2021 ANNUAL REPORT AND ACCOUNTS
CONTENTS
04 Chairman’s statement
06 Chief Executive’s review
09 Strategic report
19 Corporate responsibility report
22 Sustainability report
26 Your Board of directors
28 Directors’ report
31 Risk management report
36 Corporate governance report
40 Board Audit Committee report
42 Directors’ remuneration report
47 Independent auditor’s report
54 Income statements
55 Statements of comprehensive income
56 Statements of financial position
57 Statements of changes in members’ interests
58 Cash flow statements
59 Notes to the accounts
116 Annual business statement
118 Glossary
THE NOTTINGHAM BUILDING SOCIETY | 3
Against the backdrop of the challenges from the ongoing pandemic, the Society has continued its
progress in the delivery of its unique member proposition and its journey into the digital world of financial
services; whilst demonstrating its mutual ethos to members, colleagues and its communities.
Below are some of the key achievements and financial highlights of 2021:
We strive to help and
support our members
to save, plan for
and protect their
financial futures
Strong capital
position with CET 1
ratio at 16.5%
and leverage ratio
of 5.6%
New Beehive Money
app launched
looking after more
than 55,000 Lifetime
ISA customers
Arrears levels
remain very low at
a quarter of
industry average
Present in
48 locations across
nine counties with a
strong retail franchise
– total branch
balances of
£2.5 billion
Gross mortgage
lending up 13%
at over £550m
for 2021; resulting
in total assets
of £3.6 billion
Net Promoter
Score of 71%
and employee
engagement score
of 80%
Group pre-tax
profit of £15.1m;
£7.4m on
underlying basis
Net interest
margin of 1.24%;
up 17 basis points
from 1.07%
STRATEGIC REPORT
KEY HIGHLIGHTS
4 | 2021 ANNUAL REPORT AND ACCOUNTS
Introduction
Living through the pandemic over the past two years has been an
unprecedented experience and 2021 has challenged us all, as the pandemic
dominated our lives for another 12 months. On the one hand, the fact that
many of us have been vaccinated has allowed some normality to return and
in July we saw a major easing of the national lockdown. However, we have
also seen new variants emerge, resulting in waves of new cases and
intermittent lockdowns causing continued restrictions in our normal lives.
A prevailing sense of caution has led to changes in behaviour and the
knock-on impacts of these have led to uneven and unexpected challenges
for parts of the UK economy, for individuals and society at large. As a
Society, we have also needed to continuously adapt to this uncertain
environment and I would like to start my report by thanking all of our
colleagues for their exceptional dedication and effort over this year, and
throughout the ongoing pandemic, in meeting our members’ needs whilst
facing into their own professional and personal challenges.
This has been a real team effort and as an essential service provider, we
should be proud that we have kept our network of branches open
whenever possible. I would like to thank our frontline colleagues who have
continued to maintain member services throughout the periods of lockdown
and restrictions.
Fundamentally our three priorities have remained and will remain the same:
• Ensuring the wellbeing of colleagues;
• Protecting and serving our members; and
• Supporting our communities
You can see throughout our annual report how we’ve performed against
those priorities, and also how we plan to continue to ensure that we can do
this sustainably for the long-term. Deploying capital judiciously to serve
members’ interests and ensure that The Nottingham remains relevant to
existing and future members remains a guiding principle of the Board, as
we invest in our services and reinvent the Society for a more digital future.
A year of continued low interest rates with
emerging inflationary pressure
In economic terms, we have an unsustainable mixture of low interest rates
and rising inflation. Continued government responses to the pandemic have
created strong liquidity during 2021, but the medium-term implications of
withdrawing these support mechanisms in an inflationary environment remain
uncertain. The Board continues to monitor market and macroeconomic
developments closely. In December, the Monetary Policy Committee (MPC)
surprised the market with its first rate rise and a further rise followed in
February. All signs indicate increasing interest rates in 2022, although the
exact timing and quantum of any further increases continue to be unclear.
Negative interest rates are now much less likely in the short to medium-term
than when we entered 2021, however inflationary pressures mean that real
interest rates could remain negative for some time.
A very competitive business environment with low base rates and high levels
of liquidity available to those focused on the mortgage lending market
(including the ring-fenced retail banks who benefit from both low cost of
funds on their current accounts and greater market share and scale) has
meant historically low interest rates have been available to borrowers
throughout the year. Combined with the limited supply of housing stock for
sale, and the impact of temporary stamp duty reductions, this has led to
buoyant market conditions and continuing rising house prices.
The rates available in the mortgage market have a knock-on impact on what
we can afford to pay savers. We have sought to pay what we can while
maintaining a prudent margin so that we can continue to invest in the long-
term sustainability of the Society.
Strategy and progress
Both for the short-term and the long-term, we’ve had to continue to think
about how we will deal with our customers’ changing expectations and
how best we, and our strategic partners can meet those needs. As we saw
last year, the pandemic and lockdowns have accelerated some of the
longer-term trends – for example in the acceptance of digital interaction
with financial service providers and in increasing use of cashless
payments. David sets out in his Chief Executive’s review an update on the
major changes we’ve made in 2021. This includes the divestment of
Nottingham Mortgage Services (NMS), the launch of the Beehive Money
app and the strategic partnership with Mortgage Advice Bureau (MAB),
which represent tangible strides forward towards a more digital Society,
able to serve the needs of younger and future members.
This will be a major focus for the Board in 2022 as we address the
emerging medium-term landscape which the pandemic and broader
economic conditions are creating.
CHAIRMAN’S STATEMENT
THE NOTTINGHAM BUILDING SOCIETY | 5
STRATEGIC REPORT
Supporting our communities
As we think about the longer-term future of the Society, we also focus on our
wider communities. We encourage team members to be involved locally to
make a difference in each community as well as the support we give centrally
to key initiatives in relation to supporting our young people to aspire and
achieve their potential, financial education, and our newly established Samuel
Fox Foundation to facilitate delivery of our contribution. During 2021, we’ve
also looked more holistically at all the ways we deliver against our mutual
ethos and do the right thing as an organisation, through our Responsible
Society agenda, which includes communities and environment as well as
people. The Corporate responsibility report gives more detail of how we help.
An enhanced focus on climate change has been a priority for the Society and
we have considered and defined an appropriate strategic response for the
Society to play its part, both at a personal and corporate level, starting with
those areas over which we have direct control.
Board activity
The Board’s primary role is to ensure that the Society protects the long-term
interests of current and future members, which has been more complex and
challenging over the past two years as a result of the pandemic. Operationally,
the Board has had to adapt the way it conducts its business with many more
virtual meetings being required due to Covid-19 restrictions. The Board has
been closely involved during the year in overseeing the effective deployment
and investment of capital in the ongoing reinvention of the Society.
Board development
We were delighted to welcome Peter O’Donnell to the Board in January
2021. Peter stood down during the year as chief executive of Unum’s UK
business. His career in financial sector businesses includes senior finance
roles at Prudential, RSA and Aviva.
We are very grateful to Michael Brierley for his stewardship of the Audit
Committee over the past two years. He is not standing for re-election as a
director and will step down from the Board at the end of the AGM to focus
on increasing responsibilities in his other roles and family commitments.
As we announced in July, David Marlow is stepping down as Chief
Executive during 2022. He took over in the aftermath of the financial
crisis in 2011. The Society has grown both its capital base from £148m to
£219m and its mortgage portfolio from £1.9 billion to £3.0 billion over
that period and has done so in a measured and safe and secure way.
Over that period we have made significant investments, both visible and
invisible, in systems, processes and people. David is rightly proud of the
readiness of the Society to face up to the continuing changes and the
digital future.
I am delighted that Sue Hayes is joining the Society as the new Chief
Executive. She joins us from GB Bank after a career in retail financial
services including time at Aldermore Bank as well as senior roles at HBOS,
Santander and Barclays Bank. Her extensive knowledge of retail financial
services will be critical in the next phase of our reinvention strategy.
She finds a Society ready for the future and ready to adapt to the many
and accelerating changes we will face in the decade to come. We have
anticipated and will continue to expect changes to customer expectations
with increased digital adoption and reduced cash usage, changes to
regulation with adoption of a strong and simple post-Brexit regime, yet
continuing market and competitor pressures.
Outlook
Whilst we all hope that the pandemic will abate in the coming year, or at
least shift to an endemic, which we learn to live with; nonetheless we also
recognise a period of extreme uncertainty will continue as the economic,
socio-political and behavioural impacts of Covid-19 continue to unwind and a
new normal emerges over the years ahead.
As a Board we will continue to develop and evolve our strategy as events
unfold and ensure that the Society remains relevant and sustainable for current
and future members. We believe that our current strategy and achievements to
date in reinventing the Society position us well for that future.
Thank yous
During 2021, we have had to further adapt our business model and ways of
working at short notice in response to evolving restrictions and our
continuous assessment of risk. On behalf of the Board, I want to pay tribute
again to the teams who have ensured that you, our members and customers,
have been able to access the services you needed from us, whether
colleagues have been working in the branches, in the office or from home.
I want to thank the Board for their support in addressing all the changes we
have made in the development, and execution of our strategy.
I want to repeat our thanks to David for his steady thoughtful and incisive
leadership of the Executive team and the Society over the past 10 years.
Finally, I want to thank you, our members and customers, for the support you
have shown us as we have worked through the restrictions and made
tangible progress forward in our strategy of reinventing the Society.
Andrew Neden
Chairman
3 March 2022
6 | 2021 ANNUAL REPORT AND ACCOUNTS
Entering 2021, we had a number of key areas on which to focus our
energies: the ongoing Covid-19 pandemic; the significant economic
uncertainty brought about by a combination of the pandemic and Brexit; our
intent to reinvent the Society for the emerging new world; continue to act as
a responsible society accepting our responsibilities to stakeholders,
communities and the environment; and to continue to grow membership,
whilst delivering a level of financial performance that would sustain us for
the future.
Whilst the challenges of the pandemic remain, I am delighted to report good
progress on the development and delivery of our strategy, as well as a return
to strong financial performance providing the platform for continued
investment and growth.
The ongoing pandemic
Despite entering 2021 in national lockdown, I doubt many of us would have
predicted that we would end the year under the same threat, due to the
Omicron variant. We have become accustomed to living with varying degrees
of restrictions and controls, whilst maintaining the priorities of keeping our
team members safe and continuing to serve our members.
Through the amazing commitment of our team members and the enduring
support and understanding of our members, we have managed this well and I
am enormously proud of that achievement.
We have not been immune from the challenges and sadness that the virus
has brought but we have responded strongly, focusing on ensuring that we
continue to serve our members, helping them to save, plan and importantly
protect their futures. Whatever the next phase of the pandemic brings in
2022, we will continue to face it with the same stoicism and purpose that we
have done for the past 21 months.
Reinventing the Society
The rapidly changing world, exacerbated by the pandemic, has required us to
reinvent the Society for that newly emerging world. In 2021, we continued
our efforts to ensure that we have a proposition that is relevant to a broader
community, delivered in the manner which members expect.
In the early part of the year, we completed a number of previously announced
branch closures. These were conducted in a professional and sympathetic
manner. You may recall that the closures focused on our significant
concentration of branches in and around greater Nottingham. Despite closures
always being regrettable, I am pleased to confirm that as we end 2021, the
vast majority of members having chosen to stay with us. We are very grateful
for their understanding and loyalty.
A significant focus for 2021 was to relaunch our Beehive Money digital
platform as an app-led savings capability for younger savers looking to take
advantage of the government tax-free and Lifetime ISA (LISA) savings regime.
Our vision is to offer a market leading savings app that helps younger savers
achieve their goals through saving and enabling access to first class
independent advice on matters that are important to them.
We were delighted to launch our app to existing members in September and
to the whole market at the end of November. This is a first for a UK Building
Society offering a ‘FinTech’ standard savings capability, with access to
independent mortgage advice; essential as around 80% of Beehive members
are savings with us to buy their first home. I am delighted to say that at the
end of 2021, we have over 55,000 members saving with us in Beehive
Money. We are excited at the new opportunities for growth and innovation
that Beehive Money brings us, along with a completely new cohort of younger
savings members. In 2019, 26% of savings members were under 40 years of
age. That is now 39% and growing.
As we developed the Beehive Money platform and saw the significant rise in
members, especially those saving with us to buy their first home, it prompted
us to look at our capacity and capability to deliver digital-led independent
mortgage advice at scale in the years ahead. Following a review of our group
in-house capability, we launched a formal process to find a strong digital-led
partner for our mortgage advice offering.
Following a competitive bid process, we were delighted to announce a new
partnership with Mortgage Advice Bureau (MAB) and Belvoir. Combining
MAB’s market leading mortgage network and digital capability with Belvoir’s
national high street based advisors, we agreed to sell our own mortgage
broking business (Nottingham Mortgage Services) to Belvoir and have entered
a long-term distribution agreement with MAB/Belvoir for the provision of
independent mortgage advice. Many of our members continue to be served
by their existing advisor whilst also giving us access to digital capability and
significant advisor capacity to serve the growing number of Beehive members.
Beehive members can access the advice they need to find the right mortgage
for their first home direct through the Beehive Money app – a modern
approach for today’s first-time home buyer.
In the face of intense mortgage competition outlined by the Chairman, we
have continued to enhance and widen our mortgage offering. A series of
improvements have been introduced, with several developments also in
progress that include rewarding brokers for retaining Society mortgage
customers, enhancements to make our Limited Company buy-to-let offering
even more relevant to our customers, as well as plans to enter the growing
holiday let market. These enhancements are viewed as initial attempts to
broaden our appeal as a lender with more to come in 2022 and beyond.
CHIEF EXECUTIVE’S REVIEW
THE NOTTINGHAM BUILDING SOCIETY | 7
STRATEGIC REPORT
A responsible society
With the seismic global changes comes a stronger focus on being a
responsible organisation which embraces our responsibilities to our
employees and members, as well as the communities and the environment
in which we operate. As a mutual organisation we feel that responsibility
even more keenly.
Throughout 2021 we have worked tirelessly to live up to this expectation. In
our annual report you will find progress reports and commitments that we
are making to our stakeholders, communities and to the environment.
Highlights include over £200,000 of donations made to worthy causes in
our communities, over 1,000 hours of colleagues’ time volunteered to
make a difference and the launch of our Career Academy, in association
with national partner Ever-Fi, to provide an employability programme for
young people.
Towards the end of the year, we were delighted to launch the Samuel Fox
Foundation, named after our founding Chairman and philanthropist. The
foundation will focus on building skills and employability in our
communities, with a particular focus on enabling young people to fulfil
their potential and inspire their futures. We have already made several
significant donations from the foundation. We are looking forward to the
foundation playing a strong role in encouraging our communities to thrive
in the years ahead.
COP26 brought the climate crisis into sharp focus during the year. This
reaffirmed that the work we were carrying out to better understand our
carbon footprint and then to reduce it, was essential. For the first time
this year, our sustainability report outlines our approach to becoming a
Net Carbon Zero organisation and includes several commitments, not
least to reduce our scope 1 and 2 emissions by at least 10% by the end
of 2022. We will continue to work on our plans over the next year or two
to fulfil our obligations towards ensuring our climate can sustain the
planet as it was intended.
A sustainable performance
Another priority in 2021 was to return to a strong level of financial
performance that ensured we could continue to invest in and grow the
Society in line with our long-term plans. Despite some significant
headwinds, we have been successful in meeting this objective.
In the face of intense competition and sub 1% mortgage pricing, we have
managed the growth versus margin dynamic well. Overall, we increased our
new mortgage applications by 22% over 2020 but by being selective in the
areas we were active, and not being lulled into lending at rates we would
not have been comfortable with, we increased our interest margin by 17bps
to 1.24%. This has supported an increase in our net interest income of 13%
to £45.9m. Overall, our underlying income in the year for the total Group,
excluding gains from derivatives has risen 11% to £49m.
Despite the significant ongoing investment in the Society, we have
continued to manage our costs well and have also benefitted from the
unwinding of some headwinds we experienced in 2020. Our strong focus
on good credit quality was rewarded with the robust performance of our
lending book, enabling us to release £1.4m of the impairment charge we
made on a prudent basis last year. We have also benefitted from the shift in
market expectations of interest rates, which have moved from being
potentially negative at the beginning of 2021 to an upward track, reflected
in the Bank of England’s MPC decision to increase rates in December and
February to 0.5%.
Overall, this has delivered a total Group profit before tax of £15.1m and a
profit after tax of £12.6m. A profit after tax ratio of 0.34% has returned us
to a level that enables capital accretive growth and is a strong response to
the deficit we ended up with last year. The full details of our 2021 financial
performance can be found in the strategic report.
Quality and strength
The Society continues to enjoy high levels of financial strength and deliver
high-quality outcomes to members. The strong performance we have
delivered in 2021 only strengthens that position. We have replenished our
capital levels, which were already significantly in excess of our regulatory
requirements.
Our liquidity position remains incredibly robust with our liquidity coverage
ratio standing at 216% supported by continued growth in our branch
savings balances, despite the smaller number of branches and very positive
growth in our digital balances which have increased by 47% during the
year to £343m.
The release in impairment charge of £1.4m reflects the continued high
quality of our lending book which, despite the continued uncertainty sees
only 47 accounts three or more months in arrears at the end of the year.
Other measures of quality remain strong with our Net Promotor Score of 71
continuing to significantly exceed the financial services benchmark; our
complaints ratio of 188 per 100,000 customers also remains at very low
levels despite the challenging operating environment; and our employee
engagement score of 80% is well ahead of the financial services benchmark
and evidences the response we have had from team members to all we
have tried to do to support them through these testing times.
Outlook
Despite continued uncertainty, we enter 2022 financially strong and
confident that the changes we are making to reinvent the Society are the
right ones ensuring that we have a relevant and vibrant future. We can
therefore move forward with a strong sense of confidence.
Areas of focus, other than continuing to protect our colleagues and to serve
members through the pandemic, will be to continue to fashion our new
approach to mortgage lending to reflect the changing landscape and to
ensure we can continue to increase levels of lending at a yield we are
comfortable with.
8 | 2021 ANNUAL REPORT AND ACCOUNTS
Having successfully relaunched Beehive Money, there is much to achieve
to build on our strong start and develop the proposition further so that
an increasing number of younger savers see Beehive Money as their
primary source of support and advice to help them save, plan for, and
protect their futures.
We will also ensure that our branch network continues to meet the needs
of our traditional passbook-based savers; helping them to save, plan and
protect their future. It will be important therefore that we continue to work
effectively with our network of partners who enable us to deliver our unique
proposition to members.
Thank you and Goodbye
This is my last annual report as Chief Executive having served our
members for 11 years as Chief Executive and 16 years overall as an
Executive Director.
Having overseen the development and growth of the Society, which is
unrecognisable from the organisation I joined in 2006, as well as
navigating through a one in 100-year global financial crisis, Brexit, ultra-
low interest rates, as well as a global pandemic, now feels the right time
to hand over the reins to new leadership. The Society is significantly larger
and financially stronger than it was 16 years ago and has the capability
and vision to move forward as a modern mutual in a digital world.
I am immensely proud of what we as a team have consistently achieved
over many years and it has been an honour and privilege to serve our
members over that period. The Nottingham will always have a special
place in my heart, and I will continue to watch our continued progress
with real interest and pride.
My enormous gratitude and respect go to our colleagues and partners for
their outstanding efforts in what has been another unique and
challenging year. You have all been amazing.
Finally, I’d like to thank our members for continuing to have faith and
trust in us to help you save, plan, and protect your futures. I hope that
continues for many years to come.
David Marlow
Chief Executive
3 March 2022
CHIEF EXECUTIVE’S REVIEW (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 9
STRATEGIC REPORT
Business model and Group strategy
The Nottingham is a top ten UK building society with £3.6bn of assets and
a regional presence extending to 48 branches across nine counties.
The essence of a building society is to provide a safe and secure home for
members’ savings and to use these funds to provide mortgages to members
to purchase their homes.
To be successful, we believe a building society should offer more than this and,
at the heart of The Nottingham, we have a clear purpose, which is to build
enduring membership in savers and borrowers who are looking to receive a
proposition based on a combination of advice, price, service and convenience
that helps them save, plan and protect for a secure financial future.
The Nottingham aims to support its members in doing the right thing and
take steps to plan for their financial futures in addition to just simply saving or
borrowing with the Society. This is achieved through the provision of a suitably
targeted range of advice services, which provides a choice of product and
provider suited to their needs, which may not otherwise be available to them
at the price we choose/ are able to offer. In delivering this we expect to build
trust, loyalty and advocacy in the membership for the long-term.
During 2021, the Society has continued on its accelerated reinvention
journey, driven by the ultra low interest rate environment and resulting
pressure on net interest margins, and the wider societal impacts of the
Covid-19 pandemic, driving an unprecedented recession and a significant
shift in consumer/member behaviour and expectations.
This reinvention follows five key principles as shown in the diagram below:
STRATEGIC REPORT
The Nottingham remains committed to a strong branch network and our
reinvention has been invested to ensure we can continue to maintain the
higher quality service provided to members and provide them with an
appropriate range of services focused on later life.
The Nottingham recognises that to remain successful in the long-term as a
modern mutual, it needs to attract a broader membership and be relevant
and attractive to younger customers as well as to the existing branch based
members. During 2021, the Society has relaunched its core digital member
proposition with its Beehive Money app development.
This puts us in a strong position to meet successfully the expectation of
current and future members, at a lower cost to run whilst retaining our
industry leading customer service levels.
We now have in excess of 55,000 LISA members within the Beehive Money
platform and have helped over 2,400 members buy their first homes using
their LISA account.
During 2021 we further widened our partnership model, agreeing a long-term
partnership with the Mortgage Advice Bureau (MAB), to provide our members
with access to first class expert mortgage advice. As a result of the new
partnership, we also saw the sale of our mortgage advice subsidiary,
Nottingham Mortgage Services Ltd, to the Belvoir group during the year.
Group membership hubs
The Nottingham’s unique proposition places us in a strong position to meet
our customers’ needs and deliver advice, choice, service and value. As a
result of the business changes during 2021, the Society now operates under
three distinct membership hubs, supported by our strategic partners:
• Branch – providing traditional face-to-face savings propositions and
advice services, including investment and personal financial planning
estate agency, funeral planning and insurance offered through our
partnership with independent third parties.
• Digital savings (Beehive Money) – Our online platform and mobile app,
providing access to digital savings accounts, including LISAs, as well as direct
access to digital expert mortgage advice through our MAB partnership.
• Mortgages – Our intermediary-led lending hub, offering a wide variety
of mortgages, to home owners, landlords and small commercial entities.
To maintain our relevance to both existing and future members, our aim is to
provide members with a choice of propositions, which is keenly targeted and
relevant to their needs, which we see as a combination of the traditional face
to face branch and digital/mobile offerings.
MORTGAGES BRANCHDIGITAL SAVINGS
A SUSTAINABLE & RESPONSIBLE SOCIETY
Working in partnership with:
GROWING MEMBERSHIP
10 | 2021 ANNUAL REPORT AND ACCOUNTS
KEY PERFORMANCE INDICATORS
CONTINUING BASIS
Group
2021
Group
2020
Net interest margin 1.24% 1.07%
Group management expenses ratio 1.17% 1.21%
Profit after tax ratio 0.34% (0.19)%
Following the sale of the mortgage broking business during the year, the
statutory income statements on page 54 have been presented on a
continuing basis. However, the Board has managed the overall performance
on a total Group basis throughout the period.
The difference in financial outcomes when considered on a total Group basis
as opposed to the continuing basis are not material in the context of the
overall understanding of the financial performance covered in this report.
Therefore the following financial performance review is considered in
totality, and not separated between continuing and discontinued
performance, as referenced in the segmental analysis presented in note 2 of
the financial statements.
Business performance
The Chief Executive’s review includes a summary of factors affecting our
performance in 2021 and should be read in conjunction with this report.
Overall the Board is pleased with the performance of the Group in the context
of its strategic objectives and external market challenges we continue to face.
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 in the
Society to be sustainable over the longer-term.
The objective is to optimise our net interest margin and profit after tax ratio
so that we balance the requirements to offer attractive rates for savers and
competitive rates for borrowers.
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 as well as net strategic investment costs supporting the
reinvention of the Society and those which are not ongoing in nature, such
as asset disposals.
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 11.
The following financial review section provides a summary of the performance
of the Group in the context of its strategic objectives including details of the
Group’s Key Performance Indicators used to monitor performance.
STRATEGIC REPORT (CONTINUED)
Basis of presentation
MORTGAGES
Innovate and differentiate
our Mortgage proposition to
ensure we remain relevant
BRANCH
Provide excellent face
to face service through
our Branch Network to
support our members
on their later life journey
RESPONSIBLE SOCIETY
To create and maintain an environment where our people
can be at their best, work together to deliver the Society’s
strategic goals and feel valued and rewarded for their unique
contribution. This incorporates driving forward our diversity
and inclusion agenda, our continued commitment to support
and do good in our communities and making progress on
becoming a more environmentally sustainable society.
MEMBERSHIP
To continue to grow our membership, delivering our purpose
to support members to save, plan and protect for the future,
and serve them excellently.
SAFE & SECURE
To safeguard the things that matter most, ensuring that the
Society, our members and team members remain safe and
secure and operate within Board approved risk appetites.
STRATEGIC OBJECTIVES
DIGITAL
Accelerate our digital
savings proposition
through Beehive Money
to attract and resonate
with a younger generation
of savers
REINVENTION
To deliver our differentiated member focused strategy
in 3 core areas:
PEOPLE
ENVIRONMENT
COMMUNITY
THE NOTTINGHAM BUILDING SOCIETY | 11
STRATEGIC REPORT
INCOME STATEMENT
INCOME STATEMENT
TOTAL GROUP BASIS
Group
2021
£m
Group
2020
£m
Net interest income 45.9 40.6
Net fees & commissions receivable 3.1 3.7
Net underlying income 49.0 44.3
Administrative expenses (36.2) (33.6)
Depreciation & amortisation (6.8) (7.5)
Underlying management expenses (43.0) (41.1)
Impairment release/(charge) – loans & advances 1.4 (2.9)
Profit of disposal of property, plant & equipment - 0.1
Underlying profit before tax 7.4 0.4
Gains/(losses) from derivative financial instruments 7.9 (2.7)
Net strategic investment costs (0.2) (4.5)
Change in accounting estimate - (1.6)
Reported profit/(loss) before tax 15.1 (8.4)
Tax (charge)/credit (2.5) 1.2
Reported profit/(loss) after tax 12.6 (7.2)
Represents:
Profit/(loss) after tax – continuing operations 12.4 (7.0)
Profit/(loss) after tax – discontinued operations 0.2 (0.2)
Financial highlights
Key performance indicators
CONTINUING GROUP BASIS
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
1.24%
2020: 1.07%
£15.1m
2020: £8.4m loss
16.5%
2020: 15.0%
1.12%
2020: 0.97%
0.21%
2020: 0.21%
87.8%
2020: 92.6%
216%
2020: 215%
1.19%
2020: 1.25%
0.34%
2020: (0.19)%
STATEMENT OF FINANCIAL POSITION
STATEMENT OF FINANCIAL POSITION
Group
2021
£m
Group
2020
£m
Mortgages 3,010.9 3,128.0
Liquid assets 562.5 592.2
Other assets 61.4 38.2
TOTAL ASSETS 3,634.8 3,758.4
Retail & wholesale funding 3,370.7 3,479.4
Other liabilities 45.0 72.7
Reserves 219.1 206.3
TOTAL LIABILITIES & RESERVES 3,634.8 3,758.4
12 | 2021 ANNUAL REPORT AND ACCOUNTS
STRATEGIC REPORT (CONTINUED)
2021 2020
Net fees & commissions receivable £3.1m £3.7m
2021
£m
2020
£m
Building Society 3.0 2.1
Total continuing fees receivable 3.0 2.1
Building Society fees & commissions payable (0.9) (1.0)
Net continuing fees receivable 2.1 1.1
Mortgage Broking & Estate Agency - discontinued 1.0 2.6
Net total fees & commissions receivable 3.1 3.7
2021
£m
2020
£m
People related costs
21.5 21.4
Other administrative expenses
14.7 12.6
Underlying administrative expenses 36.2 34.0
Depreciation and amortisation – underlying 6.8 7.1
Management expenses – underlying 43.0 41.1
Strategic investment costs – admin 1.1 4.3
Depreciation, amortisation & change in estimation - 2.0
Management expenses –strategic 1.1 6.3
Total management expenses 44.1 47.4
Represents
Administrative expenses 37.3 38.3
Depreciation & amortisation 6.8 9.1
44.1 47.4
Underlying management expenses – continuing 43.3 38.1
Underlying management expenses – discontinued 0.8 3.0
The Group’s management expenses includes administrative expenses
depreciation, amortisation, and net strategic investment spend for
reinvention. Group total management expenses have reduced by £3.3m in
2021, to £44.1m.
2021 2020
Management expenses £44.1m £47.4m
2021 Financial review and
key performance indicators
INCOME STATEMENT REVIEW
The Group’s underlying profit before tax increased to £7.4m in 2021 (2020:
£0.4m). Total underlying income grew by £4.7m in the year, with an increase in
net interest income partially offset by a reduction in net fees and commissions.
Underlying management expenses have increased by £1.9m to £43.0m.
Impairment charges on loans and advances of £2.9m recorded in 2020, as a
result of the projected macroeconomic uncertainty and risk of borrower
defaults created by the Covid-19 pandemic, have partially unwound in 2021
with a £1.4m release; resulting in a total movement of £4.3m. Whilst the
overall level of macroencomic uncertainty has reduced during 2021, a degree
of uncertainty still remains, particularly in respect of inflation, interest rates
and future house prices as well as the risk of further variants and potential
additional government measures in response.
Total management expenses have fallen by £3.3m year on year, primarily due
to a number of non-recurring costs in the prior year relating to strategic
reinvention and change in amortisation estimation.
Beyond the movements detailed above, the Group has also benefitted from
a significant derivative movement gain in the year, reversing out the prior
period derivative movement losses seen in 2020 and 2019. A reduction in
the level of strategic investment expenditure spent on reinvention projects
and an increase in the level of income generated from asset disposals has
also been seen compared to 2020. The Group has benefited in the year
from gains recognised on the sale of freehold properties as well as the sale
of its mortgage advice subsidiary. These asset disposal gains are recognised
outside of underlying performance.
The Group’s reported profit before tax position has moved from a £8.4m
loss before tax in 2020 to a £15.1m profit before tax in 2021.
2021 2020
Net interest income £45.9m £40.6m
Net interest income increased by £5.3m in 2021, driven by lower interest
costs paid following savings rate reductions made in late 2020, six months
after the Bank of England base rate had reduce to 0.1%. Widening
mortgage asset yields in early 2021 also partially contributed to the
increasing net interest margin. However available asset yields have
decreased significantly in the second half of 2021. Net interest margin
increased to 1.24%, up from 1.07%.
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 commisisons payable relates to various banking charges and
mortgage related charges, which are spread over the life of the initial
product term.
The Society’s overall net fees and commissions receivable has increased to
£2.1m from £1.1m in 2020.
Net total fees & commissions receivable have fallen by £0.6m,
predominately reflecting the sale of the estate agency business in 2020
and the sale of the mortgage broking business in July 2021.
THE NOTTINGHAM BUILDING SOCIETY | 13
STRATEGIC REPORT
Underlying management expenses increased by £1.9m.
The transfer of the estate agency and lettings business and branch
optimisation activity in 2020, as well as the sale of the mortgage advice
business in 2021 generated savings in underlying administrative expenses.
