Newcastle Building Society
Annual Report & Accounts 2022
Connecting our communities
with a better financial
future
Newcastle Building Society
Annual Report & Accounts 2022
Connecting our communities with a better financial
future
1 Cobalt Park Way
Wallsend
NE28 9EJ
T 0191 244 2000
www.newcastle.co.uk
Cover photo:
Shuhana and Sue,
Volunteers, The Comfrey Project
Page 2
Page 3
Performance and Strategy
4
Performance Highlights 2022
6
Chair’s Statement
10
Chief Executive’s Review
18
Strategic Report
30
Supporting our Communities
36
Sustainability Report
Contents
Annual Report & Accounts 2022
The Comfrey Project provides facilities, support and services to local people and in particular
people who are refugees and those seeking asylum in the North East. The Comfrey Project
received a grant of £3,000. Shuhana is a volunteer at the project.
Shuhana
, Volunteer, The Comfrey Project
Governance
42
Our Directors
48
Directors’ Report
50
Statement of Directors’ Responsibilities
51
Report of the Directors on Corporate Governance
57
Audit Committee Report
60
Remuneration Committee Report
67
Risk Management Report
Financial Statements
73
Independent Auditor's Report
82
Income Statements
83
Statements of Comprehensive Income
84
Balance Sheets
86
Statements of Movements in Members’ Interests
87
Cash Flow Statements
88
Notes to the Accounts
Other information
158
Annual Business Statement
159
Directors Listing
160
Glossary
162
Branch and Financial Advice Centre Directory
“The Comfrey Project is my second home. I first came here as my
father was a farmer and I was interested in the gardening side of the
charity. I have since learned a lot of skills resulting in me starting
my own business, which is very successful.”
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Colleagues
(2021: 1,200+)
1,450
+
Colleague
engagement score
(2021: +43)
+58
£1.1bn
900+
Gross residential
lending
(2021: £861m)
Colleague
volunteering days
(2021: 400+)
Common Equity Tier 1
Profit before tax
(2021: 13.8%)
(2021: £29.1m)
New mortgage
customers
(2021: 5,300)
12.5
%
£31.7m
5,600
Operating profit before impairments
(2021: £28.5m)
£30.5m
Performance
Highlights 2022
Savings balance
(2021: £3.7bn)
£4.2bn
Branches
region-wide
(2021: 30)
Overall customer
satisfaction
(2021: 95%)
31
95
%
Tyneside & Northumberland
company of the year
North East
Business Awards
Best Regional Building Society
(For sixth consecutive year)
Four - Star Mortgage Provider
What Mortgage
Awards
Financial Adviser
Service Awards
Chair's Statement
When I first assumed the role o
f Chair, I was fully aware of
the unique role that Newcastle Building Society has in
serving our region.
Now, reflecting on my first
full year in position and
considering everything we’ve faced over the course of
2022, it is difficult to overstate the importance of that role.
Both nationally and regionally, 2022 presented the
Society with a host of new challenges including the rising
cost of living, soaring energy costs and political
turbulence. On the back of an incredibly difficult period,
the resolve and resilience of the whole organisation has
been tested once again.
I’m hugely proud that the Society has responded to these
challenges by stepping up to support those across our
region and beyond who need help. Seeing colleagues
continue to find innovative and imaginative solutions to
serve Members and clients demonstrates the special
nature of the Society.
Those challenges and economic uncertainty will
continue, but the Society remains committed to making
a positive impact in its communities and continuing to
deliver the unique benefits that come
from being part of
a Member-owned organisation. You will see concrete
examples of the difference we are making on the cover
and throughout this report.
Economic summary
The outbreak of con
flict in Ukraine in early 2022
exacerbated existing concerns around the cost of living
and price inflation. In addition, economic uncertainty
caused by a period of intense political turmoil has
increased recessionary pressure.
As is often the case, the impact is felt most acutely by
those least able to manage. Rising rates of poverty give
an indication of the scope of the challenge, but
deepening levels of hardship and a sharp increase in the
number of people using food banks paints a gloomy
picture of social wellbeing in the UK and the North East.
The Bank of England base rate was already moving
upwards at the start of 2022 and nine successive
increases meant the rate moved from a historic low of
0.1% in late 2021 to 4.0% in February 2023, rates which
we’ve not seen for more than 14 years. This does bring
some good news for savers as savings providers
responded by passing on increases, but with inflation
peaking at over 11% any relief for savers will feel short-lived.
The housing market had a tumultuous year, first with the
continued increase in house prices moving to record
levels, followed by a period of substantial change as
markets reacted to uncertainty caused by political
turmoil in what was already a rising rate environment.
First time buyers and homeowners suddenly faced steep
rate changes and a clear cooling of the housing market
which, given its nature, will take some time to adjust.
Whilst these are clearly national issues, we know the
impact is often greatest in our region.
Strategy, purpose, performance
For the past five years, our Society has made significant
progress on delivery of our Purpose: to connect
communities with a better financial
future.
But it is no coincidence that in a year in which our Society
has continued to grow, we have generated significant
momentum in delivery of its Purpose.
It proves that the strength of the Society’s performance in
2022 is tied to the ever-increasing impact of our Purpose.
Especially in the context of wider economic challenges,
helping people to own their own home, to save and plan
their finances, is deeply important
for individuals and
families. And in 2022 there was real progress on
commitments to care for our environment and to foster
inclusion, diversity and positive change. These are
long-term commitments, which mirror and support the
Society’s long-term growth ambitions.
I’m inspired by the Society’s appetite to make an even
greater, more sustainable and more meaningful impact
on our communities.
The Society also delivered a strong set of results in 2022,
performing well in the face of signi
ficant uncertainty.
Further detail on the financial per
formance is contained
in the Strategic Report.
James Ramsbotham
|
Chair
Page 6
Page 7
When I first assumed the role o
f
Chair, I was fully aware of the unique
role that Newcastle Building Society
has in serving our region.
“
”
Chair's Statement
|
Continued
Photo:
Lynne, Branch Manager
Regulatory changes
In July 2022, the Financial Conduct Authority
published
their final rules on a new Consumer Duty which looks to
set higher and clearer standards of consumer protection
across financial services and requires firms to put their
customers’ needs first.
The Group is already well placed to deliver on these new
requirements but the changes present an opportunity to
deliver even better outcomes for Members.
The final rules come into effect
from July 2023 and
colleagues have been working hard to review our existing
products, services, culture and governance. In October,
the Board approved the implementation plan and
throughout 2023 the Society will be prioritising the areas
where we have identified improvements that could be
made, in readiness for
the July deadline.
Board matters
During the year we conducted an external Board
Effectiveness Review, allowing for an independent
assessment of the Board. The review was supportive and
recognised the achievements of the Board and the
Society over the last five years, recommending that we
focus even more on our ambitions for the future.
I would like to express thanks to Non-Executive Director
Karen Ingham, who is stepping down after almost nine
years on the Board. We are extremely grateful for Karen’s
contribution over such a long period and, on behalf of
many, wish her well for the future.
Look forward
It was the Society’s laser-like focus on its Purpose which
helped weather the storm of Covid-19 and I’m con
fident
that same strategic clarity will help us meet the
challenges of 2023 and beyond. Given everything we’ve
been through over the past three years, it’s difficult to
imagine what we might face in the years ahead, but I
know that economic recession and
intense pressure on
household budgets from all angles will lead to difficult
decisions in almost every home in the region.
However, the Society has demonstrated a resilience that
provides cause for optimism and which proves how well
placed it remains to support Members and colleagues,
and to deliver positive change in our communities for
the long term.
The Society must harness its unique Purpose and
position in the region in order to meet its growth
ambitions and the Board remains committed to the
investment required to achieve this.
I’d like to recognise the hard work and commitment of
colleagues across the Society, who time and again show
incredible support for our Purpose and dedication to
Members, clients, and each other.
James Ramsbotham
|
Chair
2 March 2023
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Page 11
Chief Executive's Review
Despite the many challenges emerging in 2022,
Newcastle Building Society responded well. I am sure
many of us started the year in the hope that after all the
trauma and disruption of the Covid-19 pandemic, life
might gradually return to something much more familiar
as the year progressed.
However, conflict in Europe and the rising cost o
f living
made it another extremely difficult year for our
communities and it quickly became clear that thoughts
of returning to a sense of normality were misplaced. In
September, the mood of the entire country was saddened
by news of the death of HM Queen Elizabeth II. Then we
saw rapid political change and policy reversal cause
uncertainty in financial markets.
By the end of the year, the economy continued to be
challenged and households across the country were
facing a difficult winter with the prospect of even more
uncertainty ahead.
Resilience
I’m pleased to report that in such a volatile environment
and in the face of so many new challenges, the Society
continued to demonstrate its resilience and agility,
delivering a robust set of results.
The underlying financial per
formance remains strong with
increased profitability. Group profit be
fore tax was £31.7m
for the year ended 31 December 2022, compared to
£29.1m for 2021. In addition to positive headlines in our
financial per
formance, we continue to operate with
appropriate levels of capital and liquidity.
Furthermore, a strong financial per
formance has enabled
the Group to provide significant support to Members,
clients and colleagues during difficult times. I’m proud
that we’ve made such progress in delivery of our Purpose,
especially around branch innovation as we seek to keep
face-to-face
financial services on the high streets o
f
towns across our region and helping to tackle wider
issues of employability.
Key highlights include:
- Good value for savers, paying an average interest rate
of 1.20% versus the rest of market average rate of
0.66%, equating to around £21m more interest paid to
our savers than the market average
- Good value for borrowers, with an average Standard
Variable Rate (SVR) for mortgages 0.42% lower than
the market average, saving our SVR borrowers over
£500,000 in interest payments compared to the
market average
- Profit
for the year before taxation increased to £31.7m
(2021: £29.1m)
- Operating profit be
fore impairments and provisions
increased by £2.0m to £30.5m (2021: £28.5m)
- Underlying operating profit o
f £26.7m (2021: £22.0m)*
- Record gross mortgage lending for the year at £1.1bn
and record net core residential lending at £586m
(£861m gross and £330m net in 2021)
- Opening of a new community branch in
Knaresborough, North Yorkshire, a town recently left
with no bank on its high street
-
Development of a new blueprint for branches in
cashless communities by adding a OneBanx multi-bank
transaction kiosk pilot in two of our branches
- Partnership with Citizens Advice Gateshead to provide
Members struggling with the cost of living with a
comprehensive package of support
- Launch of a new employability partnership with armed
forces charity Walking With The Wounded
·
Increased colleague numbers by nearly 200 during the
year, creating new job opportunities for the region
- The official opening of NUCASTLE powered by
Newcastle Building Society, a new community hub and
home of Newcastle United Foundation
- Celebration of ten years of support for the Sir Bobby
Robson Foundation, with a decade of donations
totalling over £3m
- Development and launch of a new shared ownership
mortgage product to support first time buyers
- Over £94m of funds invested for Members through our
advice subsidiary, Newcastle Financial Advisers Limited
- Customer satisfaction score of 95% (2021: 95%) and net
promoter score (NPS) of +82 (2021: +82)
- Over £544,000 in community funding through charity
partnerships, community grants from the Newcastle
Building Society Community Fund at the Community
Foundation and colleague fund raising matches.
*For more information on alternative performance
measures see the strategic report.
Andrew Haigh
|
Chief Executive
A strong financial performance has enabled
the Group to provide significant support to
Members, clients and colleagues during
difficult times. I’m proud that we’ve made such
progress in delivery of our Purpose,especially
around branch innovation as we seek to keep
face-to-face financial services on the high
streets of towns across our region and helping
to tackle wider issues of employability.
“
”
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Chief Executive's Review
|
Continued
Awards
- Tyneside and Northumberland Company of the Year
- North East Business Awards
- Tyneside and Northumberland Apprenticeships,
Skills and Training - North East Business Awards
- Excellence and Positive Impact - CIPD North East of
England HR&D Awards
- Best Use of Customer Insight - Engage Awards
(highly commended)
- Best Regional Building Society (for the 6th
consecutive year) - What Mortgage Awards
- Mortgage Product Innovation - Mortgage Finance
Gazette Awards
- Best Building Society for Mortgage Credit Strategy
- Lending Awards
- Four-star Mortgage Provider - Financial Adviser
Service Awards
- Best Small Residential Lender - TMA Mortgage Club
Awards
Powered by Purpose
Newcastle Building Society has been focused on making
a difference for Members for more than 160 years. Just
five years ago, we took that spirit and commitment
shown quite literally over decades and expressed it in
the words we now recognise as our Purpose statement.
With those words, we were propelled forward on our
Purpose-led strategic journey. Our Purpose, ‘Connecting
our communities with a better financial
future’, guides
our decision making, informs our strategic approach
and drives our distinct proposition for our Members.
The fact we made such progress through delivery of
Purpose over the past few years, despite all the
challenges of the pandemic, I believe shows the true
value of our interpretation of the mutual model and
mindset.
In the course of last year, there were many moments
which highlight the progress we’ve made on our
Purpose journey:
We’ve reacted to the needs of our Members and
colleagues as they face into a cost of living crisis. This
has included real and targeted support to focus on areas
of greatest urgency: food poverty, debt, social isolation,
employability, homelessness and the environment. This
progress highlights the maturity of our Purpose journey,
as we move from an organisation which is Purpose-led
to one which is genuinely Powered by Purpose.
We’re continuing to challenge national assumptions
around high streets. In our view, something has simply
got to change when it comes to the seemingly incessant
decline of
financial services provision on our high streets.
We know how much customers value and need face-to-
face contact in
financial services and we see it as our
responsibility to explore new ways to deliver that service
in a cost effective manner for our customers.
We responded to rises in the Bank of England base rate
by increasing our savings rates multiple times and we
remained focused on providing imaginative solutions to
help people achieve the dream of owning their own home.
We continue to work with partners such as the Prince’s
Trust, Newcastle United Foundation and Walking With
The Wounded to tackle the challenges around
employability and opportunity facing young people in
our region. This approach has helped us take the first
steps towards achieving our ambition to recruit 50% of
entry level roles through our skills partnerships by 2025.
In August 2022, we announced that the Society had
entered into an exclusivity agreement with Manchester
Building Society to explore the possibility of a merger by
way of a transfer of Manchester Building Society’s
engagements to Newcastle Building Society.
We have
subsequently in February 2023 entered into Heads of
Terms with the expectation that subject to resolutions by
the Boards of both building societies and regulatory
approval, a merger will complete later in the year.
Further
information is available on the Society’s website.
Supporting customers through difficult times
The rising cost of living is creating very real challenges
for Members and for people across our region,
sometimes for people who may never have expected to
find themselves in financial difficulty.
To help provide meaningful, targeted support we
launched a partnership with Citizens Advice Gateshead
to fund the provision of a dedicated telephone hotline
and email service for Members anywhere in the country
who are struggling to manage the additional pressures.
The ‘Helping Hand’ service enables quick access to
welfare advice experts who are available to discuss
financial concerns, provide guidance on options and
even authorise emergency financial support in the
form
of supermarket vouchers. Please see our website
(www.newcastle.co.uk) for details on how to access this
cost of living support.
It’s difficult to imagine a more important time for people to
have access to financial services, in
formation and advice.
Across each of our branches, through face-to-face
appointments, telephone and video calls, we’re interacting
thousands of times every day with our Members and
clients, building meaningful relationships based on trust
and warm conversation. This customer focus is re
flected
in our customer satisfaction scores, which at the end of
2022 equalled the record high of 95% set in 2021.
Our dedicated online customer panel, ‘Connected
Communities’, continues to be a rich source of
engagement with our Members. In 2022, Member
participation in Connected Communities continued ,
helping to shape our planning and delivery on a range of
topics through thousands of individual comments and
pieces of feedback. Members provided valuable insight
into our approach to branch innovation, shared their
concerns around the cost of living and even came up
with the name for our Sustainable Living Hub, which
helped us to secure the coveted Engage award for Best
Customer Contact Strategy.
Helping people save and plan their finances
In 2022, we welcomed more than 10,000 new Members
to the Society through our savings product range.
Successive decisions by the Bank of England during
2022 saw the base rate rise to levels not seen for 14 years.
In response, we increased our variable rate savings book
multiple times, continuing to provide Members with
good and consistent value.
During the period January to December 2022, our
average savings book rate of 1.20% was materially higher
than the market average of 0.66% (source: CACI) – this
equates to around £21m more in interest for our savers.
Our subsidiary, Newcastle Financial Advisers Limited
(NFAL), which provides financial advice across our branch
locations, experienced another strong year providing
over 7,500 customer advice conversations during the
year. Demand for accessible, face-to-face meetings in
our branches, on our high streets remains strong in 2022.
To complement and build on this ongoing activity, we
piloted a secure video appointment option.
Customers have demonstrated they value the financial
advice service even more during economic uncertainty
and their cost of living challenges, helping NFAL achieve
VouchedFor “Top Rated Adviser” status and an
outstanding customer NPS of +93 (2021: +91).
For further detail on how we continue to help people
save and plan their finances, please see the Strategic
Report section.
Helping people own their own home
In 2022, we also welcomed over 5,600 new mortgage
customers to the Society, helping us to deliver record net
core residential lending of £586m (£330m in 2021).
In a rising rate environment and with house prices at
record highs, our focus supporting
first time buyers and
borrowers with lower deposits was vital, especially as the
government’s Help to Buy scheme came to an end.
Our ongoing support for those with a small deposit
wanting
to buy a home continued through mortgage
support schemes, First Homes and Deposit Unlock and
was enhanced by the launch of a new shared ownership
proposition and enhancements for our Joint Mortgage
Sole Proprietor offer, which extends the choice available to
those looking to buy their own home.
We continue to offer good value to borrowers and
throughout 2022 our Standard Variable Rate (SVR) was
0.42% lower than the market average, saving our average
SVR borrowers over £500,000. Further information on
how we’ve helped in this way can be found in the
Strategic Report section.
Creating a new blueprint for branches
We listen to our Members and remain committed to
delivering the services they need. Since starting our
Purpose journey five years ago, some o
f the most visible
impact of our Purpose stems from our investment into
our branch network and our commitment to maintaining
a physical presence in the towns and cities across our
region. We are champions of the high street and believe
that face-to-face service has a critical role to play as a
driver of social and economic wellbeing in our
communities.
We believe that too many banks are closing branches and
leaving our high streets and with more and more towns
being left with no permanent
financial services presence,
something has simply got to change. In our view, the
challenge facing the
financial services industry is not
about closing branches, but reimagining them. Over the
past five years, we’ve demonstrated the effectiveness o
f
our community branch model. We now have four full
service community branches in our network, in the towns
of Knaresborough and Hawes in North Yorkshire, Yarm in
Stockton-on-Tees and Wooler in Northumberland, showing
what can be achieved in a small, shared space and with
innovative application of technology.
Knaresborough opened in 2022 and is our 31st branch,
located within the town’s library, in partnership with
North Yorkshire County Council.
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Chief Executive's Review
|
Continued
This expression of our Purpose moved to the next level
later in 2022 when, working with fintech partner OneBanx,
we launched the pilot of a multi-bank kiosk in our
Knaresborough and Gosforth branches enabling
customers, both personal and small business, of all banks
in the open banking network to pay in and withdraw cash.
New thinking like this is required if we are to keep vital
access to cash and financial services on our high streets.
We have been proud to work with innovative, like-minded
partners who share our drive and beliefs, to develop this
new approach.
We continue to work with North Tyneside Council to
progress plans for another new community branch in
Tynemouth library, which is due to open in 2024.
Savings management
Our subsidiary Newcastle Strategic Solutions Limited
manages savings accounts on behalf of some of the UK’s
leading savings providers. A profitable business in its own
right, the Solutions' business also brings scale and the
capacity to invest in technology to the Group, while
operating under the same culture and Purpose principles.
Driven by numerous Bank of England base rate changes
and rapidly rising retail savings rates there was a very
large surge of activity in the savings market in 2022. Our
Solutions' clients reflected what was occurring in the
broader market and our activity levels also reached
all-time highs, placing a significant demand on the
operational teams in the second half of the year.
New records were achieved in the number of new
accounts opened, the amount of net balance growth in
the year and total balances under administration.
We continued to deliver a major programme of digital
investment into Solutions across the year. Ongoing work
includes the re-platforming of account opening, funding
and account management functionality, developed with
a customer-centric focus across both app and web
channels. Growth in the business meant growing the
team by an additional 120 colleagues during 2022, as we
continue to create jobs and offer outstanding career
opportunities in the region.
The Solutions' business added a new client to its base in
November whilst earlier in the year a major client chose
to renew and extend our already long-term relationship.
We launched SME Business Savings during the year and
continue to see strong interest from others in this
particular proposition.
In total, Solutions’ clients amassed a total of 20 savings
industry awards across the year and we also celebrated
the success of our Head of Operations, Patsy Legender,
who was named “Woman of the Year” at the Women in
Credit Awards.
Building opportunity
Key to the Society’s Purpose is our aim to deliver a great
place to work, where people are empowered to realise
their true potential. We do this by providing meaningful
careers and developing talent from a range of different
backgrounds.
We want the Society to be a place of work that is
inclusive, diverse and helps drive positive change in our
communities. Our strategic approach sits against wider
regional skills challenges and a lack of opportunity for
some to develop their employability.
To overcome those challenges and play our role in
enabling social mobility, we need to take a fresh
approach. By working collaboratively and imaginatively,
we took several big steps in 2022. Recognising the wider
need in our region to tackle the skills challenge, we’ve
ensured that part of the grant giving through the
Newcastle Building Society Community Fund at the
Community Foundation Tyne & Wear and
Northumberland has been focused to support charities
helping to boost employability within our communities. A
total of 15 grants were used in this way in 2022.
Working in partnership with Newcastle United Foundation,
we’ve taken an innovative approach to the delivery of a
bespoke apprentice recruitment programme. Our first
‘Customer Service Week’ took place in March 2022,
providing apprenticeship candidates with an authentic
and active experience, giving a real sense of day-to-day
life at the Society and the types of role available. Everyone
who completed the week-long programme received a
Level 1 qualification and as a direct result, six young
people joined the Society in May as full time Customer
Service Apprentices.
In March we were delighted to enter into a brand new
skills-focused partnership with the military charity Walking
With the Wounded. Together we are working to establish
meaningful careers opportunities for Armed Forces
veterans through a tailored programme of support.
Our ambition is to recruit 50% of entry level roles through
our various skills partnerships by 2025, which will only be
achieved by expanding and developing our approach
and by responding to the ever-changing needs of our
communities.
Across the Newcastle Building Society Group, almost
1,500 colleagues work at our head office and branch
locations as well as some who are fully remote, an
increase of almost 200 over the past 12 months.
As part of our participation in the Women in Finance
Charter, in 2020 we set an original target of 40% female
representation in senior positions to be achieved by
January 2023. We exceeded that target by September
2021 (43%) and as of September 2022 we have 47%
female representation in senior management roles across
the Group.
We’re continuing to deliver a broad package of initiatives
across gender, diversity and inclusion, including the
establishment of our
first colleague-led menopause
network, which aims to break some of the taboos around
menopause and provide all colleagues with the
information, support and understanding they require.
Given the wider economic conditions we all face, we
chose to support colleagues with their own cost of living
and energy price challenges. This included bringing
forward the 2023 pay increase to October for all
colleagues below executive level with an initial payment
of 3%. A further review is planned in March 2023, one
month earlier than the normal annual review date. At the
same time, for all colleagues earning £35,000 a year or
below, we made a one-off payment of £600, divided into
six instalments across the winter months. As a Real Living
Wage employer, we were proud to be an early adopter of
the new benchmark of £10.90 as the salary entry point for
the organisation.
We also strengthened our colleague benefits package,
subsidising our head office café so that colleagues can
enjoy a well-balanced meal at a low price; introduced a
discount marketplace for everyday shopping costs; and
launched a new healthcare cash plan that enables
colleagues to claim back some of the costs of basic
healthcare expenses.
For those who may be facing severe
financial hardship or
struggling with their own household budget, we worked
with Citizens Advice Gateshead to extend the Helping
Hand advice helpline to colleagues as well as customers
who find themselves in need o
f support. This is in addition
to our existing Employee Assistance programme.
We’re committed to supporting colleagues’ mental
wellbeing. In May, through our partnership with Newcastle
United Foundation, we became a business champion of
their ‘Be A Game Changer’ campaign.
Being part of the initiative means we can provide all
colleagues with access to their mental health support
and resources, strengthening the existing support
provided to Group colleagues through regular wellbeing
initiatives and an active network of mental health
champions. Progress in this space can be measured by a
clear increase in our eNPS (employee net promoter score)
from +43 in 2021 to +58 in 2022, which places us in the
top 10% of our survey provider’s
financial services client
database.
Powering communities
In March 2022 we celebrated a significant milestone at
the official opening of ‘NUCASTLE powered by Newcastle
Building Society’, a brand new community hub for sports,
education and wellbeing in Newcastle’s west end. The
building, which is also the new headquarters of the
Newcastle United Foundation, will provide future
generations with life-changing facilities and is expected
to attract more than 100,000 visitors in its first year. We
continue to work with the foundation’s team to deliver a
range of programmes including
financial education and
workplace skills development, including support for the
NU:Futures programme.
Grant giving through the Newcastle Building Society
Community Fund at the Community Foundation Tyne &
Wear and Northumberland continued throughout 2022,
with over £215,000 in small grant funding to 76 charities
across the North East, North Yorkshire and Cumbria. The
fund was focused to help tackle issues around the
priorities of employability, food poverty, homelessness,
debt management and social isolation, as well as our
continuing support for cancer care services.
In 2022 we celebrated 10 years of support from the Society
for the Sir Bobby Robson Foundation, which includes over
£3m donations since the start of our partnership in 2012.
To mark a decade of support, we worked with the
foundation and the Newcastle upon Tyne Hospitals NHS
Foundation Trust to create a film that shares the story o
f
patients taking part in clinical trials. Their inspiring stories
underscore the impact of Sir Bobby’s legacy and are why
we are proud to be the largest corporate donor to one of
the most respected charities in our region.
Although the primary focus of our community support is
within our region, sometimes circumstances mean we
want to offer help to those in need – wherever they are.
In April we donated £25,000 to the Disaster Emergency
Committee (DEC) to help those affected by the conflict in
Ukraine. DEC charities and their local partners are on the
ground in Ukraine and neighbouring countries, providing
food, water, shelter and medical assistance.
Our total community contributions this year, made up of
grants, match funding, and our ongoing partnership
donations was over £544,000, support which has
positively impacted over 71,000 people of all ages in our
region and beyond.
It was pleasing that the return to face-to-face working
allowed the return of high-impact group volunteering
activities. In total, colleagues delivered more than 900
days of support to our communities. We also continue to
use the tech for good ‘onHand’ volunteering app to
deliver meaningful support to those in need in our
communities.
Page 16
Page 17
Summary
I am proud of the way the organisation answered the
challenges we faced in 2022. Across the Group,
colleagues repeatedly showed their resilience and
determination and I believe we’ve made great progress
during difficult times. I’d like to thank all colleagues for
their hard work and for consistently demonstrating their
outstanding commitment to the Society and delivering
our Purpose, and our Members, customers and clients,
for their continued and enthusiastic support. Indications
suggest that the wider challenges of rising costs and
global uncertainty driven by the war in Ukraine will
continue through 2023 and beyond. In times like these
the Society has a particularly important role to play in
supporting our Members and their communities, and in
delivering a Purpose that is not only centred on good,
consistent financial product value and excellent service,
but also extends to delivering mutual value in many
other ways, to the wider benefit o
f the Members we
serve and their communities.
After a positive year in 2022, a year in which we built real
momentum in our Purpose delivery, despite the challenging
circumstances, we are well placed to take
the Society
forward to be an organisation that is truly powered by
our Purpose of ‘Connecting our communities with a
better financial
future’.
Andrew Haigh
|
Chief Executive
2 March 2023
Chief Executive's Review
|
Continued
Photo:
Jean and Terry, Consett customers
Page 18
Page 19
Strategic Report
Our Purpose, Strategy and Stakeholders
Purpose and strategic pillars
As a sustainable mutual business, our success lies in the intersection between serving the interests of our stakeholder Members and
communities and delivering an efficient, profitable and resilient business model: a strategy that is led
from the Purpose of the organisation,
valued by and compelling to its customers and financially robust.
Our ‘strategy wheel’ summarises our approach and demonstrates how each aspect of our business contributes and complements each other to
work in synergy and deliver stable, cost-effective funding and lending, achieving a sustainable business model for the long term, which is
uniquely placed within the region and the communities we serve.
Our business model
financial
future”. As a Member-
owned, mutual, regional building society we help people own their own home, save and plan their finances. We attract savings balances by
offering our customers consistently fair rates over the long term and we offer fairly priced mortgages on residential property to customers
finances
for the long term, while strengthening the trust and bond between us.
Our delivery of Purpose ensures that we are valued for more than consistent pricing and excellent service as we seek to bene
fit our region
through our role as employer, enabler of talent and facilitator of positive change within communities across our region.
The net effect of ‘mutual value’ we deliver is to foster long term, authentic customer relationships which in turn form the foundation of a stable,
sustainable savings and mortgage business, in the form of a building society. We bring scale and a diversi
fied income stream to the Group by
taking one of our core skills, savings management, and offering that as a service to other banks and building societies.
How we fund our Society
As a Member business, our
funding predominantly comes
from our Members and the
savings they deposit with us.
We diversify this funding with
wholesale funding and Bank of
England funding schemes. We
also hold reserves which are
generated from pro
fits
from
prior years.
How we use this funding in
our Society
We use our funding to enable
people to own their own home,
save and plan for their
finances.
We do this by offering
residential and buy-to-let
mortgages. We also hold some
of our funding in liquid assets
so we can ensure we meet
regulatory limits as well as
being able to pay out all
liabilities as they fall due.
How we generate income
We earn income from the
mortgages our customers hold
with us and this then enables
us to pay interest to our
Members who have savings
with us. We also earn income
on the liquidity we hold and
through our savings
managment outsourcing
business, Newcastle Strategic
Solutions Limited and our
financial advice business,
Newcastle Financial Advisers
Limited.
How we invest in a
sustainable business
Community sits at the heart of
our Society and as a mutual
business we are committed to
providing a service to our
communities and to building
authentic, lasting relationships.
We reward our colleagues fairly
to ensure we are a great place to
work where people can realise
their potential. We also ensure
that we are investing in the
infrastructure and capability to
provide a safe, secure and
sustainable business and adapt
to change and new
opportunities and challenges as
they arise.
As a regional building society, we are particularly focused on supporting the communities of our region, which we de
fine as the North East o
f
England, North Yorkshire and Cumbria. As a Member-owned business, we are clear how being truly led by our Purpose of ‘Connecting our
communities with a better financial
future’ means that through our
five strategic pillars we can deliver a unique and sustainable business to benefit
both our region and our customers for the long term.
We care about building lasting, authentic relationships with our customers, which means that while digital and intermediary channels play a key role
in our distribution and service delivery, face-to-face contact and a thriving branch network are particularly important. We are therefore keen to
innovate in this area, ensuring we can continue to play a role in maintaining vibrant high streets across our region.
We believe that our approach to strategy delivers a truly Purpose-led business, which is driven to act in the interests of our customers, who are also
our key stakeholders, but also has the attributes required to power a successful commercial outcome. Commercial success is vitally important as
the profits we generate are re-invested into the business to support areas such as growth, innovation and in
frastructure, for the long-term bene
fit o
f
Members, and provide the capital to underpin our operations, providing resilience and security for our Members.
What
we do
Our
Purpose
Connecting our communities with a
better financial
future.
Our strategy and business model
Our strategy is built around five themes:
1.
Being truly Purpose-led and making sure that delivering on our Purpose is at the heart of our strategy and business model that is
'Powered by Purpose'.
2.
Building our brand through our communities, recognising that our success relies on the reputation we build with our customers
and the difference we make for the communities we serve across our region.
3.
Growing the scale and efficiency of the business, increasing our impact and the long-term sustainability of our operations.
4.
Fostering mutual advocacy, whereby our customers genuinely value the services we provide and the contribution we make to their
community and region; they actively participate in the Society and become our biggest advocates, encouraging others to become
part of our Society.
5.
Understanding that making a positive contribution to the region’s environmental sustainability is no longer a matter of choice
but a necessity.
Our strategy wheel
Page 20
Page 21
A vibrant high street is often the beating heart of a community, providing
local jobs, services and driving economic wellbeing. Financial services
are an important part of this, so when the last bank branch closes, the
damage to the community extends far beyond its customers.
We’re making the most of people and partnerships to deliver for our
communities. This means bringing new thinking and working with
like-minded partners to re-imagine what a branch could be, opening
branches in unexpected locations and sharing space with local
services such as libraries, tourist information, community centres and
even the police.
After the last bank left Knaresborough in 2021, we worked with North
Yorkshire County Council to open a brand new branch within the town
library in 2022. Knaresborough is our 4th community partnership
branch following success with the model in Hawes, Wooler and in
Yarm, where our branch also sits within the town library.
In Gosforth and Knaresborough we’re running a pilot project with
shared bank branch innovator, OneBanx, to host their multi-bank kiosk
inside our branches. The kiosks use Open Banking technology to allow
small businesses and personal customers of any bank in the Open
Banking network to withdraw cash from and deposit money into their
accounts. They are the first to be located within the branch o
f a
financial services provider anywhere in the world.
Our colleagues
Being a great place to work where people can realise their potential is
key to living our Purpose.
Our People Strategy focuses on providing an immediate, ongoing and
long-term framework for engaging, developing and managing our
people, creating an inspiring place for people to work and be able to
achieve their full potential whilst delivering the Society’s ambitions with
key objectives as follows:
-
creating a healthy and sustainable culture;
-
colleague engagement and communication;
-
enabling a high performing environment; and
-
building future proof talent.
The Society places a great deal of emphasis on engaging colleagues in
the ongoing development of its business and delivering its Purpose
and strategy.
Colleague Voice, our colleague survey methodology, is representative
of views from colleagues across our Society and can make a signi
ficant
contribution to our ongoing development, both from a business
performance and a colleague experience perspective. Our approach to
colleague surveys enables us to measure colleague engagement at a
strategic level as well as provide managers with the ability to listen to
colleagues and work with the feedback, incorporating these insights
into their daily thinking, decision-making and conversations.
Our survey practices, tools and resources provide managers with
real-time access to their feedback, as well as the ability to respond
real-time and create simple and effective action plans to drive positive
change, empowering leaders and managers to own their colleague
engagement with their teams.
Employee Net Promotor Score or eNPS is our strategic people metric
and enables us to benchmark ourselves against the financial services
sector and the very best employers across the industry. Our colleague
eNPS score for 2022 was +58, placing us in the Top 10% of the
financial
services sector within Workday Peakon’s (our provider) global client
database.
An annual pay review for all colleagues takes place on 1 March and the
Group operates a discretionary bonus scheme for all colleagues based
on performance as measured by the delivery of KPIs linked to the
Group’s strategic objectives.
2022 marked the launch of our new colleague bonus scheme, “Sharing
in our Success”, which aligns more closely with other financial services
market practice regarding the make-up and performance of the scheme.
The new scheme takes into account both business and individual
performance for colleagues of all levels below Executive, with
appropriate weighting depending on the seniority of the employee.
We consult with Unite when considering our approach to annual pay
awards for colleagues, with the exception of Executives. The 2022 pay
rise for all colleagues ranged from 0% to 17%, with an average 3%
received by all colleagues. To provide additional support with the
ongoing cost of living pressures we also brought forward a portion of
our 2023 pay award and as such gave all colleagues below Executive
level a 3% increase to salary effective from 1 October 2022 and for all
colleagues earning £35,000 a year or below they received a one-off
payment of £600, divided into six instalments across the winter months.
Colleague turnover is as an important reflection o
f the success of our
colleague agenda. Although turnover remains higher than pre-
pandemic levels, we’ve seen fewer colleagues leave us in 2022 with
turnover reducing to 13.2% from 15.5% in 2021. This is a re
flection o
f
trends in the marketplace as the post-pandemic demand for labour
has stabilised, but also reflects lower desire to move roles during a
period of economic uncertainty.
The Group has a Health and Safety Committee which facilitates regular
consultation with colleagues on specific health and sa
fety matters.
The purpose of the Committee is to provide a forum for representative
colleagues to help ensure that the Group has taken all reasonable and
practicable steps to maintain a safe and healthy working environment
in line with statutory requirements.
The Committee reviews the overall operation of the Group’s Health and
Safety Policy, including the content of employee health and safety
training and discusses health and safety performance, challenges and
future priorities.
Supporting colleagues with their health and wellbeing has continued
to be an area of focus throughout 2022. We have raised awareness of
key topics such as mental health and menopause and were proud to
achieve the Continuing Excellence Level of the North East Better
Health at Work Award.
Strategic Report
|
Continued
Our customers
A key part of our strategy is delivering outstanding levels of service
and building authentic long-lasting relationships with our Members. In
2022, we maintained our exceptionally high Net Promoter Score of
+82 (2021: +82) and achieved a strong customer satisfaction score of
95% (2021: 95%), demonstrating our commitment to this strategy and
something we are very proud of.
Our Voice of the Customer programme provides daily, real-time
feedback from our customers, helping us to continue to develop and
improve the service we deliver. In 2022 we received over 21,000
responses from our customers across all our channels including the
branch network, mortgage operations, mortgage intermediaries and our
financial advice subsidiary, Newcastle Financial Advisers Limited.
One way we have used customer feedback is to examine existing
processes particularly in our savings journeys, and we will apply these
learnings to enhance our Member experience in the year ahead. We also
began to capture marketing consent from customers to use their
feedback in our communications, which has resulted in a social media
campaign that shares our customer voices’ in the external environment.
We continue to explore new ways of reaching Members to involve them
in the direction of the Society’s goals and ambitions. ‘Connected
Communities’, a Member initiative that we launched in 2021, is an online
forum where views can be exchanged and gathered in an impartial way.
To date ‘Connected Communities’ has almost 700 members and it
continues to grow. Since inception, ‘Connected Communities’ has
captured over 1,600 comments, 150 items of content, and 3,000 poll
votes; a huge testament to the value our Members place on being part
of our Society. This co-creation environment has facilitated the delivery
of our new website and also the delivery of our new environmental hub
‘Sustainable Living’, consulting Members throughout the development
process. In addition, we have started to explore other topics such as
community support and diversity, equity and inclusion. These topics
will remain on the agenda as we continue to prioritise these initiatives
within our strategic plan.
In recognition of the emphasis we place on customer insight and
engagement, we were awarded the accolade ‘Best Customer Contact
Strategy’ at the national Engage Awards, also securing a ‘Highly
Commended’ in the category of ‘Best use of Customer Insight’.
Our communities
Our local communities are important to us and we support them in a
variety of ways:
-
Newcastle United Foundation:
we've committed £1.1m in our six-year
partnership with Newcastle United Foundation, helping the team to
deliver their valuable work across our region;
-
Prince's Trust:
our ongoing relationship with the Prince’s Trust helps
young people aim high and achieve amazing things;
-
Sir Bobby Robson Foundation:
we're long-term supporters of the Sir
Bobby Robson Foundation, with donations totalling more than £3m
since launch, benefitting those in our region and beyond;
-
Community grants:
through the Newcastle Building Society
Community Fund, we provide grants to local charities and groups
across the North East, Cumbria and North Yorkshire;
-
Community collaboration:
we're committed to making a difference
to communities across our region, providing support and focused
help to thousands of people when they need it most.
-
Volunteering:
our colleagues love to get involved and help their
communities make positive changes.
-
Community branches:
we believe in the importance of investing in
our branch network, helping maintain high street access to financial
services and face-to-face interactions;
-
Slow Shopping:
all our branches now offer Slow Shopping sessions,
providing a safe, welcoming and calm environment to those who
need a little extra time, space and support; and
-
Dementia Friends:
joining the UK's biggest ever initiative to change
how people act, think and talk about dementia, we're proud to be
Dementia Friends.
Please see the supporting our communities section of this report for
more information.
Our branches
With 31 branches on high streets stretching across the North East,
Cumbria and North Yorkshire, we believe that branches play an essential
role in the heart of our communities. We’re committed to growing our
presence on our high streets and in our town centres and making
people think differently about branches.
I love working at Newcastle Building
Society as they really make a
difference in the communities they
serve and are passionate about
member experience.
Helena, Newcastle Building Society Colleague
Page 22
Page 23
Diversity, equity and inclusion
The Society operates an Equal Opportunities Policy. It is the intention of
the Society that no applicant or employee receives less favourable
treatment on the grounds of disability, sex, transgender status, sexual
orientation, marital status, civil partnership status, race, ethnic origin,
colour, age, nationality, national origins, political beliefs or trade union
membership, or is disadvantaged by conditions or requirements that
cannot be shown to be justifiable.
In 2022, the Society launched a campaign to improve colleague
diversity data disclosure, to adopt a data-led approach to identifying its
diversity, equity and inclusion strategic priorities and to enable it to
implement a programme of initiatives focused on the areas where
there are the greatest opportunities to improve. The campaign saw
disclosure rates increase from 28% to 67%.
We have developed a robust and ambitious diversity, equity and inclusion
roadmap, which we are now in the process of implementing. The
initiatives planned for 2023 include signing the Race at Work charter and
investigating other partnerships that fit with our Purpose and strategy. The
Race at Work Charter was launched by Business in the Community (BITC)
in late 2018, with the aim of tackling ethnic disparities in the workplace.
Throughout 2022, the Society has continued to raise awareness and
provide education around key topics such as gender, race, disability
and LGBTQ+ inclusion through a calendar of events. Reverse mentoring
between our Executives and colleagues with lived experience
continues to be a key initiative that is helping us to understand the
barriers faced by different groups, enabling us to design targeted
interventions to foster a culture of inclusion.
In 2020 we committed to the Women in Finance Charter. The charter is
a commitment by the government and signatory firms across the
finance sector to work together to build a more balanced and
fair
industry and to create gender balance, particularly at mid and higher
levels across financial services firms.
As part of our involvement, we have stated our commitment to achieve
a 40% female representation across senior management (which
includes our Board, Executive Committee and Executive direct reports)
by 2023. We were pleased to surpass that target early and published
attainment of 43% gender representation in 2021. Signatories to the
Women in Finance Charter are obliged to report their progress against
their target in September each year. At the point of reporting in 2022
we had exceeded our 2023 target further, with 47% representation of
females at senior level.
A number of initiatives have been underway across our Society since
2019 to deliver on gender diversity improvement, including our Women
in Leadership Network; “Be a Trustee”, providing women with the
opportunity to gain wider governance experience; and work supporting
“Women onto Boards”. We also have a number of colleague-led networks
including a Parent and Carer Network and a Menopause Network.
We want everyone to experience that their potential is not in any way
limited by their background, gender, age, race, disability, religion or
sexual identity. Our focus is on ensuring this is the case for all
colleagues in our Society.
The Board also has an approved Diversity Policy. The gender diversity
statistics for the Group at 31 December 2022 are as follows:
Our Group structure
At our core, we remain a straightforward saving, lending and advice
business putting Members at the heart of what we do. As well as
providing mortgage and savings accounts to our Members, we also
provide a number of other related services, including regulated
financial advice
for investments through our subsidiary Newcastle
Financial Advisers Limited; an Appointed Representative of Openwork
LLP. We also provide a range of home insurance policies through our
partner Fairmead Insurance Limited (renamed from Legal & General
Group Insurance Limited).
Newcastle Strategic Solutions
Newcastle Strategic Solutions, our savings management and IT
subsidiary, has been managing savings accounts on behalf of some of
the UK’s leading savings providers since 2004. Newcastle Strategic
Solutions’ purpose links directly to the overall Group’s Purpose and the
pillar “building lasting authentic relationships with customers, clients
and partners” – this plays a key role in the Society’s financial model. We
support UK banks and building societies looking to launch and grow
their savings operations, or transform the management of their existing
portfolio. Our systems are built to provide a secure online savings
platform. Newcastle Strategic Solutions' strategic ambition is to grow
its client portfolio and support the ongoing growth of its existing
clients, whilst providing an ever improving product capability and level
of service to both clients and their customers. So it can maintain its
market-leading position and to position itself to be able to launch new
and enhanced services for clients and their customers, Newcastle
Strategic Solutions continues to invest in its technology and service,
with this including investments in cyber security, digital platforming
and enhanced customer experience.
Newcastle Financial Advisers
Newcastle Financial Advisers, our financial advice subsidiary, provides
Members with access to trusted financial advice, something we believe
everyone deserves. The financial advice service provided by Newcastle
Financial Advisers is backed by The Openwork Partnership.
Our partner, the Openwork Partnership, is one of the UK’s largest and
longest-established financial advice networks. Through many changes
and challenges they have been a constant presence in the market for
over 45 years and have served over two generations of clients.
Newcastle Financial Advisers has worked with The Openwork
Partnership for over 18 years to provide customers with a variety of
products and excellent service.
Newcastle Financial Advisers continues to affirm its position on the high
street along with its reach in the community, providing experienced
advice to our Members. We are proud to offer:
1.
Personalised advice and solutions:
Advice on solutions and
products that are tailored to our Members’ needs.
2.
No pressure to make decisions or take products:
Our Members
have no obligation to follow the advice given and no fees are
charged unless they implement the advice.
3.
Trustworthy advisers you can always reach:
We’ve introduced
new telephone and video chat options as well as our face-to
face-branch service.
4.
Here for our Members at every stage of their life:
As
circumstances change, so do choices of products and services. We
offer pensions; investments; life and income protection insurance;
and inheritance tax planning.
5.
Plenty of choice and
flexibility:
Newcastle Financial Advisers
(NFAL) is part of The Openwork Partnership, one of the UK's largest
financial advice networks, meaning NFAL can offer advice on a wide
range of products and high-quality services.
6.
A service that’s open to everyone:
Unlike some UK banks and
building societies, no minimum investment is required. In fact,
Members are welcome to ask for advice even if they don’t take up
our recommendations.
Strategic Report
|
Continued
Key Performance Indicators
How it is measured
Performance
Link to our Strategy and Purpose
Financial
Sustainable business
Profit be
fore tax*
Profit be
fore tax as reported in the income statement
2022: £31.7m
2021: £29.1m
To ensure we generate the necessary capital to grow
the business.
Operating Profit be
fore impairment and
provisions
Operating profit be
fore impairment and provisions as
reported in the income statement
2022: £30.5m
2021: £28.5m
To ensure we generate the necessary capital to grow
the business.
Underlying operating profit
Underlying operating profit excludes items defined
as income or expenses that arise from events or
transactions that are distinct from the core activities of
the Group and therefore do not represent the Group’s
true performance.
2022: £26.7m
2021: £22.0m
To ensure we generate the necessary capital to grow
the business.
Common Equity Tier 1 ratio
Common Equity Tier 1 capital (defined by the PRA as
general reserves or qualifying capital instruments which
for the Society is the accumulation of retained pro
fits as
a percentage of risk weighted assets).
2022: 12.5%
2021: 13.8%
To ensure we remain financially strong and be
able to protect against risks inherent in running a
building society.
Leverage ratio
A Basel III ratio which measures Tier 1 capital against total
on and off balance sheet assets.
2022: 4.5%
2021: 4.5%
To ensure we remain financially strong and be
able to protect against risks inherent in running a
building society.
Liquidity coverage ratio
The liquidity coverage ratio measures unencumbered high
quality liquid assets as a percentage of net cash out
flows
over a 30 day stress period.
2022: 189%
2021: 216%
Ensures the Group has sufficient liquidity to operate.
Efficiency
Cost to income ratio
Administrative expenses, depreciation and amortisation as
a percentage of total income.
2022: 75%
2021: 71%
Cost to income ratio is a measure of
financial
progress against internal targets and the return
achieved on investment in the business.
Lending and saving
Net interest margin
Net interest margin is a relative measure of the Group’s net
interest income (as disclosed in the income statements)
– the difference between interest received on assets and
interest paid on liabilities – divided by the Group’s average
total assets during the year.
2022: 1.48%
2021: 1.21%
To measure the income we generate from our
mortgage and savings accounts.
Lending
Gross mortgage lending
The value of residential lending advanced during the year.
2022: £1,137m
2021: £861m
Helping people own their own homes.
Net core residential lending*
Gross residential lending, less repayments of principal
and redemptions during the year across core residential
and retail buy-to-let mortgages.
2022: £586m
2021: £330m
Helping people own their own homes.
Helping people save and plan their finances.
Savings
Savings balances
The value of savings balances held by our Members.
2022: £4,221m
2021: £3,732m
Helping people save and plan their finances.
Non-financial measures
Service quality and customer experience
Customer satisfaction
Customer satisfaction is a measure of how our products
and services meet customer expectations.
2022: 95%
2021: 95%
Building lasting authentic relationships.
Customer engagement score (NPS)*
Customer engagement measures the loyalty of our
customer relationships.
2022: +82
2021: +82
Building lasting authentic relationships.
People, leadership and culture
Colleague Turnover
Colleague turnover is as an important reflection o
f the
success of our colleague agenda.
2022: 13.2%
2021: 15.5%
Being a great place to work where people can
realise their potential.
Colleague engagement score (eNPS)*
Colleague engagement is measured throughout the year
across all colleagues. Society goals are delivered by highly
engaged colleagues.
2022: +58
2021: +43
Being a great place to work where people can
realise their potential.
*Included as a key measure in the Executive Directors’ remuneration policy calculations.
For further details see the Directors’ Remuneration Report.
Female
Male
2022
2021
2022
2021
Directors
25%
25%
75%
75%
Senior Managers
45%
50%
55%
50%
Managers
43%
43%
57%
57%
Colleagues
68%
67%
32%
33%
Overall
61%
60%
39%
40%
Key performance indicators
The Board regards key performance indicators (KPIs) as an important
way of monitoring achievement of short-term objectives and progress
against the strategic plan. The KPIs that are reported to the Board on a
monthly basis are detailed below.
Senior management consider a wide range of
financial and non-
financial metrics to assess the per
formance and future direction of
both the Group and Society. Financial metrics include both measures
defined or specified by the Group’s applicable financial reporting
frameworks (primarily International Financial Reporting Standards and
the Building Societies (Accounts and Related Provisions) Regulations),
such as Group operating profit be
fore impairments and provisions,
and non-specified measures, such as net interest margin and
cost-to-income ratio.
Those financial measures not specified by the Group’s financial
reporting frameworks are alternative performance measures (APMs)
with further detail provided in the
financial KPIs and analysis section.
Page 25
Page 24
The cost-to-income ratio was 75% in 2022 (2021: 71%). The increase in
2022 was due to increased colleague costs as well as investment in
the Group. The ratio decreased in 2021 from 2020, following increased
costs in 2020 which included costs relating to Covid-19. Although the
cost to income ratio increased in 2022 from 71% to 75% as a result of
increased costs in the year, our medium term objective remains to
increase the efficiency of our Group.
