Arbuthnot Banking - Final Results for the year to 31 December 2016 London Stock Exchange
RNS Number : 2538A
Arbuthnot Banking Group PLC
23 March 2017
 

23 March 2017

For immediate release

 

ARBUTHNOT BANKING GROUP ("Arbuthnot", "the Group" or "ABG")

Audited Final Results for the year to 31 December, 2016

 

Group well capitalised for next phase of growth

 

Arbuthnot Banking Group today announces a profit for the year of £228m.

 

Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited and has an 18.6% shareholding in Secure Trust Bank PLC.

 

FINANCIAL HIGHLIGHTS

 

·      Profit for the year £228m (2015: £27m)

·      Gain realised from sale of Everyday Loans and Secure Trust Bank shares of £228m

·      Profit before tax on continuing operations £0.2m (2015: Loss of £2.6m)

·      Underlying profit before tax £4m (2015: £3m)

·      Special dividends paid in the year 325p per share

·      Operating income increased by 20% to £41.5m (2015: £34.6m)

·      Earnings per share 1127.2p (2015: 86.3p)

·      Final dividend per share 18p (2015: 17p), an increase of 6%

·      Total dividend per share 356p (2015: 29p)

·      Underlying net assets increased by 90% to £234m (2015: £124m)

·      Net assets per share 1534p (2015: 1253p), an increase of 23%

·      Return on equity 88% (2015: 15%)

·      Underlying return on deployed equity 9.6% (2015: 9.2%)

 

OPERATIONAL HIGHLIGHTS

 

Arbuthnot Latham

·      Profit before tax £9.1m (2015: £6m) an increase of 51%

·      Net client margin steady at between 4.2% and 4.5%

·      Customer loans balances up 23% to £759m  (2015: £619m)

·      Written loan volume increased 39% to £227m (2015: £164m)

·      Customer deposits approaching £1bn increasing 11% to £998m (2015: £897m)

·      Assets under management increased to £920m (2015: £793m)

·      Number of private bankers 36 (2015: 28)

·      Number of commercial bankers 15 (2015: 2)

·      Purchased Duncan Lawrie loan portfolio £45m

·      Purchased 20 King Street office building £53m

·      Agreed the acquisition of Renaissance Asset Finance approx. £55m customer loans

(with completion expected in the next few weeks)

 

Secure Trust Bank - Associated Undertaking

·      Shareholding reduced to 18.6%

·      Treated as an associated undertaking due to significant influence via three board members

·      Reported £2.1m of profit from associates from 15 June 2016

·      Underlying share of full year profit of £3.6m

 

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "This has been a momentous and highly profitable year for Arbuthnot Banking Group. We have completed a number of major corporate transactions which have transformed the Group and set it on a new path of development. The capital generated by these corporate transactions will allow Arbuthnot Latham to develop overtime into a more significant Private and Commercial Bank."

 

ENQUIRIES:

 

Arbuthnot Banking Group

0207 012 2400

Sir Henry Angest, Chairman and Chief Executive

 

Andrew Salmon, Chief Operating Officer

 

James Cobb, Group Finance Director

 

 

 

Stifel Nicolaus Europe Ltd trading as KBW (Nomad and Joint Broker)

0207 710 7600

Robin Mann

 

Gareth Hunt

 

Stewart Wallace

 

 

 

Numis Securities Ltd (Joint Broker)

0207 260 1000

Chris Wilkinson

 

Andrew Holloway

 

 

 

Bell Pottinger (Financial PR)

0203 772 2588

Ben Woodford

 

Dan de Belder

 

Sam Cartwright

 

 

The 2016 Annual Report and Notice of Meeting will be posted and available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 7 April 2017.  Copies may be obtained from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.

 

 

Consolidated statement of comprehensive income

 

 

 

 

 

*Re-presented

 

 

 

Year ended 31 December

 

 

 

2016

2015

 

Note

 

£000

£000

Interest income

8

 

38,071

32,801

Interest expense

 

 

(7,626)

(7,990)

Net interest income

 

 

30,445

24,811

Fee and commission income

9

 

11,430

9,999

Fee and commission expense

 

 

(425)

(206)

Net fee and commission income

 

 

11,005

9,793

Operating income

 

 

41,450

34,604

Net impairment loss on financial assets

10

 

(474)

(1,284)

Profit from associates

26

 

2,145

 -  

Other income

11

 

3,169

 -  

Operating expenses

12

 

(46,111)

(35,926)

Profit / (loss) before tax from continuing operations

 

 

179

(2,606)

Income tax (expense) / credit

13

 

(720)

121

Loss after tax from continuing operations

 

 

(541)

(2,485)

Profit from discontinued operations after tax

14

 

228,110

29,009

Profit for the year

 

 

227,569

26,524

Other comprehensive income

 

 

 

 

Items that are or may be reclassified to profit or loss

 

 

 

 

Available-for-sale reserve

 

 

(2,377)

1,559

Available-for-sale reserve - Associate

 

 

(389)

 -  

Tax on other comprehensive income

 

 

456

(262)

Other comprehensive income for the period, net of tax

 

 

(2,310)

1,297

Total comprehensive income for the period

 

 

225,259

27,821

 

 

 

 

 

Profit attributable to:

 

 

 

 

Equity holders of the Company

 

 

166,143

12,726

Non-controlling interests

 

 

61,426

13,798

Profit for the year

 

 

227,569

26,524

 

 

 

 

 

Total comprehensive income attributable to:

 

 

 

 

Equity holders of the Company

 

 

164,320

14,023

Non-controlling interests

 

 

60,939

13,798

Total comprehensive income for the period

 

 

225,259

27,821

 

 

 

 

 

Earnings per share for profit attributable to the equity holders of the Company during the year

 

 

 

 

(expressed in pence per share):

 

 

 

 

Basic earnings per share - Continuing operations

16

 

(3.7)

(16.9)

Basic earnings per share - Discontinued operations

16

 

1,130.9

103.2

Basic earnings per share

16

 

1,127.2

86.3

 

 

 

 

 

Diluted earnings per share - Continuing operations

16

 

(3.7)

(16.6)

Diluted earnings per share - Discontinued operations

16

 

1,130.4

99.9

Diluted earnings per share

16

 

1,126.7

83.3

* Prior year numbers have been re-presented for discontinuing operations (see note 14).

Consolidated statement of financial position

 

 

 

 

At 31 December

 

 

 

2016

2015

 

Note

 

£000

£000

ASSETS

 

 

 

 

Cash and balances at central banks

17

 

195,752

368,611

Loans and advances to banks

18

 

36,951

28,578

Debt securities held-to-maturity

19

 

107,300

87,728

Assets classified as held for sale

14

 

118,456

Derivative financial instruments

20

 

1,516

1,490

Loans and advances to customers

21

 

758,799

1,579,512

Other assets

23

 

11,939

16,894

Financial investments

24

 

2,145

2,685

Deferred tax asset

25

 

1,665

1,784

Interests in associates

26

 

82,574

943

Intangible assets

27

 

8,522

10,874

Property, plant and equipment

28

 

4,782

14,004

Investment property

29

 

53,339

Total assets

 

 

1,265,284

2,231,559

EQUITY AND LIABILITIES

 

 

 

 

Equity attributable to owners of the parent

 

 

 

 

Share capital

35

 

153

153

Retained earnings

36

 

235,567

123,330

Other reserves

36

 

(1,362)

34

Non-controlling interests

 

 

67,887

Total equity

 

 

234,358

191,404

LIABILITIES

 

 

 

 

Deposits from banks

30

 

3,200

55,305

Derivative financial instruments

20

 

227

135

Deposits from customers

31

 

997,649

1,929,838

Liabilities relating to assets classified as held for sale

14

 

8,700

Current tax liability

 

 

147

3,366

Other liabilities

32

 

17,082

31,977

Debt securities in issue

33

 

12,621

10,834

Total liabilities

 

 

1,030,926

2,040,155

Total equity and liabilities

 

 

1,265,284

2,231,559

Chairman's statement

 

I am pleased to report that 2016 for Arbuthnot Banking Group ("ABG" or "the Group") has been a momentous year. We have completed a number of major corporate transactions that have not only transformed the Group, but also set it on a new and exciting path of development that I expect to be as successful in the future as it has been in the past. I should remind the shareholders though that we take a long term view.

 

The Group has made a profit for the year of £228m when the impact of the sale of 30% of Secure Trust Bank ("STB") is factored in, while the Group has reported a profit before tax of £0.2m on the continuing operations.

 

In the past I have commented on the complexities of the ever changing accounting conventions, so I will refrain from doing so again, but suffice to say £228m of profit for a Group that started the year with shareholder funds of £191m is a remarkable result and one that I expect in time will transform the Group. Six years ago the Group had net assets per share of £2.28 and this has risen nearly 7 fold to £15.34 per share and that is after paying special dividends of £3.25.

 

The sale of a substantial proportion of our stake in STB was a decision that we considered carefully and on balance it seemed this was the right time to allow both of the Group's banks to develop along their own chosen paths.

 

STB, despite its significant history that dates back over 60 years, has been seen by the market and commentators to be in the new category of banks collectively known as "Challenger Banks". They have come to prominence since the financial crisis and indeed several of them have only been created since that time. STB, along with the other Challengers has grown quickly, promoted competition in the market place and attracted customers with their new images and fresh approach to banking.  However, to keep taking advantage of the opportunities that exist they need to have access to the financial markets to supply capital to maintain the organic growth rates and to allow corporate or inorganic deals to be done.

 

We had seen over time that STB had developed an exceptional list of shareholders on its register and many of them were supportive of Paul Lynam's (the CEO) plans, so we decided it was appropriate for ABG to reduce its stake and for STB to seek admission to the Main London Stock Market, which it achieved in October last year. Needless to say, we wish them every success, not least because we remain an 18.6 % shareholder.

 

The sale of the shares has led to STB being deconsolidated from the Group and resulted in a significant increase in the capital resources of the remaining business. This capital we plan to deploy in diversifying Arbuthnot Latham ("AL) into the broader financial services markets, while at the same time remaining entrepreneurial and open to other opportunities. This development took several steps forward during the year. The Commercial Bank that we started to build in 2015 ended the year with 15 bankers and has now extended coverage into the South West and North West. The division has seen its lending balances grow to £76m by the year end and also has a healthy pipeline of approved lending which should see the business grow substantially in 2017.

 

In June we completed the purchase of 20 King Street, a well-known office site in the West End. While currently occupied by a tenant, it is our intention to create a small suite of offices from where the Private Bankers would be able to meet clients in the West End.

 

At the end of the year AL was able to announce that it had purchased the private banking loan book from Duncan Lawrie. The portfolio was purchased at a discount and should allow us to attract a number of new banking clients, following the decision by Duncan Lawrie to close its banking operations.

 

Finally, we reached an agreement with the shareholders of Renaissance Asset Finance to acquire their lending business. The business provides lending solutions mainly to high net worth individuals and businesses seeking to purchase assets and equipment with relatively short term financing arrangements. This will be very complementary to our existing lending business and will open up new distribution channels for the Group.

 

While these transactions should go some way to demonstrating our ambitions to grow, Arbuthnot Latham will remain a specialist bank for the time being, rather than a "challenger", as I fear the only banks that they will be able to challenge will be themselves, until the regulatory and business landscape becomes more favourable and promotes competition among all of the banks, both big and small, on a level playing field.

 

I would like to mention that while we intend to reinvest the capital that we have created during 2016 and indeed feel confident that over the long term we can fully deploy this capital into businesses that can generate returns at or around 20%, we also remain cognisant that ultimately we conduct our business on behalf of our loyal shareholders. I am therefore pleased to report that over and above our normal dividends we were able to pay two special dividends during the year. The first was for 25p and the second 300p, which has allowed the shareholders directly to benefit from the corporate transactions that we have completed in the year.

As I reflect on 2016 I cannot do so without commenting on the result of the referendum. Being Swiss born, I believe that true democracy can only lie in the hands of the people; their voice was heard loudly that day. As I commented last year, I believe the City to be a resilient and a dynamic place and both it and the rest of the UK economy will quickly respond to the new opportunities that will open up when Britain finally exits the European Union and becomes an independent and sovereign state again.

 

Board Changes and Personnel

During the year the following changes to the ABG Board occurred. Sir Alan Yarrow joined the Board on 10 June as an Independent Non Executive, while on 5 May, Ruth Lea retired after 11 years of distinguished service. She will, however, still be connected with the Group, remaining as its Economic Advisor. On 6 May Ian Henderson joined the Board as an Executive Director in his capacity as the Chief Executive of Arbuthnot Latham. At the same time James Fleming stood down from the Board to take the role of Vice Chairman for Arbuthnot Latham. Finally, Paul Lynam became a Non-Executive Director of the Board following the reduction in ownership of Secure Trust Bank. I welcome the new directors and I thank the retiring directors for their contributions.

 

I would like to thank my colleagues on the Board for their generous and continued support and for the dedication they have shown to the Group.

 

The performance of the Group also reflects the hard work and commitment of the members of staff.  On behalf of the Board I extend our thanks to all of them for their dedicated efforts in 2016.

 

Dividend

The Board is proposing a final dividend of 18p, an increase of 1p on last year. Along with the normal interim dividend of 13p and the two special dividends of 25p and 300p respectively, this gives a total dividend for the year of 356p (2015: 29p).  Excluding the special dividends the annual dividends would be 31p, which is an increase of 2p.

 

If approved, the dividend will be paid on 12 May 2017 to shareholders on the register at close of business on 18 April 2017.

 

Outlook

The short term global economic outlook remains uncertain. The US has a new President in the form of Donald Trump, who seems to be taking a significantly more protectionist stance on the US economy. On the other hand he has made encouraging noises about reduction in taxes and regulation. However, the jury remains out for the time being. Meanwhile, Britain will soon trigger Article 50 and begin the process of exiting the European Union. At the same time populist politics is beginning to spread across Europe, which leaves the European political project exposed to the risk of being forced into making some fundamental changes, while monetary union appears more and more untenable.

 

ABG however, though not entirely immune to the global-economic and geo political headwinds, remains well capitalised and more importantly has become a group that can attract high quality staff, thus we remain optimistic for our future prospects.

 

Strategic Report

 

 

 

 

 

Business Review - Private Banking - Arbuthnot Latham

 

 

 

 

2016

2015

Operating income

£41.8m

£35.1m

Other income

£4.4m

£1.9m

Operating expenses

£36.6m

£29.7m

Profit before tax

£9.1m

£6.0m

Customer loans

£758.8m

£618.9m

Customer deposits

£997.6m

£896.8m

Total assets

£1,199.2m

£1,004.4m

Assets under management

£919.8m

£738.8m

Customer net margin

4.4%

4.3%

Loan to deposit ratio

76.0%

69.0%

 

Arbuthnot Latham and Co., Limited ("AL" or "the Bank") has reported a profit before tax of £9.1m (2015: £6.0m), which is an increase of 51% on the previous year. This confirms that the continued investments being made in the Bank are showing returns. However, much of the cost of the investments this year, which totalled £1.4m, were covered by the gain that the Bank enjoyed following the acquisition of Visa Europe by Visa Inc. Our share of this transaction realised £1.6m. Thus, the underlying profit for the year was £8.8m compared to £7.8m in 2015.

 

More importantly, the balance sheet continued to demonstrate good growth. Customer loans increased by 23% to end the year at £759m (2015: £619m) and deposits are rapidly approaching the £1bn milestone, ending the year at £998m (2015: £897m). To facilitate this growth, the Bank has received further capital support totalling £22m from its parent Arbuthnot Banking Group PLC ("ABG"), which has continued to invest during the year, such that the net assets or capital of the Bank  has increased by 54% to close the year at £81m (2015: £52m).

 

The Bank has continued its plan to diversify into other areas of financial services and has taken significant steps in developing its commercial banking proposition. From a standing start in September 2015 the Commercial Bank has now recruited 31 staff with plans to expand this to approximately 50 staff by the end of 2017. Initially, the coverage was aimed at London and the South East, but this has now extended to the South West, with five staff to operate from Exeter and Bristol and also the North West with a team of five in Manchester. The team in Manchester has recently moved into our new premises in the building previously occupied by the Bank of England at 82 King Street. The teams seek to provide a "high touch relationship service" to mainly owner managed commercial clients, with sector coverage in Media and Real Estate and a specialist team which looks after trading businesses in sectors such as Healthcare, Legal Services and Private Education.

 

The Commercial Banking division has seen its lending balances grow to £76m by the year end with corresponding deposits reaching £51m. In addition, the division also has a healthy pipeline of approved lending that should see the business grow substantially in 2017. It would appear that our new Commercial Banking proposition resonates well in the market, with many experienced bankers joining the team over the last 12 months, all of whom we have attracted from larger, more well-known commercial banks. With a strong new business pipeline, the proposition is also clearly working well with our target client market place.

 

In the meantime, the Private Bank has continued to develop as planned. The number of private bankers now stands at 36 and the business continues to attract clients interested in our three main product offerings. The Private Banking loan book grew to £683m (2015: £619m) during the year and deposits were £947m (2015:£897m), an increase of 6%. During 2016 the investment management industry saw much volatility in all the main investment markets, caused initially by the mining and natural resources sectors reaching their floors. This was then followed by the Brexit vote. Despite all of this market turmoil, the investment management business was able to grow its assets under management ("AUMs") by 25% to close the year at £920m.

 

The office in Dubai has continued to perform well, despite the impact that the prolonged reduction in the value of oil has had on the region. It contributed £0.9m to the profits of the Bank and has introduced £64m of deposits, £74m of loans and £60m of AUMs to date.

 

As indicated several times in the past year and a half, the Bank has been pursuing a strategy of diversification and this was accelerated in 2016 by the finalisation of three transactions.

 

Firstly, the Bank bought the long leasehold of 20 King Street, a prominent office building in the heart of the West End at a cost of £53.3m including all associated transaction costs. This building is currently fully occupied but in time it is expected to be partly used as a West End office for the Bank. The remaining space will continue to be offered as a prime office location.

 

Secondly, the Bank was approached by Duncan Lawrie to help it in its plans to close its private banking business and return its banking licence. Duncan Lawrie had identified AL as a suitable home for its existing clients that offered a full private banking suite and high quality of service. As part of this process we were able to reach an agreement to purchase the existing loan portfolio for approximately £45m, with certain deferred items to be factored in. This represented a discount of 5% on the par value of the loans.  The portfolio has now been fully transferred to AL and is expected to be a good source of new introductions to the clients of Duncan Lawrie as they wind down their deposit portfolio.

 

Finally, AL reached agreement with the shareholders of Renaissance Asset Finance ("RAF") to acquire the whole of its lending business. RAF currently offers financing solutions mainly to high net worth individuals and businesses seeking to purchase high value cars and other equipment. The loan portfolio currently stands at £55m and is expected to be part of the Group's balance sheet around the end of the first quarter of 2017. This transaction remains subject to certain completion conditions, principally the regulatory approvals required. This business will open up new distribution channels to the Bank and should form the base from which the Bank can develop further lending products for the asset backed financing markets.

 

The transformation of the Bank has not only been via the corporate transactions and developing the Commercial Bank. The operational transformation project will also reach a significant milestone during 2017, with the implementation of the Bank's new operating system. The Oracle platform known as "Flexcube" is expected to go live in the second quarter of 2017 and will provide a robust and scalable platform to support the growth of the Bank for many years to come.

 

 

Strategic Report - Financial Review

 

Arbuthnot Banking Group adopts a pragmatic approach to risk taking and seeks to maximise long term revenues and returns. Given its relative size, it is nimble and able to remain entrepreneurial and capable of taking advantage of favourable market opportunities when they arise.

 

The Group provides a range of financial services to clients and customers in its chosen markets of Private and Commercial Banking. The Group's revenues are derived from a combination of net interest income from lending, deposit taking and treasury activities, fees for services provided and commission earned on the sale of financial instruments and products.

 

Highlights

 

 

 

2016

2015

Summarised Income Statement

£000

£000

Net interest income

30,445

24,811

Net fee and commission income

11,005

9,793

Operating income

41,450

34,604

Profit from associates

2,145

 -  

Other income

3,169

 -  

Operating expenses

(46,111)

(35,926)

Impairment losses - financial investments

(47)

(34)

Impairment losses - loans and advances to customers

(427)

(1,250)

Profit before tax from continuing operations

179

(2,606)

Income tax expense

(720)

121

Profit after tax from continuing operations

(541)

(2,485)

Profit from discontinued operations after tax

228,110

29,009

Profit for the year

227,569

26,524

 

 

 

Basic earnings per share (pence) - Continuing operations

(3.7)

(16.9)

Basic earnings per share (pence) - Discontinuing operations

1,130.9

103.2

Basic earnings per share (pence)

1,127.2

86.3

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Retail Banking Associate

Group Centre

Arbuthnot Banking Group

31 December 2016

£000

£000

 

£000

Profit before tax from continuing operations

9,053

2,145

(11,019)

179

ABG Group bonuses relating to sale of ELL

 -  

 -  

2,304

2,304

STB full year equivalent associate income*

 -  

1,732

 -  

1,732

AL realised profit on AFS investment (Visa)

(1,624)

 -  

 -  

(1,624)

AL investment in operating systems

21

 -  

 -  

21

AL commercial banking investment

999

 -  

 -  

999

AL acquisition costs

398

 -  

 -  

398

Underlying profit

8,847

3,877

(8,715)

4,009

 

 

 

 

 

Underlying basic earnings per share (pence) - Continuing operations

 

 

 

17.1

Underlying basic earnings per share (pence)

 

 

 

1,148.1

 

 

 

 

 

* - STB associate income adjustment (excl. ELL & bonuses relating to ELL sale) as if received from 1 January 2016 and not as currently included from 16 June 2016 (pro forma basis).

