
Someone who does not necessarily ‘tick all the boxes’ for one reason or
another, whether that is sporadic income as freelancers or workers in the gig
economy, those with multiple sources of income, those cases where illness,
career breaks or marital breakdown has affected their income or finally those
who need financial support from friends and family. These are ordinary people
with some extra considerations that need to be understood through the
mortgage application process.
We will continue to support all those existing mortgage customers and
members as well as the broker community in addition to the Extra Ordinary.
Achieving our purpose is not a destination, it’s an ongoing journey we have
only just begun, of listening, learning, and acting on what we learn. Making
informed decisions, ensuring our business is agile enough to adapt and
knowing our people understand the direction of travel. Unearthing our
purpose and setting out the strategic drivers to get us there will pave the way
for the change required. We need to take a different approach to borrowers
who need a helping hand on the property ladder, and we are best placed to
do that, with mutuality as our bedrock.
Laying foundations for growth
By landing on a purpose with longevity, we allow ourselves the time to set the
foundations required to make changes in the right way. We recognise we
cannot do this alone.
Building the right team has been key, and we have started to announce some
significant strategic hires and new roles to bolster our talented team with our
first Chief Technology and Transformation Officer, and Chief Lending Officer.
Alongside this, finding the right allies to support our ambitions was another
focus of 2022. Our partnership with Generation Home, announced in
November, is an excellent example of this. Their purpose is:
‘Owning a home
should be an opportunity for everyone. We’re rebuilding it to make it simple,
transparent and fair’
. Partnering with a business that shares our purpose, and
a depth of cultural alignment, provides us with a platform for success. Both
businesses are passionate about helping people to own their own home and
recognise the challenging and dynamic environment that many face to achieve
their ambitions.
These changes will not happen overnight as we build capabilities and choose
strategic partners who can offer customer innovation which is a step ahead of
ours and supports the delivery of our purpose beyond our existing channels. In
the case of Generation Home, they offer a unique proposition to help
customers get onto the property ladder by enabling their friends and relatives
to contribute to their income or deposit. With our support, they can enable
home ownership to become a reality and we are proud to be partnering with
a business that shares our resolute determination to help people own their
own home and provide fantastic customer experience. This matters now, more
than ever. Partnerships with like-minded businesses and people is a key part of
our strategy going forward.
CHIEF EXECUTIVE’S REVIEW
STRATEGIC REPORT
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Other steps we took to support home ownership in 2022 included significant
activity across our mortgage business. As the Bank of England base rate
gradually increased throughout the year, mortgage rates also rose. However, in
September we saw the most significant volatility yet as financial markets
responded to the mini-budget presented by the former Chancellor, Kwasi
Kwarteng, as then new Prime Minister, Liz Truss, pursued her growth plans
through the biggest tax-cuts since 1972, funded by a vast expansion in
borrowing. The reaction in the markets was swift, as the pound fell to its
lowest ever level against the US dollar, UK government debt prices collapsed
and the Bank of England stepped in to provide financial stability.
We were not immune to feeling the impact here as we were forced to reprice
in response to some of the most drastic swap rate and interest rate
movements in recent history. It was a challenge that our team rose to.
Although this wasn’t easy at times, we focused on keeping a market presence
to help borrowers get the mortgages they need, and to help brokers navigate
through these very challenging times.
As a result of the increase in applications during this period, and our ongoing
investment and product launches throughout the year to diversify our range
and respond to broker appetite, we ended the year breaking the £1bn
application value barrier with gross lending of £659m, up 18% on 2021.
A relevant and sustainable society
I am pleased to report that we ended the year in a strong position, with
profit before tax of £18.9m, up £3.8m on 2021. Our financial performance
has been achieved despite additional costs and increased provisions for
expected future credit losses driven by the rising cost of living, and
inflationary challenges that our borrowers face into 2023 and beyond.
Increasing interest rates have supported the strong performance.
We have made it a key priority to support our members through these
difficult times by paying savers the best rates we could whilst strengthening
the Society. Building the right team has also been very important. In 2022
we announced some significant hires to bolster our talented executive team.
Alongside this, finding the right allies to support our ambitions was a focus.
Our partnership with Generation Home, announced in November, is a great
example of how we will think differently to help achieve our goals.
Part of being a sustainable society is being relevant and adding value to all
our stakeholders, our colleagues, members and the communities we serve.
As part of this we have continued the Environmental, Social and
Governance (ESG) agenda in 2022. In relation to environmental and climate
change, we promised to cut our own emissions by >10% and have
achieved 18%. In relation to colleagues, we have made two cost of living
payments to support them through these challenging times.
Supporting local communities has continued to be an important part of The
Nottingham. Throughout 2022 we delivered our Corporate and Social
Responsibility programme that saw 841 hours volunteered to community
projects and charities by our team. In addition to this, £150,000 was
donated to the Samuel Fox Foundation.
As Andrew alluded to in his statement, the economic environment we exited
in 2021, alongside fresh challenges in 2022, meant throughout our strategic
review process we were required to assess how our Society, and our
branches more specifically, are being used today, along with predictions of
how this will change over time.
The outcome of this review saw us make the very difficult decision to close
17 of our branches in locations where the level of activity had reached a
point where it was no longer sustainable to justify the cost of running the
branch. We tested some pilot activity ahead of making that decision to see if
there were other alternatives, but these did not stimulate sufficient activity
in the form of footfall or new membership. This meant we couldn’t see the
potential for those branches to become sustainable at any point in the
future, considering the historical and ongoing trends.
We announced these closures in September and fully closed the branches in
December. We provided all impacted members with the rationale supported by
comprehensive analysis that led to our decision on why each of the locations
would be closing. This was to ensure we were being as open and transparent
as possible about the rationale for the decision, which was primarily driven by
the average cost of each transaction being prohibitively high.
Closing branches is never easy and I received feedback from some of you in
relation to this. I want to thank you for taking the time to get in touch and
share your views. The Board and I were also humbled by the dedication and
commitment the affected colleagues demonstrated to you, our members,
throughout this difficult time. I know their professionalism and tenacity was
also appreciated by those of you who were affected by these closures. The
support we gave to the impacted team members, offering where possible
redeployment opportunities and enhanced redundancy packages, meant
many left the Society with a positive outlook and we wish them all the best
of luck for the future.
Our branch network and colleagues who run them are a vital part of what
we offer to our members, and integral to fulfilling our purpose of helping
people own their homes. We continue to invest in viable branches and
maintain a high street presence where our colleagues support members and
the community.
Looking ahead
So, as you have seen already and will read more about in this report, 2022
was a year that brought challenges and opportunities, both within our
Society, and in the wider marketplace. But one we have navigated with
purpose, serving our members today, whilst building a sustainable Society
with significant growth potential.
I am proud of the results we are sharing today and would like to thank our
members, and each one of our dedicated colleagues, for their continued
trust in the Society. We look ahead to the coming years with a renewed
sense of focus, guided by a clear and impactful purpose, with mutuality as
our bedrock.
Sue Hayes
Chief Executive
2 March 2023
CHIEF EXECUTIVE’S REVIEW (CONTINUED)
STRATEGIC REPORT
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Our blueprint for the future
STRATEGIC REPORT
group has grown significantly over the last few years and so offers a real
opportunity for us to meet the true mutual purpose and to pay our savers
appropriate rates for supplying the funding to help them.
As a result, our new purpose is: Together we fight for the Extra
Ordinary to own their own home.
We define Extra Ordinary as hard-working people with circumstances that
many lenders might view as out of the ordinary – from self-employed
professionals to those who have had a setback in their career or financial
history. We believe this community has a right to be understood, that their
needs and circumstances are known, so they can achieve their dream of
owning a home. This is something that is worth us all fighting for and we
commit to going the extra mile to do this.
This purpose lives at the core of our blueprint for the future. To support
delivery of this, we have also given clear direction of what we need to do to
deliver this through our strategic drivers and the behaviours our team needs
to embrace.