The cost-to-income ratio reflects costs deemed to be under the
control of management (administrative expenses plus depreciation as
disclosed in the Income Statements) divided by total operating
income, as similarly presented.
Management assesses the ratio as a measure of operating efficiency
and continues to look for ways to improve this metric.
Impairment charges
In 2020, the Society significantly increased its loan loss provisions, given
the increased risk of a signi
ficant economic downturn or stress as a
result of the pandemic and associated lockdowns. The most signi
ficant
risks to the Society’s lending business are rising unemployment rates
and falling property prices. Despite the pandemic, both of these
measures initially improved in 2020 and 2021, supported by fiscal and
monetary policy. In addition, the Society, in line with other lenders,
supported temporarily struggling customers with measures such as
payment holidays. This led to low levels of losses on the mortgage
books crystallising in these years. Nonetheless, in 2022 inflation started
to rise, and towards the end of the year property price rises tailed off,
with rising costs and increasing interest rates bringing the expectation
of an economic downturn closer.
As the Society has already provisioned for an economic downturn in
2020 and 2021, no significant increases to provisions are expected as a
result of the current economic development.
Residential and Buy to let
In 2022, provisions of £1.4m were booked on residential and buy to let
mortgages newly originated in the year, reflecting the significant growth
of the mortgage book, including some higher loan-to-value mortgages.
In addition to the natural churn of the book, over the year, the Society
succeeded in winding down a number of the more highly provisioned
loans, overall resulting in a £1.0m reduction of the provision balance. The
Society further released £0.6m in respect to residential and buy to let
loans that had been originated before 2022. This is the result of
significant property price growth in the year resulting in lower losses in
case of default in combination with the historic trend that the probability
of default for loans reduces for seasoned books.
The 2022 provisions also include an allowance relating to the cost of
living and borrowing and reflecting the uncertainty in the external
market.
The net impact of writing new high quality loans and winding down
some older riskier loans as well as the maturing of the Society’s back
book was a net reduction in mortgage loss provision coverage ratios
from 0.11% to 0.09%.
Legacy books
The Society also successfully continued winding down legacy portfolios,
seeing the redemption of or capital repayments against some highly
provisioned loans. Provisions on legacy books therefore reduced by
£1.7m in total. The Society also saw a reduction in the risk profile against
some legacy loans that resulted in a further net reduction in provisions
of £0.3m, despite more severe economic assumptions used in the
provisioning model.
Impairment charges
As not all provisions that were carried against balances redeeming in the
year were required to cover crystallising losses, the Society saw a net
write back of impairment charges for loans and advances to customers
of £1.6m in 2022 (2021: £2.8m write-back).
The following table provides an overview of the movement in provisions.
More details are included in notes 39 and 40 to the Accounts.
Impairment charges on tangible and intangible assets was £0.3m in
2021 (2021: £2.0m) and relates to charges in relation to IT intangible
assets. The charge for 2021 related to IT equipment and leasehold
property.
Provisions for liabilities and charges
Provision for liabilities and charges was £0.1m in 2022 (2021: £0.2m),
broadly comparable with the prior year.
Taxation
The Group shows an effective corporation tax rate of 18% in 2022
(2021: 18%). The tax charge reflects both tax payable against 2022
profitable operations, the banking surcharge and a decrease in the
deferred tax assets and liabilities carried on the balance sheet. The
effective rate paid in the current year is lower than the statutory rate
of 19% due to differences in timing of when charges are recognised
for accounting and tax purposes. In addition, there was an
adjustment of £0.5m credit for previous year items.
Our financial per
formance
The Chief Executive’s review details the Society’s performance and
success throughout 2022 and should be read in conjunction with this
report. The Strategic Report outlines the financial per
formance of the
Society over 2022.
Newcastle Building Society is the largest building society based in
the North East of England with assets of £5.3 billion. For 2022, we are
reporting an increase from 2021 to our operating pro
fit be
fore
impairments and provisions and we continue to operate with strong
capital ratios and have robust liquidity ratios.
Financial profitability
Profitability is one o
f the key performance measures the Board monitors
closely. The Society seeks to make sufficient profit in order to invest in
and grow the business for the bene
fit o
f its current and future Members.
The Group’s 2022 financial results demonstrate the core strength o
f the
Group’s underlying operating model. Group profit
for the year before
taxation was £31.7m in 2022, an increase of £2.6m in comparison to
£29.1m in 2021. Operating profit be
fore impairments and provisions is
considered an important reflection o
f the operating strength of the
Group’s business and increased to £30.5m in 2022, in comparison to
£28.5m in 2021. Total operating income increased by £20.2m or 20.3%,
whilst due to the continued investment into the business, administration
expenses and depreciation also increased by £18.2m or 25.6%.
Alternative performance measures
The Board reviewed and was satisfied that the alternative
performance measure of underlying pro
fit be
fore tax, which is
reported alongside the statutory profit measure, gives a clearer view
of the underlying performance of the business for our Members.
The following items are considered in determining the underlying
profit o
f the Group. They are items de
fined as income or expenses
that arise from events or transactions that are distinct from the core
activities of the Group and therefore do not represent the Group’s
true performance, primarily relating to fair value adjustments.
On an underlying basis, operating profit be
fore impairment and
provisions was £26.7m in 2022, a difference of £3.8m to reported
operating profit be
fore impairment and provisions (2021: £22.0m). The
key non-underlying adjustments in the year include the loss in the fair
value of the equity release mortgage book of £2.2m, hedge
ineffectiveness gain of £8.8m, the revaluation of Openwork units held
of £2.1m and £0.8m in transactions costs. Transaction costs are
included in “Administrative expenses” in the Income Statement.
All other items are included in “Fair value gains less losses on financial
instruments and hedge accounting”. The following table shows the
reconciliation of operating pro
fit be
fore impairment and provisions to
underlying operating profit.
Segmental information is available in note 9 and details the Member
business and Solutions' business segments.
The fair value of equity release mortgages is net of the movement in
the fair value associated interest rate swaps.
Net interest margin
Net interest income increased by £16.4m to £75.4m and our net interest
margin was 1.48% (2021: 1.21%), both increases driven by the rising
interest rate environment as well as the Group continuing to access
central bank funding via the Term Funding Scheme (TFS) and Term
Funding Scheme with additional incentive for SMEs (TFSME) schemes.
Other income and charges
Other income and charges includes income from Newcastle Strategic
Solutions Limited (NSSL) and Newcastle Financial Advisers Limited
(NFAL). Income from NSSL includes income generated from balances
under management of Solutions’ clients. Income from NFAL relates to
fee income generated through
financial advice services. Other
income
and charges increased by £3.8m to £44.3m in 2022 from £40.5m in 2021.
Administrative expenses and depreciation
Administrative expenses increased by £17.7m or 26.9% from £65.8m to
£83.5m in 2022, with depreciation expenses increasing from £5.2m to
£5.7m. Overall management expenses (the sum of administrative
expenditure and depreciation) increased to £89.2m from £71.0m. The
increase includes colleague costs associated with reward and cost of
living incentives as well as costs associated with the continuing
investment in the Group.
Information technology is a cornerstone of any business and
investment ensures our core platforms are at a leading level to provide
security of data and enhanced resilience.
Strategic Report
|
Continued
Summary Group Income Statement
2022
2021
£m
£m
Net interest income
75.4
59.0
Other income and charges
44.3
40.5
Total operating income
119.7
99.5
Administrative expenses
(83.5)
(65.8)
Depreciation
(5.7)
(5.2)
Operating profit be
fore impairments and
provisions
30.5
28.5
Impairment reversals on loans and advances to
customers
1.6
2.8
Impairment charges on tangible and intangible
assets
(0.3)
(2.0)
Provision for liabilities and charges
(0.1)
(0.2)
Profit
for the year before taxation
31.7
29.1
Operating Profit
2022
2021
£m
£m
Operating profit be
fore impairment and provisions
30.5
28.5
Loss/ (gain) in fair value of equity release mortgages
2.2
(2.1)
Hedge ineffectiveness on accounting hedges
(8.8)
(1.0)
Revaluation (loss) / gain on equity investments
2.1
(3.4)
Gain crystallised on sale of assets
(0.1)
-
Transactional costs
0.8
-
Underlying operating profit
26.7
22.0
Cost to income ratio
2022
75%
2021
71%
2020
81%
2019
78%
2018
77%
Net interest margin
2022
1.48%
2021
1.21%
2020
1.04%
2019
1.09%
2018
1.12%
Movement
in loans and
advances to
customers
and related
provisions
Opening
balance
New
originations
in 2022
Redemptions
in 2022
Movements
relating
to loans
originated
before
2022
Closing
balance
Prime and
buy to let
Loan Balance (£m)
3,185.3
1,089.8
(501.3)
-
3,773.8
Provision (£m)
3.5
1.5
(1.0)
(0.6)
3.4
Legacy
(excl)
housing
associations
Loan Balance (£m)
61.7
-
(19.0)
-
42.7
Provision (£m)
4.3
-
(1.7)
(0.3)
2.3
Page 27
Page 26
Mortgage credit quality
Arrears
The Society measures mortgage arrears of 3 months or more
(excluding possessions) for both number and value of loans. Although
primarily a measure of the quality of the existing mortgage books, the
Society also uses its mortgage support functions to in
fluence
future
lending with “lessons learned” fed back into Lending Policy.
The percentage of mortgages in arrears by 3 months or more remains
at low levels for 2022. Overall by number of loans arrears we have seen
a decrease of 0.07% to 0.35%, and by balance we have seen a decrease
of 0.06% to 0.28%.
Forbearance
The Society will work closely with any homeowner experiencing
difficulties, o
ffering help and advice on all aspects of the situation.
Forbearance cases and options granted are monitored by the Society’s
Credit Risk Committee with the levels of concessions granted not
considered to be material for the size of the overall book. Please refer
to the credit quality note for further details.
Law of Property Act receiverships and possessions
The Society continued to experience a low level of possessions on
residential loans and Law of Property Act receiver appointments. At
the end of 2022 the Society had 1 property in possession in relation to
owner occupied loans and there were 3 exposures in relation to
legacy loans being managed by a Law of Property Act receiver.
Funding
The Society manages its funding levels, mix and duration carefully to
ensure it has the required resources in place to meet its liquidity and
lending targets. The Society is predominantly funded through retail
savings with wholesale funding used to provide a diversi
fied
funding
source.
Retail savings balances increased by £489.0m during 2022 to £4.2bn.
Wholesale funding, including drawdown on Bank of England Funding
Schemes, increased during the year by £6.2m. This has resulted in the
ratio of shares and deposits to wholesale balances moving from
83%/17% in 2021 to 85%/15% in 2022.
Capital
The table below shows the composition of the Group’s capital ratios
at the end of the year.
The Group complied with Individual Capital Guidance plus capital
buffers, as notified by the Prudential Regulation Authority, throughout
2022. The total capital ratio was 13.6% (2021: 15.1%); Tier 1, and more
importantly Common Equity Tier 1, which offers the greatest protection
to Members' funds in the unlikely event of unforeseen
financial stress
were both 12.5% in 2022 (2021: 13.8% and 13.9%). The capital ratios have
fallen during 2022 due to growth in our business. Off balance sheet risk
weighted assets has increased since the prior year following changes
to regulatory framework on counterparty credit risk.
The leverage ratio is a simplified capital strength ratio measuring
qualifying tier 1 capital against on and off balance sheet assets. The
Board monitors the leverage ratio on a monthly basis and as at 31
December 2022 the figure was 4.5% (2021: 4.5%). This is, and has
remained throughout 2022, well in excess of the regulatory target of 3%.
The Group holds capital, primarily though accumulated reserves, to
protect itself against the risks inherent in the running of a building
society: primarily credit risk inherent in mortgage lending, liquidity
investment, operational risk and the ability to realise other balance
sheet assets ultimately into cash.
The Group’s total capital requirement/individual capital guidance is
communicated annually by the Prudential Regulation Authority and
consists of minimum regulatory capital requirements (Pillar 1) plus
additional Society-specific capital requirements
for credit, market,
operational, counterparty, credit concentration, interest rate and
Balance sheet
A consolidated balance sheet is set out below with key balance sheet
items discussed in detail in this report.
Liquid assets
The Society has continued to maintain a level of high quality liquid
assets throughout 2022. The Society’s liquid assets comprise of assets
held in cash or that can be easily convertible to cash through treasury
markets (repo) or via the various Bank of England liquidity schemes. All
of the liquid assets are placed with AAA rated UK Institutions with the
exception of gilts and deposits with the Bank of England which carry
the UK Sovereign rating of AA+.
As mentioned, the Society has access to the Bank of England
liquidity schemes and has pre-positioned mortgage collateral and
asset-backed securities that provide funding as part of business as
usual and contingency funding plans.
The statutory liquidity percentage (liquid assets as a percentage of
shares, deposits and liabilities) reported at 31 December 2022 was
19.3% compared to 21.4% in 2021.
Loans and advances to customers
The Society’s strategy is to grow the core lending which includes
prime residential and buy to let mortgage business whilst winding
down legacy portfolios continued during 2022.
The balance of loans and advances to customers after provisions
increased by £465m overall in 2022, this includes a net £586m increase
in our core lending. Average LTV increased during the year to 67.7%
(2021: 65.8%) and Average ILTV was 59.0% (2021: 58.5%). The Society
does not offer new lending to professional landlords or undertake
buy-to-let lending to corporates.
The main source of the reduction in the carrying amount of the Equity
release portfolio was the change in the valuation due to the increase in
market interest rates. The Society hedges fair value movements on the
equity release portfolio due to market interest rate movements using
interest rate swaps. The value of these swaps increased by £55.7m
resulting in a net movement of £2.2m in the year included in the
income statement.
The Group’s lending is all secured with a first charge registered
against the collateral property. Core and legacy residential loans are
shown at indexed loan to value using the quarterly regional Halifax
House Price Indices, all other loans are shown without indexing.
Further information on security loan to value is provided in note 43,
credit quality.
Strategic Report
|
Continued
Arrears performance
3 months or more arrears
By number of loans
By balance
2022
2021
2022
2021
%
%
%
%
Core lending
0.36
0.44
0.32
0.40
Legacy lending
0.08
0.11
-
-
Total
0.35
0.42
0.28
0.34
Capital
2022
2021
£m
£m
Tier 1 capital
Common equity Tier 1 capital
239.3
221.0
Additional Tier 1
-
2.0
239.3
223.0
Tier 2 capital
Tier 2 capital
20.0
18.0
Collective impairment allowance
-
0.1
20.0
18.1
Total capital
259.3
241.1
Risk weighted assets
Liquid assets
45.6
44.1
Loans and advances to customers
1,544.5
1,331.6
Other assets
57.4
68.3
Off balance sheet
114.3
31.9
Operational risk
148.1
125.2
1,909.9
1,601.1
Capital Ratios
%
%
Common Equity Tier 1 Ratio
12.5
13.8
Tier 1 Ratio
12.5
13.9
Total Capital Ratio
13.6
15.1
Leverage Ratio - including claims on central banks
4.5
4.5
Leverage Ratio - excluding claims on central banks
4.8
4.9
Loan portfolios
2022
2021
Movement
in year
£m
£m
%
Core lending
Prime residential
3,378
2,779
21.2
Retail BTL <£1m
396
400
(1.0)
Legacy lending
Equity release
166
233
(28.3)
Specialist buy-to-let
14
28
(3.6)
Housing associations
283
323
(16.1)
Commercial
11
15
(26.7)
Other
19
25
4.0
4,267
3,803
12.2
Provisions
(7)
(8)
Loans and advances to customers
4,260
3,795
%
%
Average LTV%
67.7
65.8
Average ILTV%
59.0
58.5
2022
2021
�m
£m
Assets
Liquid assets
959.7
956.4
Derivative financial instruments
90.4
14.5
Loans and advances to customers
4,259.5
3,794.5
Fair value adjustments for hedged risk
(60.9)
62.1
Non-current assets available for sale
0.2
2.4
Intangible assets
10.2
7.5
Property, plant and equipment
29.1
31.0
Other assets
24.3
26.0
Total Assets
5,312.5
4,894.4
Liabilities
Shares
4,220.8
3,731.8
Deposits and debt securities
752.9
746.7
Fair value adjustments for hedged risk
0.3
-
Derivative financial instruments
52.5
147.6
Other liabilities
20.1
24.2
Subscribed capital
20.0
20.0
Reserves
245.9
224.1
Total Members' interest, equity and liabilities
5,312.5
4,894.4
Asset class
2022
2021
%
%
Cash in hand and balances with the Bank of England
52.9
49.4
Covered bonds
7.5
23.3
Residential mortgage backed securities
13.7
20.6
Gilts
22.9
4.6
Other
3.0
2.1
100.0
100.0
Page 28
pension obligation risk (Pillar 2A). The Group’s total capital requirement
at 31 December 2022 was £230.2m. Further details on the Group’s
capital position including the transitional impact of Basel III is given in
the Pillar 3 disclosures available on the Society’s website.
Principal risks and uncertainties
The principal risks and uncertainties faced by the Group are detailed
below with further detail set out in the Risk Management Report.
Anti-corruption and Anti-bribery
It is our policy to conduct all of our business in an honest and ethical
manner. In doing so we will take reasonable steps to prevent the
facilitation of bribery, corruption and tax evasion and where we
identify that our organisation is being used to facilitate bribery,
corruption or tax evasion we would take a zero tolerance approach.
Our Anti-Bribery and Corruption Policy sets out our responsibilities,
and those of anyone working for us, in observing and upholding our
position on bribery, corruption and preventing the criminal facilitation
of tax evasion, and it also provides information and guidance to
colleagues on how to recognise and deal with a suspicion of bribery,
corruption or tax evasion issues. It is a criminal offence to offer,
promise, give, request, or accept a bribe or fail to prevent our
colleagues, workers, agents or service providers facilitating tax
evasion. Individuals found guilty can be punished by up to ten years'
imprisonment and/or a fine. As an employer i
f we fail to prevent
bribery or tax evasion we can face criminal sanctions, an unlimited
fine and damage to our reputation. We there
fore take our legal
responsibilities very seriously.
Anti-Slavery and Human Trafficking
The Group has a zero tolerance approach to modern slavery and we
are committed to acting ethically and with integrity in all our business
dealings and relationships and to implementing and enforcing
effective systems and controls to ensure modern slavery is not taking
place anywhere within our own business or any of our supply chains.
We are also committed to ensuring there is transparency in our own
business and in our approach to tackling modern slavery throughout
our supply chains, consistent with our disclosure obligations under
the Modern Slavery Act 2015. We expect the same high standards
from all our contractors, suppliers and other business partners.
Our Anti-Slavery and Human Trafficking Policy applies to all persons
working for us on our behalf in any capacity, including colleagues at
all levels, Directors, officers, agency workers, seconded workers,
volunteers, agents, contractors, external consultants, third-party
representatives and business partners, sponsors, or any other person
associated with us, wherever located.
Outlook
At this time, the macroeconomic outlook remains uncertain, with
considerable variability in determining an external market consensus
as to when inflation will normalise, together with how resistant the
housing market will be to the associated external pressures.
That said, as we have demonstrated over recent years, we will
continue to monitor the external economic and market conditions
and refine our outlook to ensure we protect our resilience whilst
simultaneously ensuring we are poised to take advantages of
meaningful strategic opportunities as they present themselves.
As highlighted in this report, our core strategy continues to deliver
against our objectives with the momentum carried from 2022
strengthening the ability of our regional and national Member base to
connect to a better financial
future.
On behalf of the Board
David Samper
Chief Financial Officer
2 March 2023
Strategic Report
|
Continued
The Tyne Bridge,
Newcastle Upon Tyne
Category
Definition
Capital risk
Capital risk is the risk that the Society is or becomes inadequately
capitalised to address the risks to which it is exposed.
Climate
change risk
(emerging
risk)
Climate change risk recognises the risk associated with adverse
climate change and the impact on the Group’s operations, the
impact on borrowers and the decrease in the value of security in
support of mortgage lending. Climate risk is similarly relevantto
Solutions’ clients, and the Group may be impacted by their
exposure.
Conduct risk
Conduct risk is the risk of customer detriment arising from the
Society’s activities. It is an operational risk particularly significant to
the Society. Examples include products that do not perform as
customers expected them to, or products being sold to customers
for whom they are not suitable. Conduct risk and operational risk are
closely aligned where the operational risk results in customer
detriment.
Credit risk
Credit risk is the risk that a customer or counterparty is unable to
honour their repayment obligations as they fall due.
Credit risk:
residential
Retail borrowers do not repay the Society and the Society’s
collateral is insufficient to meet the debt obligations. The risk is
sensitive to unemployment rates, house prices, interest rates and
the application of underlying assumptions and data within our
credit loss model.
Credit risk:
commercial
Commercial borrowers do not repay the Society and the Society’s
collateral is insufficient to meet the debt obligations. The risk is
sensitive to economic conditions that can impact the viability of
tenants and commercial real estate values.
Interest rate
risk
Interest rate risk is the risk that the value of the Society’s net assets
or net interest income falls as a result of a change in interest rates.
Basis risk is the risk that net interest income falls because of a
change in the relationship between two market rates.
Investment
credit risk
Investment credit risk is the risk wholesale counterparties the Society
lends to default, or the value of the investment falls and the Society is
obliged to crystallise that fall in value. This risk arises in relation to the
treasury investments made by the Group in order to meet liquidity
requirements. The risk is sensitive to market volatility and credit spreads
(both general credit spreads and name specific credit spreads).
Liquidity risk
Liquidity risk is the risk of loss or failure caused by the Group being
unable to meet its liabilities or commitments as they fall due, or only
being able to do so at excessive cost.
Macro-
economic risk
Macro-economic risk is the risk that a deterioration of the economic
environment in the UK could negatively impact the Group’s
operations and performance. This includes the impact of increased
risks, such as credit risk, and market risk (e.g margin compression).
There is a risk of adverse impact on consumer demand and
behaviour. The overall macro-economic risk gives rise to uncertainty
and reduces the predictability of outcomes. This risk applies to both
the Society and the services provided to our Newcastle Strategic
Solutions Limited clients who may also be impacted.
Operational
risk
Operational risk is the risk of loss, resulting from inadequate or
failed internal processes, people and systems, or from external
events. For the Group this definition includes legal risk, strategic risk
and reputational risk.
Pension fund
obligation risk
Pension fund obligation risk is the risk that the value of the Scheme’s
assets, together with any agreed employer contributions, will be
insufficient to cover the projected obligations of the Scheme over
time. The return on assets, which includes equities and bonds, will
vary with movements in equity prices and interest rates. The Group
has funding obligations for a de
fined benefit scheme, which is
closed to new entrants. It was closed to future bene
fit accrual with
effect from 30 November 2010.
With our communities facing
a host of challenges, the
Society continued to focus on
the needs of our region and
on making a positive impact
wherever we could.
Page 30
Page 31
Supporting our communities
The total value of community contributions in 2022, made up
of grants, match funding and our continuing partnership
donations was £544,807, reflecting our continuing
commitment to the people and places that make up our
heartland.
Partnerships sit at the core of this commitment, including our
relationship with Newcastle United Foundation, where helping
young people across the region to unlock new opportunities
and develop their workplace skills and employability remains a
key focus. In March 2022 we celebrated the opening of the
foundation’s new home, NUCASTLE powered by Newcastle
Building Society, a state-of-the-art hub combining community
space with education and wellness facilities which will serve its
community for generations.
Colleagues are central to our work with Newcastle United
Foundation, through the continuing delivery of money
management workshops, work experience opportunities,
mock interviews and career skills sessions. Our bespoke
apprentice recruitment programme, delivered in partnership
with the foundation, enabled 15 young people to achieve a
Level 1 qualification in Customer Service in 2022 and resulted
in six young people joining our Society employed on a
full-time apprenticeship.
While we continued to nurture our existing partnerships,
establishing new connections has also been a priority. The
launch of our new branch in Knaresborough Library opened
the door to new opportunities to collaborate, including
support for Knaresborough charities, Orb Arts and Chain Lane
Community Hub, as well as collaboration with Knaresborough
Connectors and the Knaresborough Chamber of Trade.
We also announced a new five-year partnership with the
military charity, Walking With The Wounded, focusing on the
provision of access to employment and long term career
development opportunities. The partnership includes a
financial commitment to support the charity’s employment
programme and create veteran-friendly employment
opportunities, tailored to our Society.
Through the distribution of £216,727 in small grants funded
from the Newcastle Building Society Community Fund at the
Community Foundation Tyne and Wear & Northumberland we
continued to address the key themes of debt management,
employability and workplace skills, cancer care, homelessness
and food poverty. We also introduced two new strands to our
grant giving, aiming to help address emerging issues around
social isolation and the environment.
In partnership with Newcastle United Foundation we
launched #KickOutFoodPoverty, encouraging football
fans to recreate their favourite football moment, or put their
personal stamp on an iconic goal celebration, while raising
vital funds for food poverty charities throughout the North
East. A team of freestylers helped launch the campaign at
Grey's Monument, inspiring youngsters to share their own
skills on Instagram using the hashtag #KickOutFoodPoverty.
Photo:
Rebaz, Professional Football Freestyler
Page 32
Page 33
Supporting our communities
|
Continued
Addressing social isolation
In March 2022, we awarded grants to a
variety of organisations across the region to
help celebrate the Queen’s Platinum Jubilee
and tackle social isolation, which has been
a growing issue across our communities.
£14,700 was awarded to eight charities,
including the Sunderland Bangladesh
International Centre, where a £3,000 grant
from our Community Fund covered the cost
of a family fun day, welcoming a diverse
range of cultures from the Sunderland
area, with over 200 people from ethnically
diverse, refugee and asylum-seeking
communities joining an afternoon of food
and entertainment from around the world.
Alleviating hunger
The rising cost of living means support for
charities addressing food poverty in our
communities is vital. In total £34,500 was
awarded in grants to help alleviate hunger
in our region.
Following a £1,000 grant from our
community fund to St Paul’s Community
Partnership in North Tyneside in 2021,
colleagues provided further support on a
regular basis in 2022, including help with
their FairShare project, with volunteers
from our Finance team helping with the
distribution of food to local residents and
their ‘Sit Down Lunch’ at Christmas.
Workplace skills and employability
Over the course of 2022, we awarded more
than £27,000 in grant funding to regional
charities to help tackle issues around
workplace skills and employability.
This included a grant of £3,000 which
helped Skills4Work run a monthly lunch
club for around 20 older people at The
Mount community centre in Eighton Banks.
The lunch club is delivered by the charity’s
service users who have not previously had
any workplace experience.
Protecting our environment
A new area of focus for our grant giving,
charitable projects promoting environmental
and sustainability causes, received £15,000
in funding. One of these recipients was the
Durham Wildlife Trust, who received a grant of
£3,000 towards running practical conservation
tasks for families at Shibdon Pond in Blaydon.
A further £3,000 grant was awarded to the
Comfrey Project, whose community garden
in Gateshead and allotment sites in Fenham
and Walkergate provide its volunteers with a
chance to gain a range of skills at its weekly
sessions, including gardening, cookery
and housekeeping. The charity, which is
celebrating its 21st anniversary, encourages
its volunteers to share their own skills and
build new connections in the community
while also developing their confidence and
enhancing their personal wellbeing.
Page 34
Page 35
Supporting our communities
|
Continued
Cost of living
Delivered in partnership with Citizens Advice
Gateshead, our Helping Hand scheme was
set up to provide practical help to Members
and colleagues facing extreme hardship as a
result of the rising cost of living. A dedicated
helpline will provide advice and emergency
support for those most in need.
And while rising fuel and household bills
made it more difficult to stay warm during
the winter months, our popular community
rooms provide the ideal facilities for small
groups to use as bookable warm spaces,
including free tea and coffee and a warm
welcome guaranteed.
Cancer care
Cancer care has continued to be a focus in
2022 as we celebrated 10 years in partnership
with the Sir Bobby Robson Foundation with
a film highlighting the practical benefits
that the donations made by our Society and
the charity’s other funders bring to cancer
patients across the region. Since 2012,
contributions made by the Society surpassed
all early expectations and now stand at well
over £3 million. We also prioritised cancer care
through our Community Fund, with £56,000
in grants supporting charities that enhance
cancer patient care throughout our region.
Causes such as Coping with Cancer that
we provided with a £3,000 grant enabling
the charity to pay for 100 hours of one-to-
one therapy services for patients, enabling
individuals to access help more quickly.
In 2022 colleagues continued to deliver on
our Society’s Purpose and commitment to
our communities, completing 6,527 hours of
volunteering in total. Colleague volunteering
covers a huge range of activities from
packing goodie-bags for NHS staff to beach
cleans and from assisting with the delivery
of food parcels to coaching, mentoring and
governorship. Colleagues and customers also
showed incredible generosity, helping to raise
£85,983 for the Newcastle Building Society
Community Fund, Cash for Kids Mission
Christmas Appeal and a variety of other
charities close to their hearts.
This year ten of our colleagues take part in
the 41st annual Great North Run, completing
the 13.1 mile course to generate donations for
Newcastle United Foundation, raising over
£3,500, which was match-funded by the
Society.
Another group of colleagues also took part
in the third annual Children’s Heart Unit Fund
(CHUF) Dragon Boat Race on the River Tyne,
competing against nine other teams made up
of a host of local businesses, helping to raise
money to support babies and children with
heart conditions.
Colleague volunteering and fundraising
Page 36
Page 37
I am proud to introduce our
Sustainability report for 2022. This
report outlines our commitment to
operating as a responsible business
and the year on year progress we are
making on our journey to net zero.
Alnwick Castle, Northumberland
We have been Connecting our communities with a better financial
future
for over 160 years and our commitment to caring for our environment and
ensuring sustainability is more important than ever if we are to ensure that
we can help provide a strong financial
future for generations to come.
Over the last few years, we have made signi
ficant progress in supporting
our colleagues, customers and communities. We understand that
delivering our Purpose is about more than our delivery of good value
financial products and excellent service and that we have a responsibility
to play our part in caring for the places in which we live and operate. We
are focused on taking the action required to ensure that we become a net
zero operating business within the next decade.
Throughout 2022, we have been working towards understanding where
we can make the biggest impact for our Members whilst improving the
carbon footprint of our business. We are dedicated to the large scale
change that is required to achieve our strategic ambition to grow our
business effectively whilst supporting our Members on their transition to
a greener world.
Andrew Haigh
|
Chief Executive
Page 38
Page 39
Sustainability Report
Our Commitment
Our Purpose has a specific pillar which
focuses on our commitment to the environment and sustainability.
The Society has a clear commitment to safeguard our environment and deliver sustainability for future generations.
Our approach to this is managed through an Executive Environment and Sustainability Committee. The purpose of the committee is to
ensure we have appropriate polices, processes and actions in place to measure our impact and drive forward actions to achieve our desire
to meet our environment and sustainability goals.
Progress made in 2022
In 2022, we created an Environment and Sustainability team and reviewed and updated our Environmental and Sustainability Strategy.
Our dedicated Environment and Sustainable team are responsible for leading our journey to achieve a net zero operating business. Working
with the Executive team, wider business and external partners, this team will provide a structured approach that aligns to our Business
Strategy, drives positive change and delivers on agreed environmental and sustainability targets.
The Environmental and Sustainability Strategy outlines five workstreams which encompass activities that address key environmental and
sustainable priorities and it also assigns an Executive to each workstream with responsibilities to ensure committment to the action required
to achieve a successful net zero transition.
The five workstreams o
f the strategy will focus on:
The intention is that the strategy will be delivered over three phases, which will span the next decade, each phase will inform the next in
line with new and emerging technology and infrastructure. The Environmental and Sustainability Strategy aligns to our overarching
Purpose, which has a specific environmental and sustainability pillar, as outlined above, that
focuses on our commitment to the
environment and sustainability.
Our focus in 2023
In 2023, we are setting our foundation to enable us to achieve our
net zero ambition.
In 2022, we began work to extend our greenhouse gas reporting to
include scope 3 emissions and have identified that we have data
gaps relating to these emissions, therefore our focus in 2023 will be
to address these data gaps. By doing so it will enable us to progress
towards setting science based targets.
By addressing our data gaps we will improve our disclosure
contribution so that it has stronger alignment to the Task Force on
Climate-Related Financial Disclosure recommendations.
We will also invest in providing training and education to upskill our
people so that we can incorporate environmental and sustainable
consideration and impact into every business decision made
moving forward.
Data
People
Disclosure
Risk
Infrastructure
Scope 3
All other indirect
emissions
Emissions from sources that we own or control directly (eg gas
fired
heating boilers and diesel used in back-up generators).
Scope 1
Direct emissions
Encompasses emissions that are not produced by us and are not the
result of activities from assets owned or controlled by us but by those
we are indirectly responsible for, up and down our value chain (eg
business travel by employees and waste disposal).
Emissions that we cause indirectly through the energy we purchase
and use. Although electricity is used on site, the emissions take place
where the electricity is generated.
Scope 2
Indirect emissions
From 2020, we have reported our scope 1 and scope 2 emissions
annually. In 2022, work commenced to start calculating our scope 3
emissions, taking into account all relevant categories and data
available within the scope 3 criteria that apply to our business. This
work has identified some data gaps in various categories which we
will focus on addressing in 2023.
Our day-to-day business activities, as well as project and new
initiatives, are targeted at ultimately minimising our use of fossil fuels
and hence carbon emissions. As part of a planned multi-million
pound investment in our head office, we are reviewing low carbon
heating options, which is in addition to electricity already being
procured from a 100% renewable source.
We operate a salary sacrifice electric vehicle scheme, which is available
to all our colleagues, as well as a cycle to work scheme, which
encourage colleagues to reduce their personal carbon footprint when
commuting to their place of work. We have also installed seven electric
vehicle charging points at our head office and our fleet o
f three
company vehicles will be converted to electric in 2023.
Stokesley, North Yorkshire
Page 40
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Sustainability Report
|
Continued
Greenhouse Gas Emissions Report
Greenhouse gas emissions and energy usage have been calculated
using the location based method of the UK Government’s
‘Environmental Reporting Guidelines: Including streamlined energy
and carbon reporting guidance, March 2019’.
Greenhouse gas emissions and conversion factors have been taken
from the UK Government’s ‘GHG Conversion Factors for Company
Reporting’ for the year 2021. Some estimation has been used to cover
missing billing.
Greenhouse gas emissions are generally shown in units of carbon
dioxide equivalent (CO2e). This enables a common unit to be used for
the different types of greenhouse gases, which include carbon
dioxide, methane and gases used in fridges and air conditioning units.
The United Nations (UN) Sustainable Development Goals are a collection
of 17 goals and the universal call to action to end poverty, protect the
planet and ensure that all people enjoy peace and prosperity.
In 2022, we set out our intentions to adopt appropriate goals that align to
our Purpose and undertook work to identify which of the 17 United
Nations (UN) Sustainable Development Goals we intended to adopt in
2023. The work also set out our intention for further adoption of goals in
the coming years.
Due to our strong presence across local communities and our business
Purpose and values, we have a solid platform, which seamlessly aligns to
a number of the UN Sustainable Development Goals.
For 2023, we have chosen the following goals, which align to our
Purpose and initiatives:
5. Gender equity
8. Good jobs and economic growth
10. Reduced inequalities
All three goals (shown opposite) encompass activity which is already
happening across our business. Reducing inequalities generally and
creating gender equity specifically are goals which are embedded in the
day-to-day operations of our business. Initiatives such as Women in
Leadership, Platinum Investors in People recognition, mental health first
aiders and listening circles are established accomplishments, which we
are committed to evolving over the coming months. The Good Jobs and
Economic Growth goal aligns to our ‘Powered by Purpose’ ambition and
we are all collectively responsible for ensuring we grow our business to
add Member value in line with strategy and ambition.
Energy consumption
(kWh)
2022
% change
Natural gas
1,111,194
—21%
Electricity
2,412,380
—7%
Transport
245,769
+188%
Total
3,769,343
—8%
Greenhouse gas emissions in tonnes of carbon dioxide equivalent
2022
% change
Natural gas
203
—21%
Electricity
467
—15%
Transport
57
+187%
Total
727
—12%
Intensity metric
2022
2021
% change
KgC02e per sq. M
51
—5
%
54
2021
1,398,814
2,600,412
85,281
4,084,507
2021
256
552
20
828
2022 Key Achievements
•
We have identified a number o
f assets that could operate on
more self-sustaining alternative power sources allowing a move
away from fossil fuel.
•
We’ve started work to relocate our IT system capability to a more
energy-efficient facility operating on 100% renewable hydro and
wind energy.
•
We’ve started developing metrics which assess the climate
change risks associated with our lending activities.
•
We’ve created metrics that cover both physical risk data and
transition risk data.
•
As part of the Society’s 2022/3 Internal Capital Adequacy
Assessment Process, two climate related scenarios were included.
Greener communities
•
Internally we have created a net zero taskforce which drives
environmental and sustainable change tactically and operationally
across our business.
•
In 2022, we allocated grants from our community fund to various
charities related to sustainable and environmental causes, grants
worth a total of £30k.
•
We also have a partnership in place with the onHand app. In 2022,
through colleague volunteering opportunities, 253 trees were
planted and as a result 6.69 tonnes of CO2e has been taken out of
the environment.
•
Cycle to work was launched in 2022 and is available to all colleagues.
Property
•
Cobalt, our head office uses a 100% renewable electricity hydro
source.
•
A retrofit plan commenced
for our Cobalt, head office, with work
due to start in 2023.
•
We continued to install LEDs across the branch network and intend
to install at our head office in 2023.
•
7 EV chargers were installed at Cobalt and more to come in 2023.
Products
•
Creation of the Sustainability Hub, a central platform which
provides information to help Members understand how to make
more sustainable choices in their homes to help protect the planet.
The Sustainability Hub is accessible via our website.
•
Development of an app to support homeowners with retro
fitting
aspirations and borrowing needs (existing Members). The app
is available for both android and IOS devices and the link to
download the app can be found on our website.
•
Introduction of a reward for customers who take additional borrowing
to carry out energy-efficient works and can evidence them. Customers
will being given details of the reward scheme at the point of sale.
•
We undertook exploratory work, using our Connected
Communities platform to engage with our Member community,
to better understand the appetite of our Members to invest in
environment and sustainability-led products, testing a number of
product concepts.
•
We are analysing the findings o
f this research to develop an
authentic green or sustainable savings proposition that we intend to
launch in 2023.
Risk
People
Infrastructure
Scope 1 emissions have been restated for 2021 and 2022 as a result of delayed invoicing from suppliers following a period of estimated readings. In 2022 we
have also amended the reported intensity metric from kgC02e / ft
2
to kgC02e / m
2.* The
2021 metric has also been restated to reflect the updated reporting
format as well as a recalibration of
floor space area
for the 2021 period.
Page 42
Page 43
Our Directors
James Ramsbotham
|
Chair
James became Chair of Newcastle Building Society in August 2021. Prior to this, he
was Chief Executive of the North East England Chamber of Commerce for 15 years,
and Chairman of Darlington Building Society until December 2017.
Previously James was Vice Chairman of North East construction
firm, the Esh Group,
and before this spent 14 years in corporate banking in Barclays Bank plc, latterly as
Marketing Director.
James is Chair of Newcastle Financial Advisers Limited, Newcastle Strategic Solutions
Limited, as well as being Chair of the Society’s Nominations Committee, and a
member of the Group Risk Committee. He was a soldier for 12 years with the Royal
Green Jackets, and benefited
from executive education at Harvard (USA), INSEAD
(France), and Oxford University, after graduating from Durham University. He maintains
his associations with the military as an Honorary Colonel for The Ri
fles in County
Durham and as a Deputy Lieutenant and is a Trustee for The Foundation of Light, The
Willan Trust and the Gillian Dickinson Trust.
James was awarded an Honorary Doctorate in Business Administration by Sunderland
University in 2016 (where he’s also Pro-Chancellor), made an Honorary Fellow of the
Association of International Accountants in 2017; and awarded a CBE for services to
business and the North East economy in the 2019 New Year’s Honours list.
Andrew Haigh
|
Chief Executive
With over 25 years’ experience in the mutual sector, Andrew has an extensive track
record in transforming and developing businesses. He has held
financial services
leadership roles as both an Executive and a Non-Executive Director, reinforcing the
Board’s depth of consumer understanding. His previous experience is drawn from a
variety of sectors including
financial services, technology, automotive and airline
industries.
Andrew became the Society’s Chief Executive in May 2015, having joined the Board
as Chief Operating Officer in January 2014. A proven Chief Executive, Andrew has
particular strength in building effective leadership teams and organisations with
healthy, customer-focused cultures, and proudly drives our Society’s ongoing
commitment to equity, diversity and inclusion.
Andrew is the current President of the North East England Chamber of Commerce
and a Board member of the Community Foundation serving Tyne & Wear and
Northumberland.
Adam Bennett
|
Non-Executive Director
Adam joined the Board in April 2019. He is the Senior Independent Director and a member of the
Society’s Group Risk Committee, the Audit Committee and the Group Technology Governance
Committee, upholding the Society’s commitments to financial control, integrity and regulation.
During his professional career, he has advised building societies across a range of issues. He brings
formidable legal insight and experience of different business models and structures, important given
the Group structure, which includes two key subsidiaries, Newcastle Strategic Solutions Limited and
Newcastle Financial Advisers Limited.
Adam has advised on rules of building societies, on corporate governance, including compliance with
the UK Corporate Governance Code, and on the powers and statutory and fiduciary duties o
f Directors,
all of which contribute to ensuring the Society deals with its Members, colleagues and stakeholders in a
responsible, trustworthy and ethical manner.
Bryce Glover
|
Non-Executive Director
Bryce joined the Board in 2017. He is a highly experienced Director who has operated at Executive
Committee and Board level in a number of leading UK
financial services businesses.
Adding a genuine breadth of commercial and retail banking expertise, Bryce helps to shape the Group’s overall
strategy. His extensive industry knowledge and business acumen assist the development of the Group.
The majority of Bryce’s career has focused on corporate and commercial banking. He was Managing
Director of Commercial Banking at Alliance & Leicester/Santander, before joining Nationwide Building
Society in 2009 as a Director heading its Commercial Division, where he managed a £22bn commercial
lending portfolio and the Society’s business savings accounts before heading Corporate Affairs. He has a
deep understanding of the mutual sector, having spent nine years working for the UK’s largest building
society, the last three as Corporate Affairs Director.
Bryce is also Chair of the Society’s Group Risk Committee and a member of the Remuneration Committee.
Bryce recently co-founded a new UK SME bank which received its full banking licence in 2021.
Michele Faull
|
Non-Executive Director
Michele joined the Board in August 2021.
With 15 years working at the most senior levels in finance and risk at two o
f the largest mutuals, her time
as Chief Financial Officer and Group Risk Director positions her well to deliver signi
ficant building society
knowledge and a wealth of valuable experience to the Society.
She spent nine years as Trustee and Treasurer of the Bow Arts Trust and now serves on the Coventry
Cathedral Finance Committee and is Interim Chair and Trustee at The Line Art Walk.
Her wide-ranging career has also incorporated roles with global insurer Aviva; accountants PwC where
she was a Partner; and IT services provider, ICL.
Michele is a Non-Executive Director and Chair of the Audit Committee at IQUW Syndicate Management
Limited. She is also a member of both the Society’s Audit Committee and Group Risk Committee.
“I’m hugely passionate about the role of mutuals, focused on
delivering a balance of meaningful Member value and
profitability, enabling long-term positive impact in our
communities.”
“Fulfilling roles as Trustee for The Foundation of Light
(Sunderland AFC), and giving time to Durham Cathedral and
Sunderland University, I’m passionate about equity, diversity and
inclusion and how we can embed this in the Society’s strategy.”
“Having specialised in advising building societies at a law firm for 36 years, I have
a deep knowledge of the mutual sector and my understanding of its associated
corporate governance and regulatory requirements contributes to the Board’s
diverse spectrum of expertise”.
“My finance background and business experience coupled with a passion for
giving back and helping others achieve fits well with the Society’s focus on a
sustainable business model which is powered by Purpose”.
“My strong credit and risk management background is particularly valuable to
informing decisions made in my role as Chair of the Society’s Group Risk
Committee.”
Page 44
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Our Directors
|
Continued
Anne Shiels
|
Non-Executive Director
Anne joined the Board in 2017. Her extensive UK and international Board-level experience working with
both FTSE™ 100 and independently owned companies, in both regulated and non-regulated businesses,
reinforces the Board’s broad range of skills and competencies.
Her experience spans sectors including financial services, retail, telecommunications, manu
facturing and
consumer. Anne’s breadth of knowledge, skills and qualities combine strategic leadership and deep
people, culture and organisational transformation expertise with a solid understanding of governance,
control and risk.
She has held executive roles at Hallmark Cards, Lloyds Banking Group/HBOS, Safeway and Thus Plc, and is
a trusted executive coach and adviser to Boards and Directors in diverse businesses in the UK and the US.
She also chairs the Remuneration Committee and is a member of both the Society’s Audit Committee
and the Nominations Committee. She is also a Director of Newcastle Financial Advisers Limited.
Stuart Lynn
|
Non-Executive Director
Stuart joined the Group Board in April 2020, having initially joined the Society as a Non-Executive
Director of the Newcastle Strategic Solutions business in 2018.
As a prominent technology business leader Stuart has a wealth of experience drawn from an extensive
career in the technology sector, not least with software giant Sage, where he held a number of senior
leadership roles, including Executive Vice President and Chief Technology and Information Officer. He is
an advocate of utilising technology that can support the provision and delivery of excellent service that
is unequivocally human and personal, which is a key component of the Group’s strategy.
As an active member of the North East’s thriving digital and tech community, Stuart has previously been
Chair of the North East LEP’s Digital for Growth steering group; Sunderland University’s Technology
Faculty Industrial Advisory Board; Vice Chair of Dynamo North East; Board member of the Sphere
Thought Leadership network, and mentor to a number of North East business start-ups. As well as
serving on the Society and Newcastle Strategic Solutions' boards, Stuart is Chair of the Society’s
Technology Governance Committee.
Stuart Miller
|
Chief Customer Officer
Stuart became Chief Customer Officer in 2017 and has been a member of the Society’s Board since 2018.
He’s a Director of Newcastle Financial Advisers Limited and sits on the Board of the national High Streets
Task Force. The Society’s commitment to face-to-face
financial services and its track-record in innovation
align well with the Task Force’s programme of work in determining and addressing issues at a national level.
As an Associate of the Chartered Institute of Bankers, Stuart also holds the Customer Experience
Professionals Association quali
fication
for senior business leaders. Stuart has over three decades’ experience
working in the financial services sector, including Virgin Money, where he was responsible
for running
branches, lounges and the ATM network; RBS International, where he was Head of Mortgages and Head of
Customer Experience; and NatWest, where he ran large teams across branches and private banking.
Stuart is responsible for all customer-facing areas and the commercial performance of the Member
business including branches, mortgage operations, mortgage advice, product development, marketing,
group communications and financial advice.
David Samper
|
Chief Financial Officer
David became a member of the Board in 2018, when he joined the Society as Chief Financial Officer. An
accomplished strategic leader with over 20 years’ experience as a Chartered Accountant, David has
in-depth knowledge of the issues impacting the long-term commercial sustainability of the Society’s
business model, balance sheet and profitability.
With exceptional understanding of the
financial services sector, David has valuable experience in
managing financial per
formance across both large and medium sized
financial organisations in the UK
and abroad. David’s career has also encompassed multiple system migrations, which complements the
knowledge and expertise of the growing Solutions business.
David has held senior roles across a number of organisations, including RBS, Ulster Bank, and Sainsbury’s
Bank. He has led complex acquisitions and driven transformational change, whilst consistently delivering
core commercial outperformance.
David’s previous experience with broader capital markets and shaping organisational strategy in an ever-
changing economic and competitive environment is key to ensuring the success of our ambitious Group.
Mick Thompson
|
Deputy Chair and Non-Executive Director
Mick joined the Board in January 2019, and brings significant accountancy experience with a deep
knowledge of audit to support the Society’s governance and audit function. His diverse skillset and broad
range of perspectives derive from vast sector experience that has seen him work in industries including
housebuilding, social housing, education, engineering, charities, and financial services.
Mick spent 21 years as a Partner and nine years as Office Senior Partner at KPMG Newcastle. He is a
Non-Executive Director of The Clinkard Group Limited, Atlas Cloud Limited and NorthStandard Limited
(formerly known as North of England Protecting & Indemnity Association).
Recognising the importance of charitable action and giving back to causes throughout the region, Mick is
also a Trustee of Greggs Foundation Charity; Trustee of NUFC Foundation Charity; Trustee of Tyne and
Wear Building Preservation Trust, and Regional Treasurer of The Lord’s Taverners Charity.
He chairs the Society’s Audit Committee, as well as being a member of both the Nominations Committee
and Remuneration Committee. He also chairs the Newcastle Building Society Pension & Assurance
Scheme Board.
“My deep understanding and experience of the potential for digital
transformation within businesses to deliver better customer experiences and
commercial growth helps to guide digital transformation across the Society and
Newcastle Strategic Solutions.”
“My track record of leading large people functions and experience in facilitating
transformative organisational change brings a broader view for the Board on these
matters as the Society develops its people strategies, including our approach to
culture, talent, succession and reward.”
“I’m acutely aware of the benefits of a physical high street presence and the role
that face-to-face financial services plays in delivering long- term relationships
with our customers and a wider transformative impact on our communities.”
“My wide-ranging Board portfolio, particularly in the charity sector, is well aligned
to the Society’s community focus and contributes to a better understanding of the
issues affecting this sector.”
“I try to bring a series of different perspectives to my team and the Board, gained
from experience across the UK and internationally. I’m particularly interested in
how technology can enable business change, which complements the
knowledge and expertise of the growing Solutions business.”
A full list of all Directors as at 31st December is included in the Annual Business Statement on page 159.
Karen Ingham remains a Director until the Annual General Meeting, to be held on 27th April 2023, where she will step down at the conclusion of the meeting.
Page 46
Page 47
Newcastle Building Society have
agreed to support the team. The
money will be used to help us develop
skills, help us pay for a place to play,
uniforms, transportation to away
games and also to give displays and
talks about disabilities in sport.
Photo:
John, North East Warriors and Newcastle Building Society customer
Objectives and activities
It is the intention of the Directors that the Society will continue to
remain an independent regional building society. The Society’s
Purpose and strategy are set out in the Strategic Report.
Business review and future developments
The Chief Executive’s Review and Strategic Report set out the
business activities and business performance in the year against
our strategic objectives, as well as likely future developments.