This is offset by additional cost of colleagues supporting the Society’s
reinvention activity, increased licensing costs related to the Society’s
Beehive mobile app and the costs associated with the colleague bonus
scheme, which was not paid in 2020.
Underlying depreciation and amortisation reduced to £6.8m. Overall this
contributed to an underlying management expense ratio of 1.12%
(2020: 0.97%).
The Group’s underlying cost income ratio reduced to 87.8% from 92.6% as
the increase in income outweighed the slightly higher underlying cost base.
Total Group management expenses includes £1.1m of strategic investment
cost supporting the Society’s reinvention strategy. This reflects costs related to
the disposal of the mortgage advice subsidiary and establishment of the new
partnership arrangements; Beehive Money development expenditure and
costs relating to mortgage reinvention activities. This is offiset by the benefits
recognised in relation to early exit of leasehold locations and lower
dilapidations costs than expected.
The lower strategic investment costs compared to the prior year are reflective
of the progress made in delivering the reinvention strategy.
An impairment release of £1.4m has been recognised in the year under the
forward-looking requirements of the IFRS 9 accounting standard. This reflects
a partial reversal of the £2.9m impairment charge recognised in 2020.
The UK’s GDP and unemployment levels have shown much more resiliency
than anticipated at the end of 2020. However, there remains uncertainty with
regards to inflationary pressures, interest rate rises and the impact of these on
household affordability and the housing market as well as the ongoing
impacts of the pandemic. This could impact our customers’ ability to continue
to make mortgage repayments in the future.
Despite the ongoing uncertainty in the external environment, the Society’s
arrears ratio (numer of accounts in three months or more arrears) has
continued to stay at low levels, with the ratio at the end of 2021 standing
at 0.21% (2020: 0.21%). There were 47 cases (2020: 49) out of over
22,500 accounts across the mortgage book with three months or more in
arrears at 31 December 2021. The Society had 3 properties in possession at
the year-end point.
The low level of arrears ratio continues to reflect our low risk business
model and prudent underwriting approach. We always seek to ensure that
customers can afford to meet their mortgage repayments from the outset
and it is this approach that has ensured arrears levels have remained below
industry average.
However, the current uncertainty in the macroeconomic environment and
what may happen to arrears levels and resulting credit losses as we come
through the pandemic, remain a key risk to the Society and are reflective of
the level of expected credit loss provision held against mortgage assets.
2021 2020
Impairment release/(charge) £1.4m £(2.9)m
2021 2020
Derivative financial instruments gain/(loss) £7.9m £(2.7)m
The government-led payment deferral scheme has now come to an end and
from over 3,000 customers who were supported with payment deferrals
during the period of availability, the significant majority returned to fully
paying status, with only a small number of customers requiring further
forbearance support from the Society.
The Society’s total overall impairment provision as at 31 December 2021 is
£3.1m (2020: £4.5m), which equates to 0.10% of the total book.
The Nottingham predominately uses derivative instruments to manage
exposure to changes in interest rates that arise from fixed rate mortgage
lending and fixed rate retail savings products, as well as in its secured bilateral
funding arrangement. This leads to volatility in income statement results; such
volatility would only be realised if we chose to sell the derivatives before they
reach maturity.
As market expectations and prevailing market rates have increased across
2021, this has resulted in an unwinding of the losses seen in prior years,
whilst some gains on more recent derivative positions have been seen. The
Nottingham has no need, or intention, to sell these derivatives 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.
CUSTOMER SATISFACTION
2021 2020
Net promoter score 71% 76%
In addition to financial measures, the Board also monitors a range of
customer measures designed to ensure we continue to meet our
customers’ needs.
Our customer satisfaction survey is central to assessing how well we are
delivering customer service and is based on customers’ responses to actual
transactions and activity with The Nottingham. In 2021 we have maintained
our industry leading levels of satisfaction, with 83% (2020: 84%) of our
customers rating us as excellent, and in line with the prior year position.
The Net Promoter Score measures the percentage of customers strongly
prepared to recommend The Nottingham to others, less those who are not
prepared to recommend The Nottingham, which results in a net percentage of
our customers who would recommend our products and services. The
Nottingham’s Net Promoter Score also remained strong at 71% (2020: 76%).
Our customer base continues to grow, with over 30,000 new customers
welcomed to the Society during 2021 and our LISA product offering
continuing to contribute significantly to our new membership. With strong
customer satisfaction scores, enhanced digital platforms, a strong branch
network alongside the product and service offering, we expect this growth
to continue.
14 | 2021 ANNUAL REPORT AND ACCOUNTS
2021
£m
2020
£m
Branch savings
2,519.8 2,506.0
Non-branch savings 355.7 288.2
Retail savings 2,875.5 2,794.2
Secured wholesale 470.3 644.5
Unsecured wholesale
24.9 40.7
Retail & Wholsale funding
3,370.7 3,479.4
STRATEGIC REPORT (CONTINUED)
Overall, total mortgage balances fell marginally by 2.4% during the year
and stands at £3.0bn.
Gross new lending totalled £557m for the year compared against £493m
in 2020.
Residential gross lending consisted of £429m prime residential lending
(2020: £336m) and £42m to traditional buy-to-let lending both secured on
high quality residential assets. Mortgage lending remaining concentrated in
prime high quality mortgage assets. Residential mortgages, excluding buy-
to-let, account for 68% of the total lending book.
The Secured Business Lending (SBL) book increased to £232.6m, with £86m
of gross lending for the year, predominately driven by limited company BTL
lending also secured on high quality residential assets.
The Society saw continued success on customer retention where we
retained around two thirds of customers who reached the end of their fixed
or discounted product term in the year.
Residential mortgage lending is focused equally on the less than 60% and the
60% to 80% LTV categories. Performance continues to be underpinned by the
low interest rate environment and levels of House Price Inflation (HPI). The
Society’s average LTV decreased marginally from 53% to 50% during the year.
Geographic distribution continues to remain focused in two broad areas, our
heartland of the East Midlands/Yorkshire and London/South East.
RETAIL AND WHOLESALE FUNDING
The Society funds its mortgages through a combination of retail savings and
wholesale funds.
MORTGAGE LENDING
2021
£m
2020
£m
Residential
2,800.2 2,942.1
SBL
232.6 164.1
Total
3,032.8 3,106.2
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 have remained stable at £2.9bn. Branch balances remained
broadly flat as the Society looked to manage liqudity levels alongside
asset growth. Balances in the Beehive Money digital platform have grown
from £232m to £343m in 2021. The Society opened over 21,000 new
Beehive digital accounts during 2021.
The Bank of England’s Term Funding Schemes (TFS & TFSME) have
continued to provide the Group with access to secured funding at low rates
of interest, with £343m (2020: £453m) drawn down under the schemes as
at 31 December 2021. The Society drew £225m of funding down through
TFSME during the year, and repaid £335m of TFS in the same period.
The Society also has £127m (2020: £191m) outstanding as at 31 December
2021 borrowed through a secured bilateral funding agreement.
The wholesale funding ratio reduced from 19.7% to 14.7% in 2021.
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:
The Group operates a diverse funding strategy to ensure an optimum mix
and duration of retail and wholesale funding.
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 30.3% (2020: 32.5%), with
prepositioned assets in addition.
The two key measures of liquidity introduced under CRD IV are the Liquidity
Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). The final
requirements for the NSFR have now been released, but are not yet in force.
The Society is currently in excess of the minimum levels required for both
measures, with the LCR at the end of year being 216% (2020: 215%).
2021
£m
2020
£m
Bank of England 284.6 373.3
Multilateral Development Banks 104.7 78.6
UK Gilts & T’Bills 39.6 10.1
Mortgage backed securities 61.5 46.7
Covered Bonds 54.5 17.4
Other 17.6 66.1
Liquid assets 562.5 592.2
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 reduced by 3.3% in the year to £3.6bn following
a managed performance of net interest margin and liqudity management.
THE NOTTINGHAM BUILDING SOCIETY | 15
STRATEGIC REPORT
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 £9.4m 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 a significant 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 at 31 December
2021, as part of government responses to the Covid-19 pandemic.
Alongside the increase in resources outlined above, there has been a 4.5%
reduction in risk weighted assets, reflecting the fall in mortgage assets. This
resulted in an overall increased CET1 ratio of 16.5% compared against the
2020 position of 15.0%, emphasising our capital strength.
Regulatory adjustments include deductions for intangible assets, deferred tax
asset 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 5.6% under the
transitional rules basis. This is driven by the reduction in asset exposures as
well as higher capital resources.
The leverage ratio, excluding central bank deposits, would be 6.0% under
the final rules basis.
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 2021, the Society’s Total Capital Requirement was set at
8.81% of risk weighted assets or £108.7m.
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 2021 under CRD IV final and transitional rules,
and details of key ratios:
CAPITAL RATIOS
% % % %
Common Equity Tier 1 (CET1) ratio 16.4 14.8 16.5 15.0
Total Tier 1 ratio 16.4 14.8 16.7 15.4
Total Capital ratio 18.3 16.7 18.4 16.9
Leverage ratio 5.5 5.1 5.6 5.3
CAPITAL RESOURCES
2021
Final CRD IV
£m
2020
Final CRD IV
£m
2021
Transitional CRD IV
£m
2020
Transitional CRD IV
£m
COMMON EQUITY TIER 1 CAPITAL
General reserves 219.2 205.5 219.2 205.5
Fair value reserves (0.1) - (0.1) -
Regulatory adjustments and deductions (17.2) (13.7) (15.6) (11.4)
TOTAL COMMON EQUITY TIER 1 CAPITAL 201.9 191.8 203.5 194.1
ADDITIONAL TIER 1 CAPITAL
Permanent Interest Bearing Shares - - 2.4 4.7
TOTAL ADDITIONAL TIER 1 CAPITAL - - 2.4 4.7
TIER 2 CAPITAL
Permanent Interest Bearing Shares 23.8 23.8 21.4 19.1
TOTAL TIER 2 CAPITAL 23.8 23.8 21.4 19.1
TOTAL REGULATORY CAPITAL 225.7 215.6 227.3 217.9
RISK WEIGHTED ASSETS 1,233.5 1,291.7 1,233.5 1,291.7
16 | 2021 ANNUAL REPORT AND ACCOUNTS
STRATEGIC REPORT (CONTINUED)
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. This
includes climate-related risks.
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 31 to 35. They are categorised as principal risks within the
risk management framework and are defined as follows:
Economic uncertainties
The combined impacts of the global pandemic, Brexit and supply shortages
in certain sectors continue to cause high levels of uncertainty over the future
of the UK economy. The pressure on interest rates, which was predominantly
downward for the first half of 2021 has now moved significantly, with an
increase in the bank base rate to 0.5% in December and February and an
expectation of further near-term rate rises designed to counter higher levels
of UK inflation. Although recent communications from the Bank of England
have indicated that they expect interest rates to remain at low levels, the
timing and response of the market to potential rate rises are difficult to
predict and make it very challenging to plan and forecast accurately.
The Nottingham is fortunate that, thanks to careful stewardship of its
mortgage portfolio, it entered the pandemic period with historically low
levels of arrears and defaults. Despite early concerns as the pandemic
developed, there has been minimal impact on loan impairments to date.
The vast majority of customers who made use of the ability to defer
payments under the mechanism introduced in response to the pandemic,
have returned to full paying status. This is in line with much of the industry,
however it is unclear how future macroeconomic developments will impact
the ability of these customers to pay going forward. It is certainly possible
that the number of customers in arrears will increase from the historically
very low levels experienced by The Nottingham over recent years, and in
keeping with the Society’s purpose, members will continue to be supported.
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. 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 Covid-19 pandemic continues to have an impact on all of the risk
categories listed above. While the effects of the pandemic have reduced
during 2021, a high level of uncertainty remains. 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.
THE NOTTINGHAM BUILDING SOCIETY | 17
STRATEGIC REPORT
The Nottingham will also continue to closely monitor all relevant economic
forecasts to ensure that it incorporates emerging risks, including any
presented by climate change, into its planning processes. The Nottingham’s
response to climate change is well progressed, with the ongoing
assessment, management and oversight of climate-related risks embedded
within the governance and risk framework and targets and risk appetites
agreed. Further information on climate change and the Society’s response
to it can be found within the Sustainability report. As with other financial
services organisations, work continues to evolve the strategic response to
the challenge of climate change and to enhance the assessment of the
impacts of climate change on the business, particularly for the lending book
which is recognised as one of the most material sources of our carbon
footprint and therefore the main climate-related risk for The Nottingham.
The trading environment
Mortgage trading
The Bank of England’s maintenance of ultra-low interest rates has
exacerbated the ongoing challenge for all building societies in balancing the
needs of savers and of borrowers, while earning sufficient margin to run the
Society, invest for the future, build capital reserves and remain sustainable.
The ultra-low base rate and fierce competitive pressures in the mortgage
market, predominately from larger lenders with very cheap funding sources
and the cost efficiencies of scale, have driven down the rates charged for
mainstream mortgage lending products.
In this environment, The Nottingham’s ability to significantly increase
earnings in the shorter-term are likely to remain constrained for some time.
In response, the Society is considering a number of initiatives that will
enable it to expand its lending, within current risk appetite, whilst
generating required higher returns.
Acquisition of savings balances and membership growth
In an increasingly digitised world, it is important that the Society continues to
invest in its digital strategy as part of its reinvention strategy, to future proof
its business against changes in customer behaviour, remain relevant to our
members’ needs and provide a diverse and stable funding source to support
lending. Failing to do so would place at risk the Society’s funding strategy
and long-term sustainability. This is most relevant in the Society’s savings
proposition, where the Society needs to cater for members in both the
branch network and the digital channel.
A significant part of The Nottingham’s reinvention strategy was delivered
when the Society launched its Beehive Money mobile application (app) in July
2021. The app allows the Society to mitigate the strategic proposition risk of
customers moving to online channels for new savings products by significantly
enhancing our existing digital offering and creates a reliable funding channel
to manage and support the Society’s liquidity requirements. The app also
allows the Society to reach an additional cohort of customers who want to
transact via an app in a digital channel, providing a route to grow the
membership. The Beehive Money app also allows Lifetime ISA (LISA)
customers to access online mortgage advice through our partner Mortgage
Advice Bureau (MAB), which further enhances our strategic proposition to
enable our members to plan, save and protect for their futures.
People risk
One of the principal impacts of the Covid-19 pandemic has been on the
working environment and, in particular, on employees’ expectations of post-
pandemic working practices. The Society successfully focused on supporting
employees through the challenges of 2020 & 2021, supporting physical and
mental wellbeing and adopting a flexible approach where possible to suit
employee needs.
The recruitment market has tightened considerably in the second half of
2021 and there are growing expectations from candidates (incorporating
salary, benefits and working conditions) that the Society will need to align
to if talent is to be secured and retained. Failure to attract and retain talent
is likely to result in an increase in costs through having to pay more to
attract the right candidates or to acquire interim solutions to bridge gaps in
resources. Alongside this, a number of external economic conditions are
resulting in additional pressure and considerations for the Society and may
impact the Society’s ability to recruit or retain successfully. These include pay
freezes being reversed in public sector, increases to costs of living and to
the minimum wage.
In response to this, the Society has instigated a trial period of a blended/
hybrid approach to working, which will be formally reviewed in 2022. Initial
feedback is being sought from colleagues and emerging concerns of
employees around the return to office are being actively addressed and
managed. In the branch network, several renovations have been undertaken in
2021 in order to provide the best possible working environment for branch
colleagues, alongside enhanced experience for our members and potential
members. This branch renovation programme will continue into 2022. In
addition, a variety of other initiatives are being considered to ensure the
Society remains an attractive local employer of choice.
A degree of uncertainty remains, however, around what impact the Covid-19
pandemic will have on working practices over the winter period and the
situation is being closely monitored.
Strategic Partnerships
The Nottingham has simplified its business operations over the last two
years, 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 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.
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, both
financially and operationally.
18 | 2021 ANNUAL REPORT AND ACCOUNTS
Strategic partners also support the Nottingham in other ways, providing
important back-office and technology services.
The Society continues to closely manage such relationships 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
regularly reviewed 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.
Cyber risk
The Covid-19 pandemic has provided increased opportunities for cyber-
criminals to exploit weaknesses in cyber-defences. Reported incidents of
phishing and similar activities have increased across the UK as a result. 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. The new Beehive Money app includes a range of
enhanced security, anti-fraud and financial crime tools to provide not only a
great user experience during onboarding, but also an enhanced level of
security 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.
Regulatory Change
The regulatory environment continues to develop, with a number of new
initiatives coming into force in early 2022. 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:
• Operational Resilience (Joint PRA/FCA);
• Material Outsourcing (PRA);
• Climate disclosures (PRA);
• Consumer Duty (FCA);
• Updated minimum capital requirements – CRR2 (PRA); 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.
David Marlow
Chief Executive
3 March 2022
STRATEGIC REPORT (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 19
STRATEGIC REPORT
CORPORATE RESPONSIBILITY REPORT
Responsible Society
During 2021, we started looking more holistically at all the ways we, as
an organisation, have an impact on our people, communities and
environment. Our approach to help us focus on being a ‘Responsible
Society’ is set out below.
People
Our ambition is to build a culture that enables every one of our team
members to feel that their unique contribution is valued, that they are cared
for and in a place they belong. This incorporates driving forward our
diversity and inclusion ‘Because You Matter’ agenda.
Engagement
As we slowly eased into a post lockdown way of working, we continued to
enable our head office team members to work from home, while our team
members in branch continued working in their locations throughout, with
additional measures in place to protect their health and wellbeing.
During May, we ran a pulse survey to gather team member thoughts on the
future ways of working and the support we continue to provide. It was
positive to get feedback that the majority of team members felt a sense of
belonging and over two thirds rated our health & wellbeing support highly.
The overwhelming majority of our head office team members also told us
that they wanted to continue working in a hybrid way, with some preferring
to work permanently from home.
Following this feedback, a decision was taken to trial a blended working/
hybrid working arrangement from October. Our head office facilities were also
revamped to create more opportunities for collaborative working. This trial
period continues and a decision will be taken on the longer-term approach to
our ways of working after reviewing the success of the trial period.
We also ran our annual ‘Your Voice Matters’ engagement survey in
partnership with People Insight during September/October and were pleased
to see that our engagement score remained above the financial services
sector benchmark. For the first time, we also added an inclusion measure, to
get feedback on whether team members felt they belonged and were valued,
and received positive feedback on this measure. In furtherance of our
Responsible Society agenda, completion of our survey led to 4,600 trees being
planted through People Insight and their partner Eden Reforestation Projects.
Organisational alignment
On 30 July, we successfully completed the sale of Nottingham Mortgage
Services (NMS) to Brook Financial, who are the appointed representative of
Mortgage Advice Bureau. Our key priority was to ensure that there were
roles for all team members affected, either with Brook Financial or within
other areas of the Society. We were successful in this aim and there were
no compulsory job losses as a result of the sale. The majority of impacted
employees continue to work for NMS under the ownership of Brook, and
the remaining seven team members were successfully redeployed into
alternative roles within the Society.
Talent Development & Acquisition
Like many organisations in this past year, we have focussed on reviewing and
improving our working practices to best support the post pandemic workforce.
Like many, we have had to develop our practices by moving to a virtual world
for engaging, onboarding and developing talent.
The labour market has been a challenge, with the increased number of
vacancies across the market impacting all employers. This has meant there has
been increased focus on talent retention and in response, we increased our
focus on retention strategies and supporting people managers to develop
ways to retain and develop their teams.
Our recruitment processes have continued to evolve to ensure we are
engaging effectively with potential and current employees. Due to the success
of the flexible recruitment and onboarding processes implemented during the
pandemic, we’ve continued to accommodate virtual/remote interviews, virtual
ID verification, remote new starter training and additional wellbeing calls to
new employees.
As we’ve entered our reinvention phase, it has been an exciting and
challenging time to join us. Our Employee Value Proposition (EVP) has been a
key focus area for 2021 and by using insight and data to understand the key
drivers of different talent populations, we’ve segmented our proposition and
elevated specific areas to help us retain top performers but to also remain
attractive to external talent.
Our EVP focus areas are:
• Taking the ‘inside outside’ by sharing stories of why our people are proud
and motivated to work here, connecting across a suite of different
channels to reach the right audience;
• Showcasing our commitment to being greener and how we play our part
to fight against climate change by making sure the Society is
environmentally sustainable;
• Ensuring that we have right tools, technology and processes in place for a
seamless employee experience – develop a candidate experience that will
attract the right talent and will elevate The Nottingham as an employer of
choice;
• Sharing our compelling stories of how we have worked to make a
meaningful impact to the lives of our employees e.g. flexible and hybrid
working models; and
• Sharing how we have helped our people make a difference in their community.
By encompassing the central reasons that people are proud and motivated
to go to work, such as our inspiring vision or distinctive culture, we can use
this in our attraction strategy and ensure that we are bringing the right
things to life in our onboarding.
20 | 2021 ANNUAL REPORT AND ACCOUNTS
CORPORATE RESPONSIBILITY REPORT (CONTINUED)
We have adjusted our existing development practices to ensure we could
continue to provide the same level of development to our team members.
This has been achieved by moving all development on to virtual platforms
and enhancing our offering to support a digital learning framework. To
further expand our digital learning capabilities and enhance our learning
administration process, we implemented an updated learning management
system in October 2021. With these adjustments we are proud to say we
have fulfilled our obligation to maintain regulatory and behavioural
competence and development. In the last year, we have maintained high
levels of competence across all our regulated schemes.
In November, we designed and delivered our ‘Trusted Advisor’ programme
to relevant cohorts in our network teams. This three-day programme has
been designed to highlight the importance of getting to know our members
and to better understand their circumstances to then help them plan,
protect and save in the right way.
We have continued to invest in the development of our leaders focusing on
wellbeing and development of leadership skills that are needed in the new
world of work. In November, we celebrated International Leadership Week
(ILW) in which we launched our Leadership Hub to be our central leadership
and management development site. During ILW, we introduced our bite-size
Live Leadership Lessons and launched our monthly leadership podcast, both
of which we will continue in 2022.
We have continued with our layered leadership development programme,
which supports early future leaders through middle management and onto
functional heads. Sponsored through talent and succession forums, we have
several high potential employees, progressing through these channels.
Our first time leaders programme ‘Aspire’ has enabled a number of
delegates to embark on a 12-month programme, leveraging our leaders as
teachers. We have also launched an ‘Aspire for the Network’ this year, giving
customer services consultants the opportunity to embark on a development
programme tailored to future branch manager positions, with some
members of the group going on to secure these roles internally. 70% of
those who graduated from the 2020 Aspire pilot are now working in roles
with more complexity and supervisory accountability. We have exported all
modular learning onto a virtual platform to recognise accessibility
challenges across the organisation.
We have another number of delegates working towards their Level 3 and 5
accreditations endorsed by the Chartered Institute of Leadership and
Management.
We continue to grow the coaching culture through the Society by
expanding the scope of our ‘Coaching with Impact’ programme to more
managers across all functions.
Equality, Diversity & Inclusion
A key priority is to enable a more inclusive culture and this year we
introduced a Diversity & Inclusion awareness and education programme for
all levels, including the Board. We are also ensuring that inclusion and
diversity remains at the forefront of succession planning and recruitment at
Board and Executive team level.
We have remained proud signatories of the Women in Finance Charter since
its inception in 2016. We initially set a target of 30% gender diversity and
increased this to 35% in 2019. While we exceeded our target each year until
2020, this dipped to 33% in 2021. We are disappointed that we have not
met our target, as a result of turnover in senior leadership and
reorganisation, but, as stated in our annual Charter submission, we have all
the actions in place to address this in the medium and longer-term.
We’ve also focused on expanding our network of mental health first aiders
(MHFAs) and achieved our target of having 5% of the Society trained as
MHFAs by the end of 2021.
We’ve continued to focus on team member wellbeing with a range of
initiatives from our monthly ‘Your Health Matters’ e-edition to our recent
partnership with Menopause in the Workplace.
We’ve also considered financial wellbeing for our team members, with the
provision of our Covid-19 Financial Support Fund, set up in February 2021.
We recognised that, whilst we did not access the furlough scheme, team
members may be experiencing financial impacts or difficulties as a result of
the pandemic. Our Financial Support Fund gives team members financial
support to get back on track; this is linked to our mutual ethos of helping
people save, plan and protect their future. Financial support is provided in
the form of grants of up to £1,000 per employee and is open to all
employees, regardless of length of service or income. A number of
applications were received throughout the year and all went through our
panel process for review; all applications received to date met the required
criteria and have been approved. We have also recently partnered up with
StepChange debt charity to provide our team members with debt advice,
information and support.
Doing the right thing for our communities
in 2021
As the effects and ramifications of the pandemic continued to impact so
many members of the community in 2021, our mutual ethos meant we
were once again well-placed to do what was right to not only support our
people and members, but also our wider communities. We made over
£100,000 in charitable donations in 2020 and we set out in 2021 aiming
to at least match this and help our communities thrive. We achieved this
with donations totalling over £200,000.
We know that at a national level young people have been
disproportionately affected by the pandemic. In addition to the changing
and uncertain employment landscape, there has also been a significant
mental health impact on this specific age group. Therefore, we put our time
and resource into trying to help young people by supporting projects that
inspire their futures and help them achieve their potential.
As well as donations, we wanted to support charities and causes with gifts
in kind, encouraging our team to use their two paid days volunteering and
creating a number of opportunities for them to do this throughout the year.
Almost 1,000 hours of our colleague’s time was given in 2021 by
individuals and teams wanting to make a difference. A key highlight of this
was the significant uptake in team members training to be mental health
first aiders, who will not only support their colleagues across the business
but also people across their personal networks who need it most.
THE NOTTINGHAM BUILDING SOCIETY | 21
STRATEGIC REPORT
Career Academy
Employability has long been a strand of our community activity, but in 2021
we accelerated our focus and worked with a number of partners to reach as
many young people as possible with content and guidance that will inspire
their career ambitions and give them a glimpse into the multitude of journeys
available to them. Reaching your full potential starts with being inspired and
motivated and over the last 18 months we have worked with several
community partners to do just this.
We joined forces with Everfi to create a flagship employability programme
based on our Career Academy platform that produced a scalable learning
solution targeted at teachers, that connects classroom education to the real
world of work and focuses on opening new doors of opportunity for all. A
catalogue of online, downloadable, resources was made available to hundreds
of young people in 12 schools and higher education settings across the
country. The rollout to more schools has now begun and it is our aim that in
the future these resources can be used in face-to-face, interactive workshops
in schools up and down the country.
Other Career Academy partnerships in 2021 included a £30,000 donation to
Think Forward that enabled them to introduce their Ready for Work (R4W)
Passport app that allows post-16s to evidence work-readiness in areas such
as preparing a CV, interview practice, opening a bank account, volunteering
experience and demonstrating email and telephone skills.
In a world that is increasingly becoming ‘digital-first’, we recognise that not all
young people have access to devices and data so we partnered with
Framework’s ‘Level-up’ campaign to help drive awareness and funds to those
young people that need it most.
With up to 80% of 18 – 24-year-olds reporting loneliness in 2021, Career
Academy also partnered with Nottingham-based youth charity, The
Wolfpack Project, on the #FindYourFuture campaign to engage young
people up to the age of 35. The campaign reached more than 70,000
people digitally focusing on key elements including physical and mental
wellbeing, financial wellbeing and employability.
The Samuel Fox Foundation
In 2021 we were delighted to launch our very own charitable foundation in
partnership with Nottinghamshire Community Foundation. Named after our
founder and keen philanthropist, Samuel Fox, the foundation will use
fundraising and donations to continue Samuel Fox’s legacy of giving back,
raising people up and trying to build a more responsible society.
In addition to supporting the communities, which surround the Society’s
branch network, the foundation will seek to invest in causes and projects
that help young people fulfil their potential and inspire their futures.
The first award from the foundation was made in November to Stonebridge
City Farm to support its ongoing volunteering programme. Providing a safe
and nurturing place to explore work skills and develop confidence, the farm
caters for up to 140 volunteers a week, many of whom have a learning
disability, to gain valuable skills and experience. Located less than a mile
from our head office and Fox’s former home, the charity is valued highly
within the local community – not only as a free-to-visit inner-city visitor
attraction, but also as a place to grow individually as a volunteer.
In December, the foundation made over 20 donations totalling £10,000 to
local charities nominated by colleagues from across our branch network that
were identified as doing great work for communities across our heartland.
Charities ranged from local food banks to youth centres and ensured that
hundreds of people were supported over the festive period and beyond.
Beehive
A really exciting business milestone in 2021 was launching our first mobile
application (app) with Beehive Money. This gave us an opportunity to
diversify our corporate social responsibility (CSR) strategy a little and, in
support of our brand namesake, we decided an environmental cause would
be the best place to start. The plight of bees and their environmental
importance to the ecosystem and biodiversity is well-publicised so, starting
small, we decided to support the UK’s bee population by sponsoring our
own hives and wildflower meadows. Working with beekeeping experts,
Bee1, we created four brand new colonies, homing 200,000 bees, at a
purpose-built apiary in Wales. And, as Beehive Money grows, so will the
beehives and natural environments we create and support, with
sustainability targets to help us along the way. Just another way we’re
helping build a brighter future with Beehive Money. There’s much more we
can do here, and this is a really positive first step for us in this area.
Environment
We’re acutely aware of the importance of minimising our impact on the
environment and becoming a more sustainable society. We have engaged with
our longstanding energy partner, Inspired Energy, to develop our carbon balance
sheet. We are working to understand the impact of that data to help us to
formulate our plans and detailed targets to move The Nottingham forward.
We are committed to ensuring that as a business we meet the government
deadline of 2050 to achieve Net Zero and will be working hard to
understand how we may be able to improve against this milestone.
Our initial focus for 2022 will be to reduce by 10% our Scope 1 and 2
emissions (that is those emissions generated by our internal operations and
the energy we buy). We will continue to consider more detailed targets for
Scope 1 and 2 to achieve Carbon Neutrality and Net Zero.
The vast majority of our Scope 3 emissions are driven by our mortgage book
and we are working to understand the impact of our lending in more detail
in order to develop an achievable plan of action to reduce the impact on
emissions of the built environment, which is held by individuals who we
support with mortgage loans.
In terms of immediate action to support our drive to be a ‘greener’ business we
have rolled out a recycling programme across our branches and at head office
to improve our waste management. We have continued to work hard with our
main contractors as part of our refurbishment work in branches and at head
office to minimise waste and targeted zero to landfill during 2021. Additionally,
all of our key suppliers are committed to sharing and improving their
sustainability credentials to improve performance still further going forward.
We have continued to roll out LED lighting for all branch refurbishments, head
office changes and as part of any planned maintenance recommendations. By
the end of 2021, we will have 12 branches and head office all with LED lighting.
We’re continuing to make a positive environmental impact through key
partnerships such as Bee 1, which is helping to introduce around 200,000
honeybees pollinating close to 800 million plants and crops.
We manage sustainability through our own Climate Change Forum ensuring
that our approach is effectively managed in terms of agreed actions and risk.
We have also embedded sustainability as a key workstream of our
Responsible Society strategy. The Sustainability report on page 22 provides the
Society’s climate change disclosures in line with the Task Force on Climate-
Related Financial Disclosures (TCFD) requirements. This provides further details
on targets, risk management and the carbon balance sheet of the Society.
22 | 2021 ANNUAL REPORT AND ACCOUNTS
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
therefore presents the Society’s climate-related disclosures under the TCFD
requirements. As a regulated financial services organisation, the Society is
required to publish these disclosures for the first time in 2021.
