Chief Executive's Review
Introduction
I'm pleased to report another strong underlying
performance for the Society in the first half of 2024, as we
continue on our journey of growth, investment and delivery of our
Purpose; to connect our communities with a better financial
future.
Purpose is the starting point for everything we
do as an organisation, including how we think about strategy, as
well as how we measure performance and impact. As a mutual, our
principal stakeholders are our Members and it is therefore
important that we understand the multiple ways in which we create
value on their behalf.
Last year, we adopted the Mutual Value
Measurement framework (an approach developed by Australia's
Business Council for Cooperatives and Mutuals and Monash University
Business School in Melbourne) to help structure our approach to how
we think about member value, which led us to consider how we add
value in three key ways:
· Product, Pricing,
Service and Accessibility
· Membership and
Community
· Employment,
Operations and Partnerships
We were the first UK business to be accredited
for our adoption of the framework, which we have now embedded as
both a valuable strategic tool in helping us articulate our
ambition and a means to demonstrate progress in dialogue with
stakeholders. At the end of 2023 we outlined 20 member value
commitments and we have made good progress on these so far in 2024.
We will be reporting on our delivery of these at the end of the
year.
Financial Performance
Performance in the first half of 2024 has
evidenced continued progress in our strategic delivery, with
increased operating profit before impairments and provisions of
£20.1m (HY 2023: £17.9m) and underlying profit of £15.6m (HY 2023:
£15.0m).
Capital remains strong and well within
regulatory limits, with Common Equity Tier 1 at 12.1% (YE 2023:
12.5%). In view of the Society's significant investment in
infrastructure, including our technology renewal and development of
the branch network, combined with our aspiration for continued
growth, we took the opportunity to raise an additional £20m of tier
2 capital in June, increasing our total capital ratio to 14.2% (YE
2023: 14.1%).
Our profit before tax for the Group fell to
£0.2m (HY 2023: £16.3m), reflecting the impact of the decisions we
have taken to offer voluntary support to Members who are former
customers of The Will Writing Company and have been impacted by the
actions of The Philips Trust Corporation ('Philips
Trust').
Voluntary support for Members affected by the actions of
the Philips Trust
Events leading to the problems that customers
have experienced as a result of the actions of Philips Trust are
complex, the detail of which has only become clear over a long
period. As that detail has emerged, we have been very concerned by,
and sympathetic to, the difficult situation faced by Members who
have been affected by Philips Trust. It has been extremely
distressing to hear our customers' stories and the impact on their
lives.
Our Members understand our commitment to
Purpose and our support for the communities we
serve. Therefore, although
there was no obligation to do so, the Society has chosen to offer
voluntary financial support to those Members who were impacted. We
have set aside £20m of funds to provide this support, including
expected costs. Communications are now underway to finalise the
arrangements for Members wishing to participate in this voluntary
support. Further information is available on our
website.
It is clear that the difficulties that Members
have experienced are a direct result of the actions of Philips
Trust. The Society will continue to offer support to any current or
future police investigation which aims to hold those responsible to
account.
High streets are better with branches
The national trend of bank branch closures show
little sign of slowing but we continue to buck this trend through
our commitment to the provision of accessible face-to-face
financial services and advice, and our ongoing investment in our
branch network. Recent figures from Which? shows that since 2015,
more than 6,000 bank branches have now closed, but in that time
we've invested around £10m in our branches, opening in new
locations and restoring financial services in communities abandoned
by the banks.
By considering the needs of our local
communities, assessing the issues they face and thinking more
creatively about the answers, we are showing that there are ways to
deliver accessible financial services and advice in a sustainable
and impactful way.
In the first half of the year, we shared
details of our move to a new community partnership branch in North
Shields, which opened in July, and we've continued work on our new
flagship branch in Newcastle city centre. Work continues in the
rolling branch refurbishment and updating other branches across the
network.
We firmly believe that our flexible approach in
adapting size and configuration of the branch based on
understanding what a community needs is one that can be replicated
for long term success. By prioritising human interaction and
combining technology and design, we're showing that branches will
continue to have a sustainable essential role within the financial
services ecosystem, benefiting not just those most likely to be at
risk of financial exclusion.
Putting financial services at the heart of our
communities
Our latest community partnership branch builds
on previous success and takes the model to the next level. By
moving our North Shields branch into the vibrant community facility
at YMCA North Tyneside, we're establishing a new presence at the
heart of the community, sharing space with the YMCA team and their
popular café and gym. The new branch, which opened in July, extends
a longstanding partnership with YMCA North Tyneside, and as well as
contributing to their impactful work tackling complex social
challenges including poverty, addictions, homelessness, and mental
wellbeing, the move means we'll benefit from a combination of
reduced operating costs and increased footfall, and will help us to
serve even more people in North Tyneside.
At our new Monument branch in Newcastle city
centre, we are creating a flagship location with modern facilities
for customers, communities and colleagues spread over five floors,
bringing an iconic building into use for the whole community and
putting accessible financial services and advice right at the heart
of our home city for generations to come.
We continue to work with North Tyneside Council
on plans for another new branch to be located within their
redevelopment of the library in Tynemouth.
Value for Members
One important measure of value is that over the
first five months of the year (the latest data available) our
average savings rate of 3.83% compared to a market average of
3.34%, which is a benefit of £9.8m more savings interest for our
Members compared to the market average. In the first half of 2024
we've seen a £261m growth in savings balances (HY 2023: £458m) to
£5.3bn (YE 2023: £5.0bn), with a net growth in branch accounts of
around 9,000, demonstrating that the combination of good value on
the high street and exceptional customer service through our
branches is helping to grow our business.
Our Standard Variable Rate (SVR) for mortgages
remains one of the most competitive on the market at 6.94% vs a
market average of 8.18%, saving our SVR borrowers around £1.4m in
interest payments over the first half of 2024 compared to the
market average.
Through engagement with our Members, we
understand our continued commitment to offer passbook savings
accounts is important, and has also helped retain and attract
customers, especially as other high street providers have moved
away from passbooks. We're also developing our savings offer from a
digital perspective, with continued investment in our mobile app,
and by offering branch customers the option to manage their money
both online as well as in person, if they wish.
Branches play an important role in creating
value within our communities. Fifteen branches have dedicated
community space for use by local charities and community groups,
giving people a warm, comfortable place to socialise. Community
rooms are free of charge and well used for a range of purposes
including workshops, first aid classes and language groups. We've
had more than 2,200 hours of community room bookings across our
network so far this year, welcoming 61 new groups.
In July we completed our Consumer Duty change
programme after over 18 months of delivery. Over the first half of
the year our focus was on embedding the principles and finalising
the requirements, across the business, ahead of the 31 July 2024
deadline; which included completion and Board approval for our
Consumer Duty Annual Assessment report. With our Members and
customers at the heart of our action, we continue to be vigilant to
identify further opportunities to ensure more consistent and more
positive outcomes for customers.
The combined effect of our focus on what
matters to our Members is reflected through very high levels of
customer satisfaction at 91% (YE 2023: 95%).
Our financial advice subsidiary,
Newcastle Financial Advisers Limited (NFAL), which provides
regulated financial advice across our communities and locations,
has continued to deliver strong performance with almost 5,000
customer advice appointments undertaken, evidencing ongoing demand
for accessible, face to face advice in our communities.
With nearly £60m invested on behalf
of our customers, our financial advice team again achieved Top
Rated firm status from VouchedFor, the UK's leading review site for
financial advisers, for now the third consecutive year, one of only
a select group of financial advisory businesses in the UK to do so.
We have now received over 2,400 feedback reviews with an overall
rating of 4.9/5.
Powering the savings industry
Our subsidiary Newcastle Strategic Solutions
Limited ('Solutions'), which is celebrating 20 years of managing
savings accounts for providers across the UK, now manages savings
balances in excess of £50bn (YE 2023: £48bn+) for 16 different
banks and building societies. After a period of very low interest
rates, the savings market is increasingly dynamic and Solutions is
investing in new capabilities to support its clients. This includes
the transition of all clients onto a new digital savings platform,
the rollout of a new workforce management tool, and the
implementation of Contact Centre as a Service, which will continue
throughout the year. With several new clients in the pipeline, the
Solutions business is well placed to extend its important role in
generating capital for the wider Society business.
Helping homeowners
Our mortgage lending continues to perform well.
In the first half of the year we've received more than £1bn new
mortgage applications, supporting more than 2,000 first time
buyers. Our gross residential lending to 30 June 2024 was £584m (HY
2023: £660m). We have seen small increases in
underlying arrears levels as the cost of living pressures continue
to affect borrowers. We continue to offer a range of measures to
support them should they experience financial difficulty, including
measures introduced by the Government's Mortgage
Charter.
The majority of our lending is delivered
through our network of intermediary partners, and we've invested
significantly in our service with the launch of a new digital
mortgage application platform for brokers. By listening to brokers
and understanding their needs, we've built a new platform in-house
which brokers have told us helps to simplify and accelerate the
process, giving them more time to spend with their clients. 61% of
our broker partners say our new platform is better or substantially
better than other lenders' systems.
Making a difference in our communities
In the first half of the year, membership of
the Society grew to more than 371,000 and we've maintained a high
standard of service with customer satisfaction scores at 91% (YE
2023: 95%). There are signs that more and more people are
recognising the value that comes from being part of the mutual
movement and choosing long term value and sustainability for their
communities.
As part of our ongoing strategic partnership,
we're pleased to support the Community Foundation Tyne & Wear
and Northumberland in their creation of Vital Signs 2024, a
collection of reports on ten key themes which take a deep dive into
the issues faced by the North East. Earlier this year over 100
leaders from business, charity, and the public sector were involved
in an event at our Cobalt HQ to help launch Vital Signs 2024 and
start a conversation about working collaboratively to drive action
and meaningful, sustainable change in our communities. Vital Signs
2024 informs our strategic community priorities, creating a clear
link to our Purpose including how we approach giving and
volunteering.
By asking colleagues to focus their efforts on
our key strategic themes, we're able to work more closely with our
communities on the issues that matter most. Our community support
and volunteering centres on five key areas: food poverty; debt
management; work and opportunity; environment and sustainability;
and homelessness and insecure housing.
So far this year, more than 60% of colleague
volunteering time has been spent on causes and projects supporting
these strategic themes, with the total volunteering time standing
at more than 685+ days (HY 2023: 650+).
Through the Newcastle Building Society
Community Fund at the Community Foundation, we've made grants worth
a total of more than £55,000 to charities tackling these strategic
themes, which are expected to benefit almost 3,000 people in
communities around our branch network.
We continue to support Members with the
delivery of the Helping Hand scheme in partnership with Citizens
Advice Gateshead, which provides fast access to a dedicated expert
adviser. So far this year, more than 80 Members have used the
service to access advice and information on a range of topics
including housing, debt management, access to welfare support,
relationships and community care. The estimated financial gain for
all Members in the first half of the year is more than
£150,000.
Creating an organisation ready for the future
We also aim to create value for Members and our
communities in our role as a major employer. This means making the
Society a great place to work, and through our 'A Place To Be You'
strategy we're focused on building a diverse workforce which
represents all our communities where everyone feels able to be
themselves at work and can achieve their potential.
