REG - Arbuthnot BankingSecure Trust Bank - Final Results for the year to 31 December 2015 <Origin Href="QuoteRef">ARBB.L</Origin> <Origin Href="QuoteRef">STBS.L</Origin> - Part 1
RNS Number : 3559SArbuthnot Banking Group PLC17 March 201617 March 2016
ARBUTHNOT BANKING GROUP ("Arbuthnot", "the Group" or "ABG")
Audited Final Results for the year to 31 December, 2015
Diversification of business streams underway
Arbuthnot Banking Group today announces a record profit before tax of 34.2m including the results of Everyday Loans, a 52% increase on the prior year.
Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited and Secure Trust Bank PLC.
The agreed disposal of Everyday Loans announced on 4 December 2015 is progressing as planned and ownership is expected to transfer before the end of April 2016. The Board is proposing a special dividend for 2016 of 25p, which is contingent on the completion of the transaction at which time further details will be announced.*
FINANCIAL HIGHLIGHTS
Statutory Profit before tax on continuing operations of 22.6m (2014: 13.9m)
Profit before tax of 34.2m (2014: 22.5m) including the results of Everyday Loans
Special dividend of 25p is proposed dependent on the completion of Everyday Loans disposal*
Operating income grew by 38% to 126.7m (2014: 92m)
Customer lending exceeded 1.5bn for the first time; 2015: 1.6bn (2014: 1.2bn)
Positive operating leverage of 8% (2014: 13%)**
Earnings per share of 86.3p (2014: 58.6p)
Final dividend per share of 17p (2014: 16p), an increase of 6%
Total dividend per share of 29p (2014: 27p), an increase of 7%
Net assets per share of 1,253p (2014: 1136p), an increase of 10%
OPERATIONAL HIGHLIGHTS
Private Banking - Arbuthnot Latham
Profit before tax of 6m (2014: 3.6m), an increase of 65%
Customer loans up 15% to 619m (2014: 536m)
Customer deposits grew 53% to 897m (2014: 586m)
Assets under management increased 11% to 739m (2014: 666m)
Purchased mortgage portfolio performing well and now eligible for use in the Funding for Lending Scheme
Retail Banking - Secure Trust Bank
(a) Profit before tax of 36.8m (2014: 26.3m), which includes the results of Everyday Loans
(b) Customer lending balances increased by 73% to 1.1bn including ELL (2014: 0.6bn)
(c) Total customer numbers increased to 570,759 (2014: 429,507)
(d) Good progress in the development of the SME lending businesses
(e) Disposal of Everyday Loans agreed to Non Standard Finance for 127m, realising an expected gain of 115m
Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "This has been another good year for the Group with both Banks performing well. With the disposal of Everyday Loans we will have capitalised the future earnings of our highest risk lending and strengthened the Group's resources to support future growth."
*Completion includes 1) Regulatory approval of the change of control, 2) transfer of ownership and 3) recognition of the gain in the regulatory capital base of the Group.
**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
Sir Henry Angest, Chairman and Chief Executive 0207 012 2400
Andrew Salmon, Chief Operating Officer
James Cobb, Group Finance Director
David Marshall, Director of Communications
Canaccord Genuity Ltd (Nominated Advisor)
Sunil Duggal 0207 665 4500
Numis Securities Ltd (Broker)
Chris Wilkinson 0207 260 1000Bell Pottinger (Financial PR)
Ben Woodford 0203 772 2566
Dan de Belder
The 2015 Annual Report and Notice of Meeting will be posted and available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 8 April 2015. Copies may be obtained from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.
Consolidated statement of comprehensive income
Re-presented*
Year ended 31 December
2015
2014
Note
000
000
Interest income
8
133,032
87,398
Interest expense
(29,339)
(19,371)
Net interest income
103,693
68,027
Fee and commission income
9
26,866
25,841
Fee and commission expense
(3,866)
(1,819)
Net fee and commission income
23,000
24,022
Operating income
126,693
92,049
Net impairment loss on financial assets
10
(18,066)
(11,953)
Operating expenses
12
(86,059)
(66,165)
Profit before tax from continuing operations
22,568
13,931
Income tax expense
14
(5,436)
(3,444)
Profit after tax from continuing operations
17,132
10,487
Profit from discontinued operations after tax
11
9,392
6,529
Profit for the year
26,524
17,016
Other comprehensive income
Items that are or may be reclassified to profit or loss
Revaluation reserve
- Amount transferred to profit and loss
-
(2)
Cash flow hedging reserve
- Net amount transferred to profit and loss
-
378
Available-for-sale reserve
1,559
(81)
Tax on other comprehensive income
(262)
-
Other comprehensive income for the period, net of tax
1,297
295
Total comprehensive income for the period
27,821
17,311
Profit attributable to:
Equity holders of the Company
12,726
8,634
Non-controlling interests
13,798
8,382
Profit for the year
26,524
17,016
Total comprehensive income attributable to:
Equity holders of the Company
14,023
8,677
Non-controlling interests
13,798
8,634
Total comprehensive income for the period
27,821
17,311
Earnings per share for profit attributable to the equity holders of the Company during the year
(expressed in pence per share):
Basic earnings per share - Continuing operations
15
53.3
32.4
Basic earnings per share - Discontinuing operations
15
33.1
26.1
Basic earnings per share
15
86.3
58.6
Diluted earnings per share - Continuing operations
15
51.3
28.3
Diluted earnings per share - Discontinuing operations
15
32.1
24.5
Diluted earnings per share
15
83.3
52.8
* Prior year numbers have been re-presented for discontinuing operations (see note 11).
Consolidated statement of financial position
At 31 December
2015
2014
Note
000
000
ASSETS
Cash and balances at central banks
16
368,611
115,938
Loans and advances to banks
17
28,578
31,844
Debt securities held-to-maturity
18
87,728
91,683
Assets classified as held for sale
11
118,456
-
Derivative financial instruments
19
1,490
2,707
Loans and advances to customers
20
1,579,512
1,158,983
Other assets
22
16,894
16,866
Financial investments
23
2,685
1,277
Deferred tax asset
24
1,784
2,588
Investment in associate
25
943
943
Intangible assets
26
10,874
11,318
Property, plant and equipment
27
14,004
12,475
Total assets
2,231,559
1,446,622
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
33
153
153
Retained earnings
34
123,330
114,641
Other reserves
34
34
(1,263)
Non-controlling interests
67,887
60,038
Total equity
191,404
173,569
LIABILITIES
Deposits from banks
28
55,305
27,657
Derivative financial instruments
19
135
1,067
Deposits from customers
29
1,929,838
1,194,285
Liabilities relating to assets classified as held for sale
11
8,700
-
Current tax liability
3,366
3,612
Other liabilities
30
31,977
34,984
Debt securities in issue
31
10,834
11,448
Total liabilities
2,040,155
1,273,053
Total equity and liabilities
2,231,559
1,446,622
Chairman's statement
I am pleased to report that Arbuthnot Banking Group ("ABG" or "the Group") has made a record profit before tax in 2015 of 34.2m (2014: 22.5m), which is an increase of 52%. Once again, I find myself bemused by the accounting rules. As a result of agreeing the sale of our consumer finance lending business, Everyday Loans ("ELL"), we are required to show its profits as discontinued in the 2015 report and as a result they are not included in the headline reported profit before tax of 22.6m. It is my belief that it understates the performance of the Group, as we have carefully managed this business throughout the year and this should be reflected in the headline profit measure.
The story of our ownership of ELL, I believe epitomises the essence of Arbuthnot Banking Group. Our stable and supportive shareholder register has enabled us, over time, to take a long term view on our investment decisions and business strategies. This approach was best demonstrated by our cautious attitude to liquidity in the years leading up to the financial crisis, which meant we remained strong while others struggled to survive. At the height of the financial credit boom, we also recognised that the economic risk and reward had shifted in favour of brokers and introducers and away from lenders that had put their balance sheets at risk. Thus, contrary to the market, we ceased lending in the over competitive unsecured markets and instead referred our customers onto other lenders, including ELL. When the banking crisis occurred, the Group was well positioned not only to weather the storm, but more importantly, to prosper as the lending markets reopened at more appropriate levels of return.
