Arbuthnot Banking - Final Results London Stock Exchange
RNS Number : 7285C
Arbuthnot Banking Group PLC
20 March 2014
 



20 March 2014                                                                                                                                                                     

For immediate release

 

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

Audited Final Results for the year to 31 December, 2013

 

Significant Growth

 

Arbuthnot Banking Group today announces a 25 percent increase in profit before tax of £15.7m. Significant progress has been made across the Group during the year as we continue to realise our ambitions to grow.

 

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

 

FINANCIAL HIGHLIGHTS

·      Profit before tax £15.7m (2012: £12.6m)

·      Underlying Profits of £18.6m (2012: £11.6m)

·      Operating Income exceeded £100m for the first time (2012: £65.6m)

·      Achieved positive operating leverage of 14%*

·      Earnings per share 52p (2012: 53p)

·      Total dividend per share 44p (2012: 25p) including a special dividend of 18p

·      Total assets increased to £1.1bn (2012: £1.0bn)

·      Net assets per share 570.5p (2012: 449.3p) an increase of 27%

 

OPERATIONAL HIGHLIGHTS

 

Private Banking - Arbuthnot Latham

·      Profit before tax £7.7m (2012: £2.1m)

·      Customer loans up 18% to £341.0m  (2012: £289.3m)

·      Customer deposits grew £24m to £519.7m (2012: £495.7m)

·      Assets under Management increased 40% to £528m (2012: £377m)

 

Retail Banking - Secure Trust Bank

·      Profit before tax £17.2m (2012: £17.3m) with underlying profits of £25m

·      Acquired V12 loans adding £36.8m of customer loans

·      Lending balances increased by 31% to £391.0m (2012: £297.6m)

·      Total customer numbers increased to 350,861 (2012: 231,713)

·      SME Lending commenced

 

Commenting on the results, Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "This has been another significant year. Both banks have made good progress. We have substantially increased the net assets of the Group and at the same time been able to pay shareholders a special dividend."

 

*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                                                                                                             020 7012 2400

Andrew Salmon, Chief Operating Officer

James Cobb, Group Finance Director

David Marshall, Director of Communications

 

Canaccord Genuity Ltd (Nominated Advisor)

Lawrence Guthrie                                                                                                                                                              020 7665 4500

Sunil Duggal

 

Numis Securities Ltd (Broker)
Chris Wilkinson                                                                                                                                                                 020 7260 1000

Mark Lander

 

Bell Pottinger (Financial PR)

Ben Woodford                                                                                                                                                                   020 7861 3917

Zoë Pocock

 

The 2013 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 2014.  Copies may be obtained from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 20 Ropemaker Street, London, EC2Y 9AR.


 

Consolidated statement of comprehensive income

 




Year ended 31 December

Year ended 31 December




2013

2012


Note


£000

£000

Interest income



93,329

62,300

Interest expense



(20,279)

(17,514)

Net interest income



73,050

44,786

Fee and commission income

8


31,816

24,116

Fee and commission expense



(4,846)

(3,347)

Net fee and commission income



26,970

20,769

Operating income



100,020

65,555

Net impairment loss on financial assets

9


(18,807)

(10,984)

Gain from a bargain purchase

10


413

9,830

Gain on sale of building

11


6,535

 -  

Gain on sale of subsidiary

12


 -  

839

Other income

13


1,183

396

Operating expenses

15


(73,631)

(53,043)

Profit before income tax from continuing operations



15,713

12,593

Income tax expense

17


(4,198)

(1,128)

Profit after income tax from continuing operations



11,515

11,465

Loss from discontinued operations after tax

14


 -  

(347)

Profit for the year



11,515

11,118






Other comprehensive income





Items that are or may be reclassified to profit or loss





Foreign currency translation reserve



 -  

570

Revaluation reserve





Cash flow hedging reserve





 - Effective portion of changes in fair value



(15)

(34)

Available-for-sale reserve



(250)

81

Other comprehensive income for the period, net of tax



(265)

617

Total comprehensive income for the period



11,250

11,735






Profit attributable to:





Equity holders of the Company



7,930

8,041

Non-controlling interests



3,585

3,077

Profit for the year



11,515

11,118






Total comprehensive income attributable to:





Equity holders of the Company



7,681

8,658

Non-controlling interests



3,569

3,077

Total comprehensive income for the period



11,250

11,735






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





(expressed in pence per share):





 - basic and fully diluted

18


51.9

52.6


 

Consolidated statement of financial position

 




At 31 December




2013

2012


Note


£000

£000

ASSETS





Cash

19


193,046

203,683

Loans and advances to banks

20


105,061

144,391

Debt securities held-to-maturity

21


19,466

13,526

Derivative financial instruments

22


508

648

Loans and advances to customers

23


732,009

586,968

Other assets

25


17,267

11,666

Financial investments

26


1,975

3,257

Deferred tax asset

27


3,954

5,057

Investment in associate

28


943

Intangible assets

29


13,103

8,326

Property, plant and equipment

30


5,522

22,487

Total assets



1,092,854

1,000,009

EQUITY AND LIABILITIES





Equity attributable to owners of the parent





Share capital

36


153

153

Retained earnings

37


67,901

53,372

Other reserves

37


(1,467)

(1,253)

Non-controlling interests



20,327

16,376

Total equity



86,914

68,648

LIABILITIES





Deposits from banks

31


2,003

373

Derivative financial instruments

22


371

462

Deposits from customers

32


957,791

894,545

Current tax liability



1,427

346

Other liabilities

33


31,017

23,021

Deferred tax liability

27


1,099

634

Debt securities in issue

34


12,232

11,980

Total liabilities



1,005,940

931,361

Total equity and liabilities



1,092,854

1,000,009


 

Chairman's statement

 

I am pleased to report that Arbuthnot Banking Group ("ABG" or "the Group") has delivered a profit before tax of £15.7m (2012: £12.6m) which represents a 25% increase on 2012.

 

But more importantly, I note that both banks have been realising their ambitions for growth. It has always been a philosophy of the Group to build a varied source of income streams and to spread its risks, rather than become overly reliant or concentrated on a small number of business lines.

 

Notably, Secure Trust Bank ("STB") continued its diversification, as it completed the acquisitions of V12 Finance Group and Debt Managers Ltd early in 2013. These were complementary to the purchase of Everyday Loans made in 2012. All of these businesses have been successfully integrated into the Group.

 

At the same time Arbuthnot Latham ("AL") opened for business in Dubai, agreed a client custody arrangement with Pictet one of the largest Private Banks in Geneva, that allows Arbuthnot Latham's clients to use their services in Switzerland, Singapore and Hong Kong, installed a new operating platform for its investment management business and grew its total customer account balances to £1.05bn (2012: £872.3m).

 

During the year the Group took further steps to underpin the long term growth potential of both businesses by completing two significant transactions. First, we entered into a sale and lease back agreement on the Group's new headquarters at 7-21 Wilson Street. Having purchased the freehold in August 2012 for £15.7m, we could not refuse an offer that produced a net profit of £6.5m only a year later. Secondly, the Group continued to provide more liquidity to the market, by selling 580,000 shares in STB on 13 December 2013. Although we are prevented from showing the transaction as a profit by those curious accounting rules, the gain on sale of £14.4m has further increased the financial strength of the Group. Such is this strength and confidence for the future, the Directors were able to declare a special dividend of 18 pence to mark the 180 year anniversary of Arbuthnot Latham.

 

In last year's Chairman's Statement, I made reference to the regulatory environment in which both our banks operate and how the rules create a "glass ceiling" which prevents small banks becoming true challengers. During this year I have been pleased to detect a change in sentiment. In October the Governor of the Bank of England announced that it was open for business and would play its part in helping the banking industry with the introduction of new liquidity support mechanisms. These would be made available to all banks and not just the large lenders, who were usually the only ones able to offer mainstream forms of collateral, that were previously required to participate.  The Bank's view is now that as long as it could assess the credit risk of assets, they would be welcome as collateral.

 

This may seem like a small step forward, but to a well-managed banking Group such as ours, that has for years been excluded from such schemes, the news was welcome. We trust that the Bank of England truly understands the important role that the small banks can play in delivering an excellent service to its customers and also in helping to sustain the economic recovery.

 

During the year, Arbuthnot Latham celebrated its 180 year anniversary. I am proud of the history of our Private Bank, having been involved in shaping the City of London into one of the pre-eminent financial centres of the world. As part of the celebrations we published a book that recorded this history and I was particularly delighted that the Mayor of London, Boris Johnson, accepted our invitation to write the foreword to the book. He observed that despite its lack of natural resources, the City has built its success based on entrepreneurial spirit and free market forces.

 

I am, however, alarmed at the recent developments and rhetoric that have been aimed at restricting the free market. These have included wage control, caps on interest rates charged, limits on market share, regulating profitability, breaking up bank branch networks and raising the tax burden levied on the entrepreneurial classes and finally the threat of a financial transaction tax, all of which creates uncertainty for investors. This can only be unhelpful in maintaining the economic recovery, which is clearly underway.

 

Private Banking - Arbuthnot Latham & Co., Ltd

The Private Banking business has reported a pre-tax profit of £7.7m (2012: £2.1m). This result was clearly flattered by the gain of £6.5m that was generated from the sale and lease back transaction on the Wilson Street property. However, this should not overshadow the real progress that was made by Arbuthnot Latham during the year. As mentioned previously, we took the conscious decision to invest for the long term future. These investments are clearly coming to fruition when I reflect on the momentum that is being generated.

 

 

 

We have always held a long term ambition to develop our distribution capabilities to cover overseas markets. I feel we reached a major milestone this year, when we opened for business in Dubai. The predominately wealth management service appears to have been well received by the market in Dubai. The generation of new business there has exceeded our initial expectations. We have also added further options for our customers who wish to gain exposure to other overseas markets, via our custody arrangements with Pictet, which were initiated during the year.

 

In order to keep pace with the growing scale of our Investment Management business, the operating platform was replaced with new technology. This now offers the customers online facilities, which allows them immediately to review their portfolios. Early in 2014 we also launched our new mobile banking application as we continue to respond to the ever increasing needs of our clients.

 

Retail Banking - Secure Trust Bank PLC

The reported pre-tax profits of Secure Trust Bank were £17.2m (2012: £17.3m). However, once again the reported numbers do not tell the entire story of the progress being made by our retail bank. The underlying profits for STB were £25.2m, which is a record for the bank.

 

The business has maintained its focus on serving customers well and meeting their needs with simple straight forward banking solutions. This resulted in our customer numbers growing by 51% to close the year at 350,861 (2012: 231,713).

 

STB has continued to diversify its operations by adding to the acquisition of Everyday Loans in 2012 with further purchases this year of V12 Finance Group and Debt Managers Ltd. All these entities have been successfully integrated into the Group and the existing businesses have begun to leverage their expertise. The retail finance offering has been consolidated onto the V12 operating platform. Our personal loan portfolios are being managed as one business, to ensure we have an attractive offering to all our customers regardless of their standing. We have also transferred some of our existing impaired loans to Debt Managers Ltd to improve the financial returns involved in recovering these assets.