We're making good progress on our long term
journey to evolve our culture by building on our solid foundations
through our 'Be the Change' programme, to create the conditions
which match and will deliver our wider ambitions for growth and
success.
With so much change in the organisation, we
have seen our colleague employee net promoter score (eNPS) fall
slightly to +49 (YE 2023: +57); a score of +49 is a very positive
result and places us in the top 25% of our survey provider's
finance sector benchmark.
Our journey as an employer mirrors the good
progress we are making against our performance and growth
ambitions, as well as the clear ways we are creating value for our
communities. This work will continue in the second half of the
year.
Thanks
The first half of 2024 has seen strong progress
in the combined ambitions for growth and investment in the Group
and at the same time, we have voluntarily supported Members
impacted by the actions and subsequent collapse of Philips Trust.
At the heart of all that we do, is our Purpose, 'Connecting our
communities with a better financial future' and delivering value
for our Members.
As always, we are grateful for the continued
support of our Members and the hard work of colleagues from across
the Group, which ensures that we are well placed for continued
progress in the months ahead.
Andrew Haigh | Chief Executive
1 August 2024
Business review
Our financial performance
Newcastle Building Society is the largest
building society based in the North East of England and the seventh
largest building society in the UK, with assets of
£6.5 billion (31 December
2023: £6.2 billion).
Profitability is one of 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 benefit of its
current and future Members.
Summary Group Income Statement
|
Unaudited
|
Unaudited
|
Audited
|
|
|
6 months to
|
6 months to
|
12 months
to
|
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
|
Restated*
|
|
|
|
£m
|
£m
|
£m
|
|
Net interest income
|
43.6
|
40.1
|
86.4
|
|
Other income and charges
|
27.6
|
25.0
|
51.9
|
|
Fair value gains less losses and hedge
accounting
|
6.0
|
3.3
|
(0.4)
|
|
Total operating income
|
77.2
|
68.4
|
137.9
|
|
Administrative expenses and
depreciation
|
(57.1)
|
(50.5)
|
(106.5)
|
|
Operating profit before impairments and
provisions
|
20.1
|
17.9
|
31.4
|
|
Impairments and provisions charges
|
(19.9)
|
(1.6)
|
(2.3)
|
|
Profit before taxation
|
0.2
|
16.3
|
29.1
|
|
Taxation
|
4.1
|
(3.9)
|
(7.0)
|
|
Profit after taxation
|
4.3
|
12.4
|
22.1
|
*The fair value of the derivative
liabilities has been restated. This increased 30 June 2023
derivative liabilities by £2.1m, increased 30 June 2023 profit for
the period by £0.1m, with adjustments to: opening reserves at 1
January 2023 of £1.7m; other assets of £0.6m; and other liabilities
of £0.1m. Please see note 45 of the 2023 Annual Report &
Accounts for more details.
The Group's profit before taxation for the
period of £0.2m (30 June 2023:
£16.3m (restated)) was impacted by the costs that were recognised
during the period following the announcement to provide voluntary
financial support to Members who are affected by the actions and
subsequent collapse of Philips Trust. Further details of this
voluntary support are found in the CEO update on page 1 and in note
14 to the financial information.
The Group's 2024 half-yearly financial results
demonstrate the core strength of the Group's operating model and is
reflected in the operating profit before impairments and
provisions, which increased to £20.1m for the period compared to £17.9m
(restated) for the six months to 30 June 2023.
The Board reviewed and was satisfied that the
alternative performance measure of underlying operating profit,
which is reported alongside the operating profit before impairments
and provisions measure, gives a clearer view of the underlying
performance of the business for our Members.
Underlying operating profit of the Group is
determined by removing income or expenses arising from events or
transactions distinct from the core activities of the Group which
do not represent the Group's true performance. The following table
provides a reconciliation of operating profit before impairments
and provisions to underlying operating profits:
Underlying Operating Profit
|
6 months to
|
6 months to
|
12 months
to
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
Restated*
|
|
|
|
£m
|
£m
|
£m
|
|
Operating profit before impairments and
provisions
|
20.1
|
17.9
|
31.4
|
|
Net gains in fair value of equity release
mortgages and associated derivative financial
instruments
|
(4.0)
|
(3.1)
|
(0.5)
|
|
(Gains) / losses in hedge
ineffectiveness on accounting hedges
|
(1.9)
|
0.3
|
0.5
|
|
(Gains) / losses in revaluation of
investments
|
-
|
(0.1)
|
0.2
|
|
Foreign exchange movements
|
-
|
-
|
(0.3)
|
|
Transactional costs
|
-
|
1.1
|
1.3
|
|
Gains on loan modifications
|
-
|
(1.1)
|
-
|
|
IT transformation costs
|
1.4
|
-
|
0.2
|
|
Underlying operating profit
|
15.6
|
15.0
|
32.8
|
*The fair value of the derivative
liabilities has been restated. This increased 30 June 2023 profit
for the period by £0.1m.
The non-underlying adjustments in the half year
include net gains in the fair value of the equity release mortgage
book and associated derivatives of £4.0m (30 June 2023: gain of £3.1m
(restated)), hedge ineffectiveness gains on
accounting hedges of £1.9m (30 June 2023: loss of £0.3m) and £1.4m
of IT transformation costs (30 June 2023: nil) relating to IT and
systems investment during the period.
Segmental information is available
in note 9 and details the Member business and Solutions business
segments.
Net interest income
Net interest income was £43.6m (30 June 2023: £40.1m, 31 December 2023:
£86.4m) and our net interest margin was 1.38% at 30 June 2024 (30 June 2023: 1.45% and 31
December 2023: 1.50%). The reduction in net interest margin was due
to a reduction in new mortgage volumes at the start of the year,
which has since increased throughout the period. In addition, we
have increased our savings rates following significant Bank Base
Rate rises in 2023.
The impact of changing rates on the Society is
mitigated by hedging our exposure to interest rate risks using
interest rate swaps. This significantly reduces the impact of
changes in market interest rates on net interest income, ensuring
that existing lending remains profitable when interest rates
rise.
Interest rate swaps are held at fair
value and therefore the value of the swap changes when market
interest rates move. As a result of changing interest rates, net
values of the interest rate swaps have increased by £40.3m in the
six month period to June 2024. This was largely offset by
reductions in the Society's hedge adjustments and the value of
mortgages held at fair value, resulting in a net gain of
£6.0m, which is included in the
fair value gains less losses on financial
instruments and hedge accounting line in the income
statement. Additional information on
derivative and fair value movements is provided in notes 10 and 11
to the financial information.
Other income and charges
Other income and charges, which
includes income from Newcastle Strategic Solutions ('Solutions')
and Newcastle Financial Advisers, was £27.6m for the six months
ended 30 June 2024 compared to £25.0m for the first half of 2023.
Solutions continued to see growth in its underlying business in the
first half of 2024 as balances under management with existing
clients continue to increase. Newcastle Financial Advisers
delivered a strong performance over the first half of the year with
new business, service income and appointment levels performing
above original targets.
Administrative expenses and depreciation
Administrative expenses and
depreciation increased by £6.6m from £50.5m for the half year 2023
to £57.1m for the half year to June 2024. The increase in
administrative expenses relates predominantly to the continued
investment in colleagues during the period and is in line with
expectations.
The Board considers the cost to
income ratio to be a simple measure of financial progress against
internal targets and the return achieved on investment in the
business. Our cost to income ratio at 30 June 2024 has reduced to
74.0% from 77.2% at 31 December 2023 (30 June 2023:
73.9%).
Impairments and provisions
Provisions for liabilities and
charges
The Society has committed to
providing voluntary financial support to help Members whose trusts
are affected by the actions and subsequent collapse of Philips
Trust. Management have determined an estimate of the
total cost of the voluntary scheme and associated costs to be
incurred (including legal and scheme costs), which will not
exceed £20m and have recognised a provision during
the period for this cost. Further information is found in note 14
to the financial information.
Impairment on loans and advances to
customers
Impairment on loans and advances to customers
was a reversal of £0.6m for the half year to June 2024 (30 June
2023: charges of £1.1m, 31 December 2023: charges of £1.1m). The
reversal is predominantly due to the release of provisions made
against commercial properties that have since repaid their loans
during the period.
The Group's credit risk in relation to its core
residential mortgage portfolios is closely correlated with
significant rises in unemployment rates and falls in property
values. Provisions against residential exposures are based on the
Society's provisioning model that considers a range of economic
scenarios. Although the economic environment has improved over the
last six months, there is a still a significant degree of
uncertainty and tail risks that we continue to monitor. Of
particular relevance is the risk around the cost of living and
inflationary pressures which is affecting some of our borrowers,
however to a lesser degree than expected originally.
Provisions against residential and buy to let
mortgages have remained broadly static during the first six months
of the year. Assets values have appreciated by circa 3% over the
period along with a more positive view of the forward-looking macro
environment. That effect has been offset by book growth and a small
increase in stage 3 assets to 1.4%.
Taxation
The tax credit recognised in the
period of £4.1m (six months to 30 June 2023: £3.9m charge) includes
recognition of £4.0m of deferred tax assets relating to taxable
losses of Manchester Building Society. These have been recognised
in the current period following a change in tax regulations
applicable to Building Societies, allowing the Society to utilise
the tax losses against profits since 1 July 2023, as outlined in
note 19 of the 2023 Annual Report & Accounts.
Balance Sheet
A consolidated balance sheet is set out below
with key balance sheet items discussed in further detail within
this report.
|
Summary Balance sheet
|
Unaudited
|
Unaudited
|
Audited
|
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
|
Restated*
|
|
|
|
£m
|
£m
|
£m
|
|
Assets
|
|
|
|
|
Liquid assets
|
1,305.9
|
1,144.1
|
1,250.3
|
|
Derivatives and hedged risk
adjustments
|
38.1
|
43.9
|
37.7
|
|
Loans and advances to customers
|
5,079.9
|
4,619.5
|
4,859.7
|
|
Other assets
|
78.3
|
63.6
|
75.5
|
|
Total assets
|
6,502.2
|
5,871.1
|
6,223.2
|
|
Liabilities
|
|
|
|
|
Shares
|
5,275.2
|
4,678.8
|
5,014.3
|
|
Deposits and debt securities
|
800.1
|
846.2
|
801.0
|
|
Derivatives and hedged risk
adjustments
|
35.6
|
44.1
|
61.7
|
|
Other liabilities
|
62.7
|
16.9
|
25.4
|
|
Capital and reserves
|
328.6
|
285.1
|
320.8
|
|
Total liabilities and equity
|
6,502.2
|
5,871.1
|
6,223.2
|
*The fair value of the derivative
liabilities has been restated. This increased: 30 June 2023
derivative liabilities by £2.1m; 30 June 2023 profit for the period
by £0.1m, with adjustments to: opening reserves at 1 January 2023
of £1.7m; other assets of £0.6m; and other liabilities of £0.1m.
Please see note 45 of the 2023 Annual Report & Accounts for
more details.
Liquid assets
We continue to manage our liquidity levels
efficiently and comfortably within our regulatory limits. The
quality of liquidity continues to be excellent, comprising assets
held in cash or that can easily be converted to cash through
treasury markets (repo) or via the various Bank of England
liquidity schemes.