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Retail Banking Associate

Group Centre

Arbuthnot Banking Group

31 December 2015

£000

£000

£000

£000

Profit before tax from continuing operations

5,998

 -  

(8,604)

(2,606)

STB full year equivalent associate income*

 -  

3,714

 -  

3,714

AL investment in operating systems

1,123

 -  

 -  

1,123

AL commercial banking

333

 -  

 -  

333

Acquisition costs

418

 -  

 -  

418

Underlying profit

7,872

3,714

(8,604)

2,982

 

 

 

 

 

Underlying basic earnings per share (pence) - Continuing operations

 

 

 

13.5

Underlying basic earnings per share (pence)

 

 

 

116.7

 

 

 

 

 

* - STB associate income adjustment (excl. ELL) as if received from 1 January 2015.

 

Once again the results of the Group are not immediately easy to interpret from the face of the profit and loss. The profit before tax from continuing operations for 2016 is £0.2m, which compares to a loss of £2.6m in the prior year. However, these results have been adjusted to exclude the consolidated results for STB, which became an associated company on 15 June following the sale of 6m STB shares by the Group. The profit on the sale of these shares, the profit on the sale of Everyday Loans and the trading performance of ELL up to 13 April and STB up to 15 June have all been included in the discontinued operations after tax line.

 

Once these are included in the results, the Group has made a profit for the year of £227.6m (2015: £26.5m), which is almost an eight fold increase. It is also more than the net assets of the Group at the start of 2016.

 

Clearly these results are significantly influenced by the outcome of the corporate transactions, so perhaps a better indication of the financial performance of the Group is given by the underlying profit measure. Thus, the underlying profit of ABG for 2016 was £4m compared to £3m in 2015, which is a 33% increase during 2016.

 

The total Basic Earnings per share ("EPS") of the Group have increased by 1206% to 1127.2p (2015: 86.3p), with an underlying total Basic EPS increasing by 884% to 1148.1p (2015: 116.7p). Underlying Basic EPS on continuing operations has increased by 27% to 17.1p (2015: 13.5p).

 

Operating income for the year reached £41.5m, an increase of 20% on the prior year (2015: £34.6). This increase was largely as a result of increased customer lending balances, which saw a corresponding level of growth in the balance sheet of Arbuthnot Latham. Net interest income now represents 73% of total operating income compared to the prior year level of 72%.

 

This year's income statement includes £2.1m profit from Associate. This represents the Group's share (18.6%) of the profit after tax of Secure Trust Bank, which is now classified as an associated undertaking. This method of accounting for the investment that ABG retains in Secure Trust is determined by the fact that ABG is deemed to have "significant influence" over Secure Trust by way of three directors of Secure Trust also being directors of Arbuthnot Banking Group. The profit from Associate is recorded from 15 June to 31 December 2016 and a full year effect is adjusted in the underlying profit reconciliation table, on a pro forma basis.

 

The Group's expense base increased to £46.1m (2015: £35.9m), an increase of 28%; however, this does include a number of exceptional bonus payments that were payable in relation to the profit generated on the sale of Everyday Loans, which was completed in April 2016. This payment totalled £2.3m and when the expense base is adjusted for these costs, the annual increase is 22%. The Group expense base includes a significant amount of expenditure, well in excess of £1m, that relates to investment in developing the Commercial Banking business, which is expected to generate profits in future years. Impairment losses on loans and advances to customers declined to £0.4m (2015: £1.3m) as the business continued to work its way out of a small number of remaining legacy cases. The loss rate has now fallen to 7bps on the total lending book.

 

Overall, the Return on Equity of the Group was 88.4% (2015: 14.6%). This result was somewhat distorted by the large transactions which leaves the Group now in a position with significant surplus capital, even after paying 356p per share of dividends.  It is expected that the Group will over time deploy the surplus capital into new and existing businesses at returns greater than 20%.

 

Balance Sheet Strength

 

 

 

2016

2015

Summarised Balance Sheet

£000

£000

Assets

 

 

Loans and advances to customers

758,799

1,579,512

Liquid assets

340,003

484,917

Other assets

166,482

167,130

Total assets

1,265,284

2,231,559

 

 

 

Liabilities

 

 

Customer deposits

997,649

1,929,838

Other liabilities

33,277

110,317

Total liabilities

1,030,926

2,040,155

Equity

234,358

191,404

Total equity and liabilities

1,265,284

2,231,559

 

During the year total assets reduced to £1.3bn (2015: £2.2bn), largely as a result of the removal of Secure Trust Bank from the balance sheet, apart from the remaining value of the investment in associate. However, the underlying growth of the balance sheet was in excess of 20% by measuring the growth in customer balances in Arbuthnot Latham.

 

Throughout the year the balance sheet remained almost entirely funded by customer deposits. However, the Group has continued to access other sources of liquidity as they become available. The Group has £109m of assets available for use in the Funding for Lending Scheme ("FLS") and the newly announced Term Funding Scheme ("TFS").

 

The net assets of the Group closed the year at £234m (2015: £191m), which is an increase of 23%. However, this does not fully explain the movement. Included in the prior year net assets was £68m of Non-Controlling Interests, which related to the minority shareholders of Secure Trust. This element was removed when STB was deconsolidated. So, on an adjusted basis, the net assets related to the shareholders of ABG have increased by £111m, an increase of 90%. This is also after payments of £52m in dividends during the year.

 

The net assets now stand at approximately £15.34 per share.

 

Segmental Analysis

The segmental analysis is shown in more detail in Note 42. The operating segments are Arbuthnot Latham and Co., Limited and Retail Banking Associate (being the Group's 18.6% investment in Secure Trust Bank). Group costs and intercompany elimination journals are shown separately to reconcile back to Group consolidated results.

 

The analysis presented below, and in the business review, is before any consolidation adjustments to reverse the impact of the intergroup operating activities and also intergroup recharges and is a fair reflection of the way the Directors manage the Group.

 

Arbuthnot Latham

 

 

 

2016

2015

Summarised Income Statement

£000

£000

Net interest income

30,771

25,283

Net fee and commission income

11,005

9,793

Operating income

41,776

35,076

Other income

4,353

1,894

Operating expenses

(36,602)

(29,722)

Impairment losses - financial investments

(47)

 -  

Impairment losses - loans and advances to customers

(427)

(1,250)

Profit before tax

9,053

5,998

 

The profit before tax for the year was reported as £9.1m (2015: £6.0m). This was an increase of 51%. The one off gain received from the sale of Visa shares of £1.6m was largely offset by continued investment in the development of the Commercial Bank.

 

The operating income of the Bank increased by 19% largely due to the increase in customer loan balances, as the Bank becomes more led by its lending proposition, rather than fee based revenue streams.

 

During the year the monthly net client margin ranged between 4.2% and 4.5%, which was in line with the prior year.

 

Operating expenses have increased during the year by 23% to reach £36.6m (2015: £29.7m). This was largely as a result of additional hiring, mainly within the Commercial Bank and also some additional private bankers.

 

Impairment losses on loans declined from £1.3m to £0.4m, as the legacy book continues to be resolved.

 

 

2016

2015

Summarised Balance Sheet

£000

£000

Assets

 

 

Loans and advances to customers

758,799

618,902

Liquid assets

339,989

344,856

Other assets (including Group balances)

100,374

40,691

Total assets

1,199,162

1,004,449

 

 

 

Liabilities

 

 

Customer deposits

997,649

896,766

Other liabilities (including Group balances)

120,815

55,330

Total liabilities

1,118,464

952,096

Equity

80,698

52,353

Total equity and liabilities

1,199,162

1,004,449

 

Total customer assets increased by 23% to close the year at £759m (2015: £619m). However, total volume of loans written in the year increased to £227m, which was an increase of 39% on the prior year (this excludes the purchase of the Duncan Lawrie loan portfolio of £43m). Despite this significant increase, the business did experience a lengthening of time between the approval of the loans in principle and the final drawdown of the loan. This may be due to a number of factors, but the most significant is the impact of the increase in stamp duty changes on expensive properties.

 

The business also has a healthy pipeline of approved lending which should see the business grow substantially in 2017.

 

Overall, the loan book remains well secured with an average LTV of 45% (2015: 46%). Other assets increased by approximately £60m due to the purchase of the property at 20 King Street in the West End. The deposits of the Bank almost reached £1bn for the first time in the Bank's history, closing the year at £998m (2015: £897m), an increase of 11%.

 

The net assets of the Bank now stand at £81m (2015: £52m), an increase of 54%, as the Parent made further capital contributions of £22m to facilitate additional growth. This was also supplemented by the organically generated retained reserves that arise from the net earnings in the year. As a result, Arbuthnot Latham had a total capital ratio of 12.3% (2015: 10.4%) and a core tier 1 ratio of 12.3% (2015: 10.4%).

 

The investment management business was able to grow its assets under management by 25% from £739m to close the year at £920m.

 

Group & Other Costs

 

 

 

2016

2015

Summarised Income Statement

£000

£000

Net interest income

26

(148)

Subordinated loan stock interest

(352)

(324)

Operating income

(326)

(472)

Other income

120

 -  

Operating expenses

(10,813)

(8,098)

Impairment loss on financial investments

 -  

(34)

Profit after tax

(11,019)

(8,604)

 

Total Group costs increased from £8.6m to £11m as a result of the payment of exceptional bonuses related to the gain (£117m) generated by the successful completion of the disposal of Everyday Loans. The bonuses totalled £2.3m. The Group centre continues to oversee the Group operations, in particular the remaining investment in Secure Trust.

 

Capital

The Group's capital management policy is focused on optimising shareholder value over the long term. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.

 

The Group's lead regulator, the Prudential Regulation Authority ("PRA"), sets and monitors capital requirements for the Group as a whole and for the individual banking operations. The lead regulator adopted the Basel III capital requirements with effect from 1 January 2014. As a result, the Group's regulatory capital requirements have been based on Basel III since 2014.

 

In accordance with the EU's Capital Requirements Directive ("CRD") and the required parameters set out in the PRA Handbook (BIPRU 2.2), the Individual Capital Adequacy Assessment Process ("ICAAP") is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary.  However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. The Group's regulated entities are also the principal trading subsidiaries as detailed in Note 41.

 

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar 1 plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations deliver a sufficient capital sum adequate to cover management's anticipated risks. Where the Board considers that the Pillar 1 calculations do not reflect the risk, an additional capital add-on in Pillar 2 is applied, as per the Individual Capital Guidance ("ICG") issued by the PRA.

 

The Group's regulatory capital is divided into two tiers:

• Tier 1 comprises mainly shareholders' funds and revaluation reserves, after deducting goodwill, other intangible assets and the 

  deduction for a significant investment in a financial institution (STB). The portion of the investment up to 10% of ABG's Tier 1

  is added back to capital resources and then risk weighted at 250%.

• Lower Tier 2 comprises qualifying subordinated loan capital and collective provisions. Lower Tier 2 capital cannot exceed 50%

  of Tier 1 capital.

 

The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. All regulated trading entities have complied with all of the externally imposed capital requirements to which they are subject.

 

 

2016

2015

Capital ratios

£000

£000

Core Tier 1 capital

234,087

191,404

Deductions

(67,639)

(33,921)

Tier 1 capital after deductions

166,448

157,483

Tier 2 capital

12,621

12,865

Total capital

179,069

170,348

 

 

 

Core Tier 1 capital ratio (Net Core Tier 1 capital/Basel III Total Risk Exposure)

28.0%

11.7%

Total Capital Ratio (Capital/Basel III Total Risk Exposure)

30.1%

12.6%

 

Risks and Uncertainties

The Group regards the monitoring and controlling of risks and uncertainties as a fundamental part of the management process.  Consequently, senior management are involved in the development of risk management policies and in monitoring their application.  A detailed description of risk management and the associated policies is set out in note 6 to the financial statements.

 

The principal risks inherent in the Group's business are strategic, credit, market, liquidity, operational, cyber, conduct and regulatory.

 

Strategic risk

Strategic risk is the risk that may affect the Group's ability to achieve its corporate and strategic objectives. This risk is important to the Group as it continues its growth strategy. However, the Group seeks to mitigate strategic risk by focusing on a sustainable business model which is aligned to the Group's business strategy. Also, the Board of Directors meets once a year to hold a two day board meeting to ensure that the Group's strategy is appropriate for the market and economy.

 

Credit risk

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due.  This risk exists in Arbuthnot Latham & Co., Limited, which currently has a loan book of £759m. The lending portfolio in Arbuthnot Latham is extended to private banking clients and the majority is secured against cash, property or other assets. Credit risk is managed through the Credit Committee of Arbuthnot Latham.

 

Market risk

Market risk arises in relation to movements in interest rates, currencies and equity markets. The Group's treasury function operates mainly to provide a service to clients and does not take significant unmatched positions in any market for its own account.  As a result, the Group's exposure to adverse movements in interest rates and currencies is limited to interest earnings on its free cash and interest rate re-pricing mismatches. The Group also has an 18.6% interest in Secure Trust Bank PLC. There is currently the risk that a permanent or prolonged reduction in the share price could lead to an impairment of the interest in associate currently carried at £81.7m. Going forward if the Group was considered to no longer have significant influence it would lead to the investment being accounted for as an available-for-sale financial investment. The value would then be marked to market with changes in the share price giving rise to gains or losses being recorded in Other Comprehensive Income or Profit or Loss (see note 3.8 (d), note 3.10 (b) and note 4.1 (d)).

 

The Group is exposed to changes in the market value of commercial properties to the extent that the Group holds Investment Property carried at fair value. The current carrying value of Investment Property is £53.3m. Any changes in the market value of the commercial property will be accounted for in Profit or Loss and as such could have a material impact on the Profit or Loss of the Group.

 

Liquidity risk

Liquidity risk is the risk that the Group cannot meet its obligations as they fall due. The Group takes a conservative approach to managing its liquidity profile. It has placed no reliance on the wholesale lending markets and is almost entirely funded by retail customer deposits.  The loan to deposit ratios are maintained at prudent levels. Following introduction of the new liquidity regime (Liquidity Coverage Ratio), which came into force on 1 October 2010, the Group maintains liquidity asset buffers which comprise high quality, unencumbered assets such as Government Securities, which can be called upon to meet the Group's liabilities.

 

Operational risk

Operational risk is the risk that the Group may be exposed to financial losses from conducting its business. The Group is exposed to operational risks from its Information Technology and Operations platforms. There are additional internal controls in these processes that are designed to protect the Group from these risks. The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance section of the Annual Report.

 

Cyber risk

An increasing risk that the Group is subject to within its operational processes is cyber risk. This is the risk that the businesses within the Group are subject to some form of disruption arising from an interruption to its IT and data infrastructure.

 

Conduct risk

As a financial services provider we face conduct risk, including selling products to customers which do not meet their needs; failing to deal with customers' complaints effectively; not meeting customers' expectations; and exhibiting behaviours which do not meet market or regulatory standards.

 

The Group adopts a zero risk appetite for any unfair customer outcomes. It maintains clear compliance guidelines and provides ongoing training to all staff.  Periodic spot checks and internal audits are performed to ensure these guidelines are being maintained.  The Group also has insurance policies in place to cover any claims that may arise.

 

Regulatory risk

Regulatory compliance risk is the risk that the Group will have insufficient capital resources to support the business or does not comply with regulatory requirements. The Group adopts a conservative approach to managing the capital of the Group. The principal regulated entity maintains capital ratios in excess of the minimum level set by the regulator. Capital requirements are forecast as part of the annual budgeting process and these are regularly monitored.  Annually, the Group Board assesses the robustness of the capital requirements as part of the ICAAP, where stringent stress tests are performed to ensure that capital resources are adequate over a three year horizon.

 

Regulatory change also exists as a risk to the Group's business. Notwithstanding the assessments carried out by the Group to manage regulatory risk, it is not possible to predict how regulatory and legislative changes may alter and impact the business. Significant and unforeseen regulatory changes may reduce the Group's competitive situation and lower its profitability.

 

Macroeconomic and competitive environment

The Group is also exposed to indirect risks that may arise from the macroeconomic and competitive environment. The economic environment is relatively stable in the UK. However, the international landscape is increasingly uncertain. The declining performance of the economies in the EU and the increasingly protectionist stance being taken by other major economies may have an adverse affect on the UK. In particular, this may cause a softening of central London property prices, which may spread out further to the South East.

 

The Group monitors its exposure to future interest rate rises and currently has minimal lending to customers in products that would be directly sensitive to interest rate rises. However, at the current levels of interest rates, the affordability enjoyed by the Group's customers is beneficial.

 

Brexit

It is currently difficult to analyse the impacts that Brexit may have on Arbuthnot Banking Group. However, our only overseas operation is in Dubai, so the vast majority of the Group's income and expenditure is based in the UK. It is therefore anticipated that the financial impact would be minimal assuming there were to be no significant macro economic shock on the UK.

 

 

Group Directors' Report

 

The Directors submit their annual report and the audited consolidated financial statements for the year ended 31 December 2016.

 

Principal Activities and Review

The principal activities of the Group are banking and financial services. A strategic review in accordance with Section 414 C of the Companies Act 2006 forming part of this report is set out on pages 4 to 12.

 

Results and Dividends

The results for the year are shown on page 1. The profit after tax for the year of £227.6m (2015: £26.5m) is included in reserves.

 

The Directors recommend the payment of a final dividend of 18p on the ordinary shares which, together with the interim dividend of 13p paid on 30 September 2016, special dividend of 25p paid on 27 July and special dividend of 300p paid on 18 November 2016, represents total dividends for the year of 356p (2015: 29p). The final dividend, if approved by members at the Annual General Meeting, will be paid on 12 May 2017 to shareholders on the register at close of business on 18 April 2017.

 

Going Concern

After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see note 6) and capital resources (see note 7), the directors are satisfied that the Company and the Group have adequate resources to continue in operation for the foreseeable future.  The financial statements are therefore prepared on the going concern basis.

 

Share Capital

Shareholders will be asked to approve Ordinary and Special Resolutions regarding the creation of a number of new shares, which may be non-voting shares, not exceeding 5% of the existing issued share capital, with authority given to the directors to allot such shares. Directors would use the authority to generate additional capital from institutional shareholders.

 

Shareholders will also be asked to approve a Special Resolution renewing the authority of the Directors to make market purchases of shares not exceeding 10% of the existing issued share capital. The Directors will keep the position under review in order to maximise the Company's resources in the best interests of shareholders.

 

Secure Trust Bank PLC

Following approval given by shareholders on 14 June 2016, the Company completed the sale of 6,000,000 ordinary shares in Secure Trust Bank PLC at a price of £25 per share. This reduced the Company shareholding in Secure Trust Bank PLC from 51.9 per cent to 18.9 per cent. Subsequently the shareholding has reduced to 18.6 per cent following the issue of further shares by Secure Trust Bank PLC to participants in its share option scheme.

 

Financial Risk Management

Details of how the Group manages risk are set out in in the Strategic Report and in note 6.

 

Substantial Shareholders

The Company was aware at 21 March 2017 of the following substantial holdings in the ordinary shares of the Company, other than those held by one director shown below:

 

Holder

 

Ordinary Shares

%

Liontrust UK Smaller Companies Fund

1,119,607

7.3

Prudential plc

 

608,890

4.0

Mr. R Paston

 

529,130

3.5

 

 

 

 

Directors

 

 

 

Sir Henry Angest

Chairman & CEO

J R Cobb

Finance Director

I A Dewar

 

 

 

J W Fleming (to 14/04/2016)

 

 

I A Henderson (from 06/05/2016)

 

 

Ms R J Lea (to 05/05/2016)

 

 

P A Lynam

 

 

 

Sir Christopher Meyer

 

 

 

A A Salmon

Chief Operating Officer

Sir Alan Yarrow (from 10/06/2016)

 

 

 

All those who are currently directors served throughout the year except for Mr. I.A. Henderson who was appointed on 6 May 2016 and Sir Alan Yarrow who was appointed on 10 June 2016. Mr. J.W. Fleming served as a director until 14 April 2016. Ms R.J Lea retired from the Board at the Annual General Meeting on 5 May 2016.

 

Mr. Henderson, who succeeded Mr Fleming as chief executive of Arbuthnot Latham & Co., Limited, and Sir Alan Yarrow offer themselves for election under Article 75 of the Articles of Association. Mr. Henderson has a service agreement terminable on twelve months' notice. Sir Alan Yarrow's letter of appointment is terminable on three months' notice.

 

Mr. Salmon and Mr. Lynam retire under Article 78 of the Articles of Association and, being eligible, offer themselves for re-election. Mr. Salmon has a service agreement terminable on twelve months' notice. Mr. Lynam, a non-executive director who remains chief executive of Secure Trust Bank PLC, has a letter of appointment terminable on three months' notice.

 

According to the information kept under Section 3 of the Disclosure and Transparency Rules 2006 and the Market Abuse Regulation 2016, the interests of directors and their families in the ordinary 1p shares of the Company at the dates shown were, and the percentage of the current issued share capital held is, as follows:

 

Beneficial Interests

1 January 2016

31 December 2016

21 March 2017

%

Sir Henry Angest

8,200,901

8,200,901

8,200,901

53.7

J.R. Cobb

 -  

5,000

6,000

 -  

P.A. Lynam

10,000

10,000

10,000

0.1

A.A. Salmon

51,699

51,699

51,699

0.3

 

At the yearend, Mr. Lynam held 9,110 and Mr. Salmon held 7,500 ordinary 40p shares in Secure Trust Bank PLC, an associate company of the Group.