We were able to complete two significant acquisitions of non-bank lenders that had suffered as a result of the withdrawal of liquidity from the market. In 2012 we were able to acquire ELL for 1, as we had the liquidity to refinance their book of approximately 64m. We returned it to a phase of growth. This involved not only increasing its balance sheet but also its geographical foot print, as it opened new branches. Now, at the end of 2015, we have agreed to sell the business to Non Standard Finance ("NSF") for 127m, realising an expected profit of 115m, which will be recognised in 2016. This is on top of the earnings the business has contributed to the Group over the past three years.
We recognised that under our ownership ELL was not maximising its potential, as we were careful to restrict the interest rate levels charged to customers. The transaction made sense to both parties with NSF more experienced in this type of lending and better positioned to test other demographics of the market.
Once the transaction is completed, the gain will significantly increase the capital strength of the Group, which will allow our more mainstream banking activities to continue to grow at robust levels as our diversification strategy is maintained.
At the end of 2014, Arbuthnot Latham purchased a portfolio of residential mortgages from the administrator of the Dunfermline Building Society. This portfolio has been successfully transferred to the ownership of the Bank and a new servicer has been appointed and is operating well. Recently, the portfolio was accepted into the Funding for Lending Scheme ("FLS"). We believe this to be the first acquired portfolio to be included in the scheme by the Bank of England. However, more importantly, the portfolio has performed according to our expectations.
Given the success of the transaction, we were keen to explore further opportunities that may exist in the market to acquire other portfolios. Accordingly, we had made good progress in negotiations to acquire a larger mortgage book. This process was brought to a sudden halt following the publication in December by the Basel Committee of its second proposal to revise the Standardised Capital Rules. Despite an extensive consultation of its first proposal and with many leading regulators stating that the intention of the revisions was not to increase overall capital levels in the system, these new proposals will not achieve this. In fact, the capital requirements of the transaction we were contemplating would nearly double under the new proposals.
I have always accepted that the Financial Services Industry has been highly regulated and we have managed our business accordingly. However, this example of how the regulatory environment can impact the business has led me to believe that, as new rules are developed, they should not be applied retrospectively to the back book. Rather, they should only be applicable to transactions or lending that takes place after they are implemented. This would allow the industry to take decisions with certainty on how rules will be applied without having to second guess regulatory developments that may take place in the future.
As a result of the decisive outcome of the General Election in May, we have detected an upsurge in customer sentiment across our businesses. However, this result also meant that a referendum will be held to determine the United Kingdom's continued membership of the European Union. The City is a resilient and dynamic industry and I have no doubt that it will be able to flourish regardless of the final result of the ballot.
Private Banking - Arbuthnot Latham & Co., Ltd
The Private Bank has reported a profit of 6m (2014: 3.6m), which represents an increase of 65%. However, importantly, the business has also taken several additional significant steps forward. The Bank originated 250m of new loans, an increase of 45% on the previous year and a new record. Meanwhile, it attracted on average 50 new clients per month, and our Dubai office not only broke even, it returned a small overall profit for the year, ahead of plan.
As part of the continued strengthening of the infrastructure of the Bank, new premises were occupied in London and in Exeter where we moved the business to larger and more modern offices. We have signed contracts with our preferred partner to implement our new banking system, which should be largely completed during 2016.
Retail Banking - Secure Trust Bank PLC
Our Retail Banking business has delivered a pre-tax profit including ELL of 36.8m (2014: 26.3m), which is an increase of 40%. However, excluding the profits from ELL, the Bank made 25.2m (2014: 17.8m), which is an increase of 42%. This higher growth rate reflects well on our strategy to diversify our business, in particular the investment we have made in SME lending. At the end of 2015 the combined lending balances of the SME divisions stood at 468m (2014: 143m), which is a robust growth rate in excess of 200%.
Our management philosophy of exercising prudence in respect of capital, funding and lending remains unchanged. The Bank continues to be well capitalised and liquid, with interest rate risk generally mitigated by matching the tenor of our lending assets and customer deposits.
Board Changes and Personnel
During the year the following changes to the ABG Board occurred. Ian Dewar joined on 1 August and Robert Wickham retired on 31 December after 22 years of loyal and distinguished service. I would like to thank my colleagues on the Board for their generous and continued support and for the dedication they have shown to the Group.
The results of the Group also reflect the hard work and commitment of the members of staff. On behalf of the Board I extend our thanks to all of them for their contribution in 2015.
Dividend
The Board is proposing a final dividend of 17p per share, an increase of 1p on last year. Along with the interim dividend of 12p, this combines to give a total dividend for the year of 29p (2014: 27p), an increase of 2p.
If approved, the dividend will be paid on 13 May 2016 to shareholders on the register at close of business on 15 April 2016.
The disposal of Everyday Loans is proceeding as expected. Once it has completed, the Board is also proposing a special dividend of 25p for 2016. This dividend is dependent on the completion of the transaction, which includes regulatory approval of changes of control, transfer of ownership and inclusion of the gain within the Group's capital resources. Details of the arrangements to pay this dividend will be announced once the transaction has been finalised.
Outlook
The global economic outlook has become increasingly uncertain. The collapse in the commodities market, in particular the oil price, has had a knock on impact in the equity markets.
The Federal Reserve Bank in the US has increased interest rates for the first time in ten years, but the other major economies do not look like following suit at present.
On top of this, the UK has the uncertainty of the outcome of the EU referendum. However, despite these headwinds, both our banks are well capitalised and highly liquid. They remain well positioned to continue their good progress and we are optimistic about their prospects.
Strategic Report
Business Review - Private Banking - Arbuthnot Latham
2015
2014
Operating income
35.1m
28.9m
Other income
1.9m
2.1m
Operating expenses
29.7m
24.0m
Profit before tax
6.0m
3.6m
Customer loans
618.9m
536.5m
Customer deposits
896.8m
585.9m
Total assets
1,004.4m
699.5m
Assets under management
738.8m
665.9m
Customer net margin
4.3%
4.4%
Loan to deposit ratio
69%
92%
Arbuthnot Latham & Co., Limited ("AL") has reported a profit before tax of 6m (2014: 3.6m), which is a robust rate of growth of 65%. Also, in line with the rapid expansion of the business, the Bank commenced its programme of enhancing its operational capabilities. The most significant is the replacement of its banking technology platform. As a result of this investment, the profits are stated after having incurred in excess of 1m of costs related to this project.
The business momentum within the Bank remained strong throughout the year, as it continued to take advantage of the opportunities that exist to grow its client base and volumes of business. The ability to offer a high quality relationship led service is attractive to clients and this resulted in a flow of, on average, over 50 new clients per month.
Customer loan balances closed the year at 619m (2014: 536m), an increase of 15%. The bespoke nature of many of the loan facilities reflects the objective of the Bank to support clients in the development and realisation of their entrepreneurial projects, where appropriate. The demand for such lending reached record levels for the Bank, with gross lending volumes reaching 250m (2014: 172m), which is an increase of 45% on the prior year.
The Bank continues to be funded by retail deposits with customer balances reaching 897m (2014: 586m), an increase of 53%. Investment assets under management grew by 11% to 739m (2014: 666m). The growth of each of these key metrics demonstrates the success of the strategy to develop the business against the background of a more stable economic environment.
In the latter part of the year, the Bank commenced an initiative to build a wider commercial banking business, initially driven by client demand to provide banking services for the corporate structures of entrepreneurial clients in the media sector. The Bank intends to broaden the initial focus and develop its services for clients in the commercial real estate and also the professional services sectors.
While the principal geographic focus of AL is towards London and the South East, an increasing proportion of the Bank's business is being generated across the UK and particularly through its offices in Exeter and Manchester. In Exeter, the Bank moved into new premises during the year, which has had a positive effect on the local profile. In Manchester, the office was further strengthened with additional recruitment and a healthy momentum is being created in the local market. Overseas, the Dubai office goes from strength to strength and the local Gulf market offers significant opportunities for further growth in the years ahead.
Business Review - Retail Banking - Secure Trust Bank
2015
2014
Operating income
92.1m
63.7m
Operating expenses
50.1m
37.3m
Profit before tax
25.2m
17.8m
Customer loans
960.6m
622.5m
Customer deposits
1,033.1m
608.4m
Customer numbers
570,759
429,507
Net interest margin
15.7%
17.1%
Cost income ratio
0.51
0.57
Secure Trust Bank ("STB") has made profits of 36.8m (2014: 26.3m), which includes 11.7m (2014: 8.6m) from Everyday Loans ("ELL"). On a statutory basis STB has made profits on its continuing operations of 25.2m (2014: 17.8m). We have agreed to sell ELL to Non Standard Finance for 127m and it is expected to be transferred by the end of April 2016, realising an anticipated gain of 115m.