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. The Board Risk Committee
and the Executive Risk Committee are responsible for oversight of
climate-related risks. All committees are supported by the Climate Change
Working Group which provides a central point of collation and focus for
all climate-related activities at the Society, including inputs from The
Nottingham’s Responsible Society strategic initiative.
BOARD
Board Risk
Committee
Executive
Committee
Climate Change
Working Group
Executive Risk
Committee
Risk oversight
committees
The Climate Change Working Group is chaired by the Chief Executive, who
leads the Society’s response to climate change. The working group is
attended by Executive team and Leadership team members from across the
business. It meets monthly to co-ordinate activities.
Risk oversight committees include the Asset & Liabilities Committee, Retail
Credit Committee, Operational Risk & Resilience 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 Risk Committee is chaired by the Chief Risk Officer & General
Counsel. It meets monthly and reviews risk dashboards for all principal risk
categories. On a quarterly basis, risk dashboards are presented to the Board
Risk Committee. Climate change is presented within the risk dashboard for
strategy risk.
The Board have been fully engaged with the Society’s response to climate
change. During 2021, a number of sessions have been held with the Board,
including educational teach-ins, the presentation of the approach to
governance and oversight and the risk assessment outputs.
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 and for climate-related risks; this
includes independent assessment of the completeness of the risk assessment,
check and challenge of how the risks are 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 defined 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 2021 we have been working hard to better understand the
Society’s impact on our climate through a range of lenses recognised by
global experts and known as Scope 1,2 and Scope 3 Upstream and
Downstream – The Greenhouse gas (GHG) Protocol.
• Scope 1: direct emissions from owned or controlled sources;
• Scope 2: indirect emissions from purchased energy; and
• Scope 3: other indirect emissions that occur in an entity’s value chain.
We have calculated our current carbon footprint to be the emission of circa
53,000 tonnes of CO
2
. Over 95% of our current carbon footprint is related
to carbon emissions from our mortgaged properties (Scope 3 downstream).
Therefore, our efforts to reduce those emissions will need to be undertaken
in direct association with our borrowers who own those properties over a
number of years. We are however committing to be Net Carbon Zero before
2050, in line with the Government’s stated objective.
In the short-term we are putting strong focus on reducing our Scope 1 and
2 emissions over which we have more direct control. In 2022 we are
seeking to reduce our Scope 1 and 2 emissions by a total of 10%. Also,
during 2022 we will agree and establish targets to achieve Carbon Neutral
status for both Scope 1 and 2 emissions. 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.
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.
THE NOTTINGHAM BUILDING SOCIETY | 23
STRATEGIC REPORT
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 lens’, in line with the Climate
Biennial Exploratory Scenario (CBES) published in 2021. 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.
Risk Management
Identification
The Nottingham recognises that climate change is far reaching across its
business and in order to capture of 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 risk 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.
An initial risk assessment of climate-related risks has been conducted,
which comprised of two elements; a high level, top-down assessment by
the Climate Change Working Group and a detailed, bottom-up analysis
conducted through the risk oversight committees. Within this, both physical
and transitional risks have been identified, assessed, and assigned owners
and all material risks are being managed, monitored, and reported in
accordance with The Nottingham’s risk management framework.
The risks have been scored using the established impact and likelihood
scale to facilitate a consistent approach to viewing the materiality of the
risks within the risk hierarchy. The concept of proximity of the risks over
near, medium and long-term time horizons has been introduced, to account
for the extended time periods over which climate risks need to be viewed.
The management techniques identified for the climate-related risks are also
consistent with those in the risk management framework, consisting of
mitigation, transfer, avoidance, monitoring and acceptance. The application
of the approved risk management framework to all risks, including those
related to climate change, has resulted in a consistent approach to risk
being taken across the Society’s risk landscape.
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. 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 metrics have been developed, which support the risk appetite.
These have been informed by several factors, including scenario analysis.
In addition to the formal assessment of risk dashboards by risk oversight
committees (at least quarterly), climate-related risks are also 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.
24 | 2021 ANNUAL REPORT AND ACCOUNTS
SUSTAINABILITY REPORT (CONTINUED)
C02 in tonnes 2021 2020 (Baseline)
Scope 1 emissions
1
Direct emissions from owned or controlled sources
Gas 54 61
Travel - -
Scope 2 emissions
2
Indirect emissions from purchased energy
Electricity 370 484
TOTAL DIRECTLY ATTRIBUTABLE EMISSIONS 424 1% 545 1%
Scope 3 emissions
Other indirect emissions that occur in an entity’s value chain
Investments (mortgage portfolio)
3
47,198 47,215
Purchased Goods and Services 4,240 4,374
Capital Goods 1,192 695
Other
4
693 538
TOTAL INDIRECT EMISSIONS 53,323 99% 52,822 99%
TOTAL EMISSIONS 53,747 53,367
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
Metrics and Targets
Carbon Footprint
We have engaged with Inspired Energy, our longstanding energy
management partner, to support us in developing our carbon strategy.
Deliverables as a direct result of our work with Inspired are as follows:
• Understand our ambitions;
• Completion of site surveys to understand our current emissions and
opportunities for reduction;
• Development of carbon reduction targets;
• Definition and development of our carbon reduction strategy; and
• Annual review of our performance against targets.
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 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 is
based upon 2020 as the baseline and compared against 2021 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 initial data analysis show that over 99% of our emissions relate
to Scope 3 which covers indirect emission sources. Within our Scope 3
emissions over 90% are in relation to the carbon generated by the mortgages
that we have granted. Given that the carbon figures associated are partly
based upon BEIS conversion data, we have commissioned some additional
work to understand the actual EPC status of our portfiolio, which in turn will
support the development of a targeted plan to support our members.
In the short-term we have some opportunities to address our Scope 1 and 2
emissions and this will be a focus in 2022 in terms of both striving for a
10% reduction in our overall energy usage and the development of detailed
targets to get us to Carbon Neutral and Net Zero.
Details of the data included in our carbon balance sheet are shown in the
table below:
THE NOTTINGHAM BUILDING SOCIETY | 25
STRATEGIC REPORT
Energy Performance Certificate Data as at 31 December 2021
Number Exposure
£m
EPC Rating A-C 5,785 887.8
EPC Rating D-E 9,869 1,361.6
EPC Rating below E 542 78.5
No EPC available 4,602 472.3
Total 20,798 2,800.2
Balance by annual flood probability
Total
£m
%
High (>3.3%) 13.2 0.4
Medium (1.1%-3.3%) 48.8 1.6
Low (0.1%-1.1%) 99.8 3.3
Very Low (<0.1%) 33.5 1.1
Negligible (<<0.1%) 2,700.7 89.1
Unable to categorise N/A 136.8 4.5
TOTAL 3,032.8 100
Physical Risk Metrics
A key metric of physical risk is the potential flood risk of the lending
portfolio. This is assessed based on publicly available data published by the
Environment Agency. The data below categories the mortgage exposures by
annual flood probability at 31 December 2021.
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.
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.
2021
2020
1 – Gas
2 – Electricity
3 – Mortgage portfolio
3 – Purchased goods & services
3 – Capital goods
3 – Other
99% of emissions are
Scope 3 (indirect) with
only 1% from Scope 1 & 2
(direct)
26 | 2021 ANNUAL REPORT AND ACCOUNTS
Michael Brierley
Mike joined the Board in July 2020 and has over
35 years’ experience in Chief Financial Officer
(CFO) roles within the financial services industry,
most recently as CFO of Metro Bank plc where he
helped lead the challenger bank from start up to
listing from 2009 to 2018. He spent seven years
at Capital One Europe based in Nottingham as
CFO Europe, CFO UK and Chief Risk Officer
Europe. He has also worked as CFO for Royal Trust
Bank, Financial Controller at Industrial Bank of
Japan, London Branch, CFO of Gentra Limited and
Director Business Risk at Barclaycard. He is
currently a Non-Executive Director at Admiral
Group and chairs Admiral Financial Services
Limited. Mike joined the Rose Theatre Trust as
Trustee and Director in September 2021. Mike is a
Fellow of the Institute of Chartered Accountants in
England and Wales. Mike is stepping down from
the Board in 2022 and is not seeking re-election.
Simon Linares
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
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 the UK markets.
Andrew Neden
Chairman
Andrew joined the Board in 2014. He is a
Chartered Accountant with over 35 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
a non-executive member of the Remuneration
Committee of ANZ Banking Group UK Branch.
Simon Baum
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
THE NOTTINGHAM BUILDING SOCIETY | 27
GOVERNANCE
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.
David Marlow
Chief Executive
David joined the Board in 2006 and became Chief Executive in 2011.
He has over 30 years’ experience drawn from a number of senior roles
in the financial services industry. Before joining The Nottingham, David
held a number of senior posts in retail banking at Alliance & Leicester Plc,
including Director of Current Accounts & Savings and Managing Director
Alliance & Leicester Direct. David represents building societies on the FCA’s
Small Business Practitioners Panel and has previously held the posts of
Deputy Chair of the Building Societies Association (BSA) and Chair of The
Midlands and West Regional Association of the BSA. He is stepping down
from his role and as a Director in 2022 and is not seeking re-election.
Board Committees
Risk
Simon Baum (Chair)
Michael Brierley
Simon Linares
Andrew Neden
Peter O’Donnell
Kavita Patel
Kerry Spooner
Audit
Michael Brierley (Chair)
Peter O’Donnell
Kavita Patel
Kerry Spooner
Nominations
Andrew Neden (Chair)
David Marlow
Kerry Spooner
Remuneration
Kerry Spooner (Chair)
Simon Linares
Andrew Neden
Kavita Patel
Changes to the Board in the year to 31 December 2021
Peter O’Donnell was appointed to the Board as a Non-Executive Director on 1 January 2021.
Non-Executive Director Executive Director
28 | 2021 ANNUAL REPORT AND ACCOUNTS
The Directors’ report should be read
in conjunction with the Chairman’s
statement, Chief Executive’s review and
Strategic report on pages 4 to 18.
Business objectives and activities
Information on the Group’s business objectives and activities are provided in
the Strategic report on pages 9 to 18.
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 9 to 18.
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 page
16 to 18, and our approach to managing these risks can be found in the
Risk management report on pages 31 to 35.
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 31 to 35
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.
Results
Group reported profit before tax for the year was £15.1 million (2020: loss
of £8.4 million). The Group profit after tax for the year transferred to
general reserves was £12.6 million (2020: loss of £7.2 million). As at 31
December 2021, total Group reserves and equity were £219.1 million
(2020: £206.3 million).
Capital
Group gross capital as at 31 December 2021 was £243.1 million, (2020:
£230.5 million) being 7.21% (2020: 6.62%) of total shares and borrowings.
Free capital, as at the same date, amounted to £213.4 million (2020: £203.6
million) and 6.33% (2020: 5.85%) of total shares and borrowings.
The annual business statement on page 116 gives the explanation of these
ratios. The Board remains committed to maintaining a strong capital position.
Loans and advances
During 2021, total lending was £557 million (2020: £493 million) and the
average advance being £170,921 (2020: £159,250), and the average debt
at the end of the year being £133,504 (2020: £132,276). As at 31
December 2021, there were six cases (2020: seven cases) of properties being
12 or more months in arrears or in possession. The total amount of balances
outstanding in those cases was £770,954, with arrears of £113,237.
No mortgage losses were realised during the year. Provisions for potential
mortgage losses total £3.1 million (0.10% 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. During 2021, the Society has also continued to offer
customers payment deferrals as part of the Government-led scheme to respond
to the Covid-19 situation. As at 31 December 2021, the Group had 105 loans
(2020: 125) subject to some form of forbearance. There are no customers
remaining with a payment deferral in place (2020: 161 loans). Note 31 to the
Annual Report and Accounts on pages 102 and 104 provides further details.
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 2021 by the Group’s professional services team,
indicates that market value is £2.9 million (2020: £2.4 million) higher than
book value. During the 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 2021, the total amount owed to suppliers was
equivalent to 6 days’ credit (2020: 20 days).
Charitable and political donations
During the year, the Group made charitable donations of £209,000 (2020:
£125,000). No contributions were made for political purposes.
Country-by-country reporting
The Capital Requirements (Country-by-Country Reporting) Regulations
2013 place certain reporting obligations on financial institutions within
scope of the Capital Requirements Directive (CRD IV).
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
THE NOTTINGHAM BUILDING SOCIETY | 29
Environment and sustainability
The environmental policy is set out in the Corporate responsibility report on
page 19. The Sustainability report on page 22 outlines the Society’s position
in line with the requirements of the Financial Stability Board’s Taskforce on
Climate-related Disclosures (TCFD).
Our people
As a Responsible Society, our ambition is to create and maintain an
environment where our people can be at their best, work together to deliver
the Society’s strategic goals and feel valued and rewarded for their unique
contribution. This incorporates driving forward our Diversity & Inclusion
agenda, focusing on the wellbeing of our team members and seeking out
feedback on a regular basis.
As with many organisations, the pandemic transformed our ways of working:
head office teams continue working from home as we trial blended working
and meetings and training sessions are regularly held virtually. We have also
upgraded our head office to facilitate collaborative working.
As we strive towards having a more inclusive culture, we have embarked on
delivering a diversity and inclusion education programme pilot, which runs
into 2022, after which this will be rolled out to all team members.
We are keen to seek out the views of our team members and ran both a
pulse survey and annual Your Voice Matters engagement survey during the
year. This year, our engagement score was 80% and while marginally lower
than last year’s results, remains above our benchmark and our 2019 feedback.
We were pleased to receive positive feedback on our Inclusion index, a new
measure introduced to the survey, in furtherance of our Diversity & Inclusion
agenda. We also continue to engage with our Colleague Council, at which
Board and Executive team level members attend on a quarterly basis.
We expanded on our network of trained mental health first aiders this year
and have continued to focus on team member wellbeing with a range of
initiatives such as our partnership with Menopause in the Workplace, and
Wellbeing Month. We also focused on the financial wellbeing of team
members with the provision of our Covid-19 Financial Support Fund and
partnership with StepChange debt charity.
As outlined in the Corporate responsibility report on pages 19 to 21, we are
proud to continue with our community support, a tradition that started with
the work of our founder, Samuel Fox.
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.
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.
GOVERNANCE
30 | 2021 ANNUAL REPORT AND ACCOUNTS
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 Chairman’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 which have been
implemented to support this can be found in the Board Audit Committee
report on page 40.
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 16 to 18 and 31 to 35, 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 ongoing uncertainties created by Covid-19 and climate-
related considerations.
The Group’s business activities and future plans are reviewed in the
Chairman’s statement and Chief Executive’s review on pages 4 to 8. 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 2023 – 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 16 to 18 of the Strategic report and the Risk management
report on page 31, actually occurring. This includes the associated risks as a
result of the ongoing Covid-19 pandemic situation 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 26 to
27. 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 2021.
In accordance with the agreement made by the Board and in line with the
rules for re-election outlined on page 37, all Directors who wish to continue
in role will stand for re-election at the next Annual General Meeting. The
regulatory approval for Susan Hayes was received on 1 March 2022 and
she will join the Board this month. She will then stand for election at the
Annual General Meeting in April 2022.
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
Chairman
3 March 2022
DIRECTORS’ REPORT (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 31
For the year ended 31 December 2021
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 its Board Risk Policy annually.
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.
In order to streamline the risk management process, in April 2021 the Board
approved and implemented a simplified committee structure which reduced
the number of governance committees enabling focused oversight with clear
lines of responsibility 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
Reinvention
Committee
Legal,
Regulatory,
Conduct
Trading
People &
Reward
GOVERNANCE
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 based on the three lines of defence
model (described on page 38) 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;
• the effective monitoring of 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 (see below), which oversees the Society’s risk committees, as
detailed in the diagram below.
32 | 2021 ANNUAL REPORT AND ACCOUNTS
Board Risk Committee
As detailed on page 27, the membership of the Board Risk Committee
comprises all non-executive directors. 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 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 Committee and ultimately the Board takes
care to ensure that risks such as system enhancements, long-term funding
approaches, acquisitions and changes in the external economy are evaluated
and that plans are in place to effect any required risk mitigation. 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. In particular, from 2021 the Executive
Committee has taken responsibility for formulating The Nottingham’s strategic
response to climate change.
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 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 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 Group 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.
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 sustainability 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.
RISK MANAGEMENT REPORT (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 33
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.
The economy continues to be dominated by low interest rates and an uncertain
economic environment, to an extent driven by the ongoing Covid-19 pandemic
and the impacts of Brexit.. The Society actively monitors 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.
Basis risk, which arises from changes in the relationship between different
types of interest rates, is included within this risk category as a subset of
interest rate risk.
The Treasury Risk team measures the levels of basis 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 and basis 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 98.
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 multi-
lateral development banks, and also in 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.
Capital sustainability 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 IV (CRD IV) requirements.
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34 | 2021 ANNUAL REPORT AND ACCOUNTS
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 15.
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 and to
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 Covid-19 pandemic. We will continue to treat all customers fairly and to
offer appropriate forbearance activities throughout the pandemic 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). An SBL policy is
used to manage levels of business lending risk with loans manually
underwritten. To ensure appropriate management of lending risk, the Society
maintains watch lists 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 is set at 10% and the Society was comfortably
within this limit, at 7% as at 31 December 2021.
The Society does not have any exposure to the sub-prime mortgage market,
does not purchase loans from other organisations, 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”.
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.
RISK MANAGEMENT REPORT (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 35
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 Legal and Regulatory team 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.
The Committee is supported by the Conduct Regulation Working Group,
which has responsibility for overseeing matters relating to the launch,
administration and ongoing review of the products and services offered by
The Nottingham.
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. During 2021, the Committee has continued to
consider the pressures arising from the Covid-19 pandemic and the steps
the Society has taken to ensure it safely meets its members’ requirements.
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 resiliency framework), the
Committee meets monthly, but with a different focus in each of the three
months of the calendar quarter. Any given quarter therefore features the
following meetings:
• 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.
• A health & safety risk focused meeting, largely focused on matters relating
to the management of health and safety risks.
• 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.
GOVERNANCE
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 developing and embedding the
Society’s approach to operational resilience, in response to the Regulator’s
increased focus in this area.
Reinvention Committee
The Reinvention 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 Reinvention 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 Reinvention Committee is informed by the Group
corporate plan and specifically owns the Development Route Map and
Project Expenditure 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
3 March 2022
36 | 2021 ANNUAL REPORT AND ACCOUNTS
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 2021 and complied
with the provisions of the Code and specifies where the Society is not
compliant with the Code, which the Board has identified as being in the
following area:
The Code requires that there is alignment between pension contributions
for the Executive Directors with those of the workforce. This has been
considered by the Remuneration Committee and it has been agreed that
the pension arrangements for any future executive director would be
reviewed for alignment with those of all employees.
Leadership
The Board
As at 31 December 2021, the Board consisted of seven Non-Executive
Directors (including the Chairman) and one Executive Director, providing a
complementary balance of skills and expertise.
The Board held ten meetings, one strategy review meeting and one business
planning meetings during 2021. 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 Chairman 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 Chairman
The Chairman, who is elected by the Board annually, leads the Board in
approving its strategy and in the achievement of its objectives. The Chairman
is responsible for organising the business of the Board, ensuring its
effectiveness and setting its agenda.
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 Chairman and to
serve as an intermediary for the other Directors, as necessary. The Senior
Independent Director is identified on page 26.
Effectiveness
Composition of the Board
The names of the Directors together with brief biographical details are set
out on pages 26 and 27.
The Board uses 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 27.
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 2021.
CORPORATE GOVERNANCE REPORT
Director Board Risk Nominations Remuneration Audit
S Baum 10/10 6/6 - - -
M Brierley 10/10 6/6 - - 5/5
S Linares 10/10 6/6 - 4/4 -
D Marlow 10/10 - 4/4 - -
A Neden 10/10 6/6 3/4 4/4 -
P O’Donnell 10/10 6/6 - - 4/4
K Patel 10/10 6/6 - 4/4 5/5
K Spooner 10/10 6/6 4/4 4/4 5/5
THE NOTTINGHAM BUILDING SOCIETY | 37
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 meet at least 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
31 covers these committees in further detail.
Appointments to the Board
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 Chairman 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
Chairman. The performance of the Non-Executive Directors is reviewed
annually by the Chairman. The Senior Independent Director conducts
interviews with each Director in order to appraise the performance of the
Chairman, the results of which are discussed with the Chairman.
The Board and each of the committees formally evaluate their own
performance and effectiveness each year. These evaluations take into
consideration the balance of skills, experience, independence and knowledge,
and consider the diversity of the Group and its ability to work together. The
process is co-ordinated by the Senior Independent Director and the outcome
of each evaluation is presented to the Nominations Committee who assesses
the results for trends and themes. This process also includes an overall
assessment of the performance reviews undertaken by the key management
committees, which report to the various board committees. The overall
outcome of the review is then reported to the Board. The Code requires the
Board to conduct an external evaluation every three years. The last review
was performed in 2019. The Board will keep under review and consider the
Code requirement to conduct an external evaluation every three years.
Re-election
In 2022, 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. 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.
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 28 to 30 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.
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 to 8, the Strategic report on pages 9 to 18
and within the report and accounts taken as a whole.
GOVERNANCE
38 | 2021 ANNUAL REPORT AND ACCOUNTS
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 30 within the Directors’ report.
Risk management and internal control
The Board Risk Committee oversees 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 16 to 18 of the Strategic report and further information on risk
management is given in the report commencing on page 31.
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 2021 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 42 to 46.
Membership
The Committee consists of Non-Executive Directors only 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 2021, owing to government
guidance amidst the Covid-19 pandemic, 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. News about the Society is also shared with members on an
annual basis through its ‘Nottingham and You’ newsletter.
CORPORATE GOVERNANCE REPORT (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 39
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, (if permitted by government guidance relating to
Covid-19), 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 or otherwise is not permitted in
line with government guidance relating to Covid-19) and the Chairman of
the Audit, Nominations, Risk and Remuneration Committees are, therefore,
available to answer questions.
During 2021, only three Non-Executive Director and one Executive Director
attended the meeting in person, with all other Non-Executive Directors being
in attendance virtually. 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
Chairman
3 March 2022
GOVERNANCE
40 | 2021 ANNUAL REPORT AND ACCOUNTS
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 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 Michael Brierley, Kavita Patel, Kerry Spooner
and Peter O’Donnell (who joined the Committee in June 2021), 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 Officer, 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 2021.
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 Chairman meets
with the Head of Internal Audit on a regular basis.
Following each Committee meeting, the minutes of the meeting are
distributed to the Board and the Committee Chairman provides an update
to the Society’s Board on key matters discussed by the Committee.
Meeting frequency and reporting
The Committee met five times in 2021 and during the year:
• reviewed the results and draft Annual Report and Accounts for the year
ending 31 December 2020;
• 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 2022 internal audit plan;
• received progress updates on the BEIS consultation relating to audit and
corporate governance reforms; including updates from the external auditor;
• 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
2021, 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 continued impact of the Covid-19 pandemic and
declining expectations in the macroeconomic environment, as well as the
key assumptions and resulting impact of the IFRS 9 model redevelopment
completed in the year.
• 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.
• Accounting for intercompany balances under IFRS 9
The Society considered the fair value of its intercompany balances
under IFRS 9 and the resulting fair value adjustments recognised in the
financial statements.
BOARD AUDIT COMMITTEE REPORT
THE NOTTINGHAM BUILDING SOCIETY | 41
• 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.
• 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. The Committee also considered
the LIBOR-SONIA transition and impacts on hedge accounting.
• 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 continued Covid-19
impacts and detailed stress testing scenarios completed as part of the
annual liquidity and capital adequacy assessments.
• 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 seven years as at 31 December 2021.
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
identified 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 number of
other assurance services during the year, conducted in accordance with this
policy, and details of any fees paid for other assurance services are outlined in
note 6 to the accounts.
The Committee considered the performance of Ernst & Young LLP as external
auditor for 2021, 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 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 36, the Board and
each of the committees formally evaluate their own performance and
effectiveness annually. The Committee discussed the results of the 2021
review in February 2022 and concluded that, overall, the Committee
continued to be effective and was adequately discharging its responsibilities.
On behalf of the Board,
Michael Brierley
Chair of the Board Audit Committee
3 March 2022
GOVERNANCE
42 | 2021 ANNUAL REPORT AND ACCOUNTS
For the year ended 31 December 2021
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 to 31 December 2021.
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 2021.
In 2021, 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 2021 and is made up of a minimum of
three Non-Executive Directors, as detailed opposite. The Chief Executive, Head
of People & Development, 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 2021 also included:
• agreeing a new annual bonus plan for 2021;
• reviewing regulatory updates and assessing the impact on
The Nottingham;
• review of the Remuneration Policy for 2021 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 and
People & Reward Committee in relation to reward;
• agreeing the terms for any appointments and leavers for executive level
roles, Leadership team members and 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.
DIRECTORS’ REMUNERATION REPORT
Kerry Spooner
Non-Executive Director and Chair
of the Committee
Simon Linares
Non-Executive Director
Andrew Neden
Non-Executive Director and Chairman of the
Board
Kavita Patel
Non-Executive Director
2021 performance and awards
The Chairman’s statement, Chief Executive’s review and Strategic report on
pages 4 to 18 describe 2021 as a period of good performance during a
continued period of economic uncertainty. The Nottingham is a top ten
building society with total assets of £3.6 billion. The year has seen a
positive trading performance with regard to mortgage lending and fee
income and the Society has further progressed its strategic initiatives with
the launch of its Beehive Money app and new partnership relationships. 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
2021. The deferred element of the 2017 Bonus Plan, was not paid out in
2021 as originally due, but given the 2021 performance, the Remuneration
Committee has now reviewed and approved these deferrals for payment
during 2022.
THE NOTTINGHAM BUILDING SOCIETY | 43
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 contracts on a
12 months ‘rolling’ basis requiring 12 months’ notice by the Society to
terminate and six months’ notice by the individual.
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 is a member of the FCA Small Business Practitioners Panel for
which he receives 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 44.
The total remuneration received by Executive Directors is detailed on page 45.
The information has been audited and shows remuneration for the years
ending 31 December 2020 and 31 December 2021 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 his 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 1% in 2021. This is in line with
the wider Society, with the basic salary increase for colleagues ranging from
1% to 2.5%, with an average of 1.36%.
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 average employee
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.
GOVERNANCE
Employee data includes full time equivalent total remuneration for all Society
employees as at 31 December 2021.
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.
Non-Executive Directors
The Chairman 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 Chairman together
with the Executive Directors before recommendations are referred to the
Board. Remuneration of the Chairman is considered by the Remuneration
Committee, together with the Society’s Chief Executive, without the
Chairman 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
2021 23:1 17:1 10:1
2021 25th percentile Median 75th percentile
Total remuneration £19,545 £25,409 £43,517
Salary £17,635 £22,378 £37,757
44 | 2021 ANNUAL REPORT AND ACCOUNTS
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 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 is also
subject to clawback for a period of
three 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.
On target of 18% and
maximum of 36% 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. Contribution of 15% of base
salary or paid as a cash allowance.
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)
THE NOTTINGHAM BUILDING SOCIETY | 45
GOVERNANCE
Audited
Society
2021
David
Marlow
£000
2021
Daniel
Mundy
£000
2021
Charles
Roe
£000
2021
Total
£000
2020
David
Marlow
£000
2020
Daniel
Mundy
£000
2020
Charles
Roe
£000
2020
Total
£000
Fixed remuneration
Salary
1
327 - - 327 322 278 169 769
Benefits 10 - - 10 11 10 3 24
Variable remuneration
Annual bonus
2
54 - - 54 47 - - 47
391 - - 391 380 288 172 840
Pension contribution 49 - - 49 48 42 7 97
440 - - 440 428 330 179 937
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
Daniel Mundy and Charles Roe ceased to be Executive Directors with effect from 31 December 2020 and 31 March 2020, respectively.
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.
Annual report on remuneration
Executive Director remuneration
The unpaid deferred elements of the annual bonus scheme are as follows:
Executive Directors
Performance Year
Due 2021
1
2017
Due 2022
2018
Due 2023
2019
Due 2025
2021
Total Deferred
£000 £000 £000 £000 £000
David Marlow 64 56 37 54 211
64 56 37 54 211
1
Deferred payments for the 2017 performance year, which were due to be paid in March 2021 have been reviewed and approved for payment during 2022
by the Remuneration Committee.
Simon Taylor (who left the Society on 30 November 2018), received an outstanding deferred bonus of £47,000 in 2021. There are no further payments
outstanding.
Daniel Mundy (who ceased to be an Executive Director on 31 December 2020), has three deferred payments remaining outstanding. £32,000 related to 2017
performance year, originally due in 2021; £42,000 for 2018 due in 2022; and £30,000 for 2019 due in 2023. These are subject to the achievement of the
threshold criteria and Remuneration Committee approval.
46 | 2021 ANNUAL REPORT AND ACCOUNTS
DIRECTORS’ REMUNERATION REPORT (CONTINUED)
Audited
Society
2021
£000
2020
£000
Simon Baum 60 59
Michael Brierley (appointed 13 July 2020) 60 35
John Edwards (Chairman until retirement) (retired 23 September 2020) - 59
Simon Linares 45 45
Andrew Neden 90 73
Peter O’Donnell (appointed 1 January 2021) 45 -
Kavita Patel 45 45
Kerry Spooner 55 54
TOTAL EMOLUMENTS FOR SERVICES AS DIRECTORS 400 370
On behalf of the Board,
Kerry Spooner
Chair of the Remuneration Committee
3 March 2022
Annual report on remuneration (continued)
Non-Executive Director remuneration
THE NOTTINGHAM BUILDING SOCIETY | 47
GOVERNANCE
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 2021 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 2021
which comprise:
Group Society Page
Income statements for the year ended 31 December 2021 Income statements for the year ended 31 December 2021 54
Statements of comprehensive income for the year ended 31 December 2021 Statements of comprehensive income for the year ended
31 December 2021
55
Statements of financial position as at 31 December 2021 Statements of financial position as at 31 December 2021 56
Statements of changes in members’ interests for the year ended 31
December 2021
Statements of changes in members’ interests for the year ended
31 December 2021
57
Cash flow statements for the year ended 31 December 2021 Cash flow statements for the year ended 31 December 2021 58
Related notes 1 to 37 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 a ccounting 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.
48 | 2021 ANNUAL REPORT AND ACCOUNTS
Overview of our audit approach
Audit scope
• We performed an audit of the complete financial information of two components and audit procedures on specific
balances for a further one component.
• The components where we performed full or specific audit procedures accounted for 100% of Profit before tax, 100%
of Revenue 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 £0.8m which represents 0.4% of total members’ interests.
INDEPENDENT AUDITOR’S REPORT (CONTINUED)
• We considered the impact of Covid-19, including considerations relating to operational resilience, customer behaviour and business operations.
• 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 2023 – 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 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 six reporting components of the Group, we selected three components covering entities within the United Kingdom, which
represent the principal business units within the Group.
Of the three components selected, we performed an audit of the complete financial information of two components (“full scope components”) which were
selected based on their size or risk characteristics. For the remaining one component (“specific scope component”), we performed audit procedures on specific
accounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either
because of the size of these accounts or their risk profile.
The reporting components where we performed audit procedures accounted for 100% (2020: 97%) of the Group’s Profit before tax, 100% (2020: 100%) of the
Group’s Revenue and 100% (2020: 100%) of the Group’s Total assets. For the current year, the full scope components contributed 100% of the Group’s Profit
before tax, 99% of the Group’s Revenue and 100% of the Group’s Total assets. The specific scope component contributed 0% of the Group’s Profit before tax,
1% of the Group’s Revenue and 0% of the Group’s Total assets. The audit scope of these components may not have included testing of all significant accounts
of the component but will have contributed to the coverage of significant accounts tested for the Group.
