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)
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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)
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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)
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Simon Linares
Remuneration Committee Chair
Simon joined the Board in 2019. Simon is also an
Executive Mentor and Coach and Chairman of the
charity Dreams Come True. He brings a wealth
of commercial and people and development
experience spanning a range of sectors, including
FMCG, telecommunications and financial services.
His most recent position was Group HR Director at
Direct Line, where he led the HR, communications,
public affairs and corporate social responsibility
strategies. Prior to Direct Line, Simon headed
up human resources for O2 Europe, Telefonica’s
digital businesses and Diageo, covering different
geographies and cultures, including Africa, Spain
and Portugal. Simon is a fellow of the Chartered
Institute of Personnel Development and in 2018
was ranked amongst the top five most influential
HR Practitioners in the UK.
Peter O’Donnell
Audit Committee Chair
Peter joined the Board in January 2021. Peter
has over 30 years’ experience in financial
services and worked in a variety of senior
finance roles at Prudential, RSA and Aviva.
His most recent position was Executive Vice
President at Unum, a Fortune 500 company
where he was also CEO of its UK business
and Chairman of Unum Poland. Since 2016,
Peter has been a Trustee and Chair of Audit
Committee for Cardiac Risk in the Young.
Peter has a Bachelor of Commerce Degree
from University College Dublin, is a fellow of
CIMA and has significant experience of both
international and UK markets.
Kavita Patel
Kavita joined the Board at the beginning of
2017. She is a partner and Head of Investment
Funds at the law firm, Shakespeare Martineau.
Kavita has a wealth of experience advising
clients in the financial services arena both in
the retail and institutional space on corporate,
regulatory and governance matters.
Andrew Neden
Chair
Andrew joined the Board in 2014. He is a
Chartered Accountant with over 40 years’
experience in financial services in the UK and
overseas. After a number of years running
KPMG’s UK financial sector transaction services
team, he was the global Chief Operating
Officer for KPMG’s financial services business.
Current directorships include the Wesleyan
Assurance Society and ABC International Bank
plc; he chairs the Audit Committee for both
organisations. He also chairs Aetna Insurance
Company Ltd and a couple of small charities.
Kerry Spooner
Senior Independent Director
Kerry joined the Board in September 2016. Kerry
had 10 years of financial services experience in the
building society sector before joining the Board.
She acted as a Non-Executive Director at two
other building societies and has experience as
Vice Chair, Senior Independent Director, Chair of
Remuneration Committee and Chair of Nomination
Committee. Prior to that Kerry worked as a solicitor
for 20 years, the last nine years as a corporate
finance partner of the international law firm Allen
& Overy LLP. Kerry is also a Non-Executive Director
of Scotiabank Europe plc and Non-Executive chair
of the Remuneration Committee of ANZ Banking
Group UK Branch.
Simon Baum
Risk Committee Chair
Simon joined the Board in June 2018. Simon
has spent over 35 years specialising in risk
management within the financial services arena,
holding several senior positions at Experian,
Alliance & Leicester and Santander, both within
the UK and overseas. His previous roles include
Director of Mortgage Risk at Santander.
Non-Executive Directors
YOUR BOARD OF DIRECTORS
GOVERNANCE
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Sue Hayes
Chief Executive (appointed 1 March 2022)
Sue joined NBS in January 2022 and was appointed as Chief Executive in
March. Sue has focused her career in Retail and Business Banking and has
held senior positions at Lloyds, HBOS, Natwest, Santander and Barclays. Sue
joined challenger bank Aldermore in 2018 and more recently was CEO at GB
Bank, a new entrant challenger which she took through to the first stage of
the banking licence and raised additional funding. Sue previously sat on the
UK Finance mortgage board as Deputy Chair and has been nominated to UKF
Mortgage Board again as a Mutual representative for 2023. Sue holds an
Executive MBA from Cranfield Business School.
Paul Astruc
Chief Financial Officer (appointed 21 June 2022)
Paul brings over 25 years of financial services experience after qualifying as
an accountant with Shell International. During that time, Paul has worked
at a number of leading UK and international banks, including most recently
9 years as a Finance Executive at Lloyds Banking Group, leading Finance
teams and driving strategic and transformation agendas. Paul has been
the CFO at The Nottingham since April 2021 with responsibility for Finance
and also leading on Technology during 2022. Paul joined the Board as an
Executive Director in June. Paul is also a Corporate Treasurer (AMCT) and
holds an Executive MBA from Bayes Business School.
Board Committees
Risk
Simon Baum (Chair)
Simon Linares
Peter O’Donnell
Kavita Patel
Kerry Spooner
Audit
Peter O’Donnell (Chair)
Simon Baum
Kavita Patel
Kerry Spooner
Nominations
Andrew Neden (Chair)
Simon Linares
Kerry Spooner
Remuneration
Simon Linares (Chair)
Andrew Neden
Kavita Patel
Kerry Spooner
Changes to the Board in the year to 31 December 2022
Sue Hayes was appointed to the Board as an Executive Director on 1 March 2022.
Michael Brierley resigned from the Board of Directors on 25 April 2022.
David Marlow resigned from the Board of Directors on 25 April 2022.
Paul Astruc was appointed to the Board as an Executive Director on 21 June 2022.
Executive Directors
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GOVERNANCE
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The Directors’ report should be read in
conjunction with the Chair’s statement,
the Chief Executive’s review and the
Strategic report on pages 8 to 17.
Business objectives and activities
Information on the Group’s business objectives and activities are provided in
the Strategic report on pages 8 to 17.
Business review, future developments and key
performance indicators
The Group’s business activities and future plans are reviewed in the Strategic
report section of the Annual Report and Accounts on pages 8 to 17.
Additionally, within the Strategic report, we comment upon the financial (and
other) key performance indicators used by the Board during the year to assist
its control, direction and drive for business results.
Principal risks and uncertainties
The principal risks and uncertainties faced by the Group are outlined on
pages 15 to 17, and our approach to managing these risks can be found in
the Risk management report on pages 28 to 32.
Financial risk management objectives
and policies
As a result of its normal business activities, the Group is exposed to a
variety of risks, including credit, market and liquidity risk. The Group’s
objective is to minimise the impact of these risks, as well as financial risk,
upon its performance. The risk management report on pages 28 to 32
considers this in detail. A further explanation of the financial risks and the
controls in place to manage them (including the use of derivatives), is given
in note 31 to the Annual Report and Accounts. Derivatives, including the
impact on the 2022 results, are disclosed in the strategic report on page 12.
Results
Group reported profit before tax for the year was £18.9 million (2021: profit
of £15.1 million). The Group profit after tax for the year transferred to
general reserves was £15.8 million (2021: profit of £12.6 million). As at 31
December 2022, total Group reserves and equity were £231.6 million
(2021: £219.1 million).
Capital
Group gross capital as at 31 December 2022 was £255.6 million, (2021:
£243.1 million) being 7.24% (2021: 7.21%) of total shares and borrowings.
Free capital, as at the same date, amounted to £235.1 million (2021: £213.4
million) and 6.66% (2021: 6.33%) of total shares and borrowings.
The annual business statement on page 114 gives the explanation of these
ratios. The Board remains committed to maintaining a strong capital position.
Loans and advances
During 2022, total lending was £659 million (2021: £557 million) with the
average advance being £197,321 (2021: £170,921), and the average debt at
the end of the year being £138,255 (2021: £133,504). As at 31 December
2022, there were four cases (2021: six cases) of properties being 12 or more
months in arrears or in possession. The total amount of balances outstanding
in those cases was £131,151 (2021: £770,954), with arrears of £17,354
(2021: £113,237).
Mortgage losses realised during the year totalled £14,060 (2021: £nil).
Provisions for potential mortgage losses total £5.3 million (0.17% of
mortgage balances).
The Group offers a number of different forbearance options to customers
including reduced payment concessions, payment plans, capitalisations and
mortgage term extensions. As at 31 December 2022, the Group had 87 loans
(2021: 105) subject to some form of forbearance.
Property, plant and equipment
Freehold premises owned by the Group are shown in the Annual Report
and Accounts at cost less depreciation. An estimate of the value of those
properties, prepared in late 2022 by the Group’s professional services
team, indicates that market value is £3.2 million (2021: £2.9 million)
higher than book value. During the prior year, three of the Society’s
freehold properties were sold with a total gain on sale of £0.4m
recognised in the financial statements.
Supplier payment policy
The Group is committed to deal responsibly with suppliers. The policy is that
payment will be made 30 days from the receipt of the invoice, provided that
the supplier has complied with all relevant terms and conditions. Variation of
the 30 day policy can be agreed at the time an order is placed.
As at 31 December 2022, the total amount owed to suppliers was equivalent
to 17 days’ credit (2021: 6 days).
Charitable and political donations
During the year, the Group made charitable donations of £150,000 (2021:
£209,000). No contributions were made for political purposes.
Country-by-country reporting
The Capital Requirements (Country-by-Country Reporting) Regulations
place certain reporting obligations on financial institutions within scope of
the Capital Requirements Directive.
The nature of the activities of the Society are set out under business
objectives of this report and for each of the Society’s subsidiaries in note
16 to the Annual Report and Accounts. All of the activities of the Society
and its subsidiaries are conducted in the United Kingdom and therefore
100% of the total income, profit before tax and tax shown in the Income
Statement as well as employee figures disclosed in note 7, are related to
the United Kingdom. The Society and its subsidiaries have not received
any public subsidies.
DIRECTORS’ REPORT
GOVERNANCE
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Environment and sustainability
The environmental policy is set out in the Corporate responsibility report on
page 18. The Sustainability report on page 19 outlines the Society’s position
in line with the requirements of the Financial Stability Board’s Taskforce on
Climate-related Disclosures (TCFD).
Our people
Our people focus during 2022 was on ensuring that our leadership structure
and capabilities are aligned with our new purpose: extensive executive level
recruitment and internal development took place over the year to ensure we
have a skilled senior team in place to deliver on our plans. We also introduced
permanent hybrid working for Head Office team members, enabling us to
attract new talent from regions beyond our traditional geographic boundaries
while also engaging our existing team members, who enjoy the benefits of
collaborating in the office, balanced with focused time at home. We have
sought team member feedback through different channels, including the
annual engagement survey. Our engagement score was 81%, which increased
slightly from the previous year’s results and remains above our financial
services sector benchmark. We had an extensive communication drive on our
new purpose with all team members and following these sessions, team
member engagement on the new purpose was 85%. We also continue
working with our Colleague Council at which senior members of the
leadership team attend on a quarterly basis.
With the current cost of living crisis, we focused on financial wellbeing for
our team members, including providing a cost of living payment of £1,000
as well as offering grants to those team members needing additional
financial support.
Our people experience is also a key element in attracting and engaging the
talent we need to deliver on our strategy. We aim to build and maintain a
positive culture around performance management. A culture that is clear,
transparent, breeds accountability and allows our team members to maximise
their performance and grow their career within the Society. This year we
implemented our new cloud-based performance management system that
encourages continuous performance conversations. We also introduced a new
recruitment and onboarding system to streamline our selection processes and
onboarding experience.
Our diversity and inclusion journey continues. We know the importance of
diversity in organisations to achieve good outcomes and that more work
needs to be done in the financial services sector, and in our Society, to have
greater diversity and be representative of the communities we serve. We
remain a signatory to the Women in Finance charter and exceeded our
diversity target of 35% with 38% women in senior management for this year.
We have also set ourselves an ambitious target of gender parity by 2025.
We had to make some difficult decisions around the size of our retail network
as a result of our changing customer behaviours with increased online
banking and a decreased number of customers coming into the branch. 17
branches were closed in December, following a 12 week consultation period
with impacted colleagues. We were also mindful to support our colleagues
throughout and provided financial package support including career coaching
through our specialist outplacement provider.
Directors’ responsibilities in respect of the
annual report, the annual business statement,
the directors’ report and the annual accounts
The Directors are responsible for preparing the annual report, annual
business statement, directors’ report and the annual accounts in accordance
with applicable law and regulations. The Building Societies Act 1986 (‘the
Act’) requires the Directors to prepare Group and Society annual accounts for
each financial year. Under that law they are required to prepare the Group
annual accounts in accordance with UK adopted international accounting
standards (IAS) and applicable law and have elected to prepare the Society
annual accounts on the same basis.
The Group and Society annual accounts are required by law and UK adopted
IAS to present fairly the financial position and the performance of the Group
and the Society; the Act provides in relation to such annual accounts that
references in the relevant part of that Act to annual accounts giving a true
and fair view are references to their achieving a fair presentation.
In preparing each of the Group and Society annual accounts, the Directors
are required to:
• select suitable accounting policies in accordance with International
Accounting Standard 8: Accounting Polices, Changes in Accounting
Estimates and Errors and apply them consistently;
• present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
• state whether they have been prepared in accordance with UK adopted IAS
and those parts of the Building Societies Act 1986 and Building Societies
(Accounts and Related Provisions) Regulations 1998 applicable to societies
reporting under UK adopted IAS; and
• prepare the annual accounts on the going concern basis unless it is
inappropriate to presume that the Group and Society will continue
in business.
In addition to the annual accounts, the Act requires the Directors to prepare,
for each financial year, an annual business statement and a directors’ report,
each containing prescribed information relating to the business of the Group.
Directors’ responsibilities for accounting
records and internal control
The Directors are responsible for ensuring that the Group:
• keeps proper accounting records that disclose with reasonable accuracy, at
any time, the financial position of the Group and Society, in accordance
with the Act; and
• takes reasonable care to establish, maintain, document and review such
systems and controls as are appropriate to its business in accordance with
the rules made by the Financial Conduct Authority and the Prudential
Regulation Authority under the Financial Services and Markets Act 2000.
The Directors have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Group and to
prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Society’s website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
DIRECTORS’ REPORT (CONTINUED)
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The Directors who held office at the date of approval of this Directors’ report
confirm that, so far as each of them is aware, there is no relevant audit
information of which the Group’s auditor is unaware, and each Director has
taken all the steps that they ought to have taken as directors to make
themselves aware of any relevant information and to establish that the
Group’s auditor is aware of that information.
Directors’ statement pursuant to the
disclosures and transparency rules
The Directors who held office at the date of approval of this Directors’ report
confirm that, so far as they are each aware:
• the annual accounts, prepared in accordance with UK adopted IAS, give a
true and fair view of the assets, liabilities, financial position and profit of
the Group and Society; and
• the management report contained in the Chair’s statement and Chief
Executive’s review includes a fair review of the development and
performance of the business and the position of the Group and Society,
together with a description of the principal risks and uncertainties that
they face.
Directors’ statement pursuant to the UK
Corporate Governance Code
As required by the UK Corporate Governance Code, the Directors confirm
their opinion that the Annual Report and Accounts, taken as a whole, are
fair, balanced and understandable and provide the information necessary
for members to assess the performance, strategy and business model of
the Society. Details of the governance procedures that have been
implemented to support this can be found in the Board Audit Committee
report on page 37.
Going concern and viability
Going concern
In preparing the annual accounts the Directors must satisfy themselves that
it is reasonable to adopt the going concern basis.