Following the IPO of STB in 2011, the acquisition of ELL was the first significant transaction by the Group and set STB on its current trajectory of growth. However, we were always aware that despite its profitability, the ownership of ELL by STB would ultimately slow its potential growth. Our conservative approach to consumer lending was evident by the cap that we imposed on the interest rates that the business could offer to its borrowers. This resulted in a large demographic of potential customers being excluded from its markets. The sale of the business we believe will be beneficial to our shareholders, as the additional capital that it will generate can be deployed in our other businesses that have faster growth rates and larger potential markets from which to gain their share of business.
The continuing businesses in STB have been proactively managed to result in a good composition of portfolios, with a balance between consumer and SME lending assets, and this will be augmented in 2016 with a new mortgage offering that we believe will be well received in the market place and still deliver our required return on equity.
Once again, the growth in income for the Bank has been achieved by significant increases in the lending businesses. In total new business lending volumes grew by 65% to reach 903m (2014: 546m). This resulted in an overall increase in customer lending assets of 73%, with balances reaching 1.1bn (2014: 0.6bn). This is another milestone in the Bank's history as customer balances have exceeded 1bn for the first time.
Within the consumer finance division, the Retail Finance business led the way with balances increasing by 89% to 220m (2014: 117m). This business has a very strong position within the music and cycle sectors, but has been successfully broadening its reach into the leisure and home furnishing sectors. The business has also seen an increase in the volume of interest bearing lending. This has naturally resulted in higher levels of impairments, which were anticipated in the pricing of the products.
The Motor Finance balances increased by 20% to 166m (2014: 138m). This business, which focuses on the near prime market segment, continues to service the majority of the Top 100 UK car dealer groups and enjoys strong relationships with a number of specialist motor intermediaries. During the year the business tested the prime lending market, and the initial results were positive. It is therefore anticipated that activities in this area will increase during 2016.
The Group's Commercial lending operations have grown as planned. Real Estate Finance increased by 175% to 368m (2014: 134m). This lending is split roughly between residential development funding and residential investment finance. To date, our experience in the residential development lending has been that properties being developed are selling faster and for higher prices than anticipated when the loans were originated.
The residential investment lending is not a regulated mortgage business and is not designed for amateur landlords. As such, it is difficult to predict how the recent fiscal changes will affect the market in the future, but it is our initial belief that it will have a neutral impact.
In its first full year Secure Trust Commercial Services, the invoice finance division, funded in excess of 220m of customers' invoices. Customer lending balances grew 24m to 29m (2014: 5m). However, given the fact that the key customer proposition for this business is built on long term relationships, it will take a while longer before the business reaches critical mass.
The Asset Finance partnership with Haydock Finance has proved successful. Haydock is a long established and well regarded asset finance company. They provide STB with a full business process outsourcing service, while adhering to STB's credit policies and risk appetite. This business closed the year with balances at 71m (2014: 5m), an increase of 1,457%.
STB maintained its principle of funding its lending mainly from the retail deposit market, with balances increasing by 83% to close the year at 1.1bn (2014: 0.6bn). Again, the Bank attempted to minimise the interest rate risk by mainly offering fixed term deposits and bonds. This strategy would appear to be the most sensible, with current forecasts indicating that interest rates will remain low for some time to come.
Finally, STB has been able to maintain its reputation with its customers and staff. It was re-affirmed as the only bank to hold the Customer Service Excellence Award. For the fourth year running the Bank was awarded the four star mark by the Fair Banking Foundation.
Strategic Report - Financial Review
Arbuthnot Banking Group ("ABG") adopts a pragmatic approach to risk taking and seeks to maximise long term revenues and returns. Given its relative size, it is nimble and able to remain entrepreneurial and capable of taking advantage of favourable market opportunities when they arise.
The Group provides a range of financial services to customers and clients in its chosen markets of Private Banking and Retail Banking. The Group's revenues are derived from a combination of net interest income from lending, deposit taking and treasury activities, fees for services provided to customers and clients and commission earned on the sale of financial instruments and products.
Highlights
2015
2014
Summarised Income Statement
000
000
Net interest income
103,693
68,027
Net fee and commission income
23,000
24,022
Operating income
126,693
92,049
Operating expenses
(86,059)
(66,165)
Impairment losses - financial investments
(34)
(347)
Impairment losses - loans and advances to customers
(18,032)
(11,606)
Profit before tax from continuing operations
22,568
13,931
Income tax expense
(5,436)
(3,444)
Profit after tax from continuing operations
17,132
10,487
Profit from discontinued operations after tax
9,392
6,529
Profit for the year
26,524
17,016
Basic earnings per share (pence) - Continuing operations
53.3
32.4
Basic earnings per share (pence) - Discontinuing operations
33.1
26.1
Basic earnings per share (pence)
86.3
58.6
Underlying profit reconciliation
Arbuthnot Latham & Co.
Secure Trust Bank
Arbuthnot Banking Group
31 December 2015
000
000
000
Profit before tax from continuing operations
5,998
25,174
22,568
Investment in operating systems
1,123
-
1,123
AL commercial banking investment
333
-
333
Acquisition costs
418
4
422
STB share options
-
662
662
V12 fair value amortisation
-
893
893
Underlying profit
7,872
26,733
26,001
Underlying basic earnings per share (pence) - Continuing operations
65.5
Underlying basic earnings per share (pence)
101.2
Underlying profit reconciliation
Arbuthnot Latham & Co.
Secure Trust Bank
Arbuthnot Banking Group
31 December 2014
000
000
000
Profit before tax from continuing operations
3,628
17,755
13,931
Dubai office investment
981
-
981
Regional office investment
217
-
217
STB acquisition costs
-
198
198
STB share options
-
1,542
1,542
V12 fair value amortisation
-
893
893
Underlying profit
4,826
20,388
17,762
Underlying basic earnings per share (pence) - Continuing operations
46.3
Underlying basic earnings per share (pence)
84.5
Once again the Group has traded well during 2015. The reported profit before tax is 22.6m (2014: 13.9m). However, this number does not include the results from Everyday Loans ("ELL"), which is reported as "discontinued" due to the fact we reached agreement to sell this business to Non Standard Finance on 4 December 2015. The business was fully under the managerial influence of the Group during the year, so if their results are included, the overall Group's profit before tax would be 34.2m (2014: 22.5m), representing an increase of 52%. The overall result of 34.2m would be another record year of earnings for the Group.
The tables above also give an indication of the underlying momentum that exists in the Group's earnings. The reported results are adjusted for a small number of items that are included but represent significant investments for the future enhancement of the business or are accounting adjustments required by IFRS rules.
In aggregate, the Group's reported profit increases from 22.6m to an underlying result of 26m (2014: 17.8m), which shows an increase in profit of 46%. Arbuthnot Latham returned an increase in underlying profit of 63%.
The total Basic Earnings per share ("EPS") of the Group have increased by 47% to 86.3p (2014: 58.6p), with the underlying EPS closing the year at 101.2p (2014: 84.5p).
The Group exceeded 100m in operating income in 2014 (when ELL was included in the results). The continued growth in the business, particularly driven by the performance of the lending business, has resulted in the operating income increasing by 38%. Net interest income is now 82% of the overall Group operating income, which is up from last year's comparison of 74%.
The Group's expense base increased to 86.1m (2014: 66.2m), an increase of 30% due to the full year impact of the SME lending divisions, which commenced trading in 2014 and also the investment spending by Arbuthnot Latham ("AL"), mainly on the transformation project which is upgrading operational processes and ultimately replacing its core banking system.
However, despite this increased investment spending, the overall Group's operating leverage still increased by a positive 8%.
Impairment losses rose to 18m (2014: 11.6m), an increase of 6.4m, which is largely explained by three factors. Firstly, the prior year results were artificially lowered by 1m due to the provision releases that arose from a review of the carrying value of written off loans. Secondly, the volume of the balance sheet was increased, which in turn naturally leads to higher levels of expected impairments, especially in the retail lending business. Finally, our motor finance and retail lending divisions have been exploring higher yielding opportunities in their markets. This in turn leads to higher anticipated impairments.
