The Chairman, Ed Anderson, welcomed all members to the meeting and introduced the Directors. He outlined the agenda of the meeting and then reported to members as follows:
"During the past year the UK economy suffered the longest and deepest recession since records began. Against this backdrop the Yorkshire demonstrated resilience and successfully maintained a strong underlying position. We are looking forward with confidence in the enlarged Society’s future, following the merger with Chelsea, and I can assure you that the Yorkshire is well-positioned to continue to put members’ interests first providing you with financial security, long-term value and excellent service.
I would like to add that your board continues to be committed to adopting best practice with regard to corporate governance - this is something that we consider to be of the upmost importance, particularly at a time when public trust in the wider financial services sector has been damaged.
Iain is now going to talk at some length and give a comprehensive presentation covering 4 main areas:
The Chairman then handed over to Iain Cornish, Chief Executive, who reported as follows:
"In my address to members at last year’s AGM I said that "The next year or two will not be easy with continued pressure on profitability. But the fundamental strength of our underlying position continues to allow us, and our members, to look forwards with confidence."
This turned out to be an accurate prediction. We did forecast a difficult 2009, and indeed our profitability was put under some pressure as we acted to protect our members and the Society as a whole. However our underlying strength allowed us to take the opportunity to merge with Chelsea Building Society, a landmark event in the Yorkshire’s history. We now stand in a position which allows us to look forward to the future with great confidence.
Before talking about the details of our performance in 2009, I would like to dwell briefly on some of the most significant events that shaped the financial sector and the wider economy during what was an eventful year.
2009 began with the creation of the Lloyds Banking Group following the acquisition by Lloyds TSB of HBOS. During the year both Lloyds and the Royal Bank of Scotland required huge amounts of support from British taxpayers in the form of state-provided capital to shore up their balance sheets. Both banks went on to report huge losses and uncertainty remains as to if and when the taxpayer’s investment in these businesses will be disposed of at a profit.
In our own sector the Dunfermline failed and was rescued by Nationwide, and both Alliance & Leicester and Bradford & Bingley began disappearing from the high street.
We also saw National Savings & Investments along with Northern Rock, both fully-backed by the government, making headlines during the year for competing, in our view, on an unfair basis.
Activity in the housing market remained at very low levels. This graph, which shows the movement in house prices and housing transactions, highlights the severity of the downturn as well as the fact that during 2009 the volume of housing transactions remained significantly below pre-crisis levels. A notable increase in transactions occurred in December, which was in large part caused by buyers seeking to complete sales ahead of the end of the stamp duty holiday on 31 December. Actual housing transaction volumes then fell back from nearly 95,000 in December to 45,000 in January suggesting that it is too early to call a sustained recovery in the market.
Significant events also unfolded in the wider economy over the course of the year, as the UK experienced the most severe recession in its modern history. In particular we saw:
Clearly not the easiest of years in competitive or economic terms either for us or our members, and our results and the decisions we took last year in my view should be should be viewed in this context.
During the year we stuck to the principles by which we have run the business through the crisis, which we believe have served us well in times of uncertainty and challenging market conditions.
Financial security and member value have been at the top of our agenda.
In practical terms this has meant maintaining, and indeed strengthening, our capital, liquidity and funding positions, and being particularly cautious in our lending and savings decisions. The strength that the combination of these factors provides the Society, continues to give us tremendous resilience and the ability to absorb any future shocks.
We have managed the business by only lending when appropriate funding has been secured. When we lend, we are only doing so in a cautious and sustainable way.
All of this has led us to maintain a very strong underlying position.
Some of the Key Performance Indicators by which we assess our overall performance are set out on this slide.
The first indicators show profit measures. We achieved a core operating profit of £7.7m with an overall statutory loss of £12.5m.
This loss represents a fall from a corresponding profit of £8.3m in 2008 but a substantial improvement on the position at 30 June 2009, when in the Merger Booklet, we reported a statutory loss for the first half of 2009 of £22m.
2009 was very much a year of two halves with the Group’s performance improving during the second half of the year a trend which has continued strongly in 2010.
The reasons behind the reduction in core operating profit, compared to 2008, stem partly from the effects of the recession, but as much, if not more, from the deliberate decisions we took to protect members interests in line with the principles I set out earlier.
Shielding our savers as far as possible from the full impact of the cuts in Bank of England base rate left savers £85mn better off than they would otherwise have been, but with a significant impact on profits, and the cost of holding very high levels of liquidity also materially depressed our margin. I will cover both of these in more detail in this presentation.