To achieve our purpose, our decisions will be driven by these principles:
• Mighty Foundations – The right foundations for our business are in place.
The processes, governance, people and technology will underpin our Society
to ensure we are strong and resilient now and in the future.
• Extra Ordinary Depth – To help our members, customers and partners
including brokers, we must build a deep and ongoing understanding of
them and their circumstances. A journey of deep listening, learning and
adjusting using internal and external data to help us.
• Purposeful Innovation – We want to create and deliver leading
propositions and customer experiences that will support long term
sustainable advantage to lead in these markets and to enable us to
deliver our purpose.
• 10X Allies – We want our allies to be crucial partners who are
passionate about our purpose and work with us to accelerate and
multiply the impacts we can make. We want to create a movement of
people who are on the journey with us to help more and more people
own their own home.
As a mutual, it is in our DNA to understand the power of working together
and we know our purpose cannot be achieved in insolation. We will identify
the partners and like-minded allies that will join us in pursuit of our purpose.
This includes our saving community who are integral to the movement that
will enable homeownership for thousands of people every year. It also includes
our colleagues and through our behaviours we will build a culture where our
purpose can be realised.
We encourage them to:
• Have the brave conversation – We create an environment where
people feel confident to speak up and challenge with the intent to support
ongoing improvements in what we do and how we do it.
• Make the bold leap – We take action. We lean into the change and drive
it forward, challenging the status quo to continuously make things better.
• Seek the big insight – We demonstrate curiosity, leaving no stone
unturned to find different perspectives and to understand problems and
opportunities equally.
We shared this internally towards the end of the year and in Q4 saw the green
shoots of success as people were able to reset, refocus and build their future
objectives with a clear, purpose-led and member and customer focused strategy.
There is a constant requirement to assess how the world is changing and
how our strategy needs to adapt to meet the expectations of the modern
consumer. Over the last couple of years this has become even more
important and with the societal changes of the pandemic starting to be
accepted as the new norm, we have taken the opportunity to reset. This
involved an in-depth strategic review process to understand who we were
best placed to help, at a time of so many evolving and emerging needs and
to use this analysis to shape what part we could play as a modern mutual.
Building Societies are the original purpose-led financial services
organisations, and redefining our purpose is a key step in focusing our
efforts to ensure we continue to have a positive impact on our members’
lives, whilst also being relevant today as well as for future generations.
We have created a strategic blueprint that consists of three elements:
• Our purpose – the role we play in our members’ lives,
why
we do what we do.
• Our strategic drivers –
what
we need to prioritise.
• Our behaviours –
how
we all need to operate.
The journey we went on to get there involved our entire organisation and
significant insight into our customers and members, both today and also
into the future, our competitors and the wider ecosystem. This deep thinking
ensured we landed on something meaningful that demonstrates how we
can help people when they need it the most.
We know home ownership is a life changing milestone, with the potential to
provide happiness, security and opportunity for generations to come. Whilst
we have been helping people buy houses for over 170 years, we know that
home ownership is becoming increasingly difficult for significant parts of the
population and as a Society we want to be there to support people to
achieve this milestone.
We also recognise that treating traditional borrowers in a consistent and fair
way is something that we and the mainstream banks are able to do well.
This has meant that those audiences are well catered for by mainstream
banks who operate at scale and building societies therefore need to
compete on service and differentiation. We are focused on supporting
people who want to buy houses but find it hard to get onto the housing
ladder because they don’t have regular monthly incomes or have hit bumps
in the road but are fundamentally good financial risks. This Extra Ordinary
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The Nottingham is a top ten UK building society with £3.8bn of assets, with
a regional presence of 31 branches across 8 counties.
The Society operates under three membership hubs:
• Mortgages – via our intermediary-led lending hub, offering a wide
variety of mortgages, to home owners, landlords and small commercial
entities and more recently through our partnership agreement with a
fintech mortgage provider.
• Branches – via our regional presence of 31 locations across 8 counties.
• Beehive Money – our online platform and mobile app, providing access
to digital savings accounts.
Mortgages
During 2022 we have revitalised our purpose, placing a greater focus on
mortgages, but providing a safe and secure home for members to save with
us in order to fund the mortgages we provide to our borrowers.
Our aim is to provide prospective borrowing members with a choice of
mortgage propositions that suits their needs, through our mortgage broker
network or via our mortgage originator partnership.
Branches
We provide traditional branch services to serve those who prefer face to
face propositions, offering branch based savings accounts alongside
financial planning, estate planning and whole of market mortgage advice
through our partnership with the Mortgage Advice Bureau. We strive to
provide members with a higher quality of service and advice, to ensure their
needs are met.
Beehive Money
The Beehive Money proposition also provides a website/mobile offering for
those savers that prefer to manage their savings themselves, as and when
they need to, wherever they are.
The core product offering within the Beehive savings platform has
historically been the Lifetime ISA savings product (LISA). At the end of 2022
there are over 63,000 LISA customers who are saving with Beehive Money
and during the year 4,405 used their LISA funds to purchase a home.
Throughout the year the proposition set within Beehive was expanded
beyond easy access savings and LISAs to include fixed term bonds. Building
on the Mortgage Advice Bureau whole of market mortgage advice
partnership, accessible on the Beehive platform, a number of new
partnerships have been developed to further help first time buyers achieve
their home purchase goals including access to conveyancing services and
ways to help manage and improve their credit scores.
Business model and Group strategy Overall Business performance
There are no material differences between the Group and Society balance
sheet, and therefore this section is presented on a group basis only.
The Chair’s and Chief Executive’s reviews include a summary of factors
affecting our performance in 2022 and should be read in conjunction with
this report.
The Society as a mutual has no shareholders and does not need to
maximise profits but looks to ensure sufficient profits are generated to
maintain a strong capital position and enable continued investment to
ensure that the Society is sustainable over the longer-term in order to help
more members in the future.
The Board monitors both reported and underlying profit before tax.
Reported profit before tax is a commonly used comparative measure of
profit. However, it includes a number of items which the Board does not
believe fully reflect underlying business performance and therefore
underlying profit is also used to measure performance.
Underlying profit before tax equates to reported results, adjusted to exclude:
• movements in respect of fair value gains or losses from derivatives and
hedge accounting;
• net strategic investment costs, which support the reinvention of the
Society; and
• costs which are non-recurring.
The presentation of underlying profit remains consistent with that in prior
years. Further information is provided in this strategic report and a
reconciliation of the underlying profit to statutory profit can be found on
page 10.
The Nottingham has delivered a strong level of profit in 2022 during turbulent
economic conditions, with an underlying profit before tax of £15.2m (2021:
£7.4m) and a statutory profit before tax of £18.9m (2021: £15.1m).
The positive results have been significantly aided by the rising interest rate
environment and the impact on the Society’s net interest income. The
impacts of the increases in the future expectations of interest rates have
generated material gains on derivative instruments during the year, the
majority of which should be considered to be a timing difference and will
unwind over time.
These positive impacts on income have partially been offset by increases in
costs associated with the continued support for colleagues during the
increasingly difficult and uncertain economic times as well as targeted
investment throughout the year in the creation of the Society’s new purpose
and the initial deployment of its new strategy including the costs associated
with the difficult decision to reduce the Branch Network.
In light of the macroeconomic conditions, the continuation of the cost-of-living
crisis and the potential impact on mortgage affordability, the Society increased
its provision for expected losses on loans to customers, recognising the
increasing risk of credit deteriorating in a recessionary environment.