Overall the Return on Equity of the Group was 14.6% (2014: 13.2%), which is somewhat lower than the marginal returns that the Group is capable of generating. This lower amount is due to the fact that the Group has carried a significant surplus of capital set aside for future growth, in particular for the commercial lending businesses. If this surplus is excluded, the Return on Equity deployed is 18.4% (2014: 18.3%).
Balance Sheet Strength
2015
2014
Summarised Balance Sheet
000
000
Assets
Loans and advances to customers
1,579,512
1,158,983
Liquid assets
484,917
239,465
Other assets
167,130
48,174
Total assets
2,231,559
1,446,622
Liabilities
Customer deposits
1,929,838
1,194,285
Other liabilities
110,317
78,768
Total liabilities
2,040,155
1,273,053
Equity
191,404
173,569
Total equity and liabilities
2,231,559
1,446,622
During 2015 the Group's total assets exceeded 2bn for the first time, closing the year at 2.2bn (2014: 1.4bn), an increase of 54%. At the same time the Group's lending to customers reached 1.6bn (2014: 1.2bn), which is a growth rate of 33%.
Once again the Group's lending remains almost entirely funded by customer deposits, which increased by 62% and are now approaching 2bn. The Group has also developed access to other sources of liquidity, most notably Funding for Lending ("FLS"). Following the recent notification from the Bank of England that the Dunfermline Building Society mortgage portfolio is considered eligible collateral, the Group has 198m of assets that may be used to generate further liquidity.
The net assets of the Group now stand at 192m. This does not include the impact of the gain that will be recognised following the completion of the disposal of Everyday Loans. This is anticipated to be 115m, so the Group's net assets will exceed 300m or the equivalent of approximately 20 per share.
Segmental Analysis
The segmental analysis in Note 40 of the consolidated Financial Statements in the Annual Report highlights the disclosures required under IFRS 8 "Operating Segments". The operating segments are Private Banking (Arbuthnot Latham & Co., Limited) and Retail Banking (Secure Trust Bank PLC). Group costs and intercompany elimination journals are shown separately to reconcile back to the Group consolidated results.
The analysis presented below, and in the business review, is before any consolidation adjustments to reverse the impact of the intergroup operating activities and also intergroup recharges and is a fair reflection of the way the Directors manage the Group.
Private Banking - Arbuthnot Latham
2015
2014
Summarised Income Statement
000
000
Net interest income
25,283
19,387
Net fee and commission income
9,793
9,508
Operating income
35,076
28,895
Other income
1,894
2,088
Operating expenses
(29,722)
(23,977)
Impairment losses - financial investments
-
(334)
Impairment losses - loans and advances to customers
(1,250)
(3,044)
Profit before tax
5,998
3,628
The profit before tax for the year was reported as 6m (2014: 3.6m). This is an increase of 65%. As already indicated publicly, the Bank has been carrying out an investment project to transform the operational process within the Bank. Accordingly, the results are after including not only 1.1m of costs for this project, but also 300k start-up costs for the commercial banking business and 400k of expenses for an aborted acquisition of a mortgage portfolio. If these items are added back, the Private Bank would have made 7.9m.
The proportion of the bank's income that is dependent on the balance sheet has increased during the year, with net interest income 72% of total operating income compared to 67% in the prior year.
At the same time net customer margin remained consistent with prior years at around 4.4% each month.
Operating expenses have increased by 24% to 29.7m as a result of the items noted above and also the full year impact of the hiring of new private bankers in the prior year. Also as a result of the rapid expansion of employees, the Bank moved into new premises in Exeter and agreed to occupy 9,839 square feet of new office space in the City, in addition to the headquarters in Wilson Street.
Impairment losses on loans declined from 3m to below 1.3m during the year, as the impact of the legacy credit portfolio began to decline. This portfolio has now largely been resolved.
It is worth noting that the Dubai office achieved break even in July 2015 and overall returned a small profit for the whole year.
2015
2014
Summarised Balance Sheet
000
000
Assets
Loans and advances to customers
618,902
536,488
Liquid assets
344,856
122,198
Other assets (including Group balances)
40,691
40,786
Total assets
1,004,449
699,472
Liabilities
Customer deposits
896,766
585,867
Other liabilities (including Group balances)
55,330
73,636
Total liabilities
952,096
659,503
Equity
52,353
39,969
Total equity and liabilities
1,004,449
699,472
Total customer assets increased by 15% to close the year at 619m (2014: 536m). However, the total volume of new loans originated in 2015 was 250m (2014: 172m), which is an increase of 45%. The actual balance sheet lagged behind this volume growth as we experienced an uptick in redemptions following the decisive result of the General Election in May 2015, which seemed to give confidence to the housing market during the summer months. After this, the balance sheet returned to good growth levels in the final quarter.
Overall the book remains well secured with an average LTV of 46% (2014: 43%).
Following the hiring of a number of high quality private bankers, the Bank is now able to gather robust levels of new deposits and therefore the customer deposit book grew to almost 900m (2014: 586m), an increase of 53%.
In total the Bank has surpassed 1bn in total assets for the first time in its history.
The net assets of the Bank now stand at 53m (2014: 40m), a 32% increase, as the Group made further capital contributions to facilitate additional growth, on top of the organically generated reserves that arise from net earnings. As a result, the Private Bank had a total capital ratio of 10.4% (2014: 10.8%) and a core tier 1 ratio of 10.4% (2014: 9.4%).
Retail Banking - Secure Trust Bank
2015
2014
Summarised Income Statement
000
000
Net interest income
78,882
49,146
Net fee and commission income
13,207
14,514
Operating income
92,089
63,660
Operating expenses
(50,133)
(37,255)
Impairment losses - loans and advances
(16,782)
(8,650)
Profit before tax from continuing operations
25,174
17,755
Income tax expense
(5,557)
(3,618)
Profit after tax from continuing operations
19,617
14,137
Profit from discontinued operations after tax
9,392
6,529
Profit for the year
29,009
20,666
The reported profit before tax is 25.2m (2014: 17.8m), which is an increase of 42%. These figures are the continuing operations within Secure Trust Bank. If the results for Everyday Loans are included, the Retail Bank made a profit before tax of 36.8m (2014: 26.3m), an increase of 40%.
The largest increase in the components of revenue has been derived from the Net Interest Income line, which has grown by 60% to close the year at 78.9m (2014: 49.1m). Net Interest Income is now 86% of revenues compared to 77% in the prior year. Net interest margin was 15.7% (2014: 17.1%) as the impact of the SME lending starts to add a counter balance to the consumer finance lending from prior years.
Operating expenses increased 34% to 50.1m (2014: 37.3m), largely due to the investments made in growing the SME lending divisions. However, the overall cost income ratio stands at 51% (2014: 57%). The operating leverage grew by a positive 10%.
Impairment losses were 16.8m (2014: 8.7m), with the increase due to three items. Firstly, the prior year was artificially low due to the 1m provision release. Secondly, the increase in the overall lending balances led to higher impairment losses. Finally, the Retail and Motor Finance operations have been lending to higher margin sectors of the markets, which has in turn resulted in higher levels of expected impairments.
2015
2014
Summarised Balance Sheet
000
000
Assets
Consumer Finance
Personal Lending
STB
74,360
87,571
ELL
-
93,864
Motor Finance
165,697
137,853
Retail Finance
220,417
116,734
Business Finance
Asset Finance
70,685
4,541
Commercial Finance
29,295
5,024
Real Estate Finance
367,999
133,738
Additional Services
Debt Collection
4,479
3,058
Acquired Portfolios
26
28
One Bill
202
388
RentSmart
23,458
25,504
Pay4Later
3,823
14,013
Other
169
179
Total loans and advances to customers
960,610
622,495
Liquid assets
140,053
117,258
Other assets (incl. Group balances & ELL)
146,668
42,260
Total assets
1,247,331
782,013
Liabilities
Customer deposits
1,033,073
608,418
Other liabilities (incl. Group balances)
73,074
48,734
Total liabilities
1,106,147
657,152
Equity
141,184
124,861
Total equity and liabilities
1,247,331
782,013
Overall the customer lending balances closed the year at 961m (2014: 622m), an increase of 54%. Once again the Motor, Retail and Business Finance portfolios have all shown good levels of growth. Motor Finance increased by 20% as it started to widen its product offering across the risk spectrum and including prime lending for the first time. The Retail Finance business has grown by 59% due in some degree to the additional strength the STB funding profile brings to the proposition. This has enabled it to pitch and win new business relationships that previously were beyond the V12 business. Secondly, the business has developed momentum in interest bearing products as opposed to interest free. This has resulted in higher expected impairments, but still at levels lower than anticipated when the products were priced.
