Chief Executive's Statement

2007 was a year of two halves.  In the first half, the housing market was strong with house prices continuing to grow.  Demand for mortgages was also very strong.

The second half of 2007 was characterised by the credit crunch which began in August.  Banks were reluctant to lend to each other because they did not know who was exposed to US sub prime mortgages.  By early September, Northern Rock had run out of cash and the all too familiar images of queues outside Northern Rock branches had hit our TV screens.

How did this impact on the Stroud & Swindon?

Only 25% of our funding comes from sources other than our normal savers and these are known as wholesale funds.  These sources are banks, Local Authorities and some companies.  Whilst we have been able to raise funds as required, the cost rose considerably and due to the shortage of wholesale funding, lenders competed even more for retail deposits from savers.  As a result, the cost of retail funds also went up.

We found our lending was strong throughout most of 2007, only falling away towards the end of the year.  In total we lent £740 million, only slightly down from the record figure of £745 million in 2006. 

Savings receipts were very strong due to the attractive rates we offered and also no doubt because like other building societies, the Stroud & Swindon is seen as a safe and secure place for savers to deposit their money.

Our interest margin, the difference between the interest we receive on mortgages and the interest we pay on deposits, however fell to 0.83%.  This reflects the good products we offer but also the additional funding costs caused by the credit crunch.  We estimate these additional costs amounted to nearly £1 million during 2007.

We have very few bad debts.  We have never invested in US sub prime mortgages, nor in mortgage backed securities.  Our lending criteria are prudent and our mortgage book is of high quality.

We have checks in place to make sure we lend against suitable properties, that the loans do not represent too high a proportion of the value of the property, and that the borrower can afford to repay the loan. Across the total mortgage book, the average percentage of the loan to the value of the property is below 50%. The maximum loan as a multiple of income permitted in our lending criteria is 4.3 times, much lower than many other lenders have been using.

The vast majority of the mortgage book is secured against residential owner-occupied property.  Just under 25% of the book is Buy to Let lending, a sector of the market which has grown considerably in recent years.  The Society has a small amount of lending secured on commercial property, around 1% of total lending, In addition, we have a small amount of loans to UK sub-prime borrowers, around 5% of the total, which relates to loans made a number of years ago.

Our mortgage loss charge in the Income & Expenditure Account therefore amounted to only £36,000. 

We have a strong balance sheet and we maintain sufficient capital to enable us to invest in the business and protect us against the risk of losses should there be a major downturn in the housing market, which we think is unlikely.

Future Outlook

There is no doubt that house prices have fallen in early 2008.  Is there therefore a risk of another housing crash?

We think not.  There are a number of reasons why 2008 is different to the experiences of the late 1980’s and early 1990’s.

So we don’t expect a housing crash but the market remains uncertain and there is no doubt that the next year or two will see a slowdown in the economy.

Because of the shortage and the higher cost of funds, lenders have had to raise the price of their mortgages. 

And because house prices are at risk of falling – we estimate a 5% fall in 2008 and the possibility of a further 5% in 2009 – lenders are adopting stricter lending criteria.

So there are fewer mortgages available and those that are available are more expensive.

We see more difficult times ahead compared with the strong growth in the economy and the housing market during the last 10 years.

But we are well placed to deal with these difficulties. We have high levels of cash known as liquidity, only 25% of our funding is from wholesale sources, we have had no problems raising funds, and we have strong balance sheet capital to protect against losses in the unlikely event of a major housing market downturn.

There is no doubt that customer behaviours are changing and we need to make sure that we adapt to these new demands.

We recently opened a new site in Gloucestershire which houses our telephone Contact Centre.  We have a highly trained team and the latest telephony equipment.  This will enable us to provide a first class telephone service to the increasing number of people who choose to contact us in this way.  Because we are a mutual building society committed to our heartland area we did not even contemplate opening a foreign call centre. 

Although there has been massive publicity surrounding sub prime lending, it is important to distinguish between the US and the UK experience.  The Stroud & Swindon did a limited amount of sub prime lending between 1998 and 2004 but withdrew our products when competition eroded profit margins to unacceptable levels.  We no longer felt that the profit adequately covered the risks involved.

It is now a fact of life that most people want to borrow at some time in their life.  It is also sadly true that a growing number of people have experienced payment difficulties at some point.

As a mutual building society we will always lend responsibly so as not to put our depositors money at risk.

But it is part of the purpose of building societies, and it has been a tradition for well over 150 years, that building societies help people to buy their own homes.

We therefore see an opportunity and a responsibility to help those who might have experienced payment difficulties.  This is a growing part of the market.  These loans will cost borrowers more than so called prime loans but we believe that if we lend responsibly and not recklessly as in the US, we can not only lend profitably but we can also help a number of people to either stay in their homes or to get back into the housing market.

We are therefore developing plans for a limited range of products which will form part of our future lending.  The launch of these products must however await an easing of the current market conditions and will therefore be at some future date.

As some of you may know, we have operated for many years a subsidiary company, Stroud & Swindon Mortgage Company Limited, which buys mortgage portfolios.  These portfolios comprise a number of loans which are frequently offered for sale in the market.  We have considerable expertise and many years experience in this field.  We therefore ensure that we assess the risks of each book very carefully and make prudent assumptions about the number of loans which might fall into arrears.

It is inevitably the case that as people choose to use the telephone and internet more and more, activity in some branches has fallen.  We are therefore reviewing the size and shape of our branch network.  We remain committed to a branch and agency network as we know the importance of face to face contact which is valued by so many members. As spending patterns change, we see branches fulfilling an increasing role as advice shops rather than places where customers transact.  This we believe will have an effect on where we need to locate our branches in the future.