The statutory liquidity percentage (liquid
assets as a percentage of shares, deposits and liabilities) at 30
June 2024 was 21.5% (30 June
2023: 20.7%, 31 December 2023: 21.5%). This is in excess of the
Society's minimum operating level.
The Liquidity Coverage Ratio (LCR) measures
unencumbered high quality liquid assets as a percentage of net cash
outflows over a 30 day stress period. The LCR at 30 June 2024
was 212% (30 June 2023: 191%,
31 December 2023: 227%), comfortably in excess of the minimum
regulatory limit of 100%.
Loans and advances to customers
The net increase in loans and advances to
customers after provisions was £220m
for the first half of the year, which is a decrease in
comparison to £360m for the first half of 2023. The decrease
relates to a reduction in new mortgage volumes at the start of the
year, which has since increased throughout the period. In addition,
there has been a £51m
reduction in our exposure to the legacy lending book (30 June
2023: £45m), resulting in loans and advances to customers
of £5.1bn at 30 June 2024 (31
December 2023: £4.9bn). Gross lending for the first half of the
year was £584m (30 June 2023:
£660m). The Society's core residential mortgage book grew by
£280m during the first half of
2024 (30 June 2023: £408m). Movement in the
Group's mortgage provisions are outlined on page 6
above.
The percentage of mortgages in
arrears by 3 months or more was 1.06% (30 June 2023 :0.37%, 31
December 2023: 0.87%). The Society's arrears position has increased
since 30 June 2023, partly due to the mortgages acquired in the
second half of 2023 as part of the merger with Manchester Building
Society, as well as a small increase in accounts in arrears given
the cost of living pressures experienced by borrowers. The
mortgages acquired through our merger with Manchester Building
Society have significantly higher arrears positions than the
lending originated by the Society, however they make up only £119m
of total lending. In addition, we have redefined the basis of our
arrears definition to include interest only mortgages that have
passed the capital repayment date, which were not included in prior
periods as this more accurately reflects the number of mortgages
that are in arrears. Excluding these interest only mortgage
accounts, the percentage of mortgages in arrears by 3 months or
more was 0.93%.
There were 14
properties in possession at the half year ended 30 June 2024
(30 June 2023: nil, 31 December 2023: eight), of which two are from voluntary
possessions, and seven relate to the Group's legacy equity release
loans.
Shares, deposits and debt securities
The Society is predominantly funded by retail
savings with wholesale funding used to provide a diversified
funding source. 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.
Retail savings balances were
£5.3bn at 30 June 2024 (31
December 2023: £5.0bn), increasing by £261m during the first half of 2024 (6 months to
30 June 2023: £458m), as savings volumes were managed to balance
with mortgage volumes seen during the period.
Deposits and debt securities, or wholesale
funding, including drawdown on Bank of England Funding Schemes,
reduced by £1m during the
first half of the year to £800m (31
December 2023: £801m).
The Society currently utilises the Bank of England term
funding scheme which is due to be repaid in 2024. The Society has
sufficient funding available to replace those funds when they fall
due, with £30m already repaid during the period. The scheme
makes up 61% (December
2023: 65%) of the wholesale
funding mix with the remainder being made up with unsecured
wholesale funding and funding collateral.
During the period the Society took
the opportunity to diversify its funding portfolio, issuing £20m of
Tier 2 capital eligible loan notes during the period.
The ratio of shares and deposits to wholesale
balances has moved to 87%/13%
at 30 June 2024, from 86%/14% at December 2023. Insured
deposits (balances that are covered by the Financial Services
Compensation Scheme) make up 93% of the Society's retail savings as at 30 June
2024 (31 December 2023: 93%).
Capital
Total capital resource increased from £308.6m
at 31 December 2023 to £322.6m in the six months to 30 June 2024
primarily due to tier 2 capital raised in June. In the same period,
risk weighted assets increased from £2,186m to £2,271m due to
growth of the Society's mortgage book.
As a result, the total capital ratio increased,
whereas the Common Equity Tier 1 and Leverage ratio decreased. All
capital ratios remained at a robust level well in excess of
regulatory limits.
Total Capital ratio (Solvency) was 14.2% as at
30 June 2024 (31 December 2023: 14.1%) and Common Equity Tier 1
ratio 12.1% (31 December 2023: 12.5%). The regulatory minimum is
8.0% and 4.5% for Total Capital ratio and Common Equity Tier 1
ratio respectively. The Society's UK Leverage ratio was 4.6% at 30
June 2024 (31 December 2023: 4.8%). The PRA expects UK firms to
maintain their leverage ratio above 3.25%.
In late 2022, the PRA published draft rules for
the UK's Basel 3.1 implementation, which will result in a
significant change in how capital requirements for larger banks and
building societies will be determined from 2025 onwards compared to
the current framework. Some of the new rules were finalised in
2023, however the final rules most consequential for the Society
have not yet been published. Based on preliminary work, the
Society's capital requirements are expected to reduce modestly
under the Basel 3.1 framework, improving the Society's capital
ratios and headroom to regulatory requirements.
The Society will be in scope of the Small
Domestic Deposit Taker Regime, a new regulatory framework for
smaller firms. The capital rules for this regime have not yet been
published but are expected to be similar to the Basel 3.1 rules.
The Society will have a choice to either adopt the Small Domestic
Deposit Taker Regime or Basel 3.1.
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 monthly are detailed below and are
consistent with the prior year.
Please refer to the Strategic Report in the
2023 Annual Report & Accounts for further details on our
KPIs.
|
Key
performance indicators
|
6 months to
|
6 months to
|
12 months
to
|
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
Financial
|
|
Sustainable business
|
|
Profit before taxation*
|
£0.2m
|
£16.3m
|
£29.1m
|
|
Operating profit before impairments and
provisions*
|
£20.1m
|
£17.9m
|
£31.4m
|
|
Underlying operating profit
|
£15.6m
|
£15.0m
|
£32.8m
|
|
Common Equity Tier 1 ratio
|
12.1%
|
12.4%
|
12.5%
|
|
Leverage ratio
|
4.6%
|
4.8%
|
4.8%
|
|
Liquidity coverage ratio
|
212%
|
191%
|
227%
|
|
Efficiency
|
|
Cost to income ratio
|
74%
|
74%
|
77%
|
|
Lending and saving
|
|
Net interest margin
|
1.38%
|
1.45%
|
1.50%
|
|
Lending
|
|
Gross mortgage lending
|
£584m
|
£660m
|
£1,103m
|
|
Net core residential lending
|
£280m
|
£408m
|
£575m
|
|
Savings
|
|
Savings balances
|
£5,275m
|
£4,679m
|
£5,014m
|
|
Non-financial measures
|
|
Service quality and customer experience
|
|
Customer satisfaction
|
91%
|
95%
|
95%
|
|
Customer engagement score (NPS)
|
+86
|
+81
|
+82
|
|
People, leadership and culture
|
|
Colleague engagement score (eNPS)
|
+49
|
+63
|
+57
|
|
|
|
|
|
*These indicators have been restated
for the prior period adjustment of derivative liabilities,
increasing 30 June 2023 profits for the period by £0.1m. Further
detail is found in note 45 to the 2023 Annual Report &
Accounts.
Principal risks and uncertainties
The principal risks and uncertainties faced by
the Group are detailed below. A more detailed explanation of the
risks below and how the Group seeks to mitigate them can be found
in the Risk Management report of the 2023 Annual Report &
Accounts.
|
Category
|
Definition
|
|
Capital risk
|
Capital risk is the risk that the Group is or
becomes inadequately capitalised to address the risks to which it
is exposed.
|
|
Conduct risk
|
Conduct risk is the risk of customer detriment
arising from the Group's activities. Examples include products that
do not perform as customers expected them to, or products being
sold to customers for whom they are not suitable.
|
|
Credit risk
|
Retail borrowers do not repay the Group and the
Group's collateral is insufficient to meet the debt obligations.
The risk is sensitive to economic conditions, unemployment rates,
property prices, interest rates and the application of underlying
assumptions and data within our credit loss modelling.
|
|
Interest rate risk
|
Interest rate risk is the risk that the value of
the Group'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.
|
|
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.
|
|
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.
|
|
Cyber risk
|
Cyber risk refers to the potential exposure or
loss stemming from cyber incidents or data breaches, expanding to
the financial stability of the Group, consumer and client
confidence.
|
|
Climate change risk (Emerging risk)
|
Climate change risks recognise the risks
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. The most tangible
financial risk to the Group from climate change relates to flood
risk in respect to properties held as securities for mortgage
loans.
|
In addition to the above, as outlined on page 1,
the Society announced it will provide a scheme of voluntary
financial support to its customers affected by the actions and
subsequent collapse of Philips Trust. Although there is no
legal or regulatory requirement to provide financial support, in
doing so, the Society has considered how to balance our values, our
reputation as a member owned mutual business, and the
expectations of the communities we serve.
NEWCASTLE BUILDING SOCIETY
GROUP
HALF-YEARLY FINANCIAL
INFORMATION
Condensed Consolidated Income
Statement
|
|
|
Unaudited
|
Unaudited
|
Audited
|
|
|
|
6 months to
|
6 months to
|
12 months
to
|
|
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
|
|
Restated
|
|
|
|
Note
|
£m
|
£m
|
£m
|
|
|
|
|
|
|
|
Interest receivable and similar
income
|
7
|
161.4
|
108.0
|
259.9
|
|
Interest payable and similar charges
|
|
(117.8)
|
(67.9)
|
(173.5)
|
|
Net
interest income
|
|
43.6
|
40.1
|
86.4
|
|
Other income and charges
|
|
27.6
|
25.0
|
51.9
|
|
Fair value gains less losses on financial
instruments and hedge accounting
|
10
|
6.0
|
3.3
|
(0.4)
|
|
Total operating income
|
|
77.2
|
68.4
|
137.9
|
|
Administrative expenses
|
|
(53.6)
|
(47.5)
|
(100.1)
|
|
Depreciation and amortisation
|
|
(3.5)
|
(3.0)
|
(6.4)
|
|
Operating profit before impairments and
provisions
|
|
20.1
|
17.9
|
31.4
|
|
Impairment reversals / (charges) on loans and
advances to customers
|
|
0.6
|
(1.1)
|
(1.1)
|
|
Impairment charges on tangible and intangible
assets
|
|
-
|
(0.1)
|
(0.3)
|
|
Provisions for liabilities and
charges
|
|
(20.5)
|
(0.4)
|
(0.9)
|
|
Profit before taxation
|
|
0.2
|
16.3
|
29.1
|
|
Taxation
|
5
|
4.1
|
(3.9)
|
(7.0)
|
|
Profit after taxation for the financial
period
|
|
4.3
|
12.4
|
22.1
|
The fair value of the derivative liabilities has
been restated by £2.1m, increasing 30 June 2023 profit before tax
by £0.1m. Please see note 45 of the 2023 Annual Report &
Accounts for more details.
The notes on pages 16 to 31 form an integral
part of this condensed consolidated half-yearly financial
information.