The Business Finance divisions have grown by more than 200% with good growth in all three segments.
Customer deposits grew by 70% to stand at 1bn (2014: 608m). The Bank remains almost entirely funded by retail deposits. These deposits have been sourced mainly via the best buy tables and are largely in the form of fixed term deposits and bonds. This has the additional benefit not only of certainty of funding terms but also in managing the interest rate basis risk that can arise with longer term fixed rate lending business.
The net assets of the company have increased to 141m (2014: 125m), which is before recognising the gain from ELL. After this it is anticipated that the net assets of the company will be in excess of 250m. The Bank is well capitalised with a total capital ratio of 11.9% (2014: 16.3%) and a core tier 1 ratio of 12.2% (2014: 16.6%).
Group & Other Costs
2015
2014
Summarised Income Statement
000
000
Net interest income
(148)
(105)
Subordinated loan stock interest
(324)
(401)
Operating income
(472)
(506)
Operating expenses
(8,098)
(7,027)
Impairment on financial investments
(34)
81
Profit after tax
(8,604)
(7,452)
Total Group costs increased from 7.5m to 8.6m as a result of an increase in staff costs due to higher salaries and additional employees in the Group centre, to oversee the growth within the wider Group and to manage the greater requirements arising from regulation, compliance and corporate governance.
Capital
The Group's capital management policy is focused on optimising shareholder value over the long term. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.
The Group's lead regulator, the Prudential Regulation Authority ('PRA'), sets and monitors capital requirements for the Group as a whole and for the individual banking operations. The lead regulator adopted the Basel III capital requirements with effect from 1 January 2014. As a result, the Group's regulatory capital requirements have been based on Basel III since 2014.
In accordance with the EU's Capital Requirements Directive (CRD) and the required parameters set out in the PRA Handbook (BIPRU 2.2), the Individual Capital Adequacy Assessment Process (ICAAP) is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. The Group's regulated entities are also the principal trading subsidiaries as detailed in Note 39.
Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar 1 plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations deliver a sufficient capital sum adequate to cover management's anticipated risks. Where the Board considers that the Pillar 1 calculations do not reflect the risk, an additional capital add-on in Pillar 2 is applied, as per the Individual Capital Guidance (ICG) issued by the PRA.
The Group's regulatory capital is divided into two tiers:
Tier 1 comprises mainly shareholders' funds, non-controlling interests and revaluation reserves, after deducting goodwill and
other intangible assets.
Lower Tier 2 comprises qualifying subordinated loan capital and collective provisions. Lower Tier 2 capital cannot exceed 50%
of Tier 1 capital.
The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. All regulated trading entities have complied with all of the externally imposed capital requirements to which they are subject.
2015
2014
Capital ratios
000
000
Core Tier 1 capital
191,404
173,569
Deductions
(33,921)
(40,153)
Tier 1 capital after deductions
157,483
133,416
Tier 2 capital
12,865
13,479
Total capital
170,348
146,895
Core Tier 1 capital ratio (Net Core Tier 1 capital/Basel III Total Risk Exposure)
11.7%
14.0%
Total Capital Ratio (Capital/Basel III Total Risk Exposure)
12.6%
15.4%
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 strategic, credit, market, liquidity, operational, cyber, conduct and regulatory.
Strategic risk
Strategic risk is the risk that may affect the Group's ability to achieve its corporate and strategic objectives. This risk is important to the Group as it continues its growth strategy. However, the Group seeks to mitigate strategic risk by focusing on a sustainable business model which is aligned to the Group's business strategy. Also, the Board of Directors meets once a year to hold a two day board meeting to ensure that the Group's strategy is appropriate for the market and economy.
Credit risk
Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. This risk exists in Arbuthnot Latham & Co., Limited and Secure Trust Bank PLC, which currently have loan books of 619m and 961m respectively. The lending portfolio in Arbuthnot Latham is extended to private banking clients, the majority of which is secured against cash, property or other assets. The portfolios within Secure Trust are extended to retail customers and are largely unsecured. However, the new Real Estate finance business lends mainly secured on properties. Credit risk is managed through the Credit Committees of each bank with significant exposures also being approved by the Group Risk Committee.
Market risk
Market risk arises in relation to movements in interest rates, currencies and equity markets. The Group's treasury function operates mainly to provide a service to clients and does not take significant unmatched positions in any market for its own account. As a result, the Group's exposure to adverse movements in interest rates and currencies is limited to interest earnings on its free cash and interest rate re-pricing mismatches.
Liquidity risk
Liquidity risk is the risk that the Group cannot meet its obligations as they fall due. The Group takes a conservative approach to managing its liquidity profile. It has placed no reliance on the wholesale lending markets and is almost entirely funded by retail customer deposits. The loan to deposit ratios are maintained at prudent levels. Following introduction of the new liquidity regime, which came into force on 1 October 2010, the Group maintains liquidity asset buffers which comprise high quality, unencumbered assets such as Government Securities, which can be called upon to meet the Group's liabilities.
Operational risk
Operational risk is the risk that the Group may be exposed to financial losses from conducting its business. The Group is exposed to operational risks from its Information Technology and Operations platforms. There are additional internal controls in these processes that are designed to protect the Group from these risks. The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance section of the Annual Report.
Cyber risk
An increasing risk that the Group is subject to within its operational processes is cyber risk. This is the risk that the businesses within the Group are subject to some form of disruption arising from an interruption to its IT and data infrastructure.
Conduct risk
As a financial services provider we face conduct risk, including selling products to customers which do not meet their needs; failing to deal with customers' complaints effectively; not meeting customers' expectations; and exhibiting behaviours which do not meet market or regulatory standards.
The Group adopts a zero risk appetite for any unfair customer outcomes. It maintains clear compliance guidelines and provides ongoing training to all staff. Periodic spot checks and internal audits are performed to ensure these guidelines are being maintained. The Group also has insurance policies in place to cover any claims that may arise.
Regulatory risk
Regulatory compliance risk is the risk that the Group will have insufficient capital resources to support the business or does not comply with regulatory requirements. The Group adopts a conservative approach to managing the capital of the Group. The principal regulated entities maintain capital ratios in excess of the minimum level set by the regulator. Capital requirements are forecast as part of the annual budgeting process and these are regularly monitored. Annually, the Group Board assesses the robustness of the capital requirements as part of the Individual Capital Adequacy Assessment Process (ICAAP), where stringent stress tests are performed to ensure that capital resources are adequate over a three year horizon.
Regulatory change also exists as a risk to the Group's business. Not withstanding the assessments carried out by the Group to manage the regulatory risk, it is not possible to predict how regulatory and legislative changes may alter and impact the business. Significant and unforeseen regulatory changes may reduce the Group competitive situation and lower its profitability.
Macroeconomic and competitive environment
The Group is also exposed to indirect risks that may arise from the macroeconomic and competitive environment. The economic environment is relatively stable within the UK. However, the international landscape is increasingly uncertain. The declining performance of the economies in the EU, Russia and China may have an adverse affect on the UK. In particular this may cause a softening of central London property prices, which may spread out further to the South East.
Over the past year the reduction in oil prices has resulted in a lowering of the interest rate yield curve and has pushed out the time horizon for expectations of an increase in interest rates.
The Group monitors its exposure to future interest rate rises and currently has minimal lending to customers in products that would be directly sensitive to interest rate rises. However, at the current levels of interest rates, the affordability enjoyed by the Group's customers is beneficial.
EU Referendum
At the time of issuing this Annual Report, the date for the UK referendum on its membership of the European Union (EU) has been set for 23 June 2016. It is currently difficult to analyse the impacts that a vote to exit may have on the Arbuthnot Banking Group. However, our only overseas operation is in Dubai, so the vast majority of the Group's income and expenditure is based in the UK. It is therefore anticipated that the financial impact would be minimal assuming there were to be no significant macro economic shock on the UK.