STRATEGIC REPORT (CONTINUED)
STRATEGIC REPORT
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STRATEGIC REPORT (CONTINUED)
INCOME STATEMENT
INCOME STATEMENT
TOTAL GROUP BASIS
Group
2022
£m
Group
2021
£m
Net interest income 62.8 45.9
Net fees & commissions receivable 1.6 3.1
Net underlying income 64.4 49.0
Administrative expenses (39.3) (36.2)
Depreciation & amortisation (7.7) (6.8)
Underlying management expenses (47.0) (43.0)
Impairment (charge)/release – loans & advances (2.2) 1.4
Underlying profit before tax 15.2 7.4
Gains from derivative financial instruments 10.2 7.9
Net strategic investment costs (5.0) (0.2)
Change in accounting estimate (1.5) -
Reported profit before tax 18.9 15.1
Tax charge (3.1) (2.5)
Reported profit after tax 15.8 12.6
Represents:
Profit after tax – continuing operations 15.8 12.4
Profit after tax – discontinued operations - 0.2
Financial highlights
Key performance indicators
TOTAL GROUP BASIS
Net interest
margin
Profit
before tax
CET 1%
Underlying
management
expenses ratio
Arrears ratio
Underlying cost
income ratio
Liquidity
Coverage Ratio
Group
management
expenses ratio
Profit after tax
ratio
1.69%
2021: 1.24%
£18.9m
2021: £15.1m profit
16.8%
2021: 16.5%
1.26%
2021: 1.12%
0.20%
2021: 0.21%
73.0%
2021: 87.8%
192%
2021: 216%
1.44%
2021: 1.19 %
0.42%
2021: 0.34%
STATEMENT OF FINANCIAL POSITION
STATEMENT OF FINANCIAL POSITION
Group
2022
£m
Group
2021
£m
Mortgages 2,922.8 3,010.9
Liquid assets 719.3 562.5
Other assets 170.4 61.4
TOTAL ASSETS 3,812.5 3,634.8
Retail & wholesale funding 3,528.1 3,370.7
Other liabilities 52.8 45.0
Reserves 231.6 219.1
TOTAL LIABILITIES & RESERVES 3,812.5 3,634.8
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2022
£m
2021
£m
Building Society fees receivable
3.1
3.0
Total continuing fees receivable
3.1
3.0
Building Society fees & commissions payable (1.5) (0.9)
Net continuing fees receivable 1.6 2.1
Mortgage Broking – discontinued - 1.0
Net total fees & commissions receivable 1.6 3.1
2022
£m
2021
£m
Underlying administrative expenses
39.3 36.2
Depreciation and amortisation – underlying 7.7 6.8
Management expenses – underlying 47.0 43.0
Strategic investment costs
5.0 1.1
Change in accounting estimate 1.5 -
Management expenses – strategic 6.5 1.1
Total management expenses 53.5 44.1
Represents:
Administrative expenses 42.8 37.3
Depreciation & amortisation 10.7 6.8
53.5 44.1
Underlying management expenses – continuing 47.0 42.2
Underlying management expenses – discontinued - 0.8
The Group’s management expenses include administrative expenses, project
expenditure, depreciation & amortisation, and strategic investment costs.
2022 2021
Management expenses £53.5m £44.1m
2022 Financial review and
key performance indicators
INCOME STATEMENT REVIEW
Net interest income increased by £16.9m in 2022, predominantly driven by the
higher interest rate environment resulting from the increase in the Bank of
England base rate from 0.25% to 3.50% during the year.
Whilst the average customer interest rate receivable on mortgages increased,
average lending margins narrowed during the year as the Society chose to price
more competitively and increase new business volumes. However, as the Society
uses interest rate swaps, which are linked to SONIA, to hedge a large
proportion of its fixed rate mortgages, the interest it received from these was
significantly higher than in 2021.
During the year, the Society increased the rate it paid on its administered rate
products as the Bank of England increased rates. Alongside this it has increased
the rates it has offered savers on Fixed rate ISAs and Fixed Term Bonds. The
average interest rate paid to savers across the year was 0.81% compared to
0.52% in 2021, and, by the end of 2022 the average interest rate payable had
increased to 1.76%.
2022 2021
Net interest income £62.8m £45.9m
Net interest margin 1.69% 1.24%
Net total fees & commissions receivable have reduced by £1.5m
predominantly driven by the cessation of mortgage broking fees following
the sale of the mortgage advice business in 2021.
Society fee income consists of commission from mortgage-related insurance
products, financial planning and protection, rental income, along with estate
agency and mortgage advice referrals.
Society fees and commissions payable relates to various banking charges
and mortgage related charges, which are payable whether or not a
mortgage completes, an example of which is valuation fees.
During 2022, the number of mortgage applications increased significantly
resulting in a greater level of mortgage valuation fees payable.
Underlying management expenses increased by £4.0m.
Underlying administrative expenses have increased by £3.1m as a result of
staff recruitment across the Society in 2022, the impacts of the pay award
made in early 2022 and the cost-of-living support payments made in August
and November to support colleagues. Higher project related spend, driven in
part by the costs associated with the establishment of a new partnership
relationship, has also contributed to the increase in costs in the year.
Strategic investment costs increased by £3.9m to £5.0m. The 2022 cost
reflects the costs associated with the Branch closure programme, including
redundancy costs, fixed asset write-offs, onerous lease costs and dilapidation
costs of locations that were exited. Also included are non-recurring costs
associated with the costs of the development and creation of the Society’s
new purpose, strategic blueprint and strategy.
During the year a full review of the current fixed asset valuations were
undertaken. As a result of the formation of the future strategy and
anticipated future enhancements in mortgage systems and processes, the
average useful lives of the Society’s mortgage technology assets have been
reduced, resulting in a £1.5m amortisation charge.
STRATEGIC REPORT (CONTINUED)
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STRATEGIC REPORT (CONTINUED)
An impairment charge of £2.2m has been recognised in the year under the
forward-looking requirements of the IFRS 9 accounting standard for expected
credit losses.
During 2022 the UK economy saw Consumer Price Inflation of 10.5% for
the 12 months to 31 December 2022 driven by a number of issues,
particularly the war in Ukraine. The impacts on costs of goods and services
and wholesale energy prices have resulted in a cost of living crisis in the UK
and other countries around the world, which is reducing household
disposable incomes. The Bank of England has increased interest rates to
combat inflation and prevent it becoming embedded, which is in turn
increasing the borrowing costs for households across the UK. A period of
higher interest rates and a potentially extended UK recession is now highly
likely over the medium-term horizon.
The Nottingham always seeks to ensure that customers can afford to meet
their mortgage repayments from the outset and the Society’s arrears ratio
(number of accounts in three months or more arrears) has continued to
remain at low levels, with the ratio at the end of 2022 standing at 0.20%
(2021: 0.21%), with no properties in possession at the end of the year.
However, the combined impact of these worsening macroeconomic factors will
more than likely create significant strain on the ability of borrowers to repay
their mortgages in the future and will potentially increase the Society’s credit
losses. There are already signs of a housing market slowdown with falling
house prices, despite ongoing government intervention in the form of Stamp
Duty cuts. In light of these changing economic conditions, the Society has
increased its provisions for expected credit losses.
The Society will continue to work proactively and support its borrowers if they
experience financial difficulty.
The Society’s total overall impairment provisions as at 31 December 2022 is
£5.3m (2021: £3.1m), which equates to 0.17% of the total book.
2022 2021
Impairment (charge)/release (£2.2m) £1.4m
2022 2021
Derivative financial instruments gain £10.2m £7.9m
The Nottingham offers a range of fixed rate mortgage products. The
resulting interest rate risk is carefully managed using a mix of fixed term
funding and derivative instruments. The use of derivative instruments to
manage exposure to changes in interest rates that arise from fixed rate
mortgage lending and fixed rate retail savings products leads to volatility in
income statement gains and losses; these would only be realised if we
chose to sell the derivatives before they reach maturity.
As a result of the increase in the Market’s expectations of future interest
rates during 2022, the Society has recorded £10.2m of derivative financial
instrument gains in the year. The gains have been predominantly recorded as
a result of valuation differences between when the swaps are transacted as
mortgage/savings products are launched, to manage interest rate risk and
when the assets or liabilities are generated and enter a matched relationship.