The Directors have considered the risks and uncertainties discussed on
pages 15 to 17 and 28 to 32, and the extent to which they might affect
the preparation of the Annual Report and Accounts on a going concern
basis. Key to this consideration were the risks associated to regulatory
capital, liquidity and financial performance, and the impact on these risks
arising from the higher interest rate and high inflationary environment as
well as climate-related considerations.
The Group’s business activities and future plans are reviewed in the Chair’s
statement and Chief Executive’s review on pages 4 to 7. In addition, note
31 to the Annual Report and Accounts includes the Group’s policies and
processes for managing financial instrument risk such as liquidity risk,
interest rate risk and credit risk.
As with many other financial institutions, the Group meets its day-to-day
liquidity requirements through prudent management of its retail and
wholesale funding sources. It ensures it maintains sufficient liquidity to meet
both normal business demands and those that may arise in stressed
circumstances. The Society has a surplus to regulatory capital requirements
and is forecasting this to remain across the going concern assessment period.
Furthermore, the Group’s forecasts and plans, taking account of current
and possible future operating conditions, including stress tests and scenario
analysis, which have considered income, expenses and overall quality of the
mortgage portfolio, indicate that the Group has sufficient operating
liquidity and capital for the foreseeable future, and specifically for the
going concern assessment period to 31 March 2024 – twelve months from
the date of the approval of the Annual Report & Accounts.
As such, the Directors are satisfied that the Group has adequate resources
to continue in business and to use the going concern basis in preparing
the accounts.
Viability statement
In accordance with the 2018 revision of the UK Corporate Governance
Code, the Board has also assessed the prospects of the Society over a
period longer than the 12 months required by the going concern provision.
The Board has conducted this review for a period of four years. This is
shorter than the planning horizon used for corporate planning but
considered appropriate given the level of uncertainty and variability
increases towards the outer years.
The corporate plan considers the Group’s profitability, cash flows, liquidity
and capital requirements as well as other key financial ratios over the
period. These ratios are subject to sensitivity analysis and stress testing,
which involves varying a number of the main assumptions underlying the
forecast both individually and in unison. Where appropriate, this stress
testing is carried out to evaluate the potential impact of the Group’s
principal risks, outlined on pages 15 to 17 of the Strategic report and the
Risk management report on page 28, actually occurring. This includes the
associated risks as a result of the higher interest rate and high inflationary
environment as well as the consideration of climate-related risks. Based on
the reviews completed, the Board considers that the Society is viable over
the medium-term.
Directors
The names of the Directors of the Society who served during the year and
up to the date of signing the accounts, their roles and membership of
Board committees are detailed in the governance section on pages 23 to
24. Other business interests are shown in the annual business statement.
None of the Directors have any beneficial interest in, or any rights to
subscribe for shares in, or debentures of, any connected undertaking of the
Society, as at 31 December 2022.
In accordance with the agreement made by the Board and in line with the
rules for re-election outlined on page 34, all Directors who wish to continue
in role will stand for re-election at the next Annual General Meeting.
Auditor
A resolution to reappoint Ernst & Young LLP as auditors of the Society will be
proposed at the Annual General Meeting.
On behalf of the Board,
Andrew Neden
Chair
2 March 2023
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For the year ended 31 December 2022
The Nottingham recognises risk as a natural consequence of its business
activities and environment. It endeavours, through positive risk strategies, to
manage these in a manner that ensures delivery of its strategic objectives and
business plan, whilst protecting members’ interests and its financial resources.
The Board is responsible for ensuring that an effective framework is in place to
promote and embed a risk-aware culture that identifies, appropriately
mitigates and manages the risks the Group and Society face in the course of
delivering its strategic objectives. This includes both current risks and those
associated with the implementation of future strategy.
The Board reviews and approves key risk management policies annually,
including the Board Risk Policy, ICAAP, ILAAP and the Recovery and
Resolution Plan.
In pursuing its strategy, the Board ensures there are appropriate capabilities
and resources available, along with sufficient capital strength to succeed.
This includes focusing on risk and reward to ensure both remain at an
acceptable level.
The Society operates a committee governance structure which enables focused
oversight and has clear lines of accountability and alignment to responsibilities
allocated under the Senior Managers & Certification Regime (SMCR).
BOARD
Board Risk
Committee
Nominations
Committee
Board Audit
Committee
Remuneration
Committee
Executive
Committee
Executive Risk
Committee
Assets and
Liabilities
Operational Risk
& Resilience
Model
Governance
Retail
Credit
Change
Management
Committee
Legal,
Regulatory,
Conduct
Trading
People &
Reward
RISK MANAGEMENT REPORT
The Board Risk Framework
The Board Risk Committee is an integral part of the Group’s formal
structure, assisting the Board in overseeing all aspects of risk
management. It regularly reviews and approves policy statements, risk
appetite statements, and management committee terms of reference. It
receives summary management information and minutes from the
individual management committees.
The risk management framework is approved annually by the Board Risk
Committee and is based on the three lines of defence model (described on
page 35) and focuses on:
• clear accountability and ownership;
• defined roles and responsibilities;
• the identification of business objectives;
• identification of the risks arising from these objectives;
• an assessment of the identified risks and controls using the Board
approved risk framework;
• assessing the effectiveness of the documented controls;
• monitoring the risks and controls on an ongoing basis; and
• reporting risks to the relevant committees.
Day-to-day risk management is the responsibility of the Executive Risk
Committee which oversees the Society’s risk committees, as detailed in the
diagram below.
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Board Risk Committee
As detailed on page 24, the membership of the Board Risk Committee
comprises all of the Non-Executive Directors other than the Chair. It is
responsible for ensuring:
• key risks are identified and appropriate steps taken by management to
mitigate them;
• new and emerging risks are identified and reviewed through the horizon
scanning process;
• due consideration is given to all significant matters relating to governance,
control, regulatory and compliance issues;
• adequate capital and liquidity are maintained to address the Group’s key
risk exposures, both to ensure regulatory compliance and to support the
achievement of strategic goals;
• all conduct risks (including Consumer Duty) are properly considered, again
to ensure regulatory compliance and the achievement of fair and proper
outcomes for all our members;
• The Nottingham has considered the risks to operational resiliency and
mitigated them to within approved tolerances;
• the climate related financial risks have been appropriately identified,
managed and mitigated; and
• the effective monitoring of the Group’s key risks and controls.
The Board Risk Committee meets at least four times per year to review risk
management activities and consolidated management information regarding
existing and emerging areas of risk.
The scope of the Board Risk Committee extends to all types of risk faced by
the Group with the management of certain risks delegated to the Executive
Risk Committee, Executive Committee and relevant management committees.
The responsibilities of these committees are described below.
Executive Committee
The Executive Committee is responsible for acting on behalf of the Board in
formulating strategy, the business plan and for organising the Society’s assets
and resources to deliver value to members in a fair and appropriate manner.
The Committee is chaired by the Chief Executive and comprises all Executive
team members.
Strategic risk
When discussing future strategy, the Executive Committee and ultimately the
Board takes care to ensure that risks associated with maintaining a
sustainable Society are evaluated and that plans are in place to effect any
required risk mitigation. These include risks associated with changes to the
external and economic environment, regulatory and statutory developments,
people and resources, strategic partnerships and alliances and change
execution. The Executive Committee oversees the detailed evaluation and
monitoring of these risks.
The Committee also oversees the management of risks relating to changes in
the external environment, which have the potential to affect the Group’s
business model either through the level of demand for products and services
and/or its ability to meet that demand. This includes responsibility for
monitoring the macroeconomic environment and formulating The
Nottingham’s strategic response to regulatory changes such as climate change,
operational resilience and Consumer Duty.
The Committee looks to mitigate this exposure through regular review of its
Group corporate plan, ensuring activities remain within risk appetites.
Executive Risk Committee
The Executive Risk Committee is responsible for acting on behalf of the
Board and the Board Risk Committee in the management and oversight of
The Nottingham’s principal risks. It reviews relevant policies to ensure that
the Society acts in such a way as to organise, manage and protect the
Society’s assets to deliver value to members through the provision of
savings and mortgages, whilst remaining within law, regulation and
agreed Board risk appetites.
The Committee enables the Board Risk Committee to fulfil its role by
ensuring that:
• there is executive level oversight of the risk management framework;
• the accountability and responsibility for managing risk is clearly defined;
• the risk culture of the Society is defined and embedded;
• the nature and extent of the top risks of The Nottingham are determined
and understood, including the nine risk categories and any thematic risks;
• appropriate risk appetites are defined and documented;
• The Nottingham, at all times, operates within stated risk appetites;
• processes are in place to consistently identify, measure, assess, monitor and
control risks;
• the risk event process is effectively capturing and reporting on operational
failures;
• the horizon scanning process is identifying emerging risks and regulatory
themes;
• The Nottingham is compliant with regulatory requirements, including the
ICAAP and ILAAP process;
• The Nottingham operates within its impact tolerance statements for its
Important Business Services and remains operationally resilient;
• The Nottingham maintains an up to date and adequate Recovery &
Resolution Plan which fully reflects the requirements of the Board and
regulators;
• Conduct related risks are appropriately identified, managed and reported
up to the Board Risk Committee; and
• The Nottingham has identified climate-related risks and has embedded
them within its risk management framework, to facilitate effective
mitigation and oversight.
The Committee is provided with regular updates on the principal risk
categories by first line management.
To ensure the effective monitoring and reporting of risk, The Nottingham
maintains a number of risk registers, including a Top Risk register, functional
risk registers and project risk registers. These risk registers help management
assess the probability and impact of the risks identified, and the effectiveness
of mitigating controls.
The Committee is chaired by the Chief Risk Officer & General Counsel and
includes all Executive Directors, certain members of the Executive Committee
and other senior colleagues.
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Assets and Liabilities Committee
The Assets and Liabilities Committee (ALCO) is responsible for overseeing
The Nottingham’s liquidity risk, market and interest rate risk, wholesale
credit risk and its capital risk. In addition, ALCO reviews treasury activity for
compliance with approved treasury policies and procedures. The Committee
is chaired by the Chief Financial Officer and the membership is made up of
relevant senior managers.
Market and interest rate risk
The Society defines market and interest rate risk as the risk to net interest
income and economic value arising from changes in market interest rates and
mismatches in the Society’s balance sheet. Economic value is the present
value of the Society’s future cash flows.
As the uncertain economic environment persists, the Society continues to
actively monitor its position against its interest risk appetite to mitigate the
impact that any future change to interest rates might have in adversely
affecting the Society’s interest margin.
The Society’s limits for the management of market and interest rate risk are
documented in the Market and Interest Rate Risk Policy, which is developed,
defined and recommended by ALCO and considered and approved ultimately
by the Board Risk Committee.
Basis, gap and repricing risk are all elements of interest rate risk captured by
the market and interest rate risk category.
The Treasury Risk team measures the levels of interest rate risk inherent in
the Society’s balance sheet, as well as subjecting the balance sheet to
monthly stress tests designed to measure the likely impact of a sudden
change in interest rates. This is assessed and monitored against the Board
approved risk appetite.
The Treasury team is responsible for day-to-day management of the Society’s
interest rate risk exposures within the approved risk appetites. Typically
interest rate risk is managed by taking advantage of natural hedging
opportunities within our balance sheet or through the use of appropriate
hedging instruments.
ALCO is responsible for reviewing Treasury activity, performance and
compliance with the approved policy and risk appetites.
Liquidity risk
The Society defines liquidity risk as the risk that the Society, although solvent,
does not have available sufficient financial resources to enable it to meet its
obligations as they fall due. This risk is managed through holding cash and
other high quality liquid assets and maintaining wholesale funding facilities.
ALCO develops, defines and recommends the liquidity risk appetite, which is
considered and approved by the Board and documented in the Liquidity Risk
Policy. The liquidity risk appetite helps to ensure that the management of the
liquidity portfolio by the Treasury team supports the corporate plan.
The liquidity policy sets the framework for the day-to-day activities of the
Treasury team to ensure that all liquidity management activities are conducted
within approved risk appetites. The Society maintains a diverse funding base
and ensures compliance with applicable regulatory requirements. Defined
control limits determine the overall level of liquidity to be maintained. The base
level and composition of the Society’s liquidity is subject to PRA guidance and
regular stress testing and is also documented as part of its Internal Liquidity
Adequacy Assessment Process (ILAAP), as required by the PRA.
The Society is required to be compliant with the Liquidity Coverage Ratio
(LCR), which measures the amount of high quality liquid assets relative to
modelled net stressed cash outflows within a 30 day period.
The Society also maintains a funding profile in line with a longer-term
funding measure, the Net Stable Funding Ratio (NSFR), which requires
financial institutions to hold sufficient stable funding to cover the duration of
their long-term assets.
Based on our current and forecast liquidity positions, the liquidity portfolio
held by the Society comfortably exceeds the minimum requirements of the
LCR. Similarly, the funding profile exceeds the future requirements under
the NSFR.
The Society has documented a Recovery and Resolution Plan, which describes
those metrics that would indicate an emerging market-wide or Society-
specific stress event. The Plan includes a range of options available to the
Society should such a stress event crystalise in order to ensure adequate
levels of liquidity and capital are maintained.
Regular stress testing is performed to confirm that the Society’s available
liquidity is adequate, within risk appetite and is sufficient to support extreme
levels of net cash outflows.
Responsibility for the day-to-day operational management of liquidity risk lies
with the Society’s Treasurer, with operational oversight provided by the
Treasury Risk team and reported to ALCO. A detailed analysis of the Society’s
liquidity profile can be found in note 31 to the annual accounts.
Wholesale credit risk
Wholesale credit risk arises from counterparties who may be unable to repay
loans and other financial instruments that the Society holds as part of its
liquidity portfolio.
The Society’s risk of counterparty default is relatively low due to the high
proportion of total liquidity held in UK Sovereign debt securities and the Bank
of England reserve account. The composition of the treasury loans can be
found on page 95.
The Society’s liquidity policy sets out the amounts, products and
counterparties under which Treasury liquid assets can be held. Credit
worthiness of counterparties is assessed using a number of factors including
minimum acceptable credit ratings approved by the Board Risk Committee,
together with lending limits. The policy also allows for investments in
multilateral development banks, covered bonds and residential mortgage
backed securities (RMBS), subject to criteria set by the Board Risk Committee.
The Board does not permit any lending directly to sovereign states, other
than the UK Government, and all lending is in Sterling.
The Board, via the approved policy, further restricts the level of risk by placing
limits on the amount of exposure that can be taken in relation to one
counterparty or group of counterparties, and to industry sectors and
geographical regions.
The Society’s Treasury team has day-to-day responsibility for operating within
Board approved credit limits. Monitoring and oversight, including assessment
of counterparty credit worthiness, is undertaken by the Treasury Risk team to
ensure all exposures remain within risk appetite. This information is shared
with ALCO.
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Capital risk
The Nottingham conducts timely evaluations of its capital adequacy and
financial resources to determine the level of capital required to support
current and future risks contained within its strategic plan. This process,
which is a regulatory requirement, is known as the Internal Capital Adequacy
Assessment Process (ICAAP).
