Arbuthnot Banking - Final Results
RNS Number : 8401H
Arbuthnot Banking Group PLC
19 March 2015
 

19 March 2015                                                                                                                                                                     

For immediate release

 

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

Audited Final Results for the year to 31 December, 2014

 

Poised for next phase of growth

 

Arbuthnot Banking Group today announces a record profit before tax of £22.5m, a 43% increase on the prior year.

 

Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited and Secure Trust Bank PLC.

 

FINANCIAL HIGHLIGHTS

·      Profit before tax £22.5m (2013: £15.7m)

·      No significant one off transactions

·      Underlying profits of £30.6m (2013: £18.5m)

·      Operating income grew by 26% to £126.3m (2013: £100m)

·      Customer lending exceeded £1bn for the first time; 2014 £1.1bn (2013: £732m)

·      Positive operating leverage of 13% (2013: 14%)*

·      Earnings per share 56.5p (2013: 51.9p)

·      Total dividend per share 27p (2013: 44p which included a 18p special dividend)

·      Net assets per share 1,136p (2013: 570.5p) an increase of 99%

 

OPERATIONAL HIGHLIGHTS

 

Private Banking - Arbuthnot Latham

·      Profit before tax £3.6m (2013: £7.7m which included a £6.5m gain on sale of Wilson Street, the Group's offices)

·      Customer loans up 57% to £536.0m  (2013: £341.0m)

·      Customer deposits grew 12% to £585.9m (2013: £519.7m)

·      Assets under management increased 26% to £666m (2013: £528m)

·      Completed the purchase of £106m mortgage portfolio

 

Retail Banking - Secure Trust Bank

·      Profit before tax £26.3m (2013: £17.2m)

·      Customer lending balances increased by 59% to £622m (2013: £391m)

·      Total customer numbers increased to 429,507 (2013: 350,861)

·      All SME lending divisions have now extended credit

·      Successful share placing raised a further £50m of capital to fund further growth

 

Commenting on the results, Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "This has been another good year for the Group with it reporting record profits. Customer lending across the Group has been particularly strong and has now exceeded £1.1 billion. Over the recent past Secure Trust has remained the Group's main focus of strategic investment while Arbuthnot Latham has also been growing well. The Group has now generated additional capital and is well positioned further to support this growth."

 

*Percentage difference between the increase in Operating Income and Operating Expenses

 

Note: Secure Trust Bank is also making its final results announcement today which should be read in conjunction with this statement.

 

ENQUIRIES:
 

Arbuthnot Banking Group

Henry Angest, Chairman and Chief Executive                                                                                                           0207 012 2400

Andrew Salmon, Chief Operating Officer

James Cobb, Group Finance Director

David Marshall, Director of Communications

 

Canaccord Genuity Ltd (Nominated Advisor)

Sunil Duggal                                                                                                                                                                    0207 665 4500

 

Numis Securities Ltd (Broker)
Chris Wilkinson                                                                                                                                                              0207 260 1000

Mark Lander

 

Bell Pottinger (Financial PR)

Ben Woodford                                                                                                                                                                0203 772 2566

Dan de Belder

 

The 2014 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 2015.  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

 

 

 

 

Year ended 31 December

Year ended 31 December

 

 

 

2014

2013

 

Note

 

£000

£000

Interest income

 

 

117,624

93,329

Interest expense

 

 

(19,371)

(20,279)

Net interest income

 

 

98,253

73,050

Fee and commission income

9

 

29,963

31,816

Fee and commission expense

 

 

(1,930)

(4,846)

Net fee and commission income

 

 

28,033

26,970

Operating income

 

 

126,286

100,020

Net impairment loss on financial assets

10

 

(18,591)

(18,807)

Gain from a bargain purchase

11

 

 -  

413

Gain on sale of building

12

 

 -  

6,535

Other income

13

 

 -  

1,183

Operating expenses

14

 

(85,180)

(73,631)

Profit before income tax from continuing operations

 

 

22,515

15,713

Income tax expense

16

 

(5,499)

(4,198)

Profit after income tax from continuing operations

 

 

17,016

11,515

Profit for the year

 

 

17,016

11,515

 

 

 

 

 

Other comprehensive income

 

 

 

 

Items that are or may be reclassified to profit or loss

 

 

 

 

Revaluation reserve

 

 

 

 

 - Amount transferred to profit and loss

 

 

(2)

 -  

Cash flow hedging reserve

 

 

 

 

 - Effective portion of changes in fair value

 

 

 -  

(15)

 - Net amount transferred to profit and loss

 

 

378

 -  

Available-for-sale reserve

 

 

(81)

(250)

Other comprehensive income for the period, net of tax

 

 

295

(265)

Total comprehensive income for the period

 

 

17,311

11,250

 

 

 

 

 

Profit attributable to:

 

 

 

 

Equity holders of the Company

 

 

8,634

7,930

Non-controlling interests

 

 

8,382

3,585

Profit for the year

 

 

17,016

11,515

 

 

 

 

 

Total comprehensive income attributable to:

 

 

 

 

Equity holders of the Company

 

 

8,677

7,681

Non-controlling interests

 

 

8,634

3,569

Total comprehensive income for the period

 

 

17,311

11,250

 

 

 

 

 

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

 

 

 

 

(expressed in pence per share):

 

 

 

 

 - basic

17

 

56.5

51.9

 - diluted

17

 

55.8

51.5

 

 

Consolidated statement of financial position

 

 

 

 

At 31 December

 

 

 

2014

2013

 

Note

 

£000

£000

ASSETS

 

 

 

 

Cash and balances at central banks

18

 

115,938

193,046

Loans and advances to banks

19

 

31,844

105,061

Debt securities held-to-maturity

20

 

91,683

19,466

Derivative financial instruments

21

 

2,707

508

Loans and advances to customers

22

 

1,158,983

732,009

Other assets

24

 

16,866

17,267

Financial investments

25

 

1,277

1,975

Deferred tax asset

26

 

2,588

3,954

Investment in associate

27

 

943

943

Intangible assets

28

 

11,318

13,103

Property, plant and equipment

29

 

12,475

5,522

Total assets

 

 

1,446,622

1,092,854

EQUITY AND LIABILITIES

 

 

 

 

Equity attributable to owners of the parent

 

 

 

 

Share capital

35

 

153

153

Retained earnings

36

 

114,641

67,901

Other reserves

36

 

(1,263)

(1,467)

Non-controlling interests

 

 

60,038

20,327

Total equity

 

 

173,569

86,914

LIABILITIES

 

 

 

 

Deposits from banks

30

 

27,657

2,003

Derivative financial instruments

21

 

1,067

371

Deposits from customers

31

 

1,194,285

957,791

Current tax liability

 

 

3,612

1,427

Other liabilities

32

 

34,984

31,017

Deferred tax liability

26

 

1,099

Debt securities in issue

33

 

11,448

12,232

Total liabilities

 

 

1,273,053

1,005,940

Total equity and liabilities

 

 

1,446,622

1,092,854

 

 

Chairman's statement

 

Once again I am pleased to report that Arbuthnot Banking Group ("ABG" or "the Group") has made a record profit before tax, this year of £22.5m (2013: £15.7m), which represents an increase of 43% on 2013.  This result does not include any large one off transactions, so the true value of the recurring business that we are developing can now be clearly seen.

 

While I reflect on the financial results, I note with interest that the customer lending across the Group has now exceeded £1.1bn.  This is a strong performance, given that at the start of the recent financial crisis the balance stood at £172m.  This would seem to justify our cautious approach leading up to the downturn, but also reflects our decisive and entrepreneurial reaction to the opportunities that have since arisen.

 

The most significant decision that we took three years ago was to proceed with an IPO of Secure Trust Bank ("STB" or "the Retail Bank").  This gave our retail bank the access to the capital markets that it needed to support its expansion plans.  The first phase of its development has been to grow the consumer finance lending portfolios, both organically and through acquisition.  These are now well established and hence it has started the next phase, which is to build the SME lending operations.

 

In order to fund these plans, STB carried out a successful share placing in July which raised a further £50m of new capital.  At the same time the Group took the opportunity to sell £25m of its stake in STB.  The result of these transactions was nearly to double the net assets of the Group.

 

While STB has remained the Group's main focus of strategic investment over the recent past, Arbuthnot Latham ("AL" or "the Private Bank") has also been growing well.  Now that the Group has generated additional capital, it is positioned to further support the development of AL, by allowing it to expand into other areas, where it can use its position as a highly respected and well-funded bank.

 

The first of such actions resulted in AL being able to buy a geographically diversified portfolio of residential mortgages from the administrator of the Dunfermline Building Society.  This purchase was achieved at a good discount to the face value of the loans, but more importantly it is a well-seasoned portfolio, which allows us to predict the credit performance with a high degree of accuracy.  In the longer term the assets should enable us to take advantage of the Bank of England's sterling monetary framework, giving us another source of stable funding with which to manage the Private Bank's liquidity.

 

AL also completed its move to our new headquarters in Wilson Street.  The upgrade in facilities appears to have been well received by both our clients and employees alike and represents a clear statement of confidence in our prospects for the future.

 

One note of caution regarding an issue that has concerned me during the recent months is the acceleration of regulatory pronouncements emanating from both the UK and International regulators.  We had hoped for a more level playing field on which to compete with the larger banks. However, the Basel Committee's recent proposed revision to the standardised capital rules would not appear to achieve this. I hope that the consultation process will enable this to be addressed, before it is implemented in the future.  We will watch developments on this matter closely.  Another issue is the increasing geo-political risks that emanate from various flashpoints.

 

Private Banking - Arbuthnot Latham & Co., Ltd

The Private Bank has reported a profit of £3.6m (2013: £7.7m).  At first glance this does not seem to reflect the good progress that the business has made. However, when you exclude the £6.5m one off gain from the sale and lease back transaction in 2013, the underlying profits have more than doubled.  I am also pleased to note that customer loans have exceeded £500m for the first time.  Helped in part by the acquisition of the mortgage portfolio, but excluding that, the core loan book still grew at a healthy rate of 26%. 

 

Last year, I discussed the importance of investing for the future by developing the bank's distribution capabilities.  The dislocation in the financial services sector has made it possible for us to continue to attract experienced senior bankers, which has proved an effective means of increasing both the number and also the quality of clients that we serve.  Outside London, the office in Dubai celebrated its first anniversary and has generated good momentum in a short space of time.  Elsewhere, the Exeter office has been strengthened and we opened a new office in Manchester to cover the North West of England.

 

Retail Banking - Secure Trust Bank PLC

Our retail banking business has delivered a pre-tax profit of £26.3m (2013: £17.2m), which is a 53% increase on the previous year and confirms that the underlying profits of the bank are emerging as the effect of the accounting required for the acquisitions is unwinding.

 

All of the STB lending portfolios have grown at a good rate, but I have been particularly pleased to see the robust performance of the retail finance division.  This has been largely due to the smooth integration of the V12 business.  Their market leading technology and operating platform, along with the strong funding profile of STB, has combined to allow them to pitch with greater confidence and success to larger retail clients than previously.  This is evidenced by amongst others, the new strategic relationship with the online retailer AO.com.

 

The next phase of expansion for STB began in 2014 with the start of the SME division. The largest part of this is currently Real Estate Finance which generated £133.7m of new lending volumes, most of which was secured on residential property.  Furthermore, the division also launched an invoice finance business and formed a partnership with Haydock Finance to offer asset based lending.

 

Board Changes and Personnel

The ABG Board has once again remained unchanged throughout the year.  I would like to thank my colleagues on the Board for their generous and continued support and the dedication they have shown to the Group.

 

The results of the Group also reflect the hard work and commitment of both existing and new members of staff.  On behalf of the Board I extend our thanks to all of them for their contribution in 2014.

 

Dividend

The Board is proposing a final dividend of 16p per share, an increase of 1p on last year and together with the interim dividend of 11p combines to give a total dividend for the year of 27p (2013: 44p), which is an increase of 1p excluding last year's special dividend of 18p.

 

If approved, the dividend will be paid on 15 May 2015 to shareholders on the register at close of business on 17 April 2015.

 

Outlook

The economic outlook is now uncertain; deflation may become a short term reality in the UK. The Eurozone economy is still weak and the central banks seem committed to expansionary monetary policies.  On top of this the General Election looms large with an uncertain outcome and potentially far reaching consequences.  Despite all of this both of our banks are making good progress and we remain optimistic that this can continue.

 

 

Strategic Report

 

 

 

 

 

Business Review - Private Banking - Arbuthnot Latham

 

 

 

 

2014

2013

Operating income

£28.9m

£21.7m

Other income

£2.1m

£10.3m

Operating expenses

£24.0m

£21.3m

Profit before tax

£3.6m

£7.7m

Customer loans

£536.5m

£341.0m

Customer deposits

£585.9m

£521.2m

Total assets

£700.8m

£619.7m

Customer net margin

4.4%

4.4%

Loan to deposit ratio

92%

66%

 

AL delivered a year of further growth across all of its key business areas, with the momentum that has been established in previous years continuing to strengthen.  The core business of Private Banking and Wealth Management benefited from the evolving market conditions.  Its client focused approach resonates well in its core market.  As a consequence the bank has been able to increase its profile and in turn its flow of good quality borrowers.  The move into the newly refurbished headquarters in London towards the end of the year was a tangible sign of the development of the business and the positive intent towards continuing this growth in the years ahead.

 

The year-end reported profit for AL is £3.6m (2013: £7.7m).  However, the prior year's result was dominated by the gain generated by the sale and lease back transaction on the new headquarters.

 

The strategy to focus on key sectors of the wealth market in the UK, through the recruitment of new Senior Bankers, is proving to be increasingly effective.  At the same time, the growing disenchantment of wealthy clients with the ever increasing volume of changes, in what is essentially a relationship driven market, has resulted in many of these clients moving their business to AL.  Delivering on relationship led client service is at the heart of the philosophy of the bank and the foundation principle of its business.  The financial results demonstrate the success of this strategy.

 

During the year the client loan book (excluding the acquired portfolio) grew by 26% to £430m (2013: £341m), as the bank supported its clients in pursuing their wealth preservation and enhancement strategies, through appropriate use of well-structured lending opportunities.  Client deposits grew by 12% to close the year at £586m (2013: £521m).  As a result of the higher number of quality private banking clients, the overall cost of deposits fell during the year as, these clients have a higher propensity to retain a proportion of their deposits at call.

 

The final product in the bank's full service offering to clients is wealth management.  This maintained its momentum with a 26% increase in Assets Under Management which finished the year at £666m (2013: £528m).

 

The bank has continued to develop the strength of its business outside of the London headquarters.  The office in Exeter has grown, a new office in Manchester to cover the North West has been opened and Dubai completed its first year of operation.  Here strong business growth has been achieved in a short space of time, reflecting the dynamic nature of the local market and its long term potential.