Any gains or losses in the value of the swaps during the pre-matching period
are recorded in the P&L and amortised over the life of the instrument. The
Nottingham has no need, or intention, to sell these derivatives that are
transacted to manage interest rate risk and therefore expects that any gains
or losses unwind over the remaining lives of the derivatives.
As this volatility arises primarily due to timing differences, the Board
excludes its impact from underlying performance.
2022
£m
2021
£m
Residential
2,702.6 2,800.2
SBL
334.7 232.6
Total
3,037.3 3,032.8
STATEMENT OF OTHER COMPREHENSIVE INCOME REVIEW
2022
£m
2021
£m
(Loss)/gain on pension assets
(24.9) 1.9
Gain/(loss) on pension liabilities
25.0 (1.9)
Deferred tax (expense)/credit
(0.1) 0.3
Net gain on defined benefit pension scheme
- 0.3
2022
£m
2021
£m
Fair value loss on treasury assets
(4.1) (0.3)
Deferred tax credit
0.8 0.2
Net loss on treasury assets held at FVOCI
(3.3) (0.1)
Overall, total mortgage balances held flat during the year. The book declined
in H1 2022 as a result of a reduction in mortgage applications during Q4
2021, however, following strong performance during 2022, the mortgage
book has grown by 3.0% since half year and the mortgage pipeline (offered
and pre-offer) stands at £280m, with the Society in a good position for
continued growth into 2023.
The Society received over £1bn of mortgage applications during the year, up
25% on 2021, with gross new lending totalling £659m in 2022, compared
against £557m in 2021.
As a result of the increase in the Market’s expectations of future interest
rates during 2022, the Society has recorded losses on the fair value of its
treasury assets held at fair value through other comprehensive income.
As the Society’s policy is to hold these assets to maturity (with the ability to
sell if liquidity is required), these losses are anticipated to result in future fair
value gains as they progress towards maturity.
STATEMENT OF FINANCIAL POSITION REVIEW
There is no material difference between the Group and Society balance
sheet, and therefore this section is presented on a Group basis only.
The Group balance sheet grew by 4.9% in the year to £3.8bn driven by an
increase in liquid and other non-mortgage assets.
MORTGAGE LENDING
The defined pension scheme’s liabilities are suitably hedged by the pension
scheme’s assets due to the hedging strategy undertaken by the Society. This
can be observed in both 2022 and 2021, where gains / (losses) on the
pension scheme’s liabilities have been appropriately offset by (losses) / gains
on the pension scheme’s assets.
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2022
£m
2021
£m
Branch savings
2,508.0 2,519.8
Non-branch savings 502.7 355.7
Retail savings 3,010.7 2,875.5
Secured wholesale 346.9 470.3
Unsecured wholesale
89.0 24.9
Collateral liabilities
81.5
-
Retail & Wholsale funding
3,528.1 3,370.7
The Group operates a diverse funding strategy to ensure an optimum mix
and duration of retail and wholesale funding.
Retail savings continue to be the cornerstone of our funding requirement,
with the remainder obtained from the secured and unsecured wholesale
funding markets.
Retail savings grew just under 5% to £3.0bn. Branch balances have reduced
marginally during the year, with some members choosing to withdraw their
funds following the announcement of branch closures in H2. We have
continued to see growth in our non-branch savings primarily in the Beehive
channel where we have seen LISA balances grow by £112m.
The Society continues to hold funding from The Bank of England’s Term
Funding Schemes, providing the Group with access to secured funding at
low rates of interest, with £315m (2021: £343m) drawn down under the
schemes as at 31 December 2022. The Society repaid £28m of TFS in the
same period.
By holding liquid resources of the highest quality, which can be turned readily
into cash, termed ‘buffer’ assets, the Group is able to manage the on-balance
sheet liquidity it holds at a lower level. During the year, the Group continued
to maintain a level well in excess of the regulatory minimum.
The Society supplements on-balance sheet liquidity with access to the Bank of
England’s Sterling Monetary Framework facilities supported by prepositioned
collateral. When taking into account both on- and off-balance sheet liquidity,
total liquid resources were 27.3% (2021: 30.3%), with prepositioned assets
in addition.
The two key measures of liquidity are the Liquidity Coverage Ratio (LCR) and
Net Stable Funding Ratio (NSFR). These are being reported in accordance with
the finalised CRR/CRD rules, which came into force on 1 January 2022. The
Society was in excess of the minimum levels required for both measures at the
end of the year with the LCR being 192% (2021: 216%) and the NSFR being
144% (2021: 144%).
2022
£m
2021
£m
Bank of England
289.0
284.6
Multilateral Development Banks
106.0
104.7
UK Gilts & T’Bills
126.7
39.6
Mortgage backed securities
63.3
61.5
Covered Bonds
54.2
54.5
Other
80.1
17.6
Liquid assets
719.3
562.5
STRATEGIC REPORT (CONTINUED)
The Society also has £91m (2021: £127m) outstanding as at 31 December
2022 borrowed through a secured bilateral funding agreement, which was
extended and upsized to a total of £200m of available funding during 2022.
The wholesale funding ratio reduced from 14.7% to 12.6% in 2022.
LIQUID ASSETS
The Society maintains a prudent level of liquid resources, of an appropriate
level and quality, to meet its financial obligations as they fall due under
normal and stressed conditions.
The Group’s liquidity resources comprise a combination of ‘on-balance sheet’
liquid assets and ‘off-balance sheet’ liquidity held with the Bank of England
secured against approved mortgage portfolios. The Group is able to exchange
these assets for cash as required.
The Group’s on-balance sheet liquidity is made up as follows:
During H2 the Society agreed a forward flow agreement with a fintech
mortgage provider, with £10m of loans purchased in 2022 and a mortgage
pipeline of future purchases of £108m at 31 December 2022. Under this
agreement, the Society purchases the beneficial interest in the cash flows from
the mortgages originated whilst the third party retains the legal charge.
Mortgage lending remains concentrated in prime high quality mortgage
assets. Residential mortgages, excluding buy-to-let, account for 67% of the
total lending book at 31 December 2022.
The Secured Business Lending (SBL) book increased to £334.7m, with
£141.9m of gross lending for the year, predominantly driven by continued
origination of Limited Company Buy to Let lending, which is secured against
the same high quality residential property as Residential and traditional BTL
lending but called SBL lending as the loans are made to limited companies
as opposed to individuals.
During the year we launched broker product transfers capability, which is
available from most other lenders in the market. If brokers advise their
customers to transfer to another product with The Nottingham at the end of
their current product maturity, they are paid a procuration fee in the same
way they would be if they advised their customers to take a mortgage with
another mortgage provider.
The mortgage portfolio is well distributed throughout England and Wales
and is predominantly focused in the three broad areas of East Midlands,
Yorkshire & Humberside and London & the South East.
RETAIL AND WHOLESALE FUNDING
The Society funds its mortgages through a combination of retail savings and
wholesale funds.
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STRATEGIC REPORT (CONTINUED)
CAPITAL
The Society continues to focus on maintaining strong capital ratios to protect
members’ interests.
Common Equity Tier 1 (CET1) capital is the strongest form of capital and
comprises the Society’s general reserves. Overall CET1 resources have
increased by £18.7m in the year. This is driven by the profit for the year and
other comprehensive income movements, offset by unfavourable changes in
fair value reserves and an increase in regulatory adjustments driven by the
capitalisation of intangible assets. The Society also continues to benefit from
a positive IFRS 9 regulatory adjustment, as part of the Government’s
response to the Covid-19 pandemic.
Alongside the increase in resources outlined above, there has been a 7.4%
increase in risk weighted assets, reflecting the increase in mortgage assets
and operational risk exposure requirements. This resulted in an overall
increased CET1 ratio of 16.8% compared against the 2021 position of
16.5%, emphasising our capital strength.
Regulatory adjustments include deductions for intangible assets and
valuation adjustments on fair value financial instruments, offset by an
addback for the IFRS 9 transitional arrangements.