 

Board Changes and Personnel

The Board has remained unchanged throughout the year. I would like to take this opportunity to express my thanks to my colleagues on the Board for their generous support and the dedication they have given to the Group and me personally.

 

The results of the Group reflect the hard work and commitment of both existing and new members of staff who, with few exceptions, have performed well. On behalf of the Board I extend our thanks to all of them for their contributions in 2013.

 

Dividend

The Board is proposing a final dividend of 15p, an increase of 1p on last year, together with the interim dividend of 11p and the special dividend of 18p making a total dividend for the year of 44p (2012: 25p). If approved, the dividend will be paid on 16 May 2014 to shareholders on the register at close of business on 18 April 2014.

 

Outlook 

With the economic recovery underway, both banks have worked hard to be in a position to prosper as the economy grows. We are therefore optimistic that we can continue to make good steady progress, while remaining focussed on the needs and aspirations of our customers. The outlook is bright, the economy is improving and business is prospering. This will last as long as politics does not interfere with it.


 

Strategic Report






Business Review - Private Banking - Arbuthnot Latham



 


2013

2012

Operating income

£21.7m

£18.9m

Other income

£10.3m

£3.1m

Operating expenses

£21.3m

£17.9m

Profit before tax

£7.7m

£2.1m

Customer loans

£341.0m

£289.3m

Customer deposits

£521.2m

£495.7m

Total assets

£619.7m

£568.6m

Customer net margin

4.4%

3.3%

Loan to deposit ratio

66%

59%

 

Arbuthnot Latham celebrated its 180th anniversary in 2013 and during the year made good progress across many areas of business. The core business of private banking and wealth management, grew all key components of its business during the year and finished with a strong underlying momentum. The first international office for Arbuthnot Latham was opened in Dubai and through the establishment of international custody arrangements with Pictet, the Bank is now able to offer its services to wealthy clients from overseas who wish to have a private banking relationship in London. In addition, the sale and leaseback arrangement concluded for our new headquarters building produced a profit of £6.5m.

 

The year-end reported profit for Arbuthnot Latham was £7.7m with the core private banking and wealth management business delivering a profit of £4.9m (2012: £3.5m) before credit provisions.

 

The strategy to grow the private banking and wealth management business through the addition of several experienced bankers and the overall strengthening of the client proposition began to produce positive results during the year. With the recent upheaval across the financial services industry caused by the financial crisis, there is a significant opportunity for a client focused bank such as Arbuthnot Latham to benefit from clients looking to establish a new financial relationship.

 

This growth in new clients was reflected in the financial results. Client deposits ended the year at £521.2m (2012: £495.7m), an increase of 5%. The Bank was also able to draw on the Funding for Lending Scheme and by the year end had drawn £40m under this scheme. The overall cost of deposits fell during the year thereby enhancing the net interest income position of the Bank.

The loan book grew in 2013 by 18% to end the year at £341.0m (2012: £289.3m). The Bank continued its focus towards supporting the objectives of the client base with good quality lending transactions. The loan to deposit ratio at the end of the year was 66% (2012: 59%) which continued to reflect our prudent approach to the management of our balance sheet.  

 

In the wealth management business, the strengthening of the client proposition and the attraction to clients of the independent approach of the Bank in its investment management services resulted in a 40% increase in assets under management which finished the year at £527.9m (2012: £376.6m).

 

Following the strategic decision to open an office in Dubai, the Bank received its licence to operate in the Dubai International Financial Centre from the Dubai Financial Services Authority in late July 2013. The business in Dubai is focused towards international private banking and wealth management services. Since opening the office, an encouraging and positive foundation has been established with several new accounts opened and the business is proceeding to plan. Dubai is a growing market for international financial services and Arbuthnot Latham is now well placed to share in the growth that this market is expected to experience over the next few years.  

 

Our structured product distribution business, Gilliat Financial Solutions, experienced a challenging year with resulting weaker income margins across the business. While the UK distribution base continued to grow and the offshore business established some very positive distribution relationships, the business made a loss for the year of £0.4m (2012: £0.6m profit). The business has undertaken a review of its activities and we are confident that 2014 will see a return to profit.


 

Business Review - Retail Banking - Secure Trust Bank



 


2013

2012

Operating income

£79.0m

£47.0m

Operating expenses

£46.7m

£30.7m

Profit before tax

£17.2m

£17.3m

Customer loans - unsecured

£391.0m

£297.6m

Customer deposits

£436.6m

£398.9m

Customer numbers

 350,861

 231,713

Net interest margin

16.9%

15.0%

Cost income ratio

0.55

0.59

 

Secure Trust Bank ("STB") has reported pre-tax profits of £17.2m (2012: £17.3m). The fact that the reported number is largely unchanged from the previous year does not reflect the true growth in profitability that is being generated by the bank. Shareholders will recall that the 2012 statutory profit included a fair value adjustment arising from the acquisition of Everyday Loans. The underlying profit of STB for 2013 is £25.2m, which represents a 51% increase on the prior year underlying profit of £16.8m. It should also be noted that since the IPO in November 2011, the bank's underlying profit before tax has increased by 220% from £7.9m.

 

Ultimately the success of the business will depend on the ability of STB to attract and serve its customers. During 2013 its strategy of providing simple and straight forward banking solutions has proved successful, as the number of customers grew by 51% to close the year at 350,861. This figure also represents a 142% increase since the flotation on the AIM market. As the opportunity to provide credit solutions remains attractive, given the reduced level of funding available from the high street banks, the lending operations of the bank have become the engine for growth in recent times. Once again this was the case in 2013.

 

Overall, new business lending volumes grew by 50% to £304.7m (2012: £202.5m). In turn, this resulted in an increase of 31% in total customer loans at £391m (2012: £297.6m). The Motor finance business, which focusses on the near prime market segments, continues to service the majority of the top 100 UK car dealer groups. The growth in the portfolio for the year was 28%, as balances closed at £114.6m (2012: £89.6m).

 

The personal unsecured loan portfolio increased by 14% to £77.9m (2012: £68.2m). The rate of growth in this portfolio was partly constrained by a significant delay in the commencement of a new bank to bank loan referral arrangement. This activity is now operational with Sainsbury's Bank and should deliver benefits in 2014.

 

This year saw STB take a significant step forward in developing its retail point of sale business. The growth in balances was as a result of strong demand from retailers and also the acquisition of V12 Finance. Accordingly, the customer balances grew by 78% to close the year at £114.4m (2012: £64.2m). The business made good progress in integration, creating a single retail finance offering. The existing STB relationships have been transferred to the V12 platform. This has allowed the bank to offer a compelling proposition and has led to greater success in attracting retailers, notably including the recently announced Halfords agreement.

 

Everyday Loans portfolio grew to £81.4m (2012: £73.8m). This branch based unsecured lending portfolio serves relatively high credit risk customers with low average balance (£2,700) accounts. Given the higher risk in this business, the strategy has been to grow the portfolio in a controlled fashion, concentrating on profit maximisation rather than simply growth in volumes.

 

Once again the overall growth in the bank's lending portfolios has resulted in a higher level in the value of reported impairments. Given our prudent underwriting criteria, the actual rate of impairments remains lower than the level anticipated at origination and therefore below the rates at which the loans were priced.

 

The robust growth in the customer loan portfolios has continued to be matched by customer deposits. The balance sheet remains entirely funded by retail deposits with the year end loan to deposit ratio being 90%. However, as the markets begin to signal an eventual rise in interest rates, the profile of the average tenor of the bank's deposits has been extended. Fixed term deposits now represent 44% of the total deposit book, compared to 39% in the prior year.

 

Finally, to initiate the next phase of growth, the bank is in the process of entering the SME lending markets. The bank has already written a number of good quality real estate finance transactions and is exploring asset based finance opportunities. All of these are expected to develop further in 2014.


 

Strategic Report - Financial Review

 

Arbuthnot Banking Group PLC adopts a pragmatic approach to risk taking and seeks to maximise long term revenues and returns.  Given its relative size, it is 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 (Arbuthnot Latham & Co., Limited) and Retail Banking (Secure Trust Bank PLC).  The Group's revenues are derived from a combination of net interest income from lending, deposit-taking and money market activities, fees for services provided to customers and clients and commission earned on the sale of financial instruments and products.

 

Highlights




2013

2012

Summarised Income Statement

£000

£000

Net interest income

73,050

44,786

Net fee and commission income

26,970

20,769

Operating income

100,020

65,555

Gain from a bargain purchase

413

9,830

Gain from sale of building

6,535

 -  

Other income

1,183

396

Gain on sale of subsidiary

 -  

839

Operating expenses

(73,631)

(53,043)

Impairment losses - financial investments

(1,073)

 -  

Impairment losses - loans and advances to customers

(17,734)

(10,984)

Profit on continuing operations before tax

15,713

12,593

Income tax

(4,198)

(1,128)

Profit on continuing operations after tax

11,515

11,465

Loss from discontinued operations after tax

 -  

(347)

Profit after tax

11,515

11,118

Basic earnings per share (pence)

51.9

52.6

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Secure Trust Bank

Arbuthnot Banking Group

31 December 2013

£000

£000

£000

Profit after 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)



40.6

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Secure Trust Bank

Arbuthnot Banking Group

31 December 2012

£000

£000

£000

Profit after tax

2,058

17,253

12,593

Bargain purchase gain on acquisition of ELL

 -  

(9,830)

(9,830)

ELL fair value amortisation

 -  

3,056

3,056

ELL management incentives

 -  

1,700

1,700

Excess funding costs of acquisition

 -  

1,900

1,900

STB acquisition costs

 -  

1,428

1,428

STB share options

 -  

1,610

1,610

Acquired portfolios

 -  

(363)

(363)

Gain on sale of Switzerland subsidiary

 -  

 -  

(839)

AL hire of new executives

300

 -  

300

Underlying profit

2,358

16,754

11,555





Basic earnings per share (pence)



38.2

 

Once again the Group has continued to trade robustly in 2013 and has reported a profit before tax of £15.7m (2012: £12.6m), which on a statutory basis represents an increase of 25%. However, the financial results for 2013 and those of 2012 contain a number of individually significant items. The Annual Report and Accounts for 2012 detail the bargain purchase gain that arose from the acquisition of Everyday Loans. This year the Group has recognised a £6.5m gain from the sale and lease back of the new head office building. Once the impact of these and a small number of other non-recurring items such as the recognition of the 180 year anniversary (£0.4m) are excluded from the results, the Group has underlying earnings of £18.5m (2012: £11.6m) which represents an increase in excess of 60%. Similarly, the statutory Earnings Per Share ("EPS") is 51.9 pence (2012: 52.6 pence), but the underlying EPS has increased by 6% to 40.6 pence (2012: 38.2 pence).