 

On 16 April 2013 Mr. Salmon and Mr. Cobb were granted options under the Company's Unapproved Executive Share Option Scheme to subscribe between April 2016 and April 2021 for 100,000 and 50,000 ordinary 1p shares respectively in the Company at 930p. The fair value of the options at grant date was £125,000. On 14 June 2016 Mr. Salmon and Mr. Cobb each exercised all their respective options granted on 16 April 2013. The exercise price was 1591p and the Board agreed to make a cash settlement rather than allot new shares.

 

On 1 April 2014 Mr. Fleming was granted an option to subscribe between April 2017 and April 2022 for 50,000 ordinary 1p shares in the Company at 1185p. The fair value of the options at the grant date was £53,000.

 

At the date of this remuneration report, the only outstanding options to directors under the Unapproved Executive Share Option Scheme are those in relation to 50,000 shares for James Fleming.

 

On 14 June 2016 Mr. Salmon, Mr. Cobb and Mr. Henderson were granted phantom options to subscribe for 200,000, 100,000 and 100,000 ordinary 1p shares respectively in the Company at 1591p.   50% of each director's individual holding of phantom options is exercisable at any time after 15 June 2019 and the other 50% is exercisable at any time after 15 June 2021.  These options replaced options for Mr. Salmon to subscribe for 100,000 ordinary 1p shares and Mr. Cobb to subscribe for 50,000 ordinary 1p shares granted on 16 April 2013 subject to a cash payment reflecting the difference between 930p and 1591p per share.  The fair value of the option at the grant date was £1.3m.

 

Mr. Lynam continues to hold options granted to him on 2 November 2011 to subscribe for 141,667 ordinary 40p shares in Secure Trust Bank PLC (an associate company of the Group), under the Unapproved Executive Share Option Scheme established in November 2011,  at 720p between 2 November 2016 and 2 November 2021. The fair value of the options at grant date was £0.3m. On 7 November 2016 Mr. Salmon exercised options granted to him on 2 November 2011 to subscribe for 141,667 ordinary 40p shares in Secure Trust Bank PLC at 720p and sold the shares at a price of 2200p.

 

On 23 March 2015 Mr. Lynam was granted phantom options to acquire 187,500 ordinary 40p shares in Secure Trust Bank PLC at 2500p exercisable on or after 3 November 2018 when a cash payment would be made equal to any increase in value.

 

Apart from the interests disclosed above, no director was interested at any time in the year in the share capital of Group companies.

 

No director, either during or at the end of the financial year, was materially interested in any contract with the Company or any of its subsidiaries or associated companies, which was significant in relation to the Group's business. At 31 December 2016 two directors had loans from Arbuthnot Latham & Co., Limited amounting to £1,361,000 and one director had a loan from Secure Trust Bank PLC amounting to £404,000, on normal commercial terms as disclosed in note 40 to the financial statements. At 31 December 2016 five directors had deposits with Arbuthnot Latham & Co., Limited amounting to £3,398,000 and two directors had deposits with Secure Trust Bank PLC amounting to £318,000, all on normal commercial terms as disclosed in note 40 to the financial statements.

 

Shareholders will be asked to approve a Special Resolution removing the limit on the amount of fees payable to non-executive directors, currently £400,000.   The corresponding Article regarding the remuneration of executive directors contains no such limit. Responsibilities of non-executive directors have increased significantly in recent years with further obligations falling on those who serve on board committees.  Removal of the limit would increase the flexibility of the Board, not least if it is felt appropriate to make any additional appointment between Annual General Meetings.

 

Shareholders will also be asked to approve a Special Resolution amending the Articles relating to the function of the President, to widen the role, with the objective of safeguarding the long term prosperity and well being of the Company.

 

The Company maintains insurance to provide liability cover for directors and officers of the Company.

 

Board Committees

The report of the Remuneration Committee on pages 21 to 22 will be the subject of an Ordinary Resolution at the Annual General Meeting.

 

Information on the Audit, Nomination, Risk and Political Donations Committees is included in the Corporate Governance section of the Annual Report on pages 17 to 20.

 

As explained in the Corporate Governance section of the Annual Report, the Board now maintains direct responsibility for issues of risk, as responsibility for large lending proposals has become a direct responsibility of its subsidiary, Arbuthnot Latham & Co., Limited.

 

Employees

The Company gives due consideration to the employment of disabled persons and is an equal opportunities employer.  It also regularly provides employees with information on matters of concern to them, consults on decisions likely to affect their interests and encourages their involvement in the performance of the Company through share participation and in other ways.

 

Political Donations

The Company made political donations of £67,000 to the Conservative Party during the year (2015: £68,000).

 

The Board proposes to update the authority granted by shareholders at the 2015 Annual General Meeting to make donations to political parties and organisations or incur political expenditure within the meaning of Sections 363 to 365 of the Companies Act 2006 for a further four years limited to £250,000 in aggregate.

 

Branches outside of the UK

During the year Arbuthnot Latham & Co., Ltd operated a branch in Dubai which is regulated by the Dubai Financial Services Authority.

 

Events after the balance sheet date

There were no material post balance sheet events to report.

 

Auditor

A resolution for the re-appointment of KPMG LLP as auditor will be proposed at the forthcoming Annual General Meeting at a fee to be agreed in due course by the directors. 

 

Statement of Disclosure of Information to Auditors

The Directors confirm that:

 

• so far as each director is aware, there is no relevant audit information of which the Company's auditor is unaware; and

• the Directors have taken all the steps they ought to have taken as directors to make themselves aware of any relevant audit

  information and to establish that the Company's auditor is aware of that information.

 

This confirmation is given and shall be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

Corporate Governance

 

Introduction and Overview

Arbuthnot Banking Group has a strong and effective Corporate Governance framework. This section of the Report and Accounts summarises key elements of the governance arrangements applicable to the Company and the Company's compliance with the UK Corporate Governance Code.

 

As an AIM company, the Group is not bound by the UK Corporate Governance Code; however, the Board endorses the principles of openness, integrity and accountability, which underlie good corporate governance and takes into account the provisions of the UK Corporate Governance Code in so far as they are considered appropriate to the Group's size and circumstances. Moreover, the Group contains subsidiaries authorised to undertake regulated business under the Financial Services and Markets Act 2000, which are regulated by the Prudential Regulatory Authority and the Financial Conduct Authority, one of which is an authorised deposit-taking business. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such businesses.

 

The Group is led by an effective Board which comprises four executive directors, three independent non-executive directors and one additional non-executive director.

 

Sir Henry Angest is the Chairman of the Group. The Chairman sets the culture of the Group and his role is to ensure good corporate governance. His responsibilities include leading the Board, ensuring the effectiveness of the Board in all aspects of its role, ensuring effective communication with shareholders, setting the Board's agenda and ensuring that all Directors are encouraged to participate fully in the activities and decision-making process of the Board.

 

Ruth Lea retired from the Board on 5 May 2016. Sir Alan Yarrow was appointed on 10 June 2016 as an independent non-executive director of the Company. Sir Alan has joined the Audit, Nomination and Remuneration Committees. Paul Lynam was appointed to the Board when Secure Trust Bank PLC ("STB") was a subsidiary of the Group, and remains a director of the Group, in a non-executive role, as well as Chief Executive of STB, following the reduction in the Group's holding in STB to 18.9%. 

 

Ian Henderson succeeded James Fleming as Chief Executive of Arbuthnot Latham & Co., Limited and joined the Board on 6 May 2016. James Fleming retired from the Board on 14 April 2016.

 

The directors seeking re-election are Andrew Salmon and Paul Lynam, who have served on the Board for 13 years and 6 years respectively. The contribution of Andrew Salmon as Chief Operating Officer has been invaluable in the successful development of the Company. Paul Lynam provides an important independent measure of challenge to executive management.  Accordingly, the Board fully supports the resolutions for their reappointment. 

 

In 2016, the Board commissioned KPMG to carry out an independent Board Effectiveness Review. The Directors were satisfied with the conduct and outcome of the review, which was completed at the end of April and have taken steps to implement its recommendations.

 

The Board

At the year end the Board comprised Sir Henry Angest, Andrew Salmon, James Cobb, Ian Henderson and four non-executive directors.

 

The Board meets regularly throughout the year, holding six formal meetings during the year as well as a two day strategy meeting. Substantive agenda items have briefing papers, which are circulated in a timely manner before each meeting. The Board ensures that it is supplied with all the information that it requires and requests, in a form and of a quality to fulfil its duties.

 

In addition to determining and overseeing the implementation of the strategy and management of the Company and of the Group, the Board has determined certain items which are reserved for decision by itself. These matters include the acquisition and disposal of other than minor businesses, the issue of capital by any Group company, monitoring overall regulatory requirements of its subsidiary companies, and their adherence thereto, and any transaction by a subsidiary company that cannot be made within its own resources or that is not in the normal course of its business.

 

The Company Secretary is responsible for ensuring that the Board processes and procedures are appropriately followed and support effective decision making. All directors have access to the Company Secretary's advice and services. There is an agreed procedure for directors to obtain independent professional advice in the course of their duties, if necessary, at the Company's expense.

All directors receive induction training upon joining the Board, with individual AIM training provided by the Company's Nominated Adviser and regulatory and compliance training provided by the Group Head of Compliance.

 

Board Committees

The Board has established Audit, Nomination and Remuneration Committees, each with formally delegated duties and responsibilities and with written terms of reference, which require consideration of the committee's effectiveness. The Board keeps the governance arrangements under review. Further information in relation to these committees is set out below. The Board now maintains direct responsibility for issues of Risk without the need for its own Risk Committee, since responsibility for large lending proposals became a direct responsibility of its subsidiary, Arbuthnot Latham & Co., Limited.

 

Audit Committee

Membership and meetings

The Audit Committee assists the Board in, inter alia, discharging its responsibilities with regard to financial reporting, external and internal audits and controls, including reviewing the Company's annual financial statements, reviewing and monitoring the extent of the non-audit work undertaken by external auditors, advising on the appointment, reappointment, removal and independence of external auditors and reviewing the effectiveness of the Company's internal audit activities, internal controls, whistleblowing procedures and the process for evaluating and monitoring risk. The ultimate responsibility for reviewing and approving the annual report and accounts and the half-yearly reports remains with the Board.

 

Membership of the Audit Committee is restricted to non-executive directors and comprises Ian Dewar (as Chairman), Sir Christopher Meyer and Sir Alan Yarrow. The Committee met four times during the year.

 

The present auditors have held office since 2009, but the senior statutory auditor changed in 2013. The Board is satisfied with the effectiveness of their audit. The Committee received a report showing the level of non-audit services provided by the external auditors during the year and members were satisfied that this did not infringe auditor independence.

 

Activity in 2016

Further information in relation to this is set out in the Internal Control and Financial Reporting section at page 19.

 

Nomination Committee

Membership and meetings

The Nomination Committee assists the Board in discharging its responsibilities relating to the composition of the Board. The Nomination Committee is responsible for, inter alia, evaluating the balance of skills, experience, independence and knowledge on the Board, the size, structure and composition of the Board, retirements and appointments of additional and replacement directors and will make appropriate recommendations to the Board on such matters. The Nomination Committee also considers succession planning, taking into account the skills and expertise that will be needed on and beneficial to the Board in the future.

 

The Nomination Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Sir Alan Yarrow. The Committee met twice during the year. It is required to meet formally at least once per year and otherwise as required.

 

Activity in 2016

During the year, the Nomination Committee was involved in the identification, assessment and appointment of an additional independent Non-Executive Director. This culminated in the recommendation of the Nomination Committee that Sir Alan Yarrow be appointed as a director of the Company. It also reviewed the terms of service of the Group Finance Director. It has recently reviewed and reconfirmed Sir Christopher Meyer's independence.

 

Remuneration Committee

Membership and meetings

The Remuneration Committee assists the Board in determining its responsibilities in relation to remuneration including, inter alia, in relation to the Company's policy on executive remuneration determining the individual remuneration and benefits package of each of the Executive Directors, and the fees for Non-Executive Directors.

 

The Committee also deals with remuneration-related issues under the Prudential Regulation Authority's Remuneration Code applicable to the Company.

 

The Remuneration Committee meets formally at least once per year and otherwise as required.

 

Information on the Remuneration Committee and details of the Directors' remuneration are set out in the separate Remuneration Report.

 

Donations Committee

Membership and meetings

The Donations Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Sir Alan Yarrow. The Committee met once during the year. The Committee considers any political donation or expenditure as defined within sections 366 and 367 of the Companies Act 2006.

 

Shareholder Communications

The Company maintains ongoing communications with its major shareholders and makes full use of the Annual General Meeting and other General Meetings (when held) to communicate with investors. The Company aims to present a balanced and understandable assessment in all its reports to shareholders, its regulators, other stakeholders and the wider public. Key announcements and other information can be found at www.arbuthnotgroup.com.

 

Internal Control and Financial Reporting

The Board of directors has overall responsibility for the Group's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable but not absolute assurance against the risk of material misstatement or loss.

 

The Directors and senior management of the Group have formally adopted a Group Risk and Controls Policy which sets out the Board's attitude to risk and internal control. Key risks identified by the Directors are formally reviewed and assessed at least once a year by the Board. In addition, key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention.

 

Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are well-established budgeting procedures in place and reports are presented regularly to the Board detailing the results, in relation to Arbuthnot Latham & Co., Limited, of each principal business unit, variances against budget and prior year, and other performance data.

 

The effectiveness of the internal control system is reviewed regularly by the Board and the Audit Committee, which also receives reports of reviews undertaken by the internal audit function, which was carried out internally during 2016. Internal Audit provides the Audit Committee and the Board with detailed independent and objective assurance on the effectiveness of governance, operational risk management and internal controls.  Since Arbuthnot Latham & Co., Limited established its own Audit Committee, the role of the Group Audit Committee has been mainly supervisory in relation to internal audit matters.

 

The Audit Committee also receives reports from the external auditors, KPMG LLP, which include details of internal control matters that they have identified as part of the annual statutory Financial Statement audit. The ICAAP and ILAAP are considered key issues and are reviewed in detail by the Arbuthnot Latham & Co., Limited Board and its Risk Committee. The Board receives reports on these by exception. Certain aspects of the system of internal control are also subject to regulatory supervision, the results of which are monitored closely by the Board.

 

Statement of Directors' Responsibilities in Respect of the Strategic Report and the Directors' Report and the Financial Statements

The Directors are responsible for preparing the Strategic Report, the Directors' Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent Company financial statements on the same basis.

 

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to:

 

• select suitable accounting policies and then apply them consistently;

 

• make judgments and estimates that are reasonable and prudent;

 

• state whether they have been prepared in accordance with IFRSs as adopted by the EU; and

 

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent 

  Company will continue in business.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

 

Remuneration Report

 

Remuneration Committee

Membership of the Remuneration Committee is limited to non-executive directors together with Sir Henry Angest as Chairman. The present members of the Committee are Sir Henry Angest, Sir Christopher Meyer and Sir Alan Yarrow. The Committee met twice during the year.

 

The Committee has responsibility for producing recommendations on the overall remuneration policy for directors for review by the Board and for setting the remuneration of individual directors. Members of the Committee do not vote on their own remuneration.

 

Remuneration Policy

The Remuneration Committee determines the remuneration of individual directors having regard to the size and nature of the business; the importance of attracting, retaining and motivating management of the appropriate calibre without paying more than is necessary for this purpose; remuneration data for comparable positions, in particular the rising remuneration packages at the challenger banks; the need to align the interests of executives with those of shareholders; and an appropriate balance between current remuneration and longer-term performance-related rewards. The remuneration package can comprise a combination of basic annual salary and benefits (including pension), a discretionary annual bonus award related to the Committee's assessment of the contribution made by the executive during the year and longer-term incentives, including executive and phantom share options. Pension benefits take the form of annual contributions paid by the Company to individual money purchase schemes. The Remuneration Committee reviews salary levels each year based on the performance of the Group during the preceding financial period. This review does not necessarily lead to increases in salary levels. For the purposes of the FCA Remuneration Code, all applicable provisions of which have been implemented, the Group and its subsidiary are considered to be Tier 3 institutions.

 

Directors' Service Contracts

Sir Henry Angest, Andrew Salmon, James Cobb and Ian Henderson each have service contracts terminable at any time on 12 months' notice in writing by either party.

 

Long Term Incentive Schemes

This part of the remuneration report is audited information.

 

At the Annual General Meeting in May 2015, shareholders voted by Ordinary Resolution to extend the Company's Unapproved Executive Share Option Scheme for a further period of 10 years.

 

On 14 June 2016, the Company announced a phantom share option scheme, intended to replace the Unapproved Executive Share Option Scheme. The value of each phantom option is related to the market price of an ordinary share of 1p in the Company. An increase in the market value of an ordinary share of 1p in the Company over the market value per share at the date of grant of the phantom option will give rise to an entitlement to a cash payment by the Company on the exercise of a phantom option ('Phantom Option Scheme').

 

The Company has an ESOP ('the Arbuthnot ESOP Trust') under which trustees may purchase shares in the Company to satisfy the exercise of share options by employees, including executive directors. 150,500 shares are held in the Arbuthnot ESOP Trust.

 

On 16 April 2013 Mr. Salmon and Mr. Cobb were granted options under the Company's Unapproved Executive Share Option Scheme to subscribe between April 2016 and April 2021 for 100,000 and 50,000 ordinary 1p shares respectively in the Company at 930p. The fair value of the options at grant date was £125,000. On 14 June 2016 Mr. Salmon and Mr. Cobb each exercised all their respective options granted on 16 April 2013. The exercise price was 1591p and the Board agreed to make a cash settlement rather than allot new shares.

 

On 1 April 2014 Mr. Fleming was granted an option to subscribe between April 2017 and April 2022 for 50,000 ordinary 1p shares in the Company at 1185p. The fair value of the options at the grant date was £53,000.

 

At the date of this remuneration report, the only outstanding options to directors under the Unapproved Executive Share Option Scheme are those in relation to 50,000 shares for James Fleming.

 

On 14 June 2016 Mr. Salmon was granted phantom options pursuant to the Phantom Option Scheme to acquire 200,000 ordinary 1p shares in the Company at 1591p exercisable in respect of 50% on or after 15 June 2019 and in respect of the remaining 50% on or after 15 June 2021 when a cash payment would be made equal to any increase in market value. On 14 June 2016 Mr. Cobb and Mr. Henderson were each granted phantom options pursuant to the Phantom Option Scheme to acquire 100,000 ordinary 1p shares in the Company at 1591p exercisable in respect of 50% on or after 15 June 2019 and in respect of the remaining 50% on or after 15 June 2021 when a cash payment would be made equal to any increase in market value. The fair value of the options at the grant date was £1.3m

 

On 7 November 2016 Mr. Salmon exercised options granted to him on 2 November 2011 to subscribe for 141,667 ordinary 40p shares in Secure Trust Bank PLC at 720p (an associate company of the Group) and sold the shares at a price of 2200p.

 

Directors' Emoluments

 

 

This part of the remuneration report is audited information.

 

2016

2015

 

£000

£000

Fees (including benefits in kind)

215

70

Salary payments (including benefits in kind)

7,731

5,165

Pension contributions

119

140

Long term incentive

992

5,030

 

9,057

10,405

 

 

 

 

 

 

 

Long term

Total

Total

 

Salary

Bonus

Benefits

Pension

Fees

incentive

2016

2015

 

£000

£000

£000

£000

£000

£000

£000

£000

Sir Henry Angest

1,200

 -  

60

 -  

 -  

 -  

1,260

987

JR Cobb

550

650

17

35

 -  

331

1,583

701

IA Dewar

 -  

 -  

 -  

 -  

75

 -  

75

29

JW Fleming (to 14/04/2016)

130

 -  

5

10

 -  

 -  

145

601

IA Henderson (from 06/05/2016)

297

215

8

23

 -  

 -  

543

 -  

Ms RJ Lea (to 05/05/2016)

 -  

 -  

 -  

 -  

45

 -  

45

130

PA Lynam

550

917

10

16

 -  

 -  

1,493

1,456

Sir Christopher Meyer

 -  

 -  

 -  

 -  

60

 -  

60

55

AA Salmon

1,200

1,900

22

35

 -  

661

3,818

1,356

RJJ Wickham (to 31/12/2015)

 -  

 -  

 -  

 -  

 -  

 -  

 -  

60

Sir Alan Yarrow (from 10/06/2016)

 -  

 -  

 -  

 -  

35

 -  

35

 -  

 

3,927

3,682

122

119

215

992

9,057

5,375

 

Details of any shares or options held by directors are presented on page 14.

 

The emoluments of the Chairman were £1,260,000 (2015: £987,000). The emoluments of the highest paid director were £3,818,000 (2015: £1,456,000) including pension contributions of £35,000 (2015: £35,000).  

 

On 15 June 2016 Secure Trust Bank PLC ceased to be a subsidiary company so the salary of Mr. Lynam as its chief executive is only shown up to that date. Mr. Lynam then became a non-executive director of the Company, for which Secure Trust Bank received a fee. On 7 November 2016 Mr Salmon exercised 141,667 share options in Secure Trust Bank (currently treated as an associate company of the Group) at £7.20 and sold the shares on the same day at a price of £22, realising £2,097,000. This is also not included in the table above.

 

Retirement benefits are accruing under money purchase schemes for five directors who served during 2016 (2015: five directors).

Independent Auditor's Report

 

We have audited the financial statements of Arbuthnot Banking Group PLC for the year ended 31 December 2016 set out on pages 25 to 105. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. 

 

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.  Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed.