Of the remaining three components that together represent less than 1% of the Group’s total members’ interests, none are individually greater than 1% of the
Group’s total members’ interests. For these components, we performed other procedures, including analytical reviews to respond to any potential risks of
material misstatement to the Group financial statements.
THE NOTTINGHAM BUILDING SOCIETY | 49
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 2021, income included within Interest receivable and similar income: £64.4m (2020: £68.8m), and Fees and commissions
receivable: £3.0m (2020: £2.1m)
Refer to the Audit Committee Report
(page 40); Accounting policies (page
60); and Note 3 of the Consolidated
Financial Statements (page 69)
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.
GOVERNANCE
Changes from the prior year
Arrow Mortgage Finance No.1 Limited has been designated as a full scope component in 2021 in a change from the prior period where it was designated as
specific-scope. This change is a result of increased profits within Arrow Mortgage Finance No.1 Limited and it therefore now being considered a significant
component based on its size and share of the Group.
Involvement with component teams
All audit work performed for the purposes of the audit was undertaken by a single Group audit team.
Climate change
The Group has performed a climate-related risk assessment which is explained on pages 22-25 in the Task Force for Climate related Financial Disclosures and on
page 16 in the principal risks and uncertainties, which form part of the ‘Other information’. Our procedures on these disclosures 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.
As explained in note 1, Basis of preparation on page 59, the Group considers its present financial exposure to climate-related risk, to the best of its knowledge,
to be low and accordingly has made limited reference to the impacts of climate-related risk in the notes to the financial statements. Our audit effort in
considering climate change was focused on assessing whether the effects of potential climate risks have been appropriately reflected by management in
reaching their judgements in relation to the measurement of financial assets and liabilities, and in impairment assessments. We also challenged the Directors’
considerations of climate change in their assessment of viability and associated disclosure.
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.
50 | 2021 ANNUAL REPORT AND ACCOUNTS
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 2021: £3.1m (2020: £4.5m)
Refer to the Audit Committee Report
(page 40); Accounting policies (page 61);
and Note 15 of the Consolidated
Financial Statements (page 75)
Valuation and completeness of expected
credit loss (ECL) provisions is an area of
estimation that requires Management
judgement. The Covid-19 pandemic
continues to have 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 models 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.
THE NOTTINGHAM BUILDING SOCIETY | 51
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 £0.8 million (2020: £0.5 million), which is 0.4% of total members’ interests (2020: 5% of average
adjusted profit before tax).
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% (2020: 75%) of our planning materiality, namely £0.6m (2020: £0.4m). 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. In the current year, all components were allocated Group
performance materiality of £0.6m, due to all procedures being performed by the same audit team.
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 £0.04m (2020: £0.03m), which is set at
5% of planning 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 46, including Key highlights, Chairman’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, 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.
GOVERNANCE
52 | 2021 ANNUAL REPORT AND ACCOUNTS
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 30;
• 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 30;
• Directors’ statement on fair, balanced and understandable set out on page 29;
• Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 28;
• The section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on page 29; and
• The section describing the work of the audit committee set out on page 40.
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 29, 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.
THE NOTTINGHAM BUILDING SOCIETY | 53
GOVERNANCE
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 7 years, covering the years ending 2015 to 2021.
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
3 March 2022
54 | 2021 ANNUAL REPORT AND ACCOUNTS
Notes
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
CONTINUING OPERATIONS
Interest receivable and similar income
Calculated using the effective interest rate method 3 65.4 69.5 67.2 70.4
Other 3 (1.0 )
(0.7 )
(0.7) (0.5)
Interest receivable and similar income 64.4 68.8 66.5 69.9
Interest payable and similar charges 4 (18.5 ) (28.2 ) (20.6) (29.5)
NET INTEREST INCOME 45.9 40.6 45.9 40.4
Fees and commissions receivable 3.0 2.1 3.0 2.1
Fees and commissions payable (0.9 ) (1.0 ) (0.9) (1.0)
Other income - - - 0.5
Net gains/(losses) from derivative financial instruments 5 7.9 (2.7 ) 5.4 (2.6)
TOTAL NET INCOME 55.9 39.0 53.4 39.4
Administrative expenses 6 (36.5 ) (35.3 ) (36.5) (35.2)
Depreciation and amortisation 17,18 ,19 (6.8 ) (9.1 ) (6.8) (8.7)
Operating profit/(loss) before impairment and fair value movement 12.6 (5.4 ) 10.1 (4.5)
Impairment release/(charge) - loans and advances 15 1.4 (2.9 ) 1.4 (2.9)
Fair value movement of intercompany balances 16 - - 1.1 (0.4)
Profit on disposal of subsidiary undertaking 0.5 - 0.7 -
Profit on disposal of property, plant and equipment 17 0.4 0.1 0.4 0.1
PROFIT/(LOSS) BEFORE TAX 14.9 (8.2 ) 13.7 (7.7)
Tax (charge)/credit 8 (2.5 ) 1.2 (2.5) 1.3
PROFIT/(LOSS) AFTER TAX FOR THE FINANCIAL YEAR FROM CONTINUING OPERATIONS 12.4 (7.0 ) 11.2 (6.4)
DISCONTINUED OPERATIONS
Profit/(loss) after tax for the financial year from discontinued operations 34 0.2 (0.2 )
- -
PROFIT/(LOSS) AFTER TAX FOR THE FINANCIAL YEAR 12.6 (7.2 ) 11.2 (6.4)
A reconciliation from profit/(loss) before tax for the financial year to underlying profit used by management can be found on page 11.
The 2020 Group income statement has been represented on a continuing and discontinued operations basis following the sale of a subsidiary undertaking.
The notes on pages 59 to 115 form part of these accounts.
INCOME STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
THE NOTTINGHAM BUILDING SOCIETY | 55
ACCOUNTS
Notes
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Profit/(loss) for the financial year
Items that will not be re-classified to the income statement
Remeasurements of defined benefit obligation 28 - (3.9 ) - (3.9)
Tax on items that will not be re-classified 8 0.3 0.8 0.3 0.8
Items that may subsequently be re-classified to the income statement
FVOCI reserve
Valuation (losses)/gains taken to reserves 12 (0.3 ) 0.4 (0.3) 0.4
Tax on items that may subsequently be re-classified 8 0.2 - 0.2 -
Other comprehensive income/(expense) for the period net of income tax 0.2 (2.7 ) 0.2 (2.7)
TOTAL COMPREHENSIVE INCOME/(EXPENSE) FOR THE YEAR 12.8 (9.9 ) 11.4 (9.1)
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 59 to 115 form part of these accounts.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2021
56 | 2021 ANNUAL REPORT AND ACCOUNTS
Notes
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
ASSETS
Cash in hand and balances with the Bank of England 9 286.1 374.9 286.1 374.9
Loans and advances to credit institutions 10 16.1 64.5 8.1 51.5
Debt securities 12 260.3 152.8 260.3 152.8
Derivative financial instruments 13 26.1 0.8 24.0 0.8
Loans and advances to customers 14 3,010.9 3,128.0 3,010.9 3,128.0
Amounts due from subsidiary undertakings 16 - - 26.6 26.6
Other assets 3.9 5.8 3.9 5.8
Property, plant and equipment 17 10.0 10.9 10.0 10.0
Right of use assets 19 2.9 3.5 2.9 3.4
Intangible assets 18 16.8 12.5 16.8 12.5
Current tax asset - 2.0 - 2.0
Deferred tax assets 20
TOTAL ASSETS 3,634.8 3,758.4 3,651.3 3,770.9
LIABILITIES
Shares 21 2,874.6 2,794.2 2,874.6 2,794.2
Amounts owed to credit institutions 22 346.1 456.6 346.1 456.6
Amounts owed to other customers 23 22.9 34.9 22.9 34.9
Amounts owed to subsidiary undertakings 24 - - 145.2 205.2
Debt securities in issue 25 127.1 193.7 - 2.5
Derivative financial instruments 13 6.5 32.5 6.5 32.1
Other liabilities and accruals 26 6.3 5.7 6.3 5.3
Lease liabilities 19 3.2 4.4 3.2 3.9
Current tax liabilities 0.6 - 0.6 -
Retirement benefit obligations 28 4.4 5.9 4.4 5.9
Subscribed capital 29 24.0 24.2 24.0 24.2
TOTAL LIABILITIES 3,415.7 3,552.1 3,433.8 3,564.8
RESERVES
General reserves 219.2 206.3 217.6 206.1
Fair value reserves 30 (0.1 ) - (0.1) -
Total reserves attributable to members of the Society 219.1 206.3 217.5 206.1
TOTAL RESERVES AND LIABILITIES 3,634.8 3,758.4 3,651.3 3,770.9
The notes on pages 59 to 115 form part of these accounts.
These accounts were approved by the Board of directors on 3 March 2022 and signed on its behalf:
Andrew Neden
Chairman
David Marlow
Chief Executive
STATEMENTS OF FINANCIAL POSITION
AS AT 31 DECEMBER 2021
THE NOTTINGHAM BUILDING SOCIETY | 57
ACCOUNTS
General reserves
£m
FVOCI reserve
£m
Total
£m
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
GROUP 2020
Balance as at 1 January 2020 216.6 (0.4 ) 216.2
Loss for the year (7.2 ) - (7.2 )
Other comprehensive (expense)/income for the period (net of tax)
Net (losses)/gains from changes in fair value (3.1 ) 0.4 (2.7 )
Total other comprehensive (expense)/income (3.1 ) 0.4 (2.7 )
Total comprehensive (expense)/income for the period (10.3 ) 0.4 (9.9 )
BALANCE AS AT 31 DECEMBER 2020 206.3 - 206.3
General reserves
£m
FVOCI reserve
£m
Total
£m
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 income/(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
SOCIETY 2020
Balance as at 1 January 2020 215.6 (0.4) 215.2
Loss for the year (6.4) - (6.4)
Other comprehensive (expense)/income for the period (net of tax)
Net (losses)/gains from changes in fair value (3.1) 0.4 (2.7)
Total other comprehensive (expense)/income (3.1) 0.4 (2.7)
Total comprehensive (expense)/income for the period (9.5) 0.4 (9.1)
BALANCE AS AT 31 DECEMBER 2020 206.1 - 206.1
The notes on pages 59 to 115 form part of these accounts.
STATEMENTS OF CHANGES IN MEMBERS’ INTERESTS
FOR THE YEAR ENDED 31 DECEMBER 2021
58 | 2021 ANNUAL REPORT AND ACCOUNTS
Notes
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
CASH FLOWS FROM OPERATING ACTIVITIES
Profit/(loss) before tax from continuing operations 14.9 (8.0 ) 13.7 (7.7)
Profit/(loss) from discontinued operations 0.2 (0.4 ) - -
Depreciation and amortisation 6.8 9.1 6.8 8.7
Profit on disposal of property, plant and equipment (0.4 ) (0.1 ) (0.4) (0.1)
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 0.3 - 0.3 -
(Decrease)/increase in impairment (1.4 ) 2.9 (1.4) 2.9
CHANGES IN OPERATING ASSETS AND LIABILITIES
(Increase)/decrease in prepayments, accrued income and other assets (23.0 ) (1.1 ) (82.0) 120.5
(Decrease)/increase in accruals, deferred income and other liabilities (25.9 ) 20.3 (24.8) 20.2
Decrease in loans and advances to customers 118.5 30.5 118.5 30.5
Increase in shares 21 80.4 13.1 80.4 13.1
Decrease in amounts owed to other credit institutions and other customers 22,23 (122.5 ) (211.7 ) (122.5) (211.7)
(Decrease)/increase in loans and advances to credit institutions 42.4 (21.5 ) 42.4 (21.5)
(Decrease)/increase in debt securities in issue 25 (66.6 ) 125.6 (2.5) (3.0)
Decrease in retirement benefit obligation 28 (1.5 ) (1.5 ) (1.5) (1.5)
Taxation received 1.4 0.3 1.4 0.3
NET CASH GENERATED FROM/(USED IN) OPERATING ACTIVITIES 25.2 (40.4 ) 29.8 (47.2)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of debt securities (168.5 ) (61.7 ) (168.5) (61.7)
Disposal of debt securities 60.4 215.9 60.4 215.9
Purchase of property, plant and equipment (1.4 ) (1.3 ) (1.4) (1.1)
Disposal of property, plant and equipment 0.6 0.1 0.6 0.1
Consideration on disposal of subsidiary undertaking or trade and assets 0.3 0.2 0.7 -
Purchase of intangible assets (8.6 ) (0.6 ) (8.6) (0.6)
NET CASH (USED IN)/GENERATED FROM INVESTING ACTIVITIES (117.2 ) 152.6 (116.8) 152.6
CASH FLOWS FROM FINANCING ACTIVITIES
Interest paid on subscribed capital 36 (1.9 ) (1.9 ) (1.9) (1.9)
Principal element of lease payments (0.9 ) (0.9 ) (0.9) (0.9)
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (94.8 ) 109.4 (89.8) 102.6
Cash and cash equivalents at 1 January 382.0 272.6 369.0 266.4
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 11 287.2 382.0 279.2 369.0
The notes on pages 59 to 115 form part of these accounts.
CASH FLOW STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
THE NOTTINGHAM BUILDING SOCIETY | 59
ACCOUNTS
The principal accounting policies adopted in the preparation of these
financial statements are set out below.
Basis of preparation
Both the Society and Group annual accounts are prepared and approved by
the directors in accordance with UK adopted international accounting
standards (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. The annual accounts
are prepared under the historical cost convention as modified by the fair
value of FVOCI assets, certain intercompany balances and derivatives.
The financial statements are prepared in pounds sterling, which is the
functional currency of the Group, and have been rounded to the nearest
one hundred thousand pounds.
Governmental and societal responses to climate change risks are still
developing, and are interdependent upon each other, and consequently
financial statements cannot capture all possible future outcomes as these are
not yet known nor capable of reasonable estimation. The degree of uncertainty
of these changes may also mean that they cannot be conclusively taken into
account when determining asset and liability valuations and the timing of
future cash flows under the requirements of applicable accounting standards.
At 31 December 2021, the Group considers its present financial exposure to
climate-related risk to the best of its knowledge to be low and accordingly has
made limited reference to the impacts of climate-related risk in the notes to
the financial statements. We will seek to develop this going forward as the
responses develop sufficiently to apply reasonable estimation.
The Directors have considered the risks and uncertainties discussed on pages
16 to 18 and 31 to 35, and the extent to which they might affect the
preparation of the Annual Report & 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
continuing uncertainties created by Covid-19 and climate change. 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
Group 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 2023 – twelve months from the date of the approval of the Annual
Report and 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.
The accounting policies for the Group also include those for the Society
unless otherwise stated.
The preparation of accounts in conformity with UK adopted IAS requires
management to make judgements, estimates and assumptions that affect
the application of policies and reported amounts of assets and liabilities,
income and expenses. These estimates and assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances. Although these estimates are based on
management’s best knowledge of the amount, event or actions, actual
results may differ from those estimates.
Changes in accounting policy and future accounting
developments
Interest Rate Benchmark Reform – Phase 2 Amendments to IFRS 9, IAS 39
and IFRS 7
was issued by the IASB in August 2020 and the Society has
adopted from 1 January 2021. The amendments allow a relief for
accounting for changes to financial assets and liabilities where the
modification is as a direct result of the IBOR reforms. The amendments
allow organisations to account for the modification to the asset or liability
by applying the updated effective interest rate following a transition to a
new benchmark interest rate to value the financial asset or liability, rather
than continuing to discount the asset or liability at the original discount rate
and recognising a gain or loss in the income statement as per the usual
requirements under the relevant accounting standard for modifications of
financial assets and liabilities.
In addition, the amendments state that a hedging relationship must not
be discontinued solely due to the IBOR reform. Where the Society’s
hedging instruments and hedged items that are in a hedging relationship
have been converted from LIBOR to SONIA, the hedging relationship has
not been discontinued and all hedging documentation has been updated
accordingly in line with the requirements of the amendments.
During the year, the Society has exposure to LIBOR-linked financial
instruments, predominately interest rate derivatives and as at 31 December
2021, all remaining LIBOR exposures have been converted to an alternative
benchmark rate under the ISDA Fallback Protocol and therefore no further
risks remain to the Group. Further detail is disclosed in note 35.
A number of amendments and improvements to accounting standards
have been issued by the International Accounting Standards Board (IASB)
with an effective date of 1 January 2021 and beyond. They do not impact
the financial statements of the Group.
Basis of consolidation
Subsidiary companies are defined as those in which the Society has the
power over relevant activities, has exposure to the rights of variable returns
and has the influence to affect those returns.
Subsidiaries are fully consolidated from the date on which control is
transferred to the Group and de-consolidated from the date that control
ceases. The Group accounts consolidate the assets, liabilities and results of
the Society and all of its subsidiaries, eliminating intercompany balances and
transactions. All entities have accounting periods ending on 31 December.
The results of subsidiary undertakings acquired or disposed of during the
year are included in the consolidated income statement from the effective
date of acquisition or up to the effective date that ownership ceases.
1. ACCOUNTING POLICIES
NOTES TO THE ACCOUNTS
60 | 2021 ANNUAL REPORT AND ACCOUNTS
Special purpose funding vehicles
The Society has transferred the beneficial interest in certain loans and
advances to customers to special purpose funding vehicles (SPV). These SPVs
enable a subsequent raising of debt to investors who gain the security of the
underlying assets as collateral. The SPVs are fully consolidated into the Group
accounts in accordance with IFRS 10 as the Society is deemed to have
control over the SPV because it has power and exposure to variable returns.
The transfer of the beneficial interest in these loans to the SPVs are not
treated as sales by the Society. The Society continues to recognise these
assets within its own Statement of Financial Position after the transfer
because it retains substantially all the risk and rewards of the portfolio
through the receipt of the majority of profits of the structured entity. In the
accounts of the Society, the proceeds received from the transfer are
accounted for as a deemed loan repayable to the SPV, which is held at
amortised cost.
Business combinations between mutual organisations
Identifiable assets and liabilities are measured at fair value. Intangible assets
are amortised through the income statement over their estimated useful
lives, being between one and ten years. A deemed purchase price is
calculated by measuring the fair value of the acquired business. Goodwill is
measured as the difference between the adjusted value of the acquired
assets and liabilities and the deemed purchase price. Goodwill is recorded as
an asset; negative goodwill is recognised in the income statement.
Interest income and expense
Interest income and interest expense for all interest-bearing financial
instruments are recognised in ‘interest receivable and similar income’ or
‘interest payable and similar charges’.
The effective interest rate (EIR) method is applied for all financial assets or
liabilities recorded at amortised cost, FVOCI, interest rate derivatives for
which hedge accounting is applied and the related amortisation/recycling
effect of hedge accounting. The effective interest rate is the rate that
discounts the expected future cash flows, over the expected life of the
financial instrument, to the net carrying amount of the financial asset or
liability. This may include fees and commissions if they are an integral part of
the effective interest rate of a financial instrument.
Interest income on financial assets is calculated by applying the EIR to the
gross carrying amount of the financial asset, unless considered credit
impaired. When a financial asset becomes credit impaired, and therefore
considered as Stage 3, interest income is calculated by applying the EIR to
the net amortised cost of the financial asset. If the financial asset cures and
is no longer credit impaired, interest income is reverted to being calculated
on a gross basis.
Interest income and expense also includes interest on derivatives measured
at FVPL, where hedge accounting is not applied, using the contractual
interest rate.
Fees and commissions
Fees receivable are generally recognised when all performance obligations of
the contract have been fulfilled, with fees earned on the sale of properties
recognised on the date contracts are exchanged.
Commission receivable from the sale of third party products is recognised
upon fulfilment of contractual performance obligations, that is the inception
date of the product or on completion of a mortgage.
If the fees are an integral part of the effective interest rate of a financial
instrument, they are recognised as an adjustment to the effective interest
rate and recorded in interest receivable/payable.
Fees payable are recognised on an accruals basis when the service has been
provided or on the completion of an act to which the fee relates.
Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents
comprise balances with less than three months’ maturity from the date of
acquisition, including cash, treasury bills and other eligible bills and loans
and advances to credit institutions.
Derivative financial instruments and hedge accounting
The Group uses derivatives only for risk management purposes. It does not use
derivatives for trading purposes. Derivatives are measured at fair value in the
statement of financial position. Fair values are obtained by applying quoted
market rates to a discounted cash flow model. All derivatives are carried as
assets when fair value is positive and as liabilities when fair value is negative.
The Group has elected to continue to apply the hedge accounting requirements
of IAS 39 on adoption of IFRS 9.
The Group looks to designate derivatives held for risk management
purposes as hedging instruments in qualifying hedging relationships. On
initial designation of the hedge, the Group documents formally the
relationship between the hedging instruments and hedged items, including
the risk management objective and strategy in undertaking the hedge,
together with the method that will be used to assess the effectiveness of
the hedging relationship. The Group makes an assessment, both at the
inception of the hedge relationship as well as on an ongoing basis, as to
whether the hedging instruments are expected to be highly effective in
offsetting the changes in the fair value of the respective hedged items
during the period for which the hedge is designated, and whether the
actual results of each hedge are within a range of 80-125 percent.
If derivatives are not designated as hedges, then changes in their fair values
are recognised immediately in the income statement in the period in which
they arise.
Fair value hedges
Portfolio fair value hedges are used to hedge exposures to variability in the
fair value of financial assets and liabilities, such as fixed rate mortgages and
savings products. Changes in the fair value of derivatives are recognised
immediately in the income statement together with changes in the fair value
of the hedged item that are attributable to the hedged risk (in the same line
in the income statement as the hedged item).
If the hedging derivative expires or is sold, terminated, or exercised, or the
hedge no longer meets the criteria for fair value hedge accounting, or the
hedge designation is revoked, hedge accounting is discontinued prospectively.
Any adjustment up to that point to a hedge item, for which the effective
interest method is used, is amortised to the income statement as part of the
recalculated effective interest rate of the item over its remaining life.
1. ACCOUNTING POLICIES (CONTINUED)
NOTES TO THE ACCOUNTS (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 61
ACCOUNTS
1. ACCOUNTING POLICIES (CONTINUED)
Financial assets
Classification and Measurement
Financial assets comprise cash, loans and advances to credit institutions, debt
securities, derivative financial instruments and loans and advances to
customers. The Group classifies non-derivative financial assets as either
amortised cost, FVOCI or FVPL depending on the business model for managing
the assets and the contractual cash flow characteristics. The Group determines
its business model at the level that best reflects how it manages groups of
assets to achieve its business objective. In making this assessment it considers
how the performance of the business model is evaluated and reported within
the Group, how the risks of the business model are managed and the expected
frequency, value and timing of sales of assets. The contractual terms of the
financial assets are assessed to determine whether their cash flows represent
solely payments of principal and interest or expose the Group to other risks.
Management determines the classification of financial assets under IFRS 9 at
the earlier of 1 January 2018 or initial recognition.
Amortised cost
Financial assets whose business model is to hold for collection of
contractual cash flows where those cash flows represent solely payments of
principal and interest (SPPI) are measured at amortised cost. Interest income
from these financial assets is included in net interest income using the
effective interest rate method. Any gain or loss arising on derecognition is
recognised directly in profit or loss. The carrying value of these assets is
adjusted by any expected credit loss allowance recognised. The Society
classifies the following financial instruments as amortised cost:
• cash in hand and balances with the Bank of England;
• loans and advances to credit institutions; and
• loans and advances to customers.
Loans and advances to customers
The initial value of loans and advances to customers may, if applicable,
include certain upfront costs and fees such as procuration fees, legal fees,
mortgage indemnity guarantee premiums and application fees, which are
recognised over the expected life of mortgage assets. Mortgage discounts
are also recognised over the expected life of mortgage assets as part of the
effective interest rate.
Throughout the year and at each year end, the mortgage life assumptions
are reviewed for appropriateness. Any changes to the expected life
assumptions of the assets are recognised through interest receivable and
similar income and reflected in the carrying value of the mortgage assets.
Included in loans and advances to customers of the Society are balances
which have been used to secure funding issued by the Group’s special
purpose vehicle, which is consolidated into the Group financial statements.
The beneficial interest in the underlying loans has been transferred to this
entity. The loans are retained within the Society’s Statement of Financial
Position however, as the Society retains substantially all of the risks and
rewards relating to the loans.
Fair value through other comprehensive income (FVOCI)
The Society recognises its debt securities as FVOCI assets. The business
model for these financial assets is to hold for collection of contractual cash
flows and for selling the financial assets, where the assets’ cash flows
represent solely payments of principal and interest and are measured at
FVOCI. Movements in the carrying amount are taken through Other
Comprehensive Income (OCI). When the financial asset is derecognised, the
cumulative gain or loss previously recognised in OCI is reclassified from
reserves to the income statement. Interest income from these financial
assets is included in net interest income using the effective interest rate
method. The expected credit loss for these assets does not reduce the
carrying amount in the statement of financial position, which remains at fair
value. Instead, an amount equal to the allowance that would arise if the
assets were at amortised cost, is recognised in OCI as an accumulated
impairment amount, with a corresponding charge to profit or loss.
Fair value through profit or loss (FVPL)
Assets that do not meet the criteria for amortised cost or FVOCI are
measured at FVPL. Interest income from these financial assets is included in
net interest income. The Society recognises its derivative financial instruments
and some of its balances with subsidiary entities as FVPL assets.
Impairment of financial assets not carried at fair value
through profit or loss
Under IFRS 9, the Group assesses on a forward-looking basis the expected
credit losses (ECL) associated with its financial assets carried at amortised
cost and FVOCI and with the exposure arising from loan commitments. The
allowance is based on the ECLs associated with the probability of default in
the next 12 months unless there has been a significant increase in credit risk
since origination and the measurement of ECL reflects:
• An unbiased and probability weighted amount that is determined by
evaluating a range of possible outcomes;
• The time value of money; and
• Reasonable and supportable information that is available without undue
cost or effort at the reporting date about past events, current conditions
and forecasts of future economic conditions.
IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in
credit quality since initial recognition as summarised below:
• Stage 1: A financial instrument that is not credit-impaired on initial
recognition and its credit risk has not significantly increased since
origination. ECL is measured at an amount equal to the portion of
lifetime expected credit losses that result from default events possible
within the next 12 months.
• Stage 2: If a significant increase in credit risk (SICR) since initial
recognition is identified, the financial asset is moved to ‘Stage 2’ but is
not yet deemed to be credit impaired. The definition of a significant
increase in credit risk is detailed below. ECL for stage 2 assets are
measured based on expected credit losses on a lifetime basis.
• Stage 3: If the financial asset is credit-impaired, it is moved to ‘Stage 3’.
The definition of credit-impaired and default is outlined below. ECL for
stage 3 assets is also measured on expected credit losses on a lifetime
basis.
Forward-looking information is taken into account in the measurement of
ECL with its use of economic assumptions such as inflation, unemployment
rates, house price indices and Gross Domestic Product.
The Group has no purchased or originated credit impaired assets and has
not applied any simplified approaches.
62 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
Significant increase in credit risk (SICR)
The Group considers a financial instrument to have experienced a significant
increase in credit risk when one of more of the following criteria has been met:
Loans and advances to customers
Forward-looking information incorporated in the ECL models
The assessment of SICR and the calculation of ECL both incorporate
forward-looking information. Forecasts of these economic variables are
provided by a reputable third party on a regular basis and provide the best
estimate view of the economy over the next five years. After five years, to
project the economic variables out for the full remaining lifetime, a mean
reversion approach is used, i.e. long-run averages.
In addition to the base economic scenario forecast, other possible scenarios
along with scenario weightings are obtained, of which management have
applied four (2020: three) scenarios in the model calculations to align with
wider market practices. Further details of these scenarios are outlined in note 15.
ECL models
The ECL models are driven by three key components:
• Probability of Default (PD): The PD model takes attributes of the
mortgage accounts on the portfolio (for example, origination vintage and
time on book) and adjusts for the impacts of a range of independently
sourced forward-looking macroeconomic scenarios to produce a vector
detailing the likelihood of an account defaulting in a given month within
the expected behavioural lifetime. The model outputs are scaled against a
number of internal risk grades which are determined using the Society’s
behavioural scoring models. These behavioural scoring models contain a
combination of internal and externally derived data to rank the mortgage
accounts by risk and pool the accounts into groups of comparable
expected performance.
• Exposure at Default (EAD): The EAD model predicts the loan exposure
of each mortgage account at a future default date. The model takes into
account balance amortisation and accrued interest from missed payments
given expected changes in the repayment terms of the mortgage; for
example interest rates may move in a manner consistent with the
macroeconomic scenarios. The calculation produces a vector to represent
‘expected’ EAD at each potential point of default along the vector from the
reporting date up to the expected behavioural lifetime; and
• Loss Given Default (LGD): The LGD model calculates the likely loss on
asset disposal that the Society would suffer if a default were to occur in
any given month over the expected behavioural lifetime of the mortgage
account. LGD takes into account the EAD in comparison to the value
expected to be recovered through the sale of an asset, given the
macroeconomic scenario specific trend in property price indices. The
expectation of loss is then scaled to reflect the likelihood of a mortgage
account reaching default, progressing on to sale of the asset.
Forbearance strategies and renegotiated loans
A range of forbearance options are available to support customers who are
in financial difficulty. The purpose of forbearance is to support customers who
have temporary financial difficulties and help them get back on their feet.
The main options offered by the Society include:
• Reduced monthly payment;
• An arrangement to clear outstanding arrears;
• Capitalisation of arrears; and
• Extension of mortgage term.
Financial
instrument
Definition of significant increase in
credit risk
2021
Loans and advances
to customers – Retail
• Over 30 days past due on contractual repayments;
• Change in PD exceeds relative threshold of 100%
AND absolute threshold of 0.5%; or
• In forbearance.
2020
Loans and advances
to customers – Retail
• Over 30 days past due on contractual repayments;
• In forbearance;
• Lifetime probability of default doubled since
origination; and
• Lifetime probability of default greater than 1%.
2021
Loans and advances
to customers – SBL
• Over 30 days past due on contractual repayments;
• Change in PD exceeds relative threshold of 100%
AND absolute threshold of 0.5%; or
• In forbearance.
2020
Loans and advances
to customers – SBL
• Over 30 days past due on contractual repayments;
• On management watch list;
• Lifetime probability of default doubled since
origination; or
• In forbearance.
2020 & 2021
Wholesale liquidity
instruments
• Any arrears or receipt of adverse information
During the year, the Society has updated its SICR criteria. This has been
treated as a change in accounting estimate and further disclosed on page
65 and in note 15.
Definition of default and credit-impaired
The Group defines a financial asset as in default, which is fully aligned
with the definition of credit-impaired, when it is more than 90 days past
due on contractual repayments.
It is the Society’s policy to consider a financial instrument as ‘cured’ and
therefore reclassified out of Stage 3 when none of the default criteria have
been present for at least twelve consecutive months for forbearance
defaults and nine months for any other defaults. The decision whether to
classify an asset as Stage 2 or Stage 1 once cured depends on the updated
position, at the time of the cure, and whether there has been a significant
increase in credit risk compared to initial recognition.
THE NOTTINGHAM BUILDING SOCIETY | 63
ACCOUNTS
1. ACCOUNTING POLICIES (CONTINUED)
During the year, the Society has also offered payment deferrals in response
to the Covid-19 pandemic, through to the end of government scheme.
Customers requesting a forbearance option will need to provide
information to support the request which is likely to include a budget
planner, statement of assets and liabilities, bank/credit card statements,
payslips etc. in order that the request can be properly assessed. If the
forbearance request is granted the account is monitored in accordance
with our policy and procedures. At the appropriate time the forbearance
option that has been implemented is cancelled, with the exception of
capitalisation of arrears, and the customer’s normal contractual payment
is restored.