 

Towards the end of the year, the bank successfully completed the purchase of a portfolio of residential mortgage loans.  This portfolio was being sold by the Administrator of the Dunfermline Building Society. The loans are well seasoned which offers us a good insight into their underlying credit risk. They are also geographically diversified. More importantly, these loans should give us a stable asset to offer as collateral to participate in the Bank of England's sterling monetary framework.  This further diversifies and strengthens our sources of liquidity.

 

The portfolio was purchased at a discount to face value and came onto our balance sheet at £106m.  It had little impact on the results for 2014 but will be immediately accretive in 2015. 

 

Looking ahead, the increasing profile of the bank along with the continuing positive conditions in the market, provide an encouraging scenario for the bank to continue its growth in the future.

 

 

Business Review - Retail Banking - Secure Trust Bank

 

 

 

 

2014

2013

Operating income

£97.9m

£79.0m

Operating expenses

£56.3m

£46.7m

Profit before tax

£26.3m

£17.2m

Customer loans

£622.5m

£391.0m

Customer deposits

£608.4m

£436.6m

Customer numbers

 429,507

 350,861

Net interest margin

17.1%

16.9%

Cost income ratio

0.57

0.55

 

STB has reported record pre-tax profits of £26.3m (2013: £17.2m), which is an increase of 53% on the previous year.

 

This continues the favourable trend of the business since the IPO late in 2011, which now shows that underlying profits have increased by 323% and customer lending balances have followed suit with growth in excess of 300%.

 

The bank is also serving record numbers of customers (429,507) across its savings, basic bank account, motor finance, retail finance, unsecured lending, asset finance, invoice finance and real estate finance markets.  As ever, the bank's friendly and professional staff remain fully committed to achieving good outcomes for its customers, through the provision of straightforward transparent banking solutions.

 

In total, the bank's lending portfolios achieved healthy double digit growth with advances to customers increasing 59% to close the year at £622.5m.  Total new lending volumes grew 79% to £545.9m (2013: £304.7m).

 

Across the individual portfolios, motor finance increased by 20% to £137.9m, as the business continued to service the Top 100 UK car dealer groups and strengthened its relationship with specialist motor intermediaries.

 

Retail finance grew by 37% to £156.3m, with the encouraging performance of V12, the business acquired in 2013.  The launch of its season ticket offering was well received and the funding strength provided by STB has allowed the business to pitch to larger retailers.

 

Personal unsecured lending balances including Everyday Loans increased to £181.4m (2013: £159.2m).  These portfolios are currently being managed to maximise return rather than outright growth, however the business has now successfully launched a Guarantor Loan offering which should supplement the portfolio growth rates in 2015.

 

As forecast in 2013, the bank launched its SME division during the year.  Real estate finance has quickly developed a portfolio of loans totalling £133.7m largely secured on residential properties.

 

Towards the end of the year the bank also began its invoice finance business via STB Commercial Services.  The flow of new business exceeded our initial expectations and the portfolio at the end of the year totalled £5m.

 

Finally, asset finance was commenced via a strategic partnership with Haydock Finance, which provides a full business outsourcing service.

 

Given the focus that the bank puts on ensuring that its credit underwriting systems and processes generate the appropriate lending decisions, it is not surprising that the credit performance of the portfolios continues to outperform the levels expected at the time of origination. 

 

The bank has been on a good trajectory of growth and the management teams have been careful to ensure that growth is well controlled.  Improvements have been made in key areas of the bank, the risk and compliance teams have been enhanced.  A new Treasurer, a Chief Internal Auditor and a Chief Technology Officer have been appointed.  As ever, the team have ensured that their long established principles of ensuring a stable and secure funding base to underpin the growth have been followed. The bank remains funded from the retail deposit market and during the year customer deposits increased by 39% to close at £608.4m.  Also, in July the bank successfully completed a £50m share placement, which increased the capital base of the bank by 44%.

 

As the good reputation of the bank continues to grow, it has been recognised by receiving external accolades.  STB remains the only bank in the UK to hold the Customer Service Excellence Award (CSE), which replaced the kite mark and for the third year running it has been awarded the 4 star mark by the Fair Banking Foundation.  Finally, Investors in People upgraded the bank's status from bronze to silver.

 

 

Strategic Report - Financial Review

 

ABG 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 customers and clients in its chosen markets of Private Banking and Retail 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 to customers and clients and commission earned on the sale of financial instruments and products.

 

Highlights

 

 

 

2014

2013

Summarised Income Statement

£000

£000

Net interest income

98,253

73,050

Net fee and commission income

28,033

26,970

Operating income

126,286

100,020

Gain from a bargain purchase

 -  

413

Gain from sale of building

 -  

6,535

Other income

 -  

1,183

Operating expenses

(85,180)

(73,631)

Impairment losses - financial investments

(347)

(1,073)

Impairment losses - loans and advances to customers

(18,244)

(17,734)

Profit before tax

22,515

15,713

Income tax

(5,499)

(4,198)

Profit after tax

17,016

11,515

Basic earnings per share (pence)

56.5

51.9

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Secure Trust Bank

Arbuthnot Banking Group

31 December 2014

£000

£000

£000

Profit before tax

3,628

26,339

22,515

Dubai office investment

981

 -  

981

Regional office investment

217

 -  

217

ELL fair value amortisation

 -  

4,294

4,294

STB acquisition costs

 -  

198

198

STB share options

 -  

1,542

1,542

V12 fair value amortisation

 -  

893

893

Underlying profit

4,826

33,266

30,640

 

 

 

 

Basic earnings per share (pence)

 

 

79.8

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Secure Trust Bank

Arbuthnot Banking Group

31 December 2013

£000

£000

£000

Profit before tax

7,728

17,193

15,713

Gain on sale of building

(6,535)

 -  

(6,535)

180th Year anniversary

 -  

 -  

436

Dubai office investment

879

 -  

879

ELL fair value amortisation

 -  

4,066

4,066

STB acquisition costs

 -  

854

854

STB share options

 -  

2,221

2,221

V12 fair value amortisation

 -  

893

893

Acquired portfolios

 -  

1

1

Underlying profit

2,072

25,228

18,528

 

 

 

 

Basic earnings per share (pence)

 

 

42.3

 

Once again the Group has traded well during 2014. The profit before tax at £22.5m is a record for the Group. It represents an increase of 43% compared to 2013 (£15.7m) which in itself is a significant increase, but this is even more impressive if the prior year results are adjusted for the £6.5m gain recognised on the sale and lease back transaction of Wilson Street.

 

The results are also noteworthy in that 2014 contained no significant "one off" items. This gives a better understanding to shareholders of the returns of the business that the Group has been developing over the recent few years.

 

This profit before tax translates into a basic earnings per share ("EPS") of 56.5p compared to the prior year of 51.9p, which is an increase of 9%.  However, on an underlying basis the EPS is 79.8p up from 42.3p in the prior year, an increase of 89%.

 

During 2013 the Group recorded operating income in excess of £100m for the first time, which continued its robust growth in 2014 with a further 26% increase led once again by the growth in our lending balances.  Net interest income now represents 78% of total revenues compared to 73% in the prior year.  Also, the approximate average blended yield of net interest income compared to average customer loans increased to 13% with the continuing increased proportion of the higher yielding loan portfolios in Secure Trust Bank.  However, I would expect this value to fall over time as the impact of the Real estate finance written by Secure Trust Bank becomes more significant as a proportion of the Group's overall lending portfolio.

 

The expense base grew by 16% to £85m as the first impact of the new business lines was recognised.  However, the net operating leverage was 13% (2013: 14%), which indicates that for every pound the Group adds to its expense base it receives back £1.13 in revenues.

 

Impairment losses increased by 3% to £18.2m; however, compared to the increase in the loan book of 58% this would suggest that the Group credit decision process is performing well.

 

Balance Sheet Strength

 

 

 

2014

2013

Summarised Balance Sheet

£000

£000

Assets

 

 

Loans and advances to customers

1,158,983

732,009

Liquid assets

239,465

317,573

Other assets

48,174

43,272

Total assets

1,446,622

1,092,854

 

 

 

Liabilities

 

 

Customer deposits

1,194,285

957,791

Other liabilities

78,768

48,149

Total liabilities

1,273,053

1,005,940

Equity

173,569

86,914

Total equity and liabilities

1,446,622

1,092,854

 

During 2014 the Group's lending to customers exceeded £1bn for the first time and closed the year at over £1.1bn. This figure was increased by the purchase of the residential mortgage portfolio (£106m) toward the end of December, but excluding that the customer loans portfolio increased by 44% and all in the figure grew by 58%.

 

Once again the Group's lending remains almost entirely funded by customer deposits, which increased by 25% during the year.  The Group's deposit base also broke through £1bn for the first time in its history.  The loan to deposit ratio closed at 97% as a result of the mortgage portfolio purchase.  However, the Group has significantly increased its access to sources of liquidity during the year.  The share placing in July raised £75m of cash, but more importantly the mortgage portfolio should contribute collateral to the Funding for Lending Scheme ("FLS") and other schemes operated by the Bank of England.

 

As noted, the share placing not only raised surplus cash but it also helped to significantly increase the net assets of the Group which closed the year at £174m, double the value of the prior year.

 

Segmental Analysis

The segmental analysis in Note 42 of the Consolidated Financial Statements in the Annual Report highlights the disclosures required under IFRS 8 'Operating Segments'. The operating segments are Private Banking (Arbuthnot Latham & Co., Ltd) and Retail Banking (Secure Trust Bank PLC). Group costs and intercompany elimination journals are shown separately to reconcile back to the Group consolidated result.

 

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

 

Private Banking - Arbuthnot Latham

 

 

 

2014

2013

Summarised Income Statement

£000

£000

Net interest income

19,387

12,778

Net fee and commission income

9,508

8,873

Operating income

28,895

21,651

Gain from sale of building

 -  

6,535

Other income

2,088

3,765

Operating expenses

(23,977)

(21,309)

Impairment losses - financial investments

(334)

(824)

Impairment losses - loans and advances to customers

(3,044)

(2,090)

Profit before tax

3,628

7,728

 

The profit before tax for the year was reported at £3.6m (2013: £7.7m).  However, the prior year results included the one off gain of £6.5m on the sale of the Wilson Street property. Once the impact of this is excluded, the core results show a robust increase of 200%.  Much of this increase was driven by the growth in net interest income which grew by 52%, as the continued growth in the loan portfolio has a positive benefit to the income of the bank. It should also be noted that the purchase of the mortgage portfolio from the Dunfermline Building Society had an immaterial impact on the results for 2014, having only been completed on 19 December. The benefit to net interest will emerge in 2015.

 

With the continued low interest rate environment, which was helped by the extension to the Funding for Lending Scheme, the bank's net customer margin remained at 4.4% consistent with the prior year. The fees and commissions earned grew by 7% as a result of the continued success of the investment management and wealth planning businesses. Operating expenses increased by 13% with the further investment in the number and quality of our Private Bankers.

 

The credit impairment losses increased to £3m, but compared to the average loan portfolio the loss rate was 68 basis points, well below the 1% benchmark and trending to below 50 basis points, as the legacy portfolio continues to be worked through by our recovery team.

 

During 2014 the bank closed Gilliat Financial Solutions. The financial impact of this was broadly neutral, with the exit costs being offset by receipts from the sale of certain intellectual properties.

 

 

2014

2013

Summarised Balance Sheet

£000

£000

Assets

 

 

Loans and advances to customers

536,488

340,982

Liquid assets

122,198

239,168

Other assets (including Group balances)

40,786

39,523

Total assets

699,472

619,673

 

 

 

Liabilities

 

 

Customer deposits

585,867

521,183

Other liabilities (including Group balances)

73,636

71,438

Total liabilities

659,503

592,621

Equity

39,969

27,052

Total equity and liabilities

699,472

619,673

 

Customer assets increased by 57% and by 26% excluding the purchase of the mortgage portfolio (£106m) to close the year at £536.5m (2013: £341.0m). The loan book remains well secured with an average LTV of 48% (2013: 50%).

 

The fall in liquid assets is largely as a result of utilising surplus cash resources held at the Bank of England to complete the portfolio acquisition. Customer deposits increased by £64.7m (12%) to close the year at £585.9m as the bank continued to experience strong deposit growth.

 

In order to facilitate the bank's ambitions to grow and more specifically to complete the portfolio acquisition, the Group made further capital contributions to the bank during the year. This increased its net assets by 48% to close at £40m. As a result, the Private Bank had a total capital ratio of 10.8% (2013: 10.8%) and a core tier 1 ratio of 9.4% (2013: 8.8%).

 

Retail Banking - Secure Trust Bank

 

 

 

2014

2013

Summarised Income Statement

£000

£000

Net interest income

79,372

60,885

Net fee and commission income

18,525

18,097

Operating income

97,897

78,982

Gain from a bargain purchase

 -  

413

Operating expenses

(56,270)

(46,558)

Impairment losses - loans and advances

(15,288)

(15,644)

Profit after tax

26,339

17,193

 

The reported profit before tax is £26.3m (2013: £17.2m), which represents an increase of 53%.  This increase is once again driven by the increase in net interest income from the lending portfolios, which grew by 30% to £79.4m for the full year.  In total the operating income fell marginally short of £100m, a milestone that the bank expects to surpass in 2015, as the SME lending division develops.

 

Operating expenses increased by 21% to £56.3m but the operational efficiency of the bank is borne out by the fact that overall operating leverage was a positive 4%.

 

Total impairments in the year actually declined despite the increase in the bank's balance sheet. Firstly, a significant proportion of the increase in lending was as a result of the start up of the Real estate finance division. This lending is fully secured typically at LTV's of around 60%, so losses on this portfolio should be minimal and due to the short time since its inception, it is too early for any of its lending to have become impaired. Secondly, as a result of a market benchmarking exercise for non performing loans, the business concluded that the provisions held against our debt in long term recovery were excessive. This provision was therefore released. Without this the annual impairment charge would have been £17.7m.

 

The Current Account ended the year with 20,792 accounts (2013: 22,860) and One Bill with 22,731 (2013: 24,297).

 

 

2014

2013

Summarised Balance Sheet

£000

£000

Assets

 

 

Consumer Finance

 

 

   Personal Lending

 

 

      STB

87,571

77,889

      ELL

93,864

81,368

   Motor Finance

137,853

114,570

   Retail Finance

156,251

114,386

 

 

 

Business Finance

 

 

   Asset Finance

4,541

 -  

   Commercial Finance

5,024

 -  

   Real Estate Finance

133,738

1,784

 

 

 

Additional Services

 

 

   Debt Collection

3,058

277

   Acquired Portfolios

28

110

   One Bill

388

465

   Other

179

179

Total loans and advances to customers

622,495

391,028

Liquid assets

117,258

71,958

Other assets (including Group balances)

42,260

56,611

Total assets

782,013

519,597

 

 

 

Liabilities

 

 

Customer deposits

608,418

436,608

Other liabilities (including Group balances)

48,734

21,368

Total liabilities

657,152

457,976

Equity

124,861

61,621

Total equity and liabilities

782,013

519,597

 

Overall the customer lending portfolio grew by 59%. Apart from the start up of the SME finance division there was good growth in the Motor portfolio of 20% as a result of our broadening coverage of the UK broker and dealership networks and a wider offering of products across the credit spectrum. Also, the Retail finance division increased its lending by 37% as the integration of the V12 operating platform and the STB funding advantage allowed the division to successfully pitch to more and larger retailers.