We are also developing an improved website so that customers can apply for their mortgages on line. Our website has already won recognition. Nielsen Research ranked it first in eight key categories and the UK Financial Services Website and Accessibility Report for Quarter One 2008 ranked us 27th out of 908 websites.

The Financial Services market is being increasingly regulated for the protection of consumers.  One important initiative launched by the Financial Services Authority has been the requirement that all firms treat customers fairly.  As a mutual building society, this has always been at the heart of everything we do.  We have recently concluded a project involving managers from around the business to bring together all of the management information we need to ensure that our policies and procedures are consistent with our goal of treating customers fairly.  Further work will continue throughout 2008 in order to make sure that all of our policies, procedures and behaviours are consistent with these goals.

As a financial institution we take very seriously our responsibility regarding data security.  There has been considerable publicity surrounding data which the government and certain financial services firms have lost.  We have undertaken a complete review and I can confirm that no customer data is held on laptop computers and any data which we need to provide to third parties is done so securely.

In summary, the market outlook is more uncertain than it has been for many years.  We have witnessed over the last 10 years a sustained period of optimism and growth in the economy at large and in the housing market.  This was built on the availability of cheap finance and encouraged many new lenders to enter the market.  The credit crunch has demonstrated that many of these new lenders have been unable to sustain their businesses and can no longer see the returns that they have previously expected.  The strength of the traditional building society model has enabled Stroud & Swindon along with many other societies to come through this difficult period.  Indeed, more and more customers have found the strength of building societies and their focus on traditional lending and savings activities increasingly attractive in terms of providing not only excellent service but also the confidence of a safe and secure provider.

As a mutual building society we believe that there are a number of important features that distinguish us from the banks.

Because we do not have dividends to pay to shareholders, we are able to offer better value products.

For banks, the interests of shareholders in terms of profit are often put ahead of customers.  For a building society however, our customers are the owners of the business.  Building societies therefore do not put the interests of another group ahead of their customers.  An example of this is the contrasting approach of banks and building societies to customer fees.  Customers of banks often feel that their fees and charges are excessive.  We endeavour to ensure that our fees are transparent and fair based on the cost of providing the service.  In this way, we believe that we are better able to develop trusted relationships with our members.

We also recognise our roots within our heartland area and we are committed to supporting our local communities.  We have a branch charity programme in which each branch nominates a local cause which it supports.  This support is in the form of the commitment of time and effort which our staff give to fundraising causes.  During 2007, our staff helped raise £57,000, a significant increase on the figure of £37,000 in 2006. 

As a mutual building society owned by our members, we believe it is important that we understand our members views and also give them an opportunity to give their feedback on what the Society is doing.  We have in place a range of member satisfaction surveys and we are actively developing a member panel in order that we can canvass opinion via the post and telephone on a range of matters.   In order to encourage members to vote, we donate 10p per vote to charity with a 20p donation for every vote cast on line.  We anticipate that over £2,800 will be donated to the Cotswold Care Hospice as a result of the AGM votes cast. 

We acknowledge that financial matters for the majority of people are complex and often difficult to understand.  We believe we have a responsibility to improve peoples awareness of financial matters and have therefore developed various initiatives.

As many of you will know, we have the Stroud & Swindon air balloon which visits balloon festivals and a number of schools.  These visits are linked to the school curriculum so that children not only have an enjoyable experience but also learn the theory of flight.  From these initial contacts with schools, we propose to develop these relationships and to support the provision of financial education to better enable children to learn how to manage their personal finances.

Improving financial capability is one of the objectives of the Financial Services Authority.  We have therefore been happy to support this initiative with a number of our managers visiting people in their workplace to provide information and advice on financial matters. 

All the surveys we conduct clearly show our members feel that we provide a very high level of service.  I would like therefore to pay tribute to the very committed and professional team of staff throughout the Society.  I know that our staff take a great deal of pride in the service they give to our members.  We also have a number of people working in support functions without whom our frontline customer service staff would not be able to deliver the level of service they do. 

We take our responsibilities in respect of the environment very seriously. A project team has been formed to develop an environmental policy and to ensure that we can minimise our impact on the environment.

For example we have installed more energy efficient IT equipment. Our new Customer Contact Centre employs movement detection lighting which only comes on when staff are in the office. We have reduced the level of water usage in Head Office and following a survey of the amount of waste we produce, are now negotiating with a waste disposal firm to ensure that as much of this as possible is recycled in the most efficient manner. All used printer cartridges are recycled.

We recognise that our people are our most important asset and these are just some of the initiatives that we have been pursuing during 2007.

We have invested a considerable amount of time and energy in developing our leadership and management team and were delighted to see this recognised through a highly successful reaccreditation of the Investors in People award for the fifth time and, in particular, a positive acknowledgement of the improvement in our leadership and management capabilities.
 
We have made significant improvements in the way we reward and review the performance of our staff and managers and everyone now works within a framework of behaviours which support our values.
 
The wellbeing of our staff is also very important to us and in 2007 we ran a very successful Healthy Workplace Scheme in conjunction with Stroud District Council which saw nearly a quarter of our staff sign up for some sort of health initiative.
 
Another successful collaboration with our communities was the launch of our Scholarship Scheme.  We have employed two local youngsters on a two year scheme which will see them build an indepth understanding of our business and gain a degree level qualification.
 
Our people strategy was further acknowledged by the National Business Awards when we reached the finals of the Employer of the Year Award for the South West Region at our first attempt.

In conclusion, as a mutual building society we recognise that our purpose is to maximise value for members.  This value is in the service we provide, the competitive products we offer, the trusted relationships we develop with our members, and our commitment to supporting our local communities.