But first I would like to cover our capital position. Capital is the amount of money that the regulators in the UK this is currently the Financial Services Authority, require all financial institutions to hold to meet any future unexpected losses which might arise. It follows that the more capital you hold, the more resilient you will be. It is additional capital, in very large amounts, that Lloyds and RBS required from the taxpayer during 2009.
As I stated last year, we are not aware of any major mortgage lender, bank or building society, which has a so-called tier 1 capital position stronger than the Yorkshire including the recapitalised banks.
Our capital position improved during the year. Our tier 1 capital ratio increased to 14.2% which is substantially above our regulatory minimum requirement. 12.2% of this is so-called core tier 1, which is essentially accumulated profits and has the greatest degree of permanency and the greatest ability to absorb any losses should it be necessary.
Liquid assets are those which are held in the form of cash, or in high quality instruments, like government gilts, that can readily be sold for cash, even under distressed market conditions. Liquidity provides a buffer between a lender’s lending commitments and its funding capacity. For example, if, for whatever reason, a greater than expected number of retail savers or wholesale investors want their money back, this liquidity buffer allows a lender to meet that demand without compromising its ability to remain in business.
It follows that the more liquidity that a lender holds, and the greater the quality of that liquidity, the more resilience it has to manage its funding position, and it is a liquidity shortfall that ultimately caused Northern Rock to fail.
In the run up to the merger, we held an exceptionally high level of liquidity, as shown by our liquidity ratio of 31.9% at the year end, compared to 25.4% in 2008.
Of course, holding high-levels of high-quality liquid assets comes at a price it reduces the interest margin and hence reduces profitability. Under the extreme circumstances of the past two years, we feel that this is a price which has been worth paying for the protection which it gives to members.
Lender’s liquidity positions are becoming a major area of focus for the regulator. A new regime began to be introduced at the end of 2009 and, of course, we will continue to meet ever-more stringent requirements in the future.
In terms of our lending activity, our gross mortgage lending was much lower in 2009 at £936m versus over £2.5bn in 2008, which represented nearly 5% of all new lending by building societies during the year.
In a similar way our net lending in 2008 of £0.3bn became a net repayment in 2009 of £1.1bn. Low levels of lending were a result of low demand from potential borrowers and our cautious approach to lending in the uncertain climate.
At the year end member savings balances had increased by £0.1bn to £13.8bn, which contrasts with a net outflow of savings for the sector as a whole.
Members’ savings together with retained earnings now fund virtually all our mortgages and our dependence on wholesale funding has reduced further during the year.
In a low growth environment, the ability to control costs and maintain efficiency becomes even more important, and we continue to focus on this area. Our management expense ratio, excluding the costs associated with the merger, fell to 54 pence per £100 of assets in 2009 from 56 pence in 2008. We recognise that the more cost-effectively we are able to run the business, the greater our ability is to deliver benefits to members.
Our non-interest income, generated by sales of good-value insurance, protection and investment products, was maintained at near-2008 levels, despite the major reduction in lending activity.
The Group has continued to focus on maintaining a high-quality mortgage portfolio.
In a recession it is inevitable that some borrowers will find themselves in difficulty. One result of this is that we made an increased provision for mortgage losses. As I predicted last year, arrears levels increased year-on-year as the economy moved further in to recession.
Our own arrears have increased at the end of 2009 the percentage of loans over three months in arrears was 1.84% up from 1.59% at the end of 2008. However, these are on a downwards trend from a peak in the first half of 2009, and we continue to put a huge amount of management focus on this area. We have developed our arrears management policies, keeping them in line with best practice and seeking to support borrowers facing difficulties whilst also protecting the interests of the membership as a whole.
Across our entire mortgage portfolio the average loan-to-value ratio of all our mortgages at the end of 2009 was just under 52%.
Overall then we are, of course, affected by the recession, but equally our profits continue to be impacted by judgements which we have taken, and continue to stand by, which are in our members’ interests and which ensure that the Yorkshire remains a resilient, independent mutual institution.
I would now like to give an update on our merger with Chelsea which, as I have said, is a landmark event in the Yorkshire’s history. I will also talk briefly about Chelsea’s results for 2009. Firstly, however, I would like to thank the members of both societies for their overwhelming support for the merger which was finally completed at the start of this month
By way of background, the process of consolidation in the building society sector continued apace last year.
Since our last AGM, the further building society mergers to have either been announced or have completed, include
Our own merger with Chelsea makes us a £35bn society with 2.8m members, and a very well-balanced branch network.
For those members not at our Special General Meeting I will repeat some of the background to the merger.