 

The SME lending division has now extended credit in all three of its portfolios. The most significant of these is currently the Real Estate finance business, which added £132m during the year. This business is benefitting from the lack of housing stock, which is driving demand for finance from developers.

 

Deposits grew by 39% to close at £608m and the bank remained entirely funded by retail deposits. Deposits have been raised across all the tenors of the bank's lending, generally in the form of fixed term deposits and bonds. 

 

Following the issuance of new shares as a result of the placement in July (£50m) and the positive earnings of the year, the net assets of the bank have more than doubled to stand at £125m.

 

Group & Other Costs

 

 

 

2014

2013

Summarised Income Statement

£000

£000

Net interest income

(105)

(195)

Subordinated loan stock interest

(401)

(418)

Operating income

(506)

(613)

Other income

 -  

18

Operating expenses

(7,027)

(8,364)

Impairment on financial investments

81

(249)

Profit after tax

(7,452)

(9,208)

 

Total Group costs fell from £9.2m to £7.5m due to a rebalancing of the share of the cost of running the London headquarters.  This is a result of the increasing utilisation of the space by the expanding Private Bank.  Also, the prior year impact of the 180 year anniversary has fallen away.

 

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 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 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, non-controlling interests and revaluation reserves, after deducting goodwill and

  other intangible assets.

• 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 entities have complied with all of the externally imposed capital requirements to which they are subject.

 

 

2014

2013

Capital ratios

£000

£000

Core Tier 1 capital

173,721

87,270

Deductions

(11,470)

(11,405)

Tier 1 capital after deductions

162,251

75,865

Tier 2 capital

13,479

13,832

Total capital

175,730

89,697

 

 

 

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

18.2%

14.4%

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

18.4%

14.8%

 

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 their associated policies is set out in note 6 to the financial statements.

 

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

 

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due.  This risk exists mainly in Arbuthnot Latham & Co., Limited and Secure Trust Bank PLC, which currently have loan books of £536.5m and £622.5m respectively. The lending portfolio in Arbuthnot Latham is extended to private banking clients, the majority of which is secured against cash, property or other assets. The portfolios within Secure Trust are extended to retail customers and are largely unsecured. However, the new Real Estate finance business lends mainly secured on properties. Credit risk is managed through the Credit Committees of each bank with significant exposures also being approved by the Group Risk Committee.

 

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.

 

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 entirely funded by retail customer deposits.  The loan to deposit ratios are maintained at prudent levels. Following introduction of the new liquidity regime, which came into force on 1 October 2010, the Group now 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 is the risk that the Group may be exposed to financial losses from conducting its business. The largest exposure to this risk exists in Arbuthnot Latham as mis-selling risk via its wealth management advisory service and its structured product distribution 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.

 

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 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 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 entities maintain 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 Individual Capital Adequacy Assessment Process (ICAAP) where stringent stress tests are performed to ensure that capital resources are adequate over a three year horizon.

 

Dividend

The Board proposes a final dividend of 16 pence per share to be paid on 15 May 2015, giving a total dividend for the year of 27 pence (2013: 44 pence) per share. The prior year dividend included a special dividend of 18p paid in November 2013. 

 

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.

 

 

James Cobb

Group Finance Director

18 March 2015

 

 

Group Directors' Report

 

The Directors present their annual report and the audited consolidated financial statements for the year ended 31 December 2014.

 

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 16.

 

Results and Dividends

The results for the year are shown on page 27. The profit after tax for the year of £17.0m (2013: £11.5m) is included in reserves.

 

The Company sold 1,041,667 ordinary 40p shares (6.7%) in its subsidiary Secure Trust Bank PLC on 9 July 2014 at a price of £24 per share. This resulted in a net gain of £24.3m which is included in the Group's reserves. On the same day, Secure Trust Bank PLC issued 2,083,333 ordinary 40p shares at a price of £24, which is also included in the Group's reserves at £48.8m.

 

The Directors recommend the payment of a final dividend of 16 pence on the ordinary shares which, together with the interim dividend of 11 pence paid on 3 October 2014, represents total dividends for the year of 27 pence (2013: 44 pence including a special dividend of 18p). The final dividend, if approved by members at the Annual General Meeting, will be paid on 15 May 2015 to shareholders on the register at close of business on 17 April 2015.

 

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 Option Scheme

At the Annual General Meeting shareholders will be asked to approve an Ordinary Resolution extending the Unapproved Executive Share Option Scheme, introduced in 1995, for a further 10 years, details of which are given in the circular to shareholders dated 2 April 2015.

 

Share Capital

Shareholders will 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.

 

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 17 March 2015 of the following substantial holdings in the ordinary shares of the Company, other than those held by one director shown below:

 

Holder

 

Ordinary Shares

%

Unicorn UK Income Fund

 

6.0

Liontrust UK Smaller Companies Fund

775,257

5.2

Prudential plc

 

624,161

4.1

Mr. R Paston

 

529,130

3.5

 

 

 

 

Directors

 

 

 

H Angest

Chairman & CEO

J R Cobb

Finance Director

J W Fleming

 

 

 

Ms R J Lea

 

 

 

P A Lynam

 

 

 

Sir Christopher Meyer

 

 

 

A A Salmon

Chief Operating Officer

R J J Wickham

Deputy Chairman

 

All directors served throughout the year.

Mr. J.R. Cobb and Mr. J.W. Fleming retire under Article 78 of the Articles of Association and, being eligible, offer themselves for re-election.  Mr. Cobb has a service agreement terminable on six months' notice, while Mr. Fleming has a service agreement terminable on twelve months' notice.

 

According to the information kept under Section 3 of the Disclosure and Transparency Rules 2006, 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 2014

31 December 2014

17 March 2015

%

H Angest

8,200,901

8,200,901

8,200,901

53.7

J W Fleming

4,500

4,500

4,500

 -  

P A Lynam

10,000

10,000

10,000

0.1

A A Salmon

51,699

51,699

51,699

0.3

R J J Wickham

3,600

3,600

3,600

 -  

 

At the year end Mr. Lynam held 9,110 and Mr. Salmon 7,500 ordinary 40p shares in Secure Trust Bank PLC, a 52% subsidiary of the Company.

 

On 16 April 2013 Mr. Salmon and Mr. Cobb were granted options 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 £125k.

 

On 2 November 2014 Mr. Lynam and Mr. Salmon each exercised options granted to them on 2 November 2011 to subscribe for 141,666 ordinary 40p shares in Secure Trust Bank PLC at 720p and sold the shares at a price of £25.  Mr. Lynam and Mr. Salmon continue to hold options granted to them on 2 November 2011 to subscribe for 141,667 ordinary 40p shares in Secure Trust Bank PLC at 720p between 2 November 2016 and 2 November 2021. The fair value of the options at grant date was £1.6m.

 

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 these shares at grant date was £53k.

 

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, which was significant in relation to the Group's business. At 31 December 2014 three directors had loans from Arbuthnot Latham & Co., Limited amounting to £5,503,000, on normal commercial terms as disclosed in note 40 to the financial statements. At 31 December 2014 three directors had deposits with Secure Trust Bank PLC amounting to £354,000 and five directors had deposits with Arbuthnot Latham & Co., Limited amounting to £2,287,000, all on normal commercial terms as disclosed in note 40 to the financial statements.

 

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 23 and 24 will be the subject of an Ordinary Resolution at the Annual General Meeting.

 

Information on the Audit, Nomination, Risk and Donations Committees is included in the Corporate Governance section of the Annual Report on pages 20 to 22.

 

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.

 

Branches outside of the UK

During the year the 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.

 

Political Donations

The Company made political donations of £48,000 to the Conservative Party during the year (2013: £27,000).

 

The Board proposes to seek renewal of the authority granted by shareholders at the 2011 Annual General Meeting to make donations to EU political parties or organisations or incur EU political expenditure within the meaning of the Political Parties, Elections and Referendums Act 2000 for a further four years limited to £250,000 in aggregate.

 

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. 

 

The directors have disclosed to the auditors to the best of their knowledge and belief all relevant information necessary to assist the auditors in the preparation of their report.

 

 

By order of the Board

 

 

J R Kaye

 

Secretary

18 March 2015

 

 

Corporate Governance

 

AIM companies are not required to comply with The UK Corporate Governance Code ("The Code"). Nevertheless, the Board endorses the principles of openness, integrity and accountability which underlie good corporate governance and intends to take into account the provisions of The Code in so far as they are 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 and regulated by the Prudential Regulatory Authority and the Financial Conduct Authority, including two which are authorised deposit taking businesses. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such businesses.

 

Directors

The Group is led and controlled by an effective Board which comprises five executive directors and three non-executive directors.

 

The senior independent non-executive director is Robert Wickham, who in addition is Deputy Chairman. Although Mr. Wickham has served on the Board for twenty one years from the date of his first election, he displays independence in both character and judgement and there are no other relationships or circumstances which could affect his judgement. Accordingly, the Board considers him to be independent.

 

The Board

The Board meets regularly throughout the year. Substantive agenda items have briefing papers, which are circulated in a timely manner before each meeting. The Board is satisfied that it is supplied with all the information that it requires and requests, in a form and of a quality to enable it to discharge its duties. In addition to ongoing matters concerning 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 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 Board processes and procedures are appropriately followed and support effective decision making. All directors have access to the Company Secretary's advice and services and 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.

 

The Board has delegated certain of its responsibilities to Committees. All Committees have written terms of reference.

 

Audit Committee

Membership of the Audit Committee is limited to non-executive directors and comprises Ruth Lea (as Chairman), Sir Christopher Meyer and Robert Wickham.

 

The Audit Committee provides a forum for discussing with the Group's external auditors their report on the annual accounts, reviewing the scope, results and effectiveness of the internal audit work programme and considering any other matters which might have a financial impact on the Company, including the Group's arrangements by which staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The Audit Committee's responsibilities include reviewing the Group's system of internal control and the process for evaluating and monitoring risk. The Committee also reviews the appointment, terms of engagement and objectivity of the external auditors, including the level of non-audit services provided, and ensures that there is an appropriate audit relationship.

 

Remuneration Committee

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

 

Nomination Committee

The Nomination Committee is chaired by Henry Angest and its other members are Robert Wickham and Ruth Lea. Before a Board appointment is made the skills, knowledge and experience required for a particular appointment are evaluated and a recommendation made to the Board.

 

Risk Committee

The Risk Committee is chaired by Henry Angest and its other members are James Cobb, James Fleming, John Reed (non-executive of Arbuthnot Latham until 31 December 2014), Paul Lynam (appointed 27 February 2014), Andrew Salmon and Robert Wickham. The principal role of the Risk Committee is to approve significant individual credit or other exposures.

 

Donations Committee

The Donations Committee is chaired by Henry Angest and its other members are Robert Wickham and Ruth Lea. The Committee considers any political donation or expenditure as defined within the Political Parties, Elections and Referendums Act 2000.

 

Shareholder Communications

The Company maintains a regular dialogue with its shareholders and makes full use of the Annual General Meeting and any other General Meetings to communicate with investors.

 

The Company aims to present a balanced and understandable assessment in all its reports to shareholders, its regulators 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 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 well-established 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 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 outsourced to EY. 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 Financial Statement audit. 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 and 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 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 Parent 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.

 

Statement of Disclosure of Information to Auditor

The Directors confirm that:

 

• so far as each director is aware, there is no relevant audit information of which the Company's auditors are 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 are 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.

 

 

Remuneration Report

 

Remuneration Committee

Membership of the Remuneration Committee is limited to non-executive directors together with Henry Angest as Chairman. The present members of the Committee are Henry Angest, Robert Wickham and Ruth Lea.

 

The Committee has responsibility for producing recommendations on the overall remuneration policy for directors and for setting the remuneration of individual directors, both for review by the Board. 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; 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 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. During 2011 the Group implemented all the provisions required under the FCA Remuneration Code. Accordingly the Group and its subsidiaries are all considered to be Tier 3 institutions.

 

Directors' Service Contracts

Henry Angest, James Fleming, Paul Lynam and Andrew Salmon each have service contracts terminable at any time on 12 months' notice in writing by either party. James Cobb has a service contract terminable at any time on 6 months' notice in writing by either party.

 

Share Option and Long Term Incentive Schemes

This part of the remuneration report is audited information.

 

In May 2005, the Company extended its Unapproved Executive Share Option Scheme for a further period of 10 years. An Ordinary Resolution will be put to shareholders at the Annual General Meeting proposing to extend the scheme for a further 10 years.

 

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.

 

On 16 April 2013 Mr. Salmon and Mr. Cobb were granted options 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 £125k.

 

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 grant date was £53k.

 

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 100,000 shares for Andrew Salmon and 50,000 shares each for James Cobb and James Fleming. 150,500 shares are held in the Arbuthnot ESOP Trust.

 

Under the Unapproved Executive Share Option Scheme of the Company's subsidiary, Secure Trust Bank PLC, established in November 2011, Paul Lynam and Andrew Salmon were each granted options over 283,333 shares in that company. The fair value of the options at grant date was £1m.

 

On 2 November 2014 Mr. Lynam and Mr. Salmon each exercised options granted to them on 2 November 2011 to subscribe for 141,666 ordinary 40p shares in Secure Trust Bank PLC at 720p and sold the shares at a price of £25.  Mr. Lynam and Mr. Salmon continue to hold options granted to them on 2 November 2011 to subscribe for 141,667 ordinary 40p shares in Secure Trust Bank PLC at 720p between 2 November 2016 and 2 November 2021.  The fair value of the options at grant date was £0.5m.

 

Directors' Emoluments

 

 

This part of the remuneration report is audited information.

 

 

 

 

2014

2013

 

£000

£000

Fees (including benefits in kind)

98

215

Salary payments (including benefits in kind)

3,938

3,328

Pension contributions

140

140

Long term incentive

5,030

897

 

9,206

4,580

 

 

 

 

 

 

 

Long term

Total

Total

 

Salary

Bonus

Benefits

Pension

Fees

incentive

2014

2013

 

£000

£000

£000

£000

£000

£000

£000

£000

H Angest

600

 -  

32

 -  

 -  

 -  

632

515

JR Cobb

275

200

16

35

 -  

 -  

526

791

JW Fleming

275

250

16

35

 -  

 -  

576

505

PA Lynam

600

500

21

35

 -  

2,515

3,671

1,031

AA Salmon

600

400

21

35

 -  

2,515

3,571

1,523

Ms RJ Lea

41

 -  

 -  

 -  

84

 -  

125

120

Sir Christopher Meyer

50

 -  

 -  

 -  

 -  

 -  

50

45

RJJ Wickham

41

 -  

 -  

 -  

14

 -  

55

50

 

2,482

1,350

106

140

98

5,030

9,206

4,580

 

Details of any shares or options held by directors are presented on page 18.