 

The Operating Income for the Group has exceeded £100m for the first time in the Group's history increasing by 53% as the full year impact of the acquisitions and the strong organic growth have emerged in the financial results. The largest component of the operating income remains Net Interest Income, which is now 73% of the total income. The approximate blended yield of Net Interest Income compared to average customer loans has increased to 11% against the prior year 9%. This is mainly as a result of the increasing proportion that Secure Trust Bank's higher yielding loan portfolios represent of the Group's asset base. Net Interest Income has also benefitted from lower deposit rates prevalent in the market, which has been brought about by the introduction of the Funding for Lending Scheme ("FLS").

 

The overall expense base increased to £73.6m (2012: £53m), which is an increase of 39%. Once again, the increase is mainly due to the full year impact of acquisitions and the cost of investment for growth. Relative to the growth in operating income, the Group has produced a positive operating leverage of 14%.

 

As expected, given the growth in the Group's lending portfolios, the impairment costs have increased by 60% in total. However, the total impairment charge compared to the total customer loan portfolio has held steady at a blended rate of below three percent (2013: 2.6%, 2012: 2.2%).

 

The Group tax charge has returned to a more normal level in 2013 following the significantly reduced amount of 2012 which was caused by the impact the bargain purchase gain had on the overall tax rate.

 

Balance Sheet Strength




2013

2012

Summarised Balance Sheet

£000

£000

Assets



Loans and advances to customers

732,009

586,968

Liquid assets

317,573

361,600

Other assets

42,905

51,441

Total assets

1,092,487

1,000,009




Liabilities



Customer deposits

957,791

894,545

Other liabilities

47,782

36,816

Total liabilities

1,005,573

931,361

Equity

86,914

68,648

Total equity and liabilities

1,092,487

1,000,009

 

In the previous year the Group's total assets exceeded £1bn for the first time in its history. Once again the Group delivered strong growth in its total assets posting an increase of 9%. This was despite the fact that the level of liquid assets reduced by 13% in the year. The assets growth was as a result of the performance of the lending portfolios. In aggregate, customer loans increased by 25% to £732.2m (2012: £587m). The acquisition of V12 Finance contributed £36.8m.

 

The Group's lending remains entirely funded by customer deposits, which increased by 7% to £957.8m (2012: £894.5m). As a result, the overall loan to deposit ratio closed the year at 76.4% (2012: 65.5%). This increase was largely planned as both the Group's banks have been admitted into the Funding for Lending Scheme, which has provided access to a valuable source of new liquidity.

 

Also, shareholders should note that the net assets of the Group increased by £18.2m (27%) even after the payment of the special dividend. Contributing to this increase was not only the record earnings, but also the gain that arose on the sale by the Group of 580,000 shares in STB. This generated a non taxable gain of £14.4m that is required to be accounted for in the Statement of Changes in Equity. The net asset value per share of the Group is now 570.5p (2012: 449.3p).

 

Segmental Analysis

The segmental analysis in note 43 to the Consolidated Financial Statements of the Annual Report highlights the disclosures required under IFRS 8 'Operating Segments'. The operating segments are Private Banking (Arbuthnot Latham & Co., Limited) 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




2013

2012

Summarised Income Statement

£000

£000

Net interest income

12,778

10,708

Net fee and commission income

8,873

8,187

Operating income

21,651

18,895

Gain from sale of building

6,535

 -  

Other income

3,765

3,072

Operating expenses

(21,309)

(17,871)

Impairment losses - financial investments

(824)

 -  

Impairment losses - loans and advances to customers

(2,090)

(2,038)

Profit before tax

7,728

2,058

 

The profit before tax increased to £7.7m (2012: £2.1m). However, as previously discussed, the results of the bank include the gain that arose on the sale of the Wilson Street property, which generated £6.5m. Also, as part of the year end analysis, the business took a more pessimistic view on its small number of equity investments that have been held in its Available-for-Sale portfolio. This resulted in incremental losses of £0.8m. The remaining equity investment portfolio now totals £1.8m.

 

As indicated to the market throughout 2013, the bank benefitted from a 20% increase in Net Interest Income, which was as a result of not only a larger customer asset portfolio but also a widening of customer margins of over 100 basis points. This was brought about by the impact of FLS on the market for deposit rates.

 

The investment made in the upgrade of the private banking front office began to pay off, resulting in growth in the assets under management of 40%. Accordingly, the bank saw an increase in the fees and commissions earned of 7%.

 

With greater confidence that the business model has sustainable momentum, further investments were made, not only in the front office but also the Dubai office which officially opened midway through the year. Additionally, a new investment management operating platform came online in the year, all of which resulted in an increase in operating expenses of 19%.

 

The credit losses declined to £1.8m (2012: £2.0m) which, on a larger portfolio, saw the actual loss rate fall to 0.6%.

 

The loan book remains well secured and of high quality, with an overall LTV of 50% with negligible losses emerging from the front book that has been developed in recent years.

 

Finally, Gilliat Financial Solutions reversed its financial progress made in the previous year by posting a loss of £0.4m (2012: profit £0.6m). This was due to overtrading during the year. Sales volumes actually increased by more than 20%, but in response to the positive signs from the IFA market, the business over purchased its stock of products and in the end had to discount its margins heavily. This strategy has been revised for 2014 and products are being purchased in line with demand from the IFAs rather than in advance. This should see the unit return to profitability in 2014.

 


2013

2012

Summarised Balance Sheet

£000

£000

Assets



Loans and advances to customers

340,982

289,337

Liquid assets

239,168

231,209

Other assets (including Group balances)

39,523

48,069

Total assets

619,673

568,615




Liabilities



Customer deposits

521,183

495,654

Other liabilities (including Group balances)

71,438

48,509

Total liabilities

592,621

544,163

Equity

27,052

24,452

Total equity and liabilities

619,673

568,615

 

Customer assets increased by 18% to close the year at £341.2m (2012: £289.3m), which was another year of robust growth, but still managed within our conservative risk appetite. Other assets reduced following the disposal of the Wilson Street property.

Customer deposits again saw good inflows with balances increasing by 5%. But more importantly, the mix of deposits was rebalanced, with a number of higher yielding term balances maturing during the year being replaced by accounts with lower rates.

 

The loan to deposit ratio closed the year at 65% (2012: 59%) as the bank now has access to the FLS liquidity resources. This does allow the bank to operate a higher ratio, while maintaining a conservative policy with regard to liquidity.

 

The Private bank remains highly liquid and well capitalised with a total capital ratio of 12.8% (2012: 12.4%) and a core tier 1 ratio of 10.5% (2012: 9.9%).

 

Retail Banking - Secure Trust Bank




2013

2012

Summarised Income Statement

£000

£000

Net interest income

60,885

34,426

Net fee and commission income

18,097

12,582

Operating income

78,982

47,008

Gain from a bargain purchase

413

9,830

Other income

 -  

37

Operating expenses

(46,558)

(30,676)

Impairment losses - loans and advances

(15,644)

(8,946)

Profit after tax

17,193

17,253

 

The reported profit before tax is £17.2m (2012: £17.3m) which is largely unchanged on a statutory basis, however, the prior year results included a gain arising from the bargain purchase of Everyday Loans. The underlying profits have grown to £25.2m (2012: £16.8m) for the year, an increase of 51%.

 

The bank generated a 68% increase in operating income as the continued organic growth in the portfolios was augmented with the full year impact of the acquisitions made in 2012 and early 2013. An increase in high yielding customer assets and lower funding costs resulted in a 199 basis point widening of the blended customer net margin to 16.9% (2012: 15%).

 

Operating expenses increased by 51%, giving a positive operational leverage ratio of 21.7%. Included in expenses for the year were £1.2m (2012: £0.7m) related to the amortisation of the Everyday Loans intangible and £0.9m (2012: £nil) from the amortisation of the V12 intangible. Also, the cost of the STB share options was £2.2m (2012:£1.6m). Finally, STB also incurred acquisition costs of £0.9m (2012: £3.1m) during the year. The increase in the impairment losses was expected given the growth in the credit portfolios and the continued seasoning of customer accounts. However, the blended average loss rate was 4.3% (2012: 3.9%), still well below the levels anticipated at origination but higher as a result of the change in mix toward the higher yielding accounts.

 

The Current Account ended the year with 22,860 accounts (2012: 20,962) and Onebill with 24,297 (2012: 26,154).

 


2013

2012

Summarised Balance Sheet

£000

£000

Assets



Asset finance



Motor vehicles

114,570

89,620

Cycles

15,357

13,938

Musical instruments

8,818

6,700

V12

36,846

 -  

Personal computers

25,549

26,306

Pay4Later

26,899

16,776

DFS

917

469

Total asset finance

228,956

153,809

Personal lending

77,889

68,175

ELL

81,368

73,806

Commercial lending

1,784

 -  

Other lending

921

1,587

Acquired portfolios

110

254

Total loans and advances to customers

391,028

297,631

Liquid assets

71,958

130,442

Other assets (including Group balances)

56,611

46,526

Total assets

519,597

474,599




Liabilities



Customer deposits

436,608

398,891

Other liabilities (including Group balances)

21,368

19,787

Total liabilities

457,976

418,678

Equity

61,621

55,921

Total equity and liabilities

519,597

474,599

 

During the year the asset finance portfolio increased by 49% with only the personal computer portfolio not growing. V12 added £36.8m during the year. Personal loans increased by 14% but growth was held back by delays in implementing the referral arrangement agreed with Sainsbury's Bank. Everyday Loans portfolio increased by 10% as caution has been exercised in the progression of this portfolio.

 

The bank remains entirely funded by retail deposits which increased by 9% to close the year at £433.4m (2012: £398.9m). The offering by the bank still remains attractive with market leading rates despite some downward corrections to rates during the year.

 

Group & Other Costs




2013

2012

Summarised Income Statement

£000

£000

Net interest income

(195)

122

Subordinated loan stock interest

(418)

(463)

Operating income

(613)

(341)

Other income

18

25

Gain on sale of subsidiary

 -  

839

Operating expenses

(8,363)

(7,235)

Impairment on financial investments

(249)

 -  

Profit after tax

(9,207)

(6,712)

 

Total Group costs increased to £9.2m (2012: £6.7m). This was a result of firstly, a lower level of operating income due to the conversion of the subordinated loan issued by STB into equity as part of the placing carried out in November 2012 and, secondly, the prior year containing a one off gain that arose on the sale of the Swiss banking subsidiary (£0.8m).

 

Group operating expenses increased by £1.1m due to higher salary and bonus awards along with the recognition of the 180 year anniversary (£0.4m) and additional provisions made in the Group's captive insurance cell (£0.3m).

 

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.

 

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 42.

 

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar I 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 I calculations does not reflect the risk, an additional capital add-on in Pillar II is applied.

 

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

• Tier 1 comprises mainly shareholders' funds and non-controlling interest, after deducting goodwill and other intangible assets.