Group Directors' Report
The Directors submit their annual report and the audited consolidated financial statements for the year ended 31 December 2015.
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 15.
Results and Dividends
The results for the year are shown on page 26. The profit after tax for the year of 26.5m (2014: 17.0m) is included in reserves.
The Directors recommend the payment of a final dividend of 17p on the ordinary shares which, together with the interim dividend of 12p paid on 2 October 2015, represents total dividends for the year of 29p (2014: 27p). The final dividend, if approved by members at the Annual General Meeting, will be paid on 13 May 2016 to shareholders on the register at close of business on 15 April 2016.
The Board is also proposing to pay a special dividend of 25p for 2016. This dividend is dependent on the completion of the sale of ELL, which includes regulatory approval of change of control, transferal of ownership and inclusion of the gain within the Group's capital resources. Following completion, the Board would also review the financial position and prospects of the Company before declaring the special dividend.
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.
Sale of subsidiary
It was announced on 4 December 2015 that the Company's subsidiary, Secure Trust Bank PLC, has agreed the conditional sale of its sub-prime consumer lending business, Everyday Loans Holdings Limited, to Non Standard Finance plc for 107m in cash and 20m in ordinary shares of the purchaser. This transaction is subject to approval by Regulators and is proceeding according to expectations and is anticipated that ownership will be transferred before 30 April 2016.
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 15 March 2016 of the following substantial holdings in the ordinary shares of the Company, other than those held by one director shown below:
Holder
Ordinary Shares
%
Liontrust UK Smaller Companies Fund
944,055
6.2
Prudential plc
609,688
4.0
Mr. R Paston
529,130
3.5
Directors
Sir Henry Angest
Chairman & CEO
J R Cobb
Finance Director
I A Dewar
J W Fleming
Ms R J Lea
P A Lynam
Sir Christopher Meyer
A A Salmon
Chief Operating Officer
All are currently directors and served throughout the year except for Mr. I.A. Dewar who was appointed on 1 August 2015.
Mr. R.J.J. Wickham served as a director throughout 2015 and retired on 31 December 2015. Ms R.J. Lea will retire at the Annual General Meeting and does not seek re-election.
Mr. Dewar, who has wide ranging experience in finance and as a senior statutory auditor, has been appointed chairman of the Audit Committee in succession to Ms Lea and offers himself for election under Article 75 of the Articles of Association.
Sir Henry Angest and Sir Christopher Meyer retire under Article 78 of the Articles of Association and, being eligible, offer themselves for re-election. Sir Henry Angest has a service agreement terminable on twelve months' notice. Sir Christopher Meyer, a non-executive director who joined the Board in October 2007, does not have a service agreement.
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 2015
31 December 2015
15 March 2016
%
Sir Henry Angest
8,200,901
8,200,901
8,200,901
53.7
J.W. Fleming
4,500
4,500
4,500
-
P.A. Lynam
10,000
10,000
10,000
0.1
A.A. Salmon
51,699
51,699
51,699
0.3
At the year end Mr. Lynam held 9,110 and Mr. Salmon held 7,500 ordinary 40p shares in Secure Trust Bank PLC, a 52% subsidiary of the Company.
On 16 April 2013 Mr. Salmon and Mr. Cobb were granted options to subscribe between April 2016 and April 2021 for 100,000 and 50,000 ordinary 1p shares respectively in the Company at 930p. The fair value of the options at grant date was 125,000.
On 1 April 2014 Mr. Fleming was granted an option to subscribe between April 2017 and April 2022 for 50,000 ordinary 1p shares in the Company at 1185p. The fair value of the option at grant date was 53,000.
Mr. Lynam and Mr. Salmon continue to hold options granted to them on 2 November 2011 to subscribe for 141,667 ordinary 40p shares in Secure Trust Bank PLC at 720p between 2 November 2016 and 2 November 2021. The fair value of the options at grant date was 1m.
Mr. Lynam was granted phantom options on 23 March 2015 to acquire 187,500 ordinary 40p shares in Secure Trust Bank PLC at 25 exercisable on or after 3 November 2018 when a cash payment would be made equal to any increase in value.
Apart from the interests disclosed above, no director was interested at any time in the year in the share capital of Group companies.
No director, either during or at the end of the financial year, was materially interested in any contract with the Company or any of its subsidiaries, which was significant in relation to the Group's business. At 31 December 2015 two directors had loans from Arbuthnot Latham & Co., Limited amounting to 2,901,000 and one director had a loan from Secure Trust Bank amounting to 223,000, on normal commercial terms as disclosed in note 38 to the financial statements. At 31 December 2015 five directors had deposits with Arbuthnot Latham & Co., Limited amounting to 2,321,000 and two directors had deposits with Secure Trust Bank PLC amounting to 371,000, all on normal commercial terms as disclosed in note 38 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 22 to 23 will be the subject of an Ordinary Resolution at the Annual General Meeting.
Information on the Audit, Nomination, Risk and Political Donations Committees is included in the Corporate Governance section of the Annual Report on pages 19 to 21.
Employees
The Company gives due consideration to the employment of disabled persons and is an equal opportunities employer. It also regularly provides employees with information on matters of concern to them, consults on decisions likely to affect their interests and encourages their involvement in the performance of the Company through share participation and in other ways.
Political Donations
The Company made political donations of 68,000 to the Conservative Party during the year (2014: 48,000).
Branches outside of the UK
During the year the Arbuthnot Latham & Co., Ltd operated a branch in Dubai which is regulated by the Dubai Financial Services Authority.
Events after the balance sheet date
On 15 January 2016 Arbuthnot Latham & Co., Ltd signed a contract with Oracle to replace its current banking system. The committed cost is 2m.
Auditors
A resolution for the re-appointment of KPMG LLP as auditor will be proposed at the forthcoming Annual General Meeting at a fee to be agreed in due course by the directors.
Statement of Disclosure of Information to Auditors
The Directors confirm that:
so far as each director is aware, there is no relevant audit information of which the Company's auditor is unaware; and
the Directors have taken all the steps they ought to have taken as directors to make themselves aware of any relevant audit
information and to establish that the Company's auditor is aware of that information.
This confirmation is given and shall be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
Corporate Governance
Arbuthnot Banking Group has a strong and effective Corporate Governance framework. The Board endorses the principles of openness, integrity and accountability, which underlie good corporate governance and take into account the provisions of the UK Corporate Governance Code in so far as they are considered appropriate to the Group's size and circumstances. Moreover, the Group contains subsidiaries authorised to undertake regulated business under the Financial Services and Markets Act 2000, which are regulated by the Prudential Regulatory Authority and the Financial Conduct Authority, 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 by an effective Board which comprises five executive directors and three non-executive directors. During 2015, the senior independent non-executive director, and Deputy Chairman, was Robert Wickham. Mr. Wickham retired from the Board on 31 December 2015. Ian Dewar was appointed on 1 August 2015 as an independent non-executive director of the Company and assigned the role of chairman of the Audit Committee in succession to Ruth Lea, who will retire from the Board at the Annual General Meeting. The directors seeking re-election are Sir Henry Angest and Sir Christopher Meyer, who have served on the Board for 30 years and eight years respectively. The contribution of Sir Henry Angest, who beneficially owns more than 50% of the issued share capital, has been invaluable in the successful development of the Company. Sir Christopher Meyer's wide-ranging experience as a diplomat has provided an important independent measure of challenge to executive management. Accordingly, the Board fully supports the resolutions for their reappointment.
The Board
The Board held six formal meetings during the year as well as a two day strategy meeting. Substantive agenda items have briefing papers, which are circulated in a timely manner before each meeting. The Board 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, monitoring overall regulatory requirements of its subsidiary companies, and their adherence thereto, and any transaction by a subsidiary company that cannot be made within its own resources or that is not in the normal course of its business.
The Company Secretary is responsible for ensuring that the Board processes and procedures are appropriately followed and support effective decision making. All directors have access to the Company Secretary's advice and services. There is an agreed procedure for directors to obtain independent professional advice in the course of their duties, if necessary, and at the Company's expense.
The Board has delegated certain of its responsibilities to Committees. All Committees have written terms of reference approved by the Board.