We began talking to Chelsea in the first half of 2009
Our initial interest in a merger of this type stemmed directly from the strategic imperatives we recognised for the Yorkshire some time ago.
The external landscape in which the Yorkshire operates has been substantially changed by the events of the past two years.
We are clear that to be successful as a traditional building society fit for the 21st Century we need to:
Merger with the Chelsea delivers many of these things to us far more quickly than we could have achieved by ourselves.
Clearly Chelsea has had financial difficulties over the past two years, which is why our first priority was to understand all these issues in detail, and then to protect against them which we have successfully done.
We reported on all these matters comprehensively to members as part of the merger voting process.
Our programme of work to fully integrate the two societies is well underway and is proceeding according to plan. We remain very confident of our ability to deliver around £35mn of cost savings per year savings which directly strengthen our ability to deliver benefits to members on an ongoing basis.
We have said that we will retain the Chelsea Building Society brand name and there are a number of reasons for this:
The Chelsea announced its annual results for 2009 on the same day as the Yorkshire. In summary:
Overall the Chelsea performed better than we had expected in 2009, and better than we factored into the financial appraisal we based our merger decision on. It continues to do so, and this adds to our confidence about its future contribution the enlarged Yorkshire.
Moving on to membership matters more generally we recognise that the effects of the recession combined with a very low Bank of England base rate of interest have been difficult for very many of our borrowers and savers.
We understand that many of our savers rely on the income from their savings as an important supplement to their pension. Savers have now experienced a protracted period of very low interest rates which has put great pressure on many people’s personal budgets and continues to do so.
We have continued to do what we can to protect our savers as much as we can by sheltering as many as possible from the full reduction in interest rates that began in 2008.
And I am not talking here about the one year fixed rate bond market, which in many instances we view to be based on unsustainable rates, or rates which have to be funded by unfair treatment of other savers. What I am talking about is the millions of savers who perhaps don’t look at there accounts from month to month, or who want to use a branch or cannot tie up their money.
Clearly we have not been able to shelter these savers from all of the interest rate reductions, or to the degree that they will no doubt have wished. But we have protected them as far as we have been able to in such a low interest rate environment.
The chart on the screen shows the average rate on our range of variable-rate savings accounts compared with that of the main banks and several leading building societies.
By not passing on the full Bank of England base rate reductions, we have delivered a benefit to our savers, which over the course of 2009 we estimate to be in excess of £85 million
In addition, we launched a range of new savings accounts to provide members with greater choice and we also sought to further enhance the service provided to our saving members by a range of initiatives, including:
For our existing borrowers we recognise that as a result of the downturn in the housing market a number of them have seen the loan-to-value ratio on their homes increase and their equity in their property reduce.
In order to help those borrowers who find themselves in this position, we have offered them replacement fixed-rate mortgage products at the end of their existing deals. By doing this were are proactively helping them to manage their finances in what are difficult conditions, in circumstances in which many of them would otherwise be unable to replace maturing deals with an attractive alternative.
Many of the Yorkshire’s mortgage products also incorporate the ability to offset savings, and this has become a more valuable feature in the low interest rate environment.
Whilst we have avoided competing in areas of the market which we believe to be unsustainable, our consistent approach to offering attractive mortgage and saving products nonetheless meant that we achieved over 1,100 Best Buy’ mentions for our products in 2009, over 15% more than in 2008 and during 2009 we opened over a quarter of a million savings accounts.
Once again we gained external recognition for our products and services during the year, receiving a number of industry awards across the Group.
We also expanded our distribution network during the year with the net addition of 10 high street agencies. Our total distribution network now includes 178 branches and 79 agencies.
Overall, and despite the challenging climate, our ongoing survey of member views once again provides us with reassurance that we are continuing to act in members’ interests and deliver value and excellent service, 9 out of 10 of our members trust us to the point they would recommend us to their friends and family.
We continue to believe that it is important that institutions as financially strong as the Yorkshire should continue to support their local communities despite the market conditions and we continue to do just that.
In 2009 our Charitable Foundation donated over £450,000 to over 2,400 registered charities and other good causes, nearly 9 in 10 of which were nominated by our members and by our staff. This brings the total donations made by the Foundation since its inception in 1998 to over £3.4 million, including over £1.5 million raised through our Small Change Big Difference Scheme whereby members donate the pence on their interest to the Foundation.
In 2009 we continued our responsible environmental practices recycling up to 90% of head office waste, purchasing electricity from renewable sources along with initiatives to reduce the consumption of electricity and water within the Society.