The leverage ratio, which is calculated as Tier 1 capital divided by total
balance sheet exposure, has increased marginally to 5.7%. This is being
reported as per the transitional CRD V rules. This is driven primarily by higher
capital resources and asset exposures.
The Regulator requires that the Society holds a certain amount of capital
against the assets it holds. This is referred to as its Total Capital Requirement.
As at 31 December 2022, the Society’s Total Capital Requirement was set at
8.60% of risk weighted assets or £114.0m.
All the Society’s capital ratios remained comfortably in excess of regulatory
requirements throughout the year.
Further information regarding the Society’s capital management can be found
in the Pillar 3 report available at www.thenottingham.com.
The following tables show the composition of The Nottingham’s regulatory
capital as at 31 December 2022 under CRR/CRD final and transitional rules,
and details of key ratios.
CAPITAL RATIOS
% % % %
Common Equity Tier 1 (CET1) ratio 16.6 16.4 16.8 16.5
Total Tier 1 ratio 16.6 16.4 16.8 16.7
Total Capital ratio 18.4 18.3 18.6 18.4
Leverage ratio 5.6 5.5 5.7 5.6
CAPITAL RESOURCES
2022
Final CRR/CRD Rules
£m
2021
Final CRR/CRD Rules
£m
2022
Transitional CRD V
£m
2021
Transitional CRD V
£m
COMMON EQUITY TIER 1 CAPITAL
General reserves 235.0 219.2 235.0 219.2
Fair value reserves (3.4) (0.1) (3.4) (0.1)
Regulatory adjustments and deductions (11.8) (17.2) (9.4) (15.6)
TOTAL COMMON EQUITY TIER 1 CAPITAL 219.8 201.9 222.2 203.5
ADDITIONAL TIER 1 CAPITAL
Permanent Interest Bearing Shares - - - 2.4
TOTAL ADDITIONAL TIER 1 CAPITAL - - - 2.4
TIER 2 CAPITAL
Permanent Interest Bearing Shares 23.9 23.8 23.9 21.4
TOTAL TIER 2 CAPITAL 23.9 23.8 23.9 21.4
TOTAL REGULATORY CAPITAL 243.7 225.7 246.1 227.3
RISK WEIGHTED ASSETS 1,324.8 1,233.5 1,324.8 1,233.5
STRATEGIC REPORT
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Principal Risk
Category Definition
Strategy The risk that The Nottingham does not have an
appropriate strategy and corporate plan to deliver
sustainable long-term value to members and/or fails to
effectively implement and execute the strategy.
Capital The risk that The Nottingham does not have sufficient
capital or allocates it ineffectively. This includes The
Nottingham’s ability to manage its capital effectively in
a range of business and economic environments.
Transformation &
Change
The risk that The Nottingham is adversely affected due
to the failed or ineffective implementation of change or
programmes of change.
Market & Interest Rate The risk to The Nottingham’s net interest income and
economic value arising from changes in market interest
rates and mismatches in The Nottingham’s balance
sheet.
Retail Credit The risk of loss stemming from a borrower’s failure
to repay a loan or otherwise meet a contractual
obligation.
Liquidity The risk that The Nottingham, although solvent, does not
have sufficient financial resources available to meet its
obligations as they fall due.
Model Governance The risk of having an inadequate or ineffective
framework for managing model risk.
Legal, Regulatory &
Conduct
Legal: Risks associated with the failure to meet the
contractual obligations of The Nottingham resulting in
financial liability or litigation and risks associated with
the failure to put in place appropriate insurance policies
to mitigate legal liability.
Regulatory: Risks associated with failure of The
Nottingham to comply with statutory and regulatory
requirements.
Conduct: Risks associated with failure to deliver fair
outcomes for The Nottingham’s customers.
Operational The risk of loss resulting from human factors, inadequate
or failed internal processes and systems or from external
events. This includes operational resilience, cyber and
health and safety.
Principal risks and uncertainties
The Nottingham is a low-risk, UK-based organisation and, in common with
other financial institutions, the nature of the business results in a number of
unavoidable or inherent risks. These inherent risks are continuously
monitored and managed by the Board, as noted in the risk management
report on pages 28 to 32. They are categorised as principal risks within the
risk management framework and are defined as follows:
Economic uncertainties
Inflationary pressures, the ‘cost of living crisis’ and return to a higher interest
rate environment create a heightened level of uncertainty in the
macroeconomic environment. How customers will respond, following such
an extended low interest rate environment, is challenging to predict,
although a slower mortgage market and the need to exercise more
forbearance is expected, with increased credit losses a possibility.
Recent communications from the Bank of England have indicated that they
expect interest rates to continue to rise in the short/medium-term to tackle
inflation, likely placing increasing pressure on borrowers as mortgage rates
increase across the sector, and high levels of volatility in swap rates make it
extremely difficult for lenders to confidently price mortgage products.
In addition, potential house price reductions as a result of a less active
mortgage market and more conservative consumer behaviour, in light of the
cost of living crisis and recession, could reduce market buoyancy and further
increase competition.
The Nottingham‘s historically low levels of arrears and defaults continue but
the need to remain prudent is recognised, with the sector anticipating an
increase in mortgage defaults and repossessions. Processes to support
customers through financial hardship are well established and embedded. In
addition, the provisions for credit losses have been increased this year.
The Nottingham has considered the credit losses that may arise from a
significant shock to house prices, increased unemployment and any
subsequent increase in arrears and defaults, which may arise as a result of
the economic uncertainty and affordability squeeze. The Society undertakes
regular stress-testing, conducts an annual Internal Capital Adequacy
Assessment Process (ICAAP), regularly assesses the levels of provisions held
against bad debts and sets a capital appetite requirement at a level that is
designed to be more than adequate to absorb credit losses should they
arise. The Society maintains a strong capital position relative to its Overall
Capital Requirement (OCR).
Lending decision-making is supported by models which are constantly
reviewed and overseen as part of the governance framework to ensure they
remain relevant and accurate in the unprecedented macroeconomic
environment. The Society is aware that many models were created at a time
when the current trading environment was not envisaged thereby presenting
a heightened level of model risk. The Society’s model governance framework
is primarily overseen by the Model Governance Committee, supported by
other governance committees, with key models subject to external
development and review by specialist third parties.
The Nottingham will continue to take a prudent approach both in its
assessment of house prices and in its forecast of arrears levels. In response
to the crisis, the level of provisions held against future mortgage defaults
were significantly increased to ensure that the Society effectively manages
the risk of future defaults.
The Nottingham will also continue to closely monitor all relevant economic
forecasts to ensure that it incorporates emerging risks.
In recent times, the Covid-19 pandemic has dominated the risk landscape,
impacting all principal risk categories. Despite the impacts of the pandemic
diminishing, a high degree of uncertainty remains. Economic uncertainty and
affordability pressures, created by a number of external factors, including:
inflation, the war in Ukraine, the energy crisis, the government’s financial
policy and ‘mini budget’ in Q4, along with base rate movements, are now
key factors. This uncertainty is reflected in the principal risks facing the
Society and is discussed below, along with the controls and mitigations that
have been put in place to manage the risks and minimise their impacts.
STRATEGIC REPORT (CONTINUED)
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STRATEGIC REPORT (CONTINUED)
The trading environment
Mortgage trading
Mortgage conditions remain challenging, with fierce competition continuing
across all segments. As a result, margin compression remains an active issue
for all building societies as they try to balance the needs of savers and
borrowers, while earning sufficient margin to run the society, invest for the
future, build capital reserves and remain sustainable.
In this environment, it is likely to be challenging for The Nottingham to
maintain its recent level of earnings in the shorter-term. In response, the
Society is considering a number of initiatives in the medium-term that will
enable it to expand its lending, within current risk appetite, whilst
generating required higher returns.
Strategic review
Longer-term prospects and the need to maintain and promote a sustainable
future for the Society underpinned the strategic review undertaken in 2022.