NEWCASTLE BUILDING SOCIETY
GROUP
HALF-YEARLY FINANCIAL
INFORMATION
Condensed Consolidated Statement of
Comprehensive Income
|
|
Unaudited
|
Unaudited
|
Audited
|
|
|
6 months to
|
6 months to
|
12 months
to
|
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
|
Restated
|
|
|
|
£m
|
£m
|
£m
|
|
Profit for the period
|
4.3
|
12.4
|
22.1
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
Items that may be reclassified to
income statement
|
|
|
|
Cash flow hedges
|
|
|
|
|
Fair value movements recognised in
equity
|
5.9
|
10.3
|
5.8
|
|
Amounts transferred to income
statement
|
(0.9)
|
0.3
|
(0.4)
|
|
Tax on net amounts recognised in
equity
|
(1.3)
|
(2.7)
|
(1.3)
|
|
|
|
|
|
Financial assets measured at fair value through
other
comprehensive income
|
|
|
|
|
Fair value movements recognised in
equity
|
(0.3)
|
0.8
|
0.6
|
|
Tax on net amounts recognised in
equity
|
0.1
|
(0.2)
|
(0.2)
|
Total items that may be reclassified to income
statement
|
3.5
|
8.5
|
4.5
|
|
|
|
|
Total other comprehensive income
|
3.5
|
8.5
|
4.5
|
Total comprehensive income for the financial
period
|
7.8
|
20.9
|
26.6
|
The fair value of the derivative liabilities has
been restated by £2.1m, increasing 30 June 2023 profit for the
period by £0.1m. Please see note 45 of the 2023 Annual Report &
Accounts for more details.
The notes on pages 16 to 31 form an integral
part of this condensed consolidated half-yearly financial
information.
NEWCASTLE BUILDING SOCIETY
GROUP
HALF-YEARLY FINANCIAL
INFORMATION
Condensed Consolidated Balance
Sheet
|
|
|
Unaudited
|
Unaudited
|
Audited
|
|
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
|
|
Restated
|
|
|
|
Note
|
£m
|
£m
|
£m
|
|
ASSETS
|
|
|
|
|
|
Liquid assets
|
|
1,305.9
|
1,144.1
|
1,250.3
|
|
Derivative financial instruments
|
|
65.2
|
128.6
|
50.9
|
|
Loans and advances to customers
|
|
5,079.9
|
4,619.5
|
4,859.7
|
|
Fair value adjustments for hedged
risk
|
|
(27.1)
|
(84.7)
|
(13.2)
|
|
Property, plant and equipment
|
|
30.9
|
27.9
|
31.5
|
|
Intangible assets
|
|
13.8
|
11.8
|
12.8
|
|
Other assets
|
|
33.6
|
23.9
|
31.2
|
|
TOTAL ASSETS
|
|
6,502.2
|
5,871.1
|
6,223.2
|
|
|
|
Unaudited
|
Unaudited
|
Audited
|
|
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
|
|
Restated
|
|
|
|
|
£m
|
£m
|
£m
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Shares
|
|
5,275.2
|
4,678.8
|
5,014.3
|
|
Fair value adjustments for hedged
risk
|
|
(0.1)
|
(0.3)
|
-
|
|
Deposits and debt securities
|
|
800.1
|
846.2
|
801.0
|
|
Derivative financial instruments
|
|
35.7
|
44.4
|
61.7
|
|
Provisions for liabilities
|
14
|
20.3
|
0.7
|
0.6
|
|
Other liabilities
|
|
22.9
|
16.2
|
24.8
|
|
Subordinated liabilities
|
|
19.5
|
-
|
-
|
|
Subscribed capital
|
|
34.8
|
20.0
|
34.8
|
|
TOTAL LIABILITIES
|
|
6,208.4
|
5,606.0
|
5,937.2
|
|
Reserves
|
|
293.8
|
265.1
|
286.0
|
|
TOTAL LIABILITIES AND EQUITY
|
|
6,502.2
|
5,871.1
|
6,223.2
|
The fair value of the derivative liabilities has
been restated. This increased 30 June 2023 derivative liabilities
by £2.1m, increased 30 June 2023 profit for the period by £0.1m,
with an adjustment to opening reserves at 1 January 2023 of £1.7m,
an adjustment to other assets of £0.6m and an adjustment to other
liabilities of £0.1m. Please see note 45 of the 2023 Annual Report
& Accounts for more details.
The notes on pages 16 to 31 form an integral
part of this condensed consolidated half-yearly financial
information.
NEWCASTLE BUILDING SOCIETY
GROUP
HALF-YEARLY FINANCIAL
INFORMATION
Condensed Consolidated Statement of Movement in Members'
Interests
|
For the 6
months ended 30 June 2024 (Unaudited)
|
|
|
|
|
|
|
General reserve
|
Fair value through other comprehensive
income
|
Cash flow hedge
reserve
|
Total
reserves
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
|
|
|
|
|
At 1 January 2024
|
284.2
|
0.4
|
1.4
|
286.0
|
|
Profit for the period
|
4.3
|
-
|
-
|
4.3
|
|
Net movement in fair value through other
comprehensive income
|
-
|
(0.2)
|
-
|
(0.2)
|
|
Net movement in cash flow hedge
reserve
|
-
|
-
|
3.7
|
3.7
|
|
At 30 June
2024
|
288.5
|
0.2
|
5.1
|
293.8
|
|
|
|
|
|
|
|
For the 6
months ended 30 June 2023 (Unaudited)
|
|
|
|
|
|
|
General
reserve
|
Fair value through other comprehensive
income
|
Cash flow hedge
reserve
|
Total
reserves
|
|
|
Restated
|
|
|
Restated
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
|
|
|
|
|
At 1 January 2023
|
246.5
|
0.4
|
(2.7)
|
244.2
|
|
Reclassification*
|
0.4
|
(0.4)
|
-
|
-
|
|
Profit for the period
|
12.4
|
-
|
-
|
12.4
|
|
Net movement in fair value through other
comprehensive income
|
-
|
0.6
|
-
|
0.6
|
|
Net movement in cash flow hedge
reserve
|
-
|
-
|
7.9
|
7.9
|
|
At 30 June
2023
|
259.3
|
0.6
|
5.2
|
265.1
|
|
|
|
For the year
ended 31 December 2023 (Audited)
|
|
|
|
|
|
|
General reserve
|
Fair value through other comprehensive
income
|
Cash flow hedge
reserve
|
Total
reserves
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
|
|
|
|
|
At 1 January 2023
|
246.5
|
0.4
|
(2.7)
|
244.2
|
|
Reclassification*
|
0.4
|
(0.4)
|
-
|
-
|
|
Profit for the period
|
22.1
|
-
|
-
|
22.1
|
|
Net movement in fair value through other
comprehensive income
|
-
|
0.4
|
-
|
0.4
|
|
Net movement in cash flow hedge
reserve
|
-
|
-
|
4.1
|
4.1
|
|
Total comprehensive income
|
269.0
|
0.4
|
1.4
|
270.8
|
|
Transfer of engagements**
|
15.2
|
-
|
-
|
15.2
|
|
At 31 December
2023
|
284.2
|
0.4
|
1.4
|
286.0
|
*The reclassification relates to historic tax
amounts which have been previously realised in the income
statement.
** Transfer of engagements from Manchester
Building Society.
The fair value of the derivative liabilities has
been restated. This increased 30 June 2023 derivative liabilities
by £2.1m, increased 30 June 2023 profit for the period by £0.1m,
with an adjustment to opening reserves at 1 January 2023 of £1.7m
Please see note 45 of the 2023 Annual Report & Accounts for
more details.
The notes on pages 16 to 31 form an integral
part of this condensed consolidated half-yearly financial
information.
NEWCASTLE BUILDING SOCIETY
GROUP
HALF-YEARLY FINANCIAL
INFORMATION
Condensed Consolidated Cash Flow
Statement
|
|
|
Unaudited
|
Unaudited
|
Audited
|
|
6 months to
|
6 months to
|
12 months to
|
Note
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
|
|
Restated
|
|
|
|
|
£m
|
£m
|
£m
|
|
|
|
|
|
|
Net cash inflows from operating activities
|
15
|
66.1
|
193.8
|
251.9
|
|
Taxation
|
|
0.2
|
(4.0)
|
(7.0)
|
Cash inflows from operating activities
|
|
66.3
|
189.8
|
244.9
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
(1.9)
|
(1.2)
|
(2.0)
|
|
Purchase of intangible assets
|
|
(2.4)
|
(2.9)
|
(5.4)
|
|
Sales of property, plant and
equipment
|
|
-
|
-
|
0.7
|
|
Acquisition of trade and assets
|
|
(0.1)
|
-
|
-
|
|
Cash acquired on transfer of
engagements
|
|
-
|
-
|
42.7
|
|
Purchase of investment securities
|
|
(241.1)
|
(132.1)
|
(501.5)
|
|
Sale and maturity of investment
securities
|
|
241.8
|
165.2
|
330.0
|
Net cash (outflows) / inflows from investing
activities
|
|
(3.7)
|
29.0
|
(135.5)
|
|
|
|
|
|
|
|
Interest paid on subscribed capital
|
|
(1.8)
|
(1.2)
|
(2.9)
|
|
Capital payment for finance lease
arrangements
|
|
(1.0)
|
(0.6)
|
(0.9)
|
|
Proceeds on issue of subordinated
liabilities
|
|
19.8
|
-
|
-
|
Net cash inflows / (outflows) from financing
activities
|
|
17.0
|
(1.8)
|
(3.8)
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
79.6
|
217.0
|
105.6
|
|
Cash and cash equivalents at the start of
period
|
15
|
533.5
|
427.9
|
427.9
|
Cash and cash equivalents at the end of the
period
|
15
|
613.1
|
644.9
|
533.5
|
The 30 June 2023 cash flow statement has been
restated due to the removal of the cash ratio deposit held with the
Bank of England of £12.6m from cash and cash equivalents as it does
not meet the criteria to be included within cash and cash
equivalents. Please see note 28 of the 2023 Annual Report &
Accounts for more details.
The notes on pages 16 to 31 form an integral
part of this condensed consolidated half-yearly financial
information.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL
INFORMATION
Notes
1. General information
1.1. The half-yearly
financial information set out above, which was approved by the
Board of Directors, does not constitute accounts within the meaning
of the Building Societies Act 1986.
1.2. The financial information for
the 12 months to 31 December 2023 has been extracted from the
accounts for that year. The auditors gave an unqualified opinion on
the accounts for the 12 months to 31 December 2023, and they have
been filed with the Financial Conduct Authority and the Prudential
Regulation Authority.
1.3. The half-yearly
financial information for the six months to 30 June 2024 and the
six months to 30 June 2023 is unaudited.
1.4. The announcement is available
at www.newcastle.co.uk.
2. Basis of
preparation
The condensed consolidated financial
information for the half year ended 30 June 2024 has been prepared
in accordance with the Disclosure and Transparency Rules of the
Financial Conduct Authority and with IAS 34, 'Interim financial
reporting' as applicable in the United Kingdom. It does not include
all the information required by International Financial Reporting
Standards (IFRSs). The half-yearly financial information should be
read in conjunction with the Annual Report & Accounts for the
year ended 31 December 2023, which have been prepared in accordance
with International Financial Reporting Standards (IFRSs) as
applicable in the United Kingdom.
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 forecasts including different possible scenarios based
on possible internal and external developments and arising risks.