Audit Committee
Membership of the Audit Committee is restricted to non-executive directors and comprises Ian Dewar (as Chairman), Ruth Lea and Sir Christopher Meyer. The Committee met four times during the year.
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. These include 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, whistleblowing procedures 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.
The present auditors have held office since 2009, but the senior statutory auditor changed in 2013. The Board is very satisfied with the effectiveness of their audit. The Committee received a report showing the level of non-audit services provided by the external auditors during the year and members were satisfied that this did not infringe auditor independence.
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 Sir Henry Angest and its other members are Sir Christopher Meyer and Ruth Lea. The Committee met twice during the year. 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, with recruitment consultants appointed if appropriate. The Committee has under active consideration the appointment of an additional independent non-executive director to succeed Ruth Lea on her retirement from the Board.
Risk Committee
The Risk Committee is chaired by Sir Henry Angest and its other members are James Cobb, James Fleming, Paul Lynam and Andrew Salmon. The Committee met six times during the year. The principal role of the Risk Committee is to approve significant individual credits or other exposures.
Donations Committee
The Donations Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Ruth Lea. The Committee met three times during the year. 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 other General Meetings (when held) to communicate with investors. The Company aims to present a balanced and understandable assessment in all its reports to shareholders, its regulators, other stakeholders and the wider public. Key announcements and other information can be found at www.arbuthnotgroup.com.
Internal Control and Financial Reporting
The Board of directors has overall responsibility for the Group's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable but not absolute assurance against the risk of material misstatement or loss.
The Directors and senior management of the Group have formally adopted a Group Risk and Controls Policy which sets out the Board's attitude to risk and internal control. Key risks identified by the Directors are formally reviewed and assessed at least once a year by the Board. In addition, key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention.
Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are well-established budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data.
The effectiveness of the internal control system is reviewed regularly by the Board and the Audit Committee, which also receives reports of reviews undertaken by the internal audit function, which was outsourced to EY during 2015. The Audit Committee also receives reports from the external auditors, KPMG LLP, which include details of internal control matters that they have identified as part of the annual statutory Financial Statement audit. The ICAAP and ILAAP are considered key issues and are considered in detail by the subsidiary Boards and their Risk Committees. The Board receives reports on these by exception. Certain aspects of the system of internal control are also subject to regulatory supervision, the results of which are monitored closely by the Board.
Statement of Directors' Responsibilities in Respect of the Strategic Report and the Directors' Report and the Financial Statements
The Directors are responsible for preparing the Strategic Report 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.
Remuneration Report
Remuneration Committee
Membership of the Remuneration Committee is limited to non-executive directors together with Sir Henry Angest as Chairman. The present members of the Committee are Sir Henry Angest, Sir Christopher Meyer and Ruth Lea. The Committee met four times during the year.
The Committee has responsibility for producing recommendations on the overall remuneration policy for directors for review by the Board and for setting the remuneration of individual directors. Members of the Committee do not vote on their own remuneration.
Remuneration Policy
The Remuneration Committee determines the remuneration of individual directors having regard to the size and nature of the business; the importance of attracting, retaining and motivating management of the appropriate calibre without paying more than is necessary for this purpose; remuneration data for comparable positions, in particular the rising remuneration packages at other challenger banks; the need to align the interests of executives with those of shareholders; and an appropriate balance between current remuneration and longer-term performance-related rewards. The remuneration package can comprise a combination of basic annual salary and benefits (including pension), a discretionary annual bonus award related to the Committee's assessment of the contribution made by the executive during the year and longer-term incentives, including executive share options. Pension benefits take the form of annual contributions paid by the Company to individual money purchase schemes. The Remuneration Committee reviews salary levels each year based on the performance of the Group during the preceding financial period. This review does not necessarily lead to increases in salary levels. For the purposes of the FCA Remuneration Code, all the provisions of which have been implemented. The Group and its subsidiaries are all considered to be Tier 3 institutions.
Directors' Service Contracts
Sir 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 six months' notice in writing by either party.
Share Option and Long Term Incentive Schemes
This part of the remuneration report is audited information.
At the Annual General Meeting in May 2015, shareholders voted by Ordinary Resolution to extend the Company's Unapproved Executive Share Option Scheme for a further period of 10 years.
The Company has an ESOP ('the Arbuthnot ESOP Trust') under which trustees may purchase shares in the Company to satisfy the exercise of share options by employees, including executive directors.
On 16 April 2013 Mr. Salmon and Mr. Cobb were granted options to subscribe between April 2016 and April 2021 for 100,000 and 50,000 ordinary 1p shares respectively in the Company at 930p. The fair value of the options at grant date was 125,000.
On 1 April 2014 Mr. Fleming was granted an option to subscribe between April 2017 and April 2022 for 50,000 ordinary 1p shares in the Company at 1185p. The fair value of the options at the grant date was 53,000.
At the date of this remuneration report, the only outstanding options to directors under the Unapproved Executive Share Option Scheme are those in relation to 100,000 shares for Andrew Salmon and 50,000 shares each for James Cobb and James Fleming. 150,500 shares are held in the Arbuthnot ESOP Trust.
Under the Unapproved Executive Share Option Scheme of the Company 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 the grant date was 1m.
On 2 November 2014 Mr. Lynam and Mr. Salmon each exercised options granted to them on 2 November 2011 to subscribe for 141,666 ordinary 40p shares in Secure Trust Bank PLC at 720p and sold the shares at a price of 25. Mr. Lynam and Mr. Salmon continue to hold options granted to them on 2 November 2011 to subscribe for 141,667 ordinary 40p shares in Secure Trust Bank PLC at 720p between 2 November 2016 and 2 November 2021. The fair value of the options at grant date was 0.5m.
On 23 March 2015 Mr. Lynam was granted phantom options to acquire 187,500 ordinary 40p shares in Secure Trust Bank PLC at 25 exercisable on or after 3 November 2016 when a cash payment would be made equal to any increase in value.
Directors' Emoluments
This part of the remuneration report is audited information.
2015
2014
000
000
Fees (including benefits in kind)
70
98
Salary payments (including benefits in kind)
5,165
3,938
Pension contributions
140
140
Long term incentive
-
5,030
5,375
9,206
Total
Total
Salary
Bonus
Benefits
Pension
Fees
2015
2014
000
000
000
000
000
000
000
Sir Henry Angest
900
-
87
-
-
987
632
JR Cobb
450
200
16
35
-
701
526
IA Dewar
29
-
-
-
-
29
-
JW Fleming
450
100
16
35
-
601
576
Ms RJ Lea
60
-
-
-
70
130
125
PA Lynam
900
500
21
35
-
1,456
3,671
Sir Christopher Meyer
55
-
-
-
-
55
50
AA Salmon
900
400
21
35
-
1,356
3,571
RJJ Wickham
60
-
-
-
-
60
55
3,804
1,200
161
140
70
5,375
9,206
Details of any shares or options held by directors are presented on page 17.
The emoluments of the Chairman were 987,000 (2014: 632,000). The emoluments of the highest paid director were 1,456,000 (2014: 3,671,000) including pension contributions of 35,000 (2014: 35,000).
Mr. R J J Wickham was a director of Calando Finance Limited which received an annual fee of nil (2014: 14,000) in respect of his services to the Group. This amount is included in the table above. Retirement benefits are accruing under money purchase schemes for five directors who served during 2015 (2014: five directors).
Independent Auditor's Report
We have audited the financial statements of Arbuthnot Banking Group PLC for the year ended 31 December 2015 set out on pages 26 to 102. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the Directors' Responsibilities Statement set out on page 21, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at
www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion:
the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31
December 2015 and of the Group's profit for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as
applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006 and under the terms of our engagement
In our opinion the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
the Parent Company financial statements are not in agreement with the accounting records and returns; or
certain disclosures of directors' remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Richard Gabbertas (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
16 March 2016
Company statement of financial position
At 31 December
2015
2014
Note
000
000
ASSETS
Due from subsidiary undertakings - bank balances
12,444
19,244
Financial investments
23
125
158
Deferred tax asset
24
418
406
Intangible assets
26
-
4
Property, plant and equipment
27
204
127
Other assets
22
991
5,472
Investment in subsidiary undertakings
39
46,466
39,966
Total assets
60,648
65,377
EQUITY AND LIABILITIES
Equity
Share capital
33
153
153
Other reserves
34
(1,111)
(1,111)
Retained earnings
34
46,537
50,755
Total equity
45,579
49,797
LIABILITIES
Other liabilities
30
4,235
4,132
Debt securities in issue
31
10,834
11,448
Total liabilities
15,069
15,580
Total equity and liabilities
60,648
65,377
The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Parent Company
profit and loss account. The profit for the Parent Company for the year is presented in the Statement of Changes in Equity.