The ICAAP assesses The Nottingham’s future capital requirements by
considering changes to business volumes, the type and mix of assets, and
business activities within the context of current and future anticipated risks
and stress scenarios. The ICAAP also incorporates the Capital Requirement
Directive requirements.
The PRA uses the ICAAP during its Supervisory Review and Evaluation
Process (SREP) through which it determines the amount of capital it requires
The Nottingham to hold against its Total Capital Requirement (TCR).
The Board monitors the current and future level of capital held by the Society
in relation to its TCR on a regular basis. The Society’s current and future
capital levels remain well in excess of the PRA requirements. An analysis of
the components of The Nottingham’s current capital position can be found in
the Strategic report on page 14.
Retail Credit Committee
The Retail Credit Committee is comprised of relevant senior managers and
chaired by the Chief Financial Officer. It is responsible for oversight of the
Society’s retail credit risks, which includes exposures to residential and buy-
to-let (BTL) mortgages, limited company buy-to-let mortgages and Secured
Business Loans (SBL).
Retail credit risk
The Society defines retail credit risk as the risk that a financial loss arises
from the failure of a customer to meet their contractual obligations. As a
building society, this is most likely to arise through the inability of borrowers
to repay a mortgage. The Society’s exposure to retail credit risk is limited to
the provision of loans secured on property within England and Wales.
A Retail Credit Risk Policy (incorporating the credit risk appetites) is
developed and proposed by the Retail Credit Committee, reviewed by
Executive Risk Committee and considered and approved by the Board Risk
Committee. The Society manages the level of credit risk it undertakes by
applying various control disciplines, the objectives of which are to maintain
asset quality in line with approved risk appetite. The Board receives monthly
information on key risk appetite limits.
Exposure to retail credit risk is carefully monitored by the Retail Credit
Committee. Day-to-day retail credit risk is managed through the application
of prudent lending policies, which are aligned to the stated risk appetites.
This ongoing monitoring provides assurance that current and future
exposures, such as LTV levels, geographic concentration and probability of
default, are managed within the risk appetite limits set by both the Board
and regulators.
The Society remains committed to promoting home ownership and its risk
appetite allows lending to first time buyers, but it restricts the overall level
of high loan-to-value lending to ensure the risk is managed sufficiently.
Similarly, the Society continues to follow our long-term policy of also
offering interest-only products to a small number of borrowers, which are
covered by strict policies and monitoring procedures.
The Society regularly stress tests the mortgage portfolio to detect any signs
of potential payment stress or sensitivity for our borrowers to the impact of
future rate rises. The mortgage portfolio shows resilience to the impact of
rate rises, but the Society ensures adequate monitoring and analysis is in
place to detect any signs of potential deterioration. In light of recent
regulatory developments, the Society has also designed a stress testing
framework for the potential effects of climate change on property values.
This will be an area of increased focus in future years for the Society, the
wider sector and the regulators.
All mortgage loan applications are reviewed by an individual underwriter
supported by the use of application scorecards. Credit reference bureau data
is obtained on all applications, which in turn supports our responsible
lending requirements. The Society also shares account performance data
with the selected bureaux. The Society’s lending has become increasingly
geographically diversified throughout England and Wales over the last few
years with no one area dominating the portfolio.
The Society continues to be a responsible lender and its approach to lending
is based on making sure that customers can afford to meet their mortgage
repayments from the outset, through the use of a prudent affordability
calculator, as well as our manual underwriting processes. Should customers
find themselves in financial difficulty, the Society responds with appropriate
forbearance and collections activities to ensure fair customer outcomes. It
also supports customers who experience temporary financial difficulties by
providing the assistance they require to enable them to regularise their
financial arrangements. Only as a matter of last resort does the Society seek
to take the property into possession.
The Society is committed to providing support to those members who are
experiencing difficulties in meeting their mortgage payments due to the
impacts of the cost of living crisis. We will continue to treat all customers
fairly and to offer appropriate forbearance activities throughout the cost of
living crisis and beyond.
Residential, BTL and SBL loans are granted only against the ‘bricks and
mortar’ value (i.e. loans are provided only for the purchase or re-mortgaging
of a property and not for working capital or machinery etc). A Commercial
Lending policy is used to manage levels of business lending risk with loans
manually underwritten. To ensure appropriate management of lending risk,
the Society maintains watchlists to monitor those loans that are a possible
cause for concern in order that risk mitigating action can be taken as
appropriate. Primarily, SBL loans are made available to Small and Medium-
sized Enterprises (SMEs) for either owner-occupied or investment property
purposes. The regulatory limit for SBL lending was extended to 20% during
the year and the Society was comfortably within this limit, at 11.0% as at
31 December 2022.
The Society does not have any exposure to the sub-prime mortgage market,
it lends only to ‘prime’ customers and has never written ‘self-certified’
lending business.
Model Governance Committee
The Model Governance Committee (MGC) assists the Executive Risk
Committee in the oversight of computer-based models and End User
Computing (EUC) applications that are used throughout The Nottingham’s
strategic and operational activities. A model is defined as “a quantitative
method (including the complex manipulations of expert judgements) or
system that applies theories to process input data into quantitative
estimates, repeatedly used for decision making”.
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The Committee, which is made up of relevant senior managers and is
chaired by the Chief Risk Officer & General Counsel, oversees the
management of risks related to models to ensure that models are included
within the Society’s governance framework and are robustly designed,
developed, documented and reviewed.
The Committee provides oversight ensuring that models and EUC
applications are managed in line with the Model Governance Risk Policy,
both on an ongoing basis and during model development. It ensures that
models and EUC applications are compliant with applicable regulation and
remain fit for purpose.
Legal, Regulatory & Conduct Risk Committee
The Society, being a provider of mortgage, savings and insurance products,
is regulated by both the FCA and the PRA.
The Legal, Regulatory & Conduct Risk Committee (LRC) is responsible for
overseeing how The Nottingham conducts its business, ensuring that all
customer-impacting activities are conducted in a clear, transparent and fair
manner, delivering fair outcomes for customers.
The Committee is chaired by the Head of Compliance & DPO, supported by
relevant senior managers.
Each business area is responsible for ensuring that all regulatory and
statutory requirements are complied with on a day-to-day basis. Formal
oversight is provided by the Compliance Function through a programme of
compliance monitoring.
The Nottingham has a very low appetite for breaches of regulation or for
any activity that may lead to an unfair outcome for our customers.
Accordingly, The Nottingham carefully chooses the products and services it is
willing to offer to its customers and ensures the appropriate level of
expertise exists in the organisation to ensure good customer outcomes,
compliant sales processes and clear oversight of third party providers.
Operational Risk and Resilience Committee
The Operational Risk and Resilience Committee (ORRC) is responsible for
actively overseeing the management of operational risk across The
Nottingham. It is also responsible for ensuring that the Society maintains
sufficient operational resilience to ensure the ongoing delivery of key
services to customers.
The Committee is chaired by the Chief Customer Officer supported by
relevant senior managers.
In order to allow the Committee to focus on the key elements of
operational risk (which includes ‘people risk’ in respect of our own
colleagues and ‘third party risk’ in respect of reliance on third parties and
partners to deliver key elements of our proposition and our operational
resilience framework), the Committee meets eight times a year with
agendas alternating between the following:
• A formal quarterly ORRC meeting, covering the full range of operational
risks including review and approval of the operational risk dashboard and
oversight of operational resilience.
• An information risk focused meeting, largely focused on matters relating to
the management of information security, information management and
technology risks, as well as providing specialist oversight of the Society’s
defences against cyber-attack.
The Nottingham defines operational risk as the risk of loss resulting from
human factors, inadequate or failed internal processes and systems, or from
external events. Operational risk exists in every aspect of The Nottingham’s
business activities. Proactive management of operational risk is essential in
helping The Nottingham achieve both short-term operational objectives and
longer-term strategic goals.
To ensure that The Nottingham’s services are operationally resilient, the
Committee is also responsible for ensuring that processes are in place to
prevent, adapt, respond to, recover and learn from operational disruptions.
The Committee oversees the process by which the Society identifies its
important business services, understands and remediates any potential
weaknesses in the supporting processes, ensures that appropriate business
continuity plans are in place and verifies that third party suppliers are able
to meet our customers’ needs at all times.
One of the key processes that support the effective identification and
management of operational risk is the risk event process, which provides a
mechanism for operational incidents to be reported, their impacts assessed,
remediation to be performed and root cause analysis to be undertaken,
thereby reducing the risk of recurrence.
The Committee also continues to work on embedding the Society’s approach to
operational resilience, in response to the Regulator’s increased focus in this area.
Change Management Committee
The Change Management Committee is responsible for the oversight and
management of the Transformation and Change risk category; for which it
reports to Executive Risk Committee. It is also responsible for ensuring that
transformation and change activity supports the effective delivery of the
Society’s strategy. In this second role, the Committee reports to Executive
Committee. The Change Management Committee acts on behalf of the
Executive Committee and Executive Risk Committee monitoring delivery
execution and operational tolerance impact of transformational, large and
small business change for the Society through the effective control of a
portfolio of change activity. The Change Management Committee is informed
by the Group corporate plan and specifically owns the change execution plan
on behalf of the Executive Committee, ensuring effective delivery, balancing
risk and benefit in the achievement of the Society’s strategy.
The Nottingham’s change activity is underpinned by the project risk
management framework, which champions clear responsibilities, regular and
transparent status reporting and a high level of oversight and scrutiny by
members of the Executive team and the Board. All significant projects must be
approved by the Executive Committee and the Board.
Risk Oversight
The risk management framework is supported by a series of control documents
and risk reporting and is overseen by both the second and third lines of defence
working through the Committee structure detailed above and undertaking
independent oversight and assurance activity on key areas of risk for the Society.
This framework enables the Board and senior management to maintain
effective supervision of the level of risk within The Nottingham and to
ensure that appropriate controls and mitigating activities are in place.
On behalf of the Board,
Simon Baum
Chair of the Board Risk Committee
2 March 2023
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Nottingham Building Society is committed
to best practice in corporate governance
and has considered the requirements of
the UK Corporate Governance Code.
The Board has reviewed the Society’s corporate governance practices
against the revised UK Corporate Governance Code (July 2018) (the ‘Code’),
which is intended to apply to listed companies, to the extent that it is
relevant to a building society. In the interest of transparency, each building
society is encouraged to explain in its Annual Report and Accounts whether,
and to what extent, it adheres to the Code. The Board is committed to
complying with best practice in corporate governance.
This report sets out how the Board has operated in 2022 and complied with
the provisions of the Code and the Board has identified that it is fully
compliant with the provisions of the Code.
Leadership
The Board
As at 31 December 2022, the Board consisted of six Non-Executive Directors
(including the Chair) and two Executive Directors, providing a complementary
balance of skills and expertise.
The Board held eight meetings, four strategy review meetings and one
business planning meeting during 2022. In addition, the Non-Executive
Directors meet regularly, without the Executive Directors present, and
consider all aspects of Board responsibilities, governance and performance.
In line with Code principles, the Board operates effectively and is collectively
responsible for the long-term success of the Group and ensuring that the
necessary resources are in place for the Group to meet this objective. It has a
schedule of reserved matters and its principal function is to focus on how it
has considered and addressed the opportunities and risks to the future
success of the Group, and the sustainability of the Group’s business model
and how its governance contributes to the delivery of its strategy.
Additionally, it ensures the appropriate financial and business systems and
controls are in place to safeguard members’ interests, maintain effective
corporate governance and measure business performance. All Executive and
Non-Executive Directors are able to obtain independent professional advice,
at the Society’s expense, should that be necessary in the fulfilment of their
duties, and have access to the services and advice of both the Chief Risk
Officer & General Counsel and the Company Secretary.
Division of responsibilities
The roles of the Chair of the Board and the Chief Executive are held by
different people and are distinct in their purpose, with division of
responsibility set out in writing.
The Chief Executive has direct charge of the Group on a day-to-day basis and
is accountable to the Board for the financial and operational performance of
the Group, as well as for the formation of its strategy.
The Chair
The Chair, who is elected by the Board annually, leads the Board in approving
its strategy and in the achievement of its objectives. The Chair is responsible
for organising the business of the Board, ensuring its effectiveness and
setting its agenda. Following a review by the Board to validate that the Chair
could continue to be regarded as independent, and approval of that status at
a meeting of the Board of Directors, the tenure of the Chair has been
extended to September 2024, to provide time for a robust recruitment
process to be undertaken to appoint a new Chair.
Non-Executive Directors
Independent Non-Executive Directors play a vital role in challenging and
helping develop strategy for The Nottingham, whilst providing independent
judgement, knowledge and experience.
The Board considers all Non-Executive Directors to be independent in
character and judgement and free of any relationship or circumstances that
could interfere with the exercise of their independent judgement.
One of the independent Non-Executive Directors is appointed as the Senior
Independent Director, to provide a sounding board for the Chair and to
serve as an intermediary for the other Directors, as necessary. The Senior
Independent Director is identified on page 23.
Effectiveness
Composition of the Board
The names of the Directors together with brief biographical details are set
out on pages 23 and 24.
The Board has four committees (Risk, Nominations, Remuneration, and Audit)
to help it discharge its duties. The terms of reference for these committees
are reviewed annually.
The four committees meet regularly and current membership of these
committees is shown on page 24.
The table below shows the attendance of each Director at the relevant Board
and Board committee meetings. The number to the left is the number of
meetings actually attended; the number to the right is the number of
meetings the Director was eligible to attend during 2022.
CORPORATE GOVERNANCE REPORT
Director Board Risk Nominations Remuneration Audit
P Astruc 5/5 - - - -
S Baum 8/8 5/5 - - 4/4
S Hayes 6/6 - - - -
S Linares 8/8 5/5 3/3 4/4 -
A Neden 8/8 5/5 4/4 4/4 -
P O’Donnell 8/8 5/5 - - 5/5
K Patel 8/8 5/5 - 4/4 5/5
K Spooner 8/8 5/5 4/4 4/4 5/5
M Brierley 2/2 2/2 - - 1/1
D Marlow 2/2 - 1/1 - -
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The minutes of committee meetings are reviewed by the Board. The Board
also receives reports from the chair of each of the committees and
recommendations arising. The terms of reference for these four committees
are available on the Society’s website.
In addition to the four Board committees identified above, the Board has
the Executive Committee and Executive Risk Committees to support the
Board in managing the day-to-day operations of the Group. The Executive
and Executive Risk Committees generally meet once a month and the
membership of both committees is made up of both Executive Directors and
senior leaders. Together, both committees are responsible for acting on
behalf of the Board in organising, managing and protecting the Society’s
assets to deliver value to members, whilst ensuring the Society operates
within the law, regulation and clear, agreed Board risk appetites. Together
they are therefore responsible for ensuring the management and delivery of
four key areas on behalf of the Board: Strategy, Risk Management, Business
Planning, and Operational Oversight. The Risk Management Report on page
28 covers these committees in further detail.
Appointments to the Board
Specialist third party recruitment consultants are engaged to assist with all
Board recruitment activities, whether Executive or Non-Executive appointments.