                                                                               

The emoluments of the Chairman were £632,000 (2013: £515,000). The emoluments of the highest paid director were £3,671,000 (2013: £1,523,000) including pension contributions of £35,000 (2013: £35,000).  

 

Mr. R J J Wickham is a director of Calando Finance Limited which received an annual fee of £14,000 (2013: £50,000) in respect of his services to the Group. These amounts are included in the table above.                                                                                                   

Retirement benefits are accruing under money purchase schemes for five directors who served during 2014 (2013: five directors).

 

 

Henry Angest

Chairman of the Remuneration Committee

18 March 2015                                                     

 

 

Independent Auditor's Report

 

We have audited the financial statements of Arbuthnot Banking Group PLC for the year ended 31 December 2014 set out on pages 27 to 96. 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 21, 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 2014 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 and under the terms of our engagement

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

 

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

18 March 2015

 

 

Company statement of financial position

 

 

 

 

At 31 December

 

 

 

2014

2013

 

Note

 

£000

£000

ASSETS

 

 

 

 

Due from subsidiary undertakings - bank balances

 

 

19,244

16,551

Financial investments

25

 

158

165

Deferred tax asset

 

 

406

441

Intangible assets

28

 

4

12

Property, plant and equipment

29

 

127

130

Other assets

24

 

5,472

5,415

Investment in subsidiary undertakings

41

 

39,966

30,995

Total assets

 

 

65,377

53,709

EQUITY AND LIABILITIES

 

 

 

 

Equity

 

 

 

 

Share capital

35

 

153

153

Other reserves

36

 

(1,111)

(1,030)

Retained earnings

36

 

50,755

31,325

Total equity

 

 

49,797

30,448

LIABILITIES

 

 

 

 

Deposits from banks

 

 

 -  

2,000

Other liabilities

32

 

4,132

9,029

Debt securities in issue

33

 

11,448

12,232

Total liabilities

 

 

15,580

23,261

Total equity and liabilities

 

 

65,377

53,709

 

 

 

 

 

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

Cash flow hedging reserve

Treasury shares

Retained earnings

Non-controlling interests

Total

 

£000

£000

£000

£000

£000

£000

£000

£000

£000

Balance at 1 January 2014

153

191

20

(169)

(378)

(1,131)

67,901

20,327

86,914

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the period

 

 

 

 

 

 

 

 

 

Profit for 2014

 -  

 -  

 -  

 -  

 -  

 -  

8,634

8,382

17,016

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

Revaluation reserve

 

 

 

 

 

 

 

 

 

 - Adjustment

 -  

(91)

 -  

 -  

 -  

 -  

91

 -  

 -  

 - Amount transferred to profit and loss

 -  

(2)

 -  

 -  

 -  

 -  

 -  

 -  

(2)

Cash flow hedging reserve

 

 

 

 

 

 

 

 

 

 - Adjustment

 -  

 -  

 -  

 -  

124

 -  

(124)

 -  

 -  

 - Net amount transferred to profit and loss

 -  

 -  

 -  

 -  

254

 -  

 -  

124

378

Available-for-sale reserve

 -  

 -  

 -  

(81)

 -  

 -  

 -  

 -  

(81)

Total other comprehensive income

 -  

(93)

 -  

(81)

378

 -  

(33)

124

295

Total comprehensive income for the period

 -  

(93)

 -  

(81)

378

 -  

8,601

8,506

17,311

 

 

 

 

 

 

 

 

 

 

Transactions with owners, recorded directly in equity

 

 

 

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

 

 

 

Equity settled share based payment transactions

 -  

 -  

 -  

 -  

 -  

 -  

488

3,393

3,881

Issue of new shares Secure Trust Bank

 -  

 -  

 -  

 -  

 -  

 -  

23,810

24,949

48,759

Sale of shares Secure Trust Bank

 -  

 -  

 -  

 -  

 -  

 -  

17,712

6,615

24,327

Final dividend relating to 2013

 -  

 -  

 -  

 -  

 -  

 -  

(2,233)

(2,426)

(4,659)

Interim dividend relating to 2014

 -  

 -  

 -  

 -  

 -  

 -  

(1,638)

(1,326)

(2,964)

Total contributions by and distributions to owners

 -  

 -  

 -  

 -  

 -  

 -  

38,139

31,205

69,344

Balance at 31 December 2014

153

98

20

(250)

 -  

(1,131)

114,641

60,038

173,569

 

 

 

Attributable to equity holders of the Group

 

 

 

Share capital

Revaluation reserve

Capital redemption reserve

Available-for-sale reserve

Cash flow hedging reserve

Treasury shares

Retained earnings

Non-controlling interests

Total

 

£000

£000

£000

£000

£000

£000

£000

£000

£000

Balance at 1 January 2013

153

140

20

81

(363)

(1,131)

53,372

16,376

68,648

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the period

 

 

 

 

 

 

 

 

 

Profit for 2013

 -  

 -  

 -  

 -  

 -  

 -  

7,930

3,585

11,515

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

Revaluation reserve

 

 

 

 

 

 

 

 

 

 - Adjustment

 -  

51

 -  

 -  

 -  

 -  

(35)

(16)

 -  

Cash flow hedging reserve

 

 

 

 

 

 

 

 

 

 - Effective portion of changes in fair value

 -  

 -  

 -  

 -  

(15)

 -  

 -  

 -  

(15)

Available-for-sale reserve

 -  

 -  

 -  

(250)

 -  

 -  

 -  

 -  

(250)

Total other comprehensive income

 -  

51

 -  

(250)

(15)

 -  

(35)

(16)

(265)

Total comprehensive income for the period

 -  

51

 -  

(250)

(15)

 -  

7,895

3,569

11,250

 

 

 

 

 

 

 

 

 

 

Transactions with owners, recorded directly in equity

 

 

 

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

 

 

 

Equity settled share based payment transactions

 -  

 -  

 -  

 -  

 -  

 -  

901

770

1,671

Sale of shares Secure Trust Bank

 -  

 -  

 -  

 -  

 -  

 -  

12,135

2,270

14,405

Final dividend relating to 2012

 -  

 -  

 -  

 -  

 -  

 -  

(2,084)

(1,970)

(4,054)

Interim dividend relating to 2013

 -  

 -  

 -  

 -  

 -  

 -  

(1,638)

(688)

(2,326)

Special dividend relating to 2013

 -  

 -  

 -  

 -  

 -  

 -  

(2,680)

 -  

(2,680)

Total contributions by and distributions to owners

 -  

 -  

 -  

 -  

 -  

 -  

6,634

382

7,016

Balance at 31 December 2013

153

191

20

(169)

(378)

(1,131)

67,901

20,327

86,914

 

 

Company statement of changes in equity

 

 

Attributable to equity holders of the Company

 

 

Share capital

Capital redemption reserve

Available -for-sale reserve

Treasury shares

Retained earnings

Total

 

£000

£000

£000

£000

£000

£000

Balance at 1 January 2013

153

20

81

(1,131)

20,768

19,891

 

 

 

 

 

 

 

Total comprehensive income for the period

 

 

 

 

 

 

Profit for 2013

 -  

 -  

 -  

 -  

17,828

17,828

 

 

 

 

 

 

 

Other comprehensive income, net of income tax

 

 

 

 

 

 

Total comprehensive income for the period

 -  

 -  

 -  

 -  

17,828

17,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transactions with owners, recorded directly in equity

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

Share based payments settled in cash

 -  

 -  

 -  

 -  

(897)

(897)

Equity settled share based payment transactions

 -  

 -  

 -  

 -  

28

28

Final dividend relating to 2012

 -  

 -  

 -  

 -  

(2,084)

(2,084)

Interim dividend relating to 2013

 -  

 -  

 -  

 -  

(1,638)

(1,638)

Special dividend relating to 2013

 -  

 -  

 -  

 -  

(2,680)

(2,680)

Total contributions by and distributions to owners

 -  

 -  

 -  

 -  

(7,271)

(7,271)

Balance at 1 January 2014

153

20

81

(1,131)

31,325

30,448

 

 

 

 

 

 

 

Total comprehensive income for the period

 

 

 

 

 

 

Profit for 2014

 -  

 -  

 -  

 -  

23,260

23,260

 

 

 

 

 

 

 

Other comprehensive income, net of income tax

 

 

 

 

 

 

Available-for-sale reserve

 -  

 -  

(81)

 -  

 -  

(81)

Total other comprehensive income

 -  

 -  

(81)

 -  

 -  

(81)

Total comprehensive income for the period

 -  

 -  

(81)

 -  

23,260

23,179

 

 

 

 

 

 

 

Transactions with owners, recorded directly in equity

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

Equity settled share based payment transactions

 -  

 -  

 -  

 -  

41

41

Final dividend relating to 2013

 -  

 -  

 -  

 -  

(2,233)

(2,233)

Interim dividend relating to 2014

 -  

 -  

 -  

 -  

(1,638)

(1,638)

Total contributions by and distributions to owners

 -  

 -  

 -  

 -  

(3,830)

(3,830)

Balance at 31 December 2014

153

20

 -  

(1,131)

50,755

49,797

 

 

Consolidated statement of cash flows

 

 

 

 

Year ended 31 December

Year ended 31 December

 

 

 

2014

2013

 

Note

 

£000

£000

Cash flows from operating activities

 

 

 

 

Interest received

 

 

116,675

91,075

Interest paid

 

 

(18,260)

(20,085)

Fees and commissions received

 

 

27,692

26,325

Net trading and other income

 

 

 -  

7,718

Cash payments to employees and suppliers

 

 

(91,874)

(81,157)

Taxation paid

 

 

(3,047)

(2,543)

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

 

 

31,186

21,333

Changes in operating assets and liabilities:

 

 

 

 

 - net (increase)/decrease in derivative financial instruments

 

 

(1,503)

49

 - net increase in loans and advances to customers

 

 

(434,352)

(122,682)

 - net decrease/(increase) in other assets

 

 

401

(3,572)

 - net increase/increase in deposits from banks

 

 

 -  

1,630

 - net increase in amounts due to customers

 

 

236,494

61,945

 - net increase in other liabilities

 

 

3,967

6,990

Net cash outflow from operating activities

 

 

(163,807)

(34,307)

Cash flows from investing activities

 

 

 

 

Borrowings repaid on acquisition of subsidiary undertakings

11,43

 

 -  

(36,922)

Cash acquired on purchase of subsidiary undertakings

11,43

 

 -  

1,512

Purchase of subsidiary undertakings

11,43

 

 -  

(4,026)

Disposal of financial investments

 

 

243

63

Purchase of computer software

28

 

(1,214)

(1,162)

Disposal of computer software

28

 

 -  

1,900

Purchase of property, plant and equipment

29

 

(7,803)

(746)

Investment in associate

27

 

 -  

(943)

Proceeds from sale of property, plant and equipment

29

 

42

23,259

Purchases of debt securities

 

 

(85,243)

(9,844)

Proceeds from redemption of debt securities

 

 

13,026

3,904

Net cash from investing activities

 

 

(80,949)

(23,005)

Cash flows from financing activities

 

 

 

 

Increase in borrowings

 

 

25,654

2,000

Dividends paid

 

 

(7,623)

(9,060)

Proceeds from share placing by Secure Trust Bank

 

 

48,758

14,405

Proceeds from sale of Secure Trust Bank shares

 

 

24,327

 -  

Proceeds from exercise of Secure Trust Bank share options

 

 

3,315

 -  

Net cash used in financing activities

 

 

94,431

7,345

Net decrease in cash and cash equivalents

 

 

(150,325)

(49,967)

Cash and cash equivalents at 1 January

 

 

298,107

348,074

Cash and cash equivalents at 31 December

39

 

147,782

298,107

 

 

Company statement of cash flows

 

 

 

 

Year ended 31 December

Year ended 31 December

 

 

 

2014

2013

 

Note

 

£000

£000

Cash flows from operating activities

 

 

 

 

Dividends received from subsidiaries

 

 

6,440

11,418

Interest received

 

 

149

99

Interest paid

 

 

(661)

(714)

Net trading and other income

 

 

1,629

1,364

Cash payments to employees and suppliers

 

 

(7,866)

(8,089)

Taxation received

 

 

 -  

(160)

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

 

 

(309)

3,918

Changes in operating assets and liabilities:

 

 

 

 

 - net (increase)/decrease in group company balances

 

 

(4,950)

3,128

 - net (increase)/decrease in other assets

 

 

(3)

254

 - net (decrease)/increase in other liabilities

 

 

(1)

348

Net cash (outflow)/inflow from operating activities

 

 

(5,263)

7,648

Cash flows from investing activities

 

 

 

 

Increase investment in subsidiary

41

 

(10,500)

(1,000)

Disposal of share in subsidiaries

41

 

24,327

14,405

Net cash from investing activities

 

 

13,827

13,405

Cash flows from financing activities

 

 

 

 

Dividends paid

 

 

(3,871)

(6,402)

(Decrease)/Increase in borrowings

 

 

(2,000)

2,000

Net cash used in financing activities

 

 

(5,871)

(4,402)

Net increase in cash and cash equivalents

 

 

2,693

16,651

Cash and cash equivalents at 1 January

 

 

16,551

(100)

Cash and cash equivalents at 31 December

39

 

19,244

16,551

 

 

Notes to the Consolidated Financial Statements

 

1.  Reporting entity

Arbuthnot Banking Group PLC is a company domiciled in 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 2014 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 18 March 2015.

 

(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, 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

• IFRS 10, 'Consolidated Financial Statements' and IAS 27 (Revised), 'Separate Financial Statements' (effective 1 January 2013). IFRS 10 supersedes IAS 27 and SIC-12, and provides a single model to be applied in the control analysis for all investees. There are some minor clarifications in IAS27, and the requirements of IAS 28 and IAS 31 have been incorporated into IAS 27. Due to the adoption of IFRS 10 the Group had to change its accounting policy for determining whether it has control over and consequently whether it consolidates other investees. According to this standard, control is now defined as when the investor 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. However, this standard did not have any material impact on the financial statements as there was no change in the investees consolidated.

 

• IFRS 11, 'Joint Arrangements' (effective 1 January 2013). This standard replaces the existing accounting for subsidiaries and joint ventures (now joint arrangements) and removes the choice of equity or proportionate accounting for jointly controlled entities, as was the case under IAS 31. This standard did not have any material impact on the financial statements.