• Lower Tier 2 comprises qualifying subordinated loan capital and revaluation reserves. 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.

 


2013

2012

Capital ratios

£000

£000

Core Tier 1 capital

87,270

68,508

Deductions

(11,405)

(7,309)

Tier 1 capital after deductions

75,865

61,199

Tier 2 capital

13,832

12,120

Total capital

89,697

73,319




Core Tier 1 capital ratio (Net Core Tier 1 capital/Basel 2 RWAs*)

15.8%

15.5%

Total Capital Ratio (Capital/Basel 2 RWAs*)

18.7%

18.5%

* - Risk Weighted Assets (RWAs)



 

In June 2013, the PRA published a final regulation to give effect to the Basel III framework, which amends the definition of Tier 1 capital. This comes into effect on 1 January 2014. The Group's current capital position is sufficient to meet the Tier 1 capital ratio based on the Tier 1 capital definition under the new regulation.

 

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 £341.2m and £391.0m 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. 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.  Hence, 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 liabilities 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 future three year horizon.

 

Dividend

The Board proposes a final dividend of 15 pence per share to be paid on 16 May 2014, giving a total dividend for the year of 44 pence (2012: 25 pence) per share, which include 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

19 March 2014


 

Group Directors' Report

 

The Directors submit their annual report and the audited consolidated financial statements for the year ended 31 December 2013.

 

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 14.

 

Results and Dividends

The results for the year are shown on page 1. The profit after tax for the year of £11.5 million (2012: £11.1 million) is included in reserves.

 

The Company sold 580,000 ordinary 40p shares (3.7%) in its subsidiary Secure Trust Bank PLC on 13 December 2013 at a price of £25 per share. This resulted in a net gain of £14.4m which is also included in the Group's reserves.

 

The Directors recommend the payment of a final dividend of 15 pence on the ordinary shares which, together with the interim dividend of 11 pence paid on 4 October 2013 and a special dividend of 18p paid on 22 November 2013, represents total dividends for the year of 44 pence (2012: 25 pence). The final dividend, if approved by members at the Annual General Meeting, will be paid on 16 May 2014 to shareholders on the register at close of business on 18 April 2014.

 

Going Concern

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

 

Share Capital

Shareholders will be asked to approve 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.

 

Remuneration

Shareholders will be asked to approve an Ordinary Resolution permitting bonus payments to be made to executive directors or senior managers not exceeding two times that director's annual basic salary if required by forthcoming regulation.  It is the practice of the Company to pay fair and reasonable salaries and to reward exceptional performance under a bonus scheme.  The Company seeks to keep down fixed overhead costs but does not welcome the principle of wage control.

 

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 19 March 2014 of the following substantial holdings in the ordinary shares of the Company, other than those held by one director shown below:

 

Holder


Ordinary Shares

%

Prudential plc


625,161

4.2

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. A.A. Salmon and Mr. P.A. Lynam retire under Article 78 of the Articles of Association and, being eligible, offer themselves for re-election.  Both directors have service agreements 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 2013

31 December 2013

18 March 2014

%

H Angest

8,186,901

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 67% subsidiary of the Company.

 

On 16 April 2013 Mr. Salmon exercised the option granted to him on 21 May 2008 to subscribe for 100,000 ordinary 1p shares in the Company at 337.5p and Mr. Cobb exercised the option granted to him on 5 November 2008 to subscribe for 50,000 ordinary 1p shares in the Company at 320p.  The exercise price was 930p per share and the Board agreed to make a cash settlement rather than allot new shares.

 

On the same day Mr. Salmon and Mr. Cobb were granted new 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 2011 Mr. Lynam and Mr. Salmon were each granted options to subscribe for 141,666 ordinary 40p shares in Secure Trust Bank PLC at 720p between 2 November 2014 and 1 November 2021, and a further 141,667 shares at 720p between 2 November 2016 and 1 November 2021. The fair value of the options at grant date was £1.6m.

 

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 2013 three directors had loans from Arbuthnot Latham & Co., Limited amounting to £5,188,000, on normal commercial terms as disclosed in note 41 to the financial statements. At 31 December 2013 three directors had deposits with Secure Trust Bank PLC amounting to £265,000 and five directors had deposits with Arbuthnot Latham & Co., Limited amounting to £2,257,000, all on normal commercial terms as disclosed in note 41 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 21 and 22 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 page 18 to 20.

 

Employees

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

 

Political Donations

The Company made a political donation of £27,000 to the Conservative Party during the year (2012: £50,000).

 

Auditors

Following a review of their corporate structure, our auditors KPMG Audit Plc, have instigated an orderly wind down of business, with future audit work being undertaken by KPMG LLP.  The Board has decided to nominate KPMG LLP as auditors and a resolution for their appointment will be proposed at the forthcoming Annual General Meeting at a fee to be agreed in due course by the directors.  There is no difference in liability terms between KPMG Audit Plc and KPMG LLP.

 

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

19 March 2014


 

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, 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 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), Paul Lynam (appointed 27 February 2014), Andrew Salmon and Robert Wickham. The role of the Risk Committee is to approve specific risk policies for Group subsidiaries and 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 Ernst & Young. The Audit Committee also receives reports from the external auditors, KPMG Audit Plc, 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 London Stock Exchange they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent Company financial statements on the same basis.

 

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and 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 Auditors

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 auditors 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.

 

Remuneration Resolution

Shareholders will be asked to approve an Ordinary Resolution permitting bonus payments to be made to executive directors or senior managers not exceeding two times that director's annual basic salary if required by forthcoming regulation.  It is the practice of the Company to pay fair and reasonable salaries and to reward exceptional performance under a bonus scheme.  The company seeks to keep down fixed overhead costs but does not welcome the principle of wage control.

 

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.

 

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 exercised the option granted to him on 21 May 2008 to subscribe for 100,000 ordinary 1p shares in the Company at 337.5p and Mr. Cobb exercised the option granted to him on 5 November 2008 to subscribe for 50,000 ordinary 1p shares in the Company at 320p.  The exercise price was 930p per share and the Board agreed to make a cash settlement rather than allot new shares.

 

On the same day Mr. Salmon and Mr. Cobb were granted new 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.

 

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 for James Cobb. 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 £1.6m.

 

Directors' Emoluments



This part of the remuneration report is audited information.





2013

2012


£000

£000

Fees (including benefits in kind)

215

215

Salary payments (including benefits in kind)

3,328

3,027

Pension contributions

140

137

Long term incentive

897

 -  


4,580

3,379

 







Long term

Total

Total


Salary

Bonus

Benefits

Pension

Fees

incentive

2013

2012


£000

£000

£000

£000

£000

£000

£000

£000

H Angest

475

 -  

40

 -  

 -  

 -  

515

519

JR Cobb

235

200

16

35

 -  

305

791

436

JW Fleming (from 01/03/12)

230

225

15

35

 -  

 -  

505

458

PA Lynam

475

500

21

35

 -  

 -  

1,031

870

DM Proctor (to 01/03/12)

 -  

 -  

 -  

 -  

 -  

 -  

 -  

49

AA Salmon

475

400

21

35

 -  

592

1,523

832

Ms RJ Lea

 -  

 -  

 -  

 -  

120

 -  

120

120

Sir Christopher Meyer

 -  

 -  

 -  

 -  

45

 -  

45

45

RJJW Wickham

 -  

 -  

 -  

 -  

50

 -  

50

50


1,890

1,325

113

140

215

897

4,580

3,379

 

Details of any shares or options held by directors are presented on page 16.

                                                                               

The emoluments of the Chairman were £515,000 (2012: £519,000). The emoluments of the highest paid director were £1,523,000 (2012: £870,000) including pension contributions of £35,000 (2012: £35,000).     

 

Mr. R J J Wickham is a director of Calando Finance Limited which received an annual fee of £50,000 (2012: £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 2013 (2012: six directors).

 

 

 

 

Henry Angest

Chairman of the Remuneration Committee

19 March 2014                                                     


 

Independent Auditor's Report

 

We have audited the financial statements of Arbuthnot Banking Group PLC for the year ended 31 December 2013 set out on pages 25 to 85. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. 

 

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

 

Respective responsibilities of directors and auditors

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

 

Scope of the audit of the financial statements

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

www.frc.org.uk/auditscopeukprivate.

 

Opinion on financial statements

In our opinion:

 

• the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2013 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 Audit Plc, Statutory Auditor

Chartered Accountants

 

15 Canada Square

London

E14 5GL

19 March 2014


 

Company statement of financial position

 




At 31 December




2013

2012


Note


£000

£000

ASSETS





Due from subsidiary undertakings - bank balances



16,551

 -  

Financial investments

26


165

413

Deferred tax asset



441

447

Intangible assets

29


12

20

Property, plant and equipment

30


130

134

Other assets

25


5,415

5,662

Investment in subsidiary undertakings

42


30,995

30,847

Total assets



53,709

37,523

EQUITY AND LIABILITIES





Equity





Share capital

36


153

153

Other reserves

37


(1,030)

(1,030)

Retained earnings

37


31,325

20,768

Total equity



30,448

19,891

LIABILITIES





Bank overdraft



2,000

100

Other liabilities

33


9,029

5,552

Debt securities in issue

34


12,232

11,980

Total liabilities



23,261

17,632

Total equity and liabilities



53,709

37,523






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

Share premium account

Foreign currency translation reserve

Revaluation reserve

Capital redemption reserve

Cash flow hedging reserve

Treasury shares

Non-controlling interests

Total


£000

£000

£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


 


Attributable to equity holders of the Group




Share capital

Share premium account

Foreign currency translation reserve

Revaluation reserve

Capital redemption reserve

Cash flow hedging reserve

Treasury shares

Non-controlling interests

Total


£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Balance at 1 January 2012

153

21,085

(570)

140

20

 -  

(329)

(1,097)

21,571

5,998

46,971













Total comprehensive income for the period












Profit for 2012

 -  

 -  

 -  

 -  

 -  

 -  

 -  

 -  

8,041

3,077

11,118













Other comprehensive income, net of tax












Foreign currency translation reserve

 -  

 -  

570

 -  

 -  

 -  

 -  

 -  

 -  

 -  

570

Revaluation reserve












Cash flow hedging reserve












 - Effective portion of changes in fair value

 -  

 -  

 -  

 -  

 -  

 -  

(34)

 -  

 -  

 -  

(34)

Available-for-sale reserve

 -  

 -  

 -  

 -  

 -  

81

 -  

 -  

 -  

 -  

81

Total other comprehensive income

 -  

 -  

570

 -  

 -  

81

(34)

 -  

 -  

 -  

617

Total comprehensive income for the period

 -  

 -  

570

 -  

 -  

81

(34)

 -  

8,041

3,077

11,735













Transactions with owners, recorded directly in equity












Contributions by and distributions to owners












Cancellation of share premium

 -  

(21,085)

 -  

 -  

 -  

 -  

 -  

 -  

21,085

 -  

 -  

Purchase of own shares

 -  

 -  

 -  

 -  

 -  

 -  

 -  

(34)