It was recognised that established ways of attracting, retaining and
interacting with members had changed and that the Society needed to
modernise its proposition in order to remain relevant in a world where
traditional customer behaviours were changing.
The proposed plans are ambitious and will impact all principal risk
categories. Of particular note is the pressure on colleagues that is naturally
created through the need to continue to run the business whilst
transforming it. Significant support will be required from existing and new
partners to aid successful execution of the change activity and these
alliances will need to be carefully managed to ensure delivery and
commercial targets are preserved.
Transitioning from the Society’s traditional mortgage activities to fighting for
Extra Ordinary Borrowers represents a shift and will require data-driven
insight which can be used to inform a robust and ongoing assessment of
lending risks as well as an excellent service proposition.
Extensive plans are in place to address these risks and others, to manage
execution risks throughout the implementation of the new strategy.
People risk
Following the pandemic, hybrid working practices have been successfully
adopted by the Society. Colleagues have been receptive to a more modern
way of working which provides greater flexibility to accommodate employee
needs. The work undertaken to support colleagues’ physical and mental
wellbeing has continued.
Financial assistance has also been provided, in the form of two cost of living
crisis payments, as The Nottingham seeks to support its colleagues through
challenging economic conditions.
Levels of employee turnover during 2022 have remained elevated but
significant hires have been secured into key roles, such as the Chief
Technology and Transformation Officer and Chief Lending Officer.
Navigating the fiercely competitive recruitment market to attract talent has
been a challenge, with additional costs incurred as a result of inflated salary
requirements and the use of interim resource solutions to bridge gaps. In
order to remain competitive and an attractive employer, work to enhance
the appeal of the Society must continue. Investment has been undertaken in
recruitment technology and performance management processes and tools.
Cyber risk
Cyber risk has remained heightened following the Covid-19 pandemic, with
the war in Ukraine contributing to an increase in reported incidents of
phishing and similar activities in the UK. The Nottingham’s Information
Security and Financial Crime teams have responded by launching a variety of
initiatives to further raise awareness across both colleagues and customers in
the methods used by cyber-criminals to gain access to information or money.
In all areas, managing cyber risk remains a key focus of the Society’s
management to safeguard the business and protect members’ data and
savings. This includes remote working solutions. The Society continues to
invest in technology to prevent and detect cyber-attacks, whilst specialists
maintain an awareness of prevailing threats and are able to respond
proactively to events. Strengthening of the Society’s security in systems, is a
constant focus, with a comprehensive programme of technology upgrades
and the implementation of enhanced security tools to keep our members
safe and secure.
Technical expertise is complemented with education and awareness activities
to ensure that employees are equipped to recognise and manage the risks
associated with cyber activity. The capability to respond to and recover from
cyber events is kept under continuous review including contingency planning,
crisis management and disaster recovery plans.
Retail funding
The strategic decision to close 17 branches impacted 72 colleagues. A
programme of redeployment was undertaken and enhanced redundancy
offered to those affected. Colleagues across the organisation responded
professionally to the news and support was provided.
Following a period of low and benign interest rates, the transition to an
increasing interest rate environment poses a number of challenges for The
Nottingham and other financial services providers. Volatile markets and
elevated interest rates have resulted in increases to costs of funds and
balancing the reward of saving customers with margin management will
need continued careful consideration.
The Society possesses a diverse mix of funding options to allow it to secure
retail funding at competitive rates, including the digital capability provided by
the Beehive Money app. Liquidity is assessed as part of the Internal Liquidity
Adequacy Assessment Process (ILAAP) which includes robust stress testing.
Strategic Partnerships
The Nottingham works closely with key partners who provide services to
members on its behalf. As the Society explores new ways of meeting the
needs of its members it is likely that the number of key strategic partners
will increase.
During 2022, the Society entered into a strategic partnership with a fintech
mortgage provider and are targeting to fund up to £600m of new mortgage
originations over the next two years. The partnership reflects a shared
commitment to boost home ownership and transform the housing market.
The Nottingham performed rigorous due diligence activities and was
supported by a number of advisors when setting up the arrangement which
is underpinned by comprehensive legal contracts.
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In recent years, The Nottingham has simplified its business operations, moving
to a partner-based model for the delivery of estate agency services and expert
mortgage advice. This has enabled the Society to maintain its proposition
offering by partnering with specialist providers of these services. As such, the
Society relies on certain key partners for the delivery of important elements of
its proposition and for the generation of related fee income.
The Society recognises that working with external parties requires close and
continuous oversight. It is a key objective of The Nottingham that selected
partners manage their relationships with members to exactly the same high
standards that are applied internally. Many of the Society’s partners have
also been affected by the Covid-19 pandemic, inflation and recessionary
pressures, both financially and operationally.
Strategic partners also support the Nottingham in other ways, providing
important back-office and technology services.
The Society continues to manage such relationships closely by rigorous
contractual requirements and strict service delivery standards. All partners
are monitored to ensure that their services meet the Society’s high standards
at all times and, where applicable, ensuring that they meet defined financial
adequacy requirements. Metrics on service delivery are reviewed regularly at
management committees. The Nottingham is committed to ensuring that its
trusted partners provide the highest level of service to members and, on the
rare occasions where this doesn’t happen, the Society acts in the best
interests of customers to ensure good, regulatory compliant, customer
outcomes are achieved.
Regulatory Change
The regulatory environment continues to develop, with a number of new
initiatives coming into force in 2023 and beyond. The new regulations
cover a wide range of categories and have all required significant resource
to be applied to ensure that the Society remains able to meet all regulatory
requirements.
The key elements of regulatory change under consideration include:
• Consumer Duty (FCA);
• Basel 3.1 requirements;
• Model Risk Management Requirements for Banks; and
• Strong & Simple prudential framework (PRA).
The Society actively monitors the regulatory environment to ensure that it
is able to comply fully with all new and changing regulatory requirements.
Horizon scanning is a key process that supports the work of the Legal,
Regulatory & Conduct Risk Committee, which oversees the Society’s
approach to developing new processes in line with regulatory changes.
Paul Astruc
Chief Financial Officer
2 March 2023
STRATEGIC REPORT (CONTINUED)
STRATEGIC REPORT
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Our community commitment
As a building society, our mutual ethos means being responsible and giving
back is part of our DNA. Since our inception, we have strived to do the right
thing for our members, our people, and our wider communities. In 2021 the
Society committed over £100,000 to our charitable foundation that was
founded with the aim of helping inspire the futures of young people, as well
as supporting those most impacted by the cost-of-living crisis throughout
2022. We also entered the new year with the aim of encouraging wider
engagement in our volunteering programme that allow our colleagues two
paid days leave for supporting their communities.
In conjunction with the journey, we have been on through the strategic
review process to unlock our purpose, we also took the opportunity to
review and reflect on our community programmes. In recent years, our
programmes have been agile and responsive to the needs within our
communities created by the pandemic and its aftermath. In 2022, we
continued some of the relationships started during the previous year, reacted
to developing needs coming to the fore and ended the year carefully
considering the building blocks needed to create the strong foundations of
a purpose-led community approach for 2023 and beyond.
Charitable giving and volunteering
We sought to support local charities to help them to benefit from over
£100,000 in donations from our Samuel Fox Foundation throughout the year.
Named after our founder, the foundation was launched in 2021 in partnership
with Nottinghamshire Community Foundation. The first beneficiary of support
in 2022 came as we responded to the humanitarian crisis emerging in Ukraine
as war was declared. A donation was made to Operation Orphan, a
Nottingham-based charity working in bordering Moldova to respond to young
people and their families fleeing Ukraine. We were also able to support by
collecting donated items in our branches, with 111 hours of volunteer time
sorting through donations and boxing to be sent over to Moldova, as well as
a financial contribution for transportation costs.