Loans that are subject to restructuring may only be classified as restructured
and up-to-date once a specified number and/or amount of qualifying
payments have been received. These qualifying payments are set at a level
appropriate to the nature of the loan and the customer’s ability to make the
repayment going forward. Typically the receipt of six months’ qualifying
payments is required. Loans that have been restructured and would
otherwise have been past due or impaired are classified as renegotiated.
The carrying amount of loans that have been classified as renegotiated
retain this classification until maturity or derecognition. Interest is recorded
on renegotiated loans on the basis of new contractual terms following
renegotiation. The original effective interest rate will be retained.
Modifications
The Society may on occasion modify the contractual terms of loans provided
to customers. When this is solely for commercial reasons and considered part
of the ordinary course of business, there is no impact on the impairment
approach. Generally, forbearance at the Society, whether retail or SBL
lending, does not result in the terms of the loan being modified so
significantly that it becomes substantially a different financial asset, and
therefore, the original loan remains and does not result in derecognition.
Write off of financial assets
Financial assets are written off either partially or in their entirety only when
the Group has stopped pursuing the recovery, for example by bankruptcy,
insolvency, renegotiation and similar events. If the amount to be written off
is greater than the accumulated loss allowance, the difference is first
treated as an addition to the loss allowance, which is then applied to the
gross carrying amount. Any subsequent recoveries are credited to the
income statement on settlement receipt.
Cash in hand and balances with the Bank of England, Loans
and advances to credit institutions and Debt securities
The Group reviews the external credit ratings of its liquid assets at each
reporting date. Those assets, which are of investment grade or higher, are
considered to have low credit risk and therefore are assumed to have not
had a significant increase in credit risk since initial recognition. This
includes the Society’s debt security portfolio. The Society’s policy to allow
only high quality, senior secured exposures to Residential Mortgage Backed
Securities (RMBS) and Covered Bonds ensures continued Society receipt of
contractual cash flows in stressed scenarios. For all other wholesale
liquidity balances, a simple model calculates the ECL allowance, based on
externally provided 12 month PD rates for individual counterparties.
Derecognition of financial assets and liabilities
Financial assets are derecognised when the contractual rights to receive cash
flows have expired or where substantially all the risks and rewards of
ownership have been transferred. Financial liabilities are derecognised only
when the obligation is discharged, cancelled or has expired.
Financial liabilities
All non-derivative financial liabilities, that include shares and wholesale
funds, held by the Group are measured at amortised cost with interest
recognised using the effective interest rate method. Discounts and other
costs incurred in the raising of wholesale funds are amortised over the
period to maturity using the effective interest rate method.
Fair value of financial assets and liabilities
IFRS 13 requires an entity to classify financial instruments held at fair value
and those not measured at fair value but for which the fair value is disclosed
according to a hierarchy that reflects the significance of observable market
inputs in calculating those fair values. The three levels of the fair value
hierarchy are defined as:
Level 1 – Valuation using quoted market prices
Financial instruments are classified as level 1 if their value is observable in an
active market. Such instruments are valued by reference to unadjusted
quoted prices for identical assets or liabilities in active markets where the
quoted price is readily available, and the price reflects actual and regularly
occurring market transactions on an arm’s length basis. An active market is
one in which transactions occur with sufficient volume and frequency to
provide pricing information on an ongoing basis.
Level 2 – Valuation technique using observable inputs
Financial instruments classified as Level 2 have been valued using models
whose inputs are observable in an active market. Valuations based on
observable inputs include derivative financial instruments such as swaps and
forwards which are valued using market standard pricing techniques and
options that are commonly traded in markets where all the inputs to the
market standard pricing models are observable. They also include investment
securities valued using consensus pricing or other observable market prices.
Level 3 – Valuation technique using significant
unobservable inputs
Financial instruments are classified as level 3 if their valuation incorporates
significant inputs that are not based on observable market data (‘unobservable
inputs’). A valuation input is considered observable if it can be directly observed
from transactions in an active market, or if there is compelling external
evidence demonstrating an executable exit price. Unobservable input levels can
generally be determined based on observable inputs of a similar nature,
historical observations or other analytical techniques.
Subscribed capital
Subscribed capital comprises Permanent Interest Bearing Shares (PIBS) which
have no voting rights and have contractual terms to settle interest and is
therefore classified as a financial liability. It is presented separately on the face
of the statement of financial position. Subscribed capital is initially recognised
at ‘fair value’ being its issue proceeds net of transaction costs incurred.
The interest on the subscribed capital is recognised on an effective interest
rate basis in the income statement as interest expense.
64 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
Intangible assets
Computer Software
Purchased software and costs and internal time directly associated with the
internal development of computer software are capitalised as intangible
assets where the software is an identifiable asset controlled by the Group
which will generate future economic benefits and where costs can be reliably
measured. Costs incurred to establish technological feasibility or to maintain
existing levels of performance are recognised as an expense as incurred.
Intangible assets are stated at cost less cumulative amortisation and
impairment losses.
Amortisation begins when the asset becomes available for operational use
and is charged to the income statement on a straight-line basis over the
estimated useful life of the software, which is generally between 3 to 8 years.
The amortisation periods used are reviewed annually.
Assets are reviewed for impairment at each statement of financial position
date or whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An asset’s carrying amount is written
down immediately to its recoverable amount, if the asset’s carrying amount is
greater than its estimated recoverable amount. The recoverable amount is the
higher of the asset’s fair value less costs to sell, and its value in use.
Property, plant and equipment
Additions and improvements to office premises and equipment, including
costs directly attributable to the acquisition of the asset, are capitalised at
cost. The property, plant and equipment value in the statement of financial
position represents the original cost, less cumulative depreciation. The costs,
less estimated residual values of assets, are depreciated on a straight-line
basis over their estimated useful economic lives as follows:
• Freehold buildings 50 - 100 years;
• Leasehold premises over the remainder of the lease or 100 years if shorter;
• Refurbishment of premises over 5 to 10 years or length of lease if shorter;
• Equipment, fixtures, fittings and vehicles over 4 to 10 years;
• No depreciation is provided on freehold land.
Assets are reviewed for impairment at each statement of financial position
date or whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An asset’s carrying amount is written
down immediately to its recoverable amount if the asset’s carrying amount is
greater than its estimated recoverable amount. The recoverable amount is the
higher of the asset’s fair value less costs to sell, and its value in use.
Employee benefits
Long-term incentive schemes
The costs of bonuses payable after the end of the year in which they are
earned are recognised in the year in which the employees render the related
service. Where long-term incentive schemes run over more than one year, the
costs are recognised over the life of the scheme. The long-term incentive
bonuses disclosed in the Directors’ remuneration report are included when
paid. The annual bonus figure disclosed reflects the amount awarded in the
year which is not subject to deferral and is the total paid. The element
subject to deferral is disclosed in the year of payment.
Pensions
The Group operated a contributory defined benefit pension scheme until 31
January 2009 when it was closed to future service accrual. The assets are
held in a separate trustee administered fund. Included within the statement
of financial position is the Group’s net obligation calculated as the present
value of the defined benefit obligation less the fair value of plan assets less
any unrecognised past service costs. Any remeasurements that arise are
recognised immediately in other comprehensive income through the
statement of comprehensive income. The finance cost is recognised within
finance income and expense in the income statement. The finance cost is
the increase in the defined benefit obligation which arises because the
benefits are one period closer to settlement.
Contributions are transferred to the trustee administered fund on a regular
basis to secure the benefits provided under the rules of the scheme. Pension
costs are assessed in accordance with the advice of a professionally
qualified actuary.
The Group also operates a contributory defined contribution pension
scheme, the assets of which are held separately from those of the Group.
For this scheme the cost is charged to the income statement as
contributions become due.
Leases
The Group assesses at contract inception whether a contract is, or contains, a
lease. That is, if the contract conveys the right to control the use of an
identified asset for a period of time in exchange for consideration.
Group as a lessee
The Group applies a single recognition and measurement approach for all
leases, except for short-term leases and leases of low value assets. The Group
recognises lease liabilities, as the current value of future lease payments, and
right-of-use assets representing the right to use the underlying leased assets.
Right-of-use assets
The Group recognises right-of-use assets at the commencement date of the
lease (i.e. the date the underlying asset is available for use). Right-of-use
assets are measured at cost, less any accumulated depreciation and
impairment losses, and adjusted for any remeasurement of lease liabilities.
The cost of right-of-use assets includes 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. Right-of-
use assets are depreciated on a straight line basis over the lease term,
adjusted to take account of any expected break or extension options.
• Leasehold premises over 10 to 15 years;
• Equipment, fixtures, fittings and vehicles over 3 to 5 years;
• Motor vehicles over 3 to 5 years;
Right-of-use assets are reviewed for impairment at each statement of
financial position date or whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. An asset’s carrying
amount is written down immediately to its recoverable amount if the asset’s
carrying amount is greater than its estimated recoverable amount. The
recoverable amount is the higher of the asset’s fair value less costs to sell,
and its value in use.
THE NOTTINGHAM BUILDING SOCIETY | 65
ACCOUNTS
1. ACCOUNTING POLICIES (CONTINUED)
Lease liabilities
At the commencement date of the lease, the Group recognises lease
liabilities measured at the present value of lease payments to be made over
the lease term, discounted using the incremental borrowing rate. The lease
payments include fixed payments less any lease incentive receivable, variable
lease payments that depend on an index or a rate, and amounts expected to
be paid under any residual value guarantees.
In calculating the present value of lease payments, the Group uses its
incremental borrowing rate at the lease commencement date as the interest
rate implicit in the lease is not readily determinable. The incremental
borrowing rate is determined based on the cost of funding to the Group.
After the commencement date, the amount of lease liabilities is increased to
reflect the accretion of interest and reduced for lease payments made.
In addition, the carrying amount of lease liabilities is remeasured if there is a
modification, a change in the lease term or a change in the lease payments.
The Group does not have an option to purchase the underlying asset in its
lease agreements.
Short-term leases and leases of low-value assets
The Group applies the short-term lease recognition exemption to its short-
term leases (i.e. those leases that have a lease term of 12 months or less
from the commencement date). It also applies the lease of low-value assets
recognition exemption to assets that are considered be of low value. Lease
payments on short-term leases and leases of low-value assets are recognised
as an expense on a straight-line basis over the term of the lease.
Taxation
Income tax on the profit or loss for the year comprises current and deferred
tax. Income tax is recognised in the income statement except to the extent
that it relates to items recognised directly in other comprehensive income, in
which case it is recognised in other comprehensive income.
Current tax is the expected tax payable on the taxable income and gains
arising in the accounting period.
Deferred tax is recognised on all temporary differences arising between the
tax bases of assets and liabilities and their carrying amounts in the financial
statements. Deferred tax assets and liabilities are offset only if a legally
enforceable right exists to set off current tax assets against current tax
liabilities, the deferred income taxes relate to the same taxation authority
and the authority permits the company to make a single net payment.
Deferred tax assets are only recognised where it is probable that future
taxable profit will be available against which the temporary differences can
be utilised.
Both current and deferred taxes are determined using the rates enacted or
substantively enacted at the statement of financial position date.
Tax relating to fair value re-measurement of available-for-sale investments,
which are charged or credited directly to other comprehensive income, is also
credited or charged directly to other comprehensive income and is
subsequently recognised in the income statement when the deferred fair
value gain or loss is recognised in the income statement.
Tax relating to actuarial gains/(losses) on retirement benefit obligations is
recognised in other comprehensive income.
Provisions and contingent liabilities
The Group recognises a provision when there is a present legal or
constructive obligation as a result of past events, and it is probable that an
outflow of resources will be required to settle the obligation, and the amount
has been reliably estimated.
The Society has an obligation to contribute to the Financial Services
Compensation Scheme (FSCS) to enable the FSCS to meet compensation
claims from, in particular, retail depositors of failed banks. A provision is
recognised to the extent it can be reliably estimated and when the Society
has an obligation in accordance with IFRIC 21. The amount provided is based
on information received from the FSCS, forecast future interest rates and the
Society’s historic share of industry protected deposits.
Contingent liabilities are potential obligations from past events which will
only be confirmed by future events. Contingent liabilities are not recognised
in the Statement of financial position.
Accounting estimates and judgements
In the course of preparing the financial statements, no judgements have been
made in the process of applying the Group’s significant accounting policies,
other than those involving estimations, which have had a significant effect on
the amounts recognised in the financial statements. The Group’s significant
estimates, including judgements involving estimations, are shown below.
Impairment losses on loans and advances to customers
The Group reviews its mortgage advances portfolio at least on a quarterly
basis to assess impairment. In determining whether an impairment loss
should be recorded, the Group is required to exercise a degree of
judgement, in particular, the estimation of the amount and timing of future
cash flows and collateral values and the assessment of significant increase
in credit risk. The Society’s ECL calculations under IFRS 9 are outputs of
complex models with a number of underlying assumptions regarding the
choice of variable inputs and their interdependencies, which individually are
not possible to isolate. Note 1 on page 61 outlines the accounting policies
and key definitions for IFRS 9.
Key elements of the ECL models that are considered accounting
judgements, including estimation, include:
• The internal credit grading model, which assigns PDs to individual accounts;
• The criteria for assessing if there has been a significant increase in credit risk;
• Determination of associations between macroeconomic scenarios,
economic inputs and the effect on PDs, EADs and LGDs; and
• Selection of forward-looking macroeconomic scenarios and their
probability weightings to derive economic inputs to the ECL models.
During the year, as part of model development activity, the Society has
reviewed its criteria assessing whether there has been a significant increase in
credit risk and its number of economic scenarios used. This has resulted in a
change in accounting estimate.
As identified in note 15 on page 76, the implementation of an absolute and
relative threshold as part of that change in criteria has improved staging
sensitivity in the models but has no material impact on the overall expected
credit loss provision. The move to use four economic scenarios instead of
three results in a movement of less than £0.1m in the ECL allowance.
66 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
The models are now more responsive to the economic scenarios and less
reliant on Gross Domestic Product as a model input. As a result, the total prior
year ECL position of £4.5m at 31 December 2020, would have had a £0.9m
higher core modelled output and a lower equivalent post model adjustment.
The future impact of the revised models is not possible to anticipate.
Applying a 100% weighting to the Society’s core economic scenario results is
disclosed in note 15 on page 80.
At 31 December 2021, the Society continues to recognise a post model
adjustment in the financial statements to reflect the ongoing heightened
uncertainty over the macroeconomic environment. This required the use of
management judgement and estimation to determine the level of adjustment
to be recognised. This is detailed in note 15 on page 76.
Expected mortgage life
In determining the expected life of mortgage assets, which is used as part of
the effective interest rate calculation, the Group uses historical and forecast
redemption data as well as management judgement. At regular intervals
throughout the year, the expected life of mortgage assets is reassessed for
reasonableness. Any variation in the expected life of mortgage assets will
change the carrying value in the statement of financial position and the
timing of the recognition of interest income.
The Group has assessed that no member remains on a Standard Variable
Rate (SVR) for any meaningful period of time at the end of their product
term. A two week extension of the time spent on SVR would result in an
increase in the value of loans on the statement of financial position by
approximately £0.3 million.
Employee benefits
The Group operates a defined benefit pension scheme. Significant
judgements (on such areas as future interest and inflation rates and mortality
rates) have to be exercised in estimating the value of the assets and liabilities
of the scheme, and hence of its net deficit. The assumptions are outlined in
note 28 to the accounts. Of these assumptions, the main determinant of the
liability is the discount rate. A variation of 0.1% in the discount rate will
change liabilities by approximately £1.1 million.
1. ACCOUNTING POLICIES (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 67
ACCOUNTS
2. SEGMENTAL REPORTING
Retail
financial
services
£m
Consolidation
adjustments
£m
Group
continuing
operations
£m
Discontinued
operations:
Mortgage
broking
£m
Total
Group
£m
2021
Net interest income 45.9 - 45.9 - 45.9
Fees and commission receivable 3.0 - 3.0 1.0 4.0
Fees and commission payable (0.9) - (0.9) - (0.9)
TOTAL INCOME 48.0 - 48.0 1.0 49.0
Administrative expenses (35.4) - (35.4) (0.8) (36.2)
Depreciation and amortisation (6.8) - (6.8) - (6.8)
Impairment release on loans and advances 1.4 - 1.4 - 1.4
UNDERLYING PROFIT 7.2 - 7.2 0.2 7.4
Net gains from derivative financial instruments 7.9 - 7.9 - 7.9
Profit on disposal of subsidiary undertaking 0.7 (0.2) 0.5 - 0.5
Profit on disposal of property, plant & equipment 0.4 - 0.4 - 0.4
Strategic investment costs (1.1) - (1.1) - (1.1)
Fair value movement of intercompany balances 1.1 (1.1) - - -
PROFIT/(LOSS) BEFORE TAX 16.2 (1.3) 14.9 0.2 15.1
Tax charge (2.5) - (2.5) - (2.5)
PROFIT/(LOSS) AFTER TAX 13.7 (1.3) 12.4 0.2 12.6
Total assets 3,634.8 - 3,634.8 - 3,634.8
Total liabilities 3,415.7 - 3,415.7 - 3,415.7
Capital expenditure 10.0 - 10.0 - 10.0
Nottingham Building Society and its subsidiaries are all UK registered entities, the activities of which are detailed below and in Note 16. The Group operates
throughout the UK therefore no geographical analysis has been presented.
The chief operating decision maker has been identified as the Group Board. The Board reviews the Group’s internal reporting in order to assess performance
and allocate resources. Operating segments are reported in a manner consistent with the internal reporting provided to the Board.
The Group reports through three operating segments:
Continuing operations
• Retail financial services – Provides mortgages, savings, third party insurance and investments. Includes all income and costs associated with Nottingham
Building Society and Arrow Mortgage Finance No. 1 Ltd.
Discontinued operations
• Estate agency – Discontinued in the prior year. Previously provided estate agency and lettings services. Includes all income and costs associated with
Nottingham Property Services Ltd, Harrison Murray Ltd and HM Lettings Ltd.
•
Mortgage Broking – Discontinued in the current year. Provided whole-of-market mortgage broking services. Includes all income and costs associated with
Nottingham Mortgage Services Ltd.
Discontinued operations are further considered in note 34.
The 2020 segmental analysis has also been represented to reflect the sale of the mortgage broking segment during 2021.
68 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
2. SEGMENTAL REPORTING (CONTINUED)
Retail
financial
services
£m
Estate
Agency
to be
transferred
£m
Consolidation
adjustments
£m
Group
continuing
operations
£m
Discontinued
operations:
Estate
agency
£m
Discontinued
operations:
Mortgage
broking
£m
Total
Group
£m
2020
Net interest income 40.6 - - 40.6 - - 40.6
Fees and commission receivable 2.1 - - 2.1 0.9 1.7 4.7
Fees and commission payable (1.0) - - (1.0) - - (1.0)
Other income 0.5 - (0.5) - - - -
TOTAL INCOME 42.2 - (0.5) 41.7 0.9 1.7 44.3
Administrative expenses (31.7) - - (31.7) (0.9) (1.4) (34.0)
Depreciation and amortisation (6.7) (0.4) - (7.1) - - (7.1)
Impairment losses on loans and
advances
(2.9) - - (2.9) - - (2.9)
Profit on disposal of property,
plant & equipment
0.1 - - 0.1 - - 0.1
UNDERLYING PROFIT/(LOSS) 1.0 (0.4) (0.5) 0.1 - 0.3 0.4
Net losses from derivative
financial instruments
(2.7) - - (2.7) - - (2.7)
Other income - - - - 0.2 - 0.2
Strategic investment costs (4.1) - - (4.1) (0.6) - (4.7)
Change in accounting estimates (1.6) - - (1.6) - - (1.6)
Fair value movement of
intercompany balances
(0.4) 0.4 - - - - -
(LOSS)/PROFIT BEFORE TAX (7.8) - (0.5) (8.3) (0.4) 0.3 (8.4)
Tax credit 1.3 - - 1.3 - (0.1) 1.2
(LOSS)/PROFIT AFTER TAX (6.5) - (0.5) (7.0) (0.4) 0.2 (7.2)
Total assets 3,756.6 1.5 (0.2) 3,757.9 - 0.5 3,758.4
Total liabilities 3,551.4 0.6 (0.2) 3,551.8 - 0.3 3,552.1
Capital expenditure 1.7 - - 1.7 - - 1.7
The continuing Estate Agency segment relates to property costs which have been transferred to other Group entities and therefore will remain ongoing
in future periods.
Any transactions between operating segments relate to introducer fees, central cost recharges and rents. All revenue with the exception of introducer
fees and central recharges is externally generated with no one segment relying on a significant customer.
There are no further reportable segments or activities which are not presented above or in the primary statements on pages 54 to 58.
THE NOTTINGHAM BUILDING SOCIETY | 69
ACCOUNTS
4. INTEREST PAYABLE AND SIMILAR CHARGES
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
On shares held by individuals 14.8 24.3 14.8 24.3
On amounts due to group undertakings - - 3.4 2.0
On deposits and other borrowings 2.1 2.6 0.8 1.9
On subscribed capital 2.0 2.0 2.0 2.0
On leases 0.1 0.1 0.1 0.1
On derivative hedging of financial liabilities (0.5) (0.8) (0.5) (0.8)
18.5 28.2 20.6 29.5
5. NET GAINS/(LOSSES) FROM DERIVATIVE FINANCIAL INSTRUMENTS
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Derivatives in designated fair value hedge relationships 47.1 (16.7) 47.1 (16.7)
Adjustments to hedged items in fair value hedge accounting relationships (40.4) 15.0 (40.4) 15.0
Derivatives not in designated fair value hedge relationships 1.2 (1.0) (1.3) (0.9)
7.9 (2.7) 5.4 (2.6)
The net gain from derivative financial instruments of £7.9 million (2020: £2.7 million loss) represents the net fair value movement on derivative
instruments that are matching risk exposure on an economic basis. Some accounting volatility arises on these items due to accounting ineffectiveness
on designated hedges, or because hedge accounting is not achievable on certain items. The movement is primarily due to timing differences in income
recognition between derivative instruments and the hedged assets or liabilities. This gain or loss will trend to zero over time and this is taken into account
by the Board when considering the Group’s underlying performance.
Further information regarding the Group and Society’s derivative financial instruments and fair value hedge accounting is presented in notes 13, 31 and
35 of these financial statements.
3. INTEREST RECEIVABLE AND SIMILAR INCOME
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
On loans fully secured on residential property 67.3 72.4 67.3 72.4
On other loans 7.3 4.6 7.3 4.6
On amounts due from group undertakings - - 1.8 1.0
On liquid assets 0.4 1.0 0.4 1.0
On instruments held at amortised cost 75.0 78.0 76.8 79.0
On debt securities 0.7 1.3 0.7 1.3
On derivative hedging of financial assets (10.3) (9.8) (10.3) (9.9)
On instruments calculated on an EIR basis 65.4 69.5 67.2 70.4
On derivatives not in a hedge accounting relationship (1.0) (0.7) (0.7) (0.5)
64.4 68.8 66.5 69.9
Interest on debt securities includes £0.3 million (2020: £0.7 million) arising from fixed income investment securities.
Included within interest income is £0.2 million (2020: £0.2 million) in respect of interest income accrued on impaired loans three or more months in arrears.
70 | 2021 ANNUAL REPORT AND ACCOUNTS
6. ADMINISTRATIVE EXPENSES
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Continuing operations
Wages and salaries 18.3 18.0 18.3 18.0
Social security costs 1.7 1.7 1.7 1.7
Other pension costs 1.0 1.0 1.0 1.0
Total employee costs 21.0 20.7 21.0 20.7
Premises and facilities 2.1 3.1 2.1 3.1
IT 6.0 5.6 6.0 5.5
Marketing and advertising 1.0 1.0 1.0 1.0
Lease costs 0.3 0.4 0.3 0.4
Other administrative costs 6.1 4.5 6.1 4.5
36.5 35.3 36.5 35.2
There were no restructuring costs relating to continuing operations included in wages and salaries for the Group and Society in 2021 (2020: £0.8m).
Group
2021
£m
Group
2020
£m
Discontinued operations
Wages and salaries 0.5 1.7
Social security costs - 0.1
Other pension costs - 0.1
Total employee costs 0.5 1.9
Marketing and advertising - 0.1
Other administrative costs 0.3 1.0
0.8 3.0
Group
2021
£000
Group
2020
£000
Society
2021
£000
Society
2020
£000
Other administrative costs include:
Remuneration of auditors and associates (excluding VAT)
Fees payable to the auditor for the audit of the annual accounts 358 245 353 245
Fees payable to the auditor for other services:
Audit of the accounts of subsidiary undertakings 8 43 - -
Audit of associated pension schemes 14 13 14 13
Audit related assurance services 60 58 60 58
Non-audit services 25 - 25 -
Total audit fees for the financial year 465 359 452 316
NOTES TO THE ACCOUNTS (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 71
7. EMPLOYEES
Group
2021
Number
Group
2020
Number
Society
2021
Number
Society
2020
Number
Continuing operations
The average number of persons employed during the year was:
Full time 388 414 388 414
Part time 149 175 149 175
537 589 537 589
Building Society
Central Administration 299 293 299 293
Branches 238 296 238 296
537 589 537 589
The average number of employees on a full time equivalent basis in the Society was 510 (2020: 532) and all of these are employed within the United Kingdom.
Group
2021
Number
Group
2020
Number
Discontinued operations
The average number of employees employed during the year was:
Full time 11 35
Part time 2 9
13 44
Subsidiaries 13 44
ACCOUNTS
8. TAX CHARGE/(CREDIT)
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Current tax charge/(credit) 0.9 0.3 0.9 0.3
Adjustments for prior years 0.4 (0.6) 0.4 (0.6)
TOTAL CURRENT TAX 1.3 (0.3) 1.3 (0.3)
Deferred tax 1.7 (1.5) 1.7 (1.6)
Adjustments for prior years (0.5) 0.6 (0.5) 0.6
TOTAL DEFERRED TAX 20 1.2 (0.9) 1.2 (1.0)
2.5 (1.2) 2.5 (1.3)
The total tax charge/(credit) for the period differs from that calculated using the UK standard rate of corporation tax. The differences are explained below.
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Profit/(loss) before taxation 15.1 (8.4) 13.7 (7.7)
Expected tax charge/(credit) at 19% (2020: 19%) 2.9 (1.6) 2.6 (1.5)
Expenses not deductible for corporation tax 0.2 0.2 0.3 0.4
Amounts not recognised - 0.2 - -
Effective securitisation (0.4) 0.1 - -
Income not taxable (0.1) (0.1) (0.3) (0.2)
Adjustment for prior years (0.1) - (0.1) -
2.5 (1.2) 2.5 (1.3)
72 | 2021 ANNUAL REPORT AND ACCOUNTS
9. CASH IN HAND AND BALANCES WITH THE BANK OF ENGLAND
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Cash in hand 1.5 1.6 1.5 1.6
Balances with the Bank of England 284.6 373.3 284.6 373.3
286.1 374.9 286.1 374.9
Balances with the Bank of England includes cash ratio deposits of £6.9 million (2020: £6.2 million) which are not readily available for use in the
Group’s day-to-day operations and therefore are excluded from cash and cash equivalents.
8. TAX CHARGE/(CREDIT) (CONTINUED)
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Tax recognised directly in other comprehensive income
Tax on FVOCI assets (0.2) - (0.2) -
Tax on pension scheme (0.3) (0.8) (0.3) (0.8)
TAX CREDIT FOR THE YEAR (0.5) (0.8) (0.5) (0.8)
The tax impact of discontinued operations is immaterial to the financial statements. The adjustments for prior years are impacted by timing of
Research and Development claims.
Factors affecting standard rate of tax
The Finance Act 2021, which was enacted in May 2021, will increase the rate of tax from 19% to 25% with effect from 1 April 2023. Deferred tax
assets and liabilities are measured at whichever of the enacted tax rates are expected to apply when the related asset is realised or liability is settled.
10. LOANS AND ADVANCES TO CREDIT INSTITUTIONS
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Repayable on call and short notice 8.0 13.3 - 0.3
Other loans and advances to credit institutions 8.1 51.2 8.1 51.2
16.1 64.5 8.1 51.5
As at 31 December 2021 £8.1 million (2020: £51.2 million) of cash has been deposited by the Group and Society as collateral against derivative contracts.
11. CASH AND CASH EQUIVALENTS
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Cash in hand and balances with the Bank of England 279.2 368.7 279.2 368.7
Loans and advances to credit institutions 8.0 13.3 - 0.3
287.2 382.0 279.2 369.0
NOTES TO THE ACCOUNTS (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 73
ACCOUNTS
12. DEBT SECURITIES
2021
£m
2020
£m
Group and Society
Notes
Debt securities
Gilts 39.6 10.0
Fixed rate notes
34.1 8.1
Floating rate notes 70.6 70.6
Mortgage backed securities 61.5 46.7
Floating covered bonds 54.5 17.4
260.3 152.8
Movements on debt securities during the year may be analysed as follows:
As at 1 January 152.8 306.6
Additions 168.2 61.7
Disposals and maturities (60.4) (215.9)
Net gains from changes in fair value recognised in other comprehensive income 30 (0.3) 0.4
260.3 152.8
Of this total £73.7 million (2020: £18.1 million) is attributable to fixed income debt securities.
Debt securities include items with a carrying value of £nil (2020: £nil) which have been pledged as collateral under Bank of England facilities.
13. DERIVATIVE FINANCIAL INSTRUMENTS
2021
Contract/
notional
amount
£m
2021
Fair
value of
assets
£m
2021
Fair
value of
liabilities
£m
2020
Contract/
notional
amount
£m
2020
Fair
value of
assets
£m
2020
Fair
value of
liabilities
£mGroup
Derivatives not in hedge accounting relationship
Interest rate swaps 1,525.1 3.1 (0.1) 669.4 0.4 (1.0)
Derivatives designated as fair value hedges
Interest rate swaps 2,065.0 23.0 (6.4) 2,173.0 0.4 (31.5)
3,590.1 26.1 (6.5) 2,842.4 0.8 (32.5)
2021
Contract/
notional
amount
£m
2021
Fair
value of
assets
£m
2021
Fair
value of
liabilities
£m
2020
Contract/
notional
amount
£m
2020
Fair
value of
assets
£m
2020
Fair
value of
liabilities
£mSociety
Derivatives not in a hedge accounting relationship
Interest rate swaps 1,378.6 1.0 (0.1) 464.7 0.4 (0.6)
Derivatives designated as fair value hedges
Interest rate swaps 2,065.0 23.0 (6.4) 2,173.0 0.4 (31.5)
3,443.6 24.0 (6.5) 2,637.7 0.8 (32.1)
Further information regarding the Group’s hedge accounting and fair value hedges is presented in note 31 on page 109.
74 | 2021 ANNUAL REPORT AND ACCOUNTS
14. LOANS AND ADVANCES TO CUSTOMERS
Group and Society Notes
2021
£m
2020
£m
Loans fully secured on residential property 2,800.2 2,942.1
Other loans fully secured on land 232.6 164.1
3,032.8 3,106.2
Provision for impairment losses on loans and advances 15 (3.1) (4.5)
3,029.7 3,101.7
Fair value adjustment for hedged risk (18.8) 26.3
3,010.9 3,128.0
Other loans fully secured on land represents Secured Business Lending (SBL) assets.
Encumbrance
The Society pledges a proportion of its loans and advances to customers to enable it to access funding either through a secured funding arrangement or as
whole mortgage loan pools with the Bank of England.