 

• IFRS 12, 'Disclosure of Interests in Other Entities' (effective 1 January 2013). This standard replaces the existing accounting for subsidiaries and joint ventures (now joint arrangements) and contains the disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. Due to the adoption of IFRS 12 the Group has expanded its disclosures surrounding associates (see Note 27) and subsidiaries (see Note 41).

 

• IAS 32 (Revised), 'Offsetting Financial Assets and Financial Liabilities' (effective 1 January 2014). This standard was amended to clarify the offsetting criteria, specifically when an entity currently has a legal right of set off; and when gross settlement is equivalent to net settlement. This standard did not have any material impact on the financial statements.

 

• IFRIC 21, 'Levies' (effective 1 January 2014). The interpretation defines a levy as an outflow from an entity imposed by a government in accordance with legislation. That levy is recognised as a liability when, and only when, the triggering event specified in the legislation occurs. This standard did not have any material impact on the Group, due to the fact that in the prior year the Group already adjusted the trigger date for FSCS levies from 31 December to 1 April.

 

 (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 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 substance of the relationship between the Group and the entity and the evaluation of the Group's exposure to the risks and rewards of the SPE indicates control. The following circumstances may indicate control by the Group and would therefore require consolidation of the SPE:

 

• in substance, the activities of the SPE are being conducted on behalf of the entity according to its specific business needs so that

  the entity obtains benefits from the SPE's operation;

 

• in substance, the entity has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by

  setting up an 'autopilot' mechanism, the entity has delegated these decision-making powers;

 

• in substance, the entity has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks incident

  to the activities of the SPE; or

 

• in substance, the entity retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain

  benefits from its activities.

 

 

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 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 year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of 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 method calculates the amortised cost of a financial asset or a financial liability and allocates the interest income or interest expense over the relevant period. 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 new 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. Loan commitment fees are deferred and recognised as an adjustment to the effective interest rate on the loan.

 

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 accrued 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.  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 carried 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.

 

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 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.

 

3.7.  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.

 

(a) Fair value hedges

Fair value hedges are used to hedge against the change in fair value of a recognised asset or liability or a firm commitment that could affect profit or loss. Changes in the fair value of the derivative are recognised immediately in profit or loss together with changes in the fair value of the hedged item that are attributable to the hedged risk (in the same line item in the profit or loss as the hedged item).

 

If the hedging derivative expires or is sold, terminated or exercised, or the hedging relationship no longer meets the criteria for hedge accounting, the carrying amount of the hedged item is amortised over the residual period to maturity, as part of the newly calculated effective interest rate. However, if the hedged item has been derecognised, it is immediately released to the profit or loss.

 

(b) Cash flow hedges

These cash flow hedges are used to hedge against fluctuations in future cash flows from interest rate movements on variable rate customer deposits. On initial purchase the derivative is valued at fair value and then the effective portion of the change in the fair value of the hedging instrument is recognised in equity (cash flow hedging reserve) until the gain or loss on the hedged item is realised, when it is amortised; the ineffective portion of the hedging instrument is recognised in the immediately in the profit or loss.

 

If a hedging derivative expires or is sold, terminated, or exchanged, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively.  In a discontinued hedge of a forecast transaction the cumulative amount recognised in other comprehensive income from the period when the hedge was effective is reclassified from equity to profit or loss as a reclassification adjustment when the forecast transaction occurs and affects profit or loss.  If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is reclassified immediately to profit or loss as a reclassification adjustment.

 

Hedge effectiveness testing

On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and the hedged items, including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, as to whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125%. The Group makes an assessment for a cash flow hedge of a forecast transaction, as to whether the forecast transaction is highly probable to occur and presents an exposure to variations in cash flows that could ultimately affect profit or loss.

 

(c) 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.

 

3.8.  Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the Statement of Financial Position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

 

3.9.  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. When a loan is uncollectible, it is written off against the related provision for loan impairment. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the Statement of Comprehensive Income.

 

(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 Statement of Comprehensive Income. Impairment losses recognised in the Statement of Comprehensive Income on equity instruments are not reversed through the Statement of Comprehensive Income.

 

(c) Renegotiated loans

Loans that are either 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

Forbearance is available to support customers who are in financial difficulty and help them re-establish their contractual payment plan.  The main option offered by the Group is an arrangement to clear outstanding arrears.  If the forbearance request is granted the account is monitored in accordance with the Group's policy and procedures. All debts however retain the customer's normal contractual payment due dates.  Arrears tracking and the allowance for impairment is based on the original contractual due dates for both the secured and unsecured lending channels.

 

3.10  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.

 

3.11  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.

 

3.12.  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 five years).

 

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

 

(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).

 

3.13.  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 20 years

Computer equipment

3 to 5 years

Motor vehicles

4 years

 

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.

 

3.14.  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.

 

3.15.  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.

 

3.16.  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 cash settled to equity 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, the liability in the Statement of Financial Position is reclassified to equity and the prospective charge to the profit or loss from the modification reflects the spreading of the initial grant date fair value of the award over the remaining vesting period in line with the policy on equity settled awards.

 

3.17.  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.

 

3.18.  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.

 

3.19.  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.

 

3.20.  Financial guarantee contracts

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.

 

3.21.  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.

 

3.22.  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 2015 or later periods, but the Group has not early adopted them:

 

• 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 9, 'Financial instruments' (effective from 1 January 2018). This standard deals with the classification and measurement of financial assets and will replace IAS 39. The requirements of this standard represent a significant change from the existing requirements in IAS 39. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. The standard eliminates the existing IAS 39 categories of 'held to maturity', 'available for sale' and ' loans and receivables'. Further development phases for IFRS 9 are scheduled to cover key areas such as impairment and hedge accounting. The potential effect of this standard together with the further development phases are currently being evaluated but it is expected to have a material impact on the Group's financial statements, due to the nature of the Group's operations.

 

 

Notes to the consolidated financial statements

 

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 Credit losses

The Group reviews its loan portfolios and held-to-maturity investments to assess impairment at least on a half-yearly 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.

 

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.

 

To the extent that the default rates differ from that estimated by 10%, the allowance for impairment on loans and advances would change by an estimated £3.2m (2013: £2.6m).

 

4.2 Goodwill impairment

The accounting policy for goodwill is described in note 3.12 (a). The Company reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken place. Significant management judgements are made in estimations, to evaluate whether an impairment of goodwill is necessary. Impairment testing is done at CGU level and the following two items, with judgements surrounding them, have a significant impact on the estimations used in determining the necessity of an impairment charge:

 

• Future cash flows - Cash flow forecasts reflect management's view of future business forecasts at the time of the assessment. A detailed three year budget is done every year and management also uses judgement in applying a growth rate. The accuracy of future cash flows is subject to a high degree of uncertainty in volatile market conditions. During such conditions, management would do impairment testing more frequently than annually to ensure that the assumptions applied are still valid in the current market conditions.

• Discount rate - Management also apply judgement in determining the discount rate used to discount future expected cash flows. The discount rate is derived from the cost of capital for each CGU.

 

The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. There are currently three CGU's (2013: three) with goodwill attached; the core Arbuthnot Latham CGU, the Music Finance CGU and the V12 Group CGU (subsidiary of Secure Trust Bank acquired in the year).

 

Management considers the value in use for the core Arbuthnot Latham CGU to be the discounted cash flows over 5 years with a terminal value (2013: 5 years with a terminal value). The 5 year discounted cash flows with a terminal value is considered to be appropriate as the goodwill relates to an ongoing well established business and not underlying assets with finite lives. The terminal value is calculated by applying a discounted perpetual growth model to the profit expected in 2017 as per the approved 3 year plan. A growth rate of 10% (2013: 9%) was used for income and 10% (2013: 7%) for expenditure from 2015 to 2017 (these rates were the best estimate of future forecasted performance), while a 3% (2013: 3%) percent growth rate for income and expenditure (a more conservative approach was taken for latter years as these were not budgeted for in detail as per the three year plan approved by the Board of Directors) was used for cash flows after the approved three year plan.

 

Management considers the value in use for the Music Finance CGU and V12 Group CGU to be the discounted cash flows over 5 years (2013: 5 years). Income and expenditure were kept flat (2013: 0%) over the 5 year period.

 

Cash flows were discounted at a pre-tax rate of 12% (2013: 12%) to their net present value. The discount rate of 12% is considered to be appropriate after evaluating current market assessments of the time value of money and the risks specific to the assets or CGUs. Currently the value in use and fair value less costs to sell far exceeds the carrying value and as such no sensitivity analysis was done.

 

At the time of the impairment testing, if the future expected cash flows decline and/or the cost of capital has increased, then the recoverable amount will reduce.

 

4.3 Taxation

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.

 

4.4 Acquisition of loan book

Acquired loan books are initially recognised at fair value. Significant judgement is exercised in calculating their effective interest rate ("EIR") using cash flow models which include assumptions on the likely macroeconomic environment, including HPI, unemployment levels and interest rates, as well as loan level and portfolio attributes and history used to derive prepayment rates, the probability and timing of defaults and the amount of incurred losses.

 

4.5 Acquisition accounting

The Group recognises identifiable assets and liabilities at their acquisition date fair values. The exercise of attributing a fair value to the balance sheet of the acquired entity requires the use of a number of assumptions and estimates, which are documented at the time of the acquisition. These fair value adjustments are determined from the estimated future cash flows generated by the assets.

 

Loans and advances to customers

The methodology of attributing a fair value to the loans and advances to customers involves discounting the estimated future cashflows after impairment losses, using a risk adjusted discount factor. A fair value adjustment is then applied to the carrying value in the acquiree's balance sheet.

 

Intangible assets

Identifying the separately identifiable intangible assets of an acquired company is subjective and based upon discussions with management and a review of relevant documentation.  During the current and prior years the acquisition of Everyday Loans and the V12 Finance Group indicated that there were four separately identifiable intangible assets which met the criteria for separation from goodwill, these being Trademarks/Tradenames, Customer Relationships, Broker Relationships and Technology.

 

Trademarks and Tradenames are valued by estimating the fair value of the estimated costs savings resulting from the ownership of trade names as opposed to licensing them.  Customer Relationships are valued through the application of a discounted cashflow methodology to net anticipated renewal revenues.  The valuation of Broker Relationships is derived from a costs avoided methodology, by reviewing costs incurred on non-broker platforms versus costs which are incurred in broker commission.  Technology is valued by the market derived royalty rate applied to the related cash flows to arrive at estimated savings resulting from the use of the acquired credit decisioning technology.

 

4.6 Average life of lending

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.

 

4.7 Share option scheme valuation

The valuation of the Secure Trust Bank equity-settled share option scheme was determined at the original grant date of 2 November 2011 using Black-Scholes valuation models. 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.

 

Much of the bank's lending is in the near and sub-prime categories, with performance of the book heavily influenced by employment trends. With the UK economy remaining fragile, the impact of a further downturn would be increasing unemployment, potentially causing impairments to rise and new business levels to fall, thereby affecting the bank's ability to sustain the levels of dividend growth required under the terms of the scheme. Depending on the product type, market and customer demographics, the bank's current product range includes expected lifetime losses of between 1% and 20%.

 

Uncertainties in the regulatory environment continue, with pressure on the government to further constrain the activities of banks following the well reported catalogue of recent issues in the industry. 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 95% for the remaining share options (SOS2) which vest on 2 November 2016.

 

Although one participant in the share option scheme left the Company during 2012 and was consequently withdrawn from the scheme. The directors consider that there is no further uncertainty surrounding whether the remaining participants will all still be in situ and eligible at the vesting date. Therefore the directors have assumed no attrition rate for the remaining share options over the scheme period.

 

4.8 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".

 

4.9 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 analyses financial instrument by the level in the fair value hierarchy into which the measurement is categorised:

 

 

Level 1

Level 2

Level 3

Total

At 31 December 2014

£000

£000

£000

£000

ASSETS

 

 

 

 

Cash and balances at central banks

 -  

115,938

 -  

115,938

Loans and advances to banks

 -  

31,844

 -  

31,844

Debt securities held-to-maturity

 -  

91,683

 -  

91,683

Derivative financial instruments

 -  

2,707

 -  

2,707

Loans and advances to customers

 -  

106,285

1,052,698

1,158,983

Other assets

 -  

 -  

5,522

5,522

Financial investments

171

 -  

1,106

1,277

Asset

171

348,457

1,059,326

1,407,954

LIABILITIES

 

 

 

 

Deposits from banks

 -  

27,657

 -  

27,657

Derivative financial instruments

 -  

1,067

 -  

1,067

Deposits from customers

 -  

 -  

1,194,285

1,194,285

Other liabilities

 -  

 -  

12,024

12,024

Debt securities in issue

 -  

 -  

11,448

11,448

Liability

 -  

28,724

1,217,757

1,246,481

 

 

Level 1

Level 2

Level 3

Total

At 31 December 2013

£000

£000

£000

£000

ASSETS

 

 

 

 

Cash and balances at central banks

 -  

193,046

 -  

193,046

Loans and advances to banks

 -  

105,061

 -  

105,061

Debt securities held-to-maturity

 -  

19,466

 -  

19,466

Derivative financial instruments

 -  

508

 -  

508

Loans and advances to customers

 -  

 -  

732,009

732,009

Other assets

 -  

 -  

6,135

6,135

Financial investments

179

 -  

1,796

1,975

Asset

179

318,081

739,940

1,058,200

LIABILITIES

 

 

 

 

Deposits from banks

 -  

2,003

 -  

2,003

Derivative financial instruments

 -  

371

 -  

371

Deposits from customers

 -  

 -  

957,791

957,791

Other liabilities

 -  

 -  

10,152

10,152

Debt securities in issue

 -  

 -  

12,232

12,232

Liability

 -  

2,374

980,175

982,549

 

 

5.  Maturity analysis of assets and liabilities

 

 

 

 

 

 

 

The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2014:

 

Due within one year

Due after more than one year

Total

At 31 December 2014

£000

£000

£000

ASSETS

 

 

 

Cash

115,938

115,938

Loans and advances to banks

31,844

31,844

Debt securities held-to-maturity

62,839

28,844

91,683

Derivative financial instruments

1,209

1,498

2,707

Loans and advances to customers

444,594

714,389

1,158,983

Other assets

16,516

350

16,866

Financial investments

1,277

1,277

Deferred tax asset

992

1,596

2,588

Investment in associate

943

943

Intangible assets

11,318

11,318

Property, plant and equipment

12,475

12,475

Total assets

673,932

772,690

1,446,622

LIABILITIES

 

 

 

Deposits from banks

27,657

27,657

Derivative financial instruments

1,067

1,067

Deposits from customers

911,579

282,706

1,194,285

Current tax liability

3,612

3,612

Other liabilities

30,679

4,305

34,984

Debt securities in issue

11,448

11,448

Total liabilities

974,594

298,459

1,273,053

 

The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2013:

 