Although we started the year with an ambition to increase engagement in
our volunteering programme, with Government restrictions and coronavirus
rules still in place amid rising case rates fuelled by the Omicron variant, we
needed to pivot our first volunteering campaign of the year. This meant
adapting our original plans and conducting virtual career insight sessions
with Nottingham-based young person’s charity, Think Forward. This was a
continuation of the work we started with the charity in 2021. Think Forward
exists to empower young people to create better and brighter futures. We
want them to be able to identify, realise and shape their aspirations and be
ready to make a successful transition into work.
As the year progressed and restrictions relaxed, we were able to evolve our
Think Forward partnership and launch a business mentoring programme
with students face-to-face at our head office in Nottingham. This
programme played to our strengths as it leans into the talent and expertise
of our colleague to help inspire and inform young people’s careers decisions
and options.
Alongside these volunteering-led opportunities, we also continued to invest
in our flagship employability programme, Career Academy. We support
teachers to deliver career guidance to young people aged 16-24. Since its
launch in 2021, this free to use material has been accessed by 10,000
students in over 200 schools.
Understanding it is not just the career prospects of a generation that have
been impacted by the pandemic, but also their mental health and wellbeing,
we continued to support The Wolfpack Project. This local charity, based in
Sherwood, is dedicated to tackling loneliness and social isolation within the
community. It seeks to break down the stigma of loneliness and provide a
forum where everyone affected can reach out and have the social
connections and support, they want. Support included a monetary donation
from the Samuel Fox Foundation as well as our people dedicating their time
so events could be held for their service users covering social media
presence, fraud prevention and scam awareness.
In addition to our people using their skills and knowledge to support local
communities and causes, we extended the options available to team
members when using their two paid days volunteer time and encouraged
people to follow their passions whilst making a difference. Activities like
helping local schools, charity board work, running soup kitchens and much
more make up the diverse collection of causes helped in 2022 through
volunteer time. We truly appreciate the value this time demonstrates not
only to the causes they support, but also from a team building and
engagement point of view. From food banks and local schools to litter
picking and much more, we collectively accumulated 841 volunteer hours,
with almost 25% of our team participating at least once.
As we closed out 2022, we recognised Christmas should be a time of great
celebration, but we were acutely aware that would not be the case for lots
of families in 2022, with so many struggling to make ends meet. With this
in mind, the Samuel Fox Foundation ramped up giving throughout
December with colleague-nominated charities benefitting from almost
£50,000 worth of donations to causes doing great work to ease the cost-of-
living crisis at Christmas time. The fund also supported an alternative giving
project being run by Nottingham Voluntary Community Action Group with
the aim of tackling homelessness and provided early intervention to those at
risk of homelessness. In December we donated a further £150,000 to the
Samuel Fox Foundation so our good work supporting charitable causes from
the fund can continue in 2023.
As we look to the months ahead, we are excited at the prospect of
launching a purpose-led community engagement strategy that will
demonstrate our commitment to helping people own their own home, as we
seek to find more ways to support the extra ordinary and causes which
matter to our communities.
CORPORATE RESPONSIBILITY REPORT
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SUSTAINABILITY REPORT
The Financial Stability Board created the Task Force on Climate-Related
Financial Disclosures (TCFD) to improve and increase consistent reporting of
climate-related financial information. The following sustainability report
presents the Society’s climate-related disclosures under the TCFD requirements.
Governance
The Nottingham’s Board is ultimately accountable for all climate change
related matters. The Executive Committee is responsible for deriving the
Society’s strategic response to climate change and overseeing day to day
management of climate-related activities. It provides the focal point for
climate-related decision-making and is supported by Subject Matter Experts
from across the Society. The Board Risk Committee and the Executive Risk
Committee are responsible for oversight of climate-related risks.
BOARD
BRCBAC
ERCExCo
Other relevant risk
oversight committees
Risk oversight committees include the Asset & Liabilities Committee, Retail
Credit Committee, Operational Risk & Resiliency Committee, Model
Governance Committee, Legal, Regulatory & Conduct Committee and
Reinvention Committee. These committees have primary responsibility for
identifying, managing, and reporting of climate-related and other risks. The
Executive Committee (ExCo) has ultimate responsibility for co-ordinating all
climate-related risks and assessing them collectively as part of the quarterly
review of the Strategy Risk dashboard, of which climate risk is a component.
The Executive Risk Committee (ERC) is chaired by the Chief Risk Officer &
General Counsel. It meets at least quarterly and reviews risk dashboards for
all principal risk categories. On a quarterly basis, risk dashboards are
presented to the Board Risk Committee (BRC). Climate change is presented
within the risk dashboard for strategy risk.
The Board Risk Committee (under delegated authority from the Board) has
been fully engaged with the Society’s response to climate change. During
2022, a number of sessions have been held with the Board, including the
reporting of climate-related risk assessments.
The Nottingham operates a three lines of defence model for risk
management, in common with many financial sector firms. Responsibility for
identifying, managing and reporting risks, including climate-related risks,
resides with the first line of defence. The second line of defence is
responsible for providing challenge and oversight over the first line, the risks
being assessed and modelled and oversight of the reporting of them to
ensure it remains comprehensive. The third line of defence is responsible for
providing independent assurance and assessment of the impacts of climate-
related risks.
In addition, The Nottingham has a number of policies and procedures in
place, which define the Society’s approach to climate change and ensure that
activities are performed consistently and in accordance with the Board’s
stated objectives and goals.
Strategy
Throughout 2022 we have targeted the reduction in our Scope 1 and 2
emissions as a priority underpinned with a commitment to reduce our
overall tC02e by a minimum 10% over the year versus 2021. As detailed in
our 2021 report this approach was agreed due to Scope 1 and 2 being
more within our direct control and we have committed to be Carbon
Neutral through offsets for the 2022 reporting period.
During 2022 we have focused on continued deployment of LED lighting
throughout the business, and this is now completed in-house through our
Facilities Team as part of scheduled maintenance visits rather than through
contractors. We expect the whole business to be fully LED by the end of
2023, supporting further improvements in our Scope 1 and 2 energy usage.
During 2022 we removed all gas usage from our estate and are now
exclusively using green electricity to power our business. Additionally, we
have rolled out smart meters across the entire estate. We have integrated
this increased quality data with an energy analysis portal that allows us to
identify where we have spikes in usage, which we can then take steps to
address.
In 2023 we are seeking to continue to reduce our tCO2e Scope 1 and 2
further by a total of 10%. Whilst we will continue to focus on Scope 1 and
2 emissions in support of this target, we will also look to develop our
understanding of the Scope 3 drivers and identify actions we can take to
reduce our footprint in this regard. We also plan to set a target for Net
Carbon Zero status for Scope 1 and 2.
In the meantime, we will also continue to develop our understanding and
risk assessment that ongoing climate change poses to our business assets,
the risks to our business model and to our members – particularly to their
homes as a consequence of increasingly unpredictable weather patterns. We
will also continue to fully meet our regulatory obligations in this area.
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Climate Change Scenario Analysis
The Nottingham assesses climate change risk across two main categories.
Physical risk considers the impact of physical effects of climate change or
weather-related events such as flooding. Transitional risk assesses the
transition to a low-carbon and climate resilient future such as changes in
policy and regulation.
In order to ensure strategic decisions are informed appropriately, a range of
scenario analysis is performed in relation to climate change. These include
the impact of flooding across the mortgage portfolio as well as transitional
risks of an increase in minimum Energy Performance Certificate (EPC) ratings
and the potential costs this could incur.
Analysis is considered across three potential lenses, in line with the Climate
Biennial Exploratory Scenario (CBES) published in 2021 and updated in
2022. These include:
• Early Policy Action: Transition to net zero starts early with global
warming limited to 2 degrees;
• Late Policy Action: Policy delayed until 2031 and is more sudden and
disorderly. Global warming limited to 2 degrees; and
• No Policy Action: Mitigation is either absent or unsuccessful and global
warming increases to 3 degrees.
Outputs of the scenario analysis are used to inform the ICAAP assessment and
are also considered across the risk categories in The Nottingham’s risk
management framework. The conclusion from the ICAAP assessment is that no
additional capital is required to cover climate change risk at this point in time.