The Strategic Report also outlines the Group’s key performance
indicators (KPIs), which include customer, colleague and financial
KPIs, details of the Group’s customer focus, colleague agenda,
financial analysis, mortgage credit quality,
funding and capital
position.
The Annual Business Statement and the Credit Risk Notes, 30
to 43, contain respectively the ratios and arrears disclosures
required by the Building Societies Act 1986.
Going Concern and Long Term Viability Assessment
Financial planning, risk and stress testing
The Group’s financial planning includes a detailed budget
for the
next financial year and an assumptive
forecast for a number of
financial years therea
fter, which consider a range of outcomes
relative to internal and external conditions. Achievement of long-
term plans and goals is not guaranteed, given the uncertainty in
predicting macro-economic factors long into the future, which
may materially impact the Group’s performance and could also
lead to changes in the Group’s business strategy.
The Strategic Report includes a description of the Group’s
business activities and any factors likely to affect its future
development, as well as details of the Society’s
financial
performance and position, including liquidity and capital
structure. The Group’s Principal Risks, including the strategy for
managing these, are detailed in the Risk Management Report.
Further details with respect to interest rate risk, liquidity risk and
capital risk are provided in the notes to the Accounts (see Notes
30 to 43).
The Group performs detailed capital and liquidity stress testing at
least once per year in the Internal Capital Adequacy Assessment
(ICAAP) and the Internal Liquidity Adequacy Assessment (ILAAP)
in line with regulatory requirements.
The ICAAP stress test ensures that the Group’s forecast for
both capital requirements and capital generation is resilient to
‘severe but plausible’ stresses to the Group’s external or internal
environment, beyond the levels forecast in the most negative
scenarios considered in the Group’s longer-term plan.
The stress test demonstrates that the Group’s capital buffers are
sufficient to absorb the level of capital erosion considered in the
stress scenario, continuing to meet minimum regulatory capital
requirements.
The ILAAP stress test ensures that the Group holds adequate
liquid assets to meet both its business-as-usual liquidity needs
and increased liquidity requirements that could occur as a result
of entering a period of stress. The Group is forecast to hold a
sufficient quantity and quality of liquid assets over the following
three year period to be able to meet its liabilities as they fall due,
even in the event of a severe but plausible stress scenario.
The Group also maintains a detailed recovery plan, which
describes actions management can take in case of a severe
stress, including in a liquidity or capital stress. The recovery plan is
updated and tested regularly to ensure it remains up to date and
can be implemented without delay should the need arise.
Assessment of the appropriateness of preparing the Annual
Accounts on a going concern basis
The Directors are required to satisfy themselves that it is
appropriate to adopt the Going Concern basis of accounting
when preparing the financial statements in accordance with IAS
1 Presentation of Financial Statements and guidance from the
Financial Reporting Council.
The Directors’ Going Concern review considered the Group’s and
Society’s forecasts, including different possible scenarios based
on possible internal and external developments and arising risks.
Together with regular stress testing, the forecasts show that the
Society will be able to maintain adequate levels of both liquidity
and capital for at least the next 12 months while meeting all
relevant regulatory requirements.
After making enquiries, the Directors are therefore satis
fied that
the Society has adequate resources to continue in business for at
least the next 12 months and therefore it is appropriate to adopt
the Going Concern basis of accounting in preparing these
financial
statements. The Directors have concluded that there are no material
uncertainties that may cast significant doubt upon the Society’s
ability to continue to apply the Going Concern basis of accounting.
Assessment of the Group’s long-term viability
The Directors have assessed the viability of the Group and the
Society over the three years to December 2025. The assessment
took account of the Group’s principal and emerging risks and
relevant management actions and controls, including the Board’s
risk appetite and performance against risk limits. It considered
the Group’s financial
forecasts, including pro
fitability, capital and
liquidity positions. It also considered the most recent ICAAP and
ILAAP stress tests, complemented by stress tests and forecasts
performed as at December 2022, to ensure the viability of the
Society even in times of severe stress. The most signi
ficant
stress scenario which was considered included an increase in
unemployment to 8% and house price falls of 21% over the period
2023 to 2025 alongside a significant operational risk event.
Based on this assessment, the Directors have a reasonable
expectation that the Society will continue in operation and meet
its liabilities as they fall due over the period to December 2025.
The Directors consider three years the most appropriate period
for the viability assessment, as it is within the period covered
by the financial
forecasts and the stress testing undertaken by
the Society, but does not extend too far into the future, where
forecasts become increasingly more uncertain.
Risk management, principal risks and uncertainties
The Risk Management Report sets out the Principal Risks and
uncertainties faced by the Group together with the Risk
Management Framework and risk governance structure. The Risk
Management Report also details how the Group mitigates the
specific key risks to which it is exposed, which are capital risk,
climate change risk, conduct risk, credit risk (commercial,
investment and residential), liquidity risk, market risk (interest rate,
macro-economic) and pension fund obligation risk. In addition,
the Credit Risk Notes, 30 to 43, set out the metrics associated
with the key risks including sensitivity analysis and exposure level.
Mortgage arrears
As at 31 December 2022 there were 32 cases (2021: 25) where
payments were 12 months or more in arrears. The capital balances
of these loans was £4.0m (2021: £3.0m). The total amount of
arrears on these loans was £0.4m (2021: £0.8m).
Political and charitable gifts
The Society is pleased to be able to give back to its heartland
communities, through charitable donations, colleague fundraising
and volunteering, donating a total of £323,602 in 2022 (2021:
£279,602).
The organisations’ that the Society supported and the
corresponding donations made in 2022 were: £173,602 to
the Newcastle Building Society Community Fund; £50,000
to Newcastle United Foundation to support their NU Futures
employability programme; £25,000 to Walking With The Wounded
and £25,000 to the Disasters Emergency Committee appeal
following the outbreak of con
flict in Ukraine. In 2022, £50,000
was donated to each of the Sir Bobby Robson Foundation and the
Prince’s Trust to support activity to be delivered in 2023.
In 2022 the Society’s colleagues maintained a real commitment
to local communities. A variety of fundraising activities secured
a colleague and customer fundraising contribution of £85,982 in
aid of the Newcastle Building Society Community Fund and other
charities including Marie Curie, Alzheimer’s Society, Cash for Kids
and CHUF (the Children’s Heart Unit Fund).
Colleagues also continued to volunteer in the community,
supporting good causes and people across the region. In 2022,
through a range of volunteering commitments, colleagues
delivered more than 900 days of support to local communities.
The Group has not made any political donations during 2022
(2021: nil).
Supplier payment policy
The Group follows an internal policy that payment to suppliers
will be made within 30 days from receipt of an invoice and
endeavours to meet individual supplier payment terms which
may be set at shorter timescales. At 31 December 2022, the
number of creditor days was 28 (2021: 27 days).
Directors
As at 31 December 2022, the members of the Board, who
have served at any time during the year and continue to act as
Directors, are as follows:
James Ramsbotham, Adam Bennett, Michele Faull, Bryce Glover,
Andrew Haigh*, Karen Ingham, Anne Laverack (business name:
Anne Shiels), Stuart Lynn, Stuart Miller*, David Samper*, Mick
Thompson. Ian Ward retired from the Board on 27 April 2022.
At the Annual General Meeting (AGM), to be held on 26 April
2023, all of the current Directors will offer themselves up for either
election or re-election, with the exception of Karen Ingham who
will step down at the conclusion of the meeting.
Directors and Officers insurance has been put in place by the
Society.
*Executive Directors are Members of the Society.
Please see the Remuneration Committee Report for further
information.
Independent auditors
A resolution to re-appoint Deloitte LLP will be proposed at the
Annual General Meeting.
Statement of disclosure to auditors
So far as each Director is aware, there is no relevant audit
information of which the Society’s auditors are unaware. Each
of the Directors, whose names and functions are listed in the
Our Directors section have taken all steps that they ought to
have taken as a Director in order to make themselves aware of
any relevant audit information and to establish that the Society’s
auditors are aware of that information.
Post balance sheet events
On 21st February, the Boards of the Society and Manchester
Building Society agreed heads of terms to merge by way of a
transfer of Manchester Building Society’s engagements into the
Society. The Boards believes it is in Members’ best interests to
complete the merger as members will benefit
from an enlarged
and expanding Building Society. The transaction is still subject
to resolutions by the Boards of both building societies as well as
regulatory approval. As such, the financial impact o
f the transfer
of engagements on the Society’s
financial position is uncertain
and has not been included in these financial statements.
Corporate governance
The Society’s statement on corporate governance can be found
in the Report of the Directors on Corporate Governance.
Page 48
Page 49
Directors’ Report
The Directors present their Annual Report and Accounts and Annual
Business Statement for the year ended 31 December 2022, which
they consider to be fair, balanced and understandable, providing
Members with the information necessary to assess the Group’s
position and performance, business model and strategy.
Introduction
Corporate governance is the system of rules and practices by
which the Society is directed and controlled. In discharging its
responsibilities, to be accountable to the Society’s Members for
the operation of the Society, the Board regards good corporate
governance as extremely important. The UK Corporate Governance
Code (the Code), issued by the Financial Reporting Council (FRC) in
July 2018, is addressed to companies with a premium listing, however
the Society’s Board considers it to be best practice and in the best
interests of all our stakeholders to have regard to the Code when
establishing and reviewing corporate governance arrangements.
The Code contains a set of Principles that emphasise the value of
good corporate governance to long-term sustainable success. The
Code also has at its heart the culture and Purpose of an organisation:
putting the relationship between organisations and their stakeholders
at the heart of a set of principles designed to promote long-term
sustainable growth in the UK economy. The Code includes the
responsibility for a board to have appropriate workforce policies and
practices, which re-inforce a healthy culture. To help achieve this,
the Society has a now well established “Colleague Forum”, chaired
by a member of the Executive team. This formally recognised group
consists of colleagues who represent areas across the entire Group
and who support leaders in the delivery of key organisational and
people matters that are focused on creating a great colleague
experience. The Code asks boards to create a culture which aligns
corporate values with strategy and to assess how they preserve value
over the long term. As a Purpose-led Society, we continue to comply
with this last point by expecting that colleagues embrace the Society’s
Purpose, values and behaviours. In addition, a third party agency is
used to organise surveys and capture comments made by colleague,
in confidence, which are then acted upon by senior management.
It has also been agreed that culture will be formally reviewed by
the Board at regular intervals with the aim of preserving long-term
sustainable success.
Corporate governance procedures and processes within the Society
are regularly reviewed to ensure they are aligned appropriately with
the Code, including when updates or revised guidance are published.
This report outlines the approach taken by the Society and how the
Board considers it has demonstrated application of the principles of
the 2018 Code.
The Board
The Society recognises that it must be headed by an effective Board
which is responsible for the long-term success of the Society. The
composition of the Board is detailed in the Our Directors section of the
Annual Report and Accounts. In carrying out its role, the Board aims
to achieve its strategic goals for the bene
fit o
f the Society’s Members.
The Board has responsibilities for setting the values of the Group and
believes that the interests of all stakeholders can be best served by
remaining a strong and forward looking mutual building society.
There is a clear division of responsibilities between the running of the
Board and the Executive responsibility for the running of the Society’s
business. No one individual has unfettered powers of decision and the
roles of Chair and Chief Executive are exercised by different people
within the Society. The Nominations Committee (NomCo) carries out
a review of the independence of Non-Executive Directors as set out
within the Nominations Committee section of this report.
An effective Board should not necessarily be a comfortable place;
constructive challenge, as well as teamwork, being essential features.
Open, honest and transparent debate by Non-Executive Directors is
something which is encouraged by the Chair and, where appropriate,
training is provided to support the challenge process. A culture of
openness and accountability exists within the Society at every level and
Non-Executive Directors regularly meet with members of the Executive
team throughout the year to ensure a good understanding of the
business and to promote strong relationships amongst the Board.
James Ramsbotham is Chair of the Society , Mick Thompson is the
Deputy Chair and Adam Bennett is the Senior Independent Director.
The positions of Deputy Chair and Senior Independent Director
provide a sounding board for the Chair and where necessary they
serve as intermediaries for the other Directors.
Board balance and independence is important to ensure an unfettered
ability to fairly and objectively direct the affairs of the Society and the
Board should include an appropriate combination of Executive and
Non-Executive Directors (and in particular independent Non-Executive
Directors) such that no individual or small group of individuals can
dominate the Board’s decision making. The composition of the Board,
through NomCo, reflects an appropriate balance o
f skills and comprises
of eight Non-Executive Directors and three Executive Directors.
Details of the various Board Committees in existence are set out later
in this report.
Matters reserved to Board
The Board’s Terms of Reference are reviewed on a regular basis and
were last agreed by the Board in November 2021 (the next review of the
Terms of Reference has been deferred until early 2023 to incorporate the
outcomes of the Board Effectiveness Review).
A schedule is maintained of matters reserved to the Board which
includes the following:
-
Strategy and Management –
determining the overall strategy
of the Group including approval of the Strategic Plan, with the
responsibility for its implementation delegated to the Executive
team; monitoring operational and financial per
formance in
pursuit of the strategy; overseeing and approving the Society’s
recovery plans, playbook, and resolution pack on an annual basis;
monitoring the indicators and overseeing any proposed actions
in accordance with the playbook; approving budgets, forecasts
and major capital expenditure or major disposal; approving
any extension of the Society’s activities into new business or
geographical areas; and approving any decision to cease all, or a
material part, of the Society’s business.
-
Culture –
overseeing and setting the tone for the culture, values
and behaviours of the Group; and overseeing and setting the tone
for diversity and inclusion within the Group.
-
Structure, Capital and Liquidity –
approval of the Society’s
Internal Liquidity Adequacy Assessment Process (ILAAP); approval
of the Society’s Internal Capital Adequacy Assessment Process
(ICAAP); approval of changes to the Group’s corporate structure;
approval of any programme for the issuance or buy back of long-
term debt or capital; and approval of any utilisation of Bank of
England emergency liquidity support.
Report of the Directors on
Corporate Governance
Page 50
Page 51
The following statement, which should be read in conjunction with
the Statement of Auditors’ Responsibilities, is made by the Directors
to explain their responsibilities in relation to the preparation of
the Annual Report and Accounts, Annual Business Statement and
Directors’ Report.
The Directors are responsible for preparing the Annual Report and
Accounts in accordance with applicable law and regulation. The
Building Societies Act 1986 (the Act) requires the Directors to prepare
Accounts for each
financial year.
Under that law, the Directors have prepared the Group and Society
Accounts in accordance with International Financial Reporting
Standards (IFRSs). Under the Act, Directors must not approve the
Accounts unless they are satisfied that they give a true and
fair view
of the state of affairs of the Group and Society and of the pro
fit or loss
of the Group and Society for that period. In preparing the Accounts,
the Directors are required to:
-
select suitable accounting policies and then apply them
consistently;
-
state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
Accounts;
-
make judgements and accounting estimates that are reasonable
and prudent; and
-
prepare the Accounts on the Going Concern basis unless it is
inappropriate to presume that the Group and Society will continue
in business.
The Directors consider that the Annual Report and Accounts are
fair, balanced and understandable, when taken as a whole, and that
they provide the information necessary for Members to assess the
Society’s and Group’s performance, business model and strategy. In
addition to the Annual Accounts, the Act requires the Directors to
prepare an Annual Business Statement and a Directors’ Report for
each financial year. Each contains prescribed in
formation relating to
our business and subsidiary undertakings.
The Directors are also responsible for safeguarding the assets of the
Group and Society and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group’s and
Society’s transactions and disclose with reasonable accuracy at any
time the financial position o
f the Group and Society and enable them
to ensure that the Accounts comply with the Act, as regards the
Group Financial Statements.
The Disclosure and Transparency (the DTR) rules of the Financial
Conduct Authority (the DTR) require the Annual Report and
Accounts to include:
-
the audited Accounts for the Society and Group;
-
a strategic and risk report that includes a fair review of the business
and a description of the Principal Risks and uncertainties; and
-
responsibility statements (see below).
The Directors are responsible for the maintenance and integrity of
the corporate and financial in
formation included on the Society’s
website. Legislation in the United Kingdom governing the preparation
and dissemination of accounts may differ from legislation in other
jurisdictions.
Each of the Directors, whose names and functions are listed in the
Directors' Report, confirm that, to the best o
f their knowledge:
-
the Group and Society Accounts, which have been prepared in
accordance with IFRSs, give a true and fair view of the assets,
liabilities, financial position and profit o
f the Group and pro
fit o
f the
Society; and
-
the Strategic Report 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 it faces.
In the case of each Director in office at the date the Directors’
Report is approved:
-
so far as each Director is aware, there is no relevant audit
information of which the Group’s and Society’s External Auditors
are unaware;
-
they have taken all the steps that they ought to have taken as a
Director in order to make themselves aware of any relevant audit
information and to establish that the Group’s and Society’s External
Auditors are aware of that information; and
-
the Annual Report and Financial Statements, taken as a whole, are
fair, balanced and understandable and provide the information
necessary for Members to assess the Society’s position,
performance, business model and strategy.
This responsibility statement was approved by the Board of Directors
on 2 March 2023 and is signed on its behalf by:
On behalf of the Board
James Ramsbotham
Chair
2 March 2023
Statement of Directors’ Responsibilities
-
Financial Reporting and Internal Controls –
approval of stock
exchange announcements, half year and annual results; approval
of the Annual Report and Accounts including the Strategic Report,
Risk Management Report, Report of the Directors on Corporate
Governance, and the Remuneration Committee Report; approval
of the Pillar 3 disclosures; rati
fication o
f the Going Concern
and business viability review following review and approval by
the Audit Committee; approval of any signi
ficant changes in
accounting policies or practice based on the recommendations of
the Audit Committee; and ensuring an adequate internal control
environment is in existence. The Board delegates oversight of
internal controls to the Audit Committee.
-
Risk Management and Regulatory –
ensuring an adequate
Risk Management Framework is in place. This includes approval
of risk appetite, oversight of risk governance, reviewing the top
risks, ensuring the strategy and risk appetite are consistent,
and approving the ICAAP. The Board delegates oversight of risk
management to the Group Risk Committee, as well as oversight of
compliance with regulations (including by the Prudential Regulation
Authority and the Financial Conduct Authority).
-
Senior Managers and Certification Regime –
ensuring that the
Society meets its obligations under the Senior Managers Regime
(SMCR), including: reviewing at least annually the SMCR Policy; and
maintaining a responsibilities map for all prescribed responsibilities
and ensuring all prescribed responsibilities have been allocated.
-
Operational Resilience –
the Board retains oversight and approval
of the Operational Resilience strategy and matters prescribed in
regulatory requirements.
-
Board Membership and Senior Management Issues –
approval
of changes to the structure, size and composition of the Board,
following recommendations from NomCo; ensuring that adequate
succession planning for the Board and senior management
is in place following recommendations from the Nominations
Committee; and approving and overseeing appointments to the
Boards of subsidiary companies..
-
Appointment and/or re-appointment or removal of the
external auditor –
to be put to Members for approval, following a
recommendation from the Audit Committee.
-
Remuneration –
agreeing the Remuneration Policy for the
Directors and other senior executives, following recommendations
from the Remuneration Committee.
-
Delegation of Authority –
approval of the responsibilities of the
Chair, the Chief Executive and the Senior Independent Director;
approval of the delegation of authorities to the Chief Executive;
ratifying the terms of reference for Board Committees and
subsidiary companies; and receiving minutes and/or reports from
the Chairs of the Board Committees and subsidiary companies.
-
Corporate Governance Matters –
to ensure that a formal
evaluation of the effectiveness of the Board is undertaken and to
facilitate an assessment by external consultants at an opportune
time; determining the independence of Directors; reviewing the
Group’s overall corporate governance arrangements; agreeing the
Directors’ Conflicts o
f Interest Policy and other relevant policies;
approval of the Notice of any General Meeting of the Society
including all resolutions to be put forward to Members; and
insurance: approval of overall levels of insurance for the Group,
including Directors & Officers liability insurance.
-
The Society’s Defined Benefit Pension Scheme –
the consent of
the Board is required to amend the Pension Scheme’s Trust Deed
and Rules; and the Board approves of the appointment/removal of
Society nominated Trustees.
The Board’s Terms of Reference are included on the Society’s website
(https://www.newcastle.co.uk/who-we-are/our-governance/our-
committees).
Board changes and elections/re-elections
It is recognised that changes need to be made to the Board from
time to time.
In 2022, Ian Ward resigned as a Non-Executive Director
on 27th April 2022 at the 2022 AGM and Adam Bennett (already a
Non-Executive Director) replaced Ian Ward as Senior Independent
Director.
Copies of the Terms of Engagement for all of the Society’s Directors
are available on request, and at the Annual General Meeting (AGM).
All of the Society’s Directors are standing for either election or re-election
at the AGM, with the exception of Karen Ingham who will be retiring at
the end of the meeting.
The biographies of all of the Directors are detailed in the Our Directors
section.
Management Information
The Chair is responsible for ensuring that the Directors receive accurate,
timely and clear information. Board members receive meeting packs on
a regular basis, bar August or December. Management Information is
provided to Directors throughout the year. A rolling Board agenda is
tabled at each Board meeting to ensure that all key areas are covered
appropriately during the year and sufficient time is set aside at each
meeting to ensure that constructive discussion and challenge can take
place.
All Directors have access to independent professional advice, if
required, and also access to the services of the Group Secretary.
Board effectiveness
Under the UK Corporate Governance Code there shall be a formal
and rigorous annual evaluation of the performance of the Board, its
committees, the Chair and individual directors and shall be externally
facilitated every 3 years. An external review of the effectiveness of the
Board was carried out in 2022 by BVALCO Limited.
The external evaluator conducted one-to-one interviews with all Board
members, the Group Secretary and any other relevant key stakeholder,
as well as attending main Board meetings to observe proceedings and
behaviours.
The key findings were presented to the Board in October 2022 with
outcomes of the report assisting the Board to build further on its
current effectiveness and will form the basis for an action plan for 2023.
Board committees
The Board has a number of Committees, all of which have their own
Terms of Reference, which are reviewed on an annual basis and further
details are provided below. The Chair of each Committee reports to
the Board at a subsequent meeting on matters discussed at each
Committee meeting.
Similar to the Board, each Committee carries out a review of its own
effectiveness and where improvement opportunities have been
identified the individual Committees are responsible
for tracking
action points. These reviews are carried out on an annual basis and
concluded satisfactorily in 2022.
Information concerning attendances at the meetings is detailed in the
Board and Board Committee Membership Attendance Record section
of this report. Terms of Reference for the Audit Committee, Group Risk
Committee, Remuneration Committee and Nominations Committee
are included on the Society’s website (https://www.newcastle.co.uk/
who-we-are/our-governance/our-committees).
Audit Committee
Details of the Audit Committee are contained in the Audit Committee
Report. Through the work of the Audit Committee and the Internal
Audit Services department during 2022, the Directors have carried out
a review of the Group’s risk management and internal control systems,
covering all material controls, including financial, operational and
compliance controls.
Group Risk Committee
Details of the Group Risk Committee are contained in the Risk
Management Report.
Remuneration Committee
Details of the Remuneration Committee are contained in the
Remuneration Committee Report.
Non-Executive Director Remuneration Committee
In January 2022, the Board established another Committee of the
Board to be known as the Non-Executive Director Remuneration
Committee (“NED RemCo”). NED RemCo reports to the Board and
its overarching purpose is to consider, agree and recommend to the
Board an overall remuneration approach for Non-Executive Directors
together with recommendations for individual fees. The Committee is
chaired by the Society Chair.
Group Technology Governance Committee
Group Technology Governance Committee was established at the
end of 2020, its authority being to govern the strategic direction of
the Group’s technology capabilities and to advise the Group Board
with regard to progress against the agreed strategy. The Committee is
chaired by a Non-Executive Director.
Nominations Committee (NomCo)
The Society has a separate NomCo comprising only of Non-Executive
Directors and which operates within the Terms of Reference agreed by
the Board.
The main objectives of NomCo are summarised as follows:-
- to oversee the size and structure of the Board, Board Committees
and subsidiary company Boards;
-
to identify suitable candidates to
fill Board vacancies;
-
to regularly review that the Board and its sub-committees has the
appropriate balance of skills, diversity (including gender balance)
and experience;
-
to oversee the Board’s succession plan; and
-
to oversee corporate governance.
All key decisions of NomCo, for example, Board appointments, must
also be ratified by the
full Board.
Members of NomCo are James Ramsbotham (Committee Chair), Anne
Shiels and Mick Thompson. NomCo operates to a rolling agenda to
ensure it discharges its full responsibilities and in 2022 it met on four
occasions.
NomCo is supported by the Chief Executive and the Chief People
Officer who attend meetings in an advisory capacity only.
Appointments to the Board
NomCo follows a stringent recruitment process when making
appointments to the Board. This process is tailored to meet the
requirements of each particular vacancy and the method of attracting
candidates is adapted depending on the nature of the skills required
for the vacancy. Board appointments must be rati
fied by the
full Board
following the NomCo recruitment process. External consultants and
advisers are normally utilised to ensure there is a robust list of suitable
candidates with which to fill a vacancy.
When a new Director is appointed, the Financial Conduct Authority
and Prudential Regulation Authority have the right, for certain key
roles, to carry out formal Signi
ficant Influence Function (SIF) interviews
in order that the Director becomes an Approved Person.
All Directors have been issued with Service Agreements, Role
Descriptions and Terms of Engagement (for Non-Executive Directors)
to ensure that they all fully understand and comply with their roles and
the responsibilities of being a Director of the Society.
Diversity of the Board
The Board recognises and embraces the benefits o
f having a diverse
Board which utilises a range of factors including skills, industry
experience, background, race, gender and the other characteristics,
experience and qualities of its Directors. Giving speci
fic regard to
gender ratios, in 2022 there were three female Directors on the Board,
namely Michele Faull, Karen Ingham and Anne Shiels.
It is important to note that all Board appointments are made on the
basis of individual competence, skills and expertise measured against
identified objective criteria. Appointment is there
fore based on merit.
Page 52
Page 53
Report of the Directors on
Corporate Governance
|
Continued
Election or re-election to the Board
All Directors are required to seek election or re-election at the
forthcoming Annual General Meeting (AGM), to be held on 26 April
2023, with the exception of Karen Ingham who, as mentioned
beforehand, will be retiring at the end of the meeting.
Non-Executive Directors are usually expected to serve more than one
three year term, subject to satisfactory performance evaluations and
re-election by Members. Only in exceptional circumstances would
Non-Executive Directors be able to seek re-election when they have
served nine years on the Board. NomCo has in place a risk-based
succession plan which is reviewed on a regular basis.
Independence of Directors
The Terms of Engagement for Non-Executive Directors require that
they declare to the Society any other external interests.
NomCo carries out an annual review of the independence of Non-
Executive Directors against the circumstances set out in the Code.
The last review of the independence of Non-Executive Directors was
carried out by NomCo in February 2023, where it was confirmed they
considered them to be independent; this was subsequently agreed by
the Board.
One of the Non-Executive Directors, Bryce Glover, is a Director of
Recognise Bank Limited and he has advised the Board of the existence
of the relationship under the policy for dealing with con
flicts o
f interest
and procedures exist within the Society to manage the position.
The Society recognises that it is good corporate governance to have
a Senior Independent Director, a role currently carried out by Adam
Bennett, acting as a sounding board for the Chair and an intermediary
for the other Directors and Members.
During 2022 the current Chair, James Ramsbotham, met separately
with the Non-Executive Directors throughout the year, without the
Executive Directors present.
Assessment of Directors
All Directors are subject to a formal appraisal of their performance
on an annual basis. The Chair conducted the appraisals of the Chief
Executive and Non-Executive Directors, the Senior Independent
Director conducted the appraisal of the Chair and the Chief Executive
conducted the appraisals of the Executive Directors.
Skills and continuous development
All Directors are required, as part of their terms of engagement, to
follow a process of continuous development to ensure their skills
and experience meet the needs of the Society and the regulatory
environment in which it operates. The training and development plans
of Non-Executive Directors are reviewed at least annually during their
performance appraisal.
NomCo oversees the ongoing training and development of Non-
Executive Directors including a formal induction programme for newly
appointed Directors. The Chief Executive oversees the programme for
Executive Directors.
In order to ensure that NomCo discharges its duties in this area
effectively, a Board skills matrix and a training menu for Non-Executive
Directors are in place.
Newcastle Strategic Solutions Limited (NSSL)
NSSL Board members are:
James Ramsbotham (Chair), Karen Ingham (Non-Executive Director),
Stuart Lynn (Non-Executive Director), Phil Grand (Managing Director
NSSL) and Andrew Ward (Finance Director NSSL).
The main responsibilities of NSSL, as delegated by the Society’s
main Board, are as follows:-
-
to oversee the strategic direction of NSSL ensuring this is
consistent with the Society’s agreed Strategic Plan;
-
to evaluate and monitor the financial and operational per
formance
of NSSL against pre-determined objectives, which includes
assessing performance in terms of contract contribution,
profitability, efficiencies, risk, compliance and development o
f the
savings management proposition;
-
to ensure that appropriate mechanisms are in place to inform the
Society’s Board about the performance of NSSL and any key issues
identified;
-
to ensure that NSSL complies with all relevant legislation, including
the General Data Protection Regulation and associated data
protection legislation and the appropriate regulations relating to
NSSL activities;
- to establish and review a risk appetite statement for NSSL, and
to review, at least annually, the position of NSSL against that risk
appetite statement;
-
to ensure that an annual review of service resilience is conducted
and that there is ongoing development to enhance resilience;
-
to approve the NSSL budget on an annual basis (prior to inclusion
in the Group budget which is approved by the Society’s Board);
- to approve the NSSL statutory accounts;
- to consider and act upon the findings o
f any external/internal
audits or reviews;
- to ensure that information assets are protected sufficiently that
their confidentiality, integrity and availability are maintained in
line with the ISO27001 standard along with company and client
requirements; and
- to ensure that a formal evaluation of the effectiveness of the NSSL
Board is undertaken on an annual basis.
Further details of the activities of NSSL are given in the Strategic
Report.
Newcastle Financial Advisers Limited (NFAL)
NFAL Board members are:
James Ramsbotham (Chair), Anne Shiels (Non-Executive Director) and
Stuart Miller (the Society’s Chief Customer Officer). Stuart Dodson
(Managing Director NFAL) resigned from the NFAL Board with effect
from 31 January 2022. Interim arrangements were made for the
operational oversight of the business following resignation of Stuart
Dodson and pending appointment of a new Managing Director.
The NFAL Board will also use external consultants to provide challenge
and advice to the Board, as required. At least once a year Directors
from Openwork Limited usually attend a NFAL Board meeting
to provide a financial and market update; NFAL is an appointed
representative of Openwork Limited.
The main responsibilities of NFAL, as delegated by the Society’s
main Board, are as follows:
-
to oversee the strategic direction of NFAL ensuring this is consistent
with the Society’s agreed Strategic Plan;
-
to evaluate and monitor the performance of NFAL against the
objectives set, which includes assessing performance in terms of
sales quality, customer satisfaction and outcomes, complaints, risk
and compliance oversight (including consideration of the aspects
that are specifically the responsibility o
f Openwork Limited) and
profitability;
-
to review the performance of NFAL in terms of
financial results
including profitability, risk management and customer outcomes.
-
to review and approve the NFAL variable remuneration scheme
ensuring that quality and customer outcomes are central to
performance assessment;
-
to review, at least annually, the reputational and consumer risks
associated with NFAL and the controls in place in respect of this risk.
The review will be presented to the NFAL Board in the first instance
and ratified by the Group Risk Committee;
-
to ensure that NFAL complies with all relevant legislation including
the General Data Protection Regulation and associated data
protection legislation, and the appropriate regulations relating to
NFAL activities;
-
to approve the NFAL budget on an annual basis (prior to inclusion in
the Group budget which is approved by the Society’s Board);
-
to approve the NFAL statutory accounts;
-
To receive the minutes of strategic partner governance meetings
and to be made aware of any changes to the framework for
managing relationships with strategic partners;
-
to consider and act upon the findings o
f any external/internal audits
or reviews and make suitable recommendations as appropriate; and
-
to ensure that a formal evaluation of the effectiveness of the NFAL
Board is undertaken on an annual basis.
Relations with Members
Member engagement is at the heart of our strategy and the Society
develops relationships with Members on a number of different levels.
The first and most obvious is through the Annual General Meeting
voting process where Members are encouraged, as owners of the
business, to use their vote to register their views. We try to make this
process as easy as possible, providing the convenience of voting
online or by post, and providing an additional incentive through a
small charity contribution for every vote cast.
As part of our usual activity we run a number of Member engagement
events every year in locations across the North East where Members
can share their feedback with the Chief Executive, Executive team and
Non-Executive Directors. We have a daily online Customer Satisfaction
Survey which is reviewed every morning by the Chief Executive,
Executive team and senior managers. In 2021 we introduced a digital
Member forum (Connected Communities) where Members can share
their views across a range of topics. The forum's feedback shapes a
range of decision making, including grant giving, product and service
development and what Members want in the future. Our social
media channels are also used by customers to provide feedback and
request additional information. As part of our branch refurbishment
and expansion programme we invite local customers along to branch
re-launch events taking the opportunity to gain their feedback
and understand their perspectives. In addition, we have a range of
marketing communications designed to inform Members about our
progress, products, community activities and the numerous ways we
can help them.
Through our community and charity support activities we are able
to engage with both our Members and the communities we serve.
Following the launch of the Newcastle Building Society Community
Fund at the Community Foundation, we have provided a growing
volume of
financial grants to North East community projects, some
of which are nominated by our Members. Through our branch
network we have been sharing volunteering and regional assistance
opportunities with Members, facilitated by our participation in and
support of the onHand volunteering app. We intend this
financial
support for our heartland communities will continue to grow in
scope and scale. We work hard to make a difference and help our
communities make positive changes.
Further details regarding our Member and community engagement
are given in the Supporting our Communities section.
Page 54
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Report of the Directors on
Corporate Governance
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Continued
Audit Committee Report
Audit Committee
Members of the Audit Committee at 31 December 2022 were:
Mick Thompson (Committee Chair), Adam Bennett, Anne Shiels
and Michele Faull.
The Audit Committee’s extensive experience and qualifications
are detailed in the Our Directors section of the Annual Report
and Accounts. The Committee has combined financial sector
experience and their competence remains considerable and
wide-ranging with specific relevance to the Group’s core building
society activities and commercial subsidiaries. At least one
member of the Committee meets the requirements of the UK
Corporate Governance Code to have significant recent, relevant
financial experience. The Committee members were selected
for
appointment by recommendation of the Nominations
Committee in consultation with the Audit Committee Chair.
Directors’ remuneration, including for members of the Audit
Committee, is detailed within the Remuneration Committee Report.
The Report of the Directors on Corporate Governance also sets out
the process for review of effectiveness of Board sub-committees
including the Audit Committee. The Committee concluded that it
was operating effectively as part of its 2022 review on 28
November 2022.
Committee meetings:
The Committee meets at least four times each year coinciding
with key dates in the Group’s financial reporting calendar
following a rolling schedule of items for discussion, agreed and
reviewed on an ongoing basis. Meetings are attended by Audit
Committee members with other regular attendees at meetings
including the Chief Executive, Chief Financial Officer, Chief Risk
Officer, Chief Internal Auditor and a representative of the External
Auditor, Deloitte LLP, as well as other management, as the
Committee feels is appropriate and necessary. For details of
Committee meeting attendance, see the Board and Board
Committee Membership Attendance Record in the Report of the
Directors on Corporate Governance.
As a general rule, the committee formally invites the External
Auditor and the Chief Internal Auditor to meet the Committee
without senior management present as least once a year. These
meetings cover matters relating to the Audit Committee’s terms
of reference and any issues arising from audits. The Chair and
Chief Internal Auditor also meet outside of the Committee on a
regular basis.
Key roles and responsibilities as delegated by the Board:
The main function of the Audit Committee is to assist the Board in
ful
filling its oversight responsibilities, specifically the ongoing
review, monitoring and assessment of the following areas:
The Committee’s responsibilities are delegated from the Board
and details of the delegated responsibilities are available on the
Society’s website https://www.newcastle.co.uk/about-us/
governance/our-committees/. All Board members have access to
minutes from Audit Committee meetings and the Chair of the
Audit Committee provides a verbal update to the Board after
each Audit Committee meeting.
Financial reporting:
The Audit Committee’s primary role regarding financial reporting
is to monitor the integrity of the Group’s
financial statements,
including the interim and annual reports, and any other formal
announcements relating to the Group’s financial per
formance.
This responsibility is discharged though:
-
review of interim and year-end announcements, the Annual
Report and Accounts, Summary Financial Statement and Pillar
3 disclosures, covering their clarity, completeness and
compliance with relevant accounting standards and other
regulatory and legal requirements;
-
reporting to the Board on the consistency and appropriateness
of critical accounting policies and any changes thereto, taking
into account the views of the External Auditor;
-
review and challenge of signi
ficant financial reporting
judgements, estimates and the actions and judgements of
management;
-
review and challenge of accounting disclosures to ensure as a
whole they are fair, balanced and understandable and in
accordance with relevant disclosure requirements.
-
advice to the Board on whether 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 Group;
-
review of any correspondence from regulators in relation to
financial reporting;
-
review of the Going Concern and business viability assessment
produced by the Chief Financial Officer on a six monthly basis;
-
evaluating the risks to the quality and effectiveness of the
financial reporting process, especially in light o
f the External
Auditor’s communications with the Audit Committee; and
-
review and monitoring of management’s responsiveness to the
External Auditor findings and recommendations.
In 2022, the main areas of signi
ficant financial reporting
considered by the Audit Committee were as follows:
-
IFRS 9 provisioning:
The Audit Committee maintains oversight
and challenge of the key model inputs driving the Group’s IFRS
9 provisioning models for the residential and commercial books,
with particular focus paid towards the Group’s forward looking
macroeconomic forecast inputs. These inputs are the key
judgements in calculating the provision. The Group’s Model Risk
Committee makes non-binding recommendations on the
Group’s IFRS 9 scenarios (base, upside, downside and stress),
scenario inputs and scenario weightings. In 2022, the Audit
Committee’s attention focused towards the current economic
environment and consideration of the impact of the cost of
living crisis on the Group’s existing IFRS 9 scenarios also noting
the potential impact of
fire sa
fety risks relating to securities
pledged on a small portion of the book.
Board and board committee membership attendance record
The table below sets out the number of meetings attended by Directors during 2022 with the number in brackets representing the maximum
number of meetings the Director was eligible to attend.
** resigned as Director on 27th April 2022
Annual General Meeting (AGM)
The AGM provides an opportunity for Members to question the
Chair, Chief Executive, Committee Chairs and fellow Directors on the
resolutions to be proposed at the meeting, the Annual Report and
Accounts and on any other aspect of the Society’s business.
All Members who are eligible to vote at the Annual General Meeting
are encouraged to participate, either in person or online, or by
using their proxy voting form. The use of the online voting system
is encouraged and for each vote placed online, the Society will be
donating £1 to the Newcastle Building Society Community Fund at the
Community Foundation.
All votes are counted by independent scrutineers. As soon as
practicable after the AGM, full details of the results of the voting are
placed on the Society’s website.
On behalf of the Board
James Ramsbotham
Chair
2 March 2023
Director
Board
Audit
Committee
Group Risk
Committee
Remuneration
Committee
Nominations
Committee
Group
Technology
Governance
Committee
NSSL
NFAL
Adam Bennett
10 (11)
7 (7)
5 (6)
7 (7)
Michele Faull
11 (11)
7 (7)
6 (6)
Bryce Glover
10 (11)
6 (6)
6 (6)
Andrew Haigh
11 (11)
7 (7)
5 (7)
Karen Ingham
10 (11)
6 (6)
6 (6)
Stuart Lynn
11 (11)
7 (7)
5 (6)
Stuart Miller
11 (11)
7 (7)
James Ramsbotham
11 (11)
6 (7)
6 (6)
4 (4)
6 (6)
7 (7)
David Samper
11 (11)
7 (7)
Anne Shiels
11 (11)
6 (7)
6 (6)
4 (4)
7 (7)
Mick Thompson
10 (11)
7 (7)
5 (6)
4 (4)
Ian Ward **
4 (4)
3 (3)
3 (3)
Page 57
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Report of the Directors on
Corporate Governance
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Continued
-
Equity release accounting and valuation:
In respect to the
valuation of the legacy, equity release portfolio, the Audit
Committee review and challenge the key model inputs. In
particular, the determination of the discount rate used to
calculate the value of projected cash
flows; the actuarial
assumptions determined with the advice by an independent
actuary; and the assumptions used to value the No Negative
Equity Guarantee, such as future property price growth and
volatility.
-
Effective interest rate:
Loans and advances to customers are
held at amortised cost, using the effective interest rate
method (EIR). That implies that one-off charges and receipts,
such as property valuations the Society pays for, arrangement
fees and early repayment fees, are included as interest
income and spread over the life of the product, rather than
being recognised separately. Assumptions and estimates
relating to the expected behaviour of the Society’s current
mortgages were reviewed based on recent experience.
-
Valuation of equity investments:
The Group’s investment in
Openwork units is accounted for at fair value. At the year end
2021, the Group adopted a valuation approach based on
market value of the units during a trading window available to
unit holders. The appropriateness of the valuation
methodology is assessed annually and it was concluded that
a discounted cash flow approach was more appropriate in
valuing the units for the year end 2022. Further details on the
change in valuation approach are provided in note 32. The
Audit Committee review and challenge the appropriateness
and rationale of Management’s accounting judgements,
assumptions and estimates on the valuation approach,
forecasting potential returns from the units and the discount
rate applied. It also monitors the latest trading windows for
the units as a benchmark for the valuation process.
-
Hedge accounting:
The Audit Committee is appraised of the
Group’s derivative and hedge accounting position and strategy
and agrees the accounting policy for hedging, including
disclosures in the Annual Report and Accounts. The Group has
adopted macro cash flow hedging under IFRS 9 during the
year, which allows for the economic hedging of pipeline
mortgage completions to be included in formal hedge
accounting relationships. This requires additional disclosures
relating to affected hedging instruments and hedged items.
-
Going Concern:
Preparing the Annual Report and Accounts
under the Going Concern assumption requires the Board and
Audit Committee to be satisfied that the Society will stay in
business for at least 12 months from the date the Accounts
are signed. In addition, the Accounts should contain a
statement that the Society and Group are considered viable
over a longer time period. As a result, a detailed assessment
of the Group’s viability over the next three years is reviewed by
the Committee, which considers the Group’s business
operations, business planning, business management and risk
management. The assessment also includes forecasts and
stress testing of long term liquidity and capital resources. The
Audit Committee concluded that the adoption of the Going
Concern basis to prepare the Accounts is appropriate and
considers the Group viable over the next three years.
-
The Committee considers matters raised by the External
Auditor
and concluded there were no adjustments required
that were material to the Annual Report and Accounts.
The Audit Committee is satisfied that the key estimates and
judgements are appropriate and suitably disclosed in the Annual
Report and Accounts. Having undertaken the above
responsibilities and considerations throughout the Group’s 2022
financial year, the Audit Committee recommended to the Board
that approval be given to the audited Annual Report and Accounts
and Summary Financial Statement as at 31 December 2022.
Internal control and risk management:
The Audit Committee works closely with the Group Risk
Committee to ensure that management and colleagues take
appropriate responsibility for departmental, business unit and
subsidiary risk mitigation and internal control. The Audit
Committee also reviews Internal Audit and management reports
on the effectiveness of systems for internal control and risk
management across the Group.
Further details of risk management activities are given in the Risk
Management Report.
The Audit Committee is responsible for:
-
review of the scope and effectiveness of the Group’s internal
controls and risk management systems, including those for
ensuring compliance with the regulatory environment in which the
Group operates;
-
review of the Society’s resolution pack arrangements and
oversight of the Society’s recovery plan self-assessment; and
-
review and approval of the statements to be included in the
Annual Report concerning internal controls and risk
management.
The Group’s Internal Audit Services forms a core component of
the Group’s risk management and internal control process.
During the year, the Audit Committee, through Internal Audit
Services and from other management reports, reviewed the scope
and effectiveness of the Group’s internal controls. The coverage of
the reviews in 2022 included reviewing the controls in operation
for: lending, savings,
financial advice, in
formation technology and
cyber security, treasury, finance, risk management, operational
resilience, regulatory compliance and reporting, governance and
strategic change initiatives. Internal Audit Services utilised the
services of PricewaterhouseCoopers LLP, BDO LLP and RSM during
2022 for co-sourced internal audits to provide specialist expert
input and promote knowledge transfer to Internal Audit Services.
Internal Audit Services reflects the Audit Committee’s primary
available resource, however the Committee retain the authority to
obtain outside legal or independent professional advice as it sees
fit. Reports
from the Chief Risk Officer, Internal Audit Services, the
External Auditor and senior management provide input on key
risks, uncertainties and controls directly to the Audit Committee.
Internal Audit Services:
The Audit Committee is responsible for monitoring and reviewing
the effectiveness of the Group’s Internal Audit Services in the
context of the Group’s risk management, and for ensuring that
professional standards are applied, resource is adequate in terms
of number, skills, knowledge and standing within the Group to
execute its responsibilities in an independent and objective
manner. This review includes assessment of the Chief Internal
Auditor with respect to appointment, remuneration, performance
evaluation and assessment of their objectivity and independence.
A formal internal review of the quali
fication and effectiveness o
f
Internal Audit Services is undertaken by the Committee annually
and most recently in July 2022, which concluded positively,
confirming that Internal Audit Services effectively met its
responsibilities.
Additionally and in accordance with good practice, the Audit
Committee also requires an external effectiveness review of
Internal Audit Services at least every five years, which considers
the quality, experience and expertise of the function. A review
was carried out during 2019 by an external firm appointed by the
Audit Committee.
The review concluded that Internal Audit Services was operating
effectively, and confirmed that Internal Audit Services con
forms
to the standards expected by the Institute of Internal Auditors.
The next external review is planned for 2024, but the Audit
Committee has discretion to require an earlier review if this is
deemed appropriate.
The Committee approves and reviews the Internal Audit strategy,
work programme and results, and ensures Internal Audit Services
maintains sufficient access to the Board, management and the
books and records of the Society and its subsidiaries. This
oversight allows the Audit Committee to monitor and assess the
role and effectiveness of Internal Audit Services in the overall
context of the Group’s internal control framework, ensure
appropriate management responsiveness to audit findings and
recommendations given and promote open communication
between the Group’s Risk, Compliance, Finance and Internal Audit
functions and the External Auditor.
External audit:
The Audit Committee is responsible for overseeing the Group’s
relationship with the External Auditor Deloitte LLP. This role
extends to:
-
appointment, reappointment, removal and assessment of
independence, objectivity and effectiveness of the External
Auditor;
-
approval of terms and remuneration in respect of audit services
provided;
-
annual approval of the Group’s policy on the use of the External
Auditor for non-audit work as well as any non-audit work to be
performed by the External Auditor; and
-
consideration of audit quality, including reports by the Audit
Quality Review Team.
The Audit Committee annually assesses the qualification, expertise
and resources of the External Auditor, seeking reassurance that
the auditor and their staff have no family,
financial, employment,
investment or business relationship with the Group that are
considered to impact their independence. The External Auditor
communicates their formal independence annually and appraises
the Audit Committee of policies, processes and monitoring in
place for maintaining their independence. The Audit Committee
seek annual feedback from internal stakeholders to facilitate a
robust assessment of the effectiveness of the External Auditor.
Prior to an External Audit engagement, the Audit Committee
discusses the nature and scope of the audit. It reviews
findings o
f
the auditor’s work and assesses the effectiveness of the audit
process. This assessment reviews whether the auditor has met
the agreed audit plan, considers the robustness and
perceptiveness of the auditor in responding to questions from the
Audit Committee and obtains feedback about the conduct of the
audit from key people involved.
The Audit Committee ensures that non-audit services provided by
the External Auditor will not adversely impact the independence
and objectivity of the audit
firm in per
forming their duties. A
formal policy on the use of the External Auditor for non-audit work
is reviewed annually.
During 2022, the External Auditor provided accounting advice to
the Group that was non-audit work. The Audit Committee
approved this work prior to it being carried out as it was limited
scope advice and closely linked to future audit engagements.
Where necessary to maintain independence, non-audit work is
carried out by Deloitte partners and staff that have no connection
to the External Audit team. The fees paid to the External Audit
firm
for audit and non-audit services are set out in the Administrative
Expenses note to the Annual Report and Accounts.
Whistle blowing:
The Audit Committee reviews the Group’s procedures for
detecting fraud and policies related to its prevention and
detection, including whistle blowing. This includes ensuring that
arrangements are in place by which colleagues, in confidence
may raise concerns about possible improprieties ensuring
that arrangements are in place for independent investigation
and appropriate follow up action. These could be in matters of
financial reporting, financial control or any other matters. The
outcome of the review is reported to the Board.
On behalf of the Board
Mick Thompson
Chair of the Audit Committee
2 March 2023
Audit Committee Report
|
Continued
Page 58
Page 59
Remuneration Committee Report
Annual statement from the Chair of the Remuneration Committee
Page 60
Page 61
Introduction
I am pleased to share the Directors’ Remuneration Report, on behalf of
the Remuneration Committee, which details the Group’s approach to
pay, incentives and benefits
for the period 1 January to 31 December
2022. It sets out the remuneration policy and remuneration details for
the Group’s Executive and Non-Executive Directors, how this aligns
with our broader business strategy and how it applies the principles of
the UK Corporate Governance Code relating to remuneration, the
Regulators’ Remuneration Code and the disclosure requirements
arising under the EU Capital Requirements Directive IV (CRD IV).
The Committee
The Committee is comprised solely of Non-Executive Directors who
have no personal financial interest in the recommendations and
include members of the Board Risk and Audit Committees:
Anne Shiels
Non-Executive Director (Chair)
Bryce Glover
Non-Executive Director & Chair of
Group Risk Committee
Mick Thompson
Non-Executive Director & Chair of
Audit Committee
The Chair of the Board, Chief Executive and Chief People Officer (except
for items relating to their own remuneration) also attend meetings but
are not members of the Committee.
Rewarding with Purpose
As a Society, our Purpose continues to be connecting our
communities with a better financial
future. This guides all of the
Society’s actions including how we reward our colleagues, leaders and
Board members. Paying our people a fair and competitive wage not
only contributes to their own financial wellbeing, but also ensures that
we can attract and retain the best talent from our region and beyond.