Together with regular stress testing, the Group's forecasts show
that the Group 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 satisfied that the Group 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 the half-yearly financial information. The Directors have
concluded that there are no material uncertainties that may cast
significant doubt upon the Group's ability to continue to apply the
going concern basis of accounting.
3. Accounting policies
The half-yearly financial information has been
prepared on the basis of the accounting policies adopted for the
year ended 31 December 2023.
4. Critical accounting estimates
and judgements in applying accounting policies
The Group has to make judgements in applying
its accounting policies, which affect the amounts recognised in the
half-yearly financial information. 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. Whilst there have been no changes to the
accounting areas where the most significant estimates and
judgements are applied, with the exception of management judgement
applied to the voluntary financial support provision, an overview
on the impact the changed economic situation has had on these is
provided below.
Estimates
Fair value of the equity release mortgage
assets
The valuation of the Group's equity release
mortgage assets depends on a range of assumptions, including the
most appropriate discount rate, property price growth rates and
volatility. Key assumptions and sensitivity analysis are outlined
in note 12, Equity release mortgages.
Impairment of financial assets
The impairment of mortgage assets is determined
by a weighted average of the expected credit losses of four
different 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.
Economic scenarios and scenario weightings are outlined in note 13,
Credit risk.
Pensions
At 31 December 2023 year end, management relied
on a range of assumptions including the most appropriate discount
rate, mortality rates, inflation, take up of the Pension Increase
Exchange offer and future salary increases in estimating the value
of the pension scheme. The Board received independent external
advice from its actuarial consultants in arriving at the scheme
assumptions which were outlined together with sensitivity analysis
in note 20, Retirement benefit obligations, of the 2023 Annual
Report & Accounts. Detailed sensitivity analysis and stress
testing was performed at year end which showed that the probability
of the pension surplus becoming a deficit was remote. As a result,
no revaluation of the pension scheme surplus was performed at the
half year.
Fair value of the assets and liabilities acquired on
transfer of engagements
The valuation of identifiable assets and
liabilities transferred from Manchester Building Society on merger
on 1 July 2023 was dependent on a range of assumptions, including
the most appropriate discount rates, property price growth rates,
forced sale discounts and property price volatility. The fair value
adjustments made are detailed in note 43 to the 2023 Report &
Accounts; there have been no changes to these assumptions since
publication of the 2023 Report & Accounts.
Judgements
Fair value of derivatives and financial
assets
Fair values are determined by the three tier
valuation hierarchy as defined within IFRS 13 'Fair Value
Hierarchy'. There have been no significant changes to valuation
methodologies applied since the publication of the 2023 Annual
Report & Accounts.
Impairment of financial assets
The modelling of impairment of mortgage assets
included a range of management judgements, including the Society's
definition of default, significant increase in credit risk and the
use of post model adjustments. See note 13, Credit risk for
details.
Fair value of the consideration exchanged on
merger
The business combination of the Society with
Manchester Building Society did not involve the transfer of any
cash consideration. The deemed purchase consideration represents
the fair value of the members' interests transferred. We consider
the most appropriate method for determining fair value of the
members' interests to be the fair value of the net assets
transferred on merger, due to Manchester Building Society being in
run-off, such that there were no cash flows identified that were
not taken into consideration when determining the fair value of the
assets and liabilities. The judgement involved the selection of an
appropriate method under IFRS 13 to determine the fair value of the
acquired business. Further detail is provided in note 43 to the
2023 Annual Report & Accounts.
Voluntary financial support provision
In determining the level of provision for the
voluntary financial support announced for Members affected by the
collapse of Philips Trust, management judgement and estimates have
been used, based on information available at the time, noting
detailed information from the Administrators has not yet been
provided. Management judgements include estimation of the level of
expected claims under the scheme, the value of each claim,
potential recoveries from the liquidation of Philips Trust and the
expected associated costs of administration of the scheme. In the
absence of any detailed information being available, Management
have applied an assumption that, based on all known information at
this time, all known affected customers would make a claim under
this scheme and there will be no recoverable assets repaid from
liquidation proceedings. Given the level of management judgement
involved in determining the level of provision recognised, actual
outcomes could materially adjust the carrying amount of these
balances.
5.
Taxation
Tax credits recognised
in the period of £4.1m (six months to 30 June 2023: £3.9m charge)
includes recognition of £4.0m of deferred tax assets relating to
taxable losses of Manchester Building Society. These have been
recognised in the current period following a change in tax
regulations applicable to Building Societies, allowing the Society
to utilise the tax losses against profits since 1 July 2023, as
outlined in note 19 of the 2023 Annual Report &
Accounts. The recognition of £4.0m of deferred tax assets
results in the effective rate of tax for the period being
significantly different to the standard rate of tax of 25%
(30 June 2023: 23.5%).
6. Related party
transactions
During the six months to 30 June 2024 the
Society purchased £8.4m of business support services and managed IT
and property services from Newcastle Strategic Solutions Limited
('Solutions'), a wholly owned subsidiary (in the same period in
2023, £7.9m was procured from Solutions). The Society received
£5.1m from Solutions in the six months to 30 June 2024 for the
provision of financial and administrative services. This compares
to £5.5m from Solutions for the same period in 2023. As outlined in
note 9, revised arrangements for funding and
administrative expenses between the Society and Solutions were
entered into during the first half of 2024. Should these
arrangements have been in place in prior periods, the amount
received by the Society from Solutions in the six months to 30 June
2023 for the provision of financial and administrative services
would have been £4.1m.
7. Interest receivable and similar
income
|
|
Unaudited
|
Unaudited
|
Audited
|
6 months to
|
6 months to
|
12 months to
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
£m
|
£m
|
£m
|
|
|
|
|
|
|
Interest income on assets held at amortised
cost
|
120.2
|
78.8
|
193.3
|
|
Interest income on assets held at fair value
through
profit or loss
|
6.0
|
5.2
|
11.1
|
|
Interest income on assets held at fair value
through
other comprehensive income
|
16.4
|
8.8
|
21.1
|
|
Net income on derivatives used for hedging
purposes
|
18.8
|
15.2
|
34.4
|
Total interest receivable and similar income
|
161.4
|
108.0
|
259.9
|
8. Revenue from contracts with
customers
In accordance with IFRS 8, 'Operating Segments',
the Group reports the following segments: Member business and
Solutions business segment (also referred to as Newcastle Strategic
Solutions Limited ('Solutions')). When the Group prepares financial
information for management, it disaggregates revenue by segment and
service type.
The table below illustrates the disaggregation
of revenue in scope of IFRS 15, 'Revenue from Contracts with
Customers'. Revenue from contracts with customers generated by the
Solutions business and the Member business is included in 'Other
income and charges' within note 9, Segment information.
|
|
Unaudited
|
Unaudited
|
Audited
|
6 months to
|
6 months to
|
12 months to
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
£m
|
£m
|
£m
|
|
|
|
|
|
Revenue from contracts with customers
|
|
|
|
Solutions business:
|
|
|
|
|
Savings management
services
|
22.5
|
19.6
|
41.7
|
|
Savings management project and change
services
|
0.2
|
0.3
|
1.0
|
|
IT services
|
0.4
|
0.4
|
0.9
|
Member business:
|
|
|
|
|
Regulated advice services
|
1.3
|
3.1
|
6.1
|
|
Third party services
|
1.9
|
1.0
|
1.6
|
|
Other services
|
1.2
|
0.1
|
0.1
|
Total revenue from contracts with customers
|
27.5
|
24.5
|
51.4
|
9. Segment information
The chief operating decision maker has been
identified as the Board of 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 definition of 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 ('Solutions')) provides
business to business services through people, processes and
technology. The Board assesses performance based on profit before
tax after the allocation of all central costs. Operating profit
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 arrangements between the Society and
Solutions were entered into during the first half of 2024 to
reflect the unique funding arrangements provided by the Society to
the Solutions business. The revised arrangements have decreased net
interest expense and administrative expenses in the Solutions
business.
Should these revised arrangements have been in
place at the half year ended 30 June 2023, the net interest income
for the Solutions business would have been £0.1m, administrative
expenses £23.9m and operating profit before impairments and
provisions would have been £2.9m. At the year ended 2023, the net
interest income for the Solutions business would have been £0.2m,
administrative expenses £50.4m and operating profit before
impairments and provisions would have been £6.3m. There is no
impact on the Group position.
6 months to 30 June 2024 - Unaudited
|
Member
|
Solutions
|
|
|
Business
|
Business
|
Total
|
|
£m
|
£m
|
£m
|
|
Net interest income
|
43.5
|
0.1
|
43.6
|
|
Other (charges) and income
|
(4.0)
|
31.6
|
27.6
|
|
Fair value gains less losses on financial
instruments and hedge accounting
|
6.0
|
-
|
6.0
|
|
Administrative expenses
|
(26.0)
|
(27.6)
|
(53.6)
|
|
Depreciation and amortisation
|
(1.2)
|
(2.3)
|
(3.5)
|
Operating profit before impairments and
provisions
|
18.3
|
1.8
|
20.1
|
|
Impairment reversals on loans and advances to
customers
|
0.6
|
-
|
0.6
|
|
Provisions for liabilities and
charges
|
(20.4)
|
(0.1)
|
(20.5)
|
|
(1.5)
|
1.7
|
0.2
|
Profit before taxation
|
|
|
0.2
|
|
Taxation
|
|
|
4.1
|
Profit after taxation for the financial
period
|
|
|
4.3
|
|
|
|
|
|
6 months to 30 June 2023 - Unaudited
|
|
|
|
|
Member Business
|
Solutions Business
|
Total
|
|
Restated
|
|
Restated
|
|
£m
|
£m
|
£m
|
|
Net interest income
|
40.8
|
(0.7)
|
40.1
|
|
Other (charges) and income
|
(3.6)
|
28.6
|
25.0
|
|
Fair value gains less losses on financial
instruments and hedge accounting
|
3.3
|
-
|
3.3
|
|
Administrative expenses
|
(22.2)
|
(25.3)
|
(47.5)
|
|
Depreciation and amortisation
|
(1.1)
|
(1.9)
|
(3.0)
|
Operating profit before impairments and
provisions
|
17.2
|
0.7
|
17.9
|
|
Impairment charge on loans and advances to
customers
|
(1.1)
|
-
|
(1.1)
|
|
Provisions for liabilities and
charges
|
(0.2)
|
(0.2)
|
(0.4)
|
|
15.9
|
0.5
|
16.4
|
|
Impairment charges on tangible and intangible
assets
|
|
|
(0.1)
|
Profit before taxation
|
|
|
16.3
|
|
Taxation
|
|
|
(3.9)
|
Profit after taxation for the financial
period
|
|
|
12.4
|
|
|
The fair value of the derivative liabilities has
been restated. This increased 30 June 2023 profit for the period by
£0.1m.