The Nominations Committee assists the Board by making timely
recommendations on the Board and executive succession plan, Board
recruitment and composition and other relevant matters. The Committee
considers annually the competence and suitability of those directors seeking
election or re-election at each annual general meeting.
The Committee meets at least twice a year. Additional meetings may be
convened if necessary.
Appointments to the Board are made on merit and against objective criteria
balancing skills, experience, independence and knowledge on the Board. The
Society gives consideration to diversity in respect of gender and other measures,
both at Board level and in recruitment throughout the business; however, it is
not thought to be in the interests of the business to set measurable objectives
in this regard. Candidates for both Executive and Non-Executive Directorships
are recommended by the Nominations Committee to the Board for approval,
with the assistance of external consultants.
All directors must meet the requirements of the Senior Managers and
Certification Regime prescribed by the Financial Conduct Authority and
Prudential Regulation Authority including, where appropriate, receiving
regulatory approval.
Commitment
Prior to appointment, Non-Executive Directors are required to disclose their
other significant commitments. Before appointment, Non-Executive Directors
undertake that they will have sufficient time to meet what is expected of
them, recognising the need for availability in the event of crises. In addition,
throughout their tenure with the Society, directors are required to inform the
Board in advance of any other positions they wish to take up so the time
commitment and any potential conflicts of interest can be considered.
Development
Upon appointment, new directors receive a formal and tailored induction and
throughout their tenure all directors receive timely and appropriate training
to enable them to properly fulfil their roles. The information and training
requirements of all directors are reviewed annually.
Information and support
The Chair ensures that all directors receive accurate, timely and clear information.
The Society has in place appropriate insurance cover in respect of the directors.
Evaluation
Executive directors are evaluated using the performance management
framework for all employees. The Chief Executive is appraised by the Chair.
The performance of the Non-Executive Directors is reviewed annually by the
Chair. The Senior Independent Director conducts interviews with each Director
in order to appraise the performance of the Chair, the results of which are
discussed with the Chair.
Each year the Board and each of its Committees undertake an assessment of
the effectiveness of their performance during the year. The Corporate
Governance Code prescribes that this review should be undertaken by an
independent external party at least every three years and as a result the
Board appointed consultant and board evaluator, Ian White, to undertake
that review in 2022. As a pre-cursor to that review being undertaken, an
assessment was undertaken to ensure that Ian does not have any other
connection either with the Society or any of the individual directors. The
results of that review confirmed that the Board and its Committees operated
effectively. The effective operation of the Board and its Committee was
supported by an inclusive working methodology amongst members of the
Board which offered an appropriate balance between challenge and support
and ultimately enabled it to act as an effective decision making body which
considered the interest of principal stakeholders of the Society in making its
decisions. The review also noted some areas where the Board and its
Committees could enhance its effectiveness and these will be a focus for the
Board throughout 2023 and beyond.
Re-election
In 2023, all Directors will submit themselves for election at the annual
general meeting (the AGM) in accordance with the Code.
Non-Executive Directors can serve up to a maximum of three three-year terms,
although the tenure of the Chair has, during this year, been extended for two
years beyond that period to allow the Chair to provide his assistance in the
roll out of the new strategy and then to allow the necessary time for a robust
recruitment process to be undertaken. Any extension must be approved annually,
subject to rigorous review, and be explained giving due consideration to the
continuing independence and objectivity of the Non-Executive Director and these
requirements will continue to be applied to the Chair until his tenure ends.
The Nominations Committee makes recommendations for the Board
concerning the re-appointment of any Non-Executive Director at the
conclusion of their specified term of office, having due regard to their
performance and ability to continue to contribute to the Board in light of
knowledge, skills and experience required.
Accountability and audit
Financial and business reporting
The Directors’ report on pages 25 to 27 details the responsibilities of the
directors in preparing the Group’s accounts.
This includes ensuring suitable accounting policies are followed, that a true
and fair view of the Group’s financial position is given and that the Group’s
business is a going concern.
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The Board has responsibility to present a fair, balanced and understandable
assessment of the Group’s performance and financial position, business
model and strategy, consideration of which is contained within the Chief
Executive’s review on pages 6 and 7, the Strategic report on pages 8 to 17
and within the report and accounts taken as a whole.
Viability statement
In accordance with the requirements of the Code, the Board has assessed the
prospects of the Society over a period longer than the 12 months required by
the going concern provision. The viability statement is considered on page 27
within the Directors’ report.
Risk management and internal control
The Board Risk Committee overseas the entire risk management framework
of the Group. It advises the Board on determination of risk appetite and
setting of risk limits. The Committee fulfils its obligations through two
approaches. Firstly, it is responsible for monitoring risks to ensure they are in
line with the Group’s prudent policies and with its agreed Group risk
appetite statement. In doing so, the Committee considers any emerging risks
and ensures significant changes in exposures to existing risks are promptly
identified and addressed by management.
This includes overseeing the identification and management of project risks
across the Group.
The second approach involves the Committee focusing its attention on the
risks within the Group’s strategy and the management of these risks.
The Board has carried out a robust assessment of the principal risks facing
the Group, including those that would threaten the business model, future
performance, solvency and liquidity. These principal risks are detailed on
pages 15 to 17 of the Strategic report and further information on risk
management is given in the report commencing on page 28.
In accordance with the Code, the Board is committed to maintaining a
sound system of internal controls to safeguard both its own assets and
those of its members and there is an annual review of risk management and
internal control systems.
1st Line:
Focus: Control
Day-to-day management and control of risk by
the business. Results reported to management
and Board Risk Committee
2nd Line:
Focus: Oversight
Maintenance of coherent risk frameworks with
regular validation and challenge of first line controls.
Results reported to management and Board
Risk Committee
3rd Line:
Focus: Assurance
Independent assurance of effectiveness of risk
control and risk oversight. Results reported to
management and Board Audit Committee.
The operation of these three lines of defence is embodied in the terms of
reference of the Society’s risk committees. The Board Risk Committee has a
range of policies and procedures that relate to the identification, assessment,
monitoring and control of all the main areas of risk that the Group faces.
The information received and considered by the risk committees provided
reasonable assurance that during 2022 there were no material breaches of
control or regulatory standards and that the Society maintained an adequate
system of internal control. Where weaknesses in controls are identified by the
three lines of defence, the Board monitors the steps taken to remedy the
issues and to ensure that the Society responds to changing external threats
and economic circumstances and to the changing regulatory environment.
Remuneration
Policy and procedures
The level and make-up of director remuneration and the procedure for
developing policy on executive remuneration, (including fixing the
remuneration packages of individual directors), is considered by the
Remuneration Committee.
The Remuneration Committee’s work and the Society’s compliance with the
Code principles relating to remuneration is covered in the Directors’
remuneration report on pages 39 to 43.
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Membership
The Committee consists of four Non-Executive Directors and met on four
occasions during the year.
The Remuneration Committee reviews employment terms for the Group’s
employees, reporting recommended changes to the Board.
Relations with members
Dialogue with members
The Society’s members are all customers of the Society. Engagement with
customers is undertaken in various ways including member events, social
media, customer panels, regular literature and mainstream media.
The Society is keen to find out its members’ views so that it can continually
improve. It provides them with a number of ways and opportunities to give
their feedback. It surveys a selection of its members on a regular basis
through its customer satisfaction survey. The results of this feedback are
shared in Board meetings. In more normal times, members of the Board visit
branches and meet with members as part of their role. The Society also
encourages its members to attend its AGM where they are able to ask
questions and voice their opinions. During 2022, owing to a desire to
protect the health and well-being of members, members were invited to
attend the meeting virtually and invited to pre-submit questions.
Furthermore, each year, the Society produces a Members’ Newsletter,
including the summary financial statement, which provides an abridged
version of information contained within the Annual Report and Accounts.
The Members’ Newsletter is provided to all members as part of its annual
AGM documentation.
Constructive use of the AGM
Each year, notice of the AGM is given to all members who are eligible to
vote. Members are sent voting forms and are encouraged to vote online, by
post, at a local branch or by person or proxy at the AGM.
All postal and proxy votes are counted using independent scrutineers.
All members of the Board are present at the AGM each year (unless,
exceptionally, their absence is unavoidable) and the Chair of the Audit,
Nominations, Risk and Remuneration Committees are, therefore, available to
answer questions.
During 2022, all Non-Executive Directors and one Executive Director attended
the meeting in person. All pre-submitted questions were provided with an
answer from the relevant Board member and members were invited to ask
any questions outside of the meeting.
The Notice of the AGM and related papers are sent at least 21 days before
the AGM in accordance with the Building Societies Act 1986.
On behalf of the Board,
Andrew Neden
Chair
2 March 2023
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Board Audit Committee
The principal role of the Board Audit Committee is providing support to the
Board in its oversight of financial reporting and the financial control
environment across the Society. The Committee’s primary functions are:
• to monitor the integrity of the financial statements of the Society and any
formal announcements relating to the Society’s financial performance,
reviewing any significant financial reporting judgements which they
contain, including that of the Society’s going concern status;
• to keep under review the Society’s financial control systems and processes
that manage and monitor financial risks. Review and approve the
statements to be included in the Annual Report and Accounts concerning
internal control, financial risk management and the viability statement;
• to review the Society’s procedures for detecting fraud and its systems and
controls for the prevention of bribery;
• to monitor and review the effectiveness of the internal audit function;
• approve and review progress of the annual Internal Audit Plan;
• prior to the members vote at the Annual General Meeting, to make
recommendations to the Board for appointment, re-appointment and
removal of the external auditor;
• to review and monitor the external auditor’s independence and objectivity
and the effectiveness of the audit process, taking into consideration
relevant UK law, regulation and applicable ethical standards;
• to approve the remuneration and terms of engagement of the Society’s
external auditor;
• to develop and implement policy on the engagement of the external
auditor to supply non-audit services, taking into account relevant ethical
guidance regarding the provision of non-audit services by the external
audit firm; and
• to report to the Board on how the Committee has discharged its
responsibilities.
Membership and attendance
The Board Audit Committee consists of four Non-Executive Directors. The
members of the Committee are Peter O’Donnell, Kavita Patel, Kerry Spooner
and Simon Baum (who joined the Committee in April 2022), who have a
broad range of skills, experience and knowledge relevant to the building
society and financial services sector. The Company Secretary acts as
Secretary to the Committee.
Other individuals such as the Chief Executive, Chief Financial Officer, Chief
Risk Officer, Head of Internal Audit and Director of Finance, may be invited
to attend all or part of any meeting as and when appropriate. The external
auditor was invited to attend all of the Committee’s meetings held in 2022.
Private meetings are held at least once a year with the external auditor and
with the Head of Internal Audit in the absence of management to enable
issues to be raised directly if necessary. The Committee Chair meets with the
Head of Internal Audit and the external auditor on a regular basis.
Following each Committee meeting, the minutes of the meeting are
distributed to the Board and the Committee Chair provides an update to
the Society’s Board at the next Board meeting on key matters discussed by
the Committee.
Meeting frequency and reporting
The Committee met five times in 2022 and during the year:
• reviewed the results and draft Annual Report and Accounts for the year
ending 31 December 2021;
• challenged the key loan provision assumptions and judgements, underlying
the analysis of expected credit losses proposed by management;
• reviewed the going concern and viability statement assumptions and all key
issues and areas of judgement relating to the financial statement reporting;
• reviewed reports from the external auditor, including the management
letter highlighting system and control recommendations, key accounting
and audit issues and conclusions for the interim and full year financial
statement reporting;
• reviewed the year end and interim financial statements and draft press
releases, with consideration of the fair, balanced and understandable
requirements of the UK Corporate Governance Code;
• approved the risk-based 2023 internal audit plan;
• received and reviewed reports from internal audit;
• reviewed and approved (working with Board Risk Committee) the
statements to be included in the Annual Report and Accounts concerning
internal control, financial risk management and the viability statement; and
• carried out a review of the Committee’s own effectiveness and terms of
reference.
Significant matters in relation to the
financial statements
The Committee considers a wide range of matters in relation to the financial
statements, which relate mainly to key judgements, accounting policies and
estimates which management have to make during the preparation of the
statements, particularly in respect of large or unusual transactions. During
2022, the significant matters considered by the Committee included:
• Expected credit loss provisioning
The Society reviews the IFRS 9 model outputs to estimate the level of
impairment provision required across the mortgage portfolio, which uses
historical default and loss experience as well as applying judgement. The
Committee reviewed and challenged the approach to calculating the
provisions, including the impact of the worsening macroeconomic
environment, inflation and affordability stresses.
• Carrying value of intangible assets
The Society has an increased intangible asset balance as a result of its
continued investment in new technology and digitalisation. The Committee
reviewed the carrying value of intangible assets, representing capitalised
software, implementation and internal development costs, along with the
remaining lives of those assets, and approved changes to the duration of
those lives.
• Effective Interest Rate (EIR) methodology
The Society recognises interest income using a constant level of interest
over the expected behavioural life of the loan. The Committee reviewed
the basis of the EIR calculations.
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• Calculation of the defined benefit pension plan position
The Society has a defined benefit pension scheme which was closed to
new entrants in 1997 and closed to future service accrual from 31
January 2009. The Committee reviewed the methodologies and
assumptions used in calculating the latest estimate of the scheme’s
assets and liabilities. This review was supported by a report provided by
the Society’s pension advisors.
• Fair value of derivative financial instruments
In light of the significant market volatility seen in the external markets in
the year and resulting impact on derivative fair values, the Committee
considered the income statement position.
• Going concern assumption
The Committee evaluated whether the going concern basis of accounting
was appropriate by considering forecast profitability liquidity position,
funding availability and regulatory capital positions. The review also
considered the external environment as a result of the impact of the
worsening macroeconomic environment, inflation and affordability stresses.
• Fair, balanced and understandable
The Committee reviewed the integrity of the financial statements and any
formal announcements. The content of the Annual Report and Accounts
was reviewed and the Committee advised the Board that, in its view, and
taken as a whole, it is fair, balanced and understandable and provides the
information necessary for members to assess the Society’s performance,
business model and strategy. The Committee therefore recommended that
the Board approve the Annual Report and Accounts.
• Viability statement
The Committee reviewed the requirements of the UK Corporate
Governance Code to provide the medium-term viability statement in
the Annual Report and Accounts and agreed the definition of the
medium-term period.
• Corporate Governance Code
The Committee reviewed the impacts on the financial statements of the
Corporate Governance Code.
• Changes to accounting standards and other relevant
developments
The Committee is kept up to date with changes to Accounting Standards
and relevant developments in financial reporting and applicable law. In
addition, as appropriate members attend relevant seminars and
conferences provided by external bodies.
Independence and effectiveness of
external auditor
In 2014, the Society tendered its external audit relationship in line with best
practice and Ernst & Young LLP were engaged during 2015 and have therefore
been in post for eight years as at 31 December 2022.
In advance of the commencement of the annual audit, the Committee reviewed
a report presented by the external auditor detailing the audit plan, planning
materiality, areas of audit focus, terms of engagement and fees payable.