We continue to see our catchment area for talent widening, and like
many other organisations, we now find ourselves competing
for talent
in a national market. This has meant that we have had to further review
our reward practices to make sure that we remain competitive. Having
the right talent in the business enables us to deliver our ambitious
strategy and objectives, deliver for our Members and ultimately
continue our work to benefit and support the communities we are
proud to serve. The wider economic and geo-political situation during
2022 and the resulting challenges this has presented to our colleagues
in dealing with cost of living pressures, has made us acutely aware of
the importance of ensuring our colleagues receive a fair, purposeful
total reward package, and the Committee has been mindful of this
throughout the year.
We have worked hard in recent years to implement a fair and purposeful
reward strategy, ensuring that our people are compensated
appropriately with a mix of variable and
fixed remuneration. This work
along with the significant investment which has accompanied it, has
allowed us the flexibility and agility to respond to challenges as they
emerged this year.
The Remuneration Committee’s purpose is to consider, agree and
recommend to the Board an overall remuneration policy and approach
that promotes this aim, while ensuring that it remains aligned with the
long term interests of the Society’s Members and other stakeholders.
We constantly strive to maintain the highest standards of governance
and fairness in relation to remuneration and continued alignment with
our business strategy. Risk appetite and regulatory requirements are also
at the forefront of the Committee’s consideration.
The Remuneration Committee 2022
2022 has continued to present economic turmoil for the UK which has
impacted the Society, its Members and its colleagues. As we continue
to operate in the shadow of the Covid-19 pandemic we are still seeing
volatile labour markets with an increased demand on certain skills,
although there is emerging evidence that this is starting to calm.
Inflation has continued to rise throughout the year, with the war in
Ukraine compounding already high energy costs. As a result, we have
seen significant wage movement across all sectors, and also observed
businesses offering additional support to their employees during this
time. The Committee considered what would be the most appropriate
way to respond to this and how best to support our own colleagues
during this time. It accordingly approved a set of measures, both
financial and non-financial,
for colleagues during the year.
In spite of the challenging conditions which 2022 presented, our
colleague net promoter score climbed to an all-time high of +58 which
places us in the top 10% of
financial services sector within the Workday
Peakon’s (our external provider) global database.
The Society has renewed its commitment this year to fostering
diversity, equity and inclusion at work and the Committee has been
continuing its focus on ensuring we are a fair and equitable employer.
We continue to closely monitor our Gender Pay Gap and have
further increased our female representation at senior management
level, building on the excellent progress we made in 2021 where we
exceeded our 2023 target two years early. There is, however, still more
to do to ensure our colleagues fully re
flect the communities we serve.
The focus on equitable pay will continue into 2023, with refreshed
diversity, equity and inclusion data allowing us to do further analysis on
wider reward inclusion.
Director and Executive remuneration in respect of 2022
Significant work has been carried out over recent years to introduce a
robust and fair performance and reward framework for colleagues
across the Society, in a way that is fair, affordable, re
flects market
practice and ensures that the organisation offers competitive total
reward practices. Colleague reward continues to be competitive,
equitable and ethical, ensuring we can attract, retain, motivate and
reward the right people with the right skills to deliver our strategy for
our Members.
The implementation of our Reward strategy referred to earlier, is the
culmination of the work we have undertaken over the past few years to
ensure that we pay all our people a reasonable and appropriate wage,
comparable with industry peers. The work began by re-aligning our
grading structure and benchmarking process for colleagues below
executive level in line with external guidance and data, and concluded
with a review of our Executive remuneration and Non-Executive fees in
line with industry norms. We started this work in 2021 and continued
with the second phase of the realignment of Executive compensation
in 2022, with further adjustments being made to our Executive pay of
between 5% and 18% to bring remuneration closer in line with peers in
the sector and wider marketplace. This will help ensure we attract and
retain the quality of leadership that will be required to implement the
strategic goals we have laid out to grow and evolve our business and
equip our leaders to successfully take the Society into the future.
Further detail on how we have delivered our Purpose of being a great
place to work, where people can realise their potential in 2022, can be
found in the Chair’s Statement and Chief Executive’s Review.
Directors’ Remuneration Policy
Policy aims and principles
The Group’s policy for remunerating Directors is designed to provide fair
and competitive remuneration packages that attract, retain and reward
Executives, including Executive Directors, to deliver business objectives
in support of the Society’s strategy, while providing value for Members.
With regard to Executive Directors’ annual pay rise, the percentage
increases are dependent on performance in the same way that this
applies to the Group’s wider colleague base.
In designing the Remuneration Policy, the following key principles
have been followed:
-
The policy is clearly linked to and influenced by the Group’s
Purpose, Strategic Plan, objectives and values and serves the
interests of all key stakeholders;
-
Policy, process and practice are consistent with and promote
effective risk management in line with the Group’s Risk Appetite
Statement and detailed policies;
-
Basic pay and total remuneration are set at a fair, affordable,
reasonable and competitive level to attract and retain the
appropriate calibre of people;
-
The approach to pay and total remuneration is inclusive and
equitable, supporting wider diversity and inclusion aims;
-
The approach to pay satisfies all regulatory requirements and good,
responsible corporate governance practice;
-
Remuneration arrangements are transparent and fair re
flecting
individual responsibilities and performance; and
-
Remuneration arrangements are straightforward to understand,
communicate and administer.
Directors’ service agreements and notice periods
Executive Directors are employed on service agreements which can be
terminated by either the Society or the Director giving 6 months’ notice.
Non-Executive Directors do not have service agreements. Non-
Executive Directors are appointed for an initial three-year term. They
will generally be expected to serve more than one three-year term, but
not longer than 9 years in total, unless in exceptional circumstances
and after approval by the Board.
All of the Society’s Directors volunteer for annual re-election.
Policy on termination pay
The Committee aims to treat departing Executive Directors fairly, taking
into account the circumstances of their departure, but is always careful
to ensure that the interests of Members are considered and that there
are no rewards for failure. Executive Directors are entitled to be paid
their basic salary and contractual benefits (including pension
contributions) during their notice period. The Society has the discretion
to pay these as a lump sum in lieu of notice.
The rules of the Executive Bonus Scheme set out the treatment for an
individual who ceases to be a colleague or Director of the Society.
Remuneration Committee Report
|
Continued
Page 62
Page 63
How elements support
our strategy
Policy
Financial investment
Performance conditions
and assessment
Basic salary
Supports the attraction and
retention of Executive Directors,
reflecting their individual roles,
skills and contribution and
ensuring internal pay equity
(ensuring colleagues within
similar roles are compensated
in a similar way).
Basic salary reflects the size o
f the
role and responsibilities, individual
performance (assessed annually)
and the skills and experience of the
individual. In setting appropriate
salary levels, the Committee takes
into account data for similar roles
in comparable organisations as
determined by the Group Job
Evaluation Policy. The Society aims
to position Executive Directors
competitively within the reference
group. Consideration is also given
to internal pay equity.
Increases to base salary are
determined annually by the
Committee taking into account:
individual performance;
•
the scope of the role;
•
pay levels of comparable
• organisations; and
•
pay increases elsewhere in
the Group.
Individual performance is taken into
account when considering base
increases, as well as affordability
and the performance of the Group.
Increases are proposed by the Chief
Executive and approved by the
Remuneration Committee.
Benefits
•
Supports attraction and
retention of Executive
Directors; and
•
Provides a competitive
level of bene
fits to assist
Executive Directors to carry
out their roles effectively.
A number of bene
fits are provided
to Executive Directors, including
car allowance, private medical
insurance, life insurance and
permanent health insurance.
The Committee reviews benefits
offered and may make changes, for
example to reflect market practice
or the needs of the business. The
Society offers all colleagues the
option to participate in a salary
sacrifice scheme in order to make
use of current incentives and
encourage use of electric vehicles.
The Society chooses to
invest in the cost of providing
benefits which may vary
from
year to year.
None applicable.
Executive Bonus Scheme*
•
Rewards performance within
the context of achieving
corporate goals and
objectives as set out in the
corporate strategy;
•
Supports attraction and
retention of Executive
Directors; and
•
Supports the development
of a high performance
culture.
•
Based on a number of
performance measures and
targets linked to the delivery of
corporate strategy;
•
Measures include financial,
customer, people and personal
objectives;
•
Targets are set annually and
payments are made at the
discretion of the Remuneration
Committee; and
•
Payments are made in cash in
instalments over a three year
period.
The maximum potential
bonus opportunity is 50% of
base salary. On target bonus
opportunity is 30% of base
salary.
Performance against pre-determined
objectives will be measured by
the Remuneration Committee on
an annual basis and discretion
may be applied under exceptional
circumstances. Bonus levels take
affordability into account together
with specific per
formance measures
which are set at the beginning of each
financial year. For 2022, per
formance
measures were weighted as follows:
•
40% financial
•
30% non-financial
•
30% personal objectives
A financial gateway exists in the
operation of the Scheme.
Notes to the table
*As noted above, the Committee has complete discretion to make payment under the Executive Bonus Scheme and also has discretion to amend or
remove that Scheme where necessary to ensure the arrangements continue to meet the Committee’s overriding remuneration principles. For example,
due to the uncertain economic situation caused by the Covid-19 pandemic, in early 2020, it was agreed that there would be no participation in the
Executive Bonus Scheme for performance year 2020.
Remuneration for Executive Directors
The table below shows the elements of remuneration for Executive Directors and the way they operate. These elements would be expected to
apply equally to any new Executive Directors appointed in the future.
Pension
Supports attraction and
retention of Executive
Directors at a cost that can be
controlled by the Society.
Generally, the Society contributes
to a defined contribution pension
scheme for the Executive Directors.
The contribution can instead be
paid in cash (which is excluded from
bonus calculations) if the Executive
Director is likely to be affected by
the limits for tax approved pension
saving.
None applicable.
9% of basic salary.
Directors’ Emoluments (Audited)
The total remuneration received by Executive Directors is shown below. The information has been audited and shows remuneration for the years
ended 31 December 2021 and 31 December 2022 as required under the Building Societies (Accounts and Related Provisions) Regulations 1998.
There is a requirement under Rule 14 of the Society’s Rules to have deposits to the value of not less than £1,000 in a Society share account in
order to qualify as a Director. This means all Directors are Members of the Society. There are no requirements for a Director to own shares in the
Society’s subsidiary companies.
Details of other non-Society Board positions held by the Group’s Directors are shown in the Annual Business Statement in the Annual Report and
Accounts. None of the current Executive Directors retained any remuneration as a result of their non-Society positions.
Notes
1.
During 2022 the Society’s Executive Directors participated in the Group’s annual Executive
Bonus Scheme. A proportion of the Executive bonus payment is deferred and is payable in
future years as shown in the Executive Bonus Payment table overleaf.
2. Mr AS Haigh has elected to take his pension contribution amounting to £41,400 (2021: £34,326) as
a cash payment. He is liable for his own tax and National Insurance contributions on this payment.
3. Mr D Samper has elected to take his pension contribution amounting to £26,438 (2021: £21,878) as
a cash payment. He is liable for his own tax and National Insurance contributions on this payment.
4. Mr S Miller has elected to take his pension contributions amounting to £21,938 (2021: £16,825)
as a cash payment. He is liable for his own tax and National Insurance contributions on this
payment.
5. Mr M Thompson received £18,000 (2021: £18,000) in relation to chairing the Newcastle
Building Society Pension and Assurance Scheme Board.
6. No Directors received termination payments in 2022 (2021: None).
Year
Salary
or fees
Taxable
benefits
(Notes 2,3
and 4)
Annual
bonus
(Note 1)
Pension
contributions
to defined
contribution
scheme
(Notes 2,3 and 4)
Total
contractual
benefits
Executive Directors
£000
£000
£000
£000
£000
AS Haigh
2022
460
55
215
-
730
2021
381
48
160
-
589
D Samper
2022
294
38
146
-
478
2021
243
34
118
-
395
S Miller
2022
244
34
121
-
399
2021
187
29
90
-
306
Total for Executive Directors
2022
998
127
482
-
1,607
2021
811
111
368
-
1,290
Non-Executive Directors
PJ Moorhouse
(Retired 23 August 2021)
2022
-
-
-
-
-
2021
53
-
-
-
53
IW Ward
(Retired 27 April 2022)
2022
22
22
2021
52
-
-
-
52
B Glover
2022
68
68
2021
47
-
-
-
47
A Laverack
(Business name: Anne Shiels)
2022
65
65
2021
57
-
-
-
57
K Ingham
2022
53
53
2021
48
-
-
-
48
MR Thompson
(Note 5)
2022
86
86
2021
75
-
-
-
75
GA Bennett
2022
54
54
2021
48
-
-
-
48
S Lynn
2022
61
61
2021
46
-
-
-
46
MJ Faull
(Appointed 23 August 2021)
2022
48
48
2021
23
-
-
-
23
JDA Ramsbotham
(Appointed 23 August 2021)
2022
110
110
2021
40
40
Total for Non-Executive Directors
2022
567
567
2021
489
-
-
-
489
Total for all Directors
2022
1,565
127
482
2,174
2021
1,300
111
368
-
1,779
Remuneration Committee Report
|
Continued
Page 64
Page 65
Chief Executive remuneration
The Chief Executive is the Group’s most highly paid colleague and no
colleague earns more than any Executive Director.
Mr A Haigh received an 18% pay rise on base salary in March 2022. This
increase is an outcome of the independent review of Executive reward,
undertaken by the Committee’s reward advisors Willis Towers Watson
and represents the second of two stages of a reward roadmap
adopted by the Committee in respect of Executive remuneration.
Chief Executive Officer (CEO) pay ratio
The Companies (miscellaneous Reporting) Regulations 2018 requires
the publication of the ratio of the CEO’s single
figure remuneration. We
have chosen to use the Governments’ preferred methodology (option
A), which determines the total full time equivalent total remuneration
for all colleagues for the relevant
financial year, and compares the
25th, 50th and 75th percentiles against the CEO’s single figure.
Annual Executive Bonus
An Executive Bonus Scheme, which Executive Directors and other
Executives participate in, was introduced in 2019 as part of the move
towards alignment to market practice. It is paid in three parts, with the
first payment o
f 50% in the year after the bonus is earned and the
remainder over two equal payments in the following two years. This
allows the Committee to review whether the payment remains
appropriate and in line with strategy and Purpose, providing the ability
to reduce or cancel the payment in cases such as, but not limited to,
significant
failures in risk management, material errors or the Society’s
financial underper
formance. The Executive Bonus Scheme is
dependent on performance, measured against personal objectives as
well as financial and non-financial per
formance indicators. Should all
metrics be met, on target bonus payments are set at 30% of base
salary, with a maximum bonus potential of 50% of base salary for
exceptional business and personal performance.
The Executive Bonus Scheme has been paid out in line with the rules
of the Executive Bonus scheme. 2022 pay awards for Executive
Directors were paid in line with pre-agreed levels as part of the review
which was based on Willis Towers Watson advice. As a result there was
no discretion applied.
Payments and deferred payments under the Executive Bonus Scheme
for performance year 2022 are shown in the table below.
Remuneration of Non-Executive Directors
A focus on Non-Executive Director remuneration was the
final phase o
f
the work undertaken over recent years to introduce a robust and fair
performance and reward framework across the Society. This included
the introduction of a new separate Non-Executive Director
Remuneration Committee who approve the fees of non-executive
directors which are then be ratified by the Board. Membership o
f the
Non-Executive Remuneration Committee consists of the Chair of the
Board, Chief Executive and Chief Financial Officer and is attended by
the Chair of Remuneration Committee and Chief People Officer.
Remuneration for the Chair of the Board is recommended by the Chief
Executive to the Remuneration Committee for approval and subsequent
ratification by the Board.
Consideration of remuneration for colleagues who
are not Directors
Code Staff and Executives who are not Directors
In addition to setting the remuneration of the Executive Directors, the
Remuneration Committee approves the remuneration policy for senior
managers who have a material impact on the Society’s risk profile
(code staff). The Committee also reviews recommendations from the
Chief Executive for approval of the remuneration of other Executives.
The Group’s colleagues
All colleagues receive basic salary and benefits consistent with market
practice, and are eligible to participate in the Group’s Corporate Bonus
Scheme and pension arrangements. When setting salary increases for
Executive Directors, the Committee considers the level of salary
increases across the Society and Group. No colleague consultation on
Executive Director remuneration has been undertaken.
In 2022 the Society introduced the ‘Sharing in our Success Scheme’
for colleagues below Executive level. Introduction of the scheme
improves the reward practices and structures, ensuring the Society
has the correct mix of base and variable pay to incentivise the level of
performance required to deliver the ambitious strategic plans over the
next 3-5 years.
The Remuneration Committee approved the payment of the 2022
‘Sharing in our Success Scheme’, in line with the scheme rules.
Please refer to the 'Our Collegaues' section of the Strategic Report for
more information.
Summary of the remuneration of code staff
Remuneration code staff are currently defined as senior management,
control functions and any colleague receiving total remuneration that
takes them into the same remuneration bracket as senior management,
or whose professional activities have a material impact on the Group’s
risk profile. The table below shows the aggregate remuneration
for code
staff in relation to their services to the Society and Group.
Consideration of Member views
The Committee does not consult with the Society’s Members on its
Executive Remuneration Policy, but takes into account feedback given
by Members. For a number of years, the Committee has invited
Members to vote on the annual remuneration report and Members
have always voted in favour.
The Directors’ Remuneration Report and Policy were last voted on in
April 2022. Member approval was given to the 31 December 2021
Directors’ Remuneration Report (90.46% approval with 12,681 votes for,
1,337 against and 241 withheld).
Executive
Director
Bonus
deferred
from
Bonus
payable
in 2023
£000
Bonus
payable
in 2024
£000
Bonus
payable
in 2025
£000
Total
bonus
deferred
£000
Andrew Haigh
2021
40
40
-
40
2022
107
54
54
108
Total
147
94
54
148
David Samper
2021
30
30
-
30
2022
73
37
36
73
Total
103
67
36
103
Stuart Miller
2021
22
23
-
23
2022
61
30
30
60
Total
83
53
30
83
Total
333
214
120
334
Element
Approach
Basic fees
Reviewed annually, based on time commitment
and responsibility required by Board and Board
Committee meetings. The review takes into
account fees paid by comparable
financial services
organisations. The basic fee currently paid is
£48,000 (2021: £35,000)
Additional
fees
Additional fees are payable for additional
responsibilities, such as Committee Chair.
Committee Chair fees range from £12,000 to
£20,000 (2021: £8,150 to £10,500) depending on
time commitments required
Other
items
Non-Executive Directors are not eligible to
participate in any form of performance pay and do
not receive pensions or other benefits in kind.
Category
Typical Functions
Year
Number
Salary or Fees
£000
Other
taxable
benefits
£000
Variable
remuneration
(Note 1)
£000
Total
remuneration
£000
Executive
Directors
Chief Executive Officer
Chief Financial Officer
Chief Customer Director
2022
3
998
127
482
1,607
2021
3
811
111
368
1,290
Other
Executives
Chief Information Officer
Chief People Officer
Chief Risk Officer
Chief Transformation Officer
Managing Director NSSL
Managing Director NFAL
2022
6
968
135
315
1,418
2021
6
861
128
323
1,312
Control
Functions
Balance Sheet Management
Compliance
Customer Outcomes
Internal Audit
IT Services
Product Development
Risk
Treasury
Underwriting
2022
10
933
124
261
1,318
2021
10
745
109
44
898
Total
2022
19
2,899
386
1,058
4,343
2021
19
2,417
348
735
3,500
Notes:
1.
Variable remuneration reflects participation in the Group’s Executive Bonus Scheme
for Executive Directors and other members of the Executive Committee and
the Group’s annual Corporate Bonus Scheme for all other code staff.
Quartile
Base
salary
£
Total pay
and
benefits
£
Ratio to
CEO
%
2022
25th
22,316
25,677
26.28
50th
27,882
32,082
21.03
75th
39,328
46,753
13.43
2021
25th
20,623
22,438
27.37
50th
25,987
29,087
21.11
75th
36,773
42,329
14.51
Remuneration Committee Report
|
Continued
Overview
The Society’s risk management framework is designed to
pro-actively identify and manage risk, while supporting senior
management in the delivery of the Group strategy. This is
achieved through the effective utilisation of risk appetite and
ensuring resilience to operational and financial risks. The Society’s
ability to identify, measure, monitor, report and control risks is key
to the continued delivery of sustainable and resilient business
performance, including fair outcomes for our customers. The
Society’s Chief Risk Officer has ultimate accountability for the
maintenance and enhancement of the organisation’s Risk
Management Framework.
Risk framework
The Society continues to adopt the traditional ‘Three Lines of
Defence’ approach to risk management:
The risk management framework includes the use of Board
approved risk appetite statements covering a variety of Principal
Risks that the organisation faces. Additionally, regular
management information and performance data in respect of
the overall framework is provided to the Group Risk Committee.
There is a demonstrated level of balance within the framework
with evidence of performance, stress testing, scenario analysis
and recovery planning.
Overall, there is a high degree of awareness and understanding
of risk across the organisation. Senior management understand,
and champion, the basis for risk measures with detailed
understanding of strengths and limitations. The culture across
the organisation supports the development of risk skills which is
articulated from the top down and gives due focus to risk
management.
Risk governance
The Board is ultimately responsible for ensuring that adequate
systems of risk management are in place and that the Society’s
strategy, risk appetite and risk management are aligned. To assist
the Board, a Group Risk Committee oversees the management of
risk across the Group (see below). In addition, the Board is
responsible for the establishment of risk appetites that ensure
business activities and decisions are taken within our capacity for
accepting risk, performance to risk appetites are monitored by
the Board and the Group Risk Committee.
The second line of defence Risk function oversees the suitability
and effectiveness of risk management across the organisation and
supports the Group Risk Committee. This includes the provision of
oversight reporting to the Group Risk Committee and its
sub-Committees.
The Chief Risk Officer provides formal updates on risk management
to the Board, in relation to the Group, on a regular basis.
Group Risk Committee
Members of the Group Risk Committee at 31 December 2022 were:
Bryce Glover (Committee Chair), Adam Bennett, Michele Faull,
Karen Ingham and James Ramsbotham.
The Group Risk Committee oversees the Society’s risk management
and governance framework and the Society’s overall risk pro
file.
The Committee meets at least four times per year and more
frequently when required.
The duties of Group Risk Committee include:
-
oversight of overall risk appetite, tolerance and risk
management strategy and the principal and emerging risks
the Society is willing to take in order to achieve its long-term
strategic objectives;
-
oversight of the management of risks to which the business
may be exposed, including (but not limited to) prudential risks,
conduct risks, operational risks, operational resilience and IT
related risks including cyber;
-
oversight of compliance with risk policies;
-
oversight of the risk sub-committees (see below); and
-
review and assess the Society’s risk appetite and associated
stress testing.
During 2022, the Group Risk Committee met on six occasions
and in particular considered the following matters:
-
review of key and emerging risks facing the Society, notably
post-pandemic macroeconomic risks, including the impact of
the ‘cost of living crisis’;
-
oversight of the annual stress testing report including low
likelihood high impact risks;
-
review and ratification o
f key risk policies including (but not
limited to) lending, treasury, interest rate risk and operational risk;
-
review of the Group Operational Resilience plans and approach;
-
review and approval of the Society’s Compliance monitoring
plans; and
-
review of compliance with Building Society Sourcebook limits.
Risk Management Report
First line of
defence
Comprises of core business units, which ultimately
hold the responsibility for
identifying, quantifying
and managing risk
while adhering to corporate
risk appetite, policies and standards. The first line
also holds the responsibility for implementing and
maintaining regulatory compliance.
Second line
of defence
The Risk function provides
independent oversight
of the implementation of effective risk management,
while developing and maintaining risk management
policies and methodologies. The second line reports
(through the Chief Risk Officer) to the Chief Executive
and ultimately to the Group Risk Committee.
Third line of
defence
The Internal Audit function provides
independent
assurance
to the Board and senior management
on the adequacy of the design and operational
effectiveness of internal control systems and measures
across the business.
Page 66
Page 67
The Remuneration Committee and its advisers
The Committee’s responsibilities
The Committee is responsible for the oversight and governance of the
Group’s overall compliance with the Remuneration Code.
The Committee’s main objectives are:
-
to ensure that fair and competitive remuneration packages are in
place, in line with market rates, that attract, retain and reward the
Group’s Executive and Senior Management for delivering stated
business objectives in support of the Group’s strategy and
Purpose, whilst providing value for Members, stakeholders and
communities;
-
to ensure compliance with the Regulators’ Remuneration Code
through at least annual review and to ensure the Remuneration
Policy is consistent with regulatory requirements and the Group’s
financial situation and
future prospects;
-
to determine and agree with the Board the framework for
Executive and Senior Management remuneration and conditions
of employment;
-
to approve the salaries, and any salary adjustments, variable pay
awards and payments for Executive and Material Risk Takers and to
approve the terms of the annual pay review for all colleagues;
-
approve the design of any variable remuneration schemes and
approve the total annual payments under such schemes;
-
to approve the Society’s Remuneration Policy Statement and
Remuneration Committee Reports in the Group’s Annual Report
and Accounts and Summary Financial Statements, and the
remuneration section of the Group’s Pillar 3 disclosures
-
to approve service agreements, and terms and conditions for the
appointment of Executive Directors;
-
to consider and make recommendation to the Board on the
general framework of colleague bonus schemes.
The Board believes remuneration should be sufficient to attract, retain
and motivate colleagues and senior managers to continue to run the
Group successfully and in line with stated aims and purpose. The
Remuneration Policy, therefore, focuses on rewarding colleagues and
Executives in line with the achievement of the Group’s goals set out in
the Strategic Plan and Corporate Key Performance Indicators, thus
ensuring long-term value for money for Members.
The Remuneration Committee operates within the Terms of Reference
(TOR) agreed by the Board. The TOR are reviewed annually and were
last reviewed in January 2023. The effectiveness of the Committee is to
be included in a broader Board effectiveness review which will take
place during 2023. A plan is in place to undertake a full review of the
reward policy, practices and frameworks in 2023, together with a review
of effectiveness, rolling agenda and Terms of Reference of the
Remuneration Committee.
During the year, the Committee met eight times, and activities
included:
-
overseeing compliance of the Group’s approach to remuneration
against the requirements of the Regulators’ Remuneration Code;
-
considering and agreeing pay and benefits
for Executive Directors,
Executives, Material Risk Takers and the Chair;
-
overseeing remuneration matters across the Society and its
subsidiaries;
-
reviewing the performance for the full year and approving the level of
Executive and Corporate Bonus to be paid based on achievement of
various financial and non-financial key per
formance measures;
-
responding to the macroeconomic conditions specific to 2022 that
were impacting on colleagues’ cost of living;
- r
eviewing and benchmarking the level of pay for both colleagues
and Executives;
-
considering the disclosure requirements for the Remuneration
Report including Pillar 3 disclosures; and
-
approving the Directors’ Remuneration Report.
External advice received
During the year, Willis Towers Watson were engaged to assist the
Remuneration Committee by reviewing the Group’s Director and
Executive level remuneration and benchmarking it against the external
market. The Committee is satisfied that the advice received is objective
and independent, with Willis Towers Watson being a reputable firm with
no other ties to the Group, its Directors or senior management.
The fee for the advice was £18,925 (2021: £13,192)
On behalf of the Board
Anne Shiels
Chair of the Remuneration Committee
2 March 2023
Credit Risk Committee
The Credit Risk Committee, chaired by the Chief Risk Officer, is
responsible for the oversight of the retail and commercial credit
risk framework. This Committee acts under the authority of the
Group Risk Committee and has delegated authority to make
decisions and recommendations in accordance with the agreed
terms of reference. The Credit Risk Committee ensures the use
of regular stress testing and scenario modelling that are
reflective o
f the nature of the associated risk.
The Credit Risk Committee met on thirteen occasions during 2022.
Enterprise Risk Committee
The Enterprise Risk Committee, chaired by the Chief Risk Officer,
is responsible for overseeing the risk framework for Operational
Risk, Conduct Risk, IT Risk, People Risk and Operational Resilience.
The Enterprise Risk Committee has the responsibility for review
and approval of Group-wide policies in advance of
final approval
by the Group Risk Committee. All relevant operational risk
management information, to include (but not limited to)
performance against risk appetite statements, is reported to the
Enterprise Risk Committee.
The Enterprise Risk Committee met on eleven occasions during
2022.
Model Risk Committee
The Model Risk Committee, chaired by the Chief Risk Officer,
ensures the Group’s compliance with the Prudential Regulation
Authority Supervisory Statement SS3/18 ‘Model Risk Management
Principles for Stress Testing’. The Model Risk Committee acts
under the authority of the Group Risk Committee in an advisory
capacity and makes non-binding recommendations concerning
the Group’s adherence to the Model Risk Policy.
Recommendations are made by the Model Risk Committee to the
Group Risk Committee on suitable macroeconomic scenarios,
model risk appetite, model performance (monitoring) and model
limitations. Approval of the Group’s macroeconomic scenarios
remain the responsibility of the Board.
The Model Risk Committee met on seven occasions in 2022.
Assets and Liabilities Committee
The Assets and Liabilities Committee, chaired by the Chief
Financial Officer, oversees asset and liability mix, the e
ffectiveness
of risk and controls of strategic capital planning, liquidity, funding
and interest rate risk in the Banking Book (IRRBB) and compliance
with limits and metrics set out in the Treasury Policy and
Standards.
The Assets and Liability Committee met on twelve occasions in
2022.
Principal Risks
The following table provides an overview of the Group’s principal
and emerging risks and the way these are managed. In assessing
these risks, due account is taken of the challenging macroeconomic
environment, to include the global economic outlook and the
impact of sustained rises in food prices, high energy costs and
increased cost of credit continue to squeeze the reach of
household income.
Risk Management Report
|
Continued
Principal Risk
Capital Risk
(Principal Risk)
Risk Management
As a deposit taking institution, the Society’s capital is
highly regulated and the Society submits regular capital
returns to regulators. The Group’s capital position is
forecast monthly and its adequacy monitored by the
Board and senior management. The Group uses stress
testing at least annually to assess whether its capital
buffers and limits are su
fficient to withstand even very
severe economic and idiosyncratic conditions.
The Group also maintains a recovery plan with detailed
measures that could be used to rebuild the Group’s
capital if this was necessary. The Group maintains its
capital at a level in excess of its regulatory total capital
and buffer requirements and internal limits.
Commentary
Risk remained static in 2022
In line with the Society’s growth
plan, the Group’s Common Equity
Tier 1 ratio has decreased from
13.8% to 12.5%, comfortably above
the regulatory minimum of 4.5%.
The decrease is a result of the
growth of the Society’s mortgage
book outweighing captial
generation in the year.
Climate Change Risk
(Emerging Risk)
The Society has robust operational resilience processes
and responses to manage the impact of any transient
localised climate change events. The Society has
developed climate change scenarios which have been
used in our capital modelling and stress testing.
The Group actively engages with the industry as a
whole to consider the potential impacts and longer-
term scenarios of climate changes and resulting risks.
Risk increased in 2022
Risk increased due to progressive
climate change events.
The Society is strengthening its
strategic focus on environmental
sustainability to include relevant
CO2 reduction.
Scenario planning and modelling
continue to evolve, though the
Society’s exposure to losses
from climate change related risks
remain low in the context of overall
credit loss provisioning.
Credit Risk - Commercial
(Principal Risk)
The commercial loan book continues to be actively
managed down. All commercial loans over £500k are
subject to annual review, with summary reporting of
outcomes to the Credit Risk Committee. Quarterly
lending management information provides the Credit
Risk Committee with high-level detail for greater than
£500k loans, emerging risks and wind-down progress.
Risk reduced in 2022
The Society withdrew from new
commercial lending in 2008.
Lending balances on commercial
property continue to reduce.
The legacy commercial book has
remained performant throughout
2022. Throughout 2022, the
Society continued to see further
redemptions, in this respect the
risk is decreasing, though we
continue to monitor the external
macroeconomic influence.
Page 68
Page 69
Credit
Risk
Committee
Model Risk
Committee
Enterprise Risk
Committee
Assets and
Liabilities
Committee
Group
Risk
Committee
Audit
Committee
Board
Risk governance structure
Risk remained static in 2022
The Society provides a simple
product range of savings and
mortgages to its Members.
Newcastle Financial Advisers
Limited provides financial advice
as an appointed representative of
Openwork.
The Society continues to review
its suite of conduct risk controls in
line with forthcoming Consumer
Duty requirements.
Risk remained static in 2022
Liquidity risk overall remains within
our risk appetite and the Group
maintains sufficient sources of
liquidity to be able to avoid having
to sell investments at a discount
to raise cash, even in severely
stressed circumstances.
Risk Management Report
|
Continued
Principal Risk
Credit Risk - Residential
(Principal Risk)
Principal Risk
Investment Credit Risk
(Principal Risk)
Risk Management
Loans are underwritten individually based on
affordability, credit score and history, acceptable
collateral (including loan to value) and the Society’s
lending criteria. The Society does not undertake
sub-prime or self-certi
fication lending. The Society’s
Lending Policy has been actively reviewed and
enhanced through 2022 to ensure we respond
appropriately to the macro economic environment
and market challenges.
The residential book is subject to monthly reporting to
the Credit Risk Committee in relation to its credit risk
characteristics (including loan to value, loan to income,
arrears, credit score profile, early delinquencies, and
arrears arising from cohorts of lending). The Society’s
risk appetite is expressed in terms of losses arising in a
stressed scenario, and stress testing is used to ensure
that the portfolio is within the Society’s risk appetite.
Risk Management
Investments are subject to a Group Risk Committee
approved policy, including limits on exposures
to instruments, countries and counterparties.
Investments are monitored and reported daily
to management and monthly to the Assets and
Liabilities Committee, including compliance with the
policy. The credit default swap rates for the Society’s
counterparties are monitored and alerts raised if
certain criteria are met in relation to those spreads.
The mark-to-market value of the Society’s investments
in gilts, residential mortgage backed securities and
covered bonds are monitored daily and reported to
the Assets and Liabilities Committee monthly.
Commentary
Risk increased in 2022
Risk increased due to
macroeconomic influences.
The Society has maintained a
prudent approach to lending
during 2022, whilst continuing to
enhance predictive modelling and
scenario analysis to inform our
lending approach and controls,
recognising increasing financial
pressures on borrowers due to
rising living costs.
The volume of loans that are three
months or more in arrears remain
well within the Society’s risk
appetite and remain consistent
with levels of 2021. Actual losses
on residential mortgages remain
extremely low. The residential
mortgage book will continue to
be closely monitored for early
indications of arrears.
Commentary
Risk remained static in 2022
Acknowledging increased market
volatility in 2022, the Society
maintains a robust Treasury Policy
governing such activity and almost
all investments are in high-quality
liquid assets. The Society has
increased analysis of asset-backed
securities which are proving
to be resilient and sufficiently
overcollateralised.
Conduct Risk
(Principal Risk)
Liquidity Risk
(Principal Risk)
The Society maintains a risk appetite statement relating
to customer outcomes and measures performance
against this monthly, reporting to the Enterprise
Risk Committee with oversight from the Group Risk
Committee. All new products are approved by a
Mortgage and Savings Committee, which includes
consideration of an assessment of risks to customer
outcomes.
The Society maintains a Customer Outcomes
dashboard, which looks at evidence supporting good
customer outcomes (or suggesting poor outcomes)
and this is reviewed monthly and reported to the
Enterprise Risk Committee. The Society maintains
quarterly Conduct Risk monitoring plans, which are
risk based, reporting to Enterprise Risk Committee with
oversight from the Group Risk Committee.
Liquidity risk is monitored against limits and metrics
defined within the approved Treasury Policy and
Standards, including Liquidity Coverage Ratios, whilst
the Internal Liquidity Adequacy Assessment Process
is subject to both the Assets and Liabilities Committee
and Board approval. Stress tests are used to ensure
liquidity risk is managed within risk appetite.
Liquidity is monitored daily with monthly reporting to
the Assets and Liabilities Committee.
Interest Rate
Risk
(Principal Risk)
Macroeconomic Risk
(Principal Risk)
Operational Risk
(Principal Risk)
Interest rate risk (IRR) exists in the Society’s Banking
Book only. The Society does not operate a Trading Book.
Interest rate risk and basis risk are monitored and
reported monthly to the Assets and Liabilities
Committee, including compliance with policy defined
limits and metrics.
The Society uses a suite of metrics to manage interest
rate risks within risk appetite. These metrics are
designed to address all sub-components of interest rate
risk including basis risk, earnings risks, economic value
risks, credit spread risks, duration and optionality risks.
The Society completes regular stress testing analysis
to ensure that IRR remains within appetite should such
scenarios arise.
The Society actively monitors and responds to the key
macroeconomic indicators, taking account of wider
industry economic forecasting to ensure management
understand the range of possible outcomes. We
continue to use outcomes based scenario modelling,
to inform strategic decisions and risk management. We
consider a variety of scenarios and sensitivities to re
flect
outcomes and to ensure we have appropriate mitigation
strategies in place.
Operational risk is subject to a Group Risk Committee
approved policy, which covers the framework for
the management of operational risk. This framework
includes identification, assessment against risk appetite
and management of risks through controls and control
testing. The framework also de
fines procedures
for
reporting risk events, response and operational losses.
Key risks and controls are mapped by all areas of the
business and are used to inform scenario exercises
to test business resilience and operational recovery.
Corporate insurance policies are negotiated with regard
to the key risks within the Group requiring greater
mitigation.
Risk increased in 2022
Risk increased due to market
response to political events,
monetary and fiscal policy
decisions.
The Society continues to
maintain a robust interest rate
risk framework and an effective
hedging strategy. The interest
rate risk in the Banking Book
continues to be managed within
the Society’s low risk appetite.
Risk increased in 2022
The macro-economic risks
continue to create uncertainty,
rising inflation has led to increases
in the Bank of England base rate
and signs of upward pressure on
living and borrowing costs. The
Society continues to monitor,
forecast and plan for increases
in arrears and support to our
customers, though the impact of
macroeconomic risks has not had
a material impact on the Society’s
credit book as at end of 2022.
Risk remained static in 2022
As the Society’s business model
includes diversification via the
Solutions business, this increases
exposure to operational risk
particularly in relation to IT
systems capability and human
error. The Society continues
to invest in a programme of
operational resilience which is
predicated on reducing the impact
of operational events within the
business. Throughout 2022, the
Society’s operational risk exposure
has been managed and remains
well within risk appetite.
Page 70
Page 71
Report on the audit of the
financial statements
1.
Opinion
In our opinion the financial statements o
f Newcastle Building Society (the ‘Society’) and its subsidiaries (the ‘Group’):
-
give a true and fair view of the state of the Group’s and of the Society’s affairs as at 31 December 2022 and of the Group’s and the Society’s
income and expenditure for the year then ended;
-
have been properly prepared in accordance with United Kingdom adopted international accounting standards; and
-
have been prepared in accordance with the requirements of the Building Societies Act 1986.
We have audited the financial statements which comprise:
-
the Group and Society income statements;
-
the Group and Society statements of comprehensive income;
-
the Group and Society balance sheets;
-
the Group and Society statements of movements in Members’ interests;
-
the Group and Society cash flow statements; and
-
the related notes 1 to 45.
The financial reporting
framework that has been applied in their preparation is applicable law and United Kingdom international accounting standards.
2.
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 o
f our report.
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 Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public interest entities, and we
have ful
filled our other ethical responsibilities in accordance with these requirements. The non-audit services provided to the Group and the
Society for the year are disclosed in note 6 to the
financial statements. We confirm that that we have not provided any non-audit services
prohibited by the FRC’s Ethical Standard to the Group or the Society.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3.
Summary of our audit approach
Risk Management Report
|
Continued
On behalf of the Board
Bryce Glover
Chair of the Group Risk Committee
2 March 2023
Independent Auditor's Report
to the Members of Newcastle Building Society
Principal Risk
Pension Fund Obligation Risk
(Principal Risk)
Risk Management
The pension fund is overseen by the Trustees of
the Scheme, within an agreed Investment Strategy.
Reports prepared by the Scheme’s independent
actuary are reviewed by the Trustees quarterly and
if appropriate, management action is taken. The
Group performs stress testing on the pension scheme
liabilities and assets at least annually.
Commentary
Risk increased in 2022
The risk increased in 2022 due to
adverse market turbulence.
The Scheme has continued to
maintain a satisfactory funding
position, despite adverse market
turbulence. The Scheme and
the Society are actively looking
to further reduce/extinguish the
residual risk to the Society through
a strategy of buy in/buy out.
Page 73
Page 72
Key audit matters
The key audit matters that we identified in the current year were:
-
Fair value of equity release mortgages;
-
Expected credit loss (ECL) allowance on residential lending; and
-
Expected credit loss (ECL) allowance on commercial lending.
Within this report, key audit matters are identified as
follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
The materiality that we used for the Group
financial statements was £1.3m which was determined on the basis o
f 0.5% of net assets
(consisting of reserves and subscribed capital).
Scoping
All material entities in the Group are within our audit scope and audited to a lower materiality for the purposes of individual entity
reporting. Audit work to respond to the risks of material misstatement was performed directly by the Group audit engagement team.
Significant changes
in our approach
Following our risk assessment procedures, we considered it appropriate to remove fair value of hedge accounting as a key audit
matter. Following an accounting policy change in the prior year, there is no longer a hedge designation in respect of the equity release
mortgage portfolio and the remaining hedge accounting judgements do not involve signi
ficant estimation.
4.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors’ use o
f the going concern basis of accounting in the preparation of
the financial statements is appropriate.
Our evaluation of the Directors’ assessment of the Group’s and Society’s ability to continue to adopt the going concern basis of accounting included:
-
obtaining an understanding of relevant controls around the Directors’’ going concern assessment;
-
assessing Directors’’ considerations regarding whether they consider it appropriate to adopt the going concern basis of accounting;
-
assessing the Group’s and Society’s compliance with regulation including capital and liquidity requirements;
-
involving prudential risk specialists in assessing the information supporting the liquidity and capital forecasts, including the stress testing and
reverse stress testing performed by the Directors;
•
assessing the assumptions such as cash flows, capital and liquidity, used in the
forecasts prepared by the Directors;
•
assessing historical accuracy of forecasts prepared by the Directors; and
•
assessing the appropriateness of the going concern disclosures.
Based on the work we have performed, we have not identi
fied any material uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the Group’s and Society’s ability to continue as a going concern
for a period of at least twelve months
from when the
financial statements are authorised
for issue.
In relation to the reporting on how the Group has 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.
5.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most signi
ficance in our audit o
f the
financial statements o
f the
current period and include the most significant assessed risks o
f material misstatement (whether or not due to fraud) that we identi
fied. 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
forming our opinion thereon, and we do
not provide a separate opinion on these matters.
5.1
Fair value of equity release mortgages
Independent Auditor's Report
to the Members of Newcastle Building Society (continued)
5.2
Expected credit loss (ECL) allowance on residential lending
5.3
Expected credit loss (ECL) allowance on commercial lending
Key audit matter
description
Under IFRS 9, the Group is required to determine a provision for the expected credit loss (‘ECL’) on loans measured at amortised cost.
Estimating expected credit losses requires judgement and estimation on assumptions relating to customer default rates, likelihood of
repossession, future property values, forced sale discounts and indicators of signi
ficant increases in credit risk. These assumptions are
informed using historical behaviour and experience through different economic cycles as well as credit bureau data.
The Group held £3.5m of impairment provisions at year-end in accordance with IFRS 9 (2021: £3.4m) against total loans and advances
to customers of £3,773.8m (2021: £3,185.3m).
The Group applies four macro-economic scenarios when determining the ECL calculation: a central outlook, a downside, a severe
downside and a growth scenario. The selection and probability weighting of relevant macro-economic scenarios is judgemental and
has a significant impact on the ECL calculation.
The level of judgement is also increased in the current year due to the rises in in
flation, interest rates and the cost o
f living for
borrowers which are macro-economic factors that are not captured in the Group’s core ECL model. The Directors have therefore
determined a post model adjustment to increase the ECL by £0.2m (2021: £nil). This estimate was determined by using credit bureau
data to identify a population of customers that may be at risk of future affordability to meet loan repayments.
We have identified the selection o
f macro-economic assumptions, scenario weightings and the post model adjustment in respect of
inflation and interest rate rises as a key audit matter; it is highly judgemental and has a significant impact on the ECL calculation. There
exists a risk of bias in selecting the weightings and assumptions applied in the IFRS 9 model.
The Group’s loan loss provision balances are detailed within note 12. The associated accounting policies are detailed on page 88 with
detail about critical accounting judgements in applying accounting policies and key sources of estimation uncertainty on page
92. The
Group’s consideration of the effect of the future economic environment is disclosed in note 39. The Audit Committee’s consideration of
the matter is described on page 58.
How the scope of our
audit responded to
the key audit matter
We obtained an understanding of the relevant controls over the loan impairment provisioning process. This included assessment of the
data flows used within the models, and the level o
f challenge at the Model Risk Committee in respect of the assumption and methods
used to determine these accounting estimates.
With the involvement of our credit risk specialists, we assessed the compliance of the modelling approach and methodology with the
requirements of IFRS 9. With the involvement of our credit risk specialists we assessed whether the documented modelled approach
was implemented in practice and if there had been any changes to the model since our review in the prior period.
We challenged the Group’s consideration of the future economic environment by engaging our economic specialists to review the
Group’s approach as well as comparing modelled assumptions to publicly available data from peer organisations, regulators and
economic commentators.
We challenged management as to whether there was sufficient evidence for the level of provisions held compared to the low levels of
historical loss data.
We assessed, using publicly available data, whether the combination of management’s modelled downside and alternative downside
scenarios appropriately captured credit risk relating to the future economic environment.
Working with our credit risk specialists, we assessed the methodology and valuation of the post model adjustment that was made in
respect of affordability risks.
We reconciled the mortgage book to the general ledger and substantively tested a sample of loans to assess whether the data used in
the provision calculation was complete and accurate.
Key observations
Based on the work performed, we concluded that the Group’s ECL applied to the residential mortgage book is reasonable.
Key audit matter
description
As noted above, under IFRS 9 a provision is required for the expected credit loss (ECL) on loans measured at amortised cost.
The Group holds a legacy mortgage portfolio secured against commercial properties, which totalled £13.9m as of 31 December 2022
(31 Dec 2021: £32.0m). The portfolio includes a wide variety of property types, however as a legacy portfolio only a small number of
loans with individually material exposures remain. The expected credit loss provision balance of £2.3m as of 31 December 2022 (31 Dec
2020: £4.3m) which is determined following an assessment of each individual loan.
We consider the most significant areas o
f judgement within the Group’s commercial ECL allowance to be:
•
the macro-economic assumptions and assigned probability scenario weightings; and
•
underlying collateral valuations, given the uncertainty that increased energy costs could have on tenants’ ability to pay rent,
particularly in certain sectors.
The Group’s loan loss provision balances are detailed within note 12. The associated accounting policies are detailed on page 88 with
detail about critical accounting judgements in applying accounting policies and key sources of estimation uncertainty on page 92. The
Group’s consideration of the effect of the future economic environment is disclosed in note 39. The Audit Committee’s consideration of
the matter is described on page 58.
How the scope of our
audit responded to
the key audit matter
We tested the relevant controls over the loan impairment provisioning process. This included assessment of the underlying data
used within the models, and the level of challenge at the Model Risk Committee in respect of the assumption and methods used to
determine these accounting estimates.
We challenged the assumptions by:
•
utilising our real estate specialists to assess the reasonableness of the underlying collateral valuations of properties within the
commercial portfolio;
•
engaging with an internal economic advisory specialist to assess the reasonableness of the macro-economic variables and scenario
weightings; and
•
challenging the macro-economic assumptions using publicly available data, as well as benchmarking against peer organisations.
Key observations
Based on the work performed, we concluded that the Group’s ECL applied to the commercial mortgage book is reasonable.
Page 74
Page 75
Key audit matter
description
The Group holds a legacy portfolio of equity release mortgages (“ERMs”) at fair value in line with IFRS 4 and IFRS 13 which is classi
fied
within level 3 of the fair value hierarchy (see note 32 for a de
finition o
f level 3 measurements). The ERMs had a carrying value at 31
December 2022 of £166.3 million (2021: £232.6 million). The fair value of the ERMs is determined using a discounted cash
flow model
and is reliant upon several unobservable and judgemental inputs.
Our key audit matter relates to the risk of management bias in determining its estimate of the discount rate and future house price
(HPI) assumptions used within the fair value model and the impact these assumptions have on the modelling of the no negative equity
guarantee. This also includes consideration of repayment pro
files and the credit risk associated with the assets.
The Group’s disclosure of the ERMs is detailed within note 13 and note 32. The associated accounting policies are detailed on page 88
with detail about critical accounting judgements in applying accounting policies and key sources of estimation uncertainty on page 92.
The Audit Committee’s consideration of the matter is described on page 58.
How the scope of our
audit responded to
the key audit matter
We obtained an understanding of the relevant controls over the fair valuation of ERM portfolios.
We challenged the Society’s valuation methodology for the ERM portfolio by:
•
involving our valuation specialists in the audit of the Group’s valuation approach;
•
verifying that the ERM model is consistent with the model reviewed by our modelling specialists in the prior year, when we assessed
that the model mechanics had been prepared in accordance with the contractual terms of the loans;
•
assessing the rate used to discount the future cash
flows to present value, by independently determining a reasonable range o
f
discount rates through utilising external data and taking into account the repayment profiles associated with the Group’s borrowers
and credit risks related to the assets;
•
involving our economics specialists to assess the future HPI forecast assumptions used; this was done by benchmarking to external
information and internal consistency with assumptions used in other modelling by the Group;
•
testing the appropriateness of the other elements inherent in the valuation of the underlying loan assets, such as no negative equity
guarantees provided by the Group;
•
challenging the appropriateness of the assumptions in light of current market factors; and
•
performing a ‘stand back’ assessment as to whether the fair value of the ERM portfolio determined by the Group using each of the
individually assessed judgemental inputs, resulted in a reasonable outcome when combined in aggregate through the ERM model.
Key observations
Based on the work performed, we concluded that the Group’s valuation methodology of the ERM portfolio was in line with the
accounting standards and that each of the assumptions, as well as the overall valuation, were within a reasonable range.
6.
Our application of materiality
6.1
Materiality
We define materiality as the magnitude o
f misstatement in the
financial statements that makes it probable that the economic decisions o
f a
reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope o
f our audit work and in
evaluating the results of our work.
Based on our professional judgement, we determined materiality for the
financial statements as a whole as
follows:
6.2
Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the
financial statements as a whole.
6.3
Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £63k (2021: £60k), as well as
differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on
disclosure matters that we identified when assessing the overall presentation o
f the
financial statements.
7.