 

Respective responsibilities of directors and auditors

As explained more fully in the Directors' Responsibilities Statement set out on page 19, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.  Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland).  Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

 

Scope of the audit of the financial statements

A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at

www.frc.org.uk/auditscopeukprivate.

 

Opinion on financial statements

In our opinion:

 

• the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31

  December 2016 and of the Group's profit for the year then ended;

 

• the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;

 

• the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as

  applied in accordance with the provisions of the Companies Act 2006; and

 

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

 

Opinion on other matters prescribed by the Companies Act 2006

In our opinion the information given in the Strategic Report and the Directors' Report for the financial year is consistent with the financial statements.

 

Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic report and the Director' report:

 

• we have not identified material misstatements in these reports; and

 

• in our opinion, these reports have been prepared in accordance with the Companies Act 2006.

 

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

 

• adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

 

• the Parent Company financial statements are not in agreement with the accounting records and returns; or

 

• certain disclosures of directors' remuneration specified by law are not made; or

 

• we have not received all the information and explanations we require for our audit.

 

Richard Gabbertas (Senior Statutory Auditor)

for and on behalf of KPMG LLP, Statutory Auditor

Chartered Accountants

 

15 Canada Square

London

E14 5GL

22 March 2017

 

Company statement of financial position

 

 

 

 

At 31 December

 

 

 

2016

2015

 

Note

 

£000

£000

ASSETS

 

 

 

 

Loans and advances to banks

18

 

89,072

12,444

Financial investments

24

 

121

125

Deferred tax asset

25

 

397

418

Property, plant and equipment

28

 

183

204

Other assets

23

 

887

991

Interests in associates

26

 

5,056

 -  

Interests in subsidiaries

41

 

54,602

46,466

Total assets

 

 

150,318

60,648

EQUITY AND LIABILITIES

 

 

 

 

Equity

 

 

 

 

Share capital

35

 

153

153

Other reserves

36

 

(1,111)

(1,111)

Retained earnings

36

 

133,847

46,537

Total equity

 

 

132,889

45,579

LIABILITIES

 

 

 

 

Other liabilities

32

 

4,808

4,235

Debt securities in issue

33

 

12,621

10,834

Total liabilities

 

 

17,429

15,069

Total equity and liabilities

 

 

150,318

60,648

 

 

 

 

 

The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Parent Company

profit and loss account. The profit for the Parent Company for the year is presented in the Statement of Changes in Equity.

Consolidated statement of changes in equity

 

 

Attributable to equity holders of the Group

 

 

 

Share capital

Revaluation reserve

Capital redemption reserve

Available-for-sale reserve

Treasury shares

Retained earnings

Non-controlling interests

Total

 

£000

£000

£000

£000

£000

£000

£000

£000

Balance at 1 January 2016

153

98

20

1,047

(1,131)

123,330

67,887

191,404

 

 

 

 

 

 

 

 

 

Total comprehensive income for the period

 

 

 

 

 

 

 

 

Profit for 2016

 -  

 -  

 -  

 -  

 -  

166,143

61,426

227,569

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

Available-for-sale reserve - net change in fair value

 -  

 -  

 -  

(1,890)

 -  

 -  

(487)

(2,377)

Available-for-sale reserve - Associate - net change in fair value

 -  

 -  

 -  

(389)

 -  

 -  

 -  

(389)

Tax on other comprehensive income

 -  

 -  

 -  

456

 -  

 -  

 -  

456

Total other comprehensive income

 -  

 -  

 -  

(1,823)

 -  

 -  

(487)

(2,310)

Total comprehensive income for the period

 -  

 -  

 -  

(1,823)

 -  

166,143

60,939

225,259

 

 

 

 

 

 

 

 

 

Transactions with owners, recorded directly in equity

 

 

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

 

 

Equity settled share based payment transactions

 -  

 -  

 -  

 -  

 -  

(1,074)

31

(1,043)

Secure Trust Bank loss of control

 -  

(98)

 -  

525

 -  

(427)

(124,046)

(124,046)

Final dividend relating to 2015

 -  

 -  

 -  

 -  

 -  

(2,531)

(4,811)

(7,342)

Special Interim dividend relating to 2016

 -  

 -  

 -  

 -  

 -  

(3,722)

 -  

(3,722)

Interim dividend relating to 2016

 -  

 -  

 -  

 -  

 -  

(1,936)

 -  

(1,936)

Special Interim dividend relating to 2016

 -  

 -  

 -  

 -  

 -  

(44,216)

 -  

(44,216)

Total contributions by and distributions to owners

 -  

(98)

 -  

525

 -  

(53,906)

(128,826)

(182,305)

Balance at 31 December 2016

153

 -  

20

(251)

(1,131)

235,567

 -  

234,358

 

Attributable to equity holders of the Group

 

 

 

Share capital

Revaluation reserve

Capital redemption reserve

Available-for-sale reserve

Treasury shares

Retained earnings

Non-controlling interests

Total

 

£000

£000

£000

£000

£000

£000

£000

£000

Balance at 1 January 2015

153

98

20

(250)

(1,131)

114,641

60,038

173,569

 

 

 

 

 

 

 

 

 

Total comprehensive income for the period

 

 

 

 

 

 

 

 

Profit for 2015

 -  

 -  

 -  

 -  

 -  

12,726

13,798

26,524

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

Available-for-sale reserve - net change in fair value

 -  

 -  

 -  

1,297

 -  

 -  

 -  

1,297

Total other comprehensive income

 -  

 -  

 -  

1,297

 -  

 -  

 -  

1,297

Total comprehensive income for the period

 -  

 -  

 -  

1,297

 -  

12,726

13,798

27,821

 

 

 

 

 

 

 

 

 

Transactions with owners, recorded directly in equity

 

 

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

 

 

Equity settled share based payment transactions

 -  

 -  

 -  

 -  

 -  

132

87

219

Final dividend relating to 2014

 -  

 -  

 -  

 -  

 -  

(2,382)

(4,549)

(6,931)

Interim dividend relating to 2015

 -  

 -  

 -  

 -  

 -  

(1,787)

(1,487)

(3,274)

Total contributions by and distributions to owners

 -  

 -  

 -  

 -  

 -  

(4,037)

(5,949)

(9,986)

Balance at 31 December 2015

153

98

20

1,047

(1,131)

123,330

67,887

191,404

Company statement of changes in equity

 

 

Attributable to equity holders of the Company

 

 

Share capital

Capital redemption reserve

Treasury shares

Retained earnings

Total

 

£000

£000

£000

£000

£000

Balance at 1 January 2015

153

20

(1,131)

50,755

49,797

 

 

 

 

 

 

Total comprehensive income for the period

 

 

 

 

 

Profit for 2015

 -  

 -  

 -  

(87)

(87)

 

 

 

 

 

 

Other comprehensive income, net of income tax

-

-

-

-

-

Total comprehensive income for the period

 -  

 -  

 -  

(87)

(87)

 

 

 

 

 

 

 

 

 

 

 

 

Transactions with owners, recorded directly in equity

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

Equity settled share based payment transactions

 -  

 -  

 -  

38

38

Final dividend relating to 2014

 -  

 -  

 -  

(2,382)

(2,382)

Interim dividend relating to 2015

 -  

 -  

 -  

(1,787)

(1,787)

Total contributions by and distributions to owners

 -  

 -  

 -  

(4,131)

(4,131)

Balance at 31 December 2015

153

20

(1,131)

46,537

45,579

 

 

 

 

 

 

Total comprehensive income for the period

 

 

 

 

 

Profit for 2016

 -  

 -  

 -  

140,826

140,826

 

 

 

 

 

 

Other comprehensive income, net of income tax

-

-

-

-

-

Total comprehensive income for the period

 -  

 -  

 -  

140,826

140,826

 

 

 

 

 

 

Transactions with owners, recorded directly in equity

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

Equity settled share based payment transactions

 -  

 -  

 -  

(1,111)

(1,111)

Final dividend relating to 2015

 -  

 -  

 -  

(2,531)

(2,531)

Special dividend relating to 2016

 -  

 -  

 -  

(3,722)

(3,722)

Interim dividend relating to 2016

 -  

 -  

 -  

(1,936)

(1,936)

Special dividend relating to 2016

 -  

 -  

 -  

(44,216)

(44,216)

Total contributions by and distributions to owners

 -  

 -  

 -  

(53,516)

(53,516)

Balance at 31 December 2016

153

20

(1,131)

133,847

132,889

Consolidated statement of cash flows

 

 

 

 

Year ended 31 December

Year ended 31 December

 

 

 

2016

2015

 

Note

 

£000

£000

Cash flows from operating activities

 

 

 

 

Interest received

 

 

109,311

171,956

Interest paid

 

 

(19,372)

(35,040)

Fees and commissions received

 

 

37,511

15,615

Cash payments to employees and suppliers

 

 

(99,130)

(115,463)

Taxation paid

 

 

(3,020)

(7,409)

Cash flows from operating profits before changes in operating assets and liabilities

 

 

25,300

29,659

Changes in operating assets and liabilities:

 

 

 

 

 - net decrease in derivative financial instruments

 

 

66

285

 - net decrease/(increase) in loans and advances to customers

 

 

855,436

(417,814)

 - net decrease/(increase) in other assets

 

 

41,780

(118,484)

 - net (decrease)/increase in amounts due to customers

 

 

(932,189)

735,553

 - net (decrease)/increase in other liabilities

 

 

(23,595)

5,693

Net cash (outflow)/inflow from operating activities

 

 

(33,202)

234,892

Cash flows from investing activities

 

 

 

 

Disposal of financial investments

 

 

1,078

44

Purchase of computer software

27

 

(5,155)

(3,532)

Purchase of property, plant and equipment

28

 

(354)

(3,395)

Purchase of investment property

 

 

(53,339)

 -  

Proceeds from sale of Everyday Loans Group, net of cash and cash equivalents disposed

 

 

101,723

 -  

Proceeds from sale of Secure Trust Bank shares

 

 

147,999

 -  

Reduction in cash balance with deconsolidation of Secure Trust Bank

 

 

(194,344)

 -  

Purchases of debt securities

 

 

(89,384)

(145,880)

Proceeds from redemption of debt securities

 

 

69,812

149,835

Net cash outflow from investing activities

 

 

(21,964)

(2,928)

Cash flows from financing activities

 

 

 

 

(Decrease)/Increase in borrowings

 

 

(52,105)

27,648

Dividends paid

 

 

(57,215)

(10,205)

Net cash (outflow)/inflow from financing activities

 

 

(109,320)

17,443

Net (decrease)/increase in cash and cash equivalents

 

 

(164,486)

249,407

Cash and cash equivalents at 1 January

 

 

397,189

147,782

Cash and cash equivalents at 31 December

39

 

232,703

397,189

Company statement of cash flows

 

 

 

 

Year ended 31 December

Year ended 31 December

 

 

 

2016

2015

 

Note

 

£000

£000

Cash flows from operating activities

 

 

 

 

Dividends received from subsidiaries

 

 

11,468

6,648

Interest received

 

 

283

120

Interest paid

 

 

(611)

(599)

Net trading and other income

 

 

1,816

1,833

Cash payments to employees and suppliers

 

 

(10,107)

(8,718)

Taxation paid

 

 

(488)

 -  

Cash flows from operating profits/(losses) before changes in operating assets and liabilities

 

 

2,361

(716)

Changes in operating assets and liabilities:

 

 

 

 

 - net decrease/(increase) in group company balances

 

 

526

(66)

 - net decrease in other assets

 

 

104

7

 - net increase in other liabilities

 

 

48

144

Net cash inflow/(outflow) from operating activities

 

 

3,039

(631)

Cash flows from investing activities

 

 

 

 

Repayment of loans to subsidiary companies

 

 

 -  

4,500

Increase investment in subsidiary

41

 

(22,000)

(6,500)

Disposal of share in subsidiaries

41

 

147,999

 -  

Purchase of property, plant and equipment

28

 

(5)

 -  

Net cash inflow/(outflow) from investing activities

 

 

125,994

(2,000)

Cash flows from financing activities

 

 

 

 

Dividends paid

 

 

(52,405)

(4,169)

Net cash used in financing activities

 

 

(52,405)

(4,169)

Net increase/(decrease) in cash and cash equivalents

 

 

76,628

(6,800)

Cash and cash equivalents at 1 January

 

 

12,444

19,244

Cash and cash equivalents at 31 December

39

 

89,072

12,444

Notes to the Consolidated Financial Statements

 

1.  Reporting entity

Arbuthnot Banking Group PLC is a company domiciled in the United Kingdom. The registered address of the Arbuthnot Banking Group PLC is 7 Wilson Street, London, EC2M 2SN. The consolidated financial statements of the Arbuthnot Banking Group PLC as at and for the year ended 31 December 2016 comprise the Arbuthnot Banking Group PLC and its subsidiaries (together referred to as the "Group" and individually as "subsidiaries"). The Company is primarily involved in banking and financial services.

 

2.  Basis of presentation

(a) Statement of compliance

The Group's consolidated financial statements and the Company's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs as adopted and endorsed by the EU) and the Companies Act 2006 applicable to companies reporting under IFRS. 

 

The consolidated financial statements were authorised for issue by the Board of Directors on 22 March 2017.

 

(b) Basis of measurement

The consolidated and company financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, investment property, available-for-sale financial assets, financial assets and financial liabilities at fair value through profit or loss, and derivatives assets and liabilities.

 

(c) Functional and presentational currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in Pound Sterling, which is the Company's functional and the Group's presentational currency.

 

(d) Use of estimates and judgements

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

 

(e) Accounting developments

The accounting policies adopted are consistent with those of the previous financial year. There were no new or amended standards or interpretations that resulted in a change in accounting policy.

 

(f) Going concern

The financial statements have been prepared on the 'going concern' basis as disclosed in the Directors' Report.

 

3.  Significant accounting policies

 

The accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

 

3.1.  Consolidation

(a)  Subsidiaries

Subsidiaries are all investees (including special purpose entities) controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

 

The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group's shares of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income as a gain on bargain purchase.

The Parent's investments in subsidiaries are recorded at cost less, where appropriate, provisions for impairment in value.

 

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

(b) Changes in ownership and non-controlling interests

Changes in ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity transactions and no gain or loss is recognised. Adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary.

 

When control of a subsidiary is lost, the Group derecognises the assets, liabilities, non-controlling interest and all other components of equity relating to the former subsidiary from the consolidated statement of financial position. Any resulting gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is recognised at its fair value at the date when control is lost.

 

(c) Special purpose entities

Special purpose entities ("SPEs") are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets or the execution of a specific borrowing or lending transaction. SPEs are consolidated when the investor controls the investee. The investor would only control the investee if it had all of the following:

 

• power over the investee;

• exposure, or rights, to variable returns from its involvement with the investee; and

• the ability to use its power over the investee to affect the amount of the investor's returns.

 

The assessment of whether the Group has control over an SPE is carried out at inception and the initial assessment is only reconsidered at a later date if there were any changes to the structure or terms of the SPE, or there were additional transactions between the Group and the SPE.

 

(d) Associates

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method and are initially recognised at cost. The Group's investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group's share of the total comprehensive income and equity movements of equity accounted investees, from the date that significant influence commences until the date that significant influence ceases. When the Group's share of losses exceeds its interest in an equity accounted investee, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee.

 

3.2.  Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the Group Board. The Group Board, which is responsible for allocating resources and assessing performance of the operating segments, has been identified as the chief operating decision maker. All transactions between segments are conducted on an arm's length basis. Income and expenses directly associated with each segment are included in determining segment performance. There are three main operating segments:

 

• Retail Banking

• Private Banking

• Group Centre

 

3.3.  Foreign currency translation

Foreign currency transactions are translated into the functional currency using the spot exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at yearend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income. Foreign exchange differences arising from translation of available-for-sale equity instruments are recognised in Other Comprehensive Income.

 

3.4.  Interest income and expense

Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost using the effective interest method.

 

The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.

 

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the impaired carrying amount.

 

3.5.  Fee and commission income

Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accrual basis when the service has been provided.

 

Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party - such as the issue or the acquisition of shares or other securities or the purchase or sale of businesses - are recognised on completion of the underlying transaction. Asset and other management, advisory and service fees are recognised on an accruals basis as the related services are performed. The same principle is applied for financial planning and insurance services that are continuously provided over an extended period of time.

 

3.6.  Rental income

Rental income is recognised on a straight line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income over the term of the lease.

 

3.7.  Discontinued operations

A discontinued operation is a component of the Group's business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which:

• represents a separate major line of business or geographical area of operations;

• is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or

• is a subsidiary acquired exclusively with a view to re-sale.

 

Classification as a discontinued operation occurs on disposal or when the operation meets the criteria to be classified as held for sale (see note 3.14), if earlier. When an operation is classified as a discontinued operation, the comparative Statement of Comprehensive Income is re-presented as if the operation had been discontinued from the start of the comparative year.

 

3.8.  Financial assets and financial liabilities

The Group classifies financial assets and financial liabilities in the following categories: financial assets and financial liabilities at fair value through profit or loss; loans and receivables; held-to-maturity investments; available-for-sale financial assets and other financial liabilities. Management determines the classification of its investments at acquisition. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue.

 

(a) Financial assets and financial liabilities at fair value through profit or loss

This category comprises listed securities and derivative financial instruments. Derivative financial instruments utilised by the Group include embedded derivatives and derivatives used for hedging purposes. Financial assets and liabilities at fair value through profit or loss are initially recognised on the date from which the Group becomes a party to the contractual provisions of the instrument. Subsequent measurement of financial assets and financial liabilities held in this category are carried at fair value through profit or loss.

 

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable.  Loans are recognised when cash is advanced to the borrowers. Loans and receivables are carried at amortised cost using the effective interest method.

 

(c) Held-to-maturity

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group has the positive intent and ability to hold to maturity and that has not been designated at fair value through profit or loss or as available-for-sale investments. Held-to-maturity investments are carried at amortised cost using the effective interest method, less any impairment loss.

 

(d) Available-for-sale

Available-for-sale ('AFS') investments are those not classified as another category of financial assets. These include investments in special purpose vehicles and equity investments in unquoted vehicles. They may be sold in response to liquidity requirements, interest rate, exchange rate or equity price movements. AFS investments are initially recognised at cost, which is considered as the fair value of the investment including any acquisition costs. AFS securities are subsequently measured at fair value in the statement of financial position. Fair value changes on the AFS securities are recognised directly in equity (AFS reserve) until the investment is sold or impaired. Once sold or impaired, the cumulative gains or losses previously recognised in the AFS reserve are recycled to the profit or loss.

 

(e) Other financial liabilities

Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date.

 

Amortised cost measurement

The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal payments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, less any reduction for impairment.

 

Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's length basis.

 

If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis. In the instance that fair values of assets and liabilities cannot be reliably measured, they are carried at cost.

 

For measuring derivatives that might change classification from being an asset to a liability or vice versa such as interest rate swaps, fair values take into account both credit valuation adjustment (CVA) and debit valuation adjustment (DVA) when market participants take this into consideration in pricing the derivatives.

 

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the Statement of Financial Position. In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. There have not been any instances where assets have only been partially derecognised.

 

The Group derecognises a financial liability when its contractual obligations are discharged, cancelled, expire, are modified or exchanged.

 

3.9.  Derivative financial instruments and hedge accounting

All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets, including recent arm's length transactions or using valuation techniques such as discounted cash flow models. Derivatives are shown in the Statement of Financial Position as assets when their fair value is positive and as liabilities when their fair value is negative.

 

Embedded derivatives

Embedded derivatives arise from contracts ('hybrid contracts') containing both a derivative (the 'embedded derivative') and a non-derivative (the 'host contract'). Where the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract, and the host contract is not at fair value through profit or loss, the embedded derivative is bifurcated and reported at fair value and gains or losses are recognised in the Statement of Comprehensive Income.

 

3.10.  Impairment of financial assets

(a) Assets carried at amortised cost

On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired.  Objective evidence is the occurrence of a loss event, after the initial recognition of the asset, that impact on the estimated contractual future cash flows of the financial asset or group of financial assets, and can be reliably estimated.

 

The criteria that the Group uses to determine that there is objective evidence of an impairment loss include, but are not limited to, the following:

 

• Delinquency in contractual payments of principal or interest;

• Cash flow difficulties experienced by the borrower;

• Initiation of bankruptcy proceedings;

• Deterioration in the value of collateral;

• Deterioration of the borrower's competitive position;

 

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Statement of Comprehensive Income. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

 

The Group considers evidence of impairment for loans and advances at both a specific asset and collective level. All individually significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. In assessing collective impairment the Group uses historical trends of the probability of default, emergence period, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends.

 

When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the Statement of Comprehensive Income.

 

A customer's account may be modified to assist customers who are in or have recently overcome financial difficulties and have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Loans that have renegotiated or deferred terms, resulting in a substantial modification to the cash flows, are no longer considered to be past due but are treated as new loans recognised at fair value, provided the customers comply with the renegotiated or deferred terms.

 

(b) Assets classified as available-for-sale

The Group assesses at each Statement of Financial Position date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and recognised in the profit or loss. Impairment losses recognised in the profit or loss on equity instruments are reversed through other comprehensive income.

 

(c) Renegotiated loans

Loans that are neither subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. 

 

(d) Forbearance

Under certain circumstances, the Group may use forbearance measures to assist borrowers who are experiencing significant financial hardship. Any forbearance support is assessed on a case by case basis in line with best practice and subject to regular monitoring and review. The Group seeks to ensure that any forbearance results in a fair outcome for both the customer and the Group.

