Despite that, N&P managed to remain in modest profit for 2009 - pre-tax profit was £1.3m (£5.9m in 2008).
Matthew Bullock, chief executive of N&P, said:
"Our business is largely removed from the wholesale debt markets and the riskier elements of lending. But so profound was the crisis that we were impacted in several ways.
"First, on seeing the near collapse of the banks in October 2008 and believing further shocks would follow, we raised over £325m additional deposits in the first quarter of 2009. At this time the cost of deposits was rising rapidly but we felt that it was worth reducing our interest margin in order to have the liquid funds to withstand those shocks which might have hit us.
"Secondly, the downgrading of many societies by rating agencies led local authorities, many of whom had suffered losses with the Icelandic banks, to reduce or remove their investments with building societies. This had the effect of keeping N&P, along with some other societies, in an increasingly costly retail deposit market throughout the middle of the year, further reducing our interest margin.
"A third impact came from the Bank of England's Quantitative Easing, which reduced the income related to market interest rates that we receive on many of our loans and other capital assets, just as the cost of funding them was rising.
"The combined effect was to reduce N&P's net interest margin from 1.12% to 0.70% and to cut interest income - which makes up roughly 2/3rds of our total income - by 38% from £52.2m to £32.2m. The sale of other products, such as insurance, banking and investment advice, was also not unexpectedly lower as economic activity fell, and income from these fell by 11%. Overall, N&P's total income fell by 30% in 2009.
"In response, we undertook a strategic review of cost. Costs incurred were reduced by 12% during 2009, including a redundancy and branch closure programme charge of £2.6m, but by the end of 2009 the run rate of costs in the Group had been cut by 24%, which will result in lower costs in 2010.
"Because of its conservative and affordability-linked lending policy, N&P was pleasingly less affected than most lenders in the level of arrears amongst our mortgage borrowers. At the end of the year, residential mortgage borrowers in serious arrears amounted to only 0.83% of accounts; this compares with an industry average of 1.81% (Source: Council of Mortgage Lenders) and well below the rating agencies' forecasts."
Summary Financial Position
The following list sets out key financial measures as at 31st December 2009:
- Pre-tax profit fell to £1.3m (2008: £5.9m)
- Total income reduced to £52m (2008: £74.4m)
- Worst affected was net income from traditional savings and mortgages - net interest income for 2009 was £32.2m (2008: £52.2m)
- Non-interest income (from insurance, banking etc) was £19.8m in 2009 (2008: £22.2m)
- N&P has reduced costs - administrative expenses (including depreciation) fell to £49.0m in 2009 (2008: £55.7m). Included in this is £2.6m of re-structuring costs incurred in reducing staff in 2009-10 and reducing N&P's retail network from 56 to 46 branches in March 2010
- Retail deposits increased to £3,544m (2008: £3,357m)
- Funding from the wholesale market at the year end reduced to £461m (2008: £1,386m)
- The subdued housing market and cost of funding combined to reduce mortgage assets to £3,223m (2008: £3,522m) as customers redeeming away were not replaced by new lending
- N&P's lending is fully funded by retail savings. Savings now exceed mortgage loans to customers by £321m
- Liquid assets total £952m of which £499m is held in UK government stocks, balances with the Bank of England, or cash. Total liquidity is equivalent to 23.8% of shares and deposits.