Year to 31 December 2023 - Audited
|
Member
|
Solutions
|
|
|
|
Business
|
Business
|
Total
|
|
|
£m
|
£m
|
£m
|
|
Net interest income
|
88.0
|
(1.6)
|
86.4
|
|
Other (charges) and income
|
(8.6)
|
60.5
|
51.9
|
|
Fair value gains less losses on financial
instruments and hedge accounting
|
(0.4)
|
-
|
(0.4)
|
|
Administrative expenses
|
(47.1)
|
(53.0)
|
(100.1)
|
|
Depreciation and amortisation
|
(2.4)
|
(4.0)
|
(6.4)
|
|
Operating
profit before impairments and provisions
|
29.5
|
1.9
|
31.4
|
|
Impairment charge on loans and advances to
customers
|
(1.1)
|
-
|
(1.1)
|
|
Provisions for liabilities and
charges
|
(0.3)
|
(0.6)
|
(0.9)
|
|
|
28.1
|
1.3
|
29.4
|
|
Impairment charges on tangible and intangible
assets
|
|
|
(0.3)
|
|
Profit before
taxation
|
|
|
29.1
|
|
Taxation
|
|
|
(7.0)
|
|
Profit after
taxation for the financial period
|
|
|
22.1
|
10. Fair value gains less losses on financial
instruments and hedge accounting
|
|
Unaudited
|
Unaudited
|
Audited
|
|
|
6 months to
|
6 months to
|
12 months to
|
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
|
Restated
|
|
|
|
£m
|
£m
|
£m
|
|
Fair value movement on loans and advances to
customers held at fair value through profit and loss
|
(3.8)
|
(4.8)
|
4.4
|
|
Fair value movement on derivatives in economic
but not in accounting hedge relationships
|
7.8
|
7.9
|
(6.6)
|
Economically offsetting fair value movements
|
4.0
|
3.1
|
(2.2)
|
|
Interest income / (expense) on derivatives in
economic but not accounting hedge relationships
|
0.1
|
(0.7)
|
(0.5)
|
|
Amounts recycled to profit and loss from cash
flow hedges
|
0.8
|
(0.3)
|
-
|
|
Fair value movement on equity
instruments
|
-
|
0.1
|
(0.2)
|
|
Fair value movement on loan
modification
|
-
|
1.1
|
-
|
|
Hedge ineffectiveness on fair value accounting
hedges
|
1.1
|
-
|
2.5
|
Fair value gains less losses on financial instruments and
hedge accounting
|
6.0
|
3.3
|
(0.4)
|
The fair value of the derivative liabilities has
been restated. This increased 30 June 2023 fair value gains by
£0.1m.
11. Fair value measurement
The following table summarises the fair value
measurement basis used for assets and liabilities held on the
balance sheet at fair value at 30 June 2024.
|
|
Level
|
Unaudited
|
Unaudited
|
Audited
|
|
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
|
|
Restated
|
|
|
|
|
£m
|
£m
|
£m
|
Financial assets
|
|
|
|
|
|
Debt securities - fair value through other
comprehensive income
|
1
|
614.2
|
400.8
|
615.0
|
|
Equity investments
|
1
|
0.1
|
0.2
|
0.1
|
|
Derivative financial instruments
|
2
|
65.2
|
128.6
|
50.9
|
|
Fair value adjustments for hedged
risk
|
2
|
(27.1)
|
(84.7)
|
(13.2)
|
|
Equity investments
|
3
|
1.8
|
2.1
|
1.8
|
|
Loans and advances to customers held at fair
value
|
3
|
178.3
|
157.8
|
188.4
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
Derivative financial instruments
|
2
|
35.7
|
44.4
|
61.7
|
|
Fair value adjustment for hedged risk
|
2
|
(0.1)
|
(0.3)
|
-
|
The fair value of the derivative liabilities at
30 June 2023 has been restated by £2.1m.
Level 1: Quoted prices (unadjusted) in active
markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices
included within Level 1 that are observable for the asset or
liability either directly (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).
Loans and advances to customers 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 is
determined with reference 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 specific characteristics of the Society's portfolio.
The model further calculates a value for the
'no-negative equity guarantee' provided to the customer 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 summarized below:
Assumption
|
Basis of estimation
|
|
Discount rate
|
Estimated funding costs and expected return on
equity of an entity that could acquire the portfolio if it was for
sale
|
|
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 30 June 2024 the fair value of the mortgage
assets held at fair value was £178.3m (December 2023: £188.4m).
The sensitivity of this value to the estimates shown above is as
follows:
Assumption
|
Change in assumption
|
(Decrease) / increase in
fair value
|
|
|
£m
|
|
Discount rate
|
+ / -1.0%
|
(10.3) /
11.4
|
|
Long term property price growth
|
+ / -2.0%
|
4.3 /
(5.6)
|
|
Sales discount on collateral
|
+ / -2.5%
|
(1.6) /
1.4
|
|
Property price volatility
|
+ / -3.0%
|
(3.1) /
2.6
|
The following table provides a reconciliation of
the equity release portfolio's opening and closing fair
value.
|
Unaudited
|
Unaudited
|
Audited
|
|
6 months to
|
6 months to
|
12 months to
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
£m
|
£m
|
£m
|
As at 1 January
|
188.4
|
166.3
|
166.3
|
|
Acquired on transfer of engagements
|
-
|
-
|
26.5
|
|
Interest accrued
|
6.5
|
4.8
|
11.2
|
|
Redemptions
|
(11.2)
|
(8.5)
|
(19.3)
|
|
Changes in property price assumptions - recorded
in profit and loss
|
0.9
|
1.1
|
(3.0)
|
|
Changes in discount rate - recorded in profit
and loss
|
(5.7)
|
(5.9)
|
6.4
|
|
Changes in exchange rates - recorded in profit
and loss
|
(0.6)
|
-
|
0.3
|
As at 30 June / 31 December
|
178.3
|
157.8
|
188.4
|
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 business
performance. These estimates are made using listed peers as a
benchmark and other publicly available information.
At 30 June 2024 the fair value of the
investments held at fair value was £1.9m (December 2023: £1.9m).
The sensitivity of this value to the estimates shown above is as
follows:
|
|
|
30 Jun 2024
|
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:
|
|
Unaudited
|
Unaudited
|
Audited
|
|
|
6 months to
|
6 months to
|
12 months to
|
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
£m
|
£m
|
£m
|
|
As at 1 January
|
1.8
|
2.0
|
2.0
|
|
Changes in fair value recorded in profit and
loss
|
-
|
0.1
|
(0.2)
|
As at June / December
|
1.8
|
2.1
|
1.8
|
12. Equity release mortgages
The gross mortgage balances and fair value
adjustment relating to the equity release mortgage portfolio are as
follows:
|
|
Unaudited
|
Unaudited
|
Audited
|
|
|
30 Jun 2024
|
30 Jun 2023
|
31 Dec 2023
|
|
Denominated in
£
|
£m
|
£m
|
£m
|
|
Gross mortgage balances
|
148.3
|
156.9
|
151.7
|
|
Fair value adjustment
|
5.1
|
0.9
|
9.6
|
Fair value presented on balance sheet
|
153.4
|
157.8
|
161.3
|
|
|
Unaudited
|
Unaudited
|
Audited
|
|
|
30 Jun 2024
|
30 Jun 2023
|
31 Dec 2023
|
|
Denominated in
€
|
£m
|
£m
|
£m
|
|
Gross mortgage balances
|
42.8
|
-
|
47.7
|
|
Fair value adjustment
|
(17.9)
|
-
|
(20.6)
|
Fair value presented on balance sheet
|
24.9
|
-
|
27.1
|
|
|
Unaudited
|
Unaudited
|
Audited
|
|
|
30 Jun 2024
|
30 Jun 2023
|
31 Dec 2023
|
|
Combined
|
£m
|
£m
|
£m
|
|
Gross mortgage balances
|
191.1
|
156.9
|
199.4
|
|
Fair value adjustment
|
(12.8)
|
0.9
|
(11.0)
|
Fair value presented on balance sheet
|
178.3
|
157.8
|
188.4
|
The gross mortgage balances above reflect the
Group's maximum pre-collateral exposure to credit risk at the
balance sheet date. 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 sale
proceeds required to repay a borrower's mortgage at the time of
sale. By their nature, equity release mortgages are not considered
to hold a pre-determined maturity date.
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 of interest detailed in the mortgage
contracts. The gross mortgage balances, as presented above, reflect
both the amortised cost and contractual balance of the Group's
equity release mortgages.
The fair value adjustment has reduced by £1.8m
during the period and provisions of £2.6m were released to the
income statement to offset crystallised losses, as well as £0.6m
effective interest rate adjustments being transferred between fair
value gains and losses and interest income, resulting in a fair
value loss of £3.8m being recognised in the income
statement. The main source of the change in fair value was a
change in market interest rates, which increased by 0.57% during
the period. 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 £7.8m,
resulting in a net movement of £4.0m in the period (see also note
10, Fair value gains less losses on financial instruments and hedge
accounting).
13. Credit risk
Loans and advances to customers consist of the
following balances:
|
Unaudited
|
Unaudited
|
Audited
|
Product
|
30 Jun 2024
|
30 Jun 2023
|
31 Dec 2023
|
|
£m
|
£m
|
£m
|
|
Prime residential
|
4,303.6
|
3,787.0
|
4,019.8
|
|
Buy to let
|
379.7
|
385.5
|
389.6
|
|
Legacy
books:
|
|
|
|
|
Legacy buy to let
|
6.9
|
9.7
|
13.3
|
|
Purchased credit impaired
lending
|
6.7
|
-
|
7.7
|
|
Commercial
|
5.9
|
8.8
|
6.1
|
|
Housing association
|
179.7
|
247.5
|
211.9
|
|
Serviced apartments
|
14.0
|
15.3
|
14.7
|
|
Policy loans
|
1.0
|
1.4
|
1.2
|
|
Equity release mortgages
|
178.3
|
157.8
|
188.4
|
|
Provisions
|
(8.0)
|
(7.7)
|
(7.6)
|
|
Micro fair value hedge adjustments
|
4.3
|
6.3
|
9.3
|
|
Effective interest rate adjustments
|
7.8
|
7.9
|
5.3
|
Total
|
5,079.9
|
4,619.5
|
4,859.7
|
Loans and advances to customers are accounted
for under IFRS 9: Financial
Instruments. This note provides an overview of changes in
credit risk since December 2023 for all books held at amortised
cost.
In line with the trend from the previous year,
the Society continues to grow its prime residential lending, and,
in line with our risk appetite, we continue to see an increase in
higher LTV lending as we optimise our portfolio.
Prime residential and retail buy to let
portfolios
Under IFRS 9, scenario analysis is used to
assess and provide for expected credit losses. Please see the 2023
Annual Report & Accounts for details of the Society's
methodology of this assessment.
No changes were made to the provisioning
methodology since the December 2023 accounts. However, scenarios
have been updated to reflect the current economic outlook. A
summary of each of the macroeconomic scenarios is as
follows:
· 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 2026 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
· Stress scenario -
uses guidance issued by the Bank of England for stress testing
purposes.
The Society's final expected credit losses are
the losses calculated under each discrete scenario, multiplied by a
'likelihood factor', or 'scenario weighting'. The scenario
weightings remain unchanged since the December 2023 accounts (10% /
40% / 40% / 10%).
The following table summarises the HPI and
unemployment assumptions used, which are the most significant
assumptions to determine the provision. House price growth is
provided as annual percentage growth or contraction compared to the
previous year.