 

3.11.  Impairment of non-financial assets

The carrying amounts of the Group's non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. Impairment for goodwill is discussed in more detail under note 3.15.

 

3.12.  Funding for Lending Scheme

Under the applicable International Accounting Standard, IAS 39, if a security is lent under an agreement to return it to the transferor, as is the case for eligible securities lent by institutions to the Bank of England under the FLS, then the security is not derecognised because the transferor retains all the risks and rewards of ownership. The UK Treasury Bills borrowed from the Bank of England under the FLS are not recognised on the Statement of Financial Position of the institution until such time as they are subject to a repurchase agreement with a third party, as they will not meet the criteria for derecognition by the Bank of England.  When the UK Treasury Bills are pledged as part of a sale and repurchase agreement with a third party, amounts borrowed from the third party are recognised on the Statement of Financial Position.

3.13.  Inventory

Land acquired through repossession of collateral which is subsequently held in the ordinary course of business with a view to develop and sell is accounted for as inventory.

 

Inventory is measured at the lower of cost or net realisable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

 

3.14.  Assets classified as held for sale

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. These assets and liabilities are subsequently measured at the lower of its carrying amount and fair value less costs to sell. Once classified as held for sale, intangible assets and property, plant and equipment are no longer amortised or depreciated.

 

3.15.  Intangible assets

(a) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries or associates is included in 'intangible assets'. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

 

The Group reviews the goodwill for impairment at least annually or more frequently when events or changes in economic circumstances indicate that impairment may have taken place and carry goodwill at cost less accumulated impairment losses. Assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit" or "CGU"). For impairment testing purposes goodwill cannot be allocated to a CGU that is greater than a reported operating segment. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. The test for impairment involves comparing the carrying value of goodwill with the present value of pre-tax cash flows, discounted at a rate of interest that reflects the inherent risks of the CGU to which the goodwill relates, or the CGU's fair value if this is higher.

 

(b) Computer software

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives (three to ten years).

 

Costs associated with maintaining computer software programs are recognised as an expense as incurred.

 

Costs associated with developing computer software which are assets in the course of construction, which management has assessed to not be available for use, are not amortised.

 

(c) Other intangibles

Other intangibles include trademarks, customer relationships, broker relationships, technology and banking licences acquired. These costs are amortised on the basis of the expected useful lives (three to ten years).

 

3.16.  Property, plant and equipment

Land and buildings comprise mainly branches and offices and are stated at the latest valuation with subsequent additions at cost less depreciation. Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

 

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, applying the following annual rates, which are subject to regular review:

 

Freehold buildings

50 years

Office equipment

6 to 10 years

Computer equipment

3 to 5 years

Motor vehicles

4 years

 

Leasehold improvements are depreciated over the term of the lease (until the first break clause). Gains and losses on disposals are determined by deducting carrying amount from proceeds. These are included in the Statement of Comprehensive Income. Depreciation on revalued freehold buildings is calculated using the straight-line method over the remaining useful life. Revaluation of assets and any subsequent disposals are addressed through the revaluation reserve and any changes are transferred to retained earnings.

3.17.  Investment property

Investment property is initially measured at cost. Transaction costs are included in the initial measurement. Subsequently, investment property is measured at fair value, with any change therein recognised in profit and loss within other income.

 

If a change in use occurs and investment property is transferred to owner-occupied property, the property's deemed cost for subsequent reporting is its fair value at the date of change in use.

 

3.18.  Leases

(a) As a lessor

Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets are held subject to finance leases, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return.

 

Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating leases. When assets are held subject to operating leases, the underlying assets are held at cost less accumulated depreciation, The assets are depreciated down to their estimated residual values on a straight-line basis over the lease term. Lease rental income is recognised on a straight line basis over the lease term.

 

(b) As a lessee

Rentals made under operating leases are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease.

 

Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases.  Leased assets by way of finance leases are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

 

3.19.  Cash and cash equivalents

For the purposes of the Statement of Cash Flows, cash and cash equivalents comprises cash on hand and demand deposits, and cash equivalents are deemed highly liquid investments that are convertible into cash with an insignificant risk of changes in value with a maturity of three months or less at the date of acquisition.

 

3.20.  Employee benefits

(a) Post-retirement obligations

The Group contributes to a defined contribution scheme and to individual defined contribution schemes for the benefit of certain employees. The schemes are funded through payments to insurance companies or trustee-administered funds at the contribution rates agreed with individual employees.

 

The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.

 

There are no post-retirement benefits other than pensions.

 

(b) Share-based compensation

The fair value of equity settled share-based payment awards are calculated at grant date and recognised over the period in which the employees become unconditionally entitled to the awards (the vesting period). The amount is recognised as personnel expenses in the profit and loss, with a corresponding increase in equity. The Group adopts a Black-Scholes valuation model in calculating the fair value of the share options as adjusted for an attrition rate of members of the scheme and a probability of pay-out reflecting the risk of not meeting the terms of the scheme over the vesting period. The number of share options that are expected to vest are reviewed at least annually.

 

The fair value of cash settled share-based payments is recognised as personnel expenses in the profit or loss with a corresponding increase in liabilities over the vesting period. The liability is remeasured at each reporting date and at settlement date based on the fair value of the options granted, with a corresponding adjustment to personnel expenses.

 

When share-based payments are changed from equity settled to cash settled and there is no change in the fair value of the replacement award, it is seen as a modification to the terms and conditions on which the equity instruments were granted and is not seen as the settlement and replacement of the instruments. Accordingly, on the date of modification, the Group recognises the entire liability as a reclassification from equity and does not recognise any profit or loss in the Statement of Comprehensive Income.

3.21.  Taxation

Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise. Income tax recoverable on tax allowable losses is recognised as an asset only to the extent that it is regarded as recoverable by offset against current or future taxable profits.

 

Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not accounted for if it arises from the initial recognition of goodwill, the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the Statement of Financial Position date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, when they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary differences can be utilised.

 

3.22.  Issued debt and equity securities

Issued financial instruments or their components are classified as liabilities where the contractual arrangement results in the Group having a present obligation to either deliver cash or another financial asset to the holder, to exchange financial instruments on terms that are potentially unfavourable. Issued financial instruments, or their components, are classified as equity where they meet the definition of equity and confer on the holder a residual interest in the assets of the Company. The components of issued financial instruments that contain both liability and equity elements are accounted for separately with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component.

 

Financial liabilities, other than trading liabilities at fair value, are carried at amortised cost using the effective interest method as set out in policy 3.4. Equity instruments, including share capital, are initially recognised as net proceeds, after deducting transaction costs and any related income tax. Dividend and other payments to equity holders are deducted from equity, net of any related tax.

 

3.23.  Share capital

(a) Share issue costs

Incremental costs directly attributable to the issue of new shares or options or the acquisition of a business by Arbuthnot Banking Group or its subsidiaries, are shown in equity as a deduction, net of tax, from the proceeds.

 

(b) Dividends on ordinary shares

Dividends on ordinary shares are recognised in equity in the period in which they are approved.

 

(c) Share buybacks

Where any Group company purchases the Company's equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company's equity holders until the shares are cancelled or reissued.

 

3.24.  Financial guarantee and loan commitments

Financial guarantees represent undertakings that the Group will meet a customer's obligation to third parties if the customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments, however, the likely amount of loss is expected to be significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards. Liabilities under financial guarantee contracts are initially recorded at their fair value, and the initial fair value is amortised over the life of the financial guarantee. Subsequently, the financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure to settle obligations.

 

3.25.  Fiduciary activities

The Group commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Group.

 

3.26.  New standards and interpretations not yet adopted

The following standards, interpretations and amendments to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2017 or later periods, but the Group has not early adopted them:

 

• IFRS 9, 'Financial instruments' (effective from 1 January 2018). This standard deals with the classification and measurement of financial assets and will replace IAS 39. Phase one of this standard deals with the classification and measurement of financial assets and represents a significant change from the existing requirements in IAS 39. The standard contains three primary measurement categories for financial assets: 'amortised cost', 'fair value through other comprehensive income' and 'fair value through profit or loss' and eliminates the existing categories of 'held to maturity', 'available for sale' and 'loans and receivables'. Phase two of the standard covers impairment, with a new expected loss impairment model that will require expected credit losses to be accounted for from when financial instruments are first recognised and lowers the threshold for the recognition of full lifetime expected losses. Phase three covers general hedge accounting and introduces a substantially reformed model for hedge accounting with enhanced disclosure about risk management activity. The new model aligns the accounting treatment with risk management activities.

 

• IFRS 15, 'Revenue from contracts with customers' (effective 1 January 2017). This standard establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. This standard is unlikely to have a material impact on the Group. (This standard has not yet been endorsed by the EU.)

 

• IFRS 16, 'Leases' (effective from 1 January 2019). The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract i.e. the customer ('lessee') and the supplier ('lessor'). IFRS 16 replaces the previous leases Standards, IAS 17 Leases, and related Interpretations. IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a lessee. Instead all leases are treated in a similar way to finance leases applying IAS 17. Leases are 'capitalised' by recognising the present value of the lease payments and showing them either as lease assets (right-of-use assets) or together with property, plant and equipment. If lease payments are made over time, a company also recognises a financial liability representing its obligation to make future lease payments. The most significant effect of the new requirements in IFRS 16 will be an increase in lease assets and financial liabilities. Accordingly, for companies with material off balance sheet leases, there will be a change to key financial metrics derived from the company's assets and liabilities (for example, leverage ratios).

4.  Critical accounting estimates and judgements in applying accounting policies

 

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

 

4.1 Estimation uncertainty

(a) Credit losses

The Group reviews its loan portfolios and held-to-maturity investments to assess impairment at least on a quarterly basis. The basis for evaluating impairment losses is described in accounting policy 3.10. Where financial assets are individually evaluated for impairment, management uses their best estimates in calculating the net present value of future cash flows. Management has to make judgements on the financial position of the counterparty and the net realisable value of collateral (where held), in determining the expected future cash flows.

 

The discounted recoverable amount is typically dependent on the sale of a property. The amount recoverable is determined with reference to:

 

• The property valuation, which is typically updated every 12 months.

• The time taken to realise the sale proceeds (UK property is assumed to take 12 months and Non-UK property 18 months).

• The property marketing costs (UK property is assumed to be at 3% of property value and Non-UK at 7%).

• The legal costs of sale (UK legal sales costs are assumed to be £5k, whilst Non-UK are assumed to be €10k).

 

Any change in timing of estimated future cash flows (other than impairment) will adjust carrying value with gain or loss in profit or loss. The revised carrying amount will be recalculated by discounting the revised estimated future cash flows at the portfolios original effective interest rate.

 

In determining whether an impairment loss should be recorded in the Statement of Comprehensive Income, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans or held-to-maturity investments with similar credit characteristics, before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the Group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

 

In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate.

 

(b) Deferred tax on carried forward losses

The Group is subject to direct and indirect taxation in a number of jurisdictions. There may be some transactions and calculations for which the ultimate tax determination has an element of uncertainty during the ordinary course of business. The Group recognises liabilities based on estimates of the quantum of taxes that may be due. Deferred tax assets on carried forward losses are recognised where it is probable that future taxable profits will be available to utilise it. Where the final tax determination is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax expense in the year in which the determination is made.

 

(c) Effective Interest Rate

Acquired loan books are initially recognised at fair value. Subsequently they are measured under the effective interest rate method, based on cash flow models which require significant judgement assumptions on the interest rates, prepayment rates, the probability and timing of defaults and the amount of incurred losses. Management review the expected cash flows against actual cash flows to ensure future assumptions on customer behaviour and future cash flows remain valid. If the estimates of future cash flows are revised, the adjustment to the carrying value of the loan book is recognised in the Statement of Comprehensive Income.

 

IAS 39 requires interest earned from lending to be measured under the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset.

 

Management must therefore use judgement to estimate the expected life of each instrument and hence the expected cash flows relating to it. The accuracy of the effective interest rate would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.

 

(d) Impairment of equity securities

A significant or prolonged decline in the fair value of an equity security is objective evidence of impairment. The Group regards a decline of more than 20 percent in fair value as "significant" and a decline in the quoted market price that persists for nine months or longer as "prolonged".

 

(e) Investment property

The valuation that the Group places on its investment property is subject to a degree of uncertainty and is made on the basis of assumptions in relation to prevailing market rents and effective yields. These assumptions may not prove to be accurate, particularly in periods of market volatility. The main lease ends in 2019. The offices will be refurbished and re-let at prevailing market rents.

 

The valuation model considers the net present value of net cash flows to be generated from the property, taking into account expected rental growth rate, void periods, occupancy rate, lease incentive costs such as rent-free periods and other costs not paid by tenants. The expected net cash flows are discounted using risk-adjusted discount rates. Among other factors, the discount rate estimation considers the quality of a building and its location, tenant quality and lease terms. Due to the current sub-market rental achieved and the fact that the future refurbishment works will improve the quality of the building (in a desirable location), it is expected that the risk-adjusted discount rate will decrease. Management judgement is required for significant unobservable inputs used in the discounted cash flow model, which have been assessed as follows:

 

• refurbishment period: 6 months

• void period after refurbishment: 6 months

• rent free period: 6 months

• estimated refurbishment costs: £2.4m

• risk adjusted discount rate: 3.75%

• expected rental uplift following re-let: 22%

• occupancy rates: 95%

 

(f) Share option scheme valuation

The valuation of the cash settled Share Option Scheme was determined at 31 December 2016 using a Black-Scholes valuation model. In the opinion of the directors the terms of the scheme are such that there remain a number of key uncertainties to be considered when calculating the probability of pay-out, which are set out below. The Directors also considered the probability of option holder attrition prior to the vesting dates, details of which are also set out below.

 

Uncertainties in the regulatory environment continue. Any tightening of capital requirements will impact on the ability of the Company to exploit future market opportunities and furthermore may inhibit its ability to maintain the required growth in distributions. Taking these into account, the probability of pay-out has been judged as 100%.

 

The Directors consider that there is some uncertainty surrounding whether the participants will all still be in situ and eligible at the vesting date. Therefore the directors have assumed a 91% attrition rate for the share options vesting in June 2019 and 85% attrition rate for the share options vesting in June 2021.

 

4.2 Judgements

(a) Valuation of financial instruments

The Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions. If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis. The objective of valuation techniques is to determine the fair value of the financial instrument at the reporting date as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In the instance that fair values of assets and liabilities cannot be reliably measured, they are carried at cost.

 

The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:

 

• Level 1: Quoted prices in active markets for identical assets or liabilities.

• Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e.

  as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active

  markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active;

  or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.

• Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs

  not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category

  includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable

  adjustments or assumptions are required to reflect differences between the instruments.

 

The consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads, assist in the judgement as to whether a market is active. If in the opinion of management, a significant proportion of the instrument's carrying amount is driven by unobservable inputs, the instrument in its entirety is classified as valued using significant unobservable inputs. 'Unobservable' in this context means that there is little or no current market data available from which to determine the level at which an arm's length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).

 

The tables below analyse financial instruments measured at fair value by the level in the fair value hierarchy into which the measurement is categorised:

 

 

Level 1

Level 2

Level 3

Total

At 31 December 2016

£000

£000

£000

£000

ASSETS

 

 

 

 

Derivative financial instruments

 -  

1,516

 -  

1,516

Financial investments

133

 -  

2,012

2,145

Asset

133

1,516

2,012

3,661

LIABILITIES

 

 

 

 

Derivative financial instruments

 -  

227

 -  

227

Liability

 -  

227

 -  

227

 

 

Level 1

Level 2

Level 3

Total

At 31 December 2015

£000

£000

£000

£000

ASSETS

 

 

 

 

Derivative financial instruments

 -  

1,490

 -  

1,490

Financial investments

137

 -  

2,548

2,685

Asset

137

1,490

2,548

4,175

LIABILITIES

 

 

 

 

Derivative financial instruments

 -  

135

 -  

135

Liability

 -  

135

 -  

135

 

There were no transfers between level 1 and level 2 during the year.

 

 

 

 

 

 

 

The following table reconciles the movement in level 3 financial instruments measured at fair value (financial investments) during the year:

 

 

 

2016

2015

Movement in level 3

 

 

£000

£000

At 1 January

 

 

2,548

1,106

Consideration received

 

 

494

 -  

Disposals

 

 

(1,310)

(44)

Movements recognised in Other Comprehensive Income

 

 

75

1,559

Movements recognised in the Income Statement

 

 

205

(73)

At 31 December

 

 

2,012

2,548

 

Visa Inc. investment

On 21 June 2016, Visa Inc. announced that it had completed the acquisition of Visa Europe Limited. This resulted in the gain which the Group had previously recognised in Other Comprehensive Income being recycled to the Income Statement. As part of the transaction the Group received preference shares in Visa Inc. These shares have been valued at their future conversion value into Visa Inc. common stock. The valuation includes a 31 % haircut. This comprises a 25% haircut due to a contingent liability disclosed in Visa Europe's accounts in relation to litigation, and a 6% haircut based on a liquidity discount.

 

Investment in overseas property company

For those financial investments measured at fair value, the Group uses proprietary valuation models which are developed from recognised valuation techniques. Some or all of the significant inputs into these models may not be observable in the market. Valuation models that employ significant unobservable inputs require a higher degree of management judgement and estimation in the determination of fair value.

 

The Group has established a valuation methodology for measuring level 3 financial investments which are categorised as available for sale. Unobservable inputs used include: yield of 4.90% (2015: 5.75%) and occupancy rates of 95.3% (2015: 94.2%). These inputs are taken from online real estate reports available from BNP Paribas. The inputs are stressed to ensure that the fair value is robust. Significant increases in the yield or decreases in annual rental value or occupancy rate would result in lower fair values. Management analyse and investigate any significant movements in the unobservable inputs which impact the valuation of level 3 instruments.

 

The tables below analyses financial instruments not measured at fair value by the level in the fair value hierarchy into which the measurement is categorised:

 

 

Level 1

Level 2

Level 3

Total

At 31 December 2016

£000

£000

£000

£000

ASSETS

 

 

 

 

Cash and balances at central banks

 -  

195,752

 -  

195,752

Loans and advances to banks

 -  

36,951

 -  

36,951

Debt securities held-to-maturity

 -  

107,300

 -  

107,300

Loans and advances to customers

 -  

42,691

716,108

758,799

Other assets

 -  

 -  

1,197

1,197

Asset

 -  

382,694

717,305

1,099,999

LIABILITIES

 

 

 

 

Deposits from banks

 -  

3,200

 -  

3,200

Deposits from customers

 -  

 -  

997,649

997,649

Other liabilities

 -  

 -  

1,812

1,812

Debt securities in issue

 -  

 -  

12,621

12,621

Liability

 -  

3,200

1,012,082

1,015,282

 

 

Level 1

Level 2

Level 3

Total

At 31 December 2015

£000

£000

£000

£000

ASSETS

 

 

 

 

Cash and balances at central banks

 -  

368,611

 -  

368,611

Loans and advances to banks

 -  

28,578

 -  

28,578

Debt securities held-to-maturity

 -  

87,728

 -  

87,728

Assets classified as held for sale

 -  

 -  

118,456

118,456

Loans and advances to customers

 -  

 -  

1,579,512

1,579,512

Other assets

 -  

 -  

2,625

2,625

Asset

 -  

484,917

1,700,593

2,185,510

LIABILITIES

 

 

 

 

Deposits from banks

 -  

55,305

 -  

55,305

Deposits from customers

 -  

 -  

1,929,838

1,929,838

Liabilities relating to assets classified as held for sale

 -  

 -  

8,700

8,700

Other liabilities

 -  

 -  

14,581

14,581

Debt securities in issue

 -  

 -  

10,834

10,834

Liability

 -  

55,305

1,963,953

2,019,258

 

(b) Associate accounting

An associate is an entity over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. It is presumed that the investor does not have significant influence if it has less than 20% of the voting power of the investee, unless proven otherwise. ABG holds 18.64% of the voting power of STB, but has retained Board representation and as a result the Board believes ABG has significant influence. The interest in STB is therefore accounted for as an associate.

 

If significant influence is lost, the shareholding will be accounted for as an available-for-sale financial investment.