Due within one year

Due after more than one year

Total

At 31 December 2013

£000

£000

£000

ASSETS

 

 

 

Cash

193,046

193,046

Loans and advances to banks

105,061

105,061

Debt securities held-to-maturity

19,466

19,466

Derivative financial instruments

488

20

508

Loans and advances to customers

419,694

312,315

732,009

Other assets

13,699

3,568

17,267

Financial investments

1,975

1,975

Deferred tax asset

3,954

3,954

Investment in associate

943

943

Intangible assets

13,103

13,103

Property, plant and equipment

5,522

5,522

Total assets

751,454

341,400

1,092,854

LIABILITIES

 

 

 

Deposits from banks

2,003

2,003

Derivative financial instruments

371

371

Deposits from customers

781,468

176,323

957,791

Current tax liability

1,427

1,427

Other liabilities

26,702

4,315

31,017

Deferred tax liability

1,099

1,099

Debt securities in issue

12,232

12,232

Total liabilities

811,971

193,969

1,005,940

 

The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2014:

 

Due within one year

Due after more than one year

Total

At 31 December 2014

£000

£000

£000

ASSETS

 

 

 

Due from subsidiary undertakings - bank balances

19,244

19,244

Financial investments

158

158

Deferred tax asset

406

406

Intangible assets

4

4

Property, plant and equipment

127

127

Other assets

622

4,850

5,472

Shares in subsidiary undertakings

39,966

39,966

Total assets

19,866

45,511

65,377

LIABILITIES

 

 

 

Other liabilities

4,132

4,132

Debt securities in issue

11,448

11,448

Total liabilities

4,132

11,448

15,580

 

 

 

 

The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2013:

 

Due within one year

Due after more than one year

Total

At 31 December 2013

£000

£000

£000

ASSETS

 

 

 

Due from subsidiary undertakings - bank balances

16,551

16,551

Financial investments

165

165

Deferred tax asset

441

441

Intangible assets

12

12

Property, plant and equipment

130

130

Other assets

565

4,850

5,415

Shares in subsidiary undertakings

30,995

30,995

Total assets

17,116

36,593

53,709

LIABILITIES

 

 

 

Deposits from banks

2,000

2,000

Other liabilities

9,029

9,029

Debt securities in issue

12,232

12,232

Total liabilities

11,029

12,232

23,261

 

 

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:

 

 

2014

2013

 

£000

£000

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

 

 

Cash and balances at central banks

115,938

193,046

Loans and advances to banks

31,844

105,061

Debt securities held-to-maturity

91,683

19,466

Derivative financial instruments

2,707

508

Loans and advances to customers - Arbuthnot Latham

536,488

340,981

Loan and advances to customers - Secure Trust Bank

622,495

391,028

Other assets

5,522

6,135

Financial investments

1,277

1,975

 

 

 

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

 

 

Guarantees

714

805

Loan commitments and other credit related liabilities

139,423

37,094

At 31 December

1,548,091

1,096,099

 

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

 

 

2014

2013

 

£000

£000

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

 

 

Due from subsidiary undertakings - bank balances

19,244

16,551

Financial investments

158

165

Other assets

5,365

5,310

 

 

 

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

 

 

Guarantees

 -  

2,500

At 31 December

24,767

24,526

 

The above tables represents the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2014 and 2013 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 2014

 

31 December 2013

 

Loan Balance

Collateral

 

Loan Balance

Collateral

Loan to value

£000

£000

 

£000

£000

 

 

 

 

 

 

Less than 60%

300,384

824,044

 

176,713

464,460

60% - 80%

179,527

269,673

 

94,295

136,786

80% - 100%

28,176

29,899

 

24,188

26,907

Greater than 100%

23,497

18,382

 

17,089

13,816

Total

531,584

1,141,998

 

312,285

641,969

 

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.

 

Arbuthnot Latham and Secure Trust Bank generally do not reschedule contractual arrangements where customers default on their repayments due to financial difficulties (referred to as 'forbearance activities'). Under its Treating Customers Fairly policies however, the Company may offer the customer the option to reduce or defer payments for a short period. If the request is granted, the account continues to be monitored in accordance with the Group's impairment provisioning policy. Such debts retain the customer's normal contractual payment due dates and will be treated the same as any other defaulting cases for impairment purposes. Arrears tracking will continue on the account with any impairment charge being based on the original contractual due dates for all products.

 

In June 2012, the Group acquired Everyday Loans whose policy on forbearance is that 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. These may be modified by way of a reschedule or deferment of repayments. Rescheduling of debts retains the customers' contractual due dates, whilst the deferment of repayments extends the payment schedule up to a maximum of four payments in a twelve month period.  As at 31 December 2014 the gross balance of rescheduled loans included in the Consolidated Statement of Financial Position was £14.7m, with an allowance for impairment on these loans of £1.0m. The gross balance of deferred loans was £3.0m with an allowance for impairment on these of £0.4m. (31 December 2013: the gross balance of rescheduled loans was £13.9m, with an allowance for impairment of £1.1m. The gross balance of deferred loans was £2.8m with an allowance for impairment of £0.4m).

 

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

 

2014

2013

 

2014

2013

 

£000

£000

 

£000

£000

Concentration by product

 

 

 

 

 

Cash collateralised

19,934

17,709

 

 -  

 -  

Commercial

164,154

31,625

 

95,790

12,492

Residential mortgages

451,645

253,845

 

43,428

19,548

Non-Performing

11,940

15,717

 

 -  

 -  

Other Collateral

32,587

8,399

 

 -  

 -  

Unsecured

11,203

27,150

 

 -  

 -  

Personal Lending

87,571

77,799

 

 -  

 -  

Motor

137,853

114,667

 

205

893

Music

13,829

10,590

 

 -  

 -  

Cycle

33,310

23,274

 

 -  

 -  

Pay4Later

14,013

18,784

 

 -  

 -  

ELL

93,864

81,368

 

 -  

 -  

Consumer electronics

24,792

7,739

 

 -  

 -  

Sport and leisure

6,882

6,810

 

 -  

 -  

Healthcare

8,756

5,165

 

 -  

 -  

Rentsmart

25,504

25,548

 

 -  

 -  

Furniture

5,263

3,679

 

 -  

 -  

Other

15,883

2,141

 

 -  

4,161

At 31 December

1,158,983

732,009

 

139,423

37,094

 

 

 

 

 

 

Concentration by location

 

 

 

 

 

East Anglia

44,359

33,138

 

7,195

 -  

East Midlands

44,869

27,790

 

 -  

 -  

London

463,333

220,028

 

64,329

11,608

Midlands

13,208

3,214

 

 -  

 -  

North East

39,292

18,934

 

17,638

 -  

North West

76,349

56,603

 

 -  

 -  

Northern Ireland

8,622

6,054

 

 -  

 -  

Scotland

53,177

39,149

 

 -  

 -  

South East

174,912

112,694

 

17,845

7,671

South West

58,627

45,964

 

10,825

1,629

Wales

32,799

25,086

 

 -  

 -  

West Midlands

44,146

36,139

 

1,262

 -  

Yorkshire & Humber

38,176

33,741

 

 -  

 -  

Other

67,114

73,475

 

20,329

16,186

At 31 December

1,158,983

732,009

 

139,423

37,094

 

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 25, a stress test scenario of a 10% (2013: 10%) decline in market prices, with all other things being equal, would result in a £127,000 (2013: £394,000) decrease in the Group's income and a decrease of £103,000 (2013: £140,000) 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 25, a stress test scenario of a 10% (2013: 10%) decline in market prices, with all other things being equal, would result in a £15,000 (2013: £15,000) decrease in the Company's income and a decrease of £13,000 (2013: £13,000) 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 2014. 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 2014

£000

£000

£000

£000

£000

ASSETS

 

 

 

 

 

Cash and balances at central banks

115,891

17

28

2

115,938

Loans and advances to banks

22,381

5,428

3,099

936

31,844

Debt securities held-to-maturity

76,124

15,559

 -  

 -  

91,683

Derivative financial instruments

2,707

 -  

 -  

 -  

2,707

Loans and advances to customers

1,107,440

8,437

43,106

 -  

1,158,983

Other assets

5,522

 -  

 -  

 -  

5,522

Financial investments

158

 -  

1,119

 -  

1,277

 

1,330,223

29,441

47,352

938

1,407,954

LIABILITIES

 

 

 

 

 

Deposits from banks

27,489

168

 -  

 -  

27,657

Derivative financial instruments

1,067

 -  

 -  

 -  

1,067

Deposits from customers

1,147,299

28,081

18,146

759

1,194,285

Other liabilities

12,024

 -  

 -  

 -  

12,024

Debt securities in issue

 -  

 -  

11,448

 -  

11,448

 

1,187,879

28,249

29,594

759

1,246,481

Net on-balance sheet position

142,344

1,192

17,758

179

161,473

Credit commitments

140,137

 -  

 -  

 -  

140,137

 

The table below summarises the Group's exposure to foreign currency exchange risk at 31 December 2013:

 

 

 

 

 

 

 

GBP (£)

USD ($)

Euro (€)

Other

Total

At 31 December 2013

£000

£000

£000

£000

£000

ASSETS

 

 

 

 

 

Cash and balances at central banks

192,972

53

20

1

193,046

Loans and advances to banks

85,365

16,703

1,160

1,833

105,061

Debt securities held-to-maturity

16,423

3,043

 -  

 -  

19,466

Derivative financial instruments

508

 -  

 -  

 -  

508

Loans and advances to customers

682,925

3,748

45,336

 -  

732,009

Other assets

6,135

 -  

 -  

 -  

6,135

Financial investments

179

 -  

1,796

 -  

1,975

 

984,507

23,547

48,312

1,834

1,058,200

LIABILITIES

 

 

 

 

 

Deposits from banks

2,003

 -  

 -  

 -  

2,003

Derivative financial instruments

371

 -  

 -  

 -  

371

Deposits from customers

916,465

20,292

19,388

1,646

957,791

Other liabilities

10,152

 -  

 -  

 -  

10,152

Debt securities in issue

 -  

 -  

12,232

 -  

12,232

 

928,991

20,292

31,620

1,646

982,549

Net on-balance sheet position

55,516

3,255

16,692

188

75,651

Credit commitments

37,899

 -  

 -  

 -  

37,899

 

A 10% strengthening of the pound against the US dollar would lead to a £1,000 decrease (2013: £5,000 increase) 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 increase (2013: £20,000 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 21), which covers 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 2014:

 

 

 

 

 

 

GBP (£)

Euro (€)

Total

At 31 December 2014

£000

£000

£000

ASSETS

 

 

 

Due from subsidiary undertakings - bank balances

7,276

11,968

19,244

Financial investments

158

 -  

158

Other assets

5,365

 -  

5,365

 

12,799

11,968

24,767

LIABILITIES

 

 

 

Other liabilities

3,028

 -  

3,028

Debt securities in issue

 -  

11,448

11,448

 

3,028

11,448

14,476

Net on-balance sheet position

9,771

520

10,291

 

The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2013:

 

 

 

 

 

 

GBP (£)

Euro (€)

Total

At 31 December 2013

£000

£000

£000

ASSETS

 

 

 

Due from subsidiary undertakings - bank balances

3,827

12,724

16,551

Financial investments

165

 -  

165

Other assets

5,310

 -  

5,310

 

9,302

12,724

22,026

LIABILITIES

 

 

 

Deposits from banks

2,000

 -  

2,000

Other liabilities

7,768

 -  

7,768

Debt securities in issue

 -  

12,232

12,232

 

9,768

12,232

22,000

Net on-balance sheet position

(466)

492

26

 

A 10% strengthening of the pound against the Euro would lead to £28,000 (2013: £24,000) 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 £0.3m to £1.1m (2013: £0.5m 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 £60,000 (2013: increase pre-tax profits and equity by £12,000).

 

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 2014

£000

£000

£000

£000

£000

£000

£000

ASSETS

 

 

 

 

 

 

 

Cash and balances at central banks

115,938

 -  

 -  

 -  

 -  

 -  

115,938

Loans and advances to banks

31,844

 -  

 -  

 -  

 -  

 -  

31,844

Debt securities held-to-maturity

86,462

 -  

 -  

5,221

 -  

 -  

91,683

Derivative financial instruments

1,209

 -  

 -  

 -  

1,498

 -  

2,707

Loans and advances to customers

615,599

74,042

116,012

383,698

200

(30,568)

1,158,983

Other assets

 -  

 -  

 -  

 -  

 -  

44,190

44,190

Financial investments

 -  

 -  

 -  

 -  

 -  

1,277

1,277

Total assets

851,052

74,042

116,012

388,919

1,698

14,899

1,446,622

LIABILITIES

 

 

 

 

 

 

 

Deposits from banks

27,657

 -  

 -  

 -  

 -  

 -  

27,657

Derivative financial instruments

1,067

 -  

 -  

 -  

 -  

 -  

1,067

Deposits from customers

615,005

119,973

138,515

253,360

29,670

37,762

1,194,285

Other liabilities

 -  

 -  

 -  

 -  

 -  

38,596

38,596

Debt securities in issue

11,448

 -  

 -  

 -  

 -  

 -  

11,448

Equity

 -  

 -  

 -  

 -  

 -  

173,569

173,569

Total liabilities

655,177

119,973

138,515

253,360

29,670

249,927

1,446,622

Impact of derivative instruments

(16,200)

20,000

 -  

(3,800)

 -  

 -  

 

Interest rate sensitivity gap

179,675

(25,931)

(22,503)

131,759

(27,972)

(235,028)

 

 

 

 

 

 

 

 

 

Cumulative gap

179,675

153,744

131,241

263,000

235,028

 -  

 

 

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 2013

£000

£000

£000

£000

£000

£000

£000

ASSETS

 

 

 

 

 

 

 

Cash and balances at central banks

193,046

 -  

 -  

 -  

 -  

 -  

193,046

Loans and advances to banks

105,061

 -  

 -  

 -  

 -  

 -  

105,061

Debt securities held-to-maturity

16,423

 -  

 -  

3,043

 -  

 -  

19,466

Derivative financial instruments

488

 -  

 -  

 -  

 -  

20

508

Loans and advances to customers

394,714

56,077

84,819

220,038

150

(23,789)

732,009

Other assets

 -  

 -  

 -  

 -  

 -  

40,789

40,789

Financial investments

 -  

 -  

 -  

 -  

 -  

1,975

1,975

Total assets

709,732

56,077

84,819

223,081

150

18,995

1,092,854

LIABILITIES

 

 

 

 

 

 

 

Deposits from banks

1,943

 -  

 -  

 -  

 -  

60

2,003

Derivative financial instruments

371

 -  

 -  

 -  

 -  

 -  

371

Deposits from customers

437,888

212,070

90,206

178,713

5,347

33,567

957,791

Other liabilities

 -  

 -  

 -  

 -  

 -  

33,543

33,543

Debt securities in issue

12,232

 -  

 -  

 -  

 -  

 -  

12,232

Equity

 -  

 -  

 -  

 -  

 -  

86,914

86,914

Total liabilities

452,434

212,070

90,206

178,713

5,347

154,084

1,092,854

Impact of derivative instruments

(16,200)

 -  

 -  

16,200

 -  

 -  

 

Interest rate sensitivity gap

241,098

(155,993)

(5,387)

60,568

(5,197)

(135,089)

 

 

 

 

 

 

 

 

 

Cumulative gap

241,098

85,105

79,718

140,286

135,089

 -  

 

 

(d) Liquidity risk

The current Liquidity regime came into force on the 1 October 2010. 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 liquid 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.