Local communities are important stakeholders in the Society, but our primary stakeholders are, of course, our members and we go to great lengths to give members every opportunity to have their say in the Yorkshire’s business.
During 2009 we invited 34,000 members to Question Time sessions and informal Meet the Chief Executive’ events which I held around the country. Our member panel, which we consult on a continuous basis, now numbers over 10,000 members and provides a valuable source of member feedback.
During the year we held two sessions with our Member Forum which has now been running successfully for 5 years. The Forum comprises 19 members drawn from a cross section of the membership. We talk to the Forum and solicit their views on a whole host of topics ranging from our products and services, to how we treat our customers under the FSA’s Treating Customers Fairly agenda. The Forum members are extremely enthusiastic and diligent and challenge myself and my colleagues on all aspects of the business. I am enormously appreciative of the effort they put in and on behalf of the membership, I want to record the Society’s thanks to them and to all the other members who take part in the initiatives I have just mentioned.
I want to pay tribute to the continued efforts of all of my colleagues throughout the Society. Despite the fact that 2009 was another challenging year for everyone involved in the Society, my colleagues throughout the business responded with professionalism, dedication and enthusiasm to the challenges which we faced. Once again, it is really pleasing to report that our latest staff opinion survey continued to record high levels of staff satisfaction and belief in the Society’s direction.
I would also like to welcome those colleagues who have joined us from Chelsea. I have been hugely impressed by the professionalism and commitment they have demonstrated during a period of some uncertainty and I am very grateful to them for their continued support.
Moving on to our future outlook, we expect the external environment to remain difficult. Economic recovery will be slow and patchy and we think that house prices will remain flat at best. Interest rates are unlikely to rise until the end of the year, and we anticipate that unemployment will continue to rise.
As far as the building society sector is concerned further consolidation seems very likely for as long as market conditions remain difficult. In the short term our focus on successfully delivering the benefits from our merger with Chelsea, means that we do not plan to be involved in further merger activity over the next 18 months or so. Beyond this we will continue to judge any opportunities entirely on their own merits and entirely from the standpoint of our members’ interests.
In terms of how we manage the Yorkshire’s position over the coming year, our approach will continue to be governed by financial security and delivering member benefits.
The positive trends in our own performance that began during the second half of 2009 have continued into 2010. We will stick to our principles of operating in our members interests, as a building society focused largely on traditional mortgage lending which allows people to own their own homes, funded mainly by the savings of individual members. All of this underpins our confidence in our future prospects and our ability to position the Yorkshire as a credible, mutual, alternative to the banking sector."
The Chairman then continued:
"I would like to re-iterate the board’s confidence in the Society’s achievements and its prospects.
I also would like to echo Iain's words of thanks to our senior management team and staff. The year held many challenges for the Group and the success of the Yorkshire would not be possible without the commitment and hard work of all our colleagues. I would like to thank them all for their efforts throughout 2009. This includes the executive team who have guided the Society through a challenging year with great skill and an enormous amount of hard work.
My special thanks also go to my fellow non-executive directors who have worked extremely hard and diligently throughout 2009 and the first part of this year. The additional time commitment and responsibility on their part, particularly due to the merger, has been tremendous and I am extremely proud of how the Board as a whole has worked together throughout this period.
I also wish to record my thanks to Stuart Bernau and Mark Jenkins of the Chelsea who were appointed as executive Chairman and Strategy & Planning Director respectively during 2009 and managed the Chelsea until completion of the merger on 1 April 2010. I am please to advise you that, on 1 April, Mark Jenkins was appointed as General Manager Commercial Development with the Yorkshire.
Finally, I would also like to thank you, the members, for your continuing loyalty to the Yorkshire and for your overwhelming support for our merger with Chelsea.
Before I turn to the formal business of voting on the resolutions I would like to say a few more words about the board.
Four directors are due for re-election at this meeting me, Lynne Charlesworth, Iain Cornish and David Paige.
Lynne, Iain, David and I were elected or re-elected three years ago and therefore it is a legal requirement that we are put forward for re-election at this AGM.
I can confirm that all non-executive directors, as well as executive directors, are subject to personal evaluations and that all directors’ re-elections are reviewed by the board without the relevant director being present. I would also add that the non-executive directors undergo ongoing training on relevant topics to ensure that we keep up to date with business, governance and regulatory issues.
I mentioned at the start of the meeting that Roger Burden was appointed a non-executive director on 1 April. In accordance with the Society’s Rules, as the appointment was after the end of the financial year and, indeed, after the AGM mailer was sent out to members eligible to vote, then members will be asked to vote on Roger’s appointment at next year’s AGM.