 

 

 

 

 

 

 

 

The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2016:

 

Due within one year

Due after more than one year

Total

At 31 December 2016

£000

£000

£000

ASSETS

 

 

 

Cash

195,752

195,752

Loans and advances to banks

36,951

36,951

Debt securities held-to-maturity

85,782

21,518

107,300

Derivative financial instruments

85

1,431

1,516

Loans and advances to customers

337,376

421,423

758,799

Other assets

7,708

4,231

11,939

Financial investments

2,145

2,145

Deferred tax asset

1,665

1,665

Interests in associates

900

81,674

82,574

Intangible assets

8,522

8,522

Property, plant and equipment

4,782

4,782

Investment property

53,339

53,339

Total assets

664,554

600,730

1,265,284

LIABILITIES

 

 

 

Deposits from banks

3,200

3,200

Derivative financial instruments

227

227

Deposits from customers

906,083

91,566

997,649

Current tax liability

147

147

Other liabilities

17,082

17,082

Debt securities in issue

12,621

12,621

Total liabilities

926,739

104,187

1,030,926

 

The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2015:

 

Due within one year

Due after more than one year

Total

At 31 December 2015

£000

£000

£000

ASSETS

 

 

 

Cash

368,611

368,611

Loans and advances to banks

28,578

28,578

Debt securities held-to-maturity

56,145

31,583

87,728

Assets classified as held for sale

118,456

118,456

Derivative financial instruments

59

1,431

1,490

Loans and advances to customers

691,315

888,197

1,579,512

Other assets

16,544

350

16,894

Financial investments

2,685

2,685

Deferred tax asset

1,784

1,784

Investment in associate

943

943

Intangible assets

10,874

10,874

Property, plant and equipment

14,004

14,004

Total assets

1,279,708

951,851

2,231,559

LIABILITIES

 

 

 

Deposits from banks

55,305

55,305

Derivative financial instruments

135

135

Deposits from customers

1,373,297

556,541

1,929,838

Liabilities classified as held for sale

8,700

8,700

Current tax liability

3,366

3,366

Other liabilities

28,319

3,658

31,977

Debt securities in issue

10,834

10,834

Total liabilities

1,469,122

571,033

2,040,155

 

The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2016:

 

Due within one year

Due after more than one year

Total

At 31 December 2016

£000

£000

£000

ASSETS

 

 

 

Loans and advances to banks

6

6

Loans and advances to banks - due from subsidiary undertakings

89,066

89,066

Financial investments

121

121

Deferred tax asset

397

397

Property, plant and equipment

183

183

Other assets

254

633

887

Interests in associates

5,056

5,056

Interests in subsidiaries

 

54,602

54,602

Total assets

89,326

60,992

150,318

LIABILITIES

 

 

 

Other liabilities

4,808

4,808

Debt securities in issue

12,621

12,621

Total liabilities

4,808

12,621

17,429

 

 

 

 

 

 

 

The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2015:

 

Due within one year

Due after more than one year

Total

At 31 December 2015

£000

£000

£000

ASSETS

 

 

 

Loans and advances to banks - due from subsidiary undertakings

12,444

12,444

Financial investments

125

125

Deferred tax asset

418

418

Property, plant and equipment

204

204

Other assets

641

350

991

Interests in subsidiaries

46,466

46,466

Total assets

13,085

47,563

60,648

LIABILITIES

 

 

 

Other liabilities

4,235

4,235

Debt securities in issue

10,834

10,834

Total liabilities

4,235

10,834

15,069

6.  Financial risk management

Strategy

By their nature, the Group's activities are principally related to the use of financial instruments. The Directors and senior management of the Group have formally adopted a Group Risk and Controls Policy which sets out the Board's attitude to risk and internal controls.  Key risks identified by the Directors are formally reviewed and assessed at least once a year by the Board, in addition to which key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data.

 

The principal non-operational risks inherent in the Group's business are credit, market and liquidity risks.

 

(a) Credit risk

The Company and Group take on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Impairment provisions are provided for losses that have been incurred at the balance sheet date. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Company and Group's portfolio, could result in losses that are different from those provided for at the balance sheet date. Credit risk is managed through the Credit Committees of the banking subsidiaries, with significant exposures also being approved by the Group Risk Committee.

 

The Company and Group structure the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The limits are approved periodically by the Board of Directors and actual exposures against limits are monitored daily.

 

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees.

 

The Group employs a range of policies and practices to mitigate credit risk.  The most traditional of these is the taking of collateral to secure advances, which is common practice.  The principal collateral types for loans and advances include, but are not limited to:

 

•  Charges over residential and commercial properties;

•  Charges over business assets such as premises, inventory and accounts receivable;

•  Charges over financial instruments such as debt securities and equities;

•  Personal guarantees; and

•  Charges over other chattels

 

Upon initial recognition of loans and advances, the fair value of collateral is based on valuation techniques commonly used for the corresponding assets.  In order to minimise any potential credit loss the Group will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Repossessed collateral, not readily convertible into cash, is made available for sale in an orderly fashion, with the proceeds used to reduce or repay the outstanding indebtedness, or held as inventory where the Group intends to develop and sell in the future. Where excess funds are available after the debt has been repaid, they are available either for other secured lenders with lower priority or are returned to the customer.

 

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards.

 

The Group's maximum exposure to credit risk before collateral held or other credit enhancements is as follows:

 

 

2016

2015

 

£000

£000

Credit risk exposures relating to on-balance sheet assets are as follows:

 

 

Cash and balances at central banks

195,752

368,611

Loans and advances to banks

36,951

28,578

Debt securities held-to-maturity

107,300

87,728

Assets classified as held for sale

 -  

118,456

Derivative financial instruments

1,516

1,490

Loans and advances to customers - Arbuthnot Latham

758,799

618,902

Loan and advances to customers - Secure Trust Bank

 -  

960,610

Other assets

1,197

2,625

Financial investments

2,145

2,685

 

 

 

Credit risk exposures relating to off-balance sheet assets are as follows:

 

 

Guarantees

274

56

Loan commitments and other credit related liabilities

35,581

178,863

At 31 December

1,139,515

2,368,604

 

The Company's maximum exposure to credit risk before collateral held or other credit enhancements is as follows:

 

 

2016

2015

 

£000

£000

Credit risk exposures relating to on-balance sheet assets are as follows:

 

 

Loans and advances to banks

89,072

12,444

Financial investments

121

125

Other assets

791

891

At 31 December

89,984

13,460

 

The above tables represent the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2016 and 2015 without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures are based on the net carrying amounts as reported in the Statement of Financial Position.

 

The table below represents an analysis of the loan to values of the property book for the Group:

 

 

 

 

 

 

 

31 December 2016

 

31 December 2015

 

Loan Balance

Collateral

 

Loan Balance

Collateral

Loan to value

£000

£000

 

£000

£000

 

 

 

 

 

 

Less than 60%

438,076

1,219,532

 

486,256

1,256,642

60% - 80%

167,765

253,550

 

340,781

507,852

80% - 100%

76,289

88,598

 

80,762

98,792

Greater than 100%

32,022

21,387

 

36,486

25,738

Total

714,152

1,583,067

 

944,285

1,889,024

 

The table below represents an analysis of the loan commitments compared to the values of the properties for the Group:

 

 

 

 

 

 

 

31 December 2016

 

31 December 2015

 

Committed

Collateral

 

Committed

Collateral

Loan commitments and other credit related liabilities

£000

£000

 

£000

£000

 

 

 

 

 

 

Less than 60%

26,988

73,659

 

74,576

171,108

60% - 80%

23,940

42,102

 

56,702

81,765

80% - 100%

 -  

 -  

 

2,278

2,848

Total

50,928

115,761

 

133,556

255,721

 

Renegotiated loans and forbearance

The contractual terms of a loan may be modified due to factors that are not related to the current or potential credit deterioration of the customer (changing market conditions, customer retention, etc.). In such cases, the modified loan may be derecognised and the renegotiated loan recognised as a new loan at fair value.

 

As at 31 December 2016, loans for which forbearance measures were undertaken totalled 0.12% (2015: 0.14%) of total loans to customers for the Bank. All forbearance measures undertaken in the year were within the UK mortgage portfolio. These are set out in the following table:

 

 

2016

 

2015

 

Number

Loan Balance

 

Number

Loan Balance

 

 

£000

 

 

£000

Transfer to interest only

3

115

 

6

764

Move historic arrears to capital

 -  

 -  

 

1

147

Interest temporarily not being charged

1

3,607

 

 -  

 -  

Payment holiday

1

78

 

 -  

 -  

Total forbearance

5

3,800

 

7

911

 

Concentration risk

The Group is well diversified in the UK, being exposed to retail banking and private banking. Management assesses the potential concentration risk from a number of areas including:

•  product concentration

•  geographical concentration; and

•  high value residential properties

 

Due to the well diversified nature of the Group and the significant collateral held against the loan book, the Directors do not consider there to be a potential material exposure arising from concentration risk. The table below show the concentration in the loan book.

 

 

Loans and advances to customers

 

Loan Commitments

 

2016

2015

 

2016

2015

 

£000

£000

 

£000

£000

Concentration by product

 

 

 

 

 

Cash collateralised

5,245

15,987

 

 -  

 -  

Commercial Lending

 

 

 

 

 

   Real estate finance

 -  

367,999

 

 -  

109,033

   Asset finance

 -  

70,685

 

35,581

20,081

   Commercial finance

71,674

52,222

 

 -  

9,277

Residential mortgages

626,751

538,701

 

 -  

40,230

Investment portfolio secured

34,014

30,284

 

 -  

 -  

Non-Performing

15,953

9,839

 

 -  

 -  

Other Collateral

2,103

7,482

 

 -  

 -  

Motor

 -  

165,697

 

 -  

242

Unsecured

 

 

 

 

 

   Personal lending

3,059

79,706

 

 -  

 -  

   Retail

 -  

220,418

 

 -  

 -  

   Other

 -  

20,492

 

 -  

 -  

At 31 December

758,799

1,579,512

 

35,581

178,863

 

 

 

 

 

 

Concentration by location

 

 

 

 

 

   East Anglia

2,714

99,340

 

 -  

28,091

   East Midlands

7,245

49,222

 

 -  

1,088

   London

422,901

600,254

 

21,691

79,523

   Midlands

3,800

7,811

 

 -  

 -  

   North East

2,100

29,239

 

 -  

564

   North West

14,288

90,496

 

4,541

4,863

   Northern Ireland

 -  

8,301

 

 -  

 -  

   Scotland

13,410

74,635

 

 -  

2,000

   South East

117,805

245,647

 

5,597

40,738

   South West

89,018

87,429

 

738

6,204

   Wales

7,460

42,436

 

 -  

1,427

   West Midlands

14,436

69,162

 

108

4,787

   Yorkshire & Humber

6,398

59,210

 

 -  

3,033

   Overseas

20,136

74,627

 

 -  

5,667

   Other

37,088

41,703

 

2,906

878

At 31 December

758,799

1,579,512

 

35,581

178,863

 

For unsecured lending, concentration by location is based on the customer's country of domicile and for lending secured by property it is based on the location of the collateral.

 

 (b) Operational risk (unaudited)

The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and to avoid control procedures that restrict initiatives and creativity. Operational risk arises from all of the Group's operations.

 

The primary responsibility for the development and implementation of controls to address operational risk is assigned to the senior management within each subsidiary. 

 

Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of the Internal Audit reviews are discussed with senior management, with summaries submitted to the Arbuthnot Banking Group Audit Committee.

 

 (c) Market risk

Price risk

The Company and Group is exposed to equity securities price risk because of investments held by the Group and classified in the Consolidated Statement of Financial Position either as available-for-sale or at fair value through the profit and loss.  The Group is not exposed to commodity price risk.  To manage its price risk arising from investments in equity securities, the Group diversifies its portfolio. Diversification of the portfolio is done in accordance with the limits set by the Group.

 

Based upon the financial investment exposure in Note 24, a stress test scenario of a 10% (2015: 10%) decline in market prices, with all other things being equal, would result in a £11,000 (2015: £11,000) decrease in the Group's income and a decrease of £172,000 (2015: £215,000) in the Group's equity. The Group consider a 10% stress test scenario appropriate after taking the current values and historic data into account.

 

Based upon the financial investment exposure given in Note 24, a stress test scenario of a 10% (2015: 10%) decline in market prices, with all other things being equal, would result in a £11,000 (2015: £11,000) decrease in the Company's income and a decrease of £10,000 (2015: £10,000) in the Company's equity.

 

Currency risk

The Company and Group take on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure for both overnight and intra-day positions, which are monitored daily. The table below summarises the Group's exposure to foreign currency exchange rate risk at 31 December 2016. Included in the table below are the Group's assets and liabilities at carrying amounts, categorised by currency.

 

 

GBP (£)

USD ($)

Euro (€)

Other

Total

At 31 December 2016

£000

£000

£000

£000

£000

ASSETS

 

 

 

 

 

Cash and balances at central banks

195,669

35

40

8

195,752

Loans and advances to banks

2,197

24,494

5,062

5,198

36,951

Debt securities held-to-maturity

94,299

13,001

 -  

 -  

107,300

Derivative financial instruments

1,516

 -  

 -  

 -  

1,516

Loans and advances to customers

701,165

21,927

35,707

 -  

758,799

Other assets

1,197

 -  

 -  

 -  

1,197

Financial investments

120

569

1,456

 -  

2,145

 

996,163

60,026

42,265

5,206

1,103,660

LIABILITIES

 

 

 

 

 

Deposits from banks

3,198

 -  

 -  

2

3,200

Derivative financial instruments

227

 -  

 -  

 -  

227

Deposits from customers

903,687

59,916

28,535

5,511

997,649

Other liabilities

1,812

 -  

 -  

 -  

1,812

Debt securities in issue

 -  

 -  

12,621

 -  

12,621

 

908,924

59,916

41,156

5,513

1,015,509

Net on-balance sheet position

87,239

110

1,109

(307)

88,151

Credit commitments

54,934

 -  

 -  

 -  

54,934

 

The table below summarises the Group's exposure to foreign currency exchange risk at 31 December 2015:

 

 

 

 

 

 

 

GBP (£)

USD ($)

Euro (€)

Other

Total

At 31 December 2015

£000

£000

£000

£000

£000

ASSETS

 

 

 

 

 

Cash and balances at central banks

365,165

3,405

35

6

368,611

Loans and advances to banks

10,045

14,527

1,925

2,081

28,578

Debt securities held-to-maturity

80,952

6,776

 -  

 -  

87,728

Assets classified as held for sale

118,456

 -  

 -  

 -  

118,456

Derivative financial instruments

1,490

 -  

 -  

 -  

1,490

Loans and advances to customers

1,522,893

17,231

39,344

44

1,579,512

Other assets

2,625

 -  

 -  

 -  

2,625

Financial investments

172

 -  

2,513

 -  

2,685

 

2,101,798

41,939

43,817

2,131

2,189,685

LIABILITIES

 

 

 

 

 

Deposits from banks

54,963

 -  

342

 -  

55,305

Derivative financial instruments

135

 -  

 -  

 -  

135

Deposits from customers

1,865,078

39,220

23,255

2,285

1,929,838

Liabilities relating to assets classified as held for sale

8,700

 -  

 -  

 -  

8,700

Other liabilities

14,581

 -  

 -  

 -  

14,581

Debt securities in issue

 -  

 -  

10,834

 -  

10,834

 

1,943,457

39,220

34,431

2,285

2,019,393

Net on-balance sheet position

158,341

2,719

9,386

(154)

170,292

Credit commitments

178,919

 -  

 -  

 -  

178,919

 

A 10% strengthening of the pound against the US dollar would lead to a £3,000 increase (2015: £3,000 decrease) in Group profits and equity, while a 10% weakening of the pound against the US dollar would lead to the same decrease in Group profits and equity. Similarly a 10% strengthening of the pound against the Euro would lead to a £6,000 (2015: £52,000) increase in Group profits and equity, while a 10% weakening of the pound against the Euro would lead to the same increase in Group profits and equity. The above results are after taking into account the effect of derivative financial instruments (see note 20), which cover most of the net exposure in each currency.

 

The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2016:

 

 

 

 

 

 

GBP (£)

Euro (€)

Total

At 31 December 2016

£000

£000

£000

ASSETS

 

 

 

Loans and advances to banks

76,037

13,035

89,072

Financial investments

121

 -  

121

Other assets

791

 -  

791

 

76,949

13,035

89,984

LIABILITIES

 

 

 

Other liabilities

3,624

 -  

3,624

Debt securities in issue

 -  

12,621

12,621

 

3,624

12,621

16,245

Net on-balance sheet position

73,325

414

73,739

 

The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2015:

 

 

 

 

 

 

GBP (£)

Euro (€)

Total

At 31 December 2015

£000

£000

£000

ASSETS

 

 

 

Loans and advances to banks

1,087

11,357

12,444

Financial investments

125

 -  

125

Other assets

894

 -  

894

 

2,106

11,357

13,463

LIABILITIES

 

 

 

Other liabilities

2,832

 -  

2,832

Debt securities in issue

 -  

10,834

10,834

 

2,832

10,834

13,666

Net on-balance sheet position

(726)

523

(203)

 

A 10% strengthening of the pound against the Euro would lead to £41,000 (2015: £52,000) decrease in the Company profits and equity, conversely a 10% weakening of the pound against the Euro would lead to the same increase in the Company profits and equity.

 

Interest rate risk

Interest rate risk is the potential adverse impact on the Company and Group's future cash flows from changes in interest rates; and arises from the differing interest rate risk characteristics of the Company and Group's assets and liabilities. In particular, fixed rate savings and borrowing products expose the Group to the risk that a change in interest rates could cause either a reduction in interest income or an increase in interest expense relative to variable rate interest flows. The Group seeks to "match" interest rate risk on either side of the Statement of Financial Position. However, this is not a perfect match and interest rate risk is present on: Money market transactions of a fixed rate nature, fixed rate loans and fixed rate savings accounts. There is interest rate mismatch in Arbuthnot Latham and Secure Trust Bank. This is monitored on a daily basis in conjunction with liquidity and capital. The interest rate mismatch is daily monitored, throughout the maturity bandings of the book, on a parallel shift scenario for 50, 100 and 200 basis points movement. The Group consider the 50, 100 and 200 basis points movement to be appropriate for scenario testing given the current economic outlook and industry expectations. This typically results in a pre-tax mismatch of £0.5m to £2.0m (2015: £0.4m to £1.8m) for the Group, with the same impact to equity pre-tax. The Company has no fixed rate exposures, but a upward change of 50 basis points on variable rates would increase pre-tax profits and equity by £7,000 (2015: increase pre-tax profits and equity by £7,000).

 

The following tables summarise the re-pricing periods for the assets and liabilities in the Company and Group, including derivative financial instruments which are principally used to reduce exposure to interest rate risk. Items are allocated to time bands by reference to the earlier of the next contractual interest rate re-price and the maturity date.

 

Group

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2016

£000

£000

£000

£000

£000

£000

£000

ASSETS

 

 

 

 

 

 

 

Cash and balances at central banks

195,752

 -  

 -  

 -  

 -  

 -  

195,752

Loans and advances to banks

36,951

 -  

 -  

 -  

 -  

 -  

36,951

Debt securities held-to-maturity

78,994

6,813

21,493

 -  

 -  

 -  

107,300

Derivative financial instruments

85

 -  

 -  

1,431

 -  

 -  

1,516

Loans and advances to customers

624,468

120,311

8,755

5,265

 -  

 -  

758,799

Other assets

 -  

 -  

 -  

 -  

 -  

162,821

162,821

Financial investments

 -  

 -  

 -  

 -  

 -  

2,145

2,145

Total assets

936,250

127,124

30,248

6,696

 -  

164,966

1,265,284

LIABILITIES

 

 

 

 

 

 

 

Deposits from banks

3,200

 -  

 -  

 -  

 -  

 -  

3,200

Derivative financial instruments

227

 -  

 -  

 -  

 -  

 -  

227

Deposits from customers

813,047

61,519

84,480

38,603

 -  

 -  

997,649

Other liabilities

 -  

 -  

 -  

 -  

 -  

17,229

17,229

Debt securities in issue

12,621

 -  

 -  

 -  

 -  

 -  

12,621

Equity

 -  

 -  

 -  

 -  

 -  

234,358

234,358

Total liabilities

829,095

61,519

84,480

38,603

 -  

251,587

1,265,284

Impact of derivative instruments

3,800

(3,800)

 -  

 -  

 -  

 -  

 

Interest rate sensitivity gap

110,955

61,805

(54,232)

(31,907)

 -  

(86,621)

 

 

 

 

 

 

 

 

 

Cumulative gap

110,955

172,760

118,528

86,621

86,621

 -  

 

 

Group

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2015

£000

£000

£000

£000

£000

£000

£000

ASSETS

 

 

 

 

 

 

 

Cash and balances at central banks

368,611

 -  

 -  

 -  

 -  

 -  

368,611

Loans and advances to banks

28,578

 -  

 -  

 -  

 -  

 -  

28,578

Assets classified as held for sale

 -  

 -  

 -  

 -  

 -  

118,456

118,456

Debt securities held-to-maturity

54,472

14,481

18,775

 -  

 -  

 -  

87,728

Derivative financial instruments

 -  

 -  

 -  

 -  

1,490

 -  

1,490

Loans and advances to customers

637,301

267,464

176,227

534,201

15

(35,696)

1,579,512

Other assets

 -  

 -  

 -  

 -  

 -  

44,499

44,499

Financial investments

 -  

 -  

 -  

 -  

 -  

2,685

2,685

Total assets

1,088,962

281,945

195,002

534,201

1,505

129,944

2,231,559

LIABILITIES

 

 

 

 

 

 

 

Deposits from banks

387

35,000

19,918

 -  

 -  

 -  

55,305

Derivative financial instruments

135

 -  

 -  

 -  

 -  

 -  

135

Deposits from customers

675,327

534,562

184,758

497,416

37,775

 -  

1,929,838

Liabilities classified as held for sale

 -  

 -  

 -  

 -  

 -  

8,700

8,700

Other liabilities

 -  

 -  

 -  

 -  

 -  

35,343

35,343

Debt securities in issue

10,834

 -  

 -  

 -  

 -  

 -  

10,834

Equity

 -  

 -  

 -  

 -  

 -  

191,404

191,404

Total liabilities

686,683

569,562

204,676

497,416

37,775

235,447

2,231,559

Impact of derivative instruments

3,800

 -  

 -  

(3,800)

 -  

 -  

 

Interest rate sensitivity gap

406,079

(287,617)

(9,674)

32,985

(36,270)

(105,503)

 

 

 

 

 

 

 

 

 

Cumulative gap

406,079

118,462

108,788

141,773

105,503

 -  

 

 

Company

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2016

£000

£000

£000

£000

£000

£000

£000

ASSETS

 

 

 

 

 

 

 

Loans and advances to banks

88,914

 -  

 -  

 -  

 -  

158

89,072

Other assets

 -  

 -  

 -  

 -  

 -  

61,125

61,125

Financial investments

 -  

 -  

 -  

 -  

 -  

121

121

Total assets

88,914

 -  

 -  

 -  

 -  

61,404

150,318

LIABILITIES

 

 

 

 

 

 

 

Other liabilities

 -  

 -  

 -  

 -  

 -  

4,808

4,808

Debt securities in issue

12,621

 -  

 -  

 -  

 -  

 -  

12,621

Equity

 -  

 -  

 -  

 -  

 -  

132,889

132,889

Total liabilities

12,621

 -  

 -  

 -  

 -  

137,697

150,318

Interest rate sensitivity gap

76,293

 -  

 -  

 -  

 -  

(76,293)

 

 

 

 

 

 

 

 

 

Cumulative gap

76,293

76,293

76,293

76,293

76,293

 -  

 

 

 

 

 

 

 

 

 

Company

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2015

£000

£000

£000

£000

£000

£000

£000

ASSETS

 

 

 

 

 

 

 

Loans and advances to banks

12,444

 -  

 -  

 -  

 -  

 -  

12,444

Other assets

 -  

 -  

 -  

 -  

 -  

48,079

48,079

Financial investments

 -  

 -  

 -  

 -  

 -  

125

125

Total assets

12,444

 -  

 -  

 -  

 -  

48,204

60,648

LIABILITIES

 

 

 

 

 

 

 

Other liabilities

 -  

 -  

 -  

 -  

 -  

4,235

4,235

Debt securities in issue

10,834

 -  

 -  

 -  

 -  

 -  

10,834

Equity

 -  

 -  

 -  

 -  

 -  

45,579

45,579

Total liabilities

10,834

 -  

 -  

 -  

 -  

49,814

60,648

Interest rate sensitivity gap

1,610

 -  

 -  

 -  

 -  

(1,610)

 

 

 

 

 

 

 

 

 

Cumulative gap

1,610

1,610

1,610

1,610

1,610

 -  

 

 

(d) Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

 

The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The liquidity requirements of the Group are met through withdrawing funds from its Bank of England Reserve Account to cover any short-term fluctuations and, longer term funding to address any structural liquidity requirements.