Loans and advances to customers used to support these funding activities are as follows:
Group and Society
2021
Mortgages
pledged
£m
Held by
third parties
£m
Held by the
Group drawn
£m
Held by the
Group undrawn
£m
Bank of England 1,089.0 - 443.9 645.1
Other secured funding 147.6 147.6 - -
1,236.6 147.6 443.9 645.1
Other secured funding
As at 31 December 2021, loans and advances to customers also includes balances for both the Group and Society which have been used in
secured funding arrangements, resulting in the beneficial interest of these loans being transferred to Arrow Mortgage Finance No.1 Limited, a
special purpose vehicle consolidated into the Group Accounts. All of the loans pledged are retained within the Society’s Statement of Financial
Position as the Society retains substantially all the risk and rewards relating to the loans. These loans secure £127.1 million (2020: £191.2 million)
of funding for the Group (note 25).
Group and Society
2020
Mortgages
pledged
£m
Held by
third parties
£m
Held by the
Group drawn
£m
Held by the
Group undrawn
£m
Bank of England 1,404.6 - 582.9 821.7
Other secured funding 207.1 207.1 - -
1,611.7 207.1 582.9 821.7
NOTES TO THE ACCOUNTS (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 75
ACCOUNTS
Loans fully
secured on
residential
property
2021
£m
Other loans
fully secured
on land
2021
£m
Total
2021
£m
Loans fully
secured on
residential
property
2020
£m
Other loans
fully secured
on land
2020
£m
Total
2020
£mGroup and Society Notes
Gross carrying amount
Stage 1 2,666.7 215.1 2,881.8 1,807.4 106.0 1,913.4
Stage 2 117.3 16.5 133.8 1,127.0 56.9 1,183.9
Stage 3 16.2 1.0 17.2 7.7 1.2 8.9
14
2,800.2 232.6 3,032.8 2,942.1 164.1 3,106.2
Loans fully
secured on
residential
property
2021
£m
Other loans
fully secured
on land
2021
£m
Total
2021
£m
Loans fully
secured on
residential
property
2020
£m
Other loans
fully secured
on land
2020
£m
Total
2020
£mGroup and Society
Expected Credit Loss allowance
Stage 1 1.4 0.8 2.2 0.5 1.5 2.0
Stage 2 0.2 0.5 0.7 1.1 0.7 1.8
Stage 3 0.1 0.1 0.2 0.2 0.5 0.7
1.7 1.4 3.1 1.8 2.7 4.5
15. PROVISION FOR IMPAIRMENT LOSSES ON LOANS AND ADVANCES TO CUSTOMERS
Impairment provisions have been deducted from the appropriate asset values on the Statement of Financial Position. The gross carrying amounts and
impairment provisions are presented in detail below.
The ECL allowance recognised against the Society’s future loan commitment balance at 31 December 2021 and 2020 is immaterial to the financial
statements and therefore has not been separately disclosed. Future loan commitments are classified as Stage 1 for ECL calculation purposes under IFRS 9.
The underlying credit risk in the mortgage portfolio remains largely consistent against the prior year with some marginal improvements seen in forecasts
impacting economic assumptions. The overall level of ECL allowance has fallen due to reducing and changing uncertainty regarding the pandemic, which
is outlined in the post model adjustment section on page 76 alongside the transfer of the limited company BTL portfolio into its own separate model. The
updated models are also now more responsive to economic scenarios and less reliant on GDP as an input.
76 | 2021 ANNUAL REPORT AND ACCOUNTS
Group and Society
2021
Loans fully secured
on residential
property
£m
2021
Other loans
fully secured
on land
£m
2021
Total
£m
2020
Loans fully secured
on residential
property
£m
2020
Other loans
fully secured
on land
£m
2020
Total
£m
(Release)/charge of provision for impairment (0.1) (1.3) (1.4) 1.3 1.6 2.9
Recoveries of debts previously written off - - - - - -
(0.1) (1.3) (1.4) 1.3 1.6 2.9
15. PROVISION FOR IMPAIRMENT LOSSES ON LOANS AND ADVANCES TO CUSTOMERS (CONTINUED)
At 31 December 2021, 4% (31 December 2020: 38%) of the gross carrying amounts are included within the stage 2 category of the ECL models. During
the year, the Society has invested in model redevelopment, which has improved the sensitivity in Significant Increase in Credit Risk (SICR) criteria when
applying IFRS 9 and has reshaped the staging profile of the portfolio resulting in significant movement out of stage 2 and into stage 1. As detailed in the
accounting policies (note 1) , this refinement is a change in key assumption within the calculation of ECL allowance and has been accounted for as a
change in accounting estimate. In the prior periods, the Society included a doubling (retail)/ tripling (SBL) of lifetime probability of default since origination
with a 1% floor within its SICR definition. The Society now applies a relative and absolute threshold when considering whether the change in probability
of default indicates that individual loans should move into stage 2. The Society only participates in the prime mortgage lending market, and within the
residential loan category in particular, this results in a very low Probability of Default (PD) at origination. Any slight deterioration in a customer’s PD can
impact the move in staging of the loan, but has limited impact on the level of ECL due to the high collateral value of the portfolio. The implementation of
a relative and absolute threshold within the model has improved this movement in staging sensitivity.
The Society’s ECL coverage ratio, as a percentage of gross loans is 0.10% at 31 December 2021 for the total book and 0.52% for those balances in stage
2. The equivalent ECL coverage ratios at 31 December 2020 were 0.14% across the total portfolio and 0.15% for stage 2 assets.
The Society has a high quality mortgage book, with a very low probability of default at origination and very low levels of default experience. The ongoing
Covid-19 pandemic is driving a continued level of uncertainty in the ECL allowance and the expected losses that may flow from this. As a consequence,
management have modelled a stress of the PD model at 31 December 2021 to recognise this expected lag, as detailed in the post model adjustment
section below.
At 31 December 2021, £4.4m of balances were over 3 months in arrears (2020: £5.1 million), representing 0.2% of the total mortgage book (2020:
0.2%). As at 31 December 2021, 0.4% (2020: 0.4%) of mortgage customers have some sort of contractual forbearance arrangement in place. The vast
majority of the over 3,000 customers who were granted payment deferrals as a result of the Government’s response to the Covid-19 disruption have
returned to a fully paying position and continue to service their mortgages. Further details of the Society’s arrears and forbearance cases are disclosed in
note 31 on pages 102 and 104.
Post model adjustment
Due to the level of uncertainty in the economy, at 31 December 2021, the Society has applied a stress of PD to its core ECL models to reflect
management’s view that there will be an impact on affordability as a result of global inflationary pressures and anticipated rate rises to manage inflation.
As a result of this PD stress, an overlay ECL allowance of £2.0m has been recognised at 31 December 2021. This is calculated within the core underlying
models with an absolute 6% stressed PD uplift applied to the modelled retail PD assumptions and 4% to the SBL PD assumptions. The stress scenario
recognises £1.8m of ECL in stage 1 and £0.2m in stage 2 of the retail portfolio. A further 1% shift in PD assumptions adjusts the ECL position by £0.2m.
At 31 December 2020, the Society recognised a post model adjustment of £2.7m for a stressed scenario to its core ECL models to reflect
management’s view that there would be a delay in recovery of unemployment position and underlying GDP, alongside the potential for increased
forced sale discount on collateral held. Due to improvements seen in HPI forecasts and unemployment in 2021, this post model adjustment is not
applicable at 31 December 2021.
The (release)/charge to the income statement comprises:
NOTES TO THE ACCOUNTS (CONTINUED)
THE NOTTINGHAM BUILDING SOCIETY | 77
15. PROVISION FOR IMPAIRMENT LOSSES ON LOANS AND ADVANCES TO CUSTOMERS (CONTINUED)
The tables below reconcile the movement in both gross balances and expected credit losses in the period.
Gross balances
Subject to
12 month ECL
Stage 1
£m
Non-credit impaired
Subject to
lifetime ECL
Stage 2
£m
Credit impaired
Subject to
lifetime ECL
Stage 3
£m
Total
£m
At 1 January 2021 1,913.4 1,183.9 8.9 3,106.2
Stage transfers:
Transfers from stage 1 to stage 2 (44.7) 44.7 - -
Transfers to stage 3
(3.9) (8.1) 12.0 -
Transfers from stage 2 to stage 1 923.1 (923.1) - -
Transfers from stage 3 2.1 0.8 (2.9) -
NET MOVEMENT ARISING FROM TRANSFER OF STAGE 876.6 (885.7) 9.1 -
New assets originated
2
494.6 34.0 1.1 529.7
Net further lending/repayments and redemptions (402.8) (198.4) (1.9) (603.1)
At 31 December 2021 2,881.8 133.8 17.2 3,032.8
ACCOUNTS
Expected Credit Loss allowance
Subject to
12 month ECL
Stage 1
£m
Non-credit impaired
Subject to
lifetime ECL
Stage 2
£m
Credit impaired
Subject to
lifetime ECL
Stage 3
£m
Total
£m
At 1 January 2021 2.0 1.8 0.7 4.5
Stage transfers:
Transfers from stage 1 to stage 2 - - - -
Transfers to stage 3 - - - -
Transfers from stage 2 to stage 1
1
1.1 (1.1) - -
Transfers from stage 3
0.1 0.1 (0.2) -
NET MOVEMENT ARISING FROM TRANSFER OF STAGE 1.2 (1.0) (0.2) -
New assets originated
2
0.5 0.1 - 0.6
Further lending/repayments and redemptions
(0.8) (0.1) - (0.9)
Changes in risk parameters in relation to credit quality (0.7) (0.1) (0.3) (1.1)
At 31 December 2021 2.2 0.7 0.2 3.1
1
Transfers from stage 2 to stage 1 in the period is impacted by the refinement of SICR criteria as outlined on page 76.
2
New assets originated enter at stage 1. The balances presented are the final position as at 31 December 2021.
78 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
15. PROVISION FOR IMPAIRMENT LOSSES ON LOANS AND ADVANCES TO CUSTOMERS (CONTINUED)
Gross balances
Subject to
12 month ECL
Stage 1
£m
Non-credit impaired
Subject to
lifetime ECL
Stage 2
£m
Credit impaired
Subject to
lifetime ECL
Stage 3
£m
Total
£m
At 1 January 2020 2,471.0 676.8 5.8 3,153.6
Stage transfers:
Transfers from stage 1 to stage 2
1
(737.1) 737.1 - -
Transfers to stage 3 (1.6) (4.5) 6.1 -
Transfers from stage 2 to stage 1
115.2 (115.2) - -
Transfers from stage 3 0.3 1.5 (1.8) -
NET MOVEMENT ARISING FROM TRANSFER OF STAGE (623.2) 618.9 4.3 -
New assets originated
2
447.1 24.1 0.7 471.9
Net further lending/repayments and redemptions (381.5) (135.9) (1.9) (519.3)
At 31 December 2020 1,913.4 1,183.9 8.9 3,106.2
Expected Credit Loss allowance
Subject to
12 month ECL
Stage 1
£m
Non-credit impaired
Subject to
lifetime ECL
Stage 2
£m
Credit impaired
Subject to
lifetime ECL
Stage 3
£m
Total
£m
At 1 January 2020 0.1 0.7 0.8 1.6
Stage transfers:
Transfers from stage 1 to stage 2 - - - -
Transfers to stage 3 - - - -
Transfers from stage 2 to stage 1 0.1 (0.1) - -
Transfers from stage 3 - 0.1 (0.1) -
NET MOVEMENT ARISING FROM TRANSFER OF STAGE 0.1 - (0.1) -
New assets originated
2
0.3 - - 0.3
Further lending/repayments and redemptions - - (0.1) (0.1)
Changes in risk parameters in relation to credit quality
1.5 1.1 0.1 2.7
At 31 December 2020 2.0 1.8 0.7 4.5
1
The level of gross loan transfers from stage 1 to stage 2 in the period is impacted by the highly sensitive models and 1% floor within its SICR criteria.
2
New assets originated enter at stage 1. The balances presented are the final position as at 31 December 2020.
THE NOTTINGHAM BUILDING SOCIETY | 79
ACCOUNTS
15. PROVISION FOR IMPAIRMENT LOSSES ON LOANS AND ADVANCES TO CUSTOMERS (CONTINUED)
Forward-looking information incorporated in the ECL models
The assessment of SICR and the calculation of ECL both incorporate forward-looking information, which takes into account key economic impacts such
as the Covid-19 pandemic. Key economic variables have been determined by management, but expert judgement is also applied. Forecasts of these
economic variables are provided by a reputable third party, providing a best estimate view of the economy over the next five years. After five years, a
mean reversion approach is used, i.e. long-run averages.
In addition to the base economic scenario forecast, other possible scenarios along with scenario weightings are obtained, of which management have
applied four scenarios in the model calculations. In the prior year, the Society applied a three scenario approach, with weightings of 43% (base), 30%
(upside) and 27% (downside) applied. These scenarios continue to be consistently provided by a reputable third party.
Weighting
Base
The base economic scenario assumes that Covid-19 infections peaked in January 2021, with infections abating by February 2022.
Due to the timing of the scenario, Delta was assumed the dominant strain, but that Omicron would soon take over as dominant.
The scenario assumes that existing vaccines would be less effective against Omicron, with measures being reimposed, such as the
use of face masks, but that a fourth lockdown is unlikely. The scenario assumes unemployment spikes in Q2 2022 and that inflation
accelerates as the economy reopens along with an energy cost crisis. Interest rate rises by the Bank of England in early 2022 are
then assumed to manage inflation.
40%
Upside
The upside scenario assumes that the vaccine is partly effective against the latest Omicron variant and infections abate in January
2022. The resulting cases, hospitalisations and deaths from Covid-19 reduce faster than the base scenario. Higher growth than the
base case gives a lower unemployment rate and a higher GDP in the long-term due to increased household wealth leading to higher
consumer spending. The UK and EU extend negotiations for free trade and access to the single market faster than in the base scenario.
30%
Downside
The downside scenario assumes that the vaccines are a lot less effective against the Omicron variant, resulting in a severe shock
to the economy. Infections do not abate until May 2022. Restrictions are imposed for sustained period, although there is low
compliance. This results in contractions in GDP due to lack of consumer confidence and spending. Unemployment reaches a peak
of 6.7% in Q2 2023 and the bank base rate remains at 0.1% until Q3 2025. Tensions rise between China and the US and a trade
deal is not agreed between the UK and the EU.
23%
Severe downside
The severe downside scenario assumes that vaccines are less effective than the downside and it takes longer to develop and roll
out a successful updated vaccine. This means that the Government reintroduces restrictions, which remain in place until Spring
2022 due to non-compliance. Infections do not abate until July 2022. The fear of Covid-19 restricts spending on goods and services,
resulting in bankruptcies and a spike in unemployment, rising to 7.7% in Q2 2023, as well as a contraction in GDP during 2022. The
unemployment rate spike pushes down the average house significantly, increasing non performing loans. The bank base rate remains
at 0.1% until Q3 2028. Tensions rise between China and the US and a trade deal is not agreed between the UK and EU.
7%
80 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
15. PROVISION FOR IMPAIRMENT LOSSES ON LOANS AND ADVANCES TO CUSTOMERS (CONTINUED)
The summary below outlines the most significant forward-looking assumptions under IFRS 9, over the five year planning period across the optimistic,
base and pessimistic scenarios.
As at 31 December 2021
2022
%
2023
%
2024
%
2025
%
2026
%
Unemployment rate
Upside
Base
Downside
Severe downside
3.9
4.7
6.3
7.2
3.3
4.4
6.6
7.5
3.5
4.4
6.5
7.2
3.8
4.5
6.3
7.1
4.0
4.5
5.9
6.6
House price index
Upside
Base
Downside
Severe downside
14.2
3.4
(9.8)
(13.4)
8.5
6.0
(8.1)
(10.3)
4.8
5.2
(1.9)
(2.5)
2.1
3.7
4.4
4.3
0.7
2.0
8.3
7.7
BoE interest rate
Upside
Base
Downside
Severe downside
0.6
0.5
0.1
0.1
1.0
0.8
0.1
0.1
1.5
1.2
0.1
0.1
2.1
1.7
0.2
0.1
2.6
2.2
0.7
0.1
A significant degree of estimation relates to the relative weightings of the economic scenarios. In order to demonstrate this sensitivity, the impact of
applying 100% of a particular scenario on the 31 December 2021 reported ECL position output is shown below.
31 December 2021
ECL provision
£m
(Decrease)/ increase
£m
(Decrease)/ increase
%
IFRS 9 weighted average
3.1 - -
Base 2.8 (0.3) (9.7)%
Downside 4.0 0.9 29.0%
Severe downside 4.5 1.4 45.2%
Upside 2.3 (0.8) (25.8)%
31 December 2020
ECL provision
£m
(Decrease)/ increase
£m
(Decrease)/ increase
%
IFRS 9 weighted average 4.5 - -
Base 4.2 (0.3) (6.7)%
Downside 5.4 0.9 20.0%
Upside 4.1 (0.4) (8.9)%
As outlined on page 62, the Society has moved to a four economic scenario approach as part of its core model redevelopment completed during 2021.
THE NOTTINGHAM BUILDING SOCIETY | 81
ACCOUNTS
16. AMOUNTS DUE FROM SUBSIDIARY UNDERTAKINGS
2021
Shares
£m
2021
Amount due
£m
2020
Shares
£m
2020
Amount due
£m
Society
As at 1 January - 26.6 - 20.3
Additions/(repayments) - (1.1) - 6.7
Change in fair value - 1.1 - (0.4)
- 26.6 - 26.6
The Society has the following subsidiary undertakings which all operate and have a registered office in the United Kingdom and are included in
the Group accounts:
Name of subsidiary undertaking Principal business activity Registration number Ownership interest
Arrow Mortgage Finance No. 1 Limited
Harrison Murray Ltd
HM Lettings Ltd
Nottingham Property Services Ltd
The Mortgage Advice Centre (East Midlands) Ltd
Funding vehicle
Estate Agency and related services
Lettings
Estate Agency and related services
Dormant
09891174
03190376
08333273
02272731
08313266
See below
100%
100%
100%
100%
The registered office of Arrow Mortgage Finance No. 1 Limited is 1 Bartholomew Lane, London, EC2N 2AX. The registered office address for all other
subsidiary companies listed above is detailed in note 37. All subsidiary entities are incorporated in England and Wales.
Harrison Murray Ltd, HM Lettings Ltd and Nottingham Property Services Ltd are exempt from the requirements of audit of the individual financial
statements under Section 479A of the Companies Act 2006.
The special purpose vehicle (SPV), Arrow Mortgage Finance No. 1 Limited, has been formed with nominal share capital, is funded through loans from the
Society and its activities are carried out under the direction of the Society, under the legal terms of its operation. The Society is exposed to variable returns
from this entity and therefore the SPV passes the test of control under IFRS 10. Consequently it is fully consolidated into the Group Accounts.
The amounts due from Arrow Mortgage Finance No. 1 Ltd have a contractual maturity of less than one year and are expected to be repaid within this
period in line with the secured funding term. The amount due from Arrow is classed as Stage 1 for ECL calculation purposes under IFRS 9 and the ECL
arising is immaterial to the financial statements.
All other intercompany balances have no fixed date of repayment and are recognised at fair value through profit or loss. The directors have reviewed the
recoverability of outstanding balances with subsidiary undertakings and therefore the fair value as at 31 December 2021 and a change in fair value gain of
£1.1m has been recognised in the year (2020: £0.4m loss).
Details of the balances outstanding with subsidiary undertakings are disclosed in the related party transactions note 33.
In July 2021, the Society disposed of its 100% owned mortgage broking subsidiary, Nottingham Mortgage Services Ltd and received sale proceeds of
£0.7m. The entity’s results until disposal, are included within the Group’s performance as discontinued operations (note 34).
During the prior year, the Group decided to exit the delivery of estate agency services and move to a alliance arrangement to deliver such services in the
future, resulting in the closure to new business. As a result the trade and operations of Harrison Murray Ltd, Nottingham Property Services Ltd and HM
Lettings Ltd are in the process of final wind down at 31 December 2021. During the year, the Society has formally waived the right to recover any residual
intercompany balances outstanding with its legacy estate agency subisidiary entities. As the balances were fair valued to nil, there is no further impact to
the financial statements.
82 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
17. PROPERTY, PLANT AND EQUIPMENT
Group Society
2021
Land and
buildings
£m
Equipment,
fixtures,
fittings
£m
Total
£m
Land and
buildings
£m
Equipment,
fixtures,
fittings
£m
Total
£m
Cost
As at 1 January 2021 16.3 26.8 43.1 14.3 26.1 40.4
Additions 0.1 1.3 1.4 0.1 1.3 1.4
Transfer between group - - - 0.7 - 0.7
Disposals (0.7) (0.1) (0.8) (0.4) (0.1) (0.5)
As at 31 December 2021 15.7 28.0 43.7 14.7 27.3 42.0
Depreciation
As at 1 January 2021 9.8 22.4 32.2 8.7 21.7 30.4
Charge for the year 0.3 1.6 1.9 0.3 1.6 1.9
On disposals (0.3) (0.1) (0.4) (0.2) (0.1) (0.3)
As at 31 December 2021 9.8 23.9 33.7 8.8 23.2 32.0
Net Book Value
As at 31 December 2021 5.9 4.1 10.0 5.9 4.1 10.0
Group Society
2020
Land and
buildings
£m
Equipment,
fixtures,
fittings
£m
Total
£m
Land and
buildings
£m
Equipment,
fixtures,
fittings
£m
Total
£m
Cost
As at 1 January 2020 16.5 25.6 42.1 14.5 24.9 39.4
Additions - 1.2 1.2 - 1.2 1.2
Disposals (0.2) - (0.2) (0.2) - (0.2)
As at 31 December 2020 16.3 26.8 43.1 14.3 26.1 40.4
Depreciation
As at 1 January 2020 9.6 20.4 30.0 8.4 19.8 28.2
Charge for the year 0.3 2.0 2.3 0.4 1.9 2.3
On disposals (0.1) - (0.1) (0.1) - (0.1)
As at 31 December 2020 9.8 22.4 32.2 8.7 21.7 30.4
Net Book Value
As at 31 December 2020 6.5 4.4 10.9 5.6 4.4 10.0
THE NOTTINGHAM BUILDING SOCIETY | 83
ACCOUNTS
17. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
The net book value of land and buildings comprises:
Freehold 5.6 6.2 5.6 5.4
Short Leasehold 0.3 0.3 0.3 0.2
5.9 6.5 5.9 5.6
The net book value of land and buildings occupied for own use:
Building Society 5.5 5.3 5.5 5.3
Subsidiaries - 0.9 - -
Non - Group 0.4 0.3 0.4 0.3
5.9 6.5 5.9 5.6
18. INTANGIBLE ASSETS
Group
2021
Purchased
Software
£m
2021
Developed
Software
£m
2021
Total
£m
2020
Purchased
Software
£m
2020
Developed
Software
£m
2020
Total
£m
Cost
As at 1 January 8.1 31.1 39.2 7.9 30.7 38.6
Additions 0.3 8.3 8.6 0.2 0.4 0.6
As at 31 December 8.4 39.4 47.8 8.1 31.1 39.2
Amortisation and impairment
As at 1 January 7.8 18.9 26.7 7.6 14.0 21.6
Charge for the year 0.1 4.2 4.3 0.2 4.9 5.1
As at 31 December 7.9 23.1 31.0 7.8 18.9 26.7
Net Book Value
As at 31 December 0.5 16.3 16.8 0.3 12.2 12.5
84 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
19. LEASES
The statement of financial position shows the following amounts relating to leases:
Group Society
Right of use assets
2021
Property
£m
Equipment
£m
Motor
Vehicles
£m
Total
£m
Property
£m
Equipment
£m
Motor
Vehicles
£m
Total
£m
Cost
As at 1 January 2021 5.5 0.3 0.2 6.0 4.8 0.3 0.2 5.3
Additions - - - - 0.1 - - 0.1
Disposals (0.6) - - (0.6) - - - -
As at 31 December 2021 4.9 0.3 0.2 5.4 4.9 0.3 0.2 5.4
Depreciation
As at 1 January 2021 2.3 0.1 0.1 2.5 1.7 0.1 0.1 1.9
Charge for the year
& impairment
0.4 0.1 0.1 0.6 0.4 0.1 0.1 0.6
On disposals (0.6) - - (0.6) - - - -
As at 31 December 2021 2.1 0.2 0.2 2.5 2.1 0.2 0.2 2.5
Net Book Value
As at 31 December 2021 2.8 0.1 - 2.9 2.8 0.1 - 2.9
18. INTANGIBLE ASSETS (CONTINUED)
Society
2021
Purchased
Software
£m
2021
Developed
Software
£m
2021
Total
£m
2020
Purchased
Software
£m
2020
Developed
Software
£m
2020
Total
£m
Cost
As at 1 January 8.0 31.1 39.1 7.8 30.7 38.5
Additions 0.3 8.3 8.6 0.2 0.4 0.6
As at 31 December 8.3 39.4 47.7 8.0 31.1 39.1
Amortisation
As at 1 January 7.7 18.9 26.6 7.5 14.0 21.5
Charge for the year 0.1 4.2 4.3 0.2 4.9 5.1
As at 31 December 7.8 23.1 30.9 7.7 18.9 26.6
Net Book Value
As at 31 December 0.5 16.3 16.8 0.3 12.2 12.5
At 31 December 2021, the Society has £nil (2020: £2.2m) held within other assets relating to assets under development in relation to the
Society’s digital technology platform, following capitalisation of the asset during the year.
THE NOTTINGHAM BUILDING SOCIETY | 85
ACCOUNTS
19. LEASES (CONTINUED)
Group Society
Right of use assets
2020
Property
£m
Equipment
£m
Motor
Vehicles
£m
Total
£m
Property
£m
Equipment
£m
Motor
Vehicles
£m
Total
£m
Cost
As at 1 January 2020 5.6 0.3 0.3 6.2 4.5 0.3 0.3 5.1
Additions 0.1 - - 0.1 0.5 - - 0.5
Disposals (0.2) - (0.1) (0.3) (0.2) - (0.1) (0.3)
As at 31 December 2020 5.5 0.3 0.2 6.0 4.8 0.3 0.2 5.3
Depreciation
As at 1 January 2020 0.7 0.1 0.1 0.9 0.5 0.1 0.1 0.7
Charge for the year &
impairment
1.7 - - 1.7 1.3 - - 1.3
On disposals (0.1) - - (0.1) (0.1) - - (0.1)
As at 31 December 2020 2.3 0.1 0.1 2.5 1.7 0.1 0.1 1.9
Net Book Value
As at 31 December 2020 3.2 0.2 0.1 3.5 3.1 0.2 0.1 3.4
Note
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Depreciation charge for right-of-use assets 0.6 1.7 0.6 1.3
Interest expense (included in interest payable and similar charges) 4 0.1 0.1 0.1 0.1
Expense relating to short-term leases (included in administrative expenses) 6 0.3 0.4 0.3 0.4
The total cash outflow for leases in 2021 was £0.7m (2020: £0.9m) for the Group, of which £0.7m (2020: £0.7m) related to the Society.
Right of use lease assets of £0.2m have been transferred from Harrison Murray Ltd to the Society during the year. Subsequent to recognition in the
Society, £0.1m of assets have been derecognised on surrender of the lease.
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Lease liabilities
Current 0.5 0.6 0.5 0.5
Non-current 2.7 3.8 2.7 3.4
3.2 4.4 3.2 3.9
The income statement shows the following amounts relating to leases:
86 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
20. DEFERRED TAX
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
As at 1 January 2.7 1.1 2.6 0.9
Adjustments in respect of prior periods 0.5 (0.6) 0.6 (0.6)
Charge to the income statement (1.7) 1.5 (1.7) 1.6
Recognised directly in other comprehensive income 0.2 0.7 0.2 0.7
1.7 2.7 1.7 2.6
The deferred tax charge/(credit) in the income statement comprises the following temporary differences:
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Pensions and other post tax retirement benefits 0.1 0.1 0.1 0.1
Intangible assets (0.4) 0.5 (0.4) 0.5
Other provisions 0.1 - 0.1 -
Tax losses 1.4 (1.5) 1.4 (1.6)
1.2 (0.9) 1.2 (1.0)
Deferred income tax assets and liabilities as at 31 December are attributable to the following items:
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Deferred tax assets
Pensions and other post-retirement benefits 1.1 1.2 1.1 1.2
Property, plant and equipment 0.4 0.4 0.4 0.3
Fair value reserves 0.3 0.2 0.3 0.2
Other timing differences 0.1 0.1 0.1 0.1
Tax losses 0.2 1.6 0.2 1.6
2.1 3.5 2.1 3.4
Deferred tax liabilities
IFRS transitional adjustments 0.2 0.2 0.2 0.2
Intangibles 0.2 0.6 0.2 0.6
0.4 0.8 0.4 0.8
Net deferred tax asset 1.7 2.7 1.7 2.6
Deferred tax liabilities have been offset against deferred tax assets in the statement of financial position in the current year as it is deemed that there is a
legal right of offset.
The Society has recognised £0.2m (2020: £1.6m) of deferred tax assets relating to losses incurred in the financial year as it is more likely than not that
future profitability will enable the recovery of such assets. There are no further assets for tax losses in the Group, which have not been recognised at
31 December 2021 (2020: £0.2m).
THE NOTTINGHAM BUILDING SOCIETY | 87
ACCOUNTS
21. SHARES
Group and Society
2021
£m
2020
£m
Held by individuals 2,874.9 2,793.2
Fair value adjustment for hedged risk
(0.3) 1.0
2,874.6 2,794.2
23. AMOUNTS OWED TO OTHER CUSTOMERS
Group and Society
2021
£m
2020
£m
Demand accounts
Retail customers 0.6 0.6
Other 0.3 0.4
0.9 1.0
Term deposits
Local Authorities 22.0 21.3
Other - 12.6
22.0 33.9
22.9 34.9
22. AMOUNTS OWED TO CREDIT INSTITUTIONS
Group and Society
2021
£m
2020
£m
Amounts owed to credit institutions 346.1 456.6
346.1 456.6
24. AMOUNTS OWED TO SUBSIDIARY UNDERTAKINGS
Society
2021
£m
2020
£m
At 1 January 205.2 77.2
Advance - 155.4
Repayment (60.0) (27.4)
145.2 205.2
The amounts owed to subsidiary undertakings represents a deemed loan as part of a secured funding balance. The repayment of the loan will
follow the collection of the principal and interest of the underlying mortgage assets, which is contractually due to be settled within one year.
88 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
26. OTHER LIABILITIES AND ACCRUALS
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Trade creditors 0.4 1.0 0.4 1.0
Accruals and deferred income 3.2
2.8
3.2 2.4
Other creditors
2.7 1.9 2.7 1.9
6.3 5.7 6.3 5.3
27. PROVISIONS FOR LIABILITIES
FSCS levy
Following the settlement of the loans outstanding from the 2008/09 banking failures, there are no further liabilities outstanding. Ongoing costs of the
FSCS scheme are recognised in administrative expenses.
Customer redress and other related provisions
Other provisions have been made in previous periods in respect of various customer claims, including claims in relation to previous sales of payment
protection insurance and endowment policies. The remaining liability at 31 December 2021 is immaterial to the financial statements.
Contingent liabilities
As a deposit taker, the Society continues to have obligations to the FSCS, as well as other contractual obligations to third party suppliers, which may
create a financial obligation in future accounting periods.