We notified our members in the Merger Booklet which was sent out to members at the end of last year that the Yorkshire Board would consider the appointment of a Chelsea Director, subject to the merger completing.
I am delighted that Roger agreed to join the Yorkshire Board given his extensive financial services experience at board level. He is a former Chief Executive and Chairman of Cheltenham & Gloucester as well as a former Chairman of the Council of Mortgage Lenders. He retired from Cheltenham & Gloucester in 2004. He joined Chelsea Building Society’s board on 1 November 2009 as a non-executive director, when merger discussions between the Yorkshire and Chelsea were well advanced.
As in previous years, we have included in the AGM mailing a summary directors' remuneration report and are asking members, once again, to vote on this. Societies are not under a legal obligation to have such a vote on this report, but in the spirit of transparency, we believe it is good practice to do this and we have done this for a number of years now.
In light of the justifiable public interest in, and media reporting on, the level of remuneration for executive directors within the financial services sector generally and more particularly within the banks - I would like to set out the Yorkshire’s approach to this in some detail.
Our approach to the level of pay for the executive directors and the other senior managers which, incidentally, is the same approach we have to all of our staff - is to aim to pay market related salaries. In addition, we believe that a significant part of the remuneration of executive directors should be based on the Society’s financial and service performance as well as individual performance in order to motivate and reward successful business and personal results. As a mutual organisation we are not wholly profit driven and therefore it is important that a bonus scheme reflects all of our key performance measures and not just profit. In particular, the factors which are taken in to account in determining the level of bonus for 2009 are: profitability, savings inflow, cost control and customer satisfaction, together with levels of capital and liquidity. In other words a broad range of measures are used, reflecting the all-round performance, strength and stability of the Society.
As Iain has mentioned in his presentation, one of the reasons for the statutory loss in 2009 is due to the deliberate decisions we have taken to protect our members, including a decision to protect our savers from the full effect of the Bank base rate reductions. By being more aggressive with savers in line with other players in the market, we could have made a pre-tax profit. This would have left members worse off and would, incidentally, have increased the bonuses paid to executive directors, but we question would that have been in members’ interests? We thought not.
And, again as Iain has mentioned, we were profitable if you strip out accounting timing differences which do not form part of real performance of the Society.
The executive directors do not participate in any discussions relating to the review of their individual salaries or their performance pay. These are matters which are determined solely by the Remuneration Committee which is made up of 4 non-executive directors me, David Paige, Indira Thambiah and Simon Turner who chairs the Committee.
As you may recall, last year the 4 executive directors each volunteered to forego any bonus payment to which they were entitled. This was despite the fact that much of the reduction in profits during the year was actually outside management’s control.
In accordance with the rules of the bonus scheme for 2009, reflecting performance against the measures that I have described, the Remuneration Committee has determined that the four executive directors are entitled to performance pay in respect of the year 2009, in common with all other staff in the organisation.
However, I can confirm that Iain Cornish has again voluntarily waived his entitlement to any bonus and the Remuneration Committee respected this decision. I can also confirm that all payments under the Society’s bonus schemes for 2009 met with the requirements of the FSA’s new Rules on Remuneration of senior staff in financial services organisations. These rules were published in the second half of 2009.
In view of the focus on the year on year increases in remuneration, I would also like to point out that any comparison of executives’ total remuneration for 2009 with 2008 should take into account the fact that the bonus waived for 2008 was greater than that paid in respect of 2009. Consequently had the 2008 bonus not been voluntarily waived, total remuneration for 2009 would actually have shown a reduction.
It is the board’s view that this senior team has performed extremely well in the current environment given that the Society has demonstrated continued resilience and has maintained a very strong underlying position.
I must emphasise that it is essential that the organisation is led by an executive team that has the necessary skills, experience and dedication to run a large and complex financial organisation and that it is a team in which the board, staff, members and the regulators can have trust and confidence. These attributes are all the more important in the current environment. The remuneration packages have to be competitive - not only to attract such people - but also to retain them and keep them motivated.
Looking ahead, the Society has amended the operation of its bonus scheme for executive directors and General Managers from 2010 onwards to introduce a deferral of 50% of variable pay over a three-year period, which will be linked to future business performance."
The Chairman then invited questions from the members attending the meeting which was followed by voting on the resolutions. After a short adjournment, the Chairman announced the results of the voting and thanked all members for taking the time to attend the meeting.
View the voting AGM 2010 results.
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