 

The Group has formal governance structures in place to manage and mitigate liquidity risk on a day to day basis. The Board of each bank sets and approves the liquidity risk management strategy for each subsidiary. The Assets and Liabilities Committee ("ALCO"), comprising senior executives of each Company, monitors liquidity risk. Key liquidity risk management information is reported by the finance teams and monitored by the Chief Executive Officer and Chief Financial Officer on a daily basis.  The ALCO meets monthly to review liquidity risk against set thresholds and risk indicators including early warning indicators, liquidity risk tolerance levels and Individual Liquidity Adequacy Assessment Process ("ILAAP") metrics.

 

The PRA requires a firm to maintain at all times liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due. There is also a requirement that a firm ensures its liquidity resources contain an adequate buffer of high quality, unencumbered assets (i.e. Government Securities in the liquidity asset buffer); and it maintains a prudent funding profile. The liquidity assets buffer is a pool of highly liquid assets that can be called upon to create sufficient liquidity to meet liabilities on demand, particularly in a period of liquidity stress. The liquidity resources outside the buffer must either be marketable assets with a demonstrable secondary market that the firm can access, or a credit facility that can be activated in times of stress.

 

Arbuthnot Latham & Co., Limited ("AL") has a Board approved ILAAP. The liquidity buffer required by the ILAAP has been put in place and maintained since that time. Liquidity resources outside of the buffer are made up of deposits placed at the Bank of England. The ILAAP is updated annually.

 

The Liquidity Coverage Ratio ("LCR") regime has applied to the Group from 1 October 2015, requiring management of net 30 day cash outflows as a proportion of high quality liquid assets. The actual LCR has significantly exceeded the regulatory minimum throughout the year.

 

The Group is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan draw-downs. The Group maintains significant cash resources to meet all of these needs as they fall due. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain term and of different types.

 

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates.

 

The tables below show the undiscounted contractual maturity analysis of the Group's financial liabilities and assets as at 31 December 2016:

 

 

 

 

 

 

 

 

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2016

£000

£000

£000

£000

£000

£000

Financial liability by type

 

 

 

 

 

 

Non-derivative liabilities

 

 

 

 

 

 

Deposits from banks

3,200

(3,200)

(3,200)

 -  

 -  

 -  

Deposits from customers

997,649

(1,000,384)

(716,285)

(243,247)

(40,852)

 -  

Other liabilities

1,812

(1,812)

(223)

 -  

 -  

(1,589)

Debt securities in issue

12,621

(14,345)

(86)

(259)

(1,379)

(12,621)

Issued financial guarantee contracts

 -  

(274)

(274)

 -  

 -  

 -  

Unrecognised loan commitments

 -  

(35,581)

(35,581)

 -  

 -  

 -  

 

1,015,282

(1,055,596)

(755,649)

(243,506)

(42,231)

(14,210)

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

Risk management:

 

 

 

 

 

 

 - Outflows

 -  

(227)

(227)

 -  

 -  

 -  

 

 -  

(227)

(227)

 -  

 -  

 -  

 

 

 

 

 

 

 

 

 

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2016

£000

£000

£000

£000

£000

£000

Financial asset by type

 

 

 

 

 

 

Non-derivative assets

 

 

 

 

 

 

Cash and balances at central banks

195,752

195,752

195,752

 -  

 -  

 -  

Loans and advances to banks

36,951

36,951

36,951

 -  

 -  

 -  

Debt securities held-to-maturity

107,300

130,360

70,082

41,334

18,944

 -  

Loans and advances to customers

758,799

841,283

218,427

130,870

447,253

44,733

Other assets

1,197

1,197

1,197

 -  

 -  

 -  

Financial investments

2,145

2,145

2,025

 -  

120

 -  

 

1,102,144

1,207,688

524,434

172,204

466,317

44,733

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

 

 

 

 

Risk management:

 

 

 

 

 

 

 - Inflows

 -  

1,516

85

 -  

 -  

1,431

 

 -  

1,516

85

 -  

 -  

1,431

 

The tables below show the undiscounted contractual maturity analysis of the Group's financial liabilities and assets as at 31 December 2015:

 

 

 

 

 

 

 

 

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2015

£000

£000

£000

£000

£000

£000

Financial liability by type

 

 

 

 

 

 

Non-derivative liabilities

 

 

 

 

 

 

Deposits from banks

55,305

(55,305)

(35,387)

(19,918)

 -  

 -  

Deposits from customers

1,929,838

(2,059,721)

(1,099,222)

(376,705)

(540,890)

(42,904)

Other liabilities

14,581

(14,581)

(12,992)

(125)

 -  

(1,464)

Debt securities in issue

10,834

(12,442)

(80)

(241)

(1,287)

(10,834)

Liabilities relating to assets classified as held for sale

8,700

(8,700)

(8,700)

 -  

 -  

 -  

Issued financial guarantee contracts

 -  

(56)

(56)

 -  

 -  

 -  

Unrecognised loan commitments

 -  

(178,863)

(178,863)

 -  

 -  

 -  

 

2,019,258

(2,329,668)

(1,335,300)

(396,989)

(542,177)

(55,202)

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

Risk management:

 

 

 

 

 

 

 - Inflows

135

 -  

 -  

 -  

 -  

 -  

 - Outflows

 -  

(135)

(135)

 -  

 -  

 -  

 

135

(135)

(135)

 -  

 -  

 -  

 

 

 

 

 

 

 

 

 

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2015

£000

£000

£000

£000

£000

£000

Financial asset by type

 

 

 

 

 

 

Non-derivative assets

 

 

 

 

 

 

Cash and balances at central banks

368,611

368,611

368,611

 -  

 -  

 -  

Loans and advances to banks

28,578

28,578

28,578

 -  

 -  

 -  

Debt securities held-to-maturity

87,728

88,887

29,333

27,302

32,252

 -  

Assets classified as held for sale

118,456

(118,456)

(118,456)

 -  

 -  

 -  

Loans and advances to customers

1,579,512

1,913,124

245,450

506,808

1,093,755

67,111

Other assets

2,625

2,625

2,625

 -  

 -  

 -  

Financial investments

2,685

2,685

2,561

 -  

124

 -  

 

2,188,195

2,286,054

558,702

534,110

1,126,131

67,111

 

 

 

 

 

 

 

Derivative assets

 

 

 

 

 

 

Risk management:

 

 

 

 

 

 

 - Inflows

1,490

1,490

59

 -  

 -  

1,431

 

1,490

1,490

59

 -  

 -  

1,431

 

The table below sets out the components of the Group's liquidity reserves:

 

 

 

 

 

 

 

 

 

 

31 December 2016

31 December 2015

 

 

 

Amount

Fair value

Amount

Fair value

Liquidity reserves

 

 

£000

£000

£000

£000

Cash and balances at central banks

 

 

 195,752

 195,752

 368,611

 368,611

Loans and advances to banks

 

 

 36,943

 36,943

 28,578

 28,578

Debt securities held-to-maturity

 

 

 107,300

 108,757

 87,728

 87,594

Undrawn credit lines

 

 

 12,500

 12,500

 38,500

 38,500

 

 

 

352,495

353,952

523,417

523,283

 

Assets pledged as collateral or encumbered

The total financial assets recognised in the statement of financial position that had been pledged as collateral for liabilities at 31 December 2016 were £112.0m (2015: £226.2m).

 

Financial assets are pledged as collateral as part of sales and repurchases, securities borrowing and securitisation transactions under terms that are usual and customary for such activities. In addition, as part of these transactions, the Group has received collateral that is permitted to sell or repledge in the absence of default.

 

The table below analyses the contractual maturity analysis of the Company's financial liabilities and assets as at 31 December 2016:

 

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2016

£000

£000

£000

£000

£000

£000

Financial liability by type

 

 

 

 

 

 

Non-derivative liabilities

 

 

 

 

 

 

Other liabilities

3,624

(3,624)

(2,035)

 -  

 -  

(1,589)

Issued financial guarantee contracts

12,621

(14,345)

(86)

(259)

(1,379)

(12,621)

 

16,245

(17,969)

(2,121)

(259)

(1,379)

(14,210)

 

 

 

 

 

 

 

 

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2016

£000

£000

£000

£000

£000

£000

Financial asset by type

 

 

 

 

 

 

Non-derivative assets

 

 

 

 

 

 

Loans and advances to banks

89,072

89,072

89,072

 -  

 -  

 -  

Financial investments

121

121

 -  

 -  

121

 -  

Other assets

791

791

791

 -  

 -  

 -  

 

89,984

89,984

89,863

 -  

121

 -  

 

The table below analyses the contractual maturity analysis of the Company's financial liabilities and assets as at 31 December 2015:

 

 

 

 

 

 

 

 

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2015

£000

£000

£000

£000

£000

£000

Financial liability by type

 

 

 

 

 

 

Non-derivative liabilities

 

 

 

 

 

 

Other liabilities

3,068

(3,068)

(1,479)

(125)

 -  

(1,464)

Debt securities in issue

10,834

(12,442)

(80)

(241)

(1,287)

(10,834)

 

13,902

(15,510)

(1,559)

(366)

(1,287)

(12,298)

 

 

 

 

 

 

 

 

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2015

£000

£000

£000

£000

£000

£000

Financial asset by type

 

 

 

 

 

 

Non-derivative assets

 

 

 

 

 

 

Loans and advances to banks

12,444

12,444

11,965

 -  

 -  

479

Financial investments

125

125

 -  

 -  

125

 -  

Other assets

891

891

891

 -  

 -  

 -  

 

13,460

13,460

12,856

 -  

125

479

 

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature

are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates.

 

Fiduciary activities

The Group provides investment management and advisory services to third parties, which involve the Group making allocation and purchase and sale decisions in relation to a wide range of financial instruments. Those assets that are held in a fiduciary capacity are not included in these financial statements. These services give rise to the risk that the Group may be accused of maladministration or underperformance. At the balance sheet date, the Group had investment management accounts amounting to approximately £920m (2015: £739m). Additionally, the Group provides investment advisory services.

 

(e) Financial assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The tables below set out the Group's financial assets and financial liabilities into the respective classifications:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value through profit or loss

Held-to-maturity

Loans and receivables

Available-for-sale

Other amortised cost

Total carrying amount

Fair value

At 31 December 2016

 

 

£000

£000

£000

£000

£000

£000

£000

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash and balances at central banks

 

 

 -  

 -  

195,752

 -  

 -  

195,752

195,752

Loans and advances to banks

 

 

 -  

 -  

36,951

 -  

 -  

36,951

36,951

Debt securities held-to-maturity

 

 

 -  

107,300

 -  

 -  

 -  

107,300

108,757

Derivative financial instruments

 

 

1,516

 -  

 -  

 -  

 -  

1,516

1,516

Loans and advances to customers

 

 

 -  

 -  

758,799

 -  

 -  

758,799

742,894

Other assets

 

 

 -  

 -  

1,197

 -  

 -  

1,197

1,197

Financial investments

 

 

 -  

 -  

 -  

2,145

 -  

2,145

2,145

 

 

 

1,516

107,300

992,699

2,145

 -  

1,103,660

1,089,212

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Deposits from banks

 

 

 -  

 -  

 -  

 -  

3,200

3,200

3,200

Derivative financial instruments

 

 

227

 -  

 -  

 -  

 -  

227

227

Deposits from customers

 

 

 -  

 -  

 -  

 -  

997,649

997,649

997,649

Other liabilities

 

 

 -  

 -  

1,812

 -  

 -  

1,812

1,812

Debt securities in issue

 

 

 -  

 -  

 -  

 -  

12,621

12,621

12,621

 

 

 

227

 -  

1,812

 -  

1,013,470

1,015,509

1,015,509

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value through profit or loss

Held-to-maturity

Loans and receivables

Available-for-sale

Other amortised cost

Total carrying amount

Fair value

At 31 December 2015

 

 

£000

£000

£000

£000

£000

£000

£000

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash and balances at central banks

 

 

 -  

 -  

368,611

 -  

 -  

368,611

368,611

Loans and advances to banks

 

 

 -  

 -  

28,578

 -  

 -  

28,578

28,578

Debt securities held-to-maturity

 

 

 -  

87,728

 -  

 -  

 -  

87,728

87,594

Assets classified as held for sale

 

 

 -  

 -  

 -  

118,456

 -  

118,456

118,456

Derivative financial instruments

 

 

1,490

 -  

 -  

 -  

 -  

1,490

1,490

Loans and advances to customers

 

 

 -  

 -  

1,579,512

 -  

 -  

1,579,512

1,570,932

Other assets

 

 

 -  

 -  

2,625

 -  

 -  

2,625

2,625

Financial investments

 

 

 -  

 -  

 -  

2,685

 -  

2,685

2,685

 

 

 

1,490

87,728

1,979,326

121,141

 -  

2,189,685

2,180,971

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Deposits from banks

 

 

 -  

 -  

 -  

 -  

55,305

55,305

55,305

Derivative financial instruments

 

 

135

 -  

 -  

 -  

 -  

135

135

Deposits from customers

 

 

 -  

 -  

 -  

 -  

1,929,838

1,929,838

1,929,838

Liabilities relating to assets classified as held for sale

 

 

 -  

 -  

 -  

8,700

 -  

8,700

8,700

Other liabilities

 

 

 -  

 -  

14,581

 -  

 -  

14,581

14,581

Debt securities in issue

 

 

 -  

 -  

 -  

 -  

10,834

10,834

10,834

 

 

 

135

 -  

14,581

8,700

1,995,977

2,019,393

2,019,393

 

Cash, loans and advances to banks, debt securities held-to-maturity, deposits from banks and deposits from customers are classified as level 2 financial instruments, on the basis that they are liquid but not traded in an active market. Loans and advances to customers and debt securities in issue are classified as level 3 as there is no observable market data for these instruments.

 

7.  Capital management

The Group's capital management policy is focused on optimising shareholder value. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.

 

The Group's lead regulator, the Prudential Regulatory Authority ('PRA'), sets and monitors capital requirements for the Group as a whole and for the individual banking operations. The lead regulator adopted the Basel III capital requirements with effect from 1 January 2014. As a result, the Group's regulatory capital requirements were based on Basel III in 2014.

 

In accordance with the EU's Capital Requirements Directive (CRD) and the required parameters set out in the Prudential Regulation Authority ('PRA') Handbook (BIPRU 2.2), the Individual Capital Adequacy Assessment Process (ICAAP) is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary.  However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management.  The Group's regulated entities are also the principal trading subsidiaries as detailed in Note 41.

 

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar 1 plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar 1 capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations delivers a sufficient capital sum adequately to cover management's anticipated risks. Where the Board considered that the Pillar 1 calculations did not reflect the risk, an additional capital add-on in Pillar 2 is applied, as per the Individual Capital Guidance (ICG) issued by the PRA.

 

The Group's regulatory capital is divided into two tiers:

• Tier 1 comprises mainly shareholders' funds and revaluation reserves, after deducting goodwill, other intangible assets and the 

  deduction for a significant investment in a financial institution (STB). The portion of the investment up to 10% of ABG's Tier 1

  is added back to capital resources and then risk weighted at 250%.

• Lower Tier 2 comprises qualifying subordinated loan capital and collective provisions. Lower Tier 2 capital cannot exceed 50%

  of Tier 1 capital.

 

The following table shows the regulatory capital resources as managed by the Group:

 

 

 

2016

2015

 

£000

£000

Tier 1

 

 

Share capital

153

153

Retained earnings

235,567

123,330

Deduction for significant investment

(81,674)

Add back 10% of CET1 (risk weighted at 250%)

22,557

Other reserves

(1,362)

(1,111)

Non-controlling interests

67,887

Deduction for non-controlling interests

(23,047)

Goodwill

(1,682)

(2,695)

Deductions for other intangibles

(6,840)

(8,179)

Revaluation reserve

(271)

1,145

Total tier 1 capital resources

166,448

157,483

Tier 2

 

 

Collective provisions

2,031

Debt securities in issue

12,621

10,834

Total tier 2 capital resources

12,621

12,865

 

 

 

Total tier 1 & tier 2 capital resources

179,069

170,348

 

The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. The PRA sets ICG for each UK bank calibrated by reference to its Capital Resources Requirement, broadly equivalent to 8 percent of risk weighted assets and thus representing the capital required under Pillar 1 of the Basel III framework. The ICAAP is a key input into the PRA's ICG setting process, which addresses the requirements of Pillar 2 of the Basel III framework. The PRA's approach is to monitor the available capital resources in relation to the ICG requirement. Each entity maintains an extra internal buffer and capital ratios are reviewed on a monthly basis to ensure that external requirements are adhered to. All regulated entities have complied with all of the externally imposed capital requirements to which they are subject.

 

Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). Its aim is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm's capital, risk exposures and risk assessment processes. Our Pillar 3 disclosures for the year ended 31 December 2016 are published as a separate document on the Group website under Investor Relations (Announcements & Shareholder Info).

 

 

 

 

 

 

 

 

 

Re-presented*

 

 

 

2016

2015

 

 

 

£000

£000

Cash and balances at central banks

 

 

997

670

Loans and advances to banks

 

 

124

218

Debt securities held-to-maturity

 

 

844

539

Loans and advances to customers

 

 

36,106

31,374

 

 

 

38,071

32,801

* Prior year numbers have been re-presented to exclude discontinuing operations (see note 14).

 

 

 

 

 

 

 

 

In 2016, the Group recognised £325k (2015: £nil) of additional interest income to reflect actual cash flows received on the aquired mortgage book having been in excess of forecast cash flows.

 

 

 

 

Re-presented*

 

2016

2015

 

£000

£000

Banking commissions

1,947

1,666

Investment management fees and commissions

7,122

5,946

Wealth planning fees and commissions

2,156

1,969

Other fee income

205

418

 

11,430

9,999

* Prior year numbers have been re-presented to exclude discontinuing operations (see note 14).

 

 

 

 

 

 

 

Re-presented*

 

2016

2015

 

£000

£000

Net Impairment losses on loans and advances to customers

427

1,250

Impairment losses on financial investments

47

34

 

474

1,284

* Prior year numbers have been re-presented to exclude discontinuing operations (see note 14).

 

 

11.  Other income

Other income mainly consists of rental income from the investment property (see note 29) of £1.1m and £1.6m realised on the investment in Visa (see note 24).

 

 

 

 

 

Re-presented*

 

2016

2015

Operating expenses comprise:

£000

£000

Staff costs, including Directors:

 

 

  Wages and salaries

26,708

19,483

  Social security costs

3,154

2,117

  Pension costs

1,247

946

  Share based payment transactions (note 37)

215

51

Amortisation of intangibles (note 27)

521

473

Depreciation (note 28)

1,146

855

Financial Services Compensation Scheme Levy

233

160

Operating lease rentals

2,610

1,941

Operating expenses for investment property

115

 -  

Acquisitions costs

398

1,645

Other administrative expenses

9,764

8,255

Total operating expenses from continuing operations

46,111

35,926

* Prior year numbers have been re-presented to exclude discontinuing operations (see note 14).

 

 

 

Details on Directors remuneration is disclosed in the Remuneration Report on page 21.

 

 

2016

2015

Remuneration of the auditor and its associates, excluding VAT, was as follows:

£000

£000

Fees payable to the Company's auditor for the audit of the Company's annual accounts

99

95

Fees payable to the Company's auditor and its associates for other services:

 

 

  Audit of the accounts of subsidiaries

237

329

  Audit related assurance services

157

65

  Taxation compliance services

36

82

  Taxation advisory services

99

61

  Other assurance services

170

321

  Corporate finance services

 -  

115

  Other non-audit services

15

13

Total fees payable

813

1,081

 

Other assurance services include regulatory assessments. Corporate finance services include due diligence work on a potential corporate transaction.