Following the review of the interim financial statements and the audit of the
annual financial statements, the Committee received a report detailing the work
performed in areas of significant risk, and a summary of misstatements and
internal control related issues identified. The Committee considered the matters
set out in these reports as part of recommending the interim and annual
financial statements for approval.
In order to monitor and assess any threats to the independence of the auditor,
the Committee reviews a report on the level of spend with the auditor on audit
and non-audit services. The Committee has a framework on the Society’s use of
the external auditor for non-audit work, to ensure their continued independence
and objectivity. The external auditor undertook a six-monthly review of the
Society’s interim results, an audit related assurance service, conducted in
accordance with this policy, and details of any fees paid for these services are
outlined in note 6 to the accounts.
The Committee considered the performance of Ernst & Young LLP as external
auditor for 2022, and is satisfied with their objectivity, independence and
effectiveness and therefore recommended that they be re-appointed at the
AGM for the current year.
Oversight and effectiveness of internal audit
The Committee receives regular reports from the Head of Internal Audit
setting out the results of assurance activity, proposed changes to the
approved audit plan and the level of resource available. Significant findings
and themes identified were considered by the Committee, alongside
management’s response and the tracking and completion of outstanding
actions. In addition to approving the annual plan and budget throughout
the year, the Committee reviewed and approved amendments to the
Internal Audit plan and resources. The effectiveness of the Internal Audit
function was also subject to an external review during the year which
identified a number of areas for minor improvement and the implementation
of those findings is now being undertaken.
The Committee therefore regularly monitors whether internal audit has
delivered its reports in accordance with the agreed plan and to the expected
standard. The Head of Internal Audit also carries out an annual review of the
effectiveness of the Society’s system of internal control and reports on the
outcome of this review to the Committee. The Head of Internal Audit reported
an adequate level of assurance in relation to the Group’s arrangements for risk
management, control infrastructure, governance and fraud prevention controls.
The Committee therefore regards the Internal Audit function to be effective.
Audit committee performance and
effectiveness
As outlined in the Corporate governance report on page 33, the Board and
each of the committees formally evaluate their own performance and
effectiveness annually. The Committee discussed the results of the 2022
review in February 2023 and concluded that, overall, the Committee continued
to be effective and was adequately discharging its responsibilities.
On behalf of the Board,
Peter O’Donnell
Chair of the Board Audit Committee
2 March 2023
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For the year ended 31 December 2022
Statement by the Chair of the
Remuneration Committee
On behalf of the Committee, I am pleased to present the annual directors’
remuneration report, which sets out the remuneration policy and details of the
directors’ remuneration in the year ended 31 December 2022.
Nottingham Building Society is committed to best practice in its remuneration
of directors. This report explains how The Nottingham applies the relevant
principles and requirements of the remuneration regulations and Codes. The
report has two sections:
• the Remuneration Policy, which sets out the Society’s remuneration policy
for directors; and
• the Annual Remuneration Report, which outlines how the policy was
implemented in 2022.
In 2022, the Remuneration Committee membership was made up as follows:
Remuneration Committee
The primary objective of the Remuneration Committee, under delegated
authority from the Board, is to make recommendations to the Board on the
general remuneration policy of The Nottingham and specifically on the
remuneration of Executive Directors. The Committee also has oversight of the
remuneration of both the Leadership team and Remuneration Code staff,
ensuring that remuneration is in line with The Nottingham’s business drivers,
values and ambitions and adheres to the Remuneration Policy. In addition, the
Committee is responsible for approving the variable pay and reward principles
and compliance with the Remuneration Code and policy statement.
The Committee met four times in 2022 and is made up of a minimum of three
Non-Executive Directors, as detailed opposite. The Chief Executive, Chief People
Officer, Senior Legal Counsel & Company Secretary attend the meetings.
The Nottingham adheres to the requirements of the Remuneration Code
applicable to a level 3 firm as defined by the Regulator. The Non-Executive
Directors do not receive variable remuneration. Information on The
Nottingham’s other Remuneration Code Staff is set out in the Pillar 3
disclosures published on our website www.thenottingham.com, along with
the Committee terms of reference.
The Remuneration Committee’s activities in 2022 also included:
• agreeing a new annual bonus plan for 2022;
• reviewing regulatory updates and assessing the impact on The Nottingham;
• review of the Remuneration Policy for 2022 and recommending it to
the Board for approval;
• reviewing and approving the Remuneration Policy Statement ensuring
its compliance with the Remuneration Code;
• oversight of the activities undertaken by the Executive Committee in
relation to reward;
• agreeing the terms for any appointments and leavers for executive level
roles, other Material Risk Taker roles; and
• considering the annual pay review for all eligible employees.
Remuneration policy
The Nottingham’s remuneration policy reflects its objectives for good
governance, appropriate risk management and acting in the long-term best
interests of members.
The policy is there to ensure that:
• remuneration should be sufficient to attract, reward, retain and motivate
high quality leaders and employees to run The Nottingham successfully,
delivering value for our members whilst avoiding paying more than is
necessary for this purpose in line with our mutual ethos; and
• remuneration is structured to strike the right balance between fixed and
variable pay. Variable pay schemes are designed to incentivise and reward
appropriate behaviour and performance, aligned with The Nottingham’s
position on risk; rewards are only attributed to the delivery of success and
achievement of objectives.
The Nottingham is classified as a level 3 firm and seeks to apply appropriate
remuneration best practice for all Remuneration Code and other staff.
All pay is benchmarked using externally provided data and the approach to
pay reviews is consistently applied to all colleagues across the Society,
regardless of position.
DIRECTORS’ REMUNERATION REPORT
Simon Linares
Non-Executive Director and Chair of the
Remuneration Committee from 28th July 2022
Kerry Spooner
Non-Executive Director Chair of the
Remuneration Committee to 28th July 2022
and Senior Independent Director
Andrew Neden
Non-Executive Director and Chair of the Board
Kavita Patel
Non-Executive Director and Chair of Conduct
sub-Committee within Board Risk Committee
2022 performance and awards
The Chair’s statement, Chief Executive’s review and Strategic report on
pages 4 to 17 describe 2022 as a period of strong performance during a
period of turbulent economic conditions. The strong results have been aided
by the rising interest rate environment which positively impacted the
Society’s net interest income. The Nottingham continues to be a top ten
building society with total assets of £3.8 billion. During the year the Society
has revitalised its purpose placing a greater focus on mortgages whilst
continuing to provide a safe and secure home for our members to save with
us. We have ensured that our regulatory capital requirements continue to be
maintained at appropriate levels, whilst continuing to invest in the Society,
and supporting both our savings and mortgage customers.
It is in this context that the payments to Executive Directors have been
determined and are detailed in this report.
The Directors’ variable pay is through the Annual Bonus Plan only. The
Nottingham was pleased to be able to operate an Annual Bonus Plan in
2022. The deferred element of the 2017 Bonus Plan was not paid out in
2021 as originally due. The Remuneration Committee reviewed and
approved these deferrals for payment during 2022 along with the 2018
bonus plan deferred amounts.
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Recruitment policy for Executive Directors
The Nottingham’s approach to recruitment is to pay no more than is
necessary to attract appropriate candidates to roles across the business,
including Executive roles. Any new Executive Director’s remuneration package
will be consistent with our remuneration policy as outlined in this report. Any
payments made to Executive Directors on joining The Nottingham to
compensate them for forfeited remuneration from their previous employer
will be compliant with the provisions of the Remuneration Code and will be
approved by the Remuneration Committee.
Service contracts
All Executive Directors, in line with best practice, have service contracts
outlining their duties and terms and conditions of employment.
Payment for loss of office of Executive Directors
Any compensation in the event of early termination is subject to
Remuneration Committee recommendation and Board approval. Pension
contributions cease on termination under the rules of the pension scheme.
Other directorships
None of the Executive Directors currently hold any paid external directorships.
David Marlow remained a member of the FCA Small Business Practitioners
Panel until April 2022 for which he received a fee of £10,000 per annum.
Executive Director’s total remuneration
Executive Directors’ emoluments comprise a basic salary, variable pay, pension
entitlement and other taxable benefits as outlined on page 41.
The total remuneration received by Executive Directors is detailed on page 42.
The information has been audited and shows remuneration for the years
ending 31 December 2021 and 31 December 2022 as required under the
Building Societies (Accounts and Related Provisions) Regulations 1998.
The remuneration of Executive Directors is considered annually by the
Remuneration Committee attended by The Nottingham’s Chief Executive, who
(except in respect of their own remuneration) makes recommendations regarding
executive pay and agreed recommendations are referred to the Board.
The Chief Executive is the Society’s most highly paid employee and no
employee earns more than any Executive Director.
The salary of Executive Directors increased by 4% in 2022. This is in line with
the wider Society, with the basic salary increase for colleagues ranging from
4% to 4.5% depending on grade, with minimum salaries implemented.
Chief Executive Officer (CEO) pay ratio
The CEO pay ratio is presented as follows to promote transparency and
encourage good governance. The Chief Executive is the highest paid person
within the organisation, and this is compared with the 25th, 50th and 75th
percentile employees in the organisation to calculate the CEO pay ratio.
This uses a single total figure of remuneration which includes total salary,
variable pay, pension and taxable benefits.
The Society has chosen to publish the CEO pay ratio using the
recommended and Government preferred approach (Option A). Option A
involves calculating the actual Full Time Equivalent remuneration for all
relevant employees for the financial year in question.
These values are then listed in order from lowest to highest and the values
at the three percentile points identified as disclosed below.
Employee data includes full time equivalent total remuneration for Society
employees as at 31 December 2022.
Non-Executive Directors
The Chair and other Non-Executive Directors each receive an annual fee
reflective of the time commitment and responsibilities of the role. Fees for
Non-Executive Directors are set by reference to benchmark information from
a building society comparator group, agreed with the Board and take into
consideration the principles underpinning the annual Society salary review.
The Non-Executive Directors’ fees are reviewed by the Chair together with
the Executive Directors before recommendations are referred to the Board.
Remuneration of the Chair is considered by the Remuneration Committee,
together with the Society’s Chief Executive, without the Chair being present.
Non-Executive Directors do not receive variable pay or pensions in order to
encourage their independence.
Non-Executive Directors are reimbursed for reasonable expenses incurred
during the course of their work on the Society’s business.
Remuneration Code staff (Material Risk Takers)
The remuneration of all Remuneration Code staff is overseen directly by
the Remuneration Committee. Fixed and variable pay decisions (including
appointment packages) for Code Staff (excluding the Head of Internal
Audit where the decision is made by the Chair of the Board Audit
Committee and approved by the Remuneration Committee), are proposed
by the Executive and all decisions are recommended to the Remuneration
Committee for approval.
The Society’s Remuneration Code staff are informed of their status
through written communication. This communication includes the
implications of their status including the potential for remuneration that
does not comply with certain requirements of the Remuneration Code to
be rendered void and recoverable by the Society.
Year 25th percentile Median 75th percentile
2022 20:1 15:1 9:1
2021 23:1 17:1 10:1
Year 25th percentile Median 75th percentile
2022
Total remuneration £22,357 £30,186 £48,504
Salary £19,174 £25,937 £42,272
2021
Total remuneration £19,545 £25,409 £43,517
Salary £17,635 £22,378 £37,757
DIRECTORS’ REMUNERATION REPORT (CONTINUED)
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Executive Directors
The table below provides a summary of the different components of remuneration for Executive Directors:
Component Purpose Operation Performance measures Opportunity
Basic salary Fixed remuneration set to
attract and retain
executives of appropriate
calibre and experience.
Basic salary is assessed by
reference to roles carrying
similar responsibilities in
comparable organisations.
A comparator group is
used that consists of
executive director positions
within banks and building
societies of a similar size
and complexity.
Reviewed annually and linked to
personal performance and market
sector benchmarking, including
Willis Towers Watson benchmark
data.
Increases based on:
• Overall employee pay increases
in the Group;
• Benchmarking comparisons;
• Personal performance; and
• Role and experience.
The base salaries of Executive
Directors are reviewed as for any
other employee in accordance
with the reward matrix, except in
circumstances where:
• Market peer benchmarking
indicates that remuneration is
moving out of line of the
appropriate peer group; and/or
• There has been a material
increase in scope or
responsibility to the Executive
Director’s role.
Variable pay
Annual
Bonus Plan
Linked to the delivery of
the Society and personal
objectives. Used to
reward Executive
Directors within the
context of achieving the
Society’s goals and
objectives.
Payments under the
variable pay schemes are
not pensionable.
The bonus will only be awarded if
the threshold criteria and Society
and individual performance targets
are met and a payment is triggered
in the Annual Bonus Plan.
50% (60% for 2018 financial year
and earlier) of the bonus is
deferred for three years and
payment is subject to meeting
Society and individual performance
threshold criteria in each of the
years from award to payment.
The Committee has the discretion
to reduce or withhold the deferred
element if it becomes apparent
that the basis on which the
variable pay award was made was
wrong or that financial
performance has deteriorated
materially since the award.
The deferred payment, prior to the
2022 performance period, is
subject to clawback for a period of
three years after payment. For
performance periods from 2022
onwards, the deferred payment is
subject to clawback for a period of
7 years after payment.
The scheme is based upon three
elements:
• Financial Adequacy -
Achievement of a minimum
level of adjusted Profit Before
Tax before any bonus is payable.
• The Annual Bonus Plan
measures Society performance
against four strategic pillars:
- Growing & rewarding
membership;
- Responsible Society;
- Strategic Reinvention;
- Safe & Secure.
• Individual performance
including achievement of
strategic objectives.
Personal performance objectives,
appropriate to the responsibilities
of the Executive Director, including
the achievement of appropriate
strategic progress are set at the
start of each year. Objectives are
set within board risk appetite and
regulatory requirements.
The maximum award possible is
50% of basic salary, payable
with 50% of the award deferred
over a three year period.
Pension or
pension
allowance
A part of fixed
remuneration to attract
and retain executives of
appropriate calibre and
experience.
Executive Directors are invited to
join the Society’s defined
contribution pension plan, or, as an
alternative, be provided with an
equivalent cash allowance.
Not applicable. Pension contributions for new
Executive Directors appointed post
1 January 2020 will be aligned
with the contribution matrix for all
employees.
Benefits A part of fixed remuneration
to attract and retain
executives of appropriate
calibre and experience.
The benefits received by Executive
Directors are private medical
insurance and a car allowance.
Not applicable. Set at a level considered
appropriate for each Executive
Director by the Committee in
line with market practice.
DIRECTORS’ REMUNERATION REPORT (CONTINUED)
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Audited
Society
2022
David
Marlow
£000
2022
Sue
Hayes
£000
2022
Paul
Astruc
£000
2022
Total
£000
2021
David
Marlow
£000
2021
Sue
Hayes
£000
2021
Paul
Astruc
£000
2021
Total
£000
Fixed remuneration
Salary
1
55 300 137 492 327 - - 327
Benefits 2 9 5 16 10 - - 10
Variable remuneration
Annual bonus
2
127 49 20 196 54 - - 54
184 358 162 704 391 - - 391
Pension contribution 8 22 10 40 49 - - 49
192 380 172 744 440 - - 440
The Directors are able to sacrifice elements of their salary and variable pay. All figures disclosed in the table above are presented pre-sacrifice.