Risk Management
Identification
The Nottingham recognises that climate change is far reaching across its
business and in order to capture all the material touchpoints, climate
change is embedded within the Society’s enterprise-wide risk management
framework. Alongside the scenario analysis, The Nottingham recognises that
climate change risks manifest across a broad range of risk categories.
The Nottingham has nine principal risk categories and climate change risk is
included within the Society’s strategy principal risk category. This provides an
elevated and centralised view of climate related risks, which is informed by
the Society’s other principal risk categories via formal assessment at risk
oversight committees.
The risk appetite statement states that The Nottingham has a low-risk
appetite for not meeting the statutory requirements of climate change and
our own stated climate change related goals.
A number of targets and metrics have been developed, which support the
risk appetite. These have been informed by several factors, including scenario
analysis. The targets considered in 2022 include:
• Short-term physical measures taken to reduce emissions;
• Reduction in overall energy usage by 10% in 2022;
• Carbon neutral for scope 1 and 2 emissions in 2022; and
• Net Zero by 2050.
The metrics and risk appetite are formally assessed by risk oversight
committees (at least quarterly). In addition, climate-related risks are
assessed as part of the half-year forecast and corporate planning processes,
to ensure that the current assessment of climate-related risks and strategic
objectives are aligned and activities co-ordinated. The risk assessments
performed via risk oversight committees at half and full year points are
presented to the Executive Risk Committee and the Board Risk Committee
as part of the strategic and corporate planning cycle.
The Nottingham recognises that the identification, measurement and
forecasting of climate-related risks present unique challenges, not least
because of the longer-term nature of the risks, the uncertainty around when
and how they will manifest and challenges around accessing reliable data
and modelling it effectively, all of which are common, to a lesser or greater
extent, to organisations. The Nottingham’s approach to climate change and
the effective management of associated risks will inevitably evolve, as
internal and external understanding and approaches develop.
The most material climate-related risks identified are as follows:
• Credit risk and the impact of climate change on The Nottingham’s
existing and future lending books from both a physical and transitional
risk perspective.
• Operational risks, including impacts on how The Nottingham and its
third parties and strategic partners operate and conduct business.
• Legal, Regulatory & Conduct risks arising from the need to comply
with challenge laws and regulations and the impacts of them on our
business operations.
As the most material risks, these will form the focus of The Nottingham’s
response to climate change risk management in the short-term.
Management and Integration
The risk assessment has informed the Society’s risk appetite statement for
climate change risk, which has been approved by the Board and is reported
upon as part of the regular risk reporting monthly to the Executive Risk
Committee and quarterly to the Board Risk Committee.
Metrics and Targets
Carbon Footprint
We have strengthened our relationship with our long standing utilities
partner, Inspired Energy, during 2022 and they will continue to support us in
developing our carbon strategy.
Deliverables as a direct result of our work with Inspired are as follows:
• Quarterly assessment of our Scope 1 and 2 emissions;
• Completion of selected site surveys to understand our current emissions
and opportunities for reduction;
• Options for carbon offset projects;
• Integration of an energy analysis portal within Estates and Facilities Team;
and
• Annual review of our performance against targets.
During 2022 we set a target to reduce our tCO2e by a minimum of 10%
against 2021 against 2021 full year. Using like for like methodologies we
have achieved an overall reduction in tCO2e of 18% in 2022.
SUSTAINABILITY REPORT (CONTINUED)
STRATEGIC REPORT
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SUSTAINABILITY REPORT (CONTINUED)
C02 in tonnes 2022 2021 (Baseline)
Scope 1 emissions
1
Direct emissions from owned or controlled sources
Gas 22 54
Travel 12 -
Scope 2 emissions
2
Indirect emissions from purchased energy
Electricity 277 370
TOTAL DIRECTLY ATTRIBUTABLE EMISSIONS 311 1% 424 1%
Scope 3 emissions
Other indirect emissions that occur in an entity’s value chain
Investments (mortgage portfolio)
3
38,240 47,198
Purchased Goods and Services 4,474 4,240
Capital Goods 410 1,192
Other
4
664 693
TOTAL INDIRECT EMISSIONS 43,788 99% 53,323 99%
TOTAL EMISSIONS 44,099 53,747
1
Scope 1 emissions exclude grey fleet emissions as these have been included within Scope 3.
2
Scope 2 emissions are presented here on a Location Based approach, presenting the average carbon intensity of the local electricity grids.
3
Scope 3 indirect emissions associated with the Society’s mortgage portfolio have been calculated by estimating energy usage and resultant emissions at mortgaged properties
and these have been allocated to the Society, based on its proportional share of the investment property.
4
Other includes the impacts of business travel (including grey fleet), employee comuting and leased assets.
Carbon Emission Data
We also set a target in 2022 to reduce our electricity usage by a minimum
of 10% against 2021 performance. We have beaten this target by achieving
a 25% reduction through a number of measures including the continued
rollout of LED lighting across our estate and the increased analysis of our
energy usage via the data portal that we now utilise, which has supported
us in taking localised actions where anomalies have been identified.
Whilst our core objective will be to ensure that the business meets the
Government’s Net Zero target date of 2050, we will be seeking to
understand our pathway and whether we can deliver aspects ahead of that
date. The current targets are outlined in the Strategy section.
Key to that understanding has been the establishment of our carbon
balance sheet, which details our emissions against Scope 1, 2 and 3. This
has been updated and we now have 3 years’ data to support us in order to
monitor trends and performance against targets.
Our internal data has been married with Government approved BEIS
greenhouse gas emission conversion factors for calculating carbon emissions
for a range of activities and processes.
Results of the 2022 data analysis show that we continue to generate over
98% of our emissions due to Scope 3 which covers indirect emission
sources. Within our Scope 3 emissions over 87% are in relation to the
carbon generated by properties where the mortgages that we have granted
provide part of the funding, but where we do not have direct control over
the carbon neutrality or otherwise of those buildings.
In the short-term we have continued to focus on addressing our Scope 1
and 2 emissions and we will be Carbon Neutral in this regard through
offsets for 2022.
Details of the data included in our carbon balance sheet are shown in the
table below.
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Energy Performance Certificate Data as at 31 December 2022
Number Exposure
£m
EPC Rating A-C 6,264 960.9
EPC Rating D-E 10,016 1,387.1
EPC Rating below E 386 51.2
No EPC available 4,487 535.2
Total 21,153 2,934.4
Balance by annual flood probability
Total
£m
%
High (>3.3%) 62.0 2.0
Medium (>1.1%-3.3%) 98.3 3.2
Low (0.1%-1.1%) 348.0 11.5
Negligible (<0.1%) 2,518.5 82.9
Unable to categorise N/A 10.5 0.3
TOTAL 3,037.3 100
Balance by subsidence risk 2030
Total
£m
%
Probable 221.0 7.3
Possible 268.4 8.8
Improbable 2,539.1 83.6
Unavailable 8.8 0.3
TOTAL 3,037.3 100
Physical Risk Metrics
Key metrics of physical risk are potential surface water risk, river and sea
flood risk and the risk of subsidence within the lending portfolio.
This is assessed based on publicly available flood risk data published by the
Environment Agency and subsidence data available from the British
Geological Survey. The data below categorises our mortgage exposures by
annual flood and subsidence probability as at 31st December 2022.
Transitional Risk Metrics
As part of understanding transition risks, The Nottingham’s lending portfolio
has been broken down by EPC rating. This will also allow the Society to
work closely with its members in order to help manage any impact as
potential policy and regulatory changes occur. The table below reflects
current EPC ratings taken from the England and Wales EPC register across
the Residential and BTL portfolios (including Ltd Co BTL).
Energy Performance Certificate (EPC) data provides an understanding of the
energy efficiency of properties, with an A rating denoting the most energy
efficient. This information also informs the Society’s scenario analysis for
transitional risks.
SUSTAINABILITY REPORT (CONTINUED)
STRATEGIC REPORT