 

 

 

 

2016

2015

United Kingdom corporation tax at 20% (2015: 20.25%)

£000

£000

Current taxation

 

 

Corporation tax charge - current year

179

71

Corporation tax charge - adjustments in respect of prior years

457

 -  

 

636

71

Deferred taxation

 

 

Origination and reversal of temporary differences

11

(67)

Adjustments in respect of prior years

73

(125)

 

84

(192)

Income tax expense/(credit)

720

(121)

Tax reconciliation

 

 

Profit/(loss) before tax

179

(2,606)

Tax at 20% (2015: 20.25%)

36

(528)

Permanent differences

67

531

Tax rate change

87

1

Prior period adjustments

530

(125)

Corporation tax charge/(credit) for the year

720

(121)

 

Prior year adjustments mainly relate to management charges disallowed, as a result of the resolution of a lengthy dispute with HMRC.

 

The tax charge on discontinuing operations is disclosed in note 14.

 

The UK corporation tax rate reduced from 21% to 20% with effect from 1 April 2015. On 26 October 2015 the Government substantively enacted a further reduction to the UK corporation tax rate to 19% from 1 April 2017 and to 17% from 1 April 2020. In addition, the Chancellor announced the introduction of a corporation tax surcharge applicable to banking companies with effect from 1 January 2016. The surcharge is levied at a rate of 8% on the profits of banking companies, after taking into account an annual allowance of £25m. This will increase the Group's future current tax charge accordingly.

 

14.  Discontinued operations

The profit after tax from discontinued operations is made up as follows:

 

 

 

 

Year ended 31 December

Year ended 31 December

 

 

 

2016

2015

Discontinued operations

 

 

£000

£000

Profit after tax from discontinued operations - ELL (up to 13 April 2016)

 

 

2,027

9,392

Profit after tax on sale of discontinued operations - ELL

 

 

116,754

 -  

Profit after tax from discontinued operations - STB (up to 15 June 2016)

 

 

9,149

19,617

Profit after tax on sale of discontinued operations - STB

 

 

100,180

 -  

Profit after tax from discontinued operations

 

 

228,110

29,009

 

On 4 December 2015, STB agreed to the conditional sale of its non-standard consumer lending business, ELL, which comprises Everyday Loans Holdings Limited and subsidiary companies Everyday Lending Limited and Everyday Loans Limited, to Non Standard Finance PLC (NSF) for £106.9 million in cash subject to a net asset adjustment and £16.3 million in NSF ordinary shares. The Disposal completed on 13 April 2016, and on completion, NSF repaid intercompany debt of £108.1 million to STB. After selling costs of £6.2m, this resulted in a gain recognised on disposal of £116.8m.

 

Details of the profits of discontinued operations, net assets disposed of and consequential gain recognised on disposal and cash flow from discontinued operations is set out below.

 

 

 

 

From 1 January to 13 April

Year ended 31 December

 

 

 

2016

2015

 

Note

 

£000

£000

Interest income

 

 

11,137

39,230

Net interest income

 

 

11,137

39,230

Fee and commission income

 

 

147

1,523

Fee and commission expense

 

 

(124)

(358)

Net fee and commission income

 

 

23

1,165

Operating income

 

 

11,160

40,395

Net impairment loss on financial assets

 

 

(2,610)

(7,537)

Operating expenses

 

 

(6,016)

(21,195)

Profit before tax

 

 

2,534

11,663

Tax expense

 

 

(507)

(2,271)

Profit after tax

 

 

2,027

9,392

Profit on sale of business

 

 

116,754

 -  

Total profit from discontinued operation

 

 

118,781

9,392

 

 

 

 

 

Profit attributable to:

 

 

 

 

Equity holders of the Company

 

 

61,667

4,876

Non-controlling interests

 

 

57,114

4,516

Profit after tax

 

 

118,781

9,392

 

 

 

 

 

Earnings per share for profit attributable to the equity holders of the Company from discontinued operations during the year

(expressed in pence per share):

 

 

 

 

 - basic

16

 

418.4

33.1

 - diluted

16

 

418.2

32.0

 

The following assets were sold as part of the sale of ELL:

 

Recognised values on sale

 

2016

 

£000

 

 

Loans and advances to banks

457

Loans and advances to customers

116,744

Property, plant and equipment

452

Intangible assets

1,258

Deferred tax assets

371

Prepayments and accrued income

451

Other assets

11

Total assets

119,744

 

 

Intercompany funding

108,088

Current tax liability

3,212

Other liabilities

4,748

Total liabilities

116,048

 

 

Net identifiable assets / (liabilities)

3,696

 

 

Consideration

123,206

Costs

(2,756)

 

 

Profit on sale of ELL

116,754

 

 

The intercompany funding was repaid by NSF at the time of completion.

 

 

 

 

From 1 January to 13 April

Year ended 31 December

 

 

 

2016

2015

 

 

 

£000

£000

Cash flows from operating activities

 

 

 

 

Interest received

 

 

11,137

40,595

Fees and commissions received

 

 

23

1,165

Cash payments to employees and suppliers

 

 

(8,626)

(21,197)

Taxation paid

 

 

(507)

(130)

Cash flows from operating profits before changes in operating assets and liabilities

 

 

2,027

20,433

Changes in operating assets and liabilities:

 

 

 

 

 - net increase in loans and advances to customers

 

 

(3,618)

(27,788)

 - net (increase) / decrease in other assets

 

 

(249)

654

 - net increase in other liabilities

 

 

2,621

7,027

Net cash inflow from operating activities

 

 

781

326

Cash flows from investing activities

 

 

 

 

Purchase of computer software

 

 

 -  

(33)

Purchase of property, plant and equipment

 

 

(9)

(253)

Net cash outflow from investing activities

 

 

(9)

(286)

Net increase/(decrease) in cash and cash equivalents

 

 

772

40

Cash and cash equivalents at 1 January

 

 

1,661

1,621

Cash and cash equivalents at 13 April / 31 December

 

 

2,433

1,661

 

On 15 June 2016 Arbuthnot Banking Group ('ABG') sold 6 million shares in Secure Trust Bank PLC ('STB'), which reduced its shareholding in STB from 51.92% to 18.93%.  From this date the Group accounted for its remaining shareholding in STB as an associate.  After the sale of the 6 million shares, the Group retained Board representation and as such is seen to have significant influence over STB.  The profit and cash flow from discontinued operations relating to ELL have been shown in the tables above.  The ELL entities were subsidiaries of STB and therefore formed part of the STB result reported in the operating segments of ABG.  The tables below therefore reflect the profit and cash flow from the STB group excluding ELL.  The combined impact can be seen in the operating segments (see note 42 - Retail banking).

 

 

 

 

From 1 January to 15 June

Year ended 31 December

 

 

 

2016

2015

 

Note

 

£000

£000

Interest income

 

 

57,498

100,442

Interest expense

 

 

(12,107)

(21,560)

Net interest income

 

 

45,391

78,882

Fee and commission income

 

 

7,981

16,867

Fee and commission expense

 

 

(779)

(3,660)

Net fee and commission income

 

 

7,202

13,207

Operating income

 

 

52,593

92,089

Net impairment loss on financial assets

 

 

(12,172)

(16,782)

Operating expenses

 

 

(29,073)

(50,133)

Profit before tax

 

 

11,348

25,174

Tax expense

 

 

(2,199)

(5,557)

Profit after tax

 

 

9,149

19,617

Profit on sale of shares

 

 

100,180

 -  

Total profit from discontinued operation

 

 

109,329

19,617

 

 

 

 

 

Profit attributable to:

 

 

 

 

Equity holders of the Company

 

 

105,017

10,335

Non-controlling interests

 

 

4,312

9,282

Profit after tax

 

 

109,329

19,617

 

 

 

 

 

Earnings per share for profit attributable to the equity holders of the Company from discontinued operations during the year

(expressed in pence per share):

 

 

 

 

 - basic

16

 

712.5

70.1

 - diluted

16

 

712.2

67.9

 

The following assets were deconsolidated as part of the sale of 6 million shares in STB:

 

Recognised values on sale

 

2016

 

£000

 

 

Cash and balances at central banks

176,647

Loans and advances to banks

27,618

Loans and advances to customers

1,117,700

Other assets

5,805

Financial investments

15,030

Deferred tax asset

606

Intangible assets

7,017

Property, plant and equipment

8,606

Total assets

1,359,029

 

 

Deposits from banks

25,000

Deposits from customers

1,046,009

Current tax liability

293

Other liabilities

29,748

Total liabilities

1,101,050

 

 

Net identifiable assets

257,979

 

 

 

 

Profit on sale of shares was calculated as follows:

 

2016

 

£000

Consideration received

150,000

Less costs

(2,001)

Less net identifiable assets

(257,979)

Add back non-controlling interest

124,046

Add back fair value of remaining investment in STB

86,114

 

 

Profit on sale of STB

100,180

 

 

 

From 1 January to 15 June

Year ended 31 December

 

 

 

2016

2015

 

 

 

£000

£000

Cash flows from operating activities

 

 

 

 

Interest received

 

 

68,635

141,145

Interest paid

 

 

(12,107)

(28,210)

Fees and commissions received

 

 

7,226

4,355

Cash payments to employees and suppliers

 

 

(51,552)

(76,150)

Taxation paid

 

 

(6,034)

(7,410)

Cash flows from operating profits before changes in operating assets and liabilities

 

 

6,168

33,730

Changes in operating assets and liabilities:

 

 

 

 

 - net decrease/(increase) in loans and advances to banks

 

 

 -  

15,000

 - net increase in loans and advances to customers

 

 

(165,976)

(338,343)

 - net decrease/(increase) in other assets

 

 

117,395

(120,678)

 - net (decrease)/increase in deposits from banks

 

 

(10,000)

19,059

 - net increase in amounts due to customers

 

 

12,936

424,655

 - net decrease in other liabilities

 

 

(5,031)

5,613

Net cash (outflow)/inflow from operating activities

 

 

(44,508)

39,036

Cash flows from investing activities

 

 

 

 

Purchase of computer software

 

 

(1,754)

(2,286)

Purchase of property, plant and equipment

 

 

(531)

(1,068)

Disposal of property, plant and equipment

 

 

2,179

 -  

Proceeds from disposal of businesses

 

 

106,912

 -  

Proceeds from sale of property, plant and equipment

 

 

456

 -  

Proceeds from redemption of debt securities

 

 

 -  

12,487

Net cash inflow/(outflow) from investing activities

 

 

107,262

9,133

Cash flows from financing activities

 

 

 

 

Dividends paid

 

 

(10,005)

(12,552)

Net cash used in financing activities

 

 

(10,005)

(12,552)

Net increase in cash and cash equivalents

 

 

52,749

35,617

Cash and cash equivalents at 1 January

 

 

141,595

105,978

Cash and cash equivalents at 15 June / 31 December

 

 

194,344

141,595

 

 

 

2016

2015

Retail banking

 -  

706

Private banking

268

210

Group

19

21

 

287

937

 

 

 

As STB was deconsolidated during the year, the employees have been removed from the  above averages in  2016

16.  Earnings per ordinary share

Basic

Basic earnings per ordinary share are calculated by dividing the profit after tax attributable to equity holders of the Company by the weighted average number of ordinary shares 14,738,548 (2015: 14,738,548) in issue during the year.

 

Diluted

Diluted earnings per ordinary share are calculated by dividing the dilutive profit after tax attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, as well as the number of dilutive share options in issue during the year. The number of dilutive share options in issue at the year end was 50,000 (2015: 200,000).

 

 

2016

2015

Profit attributable

£000

£000

Total profit after tax attributable to equity holders of the Company

166,143

12,726

Loss after tax from continuing operations attributable to equity holders of the Company

(541)

(2,485)

Profit after tax from discontinued operations attributable to equity holders of the Company (STB excl. ELL)

105,017

10,335

Profit after tax from discontinued operations attributable to equity holders of the Company (ELL)

61,667

4,876

 

 

 

 

2016

2015

Dilutive profit attributable

£000

£000

Total profit after tax attributable to equity holders of the Company

166,143

12,448

Loss after tax from continuing operations attributable to equity holders of the Company

(541)

(2,485)

Profit after tax from discontinued operations attributable to equity holders of the Company (STB excl. ELL)

105,017

10,148

Profit after tax from discontinued operations attributable to equity holders of the Company (ELL)

61,667

4,785

 

 

 

 

2016

2015

Basic Earnings per share

p

p

Total Basic Earnings per share

1,127.2

86.3

Basic Earnings per share from continuing operations

(3.7)

(16.9)

Basic Earnings per share from discontinued operations (STB excl. ELL)

712.5

70.1

Basic Earnings per share from discontinued operations (ELL)

418.4

33.1

 

 

 

 

2016

2015

Diluted Earnings per share

p

p

Total Diluted Earnings per share

1,126.7

83.3

Diluted Earnings per share from continuing operations

(3.7)

(16.6)

Diluted Earnings per share from discontinued operations (STB excl. ELL)

712.2

67.9

Diluted Earnings per share from discontinued operations (ELL)

418.2

32.0

 

 

 

2016

2015

Group

£000

£000

Cash and balances at central banks

 195,752

368,611

 

Surplus funds are mainly held in the Bank of England reserve account, with the remainder held in certificates of deposit, fixed rate notes and money market deposits in highly rated banks (the majority held in UK clearing banks).

 

 

 

2016

2015

Group

£000

£000

Placements with banks included in cash and cash equivalents (note 39)

36,951

28,578

 

 

 

The table below presents an analysis of loans and advances to banks by rating agency designation as at 31 December, based on Moody's long term ratings:

 

2016

2015

Group

£000

£000

Aa1

 -  

220

A1

20,696

15,972

A2

15,582

6,258

A3

110

5,366

Baa1

555

762

Unrated

8

 -  

 

36,951

28,578

 

 

 

 

None of the loans and advances to banks are either past due or impaired.

 

 

 

 

 

 

2016

2015

Company

£000

£000

Placements with banks included in cash and cash equivalents (note 39)

89,072

12,444

 

 

 

Loans and advances to banks include bank balances of £89.1m (2015: £12.4m) with Arbuthnot Latham & Co., Ltd

19.  Debt securities held-to-maturity

Debt securities represent certificates of deposit. The Group's intention is to hold them to maturity and, therefore, they are presented in the Statement of Financial Position at amortised cost.

 

The movement in debt securities held to maturity may be summarised as follows:

 

 

 

2016

2015

Group

£000

£000

At 1 January

87,728

91,683

Exchange difference

2,087

808

Additions

89,384

145,880

Redemptions

(68,103)

(150,643)

Deconsolidation of STB

(3,796)

 -  

At 31 December

107,300

87,728

 

The table below presents an analysis of debt securities by rating agency designation at 31 December, based on Moody's long term ratings:

 

 

 

 

2016

2015

Group

£000

£000

Aaa

40,337

42,618

Aa1

23

23,317

Aa2

26,089

8,913

Aa3

6,000

1

A1

31,953

6,311

A2

 -  

4,554

A3

2,898

2,000

Baa1

 -  

14

 

107,300

87,728

 

 

 

None of the debt securities held-to-maturity are either past due or impaired.

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

Contract/ notional amount

Fair value assets

Fair value liabilities

 

Contract/ notional amount

Fair value assets

Fair value liabilities

Group

£000

£000

£000

 

£000

£000

£000

Currency swaps

6,566

85

218

 

34,459

59

135

Interest rate caps

3,800

 -  

9

 

 -  

 -  

 -  

Structured notes

1,607

1,431

 -  

 

1,607

1,431

 -  

 

11,973

1,516

218

 

36,066

1,490

135

 

The principal derivatives used by the Group are over the counter exchange rate contracts and interest rate caps (used for cash flow hedges). Exchange rate related contracts include currency swaps and cash flow hedges include interest rate caps.

 

A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; exchange of principal can be notional or actual. The currency swaps are settled net and therefore the fair value is small in comparison to the contract/notional amount.

 

An interest rate cap is an option contract which puts an upper limit on a floating exchange rate. The writer of the cap has to pay the holder of the cap the difference between the floating rate and the reference rate when that reference rate is breached. The holder pays a premium for the cap.

 

Also included in derivative financial instruments are structured notes. These notes contain embedded derivatives (embedded options to buy and sell indices) and non-derivative host contracts (discounted bonds). Both the host and embedded derivatives are presented net within derivative financial instruments.

 

The Group only uses investment graded banks as counterparties for derivative financial instruments. None of the contracts are collateralised.

 

The table below presents an analysis of derivative financial instruments contract/notional amounts by rating agency designation of

counterparty bank at 31 December, based on Moody's long term ratings:

 

 

 

2016

2015

Group

£000

£000

Aa3

 -  

34,459

A1

10,366

 -  

Baa1

1,607

1,607

 

11,973

36,066

 

 

 

 

2016

2015

Group

£000

£000

Gross loans and advances

759,772

1,615,208

Less:  allowances for impairment on loans and advances (note 22)

(973)

(35,696)

 

758,799

1,579,512

 

On 19 December 2016 AL completed the purchase of a private banking loan portfolio from Duncan Lawrie Ltd for a consideration of £42.7m. The portfolio is included in loans and advances to customers at fair value.

 

For a maturity profile of loans and advances to customers, refer to note 6.

 

Loans and advances to customers include finance lease receivables as follows:

 

 

 

2016

2015

Group

£000

£000

Gross investment in finance lease receivables:

 

 

 - No later than 1 year

 -  

41,906

 - Later than 1 year and no later than 5 years

 -  

67,789

 - Later than 5 years

 -  

873

 

 -  

110,568

Unearned future finance income on finance leases

 -  

(18,996)

Net investment in finance leases

 -  

91,572

The net investment in finance leases may be analysed as follows:

 

 

 - No later than 1 year

 -  

31,684

 - Later than 1 year and no later than 5 years

 -  

59,074

 - Later than 5 years

 -  

814

 

 -  

91,572

 

 

 

Loans and advances to customers can be further summarised as follows:

 

 

 

2016

2015

Group

£000

£000

Neither past due nor impaired

719,515

1,516,236

Past due but not impaired

23,379

23,792

Impaired

16,878

75,180

Gross

759,772

1,615,208

Less: allowance for impairment

(973)

(35,696)

Net

758,799

1,579,512

 

 

 

(a) Loans and advances past due but not impaired

 

 

 

 

 

Gross amounts of loans and advances to customers that were past due but not impaired were as follows:

 

 

 

2016

2015

Group

£000

£000

Past due up to 30 days

961

643

Past due 30 - 60 days

5,689

1,714

Past due 60 - 90 days

638

1,706

Over 90 days

16,091

19,729

Total

23,379

23,792

 

Loans and advances typically fall into this category when there is a delay in either the sale of the underlying collateral or the completion of formalities to extend the credit facilities for a further period. Management have no material concerns regarding the quality of the collateral that secures the lending. 

 

(b) Loans and advances renegotiated

Restructuring activities include external payment arrangements, modification and deferral of payments.  Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts.  Restructuring policies and practices are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue.  These policies are kept under continuous review.  Renegotiated loans that would otherwise be past due or impaired totalled £nil (2015: £nil).

 

(c) Collateral held

Collateral is measured at fair value less costs to sell.

 

Arbuthnot Latham & Co., Ltd

Most of the loans are secured by property. The fair value of the collateral held against past due but not impaired or impaired balances is £103.7m (2015: £93.3m) against loans of £40.3m (2015: £43.2m), giving an average loan-to-value of 39% (2015: 46%). The weighted average loan-to-value is 61% (2015: 63%). The net amount of individually impaired loans and advances to customers after impairment but before taking into account the cash flows from collateral held is £15.9m (2015: £18.0m).

 

Secure Trust Bank PLC (2015 comparatives)

The majority of the loans were unsecured personal loans with an average size at inception of £5,000; therefore the portfolio did not have a significant concentration to any individuals, sectors or geographic locations. £0.2m related to a standard mortgage loan secured upon residential property which was neither past due nor impaired. The residential property over which the mortgage loan was secured had a fair value of £0.2m based on other property sales, and a loan to value ratio of 72%.

 

£368.0m of the loans were secured upon residential or commercial property and these were neither past due nor impaired. All loans secured were at a loan to value ratio of less than 80%.

 

£165.7m of the loans were secured against motor vehicles where the security was discharged when the buyer exercised an option to buy the goods at a predetermined price at the end of the loan term. Management's estimate of the fair value of the motor vehicles was £127.1m.

 

 

 

 

 

 

Reconciliation of specific allowance for impairments:

 

 

 

2016

2015

Group

£000

£000

At 1 January

35,696

38,411

Adjustments for disposals

 -  

(5,812)

Impairment losses

474

26,654

De-consolidation of STB

(34,285)

 -  

Loans written off during the year as uncollectible

(962)

(23,590)

Amounts recovered during the year

50

33

At 31 December

973

35,696

 

 

 

Reconciliation of collective allowance for impairments:

 

 

 

2016

2015

Group

£000

£000

At 1 January

3,141

2,031

Impairment losses

 -  

1,110

De-consolidation of STB

(3,141)

 -  

At 31 December

 -  

3,141

 

 

 

A further analysis of allowances for impairment of loans and advances is as follows:

 

 

 

2016

2015

Group

£000

£000

Loans and advances to customers - UK Private Bank

973

1,411

Loan and advances to customers - Retail Bank

 -  

34,285

At 31 December

973

35,696

 

 

 

 

2016

2015

Group

£000

£000

Trade receivables

1,197

2,625

Inventory

5,213

5,226