1
David Marlow ceased to be an Executive Director on 9th March 2022, Sue Hayes became an Executive Director with effect from 1st March 2022 and Paul Astruc
became an Executive Director with effect from 21st June 2022 (earnings included above are for the period as an Executive Director, not for the whole year).
2
The annual bonus figure reflects the amounts awarded in the year, which are not subject to deferral, and any deferred amount from previous financial years,
paid in year. The remaining element, which is subject to deferral and the achievement of threshold criteria, will be disclosed in the year of payment. The
bonus amounts included are for the period as an Executive Director, not the whole year.
Annual report on remuneration
Executive Director remuneration
The unpaid deferred elements of the annual bonus scheme are as follows:
Executive Directors
Performance Year
Due 2023
2019
Due 2025
1
2021
Due 2026
1
2022
Total Deferred
£000 £000 £000 £000
Sue Hayes - - 49 49
Paul Astruc - - 20 20
David Marlow 37 54 7 98
37 54 76 167
1
Deferred bonus included is for the period as an Executive Director, not for the whole year.
Daniel Mundy (who ceased to be an Executive Director on 31 December 2020), has a deferred payment outstanding of £30,000 for 2019 due in 2023. This is
subject to the achievement of the threshold criteria and Remuneration Committee approval.
DIRECTORS’ REMUNERATION REPORT (CONTINUED)
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DIRECTORS’ REMUNERATION REPORT (CONTINUED)
Audited
Society
2022
£000
2021
£000
Simon Baum 64 60
Michael Brierley (Resigned 25th April 2022) 21 60
Simon Linares 58 45
Andrew Neden (Chair) 98 90
Peter O’Donnell 59 45
Kavita Patel 53 45
Kerry Spooner 70 55
TOTAL EMOLUMENTS FOR SERVICES AS DIRECTORS 423 400
On behalf of the Board,
Simon Linares
Chair of the Remuneration Committee
2 March 2023
Annual report on remuneration (continued)
Non-Executive Director remuneration
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Independent auditor’s report to the members of Nottingham Building Society
Opinion
In our opinion:
• the Group financial statements and the Society’s financial statements (the ‘financial statements’) give a true and fair view of the state of the Group’s and the
Society’s affairs as at 31 December 2022 and of the Group’s and the Society’s income and expenditure for the year then ended;
• the financial statements have been properly prepared in accordance with UK adopted international accounting standards; and
• the financial statements have been prepared in accordance with the requirements of the Building Societies Act 1986.
We have audited the financial statements of Nottingham Building Society (the ‘Society’) and its subsidiaries (the ‘Group’) for the year ended 31 December 2022
which comprise:
Group Society
Income statements for the year ended 31 December 2022 Income statements for the year ended 31 December 2022
Statements of comprehensive income for the year ended 31 December 2022 Statements of comprehensive income for the year ended
31 December 2022
Statements of financial position as at 31 December 2022 Statements of financial position as at 31 December 2022
Statements of changes in members’ interests for the year ended
31 December 2022
Statements of changes in members’ interests for the year ended
31 December 2022
Cash flow statements for the year ended 31 December 2022 Cash flow statements for the year ended 31 December 2022
Related notes 1 to 36 to the financial statements, including a summary of significant accounting policies, except for tables in note 31 labelled as “unaudited”
Directors’ remuneration report tables as identified as “audited”
INDEPENDENT AUDITOR’S REPORT
The financial reporting framework that has been applied in their preparation is applicable law and UK adopted international accounting standards.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards
are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Group and the Society in accordance with the ethical requirements that are relevant to our audit of the financial statements in
the UK, including the FRC’s Ethical Standard as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with
these requirements.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Society and we remain independent of the Group and the
Society in conducting the audit.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the financial
statements is appropriate. Our evaluation of the Directors’ assessment of the Group and Society’s ability to continue to adopt the going concern basis of
accounting included:
• We obtained the directors’ going concern assessment, which is for a period of 12 months from approval of the financial statements.
• We compared the historical budgeted financial information with historical actual results, in order to form a view on the reliability of the forecasting process.
• We assessed the reasonableness of the Group and Society’s funding plans and considered the associated risks with the maturity of significant debt obligations,
and the Group and Society’s planned funding schedule to offset maturities and fund operational activity.
• We considered the analysis of key relevant going concern assumptions, including those relating to financial performance, regulatory capital and liquidity, and
performed independent reverse stress testing and sensitivity analysis, including considering the impact of current macroeconomic uncertainty.
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Overview of our audit approach
Audit scope
• We performed an audit of the complete financial information of two components of the Group.
• The components where we performed audit procedures accounted for 100% of Profit before tax, 100% of Total net
income and 100% of Total assets.
Key audit matters
• Expected credit loss provisions.
• Risk of fraud in relation to revenue recognition of mortgage related income.
Materiality • Overall Group materiality of £0.9m which represents 0.4% of total members’ interests.
INDEPENDENT AUDITOR’S REPORT (CONTINUED)
• We considered whether there were other events subsequent to the balance sheet date which could have a bearing on the going concern conclusion.
• We reviewed regulatory correspondence, committee and board meeting minutes, and met with the Prudential Regulation Authority, in order to identify events
or conditions that may impact the Group and Society’s ability to continue as a going concern.
• We reviewed the going concern disclosures included in the annual report in order to assess that the disclosures were appropriate and in conformity with the
reporting standards.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may
cast significant doubt on the Group and Society’s ability to continue as a going concern for a period to 31 March 2024 – twelve months from the date of the
approval of the Annual Report and accounts.
In relation to the Group and Society’s reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw
attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern
basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. However, because
not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s ability to continue as a going concern.
An overview of the scope of the Society and the Group audits
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the
Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the
Group and effectiveness of Group-wide controls, changes in the business environment, the potential impact of climate change, and other factors such as recent
internal audit results when assessing the level of work to be performed at each entity.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in
the financial statements, of the two reporting components of the Group (2021: six reporting components), we selected both of these components which are both
entities within the United Kingdom. We performed an audit of the complete financial information of these two components (“full scope components”) which
were selected based on their size or risk characteristics.
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Changes from the prior year
Following changes in the group structure during the year to 31 December 2022 the number of reporting components has reduced to two from six in the year to
31 December 2021. Both of the components selected as full scope in the prior year relate to the remaining two components in the current year.
Involvement with component teams
All audit work performed for the purposes of the audit was undertaken by a single Group audit team based in the United Kingdom.
Climate change
Stakeholders are increasingly interested in how climate change will impact the Group and Society. The Group and Society have determined that the most
significant future impacts from climate change on their operations will be from Credit risk, Operational risks and Legal, Regulatory & Conduct risks. These are
explained on pages 19 to 22 in the Sustainability report, in the required Task Force for Climate related Financial Disclosures, including their commitments to
achieve net zero emissions by 2050. All of these disclosures form part of the “Other information,” rather than the audited financial statements. Our procedures
on these unaudited disclosures therefore consisted solely of considering whether they are materially inconsistent with the financial statements or our knowledge
obtained in the course of the audit or otherwise appear to be materially misstated, in line with our responsibilities on “Other information”.
In planning and performing our audit we assessed the potential impacts of climate change on the Group’s and Society’s business and any consequential material
impact on its financial statements.
The Group and Society have explained in the note 1, Accounting policies (page 57), how they have reflected the impact of climate change in their financial
statements, including how this aligns with their climate change commitments. These disclosures explain where governmental and societal responses to climate
change risks are still developing, and where the degree of certainty of these changes means that they cannot be taken into account when determining asset and
liability valuations under the requirements of UK adopted international accounting standards.
Our audit effort in considering the impact of climate change on the financial statements was focused on evaluating Management’s assessment of the impact of
climate risk, physical and transition, their climate commitments, the effects of climate risks disclosed in note 1 and whether these have been appropriately
reflected in asset values, where these are impacted by future cash flow forecasts, following the requirements of UK adopted international accounting standards.
As part of this evaluation, we performed our own risk assessment, supported by our climate change internal specialists, to determine the risks of material
misstatement in the financial statements from climate change which needed to be considered in our audit. We also challenged the Directors’ considerations of
climate change risks in their assessment of going concern and associated disclosures. Where considerations of climate change were relevant to our assessment of
going concern and viability, these are described above.
Based on our work we have not identified the impact of climate change on the financial statements to be a key audit matter or to impact a key audit matter.
INDEPENDENT AUDITOR’S REPORT (CONTINUED)
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INDEPENDENT AUDITOR’S REPORT (CONTINUED)
Risk Our response to the risk Key observations communicated to the
Audit Committee
Expected credit loss provisions
Group and Society – 31 December 2022: £5.3m (2021: £3.1m)
Refer to the Audit Committee Report
(page 37-38); Accounting policies (page
59); and Note 15 of the Consolidated
Financial Statements (page 71)
Valuation and completeness of expected
credit loss (ECL) provisions is an area of
estimation that requires Management
judgement. The current inflationary
pressures and resulting cost of living crisis
in the United Kingdom has a significant
impact on the level of uncertainty in the
valuation of expected credit loss
provisions, particularly in relation to the
application of macro-economic scenarios
and the estimation of the probability of
default of customers in the future.
Key judgements and estimates include:
• Accounting interpretations and
modelling assumptions used to
build the credit models and calculate
the ECL.
• The appropriateness of staging criteria
selected to determine whether a
significant increase in credit risk
(“SICR”) has occurred.
• The application of multiple macro-
economic scenarios including the
appropriateness of the probability
weightings assigned to the various
scenarios.
• The completeness and valuation of
post model adjustments.
• Accuracy and adequacy of the financial
statement disclosures.
We understood and evaluated the design effectiveness of
key controls over the ECL process and adopted a
substantive approach.
We tested the assumptions, inputs and calculations used
in the ECL models with the involvement of our credit risk
modelling specialists. This included assessing the
appropriateness of the model design, model
implementation and model performance along with
model assumption testing and sensitivity analysis.
We considered the key data points in the ECL models and
performed appropriate testing procedures to establish
their completeness and accuracy.
We independently assessed the valuation of collateral for
a sample of commercial properties with support from EY
real estate valuation specialists.
With the support of EY economic specialists, we assessed
the base case and alternative macro-economic scenarios,
including challenging the probability weightings and
comparing to other scenarios from external sources.
We assessed whether the forecasted macro-economic
variables for unemployment, interest rates and property
price indices were appropriate.
We critically assessed the methodology for determining the
SICR criteria. We independently tested staging allocation
with the support of EY credit risk modelling specialists.
We assessed the completeness of post-model
adjustments using our knowledge and experience across
the UK lending sector and with the involvement of our
credit risk modelling specialists we independently
recalculated the additional ECL provision adjustment that
management had applied.
On completion of our procedures we performed a stand
back analysis to assess the overall adequacy of the ECL
provisions. This included an analytical review, assessing
whether any contradictory evidence had been obtained
from other parts of the audit and considering the Group
and Society’s provision coverage ratios in comparison to
other similar lenders using available benchmarking data.
We corroborated the adequacy and appropriateness of
the disclosures made within the financial statements for
compliance with both IFRS 9 and IFRS 7.
We communicated that we were satisfied that
expected credit loss provisions were reasonable
and in compliance with the requirements of IFRS 9.
We considered that the model’s construction and
implementation, the significant assumptions
within the models and data inputs were
materially appropriate.
The basis and calculation of the post model
adjustment was considered to be materially
appropriate.
We considered the multiple economic scenarios
incorporated in the IFRS 9 models to be
materially appropriate.
We concluded that disclosures relating to loan
impairments were in compliance with the
requirements of IFRS.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and
include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the
greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed
in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
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INDEPENDENT AUDITOR’S REPORT (CONTINUED)
Risk Our response to the risk Key observations communicated to the
Audit Committee
Risk of fraud in relation to revenue recognition of mortgage related income
Group and Society – 31 December 2022, income included within Interest receivable and similar income: £98.8m (2021: £64.4m), and Fees and commissions
receivable: £3.1m (2021: £3.0m)
Refer to the Audit Committee Report
(page 37-38); Accounting policies (page
58); and Note 3 of the Consolidated
Financial Statements (page 65)
The majority of mortgage and fee
income recorded within interest income
and fees and commissions receivable
on the income statement is low value
and with a calculation based on
contractual terms.
Mortgage income and fees are a
significant balance and the recognition
of income on financial instruments
using the effective interest rate involves
accounting assumptions and
complexity. As a result, the recording of
interest income and fees on mortgage
products represents a significant risk of
fraud in revenue recognition.
We understood and evaluated the design effectiveness of
key controls over the mortgage income process and
adopted a substantive approach.
We critically assessed the accounting policies in relation to
revenue recognition under IFRS 9 and IFRS 15, including
effective interest rate accounting.
We independently recalculated mortgage interest recorded
for the year and recalculated the element of fees to be
deferred under effective interest rate accounting.
We agreed, on a sample basis, the initial mortgage fees
charged to supporting evidence.
We communicated that we were satisfied that
the selection and application of accounting
policies, including the application of effective
interest rate accounting, was appropriate under
IFRS 9 and IFRS 15.
We communicated that our independent
recalculation of mortgage interest and deferred
mortgage fees did not identify any material
differences.
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Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our
audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of
the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £0.9 million (2021: £0.8 million), which is 0.4% of total members’ interests (2021: 4% of total members’
interest).
We consider total members’ interests provides us with an appropriate measure of materiality given this is a key focus area for the Society’s members and
regulators and is more relevant to users in an uncertain economic environment where profitability and the temporary impact of matters impacting
financial reporting is less predictable.
We determined materiality for the Society to be the same as the Group materiality.
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that
the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance
materiality was 75% (2021: 75%) of our planning materiality, namely £0.68m (2021: £0.60m). We have set performance materiality at this percentage
after considering our experience in the prior year, our assessment of an effective control environment and including our perspectives from the current year
audit. As a result, we determined that the higher of our permissible thresholds for our performance materiality was appropriate.
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a
percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component
to the Group as a whole and our assessment of the risk of misstatement at that component. All components were allocated Group performance
materiality of £0.68m.
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £0.05m (2021: £0.04m), which is set at
5% of materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the Annual Report and Accounts set out on pages 3 to 43 and 114 to 119, including Key highlights,
Chair’s statement, Chief Executive’s review, Strategic report, Corporate responsibility report, Sustainability report, Your Board of directors, Directors’ report, Risk
management report, Corporate governance report, Board Audit Committee report and Directors’ remuneration report and Glossary, other than the financial
statements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not
express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the course of the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or
apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If,
based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
INDEPENDENT AUDITOR’S REPORT (CONTINUED)
GOVERNANCE
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INDEPENDENT AUDITOR’S REPORT (CONTINUED)
Opinion on other matters prescribed by the Building Societies Act 1986
In our opinion:
• The Annual Business Statement and the Directors’ Report have been prepared in accordance with the requirements of the Building Societies Act 1986;
• The information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial
statements; and
• The information given in the Annual Business Statement (other than the information upon which we are not required to report) gives a true representation of
the matters in respect of which it is given.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Building Societies Act 1986 requires us to report to you if, in our opinion:
• Proper accounting records have not been kept by the Society; or
• The Group or Society’s financial statements are not in agreement with the accounting records; or
• We have not received all the information and explanations and access to documents we require for our audit.