 

The banking entities both prepared and approved their Individual Liquidity Adequacy Assessment ("ILAA"). The liquidity buffers required by the ILAA have all been put in place and maintained since. Liquidity resources outside of the buffer are made up of certificates of deposit and fixed rate notes (debt securities). The Company and Group also maintain long-term committed bank facilities. At 31 December 2014 AL had £119.8m (2013: £205.3m) and STB £122.3m (2013: £111.6m) in their liquidity asset buffers.

 

The tables below show the undiscounted contractual maturity analysis of the Group's financial liabilities and assets as at 31 December 2014:

 

 

 

 

 

 

 

 

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 2014

£000

£000

£000

£000

£000

£000

Financial liability by type

 

 

 

 

 

 

Non-derivative liabilities

 

 

 

 

 

 

Deposits from banks

27,657

(27,657)

(12,627)

(15,030)

 -  

 -  

Deposits from customers

1,194,285

(1,227,753)

(510,423)

(382,230)

(299,841)

(35,259)

Other liabilities

12,024

(18,674)

(17,084)

(125)

 -  

(1,465)

Debt securities in issue

11,448

(13,248)

(90)

(270)

(1,440)

(11,448)

Issued financial guarantee contracts

 

(714)

(714)

 -  

 -  

 -  

Unrecognised loan commitments

 

(139,423)

(139,423)

 -  

 -  

 -  

 

1,245,414

(1,427,469)

(680,361)

(397,655)

(301,281)

(48,172)

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

Risk management:

1,067

 -  

 -  

 -  

 -  

 -  

 - Outflows

 

(1,067)

(1,067)

 -  

 -  

 -  

 

1,067

(1,067)

(1,067)

 -  

 -  

 -  

 

 

 

 

 

 

 

 

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 2014

£000

£000

£000

£000

£000

£000

Financial asset by type

 

 

 

 

 

 

Non-derivative assets

 

 

 

 

 

 

Cash and balances at central banks

115,938

115,938

115,938

 -  

 -  

 -  

Loans and advances to banks

31,844

31,843

31,843

 -  

 -  

 -  

Debt securities held-to-maturity

91,683

92,511

50,832

12,359

29,320

 -  

Loans and advances to customers

1,158,983

1,353,592

205,066

319,221

800,860

28,445

Other assets

5,522

5,522

5,522

 -  

 -  

 -  

Financial investments

1,277

1,277

 -  

1,119

158

 -  

 

1,405,247

1,600,683

409,201

332,699

830,338

28,445

 

 

 

 

 

 

 

Derivative assets

 

 

 

 

 

 

Risk management:

2,707

 -  

 -  

 -  

 -  

 -  

 - Inflows

 

2,707

1,209

 -  

 -  

1,498

 

2,707

2,707

1,209

 -  

 -  

1,498

 

The tables below show the undiscounted contractual maturity analysis of the Group's financial liabilities and assets as at 31 December 2013:

 

 

 

 

 

 

 

 

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 2013

£000

£000

£000

£000

£000

£000

Financial liability by type

 

 

 

 

 

 

Non-derivative liabilities

 

 

 

 

 

 

Deposits from banks

2,003

(2,003)

(2,003)

 -  

 -  

 -  

Deposits from customers

957,791

(1,013,314)

(435,868)

(388,573)

(185,953)

(2,920)

Other liabilities

10,152

(8,892)

(7,857)

(1,025)

(10)

 -  

Debt securities in issue

12,232

(14,224)

(100)

(299)

(1,593)

(12,232)

Issued financial guarantee contracts

 

(805)

(805)

 -  

 -  

 -  

Unrecognised loan commitments

 

(37,094)

(37,094)

 -  

 -  

 -  

 

982,178

(1,076,332)

(483,727)

(389,897)

(187,556)

(15,152)

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

Risk management:

371

 -  

 -  

 -  

 -  

 -  

 - Outflows

 

(371)

(371)

 -  

 -  

 -  

 

371

(371)

(371)

 -  

 -  

 -  

 

 

 

 

 

 

 

 

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 2013

£000

£000

£000

£000

£000

£000

Financial asset by type

 

 

 

 

 

 

Non-derivative assets

 

 

 

 

 

 

Cash and balances at central banks

193,046

193,046

193,046

 -  

 -  

 -  

Loans and advances to banks

105,061

105,061

105,061

 -  

 -  

 -  

Debt securities held-to-maturity

19,466

19,701

2,491

141

17,069

 -  

Loans and advances to customers

732,009

878,370

167,005

169,645

540,159

1,561

Other assets

6,135

6,135

6,135

 -  

 -  

 -  

Financial investments

1,975

1,975

 -  

1,810

165

 -  

 

1,057,692

1,204,288

473,738

171,596

557,393

1,561

 

 

 

 

 

 

 

Derivative assets

 

 

 

 

 

 

Risk management:

508

 -  

 -  

 -  

 -  

 -  

 - Inflows

 

508

508

 -  

 -  

 -  

 

508

508

508

 -  

 -  

 -  

 

The table below analyses the contractual maturity analysis of the Company's financial liabilities and assets as at 31 December 2014:

 

 

 

 

 

 

 

 

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 2014

£000

£000

£000

£000

£000

£000

Financial liability by type

 

 

 

 

 

 

Non-derivative liabilities

 

 

 

 

 

 

Other liabilities

3,028

(3,028)

(1,438)

(125)

 -  

(1,465)

Debt securities in issue

11,448

(13,248)

(90)

(270)

(1,440)

(11,448)

 

14,476

(16,276)

(1,528)

(395)

(1,440)

(12,913)

 

 

 

 

 

 

 

 

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 2014

£000

£000

£000

£000

£000

£000

Financial asset by type

 

 

 

 

 

 

Non-derivative assets

 

 

 

 

 

 

Due from subsidiary undertakings - bank balances

19,244

19,244

3,776

15,000

 -  

468

Other assets

5,365

5,365

5,365

 -  

 -  

 -  

Financial investments

158

158

 -  

 -  

158

 -  

 

24,767

24,767

9,141

15,000

158

468

 

 

 

 

 

 

 

The table below analyses the contractual maturity analysis of the Company's financial liabilities and assets as at 31 December 2013:

 

 

 

 

 

 

 

 

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 2013

£000

£000

£000

£000

£000

£000

Financial liability by type

 

 

 

 

 

 

Non-derivative liabilities

 

 

 

 

 

 

Deposits from banks

2,000

(2,000)

(2,000)

 -  

 -  

 -  

Other liabilities

7,768

(7,768)

(5,143)

(1,025)

(10)

(1,590)

Debt securities in issue

12,232

(14,224)

(100)

(299)

(1,593)

(12,232)

Issued financial guarantee contracts

 

(2,500)

(2,500)

 -  

 -  

 -  

 

22,000

(26,492)

(9,743)

(1,324)

(1,603)

(13,822)

 

 

 

 

 

 

 

 

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 2013

£000

£000

£000

£000

£000

£000

Financial asset by type

 

 

 

 

 

 

Non-derivative assets

 

 

 

 

 

 

Due from subsidiary undertakings - bank balances

16,551

16,551

15,327

 -  

 -  

1,224

Other assets

5,310

5,310

5,310

 -  

 -  

 -  

Financial investments

165

165

 -  

 -  

165

 -  

 

22,026

22,026

20,637

 -  

165

1,224

 

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 £666m (2013: £528m). 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 2014

 

 

£000

£000

£000

£000

£000

£000

£000

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash and balances at central banks

 

 

 -  

 -  

115,938

 -  

 -  

115,938

115,938

Loans and advances to banks

 

 

 -  

 -  

31,844

 -  

 -  

31,844

31,844

Debt securities held-to-maturity

 

 

 -  

91,683

 -  

 -  

 -  

91,683

91,683

Derivative financial instruments

 

 

2,707

 -  

 -  

 -  

 -  

2,707

2,707

Loans and advances to customers

 

 

 -  

 -  

1,158,983

 -  

 -  

1,158,983

1,162,554

Other assets

 

 

 -  

 -  

5,522

 -  

 -  

5,522

5,522

Financial investments

 

 

171

 -  

 -  

1,106

 -  

1,277

1,277

 

 

 

2,878

91,683

1,312,287

1,106

 -  

1,407,954

1,411,525

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Deposits from banks

 

 

 -  

 -  

 -  

 -  

27,657

27,657

27,657

Derivative financial instruments

 

 

1,067

 -  

 -  

 -  

 -  

1,067

1,067

Deposits from customers

 

 

 -  

 -  

 -  

 -  

1,194,285

1,194,285

1,203,613

Other liabilities

 

 

 -  

 -  

12,024

 -  

 -  

12,024

12,024

Debt securities in issue

 

 

 -  

 -  

 -  

 -  

11,448

11,448

11,448

 

 

 

1,067

 -  

12,024

 -  

1,233,390

1,246,481

1,255,809

 

 

 

 

 

 

 

 

 

 

 

 

 

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 2013

 

 

£000

£000

£000

£000

£000

£000

£000

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash and balances at central banks

 

 

 -  

 -  

193,046

 -  

 -  

193,046

193,046

Loans and advances to banks

 

 

 -  

 -  

105,061

 -  

 -  

105,061

105,061

Debt securities held-to-maturity

 

 

 -  

19,466

 -  

 -  

 -  

19,466

19,466

Derivative financial instruments

 

 

508

 -  

 -  

 -  

 -  

508

508

Loans and advances to customers

 

 

 -  

 -  

732,009

 -  

 -  

732,009

730,706

Other assets

 

 

 -  

 -  

6,135

 -  

 -  

6,135

6,135

Financial investments

 

 

(244)

 -  

 -  

2,219

 -  

1,975

1,975

 

 

 

264

19,466

1,036,251

2,219

 -  

1,058,200

1,056,897

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Deposits from banks

 

 

 -  

 -  

 -  

 -  

2,003

2,003

2,003

Derivative financial instruments

 

 

371

 -  

 -  

 -  

 -  

371

371

Deposits from customers

 

 

 -  

 -  

 -  

 -  

957,791

957,791

957,791

Other liabilities

 

 

 -  

 -  

10,152

 -  

 -  

10,152

10,152

Debt securities in issue

 

 

 -  

 -  

 -  

 -  

12,232

12,232

12,232

 

 

 

371

 -  

10,152

 -  

972,026

982,549

982,549

 

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 Regulatory 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, non-controlling interests and revaluation reserves, after deducting goodwill and

  other intangible assets.

• 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:

 

 

 

2014

2013

 

£000

£000

Tier 1

 

 

Share capital

153

153

Retained earnings

114,641

67,901

Other reserves

(1,111)

(1,111)

Non-controlling interests

60,038

20,327

Goodwill

(2,695)

(2,695)

Deductions for other intangibles

(8,623)

(8,710)

Revaluation reserve

(152)

22

Total tier 1 capital

162,251

75,887

Tier 2

 

 

Collective provisions

2,031

1,578

Debt securities in issue

11,448

12,232

Total tier 2 capital

13,479

13,810

 

 

 

Total tier 1 & tier 2 capital

175,730

89,697

 

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 2014 are published as a separate document on the Group website under Investor Relations (Announcements & Shareholder Info).

 

 

8.  Net interest income

 

 

 

 

Year ended 31 December

Year ended 31 December

 

 

 

2014

2013

 

 

 

£000

£000

Cash and balances at central banks

 

 

1,026

733

Loans and advances to banks

 

 

52

70

Debt securities held-to-maturity

 

 

530

296

Loans and advances to customers

 

 

116,016

92,230

Interest income

 

 

117,624

93,329

 

 

9.  Fee and commission income

 

 

 

2014

2013

 

£000

£000

Banking commissions

5,014

4,714

Trust and other fiduciary fee income

5,210

4,320

Financial Planning fees and commissions

1,557

1,351

Structured product commissions

1,218

1,810

Other fee income *

16,964

19,621

 

29,963

31,816

 

 

 

* This mainly includes fee and commission income received on OneBill, PPI insurance and commission earned on debt recovery activities at Secure Trust Bank.

 

 

10.  Net impairment loss on financial assets

 

 

 

2014

2013

 

£000

£000

Net Impairment losses on loans and advances to customers

18,244

17,734

Impairment losses on financial investments

347

1,073

 

18,591

18,807

 

 

11.  Gain from a bargain purchase

On 15 January 2013 Debt Managers (Services) Limited (DMS), a wholly owned subsidiary of Secure Trust Bank, acquired certain trade and assets from Debt Managers Holdings Ltd, Debt Managers (AB) Limited and Debt Managers Limited (together "Debt Managers").  Debt Managers collects debt on behalf of a range of clients including banks and utility companies.  

 

Key benefits of this acquisition to Secure Trust Bank include:

•  Broadening the income base of Secure Trust Bank without the requirement for large amounts of capital;

•  The acquisition of a scalable collections platform through which Secure Trust Bank intends to channel its delinquent debt; and

•  The acquisition of the latest call centre and collections technology, including market leading dialler capability, interactive voice response technology and payment websites.

 

DMS acquired the Debt Managers business for an initial cash payment of £0.4m paid on completion of the transaction. Deferred consideration of up to £0.3m was payable by DMS one year after completion subject to the business achieving certain performance criteria. Of this, £0.1m was paid by DMS in final settlement.

 

The acquired assets included a software platform jointly developed with a third party.  Upon completion the rights to this software were sold to that third party for consideration of £2m. DMS then proceeded to lease back the internal rights to use this software.  On completion Secure Trust Bank provided DMS with £2.2m of funding to clear an outstanding overdraft of £1.8m and to fund the working capital requirements of DMS.

 

The Consolidated Statement of Comprehensive Income includes revenue of £3.8m and a loss before tax of £0.9m attributable to DMS. Had the acquisition occurred at the start of the financial year, the Consolidated Statement of Comprehensive Income would have included revenue of £4.0m and a loss before tax of £0.9m attributable to DMS.