 -  

 -  

(34)

Equity settled share based payment transactions

 -  

 -  

 -  

 -  

 -  

 -  

 -  

 -  

 -  

(70)

(70)

Share placing Secure Trust Bank

 -  

 -  

 -  

 -  

 -  

 -  

 -  

 -  

6,881

7,371

14,252

Final dividend relating to 2011

 -  

 -  

 -  

 -  

 -  

 -  

 -  

 -  

(2,082)

 -  

(2,082)

Interim dividend relating to 2012

 -  

 -  

 -  

 -  

 -  

 -  

 -  

 -  

(2,124)

 -  

(2,124)

Total contributions by and distributions to owners

 -  

(21,085)

 -  

 -  

 -  

 -  

 -  

(34)

23,760

7,301

9,942

Balance at 31 December 2012

153

 -  

 -  

140

20

81

(363)

(1,131)

53,372

16,376

68,648


 

Company statement of changes in equity

 


Attributable to equity holders of the Company



Share capital

Share premium account

Capital redemption reserve

Available -for-sale reserve

Treasury shares

Retained earnings

Total


£000

£000

£000

£000

£000

£000

£000

Balance at 1 January 2012

153

21,085

20

 -  

(1,097)

8,517

28,678









Total comprehensive income for the period








Loss for 2012

 -  

 -  

 -  

 -  

 -  

(5,260)

(5,260)









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

 -  

(5,260)

(5,179)

















Transactions with owners, recorded directly in equity








Contributions by and distributions to owners








Cancellation of share premium

 -  

(21,085)

 -  

 -  

 -  

21,085

 -  

Purchase of own shares

 -  

 -  

 -  

 -  

(34)

 -  

(34)

Final dividend relating to 2011

 -  

 -  

 -  

 -  

 -  

(1,936)

(1,936)

Interim dividend relating to 2012

 -  

 -  

 -  

 -  

 -  

(1,638)

(1,638)

Total contributions by and distributions to owners

 -  

(21,085)

 -  

 -  

(34)

17,511

(3,608)

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 31 December 2013

153

 -  

20

81

(1,131)

31,325

30,448


 

Consolidated statement of cash flows

 




Year ended 31 December

Year ended 31 December




2013

2012


Note


£000

£000

Cash flows from operating activities





Interest received



91,075

61,957

Interest paid



(20,085)

(13,405)

Fees and commissions received



26,325

20,769

Net trading and other income



7,718

11,065

Cash payments to employees and suppliers



(81,157)

(64,182)

Taxation paid



(2,543)

(4,083)

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



21,333

12,121

Changes in operating assets and liabilities:





 - net decrease in derivative financial instruments



49

765

 - net increase in loans and advances to customers



(122,682)

(132,312)

 - net (increase)/decrease in other assets



(3,572)

3,616

 - net increase in deposits from banks



1,630

365

 - net increase in amounts due to customers



61,945

200,745

 - net increase in other liabilities



6,990

5,096

Net cash (outflow)/inflow from operating activities



(34,307)

90,396

Cash flows from investing activities





Borrowings repaid on acquisition of subsidiary undertakings

10, 44


(36,922)

(71,618)

Cash acquired on purchase of subsidiary undertakings

10, 44


1,512

991

Purchase of subsidiary undertakings

10, 44


(4,026)

 -  

Acquisition of financial investments



 -  

(93)

Disposal of financial investments



63

 -  

Purchase of computer software

29


(1,162)

(662)

Disposal of computer software

29


1,900

 -  

Purchase of property, plant and equipment

30


(746)

(17,661)

Investment in associate

28


(943)

 -  

Proceeds from sale of property, plant and equipment



23,259

12

Purchases of debt securities



(9,844)

(51,523)

Proceeds from redemption of debt securities



3,904

78,076

Net cash from investing activities



(23,005)

(62,478)

Cash flows from financing activities





Purchase of treasury shares



 -  

(34)

Increase in borrowings



2,000

 -  

Dividends paid



(9,060)

(4,206)

Proceeds from share placing by Secure Trust Bank



 -  

14,252

Proceeds from sale of Secure Trust Bank shares



14,405

 -  

Net cash used in financing activities



7,345

10,012

Net (decrease)/increase in cash and cash equivalents



(49,967)

37,930

Cash and cash equivalents at 1 January



348,074

310,144

Cash and cash equivalents at 31 December

40


298,107

348,074


 

Company statement of cash flows

 




Year ended 31 December

Year ended 31 December




2013

2012


Note


£000

£000

Cash flows from operating activities





Dividends received from subsidiaries



11,418

1,947

Interest received



99

278

Interest paid



(714)

(631)

Net trading and other income



1,364

1,075

Cash payments to employees and suppliers



(8,089)

(8,298)

Taxation received



(160)

(7)

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



3,918

(5,636)

Changes in operating assets and liabilities:





 - net decrease in group company balances



3,128

1,061

 - net decrease/(increase) in other assets



254

(357)

 - net increase/(decrease) in other liabilities



348

(3,762)

Net cash inflow/(outflow) from operating activities



7,648

(8,694)

Cash flows from investing activities





Increase in loans to subsidiary companies



 -  

(2,000)

Repayment of loans to subsidiary companies



 -  

6,500

Increase investment in subsidiary



(1,000)

(6,000)

Disposal of share in subsidiaries



14,405

386

Purchase of property, plant and equipment

30


 -  

(13)

Net cash from investing activities



13,405

(1,127)

Cash flows from financing activities





Purchase of treasury shares



 -  

(34)

Dividends paid



(6,402)

(3,574)

Increase in borrowings



2,000

100

Net cash used in financing activities



(4,402)

(3,508)

Net increase/(decrease) in cash and cash equivalents



16,651

(13,329)

Cash and cash equivalents at 1 January



(100)

13,329

Cash and cash equivalents at 31 December



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 One Arleston Way, Solihull B90 4LH.  The consolidated financial statements of the Arbuthnot Banking Group PLC as at and for the year ended 31 December 2013 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 19 March 2014.

 

(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

• IAS 1 (Revised), 'Presentation of Financial Statements - Presentation of items of other comprehensive income' (effective 1 July 2012). The revised standard require the split of other comprehensive income between items which may subsequently be reclassified to profit or loss and items that will not be reclassified to profit or loss. The disclosure of other comprehensive income on the face of the Statement of Comprehensive Income in these financial statements has been changed to reflect this split.

 

• IFRS 7 (Revised), 'Disclosures - Offsetting Financial Assets and Financial Liabilities' (effective 1 January 2013). The revised standard amend the required disclosures to include information that will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with the entity's recognised financial assets and recognised financial liabilities, on the entity's financial position. This change did not have any material impact on the financial statements.

 

• IFRS 13, 'Fair Value Measurement' (effective 1 January 2013). This standard replaces the existing guidance on fair value measurement in different IFRSs with a single definition of fair value, a framework for measuring fair values and disclosures about fair value measurements.

 

 (f) Going concern

The Group's business activities and financial position, its objectives and policies in managing the financial risks to which it is exposed, and its capital, the factors likely to affect its future development and performance, are discussed in the Financial Review. The Directors have assessed, in the light of current and anticipated economic conditions, the Group's ability to continue as a going concern. The Directors confirm they are satisfied that the Company and the Group have adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the 'going concern' basis for preparing accounts.


 

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 entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. 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.

 

The Parent's investments in subsidiaries are recorded at cost less, where appropriate, provisions for impairment in value. Changes in the Parent's ownership interest in a subsidiary that do not result in a loss of control are treated as transactions between equity holders and are reported in equity.

 

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) 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.

 

(c) 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.

 

(d) Transactions 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.

 

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

(a) Transactions and balances

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.

 

(b) Group companies

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentational currency are translated into the presentation currency as follows:

 

• assets and liabilities for each Statement of Financial Position presented are translated at the closing rate at the date of that Statement of Financial Position;

 

• income and expenses for each Statement of Comprehensive Income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and

 

• all resulting exchange differences are recognised as a separate component of equity.

 

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the Statement of Comprehensive Income as part of the gain or loss on sale.

 

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

 

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 based on the applicable service contracts, usually on a time apportioned basis. The same principle is applied for financial planning and insurance services that are continuously provided over an extended period of time. Commissions arising from the sale of structured products are recognised at the point of sale as there are no further services provided or due.

 

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's management has the positive intention and ability to hold to maturity. Held-to-maturity investments are carried at amortised cost using the effective interest method.

 

(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.

 

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.

 

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.

 

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 of 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 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  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 comprise of 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.

 

3.11.  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 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).

 

3.12.  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 comparing proceeds with carrying amount. 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.

 

3.13.  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.

 

3.14.  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.

 

 

3.15.  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.

 

3.16.  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.

 

3.17.  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 1.6. Equity instruments, including share capital, are initially recognised at 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.

 

3.18.  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.

 

3.19.  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.

 

3.20.  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.

 

3.21.  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 2014 or later periods, but the Group has not early adopted them:

 

• 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. ¹

 

• 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. ¹

 

• 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. ¹

• 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.

 

• 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. ²

 

The above standards are unlikely to have a material impact on the Group.

 

• IFRS 9, 'Financial instruments' (effective from 1 January 2015). 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.  ²

 

¹ - These standards have been endorsed by the EU for periods from 1 January 2014.

² - These standards have not yet been endorsed by the EU.


 

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, 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.

 

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 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.

 

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 £2.6m (2012: £1.6m).

 

4.2 Goodwill impairment

The accounting policy for goodwill is described in note 3.11 (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 (2012: two) 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 (2012: 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 2016 as per the approved 3 year plan. A growth rate of 9% (2012: 9%) was used for income and 7% (2012: 5%) for expenditure from 2014 to 2016 (these rates were the best estimate of future forecasted performance), while a 3% (2012: 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 (2012: 5 years). Income and expenditure were kept flat (2012: 0%) over the 5 year period.

 

Cash flows were discounted at a pre-tax rate of 12% (2012: 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.  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 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.

 

4.5 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.

 

4.6 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 first tranche of share options (SOS1) which vest on 2 November 2014 and 80% for the second tranche of share options (SOS2) which vest on 2 November 2016.

 

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 further uncertainty surrounding whether the remaining participants will all still be in situ and eligible at the vesting date. The directors have assumed an attrition rate of 8% for the 2014 options and an attrition rate of 15% for the 2016 options over the scheme period.

 

4.7 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".

 

4.8 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).

• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 

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 instruments measured at fair value by the level in the fair value hierarchy into which the measurement is categorised:

 


Level 1

Level 2

Level 3

Total

At 31 December 2013

£000

£000

£000

£000

Derivative financial instruments

 -  

508

 -  

508

Financial investments

179

 -  

1,796

1,975

Asset

179

508

1,796

2,483

Derivative financial instruments

 -  

371

 -  

371

Liability

 -  

371

 -  

371

 


Level 1

Level 2

Level 3

Total

At 31 December 2012

£000

£000

£000

£000

Derivative financial instruments

 -  

648

 -  

648

Financial investments

489

 -  

2,768

3,257

Asset

489

648

2,768

3,905

Derivative financial instruments

 -  

462

 -  

462

Liability

 -  

462

 -  

462


 

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 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 Group as at 31 December 2012:


Due within one year

Due after more than one year

Total

At 31 December 2012

£000

£000

£000

ASSETS




Cash

203,683

203,683

Loans and advances to banks

144,391

144,391

Debt securities held-to-maturity

13,526

13,526

Derivative financial instruments

623

25

648

Loans and advances to customers

347,460

239,508

586,968

Other assets

9,080

2,586

11,666

Financial investments

3,257

3,257

Deferred tax asset

5,057

5,057

Intangible assets

8,326

8,326

Property, plant and equipment

100

22,387

22,487

Total assets

718,863

281,146

1,000,009

LIABILITIES




Deposits from banks

373

373

Derivative financial instruments

462

462

Deposits from customers

749,672

144,873

894,545

Current tax liability

346

346

Other liabilities

18,416

4,605

23,021

Deferred tax liability

634

634

Debt securities in issue

11,980

11,980

Total liabilities

769,269

162,092

931,361

 

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




Deposit from bank

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





The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2012:


Due within one year

Due after more than one year

Total

At 31 December 2012

£000

£000

£000

ASSETS




Financial investments

413

413

Deferred tax asset

421

26

447

Intangible assets

20

20

Property, plant and equipment

134

134

Other assets

812

4,850

5,662

Shares in subsidiary undertakings

30,847

30,847

Total assets

1,233

36,290

37,523

LIABILITIES




Due to subsidiary undertakings - bank balances

100

100

Other liabilities

5,552

5,552

Debt securities in issue

11,980

11,980

Total liabilities

5,652

11,980

17,632


 

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:

 


2013

2012


£000

£000

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



Cash

193,046

203,683

Loans and advances to banks

105,061

144,391

Debt securities held-to-maturity

19,466

13,526

Derivative financial instruments

508

648

Loans and advances to customers - Arbuthnot Latham

340,981

289,337

Loan and advances to customers - Secure Trust Bank

391,028

297,631

Financial investments

1,975

3,257

Other assets

6,135

3,393




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



Guarantees

805

879

Loan commitments and other credit related liabilities

37,094

21,491

At 31 December

1,096,099

978,236

 

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



2013

2012


£000

£000

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



Due from subsidiary undertakings - bank balances

16,551

 -  

Financial investments

165

413

Other assets

5,310

5,309




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



Guarantees

2,500

2,500

At 31 December

24,526

8,222

 

The above table represents the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2013 and 2012 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 2013


31 December 2012


Loan Balance

Collateral


Loan Balance

Collateral

Loan to value

£000

£000


£000

£000







Less than 60%

176,713

464,460


144,250

344,543

60% - 80%

94,295

136,786


82,462

121,832

80% - 100%

24,188

26,907


21,407

25,463

Greater than 100%

17,089

13,816


25,000

19,433

Total

312,285

641,969


273,119

511,271

 

Forbearance

Arbuthnot Latham and Secure Trust Bank generally do not reschedule contractual arrangements where customers default on their repayments. 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 customers' 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 12 month period. As at 31 December 2013 the gross balance of rescheduled loans included in the consolidated statement of financial position was £13.9 million, with an allowance for impairment on these loans of £1.1 million. The gross balance of deferred loans was £2.8 million with an allowance for impairment on these of £0.4 million (2012: the gross balance of rescheduled loans was £12.3 million, with an allowance for impairment on these loans of £1.2 million and the gross balance of deferred loans was £2.9 million with an allowance for impairment on these of £0.4 million.

 

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:

•  geographical concentration

•  product 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.

 

(b) Operational risk

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 on 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 26), a stress test scenario of a 10% (2012: 10%) decline in market prices, with all other things being equal, would result in a £394,000 (2012: £17,000) decrease in the Group's income and a decrease of £140,000 (2012: £255,000) 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 26, a stress test scenario of a 10% (2012: 10%) decline in market prices, with all other things being equal, would result in a £15,000 (2012: £17,000) decrease in the Company's income and a decrease of £13,000 (2012: £13,000) in the Company's equity.

 

Currency risk

The Company and Group takes 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 2013. 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 2013

£000

£000

£000

£000

£000

ASSETS






Cash

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

9,678

 -  

 -  

 -  

9,678

Financial investments

179

 -  

1,796

 -  

1,975


988,050

23,547

48,312

1,834

1,061,743

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

59,059

3,255

16,692

188

79,194

Credit commitments

37,899

 -  

 -  

 -  

37,899

 

The table below summarises the Group's exposure to foreign currency exchange risk at 31 December 2012:








GBP (£)

USD ($)

Euro (€)

Other

Total

At 31 December 2012

£000

£000

£000

£000

£000

ASSETS






Cash

203,638

16

27

2

203,683

Loans and advances to banks

132,202

9,713

738

1,738

144,391

Debt securities held-to-maturity

13,526

 -  

 -  

 -  

13,526

Derivative financial instruments

648

 -  

 -  

 -  

648

Loans and advances to customers

541,745

4,236

40,985

2

586,968

Other assets

11,604

62

 -  

 -  

11,666

Financial investments

515

 -  

2,742

 -  

3,257


903,878

14,027

44,492

1,742

964,139

LIABILITIES






Deposits from banks

373

 -  

 -  

 -  

373

Derivative financial instruments

462

 -  

 -  

 -  

462

Deposits from customers

861,329

14,469

17,019

1,728

894,545

Other liabilities

23,021

 -  

 -  

 -  

23,021

Debt securities in issue

 -  

 -  

11,980

 -  

11,980


885,185

14,469

28,999

1,728

930,381

Net on-balance sheet position

18,693

(442)

15,493

14

33,758

Credit commitments

22,370

 -  

 -  

 -  

22,370

 

A 10% strengthening of the pound against the US dollar would lead to a £5,000 increase (2012: £44,000 decrease) in Group profits and equity, while a 10% weakening of the pound against the US dollar would lead to the same decrease in Group profits and equity. Similarly a 10% strengthening of the pound against the Euro would lead to a £20,000 increase (2012: £86,000 decrease) 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 22), 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 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

Investment in subsidiary undertakings

30,995

 -  

30,995


40,297

12,724

53,021

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

30,529

492

31,021

 

The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2012:







GBP (£)

Euro (€)

Total

At 31 December 2012

£000

£000

£000

ASSETS




Financial investments

413

 -  

413

Other assets

5,309

 -  

5,309

Investment in subsidiary undertakings

30,847

 -  

30,847


36,569

 -  

36,569

LIABILITIES




Due to subsidiary undertakings - bank balances

12,600

(12,500)

100

Other liabilities

4,639

 -  

4,639

Debt securities in issue

 -  

11,980

11,980


17,239

(520)

16,719

Net on-balance sheet position

19,330

520

19,850

 

A 10% strengthening of the pound against the Euro would lead to £24,000 (2012: £26,000) decrease in the Company profits and equity, conversely a 10% weakening of the pound against the Euro would lead to the same increase in the Company profits and equity.

 

Interest rate risk

Interest rate risk is the potential adverse impact on the Company and Group's future cash flows from changes in interest rates; and arises from the differing interest rate risk characteristics of the Company and Group's assets and liabilities. In particular, fixed rate savings and borrowing products expose the Group to the risk that a change in interest rates could cause either a reduction in interest income or an increase in interest expense relative to variable rate interest flows. The Group seeks to "match" interest rate risk on either side of the Statement of Financial Position. However, this is not a perfect match and interest rate risk is present on: Money market transactions of a fixed rate nature, fixed rate loans and fixed rate savings accounts. There is interest rate mismatch in Arbuthnot Latham and Secure Trust Bank. This is monitored on a daily basis in conjunction with liquidity and capital. The interest rate mismatch is daily monitored, throughout the maturity bandings of the book on a parallel shift scenario for 50, 100 and 200 basis points movement. The Group consider the 50, 100 and 200 basis points movement to be appropriate for scenario testing given the current economic outlook and industry expectations. This typically results in a pre-tax mismatch of £0.5m to £1.8m (2012: £0.6m to £2.4m) 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 £12,000 (2012: decrease pre-tax profits and equity by £37,000).

 

(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.

 

The table below analyses the contractual undiscounted cash flows for the Group into relevant maturity groupings 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

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)

 -  

 -  

 -  








The table below analyses the contractual undiscounted cash flows for the Group into relevant maturity groupings at 31 December 2012:









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 2012

£000

£000

£000

£000

£000

£000

Non-derivative liabilities







Deposits from banks

373

(373)

(373)

 -  

 -  

 -  

Deposits from customers

894,545

(916,708)

(396,331)

(364,647)

(153,320)

(2,410)

Other liabilities

23,021

(23,409)

(23,056)

(207)

(146)

 -  

Debt securities in issue

11,980

(13,933)

(98)

(293)

(1,562)

(11,980)

Issued financial guarantee contracts


(879)

(879)

 -  

 -  

 -  

Unrecognised loan commitments


(21,491)

(21,491)

 -  

 -  

 -  


929,919

(976,793)

(442,228)

(365,147)

(155,028)

(14,390)








Derivative liabilities







Risk management:

462

 -  

 -  

 -  

 -  

 -  

 - Outflows


(462)

(462)

 -  

 -  

 -  


462

(462)

(462)

 -  

 -  

 -  

 

The table below analyses the contractual undiscounted cash flows for the Company into relevant maturity groupings 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

Non-derivative liabilities







Bank overdraft

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)








The table below analyses the contractual undiscounted cash flows for the Company into relevant maturity groupings at 31 December 2012:









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 2012

£000

£000

£000

£000

£000

£000

Non-derivative liabilities







Due to subsidiary undertakings - bank overdraft

100

(100)

(100)

 -  

 -  

 -  

Other liabilities

5,552

(5,552)

(4,639)

(913)

 -  

 -  

Debt securities in issue

11,980

(13,933)

(98)

(293)

(1,562)

(11,980)

Issued financial guarantee contracts


(2,500)

(2,500)

 -  

 -  

 -  


17,632

(22,085)

(7,337)

(1,206)

(1,562)

(11,980)








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 £528m (2012: £377m). 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 2013



£000

£000

£000

£000

£000

£000

£000











ASSETS










Cash



 -  

 -  

193,046

 -  

 -  

193,046

193,046

Derivative financial instruments



508

 -  

 -  

 -  

 -  

508

508

Loans and advances to banks



 -  

 -  

105,061

 -  

 -  

105,061

105,061

Loans and advances to customers



 -  

 -  

732,009

 -  

 -  

732,009

730,706

Debt securities held-to-maturity



 -  

19,466

 -  

 -  

 -  

19,466

19,547

Financial investments



152

 -  

 -  

1,823

 -  

1,975

1,975




660

19,466

1,030,116

1,823

 -  

1,052,065

1,050,843











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

Debt securities in issue



 -  

 -  

 -  

 -  

12,232

12,232

12,232




371

 -  

 -  

 -  

972,026

972,397

972,397














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 2012



£000

£000

£000

£000

£000

£000

£000











ASSETS










Cash



 -  

 -  

203,683

 -  

 -  

203,683

203,683

Derivative financial instruments



648

 -  

 -  

 -  

 -  

648

648

Loans and advances to banks



 -  

 -  

144,391

 -  

 -  

144,391

144,391

Loans and advances to customers



 -  

 -  

586,968

 -  

 -  

586,968

585,924

Debt securities held-to-maturity



 -  

13,526

 -  

 -  

 -  

13,526

13,623

Financial investments



169

 -  

 -  

3,088

 -  

3,257

3,257




817

13,526

935,042

3,088

 -  

952,473

951,526











LIABILITIES










Deposits from banks



 -  

 -  

 -  

 -  

373

373

373

Derivative financial instruments



462

 -  

 -  

 -  

 -  

462

462

Deposits from customers



 -  

 -  

 -  

 -  

894,545

894,545

894,545

Debt securities in issue



 -  

 -  

 -  

 -  

11,980

11,980

11,980




462

 -  

 -  

 -  

906,898

907,360

907,360

 

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.