Scenario
|
|
2024
|
2025
|
2026
|
2027
|
2028
|
|
Upside
|
Unemployment %
|
4.2
|
3.9
|
3.9
|
3.9
|
3.8
|
|
|
House price growth % pa
|
4.5
|
5.5
|
6.6
|
7.2
|
7.1
|
|
Base
|
Unemployment %
|
4.3
|
4.4
|
4.4
|
4.4
|
4.4
|
|
|
House price growth % pa
|
(1.8)
|
(0.4)
|
1.6
|
3.7
|
3.8
|
|
Downside
|
Unemployment %
|
4.5
|
5.0
|
5.4
|
5.7
|
5.8
|
|
|
House price growth % pa
|
(6.3)
|
(6.9)
|
(1.4)
|
2.5
|
3.3
|
|
Stress
|
Unemployment %
|
8.5
|
8.0
|
7.4
|
6.8
|
6.8
|
|
|
House price growth % pa
|
(10.7)
|
(15.2)
|
(8.3)
|
(0.8)
|
0.3
|
|
Weighted
|
Unemployment %
|
4.8
|
5.0
|
5.1
|
5.1
|
5.1
|
|
|
House price growth % pa
|
(3.9)
|
(3.9)
|
(0.1)
|
3.1
|
3.6
|
Sensitivity
The 30 June 2024 provisions are sensitive to the
likelihood factor applied to the different scenarios. The analysis
below demonstrates the impact of a 100% weighting to each
scenario.
|
|
Upside
|
Base
|
Downside
|
Severe downside
|
Provision
|
|
Provision £m
|
3.0
|
4.2
|
6.7
|
17.5
|
6.3
|
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 safety risks.
As the marketability of such properties is currently uncertain, a
post model adjustment of £0.3m (December 2023: £0.3m) has been
recognised.
Affordability
The Society has experienced modest, from a very
low base, increases in non-performing loans in the first six months
of 2024. Many borrowers are still adjusting to the high levels of
inflation, more so those who are coming off relatively favourable
existing fixed mortgage deals and are having to refinance their
debt.
However, real incomes are now well in the
recovery phase. Base rate expectations have peaked, with inflation
returning to their 2% target, and markets are pricing one or two
rate reductions in the second half of 2024.
It remains important that we keep monitoring the
level of refinance risk remaining in the portfolio as well as the
lagged impact it may have on those borrowers who have already
refinanced their debt. A post model adjustment of £1.1m is held at
30 June 2024 (December 2023: £0.9m). 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.
IFRS 9 staging and loss provisioning
The impact of IFRS 9's staging and loss
provisioning to the Society's closing 30 June 2024 balance sheet
was as follows (payment holidays are not considered to be
arrears):
IFRS 9 Gross Exposure
|
|
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
|
|
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
|
|
|
£m
|
|
|
Prime residential
|
3,611.5
|
-
|
-
|
601.5
|
27.2
|
-
|
19.2
|
12.6
|
31.6
|
4,303.6
|
|
Buy to let
|
307.1
|
-
|
-
|
62.6
|
3.3
|
-
|
2.5
|
1.9
|
2.3
|
379.7
|
|
Total
|
3,918.6
|
-
|
-
|
664.1
|
30.5
|
-
|
21.7
|
14.5
|
33.9
|
4,683.3
|
Expected Credit Losses
|
|
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
|
|
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
|
|
|
£000
|
|
|
Prime residential
|
559.1
|
-
|
-
|
3,002.2
|
360.6
|
-
|
696.8
|
233.9
|
716.2
|
5,568.8
|
|
Buy to let
|
91.4
|
-
|
-
|
274.3
|
17.2
|
-
|
261.9
|
14.5
|
85.3
|
744.6
|
|
Total
|
650.5
|
-
|
-
|
3,276.5
|
377.8
|
-
|
958.7
|
248.4
|
801.5
|
6,313.4
|
The impact of IFRS 9's staging and loss
provisioning to the Society's closing 30 June 2023 balance sheet
was as follows (payment holidays are not considered to be
arrears):
IFRS 9 Gross Exposure
|
|
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
|
|
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
|
|
|
£m
|
|
|
Prime residential
|
3,042.5
|
-
|
-
|
695.2
|
15.8
|
-
|
16.6
|
4.2
|
12.7
|
3,787.0
|
|
Buy to let
|
318.4
|
-
|
-
|
63.8
|
2.0
|
-
|
0.5
|
0.2
|
0.6
|
385.5
|
|
Total
|
3,360.9
|
-
|
-
|
759.0
|
17.8
|
-
|
17.1
|
4.4
|
13.3
|
4,172.5
|
Expected Credit Losses
|
|
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
|
|
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
|
|
|
£000
|
|
|
Prime residential
|
580.2
|
-
|
-
|
2,562.9
|
174.8
|
-
|
1,005.8
|
93.0
|
174.5
|
4,591.2
|
|
Buy to let
|
134.8
|
-
|
-
|
220.5
|
20.4
|
-
|
20.7
|
6.2
|
47.4
|
450.0
|
|
Total
|
715.0
|
-
|
-
|
2,783.4
|
195.2
|
-
|
1,026.5
|
99.2
|
221.9
|
5,041.2
|
The impact of IFRS 9's staging and loss
provisioning to the Society's closing 31 December 2023 balance
sheet was as follows (payment holidays are not considered to be
arrears):
IFRS 9 Gross Exposure
|
|
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
|
|
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
|
|
|
£m
|
|
|
Prime residential*
|
3,374.2
|
-
|
-
|
565.9
|
28.4
|
-
|
19.7
|
10.1
|
21.5
|
4,019.8
|
|
Buy to let*
|
309.5
|
-
|
-
|
71.3
|
1.6
|
-
|
1.8
|
0.1
|
5.3
|
389.6
|
|
Total
|
3,683.7
|
-
|
-
|
637.2
|
30.0
|
-
|
21.5
|
10.2
|
26.8
|
4,409.4
|
|
|
|
|
|
|
|
|
|
|
|
|
*The above balances have been represented since
December 2023 to more accurately reflect the split of post model
adjustments between the different stages, resulting in an increase
in stage 2 mortgage balances of £144m and reductions in stage 1 and
3 mortgage balances of £143m and £1m respectively. There is no
impact on the total of the gross mortgage balances or expected
credit losses.
Expected Credit Losses
|
|
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
Of which Months in
Arrears
|
|
|
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
< 1
|
1-3
|
> 3
|
|
|
|
£000
|
|
|
Prime residential
|
781.7
|
-
|
-
|
2,758.4
|
424.1
|
-
|
640.3
|
231.5
|
355.0
|
5,191.0
|
|
Buy to let
|
109.2
|
-
|
-
|
358.2
|
11.5
|
-
|
83.5
|
0.1
|
79.4
|
641.9
|
|
Total
|
890.9
|
-
|
-
|
3,116.6
|
435.6
|
-
|
723.8
|
231.6
|
434.4
|
5,832.9
|
Prime residential mortgage
book
The prime residential mortgage book consists of
traditional residential loans. No sub-prime or self-certification
lending has been undertaken.
Loan to valued (indexed)
|
Jun 2024
|
Jun 2023
|
Dec 2023
|
|
|
£m
|
%
|
£m
|
%
|
£m
|
%
|
|
<70%
|
2,498.1
|
58.1
|
2,240.2
|
59.2
|
2,274.6
|
56.6
|
|
70% - <80%
|
680.0
|
15.8
|
656.1
|
17.3
|
673.8
|
16.8
|
|
80% - <90%
|
701.6
|
16.3
|
502.5
|
13.3
|
592.8
|
14.7
|
|
>90%
|
423.9
|
9.8
|
388.2
|
10.2
|
478.6
|
11.9
|
|
|
4,303.6
|
100.0
|
3,787.0
|
100.0
|
4,019.8
|
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 June 2024, the Society
had five properties in
possession in relation to prime residential loans.
Against past due cases, £150.9m (December 2023:
£123.5m) collateral is held.
The Society offers a range of forbearance
measures to customers such as payment breaks and reductions,
transfers to interest only products and other support. No loans
that would be past due or impaired have had their terms
renegotiated.
The Society granted forbearance
against 187 residential loans in the six months to 30 June 2024
(December 2023: 157), with no alteration made to the contractual
rates of interest and balances totalling £28.8m at 30 June 2024 (31
December 2023: £22.3m), this did not lead to any modification gain
or loss as a result of short term forbearance granted. Provisions
of £0.6m (December 2023: £0.4m) are held against residential
mortgages that were granted forbearance during the
period.
Gross lending for prime residential mortgages
(excluding retail buy to let) during 2024 has the following loan to
value as at 30 June 2024:
Loan to valued (indexed)
|
|
|
|
|
£m
|
%
|
|
<70%
|
209.4
|
36.9
|
|
70% - <80%
|
88.1
|
15.5
|
|
80% - <90%
|
127.1
|
22.4
|
|
>90%
|
143.2
|
25.2
|
|
|
567.8
|
100.0
|
Retail buy to let mortgage
book
The retail buy to let mortgage book consists of
buy to let individuals of less than £1m.
Loan to valued (indexed)
|
30 Jun 2024
|
30 Jun 2023
|
31 Dec 2023
|
|
|
£m
|
%
|
£m
|
%
|
£m
|
%
|
|
<70%
|
318.1
|
83.8
|
326.6
|
84.7
|
312.4
|
80.2
|
|
70% - <80%
|
52.1
|
13.7
|
51.9
|
13.4
|
68.8
|
17.7
|
|
80% - <90%
|
8.4
|
2.2
|
6.8
|
1.8
|
7.8
|
2.0
|
|
>90%
|
1.1
|
0.3
|
0.2
|
0.1
|
0.6
|
0.1
|
|
|
379.7
|
100.0
|
385.5
|
100.0
|
389.6
|
100.0
|
At the end of June 2024, the Society had no buy
to let possession properties (December 2023: one), whose exposure
was being managed by a Law of Property Act receiver. Against past
due cases, £19.2m (December 2023: £13.6m) 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 six buy to let loans in the
six months to 30 June 2024 (December 2023: one), with no alteration
made to the contractual rates of interest and balances totalling
£1.5m at 30 June 2024 (December 2023: £0.2m). There were no
provisions (December 2023: £0.1m) held against buy to let mortgages
that were granted forbearance during the year.