Corporate Governance Statement
We have reviewed the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to
the Group and Society’s voluntary compliance with the provisions of the UK Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement are
materially consistent with the financial statements or our knowledge obtained during the audit:
• Directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out
on page 27;
• Directors’ explanation as to its assessment of the Society’s prospects, the period this assessment covers and why the period is appropriate set out on page 27;
• Directors’ statement on fair, balanced and understandable set out on page 27;
• Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 26;
• The section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on page 26; and
• The section describing the work of the audit committee set out on page 37.
Directors’ remuneration report
The Society voluntarily prepares a Report of the directors on remuneration in accordance with the provisions of the Companies Act 2006. The directors have
requested that we audit the part of the Report of the directors on remuneration specified by the Companies Act 2006 to be audited as if the Society were a
quoted company.
In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 26, the directors are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group and Society’s ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the
Society or to cease operations, or has no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of
these financial statements.
GOVERNANCE
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Explanation as to what extent the audit was considered capable of detecting irregularities,
including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined below,
to detect irregularities, including fraud. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from
error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. The extent to which our
procedures are capable of detecting irregularities, including fraud is detailed below.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the Society and management.
• We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most significant are the
regulations, licence conditions and supervisory requirements of the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and the
Building Societies Act 1986.
• We understood how the Group and the Society are complying with those frameworks by making enquiries of management, internal audit, and those
responsible for legal and compliance matters. We also reviewed correspondence between the Group and UK regulatory bodies; reviewed minutes of the Board
and Board Risk Committee; and gained an understanding of the Group’s approach to governance, demonstrated by the Board’s approval of the Group’s
governance framework and the Board’s review of the Group’s Operational Risk Framework and internal control processes.
• We assessed the susceptibility of the Group and Society’s financial statements to material misstatement, including how fraud might occur by considering the
controls that the Group and Society have established to address risks identified by the entity, or that otherwise seek to prevent, deter or detect fraud.
• Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures involved inquiries of
legal counsel, executive management, internal audit, and focused testing as referred to in the Key Audit Matters section above.
• The Group and the Society operate in the financial services sector which is a highly regulated environment. As such the Senior Statutory Auditor considered the
experience and expertise of the engagement team to ensure that the team had the appropriate competence and capabilities, which included the use of
specialists where appropriate.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at
https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Other matters we are required to address
Following the recommendation from the Audit Committee, we were appointed by the Society on 24 March 2015 to audit the financial statements for the year
ending 31 December 2015 and subsequent financial periods.
The period of total uninterrupted engagement, including previous renewals and reappointments is 8 years, covering the years ending 2015 to 2022.
The audit opinion is consistent with the additional report to the Audit Committee.
Use of our report
This report is made solely to the Society’s members, as a body, in accordance with Section 78 of the Building Societies Act 1986. Our audit work has been
undertaken so that we might state to the Society’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Society and the Society’s members as a body, for our
audit work, for this report, or for the opinions we have formed.
Stephen Littler (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
Manchester
2 March 2023
INDEPENDENT AUDITOR’S REPORT (CONTINUED)
GOVERNANCE
52
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Notes
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
CONTINUING OPERATIONS
Interest receivable and similar income
Calculated using the effective interest rate method 3 97.7 65.4 99.3 67.2
Other 3 1.1 (1.0 ) (0.1) (0.7)
Interest receivable and similar income 98.8 64.4 99.2 66.5
Interest payable and similar charges 4 (36.0 ) (18.5 ) (36.3) (20.6)
NET INTEREST INCOME 62.8 45.9 62.9 45.9
Fees and commissions receivable 3.1 3.0 3.1 3.0
Fees and commissions payable (1.5 ) (0.9 ) (1.5) (0.9)
Other income - - - -
Net gains from derivative financial instruments 5 10.2 7.9 5.7 5.4
TOTAL NET INCOME 74.6 55.9 70.2 53.4
Administrative expenses 6 (42.8 ) (36.5 ) (42.7) (36.5)
Depreciation and amortisation 17,18 ,19 (10.7 ) (6.8 ) (10.7) (6.8)
Operating profit before impairment and fair value movement 21.1 12.6 16.8 10.1
Impairment (charge)/release – loans and advances 15 (2.2 ) 1.4 (2.2) 1.4
Fair value movement of intercompany balances 16 - - - 1.1
Profit on disposal of subsidiary undertaking - 0.5 - 0.7
Profit on disposal of property, plant and equipment 17 - 0.4 - 0.4
PROFIT BEFORE TAX 18.9 14.9 14.6 13.7
Tax charge 8 (3.1 ) (2.5 ) (3.1) (2.5)
PROFIT AFTER TAX FOR THE FINANCIAL YEAR FROM CONTINUING OPERATIONS 15.8 12.4 11.5 11.2
DISCONTINUED OPERATIONS
Profit after tax for the financial year from discontinued operations - 0.2 - -
PROFIT AFTER TAX FOR THE FINANCIAL YEAR 15.8 12.6 11.5 11.2
A reconciliation from profit before tax for the financial year to underlying profit used by management can be found on page 10.
The 2022 income statement only includes income and expenditure from continuing operations. The 2021 Group income statement has been
presented on a continuing and discontinued operations basis following the sale of a subsidiary undertaking in 2021.
The notes on pages 57 to 113 form part of these accounts.
INCOME STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
ACCOUNTS
53
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ACCOUNTS
Notes
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Profit for the financial year
Items that will not be re-classified to the income statement
Remeasurements of defined benefit obligation 28 0.1 - 0.1 -
Tax on items that will not be re-classified 8 (0.1 ) 0.3 (0.1) 0.3
Items that may subsequently be re-classified to the income statement
FVOCI reserve
Valuation losses taken to reserves 12 (4.1 ) (0.3 ) (4.1) (0.3)
Tax on items that may subsequently be re-classified 8 0.8 0.2 0.8 0.2
Other comprehensive (expense)/income for the period net of income tax (3.3 ) 0.2 (3.3) 0.2
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 12.5 12.8 8.2 11.4
Both the profit for the financial year and total comprehensive income/(expense) for the period are attributable to the members of the Society.
The notes on pages 57 to 113 form part of these accounts.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2022
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Notes
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
ASSETS
Cash in hand and balances with the Bank of England 9 290.1 286.1 290.1 286.1
Loans and advances to credit institutions 10 16.0 16.1 8.4 8.1
Debt securities 12 413.2 260.3 413.2 260.3
Derivative financial instruments 13 142.6 26.1 136.1 24.0
Loans and advances to customers 14 2,922.8 3,010.9 2,922.8 3,010.9
Amounts due from subsidiary undertakings 16 - - 26.6 26.6
Other assets 4.4 3.9 4.4 3.9
Current tax asset 0.7 - 0.7 -
Property, plant and equipment 17 8.3 10.0 8.3 10.0
Right of use assets 18 1.1 2.9 1.1 2.9
Intangible assets 19 11.1 16.8 11.1 16.8
Deferred tax assets 20
TOTAL ASSETS 3,812.5 3,634.8 3,825.0 3,651.3
LIABILITIES
Shares 21 3,009.7 2,874.6 3,009.7 2,874.6
Amounts owed to credit institutions 22 419.0 346.1 419.0 346.1
Amounts owed to other customers 23 8.4 22.9 8.4 22.9
Amounts owed to subsidiary undertakings 24 - - 109.4 145.2
Debt securities in issue 25 91.0 127.1 - -
Derivative financial instruments 13 14.4 6.5 14.4 6.5
Other liabilities and accruals 26 9.3 6.3 9.3 6.3
Lease liabilities 18 2.2 3.2 2.2 3.2
Current tax liabilities - 0.6 - 0.6
Retirement benefit obligations 28 2.9 4.4 2.9 4.4
Subscribed capital 29 24.0 24.0 24.0 24.0
TOTAL LIABILITIES 3,580.9 3,415.7 3,599.3 3,433.8
RESERVES
General reserves 235.0 219.2 229.1 217.6
Fair value reserves 30 (3.4 ) (0.1 ) (3.4) (0.1)
Total reserves attributable to members of the Society 231.6 219.1 225.7 217.5
TOTAL RESERVES AND LIABILITIES 3,812.5 3,634.8 3,825.0 3,651.3
The notes on pages 57 to 113 form part of these accounts.
STATEMENTS OF FINANCIAL POSITION
AS AT 31 DECEMBER 2022
ACCOUNTS
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General reserves
£m
FVOCI reserve
£m
Total
£m
GROUP 2022
Balance as at 1 January 2022 219.2 (0.1 ) 219.1
Profit for the year 15.8 - 15.8
Other comprehensive expense for the period (net of tax)
Net losses from changes in fair value - (3.3 ) (3.3 )
Total other comprehensive expense - (3.3 ) (3.3 )
Total comprehensive income/(expense) for the period 15.8 (3.3 ) 12.5
BALANCE AS AT 31 DECEMBER 2022 235.0 (3.4 ) 231.6
GROUP 2021
Balance as at 1 January 2021 206.3 - 206.3
Profit for the year 12.6 - 12.6
Other comprehensive income/(expense) for the period (net of tax)
Net gains/(losses) from changes in fair value 0.3 (0.1 ) 0.2
Total other comprehensive income/(expense) 0.3 (0.1 ) 0.2
Total comprehensive income/(expense) for the period 12.9 (0.1 ) 12.8
BALANCE AS AT 31 DECEMBER 2021 219.2 (0.1 ) 219.1
General reserves
£m
FVOCI reserve
£m
Total
£m
SOCIETY 2022
Balance as at 1 January 2022 217.6 (0.1) 217.5
Profit for the year 11.5 - 11.5
Other comprehensive expense for the period (net of tax)
Net losses from changes in fair value - (3.3) (3.3)
Total other comprehensive expense - (3.3) (3.3)
Total comprehensive income/(expense) for the period 11.5 (3.3) 8.2
BALANCE AS AT 31 DECEMBER 2022 229.1 (3.4) 225.7
SOCIETY 2021
Balance as at 1 January 2021 206.1 - 206.1
Profit for the year 11.2 - 11.2
Other comprehensive income/(expense) for the period (net of tax)
Net gains/(losses) from changes in fair value 0.3 (0.1) 0.2
Total other comprehensive expense 0.3 (0.1) 0.2
Total comprehensive income/(expense) for the period 11.5 (0.1) 11.4
BALANCE AS AT 31 DECEMBER 2021 217.6 (0.1) 217.5
The notes on pages 57 to 113 form part of these accounts.
STATEMENTS OF CHANGES IN MEMBERS’ INTERESTS
FOR THE YEAR ENDED 31 DECEMBER 2022
ACCOUNTS
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Notes
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax from continuing operations 18.9 14.9 14.6 13.7
Profit from discontinued operations - 0.2 - -
Depreciation and amortisation 10.7 6.8 10.7 6.8
Profit on disposal of property, plant and equipment - (0.4 ) - (0.4)
Profit on disposal of subsidiary undertaking - (0.5 ) - (0.7)
Interest on subscribed capital 2.0 2.0 2.0 2.0
Interest on lease payments 0.1 0.1 0.1 0.1
Net gains on disposal and amortisation of debt securities 0.4 0.3 0.4 0.3
Increase/(decrease) in impairment on loans and advances 2.2 (1.4 ) 2.2 (1.4)
CHANGES IN OPERATING ASSETS AND LIABILITIES
Increase in prepayments, accrued income and other assets (117.2 ) (23.0 ) (148.6) (82.0)
Increase/(decrease) in accruals, deferred income and other liabilities 10.9 (25.9 ) 10.9 (24.8)
Decrease in loans and advances to customers 85.9 118.5 85.9 118.5
Increase in shares 21 135.1 80.4 135.1 80.4
Increase/(decrease) in amounts owed to other credit institutions and other customers 22,23 58.4 (122.5 ) 58.4 (122.5)
Decrease in loans and advances to credit institutions 1.3 42.4 1.3 42.4
Decrease in debt securities in issue 25 (36.1 ) (66.6 ) - (2.5)
Decrease in retirement benefit obligation 28 (1.4 ) (1.5 ) (1.4) (1.5)
Taxation (paid)/received (4.1 ) 1.4 (4.1) 1.4
NET CASH GENERATED FROM OPERATING ACTIVITIES 167.1 25.2 167.5 29.8
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of debt securities (286.5 ) (168.5 ) (286.5) (168.5)
Disposal of debt securities 129.1 60.4 129.1 60.4
Purchase of property, plant and equipment (0.3 ) (1.4 ) (0.3) (1.4)
Disposal of property, plant and equipment - 0.6 - 0.6
Consideration on disposal of subsidiary undertaking or trade and assets - 0.3 - 0.7
Purchase of intangible assets (1.5 ) (8.6 ) (1.5) (8.6)
NET CASH USED IN INVESTING ACTIVITIES (159.2 ) (117.2 ) (159.2) (116.8)
CASH FLOWS FROM FINANCING ACTIVITIES
Interest paid on subscribed capital 34 (1.9 ) (1.9 ) (1.9) (1.9)
Principal element of lease payments (0.8 ) (0.9 ) (0.8) (0.9)
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 5.2 (94.8 ) 5.6 (89.8)
Cash and cash equivalents at 1 January 287.2 382.0 279.2 369.0
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 11 292.4 287.2 284.8 279.2
The notes on pages 57 to 113 form part of these accounts.
CASH FLOW STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
ACCOUNTS
57
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ACCOUNTS
58
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
59
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
60
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
61
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
62
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
63
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
64
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
65
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
66
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
67
| 2022 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
ACCOUNTS
68
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
69
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
70
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
71
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
72
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
73
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
74
| 2022 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
ACCOUNTS
75
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
76
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
77
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
78
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
79
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
80
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
81
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
82
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
83
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
84
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
85
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
86
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
87
| 2022 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
ACCOUNTS
88
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
89
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
90
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
91
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
92
| 2022 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
ACCOUNTS
93
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
94
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
95
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
96
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
97
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
98
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
99
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
100
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
101
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
102
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
103
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
104
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
105
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
106
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
107
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
108
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
109
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
110
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
111
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
112
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
113
| 2022 ANNUAL REPORT AND ACCOUNTS
ACCOUNTS
114
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ANNUAL BUSINESS STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2022
1. Statutory percentages
2022
%
Statutory limit
%
Lending limit
Proportion of business assets not in the form of loans fully secured on residential property 12.20 25
Funding limit
Proportion of shares and borrowings not in the form of shares held by individuals 14.69 50
The percentages are calculated in accordance with, and the statutory limits are those prescribed by, sections 6 and 7 of the Building Societies Act
1986 and are based on the Group statement of financial position.
Business assets are the total assets of the Society and its subsidiary undertakings as shown in the Group’s statement of financial position plus
impairment for losses on loans and advances (note 15), less property, plant and equipment, intangible assets and liquid assets.