 

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 42.

 

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, after deducting goodwill and other intangible assets.

• Lower Tier 2 comprises qualifying subordinated loan capital, collective provisions and revaluation reserves. Lower Tier 2 capital 

  cannot exceed 50% of tier 1 capital.

 

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




2013

2012


£000

£000

Tier 1



Share capital

153

153

Retained earnings

67,901

53,372

Other reserves

(1,111)

(1,393)

Non-controlling interests

20,327

16,376

Goodwill

(2,695)

(1,991)

Deductions for other intangibles

(8,710)

(5,318)

Total tier 1 capital

75,865

61,199

Tier 2



Revaluation reserve

22

140

Collective provisions

1,578

Debt securities in issue

12,232

11,980

Total tier 2 capital

13,832

12,120




Total tier 1 & tier 2 capital

89,697

73,319

 

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 references 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 II framework. The ICAAP is a key input into the PRA's ICG setting process, which addresses the requirements of Pillar 2 of the Basel II 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.

 

In June 2013, the PRA published a final regulation to give effect to the Basel III framework, which amends the definition of Tier 1 capital. This comes into effect on 1 January 2014. The Group's current capital position is sufficient to meet the Tier 1 capital ratio based on the Tier 1 capital definition under the new regulation.

 

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 2013 are published as a separate document on the Group website under Investor Relations (Announcements & Shareholder Info).


 

8.  Fee and commission income




2013

2012


£000

£000

Banking commissions

4,714

5,872

Trust and other fiduciary fee income

4,320

3,349

Financial Planning fees and commissions

1,351

1,149

Structured product commissions

1,810

2,441

Other fee income *

19,621

11,305


31,816

24,116




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


 

9.  Net impairment loss on financial assets




2013

2012


£000

£000

Net Impairment losses on loans and advances to customers

17,734

10,984

Impairment losses on financial investments

1,073

 -  


18,807

10,984


 

10.  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 £0.4 million paid on completion of the transaction. Deferred consideration of up to £0.3 million was payable by DMS one year after completion subject to the business achieving certain performance criteria. Of this, £0.1 million 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 £2 million. DMS then proceeded to lease back the internal rights to use this software.  On completion Secure Trust Bank provided DMS with £2.2 million of funding to clear an outstanding overdraft of £1.8 million and to fund the working capital requirements of DMS.

 

The Consolidated Statement of Comprehensive Income includes revenue of £3.8 million and a loss before tax of £0.9 million 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 £4.0 million and a loss before tax of £0.9 million 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)

 

On 8 June 2012 Secure Trust Bank PLC ("STB") acquired 100% of the shares in Everyday Loans Holdings Limited and its wholly owned subsidiaries Everyday Loans Limited and Everyday Lending Limited (together "ELL"). STB acquired ELL for consideration of £1. Upon acquisition STB provided funding so that ELL could redeem the remaining £34 million of subordinated debt and also provided a loan facility of £37 million to refinance ELL's existing bank debt and to fund future loans. A gain on acquisition of £9.8m arose from the difference between the acquisition price and the fair value of net assets acquired. This is expected to amortise through the profit and loss account over 3 to 5 years.

 


Acquired


Recognised


assets /

Fair value

values on


liabilities

adjustments

acquisition


£000

£000

£000

Intangible assets

50

5,115

5,165

Property, plant and equipment

491

491

Loans and advances to customers

63,720

7,545

71,265

Cash at bank

991

991

Other assets

24

24

Prepayments and accrued income

2,939

2,939

Deferred tax asset

6,313

6,313

Total assets

68,215

18,973

87,188





Loans and debt securities

71,618

71,618

Other liabilities

960

960

Accruals and deferred income

1,741

1,741

Deferred tax liabilities

3,039

3,039

Total liabilities

74,319

3,039

77,358





Net identifiable (liabilities) / assets

(6,104)

15,934

9,830





Consideration - £1



-





Gain on acquisition



9,830


 

11.  Gain on Sale of Building

On 17 October 2013 Arbuthnot Latham & Co., Limited completed the sale and leaseback of 7-21 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 is also providing £5.4m to be drawn by Arbuthnot Latham to fund a renovation and fit out programme. After providing £3.0 million for the rent payable during the period of refurbishment prior to occupation and £0.2m of transaction costs, the net gain was £6.5m.


 

12.  Disposals

On 20 March 2012 Arbuthnot Banking Group PLC agreed terms for the sale of Arbuthnot AG. The company was sold to Ducartis Holding AG for a total cash consideration of CHF 2.0m (£1.4m) which resulted in a profit for the Group of £0.8m.


 

13.  Other income

Arbuthnot Latham received £1.2m of rental income in the year from the letting of the 7-21 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 of the building in 2015.

 

Up to the date of sale of Arbuthnot AG, the purchaser funded most of the running costs for this entity, which is included in other income and amounted to £nil (2012: £0.3m). In Secure Trust Bank there was also some other sundry income amounting to £nil (2012: £0.1m).


 

14.  Discontinued operations

 

On 20 January 2012 the Group completed the sale of Arbuthnot Securities Limited resulting in an after tax loss of £0.3m.


 

15.  Operating expenses




2013

2012

Operating expenses comprise:

£000

£000

Staff costs, including Directors:



  Wages and salaries

33,262

25,016

  Social security costs

3,553

2,686

  Pension costs

1,509

1,084

  Share based payment transactions (note 38)

2,249

1,610

Amortisation of intangibles (note 29)

2,803

1,062

Depreciation (note 30)

1,015

899

Operating lease rentals

4,617

2,463

Costs arising from acquisitions

535

1,397

Other administrative expenses

24,088

16,826

Total operating expenses

73,631

53,043

 


2013

2012

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

82

82

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



  Audit of the accounts of subsidiaries

356

263

  Audit related assurance services

104

104

  Taxation compliance services

73

178

  Taxation advisory services

62

48

  Other assurance services

56

 -  

  Corporate finance services

 -  

250

  Other non-audit services

28

47

Total fees payable

761

972

 

Remuneration for corporate finance services in 2012 include £250,000 in relation to the acquisition of Everyday Loans Holdings Limited.

 

Audit related assurance services include regulatory audits and interim profit verifications. Other non-audit services include fees for ad hoc accounting advice.


 

16.  Average number of employees




2013

2012

Retail banking

530

399

Private banking

145

144

Group

16

16


691

559


 

17.  Income tax expense




2013

2012

United Kingdom corporation tax at 23.25% (2012: 24.5%)

£000

£000

Current taxation



Corporation tax charge - current year

3,146

1,068

Corporation tax charge - adjustments in respect of prior years

548

481


3,694

1,549

Deferred taxation



Origination and reversal of temporary differences

1,006

(297)

Adjustments in respect of prior years

(502)

(124)


504

(421)

Income tax expense

4,198

1,128

Tax reconciliation



Profit before tax

15,713

12,593

Tax at 23.25% (2012: 24.5%)

3,653

3,085

Permanent differences

208

(2,573)

Tax rate change

291

259

Prior period adjustments

46

357

Corporation tax charge for the year

4,198

1,128

 

Of the £2,573,000 permanent differences in 2012, £2,408,000 relates to the non-taxable gain from a bargain purchase.

 

The UK corporation tax rate reduced from 26% to 24% with effect from 1 April 2012, 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.


 

18.  Earnings per ordinary share

Basic and fully diluted

Earnings per ordinary share are calculated by dividing the profit after tax attributable to equity holders of the Company of £7,930,000 (2012: £8,041,000) by the weighted average number of ordinary shares 15,279,322 (2012: 15,279,322) in issue during the year. There is currently no difference between basic and fully diluted earnings per ordinary share.


 

19.  Cash




2013

2012


£000

£000

Cash in hand included in cash and cash equivalents (note 40)

 193,046

203,683

 

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).


 

20.  Loans and advances to banks




2013

2012


£000

£000

Placements with banks included in cash and cash equivalents (note 40)

105,061

144,391







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:

2013

2012


£000

£000

Aaa

57,101

68,783

Aa3

 -  

23,082

A1

 -  

13,373

A2

44,327

39,153

A3

3,633

 -  


105,061

144,391




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




 

21.  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.

 


2013

2012

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

£000

£000

At 1 January

13,526

40,079

Additions

9,844

51,012

Redemptions

(3,904)

(77,565)

At 31 December

19,466

13,526

 

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





2013

2012


£000

£000

Aaa

14,120

8,026

Aa1

3,044

 -  

Aa3

2,302

1,500

A3

 -  

4,000


19,466

13,526




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




 

22.  Derivative financial instruments









2013


2012


Contract/ notional amount

Fair value assets

Fair value liabilities


Contract/ notional amount

Fair value assets

Fair value liabilities


£000

£000

£000


£000

£000

£000

Currency swaps

39,850

488

371


41,206

623

462

Interest rate caps

20,000

20

 -  


20,000

25

 -  


59,850

508

371


61,206

648

462

 

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 not yet placed to investors. 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.