25. DEBT SECURITIES IN ISSUE
Group
2021
£m
Group
2020
£m
Society
2021
£m
Society
2020
£m
Senior secured debt 127.1 191.2 - -
Certificates of deposit - 2.5 - 2.5
127.1 193.7 - 2.5
The underlying security for the senior secured debt are certain loans and advances to customers (see note 14 for further detail). The facility is due
to mature in September 2022.
THE NOTTINGHAM BUILDING SOCIETY | 89
ACCOUNTS
28. RETIREMENT BENEFIT OBLIGATIONS
a) Defined benefit obligations
The Group operates a contributory defined benefit scheme, the assets of which are held in a separate trustee administered fund. The scheme closed to
new members in 1997 and was closed for future service accrual from 31 January 2009.
The pension cost is assessed following the advice of a qualified independent actuary using the projected unit method. The latest funding review of the
scheme was as at 31 March 2020. This review showed that the market value of the scheme assets as at 31 March 2020 was £55.3 million and that the
actuarial value of those assets represented 86% of the benefits that had accrued to members after allowing for expected future increase in salaries.
An updated actuarial valuation at 31 December 2021 was carried out on a market value basis by a qualified independent actuary, as follows:
Group and Society 2021 2020
The principal actuarial assumptions used were as follows:
Discount rate 1.85% 1.25%
Rate of increase in salaries 3.55% 3.05%
Rate of increase in pensions 3.70% 3.50%
Inflation 3.55% 3.05%
Post-retirement mortality
S3PMA_L for males, S3PFA for females
tables with CMI 2019 projections using a
long-term improvement rate of 1.25% p.a
S3PMA_L for males, S3PFA for females
tables with CMI 2019 projections using a
long-term improvement rate of 1.25% p.a
The assumptions applied follow the requirements of IAS 19, which are different to the technical valuation approach. This requires the discount rate
to be benchmarked against AA corporate rated bonds, which as at 31 December 2021 were lower than the rate of inflation.
The table below shows the assumptions used for expected life at 31 December (normal retirement age of 62).
Group and Society
2021
Male
Years
2021
Female
Years
2020
Male
Years
2020
Female
Years
Expected life at retirement for a new pensioner 26.5 27.6 26.5 27.6
Expected life at retirement in 20 years’ time 27.9 29.1 27.8 29.0
Approximate sensitivities of the principal assumptions are set out in the table below which shows the increase or reduction in the pension
obligations that would result. Each sensitivity considers one change in isolation.
Group and Society
Change in
assumption
2021
£m
2020
£m
Principal actuarial assumption
Discount rate +/- 0.25% (2.7) (3.2)
Rate of increase in salaries +/- 0.25% 0.1 0.1
Rate of increase in pensions +/- 0.25% 1.0 0.9
Mortality age adjustment +/- 0.25% 0.6 0.7
Inflation +/- 0.25% 1.2 1.2
90 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
28. RETIREMENT BENEFIT OBLIGATIONS (CONTINUED)
Group and Society
2021
£m
2020
£m
Fair value of scheme assets:
As at 1 January 65.6 60.1
Interest on pension scheme assets 0.8 1.2
Contributions by employer 1.5 1.5
Benefits paid (2.1) (3.1)
Expenses paid by trustees - -
Gain on asset returns 1.9 5.9
As at 31 December 67.7 65.6
Present value of defined benefit obligations:
As at 1 January (68.8) (60.0)
Past service cost - -
Interest on pension scheme liabilities (0.8) (1.3)
Benefits paid 2.1 3.1
Experience gain on liabilities - 0.5
Changes in demographic assumptions - (2.2)
Gain on changes in financial assumptions 4.1 (8.9)
As at 31 December (63.4) (68.8)
Surplus/(deficit) in scheme at 31 December 4.3 (3.2)
Impact of asset ceiling (8.7) (2.7)
LIABILITY IN THE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER (4.4) (5.9)
In recognising the net surplus or deficit of the pension scheme, the funded status of the scheme is adjusted to reflect the funding requirement agreed
by the sponsor alongside the rights of any return of surplus, with the recognition of an asset ceiling liability. The actual return on plan assets was a
gain of £2.7 million (2020: £7.1 million gain).
The major categories of plan assets are as follows:
Group and Society
2021
£m
2020
£m
Investments quoted in active market
Listed equity investments 15.0 12.3
Multi asset growth 16.1 14.9
High yield credit 16.2 15.9
Cash and cash equivalent 4.0 4.8
Unquoted investments
Liability driven investments 15.0 16.1
Secured pensioners 1.4 1.6
Fair value of scheme assets 67.7 65.6
Amounts recognised in finance cost in the income statement:
2021
£m
2020
£m
Interest cost (0.8) (1.3)
Interest on pension scheme assets 0.8 1.2
- (0.1)
The movement in the liability recognised in the statement of financial position is as follows:
Group and Society
2021
£m
2020
£m
Opening defined benefit obligation at 1 January (5.9) (3.4)
Amount recognised in the income statement - (0.1)
Employer contributions 1.5 1.5
Remeasurement gains/(losses) - (3.9)
Closing defined benefit obligation as at 31 December (4.4) (5.9)
THE NOTTINGHAM BUILDING SOCIETY | 91
ACCOUNTS
28. RETIREMENT BENEFIT OBLIGATIONS (CONTINUED)
The amount recognised in the statement of other comprehensive income for remeasurement gains and losses is as follows:
Group and Society
2021
£m
2020
£m
Actual return less expected return on plan assets 1.9 5.9
Experience loss arising on scheme liabilities - 0.5
Changes in assumptions underlying the present value of the scheme liabilities 4.1 (8.9)
Change in demographic assumptions - (2.2)
Change in impact of asset ceiling (6.0) 0.8
Remeasurement of defined benefit obligation
- (3.9)
The average duration of the defined benefit obligation as at 31 December 2021 is 16 years (2020: 16 years). This number can be analysed as follows:
Group and Society
2021
Years
2020
Years
Active members 21 22
Deferred members 21 22
Retired members 13 13
During the year, the Group made contributions of £1.5 million (2020: £1.5 million) as part of its funding plan. The Group and Society have
committed to contribute £1.5 million in 2022 under the agreed funding plan.
b) Defined contribution obligations
The Group also operates contributory defined contribution schemes. The assets of these schemes are held separately from those of the Group.
The pension charge for the period represents contributions payable by the Group and Society to the schemes and amounted for the continuing Group
to £1.0 million (2020: £1.0 million) and for the Society £1.0 million (2020: £1.0 million). There were no outstanding or prepaid contributions at either
the beginning or end of the year.
29. SUBSCRIBED CAPITAL
Group and Society
2021
£m
2020
£m
7.875% sterling permanent interest bearing shares 23.9 23.9
Fair value adjustment for hedged risk 0.1 0.3
24.0 24.2
The subscribed capital was issued for an indeterminate period and is only repayable in the event of the winding up of the Society. PIBS holders do
not have any right to a residual interest in the Society.
30. FAIR VALUE RESERVES
Group and Society
FVOCI reserve
2021
£m
FVOCI reserve
2020
£m
At 1 January - (0.4)
Net (charge)/gain from changes in fair value (0.1) 0.4
(0.1) -
92 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
31. FINANCIAL INSTRUMENTS
Classification & Measurement
A financial instrument is a contract that gives rise to a financial asset or financial liability. Nottingham Building Society is a retailer of financial
instruments, mainly in the form of mortgages and savings products. The Group uses wholesale financial instruments to invest in liquid assets, raise
wholesale funding and to manage the risks arising from its operations.
The Group has a formal structure for managing risk, including established risk limits, reporting lines, mandates, credit risk appetite and other
control procedures. The Board Risk Committee (BRC) is tasked with monitoring the Group’s overall exposure to risk, supported by the Executive
Risk Committee (ERC). Six sub committees, the Assets and Liabilities Committee (ALCO), Retail Credit Committee (RCC), Model Governance
(MGC), Operational Risk & Resilience Committee (ORRC), Legal, Regulatory & Conduct Risk Committee (LRC), and the Reinvention Committee (RC)
monitor the individual areas of risk and report to the Board Risk Committee quarterly.
The ALCO, monitors statement of financial position risks (including the use of derivative financial instruments), funding and liquidity in line with
the Group’s prudent policy statements as well as wholesale credit risk. The Retail Credit Committee ensures that the management of credit risk is
consistent with the credit risk appetite statement.
Key performance indicators are provided to the Executive Risk Committee and Board monthly by the ALCO and Retail Credit Committee.
Instruments used for risk management purposes include derivative financial instruments (derivatives), which are contracts whose value is derived from
one or more underlying price, rate or index inherent in the contract or agreement, such as interest rates, exchange rates or stock market indices.
The objective of the Group in using derivatives is in accordance with the Building Societies Act 1986 and is to limit the extent to which the Group
will be affected by changes in interest rates. Derivatives are not used in trading activity or for speculative purposes.
The derivative instruments used by the Group in managing its statement of financial position risk exposures are interest rate swaps. These are used
to protect the Group from exposures arising principally from fixed rate mortgage lending, fixed rate savings products and fixed rate wholesale
funding. An interest rate swap is a contract to exchange one set of interest rate cash flows for another. Such swaps result in the economic
exchange of interest rates. No exchange of principal takes place. Instead interest payments are based on notional principal amounts agreed at
inception of the swap. The duration of the interest rate swap is generally short to medium-term and their maturity profile reflects the nature of the
exposures arising from the underlying business activities.
The Group applies portfolio fair value hedging techniques to reduce its exposure to interest rate risk as follows:
Hedged item Risk Fair value interest rate hedge
Fixed rate mortgage Increase in interest rates Group pays fixed, receives variable
Fixed rate savings bond Decrease in interest rates Group receives fixed, pays variable
Fixed rate funding Decrease in interest rates Group receives fixed, pays variable
The fair values of these hedges as at 31 December 2021 are shown in note 13.
THE NOTTINGHAM BUILDING SOCIETY | 93
ACCOUNTS
31. FINANCIAL INSTRUMENTS (CONTINUED)
Classification & Measurement (continued)
Below are the summary terms and conditions and accounting policies of financial instruments held by the Group. These are the same for the
Society, except for intercompany balances, which are accounted for at fair value through profit and loss.
Financial instrument Terms and conditions Accounting policy: IFRS 9
Loans and advances to credit institutions Fixed or reference linked interest rate
Fixed term
Short to medium-term maturity
Amortised cost
Accounted for at settlement date
Debt securities Fixed or reference linked interest rate
Fixed term
Short to medium-term maturity
Fair value through other
comprehensive income
Accounted for at settlement date
Loans and advances to customers Secured on residential property or land
Standard maximum contractual term of 25 years
Fixed or variable rate interest
Amortised cost
Accounted for at settlement date
Shares Variable term
Fixed or variable interest rates
Amortised cost
Accounted for at settlement date
Amounts owed to credit institutions Fixed or reference linked interest rate
Fixed term
Short to medium-term maturity
Amortised cost
Accounted for at settlement date
Amounts owed to other customers Fixed or reference linked interest rate
Fixed term
Short to medium-term maturity
Amortised cost
Accounted for at settlement date
Debt securities in issue Fixed or reference linked interest rate
Fixed term
Short to medium-term maturity
Amortised cost
Accounted for at settlement date
Subscribed capital Fixed interest rate
Issued for indeterminate period
Only repayable upon winding up of the Society
Amortised cost
Accounted for at settlement date
Derivative financial instruments Fixed interest received/paid converted
to variable interest paid/received
Based on notional value of the derivative
Fair value through profit and loss
Accounted for at trade date
94 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
31. FINANCIAL INSTRUMENTS (CONTINUED)
Classification & Measurement (continued)
Financial assets and liabilities are measured on an ongoing basis either at fair value or at amortised cost. Note 1: ‘Accounting policies’ describes
how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The
tables below analyse the Group’s assets and liabilities by financial classification:
Carrying values by category Held at amortised cost Held at fair value
Group
As at 31 December 2021
Financial
assets and
liabilities at
amortised cost
Fair value
through other
comprehensive
income
Derivatives
designated
as fair value
hedges
Unmatched
derivatives Total
£m £m £m £m £m
Financial assets
Cash in hand and balances with the Bank of England 286.1 - - - 286.1
Loans and advances to credit institutions 16.1 - - - 16.1
Debt securities - 260.3 - - 260.3
Derivative financial instruments - - 23.0 3.1 26.1
Loans and advances to customers 3,010.9 - - - 3,010.9
Other assets 35.3 - - - 35.3
3,348.4 260.3 23.0 3.1 3,634.8
Financial liabilities
Shares 2,874.6 - - - 2,874.6
Amounts owed to credit institutions 346.1 - - - 346.1
Amounts owed to other customers 22.9 - - - 22.9
Debt securities in issue 127.1 - - - 127.1
Derivative financial instruments - - 6.4 0.1 6.5
Subscribed capital 24.0 - - - 24.0
Other liabilities 14.5 - - - 14.5
3,409.2 - 6.4 0.1 3,415.7
THE NOTTINGHAM BUILDING SOCIETY | 95
ACCOUNTS
31. FINANCIAL INSTRUMENTS (CONTINUED)
Classification & Measurement (continued)
Carrying values by category Held at amortised cost Held at fair value
Group
As at 31 December 2020
Financial
assets and
liabilities at
amortised cost
Fair value
through other
comprehensive
income
Derivatives
designated
as fair value
hedges
Unmatched
derivatives Total
£m £m £m £m £m
Financial assets
Cash in hand and balances with the Bank of England 374.9 - - - 374.9
Loans and advances to credit institutions 64.5 - - - 64.5
Debt securities - 152.8 - - 152.8
Derivative financial instruments - - 0.4 0.4 0.8
Loans and advances to customers 3,128.0 - - - 3,128.0
Other assets 37.4 - - - 37.4
3,604.8 152.8 0.4 0.4 3,758.4
Financial liabilities
Shares 2,794.2 - - - 2,794.2
Amounts owed to credit institutions 456.6 - - - 456.6
Amounts owed to other customers 34.9 - - - 34.9
Debt securities in issue 193.7 - - - 193.7
Derivative financial instruments - - 31.5 1.0 32.5
Subscribed capital 24.2 - - - 24.2
Other liabilities 16.0 - - - 16.0
3,519.6 - 31.5 1.0 3,552.1
96 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
31. FINANCIAL INSTRUMENTS (CONTINUED)
Fair values of financial assets and liabilities carried at amortised cost
The table below analyses the book and fair values of the Group’s financial instruments held at amortised cost at 31 December:
Group
2021
Book value
£m
2021
Fair value
£m
2020
Book value
£m
2020
Fair value
£m
Financial assets
Cash in hand and balances with the Bank of Engand a 286.1 286.1 374.9 374.9
Loans and advances to credit institutions b 16.1 16.1 64.5 64.5
Loans and advances to customers c 3,010.9 3,029.3 3,128.0 3,119.3
Financial liabilities
Shares d 2,874.6 2,879.9 2,794.2 2,791.9
Amounts owed to credit institutions d 346.1 346.1 456.6 456.6
Amounts owed to other customers d 22.9 22.8 34.9 34.9
Debt securities in issue e 127.1 127.1 193.7 193.7
Subscribed capital f 23.9 31.0 23.9 30.5
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The estimated fair value of the financial assets and liabilities above has been calculated using the following valuation
methodology:
a) Cash in hand – Level 1
The fair value of cash in hand and deposits with central banks is the amount repayable on demand.
b) Loans and advances to credit institutions – Level 2
The fair value of overnight deposits is the amount repayable on demand.
The estimated fair value of collateral loans and advances to credit institutions is based on its market price as at the period end.
c) Loans and advances to customers – Level 3
Loans and advances are recorded net of provisions for impairment together with the fair value adjustment for hedged items. The estimated
fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received taking account of
expected prepayment rates.
Estimated cash flows are discounted at prevailing market rates for items of similar remaining maturity. The fair values have been adjusted
where necessary to reflect any observable market conditions at the time of valuation.
d) Shares, deposits and borrowings – Level 3
The fair value of shares and deposits and other borrowings with no stated maturity is the amount repayable on demand.
The fair value of fixed interest bearing deposits and other borrowings without a quoted market price is based on expected future cash flows
determined by the contractual terms and conditions discounted at prevailing market rates for items of similar remaining maturity.
e) Debt securities in issue – Level 2
The fair value is calculated using a discounted cash flow model. Expected cash flows are discounted at prevailing market rates for items of
similar remaining maturity.
f) Subscribed capital – Level 1
The estimated fair value of fixed interest bearing debt is based on its active market price as at the period end.
THE NOTTINGHAM BUILDING SOCIETY | 97
ACCOUNTS
31. FINANCIAL INSTRUMENTS (CONTINUED)
Fair values of financial assets and liabilities carried at fair value
The table below summarises the fair values of the Group’s financial assets and liabilities that are accounted for at fair value, analysed by the
valuation methodology used by the Group to derive the financial instruments fair value:
Group Notes
2021
Level 1
£m
2021
Level 2
£m
2021
Total
£m
2020
Level 1
£m
2020
Level 2
£m
2020
Total
£m
Financial assets
FVOCI - Debt securities 12 260.3 - 260.3 152.8 - 152.8
Derivative financial instruments – Interest rate swaps 13 - 26.1 26.1 - 0.8 0.8
260.3 26.1 286.4 152.8 0.8 153.6
Financial liabilities
Derivative financial instruments – Interest rate swaps 13 - (6.5) (6.5) - (32.5) (32.5)
- (6.5) (6.5) - (32.5) (32.5)
The Group has no level 3 financial instruments carried at fair value.
Valuation techniques
The following is a description of the determination of fair value for financial instruments, which are accounted for at fair value using valuation
techniques.
The fair value hierarchy detailed in IFRS 13: ‘Fair Value Measurement’ splits the source of input when deriving fair values into three levels, as
follows:
• Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities
• Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly
• Level 3 – inputs for the asset or liability that are not based on observable market data
The main valuation techniques employed by the Group to establish fair value of the financial instruments disclosed above are set out below:
Debt securities
• Level 1 – Market prices have been used to determine the fair value of listed debt securities
• Level 2 - Debt securities for which there is no readily available traded price are valued based on the ‘present value’ method. This requires
expected future principal and interest cash flows to be discounted using prevailing yield curves. The yield curves are generally observable
market data which is derived from quoted interest rates in similar time bandings, which match the timings of the cash flows and maturities of
the instruments.
Interest rate swaps
The valuation of interest rate swaps is also based on the ‘present value’ method. Expected interest cash flows are discounted using the
prevailing SONIA yield curves. The yield curves are generally observable market data which is derived from quoted interest rates in similar time
bandings which match the timings of the interest cash flows and maturities of the instruments. All swaps are fully collateralised and therefore no
adjustment is required for credit risk in the fair value of derivatives.
The Society’s intercompany balances
The Society’s intercompany balances are carried at fair value and are classed as level 3 instruments. They are measured based on a discounted
cash flow calculation based on the most recent corporate plan, taking into account the risks inherent in the business areas and existing liquidity
positions in the relevant entity.
Transfers between fair value hierarchies
Transfers between fair value hierarchies occur when either it becomes possible to value a financial instrument using a method that is higher up the
valuation hierarchy or it is no longer possible to value it using the current method and it must instead be valued using a method lower down the
hierarchy. There have been no transfers during the current or previously reported periods.
98 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
31. FINANCIAL INSTRUMENTS (CONTINUED)
Credit risk
Credit risk is the risk that the Group incurs a financial loss arising from the failure of a customer or counterparty to meet their contractual
obligations. The Group structures the level of credit risk it undertakes, by maintaining a credit governance framework involving delegated approval
authority levels and credit procedures, the objective of which is to build and maintain risk asset portfolios of high quality.
The Group’s maximum credit risk exposure is detailed in the table below:
Group and Society
2021
£m
2020
£m
Credit risk exposure
Cash in hand and balances with the Bank of England 286.1 374.9
Loans and advances to credit institutions 16.1 64.5
Debt securities 260.8 152.9
Derivative financial instruments 26.1 0.8
Loans and advances to customers 3,010.9 3,128.0
Total statement of financial position exposure 3,600.0 3,721.1
Off balance sheet exposure – mortgage commitments 120.0 96.6
3,720.0 3,817.7
a) Loans and advances to credit institutions, debt securities and derivative financial instruments
The Executive Risk Committee, supported by ALCO, is responsible for approving treasury counterparties for both derivatives and investment
purposes, within the Board’s risk appetite. Limits are placed on the amount of risk accepted in relation to one counterparty, or group of
counterparties, and to industry sectors. This is monitored weekly by the Society’s Treasury risk team and reviewed monthly by the ALCO.
The Group’s policy only permits lending to central government (which includes the Bank of England), UK local authorities, banks with a high credit
rating and building societies. The Group’s Treasury team perform regular analysis of counterparty credit risk and monitoring of publicly available
information to highlight possible indirect exposures.
An analysis of the Group’s treasury asset concentration is shown in the table below:
Group
2021
£m
2021
%
2020
£m
2020
%
Industry sector
Banks 89.0 15.8 112.8 19.0
Building Societies 44.4 7.9 17.4 2.9
Multilateral Development Banks 104.9 18.7 78.6 13.3
Central Government 324.2 57.6 383.4 64.8
562.5 592.2
Group
2021
£m
AAA
%
AA
%
A
%
2020
£m
Geographic region
United Kingdom 457.6 25.3 72.1 2.6 513.4
Multilateral Development banks 104.9 100.0 - - 78.6
North America - - - 0.2
562.5 592.2
THE NOTTINGHAM BUILDING SOCIETY | 99
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31. FINANCIAL INSTRUMENTS (CONTINUED)
Credit risk (continued)
a) Loans and advances to credit institutions, debt securities and derivative financial instruments (continued)
The Group has no exposure to foreign exchange risk. All instruments are denominated in sterling. The Group also has no direct exposure to any
sovereign states, other than the UK.
The Group’s derivative financial instruments are fully collateralised with a central clearing house in the United Kingdom and as a result there is
no exposure to the Group.
All of the Group’s treasury assets are classified as Stage 1 for ECL calculation purposes under IFRS 9 and there are no impairment charges
against any of the Group’s treasury assets as at 31 December 2021 (2020: £nil).
b) Loans and advances to customers
All mortgage loan applications are assessed with reference to the Group’s retail credit risk appetite statement and lending policy, which
includes assessing applicants for potential fraud risk, which is approved by the Board. When deciding on the overall risk appetite that the
Group wishes to adopt, both numerical and non-numerical considerations are taken into account, along with data on the current UK economic
climate, portfolio information derived from the Group’s rating system and competitor activity. The statement must comply with all the prevailing
regulatory policy and framework.
The lending portfolio is monitored by the RCC to ensure that it remains in line with the stated risk appetite of the Group, including adherence to
the lending principles, policies and lending limits.
For new customers, the first element of the retail credit control framework is achieved via credit scoring, which assesses the credit quality of
potential customers prior to making loan offers. The customers’ credit score combines demographic and financial information. A second element
is lending policy rules, which are applied to new applications to ensure that they meet the risk appetite of the Group. All mortgage applications
are overseen by the Lending Services team who ensure that any additional lending criteria are applied and that all information submitted within
the application is validated.
For existing customers who have been added to the lending portfolio, management use behavioural scorecards to review the ongoing
creditworthiness of customers by determining the likelihood of them defaulting over a rolling 12 month period together with the amount of loss
if they do default. The continual assessment of customer risk of default is used to assess the customer’s suitability for further lending as well as
feed into strategic decision making processes, such as the corporate plan. Models used within the customer rating process are monitored in line
with industry best practice and to provide insight into changes observed within the mortgage portfolios.
Credit risk management information is comprehensive and is circulated to the RCC on a monthly basis to ensure that the portfolio remains
within the Group’s risk appetite.
It is the Group’s policy to ensure good customer outcomes and lend responsibly by ensuring at the outset that the customer can meet the
mortgage repayments. This is achieved by obtaining specific information from the customer concerning income and expenditure but also
external credit reference agency data.
The Group does not have any exposure to the sub-prime market.
The maximum credit risk exposure is disclosed in the table on page 98.
Loans and advances to customers are predominantly made up of retail loans fully secured against UK residential property (£2,800.2 million),
split between residential and buy-to-let loans with the remaining £232.6 million being secured on secured business lending.
100 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
31. FINANCIAL INSTRUMENTS (CONTINUED)
Credit risk (continued)
b) Loans and advances to customers (continued)
The Group operates throughout England & Wales with the portfolio well spread throughout the geographic regions. An analysis of the Group’s
geographical concentration is shown in the table below:
Group and Society
2021
%
2020
%
Geographical analysis
Eastern 9.5 9.9
East Midlands 16.8 18.0
London 8.6 8.0
North East 5.1 5.0
North West 11.8 11.3
South East 13.9 13.8
South West 8.7 8.8
Wales 3.4 3.3
West Midlands 9.8 9.6
Yorkshire & Humberside 12.1 12.1
Other 0.3 0.2
100.0 100.0
Retail loans (Loans fully secured on residential properties)
Loans fully secured on residential property are split between residential and buy-to-let. The average LTV is the mean LTV for the portfolio. Each
individual LTV is calculated by comparing the value of the mortgage loan to the value of collateral held adjusted by a house price index. The simple
average LTV of residential mortgages is 49% (2020: 52%). All residential loans above 80% LTV are insured against loss.
The indexed LTV analysis on the Group’s residential mortgage portfolio is shown below:
Group and Society
2021
Residential
%
2021
Buy-to-let
%
2020
Residential
%
2020
Buy-to-let
%
Loan to Value analysis
< 60% 48.5
74.7
41.6
55.7
60% - 80% 45.1
25.3
42.0
44.3
80% - 90% 5.8
-
14.5
-
> 90% 0.6
-
1.9
-
100.0
100.0
100.0 100.0
Average loan to value of loans 48.2
51.1
51.8
55.6
Average loan to value of new business 67.8
64.1
71.0
66.6
The quality of the Group’s retail mortgage book is reflected in the number and value of accounts in arrears. By volume 0.2% (2020: 0.2%) of loans are
three months or more in arrears and by value it is 0.2% (2020: 0.2%).
The main factor for loans moving into arrears tends to be the condition of the general economic environment. In general, the lower the loan-to-value
percentage, the greater the equity within the property, and the lower the losses expected to be realised in the event of default or repossession
THE NOTTINGHAM BUILDING SOCIETY | 101
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Group and Society
2021
Gross loans
£m
2021
Expected
Credit Loss
£m
2020
Gross loans
£m
2020
Expected
Credit Loss
£m
Stage 1: 12 month expected credit losses
< 30 days past due 2,666.7 1.4 1,807.4 0.5
Stage 2: Lifetime expected credit losses
< 30 days past due 111.5 0.2 1,117.7 1.0
> 30 days past due 5.8 - 9.3 0.1
Stage 3: Lifetime expected credit losses
< 90 days past due 12.1 0.1 3.2 0.1
> 90 days past due 4.1 - 4.5 0.1
2,800.2 1.7 2,942.1 1.8
Group and Society
2021
Indexed
£m
2021
Unindexed
£m
2020
Indexed
£m
2020
Unindexed
£m
Value of collateral held:
Stage 1:
12 month expected credit losses
5,709.5 4,460.3 3,873.1 3,162.7
Stage 2:
Lifetime expected credit losses
257.0 196.3 1,971.7 1,692.3
Stage 3:
Lifetime expected credit losses
42.4 28.3 17.4 12.9
6,008.9 4,684.9 5,862.2 4,867.9
The collateral held consists of residential property. Collateral values are adjusted by the ONS Property Price Index to derive the indexed valuation at 31
December. This is the UK’s longest running house price index and takes into account regional data from the 12 standard planning regions of the UK. The
Group uses the index to update the property values of its residential and buy-to-let portfolios on a quarterly basis.
With collateral capped to the amount of outstanding debt, the value of collateral held against loans in stages 2 and 3 under IFRS 9 and which are in
arrears, is £11.6 million as at 31 December 2021 (2020: £15.1 million).
The change in staging profile between 2020 and 2021, due to the refinement of the SICR criteria, is detailed in note 15.
Mortgage indemnity insurance acts as additional security. It is taken out for all residential loans where the borrowing exceeds 80% of the value of the
property at the point of application.
The table below provides information on retail gross loans and Expected Credit Loss stages split by the number of days past due (DPD):
31. FINANCIAL INSTRUMENTS (CONTINUED)
Credit risk (continued)
b) Loans and advances to customers (continued)
Retail loans (continued)
The table below shows the fair value of collateral held for residential mortgages.
102 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
31. FINANCIAL INSTRUMENTS (CONTINUED)
Credit risk (continued)
b) Loans and advances to customers (continued)
Retail loans (continued)
Forbearance
Temporary interest only concessions were historically offered to customers in financial difficulty on a temporary basis with formal periodic review. The
concession allowed the customer to reduce monthly payments to cover interest only, and if made, the arrears status will not increase. Interest only
concessions are no longer offered and have been replaced by reduced payment concessions.
Reduced payment concessions allow a customer to make an agreed underpayment for a specific period of time. The monthly underpaid amount
accrues as arrears and agreement is reached at the end of the concession period on how the arrears will be repaid.
Payment plans are agreed to enable customers to reduce their arrears balances by an agreed amount per month, which is paid in addition to their
standard monthly repayment.
Capitalisations occur where arrears are added to the capital balance outstanding for the purposes of restructuring the loan.
The term of the mortgage is extended in order to reduce payments to a level that is affordable to the customer based on their current financial circumstances.
All forbearance arrangements are formally discussed with the customer and reviewed by management prior to acceptance of the forbearance arrangement.
By offering customers in financial difficulty the option of forbearance, the Society potentially exposes itself to an increased level of risk through prolonging
the period of non-contractual payment and/or potentially placing the customer into a detrimental position at the end of the forbearance period.
Regular monitoring of the level and different types of forbearance activity are reported to the RCC on a monthly basis. In addition the Legal,
Regulatory & Conduct Risk Committee monitors the level of arrears and forbearance cases. In addition, all forbearance arrangements are reviewed and
discussed with the customer on a regular basis to assess the ongoing potential risk to the Society and suitability of the arrangement for the customer.
The Society does not offer payment deferrals as a forbearance option as part of normal operating arrangements and therefore any payment deferrals,
which were granted in response to the Covid-19 pandemic and as part of the government interventions were therefore excluded from the forbearance data
presented below in relation to the prior year. The payment deferral schemes ended during 2021, and therefore is not applicable to the 2021 reported data.
The table below details the number of forbearance cases within the retail loans category:
Unaudited
Group and Society
2021
Number
2020
Number
Type of forbearance
Interest only concessions 1 2
Reduced payment concessions - 1
Payment plans 27 30
Capitalisations 47 53
Mortgage term extensions 52 62
Less: cases with more than one form of forbearance (35) (38)
92 110
These cases are covered by an IFRS 9 ECL allowance of £22,000 (2020: £32,000). In total, £8.4 million (2020: £9.6 million) of loans are subject to
forbearance.
Secured Business Loans (Other loans fully secured on land)
Secured Business Loans (SBL) are primarily made available to Small and Medium sized enterprises for either owner occupied or investment
property purposes and includes limited company buy-to-let loans. Loans are also only granted against the ‘bricks and mortar’ of the property and
not against working capital or machinery etc.