An overview of the scope of our audit
7.1
Identification and scoping o
f components
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing
the risks of material misstatement at the Group level. Based on that assessment, we performed an audit of the Society and material subsidiaries
executed at levels of materiality applicable to each individual entity which were lower than Group materiality and in the range of £0.1m to £1.2m
(2021: £0.1m to £1.1m). This provided 99% coverage of revenue, pro
fit be
fore tax and net assets of the Group.
At the Group level, we also tested the consolidation process.
Independent Auditor's Report
to the Members of Newcastle Building Society (continued)
7.2
Our consideration of the control environment
Our approach in relation to the Group’s business cycles
We relied on controls over the following business cycles for the Group:
•
Residential mortgage lending (loans and advances to customers and interest income); and
•
Saving accounts (due to members and interest payable).
We obtained an understanding of the relevant controls of the above-mentioned business cycles and tested the operating effectiveness of these.
We also assessed the design and implementation of controls that relate to our identi
fied significant audit risks. The Committee’s assessment o
f
the Group’s internal control environment is set out on page 58.
Our approach in relation to the Group’s IT systems
We planned to take a controls reliance approach over the following IT systems as being the key to the
financial reporting processes in the Group:
• core mortgage system;
•
core savings system; and
•
underlying databases for the above systems
Together with IT specialists, we tested the general IT controls related to these systems and were able to rely on the IT controls as planned. We
also tested the relevant automated controls associated with the business cycles noted in the preceding section, and where relevant reviewed
service auditor reports obtained by the Group in respect of these systems, and were able to rely on these controls as originally planned.
7.3
Our consideration of climate-related risks
In planning our audit, we have considered the potential impact of climate change on the Group’s business and its
financial statements. The
Group continues to develop its assessment of the potential impacts of environmental, social and governance (“ESG”) related risks, including
climate change, as outlined on page 69.
Management concluded that there was no material impact on the financial statements. Our evaluation o
f this conclusion included performing
enhanced risk assessment procedures over the key judgements and estimates in areas where we considered that there was greatest potential
for climate change impact. This was principally in relation to the ECL.
We also considered the consistency of the climate change disclosures included in the Strategic Report with the
financial statements and our
knowledge from our audit.
8.
Other information
The other information comprises the information included in the annual 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 in
formation and, except to the extent otherwise explicitly stated in our 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 o
f 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. I
f, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
9.
Responsibilities of Directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the
financial statements
and for being satis
fied 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’s and the 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 have no realistic alternative but to do so.
10.
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 in
fluence the
economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of the
financial statements is located on the FRC’s website at: www.
frc.org.uk/
auditorsresponsibilities. This description forms part of our auditor’s report.
Page 76
Page 77
Group financial statements
Society financial statements
Materiality
£1.3m (2021: £1.2m)
£1.2m (2021: £1.1m)
Basis for
determining
materiality
0.5% of the Group’s net assets (2021: 0.5% of Group’s net assets)
0.5% of the Society’s net assets (2021: 0.5% of net assets). Society
materiality is capped at 90% of group materiality.
Rationale for the
benchmark applied
In determining materiality we considered a range of possible benchmarks.
The overall capital base is a key focus for the Society’s
Members and regulators. Net assets are also a more stable metric in comparison to profit be
fore tax. Therefore
net assets (consisting
of reserves and subscribed capital) have been considered the most appropriate base on which to determine materiality.
Group financial statements
Society financial statements
Performance
Materiality
70% (2021: 70%) of Group materiality
70% (2021: 70%) of Society materiality
Basis and rationale
for determining
performance
materiality
In determining performance materiality, we considered the following factors:
a.
the quality of the control environment and that we consider it appropriate to rely on controls over a number of business processes; and
b. the nature, volume and size of misstatements in the previous audit.
Independent Auditor's Report
to the Members of Newcastle Building Society (continued)
11.
Extent to which 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 above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of
detecting irregularities, including fraud is detailed below.
11.1
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and
regulations, we considered the following:
•
the nature of the industry and sector, control environment and business performance including the design of the Group’s remuneration
policies, key drivers for directors’ remuneration, bonus levels and performance targets;
•
results of our enquiries of the Directors, management, internal audit and the Audit Committee about their own identi
fication and assessment
of the risks of irregularities;
•
any matters we identified having obtained and reviewed the Group’s documentation o
f their policies and procedures relating to:
o
identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
o
detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; and
o
the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations.
•
the matters discussed among the audit engagement team and relevant internal specialists, including tax, financial instruments, pensions, IT
economic, credit risk, pricing and industry specialists regarding how and where fraud might occur in the
financial statements and any
potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identi
fied
the greatest potential for fraud in the following areas: fair value of equity release mortgages and the ECL allowance for residential and
commercial lending. In common with all audits under ISAs (UK), we are also required to perform speci
fic procedures to respond to the risk o
f
management override.
We also obtained an understanding of the legal and regulatory framework that the group operates in, focusing on provisions of those laws and
regulations that had a direct effect on the determination of material amounts and disclosures in the
financial statements. The key laws and
regulations we considered in this context included the Building Societies Act 1986 for the Society and UK Companies Act for the subsidiaries.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the
financial statements but compliance
with which may be fundamental to the group’s ability to operate or to avoid a material penalty. These included the regulations set by the
Prudential Regulatory Authority (PRA) relating to regulatory capital and liquidity requirements.
As a result of performing the above, we identi
fied
fair value of equity release mortgages and the ECL allowance for residential and commercial
lending as key audit matters related to the potential risk of fraud. The key audit matters section of our report explains the matters in more detail
and also describes the specific procedures we per
formed in response to those key audit matters.
11.2
Audit response to risks identified
In addition to the above, our procedures to respond to risks identified included the
following:
•
reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions o
f relevant laws
and regulations described as having a direct effect on the financial statements;
•
enquiring of management, the Audit Committee and those responsible for legal and compliance matters concerning actual and potential
litigation and claims;
•
performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to
fraud;
•
reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with PRA and
FCA; and
•
in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the
business rationale of any signi
ficant transactions that are unusual or outside the normal course o
f business.
We also communicated relevant identified laws and regulations and potential
fraud risks to all engagement team members including internal
specialists, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
Report on other legal and regulatory requirements
12.
Opinions on other matters prescribed by the Building Societies Act 1986
In our opinion, based on the work undertaken in the course of the audit:
•
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.
In the light of the knowledge and understanding of the group and the society and their environment obtained in the course of the audit, we
have not identified any material misstatements in the directors’ report.
13.
Opinion on other matter prescribed by the Capital Requirements (Country-by-Country Reporting) Regulations 2013
In our opinion the information given in note 45 to the
financial statements
for the
financial year ended 31 December 2022 has been properly
prepared, in all material respects, in accordance with the Capital Requirements (Country-by Country Reporting) Regulations 2013.
14.
Matters on which we are required to report by exception
14.1
Adequacy of explanations received and accounting records
Under the Building Societies Act 1986 we are required to report to you if, in our opinion:
•
adequate accounting records have not been kept by the society; or
•
the society’s financial statements are not in agreement with the accounting records and returns; or
•
we have not received all the information and explanations and access to documents we require for our audit.
We have nothing to report in respect of these matters.
15.
Other matters which we are required to address
15.1
Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by the Society’s Members at the Annual General Meeting on 28
April 2021 to audit the financial statements
for the year ending 31 December 2021 and subsequent
financial periods. The period o
f total
uninterrupted engagement including previous renewals and reappointments of the
firm is 2 years, covering the years ended 31 December 2021
to 31 December 2022.
15.2 Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs UK).
16.
Use of this 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.
As required by the Financial Conduct Authority (FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.14R, these financial statements
form part
of the European Single Electronic Format (ESEF) prepared Annual Financial Report
filed on the National Storage Mechanism o
f the UK FCA in
accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditor’s report provides no assurance over whether the annual financial
report has been prepared using the single electronic format speci
fied in the ESEF RTS.
David Heaton (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Manchester, United Kingdom
2 March 2023
Page 79
Page 78
Page 80
Page 81
Newcastle Building Society has a
genuine interest in caring for their
colleagues. I always receive the support I
need to help me grow as a person, whilst
having the flexibility to focus on what I
love. That's why I love working here.
Photo:
Adam, Newcastle Building Society colleague
Note(s)
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Interest receivable and similar income
Interest income calculated using effective interest rate
2
117.8
92.4
Interest income recognised in respect of insurance contracts
2
11.1
11.9
Net income / (expense) on derivatives hedging mortgage assets
2
(13.1 )
2.2
(13.1)
Total interest receivable and similar income
2
131.1
91.2
Interest payable and similar charges
3
(55.4 )
(31.8 )
(55.4)
(31.7)
Net interest income
75.7
59.5
Other income
4
12.6
12.4
Other charges
4
(0.3 )
(0.5 )
(0.2)
(0.5)
Fair value gains less losses on financial instruments and hedge accounting
37
(1.1 )
(5.2 )
1.0
(5.2)
Income from dividends
4
1.6
1.0
Total operating income
90.7
67.2
Administrative expenses
6
(83.5 )
(65.8 )
(57.8)
(41.7)
Depreciation and amortisation
16,18
(5.7 )
(5.2 )
(2.4)
(2.4)
Operating profit be
fore impairments and provisions
30.5
23.1
Impairment reversals on loans and advances to customers
12
1.6
2.8
Impairment of tangible and intangible assets
16,18
(0.3 )
(2.0 )
(0.3)
(0.2)
Impairment charges of intercompany investment in subsidiaries
15
-
(0.1)
Provisions for liabilities and charges
25
(0.1 )
(0.2 )
-
(0.1)
Profit
for the year before taxation
31.8
25.5
Taxation
8
(5.7 )
(5.2 )
(6.3)
(4.5)
Profit a
fter taxation for the
financial year
25.5
21.0
The notes on pages 88 to 154 form part of these Accounts.
Statements of Comprehensive Income
for the year ended 31 December 2022
Note
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Profit
for the
financial year
25.5
21.0
Other comprehensive income
Items that may be reclassified to income statement
Cash flow hedges
Fair value movements recognised in equity
(3.7 )
(3.7)
-
Amounts transferred to the income statement
0.1
-
Tax on net amounts recognised in equity
19
0.9
-
Financial assets measured at fair value through other comprehensive income
Fair value changes recognised in equity
(2.1 )
(0.2 )
(2.1)
(0.2)
Amounts transferred to the income statement
0.1
-
Tax on net amounts recognised in equity
19
0.5
0.3
Total items that may be reclassified to income statement
(4.2 )
(4.2)
0.1
Items that will not be reclassified to income statement
Other non-classified items
-
(0.1)
Total items that will not be reclassified to income statement
-
(0.1)
Total comprehensive income for the
financial year
21.3
21.0
The notes on pages 88 to 154 form part of these Accounts.
Page 82
Page 83
Income Statements
for the year ended 31 December 2022
Balance Sheets
as at 31 December 2022
Note
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Assets
Cash and balances with the Bank of England
421.9
382.2
Loans and advances to credit institutions
10
88.2
170.7
Debt securities
11
433.0
390.7
Derivative financial instruments
35
73.3
13.9
Loans and advances to customers
12
4,258.7
3,793.6
Deemed loan asset
14
22.9
2.3
Fair value adjustments for hedged risk
37
(60.9 )
(60.9)
62.1
Non-current assets available for sale
17
0.2
2.4
Other assets
21
8.1
8.4
Investments
15
38.6
43.8
Intangible assets
16
1.1
1.3
Property, plant and equipment
18
10.0
12.2
Deferred tax assets
19
5.0
4.2
Current tax assets
0.4
-
Total assets
5,300.5
4,887.8
The notes on pages 88 to 154 form part of these Accounts.
Note
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Liabilities
Due to Members
22
4,220.8
3,731.8
Fair value adjustment for hedged risk
37
0.3
-
Due to other customers
23
175.8
162.6
Deposits from credit institutions
24
577.1
587.6
Derivative financial instruments
35
52.5
146.7
Current tax liabilities
-
0.3
Other liabilities
25
16.7
22.3
Deferred tax liabilities
19
-
0.5
Subscribed capital
26
20.0
20.0
Reserves
237.3
216.0
Total Members' interest, equity and liabilities
5,300.5
4,887.8
Notes 1 to 45 to the financial statements
form an integral part of these
financial statements.
Balance Sheets
as at 31 December 2022
The notes on pages 88 to 154 form part of these Accounts.
These accounts were approved by the Board of Directors on 2 March 2023 and signed on its behalf by
James Ramsbotham,
Chair of the Board
Andrew Haigh,
Chief Executive
Mick Thompson,
Chair of Audit Committee
Page 84
Page 85
Group
General
Fair Value
Cash flow
Total
Reserve
Through
Hedge
Reserves
Other
Reserve
Comprehensive
Income
£m
£m
£m
£m
At 1 January 2022
Profit
for the year
Net movement in fair value through other comprehensive income
(1.5 )
(1.5 )
Net movement in cash flow hedge reserve
(2.7 )
(2.7 )
At 31 December 2022
(2.7 )
General
Fair Value
Cash flow
Total
Reserve
Through
Hedge
Reserves
Comprehensive
Reserve
Income
£m
£m
£m
£m
At 1 January 2021
Profit
for the year
Net movement in fair value through other comprehensive income
At 31 December 2021
Society
General
Fair Value
Cash flow
Total
Reserve
Through
Hedge
Reserves
Other
Reserve
Comprehensive
Income
£m
£m
£m
£m
At 1 January 2022
214.1
1.9
-
216.0
Profit
for the year
25.5
-
-
25.5
Net movement in fair value through other comprehensive income
-
(1.5)
-
(1.5)
Net movement in cash flow hedge reserve
-
-
-
(2.7)
(2.7)
At 31 December 2022
239.6
0.4
(2.7)
237.3
General
Fair Value
Cash flow
Total
Reserve
Through
Hedge
Reserves
Other
Reserve
Comprehensive
Income
£m
£m
£m
£m
At 1 January 2021
193.2
1.8
-
195.0
Profit
for the year
21.0
-
-
21.0
Net movement in fair value through other comprehensive income
-
0.1
-
0.1
Net remeasurement of de
fined benefit obligations
(0.1)
-
-
(0.1)
At 31 December 2021
214.1
1.9
-
216.0
Movement in the year reflects changes disclosed in the Statements o
f Comprehensive Income, net of tax.
Statements of Movements in Members’ Interests
for the year ended 31 December 2022
Cash Flow Statements
for the year ended 31 December 2022
The notes on pages 88 to 154 form part of these Accounts.
The notes on pages 88 to 154 form part of these Accounts.
Note
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Net cash inflows / (outflows)
from operating activities
28
(62.8 )
92.7
(59.2)
Corporation tax paid
(4.6 )
(4.4 )
(4.4)
(4.4)
Net cash
inflows / (outflows)
from operating activities
(67.2 )
88.3
(63.6)
Cash (outflows) / inflows
from investing activities
Purchase of property, plant and equipment
18
(2.1 )
(3.7 )
(0.3)
(0.6)
Purchase of intangible assets
16
(5.0 )
(4.0 )
(0.4)
(0.9)
Sale of property, plant and equipment
2.4
-
Purchase of equity investments
32
(0.3 )
-
-
Additional loans to subsidiary undertakings
15
(1.2)
(3.9)
Repayment of loans to subsidiary undertakings
15
0.4
1.9
Purchase of investment securities
(275.1 )
(106.6 )
(275.1)
(106.6)
Sale and maturity of investment securities
229.8
84.6
Net cash (outflows) / inflows
from investing activities
(50.3 )
(24.8 )
(44.4)
(25.5)
Cash outflows
from
financing activities
Interest paid on subscribed capital
28
(2.3 )
(2.3 )
(2.3)
(2.3)
Capital payment for lease arrangements
28
(1.1 )
(1.0 )
(1.1)
(1.0)
Net cash outflows
from
financing activities
(3.4 )
(3.3 )
(3.4)
(3.3)
Net increase / (decrease) in cash
(95.3 )
40.5
(92.4)
Cash and cash equivalents at start of year
382.2
474.6
Cash and cash equivalents at end of year
28
422.7
382.2
Page 86
Page 87
International Financial Reporting Standards (IFRS) as adopted in the
UK and interpretations issued by the International Financial Reporting
Interpretations Committee (IFRIC) and in accordance with the Building
Societies Act 1986 and the Building Societies (Accounts and Related
Provisions) Regulations 1998 as applicable to building societies
The financial statements have been prepared on the historical cost
basis, as modified by the revaluation o
f certain
financial instruments
measured at fair value at the end of each reporting period.
The Board has reviewed medium and long term plans with particular
emphasis on examining the Group’s liquidity, capital and profitability,
using a variety of stress testing scenarios to determine the risk that
long term plans cannot be achieved. As a result, the Directors are
satisfied that the Society and the Group have adequate resources to
continue in business and meet their liabilities throughout the period of
assessment.
f the Society and the Group
have been prepared on a going concern basis with no material
uncertainties that the going concern basis of accounting is
The Group Accounts include the results of the Society, its subsidiary
undertakings and other entities which it is deemed to control all of
which have accounting periods ending 31 December. Subsidiaries
and other controlled entities are entities over which the Society
has the power to control financial and operating policies so as to
obtain benefits
from their activities. Subsidiaries are consolidated
from the date on which control is transferred to the Group and are
deconsolidated from the date that control ceases. Upon consolidation,
inter-company transactions, balances and unrealised gains on
transactions are eliminated. The accounting policies of subsidiaries are
Interest receivable and interest payable for all interest-bearing
financial
instruments are recognised within ‘Interest receivable and similar
income’ and ‘Interest payable and similar charges’ in the consolidated
income statements, using the effective interest rate method (EIRM).
EIRM is used to calculate the amortised cost of
financial instruments
and to recognise interest receivable or payable over the relevant
period. The effective interest rate is the rate that exactly discounts
estimated cash flows (excluding credit losses) to zero, through the
expected life of the instrument. In calculating the effective interest
rate, all contractual terms of the
financial instrument are taken into
account. Historical and forecast mortgage redemption data and
management judgement are used to estimate the expected lives of
Fees and commissions relating to creating loans and advances to
customers are deferred and spread using the EIRM and included in
interest income. Other fees and commissions are recognised as ‘Other
Other income
Other income relates to property income recognised under IFRS 16
and income from contracts with customers recognised under IFRS 15.
Revenue is recognised when the Group transfers control over a
product or service to its customer. It is measured as the fair value of
consideration specified in the contract with a customer. The Group
recognises revenue at both point in time and over time depending on
the nature of the performance obligations in the contract with the
customer.
IFRS 15 introduced asset and liability categories, “contract assets” and
“contract liabilities”. Contract assets exist when the Group has a right
to consideration in exchange for goods or services already transferred
to a customer but not yet billed. Contract liabilities exist when the
Group has an obligation to transfer goods or services to a customer
for which the Group has already received consideration.
In accordance with IFRS 9 Financial Instruments: Recognition and
Measurement, the Group classifies its financial assets into the
following categories:
Financial assets held at amortised cost
Under IFRS 9, assets may be held at amortised cost, where the asset’s
contractual cash flow reflect solely payments o
f principal and interest
on the principal amount outstanding (SPPI) and the business model is
to hold the asset to collect the contractual cash flows. In this case,
income is recognised under the EIRM.
In assessing the business model applicable to its financial assets, the
Society has considered how financial asset per
formance is evaluated
and reported to senior management, the key risks affecting this
performance, how these are managed, and how managers of the
business are compensated in respect of asset performance.
Loans and advances to customers
The Society’s mortgage lending, other than insurance contracts,
meets the definition o
f SPPI and the Group originates the mortgages
with the intention to hold the asset until maturity, collecting
contractual cash flows. Mortgage assets are recognised on the
Balance Sheet as ‘Loans and Advances to Customers’. Interest is
recognised in accordance with the EIRM.
Loans and advances to credit institutions
The Society’s non-mortgage lending, typically loans and advances to
credit institutions, is similarly undertaken with a view to recovery of
contractual cash flows and with interest charged that meets the SPPI
requirements.
Cash
The Society’s cash balances, where interest generative, are held to
collect contractual interest flows and to ensure appropriate liquidity is
available to meet the Society’s liabilities as they fall due.
Trade receivables
The Society’s trade receivables, whether due from third parties or
intra-group companies, are held to collect the contractual cash
balances as they fall due. The Society does not engage in debt
factoring activities.
Notes to the Accounts
for the year ended 31 December 2022
Financial assets held at fair value through other comprehensive income
Under IFRS 9, where the contractual cash flow characteristics o
f an
asset reflect SPPI, an asset may be classified at ‘
fair value through
comprehensive income’, whether the assets are held for sale or to
collect contractual cash flows. In this case, the
fair value of the asset
is recognised on the Balance Sheet, whilst the fair value movement is
recognised in other comprehensive income. Interest received on these
assets continues to be recognised in the Income Statement using the
effective interest rate method.
Debt securities
Whilst the Group does not trade in financial instruments, it holds
a portfolio of debt securities for liquidity management purposes,
primarily consisting of covered bonds, residential mortgage backed
securities (RMBS) and government gilts. The instruments meet the
definition o
f SPPI, but may be sold if liquidity is required. They are
therefore held at fair value through other comprehensive income.
fit and loss
Under IFRS 9, where the contractual cash flow characteristics o
f an
asset do not reflect SPPI, or where assets are neither held
for sale or
to collect contractual cash flows, the asset is classified at ‘
fair value
through profit or loss’, with
fair value movements recognised through
the Income Statement.
Equity investments
The Group has a small portfolio of equity investments. As return on
these assets are not SPPI, they have to be held at fair value on the
balance sheet, with fair value changes and any dividends recognised
in the income statement. Equity investments are included in
‘Investments’ on the Balance Sheet.
The Group enters into derivative financial instruments to hedge its
exposures relating to interest rates. Derivatives are recognised at fair value
on the date the derivative contract is entered into, and subsequently
re-measured at their fair value on a monthly basis. Changes in fair values
are recognised through the Income Statement. In accordance with
the Group’s Treasury Policy and the Building Societies Act 1986, the
Group does not hold or issue derivative financial instruments
for trading
purposes. The need for credit valuation adjustments is considered in the
Derivatives may be designated in formal accounting hedge
relationships. At the balance sheet date, this included micro fair value
hedges accounted for under IFRS 9 and portfolio (macro) fair value
hedges accounted for under IAS 39.
The fair value of the hedged risk is included on the balance sheet under
the heading “Fair value adjustments for hedged risk”. Any gain or loss
arising from hedge ineffectiveness is recognised immediately in the
Income Statements under the heading “Fair value gains less losses on
financial instruments and hedge accounting”.
Micro fair value hedges are assessed before the hedge is incepted
and regularly thereafter, ensuring there continues to be an economic
relationship between the hedged item and the hedging derivative and
that value changes are not primarily due to credit risk, as required by
IFRS 9.
The hedge effectiveness of macro hedges is assessed both pro- and
retrospectively. In accordance with IAS 39, only highly effective hedges
are incepted or continued.
When a hedging instrument expires, is sold, or no longer meets the
criteria for hedge accounting, then hedge accounting is discontinued
Cash flow hedge accounting
Derivatives may also be designated into formal cash
flow hedge
relationships under IFRS 9. The effective portion of changes in the
fair value of designated derivatives and other designated qualifying
hedging instruments are recognised in other comprehensive income
and accumulated in the cash flow hedging reserve, limited to the
cumulative change in fair value of the hedged item from inception
of the hedge. Hedge effectiveness is measured by comparing the
fair value movement of the hedging instrument to the fair value
movement of a hypothetical derivative representing the hedged
risk. The gain or loss relating to the ineffective portion is recognised
immediately in profit or loss, and is included in the 'Fair value gains
less losses on financial instruments and hedge accounting' line item.
Amounts previously recognised in other comprehensive income and
accumulated in equity are reclassified to profit or loss in the periods
when the hedged item affects profit or loss are included in 'Fair value
gains less losses on financial instruments and hedge accounting'
line. However, when the hedged forecast transaction results in the
recognition of a non-
financial asset or a non-financial liability, the
gains and losses previously recognised in other comprehensive
income and accumulated in equity are removed from equity and
included in the initial measurement of the cost of the non-
financial
asset or non-financial liability. This trans
fer does not affect other
comprehensive income. Furthermore, if the Society expects that
some or all of the loss accumulated in the cash
flow hedging reserve
will not be recovered in the future, that amount is immediately
reclassified to profit or loss.
The Society discontinues cash flow hedge accounting i
f when the
hedging relationship (or a part thereof) ceases to meet the qualifying
criteria. This includes instances when the hedging instrument expires
or is sold, terminated, exercised or where it is designated in a different
type of accounting hedge. The discontinuation is accounted for
prospectively. Any gain or loss recognised in other comprehensive
income and accumulated in cash flow hedge reserve at that time
remains in equity and is reclassified to profit or loss when the
forecast
transaction occurs. When a forecast transaction is no longer expected
to occur, the gain or loss accumulated in the cash flow hedge reserve
The Group’s equity release mortgage assets are accounted for under
IFRS 4 Insurance Contracts, as they contain no-negative equity
guarantees that meet the IFRS 4 criteria for classi
fication as insurance
contracts, as they expose the Society to insurance risk. Equity release
mortgage assets are held at fair value through pro
fit and loss.
Fair value is the present value of the forecast portfolio cash
flows less
the value of the no-negative equity guarantee, which is calculated
using an option pricing model. Where possible inputs are market
driven or where no market driven data is available, based on
management judgement informed by observable data to the extent
possible. Movements in the fair value of the equity release mortgage
assets are included in Fair value gains less losses on financial
instruments and hedge accounting.
Interest on equity release mortgage assets are recognised in
accordance with the effective interest rate method, and based on
contractual interest rates. Included in the equity release mortgage
assets is a fixed reversion book. For this book, the repayment
amount is determined at completion, but the timing of redemption is
uncertain. Interest on fixed reversion loans is recognised based on the
interest rate implicit in the mortgage contract.
Notes to the Accounts
for the year ended 31 December 2022
Page 88
Page 89
1 Significant accounting policies
(continued)
The Group recognises all insurance obligations arising from no-
negative equity guarantees. As such, the Group is not required, and
has not elected to ‘unbundle’ the insurance and deposit components
of its equity release mortgages, with the mortgages therefore
accounted in full under IFRS 4. The Group performs liability adequacy
testing on its insurance liabilities to ensure that the carrying amount of
liabilities is sufficient to cover current estimates of future cash
flows.
See note 13 to the accounts for further information.
For the purpose of the Cash Flow Statements, ‘Cash and cash
equivalents’ comprises cash in hand, balances with the credit
institutions of England, loans and advances to banks available on
demand or with original maturities of three months or less and
investment securities with a maturity period of three months or less
i.e. highly liquid assets readily convertible into cash. For operational
purposes, the Group’s debt security portfolio is maintained for liquidity
purposes with the assets therein demonstrably convertible into cash
regardless of maturity. The Group does not include encumbered
assets in its cash and cash equivalents.
The Group does not consider the timing of derivative collateral in
flows
to be sufficiently reliably estimated to include such collateral placed
with counterparties as a liquid asset for cash
financial assets
Loss allowances for expected credit losses are recognised on all
financial assets held at either amortised cost, in which case loss
allowances impact the Income Statement, or at fair value through
other comprehensive income, in which case loss allowances impact
other comprehensive income and become reserves reductions.
The Group provides for expected credit losses across applicable
financial assets based on whether there has been a significant increase
in credit risk since the asset’s origination. Internal provisioning models
are used to determine expected credit losses for each individual asset,
based on four different economic scenarios (base, upside, downside,
stressed downside). The four scenarios are assigned a probability
weighting to determine the loss allowance recognised.
Where an asset has not seen a significant increase in credit risk since
its origination (‘Stage 1 assets’), 12 month expected credit losses are
recognised as a loss allowance. These are the portion of lifetime
expected credit losses that result from default events on the asset
expected within the 12 months after the reporting date.
Where an asset has seen a significant increase in credit risk since
origination, but there is no objective evidence of impairment at the
reporting date (‘Stage 2 assets’), lifetime expected credit losses are
recognised.
Where an asset has seen significant increase in credit risk since
origination and there is objective evidence of impairment at the
reporting date (‘Stage 3 assets’), lifetime expected credit losses are
recognised and interest income is to be calculated against the net
carrying amount of the
financial asset, rather than the gross amount.
A simplified approach is adopted
for trade receivables and contract
assets. These are not classified into different stages and li
fetime
expected credit losses are recognised.
Securitisations
The Group securitises mortgage loans by transferring the bene
ficial
ownership of a mortgage pool to a Special Purpose Vehicle (SPV),
which issues debt secured on the transferred mortgage loans. The
Society is deemed to control the SPV, and therefore the SPV is fully
consolidated into the Group accounts under IFRS 10 - Consolidated
Financial Statements.
Since the Society is entitled to any residual profits or losses o
f the
SPV, it retains substantively all risks and rewards of holding the
mortgage loans. As a result, the transfer of the bene
ficial ownership
of the mortgage loans to the SPV does not meet the criteria for
derecognising the mortgages from the Society’s Balance Sheet under
IFRS 9. The Society therefore continues to recognise the securitised
mortgages on its balance sheet. The proceeds received by the Society
from the transfer are accounted for as a deemed loan from the SPV.
Any loan notes retained by the Society are netted off the deemed loan.
The securitisations includes an interest rate hedging structure to the
effect that the mortgage cash flows trans
ferred to the SPV are based
on a floating interest rate.
All financial liabilities are initially measured at
fair value, being the issue
proceeds, net of premia, discounts and transaction costs incurred.
Derivative financial liabilities remain accounted
for at fair value on
the balance sheet date. Hedged risk fair value adjustments are also
held on the balance sheet at fair value. The remaining Group
financial
liabilities including shares, deposits, debt securities and Permanent
Interest Bearing Shares are subsequently measured at amortised cost,
Intangible assets relate to computer software purchased from third
parties, development costs for internally generated software, and
customer lists acquired from third parties. Computer software and
development costs are initially recognised at cost, which includes the
original purchase price of the asset and the costs directly attributable
to acquiring the asset and bringing it into working condition for its
intended use. Customer lists are initially recognised at fair value.
Subsequently, intangible assets are recognised at their initial value less
accumulated amortisation and any provisions for impairment.
period in which it is incurred. Development expenditure is also
charged to the income statement, except where the Directors are
satisfied as to the technical, commercial and financial viability o
f
individual projects. Where all capitalisation criteria specified in IAS 38
Intangible Assets are met, the expenditure directly attributable to a
Amortisation of intangible assets commences when they are ready for
their intended use and is provided at rates calculated to write down
the assets to their estimated residual values over the course of their
anticipated useful lives, on the following bases:
Computer software
- 20% per annum, straight line
Development costs
- 20% per annum, straight line
Customer lists
- 20% per annum, straight line
At each balance sheet date, the Group reviews the carrying value of
its intangible assets to determine whether there is any indication that
those assets have suffered an impairment loss. If any such indication
exists, the recoverable value of the asset is estimated to determine
the extent of the impairment loss (if any). If the recoverable value of
an asset is estimated to be less than the current carrying value, the
carrying value of the asset is reduced to its recoverable value. Where
an impairment loss subsequently reverses, the carrying value of the
Notes to the Accounts
for the year ended 31 December 2022
Freehold property and equipment are stated at cost less accumulated
depreciation and any provisions for impairment. Cost includes the
original purchase price of the asset and the costs attributable to
bringing the asset to its working condition for its intended use.
intended use and is provided at rates calculated to write down the
assets to their estimated residual values over the course of their
anticipated useful lives, on the following bases:
Freehold buildings
Freehold buildings
- 2% per annum, straight line
Equipment, fixtures and fittings and motor vehicles
Refurbishment expenditure
- 6.67% to 10% per annum, straight line
Equipment, fixtures & fittings
- 10% per annum, straight line
Motor vehicles
- 20% per annum, straight line
Computer equipment
- 20% to 33% per annum, straight line
Gains and losses on disposals are determined by comparing the net
disposal proceeds with the carrying amount of the asset and are
Leased property and equipment is accounted for in accordance with
IFRS 16 Leases. The standard requires the lessee to recognise a right
of use asset and a corresponding liability on the balance sheet for
all leases, with the exception of short term leases or leases of a low
value asset. The liability is initially measured by discounting variable
and fixed lease payments, as well as other payments inherent to the
lease, to its present value. Where possible, the discount rate used is
the rate implicit in the lease. However, where this cannot be readily
determined, the Group’s incremental borrowing rate is used. The
incremental borrowing rate is set using the Society’s base funding
cost and the costs of any asset buffers required. The right of use
asset is initially measured at cost, including the amount of the initial
measurement of the lease liability, any lease payments made before
the commencement date of the lease, less any incentives received,
any initial direct costs and any restoration costs. Where a change
to lease payments is agreed, the lease liability is re-measured and a
corresponding adjustment is made to the right of use asset.
Leasehold buildings are depreciated on the following basis:
Leasehold with terms greater
than 50 years
- 2% per annum, straight line
Other leasehold buildings
- over the term of the lease
Interest charged on the lease liability are calculated based on the rate
used as discount factor to calculate the lease liability and is included in
The Group’s investment properties reflect purchased or leased
properties that are rented out in full or part to external tenants. All of
the Group’s investment properties have been elected to be held at
their depreciated cost in line with IAS 40. Cost includes the purchase
price of the assets and any directly attributable expenditure, primarily
legal fees associated with the purchases. Depreciation commenced
when the properties were purchased and is provided for over a 50
Impairments of Property and Equipment
At each balance sheet date, the Group reviews the carrying value of its
Plant and Equipment to determine whether there is any indication that
those assets have suffered an impairment loss. If any such indication
exists, the recoverable value of the asset is estimated to determine
the extent of the impairment loss (if any). If the recoverable value of
an asset is estimated to be less than the current carrying value, the
carrying value of the asset is reduced to its recoverable value. Where
an impairment loss subsequently reverses, the carrying value of the
asset is increased to the revised estimate of its recoverable value.
In accordance with IFRS 5, non-current assets are classified as held
for
sale where management is committed to a plan to sell the asset and
it is unlikely that the plan will be significantly changed or withdrawn,
the asset is available for immediate sale at a sales price reasonable in
relation to the asset’s fair value, an active programme to locate a buyer
is initiated, and a sale within 12 months is highly probable.
Immediately before the initial classi
fication o
f the asset as held for
sale, the carrying amount of the asset is measured and resulting
adjustments are recognised in accordance with the applicable
accounting standard. Non-current assets that are classified as held
for
sale are measured at the lower of carrying amount and fair value less
costs to sell.
A gain for any subsequent increase in fair value less costs to sell of an
asset can be recognised in the income statement to the extent that
it is not in excess of the cumulative impairment loss that has been
recognised in respect to the asset. No depreciation is charged for non-
Corporation tax is charged on profits adjusted
for tax purposes.
Deferred tax on temporary differences arising between the tax bases
and carrying amounts of assets and liabilities is provided in full, using
the liability method. Deferred tax is determined using tax rates (and
laws) that have been enacted or substantially enacted by the balance
sheet date and that are expected to apply when the related deferred
income tax asset is realised or the deferred income tax liability is
settled. Deferred tax assets are recognised to the extent that it is
probable that future taxable pro
fit will be available against which the
The Society operates a defined contribution scheme on behal
f of
executive directors and colleagues. For the defined contribution
scheme, contributions are charged to the Income Statements, as they
become payable, in accordance with the rules of the Scheme.
The Society historically operated a defined benefit scheme; this was
closed to future accrual from 30 November 2010, and was funded by
contributions partly from colleagues and partly from the Society at
rates determined by an independent actuary. These contributions are
invested separately from the Group’s assets.
Under IAS 19, the Scheme assets are measured at bid value at
each Balance Sheet date and the obligations are measured by an
independent actuary using the projected unit valuation method,
discounted using a high quality corporate bond rate.
The Group does not recognise IAS 19 pensions surpluses on its
Balance Sheet as the Society does not have an unconditional
contractual right to benefit economically
from the surplus. IAS 19
pension deficits are recognised immediately with relevant actuarial
re-measurements recognised in the Statement of Comprehensive
Notes to the Accounts
for the year ended 31 December 2022
Page 90
Page 91
1 Significant accounting policies
(continued)
A provision is recognised when there is a present obligation as a result
of a past event, it is probable that the obligation will be settled and it
can be reliably estimated. The amount recognised as a provision is the
best estimated of the net present value of the consideration required
to settle the obligation, taking into account the risks and uncertainties
surrounding the obligation.
Contingent liabilities have not been recognised. A contingent liability is
The operating segments disclosed (Member business and Solutions
business) are those used in the Group’s management and internal
reporting structures (for the Chief Operating Decision Maker) in
accordance with IFRS 8. No segment information is presented on
geographical lines, because substantially all of the Group’s activities
Accounting developments
financial statements there are no
amendments to International Financial Reporting Standards relevant
to these accounts that are mandatory for the
first time
for the
financial
Developments not effective at 31 December 2022
There are a number of new or amended standards which become
effective in 2023, and beyond. Early adoption is permitted, but the
Society does not intend to adopt the standards before their mandatory
date.
Amendments to IAS 1, Presentation of
financial statements’ on
classification o
f liabilities are effective from 1 January 2023.
Amendments to IFRS 3, Reference to the Conceptual Framework are
effective from 1 January 2023.
Amendments to IAS 16, Property, Plant and Equipment – Proceeds
before intended use are effective from 1 January 2023.
Amendments to IAS 37, Onerous Contracts – Cost of Ful
filling a
Contract are effective from 1 January 2023.
Amendments to IAS 8, Definition o
f Accounting Estimates are effective
from 1 January 2023.
Amendments to IAS 12, Deferred Tax relating to Assets and Liabilities
arising from a single transaction, are effective from 1 January 2023.
IFRS 17, Insurance Contracts replaces IFRS4, Insurance Contracts, on 1
January 2023, which is currently applied to the Society’s legacy equity
release assets. On transition, the Society will have a policy choice to
transition to either IFRS 17 or IFRS 9. The Society intends to adopt IFRS
9. Due to the change in accounting policy in the prior year, to fair value
accounting, the impact of adopting IFRS 9 will be immaterial as that
option will remain available upon transition.
accounting policies
The Group has to make judgements in applying its accounting
policies, which affect the amounts recognised in the Annual Accounts.
These judgements are based on management’s best knowledge but
the eventual outcome may differ from them. In addition, estimates
and assumptions are made that could affect the reported amounts
of assets and liabilities within the following year. The most signi
ficant
areas where judgements and estimates are made are as follows.
Estimates
Fair value of the equity release mortgage assets
The valuation of the Group’s Equity Release Mortgage asset depends
on a range of assumptions, including the most appropriate discount
rate and property price growth rates and volatility. Key assumptions
and sensitivity analysis are outlined in note 32.
Impairment of
financial assets
The impairment of mortgage assets is determined by a weighted
average of the expected credit losses of four different possible
economic scenarios. Each scenario is based on a range of
assumptions, including property price growth rates and
unemployment rates. The scenario weightings are based on
management’s current expectation about the future probability of
each economic scenario. Further details and sensitivity analysis are
provided in notes 39 and 40.
Pensions
In estimating the value of the pension scheme surplus or de
ficit,
management rely on a range of assumptions including the most
appropriate discount rate and mortality rates, inflation, take up o
f the
Pension Increase Exchange offer and future salary increases. The
Board receives independent external advice from actuarial consultants
in arriving at the scheme assumptions, which are outlined together
with sensitivity analysis in Note 20 to the Annual Accounts.
Judgements
Fair value of derivatives and
financial assets
Fair Values are determined in line with the three level valuation
hierarchy as defined within IFRS 7. Judgement can be required to
determine the classification o
f valuations into the different levels,
further details are provided in Note 32.
Impairment of
financial assets
The modelling of impairment of mortgage assets includes a range of
management judgements, including the Society’s definitions o
f default,
significant increase in credit risk and the use o
f post model adjustments.
Further detail is provided in note 39.
Securitised assets
The mortgage assets sold to the Group’s securitisation vehicle have
not been de-recognised from the Society’s balance sheet. As the
Society continues to be exposed to the risks and rewards of cash
flows
associated with the mortgages, they do not meet the criteria for
Notes to the Accounts
for the year ended 31 December 2022
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
On loans and advances to customers
101.3
88.9
102.7
89.3
On debt securities
- interest and other income
7.6
2.5
7.5
2.5
- profits net o
f losses on realisation
0.1
0.1
0.1
0.1
On other liquid assets
- interest and other income
7.6
0.5
7.5
0.5
Interest recognised in respect to insurance contracts
11.1
11.9
11.1
11.9
Net income / (expense) on derivatives hedging assets
3.1
(13.1)
2.2
(13.1)
130.8
90.8
131.1
91.2
Interest receivable and other income includes
£1.5m
(2021: £0.7m) from
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
On amounts due to Members
44.1
28.3
44.1
28.3
On subscribed capital
2.3
2.3
2.3
2.3
On deposits and other borrowings
9.6
1.0
9.6
0.9
On finance leases
0.1
0.2
0.1
0.2
Net income on derivatives hedging liabilities
(0.7)
-
(0.7)
-
55.4
31.8
55.4
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Other income
Fee and commission income
7.6
7.1
1.6
1.7
Other operating income
37.9
39.0
11.0
10.7
45.5
46.1
12.6
12.4
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Other charges
Fee and commission expense
0.3
0.5
0.2
0.5
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Dividend income
Received from equity investments
0.2
0.1
-
-
Received from subsidiary undertakings
-
-
1.6
1.0
0.2
0.1
1.6
1.0
Other income includes income from contracts with customers of
£44.6m
(2021: £40.1m) is recognised under IFRS 15 and further information is
Notes to the Accounts
for the year ended 31 December 2022
Page 92
Page 93
1. Disaggregation of revenue from contracts with customers
The Group and Society derive revenue from the transfer of services at a point in time and over time in the following business segments and
service areas, excluding intagroup income.
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Solutions business
Savings management services recognised over time
35.4
32.6
-
-
Savings management project and change services recognised over time
0.9
0.9
-
-
IT services recognised over time
0.7
0.6
-
-
37.0
34.1
-
-
Member business
Regulated advice services recognised at a point in time
4.9
4.2
-
-
Regulated advice services recognised over time
1.2
1.2
-
-
Third party services recognised at a point in time
1.4
0.5
1.4
0.5
Other services recognised over time
0.1
0.1
0.1
0.1
7.6
6.0
1.5
0.6
Total revenue from contracts with customers
44.6
40.1
1.5
0.6
In accordance with IFRS 8, ‘Operating Segments’, the Group reports the following segments; Member business and Solutions business. When
the Group prepares financial in
formation for management, it disaggregates revenue by segment and service type. Revenue from contracts
with customers generated by the Solutions business and the Member business is included in ‘Other income and charges’ within the Segment
information note.
Details of intercompany income for the Society are included in the Related parties note 29.
Notes to the Accounts
for the year ended 31 December 2022
2. Unsatisfied long-term service contracts
The following table shows partially unsatis
fied per
formance obligations resulting from
fixed-price long-term contracts as at 31 December 2022
where the contract ends after the balance sheet date:
GROUP
2022
2021
£m
£m
Aggregate amount of transaction price allocated
7.5
4.2
to long-term savings management contracts
Aggregate amount of transaction price allocated
1.2
1.8
to long-term IT services
8.7
6.0
In relation to savings management contracts, the Group expects to recognise approximately £1.6m of the unearned amount in 2023, and
£5.9m thereafter. In relation to IT contracts, the Group expects to recognise approximately £1.1m of the unearned amount in 2023, and
£0.1m thereafter.
3. Assets and liabilities related to contracts with customers
No contract assets or liabilities have been recognised by the Group (2021: £nil) due to the timing of payments and receipts associated with
on-going contracts.
Notes to the Accounts
for the year ended 31 December 2022
5 Revenue from contracts with customers
Continued
4. Descriptions of different types of income from contracts
with customers
Savings management services, and savings management
project and change services
Savings management and savings management project and change
services are provided by the Society’s subsidiary, Newcastle Strategic
Solutions Limited (NSSL).
NSSL provide outsourced savings management services to the
Society and other financial institutions. This includes managing retail
savings on behalf of the Society and third parties. Revenue relating to
this is recognised as savings management services.
Significant work may be required to implement the requirements o
f a
new customer, to implement changes required by existing customers
or to decommission NSSL’s services. Revenue relating to such services
are recognised as savings management project and change services.
Revenue for implementation, project and change services is
recognised over time. Each milestone has a corresponding transaction
price which represents the portion of the service provided to the
customer at that point in time.
Revenue for savings management services is recognised over time
in discrete monthly amounts which are calculated based on actual
work completed by NSSL in the relevant month. Revenue for providing
an ongoing savings management service is recognised monthly in
line with the time elapsed in each individual contract. The amount
of revenue recognised for ongoing savings management is spread
evenly throughout the contractual term, consistent with the pattern of
transfer of the service to the customer.
IT services
NSSL provide managed IT services to the Group and external
customers, which includes managed IT solutions for savings
management and client account systems and data storage services.
Revenue for all services is recognised monthly in line with the
time elapsed in each individual contract. The amount of revenue
recognised for savings management systems and data storage
services is spread evenly throughout the contractual term, consistent
with the pattern of transfer of the service to the customer. The amount
of revenue recognised for client account systems is calculated based
on the actual asset balance held by a customer in the relevant month
in line with the customer contract.
Regulated advice services
Regulated advice services are provided by the Society’s subsidiary,
Newcastle Financial Advisers Limited (NFAL). All services derive from
the company’s principal activity, the provision of
financial planning
services, and include regulated advice, ongoing advice and life
protection plans. The company is an appointed representative of
Openwork Limited, and provides services on behalf of Openwork
Limited. For the purposes of IFRS 15, Openwork Limited is the sole
customer of the company and all consideration for the services
provided by the company is received from Openwork Limited.
Revenue for regulated advice and protection plans is recognised when
confirmation o
f the investment or plan is received by Openwork Limited
and the service is complete. Revenue for ongoing advice is recognised
on a straight-line basis at the end of each month the service is in place.
Consideration for regulated advice and protection plans is calculated
using contractually stated and agreed rates, on an ad valorem basis
for regulated advice, and dependent upon speci
fic product lines
for
protection plans. Consideration for ongoing service is calculated on an
annual basis as a percentage of an investment portfolio.
Third party services
Third party services are provided by the Society through its branch
network and online. The Society introduces customers to third parties
who provide estate management services, and general insurance.
The Society is the principal in the relationship with each third party
provider and has no contractual relationship for the third party service
with the customer.
The service provided by the Society of introducing or referring
customers to a third party is complete once the third party provider
has agreed a sale with the customer. Revenue for all services is
recognised when cash is received, which in all instances is in line
with, or shortly after, completion of the third party contract in line
with contractual payment terms. Consideration for all services is
calculated based on discrete, and contractually agreed, transaction
prices which are noted as a commission amount to the Society. The
Society receives consideration based on an invoicing schedule agreed
with each third party and all payments received relate to performance
completed up to the invoice date.
All services
Due to the nature of services provided, IFRS 15 is more material to
NSSL and NFAL than to the Society. Details of transactions which are
not material to the Group, but are material to the individual companies,
can be found in the speci
fic company’s annual report and accounts.
The transaction prices for all services provided by the Group are
calculated using contractually stated and agreed rates. There are no
elements of variable consideration, no signi
ficant payment terms and
no critical judgements in allocating the transaction price. There is little
judgement in the recognition of this revenue as transaction prices are
agreed upfront, the timing and scope of work is agreed as part of each
customers contract.
The Group measures impairment losses on receivable balances as
of the end of the reporting period at an amount equal to lifetime
expected credit losses in accordance with IFRS 9, ‘Financial
Instruments’. Provisions held against receivable balances at 31
Page 94
Page 95
Notes to the Accounts
for the year ended 31 December 2022
Note
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Staff costs
7
59.5
47.5
36.0
25.1
Short term leases for land and buildings
- payable to third parties
0.3
0.7
0.2
0.1
Other administrative expenses
22.9
17.6
20.8
16.5
Transaction costs
0.8
-
0.8
-
83.5
65.8
57.8
41.7
administrative expenses.
GROUP
SOCIETY
2022
2021
2022
2021
£'000
£’'000
£'000
£'000
Fees payable to the Society's external auditor for the audit of Society
617
406
617
406
and consolidated financial statements
Fees payable for the audit of subsidiaries
70
62
-
-
Fees payable for the other audit related assurance services
53
48
53
48
Fees payable for non-audit services
72
-
72
-
812
516
742
454
Audit fees are inclusive of VAT.
Other audit related assurance service primarily consist of the half year review and client money assurance engagements.
Notes to the Accounts
for the year ended 31 December 2022
Note
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Wages and salaries
48.0
38.5
29.8
20.3
Social security costs
5.4
4.1
2.7
2.0
Pension costs for de
fined contribution scheme
6.1
4.9
3.5
2.8
6
59.5
47.5
36.0
25.1
The monthly average number of persons employed, including Executive Directors, during the year was:
GROUP
SOCIETY
2022
2021
2022
2021
Full time
1,120
1,032
495
443
Part time
273
252
154
157
1,393
1,284
649
600
Head Office
1,177
1,083
456
420
Branches
216
201
193
180
1,393
1,284
649
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Current tax
Current year
6.4
4.9
6.2
4.6
Adjustments in respect of previous years
(1.3)
0.8
-
0.7
Total current tax
5.1
5.7
6.2
5.3
Deferred tax
Current year
0.1
1.0
0.3
0.4
Adjustments in respect of prior years
0.8
(1.1)
(0.2)
(0.7)
Effect of changes in tax rates
(0.3)
(0.4)
-
(0.5)
Total deferred tax
0.6
(0.5)
0.1
(0.8)
Total taxation expense
in Income Statements
5.7
5.2
6.3
4.5
Analysis of taxation for the year
The tax on the Group and Society profit be
fore tax differs from the theoretical amount that would arise using the weighted average tax rate
applicable to profits as
follows:
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Analysis of taxation for the year
Profit
for the year before taxation
31.7
29.1
31.8
25.5
Profit be
fore taxation at the standard rate of
corporation tax in the UK of
19%
(2021: 19%)
6.0
5.5
6.0
4.8
Effects of:
Non-taxable dividend income received
-
-
(0.2)
(0.2)
Banking surcharge
0.4
-
0.4
-
Expenses not deductable for tax
0.1
-
0.1
-
Transfer pricing adjustment
-
-
0.2
0.2
Timing differences
-
0.4
-
0.2
Change in forward tax rates
(0.3)
(0.4)
-
(0.5)
Adjustments in respect of previous years
(0.5)
(0.3)
(0.2)
-
Total taxation expense
5.7
5.2
6.3
4.5
Factors affecting future tax charges
The Society has brought forward trading losses for tax purposes which are expected to affect future taxable pro
fits (see
Page 96
Page 97
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
The chief operating decision maker has been identi
fied as the Board o
f Directors. The Board reviews the Group’s internal reporting in order to
assess performance and allocate resources. Management has determined the operating segments based on these reports.