Gross lending during 2024 has the following loan
to value as at 30 June 2024:
Loan to valued (indexed)
|
|
|
|
|
£m
|
%
|
|
<70%
|
6.7
|
42.1
|
|
70% - <80%
|
6.5
|
40.9
|
|
80% - <90%
|
2.7
|
17.0
|
|
|
15.9
|
100.0
|
Geographical split of
lending
The table below provides a breakdown of the
geographic concentration of the Society's prime residential and
retail buy to let mortgage portfolio as at 30 June 2024. The
Society's mortgage portfolio is diversified across the
UK.
|
|
Prime
Residential
|
Buy to let
|
Total
|
Total
|
|
Region
|
£m
|
£m
|
£m
|
%
|
|
North East
|
470.5
|
7.3
|
477.8
|
10.2
|
|
East of England
|
351.0
|
38.8
|
389.8
|
8.3
|
|
East Midlands
|
297.9
|
14.3
|
312.2
|
6.7
|
|
Northern Ireland
|
-
|
-
|
-
|
-
|
|
North West
|
491.6
|
19.3
|
510.9
|
10.9
|
|
Scotland
|
491.4
|
5.6
|
497.0
|
10.6
|
|
South East
|
1,039.6
|
239.7
|
1,279.3
|
27.2
|
|
South West
|
337.8
|
22.3
|
360.1
|
7.7
|
|
Wales
|
138.0
|
5.0
|
143.0
|
3.1
|
|
West Midlands
|
302.3
|
16.1
|
318.4
|
6.8
|
|
Yorkshire
|
376.3
|
11.1
|
387.4
|
8.3
|
|
Other
|
7.2
|
0.2
|
7.4
|
0.2
|
|
Total
|
4,303.6
|
379.7
|
4,683.3
|
100.0
|
Legacy portfolios
The provisioning methodology for commercial,
legacy buy to let, and serviced apartments exposures follows that
outlined in the 2023 Annual Report & Accounts. Economic
scenarios have been updated to correspond with the scenarios used
for residential mortgages and the same scenario weightings are used
for these books as are used for the core books above. The following
sector specific discounts and uplifts have been used, compared to
current collateral valuations:
Sector
|
Upside
|
Base
|
Downside
|
Stress
|
|
Retail
|
65%
|
55%
|
45%
|
35%
|
|
Industrial
|
90%
|
70%
|
60%
|
40%
|
|
Leisure
|
60%
|
50%
|
45%
|
35%
|
|
Residential
|
100%
|
97%
|
83%
|
68%
|
|
Serviced apartments
|
106%
|
85%
|
70%
|
40%
|
These discounts and uplifts are applied to the
latest valuation of the property serving as collateral. No losses
are expected on exposures to housing associations and policy loans.
The resulting gross balances and corresponding provisions are as
follows:
Product
|
30 Jun 2024
|
30 Jun 2023
|
31 Dec 2023
|
|
Exposure
|
Provision
|
Exposure
|
Provision
|
Exposure
|
Provision
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Legacy buy to let
|
6.9
|
-
|
9.7
|
-
|
13.3
|
0.1
|
|
Purchased credit impaired lending
|
6.7
|
0.1
|
-
|
-
|
7.7
|
0.2
|
|
Commercial
|
5.9
|
0.6
|
8.8
|
1.8
|
6.1
|
0.5
|
|
Housing associations
|
179.7
|
-
|
247.5
|
-
|
211.9
|
-
|
|
Serviced apartments
|
14.0
|
1.0
|
15.3
|
0.9
|
14.7
|
1.0
|
|
Policy loans
|
1.0
|
-
|
1.4
|
-
|
1.2
|
-
|
Total
|
214.2
|
1.7
|
282.7
|
2.7
|
254.9
|
1.8
|
Sensitivity
The 30 June 2024 provisions are sensitive to
the likelihood factor applied to the different scenarios. The
analysis below demonstrates the impact of a 100% weighting to each
scenario.
|
|
Upside
|
Base
|
Downside
|
Severe downside
|
Provision
|
|
Provision £m
|
(0.5)*
|
0.8
|
2.2
|
4.6
|
1.7
|
* Purchase
credit impaired lending is presented net of the expected credit
losses on purchase, therefore an upside scenario to the initial
credit losses would be held as a positive provision, increasing the
overall value of the lending. For sensitivity above, this positive
provision offsets the provisions relating to the other legacy
mortgage books leading to a net gain to the Group in the upside
scenario.
As at 30 June 2024, 13 legacy
borrowers were in arrears of 3 months or more with exposures of
£4.2m (December 2023: 14 borrowers, £5.0m). The Society did not
grant forbearance against any legacy loans in the first six months
of 2024 or in 2023.
14. Provisions for liabilities
As announced on 2 May 2024, the Society has
committed to providing voluntary financial support to help Members
whose trusts are affected by the actions and subsequent collapse of
Philips Trust. Support will be provided where a customer was
initially referred by the Society to the Will Writing Company where
the Member subsequently appointed Philips Trust as a replacement
trustee, and appointed Philips Trust as the investment
manager.
The support offered is entirely voluntary and
there is no legal or regulatory requirement to provide financial
support. Management have determined an estimate of the total cost
of the voluntary scheme and associated costs to be incurred
(including legal and scheme costs), which will not
exceed £20m and have recognised a provision during
the period for this cost. Management judgement and
estimates have been used, based on information available at the
time, noting that detailed information from the Administrators has
not yet been provided. Further detail on the management judgement
applied is found in note 4 to the financial information.
No payments have yet been made as part of this
scheme and the timing of payments to be made remains uncertain;
offers made under this scheme will be valid for six months on a
full and final basis, however each claim will be verified by the
Administrators and the timing of this process is uncertain at this
point. As at 30 June 2024 £0.2m of associated administrative costs
have been paid in relation to the voluntary financial support
scheme.
15. Notes to the Cash Flow
Statement
|
Unaudited
|
Unaudited
|
Audited
|
|
30 Jun 24
|
30 Jun 23
|
31 Dec 23
|
|
|
Restated
|
|
|
£m
|
£m
|
£m
|
Reconciliation of profit before taxation to net cash
inflow from operating activities
|
|
|
|
|
|
|
|
|
Profit before taxation
|
0.2
|
16.3
|
29.1
|
|
|
|
|
|
|
Depreciation and amortisation
|
3.5
|
3.0
|
6.4
|
|
Interest on subscribed capital
|
1.8
|
1.2
|
2.9
|
|
(Increase) / decrease in derivative financial
instruments
|
(34.4)
|
(38.0)
|
52.0
|
|
Interest on finance lease
arrangements
|
0.1
|
0.1
|
0.2
|
|
Other non-cash movements
|
0.3
|
(1.8)
|
(10.2)
|
Net cash (outflow) /
inflow before changes in operating assets and
liabilities
|
(28.5)
|
(19.2)
|
80.4
|
|
|
|
|
|
|
Increase in loans and advances to
customers
|
(218.8)
|
(358.9)
|
(492.6)
|
|
Increase / (decrease) in fair value adjustments
for hedged risk
|
13.8
|
23.2
|
(48.0)
|
|
Decrease in cash collateral pledged
|
5.8
|
1.8
|
1.2
|
|
Decrease / (increase) in cash ratio
deposit
|
14.5
|
(1.2)
|
(3.1)
|
|
Increase in shares
|
260.9
|
458.0
|
672.8
|
|
(Decrease) / increase in amounts due to other
customers and deposits from banks
|
(0.9)
|
93.3
|
42.3
|
|
Decrease / (increase) in other assets
|
1.8
|
1.0
|
(1.5)
|
|
Increase / (decrease) in other
liabilities
|
17.5
|
(4.2)
|
0.4
|
Net cash inflow from operating activities
|
66.1
|
193.8
|
251.9
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
Cash and balances with the Bank of
England
|
588.7
|
645.0
|
525.5
|
|
Less Bank of England cash ratio
deposit
|
-
|
(12.6)
|
(14.5)
|
|
Loans and advances to banks repayable on
demand
|
24.4
|
12.5
|
22.5
|
|
|
|
|
|
At 30 June / 31 December
|
613.1
|
644.9
|
533.5
|
The 30 June 2023 cash and cash equivalents has
been restated due to the removal of the cash ratio deposit held
with the Bank of England of £12.6m as it does not meet the criteria
to be included within cash and cash equivalents. Please see note 28
of the of the 2023 Annual Report & Accounts for more
details.
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 readily convertible into
cash.
Statement of Directors' responsibilities
The Directors confirm that this condensed
consolidated half-yearly financial information has been prepared in
accordance with IAS 34 as applicable in the United Kingdom, and
that the half-yearly management report included in this
announcement includes a true and fair review of the information
required by the Disclosure Guidance and Transparency Rules (DTR
4.2.4, DTR 4.2.7 and DTR 4.2.8).
The Directors of Newcastle Building
Society are listed in in the 2023 Annual Report & Accounts
(page 168). Mr SL Lynn ceased to be a Director on 24 April
2024. At the start of 2024, Michele Faull informed the Board
of her intention not to stand for re-election at the AGM due to
personal reasons. However, due to a change in circumstances,
Michele subsequently informed the Board that she would like to
continue in her role. Due to legislative deadlines, we were
unable to include her re-election within the Notice of Meeting for
the 2024 AGM. Therefore, Michele stood down as a Director at
the end of the AGM. The Board appointed her to a casual vacancy on
29th April 2024.
On behalf of the Board
Andrew Haigh | Chief Executive
1 August 2024
Independent review report to Newcastle Building
Society
Conclusion
We have been engaged by the Society to review
the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2024 which
comprises the income statement, the balance sheet, the statement of
movement in members' interests, the cash flow statement and related
notes 1 to 15.
Based on our review, nothing has come to our
attention that causes us to believe that the condensed set of
financial statements in the half-yearly financial report for the
six months ended 30 June 2024 is not prepared, in all material
respects, in accordance with United Kingdom adopted International
Accounting Standard 34 and the Disclosure Guidance and Transparency
Rules of the United Kingdom's Financial Conduct
Authority.
Basis for Conclusion
We conducted our review in accordance with
International Standard on Review Engagements (UK) 2410 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Financial Reporting Council for use in
the United Kingdom (ISRE (UK) 2410). A review of interim financial
information consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying
analytical and other review procedures. A review is substantially
less in scope than an audit conducted in accordance with
International Standards on Auditing (UK) and consequently does not
enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit.
Accordingly, we do not express an audit opinion.
As disclosed in note 2, the annual financial
statements of the Society are prepared in accordance with United
Kingdom adopted international accounting standards. The condensed
set of financial statements included in this half-yearly financial
report has been prepared in accordance with United Kingdom adopted
International Accounting Standard 34, 'Interim Financial
Reporting'.
Conclusion Relating to Going
Concern
Based on our review procedures, which are less
extensive than those performed in an audit as described in the
Basis for Conclusion section of this report, nothing has come to
our attention to suggest that the directors have inappropriately
adopted the going concern basis of accounting or that the directors
have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This Conclusion is based on the review
procedures performed in accordance with ISRE (UK) 2410; however
future events or conditions may cause the entity to cease to
continue as a going concern.
Responsibilities of the
directors
The directors are responsible for preparing the
half-yearly financial report in accordance with the Disclosure
Guidance and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
In preparing the half-yearly financial report,
the directors are responsible for assessing 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
Society or to cease operations, or have no realistic alternative
but to do so.
Auditor's Responsibilities for the
review of the financial information
In reviewing the half-yearly financial report,
we are responsible for expressing to the Society a conclusion on
the condensed set of financial statements in the half-yearly
financial report. Our conclusions, including our conclusion
relating to going concern, are based on procedures that are less
extensive than audit procedures, as described in the Basis for
Conclusion paragraph of this report.
Use of our report
This report is made solely to the Society in
accordance with ISRE (UK) 2410. Our work has been undertaken so
that we might state to the Society those matters we are required to
state to it in an independent review 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, for our
review work, for this report, or for the conclusions we have
formed.
Deloitte LLP | Statutory Auditor
Manchester, United Kingdom
1 August 2024