The make-up of the SBL book as at 31 December is as follows:
Unaudited
Group and Society
2021
£m
2021
%
2020
£m
2020
%
Owner occupied 40.9 17.6 44.1 26.9
Investment property 191.7 82.4 120.0 73.1
232.6 100.0 164.1 100.0
THE NOTTINGHAM BUILDING SOCIETY | 103
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31. FINANCIAL INSTRUMENTS (CONTINUED)
Credit risk (continued)
b) Loans and advances to customers (continued)
Secured Business Loans (continued)
The table below shows the fair value of collateral held for SBL loans:
Group and Society
2021
Indexed
£m
2021
Unindexed
£m
2020
Indexed
£m
2020
Unindexed
£m
Value of collateral held:
Stage 1: 12 month expected credit losses 385.6 385.9 171.1 171.1
Stage 2: Lifetime expected credit losses 26.5 28.5 139.3 144.7
Stage 3: Lifetime expected credit losses 2.0 2.0 1.9 2.2
414.1 416.4 312.3 318.0
Collateral reflects the latest valuation completed. If a property has had a desktop valuation since the latest full valuation, the collateral reflects the
desktop valuation (32% of the SBL book has had a desktop valuation (2020: 35%)).
With collateral capped to the amount of outstanding debt, the value of collateral held against loans in stages 2 and 3 under IFRS 9 and which are in
arrears, is £1.5 million as at 31 December 2021 (2020: £1.8 million).
The change in staging profile between 2020 and 2021, due to the refinement of the SICR criteria, is detailed in note 15.
The table below provides information on SBL gross loans and Expected Credit Loss stages split by the number of days past due (DPD):
Group and Society
2021
Gross loans
£m
2021
Expected
Credit Loss
£m
2020
Gross loans
£m
2020
Expected
Credit Loss
£m
Stage 1: 12 month expected credit losses
< 30 days past due 215.1 0.8 106.0 1.5
Stage 2: Lifetime expected credit losses
< 30 days past due 15.5 0.5 56.0 0.4
> 30 days past due 1.0 - 0.9 0.3
Stage 3: Lifetime expected credit losses
< 90 days past due 0.7 - 0.6 0.1
> 90 days past due 0.3 0.1 0.6 0.4
232.6 1.4 164.1 2.7
In terms of SBL risk, the single largest borrower represents less than 0.4% (2020: 0.6%) of the SBL mortgage book.
The table below provides information on the original LTV of the Group’s SBL mortgage portfolio:
Group and Society
2021
%
2020
%
Loan to Value analysis
< 60% 23.7 28.4
60% - 80% 73.3 66.9
80% - 90% 2.9 4.6
> 90% 0.1 0.1
100.0 100.0
Average loan to value of loans 65.6 63.1
Average loan to value of new business 69.4 68.4
104 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
31. FINANCIAL INSTRUMENTS (CONTINUED)
Credit risk (continued)
b) Loans and advances to customers (continued)
Secured Business Loans (continued)
Forbearance
The Group has various forbearance options to support customers who may find themselves in financial difficulty. These include ‘interest only’
concessions, renegotiation of contractual payment, payment plans and capitalisations.
‘Interest only’ concessions are offered to customers in financial difficulty on a temporary basis with formal periodic review. The concession allows the
customer to reduce monthly payments to cover interest only, and if made, the arrears status will not increase.
Renegotiation of contractual payments is provided to reduce the monthly payment to a level affordable by the customer. The agreement remains
within the Society’s lending policy, for example within the maximum mortgage term.
Payment plans are agreed to enable customers to reduce their arrears balances by an agreed amount per month which is paid in addition to their
standard monthly repayment.
Capitalisations occur where arrears are added to the capital balance outstanding for the purpose of restructuring the loan.
The Society does not offer payment deferrals as a forbearance option as part of normal operating arrangements and therefore any payment deferrals,
which were granted in response to the Covid-19 pandemic and as part of the government interventions were therefore excluded from the forbearance
data presented below in relation to the prior year. The payment deferral schemes ended during 2021, and therefore is not applicable to the 2021
reported data.
The table below shows those loans subject to forbearance within the SBL loans category:
Unaudited
Group and Society
2021
Number
2020
Number
Type of forbearance
Interest only concessions 5 6
Renegotiation of contractual payment 5 6
Active payment plan 2 3
Capitalisation 1 -
13 15
These cases are covered by an IFRS 9 ECL allowance of £0.1 million (2020: £0.5 million). In total, £2.4 million (2020: £2.5 million) of loans are subject
to forbearance.
Liquidity risk
Liquidity risk is the risk that the Society will not have sufficient financial resources available to meet its obligations as they fall due, under either
normal business conditions or a stressed environment. It is the Society’s policy that a significant amount of its total assets are carried in the form of
cash and other readily realisable assets in order to:
i) meet day-to-day business needs;
ii) meet any unexpected cash needs;
iii) maintain public confidence; and
iv) ensure maturity mismatches are provided for.
Monitoring of liquidity, in line with the Society’s prudent policy framework, is performed daily. Compliance with these policies is reported to ALCO
monthly and through to the Executive Risk and Board Risk Committees.
The Society’s liquidity policy is designed to ensure the Society has sufficient liquid resources to withstand a range of stressed scenarios. A series of
liquidity stress tests have been developed as part of the Internal Liquidity Adequacy Assessment process (ILAAP). They include scenarios that fulfil
the specific requirements of the PRA (the idiosyncratic, market-wide and combination stress tests) and scenarios identified by the Society which are
specific to its business model. The stress tests are performed monthly and reported to ALCO to confirm that the liquidity policy remains appropriate.
THE NOTTINGHAM BUILDING SOCIETY | 105
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31. FINANCIAL INSTRUMENTS (CONTINUED)
Liquidity risk (continued)
The Society’s liquid resources comprise high quality liquid assets, including a Bank of England reserves account, Gilts, time deposits and investment
grade fixed and floating rate notes issued by highly rated financial institutions, supplemented by unencumbered mortgage assets. At the end of the
year the ratio of liquid assets to shares and deposits was 16.7% compared to 17.0% at the end of 2020. When also taking into account the off balance
sheet liquid resources, the ratio of liquid resources to shares and deposits was 30.3% (2020: 32.5%).
The Society maintains a contingency funding plan, as part of its Recovery and Resolution Plan process, to ensure that it has so far as possible, sufficient
liquid financial resources to meet liabilities as they fall due under each of the scenarios.
The table below analyses the Group’s assets and liabilities into relevant maturity groupings, based on the remaining period to contractual maturity at
the statement of financial position date. This is not representative of the Group’s management of liquidity. Loans and advances to customers rarely run
their full course. The actual repayment profile is likely to be significantly different from that shown in the analysis. For example most mortgages have a
contractual maturity of around 25 years but are generally repaid much sooner. The average life of a mortgage at the Group, currently in product, is
4.4 years (2020: 4.3 years). Conversely, retail deposits repayable on demand generally remain on the balance sheet much longer.
Group
Residual maturity
as at 31 December 2021
On demand
£m
Not more
than three
months
£m
More than
three months
but not more
than one year
£m
More than
one year but
not more than
five years
£m
More than
five years
£m
Total
£m
Financial assets
Liquid assets
Cash in hand and balances with the Bank of England 279.2 - 6.9 - - 286.1
Loans and advances to credit institutions 8.0 8.1 - - - 16.1
Debt securities - 14.0 11.3 235.0 - 260.3
Total liquid assets 287.2 22.1 18.2 235.0 - 562.5
Derivative financial instruments - (0.4) 2.2 16.4 7.9 26.1
Loans and advances to customers 0.7 24.6 75.1 438.0 2,472.5 3,010.9
Other assets - 1.8 3.0 0.5 30.0 35.3
287.9 48.1 98.5 689.9 2,510.4 3,634.8
Financial liabilities and reserves
Shares 1,324.4 720.4 454.2 375.6 - 2,874.6
Amounts owed to credit institutions 2.9 28.1 - 315.1 - 346.1
Amounts owed to other customers 0.9 2.0 20.0 - - 22.9
Debt securities in issue - - 127.1 - - 127.1
Derivative financial instruments - 0.4 3.0 3.1 - 6.5
Subscribed capital - 0.1 - - 23.9 24.0
Reserves - - - - 219.1 219.1
Other liabilities 1.6 3.4 1.2 3.1 5.2 14.5
1,329.8 754.4 605.5 696.9 248.2 3,634.8
Net liquidity gap (1,041.9) (706.3) (507.0) (7.0) 2,262.2 -
106 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
31. FINANCIAL INSTRUMENTS (CONTINUED)
Liquidity risk (continued)
Group
Residual maturity
as at 31 December 2020
On demand
£m
Not more
than three
months
£m
More than
three months
but not more
than one year
£m
More than
one year but
not more than
five years
£m
More than
five years
£m
Total
£m
Financial assets
Liquid assets
Cash in hand and balances with the Bank of England 368.7 - 6.2 - - 374.9
Loans and advances to credit institutions 13.2 51.3 - - - 64.5
Debt securities - 18.2 8.5 126.1 - 152.8
Total liquid assets 381.9 69.5 14.7 126.1 - 592.2
Derivative financial instruments - (0.2) (0.5) 1.4 0.1 0.8
Loans and advances to customers 3.2 25.8 78.1 488.8 2,532.1 3,128.0
Other assets - 1.8 8.4 0.3 26.9 37.4
385.1 96.9 100.7 616.6 2,559.1 3,758.4
Financial liabilities and reserves
Shares 1,364.9 584.1 394.4 450.4 0.4 2,794.2
Amounts owed to credit institutions 3.0 0.5 260.1 193.0 - 456.6
Amounts owed to other customers 1.0 33.9 - - - 34.9
Debt securities in issue - 2.5 - 191.2 - 193.7
Derivative financial instruments - - - 27.0 5.5 32.5
Subscribed capital - 0.1 - - 24.1 24.2
Reserves - - - - 206.3 206.3
Other liabilities 1.9 2.6 0.9 3.4 7.2 16.0
1,370.8 623.7 655.4 865.0 243.5 3,758.4
Net liquidity gap (985.7) (526.8) (554.7) (248.4) 2,315.6 -
There is no material difference between the maturity profile for the Group and that for the Society. As at 31 December 2021, £599.5 million (2020:
£841.2 million) of the Group’s assets were encumbered.
THE NOTTINGHAM BUILDING SOCIETY | 107
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31. FINANCIAL INSTRUMENTS (CONTINUED)
Liquidity risk (continued)
The following is an analysis of gross contractual cash flows payable under financial liabilities:
Group
31 December 2021
Repayable
on demand
£m
Not more
than
three months
£m
More than
three months
but not more
than one year
£m
More than
one year but
not more than
five years
£m
More than
five years
£m
Total
£m
Shares 1,336.7 720.4 454.3 375.8 - 2,887.2
Amounts owed to credit institutions 2.9 28.1 - 315.1 - 346.1
Amounts owed to other customers 0.9 2.0 20.0 - - 22.9
Debt securities in issue - 5.1 122.0 - - 127.1
Derivative financial instruments - 0.5 1.6 10.3 - 12.4
Subscribed capital - 0.5 1.5 7.9 23.9 33.8
TOTAL LIABILITIES 1,340.5 756.6 599.4 709.1 23.9 3,429.5
Group
31 December 2020
Shares 1,384.3 584.1 394.4 451.4 0.4 2,814.6
Amounts owed to credit institutions 2.9 0.6 260.1 193.0 - 456.6
Amounts owed to other customers 0.9 34.0 - - - 34.9
Debt securities in issue - 11.8 23.5 158.4 - 193.7
Derivative financial instruments - 0.9 4.5 28.3 - 33.7
Subscribed capital - 0.5 1.5 7.9 23.9 33.8
TOTAL LIABILITIES 1,388.1 631.9 684.0 839.0 24.3 3,567.3
The analysis of gross contractual cash flows differs from the analysis of residual maturity due to the inclusion of interest accrued at current rates,
for the average period until maturity on the amounts outstanding at the statement of financial position date.
108 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
31. FINANCIAL INSTRUMENTS (CONTINUED)
Market and interest rate risk
Market risk is the risk of changes to the Society’s financial condition caused by market interest rates. The Society is exposed to market risk in the
form of changes (or potential changes) in the general level of interest rates and changes in the relationship between different types of interest
rates (basis risk).
The Society has adopted the ‘Extended’ approach to interest rate risk, as defined by the PRA, which aims to undertake the hedging of individual
transactions within an overall strategy for structural hedging, based on a detailed analysis of the statement of financial position.
The management of interest rate risk is based on a full statement of financial position gap analysis. The statement of financial position is subjected
to a range of stress tests, including a 2% rise in interest rates on a weekly basis. The results are measured against the risk appetite for market
risk which is currently set at a maximum of 4.0% of capital. In addition, management review interest rate basis risk and its potential impact on
earnings. Risk positions are reviewed monthly by the ALCO and reported through to the Executive Risk and Board Risk Committees.
The table below summarises the Group’s exposure to interest rate risk.
Group and Society
2021
£m
2020
£m
Changes in market value from a 2% parallel upward shift in interest rates 0.1 0.9
There is no material difference between the interest rate risk profile for the Group and that for the Society.
The Group is not exposed to foreign currency risk.
The Society does not have any financial assets or liabilities that are offset with the net amount presented in the statement of financial position as
IAS 32 ‘Financial Instruments – Presentation’ requires both an enforceable right to set off and the intention to settle on a net basis or to realise the
asset and settle the liability simultaneously. Neither of these conditions are met by the Society.
All financial assets and liabilities are presented on a gross basis in the statement of financial position.
The Society centrally clears its derivative instruments, which requires it to enter into Credit Support Annexes (CSAs) and which typically provide for
the exchange of collateral on a daily basis to mitigate net mark to market credit exposure.
The following table shows the impact on derivative financial instruments and repurchase agreements after collateral:
Group and Society
2021
Gross
Amounts
£m
2021
Financial
collateral*
£m
2021
Net
amounts
£m
2020
Gross
Amounts
£m
2020
Financial
collateral*
£m
2020
Net
amounts
£m
Financial assets
Derivative financial instruments 26.1 (26.1) - 0.8 (0.8) -
TOTAL FINANCIAL ASSETS 26.1 (26.1) - 0.8 (0.8) -
Financial liabilities
Derivative financial instruments 6.5 (6.5) - 32.5 (32.5) -
Repurchase agreements - - - - - -
TOTAL FINANCIAL LIABILITIES 6.5 (6.5) - 32.5 (32.5) -
* Financial collateral disclosed is limited to the amount of the related financial asset and liability.
THE NOTTINGHAM BUILDING SOCIETY | 109
ACCOUNTS
31. FINANCIAL INSTRUMENTS (CONTINUED)
Market and interest rate risk (continued)
Fair value hedges
The Group holds a portfolio of fixed rate mortgages and savings products as well as fixed rate PIBS and therefore is exposed to changes in fair value
due to movements in market interest rates. The Group manages this risk exposure by entering into pay fixed/receive floating interest rate swaps for its
loans to customers and pay floating/receive fixed interest rate swaps to hedge its fixed rate liabilities.
Only the interest rate risk element is hedged and therefore other risks, such as credit risk, are managed separately but are not managed through
hedged derivative financial instruments by the Group. The interest rate risk component is determined as the change in the fair value of the long-
term fixed rate mortgages arising solely from changes in the appropriate 3 month benchmark rate of interest (SONIA). Such changes are usually the
largest component of the overall change in fair value. This strategy is designated as a fair value hedge and its effectiveness is assessed by comparing
changes in the fair value of the loans attributable to changes in the benchmark rate of interest with changes in the fair value of the loans attributable
to changes in the benchmark rate of interest with changes in the fair value of the interest rate swaps. The Group establishes the hedging ratio by
matching the notional of the derivatives with the principal of the portfolio being hedged. Possible sources of ineffectiveness are as follows:
• differences between the expected and actual volumes of prepayments, as the Group hedges to the expected repayment date taking into
account expected prepayments based on past experience;
• difference in the discounting between the hedged item and the hedging instrument, as cash collateralised interest rate swaps are discounted
using the relevant reference rate discount curves, which are not applied to the fixed rate mortgages; and
• hedging derivatives with a non-zero fair value at the date of initial designation as a hedging instrument.
The exposure from this portfolio frequently changes due to new loans originated, contractual repayments and early prepayments made by
customers in each period. As a result, the Group adopts a dynamic hedging strategy (sometimes referred to as a ‘macro’ or ‘portfolio’ hedge) to
hedge the exposure profile by closing and entering into new swap agreements at each month-end. The Group uses the portfolio fair value hedge of
interest rate risk to recognise fair value changes related to changes in interest rate risk in the relevant portfolio, and therefore reduce the profit or
loss volatility that would otherwise arise from changes in fair value of the interest rate swaps alone.
The following table details the hedging instruments included in the derivative financial instruments line of the Group’s consolidated statement of
financial position:
Group and Society
2021
Contract/notional
amount
£m
2021
Fair value
of assets
£m
2021
Fair value
of liabilities
£m
2021
Changes in fair
value used for
calculating hedge
ineffectiveness
£m
Derivatives designated as fair value hedges
for interest rate risk (note 13)
Fixed rate mortgages 1,991.0 21.4 (6.1) 48.6
Fixed rate savings 74.0 1.6 (0.3) -
Subscribed capital - - - (1.5)
2,065.0 23.0 (6.4) 47.1
Group and Society
2020
Contract/notional
amount
£m
2020
Fair value
of assets
£m
2020
Fair value
of liabilities
£m
2020
Changes in fair
value used for
calculating hedge
ineffectiveness
£m
Derivatives designated as fair value hedges
for interest rate risk (note 13)
Fixed rate mortgages 1,854.0 0.1 (31.5) (17.5)
Fixed rate savings 309.0 - - -
Subscribed capital 10.0 0.3 - 0.8
2,173.0 0.4 (31.5) (16.7)
110 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
31. FINANCIAL INSTRUMENTS (CONTINUED)
Market and interest rate risk (continued)
Fair value hedges (continued)
The following table details the hedge exposures covered by the Group’s hedging strategies:
2021
Carrying amount
of hedged item
2021
Accummulated amount
of fair value adjustments
on the hedged item
2021
Balance
sheet
line item
2021
Change in fair
value of hedged
item for
ineffectiveness
assessment
£m
Group and Society
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Hedged items in fair value hedges
for interest rate risk (note 13)
Fixed rate mortgages 2,047.0 - (18.8) -
Loans & advances
to customers
(42.0)
Fixed rate savings - 77.4 - (0.3)
Shares
1.3
Subscribed capital - - - -
Subscribed capital
0.3
2,047.0 77.4 (18.8) (0.3) (40.4)
2020
Carrying amount
of hedged item
2020
Accummulated amount
of fair value adjustments
on the hedged item
2020
Balance
sheet
line item
2020
Change in fair
value of hedged
item for
ineffectiveness
assessment
£mGroup and Society
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Hedged items in fair value hedges
for interest rate risk (note 13)
Fixed rate mortgages 1,897.6 - 26.3 -
Loans & advances
to customers
15.8
Fixed rate savings - 301.0 - (1.0)
Shares
(1.3)
Subscribed capital - 10.0 - (0.3)
Subscribed capital
0.5
1,897.6 311.0 26.3 (1.3) 15.0
THE NOTTINGHAM BUILDING SOCIETY | 111
ACCOUNTS
32. CAPITAL STRUCTURE
The Society’s policy is to maintain a strong capital base to maintain member, creditor and market confidence and to sustain future development
of the business. The formal Internal Capital Adequacy Assessment Process (ICAAP) assists the Society with its management of capital. Through its
quarterly business plan update the Board monitors the Society’s capital position to assess whether adequate capital is held to mitigate the risks it
faces in the course of its business activities. The Society’s actual and expected capital position is reviewed against stated risk appetite which aims
to maintain capital at a specific level above its Total Capital Requirement (TCR).
The Board manages the Society’s capital and risk exposures to maintain capital in line with regulatory requirements which includes monitoring of:
• Lending and Business Decisions – The Society uses application scorecards to help it assess whether mortgage applications fit within its
appetite for credit risk. Once loan funds have been advanced, behavioural scorecards are used to review the ongoing risk profile of both the
portfolios and individual customers. In addition, for residential and buy-to-let mortgages property values are updated on a quarterly basis.
• Pricing – Pricing models are utilised for all mortgage product launches. The models include expected loss estimates and capital utilisation
enabling the calculation of a risk adjusted return on capital.
• Concentration risk – The design of retail products takes into account the overall mix of products to ensure that exposure to market risk
remains within permitted parameters.
• Counterparty risk – Wholesale lending is only carried out with approved counterparties in line with the Society’s lending criteria and is subject
to a range of limits. The limits are monitored daily to ensure the Society remains within risk appetite.
This is subjected to regular stress tests to ensure the Society maintains sufficient capital for future possible events.
The Group’s capital requirements are set and monitored by the PRA. During 2021, the Society has complied with the requirements included within
the Capital Requirements Directive IV (Basel III). Further details of these requirements and their impact on the Society are provided in the Strategic
report on page 15.
There were no reported breaches of capital requirements during the year. There have been no material changes in the Society’s management of
capital during the year.
Under Basel III Pillar 3, the Society is required to publish further information regarding its capital position and exposures. The Society’s Pillar 3
disclosures are available on our website www.thenottingham.com.
31. FINANCIAL INSTRUMENTS (CONTINUED)
Market and interest rate risk (continued)
Fair value hedges (continued)
The following table contains information regarding the effectiveness of the hedging relationships designated by the Group, as well as the impacts
on profit or loss.
Group and Society
2021
Hedge ineffectiveness
recognised in income statement
£m
2021
Income statement line
item that includes
reclassified amount
Fair value hedges
Interest rate swaps
Fixed rate mortgages 6.6 Net gains from derivative financial instruments
Fixed rate savings (0.1) Net gains from derivative financial instruments
Subscribed capital - Net gains from derivative financial instruments
6.5
Group and Society
2020
Hedge ineffectiveness
recognised in income statement
£m
2020
Income statement line
item that includes
reclassified amount
Fair value hedges
Interest rate swaps
Fixed rate mortgages (1.7) Net losses from derivative financial instruments
Fixed rate savings - Net losses from derivative financial instruments
Subscribed capital - Net losses from derivative financial instruments
(1.7)
112 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
33. RELATED PARTY TRANSACTIONS
Transactions with Group companies
Details of the Society’s shares in group undertakings are given in note 16.
During the normal course of business the following transactions were undertaken during the year:
Society
2021
Nottingham
Mortgage Services
£m
2021
Nottingham
Property Services
£m
2021
Harrison
Murray
£m
2020
Nottingham
Mortgage Services
£m
2020
Nottingham
Property Services
£m
2020
Harrison
Murray
£m
Management charges paid - - - 0.1 0.1 0.1
People related recharges 0.1 - - 0.3 0.1 0.1
Fixed occupancy related recharges - - - - - -
During the year, Nottingham Building Society has received £0.2 million (2020: £0.1 million) in fees for providing cash manager and mortgage
servicer fees to Arrow Mortgage Finance No.1 Limited.
Movement on the intercompany balances are disclosed in note 16.
During the year, property with the value of £0.7m has been transferred at fair value to the Society from Nottingham Property Services Ltd.
At the end of the year the following balances were outstanding between the Society and its subsidiaries:
2021
Amount owed
to subsidiaries
£m
2021
Amount owed
by subsidiaries
£m
2020
Amount owed
to subsidiaries
£m
2020
Amount owed
by subsidiaries
£m
Arrow Mortgage Finance No. 1 Limited (145.2) 26.6 (205.2) 26.6
(145.2) 26.6 (205.2) 26.6
Interest accrues on the balances outstanding with Arrow Mortgage Finance at SONIA plus a margin. The repayment of the loans will follow the
collection of the principal and interest of the underlying mortgage assets, used as security and has a contractual maturity within one year.
THE NOTTINGHAM BUILDING SOCIETY | 113
ACCOUNTS
Group and Society
2021
Number of key
management
personnel and their
close family members
Number
2021
Amounts in respect
of key management
personnel and their
close family members
£000
2020
Number of key
management
personnel and their
close family members
Number
2020
Amounts in respect
of key management
personnel and their
close family members
£000
Loans and advances
Net movements in the year - (16) - (16)
Balances outstanding 31 December 2 107 2 123
Share accounts
Net movement in the year
(1) (30) (1) 24
Balances outstanding 31 December 7 135 8 105
Subscribed capital
Net movement in the year 1 7 1 6
Balances outstanding 31 December 2 13 1 6
Interest receivable on loans & advances 2 3
Interest payable on share accounts - -
Interest payable on subscribed capital 1 -
Directors’ loans and transactions
As at 31 December 2021 there was one (2020: one) outstanding secured mortgage loan made in the ordinary course of business at a normal commercial
rate to directors and their connected persons. A register is maintained at the head office of the Society that shows details of all loans, transactions and
arrangements with directors and their connected persons. A statement of the appropriate details contained in the register, for the financial year ended
31 December 2021, will be available for inspection at the head office for a period of 15 days up to and including the annual general meeting.
33. RELATED PARTY TRANSACTIONS (CONTINUED)
Transactions with key management personnel
Transactions with key management personnel are on the same terms and conditions applicable to members and other employees within the
Group. The directors are considered to be the only key management personnel as defined by IAS 24, which includes Non-Executive Directors.
Compensation for key management personnel for the year totalled £0.8 million (2020: £0.9 million) and a breakdown is disclosed on pages 45 and
46 in the Directors’ remuneration report.
In addition, the following transactions were undertaken through the normal course of business:
114 | 2021 ANNUAL REPORT AND ACCOUNTS
NOTES TO THE ACCOUNTS (CONTINUED)
34. DISCONTINUED OPERATIONS
In July 2021, the Society disposed of its 100% owned mortgage broking subsidiary, Nottingham Mortgage Services Ltd and therefore the Mortgage
Broking operating segment, as presented in note 2, is discontinued. A gain of £0.5m in the Group and £0.7m in the Society, was recognised in the
year on the disposal of the entity. The proceeds of £0.7m were received in cash and £0.2m of net assets that the Society lost control over included
£0.4m of cash and cash equivalents.
During the prior year, the Group exited the estate agency market and sold its Lettings portfolio of managed properties to a third party. Therefore the
estate agency operating segment, as presented in note 2 and which comprises Nottingham Property Services Ltd, Harrison Murray Ltd and HM Lettings
Ltd, is classed as discontinued. A gain of £0.2m was recognised in the prior year on disposal of the portfolio of Lettings managed properties.
The following results included in the Group’s statement of comprehensive income for the year are attributable to the discontinued operations:
35. INTEREST RATE BENCHMARK REFORM (IBOR REFORM)
On 1 January 2021, the Society adopted Interest Rate Benchmark Reform Phase 2 (Amendments to IFRS 9, IAS 39 and IFRS 7). The Society has applied
these amendments until the uncertainty arising from the interest rate benchmark reforms, with respect to the timing and amount of the underlying cash
flows to which the Society is exposed, ended. The Society’s remaining exposure was in relation to LIBOR interest rate derivative financial instruments.
During 2020 and 2021, the Society has been carrying out an exercise to close out the existing LIBOR interest rate financial instruments in
preparation for the benchmark transition deadline and this activity was completed by 31 December 2021, when the Society’s remaining derivative
contracts that reference LIBOR were amended to convert to the alternative benchmark rate (SONIA) and replaced the cash flows and the
relevant spread adjustment. This final conversion of the residual derivative instruments took place under the International Swaps and Derivatives
Association (ISDA) 2020 IBOR Fallbacks Protocol, which the Society is party to, through its central clearing house.
51 LIBOR linked derivative financial instruments with a notional value of £585.0m and fair value of £2.6m were converted to the alternative
benchmark rate, SONIA, during December 2021 under the ISDA 2020 IBOR Fallbacks Protocol.
As a result, as at 31 December, the Society has no remaining uncertainty arising from the interest rate benchmark reforms with all benchmark rate
linked financial instruments now referencing SONIA with respect to its underlying cash flow exposures.
2021
Discontinued
operations
£m
2020
Discontinued
operations
£m
Net interest income - -
Fees & commissions receivable 1.0 2.6
Other income - 0.2
Total net income 1.0 2.8
Administrative expenses (0.8) (3.0)
Profit/(loss) before tax 0.2 (0.2)
Profit (loss) for the financial year 0.2 (0.2)
The disclosure table above has been represented for 2020 to classify the mortgage broking operating segment as discontinued.
Both the cash flows and assets and liabilities relating to the discontinued operations are immaterial to the Group financial statements and
therefore have not been separately disclosed.
THE NOTTINGHAM BUILDING SOCIETY | 115
36. NOTES TO THE CASH FLOW STATEMENTS
Group Notes
2021
£m
2020
£m
Changes in liabilities arising from financing activities
Subscribed capital at 1 January 23.9 23.9
Accrued interest 1.9 1.9
Interest paid (1.9) (1.9)
Balance at 31 December 29 23.9 23.9
37. REGISTERED OFFICE
ACCOUNTS
116 | 2021 ANNUAL REPORT AND ACCOUNTS
ANNUAL BUSINESS STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2021
1. Statutory percentages
2021
%
Statutory limit
%
Lending limit
Proportion of business assets not in the form of loans fully secured on residential property 8.05 25
Funding limit
Proportion of shares and borrowings not in the form of shares held by individuals 14.72 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 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 statement of financial position. Shares held by individuals are found in note 21.
2. Other percentages
2021
%
2020
%
As a percentage of shares and borrowings:
Gross capital 7.21 6.62
Free capital 6.33 5.85
Liquid assets 16.69 17.02
As a percentage of mean total assets:
Profit/(loss) after taxation 0.34 (0.19)
Management expenses (Group) 1.19 1.25
Management expenses (Society) 1.17 1.15
As a percentage of year end assets:
Return on assets 0.35 (0.19)
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.
THE NOTTINGHAM BUILDING SOCIETY | 117
3. Information about the directors at 31 December 2021:
Director’s name
Date of
appointment
Age
Business
occupation
Other directorships (and offices)
Simon Baum 18.06.18 59 Director Baum Associates Ltd
Michael Brierley 13.07.20 63 Director Admiral Group plc
Admiral Financial Services Ltd
Rose Theatre Trust
Simon Linares 01.12.19 57 Director Kids Out Trading Ltd
Kids Out UK Charity
David Marlow
Chief Executive
16.01.06 56 Building Society
Executive
Harrison Murray Limited
HM Lettings Limited
Nottingham Property Services Ltd
Member of FCA Smaller Business Practitioner Panel
Andrew Neden
Chairman
17.09.14 59 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
Wesleyan Assurance Society
Wesleyan Unit Trust Managers Ltd
Peter O’Donnell 01.01.21 55 Director Cardiac Risk in the Young
Kavita Patel 01.01.17 45 Director Shakespeare Martineau LLP
Philsec Ltd
Meaujo Incorporations Ltd
Kerry Spooner 01.09.16 60 Director Scotiabank Europe plc
Directors’ service contracts:
David Marlow entered into his contract as Chief Executive on 21 February 2011; however, he has been a Director of the Society since 16 January 2006.
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.
OTHER INFORMATION
118 | 2021 ANNUAL REPORT AND ACCOUNTS
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 became effective in the UK on 1 January 2014 through CRD IV and 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 IV)
CRD IV is the European legislation which came into force from 1 January 2014 to implement Basel III. It
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 has been paid.
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 new 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.
THE NOTTINGHAM BUILDING SOCIETY | 119
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.
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 comprises 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.
Mean total assets Represents the amount produced by halving the aggregate of total assets at the beginning and end of the
financial year.
OTHER INFORMATION
120 | 2021 ANNUAL REPORT AND ACCOUNTS
GLOSSARY (CONTINUED)
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 that are a form of Additional Tier 1 capital under the transitional
rules of CRD IV. PIBS 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 on-going 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.
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.
THE NOTTINGHAM BUILDING SOCIETY | 121
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 which 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.
OTHER INFORMATION
LIT3656/1221
Nottingham Building Society, Nottingham House,
3 Fulforth Street, Nottingham NG1 3DL
thenottingham.com
0344 481 4444