Following the management approach of IFRS 8, operating segments are reported in accordance with the internal reporting provided to the
Board of Directors. The operating segments used by the Group meet the de
finition o
f a reportable segment under IFRS 8.
The ‘Member business’ segment provides mortgage, savings, investment and insurance products to Members and customers. The ‘Solutions
business’ segment (also referred to as Newcastle Strategic Solutions Limited (NSSL)) provides business to business services through people,
processes and technology. The Board assesses performance based on pro
fit be
fore tax after the allocation of all central costs. Operating pro
fit
before impairments and provisions is also assessed as this provides information on underlying business performance.
Income and directly attributable costs are allocated to each segment and support costs are apportioned, based on direct salary costs and
detailed allocations by budget holders.
Revised commercial arrangements were entered into during 2022 to reflect increasing technology and support service charges provided to the
Member business. The revised commercial arrangements have increased other income and charges received by Solutions from the Member business
and decreased the administration paid by Solutions in 2022. The December 2021 comparative for Solutions’ other income and charges re
flecting the
cost allocation exercise would have been £44.8m, administration charges of £37.0m and pro
fit
for the year ended 31 December 2021 of £4.0m.
Year to 31 December 2022
Member
Solutions
business
business
Total
£m
£m
£m
Net interest income / (expense)
76.4
(1.0)
75.4
Other income and charges
(5.3)
50.7
45.4
Fair value gains less losses on financial instruments and hedge accounting
(1.1)
-
(1.1)
Administrative expenses
(38.3)
(45.2)
(83.5)
Depreciation and amortisation
(2.4)
(3.3)
(5.7)
Operating profit be
fore impairments and provisions
29.3
1.2
30.5
Impairment reversals on loans and advances to customers
1.6
-
1.6
Provisions for liabilities and charges
-
(0.1)
(0.1)
30.9
1.1
32.0
Impairment charges on tangible and intangible assets
(0.3)
Profit be
fore taxation
31.7
Taxation expense
(5.7)
Profit a
fter taxation for the
financial period
26.0
Year to 31 December 2021
Member
Solutions
business
business
Total
£m
£m
£m
Net interest income / (expense)
60.1
(1.1)
59.0
Other income and charges
4.1
41.6
45.7
Fair value gains less losses on financial instruments and hedge accounting
(5.2)
-
(5.2)
Administrative expenses
(28.4)
(37.4)
(65.8)
Depreciation and amortisation
(2.6)
(2.6)
(5.2)
Operating profit be
fore impairments and provisions
28.0
0.5
28.5
Impairment reversals on loans and advances to customers
2.8
-
2.8
Provisions for liabilities and charges
(0.1)
(0.1)
(0.2)
30.7
0.4
31.1
Impairment charges on tangible and intangible assets
(2.0)
Profit be
fore taxation
29.1
Taxation expense
(5.2)
Profit a
fter taxation for the
financial period
Repayable from the date of the Balance Sheets in the ordinary course of business as follows:
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
On demand
17.4
12.8
0.8
-
In not more than three months
87.4
170.7
87.4
170.7
104.8
183.5
88.2
170.7
No provisions are held against loans and advances to credit institutions (2021: £nil). Included within loans and advances to credit institutions is
collateral of
£87.4m
GROUP and SOCIETY
2022
2021
Transferable debt securities
£m
£m
Issued by public bodies – listed
88.2
36.2
Issued by other borrowers – unlisted
344.8
354.5
433.0
390.7
In addition to the securities above, the Society has retained notes issued by Tyne Funding No.1 PLC, an entity controlled by the Group. These are
presented net of the deemed loan from the issuing special purpose vehicle. See note 14 Deemed loan for details. The carrying amount of debt
securities includes a fair value ledge adjustment of
£2.3m
(2021: £nil).
The Directors consider that the primary purpose of holding securities is to comply with prudential requirements. All transferrable debt securities
are held with the intention of use on a continuing basis in the Group’s activities. They are designated by management on initial recognition as
assets held at fair value with changes recognised in other comprehensive income.
Unlisted debt securities are AAA rated holdings of residential mortgage backed securities and covered bonds.
Page 98
Page 99
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Loans fully secured on residential property
4,237.8
3,769.4
4,237.0
3,768.6
Loans fully secured on land
26.8
32.0
26.8
32.0
Other loans
1.5
1.6
1.5
1.5
Gross loans and advances
4,266.1
3,803.0
4,265.3
3,802.1
Less: allowance for losses on loans and advances
(6.6)
(8.5)
(6.6)
(8.5)
4,259.5
3,794.5
4,258.7
3,793.6
Impairment provisions for loans and advances to customers
GROUP
and
SOCIETY
Loans fully
Loans fully
Total
secured on
secured
residential
on land
property
£m
£m
£m
Balance at 1 January 2022
3.4
5.1
8.5
Charge / (credit) for the year
0.4
(2.0)
(1.6)
Utilised during the year
(0.3)
-
(0.3)
Balance at 31 December 2022
3.5
3.1
6.6
GROUP
and
SOCIETY
Loans fully
Loans fully
Total
secured on
secured
residential
on land
property
£m
£m
£m
Balance at 1 January 2021
5.2
9.5
14.7
Credit for the year
(0.3)
(2.5)
(2.8)
Utilised during the year
(1.5)
(2.1)
(3.6)
Interest suspended adjustment
-
0.2
0.2
Balance at 31 December 2021
3.4
5.1
8.5
Equity release mortgage assets
Included in loans and advances to customers secured on residential property is a balance of
£166.3m
(2021: £232.6m) relating to equity release
mortgages. Equity release mortgages are held at fair value, which includes a provision for insurance liabilities. Details on the balances and
valuation of the equity release portfolio are included in notes 13 and 32.
Loans and advances to customers – Securitisation
In the prior year, the Society transferred bene
ficial ownership o
f a pool of mortgages of £282.7m to Tyne Funding No.1 PLC, a securitisation
vehicle. The Society continues to be exposed to all risk and rewards of ownership of these mortgages and therefore the mortgages continue to
be recognised on the Society’s Balance Sheet. See note 14 for details on the securitisation.
The Group’s equity release mortgage assets are accounted for as insurance contracts under IFRS 4. The mortgages were advanced as
indeterminate length fixed interest rate contracts, to be repaid in
full at maturity through sale of the mortgaged properties. Most equity release
contracts contain a no-negative-equity guarantee; that is, where the value of a mortgaged property at the point of sale falls short of the
contractual amount due to the Group, the shortfall is written off. Equity release mortgages are presented on Balance Sheet as part of the Group’s
loans and advances to customers at fair value. The fair value includes an allowance for any anticipated recovery shortfall identi
fied through IFRS
4 liability adequacy testing.
Gross
Fair value
Fair value
mortgage
uplift
presented
balances
on balance
sheet
£m
£m
£m
31 December 2022
160.6
5.7
166.3
31 December 2021
169.1
63.5
232.6
The gross mortgage balances above reflect the Group’s maximum pre collateral exposure to credit risk at 31 December. The Group typically expects
its equity release mortgages to be repaid through sale of the underlying properties. In all instances the Group holds the contractual right to sales
proceeds required to repay a borrower’s mortgage at the time of sale. Property collateral of
£429.6m
(2021: £433.5m) is held against the Group’s
equity release exposures. By their nature, equity release mortgages are not considered to hold a pre-determined maturity date.
The fair value is the present value of the forecast portfolio cash
flows less the value o
f the no-negative equity guarantee, which is calculated using
an option pricing model. See note 32 for details.
In the current year, the fair value uplift reduced by £57.8m. This was largely netted off by the £55.6m fair value increase of the interest rate
derivatives used to hedge the equity release portfolio. See note 37 for more details.
Against equity release assets the following income and charges have been recognised through the income statements:
Interest
Fair value
income
change
£m
£m
31 December 2022
11.1
(57.8)
31 December 2021
11.9
(23.3)
The Group recognises interest income on a per asset basis using the effective interest rate method. For equity release mortgages, the effective
interest rate is considered to be the contractual fixed rate o
f interest detailed in the mortgage contracts. The gross mortgage balances, as
presented above, reflect the amortised cost o
f the Group’s equity release mortgages. Changes in the fair value are included in pro
fit and loss
within Fair value gains less losses on financial instruments,
further details are given in note 37. For
fixed reversion contracts, the effective interest
rate is considered to be the rate implicit in the mortgage contract.
The balances recognised in respect to fixed reversion mortgages included in the total above are as
follows:
Reversion
Book
Interest
value
value
income
£m
£m
£m
31 December 2022
17.5
15.0
0.9
31 December 2021
21.7
18.2
1.2
The Group’s equity release books are closed to new entrants with limited further advances available to existing customers at the discretion of
the Group. The Group’s equity release lending was conducted at low loan to values, protecting the Group from adverse movements in originally
Page 100
Page 101
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
In 2021, the Society securitised a pool of mortgage loans with a book value of £282.7m, by transferring their bene
ficial ownership at net
book value to Tyne Funding No.1 PLC. Tyne Funding No. 1 PLC issued debt securities with a total value of £282.7m secured on the transferred
mortgage loans. All notes have been purchased by the Society and are available as security for repurchase agreements with the Bank of
England or third parties. Since the securitised mortgage loans do not meet the criteria for de-recognition from the Society’s Balance Sheet, they
continue to be held on the Society’s Balance Sheet. The consideration received from Tyne Funding No.1 PLC is accounted for as a deemed loan.
As permissible under IFRS 9, the Society has elected to present the deemed loan net of the retained loan notes issued by Tyne Funding No.1
PLC, as the notes constitute essentially the same asset as the transferred mortgages and presenting them gross results effectively in presenting
the same assets twice on the Society’s Balance Sheet. The carrying value of the notes reduces as coupon is paid on a quarterly basis whilst the
consideration received for transfer of mortgages is repaid on a daily basis.
The net deemed loan asset presented on the Balance Sheet consists of the following items:
Society
2022
2021
£m
£m
Retained loan notes
248.0
282.7
Consideration received for transfer of mortgages
(241.7)
(280.1)
Net value of derivatives integral to the transaction
16.6
(0.3)
22.9
2.3
At the balance sheet date, the securitised mortgage loans had a book value of £241.7m. Class A notes have a coupon rate of SONIA + 58bp
and a call date of 25 November 2026. In the group accounts, any derivatives associated with the transaction are presented gross in assets and
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Equities
2.1
3.9
0.2
0.2
Subsidiaries
-
-
38.4
43.6
2.1
3.9
38.6
43.8
Investments in equities
Equity investments relate to the Society’s holdings in Abrdn PLC after demutualisation of Standard Life, and Newcastle Financial Advisers
Limited’s holding in units in Openwork LLP, a network of independent
financial advisers, under the licence o
f which it operates. Equity
investments are held at fair value through pro
fit and loss. See note 32
for more details.
Society
Shares
Loans
Total
Investments in subsidiary undertakings
£m
£m
£m
Cost
At 1 January 2022
13.0
33.7
46.7
Additions
-
1.2
1.2
Repayments received
-
(0.4)
(0.4)
Return of investment
(9.1)
-
(9.1)
At 31 December 2022
3.9
34.5
38.4
Provisions at 31 December 2022
At 1 January 2022
3.1
-
3.1
Return of investment
(3.1)
-
(3.1)
At 31 December 2022
-
-
-
Net book amount at 31 December 2022
3.9
34.5
38.4
15 Investments
Continued
Shares
Loans
Total
Investments in subsidiary undertakings
£m
£m
£m
Cost
At 1 January 2021
13.0
31.5
44.5
Additions
-
4.1
4.1
Repayments received
-
(1.9)
(1.9)
At 31 December 2021
13.0
33.7
46.7
At 1 January 2021
2.9
-
2.9
Impairment in intercompany investment
0.2
-
0.2
At 31 December 2021
3.1
-
3.1
Net book amount at 31 December 2021
9.9
33.7
43.6
The Society directly holds 100% of the issued ordinary share capital of all its subsidiary undertakings.
The Directors believe that the carrying value of the investments in subsidiary undertakings is supported by their underlying net assets.
Name of principal subsidiary undertakings
Principal activity
Newcastle Financial Advisers Limited
Provision of
financial services
Newcastle Mortgage Loans (Jersey) Limited
Mortgage lending
Newcastle Portland House Limited
The company has not been trading after Portland House, formerly the Group’s
head office, was sold to a third party in 2021. The process of winding up the
company begun during 2022.
Newcastle Strategic Solutions Limited
Provision of specialised savings management and IT services
Newcastle Systems Management Limited
The company has not been trading since its assets were transferred
into Newcastle Strategic Solutions Limited in 2019, and the company was
dissolved in January 2023.
Newcastle Mortgage Loans (Jersey) Limited is incorporated and operates in Jersey. All other of the above subsidiary undertakings are
incorporated in England and Wales and operate in the United Kingdom.
Further information on transactions between Group entities can be found in Note 29 Related Parties.
During the year the Society received dividends from subsidiary undertakings totalling £7.6m. Of this amount, £6.0m has been treated as return
of capital and £1.6m has been treated as income from dividends in pro
Other controlled entities
The following entity is deemed to be controlled by the Society. Although the Society does not have a controlling shareholding, it has the right of
variable returns from the entity and is able to in
fluence these returns. In substance, the entity is there
fore no different than if it was wholly-owned
by the Society. As a result, it is consolidated into the Group accounts. The carrying value of the entity in the Society’s Balance Sheet is £nil.
Tyne Funding No.1 PLC
Tyne Funding No.1 PLC was incorporated on 30 September 2021. It is a special purpose vehicle (SPV) to facilitate the securitisation of a
mortgage pool previously owned by the Society (see note 14 for more details). The entity’s
financial period end date is 31 December. Its
Page 102
Page 103
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
Group
Internally
developed
Internally
software:
developed
Acquired
Purchased
Work in
software:
customer
software
progress
In use
lists
Total
£m
£m
£m
£m
£m
Cost
At 1 January 2022
11.5
1.2
3.8
0.4
16.9
Additions
0.9
4.1
-
-
5.0
Transfers
-
(2.8)
2.8
-
-
Disposals
(0.7)
-
(0.4)
-
(1.1)
At 31 December 2022
11.7
2.5
6.2
0.4
20.8
Accumulated depreciation
At 1 January 2022
8.3
-
0.9
0.2
9.4
Charge for the year
0.9
-
1.0
0.1
2.0
Impairment
0.3
-
-
-
0.3
Disposals
(0.7)
-
(0.4)
-
(1.1)
At 31 December 2022
8.8
-
1.5
0.3
10.6
Net book amount at 31 December 2022
2.9
2.5
4.7
0.1
10.2
Group
Internally
developed
Internally
software:
developed
Acquired
Purchased
Work in
software:
customer
software
progress
In use
lists
Total
£m
£m
£m
£m
£m
Cost
At 1 January 2021
10.4
1.2
0.9
0.4
12.9
Additions
1.1
2.9
-
-
4.0
Transfers
-
(2.9)
2.9
-
-
At 31 December 2021
11.5
1.2
3.8
0.4
16.9
Accumulated depreciation
At 1 January 2021
7.0
-
0.1
0.1
7.2
Charge for the year
1.0
-
0.4
0.1
1.5
Impairment
0.3
-
0.4
-
0.7
At 31 December 2021
8.3
-
0.9
0.2
9.4
Net book amount at 31 December 2021
3.2
1.2
2.9
0.2
7.5
Society
Internally
developed
Internally
software:
developed
Acquired
Purchased
Work in
software:
customer
software
progress
In use
lists
Total
£m
£m
£m
£m
£m
Cost
At 1 January 2022
3.4
-
-
-
3.4
Additions
0.4
-
-
-
0.4
At 31 December 2022
3.8
-
-
-
3.8
Accumulated depreciation
At 1 January 2022
2.1
-
-
-
2.1
Charge for the year
0.3
-
-
-
0.3
Impairment
0.3
-
-
-
0.3
At 31 December 2022
2.7
-
-
-
2.7
Net book amount at 31 December 2022
1.1
-
-
-
1.1
16 Intangible assets
Continued
Society
Internally
developed
Internally
software:
developed
Acquired
Purchased
Work in
software:
customer
software
progress
In use
lists
Total
£m
£m
£m
£m
£m
Cost
At 1 January 2021
2.5
-
-
-
2.5
Additions
0.9
-
-
-
0.9
At 31 December 2021
3.4
-
-
-
3.4
Accumulated depreciation
At 1 January 2021
1.9
-
-
-
1.9
Charge for the year
0.2
-
-
-
0.2
At 31 December 2021
2.1
-
-
-
2.1
Net book amount at 31 December 2021
1.3
-
-
-
1.3
Purchased software
Purchased software relates to IT systems purchased from external providers, with a useful economic life longer than one year.
Internally developed software
Internally developed software relates to capitalised staff costs for developing new IT systems or enhancing the functionality of existing ones. The
software is either used by the Group or licenses are sold to third parties. Internally developed software assets are classi
fied as work in progress until the
software is ready to use. Once it is ready to use, it is reclassi
fied as internally developed so
ftware in use and amortised over its useful economic life.
Acquired customer lists
Acquired customer lists relate to customer lists acquired by Newcastle Financial Advisers Limited. In 2019, Newcastle Financial Advisers bought
Fidelis Financial Solutions Limited and integrated its trade and assets into its own operations. In 2020, the customer list of Carter James
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Fixtures and fittings
-
0.1
-
0.1
Freehold land and buildings
0.2
2.3
0.2
2.3
0.2
2.4
0.2
2.4
The balance recognised in respect to the prior year relates to a property in Newcastle owned by the Society and previously classified as an
investment property. In 2021, the Board decided to sell the property and a buyer was identified. Contracts were exchanged in January 2022 and
completion of the sale took place in February 2022. The assets held for sale at December 2021 were sold for £2.4m and no pro
fit or loss was
recognised on the assets. The balance recognised in the current year relates to a property owned by the Society previously classified within
freehold buildings. In 2022, the decision was made to sell the property and a buyer identi
Page 104
Page 105
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
Group
Equipment,
fixtures,
Leasehold
fittings
Freehold
land and
and motor
buildings
buildings
vehicles
Total
£m
£m
£m
£m
£m
Cost
At 1 January 2022
3.0
23.0
26.0
1.1
53.1
Additions
-
0.2
1.9
-
2.1
Transfer to non-current assets held for sale
(0.3)
-
-
-
(0.3)
Disposals
-
(0.3)
(0.5)
-
(0.8)
At 31 December 2022
2.7
22.9
27.4
1.1
54.1
Accumulated depreciation
At 1 January 2022
0.9
3.9
16.4
0.9
22.1
Charge for the year
0.1
1.4
2.1
0.1
3.7
Transfer to non-current assets held for sale
(0.1)
-
-
-
(0.1)
Disposals
-
(0.2)
(0.5)
-
(0.7)
At 31 December 2022
0.9
5.1
18.0
1.0
25.0
Net book amount at 31 December 2022
1.8
17.8
9.4
0.1
29.1
Group
Equipment,
fixtures,
Leasehold
fittings
Freehold
land and
and motor
buildings
buildings
vehicles
Total
£m
£m
£m
£m
£m
Cost
At 1 January 2021
3.0
22.8
23.2
4.1
53.1
Additions
-
0.2
3.5
-
3.7
Transfer to non-current assets held for sale
-
-
(0.7)
(3.0)
(3.7)
At 31 December 2021
3.0
23.0
26.0
1.1
53.1
Accumulated depreciation
At 1 January 2021
0.8
2.5
13.9
1.1
18.3
Charge for the year
0.1
1.4
2.1
0.1
3.7
Impairment
-
-
1.0
0.4
1.4
Transfer to non-current assets held for sale
-
-
(0.6)
(0.7)
(1.3)
At 31 December 2021
0.9
3.9
16.4
0.9
22.1
Net book amount at 31 December 2021
2.1
19.1
9.6
0.2
31.0
Investment
property
Investment
property
18 Property, plant and equipment
Continued
Society
Equipment,
fixtures,
Leasehold
fittings
Freehold
land and
and motor
buildings
buildings
vehicles
Total
£m
£m
£m
£m
£m
Cost
At 1 January 2022
3.0
8.1
12.0
1.1
24.2
Additions
-
-
0.3
-
0.3
Transfer to non-current assets held for sale
(0.3)
-
-
-
(0.3)
Disposals
-
(0.3)
(0.1)
-
(0.4)
At 31 December 2022
2.7
7.8
12.2
1.1
23.8
Accumulated depreciation
At 1 January 2022
1.0
2.9
7.2
0.9
12.0
Charge for the year
0.1
1.0
0.9
0.1
2.1
Transfer to non-current assets held for sale
(0.1)
-
-
-
(0.1)
Disposals
-
(0.1)
(0.1)
-
(0.2)
At 31 December 2022
1.0
3.8
8.0
1.0
13.8
Net book amount at 31 December 2022
1.7
4.0
4.2
0.1
10.0
Society
Equipment,
fixtures,
Leasehold
fittings
Freehold
land and
and motor
buildings
buildings
vehicles
Total
£m
£m
£m
£m
£m
Cost
At 1 January 2021
3.0
7.9
12.3
4.1
27.3
Additions
-
0.2
0.4
-
0.6
Transfer to non-current assets held for sale
-
-
(0.7)
(3.0)
(3.7)
At 31 December 2021
3.0
8.1
12.0
1.1
24.2
Accumulated depreciation
At 1 January 2021
0.9
1.8
6.9
1.1
10.7
Charge for the year
0.1
1.1
0.9
0.1
2.2
Impairment
-
-
-
0.4
0.4
Transfer to non-current assets held for sale
-
-
(0.6)
(0.7)
(1.3)
At 31 December 2021
1.0
2.9
7.2
0.9
12.0
Net book amount at 31 December 2021
2.0
5.2
4.8
0.2
12.2
Investment
property
Investment
property
Page 106
Page 107
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
18 Property, plant and equipment
Continued
The right of use assets recognised for leases is included in the table above as “Leasehold land and buildings”.
The corresponding lease liability is included in Other liabilities (Note 25).
Lease liabilities are expected to amortise as follows:
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Within one year
1.1
1.1
1.1
1.1
In one to five years
2.5
3.4
2.4
3.4
In more than five years
1.2
1.5
1.2
1.5
4.8
6.0
4.7
6.0
The following charges are included in the income statement in respect to leases:
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Depreciation of right of use assets included in administrative expenses
1.1
1.4
1.0
1.1
Interest charges on lease liabilities (note 3)
0.1
0.2
0.1
0.2
Expenses relating to short term and low value leases included in administrative expenses
- payable to third parties
0.1
0.7
0.1
0.1
1.3
2.3
1.2
1.4
There is no expense recognised in the income statement in respect of variable lease payments that are not included in the measurement of the lease
Included within Investment property are freehold and leasehold commercial buildings, which are owned by the Group and Society held to earn rental
income. The transfer relates to a property which was held for sale at the balance sheet date (see note 17).
Management consider the purchase price less depreciation to represent a fair value for properties held. No formal third party valuation of the Society
or Group investment property holdings was undertaken during 2022 with the properties managed to facilitate continued operation (via rental to third
parties or otherwise) and not towards view of speculative sale.
During 2022 rental income from investment properties of £0.1m (2021: £0.2m) was recognised by the Group and Society. Directly attributable
The movement on the deferred tax account is shown below.
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
At 1 January
3.2
2.5
3.7
2.7
Income Statement expense
(0.1)
(1.0)
(0.3)
(0.4)
Previous year adjustment
(0.8)
1.1
0.2
0.7
Effect of change in tax rates
0.3
0.4
-
0.5
Credited on items taken directly through reserves
1.4
0.2
1.4
0.2
Other
(0.2)
-
-
-
At 31 December
3.8
3.2
5.0
3.7
Deferred tax assets
Deferred tax asset to be recovered in less than 12 months
0.2
0.9
0.2
0.5
Deferred tax asset to be recovered in more than 12 months
4.8
3.7
4.8
3.7
5.0
4.6
5.0
4.2
Deferred tax liabilities
Deferred tax liability to be recovered in less than 12 months
(0.1)
-
-
-
Deferred tax liability to be recovered in more than 12 months
(1.1)
(1.4)
-
(0.5)
(1.2)
(1.4)
-
(0.5)
For deferred tax assets recognised on the balance sheet, the Group’s latest forecast indicate that there will be sufficient future trading pro
fits in
excess of pro
fits arising
from the reversal of existing taxable temporary differences to utilise the deferred tax assets.
The table below shows the items deferred tax are attributable to and how movements in the deferred tax assets and liabilities are re
flected in the
Income Statement and the Statement of Other Comprehensive Income.
Group
Charge
credited to
Other
Income
Comprehensive
2021
Statements
Income
Other
2022
£m
£m
£m
£m
£m
Trading losses
1.9
-
-
(0.1)
1.8
Depreciation in excess of capital allowances
0.6
(0.9)
-
-
(0.3)
Adjustments relating to historic changes in accounting policies
2.1
(0.2)
-
-
1.9
Equity investments held at fair value through the Income Statement
(0.9)
0.5
-
(0.1)
(0.5)
Debt securities held at fair value through other comprehensive income
(0.5)
-
0.5
-
-
Cash flow hedge accounting held at
fair value through other comprehensive income
-
-
0.9
-
0.9
3.2
(0.6)
1.4
(0.2)
3.8
Society
Charge
credited to
Other
Income
Comprehensive
2021
Statements
Income
Other
2022
£m
£m
£m
£m
£m
Trading losses
1.9
-
-
-
1.9
Depreciation in excess of capital allowances
0.2
0.1
-
-
0.3
Adjustments relating to historic changes in accounting policies
2.1
(0.2)
-
-
1.9
Debt securities held at fair value through other comprehensive income
(0.5)
-
0.5
-
-
Cash flow hedge accounting held at
fair value through other comprehensive income
-
-
0.9
-
0.9
3.7
(0.1)
1.4
-
5.0
Adjustments relating to historic changes in accounting policies unwind to the income statement over a period of 10 years from the change in
Page 108
Page 109
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
Group and Society Pension scheme
The Society operates a UK registered trust based pension scheme, Newcastle Building Society Pension and Assurance Scheme that provides defined
benefits. The Scheme was closed to new entrants in 2000 and closed to the
future accrual of bene
fits in 2010. Pension benefits are linked to the
members’ final pensionable salaries and service at their retirement (or date o
f leaving if earlier).
The Trustees are responsible for running the Scheme in accordance with the Scheme’s Trust Deed and Rules, which sets out their powers. The
Trustees of the Scheme are required to act in the best interests of the bene
ficiaries o
f the Scheme. There is a requirement that at least one-third of
the Trustees are nominated by the members of the Scheme.
There are two categories of pension scheme members:
•
Deferred members: current and former employees of the Society who are not in receipt of a Scheme pension; and
•
Pensioner members: in receipt of Scheme pension.
The defined benefit obligation is valued by projecting the best estimate o
f future bene
fit obligations (allowing
for revaluation to retirement for
deferred members and annual pension increases for all members) and then discounting to the balance sheet date. The proportion of bene
fits receive
increases linked to inflation (subject to a cap o
f no more than 5% pa). The valuation method used is known as the Projected Unit Method.
The approximate overall duration of the Scheme’s de
fined benefit obligation as at 31 December 2022 was 13 years (2021: 16 years).
Future funding obligation
The Trustees are required to carry out an actuarial valuation every 3 years. The last actuarial valuation of the Scheme was performed by the Scheme
Actuary for the Trustees as at 30 June 2022. This valuation revealed the Scheme had no funding de
ficit relative to the Scheme’s statutory
funding
objective and so no deficit reduction contributions are payable. However, the Society has agreed to pay contributions o
f currently circa £0.4m per
annum in respect of Scheme expenses and levies. The Society does not recognise a surplus for the reasons set out in Note 1.
Assumptions
The results of the actuarial valuation as at 30 June 2022 have been updated to 31 December 2022 by a quali
fied independent actuary. The
assumptions used for the IAS 19 year end valuation are as follows:
Significant actuarial assumptions
2022
2021
Discount rate
4.90%
1.90%
RPI inflation
3.10%
3.35%
CPI inflation
2.10%
2.35%
Mortality assumptions
Mortality (post-retirement)
SAPS ‘S3’CMI 2021
SAPS ‘S3’CMI 2020
[1.25%] (yob)
[1.25%] (yob)
Other actuarial assumptions
RPI pension increases
3.05%
3.30%
Pension increases in deferment
2.40%
2.60%
Life expectancies (in years)
For an individual aged 62
Male
24.2 years
24.4 years
Female
26.9 years
27.1 years
At age 62 for an individual aged 42 in 2022
Male
25.6 years
25.8 years
Female
28.4 years
28.4 years
20 Retirement benefit obligations
Continued
Risks
Through the Scheme, the Society is exposed to a number of risks:
-
Asset volatility:
The Scheme’s defined benefit obligation is calculated using a discount rate set with re
ference to corporate bond yields,
however the scheme invests in some growth assets. These assets are expected to outperform corporate bonds in the long-term, but
provide volatility and risk in the short term.
-
Changes in bond yields:
A decrease in corporate bond yields would increase the Scheme’s defined benefit obligations. The Scheme
invests in Liability Driven Investment (LDI) assets, which are designed to offset the impact of changes to market yields. Changes in bond
yields are therefore not expected to be a signi
ficant source o
f balance sheet volatility other than signi
ficant changes in credit spreads.
-
Inflation risk:
A significant proportion o
f the Scheme’s de
fined benefit obligation is linked to inflation, there
fore higher in
flation will result in
a higher defined benefit obligation (subject to the appropriate caps in place), although the Scheme’s LDI holding is expected to offset the
impact of in
flation rate changes.
-
Mortality risk:
If Scheme members live longer than expected, the Scheme’s bene
fits will need to be paid
for longer, increasing the Scheme’s
defined benefit obligation.
The Trustees and Society manage risks in the Scheme through the following strategies:
-
Diversification:
Investments are well diversified, such that the
failure of any single investment would not have a material impact on the
overall level of assets.
-
Investment strategy:
The Trustees are required to review their investment strategy on a regular basis.
-
Liability driven investment (LDI):
The Scheme invests in LDI assets, whose long-term investment returns are expected to partially hedge
interest rate and inflation rate movements.
-
Pension increase exchange:
The Trustees currently offer retiring members an option to exchange future pension increases for a higher
immediate pension. This has reduced the Scheme liabilities for retired members who have already taken up the option and, based upon the
assumption of future take up, for deferred members who will retire in future.
Sensitivity analysis
Change in
Change in defined
Assumption
assumption
benefit obligation
Discount rate
+ / – 0.5%
– 6% / + 6%
Inflation
+ / – 0.5%
+ 3% / – 3%
Assumed life expectancy
+ / – 1 year
+ 3% / – 3%
Limitations of the sensitivity analysis
These calculations provide an approximate guide to the sensitivity of results and may not be as accurate as a full valuation carried out on these
assumptions. Each assumption change is considered in isolation, which in practice is unlikely to occur, as changes in some of the assumptions
are correlated.
Asset class at market value
The assets of the Scheme were invested as follows:
2022
2021
%
%
Equities
7.2
11.3
Diversified growth
funds
7.2
10.5
Corporate bonds
36.5
30.0
Fixed interest and index linked gilts
41.8
44.3
Annuities
1.3
-
Cash
6.0
3.9
Total
100.0
100.0
Actual return on assets over the period (£m)
(38.3)
1.0
All assets listed above are held as Legal & General Pooled Investment Vehicles with the exception of the small amount in the Trustees
bank account. The Multi Asset class consists of a single diversi
fied
fund with underlying assets of equities, bonds, commodities and listed
infrastructure, property, private equity and global real estate companies.
The reduction in the market value of the Scheme assets is due to changes in forward interest rates. They were largely netted off by the change
in value of the Scheme's liabilities, caused by increased discount rates associated with those forward interest rates, demonstrating that scheme
assets and liabilities are well matched.
Page 110
Page 111
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
20 Retirement benefit obligations
Continued
Reconciliation to the Balance Sheet
2022
2021
£m
£m
Total value of assets
77.8
121.5
Present value of de
fined benefit obligation
(70.6)
(110.7)
Funded status
7.2
10.8
Adjustment in respect of minimum funding requirement
(7.2)
(10.8)
Pension asset recognised in the Balance Sheet before allowance for deferred tax
-
-
Analysis of changes in the value of the de
fined benefit obligation over the period
2022
2021
£m
£m
Value of de
fined benefit obligations at start o
f the period
110.7
120.1
Interest cost
2.1
1.7
Benefits paid
(5.3)
(5.9)
Actuarial losses: experience differing from that assumed
0.5
1.2
Actuarial gains: changes in demographic assumptions
(0.5)
(0.8)
Actuarial gains: changes in financial assumptions
(36.9)
(5.6)
Value of de
fined benefit obligation at end o
f period
70.6
110.7
Analysis of changes in the value of the Scheme assets over the period
2022
2021
£m
£m
Market value of assets at start of period
121.5
125.7
Interest income
2.3
1.7
Actual return on assets less interest
(40.6)
-*
Employer contributions
0.3
0.3
Benefits paid
(5.3)
(5.9)
Administration costs
(0.4)
(0.3)
Market value of assets at end of period
77.8
121.5
*Actual return on assets less interest was (£0.7m) which was offset by £0.7m income in respect of insured death bene
fits.
Amount recognised in Income Statements
2022
2021
£m
£m
Administration costs
0.4
0.3
Amount charged to Income Statements
0.4
0.3
Amounts recognised in Statements of Comprehensive Income
2022
2021
£m
£m
Actuarial losses on defined benefit obligation
36.9
5.2
Actual return on assets less interest
(40.6)
-
Limit on recognition of assets less interest
3.7
(5.2)
Amounts recognised in Statements of Comprehensive Income
-
-
20 Retirement benefit obligations
Continued
Guaranteed minimum pension equalisation
On 26 October 2018, the High Court ruled in the Lloyds Banking Group case that Trustees are under a duty to make sure that equal benefits
are paid, including where these benefits are in the
form of Guaranteed Minimum Pension (GMP). As a result, all schemes with GMP rights will
have to act to allow for equalisation of bene
fits
for the effect of unequal GMPs. This is known as GMP equalisation. As a result of this judgment,
it is generally expected companies make an allowance for any increase in the de
fined benefit obligation that they expect as a result o
f GMP
equalisation. As per previous years, an approximate allowance for the impact of GMP equalisation of 0.5% of the de
fined benefit obligation has
been made. This considers current members of the Scheme only.
Past transfers
The 2018 judgment did not consider whether Trustees needed to include past transfers within the perimeter of GMP equalisation. However,
this question was addressed in a further judgment handed down on 20 November 2020. This judgment con
firmed, broadly, that past individual
transfers do need to be included (to the extent they related to relevant GMP bene
fits), but that actuarially certified bulk trans
fers do not. The
2020 judgement has resulted in an increase in the Group’s estimated scheme liabilities of £0.1m.
Insured members
The pension obligation for some members of the scheme are insured by a third party. The pension liability relating to insured members and the
corresponding insurance assets in respect to these members always net to £nil. At 30 June 2022, they were estimated to be £1.0m (2021: £1.4m).
They have no effect on any primarily financial statement. The pension liability and pension asset have been presented including the insured
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Receivable from subsidiary undertakings
-
-
1.5
1.5
Prepayments and accrued income
12.1
13.0
4.1
5.2
Other receivables
5.0
4.5
2.5
1.7
17.1
17.5
8.1
22 Due to Members
GROUP and SOCIETY
2022
2021
£m
£m
Held by individuals
4,220.7
3,731.6
Other shares
0.1
0.2
4,220.8
3,731.8
23 Due to other customers
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Due to other customers
175.8
159.1
175.8
162.6
175.8
159.1
175.8
162.6
Page 112
Page 113
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
GROUP and SOCIETY
2022
2021
£m
£m
Deposits from credit institutions
577.1
587.6
577.1
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Amounts payable to subsidiary undertakings
-
-
2.7
4.5
Lease liabilities
4.8
6.0
4.7
6.0
Other creditors
1.9
2.0
1.0
1.0
Accruals and deferred income
11.6
13.4
7.8
10.2
Provisions
0.6
0.8
0.5
0.6
18.9
22.2
16.7
22.3
GROUP
SOCIETY
2022
2021
2022
2021
£m
£m
£m
£m
Opening provision at 1 January
0.8
0.7
0.6
0.6
New provisions for the year
0.5
0.3
0.4
0.2
Released provisions for the year
(0.4)
(0.1)
(0.4)
(0.1)
Amounts utilised / transferred during the year
(0.3)
(0.1)
(0.1)
(0.1)
Closing provision at 31 December
0.6
0.8
0.5
0.6
GROUP and SOCIETY
2022
2021
£m
£m
12.625% permanent interest bearing shares
10.0
10.0
10.750% permanent interest bearing shares
10.0
10.0
20.0
20.0
The 12.625% and 10.750% subscribed capital issues were issued for an indeterminate period and are only repayable in the event of the
(i)
Until 11 June 1996, under Section 22 of the Building Societies Act 1986, the Society had an obligation to discharge the liabilities of its
subsidiary undertakings insofar as they were unable to discharge the liabilities out of their own assets.
The Society has no capital commitments for the acquisition of property, plant, and equipment at 31 December 2022.
Commitments in respect to leases classified as short term or small under IFRS 16 are disclosed in note 18.
GROUP and SOCIETY
2022
2021
£m
£m
Irrevocable undrawn committed loan facilities
267.6
Page 114
Page 115
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
GROUP
SOCIETY
2022
2021
2022
2021
Reconciliation of pro
fit
before taxation to net cash in
flow
£m
£m
£m
£m
Profit
before taxation
31.7
29.1
31.8
25.5
Depreciation and amortisation
5.7
5.2
2.4
2.4
Interest on subscribed capital
2.3
2.3
2.3
2.3
Increase in derivative financial instruments
(171.0)
(81.2)
(153.6)
(81.5)
Interest payment for
finance lease arrangements
(0.1)
(0.2)
(0.1)
(0.2)
Other non-cash movements
(1.2)
2.4
1.5
0.5
Net cash outflows be
fore changes in operating assets and liabilities
(132.5)
(42.2)
(115.7)
(50.8)
Increase in loans and advances to customers
(465.0)
(227.4)
(465.1)
(228.6)
Decrease in fair value adjustments for hedged risk
123.3
54.0
123.3
54.0
Decrease in cash collateral pledged
83.3
79.9
83.3
79.9
Increase / (decrease) in shares
489.0
(44.5)
489.0
(44.5)
Increase in amounts due to other customers and deposits from banks
6.2
118.7
2.7
122.2
Increase in deemed loan
-
-
(20.6)
(2.3)
Decrease / (increase) in investments, other assets, prepayments and accrued income
0.4
(5.9)
0.3
7.1
(Decrease) / increase in other liabilities
(2.1)
5.1
(4.4)
3.8
Net cash
inflows / (outflows)
from operating activities
102.6
(62.8)
92.7
(59.2)
Cash and cash equivalents
Cash and balances with the Bank of England
421.9
382.2
421.9
382.2
Loans and advances to banks repayable on demand
17.4
12.8
0.8
-
At 31 December
439.3
395.0
422.7
382.2
Cash and cash equivalents comprise cash in hand, balances with the Bank of England, loans and advances to banks available on demand or
with original maturities of three months or less and investment securities with a maturity period of three months or less i.e. highly liquid assets
IAS 7 “statement of cash
flows” requires enhanced disclosures around changes in liabilities
from
financing activities arising
from cash
flows and
non cash changes.
28 Note to the Cash Flow Statements
Continued
Changes of liabilities arising from
financing liabilities in the year were as
follows:
£m
£m
£m
£m
£m
£m
£m
£m
Subscribed capital (PIBS)
20.4
-
-
2.3
(2.3)
-
-
20.4
Finance lease arrangements
6.0
0.1
(0.2)
0.1
(0.1)
(1.1)
-
4.8
£m
£m
£m
£m
£m
£m
£m
£m
Subscribed capital (PIBS)
20.2
-
-
2.3
(2.3)
-
0.2
20.4
Finance lease arrangements
7.0
-
-
0.2
(0.2)
(1.0)
-
6.0
Opening and closing balance sheet positions include applicable accrued interest. The Group's financing liabilities are held on balance sheet at
their amortised cost under IFRS 9 and are denominated in Sterling. Accordingly, the accounting value of the Group's
financing liabilities has not
been impacted by changes in fair value or foreign exchange rates during the years to 31 December 2022 or 2021.
* Initial lease recognition adjustment relates to finance lease arrangements on the initial recognition o
f IFRS16 lease liability on balance sheet for
Balance sheet
31 December
2021
Balance sheet
31 December
2020
Accrued
interest/lease
charge
Accrued
interest/lease
charge
Initial lease
recognition*
Lease
remeasurement*
Lease
remeasurement*
Initial lease
recognition*
Interest
payment
flows
Interest
payment
flows
Capital
repayment
flows
Capital
repayment
flows
Other
Other
Balance sheet
31 December
2022
Balance sheet
31 December
2021
Non-cash changes
Non-cash changes
Cash Flows
Cash Flows
Page 116
Page 117
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
The Group is controlled by Newcastle Building Society which is registered in England and Wales and operates in the United Kingdom. Further
details of subsidiary undertakings are disclosed in Note 15 to these Accounts. The Directors are considered to be the only key management
personnel as defined by IAS 24.
Transactions with Directors and their close family members
Directors and their close family members have entered into the following transactions with Newcastle Building Society in the normal course of
business.
Loans to Directors and their close family members
2022
2021
£000
£000
At 31 December
249
258
These loans were made on normal commercial terms and a register of them is available for inspection at the Principal Office for a period of 15
days up to and including the Annual General Meeting.
Deposits and investments held by Directors and their close family members
2022
2021
£000s
£000s
At 31 December
393
261
Amounts deposited by Directors and members of their close families earn interest on the same terms and conditions applicable to other
customers. There were no other transactions with Directors or their close family members during 2022 or 2021.
Transactions with other Group undertakings
The Society receives managed IT, property and business support services from Newcastle Strategic Solutions Limited, a wholly owned subsidiary of
the Society. The Society provides financial and administrative services to Newcastle Strategic Solutions Limited.
During the year, the following transactions were carried out with related parties:
(a) Sales of
financial and administrative services
2022
2021
£000s
£000s
Newcastle Strategic Solutions Limited
10,191
10,148
Sales of services are negotiated with related parties on commercial terms.
(b) Purchases of services:
2022
2021
£000s
£000s
Business Support Services
Newcastle Strategic Solutions Limited
13,391
6,593
Purchased services are negotiated with related parties on commercial terms.
29 Related parties
Continued
At 31 December 2022 the following unsecured balances remained outstanding with related parties:
(c) Outstanding balances:
Amounts owed to Society
Amounts owed by Society
2022
2021
2022
2021
£000
£000
£000
£000
Newcastle Systems Management Limited
-
42
-
-
Newcastle Strategic Solutions Limited
1,515
1,451
1,465
769
Newcastle Financial Advisers Limited
-
-
1,232
792
Newcastle Portland House Limited
-
-
-
2,900
Newcastle Mortgage Loans (Jersey) Limited
-
16
-
-
At 31 December 2022 the following borrowings and cash deposits remained outstanding with related parties:
(d) Borrowings/ cash deposits:
Amounts borrowed from Society
Amounts deposited with Society
2022
2021
2022
2021
£000
£000
£000
£000
Newcastle Strategic Solutions Limited
31,540
30,735
-
-
Newcastle Mortgage Loans (Jersey) Limited
396
410
-
-
Tyne Funding No. 1 Plc
2,544
2,544
-
-
Interest paid to Society
Interest paid by Society
2022
2021
2022
2021
£000
£000
£000
£000
Newcastle Strategic Solutions Limited
1,096
1,057
-
-
Newcastle Mortgage Loans (Jersey) Limited
26
59
-
-
Tyne Funding No. 1 Plc
12
1
-
-
The loan between the Society to Newcastle Strategic Solutions Limited is made up of three tranches with each on a rolling basis. The interest
rate on the loans is the Society’s SVR +1% and SVR -2%.
The loan between the Society and Newcastle Mortgage Loans (Jersey) Limited has an interest rate of Sonia + 11.93bps and will mature when the
company’s underlying mortgage book redeems.
The loan to Tyne Funding No.1 Plc has an interest rate of 0.5%. The loan is subordinate to all other obligations of Tyne Funding No.1 Plc and
Page 118
Page 119
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
financial instruments
Disclosures relating to financial instruments and related risks in notes 31 to 43 are given on a Group basis, as the risks o
f the organisation are
managed on a Group basis. The Society basis is not considered to be materially different from the Group basis for any of these disclosures.
Note 1 describes how the classes of
financial instruments are measured and how income and expenses, including
fair value gains and losses, are
recognised. The following measurement basis acronyms are used throughout this disclosure:
FVOCI
fair value through other comprehensive income
FVTPL
fair value through pro
fit or loss
The Group has financial assets and liabilities
for which there is a practical right to offset the recognised amounts and which are settled net in
practice. However, the netting arrangements do not result in an offset of balance sheet assets and liabilities for accounting purposes as the right
to offset is not unconditional in all circumstances. There are no financial assets or liabilities which are offset with the net amount presented on
the balance sheet.
The Group has also reclassified certain equity investments
from level 2 to level 3, see note 32 for further details. The Group has not reclassi
fied
any other financial assets during the year.
Notes 31-33 provide further information on the classi
fication and valuation o
f
financial instruments.
Notes 34-38 provide further information on the Group’s interest rate risk management.
Notes 39-41 provide further information on the Group’s credit risk management.
Note 42 provides further information on the Group’s liquidity risk management.
Note 43 provides further information on the Group’s capital risk management.
The Group does not have exposures to currency risk and has no material exposure to equity risk.
31 Categories of
financial instruments
The following table analyses the
financial assets and liabilities in the balance sheet by the class o
f
financial instrument to which they are
assigned and by the measurement basis.
Amortised
FVOCI
FVTPL
Total
Cost
Group as at 31 December 2022
Note
£m
£m
£m
£m
Cash in hand and balances with the Bank of England
421.9
-
-
421.9
Loans and advances to credit institutions*
10
104.8
-
-
104.8
Debt securities
11
-
433.0
-
433.0
Derivative financial instruments
35
-
-
90.4
90.4
Loans and advances to customers
12
4,093.2
-
166.3
4,259.5
Fair value adjustments for hedged risk
37
-
-
(60.9)
(60.9)
Investments
15
-
-
2.1
2.1
Other assets, of which
financial
6.5
-
-
6.5
Total financial assets
4,626.4
433.0
197.9
5,257.3
Financial liabilities
Due to Members
22
4,220.8
-
-
4,220.8
Fair value adjustments for hedged risk
37
-
-
0.3
0.3
Due to other customers
23
175.8
-
-
175.8
Deposits from credit institutions
24
577.1
-
-
577.1
Derivative financial instruments
35
-
-
52.5
52.5
Subscribed capital
26
20.0
-
-
20.0
Other liabilities, of which
financial
2.4
-
-
2.4
Total financial liabilities
4,996.1
-
52.8
5,048.9
31 Categories of
financial instruments
Continued
Amortised
FVOCI
FVTPL
Total
Cost
Group as at 31 December 2021
Note
£m
£m
£m
£m
Cash in hand and balances with the Bank of England
382.2
-
-
382.2
Loans and advances to credit institutions*
10
183.5
-
-
183.5
Debt securities
11
-
390.7
-
390.7
Derivative financial instruments
35
-
-
14.5
14.5
Loans and advances to customers
12
3,561.9
-
232.6
3,794.5
Fair value adjustments for hedged risk
37
-
-
62.1
62.1
Investments
15
-
-
3.9
3.9
Other assets, of which
financial
5.6
-
-
5.6
Total financial assets
4,133.2
390.7
313.1
4,837.0
Financial liabilities
Due to Members
22
3,731.8
-
-
3,731.8
Due to other customers
23
159.1
-
-
159.1
Deposits from credit institutions
24
587.6
-
-
587.6
Derivative financial instruments
35
-
-
147.6
147.6
Subscribed capital
26
20.0
-
-
20.0
Other liabilities, of which
financial
7.4
-
-
7.4
Total financial liabilities
4,505.9
-
147.6
4,653.5
*Loans and advances to credit institutions includes
£16.6m
(2021: £12.8m) in cash held by the Society’s subsidiary entities.
Loans and advances to customers held at FVTPL relates to the Society’s legacy equity release portfolio, which is accounted for under IFRS 4 (see notes
13 and 35 for details). All other of the Group’s FVTPL
financial assets and liabilities are mandatorily measured at
fair value under IFRS 9. The Group has
not elected to hold at any financial assets or liabilities at FVTPL under IFRS 9 that could otherwise have been held at amortised cost or at FVOCI.
Cash in hand and balances with the Bank of England
Cash held for liquidity and operational purposes.
Loans and advances to credit institutions
Cash lent to financial institutions to generate an interest income return, operational bank accounts and cash collateral placed with derivative
counterparties to be repaid to the Society in future periods.
Debt securities
Assets comprising covered bonds, residential mortgage backed securities, and government gilts. Investments made to utilise liquid cash
reserves to generate interest income.
Derivative financial instruments
Financial instruments whose value is derived from an underlying asset, index or reference rate it is linked to. The Group does not operate a
derivative financial instruments trading book. Derivatives are held
for hedging purposes.
Loans and advances to customers
Cash lent to individual Members of the Society, corporates and housing associations.
Fair value adjustments for hedged risk
Adjustments to reflect the
fair value of
financial instruments that are designated as hedged items as part o
f the Group’s interest rate risk
hedging activities.
Investments
Equity investments
Due to Members
Cash deposits made by customers held by the Society.
Due to other customers
Cash deposits made by non-Members of the Society.
Deposits from credit institutions
Deposits made by financial institutions with the Society.
Subscribed capital
Permanent Interest Bearing Shares issued by the Society, with further details given in Note 26.
Page 120
Page 121
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
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.
For assets held at fair value, the following table summarises the basis for measuring the fair value, using the three levels de
fined in IFRS 13:
Level
2022
2021
£m
£m
Financial assets
Debt securities at FVOCI
1
433.0
390.7
Equity investments
1
0.1
0.2
Derivative financial instruments
2
90.4
14.5
Fair value adjustments for hedged risk
2
(60.9)
62.1
Equity investments*
2
-
3.7
Equity investments*
3
2.0
-
Loans and advances to customers held at fair value
3
166.3
232.6
Financial liabilities
Derivative financial instruments
2
52.5
147.6
Fair value adjustments for hedged risk
2
0.3
-
Level 1:
Unadjusted quoted prices 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 (i.e. as price) or
indirectly (i.e. derived from prices).