 

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:




2013

2012


£000

£000

Aa3

39,850

41,206

A1

20,000

20,000


59,850

61,206


 

23.  Loans and advances to customers




2013

2012


£000

£000

Gross loans and advances

763,042

607,616

Less:  allowances for impairment on loans and advances (note 24)

(31,033)

(20,648)


732,009

586,968







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







2013

2012

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

£000

£000

Gross investment in finance lease receivables:



 - No later than 1 year

16,386

22,188

 - Later than 1 year and no later than 5 years

16,053

13,047


32,439

35,235

Unearned future finance income on finance leases

(6,885)

(8,914)

Net investment in finance leases

25,554

26,321

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



 - No later than 1 year

12,905

10,509

 - Later than 1 year and no later than 5 years

12,649

15,812


25,554

26,321





2013

2012

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

£000

£000

Neither past due nor impaired

684,783

550,640

Past due but not impaired

19,210

14,756

Impaired

59,049

42,220

Gross

763,042

607,616

Less: allowance for impairment

(31,033)

(20,648)

Net

732,009

586,968







(a) Loans and advances past due but not impaired




2013

2012

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

£000

£000

Past due up to 30 days

2,681

1,160

Past due 30 - 60 days

4,369

4,584

Past due 60 - 90 days

3,439

5,354

Over 90 days

8,721

3,658

Total

19,210

14,756

 

Loans and advances normally 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 (2012: £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:





2013

2012


£000

£000

Past due but not impaired

62,168

39,162

Impaired

10,963

7,881

Fair value of collateral held

73,131

47,043

 

Collateral is shown at fair value less costs to sell. The fair value of the collateral held is £73,131,000 against £47,226,000 secured loans, giving an average loan-to-value of 65% (2012: 77%).

 

The gross amount of individually impaired loans and advances to customers before taking into account the cash flows from collateral held is £28,016,000 (2012: £21,572,000).

 

Interest income on loans classified as impaired totalled £2,574,000 (2012: £1,601,000).


 

24.  Allowances for impairment of loans and advances




2013

2012

Reconciliation of specific allowance for impairments:

£000

£000

At 1 January

20,278

11,250

Impairment losses

17,590

11,248

Loans written off during the year as uncollectible

(8,413)

(1,586)

Amounts recovered during the year

 -  

(634)

At 31 December

29,455

20,278





2013

2012

Reconciliation of collective allowance for impairments:

£000

£000

At 1 January

370

 -  

Impairment losses

1,208

370

At 31 December

1,578

370





2013

2012

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

£000

£000

Loans and advances to customers - UK Private Bank

3,973

4,423

Loan and advances to customers - Retail Bank - unsecured

27,060

16,225

At 31 December

31,033

20,648


 

25.  Other assets




2013

2012

Group

£000

£000

Trade receivables

6,135

3,393

Repossessed collateral - held as inventory

3,543

2,586

Prepayments and accrued income

7,589

5,687


17,267

11,666

 

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.

 


2013

2012

Company

£000

£000

Trade receivables

731

731

Due from subsidiary undertakings

4,579

4,578

Prepayments and accrued income

105

353


5,415

5,662


 

26.  Financial investments




2013

2012

Group:

£000

£000

Financial investments comprise:



 - Securities (at fair value through profit and loss)

152

169

 - Securities (available-for-sale)

1,823

3,088

Total financial investments

1,975

3,257

 

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 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.

 


2013

2012

Company

£000

£000

Financial investments comprise:



 - Securities (at fair value through profit and loss)

152

169

 - Securities (available-for-sale)

13

244

Total financial investments

165

413


 

27.  Deferred taxation






The deferred tax asset comprises:




2013

2012


£000

£000

Unrealised surplus on revaluation of freehold property

173

(71)

Accelerated capital allowances and other short-term timing differences

(160)

(673)

Fair value of derivatives

100

110

Tax losses

2,742

5,057

Deferred tax asset

2,855

4,423




At 1 January

4,423

629

On acquisition of V12/ELL

(960)

3,276

Revaluation reserve

242

 -  

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

589

1,040

Profit and loss account - tax losses

(1,439)

(522)

Deferred tax asset at 31 December

2,855

4,423




The above balance is made up as follows:




2013

2012


£000

£000

Deferred tax assets within the Group

3,954

5,057

Deferred tax liabilities within the Group

(1,099)

(634)


2,855

4,423

 

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 26% to 24% with effect from 1 April 2012, to 23% with effect from 1 April 2013 and to 21% with effect from 1 April 2014. This will reduce the Group's future current tax charge accordingly.  Deferred tax has been calculated based on a rate of 21% to the extent that the related temporary or timing differences are expected to reverse. 

 

On 2 July 2013 the Government substantively enacted a further reduction to the UK corporation tax rate to 20% from 1 April 2015.  It has not yet been possible to quantify the full anticipated effect of the announced further 1% reduction, although this will further reduce the Group's future tax charge and reduce the Group's deferred tax assets and liabilities accordingly.


 

28.  Investment in associate




2013

2012


£000

£000

Investment in associate

 943

 - 

 

On 11 October 2013, Arbuthnot Latham & Co. 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.

 

No profit or loss was recorded in the current year. The summarised financial information of the associate is set out below:

 



At 31 December 2013

£000

ASSETS


Cash

320

Property, plant and equipment

10,580


10,900

LIABILITIES


Bank loans

9,500

Debt securities in issue

1,400


10,900


 

29.  Intangible assets











Goodwill

Computer software

Other    intangibles

Total

Group

£000

£000

£000

£000

Cost





At 1 January 2012

1,991

4,920

 -  

6,911

Additions

 -  

662

 -  

662

On acquisition of ELL (note 11)

 -  

50

5,115

5,165

At 31 December 2012

1,991

5,632

5,115

12,738

Additions

 -  

948

214

1,162

On acquisition of V12 & DMS (note 11 and 44)

704

5,414

2,200

8,318

Disposals

 -  

(1,900)

 -  

(1,900)

At 31 December 2013

2,695

10,094

7,529

20,318






Accumulated amortisation





At 1 January 2012

 -  

(3,350)

 -  

(3,350)

Amortisation charge

 -  

(367)

(695)

(1,062)

At 31 December 2012

 -  

(3,717)

(695)

(4,412)

Amortisation charge

 -  

(1,307)

(1,496)

(2,803)

At 31 December 2013

 -  

(5,024)

(2,191)

(7,215)






Net book amount





At 31 December 2012

1,991

1,915

4,420

8,326

At 31 December 2013

2,695

5,070

5,338

13,103






 


Computer software

Company

£000

Cost


At 1 January 2012

40

At 31 December 2012

40

At 31 December 2013

40



Accumulated amortisation


At 1 January 2012

(12)

Amortisation charge

(8)

At 31 December 2012

(20)

Amortisation charge

(8)

At 31 December 2013

(28)



Net book amount


At 31 December 2012

20

At 31 December 2013

12



Refer to note 4.2 for assumptions used in the impairment review of goodwill.



 

30.  Property, plant and equipment











Freehold land and buildings

Leasehold improvements

Computer and other equipment

Total

Group

£000

£000

£000

£000

Cost or valuation





At 1 January 2012

4,850

 -  

11,174

16,024

Additions

16,789

5

818

17,612

On acquisition of ELL (note 11)

 -  

540

 -  

540

Disposals

 -  

(32)

(200)

(232)

At 31 December 2012

21,639

513

11,792

33,944

Additions

 -  

122

624

746

On acquisition of V12 & DMS (note 11 and 44)

 -  

9

78

87

Disposals

(16,789)

(16)

(461)

(17,266)

At 31 December 2013

4,850

628

12,033

17,511






Accumulated depreciation





At 1 January 2012

(685)

 -  

(10,125)

(10,810)

Depreciation charge

(199)

(101)

(567)

(867)

Disposals

 -  

22

198

220

At 31 December 2012

(884)

(79)

(10,494)

(11,457)

Depreciation charge

(301)

(168)

(546)

(1,015)

Disposals

345

 -  

138

483

At 31 December 2013

(840)

(247)

(10,902)

(11,989)






Net book amount





At 31 December 2012

20,755

434

1,298

22,487

At 31 December 2013

4,010

381

1,131

5,522

 

The Group's freehold property at 1 Arleston Way, Solihull, B90 4LH, was valued on 17 December 2008 by an Independent external valuer, who is a Fellow of the Royal Institution of Chartered Surveyors. The Valuation was in accordance with the requirements of the RICS Valuation Standards 6th Edition and the International Valuation Standards. The Valuation of the property was on the basis and assumption it is an Owner/Occupied property, valued to Market Value assuming that the property will be sold as part of the continuing business. The Valuer's opinion of Market Value was primarily derived using comparable recent market transactions on arms-length terms. The Directors have assessed the value at year end through comparison to current rental yields on similar properties in the area and do not believe that the fair value of freehold property is materially different from the carrying value.

 

On 3 August 2012 the Group acquired freehold premises at 7-21 Wilson Street, London, EC2M 2TD ("Wilson Street") for £15.7 million plus acquisition costs (including stamp duty) of £1.1m. On 17 October 2013 the Group disposed of the property and leased it back from the purchaser.

 

The carrying value of freehold land not depreciated is £0.5 million (2012: £1.7 million). The historical cost of freehold property included at valuation is as follows:

 


2013

2012


£000

£000

Cost

4,832

20,567

Accumulated depreciation

(1,063)

(1,102)

Net book amount

3,769

19,465

 




Computer and other equipment

Company



£000

Cost or valuation




At 1 January 2012



189

Additions



13

At 31 December 2012



202

Additions



1

At 31 December 2013



203





Accumulated depreciation




At 1 January 2012



(62)

Depreciation charge



(6)

At 31 December 2012



(68)

Depreciation charge



(5)

At 31 December 2013



(73)





Net book amount




At 31 December 2012



134

At 31 December 2013



130


 

31.  Deposits from banks




2013

2012


£000

£000

Deposits from other banks

2,003

373




For a maturity profile of deposits from banks, refer to Note 6.




 

32.  Deposits from customers




2013

2012


£000

£000

Current/demand accounts

366,797

260,037

Term deposits

590,994

634,508


957,791

894,545

 

Included in customer accounts are deposits of £9,947,000 (2012: £8,578,000) held as collateral for loans and advances. The fair value of these deposits approximates the carrying value.

 

For a maturity profile of deposits from customers, refer to Note 6.


 

33.  Other liabilities




2013

2012

Group

£000

£000

Trade payables

10,152

7,656

Accruals and deferred income

20,865

15,365


31,017

23,021

 

The Financial Services Compensation Scheme ('FSCS') has provided compensation to consumers following the collapse of a number of deposit takers. The compensation paid out to consumers is currently funded through loans from the Bank of England and HM Treasury.

 

In previous years the Company has applied a trigger date for recognition of FSCS liabilities of 31 December. During 2013 this was changed to 1 April.

 

Included in accruals is a provision for non occupancy rent of £3m (2012: £nil). This was taken into account when calculating the profit on the sale and leaseback of the Wilson Street property (see note 11).

 

Company

£000

£000

Due to subsidiary undertakings

7,768

4,639

Accruals and deferred income

1,261

913


9,029

5,552


 

34.  Debt securities in issue




2013

2012


£000

£000

Subordinated loan notes 2035

12,232

11,980

 

The subordinated loan notes 2035 were issued on 7 November 2005 and are denominated in Euros. The principal amount outstanding at 31 December 2013 was €15,000,000 (2012: €15,0