 

 

Acquired

 

Recognised

 

assets /

Fair value

values on

 

liabilities

adjustments

acquisition

 

£000

£000

£000

 

 

 

 

Clients cash at bank

1,362

1,362

Other assets

1,117

263

1,380

Intangible assets

2,010

2,010

Property, plant and equipment

57

57

Total assets

4,546

263

4,809

 

 

 

 

Bank overdraft

1,846

1,846

Client account

1,301

1,301

Other liabilities

730

730

Total liabilities

3,877

3,877

 

 

 

 

Net identifiable (liabilities)/assets

669

263

932

 

 

 

 

Consideration

 

 

519

 

 

 

 

Goodwill

 

 

(413)

 

 

12.  Gain on Sale of Building

On 17 October 2013 Arbuthnot Latham & Co., Limited completed the sale and leaseback of 7 Wilson Street. The net book value of the property at the date of sale was £16.5m.  Under the terms of the sale and leaseback agreement, the cash consideration received by Arbuthnot Latham was £26.2m paid on completion. The Buyer also provided £5.4m to be drawn by Arbuthnot Latham to fund a renovation and fit out programme. After providing £3.0m for the rent payable during the period of refurbishment prior to occupation and £0.2m of transaction costs, the net gain was £6.5m.

 

 

13.  Other income

Arbuthnot Latham received £1.2m of rental income in 2013 from the letting of the 7 Wilson Street property.  The property was vacated by the tenants at the end of September 2013 and refurbishment works started soon afterwards in anticipation of the Group occupation which took place in November 2014.

 

 

14.  Operating expenses

 

 

 

2014

2013

Operating expenses comprise:

£000

£000

Staff costs, including Directors:

 

 

  Wages and salaries

41,082

33,262

  Social security costs

4,180

3,553

  Pension costs

1,741

1,509

  Share based payment transactions (note 37)

1,583

2,249

Amortisation of intangibles (note 28)

3,000

2,803

Depreciation (note 29)

808

1,015

Operating lease rentals

5,120

4,617

Costs arising from acquisitions

198

535

Other administrative expenses

27,468

24,088

Total operating expenses

85,180

73,631

 

 

2014

2013

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

95

82

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

 

 

  Audit of the accounts of subsidiaries

329

356

  Audit related assurance services

65

104

  Taxation compliance services

82

73

  Taxation advisory services

61

62

  Other assurance services

321

56

  Corporate finance services

115

 -  

  Other non-audit services

13

28

Total fees payable

1,081

761

 

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

 

 

15.  Average number of employees

 

 

 

2014

2013

Retail banking

608

530

Private banking

175

145

Group

17

16

 

800

691

 

 

16.  Income tax expense

 

 

 

2014

2013

United Kingdom corporation tax at 21.5% (2013: 23.25%)

£000

£000

Current taxation

 

 

Corporation tax charge - current year

5,349

3,146

Corporation tax charge - adjustments in respect of prior years

(18)

548

 

5,331

3,694

Deferred taxation

 

 

Origination and reversal of temporary differences

274

1,006

Adjustments in respect of prior years

(106)

(502)

 

168

504

Income tax expense

5,499

4,198

Tax reconciliation

 

 

Profit before tax

22,515

15,713

Tax at 21.5% (2013: 23.25%)

4,841

3,653

Permanent differences

657

208

Tax rate change

126

291

Prior period adjustments

(125)

46

Corporation tax charge for the year

5,499

4,198

 

The UK corporation tax rate reduced from 24% to 23% with effect from 1 April 2013 and to 21% from 1 April 2014. On 2 July 2013 the Government substantively enacted a further reduction to the UK corporation tax rate to 20% from 1 April 2015. This will reduce the Company's future current tax charge accordingly.

 

 

17.  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 of £8,634,000  (2013: £7,930,000 ) by the weighted average number of ordinary shares 15,279,322 (2013: 15,279,322) in issue during the year.

 

Diluted

Diluted earnings per ordinary share are calculated by dividing the profit after tax attributable to equity holders of the Company of £8,634,000  (2013: £7,930,000 ) by the weighted average number of ordinary shares in issue during the year, as noted above, 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 187,500 (2013: 106,250).

 

 

18.  Cash and balances at central banks

 

 

 

2014

2013

Group

£000

£000

Cash and balances at central banks

 115,938

193,046

 

In 2010 a reserve account was opened at the Bank of England (BoE) to comply with the new liquidity regime that came into force on 1 October 2010. Surplus funds are now mainly held in the BoE 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).

 

 

19.  Loans and advances to banks

 

 

 

2014

2013

Group

£000

£000

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

31,844

105,061

 

 

 

 

 

 

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:

 

2014

2013

Group

£000

£000

Aaa

 -  

57,101

A1

3,216

 -  

A2

26,242

44,327

A3

 -  

3,633

Baa1

2,386

 -  

 

31,844

105,061

 

 

 

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

 

 

 

 

20.  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 stated in the Statement of Financial Position at amortised cost.

 

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

 

 

 

2014

2013

Group

£000

£000

At 1 January

19,466

13,526

Exchange difference on monetary assets

188

 -  

Additions

85,244

9,844

Redemptions

(13,215)

(3,904)

At 31 December

91,683

19,466

 

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

 

 

 

 

2014

2013

Group

£000

£000

Aaa

48,714

14,120

Aa1

22,284

3,044

Aa2

5,001

 -  

Aa3

3,747

2,302

A1

3,922

 -  

A3

3,507

 -  

Baa1

4,508

 -  

 

91,683

19,466

 

 

 

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

 

 

 

 

21.  Derivative financial instruments

 

 

 

 

 

 

 

 

2014

 

2013

 

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

81,898

1,209

1,067

 

39,850

488

371

Interest rate caps

20,000

 -  

 -  

 

20,000

20

 -  

Structured notes

1,607

1,498

 -  

 

 -  

 -  

 -  

103,505

2,707

1,067

 

59,850

508

371

 

The principal derivatives used by the Group are 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 indicies) 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:

 

 

 

2014

2013

Group

£000

£000

Aa3

81,898

39,850

A2

20,000

20,000

Baa1

1,607

 -  

 

103,505

59,850

 

 

22.  Loans and advances to customers

 

 

 

2014

2013

Group

£000

£000

Gross loans and advances

1,197,394

763,042

Less:  allowances for impairment on loans and advances (note 23)

(38,411)

(31,033)

 

1,158,983

732,009

 

On the 18th December 2014 AL completed the purchase of a residential mortgage portfolio acquired from the administrators of the Dunfermline Building Society ("DBS") for a consideration of £106.3m.  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:

 

 

 

2014

2013

Group

£000

£000

Gross investment in finance lease receivables:

 

 

 - No later than 1 year

18,262

16,386

 - Later than 1 year and no later than 5 years

13,047

16,053

 

31,309

32,439

Unearned future finance income on finance leases

(5,799)

(6,885)

Net investment in finance leases

25,510

25,554

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

 

 

 - No later than 1 year

13,729

12,905

 - Later than 1 year and no later than 5 years

11,781

12,649

 

25,510

25,554

 

 

 

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

 

 

 

2014

2013

Group

£000

£000

Neither past due nor impaired

1,082,580

684,783

Past due but not impaired

23,175

19,210

Impaired

91,639

59,049

Gross

1,197,394

763,042

Less: allowance for impairment

(38,411)

(31,033)

Net

1,158,983

732,009

 

 

 

(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:

 

 

 

2014

2013

Group

£000

£000

Past due up to 30 days

4,763

2,681

Past due 30 - 60 days

1,145

4,369

Past due 60 - 90 days

1,233

3,439

Over 90 days

16,034

8,721

Total

23,175

19,210

 

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 (2013: £nil).

 

(c) Collateral held

 

 

An analysis of loans and advances to customers past due or impaired by reference to the fair value of the underlying collateral is as follows:

 

2014

2013

Group

£000

£000

Past due but not impaired

73,047

62,168

Impaired

16,477

10,963

Fair value of collateral held

89,524

73,131

 

Collateral is shown at fair value less costs to sell. The fair value of the collateral held is £89,524,000 against £76,403,000 secured loans, giving an average loan-to-value of 85% (2013: 65%).

 

The gross amount of individually impaired loans and advances to customers before taking into account the cash flows from collateral held is £53,228,000 (2013: £28,016,000). Interest income on loans classified as impaired totalled £3,143,000 (2013: £2,574,000).

 

 

23.  Allowances for impairment of loans and advances

 

 

 

 

 

Reconciliation of specific allowance for impairments:

 

 

 

2014

2013

Group

£000

£000

At 1 January

31,033

20,648

Impairment losses

18,669

18,798

Loans written off during the year as uncollectible

(11,003)

(8,413)

Amounts recovered during the year

(288)

 -  

At 31 December

38,411

31,033

 

 

 

Reconciliation of collective allowance for impairments:

 

 

 

2014

2013

Group

£000

£000

At 1 January

1,578

370

Impairment losses

453

1,208

At 31 December

2,031

1,578

 

 

 

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

 

 

 

2014

2013

Group

£000

£000

Loans and advances to customers - UK Private Bank

4,355

3,973

Loan and advances to customers - Retail Bank - unsecured

34,056

27,060

At 31 December

38,411

31,033

 

 

24.  Other assets

 

 

 

2014

2013

Group

£000

£000

Trade receivables

5,522

6,135

Repossessed collateral - held as inventory

3,742

3,543

Prepayments and accrued income

7,602

7,589

 

16,866

17,267

 

 

2014

2013

Company

£000

£000

Trade receivables

732

731

Due from subsidiary undertakings

4,633

4,579

Prepayments and accrued income

107

105

 

5,472

5,415

 

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.

 

 

25.  Financial investments

 

 

 

2014

2013

Group

£000

£000

Financial investments comprise:

 

 

 - Securities (at fair value through profit and loss)

145

152

 - Securities (available-for-sale)

1,132

1,823

Total financial investments

1,277

1,975

 

Unlisted securities

The Group has made equity investments in unlisted special purpose vehicles set up to acquire and enhance the value of commercial properties.  These investments are of a medium term nature. There is no open market for these investments and therefore the Group has valued them using appropriate valuation methodologies, which include net asset valuations and discounted future cash flows.

 

The Directors intend to dispose of these assets when a suitable buyer has been identified and when the Directors believe that the underlying assets have reached their maximum value.

 

 

2014

2013

Company

£000

£000

Financial investments comprise:

 

 

 - Securities (at fair value through profit and loss)

145

152

 - Securities (available-for-sale)

13

13

Total financial investments

158

165

 

 

26.  Deferred taxation

 

 

 

 

 

The deferred tax asset comprises:

 

 

 

2014

2013

Group

£000

£000

Unrealised surplus on revaluation of freehold property

180

173

Accelerated capital allowances and other short-term timing differences

215

(160)

Fair value of derivatives

 -  

100

Tax losses

2,193

2,742

Deferred tax asset

2,588

2,855

 

 

 

At 1 January

2,855

4,423

On acquisition of V12/ELL

 -  

(960)

Revaluation reserve

 -  

242

Profit and loss account - accelerated capital allowances and other short-term timing differences

282

589

Profit and loss account - tax losses

(549)

(1,439)

Deferred tax asset at 31 December

2,588

2,855

 

 

 

The above balance is made up as follows:

 

 

 

2014

2013

Group

£000

£000

Deferred tax assets

2,588

3,954

Deferred tax liabilities

 -  

(1,099)

 

2,588

2,855

 

 

2014

2013

Company

£000

£000

Accelerated capital allowances and other short-term timing differences

406

441

Deferred tax asset

406

441

 

 

 

At 1 January

441

447

Profit and loss account - accelerated capital allowances and other short-term timing differences

(35)

(6)

Deferred tax asset at 31 December

406

441

 

Deferred tax assets are recognised for tax losses to the extent that the realisation of the related tax benefit through future taxable profits is probable.

 

The UK corporation tax rate reduced from 24% to 23% with effect from 1 April 2013 and to 21% with effect from 1 April 2014. On 2 July 2013 the Government substantively enacted a further reduction to the UK corporation tax rate to 20% from 1 April 2015. Deferred tax has been calculated based on a rate of 20% to the extent that the related temporary or timing differences are expected to reverse. 

 

 

27.  Investment in associate

 

 

 

2014

2013

Group

£000

£000

Investment in associate

 943

 943

 

On 11 October 2013, Arbuthnot Latham & Co., Ltd together with Praxis (Holding) Limited, formed a special purpose vehicle in the form of a separate legal entity (Tarn Crag Limited). The purpose of this legal entity is to refurbish and re-let a property in Glasgow, with the intention to exit via a sale to an institutional investor in circa 5 years time. The investment is accounted for using the equity method.

 

During the year the associate recorded a loss of £87k. Due to the fact that the associate made a profit in the last quarter and the fact that the value of the outstanding loan notes (including accrued interest) exceeded the investment in associate, no loss has been recorded at Group level and the carrying value was left at cost. The summarised Statement of Financial Position of the associate is set out below:

 

 

 

 

 

2014

2013

At 31 December 2014

£000

£000

ASSETS

 

 

Cash and balances at central banks

1,724

320

Other assets

8

 -  

Property, plant and equipment

10,416

10,580

 

12,148

10,900

EQUITY AND LIABILITIES

 

 

Deposits from banks

9,970

9,500

Other liabilities

865

 -  

Debt securities in issue

1,400

1,400

Retained Earnings

(87)

 -  

 

12,148

10,900

 

(a) Significant restrictions

Praxis (Holding) Ltd receives £0.1m per annum in its capacity as property manager. Arbuthnot Latham & Co., Ltd subscribed to £0.9m of loan notes and Praxis (Holding) Ltd subscribed to £0.5m of loan notes, which carry interest at 15% and is rolled up and payable on redemption. The bank debt and interest and the loan notes and interest thereon as well as the property management fees need to be repaid, before further distributions to shareholders can take place.

 

(b) Risks associated with interests

Arbuthnot Latham & Co., Ltd agreed to subscribe to a further £0.2m of loan notes when required to fund working capital.

 

 

28.  Intangible assets

 

 

 

 

 

 

 

 

 

 

Goodwill

Computer software

Other    intangibles

Total

Group

£000

£000

£000

£000

Cost

 

 

 

 

At 1 January 2013

1,991

5,632

5,115

12,738

Additions

 -  

948

214

1,162

On acquisition of V12 & DMS (note 12 and 43)

704

5,414

2,200

8,318

Disposals

 -  

(1,900)

 -  

(1,900)

At 31 December 2013

2,695

10,094

7,529

20,318

Additions

 -  

1,214

 -  

1,214

Disposals

 -  

(1,838)

 -  

(1,838)

At 31 December 2014

2,695

9,470

7,529

19,694

 

 

 

 

 

Accumulated amortisation

 

 

 

 

At 1 January 2013

 -  

(3,717)

(695)

(4,412)

Amortisation charge

 -  

(1,307)

(1,496)

(2,803)

At 31 December 2013

 -  

(5,024)

(2,191)

(7,215)

Amortisation charge

 -  

(1,482)

(1,517)

(2,999)

Disposals

 -  

1,838

 -  

1,838

At 31 December 2014

 -