Level 3:
Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Gains and losses on disposal of assets and liabilities held at fair value
The Society does not trade in financial instruments but is required to demonstrate the liquidity o
f its debt security holdings for regulatory purposes
Mortgage assets held at fair value
The fair value of the equity release portfolio is calculated using a model that estimates the future cash
flows expected
from the portfolio. The timing
of those cash
flows are determined with re
ference to mortality tables overlaid by expected prepayments. The model discounts these cash
flows
to their present value, using a discount rate based on interest rates for new equity release mortgages available at the balance sheet date, adjusted
for the speci
fic characteristics o
f the Society’s portfolio. The model further calculates a value for the ‘no-negative equity guarantee’ provided to the
customers using an option pricing method.
The valuation uses a number of inputs which require estimation, such as the mortality and prepayment rates, the discount rate, property price
volatility and the haircut applied to individual sales prices.
The key estimates used in the model and the basis of estimation are summarised below:
Assumption
Basis of estimation
Discount rate
Interest rates for equity release mortgages available at the balance sheet date, adjusted
for speci
fic characteristics o
f the Society’s portfolio
Long-term property price growth
Analysis of historic long-term property price growth
Sales discount on collateral
Analysis of historic sales discounts
Property price volatility
Analysis of historic property price volatility and third party research
At 31 December 2022 the fair value of the mortgage assets held at fair value was
£166.3m
(2021: £232.6m). The sensitivity of this value to the
estimates shown above is as follows:
31 December 2022
31 December 2021
Assumption
Change in Assumption
(Decrease) / Increase
(Decrease) / Increase
in fair value £m 2022
in fair value £m 2021
Discount rate
+/- 1.0%
(10.3) / 11.5
(18.0) / 20.6
Long-term property price growth
+/- 2.0%
2.7 / (4.1)
(4.5) / 6.3
Sales discount on collateral
+/- 2.5%
(0.7) / 0.9
(1.1) / 1.1
Property price volatility
+/- 3.0%
2.8 / (3.1)
5.1 / (4.3)
The Society has increased its range of potential discount rates since its half year reporting due to the increase in the underlying interest rate environment
The following table provides a reconciliation of the equity release portfolio’s opening and closing fair value.
2022
£m
2021
£m
As at 1 January
232.6
268.8
Interest accrued
11.1
11.9
Redemptions
(19.6)
(24.9)
Changes in property price assumptions – recorded in profit and loss
(2.0)
(8.0)
Changes in discount rate assumptions – recorded in profit and loss
(55.8)
(15.2)
As at 31 December
166.3
232.6
The main source of the change in valuation was a change in market interest rates. The Society hedges fair value movements on the equity
release portfolio due to market interest rate movements using interest rate swaps. The value of these swaps increased by £55.6m resulting in a
net movement of £2.2m in the year included in the income statement (See note 37).
Equity Investments
The fair value of the Group’s investment in Openwork units is calculated using a model which discounts the future expected cash
flows
from the
investment. These cash flows relate primarily to the dividends receivable by the Group. These dividends are then discounted to their present value,
using a discount rate that estimates the underlying risks associated with an unlisted equity instrument. The valuation uses a number of inputs which
require estimation, such as future dividend payout ratios, discount rates, long term dividend growth and the underlying businesses performance.
At 31 December 2022 the fair value of the investments held at fair value was
£2.0m
(2021: £3.7m). The sensitivity of this value to the estimates
shown above is as follows, no sensitivities are given for the December 2021 year end due to the change in measurement approach.
31 December 2022
Assumption
Change in assumption
(Decrease) / Increase in fair value
£m
Discount rate
+/- 1%
(0.2) / 0.2
Long term dividend growth rate
+/- 2%
0.3 / (0.2)
The following table provides a reconciliation of the level 3 Equity investments opening and closing fair value:
2022
£m
2021
£m
As at 1 January
-
0.3
Transferred to / (from) Level 3
3.7
(0.3)
Units acquired
0.3
-
Changes in fair value
(2.0)
-
As at 31 December
2.0
-
*Equity investments in Openwork LLP were reclassified
from level 3 to level 2 in 2021, as a market for these instruments was established during
the period. Market prices of equity units are not publicly quoted, but they are observable to members of the LLP. However, the instruments have
subsequently been reclassified back to level 3 as the market established has proved not to be a reliable estimate o
f the value of the equity units
32 Financial instruments held at fair value
Continued
Page 122
Page 123
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
33 Fair value of assets held at amortised cost
Fair value
The following table summarises the carrying amounts and fair values of those
financial assets and liabilities not presented on the Group’s or
Society's balance sheets at their fair value. These assets and liabilities are held at values re
flecting their intended use. In all cases, this is via
collection of contractual amounts due and not through disposal. This is deemed to also re
flect their best use. I
f the Society's intended use of
an asset or liability changes, the accounting adopted for the item is revisited for reclassi
fication. The carrying values below reflect the Group's
maximum exposure to counterparty credit risk at 31 December 2022.
Group
Carrying value
Fair value
2022
2021
2022
2021
Note
Level*
£m
£m
£m
£m
Financial assets
Cash and balances with the Bank of England
1
421.9
382.2
421.9
382.2
Loans and advances to credit institutions
10
1
104.8
183.5
104.8
183.5
Loans and advances to customers
12
3
4,093.2
3,561.9
3,942.7
3,724.0
Other assets, of which
financial
21
1
6.5
5.6
6.5
5.6
Financial liabilities
Due to Members
22
3
4,220.8
3,731.8
4,186.5
3,738.9
Due to other customers
23
3
175.8
159.1
175.3
159.2
Deposits from credit institutions
24
3
577.1
587.6
577.1
587.6
Subscribed capital
26
1
20.0
20.0
29.6
38.7
Other liabilities, of which
financial
1
2.4
7.4
2.4
7.4
*Levels are defined in note 32.
The Group does not trade in financial instruments. Against level three assets there is no expectation that a de
ferred gain or loss on initial recognition
will be recognised in future periods: the transaction price at inception is considered to re
flect an appropriate day one
fair value. For short-term
receivables and payables within other assets and other liabilities, the carrying value of amounts due and owed is considered to approximate the fair
value of the amounts due and owed. IFRS 9 based impairment allowances against other assets is not material.
Cash and balances with the Bank of England
The fair value of
floating rate and overnight deposits is their carrying amount
Loans and advances to credit institutions
The fair value of
floating rate and overnight deposits is their carrying amount. The
fair value of
fixed interest bearing deposits is based on
discounted cash flows using prevailing money-market interest rates
for debts with similar credit risk and remaining maturity.
Loans and advances to customers
Loans and advances to customers are net of provisions for impairment. The estimated fair value of loans and advances represents the
discounted amount of estimated future cash
flows expected to be received. Expected cash flows are discounted at current market rates to
determine fair value.
Due to Members and due to other customers
The fair value of shares and balances due to other customers represents the discounted amount of estimated future cash
flows paid to
shareholders.
Deposits from credit institutions
The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand.
The estimated fair value of
fixed interest-bearing deposits and other borrowings without market price is based on discounted cash flows using
interest rates for new debts with similar remaining maturity.
Subscribed capital
Interest rate risk is the exposure of the Group’s net interest income to movement in interest rates. This is managed using a combination of limits
set by the Board and by the use of derivative
financial instruments. The sensitivity to interest rate movements is measured using dynamic stress
tests for a series of parallel rate shifts over various time periods.
2022
2021
+2%
-2%
+2%
-2%
£m
£m
£m
£m
Next 12 months
3.6
(3.7)
(0.3)
0.3
Please see notes 35-38 for details about instruments used for managing interest rate risk.
The exposure to interest rate risk due to the Group’s defined benefit pension scheme is detailed in note 20.
35 Derivative financial instruments
The Group uses interest rate swaps to hedge against interest rate risk. Offsetting collateral is pledged and received in line with underlying Credit
Support Annexes (CSA) with the Group's financial counterparties. The table below shows the
fair value of the Group’s derivative portfolios and
the collateral pledged/received against these.
Group as at 31 December 2022
Gross
Master
Financial
Net
Amount
netting
collateral
amount
arrangements
£m
£m
£m
£m
Financial assets
Interest rate swaps
90.4
(23.2)
(48.7)
18.5
Financial liabilities
Interest rate swaps
(52.5)
23.2
29.2
(0.1)
Society as at 31 December 2022
Gross
Master
Financial
Net
Amount
netting
collateral
amount
arrangements
£m
£m
£m
£m
Financial assets
Interest rate swaps
73.3
(23.2)
(48.7)
1.4
Financial liabilities
Interest rate swaps
(52.5)
23.2
29.2
(0.1)
Group as at 31 December 2021
Gross
Master
Financial
Net
Amount
netting
collateral
amount
arrangements
£m
£m
£m
£m
Financial assets
Interest rate swaps
14.5
(13.9)
-
0.6
Financial liabilities
Interest rate swaps
(147.6)
13.9
137.7
(4.0)
Society as at 31 December 2021
Gross
Master
Financial
Net
Amount
netting
collateral
amount
arrangements
£m
£m
£m
£m
Financial assets
Interest rate swaps
13.9
(13.9)
-
-
Financial liabilities
Interest rate swaps
(146.7)
13.9
137.7
(4.0)
Cash collateral is posted and received on a daily basis to minimise the Group’s and the counterparty’s credit risk. Collateral posted is measured
against counterparty mark-to-market values and may not reflect the Society's internal valuation o
f its
financial instruments.
The Society has entered into International Swaps and Derivatives Association (ISDA) Master agreements with financial counterparties in line with
standard industry practice. Netting agreements contained within are not alone considered sufficient to satisfy the o
ffsetting criteria of IAS 32.
The netting agreements are intended to protect the Society against fair value loss in the unlikely future event of counterparty default.
The Society has continued to make use of the London Clearing House (LCH), minimising its exposure to non-LCH counterparties.
The protected manner of LCH collateral placements mitigates counterparty credit risk with respect to collateral that would otherwise be
pledged to non-centralised derivative counterparties.
Page 124
Page 125
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
36 Encumbered assets
Some of the Society’s assets are used as security for funding with the Bank of England or other third parties. Alternatively, assets may be used
as collateral in line with Credit Support Annexes relating to derivatives, as detailed in Note 35. Assets that are used for such purposes are
classified as encumbered and cannot be used
for other purposes.
The following table provides an overview of the Group’s encumbered and un-encumbered
financial assets.
Cash and balances with
the Bank of England
Loans and advances to
banks
Debt securities
Retained loan notes
securitised on the
Society's loans and
advances to customers*
Loans and advances to
customers*
Derivative financial
instruments
Other assets
Total
-
87.7
-
-
241.7
-
-
329.4
11.4
-
-
-
846.5
-
-
857.9
-
-
348.4
-
-
-
-
348.4
410.5
-
82.6
215.3
-
-
-
708.4
-
-
-
-
3,171.3
-
-
3,171.3
-
17.1
2.0
32.7
-
90.4
6.5
148.8
-
-
-
(248.0)
-
-
-
(248.0)
421.9
104.8
433.0
-
4,259.5
90.4
6.5
5,316.2
Group as at
31 December 2022
Encumbered assets
Unencumbered assets
Total
Consolidation
With counterparties
other than central
banks
£m
Prepositioned
with central
banks
£m
With
central
banks
£m
Readily
available
as security
£m
Available
as security
in principle
£m
Not
available
as security
£m
£m
£m
* Loans and advances to customers encumbered with counterparties other than central banks relate to mortgage assets used as a security in
the Society’s securitisation programme. Loan notes secured on these mortgage assets totalling
£248.0m
(2021: £282.7m) have been retained by
the Group and are included in loans and advances to customers. These notes are not presented on the Group Balance sheet, but are available
as securities to the Group. See note 14 for details on the Society’s Securitisation programme.
35 Derivative financial instruments
Continued
Financial collateral of
£56.5m
(2021: £33.0m) has been placed with LCH with respect to 'initial margin': an amount calculated by central
counterparties to protect against potential future exposures that could arise from valuation changes. This is in addition to the 'variation margin',
covering LCH's current net exposure to the Society. The Society's collateral pledged against initial margin requirements is not included in the
collateral column above, but it is included in note 36.
The Society has a one way collaterisation swap agreement as part of the securitisation program, the exposure under this agreement is £17.1m
The remaining under-collateralisation of
£1.3m
(2021: under-collateralisation of £0.6m) relates to differences between internal valuations
used for reporting purposes and counterparty valuations which collateral is based on, changes in the valuation since the last margin call and
thresholds to minimum margin calls.
Where the Society holds multiple financial assets and liabilities with a single counterparty, and a Master netting agreement is in effect, the net
fair value exposure for each counterparty is calculated. Net exposures placed with counterparties are consolidated into the
financial assets
disclosure above, net exposures received from counterparties are similarly consolidated into the
Cash and balances with
the Bank of England
Loans and advances to
banks
Debt securities
Retained loan notes
securitised on the
Society's loans and
advances to customers*
Loans and advances to
customers*
Derivative financial
instruments
Other assets
Total
-
170.7
-
-
280.2
-
-
450.9
10.1
-
-
-
872.2
-
-
882.3
-
-
319.9
-
165.2
-
-
485.1
372.1
12.8
38.7
250.0
-
-
-
673.6
-
-
-
-
2,476.9
-
-
2,476.9
-
-
32.1
32.7
-
14.5
5.6
84.9
-
-
-
(282.7)
-
-
-
(282.7)
382.2
183.5
390.7
-
3,794.5
14.5
5.6
4,771.0
Group as at
31 December 2021
Encumbered assets
Unencumbered assets
Total
Consolidation
With counterparties
other than central
banks
£m
Prepositioned
with central
banks
£m
With
central
banks
£m
Readily
available
as security
£m
Available
as security
in principle
£m
Not
available
as security
£m
£m
£m
36 Encumbered assets
Continued
Encumbered assets are assets pledged as collateral for credit or derivative liabilities with either the Bank of England or a different counterparty.
Unencumbered assets prepositioned with central banks are loan pools or debt securities that have already been placed with the Bank of
England, which enables the Society to draw down funds under one of the Bank’s schemes where required.
Unencumbered assets readily available as security are highly liquid assets, such as cash and publicly traded debt securities that have not been
prepositioned with the Bank of England. Loans and advances to customers are included in this category where they have been securitised and
the resulting notes have been retained by the Society and can therefore pledge them as collateral.
Unencumbered assets available as security in principle are assets that are not highly liquid, but could be turned into collateral where required. This
includes loans and advances to customers that are not securitised and are not prepositioned with the Bank of England or a different counterparty.
Unencumbered assets not available as security are assets that are not usually used as collateral by the Society.
Page 126
Page 127
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
The Group is exposed to interest rate risk across its fixed interest rate financial assets and liabilities.
The Society’s core business is to provide competitive mortgage and savings products to its Members. Deposits by Members fund the Society’s
mortgage lending, with the Society paying an interest charge in return for deposited funds, and borrowers pay to the Society an interest income
in return for the funds they have borrowed.
Mortgage contracts attracting a fixed rate o
f interest are typically the most popular of the Society’s mortgage offerings, with a
fixed rate usually
agreed for a term of two to
five years. By contrast, most o
f the Society’s deposits are made under short-term agreements, with deposits often
repayable ‘on demand’. This introduces ‘interest rate risk’ to the Society’s business, as when market-wide interest rates move, the return received
on mortgage assets adjusts more slowly than the return paid on Member deposits.
To address this risk, the Society enters into interest rate swap agreements with external counterparties. These contracts protect against interest
rate risk by ‘swapping’ a portion of the Society’s
fixed interest rate exposure to a variable rate: the Society agrees to pay a fixed rate to a financial
counterparty for a period of time in exchange for receipt of a variable interest rate against a notional balance. The resulting variable rate interest
income moves in line with the Society’s variable interest expense, locking in interest margin.
Derivative financial instruments, including interest rate swaps, are held at
fair value, which changes when market interest rates change; and this
change is reflected in the Income Statement. However, most o
f the
fixed rate exposures are used to hedge are held at amortised cost, and thus
their value on the Society’s balance sheet does not change in line with market interest rates. The Society applies fair value hedge accounting
and cash flow hedge accounting to address this mismatch. Hedge accounting allows the Society to post an adjustment
for the value change in
the hedged risk; and the movement of this adjustment is re
flected in the Income Statement. I
f the hedge is effective, the adjustment in relation
to swaps’ fair value change and the hedged risks’ fair value change net off.
The Society also uses swap contracts in order to hedge exposures that are not yet on its Balance Sheet, for example
fixed rate mortgages that
have been offered but have not yet completed. To avoid volatility in the Society’s Income Statement as a result of this hedging activity, the
Society has adopted cash flow hedge accounting in 2022.
Cash flow hedge accounting allows
fair value adjustments to derivatives designated in a cash
flow hedge to be posted through Other
Comprehensive Income rather than the Income statement to the extent the hedge is effective. Hedge effectiveness is measured by comparing
the derivative fair value movement to that of a hypothetical derivative representing the hedged risk. The fair value movement represented
in Other Comprehensive Income is restricted to the cumulative fair value movement of the hypothetical derivative. Hedge ineffectiveness is
recognised in the Income Statement where fair value movements in the hedging instrument exceed those in the hypothetical derivative.
The Society makes use of the following different types of accounting hedges:-
-
The hedged item in a fair value micro hedge is a speci
fic mortgage contract or a specific group o
f such contracts. It can also be a speci
fied
treasury asset (e.g. a fixed rate gilt) or treasury liability;-
-
The hedged item in a fair value macro hedge is a de
fined portion o
f a mortgage or savings book, but this portion is re-designated on a
regular basis to reflect changes in the hedged port
folio, such as mortgage prepayments or new mortgage contracts; and
-
The hedged item in a cash flow hedge is usually a
forecast
floating rate liability, such as Term Funding Scheme or
future securitisation
funding. This is primarily used to hedge wholesale funding that will economically hedge the mortgage pipeline and swaps that have been
transacted during the month. These swaps are designated into a macro fair value hedge at the beginning of the month following the
drawdown of the hedged loans.
The Society enters into derivative contracts for hedging purposes only. However, not all interest rate swaps may be designated in accounting
hedge relationships. This could be the case if the hedged item is held at fair value, and there is therefore no mismatch to be addressed by
hedge accounting, or if the restrictive accounting rules do not allow for a hedge to be designated or make it impractical to do so.
37 Hedge accounting
Continued
Maturity analysis of hedging instruments
The maturity profile o
f the Group’s hedging instruments as at 31 December 2022 is as follows:
Interest rate swaps designated in macro fair value hedge relationships
Nominal amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
Interest rate swaps designated in micro fair value hedge relationships
Nominal amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
Interest rate swaps utilised in securitisations
Nominal asset amount £m
Average fixed interest rate
Nominal liability amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
Interest swaps in economic hedge relationships but not designated in accounting hedge relationships
Nominal amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
Total
Nominal amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
Interest rate swaps designated in cash flow hedge relationships
Nominal amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
Up to 3 months
60.0
0.39%
0.5
-
3.0
4.73%
-
-
-
-
-
-
-
-
-
-
-
-
35.0
0.36%
0.3
-
98.0
1.10%
0.8
-
Between 3 and 12
months
500.5
1.85%
9.0
-
13.0
3.80%
-
(0.1)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
513.5
1.13%
9.0
(0.1)
Between 1 and 5
years
747.5
1.65%
60.8
(1.2)
60.9
3.09%
2.3
(0.3)
93.0
4.41%
0.4
(0.6)
-
-
-
-
-
-
-
-
-
-
901.4
1.83%
63.5
(2.1)
Over 5 years
15.0
4.47%
-
(0.5)
100.8
4.57%
-
(12.8)
52.0
4.52%
-
(1.2)
244.7
1.49%
(244.7)
1.54%
17.1
(17.4)
151.8
5.03%
-
(18.4)
564.3
4.02%
17.1
(50.3)
Total
1,323.0
1.70%
70.3
(1.7)
177.7
4.01%
2.3
(13.2)
145.0
4.45%
0.4
(1.8)
244.7
1.49%
(244.7)
1.54%
17.1
(17.4)
186.8
4.16%
0.3
(18.4)
2,077.2
3.16%
90.4
(52.5)
Page 128
Page 129
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
37 Hedge accounting
Continued
Swap assets and liabilities are held at their fair value on balance sheet as 'derivative
financial instruments'.
The maturity profile o
f the Group’s hedging instruments as at 31 December 2021 is as follows:
Interest rate swaps designated in macro fair value hedge relationships
Nominal amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
Interest rate swaps designated in micro fair value hedge relationships
Nominal amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
Interest swaps in economic hedge relationships but not designated in accounting hedge relationships
Nominal amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
Total
Nominal amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
Up to 3 months
145.0
0.32%
-
-
-
-
-
-
-
-
-
-
145.0
0.32%
-
-
Between 3 and 12
months
334.5
0.34%
0.6
(0.2)
9.1
5.59%
-
(0.3)
-
-
-
-
343.6
0.48%
0.6
(0.5)
Between 1 and 5
years
894.0
0.41%
13.0
(0.3)
83.8
3.45%
-
(5.5)
10.0
0.83%
0.1
-
987.8
0.67%
13.1
(5.8)
Over 5 years
10.0
0.85%
0.1
-
114.8
4.61%
-
(67.1)
163.3
4.78%
0.1
(73.4)
567.8
4.58%
0.8
(141.3)
Total
1,383.5
0.39%
13.7
(0.5)
207.7
4.18%
-
(72.9)
173.3
4.55%
0.2
(73.4)
2,044.2
1.24%
14.5
(147.6)
Interest rate swaps utilised in securitisations
Nominal asset amount £m
Average fixed interest rate
Nominal liability amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
279.7
1.49%
(279.7)
1.54%
0.6
(0.8)
279.7
1.49%
(279.7)
1.54%
0.6
(0.8)
Interest rate swaps designated in cash flow hedge relationships
Nominal amount £m
Average fixed interest rate
Fair value of assets
Fair value of liabilities
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Summary of hedged items in designated hedge relationships
2022
2021
Fair value
hedges
Interest rate
risk
Carrying amount of
hedged items
Accumulated
amount of
fair value
adjustments
on the
hedged item
Change in
fair value
of hedged
items in the
year used for
ineffectiveness
measurement
Carrying amount of
hedged items
Accumulated
amount of
fair value
adjustments
on the
hedged item
Change in fair
value of hedged
items in the
year used for
ineffectiveness
measurement
Assets
Liabilities
Assets
Liabilities
£m
£m
£m
£m
£m
£m
£m
£m
Fixed rate
mortgages
1,128.8
-
(60.9)
(48.9)
1,225.5
-
(12.1)
(19.4)
Fixed rate
customer
deposits
-
137.8
(0.3)
(0.2)
-
-
-
-
Fixed rate
customer
loans
individually
hedged
139.8
-
12.8
(60.8)
247.9
-
73.6
(32.4)
Fixed rate
FVOCI debt
instruments
28.7
-
(2.3)
(2.9)
36.1
-
0.6
(2.3)
Cash flow hedges
Interest rate risk
2022
2021
Change in fair
value of hedged
item in the year
used for hedge
ineffectiveness
measurement
Cash flow hedge reserve
Change in fair
value of hedged
item in the year
used for hedge
ineffectiveness
measurement
Cash flow hedge reserve
Continuing
hedges
Discontinued
hedges
Continuing
hedges
Discontinued
hedges
£m
£m
£m
£m
£m
£m
Gross floating rate assets and
gross floating rate liabilities*
3.7
(1.3)
(2.3)
-
-
-
Cash flow
hedges
Interest rate
risk
2022
2021
Hedge
ineffectiveness
recognised
in income
statement
Effective portion
recognised
in other
comprehensive
income
Reclassified into
income statement
Hedge
ineffectiveness
recognised
in income
statement
Effective portion
recognised
in other
comprehensive
income
Reclassified into
income statement
Net
interest
income
Non-
interest
income
Net
interest
income
Non-
interest
income
£m
£m
£m
£m
£m
£m
£m
£m
Gross
floating
rate assets
and gross
floating rate
liabilities
*
-
3.7
-
(0.1)
-
-
-
-
*Highly probable future cash
flows arising
from forecasting
floating rate wholesale
funding.
37 Hedge accounting
Continued
Page 130
Page 131
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
37 Hedge accounting
Continued
Hedge Ineffectiveness
By design, the Society’s hedges are expected to be economically effective, with notional balances, durations and rates on interest rate swaps agreed
only where they are expected to be a good fit to the same characteristics o
f the underlying assets that are to be hedged. Hedge ineffectiveness can
nonetheless arise from early asset repayments, imperfectly matched key terms, differences in the timing of cash
flows o
f hedged items and hedging
instruments, different interest rate curves applied to discount the hedged items and hedging instruments and the effect of changes in counterparties’
credit risk on the fair values of hedging instruments. The table below provides details of the hedge ineffectiveness during the year.
2022
2021
£m
£m
Gains on micro hedging instruments
Interest rate swaps
62.4
34.5
Losses on micro hedged items
Mortgage assets (loans and advances to customers)
(63.7)
(34.7)
Losses on cash flow hedge instruments
Interest rate swaps
(3.7)
-
Gains on cash flow hedge items
Floating rate liabilities
3.6
-
Gains on macro hedging instruments
Interest rate swaps
54.8
20.6
Losses on macro hedged items
Mortgage assets (loans and advances to customers)
(49.1)
(19.4)
Total ineffectiveness recognised in the income statement
4.3
1.0
Hedging gains and losses are recognised in the income statement within 'gains less losses on financial instruments and hedge accounting’.
There were no unexpected sources of hedge ineffectiveness during the year.
Fair value gains less losses on financial instruments and hedge accounting recognised in the income statement
Group
Society
2022
2021
2022
2021
£m
£m
£m
£m
Fair value movement on loans and advances to customers held at FVTP
(57.8)
(23.3)
(57.9)
(23.3)
Fair value movement on derivative financial instruments in economic relationship with
loans and advances to customers held at FVTP but not in accounting hedge relationships
55.6
25.4
55.7
25.4
Fair value movement on derivative financial instruments in economic but not in
accounting hedge relationships
4.5
-
4.5
-
Amounts recycled to profit and loss
from cash
flow hedges
(0.1)
-
(0.1)
-
Interest expense on derivatives in economic but not in accounting
hedge relationships
(5.6)
(8.4)
(5.6)
(8.4)
Gains crystallised on sale of assets held at FVOCI
0.1
0.1
0.1
0.1
Hedge ineffectiveness on accounting hedges
4.3
1.0
4.3
1.0
Revaluation loss on equity investments
(2.1)
-
-
-
(1.1)
(5.2)
1.0
(5.2)
Cash flow hedging reserve
Total £m
Balance at 1 January 2022
-
Reclassification o
f hedging losses to income statement
0.1
Revaluation of interest rate cash
flow hedges in other comprehensive income
(3.7)
Deferred tax on cash
flow hedges
0.9
Balance at 31 December 2022
(2.7)
38 Interest rate benchmark reform
Following the financial crisis, the replacement o
f benchmark interest rates such as LIBOR and other interbank offers rates ('IBORs') became a
priority for global regulators, with the transaction period to move to a new benchmark ending on 31 December 2021.
The Society’s exposure to LIBOR
As of 31 December 2022, the Society has successfully transitioned all LIBOR positions apart from a small number of legacy loans that have
subsequently moved to Synthetic LIBOR.
The Society does not have exposures to interbank offer rates other than LIBOR.
The table below summarises the remaining exposure to LIBOR linked financial instruments.
Instrument
Loans secured on commercial property
-
-
18
150.0
Investments in RMBS and Covered Bonds
-
-
2
11
Other loans
63
0.7
96
1.8
No of
contracts
No of
contracts
Notional
value
£m
Notional
value
£m
31 December 2022
31 December 2021
Page 132
Page 133
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
Credit risk is the risk that a customer or counterparty is unable to honour their repayment of obligations as they fall due. The Group Risk
Committee, as detailed in the Risk Management Report, maintain oversight of the Credit Risk Committee, which is involved in the monitoring of
the credit risk within the Group's assets. With IFRS 9 introducing forward looking requirements to model credit risk across long term horizons,
a Model Risk Committee also operates charged, with oversight of the Group’s IFRS 9 models and assessment and approval of its key model
inputs. Through 2022 the Model Risk Committee met regularly, coinciding with key dates in the Society’s reporting calendar.
Credit risk mainly arises from commercial and customer loans and advances and loan commitments arising from such lending activities but also
arises from the Group's investment in debt securities and exposure to third party (
financial and non-financial) debtors.
The Group’s policy with respect to accounting for impairment of
financial assets is given in Note 1. This note describes the practical application
of this policy.
Provisioning methodology
Under IFRS 9, the Group conducts a forward looking assessment of impairment. Expected credit losses are recognised across applicable
financial assets based on whether there has been a significant increase in credit risk since the asset’s origination. Assets with no significant
increase in credit risk since origination are denoted as ‘stage 1 assets’, assets which have suffered a significant increase in credit risk but have
not defaulted are denoted as ‘stage 2 assets’ and assets that have defaulted are denoted as ‘stage 3 assets’.
When assessing movement in credit risk, the change in the risk of default is considered not the change in the amount of any expected credit loss.
Assets are assessed on an individual basis with a forward looking assessment undertaken to support the recognition of future expected losses.
While losses are provided for, assets are only formally written off when the Society no longer holds any expectation of subsequent receipt,
typically at the conclusion of a negotiation or sale.
Residential and Buy-to-let mortgages
Significant increase in credit risk since origination
At the application stage, a prospective borrower’s credit risk is assessed. The Society does not lend to high risk customers but will lend to
‘prime customers’ who can fall under a range of ‘application scores’- based on a wide variety of factors including affordability, credit history and
committed monthly spend. A borrower’s application score gives a quantified assessment o
f borrower risk – a ‘risk score’.
On a quarterly basis, the Group receives borrower credit scores from Experian, an industry leader in the provisioning of consolidated credit
scoring information. This data is mapped internally to a new borrower risk score – allowing continuous assessment of the movement in
borrower risk since origination.
Where a borrower’s risk score is suitably consistent between origination and the reporting date, a borrower is categorised as a ‘stage 1’ borrower.
Where a borrower’s risk score increases past pre-defined internal thresholds, but a borrower has not otherwise de
faulted, the borrower is
categorised as a ‘stage 2’ borrower. A borrower who has fallen into >1 month’s arrears is automatically considered to be a stage 2 borrower.
A borrower who has defaulted, (assessed against a range of internal qualitative and quantitative criteria) is categorised as a ‘stage 3’ borrower. A
borrower who has fallen into >3 month’s arrears is automatically considered to be a stage 3 borrower.
Impairment calculation
The Society calculates for each mortgage exposure a forward view as to how likely that mortgage is to default at some point over its expected
life. For stage 1 assets, the Society provides for losses resulting from events that may occur in the following 12 months. For stage 2 and stage 3
assets, the Society provides for losses that may occur at any time in the life of the mortgage.
12 months and lifetime expected credit losses are calculated by the Society as the discrete losses that would likely be incurred (considering
mortgage exposure vs. the expected sale value of the mortgaged property) if a mortgage defaulted on any of a large range of future dates.
Each discrete provision needs to be assigned a probability of default weighting in order to calculate one overall ‘lifetime’ expected credit loss.
As such, a continuous forward view to the probability of default is calculated.
39 Credit risk: Impairment methodologies
Continued
Residential and Buy-to-let mortgages
Continued
Key impairment model inputs, assumptions and estimation techniques
The Society calculates its probability of default as follows:
-
The Society has undertaken a detailed assessment of more than 12 years of its internal credit risk data to determine the core factors that lead
to borrower default.
-
Default indicators identi
fied included granting o
f forbearance, evidence of mortgage fraud, borrowers falling into > 3 months arrears,
borrower insolvency or bankruptcy and voluntary repossession of property. These are used in the staging assessment above to assist in the
classification o
f borrowers as stage 1, stage 2 or stage 3.
-
The Society’s assessment also considered ‘wider’ patterns of default, analysing historic borrower defaults by their maturity (how long a
mortgage had been held by the Society), vintage (during which original time period the Society lent to a borrower) and considering
‘exogenous’ factors in play at the time of default (external factors including the interest rate environment, unemployment rates, UK (nominal)
GDP, House Price Index, etc.).
-
The exogenous, maturity and vintage (EMV) factors are used to derive point in time and forward looking probability of default curves:
projecting historical information about defaults suffered under known ‘EMV conditions’ forward in combination with the Society forward
views on the wider macro-economic environment (as this will influence the
forward view on how exogenous factors may develop over time).
In combination, these curves form the Society’s forward looking probability of default curve, as calculated under the ‘EMV’ model.
The Society calculates its exposure at default (EAD) as follows:
-
The Society projects mortgage balances forward to give an estimate of each borrower’s mortgage balance over time. This factors in forecast
interest additions and expected borrower payments alongside an estimate of the value of each borrower’s property collateral throughout a
long-term forecast. An adjustment is made to uplift the Society’s exposure to borrowers to simulate a typical borrower default of 3 missed
monthly payments plus typical fees associated with arrears.
-
The output is a per-mortgage forward projection of mortgage balances.
The Society calculates its expected loss given default (LGD) as follows:
-
The Society calculates a per-mortgage ‘loss given default’ (LGD), an estimate of the proportion of each mortgage loan exposure that is
believed to be at risk if the borrower defaults on their obligation to repay the outstanding capital and interest and the property is subsequently
possessed and sold.
-
LGD is calculated as the probability of possession given the default of a borrower (PPD) which estimates the likelihood of possession following
default multiplied by the expected shortfall on each mortgage: an estimation of the difference between the exposure at default (as discussed
above) and the sale price of the property, net of relevant sales costs.
The Society calculates expected credit loss provisions as PD * EAD * LGD
-
The Group calculates a final provision
for each mortgage as the probability of default multiplied by the amount the Group expects to lose in
the event of a default.
-
As discussed above, this is not ‘static’ or a ‘point in time’ loss: the Group calculates PD, EAD and LGD across a continuous forward planning
horizon. The final provision number is not a singular PD*EAD*LGD, it reflects the discounted overall expected loss that could be incurred over
the life of each mortgage: a weighted average of multiple possible future loss events.
Multiple economic scenarios
IFRS 9 expects more than one scenario to be considered when calculating expected credit losses. The Society applies this principle by
assessing the provisions required under four separate macro-economic forecasts. These macro-economic forecasts feed into the exogenous
component of the Society’s EMV models.
The Society runs:
-
Base scenario – uses as a reference the average HM Treasury short term forecast for the UK economy over the
first two years and
then the Medium term forecasts for 2024 onwards
-
Upside scenario – uses as a reference the most positive HM Treasury short and medium term forecasts for the UK economy
-
Downside scenario – uses the most negative short and medium term HM Treasury forecasts, and
-
Stress scenario: a severely negative scenario, developed with reference to the Bank of England’s annual concurrent stress test
scenarios for the largest UK banks and building societies.
The Society’s final expected credit losses are the losses calculated under each discrete scenario, multiplied by a ‘likelihood
factor’, or ‘scenario
weighting’. The weightings as at 31 December 2022 were as follows:
Scenario weightings
2022
10%
40%
40%
10%
2021
5%
35%
40%
20%
Upside
Downside
Base
Stress
Page 134
Page 135
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
39 Credit risk: Impairment methodologies
Continued
Note that the scenarios for 2021 had been developed before the arrival of the Omicron variant of Covid-19 towards the end of 2021. The
arrival of the new variant introduced additional economic risks to the UK economy that could impact borrower’s ability to make contractual
repayments and could negatively influence property prices. To reflect this additional risk that had not been present when the scenarios were
designed, the scenario weightings for 2021 were adjusted towards the downside and stress scenarios.
Key macro-economic information
The Society considers the following to be the key macro-economic and forward view inputs to its impairment models:
-
UK unemployment rate
-
UK house price index
-
UK household income
-
Bank of England base rate
-
UK nominal gross domestic product
The Society’s assessments as to which variables are key has not changed in the current year. Quarterly updates to the variables themselves to
reflect the most recent market in
formation have been re
flected in the Society’s impairment results.
Changes to economic scenarios
Against the uncertainty in the UK economy specifically the high inflationary environment and the expected cost o
f living crisis, the Group
have developed new economic scenarios for the credit loss provision model, using the most recent industry data, forecasts and benchmarks
available at the time of development.
The Society’s IFRS 9 model is most sensitive to forecasted house price growth and unemployment, which are summarised below.
Upside
Base
Downside
Severe downside
Weighted*
Upside
Base
Downside
Severe downside
Weighted*
Unemployment rate, %
House price growth, % pa
Unemployment rate, %
House price growth, % pa
Unemployment rate, %
House price growth, % pa
Unemployment rate, %
House price growth, % pa
Unemployment rate, %
House price growth, % pa
Unemployment rate, %
House price growth, % pa
Unemployment rate, %
House price growth, % pa
Unemployment rate, %
House price growth, % pa
Unemployment rate, %
House price growth, % pa
Unemployment rate, %
House price growth, % pa
3.7%
2.0%
5.0%
2.0%
6.5%
0.0%
7.4%
0.0%
5.7%
1.0%
3.6%
4.8%
5.0%
2.2%
6.6%
(3.7)%
7.4%
3.8%
5.7%
0.2%
4.6%
11.2%
4.9%
6.6%
5.7%
3.0%
5.7%
3.0%
5.4%
4.7%
3.5%
12.0%
3.7%
8.4%
4.1%
(6.8)%
4.0%
(3.6)%
3.9%
6.9%
4.2%
5.0%
4.8%
1.6%
6.4%
(14.2)%
8.9%
(26.5)%
6.2%
(10.2)%
4.2%
(0.3)%
5.2%
(4.9)%
6.3%
(9.5)%
5.2%
(7.1)%
5.5%
(7.5)%
3.6%
1.3%
4.4%
0.4%
7.5%
1.6%
11.0%
(2.5)%
6.9%
0.3%
3.6%
(0.7)%
5.1%
(3.2)%
6.4%
(8.4)%
8.5%
(19.4)%
5.8%
(6.6)%
3.6%
1.3%
4.3%
0.6%
7.5%
1.3%
10.0%
5.5%
6.7%
1.9%
3.6%
(0.7)%
4.9%
1.1%
6.2%
(4.0)%
8.0%
13.0%
5.6%
0.4%
3.8%
2.5%
4.2%
1.5%
6.0%
1.3%
6.5%
5.5%
5.4%
2.3%
3.8%
2.5%
4.2%
1.5%
6.0%
1.3%
6.5%
5.5%
5.4%
2.3%
Scenario
Scenario
31 December 2021
31 December 2022
Economic measure
Economic measure
2027
2026
2021
2022
2022
2023
2023
2024
2024
2025
2025
2026
*ECLs are calculated for each loan in each scenario and are then probability weighted, so the weighted
figure presented above is
for illustrative
purposes only.
39 Credit risk: Impairment methodologies
Continued
Post model adjustments
Fire safety and cladding risk
The Society has a small number of loans secured on properties with unsuitable cladding or other
fire sa
fety risks. A review of high risk properties
has been performed and as the marketability of such properties is currently uncertain, a post model adjustment of £0.5m (December 2021: £0.6m)
has been recognised.
Interest only accounts
Historically, the Society has booked a post model adjustment against risk of default from interest only accounts that are close to maturity and
where no suitable repayment vehicle is in place (December 2021: £0.1m). This has now been integrated into the model and as a result, no post
model adjustment is required anymore.
As part of the integration, the Society also adjusted its staging policy for such loans. Whereas previously interest only accounts were classi
fied
as stage 3 where no credible repayment option was in place and the account had less than 5 years to maturity, it was considered more
appropriate to treat such accounts as stage 2. The change has resulted in a balance of £9.0m being reclassi
fied
from stage 3 to stage 2.
Affordability
The Society has not seen increases in non-performing loans in 2022. However, the high levels of in
flation currently observed may have a
negative impact on some borrowers’ ability to service their loans, resulting in higher levels of default. The Society’s provisioning model indirectly
reflects the impact o
f high in
flation levels by linking increasing or increased base rates to higher probabilities o
f default, with higher base rates
being correlated to high inflation. However, there is a lag between inflation rising and base rate increases, which is not reflected in the Society’s
model. In addition, the data used to train the Society’s provisioning model does not include a period of in
flation as high as that in 2022 and
expected for 2023. To re
flect the risk
from in
flation in 2023 that is not already accommodated by the model a post model adjustment
for £0.2m
has been booked (December 2021: £nil). Inflation is expected to reduce and wage inflation rise meaning the
future affordability gap will reduce
in addition, the loan book will season reducing the impact of the affordability gap therefore, management have concluded that no post model
adjustment is required for periods after 2023. The adjustment has been determined by classifying borrowers most at risk from increased
mortgage interest rates as stage 2 resulting in higher probabilities of default and recognition of lifetime expected credit losses.
A number of risk indicators outside of the core provisioning model have been considered as part of the provisioning process such as the impact
of climate change. No further material post model adjustments have been identi
fied.
Commercial and other legacy books
Commercial and other legacy books are managed by the Commercial Lending department and includes properties secured on commercial
property, buy-to-let customers which would now be outside of the Society’s lending policy and loans secured on serviced apartments.
Significant increase in credit risk since origination
Specialist internal departments assess the risk of loss against the Group’s legacy mortgage books on a case by case basis. Across the Society’s
highest risk exposures, this includes the annual completion of a tailored risk grade scorecard designed to encompass the key characteristics
contributing to underlying risk.
Each of the scorecard risks are weighted to provide a
final ‘weighted risk score’
for the loan, which categorises the loan in terms of likelihood of
failure in a moderate or severe recessionary scenario. The risks that carry the highest weightings relate to tenant failure and serviceability.
Due to the low number of remaining commercial borrowers, all borrowers are closely monitored. All payments due are monitored on a real-time
basis. In the event of a late payment, the position is reviewed immediately and appropriate action taken.
Where a borrower’s risk score is suitably consistent between origination and the reporting date, a borrower is categorised as a ‘stage 1’ borrower.
Where a borrower’s risk score increases past pre-defined internal thresholds, or where the specialist commercial lending department flags that
credit risk has increased significantly, but a borrower has not otherwise ‘de
faulted’, the borrower is categorised as a ‘stage 2’ borrower.
A borrower who has fallen into over 1 month’s, arrears is automatically considered to be a stage 2 borrower.
A borrower who has defaulted, (assessed against a range of internal qualitative and quantitative criteria) is categorised as a ‘stage 3’ borrower.
A borrower who has fallen into over 3 month’s arrears is automatically considered to be a stage 3 borrower.
Impairment calculation and key impairment model inputs
The calculation used to determine the provisions for legacy mortgage contracts is similar to that used for the prime residential book. Provisions
are determined as probability of default (PD) * exposure at default (EAD) * loss given default (LGD). Please see explanations of each of these
terms above.
The main difference between the prime residential and the legacy books consists in the way model inputs are determined. Due to the nature
and the small size of the legacy books, the most signi
ficant model inputs are determined manually on a mortgage by mortgage basis or
for
small groups of mortgages.
Thus, for each mortgage contract, the Society uses its expertise, knowledge of the customer and the property, as well as its understanding of
the sector to determine a forward view as to how likely that mortgage is to default at some point over its expected life for stage 2 mortgages, or
due to events occurring in the following 12 months in the case of stage 1 accounts.
Loss given default is calculated based on a sector speci
fic discount to the property’s current indexed valuation. The discount reflects
management’s confidence about the sector’s prospects in the current and projected
future economic environment. The valuation takes into
account the individual property’s circumstance and the local market conditions.
Page 136
Page 137
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
39 Credit risk: Impairment methodologies
Continued
Economic scenarios
The provisions booked in respect to commercial and other legacy books are based on four economic scenarios, consistent with those scenarios
used for residential provisioning.
The impairment provision is most sensitive to the borrower specific probability o
f default and the sector or property speci
fic discount to
indexed valuations at the time of disposal.
Future commercial property prices are highly uncertain and depend on the future prosperity of the UK in general, the individual sector the property
can be used for, local economic conditions, the remaining duration of the current lease agreement, and the strength of the current tenant.
For loans secured on Legacy Buy to Let and Commercial properties, the following reductions/increases to valuations as at 30 November 2022
(the Society does not assume that valuations as at 31 December 2022 are materially different):
Sector
Upside
Base
Downside
Stress
Retail
90%
80%
70%
40%
Distribution
120%
100%
90%
80%
Leisure
60%
50%
45%
35%
Residential
103%
94%
86%
73%
A separate model has been designed to accommodate the specific circumstances o
f the Serviced Apartments portfolio, where property values are
exposed to the profitability o
f the London hotel market. For this portfolio, the following reductions/increases to 2022 property values have
been assumed:
Sector
Upside
Base
Downside
Stress
Serviced Apartments
106%
85%
70%
40%
Housing associations
Housing associations are monitored and managed by the Commercial Lending Department with a range of management information used to
assess the Society’s ongoing exposure (which while of extremely high credit quality remains of signi
ficant size). An open dialogue is maintained
with borrowers, with the Society appraised of their status,
financial results and position, and numerous other financial and risk metrics. Quarterly
management information is also reviewed including business plans. Lending is contingent on compliance with a number of
financial commitments
and covenants. The Society actively monitors for potential breaches of contractual positions.
Whilst the Society has never experienced any arrears or suffered losses, due to the scale and nature of long term exposures, borrowers’ credit risk is
measured through a bespoke risk grade scorecard which charts financial per
formance, covenant compliance, asset cover, stock location/demand
and regulatory feedback.
Housing associations are historically a nil loss, nil default sector and are widely considered to be government backed in the case of
financial
stress. The strength of a ‘nil-default sector’ should not be understated: housing association exposures have proven to be of the lowest credit risk
throughout a volatile and extended recession period. The Society has no internal history of loss to draw on with respect to housing association
exposures and cannot supplement its own data with loss data of its peers.
The combined effect of a well collateralized set of exposures, in an environment where the demand for housing is only increasing, with no history
of default on the part of any borrower and a sincere expectation that any theoretical default would be addressed by the jurisdictional government,
leads to a conclusion that no material impairment of housing association exposures is plausibly expected
.
Debt securities
The Society monitors the external credit ratings applied to its debt security investments on a daily basis.
The Society’s debt security holdings are all of ‘investment grade’ or higher. The Society has therefore assessed that the credit risk on its debt
security exposures has not increased significantly since initial recognition.
The Society’s treasury risk department runs very severe annual stressed scenarios over the Society’s residential mortgage backed securities
(RMBS). The Society’s policy to allow only investment grade and senior secured exposures leaves the Society highly insensitive to stressed
scenarios as the ‘waterfall structure’ of RMBS payments ensures continued Society receipt of contractual cash
flows even through significantly
stressed scenarios.
The Society’s covered bond exposures are similarly resilient: the Society is only exposed to regulated UK covered bonds with the regulations
providing for the full segregation of covered bond asset pools from the bond issuer. The regulations introduce numerous investor protections
including mandatory over-collateralisation, an extensive initial application process and regular regulatory stress testing and supervisory monitoring.
39 Credit risk: Impairment methodologies
Continued
Other financial assets
The Society has elected to take advantage of IFRS 9's practical expedient when assessing the accounting impairment applied to its trade
receivables. Lifetime expected credit losses are therefore provided against all trade receivables. A provisions matrix approach, where
provisions against receivables are calculated as an increasing percentage of the receivable balance, rising as receivables fall further overdue,
has been adopted.
Assessment of the appropriate provision percentages has been made in line with the Group’s historic trade receivable recovery. Where appropriate,
forward looking views to recovery are also being incorporated.
Modifications
The Society grants forbearance to commercial borrowers in the form of extending the loan term on maturity, capitalising arrears as part
of a wider exercise to get a borrower back on track with a revised debt repayment plan, and adjusting the interest rate to aid serviceability
particularly where a fixed rate has expired. Generally the Society expects commercial investment loans to be repaid on maturity given the
stated strategy of winding down the portfolio, but the Society will grant forbearance when this is also in the best interests of the Society,
e.g. providing the borrower with more time to sell the security property following a tenant renewal.
The Society occasionally grants forbearance to other borrowers (in similar forms to commercial) where this is expected to improve the ultimate
recovery on loans advanced.
The requirement to grant forbearance is considered an objective indicator that an asset has suffered a signi
ficant increase in credit risk since
origination. As such, while forbearance may mitigate a selection of the Society’s other indications of default, the granting of forbearance will not
result in a preferential staging (Stage 1 or 2) being applied to any forborne asset. While bene
fitting
from any revised terms that forbearance may
bring, an asset is not able to move to a lower staging. Only once forbearance has been lifted can an asset qualify for a reduced staging with the
Society operating a 6 month ‘curing’ policy: deferring the reduction in staging until a 6 month period has passed in which no other indicators of
In 2020, the Society significantly increased its loan loss provisions, given the increased risk o
f a signi
ficant economic downturn or stress as a result
of the pandemic and associated lockdowns. The most signi
ficant risks to the Society’s lending business are rising unemployment rates and
falling
property prices. Despite the pandemic, both of these measures initially improved in 2020 and 2021, supported by
fiscal and monetary policy. In
addition, the Society, in line with other lenders, supported temporarily struggling customers with measures such as payment holidays. This led to
low levels of losses on the mortgage books crystallising in these years. Nonetheless, in 2022 in
flation started to rise, and towards the end o
f the year
property price rises tailed off, with rising costs and increasing interest rates bringing the expectation of an economic downturn closer.
As the Society has already provisioned for an economic downturn in 2020 and 2021, no signi
ficant increases to provisions are expected as a
result of the current economic development.
Residential and Buy to let
In 2022, provisions of £1.4m were booked on residential and buy to let mortgages newly originated in the year, re
flecting the significant growth
of the mortgage book, including some higher loan-to-value mortgages. In addition to the natural churn of the book, over the year, the Society
succeeded in winding down a number of the more highly provisioned loans, overall resulting in a £1.0m reduction of the provision balance. The
Society further released £0.6m in respect to residential and buy to let loans that had been originated before 2022. This is the result of signi
ficant
property price growth in the year resulting in lower losses in case of default in combination with the historic trend that the probability of default
for loans reduces for seasoned books. The latter is particularly visible in the signi
ficant movement o
f balances and provisions from stage 2 to
stage 1 in the residential book.
The 2022 provisions also include an allowance relating to the cost of living and borrowing.
The net impact of writing new high quality loans and winding down some older riskier loans as well as the maturing of the Society’s back book
was a net reduction in mortgage loss provision coverage ratios from 0.11% to 0.09%.