Loans fully secured on residential property are the amount of principal owing by borrowers and interest accrued not yet payable.
Total ‘shares and borrowings’ are the aggregate of ‘shares’, ‘amounts owed to credit institutions’, ‘amounts owed to other customers’ and ‘debt
securities in issue’ in the Group’s statement of financial position. Shares held by individuals are found in note 21.
2. Other percentages
2022
%
2021
%
As a percentage of shares and borrowings:
Gross capital 7.24 7.21
Free capital 6.66 6.33
Liquid assets 20.39 16.69
As a percentage of mean total assets:
Profit after taxation 0.44 0.34
Management expenses (Group) 1.44 1.19
Management expenses (Society) 1.43 1.17
As a percentage of year end assets:
Return on assets 0.42 0.35
The above percentages have been calculated from the Group accounts.
‘Shares and borrowings’ are the aggregate of ‘shares’, ‘amounts owed to credit institutions’, ‘amounts owed to other customers’ and ‘debt
securities in issue’ in the Group statement of financial position.
‘Gross capital’ is the aggregate of subscribed capital and aggregated reserves as shown in the Group statement of financial position.
‘Free capital’ is gross capital less property, plant and equipment, lease assets and intangible assets in the Group statement of financial position.
‘Mean total assets’ are calculated by halving the aggregate of total assets at the beginning and end of the financial year for the Group/Society.
‘Liquid assets’ are the first three items on the asset side of the Group statement of financial position.
‘Management expenses’ are the aggregate of administrative expenses (excluding acquisition and merger costs) and depreciation and amortisation
taken from the Group/Society statements of comprehensive income.
OTHER INFORMATION
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3. Information about the directors at 31 December 2021:
Director’s name
Date of
appointment
Age
Business
occupation
Other directorships (and offices)
Paul Astruc
Chief Financial Officer
21.06.22 56 Building Society
Executive
Rocket Sense Limited
Simon Baum 18.06.18 60 Director Baum Associates Ltd
Sue Hayes
Chief Executive
08.03.22 55 Building Society
Executive
UK Finance mortgage Board
Simon Linares 01.12.19 58 Director Dreams Come True charity
Andrew Neden
Chair
17.09.14 60 Director ABC International Bank plc
Aetna Insurance Company Ltd
Eltham College Ltd
Grace Church Dulwich Ltd
Northgate (Warwick) Developments Ltd
The Great St Helen’s Trust Ltd (renamed to Gospel
Support and Homes Trust from February 2023)
Wesleyan Assurance Society
Wesleyan Financial Services Limited
Wesleyan Unit Trust Managers Ltd
Peter O’Donnell 01.01.21 56 Director Cardiac Risk in the Young
Kavita Patel 01.01.17 46 Director Shakespeare Martineau LLP
Philsec Ltd
Meaujo Incorporations Ltd
Ampa Holdings LLP
Kerry Spooner 01.09.16 61 Director ANZ UK branch
Scotiabank Europe plc
Directors’ service contracts:
All contracts are terminable at any time by the Society on 12 months’ notice and by the individual on six months’ notice. Unless notice to terminate is
given by either party, the contracts continue automatically.
ANNUAL BUSINESS STATEMENT (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2022
OTHER INFORMATION
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GLOSSARY
Set out below are the definitions of the terms used within the Annual Report and Accounts to assist the reader and to facilitate comparison with other
financial institutions:
Additional Tier 1 capital (AT1) Capital that meets certain rules under CRD IV and which comprises the Society’s PIBS but only under the
transitional provisions.
Arrears A customer is in arrears when they are behind in meeting their contractual obligations with the result that an
outstanding loan payment is overdue. The value of the arrears is the value of any payments that have been missed.
Basel III Basel III sets out the details of strengthened global regulatory standards on bank capital adequacy and liquidity.
Buy-to-let loans (BTL) Buy-to-let loans are those loans which are offered to customers buying residential property specifically to let out
and generate a rental income.
Capital Requirements Directive
(CRD V)
CRD V is made up of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive
(CRD), outlining the capital requirements framework and introduced liquidity requirements, which regulators
use when supervising firms.
Common Equity Tier 1 capital (CET1) CET1 capital consists of internally generated capital generated from retained profits, other reserves less
intangible assets and other regulatory deductions. CET1 capital is fully loss absorbing.
Common Equity Tier 1 ratio Common Equity Tier 1 capital as a percentage of risk weighted assets.
Contractual maturity The date at which a loan or financial instrument expires, at which point all outstanding principal and
interest is due.
Cost income ratio A ratio that represents the proportion of administrative expenses to total income. On an underlying basis, is
defined as total administrative expenses (excluding one-off strategic investment costs) as a percentage of
total income (excluding the impact of fair value gains or losses from derivatives and one off income).
Credit risk This is the risk that a customer or counterparty fails to meet their contractual obligations.
Debt securities Assets representing certificates of indebtedness of credit institutions, public bodies or other undertakings
excluding those issued by central banks.
Debt securities in issue Transferable certificates of indebtedness of the Society to the bearer of the certificates. These are liabilities of the
Group and include certificates of deposit.
Derivative financial instruments A derivative financial instrument is a contract between two parties whose value is based on an underlying
price or index rate it is linked to, such as interest rates, exchange rates or stock market indices. The Society
uses derivative financial instruments to hedge its exposure to interest rate risk.
Effective interest rate method (EIR) The method used to measure the carrying value of a financial asset or liability and to allocate associated
interest income or expense over the relevant period. The calculation includes all fees and penalties paid and
received between parties which are integral to the contract.
Expected Credit Loss (ECL) The present value of all cash shortfalls over the expected life of the financial instrument. The term is used for
accounting for impairment provisions under the IFRS 9 standard.
Exposure The maximum loss a financial institution might suffer if a borrower, counterparty or group fails to meet
their obligations.
Exposure at Default (EAD) A component of the IFRS 9 expected credit loss calculation. The EAD model calculates the balance profile of
each mortgage account over its expected behavioural lifetime.
Fair value Fair value is the amount for which an asset could be exchanged or a liability settled, between knowledgeable,
willing parties in an arm’s length transaction.
Fair value through other
comprehensive income (FVOCI)
Financial assets held at fair value on the balance sheet with changes in fair value being recognised through
other comprehensive income.
Fair value through profit or loss
(FVPL)
Financial assets held at fair value on the balance sheet with changes in fair value being recognised through
the income statement.
Financial Conduct Authority (FCA) The statutory body responsible for conduct of business regulation and supervision of UK authorised firms.
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Financial Services
Compensation Scheme (FSCS)
The UK’s compensation fund of last resort for customers of authorised financial services firms. The FSCS may pay
compensation to customers if a firm is unable, or likely to be unable, to pay claims against it, usually because
it has stopped trading or has been declared in default. The FSCS is funded by the financial services industry.
Every firm authorised by the FCA is obliged to pay an annual levy, which goes towards its running costs and
compensation payments.
Fintech A company whose purpose is to create technology enabled financial innovation.
Forbearance strategies Strategies to support borrowers in financial difficulty, such as agreeing a temporary reduction in the monthly
payment, extending mortgage terms and a conversion to an interest-only basis. The aim of forbearance
strategies is to avoid repossession.
Free capital The aggregate of gross capital and provisions for collective impairment losses on loans and advances to
customers less property, plant and equipment and intangible assets.
Funding limit Measures the proportion of shares and borrowings (excluding the fair value adjustment for hedged risk)
not in the form of shares held by individuals. The calculation of the funding limit is explained in the Annual
Business Statement.
General reserves The accumulation of the Society’s historic and current year profits which is the main component of Common
Equity Tier 1 capital.
Gross capital The aggregate of general reserves, fair value reserves and subscribed capital.
Impaired loans Loans where there is objective evidence that an impairment event has occurred, meaning that the Society
does not expect to collect all the contractual cash flows or expect to collect them later than they are
contractually due.
Interest rate risk The risk of loss due to a change in market interest rates. Interest rate risk can have an impact on Society’s
mortgages and savings products.
Internal Capital Adequacy
Assessment Process (ICAAP)
The Society’s own assessment, as part of Basel III requirements, of the levels of capital that it needs to hold in respect
of its regulatory capital requirements for risks it faces under a business as usual scenario including stress events.
Internal Liquidity Adequacy
Assessment Process (ILAAP)
The Society’s own assessment of the liquidity resources it requires in order to remain within the risk tolerances
it has set. This will include an evaluation of potential stresses based on multiple market environments.
Lending limit Measures the proportion of business assets not in the form of loans fully secured on residential property.
Leverage ratio The ratio of Tier 1 capital divided by the total exposures, which includes on and off balance sheet items.
Liquid assets Total of cash in hand, loans and advances to credit institutions, and debt securities.
Liquid assets ratio A ratio that expresses liquid assets as a percentage of mean total assets.
Liquidity resources Assets held in order to manage liquidity risk. Liquidity resources comprise cash and balances with the
Bank of England, UK Government securities and multilateral development banks, other securities and
bank deposits and Bank of England approved mortgage portfolios. Liquid resources ratio is expressed as a
percentage of shares, deposits and funding liabilities.
Liquidity risk Liquidity risk is the risk that the Society is unable to meet its financial obligations as they fall due, or can
only secure them at excessive cost. This risk arises from timing mismatches of cash inflows and outflows.
Loan to value ratio (LTV) LTV expresses the amount of a mortgage as a percentage of the value of the property.
Loans past due Loans on which a payment has not been made as of its due date.
Loss Given Default (LGD) A component of the IFRS 9 expected credit loss calculation. The LGD model calculates the likely loss on
asset disposal that the Society would suffer if a default event were to occur in any given month over the
expected behavioural lifetime of a mortgage account.
Management expenses The aggregate of administrative expenses, depreciation and amortisation.
Management expenses ratio A ratio that expresses management expenses as a percentage of mean total assets. On an underlying basis,
excludes one-off strategic investment costs.
Market risk The risk that movements in market risk factors, including foreign exchange rates, interest rates, credit spreads
and customer-driven factors will create potential losses or decrease the value of the Society balance sheet.
GLOSSARY (CONTINUED)
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Mean total assets Represents the amount produced by halving the aggregate of total assets at the beginning and end of the
financial year.
Member A person who has a share investment or a mortgage loan with the Society.
Net interest income The difference between interest receivable on assets and similar income and interest paid on liabilities and
similar charges.
Net interest margin A ratio expressing net interest income as a percentage of mean total assets.
Operational risk The risk of loss arising from inadequate or failed internal processes, people and systems, or from external events.
Permanent interest bearing shares
(PIBS) / Subscribed capital
Unsecured, deferred shares of the Society which rank behind the claims of all depositors, payables and
investing members of the Society. PIBS are also known as subscribed capital.
Probability of Default (PD) A component of the IFRS 9 expected credit loss calculation. An estimate of the probability that a borrower
will default on their credit obligation over a fixed time period. A 12 month ECL uses a 12 month PD, whilst
a lifetime ECL uses the estimated PD over the remaining contractual life of the loan.
Prudential Regulation Authority
(PRA)
The statutory body responsible for the prudential supervision of banks, building societies, insurers and small
number of significant investment firms in the UK. The PRA is a subsidiary of the Bank of England.
Renegotiated loans Loans are classed as renegotiated where an agreement between a borrower and a lender has been made to
modify the loan terms either as part of an ongoing relationship or if the borrower is in financial difficulties.
The renegotiated loan may no longer be treated as past due or impaired.
Residential loans Loans that are loaned to individuals rather than institutions and are secured against residential property.
Right-of-use assets A lessee’s right to use an asset over the life of a lease. The cost of the asset is calculated as the amount
of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the
commencement date less any lease incentives received.
Risk appetite The articulation of the level of risk that the Society is willing to accept (or not accept) in order to safeguard
the interests of the Society’s members whilst also achieving business objectives.
Risk weighted assets (RWA) The value of assets, after adjustment, under the relevant Basel III capital rules to reflect the degree of risk
they represent.
Secured business lending (SBL) Loans secured on commercial property which is only made available to Small and Medium sized Enterprises
and includes limited company buy-to-let lending.
Shares Funds deposited by a person in a retail savings account with the Society. Such funds are recorded as
liabilities for the Society.
Shares and borrowings The aggregate of shares, amounts owed to credit institutions, amounts owed to other customers and debt
securities in issue.
Significant increase in credit risk
(SICR)
A significant increase in credit risk on a financial asset is judged to have occurred when an assessment,
using quantitative and qualitative factors, identifies at a reporting date that the credit risk has moved
significantly since the last asset was originally recognised.
Special Purpose Vehicle (SPV) A legal entity (usually a limited company) created to fulfil narrow, specific or temporary objectives. In the
context of the Society, the SPV is used in relation to securitisation activities.
SPPI test An assessment of whether the contractual terms of the financial asset give rise to cash flows that are in
substance solely payments of principal and interest.
Stage 1 A component of the IFRS 9 expected credit loss calculation. Stage 1 assets are assets which have not
experienced a significant increase in credit risk since the asset was originally recognised on the balance
sheet. 12 month ECL are recognised as the impairment provision for all financial assets on initial
recognition. Interest revenue is the EIR on the gross carrying amount.
Stage 2 A component of the IFRS 9 expected credit loss calculation. Stage 2 assets have experienced a significant
increase in credit risk since initial recognition. Lifetime ECL is recognised as an impairment provision.
Interest revenue is the EIR on the gross carrying amount.
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Stage 3 A component of the IFRS 9 expected credit loss calculation. Stage 3 assets are identified as in default and
considered credit impaired. Lifetime ECL is also recognised as an impairment provision. Interest revenue is
the EIR on the net carrying amount.
Standardised approach The basic method used to calculate capital requirements for credit risk. In this approach the risk weighting
used in the capital calculation are determined by specified percentages.
Term Funding Scheme (TFS)
Term Funding with additional
incentives for SMEs (TFSME)
Schemes launched by the Bank of England and HM Treasury, which provides funding to participating banks
and building societies with the aim of stimulating lending within the economy.
Tier 1 capital A component of regulatory capital, it comprises CET1 and AT1.
Tier 1 ratio Tier 1 capital as a percentage of risk weighted assets.
Tier 2 capital Comprises the collective impairment allowance (for exposures treated on a Standardised basis), less certain
regulatory deductions.
Total Capital Requirement (TCR) The total amount of capital the regulator requires the Society to hold, which is made up of Pillar 1 and Pillar
2A capital.
Underlying profit A measure that aims to present management’s view of the Group’s underlying performance for the reader
of the Annual Report & Accounts with like for like comparisons of performance across years without the
distortion of one-off volatility and items which are not reflective of the Group’s ongoing business activities.
Wholesale funding Amounts owed to credit institutions, amounts owed to other customers and debt securities in issue.
GLOSSARY (CONTINUED)
OTHER INFORMATION
DTL0109/0223
Nottingham Building Society, Nottingham House,
3 Fulforth Street, Nottingham NG1 3DL
thenottingham.com
0344 481 4444
Robin Trow - Marketing and Product Risk Manager