The cost of living post model adjustment described in Note 39 has resulted in a reclassi
fication o
f accounts from stage 1 into stage 2 where
borrowers may be particularly effected by high inflation and interest rates, resulting in an increased number o
f stage 2 customers. The cladding
post model adjustment has not affected the staging of loans.
The change in provisioning methodology relating to interest only accounts described in note 39 has resulted in accounts with a total balance of
£9m with provisions of £16,100 being reclassi
fied
from stage 3 to stage 2.
Legacy books
The Society also successfully continued winding down legacy portfolios, seeing the redemption of or capital repayments against some highly
provisioned loans. Provisions on legacy books therefore reduced by £1.7m in total. The Society also saw a reduction in the risk pro
file against
some legacy loans that resulted in a further net reduction in provisions of £0.3m, despite more severe economic assumptions used in the
provisioning model.
Page 138
Page 139
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
40 Credit risk: Expected credit losses
Continued
Quantitative impairment impact
Prime residential
Stage 1
Stage 2
Stage 3
Total
Reconciliation table
Loss
allowance
at 1 January
2022
£000
Increases
due to
origination
and
acquisition
£000
Decreases
due to
derecognition
£000
Changes due
to change
in the
provisioning
methodology
£000
Transition
between
stages
£000
Changes
in credit
risk
£000
Loss
allowance at
31 December
2022
£000
392.3
1,019.8
1,368.3
2,780.4
259.9
1,129.7
19.0
1,408.6
(50.4)
(91.3)
(710.1)
(851.8)
-
9.1
(9.1)
-
337.0
(350.7)
13.7
-
(497.6)
(36.1)
191.7
(342.0)
441.2
1,680.5
873.5
2,995.2
Buy-to-let
Stage 1
Stage 2
Stage 3
Total
Legacy Buy-to-let
Stage 1
Stage 2
Stage 3
Total
479.4
110.5
154.5
744.4
17.7
26.5
-
44.2
(23.0)
(1.5)
(101.9)
(126.4)
-
7.0
(7.0)
-
(44.9)
49.0
(4.1)
-
(297.6)
32.3
52.9
(212.4)
131.6
223.8
94.4
449.8
7.3
966.6
-
973.9
-
-
-
-
-
(966.6)
-
(966.6)
-
-
-
-
-
-
-
-
32.3
-
-
32.3
39.6
-
-
39.6
Commercial
Stage 1
Stage 2
Stage 3
Total
118.7
749.2
2,602.5
3,470.4
-
-
-
-
(79.5)
(150.9)
(672.2)
(902.6)
-
-
-
-
-
-
-
-
-
(68.7)
(103.3)
(172.0)
39.2
529.6
1,826.9
2,395.7
Housing Association
Stage 1
Stage 2
Stage 3
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Serviced Apartments
Stage 1
Stage 2
Stage 3
Total
35.9
512.7
249.1
797.7
-
-
-
-
-
(28.3)
-
(28.3)
-
-
-
-
(0.4)
0.4
-
-
(23.7)
(45.4)
54.2
(14.9)
11.8
439.4
303.3
754.5
Policy Loans
Stage 1
Stage 2
Stage 3
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
Stage 1
Stage 2
Stage 3
Total
1,033.6
3,358.8
4,374.4
8,766.8
277.6
1,156.2
19.0
1,452.8
(152.9)
(1,238.6)
(1,484.3)
(2,875.8)
-
16.1
(16.1)
-
291.7
(301.3)
(9.6)
-
(786.6)
(117.9)
195.5
(709.0)
663.4
2,873.3
3,098.1
6,634.8
40 Credit risk: Expected credit losses
Continued
Quantitative impairment impact
Prime residential
Stage 1
Stage 2
Stage 3
Total
Reconciliation table
Gross
exposure at 1
January
2022
£m
Increases
due to
origination
and
acquisition
£m
Decreases
due to
derecognition
£m
Changes due
to change
in the
provisioning
methodology
£m
Gross
exposure at
31 December
2022
£m
2,421.6
329.0
35.1
2,785.7
845.8
195.8
0.6
1,042.2
(407.2)
(35.1)
(8.1)
(450.4)
-
8.4
(8.4)
-
2,818.7
531.6
27.2
3,377.5
Buy-to-let
Stage 1
Stage 2
Stage 3
Total
Legacy Buy-to-let
Stage 1
Stage 2
Stage 3
Total
367.0
28.4
4.2
399.6
39.1
8.5
-
47.6
(48.9)
(1.3)
(0.7)
(50.9)
-
0.6
(0.6)
-
328.7
65.2
2.4
396.3
15.7
12.0
-
27.7
-
-
-
-
(7.2)
(6.5)
-
(13.7)
-
-
-
-
14.0
-
-
14.0
Commercial
Stage 1
Stage 2
Stage 3
Total
6.5
2.9
5.5
14.9
-
-
-
-
(3.4)
(0.2)
(0.7)
(4.3)
-
-
-
-
3.1
2.7
4.8
10.6
Housing Association
Stage 1
Stage 2
Stage 3
Total
323.4
-
-
323.4
-
-
-
-
(52.5)
-
-
(52.5)
-
-
-
-
270.9
-
-
270.9
Serviced Apartments
Stage 1
Stage 2
Stage 3
Total
12.6
3.6
1.3
17.5
-
-
-
-
(0.7)
(0.2)
-
(0.9)
-
-
-
-
11.8
3.5
1.3
16.6
Policy Loans
Stage 1
Stage 2
Stage 3
Total
1.6
-
-
1.6
-
-
-
-
(0.1)
-
-
(0.1)
-
-
-
-
1.5
-
-
1.5
Total
Stage 1
Stage 2
Stage 3
Total
3,148.4
375.9
46.1
3,570.4
884.9
204.3
0.6
1,089.8
(520.0)
(43.3)
(9.5)
(572.8)
Transition
between
stages
£m
(39.9)
33.5
8.0
-
(28.5)
29.0
(0.5)
-
5.5
(5.5)
-
-
-
-
-
-
-
-
-
-
(0.1)
0.1
-
-
-
-
-
-
(63.0)
57.1
5.9
-
-
9.0
(9.0)
-
3,450.3
603.0
34.1
4,087.4
*The carrying value of Housing associations excludes micro fair value hedge asset adjustments of
£12.8m
(2021: £nil).
Page 140
Page 141
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
40 Credit risk: Expected credit losses
Continued
Quantitative impairment impact
Prime residential
Stage 1
Stage 2
Stage 3
Total
Reconciliation table
Loss
allowance
at 1 January
2021
£000
Increases
due to
origination
and
acquisition
£000
Decreases
due to
derecognition
£000
Changes due
to change
in the
provisioning
methodology
£000
Transition
between
stages
£000
Changes
in credit
risk
£000
Loss
allowance at
31 December
2021
£000
328.2
1,859.4
911.6
3,099.2
120.1
578.5
127.8
826.4
(40.0)
(164.7)
(40.7)
(245.4)
-
-
-
-
(829.0)
808.5
20.5
-
813.0
(2,061.9)
349.2
(899.7)
392.3
1,019.8
1,368.3
2,780.5
Buy-to-let
Stage 1
Stage 2
Stage 3
Total
Legacy Buy-to-let
Stage 1
Stage 2
Stage 3
Total
95.2
236.3
357.6
689.1
7.8
26.0
1.9
35.7
(3.7)
(13.3)
-
(17.0)
-
-
-
-
(68.0)
130.6
(62.6)
-
448.1
(269.1)
(142.4)
36.6
479.4
110.5
154.5
744.4
-
908.8
2,059.2
2,968.0
-
-
-
-
-
-
(2,059.2)
(2,059.2)
-
-
-
-
-
-
-
-
7.3
57.8
-
65.1
7.3
966.6
-
973.9
Commercial
Stage 1
Stage 2
Stage 3
Total
-
460.3
5,182.6
5,642.9
-
-
-
-
-
(287.7)
(979.2)
(1,266.9)
-
-
-
-
8.5
1,444.8
(1,453.3)
-
110.2
(868.2)
(147.6)
(905.6)
118.7
749.2
2,602.5
3,470.4
Housing Association
Stage 1
Stage 2
Stage 3
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Serviced Apartments
Stage 1
Stage 2
Stage 3
Total
141.2
531.0
177.7
849.9
-
-
-
-
(11.2)
(49.7)
(50.2)
(111.1)
-
-
-
-
38.2
(138.4)
100.2
-
(132.3)
169.8
21.4
58.9
35.9
512.7
249.1
797.7
Policy Loans
Stage 1
Stage 2
Stage 3
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
Stage 1
Stage 2
Stage 3
Total
564.6
3,995.8
8,688.7
13,249.1
127.9
604.5
129.7
862.1
(54.9)
(515.4)
(3,129.3)
(3,699.6)
-
-
-
-
(850.3)
2,245.5
(1,395.2)
-
(1,246.3)
(2,971.6)
804.4
(1,644.7)
1,033.6
3,358.8
4,374.3
8,766.7
40 Credit risk: Expected credit losses
Continued
Quantitative impairment impact
The gross carrying values above reflect the Group’s maximum exposure to credit risk as at 31 December 2022 and 31 December 2021 without
taking into account any collateral held or provisions made against expected losses.
The Society did not purchase or originate any financial assets that were considered to be credit impaired during 2022 or 2021.
There has been no material movement in loss allowances held against other financial assets during 2022. Debt securities held remain o
f very
high credit quality at 31 December 2022 and the Group is not exposed to any significant value or volume o
f overdue trade receivables.
No collateral is held against the Group’s debt security or other financial asset exposures.
Prime residential
Stage 1
Stage 2
Stage 3
Total
Reconciliation table
Gross
exposure at 1
January
2021
£m
Increases
due to
origination
and
acquisition
£m
Decreases
due to
derecognition
£m
Changes due
to change
in the
provisioning
methodology
£m
Gross
exposure at
31 December
2021
£m
2,177.3
295.4
24.8
2,497.5
623.3
141.0
25.5
789.8
(434.3)
(37.7)
(29.6)
(501.6)
-
-
-
-
2,421.6
329.0
33.7
2,785.7
Buy-to-let
Stage 1
Stage 2
Stage 3
Total
Legacy Buy-to-let
Stage 1
Stage 2
Stage 3
Total
322.3
28.0
1.7
352.0
71.0
7.5
4.8
83.3
(24.2)
(11.5)
-
(35.7)
-
-
-
-
367.0
28.4
4.2
399.6
20.7
7.8
3.5
32.0
-
-
-
-
(0.5)
(0.3)
(3.5)
(4.3)
-
-
-
-
15.7
12.0
-
27.7
Commercial
Stage 1
Stage 2
Stage 3
Total
10.2
3.0
8.6
21.8
-
-
-
-
(4.1)
(0.2)
(2.6)
(6.9)
-
-
-
-
6.5
2.9
5.5
14.9
Housing Association
Stage 1
Stage 2
Stage 3
Total
381.4
-
-
381.4
-
-
-
-
(58.0)
-
-
(58.0)
-
-
-
-
323.4
-
-
323.4
Serviced Apartments
Stage 1
Stage 2
Stage 3
Total
14.0
3.5
0.5
18.0
-
-
-
-
(0.5)
-
-
(0.5)
-
-
-
-
12.6
3.6
1.3
17.5
Policy Loans
Stage 1
Stage 2
Stage 3
Total
1.9
-
-
1.9
-
-
-
-
(0.3)
-
-
(0.3)
-
-
-
-
1.6
-
-
1.6
Total
Stage 1
Stage 2
Stage 3
Total
2,927.8
337.7
39.1
3,304.6
694.3
148.5
30.3
873.1
(521.9)
(49.7)
(35.7)
(607.3)
Transition
between
stages
£m
55.3
(69.7)
14.4
-
(2.1)
4.4
(2.3)
-
(4.5)
4.5
-
-
0.4
0.1
(0.5)
-
-
-
-
-
(0.9)
0.1
0.8
-
-
-
-
-
48.2
(60.6)
12.4
-
-
-
-
-
3,148.4
375.9
46.1
3,570.4
Page 142
Page 143
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
40 Credit risk: Expected credit losses
Continued
Risk exposures by credit grade for residential lending
Across the Society’s prime residential and buy-to-let mortgage exposures, provisions may be disaggregated by detailed probability of default
ranges as follows:
0% - 1%
1% - 2%
2% - 3%
3% - 4%
4% - 5%
5% - 6%
6% - 7%
7% - 8%
8% - 9%
9% - 10%
10% - 100%
2022
Total
Exposure
Provision
Provision Coverage Ratio
Stage 1
3,145.8
Stage 2
596.8
Stage 3
29.6
125.4
1,327.3
1,167.8
96.2
339.8
3.3
1.6
1.8
0.5
2.7
79.4
2.5
67.0
55.1
6.1
7.8
0.2
-
2.1
2.1
9.3
444.6
-
-
-
-
-
-
-
-
-
-
29.6
4.9
147.5
204.1
25.2
124.0
-
0.1
-
-
0.1
66.9
13.3
89.9
91.2
6.4
34.8
-
-
-
0.2
2.8
1,665.7
-
-
-
-
-
-
-
-
-
-
235.5
-
0.01
0.02
0.03
0.04
-
0.01
-
-
-
0.08
0.53
0.13
0.17
0.10
0.45
-
-
-
0.01
0.03
0.37
-
-
-
-
-
-
-
-
-
-
0.80
£m
Lifetime PD %
£m
£m
Stage 1
572.8
Stage 2
1,904.3
Stage 3
235.5
£000
£000
£000
Stage 1
0.02
Stage 2
0.32
Stage 3
0.80
%
%
%
*The table above excludes a total balance of £1.6m, with a provision of £0.7m, for which no lifetime probability of default is available.
*The table above excludes a total balance of £2.1m, with a provision of £0.9m, for which no lifetime probability of default is available.
Lifetime probability of default indicates the percentage change that a loan will trigger any of the stage 3 indicators, as detailed above, over the
life of the loan and does not alone indicate a likeliness that the default will result in any signi
ficant loss to the Group.
The comparatively small provisions coverage reflects the capacity
for property collateral to effectively mitigate the Society’s ultimate exposure
to loss.
Provisions against other financial assets are not considered to be sufficiently material to warrant
further detailed analysis.
Provisions against commercial and legacy Buy to Let mortgages are not presented by risk grade as legacy exposures are assessed for
impairment on an individual basis by the specialist commercial lending department.
0% - 1%
1% - 2%
2% - 3%
3% - 4%
4% - 5%
5% - 6%
6% - 7%
7% - 8%
8% - 9%
9% - 10%
10% - 100%
2021
Total*
Exposure
Provision
Provision Coverage Ratio
Stage 1
2,787.7
Stage 2
357.3
Stage 3
37.9
62.3
1,197.2
925.9
213.6
283.9
70.5
2.3
1.3
0.8
1.0
30.9
-
-
-
-
-
-
-
0.5
2.3
2.0
352.5
0.1
-
-
-
-
-
-
-
-
-
37.8
0.2
425.0
225.5
19.9
127.1
41.4
-
0.2
-
-
32.1
-
-
-
-
-
-
-
-
0.1
-
1,130.3
-
-
-
-
-
-
-
-
-
-
486.1
-
0.04
0.02
0.01
0.04
0.06
-
0.11
-
-
0.11
-
-
-
-
-
-
-
-
-
-
0.32
-
-
-
-
-
-
-
-
-
-
1.28
£m
Lifetime PD %
£m
£m
Stage 1
871.4
Stage 2
1,130.4
Stage 3
486.1
£000
£000
£000
Stage 1
0.03
Stage 2
0.32
Stage 3
1.28
%
%
%
40 Credit risk: Expected credit losses
Continued
Sensitivity of the credit loss provisions to key assumptions
The Group’s mortgage provisions reflect probability weighted scenarios run across its mortgage books and are sensitive to the probabilities
applied accordingly. Provisions are most sensitive to increases in the downside and stress scenarios probabilities:
Actual (weighted average)
Upside
Base
Downside
Stress
Actual (weighted average)
Upside
Base
Downside
Stress
Residential and
Buy to let
£m
Residential and
Buy to let
£m
Commercial and Legacy
Buy to let
£m
Commercial and Legacy
Buy to let
£m
Serviced apartments
£m
Serviced apartments
£m
2022
2021
3.4
1.5
2.0
3.2
4.8
3.5
2.0
2.2
3.7
6.0
2.3
1.0
2.0
2.6
3.9
4.4
2.0
3.6
4.6
6.3
0.8
-
0.4
1.0
2.4
0.8
-
-
0.8
2.3
Equity release portfolio
The Society’s equity release portfolio is accounted for under IFRS 4: insurance contracts. Its fair value includes any allowances for credit risk.
Page 144
Page 145
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
41 Credit quality
The Group's mortgage lending is all secured with a first charge registered against the collateral property. While not in scope o
f IFRS 9, this includes
the Group’s equity release mortgages. The average loan to value of the Group's loan portfolios at 31 December 2022 is 67.7% (2021: 65.8%) as
detailed in the Strategic Report. Quarterly regional Halifax House Price Index data is used to monitor the value of residential collateral. The
contractual capacity to recover defaulted mortgage contracts through the sale of property collateral acts signi
ficantly to reduce the Group’s
risk of loss.
The credit quality of the Group's residential loans is considered to be excellent with the loans continuing to perform and arrears being below
industry averages. At 31 December 2022 there were 32 loans in 12 months arrears or more with balances of
£4.0m
(2021: 25 loans totalling £3.0m).
The Group's non-impaired commercial loan assets are also considered to be of a good credit quality.
Further specifics by type o
f mortgage lending are as follows:
Prime residential mortgage book
The Prime residential mortgage book consists of traditional residential loans. No sub-prime or self-certi
fication lending has been undertaken.
2022
2022
2021
2021
Loan to value (indexed)
£m
%
£m
%
<70%
2,250.0
66.6
1,819.5
65.3
70% - <80%
493.0
14.6
744.6
26.8
80% - <90%
405.6
12.0
154.0
5.5
>90%
228.9
6.8
67.6
2.4
3,377.5
100.0
2,785.7
100.0
Payment status
2022
2022
2021
2021
£m
%
£m
%
Not past due
3,349.1
99.2
2,754.9
99.1
Past due up to 3 months
18.0
0.5
12.5
0.4
3 to 6 months past due
4.5
0.1
4.8
0.2
Over 6 months past due
5.9
0.2
6.3
0.2
3,377.5
100.0
2,778.5
100.0
The Society continued to experience a low level of possessions on residential loans and Law of Property Act receiver appointments. At the end
of 2022 the Society had no possession property in relation to owner occupied loans.
Against past due cases,
£65.7m
(2021: £57.2m) collateral is held. No loans that would be past due or impaired have had their terms renegotiated.
No loans that would be past due or impaired have had their terms renegotiated.
The Society offers a range of forbearance measures to customers such as payment breaks and reductions, transfers to interest only products
and other support. The Society granted forbearance against 91 residential loans in 2022, with no alteration made to the contractual rates of
interest and balances totalling £7.7m at 31 December 2022, this did not lead to any modification gain or loss a result o
f short-term forbearance
granted. Provisions of £0.1m are held against residential mortgages that were granted forbearance during the year.
41 Credit quality
Continued
Retail buy-to-let mortgage book
The Retail Buy-to-let (BTL) mortgage book consists of buy-to-let to individuals <£1m.
2022
2022
2021
2021
Loan to value (indexed)
£m
%
£m
%
<70%
363.7
91.8
349.1
87.3
70% - <80%
29.7
7.5
49.9
12.5
80% - <90%
2.9
0.7
0.3
0.1
>90%
-
-
0.3
0.1
396.3
100.0
399.6
100.0
Payment status
2022
2022
2021
2021
£m
%
£m
%
Not past due
392.5
99.0
395.7
99.0
Past due up to 3 months
2.1
0.5
2.2
0.6
3 to 6 months past due
1.2
0.3
-
-
Over 6 months past due
0.4
0.1
1.6
0.4
LPA receivership
0.1
-
0.1
-
396.3
100.0
399.6
100.0
At the end of 2022 the Society had no BTL possession properties, whose exposure was being managed by a Law of Property Act receiver.
Against past due and possession cases,
£6.5m
(2021: £6.6m) collateral is held. No loans that would be past due or impaired have had their
terms renegotiated. The Society offers a range of forbearance measures to customers such as payment breaks and reductions, transfers to
interest only products and other support.
The Society granted forbearance against 1 retail BTL loan in 2022. With no alteration made to the contractual rates of interest and balances
totalling £0.3m at 31 December 2022 leading to no modification gain or loss recorded as a result o
f short-term forbearance granted. No
provisions are held against BTL mortgages that were grated forbearance during the year.
Page 146
Page 147
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
41 Credit quality
Continued
Equity release mortgages
The below analysis includes equity release mortgage lending that is not within the scope of the IFRS 9 credit risk disclosures provided in the
tables below and excludes the fair value adjustments detailed in note 13.
Loan to valued (indexed)
2022
2022
2021
2021
£m
%
£m
%
<70%
157.3
98.0
166.1
98.1
70% - <80%
2.3
1.4
2.3
1.3
80% - <90%
0.7
0.4
0.6
0.4
>90%
0.3
0.2
0.3
0.2
160.6
100.0
169.3
100.0
Payment status
2022
2022
2021
2021
£m
%
£m
%
Neither past due nor in default
160.6
100.0
169.3
100.0
160.6
100.0
169.3
100.0
At the end of 2022 the Society had no equity release possession properties.
Legacy lending books
The legacy lending books comprise the following:
2022
2022
2021
2021
£m
%
£m
%
Loans secured on commercial property
10.6
3.4
14.9
3.9
Loans secured on Serviced Apartments
16.6
5.3
17.5
4.1
Specialist Buy to Let
14.0
4.5
27.7
7.4
Loans to Housing Associations
270.9
86.8
323.4
84.6
312.1
100.0
383.5
100.0
Loans secured on commercial property
2022
2022
2021
2021
Loan to value (unindexed)
£m
%
£m
%
<70%
5.8
54.7
10.2
68.5
70% - <80%
3.5
33.0
-
-
>90%
1.3
12.3
4.7
31.5
10.6
100.0
14.9
100.0
2022
2022
2021
2021
Payment status
£m
%
£m
%
Not past due
10.6
100.0
14.9
100.0
10.6
100.0
14.9
100.0
2022
2022
2021
2021
Diversification by industry type
£m
%
£m
%
Retail
8.5
80.2
11.2
74.6
Office
-
-
0.8
5.3
Industrial
0.5
4.7
1.0
6.4
Hotel / leisure
1.6
15.1
1.7
11.6
Other
-
-
0.2
2.1
10.6
100.0
14.9
100.0
At 31 December 2022, the Society had no commercial investment loans in arrears of 3 months or more (2021: none). One loan that would be
past due or impaired have had their terms renegotiated.
The Society had no commercial loans in possession or subject to LPA receivership at the end of 2022 (2021: none).The Society did not grant
forbearance against any loans secured on commercial property in 2022 (2021: none).
41 Credit quality
Continued
Loans secured on serviced apartments
2022
2022
2021
2021
Loan to value (indexed)
£m
%
£m
%
<70%
2.6
15.7
2.8
18.1
70% - <80%
8.4
50.6
9.6
49.0
80% - <90%
5.6
33.7
5.1
32.9
16.6
100.0
17.5
100.0
2022
2022
2021
2021
Payment status
£m
%
£m
%
Not past due
16.1
97.0
17.5
100.0
LPA receivership
0.5
3.0
-
-
16.6
100.0
17.5
100.0
Against cases where an LPA appointment has been made, £0.6m collateral is held.
The Society did not grant forbearance against any loans for serviced apartments during the year.
Page 148
Page 149
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
41 Credit quality
Continued
Legacy buy-to-let
The legacy residential mortgage book consists of residential investment loans, loans secured on buy-to-let properties to corporates, and loans
secured on buy-to-let properties to individuals, where the Society’s exposure to the borrower is larger than £1m.
2022
2022
2021
2021
Loan to value (unindexed)
£m
%
£m
%
<70%
14.0
100.0
20.0
72.2
80% - <90%
-
-
7.7
27.8
14.0
100.0
27.7
100.0
2022
2022
2021
2021
Payment status
£m
%
£m
%
Not past due
14.0
100.0
27.7
100.0
14.0
100.0
27.7
100.0
There are no past due or possession cases in 2022. For 2022, no collateral (2021: £nil) was held against past due and in possession cases.
At 31 December 2022, the Society had no specialist buy to let loans in arrears of 3 months or more (2021: none). No loans that would be past
due or impaired have had their terms renegotiated.
The Society did not grant forbearance against any loans secured on specialist buy to let property in 2022 (2021: £3.0m).
Loans to housing associations
2022
2022
2021
2021
Loan to value (unindexed)
£m
%
£m
%
<70%
178.5
65.9
176.5
54.4
70% - <80%
92.4
34.1
61.9
19.2
80% - <90%
-
-
85.0
26.4
270.9
100.0
323.4
100.0
Loans to Housing Associations are secured on residential property. No Housing Association loans are past due or impaired.
Liquidity risk is the risk that the Group has insufficient funds to meet its obligations as they fall due. This risk is managed on a Group basis
(including all subsidiary entities) with day-to-day responsibility delegated to the Group’s Treasury department with oversight by the Assets and
Liabilities Committee, the Group Risk Committee and the Board.
Management of liquidity risk
The Group ensures it holds sufficient quality and quantity of liquidity to remain a going concern after a severe but plausible stress. Cash
flow
forecasts are used to forecast liquidity, ensuring future compliance with limits set by the Board. Wherever appropriate, the Group ensures it takes
any necessary steps to ensure it has access to any available Bank of England Schemes designed to support
financial institutions.
Liquidity resources
The Group’s liquidity resources include funds in cash accounts held in the Bank of England reserve account and other easily marketable assets
and contingent liquidity. The Group monitors compliance against Liquidity Coverage Ratio (LCR) requirements on a weekly basis above the
regulatory minimum of 100% throughout the year.
Contractual maturity profile o
f
financial assets and liabilities
The table below analyses the carrying value of
financial assets and financial liabilities based on the remaining contractual li
fe to the maturity
date. The contractual maturity will differ to actual payments; for example, most on demand customer deposits will be repaid later than the
earliest date on which repayment can be requested and mortgages may be repaid ahead of their contractual maturity. Derivative
financial
instruments’ cash flows are based on discounted amounts and are allocated into maturity buckets on the basis o
f each derivative’s contractual
maturity.
At 31 December 2022
Repayable
Upto
3-12
1-5
More than
Total
on demand
3 months
months
years
5 years
£m
£m
£m
£m
£m
£m
Assets
Cash and balances with the bank of England
421.9
-
-
-
-
421.9
Loans and advances to credit institutions
17.4
87.4
-
-
-
104.8
Debt securities
1.6
63.1
93.8
268.6
5.9
433.0
Derivative financial investments
-
0.8
9.0
63.5
17.1
90.4
Loans and advances to customers
2.9
35.6
86.1
469.2
3,665.7
4,259.5
Fair value adjustments for hedged risks
-
(3.2)
(17.1)
(30.0)
(10.6)
(60.9)
Other financial assets
-
6.6
-
-
-
6.6
Total financial assets
443.8
190.3
171.8
771.3
3,678.1
5,255.3
Liabilities
Due to members
3,100.4
495.1
295.8
327.4
2.1
4,220.8
Fair value adjustments for hedged risks
-
0.3
-
-
-
0.3
Due to other customers
48.6
92.9
34.3
-
-
175.8
Deposits from credit institutions
3.6
57.9
0.5
515.1
-
577.1
Derivative financial instruments
-
-
0.1
2.1
50.3
52.5
Other financial liabilities
-
2.4
-
-
-
2.4
Total financial liabilities
3,152.6
648.6
330.7
844.6
52.4
5,028.9
Net liquidity gap (contractual)
(2,708.8)
(458.4)
(158.8)
(73.3)
3,625.7
226.4
Page 150
Page 151
Notes to the Accounts
for the year ended 31 December 2022
Notes to the Accounts
for the year ended 31 December 2022
42 Liquidity risk
Contractual maturity profile o
f
financial assets and liability
Continued
At 31 December 2021
Repayable
Upto
3-12
1-5
More than
Total
on demand
3 months
months
years
5 years
£m
£m
£m
£m
£m
£m
Assets
Cash and balances with the bank of England
382.2
-
-
-
-
382.2
Loans and advances to credit institutions
183.5
-
-
-
-
183.5
Debt securities
-
24.8
35.2
328.7
2.0
390.7
Derivative financial investments
-
-
0.6
13.1
0.8
14.5
Loans and advances to customers
3.1
30.2
84.4
407.2
3,269.6
3,794.5
Fair value adjustments for hedged risks
0.1
0.5
1.4
6.7
53.4
62.1
Total financial assets
568.9
55.5
121.6
755.7
3,325.8
4,827.5
Liabilities
Due to members
2,881.8
374.7
208.8
263.8
2.7
3,731.8
Due to other customers
9.5
76.5
73.1
-
-
159.1
Deposits from credit institutions
1.9
70.2
0.5
515.0
-
587.6
Derivative financial instruments
-
-
0.5
5.8
141.3
147.6
Total financial liabilities
2,893.2
521.4
286.4
784.6
144.0
4,626.1
Net liquidity gap (contractual)
(2,324.3)
(465.9)
(164.8)
(28.9)
3,181.8
201.4
Liquidity risk outlook
The Group has
£518m
(2021: £575.0m) of TFS and TFSME drawings which are due to be repaid during 2024. The Group’s plans to replace these
funds are well advanced and have seen the Group extend its range of wholesale funding.
Capital risk is the risk that the Group is or becomes inadequately capitalised to address the risks to which it is exposed.
Management of capital
Day to day capital management is delegated to the Chief Financial Officer with oversight by the Assets & Liabilities Committee, the Group Risk
Committee and the Board.
The Society assesses its capital position and risks through an annual Internal Capital Adequacy Assessment Process (ICAAP) in line with the
regulatory requirements. The ICAAP consider the key capital risks and the amount of capital it should retain. These requirements are assessed
against the current position and throughout any forward planning. The PRA sets and monitors capital requirements for the Group. Capital
adequacy is measured by comparing both current and forecast capital resources to capital requirements.
Capital stress testing is performed as part of the ICAAP and makes sure that the Group is resilient to a range of stresses, assessing whether
capital requirements would be met under severe but plausible stress scenarios and considers what mitigating actions are available to
management.
The Group’s policy is to maintain a strong capital base to maintain member, creditor and market confidence and to sustain the
future growth of
On 21st February, the Boards of the Society and Manchester Building Society agreed heads of terms to merge by way of a transfer of
Manchester Building Society’s engagement into the Society. The Boards believes it is in Members’ best interests to complete the merger as
members will benefit
from an enlarged and expanding Building Society. The transaction is still subject to resolutions by the Boards of both
building societies as well as regulatory approval. As such, the financial impact o
f the transfer of engagements on the Society’s
financial position
Page 152
Page 153
Notes to the Accounts
for the year ended 31 December 2022
The reporting obligations set out in Article 89 of the European Union’s Capital Requirements Directive IV (CRD IV) have been implemented in the
UK by the Capital Requirements (Country-by-Country Reporting) Regulations.
Newcastle Building Society is the biggest building society in the North East and the 8th largest in the UK with assets c.
£5.3
billion (2021: £4.9 billion).
As a mutual organisation, the Society’s primary focus is its Members and it aims to provide mortgage, savings and insurance products supported
by excellent customer service. Additionally, the Society offers financial advice, as an appointed representative o
f Openwork, through Newcastle
Financial Advisers Limited. Outsourcing of
financial services and In
formation Technology services are provided through Newcastle Strategic
Solutions Limited.
The consolidated financial statements o
f the Newcastle Building Society Group include the audited results of the Society and its subsidiary
undertakings. The consolidated entities, their principal activities and countries of incorporation, are detailed in Note 15 to the Annual Report and
Accounts.
Basis of preparation
a)
Country
All of the consolidated entities were incorporated in the United Kingdom, with the exception of Newcastle Mortgage Loans (Jersey) Limited,
which is incorporated and operates with no employees in Jersey.
b)
Total operating income and profit be
fore tax
Total operating income and profit be
fore tax are compiled from the Newcastle Building Society Group consolidated
financial statements
for
the year ended 31 December 2022, which are prepared in accordance with International Financial Reporting Standards ("IFRS"). Total operating
income represents the sum of the Group's net interest income, other income, other charges and gains less losses on
financial instruments
and hedge accounting. Group total operating income was
£119.7m
(2021: £99.5m), the proportion not arising from UK-based activity is not
considered material for the purpose of this disclosure.
c)
Corporation tax paid
Corporation tax paid represents the net cash taxes paid to the tax authority, HMRC, during 2022. Corporation tax paid is reported on a cash
basis and will normally differ from the tax expense recorded for accounting purposes due to:
-
Timing differences in the accrual of tax charge. The Group makes quarterly payments on account to HMRC. Payments are made in
July, October, January, and April. As the Group's accounting year runs from January to December, payments made in any
financial
year will not align with tax due in that financial year.
-
The Society brought forward into 2022 tax losses from previous years that were used to extinguish a portion of its taxable pro
fits in 2022.
- Other differences between when income and expenses are accounted for under IFRSs and when they become taxable.
During 2022 the Group paid
£4.6m
in corporation tax. (2021: £4.4m).
d)
Full-time equivalent employees (“FTEs”)
The average number of Group full time equivalent employees was
1,297.4
(2021: 1,196.1) all of which were employed in the UK.
e)
Group profit be
fore tax
Group profit be
fore tax was
£31.7m
(2021: £29.1m) with tax a charge of
£5.7m
(2021: £5.2m). The profit be
fore tax and the tax charged relates
Page 154
Page 155
Photo:
Tanya, Newcastle Building Society Colleague
Page 156
Page 157
Millennium Bridge, Newcastle/Gateshead Quayside
Documents may be served on any of the Directors c/o Addleshaw Goddard LLP, One St Peter's Square, Manchester M2 3DE. The Executive Directors have
service contracts which can be terminated at any time by the Society on six months’ notice. The Executive Directors’ service contracts were entered into
on the dates of their appointment, excepting A S Haigh who was appointed to the role of Chief Executive on 1 May 2015, having previously held the role of
Chief Operating Officer. There are no contracts for Non-Executive Directors and no compensatory terms for loss of office.
Principal office
The address of the Society’s principal office is 1 Cobalt Park Way, Wallsend, NE28 9EJ .
Directors at 31 December 2022
Date of Birth
Date of Appointment
Business Occupation
GA Bennett
MA
10.02.61
24.04.19
Non Executive Director
Other Directorships: Newcastle Portland House Limited; Darkwood Croft Management Company Limited;
MAM Properties Limited.
MJ Faull
FCCA
24.11.60
23.08.21
Non Executive Director
Other Directorships: IQUW Syndicate Management Limited. The Line Art Walk; The Line Public Art Walk CIC.
BP Glover
LLB, ACIB
03.07.60
11.08.17
Company Director
Other Directorships: Credit Asset Management Limited; Professions Funding Limited;
Property & Funding Solutions Ltd; Recognise Bank Limited.
AS Haigh
BSc
26.01.63
27.01.14
Building Society Chief Executive Officer
Other Directorships: Community Foundation serving Tyne & Wear and Northumberland;
North East England Chamber of Commerce.
K Ingham
20.02.65
04.09.14
Vice President, Global Partner Success
Other Directorships: Newcastle Strategic Solutions Limited; Vice President,
Global Partner Success (Europe Middle East and Africa at Expedia Inc.); Ramsdons Holdings PLC.
A Laverack
BA
08.06.61
17.07.17
Company Director
(Business name: Anne Shiels)
Other Directorships: Newcastle Financial Advisers Limited; Anne Shiels Consulting Limited;
LNT Care Developments Group Limited.
SL Lynn
10.05.60
22.04.20
Non Executive Director
Other Directorships: Newcastle Strategic Solutions Limited; Stuart Lynn Limited; Whitley Bay Golf Club Limited.
S Miller
BSc, ACIB
16.10.70
16.01.18
Building Society Customer Director
Other Directorships: Newcastle Financial Advisers Limited.
JDA Ramsbotham
CBE, DL
30.08.59
23.08.21
Non Executive Director
Other Directorships: Newcastle Financial Advisers Limited; Newcastle Strategic Solutions Limited;
Hargreaves Land Limited; High Doctor Pasture Caravan Park Limited; Altruism Limited.
DA Samper
BA, CA
21.12.74
20.12.18
Building Society Chief Financial Officer
Other Directorships: Newcastle Portland House Limited.
MR Thompson
BA, FCA
11.10.61
29.01.19
Non Executive Director
Other Directorships: Atlas Cloud Limited; Newcastle United Foundation; The Clinkard Group Limited;
NorthStandard Limited (formerly known as The North of England Protecting and Indemnity Association Limited);
Tyne and Wear Building Preservation Trust Limited.
1
Statutory percentages
2022
Statutory
%
%
Lending limit
1.5
25.00
Funding limit
15.1
50.00
The above percentages have been calculated in accordance with the provisions of the Building Societies Act 1986. Lending limit is calculated
excluding fair value adjustments for derivative values.
The lending limit measures the proportion of business assets not in the form of loans secured on residential property.
Business assets are the total assets of the Group plus allowances for losses on loans and advances less liquid assets, investment properties and
property, plant and equipment as shown in the Group balance sheet.
The funding limit measures the proportion of shares and borrowings not in the form of shares held by individuals.
The statutory limits are as laid down under the Building Societies Act 1986 and ensure that the principal purpose of a building society is that of
making loans which are fully secured on residential property and are funded substantially by its Members.
2
Other percentages
2022
2021
As a percentage of shares and borrowings:
%
%
Gross capital
5.35
5.45
Free capital
4.65
4.71
Liquid assets
19.29
21.36
Result for the year as a percentage of mean total assets
0.51
0.49
Management expenses as a percentage of mean total assets
1.75
1.45
The above percentages have been prepared from the Annual Accounts.
Gross capital represents the aggregate of the general reserve, available for sale reserve and subscribed capital.
Free capital represents gross capital less property, plant and equipment, investment property and non-current assets held for sale.
Liquid assets are as shown in the Group Balance Sheets but exclude liquid assets pledged under repo agreements and includes collateral.
Shares and borrowings represent the total of shares, amounts owed to credit institutions, amounts owed to other customers and debt securities
in issue.
Management expenses represent the aggregate of administrative expenses and depreciation, and includes expenses relation to the Group’s
Solutions business.
Mean total assets are the average of the 2022 and 2021 total assets.
Annual Business Statement
for the year ended 31 December 2022
Page 158
Page 159
Loan-to-value ratio (LTV) -
A ratio which expresses the amount of
a mortgage as a percentage of the value of the property. The Group
calculates UK residential mortgage LTV on an indexed basis (the value
of the property is updated on a quarterly basis) to re
flect changes in
house prices.
Loans and advances to banks -
Treasury investments purchased with
banking institutions.
Management expenses -
Management expenses represent
administrative expense and depreciation. The management expense
ratio is management expenses expressed as a percentage of mean
total assets.
Market risk -
The risk that movements in market risk factors, including
re-pricing of assets and liabilities and the imperfect matching of
interest rates between different asset and liability types, may adversely
impact the Society.
Mean total assets -
Represents the amount produced by halving the
aggregate of total assets at the beginning and end of the
financial
year.
Member -
A person who has a qualifying share investment or a
mortgage loan with the Society.
Net interest income -
The difference between interest received on
assets and interest paid on liabilities.
Non-Executive Director -
A Member of the Society’s Board who does
not form part of the executive management team. They are not an
employee of the Society.
Operational risk -
The risk of loss arising from inadequate or failed
internal processes, people and systems or from external events.
Other lending -
Loans and advances secured on traded endowment
policies.
Past due -
Loans on which payments are overdue including those on
which partial payments are being made.
Permanent Interest Bearing Shares (PIBS) -
Unsecured, deferred
shares that are a form of capital. PIBS rank behind the claims of
all subordinated debt holders, depositors, payables and investing
Members of Newcastle Building Society.
Prime -
Prime mortgages are those granted to the most credit worthy
category of residential borrowers.
Prudential Regulation Authority (PRA) -
Part of the Bank of England
and responsible for the prudential regulation and supervision of banks,
building societies, credit unions, insurers and major investment firms
Renegotiated loans -
Loans are classed as renegotiated with the
customer’s consent, when their terms have changed during the year.
Loans and advances are generally renegotiated either as part of an
ongoing customer relationship or in response to an adverse change in
the circumstances of the borrower.
Repo -
Short to medium-term funding agreements which allow a
borrower to sell a financial asset, such as government bonds, as security
for cash. As part of the agreement the borrower agrees to repurchase
the security at a later date. For the party selling the security (and
agreeing to repurchase it in the future) it is a repo; for the party on the
other end of the transaction (buying the security and agreeing to sell in
the future), it is a reverse repurchase agreement or reverse repo.
Residential mortgage backed securities (RMBS) -
Asset backed
securities that represent interests in residential mortgages. Investors in
these securities have the right to cash received from future mortgage
payments (interest and principal).
Residential loans -
Residential loans are secured against residential
property.
Risk appetite -
The articulation of the level of risk that the Group is
willing to take (or not take) in order to safeguard the interests of the
Society’s Members whilst achieving business objectives.
Risk-weighted assets (RWA) -
The value of assets, after adjustment
under Basel II rules, to reflect the degree o
f risk they represent. The
Society measures RWA using the standardised approach.
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 total of shares, amounts owed to credit
institutions, amounts owed to other customers and debt securities in
issue, including accrued interest.
Solutions -
A subsidiary of the Society that offers business to business
services through people, process and innovative application of
technology. Services include complete systems for smaller societies
and white-labelled savings management for a range of banks and
building societies.
Solvency ratio -
The ratio of total capital to total risk weighted assets.
Subordinated debt / liabilities -
A form of Tier 2 capital that is
unsecured and ranks behind the claims of all depositors, creditors, and
investing Members (other than holders of PIBS).
Tier 1 capital
-
Tier 1 capital is divided into Common Equity Tier 1 and
other Tier 1 capital. Common Equity Tier 1 capital comprises general
reserves from retained pro
fits. Other regulatory adjustments may be
made for the purposes of capital adequacy. Under the grandfathering
rules of Basel III qualifying capital instruments such as PIBS can
be included in other Tier 1 capital (i.e. not Common Equity Tier 1)
transferring to Tier 2 over the grandfathering period.
Tier 2 capital -
Comprises the Group’s qualifying subordinated debt
and collective impairment allowance (for exposures treated on a Basel
II standardised basis).
Wholesale funding -
The total of deposits from banks, amounts owed
to other customers and debt securities in issue.
Set out below are the definitions o
f the terms used within the Annual
Report and Accounts to assist the reader and to facilitate comparison
with other financial institutions:
Arrears -
A customer is in arrears when they are behind in their
mortgage payments. A customer is 3 months in arrears when they
have missed the equivalent of 3 mortgage payments.
Administrative expenses -
Expenses incurred in running the day to
day activities of the Society including staff, property, marketing and
technology costs.
Basel II
-
The second of the Basel Accords, issued by the Basel
Committee on Banking supervision, which defines the methods by
which firms should calculate their regulatory capital requirements
to retain enough capital to protect the financial system against
unexpected losses. Basel II became law in the EU Capital
Requirements Directive, and was implemented in the UK via the PRA
Handbook.
Basel
III
-
The third of the Basel Accords, issued by the Basel
Committee on Banking supervision, which are a long-term package of
changes that will strengthen regulatory requirements for capital and
liquidity.
Buy-to-let (BTL)
-
A mortgage designed to support customers
purchasing an investment property to let out.
Capital Requirements Directive (CRD IV) -
The EU legislative
package covering prudential rules for banks, building societies and
investment firms. CRD IV is made up o
f the Capital Requirements
Directive and Capital Requirements Regulations, it is designed to
implement the Basel III Accord across the EU.
Commercial lending / mortgage -
Loans secured on commercial
property.
Common Equity Tier 1 capital -
Defined by the PRA as general
reserves or qualifying capital instruments which for the Society is the
accumulation of retained pro
fits.
Common Equity Tier 1 ratio -
Common Equity Tier 1 capital as a
percentage of risk weighted assets.
Contractual maturity -
The final payment date o
f a loan or other
financial instrument, at which point all the remaining outstanding
principal and interest is due to be paid.
Covered bonds -
Debt securities backed by a portfolio of mortgages
that is segregated from the issuer’s other on-balance sheet assets
solely for the bene
fit o
f the holders of the covered bonds.
Credit risk -
The risk that a customer or counterparty is unable to
honour their repayment obligations as they fall due.
Debt securities -
Assets representing certificates o
f indebtedness
of credit institutions, public bodies or other undertakings excluding
central banks.
Derivative financial instruments -
A derivative financial instrument is
a type of
financial instrument (or an agreement between two parties)
that has a value based on the underlying asset, index or reference rate
it is linked to. The Group uses derivative financial instruments to hedge
its exposures to interest rate risk.
Effective interest rate method (EIR) -
The method used to measure
the carrying value of a
financial asset or a liability and to allocate
associated interest income or expense over the relevant period.
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.
Financial Conduct Authority (FCA) -
FCA regulates the conduct of
financial firms providing services to consumers and maintains the
integrity of the UK’s
financial markets.
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 i
f 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 PRA is obliged to pay an annual levy, which goes towards
running costs and compensation payments.
Forbearance -
A term generally applied to arrangements which are
provided to support mortgage customers experiencing financial
difficulties. An example of this would be a temporary reduction in
mortgage payments.
Free capital -
Represents gross capital less property, plant and
equipment and investment property.
Funding limit -
Measures the proportion of shares and borrowings not
in the form of shares held by individuals.
Gilts -
These are bonds issued by certain national governments. The
Group only classifies debt securities issued by the Bank o
f England as
Gilts.
Gross capital -
The aggregate of general reserve, available-for-sale
reserve, subscribed capital and subordinated liabilities.
Impaired loans -
Loans where an event has occurred which indicates
the Group does not expect to collect all the contractual cash flows
due, or expects to collect them later than they are contractually due.
Individual Capital Guidance (ICG) -
Guidance from the PRA on the
minimum level of capital that must be held.
Individual Liquidity Guidance (ILG) -
Guidance from the PRA on the
minimum quantity of a
firm’s liquidity resources and the firm’s
funding
profile.
Individually / collectively assessed -
Individual assessments are
made of all mortgage loans where objective evidence indicates losses
are likely or the property is in possession. A collective impairment
provision is made against the remaining group of loans and advances
where objective evidence indicates that it is likely that losses may be
incurred.
Interest rate risk -
The risk that the value of the Society’s net assets or
net interest income falls as a result of a change in interest rates.
Internal Capital Adequacy Assessment Process (ICAAP) -
The
Group’s own assessment of the levels of capital that it needs to hold in
respect of the risks it faces under a business as usual scenario and a
variety of stress scenarios.
Internal Liquidity Adequacy Assessment Process (ILAAP) -
The
Group’s internal assessment of the liquidity levels needed to meet its
regulatory liquidity requirements.
Legacy mortgage portfolios
-
Mortgage loan books where the Group
has ceased new lending and is winding down exposures.
Lending limit -
Measures the proportion of business assets not in the
form of loans fully secured on residential property.
Leverage ratio -
A Basel III ratio which measures Tier 1 capital against
total on and off balance sheet assets.
Liquid assets -
The total of cash in hand and balances with the Bank of
England, loans and advances to credit institutions and debt securities.
Liquidity Coverage Ratio (LCR) -
A Basel III measure of the amount of
highly-liquid assets against cash outflows over a 30 day period.
Liquidity risk -
The risk that the Group does not have sufficient
financial resources to meet its obligations as they
fall due, or will have
to do so at an excessive cost. This risk arises from mismatches in the
timing of cash in
flows and outflows.
Glossary
Page 160
Page 161
Alnwick -
28 Bondgate Within, NE66 1TD
Tel: (01665) 603 344
Ashington -
10 Station Road, NE63 9UJ
Tel: (01670) 815 919
Barnard Castle -
25 Market Place, DL12 8NE
Tel: (01833) 600 100
Berwick Upon Tweed -
12 Hide Hill, TD15 1AB
Tel: (01289) 306 417
Bishop Auckland -
15 Newgate Street, DL14 7HG
Tel: (01388) 433 001
Carlisle -
65 English Street, CA3 8JU
Tel: (01228) 524 518
Chester-Le-Street -
42 Front Street, DH3 3BG
Tel: (0191) 388 5266
Consett -
19/21 Middle Street, DH8 5QP
Tel: (01207) 502 636
Cramlington -
34/35 Craster Court, NE23 6UT
Tel: (01670) 735 813
Darlington -
7/8 Horsemarket, DL1 5PW
Tel: (01325) 383 656
Durham -
73/75 Saddler Street, DH1 3NP
Tel: (0191) 384 3182
Gateshead -
12 Ellison Walk, Trinity Square, NE8 1BF
Tel: (0191) 477 2547
Gosforth -
105/107 High Street, NE3 1HA
Tel: (0191) 285 5965
Hartlepool -
133/135 York Road, TS26 9DR
Tel: (01429) 233 014
Hawes -
Hawes Community Office, Market Place, DL8 3RA
Tel: (01969) 600 333
Hexham -
1-2 Beaumont Street, NE46 3LZ
Tel: (01434) 605 106
Knaresborough
- 40 Market Place, HG5 8AG
Tel: (01423) 648 750
Middlesbrough -
38 Linthorpe Road, TS1 1RD
Tel: (01642) 243 617
Morpeth -
14 Market Place, NE61 1HG
Tel: (01670) 514 702
Newcastle -
136 Northumberland Street, NE1 7DQ
Tel: (0191) 261 4940
North Shields -
76 Bedford Street, NE29 0LD
Tel: (0191) 259 5286
Penrith -
12 Market Square, CA11 7BX
Tel: (01768) 862 888
Ponteland -
23 Broadway, Darras Hall, NE20 9PW
Tel: (01661) 821 828
South Shields -
Unit 3-5 Denmark Centre, NE33 2LR
Tel: (0191) 454 0407
Stokesley -
36 High Street, TS9 5DQ
Tel: (01642) 711 742
Sunderland -
14 Waterloo Place, SR1 3HT
Tel: (0191) 565 0464
West Denton -
15 Denton Park Centre, NE5 2RA
Tel: (0191) 267 5038
Whickham -
28 Front Street, NE16 4DT
Tel: (0191) 488 1766
Whitley Bay -
303 Whitley Road, NE26 2HU
Tel: (0191) 252 0642
Wooler -
The Cheviot Centre, NE71 6BL
Tel: (01668) 260 360
Yarm -
41 The High Street, Yarm, TS15 9BH
Tel: (01642) 785 985
Branch and Financial Advice Centre Directory
Page 163
Page 162
Photo:
Vita, Branch Manager, Bishop Auckland