Consolidated statement of changes in equity
Attributable to equity holders of the Group
Share capital
Revaluation reserve
Capital redemption reserve
Available-for-sale reserve
Cash flow hedging reserve
Treasury shares
Retained earnings
Non-controlling interests
Total
000
000
000
000
000
000
000
000
000
Balance at 1 January 2015
153
98
20
(250)
-
(1,131)
114,641
60,038
173,569
Total comprehensive income for the period
Profit for 2015
-
-
-
-
-
-
12,726
13,798
26,524
Other comprehensive income, net of tax
Revaluation reserve
Cash flow hedging reserve
Available-for-sale reserve
-
-
-
1,297
-
-
-
-
1,297
Total other comprehensive income
-
-
-
1,297
-
-
-
-
1,297
Total comprehensive income for the period
-
-
-
1,297
-
-
12,726
13,798
27,821
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Equity settled share based payment transactions
-
-
-
-
-
-
132
87
219
Final dividend relating to 2014
-
-
-
-
-
-
(2,382)
(4,549)
(6,931)
Interim dividend relating to 2015
-
-
-
-
-
-
(1,787)
(1,487)
(3,274)
Total contributions by and distributions to owners
-
-
-
-
-
-
(4,037)
(5,949)
(9,986)
Balance at 31 December 2015
153
98
20
1,047
-
(1,131)
123,330
67,887
191,404
Attributable to equity holders of the Group
Share capital
Revaluation reserve
Capital redemption reserve
Available-for-sale reserve
Cash flow hedging reserve
Treasury shares
Retained earnings
Non-controlling interests
Total
000
000
000
000
000
000
000
000
000
Balance at 1 January 2014
153
191
20
(169)
(378)
(1,131)
67,901
20,327
86,914
Total comprehensive income for the period
Profit for 2014
-
-
-
-
-
-
8,634
8,382
17,016
Other comprehensive income, net of tax
Revaluation reserve
- Adjustment
-
(91)
-
-
-
-
91
-
-
- Amount transferred to profit and loss
-
(2)
-
-
-
-
-
-
(2)
Cash flow hedging reserve
- Adjustment
-
-
-
-
124
-
(124)
-
-
- Net amount transferred to profit and loss
-
-
-
-
254
-
-
124
378
Available-for-sale reserve
-
-
-
(81)
-
-
-
-
(81)
Total other comprehensive income
-
(93)
-
(81)
378
-
(33)
124
295
Total comprehensive income for the period
-
(93)
-
(81)
378
-
8,601
8,506
17,311
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Equity settled share based payment transactions
-
-
-
-
-
-
488
3,393
3,881
Issue of new shares Secure Trust Bank
-
-
-
-
-
-
23,810
24,949
48,759
Sale of shares Secure Trust Bank
-
-
-
-
-
-
17,712
6,615
24,327
Final dividend relating to 2013
-
-
-
-
-
-
(2,233)
(2,426)
(4,659)
Interim dividend relating to 2014
-
-
-
-
-
-
(1,638)
(1,326)
(2,964)
Total contributions by and distributions to owners
-
-
-
-
-
-
38,139
31,205
69,344
Balance at 31 December 2014
153
98
20
(250)
-
(1,131)
114,641
60,038
173,569
Company statement of changes in equity
Attributable to equity holders of the Company
Share capital
Capital redemption reserve
Available -for-sale reserve
Treasury shares
Retained earnings
Total
000
000
000
000
000
000
Balance at 1 January 2014
153
20
81
(1,131)
31,325
30,448
Total comprehensive income for the period
Profit for 2014
-
-
-
-
23,260
23,260
Other comprehensive income, net of income tax
Available-for-sale reserve
-
-
(81)
-
-
(81)
Total other comprehensive income
-
-
(81)
-
-
(81)
Total comprehensive income for the period
-
-
(81)
-
23,260
23,179
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Equity settled share based payment transactions
-
-
-
-
41
41
Final dividend relating to 2013
-
-
-
-
(2,233)
(2,233)
Interim dividend relating to 2014
-
-
-
-
(1,638)
(1,638)
Total contributions by and distributions to owners
-
-
-
-
(3,830)
(3,830)
Balance at 1 January 2015
153
20
-
(1,131)
50,755
49,797
Total comprehensive income for the period
Profit for 2015
-
-
-
-
(87)
(87)
Other comprehensive income, net of income tax
Total comprehensive income for the period
-
-
-
-
(87)
(87)
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Equity settled share based payment transactions
-
-
-
-
38
38
Final dividend relating to 2014
-
-
-
-
(2,382)
(2,382)
Interim dividend relating to 2015
-
-
-
-
(1,787)
(1,787)
Total contributions by and distributions to owners
-
-
-
-
(4,131)
(4,131)
Balance at 31 December 2015
153
20
-
(1,131)
46,537
45,579
Consolidated statement of cash flows
Year ended 31 December
Year ended 31 December
2015
2014
Note
000
000
Cash flows from operating activities
Interest received
171,956
116,675
Interest paid
(35,040)
(18,260)
Fees and commissions received
15,615
27,692
Cash payments to employees and suppliers
(115,463)
(91,874)
Taxation paid
(7,409)
(3,047)
Cash flows from operating profits before changes in operating assets and liabilities
29,659
31,186
Changes in operating assets and liabilities:
- net decrease/(increase) in derivative financial instruments
285
(1,503)
- net increase in loans and advances to customers
(417,814)
(434,352)
- net (increase)/decrease in other assets
(118,484)
401
- net increase in amounts due to customers
735,553
236,494
- net increase in other liabilities
5,693
3,967
Net cash inflow/(outflow) from operating activities
234,892
(163,807)
Cash flows from investing activities
Disposal of financial investments
44
243
Purchase of computer software
26
(3,532)
(1,214)
Purchase of property, plant and equipment
27
(3,395)
(7,803)
Proceeds from sale of property, plant and equipment
27
-
42
Proceeds from sale of Secure Trust Bank shares
-
24,327
Purchases of debt securities
(145,880)
(85,243)
Proceeds from redemption of debt securities
149,835
13,026
Net cash from investing activities
(2,928)
(56,622)
Cash flows from financing activities
Increase in borrowings
27,648
25,654
Dividends paid
(10,205)
(7,623)
Proceeds from share placing by Secure Trust Bank
-
48,758
Proceeds from exercise of Secure Trust Bank share options
-
3,315
Net cash used in financing activities
17,443
70,104
Net increase/(decrease) in cash and cash equivalents
249,407
(150,325)
Cash and cash equivalents at 1 January
147,782
298,107
Cash and cash equivalents at 31 December
37
397,189
147,782
Company statement of cash flows
Year ended 31 December
Year ended 31 December
2015
2014
Note
000
000
Cash flows from operating activities
Dividends received from subsidiaries
6,648
6,440
Interest received
120
149
Interest paid
(599)
(661)
Net trading and other income
1,833
1,629
Cash payments to employees and suppliers
(8,718)
(7,866)
Cash flows from operating losses before changes in operating assets and liabilities
(715)
(309)
Changes in operating assets and liabilities:
- net increase in group company balances
(66)
(4,950)
- net decrease/(increase) in other assets
7
(3)
- net increase/(decrease) in other liabilities
143
(1)
Net cash outflow from operating activities
(631)
(5,263)
Cash flows from investing activities
Repayment of loans to subsidiary companies
4,500
-
Increase investment in subsidiary
39
(6,500)
(10,500)
Disposal of share in subsidiaries
39
-
24,327
Net cash from investing activities
(2,000)
13,827
Cash flows from financing activities
Dividends paid
(4,169)
(3,871)
(Decrease)/Increase in borrowings
-
(2,000)
Net cash used in financing activities
(4,169)
(5,871)
Net (decrease)/increase in cash and cash equivalents
(6,800)
2,693
Cash and cash equivalents at 1 January
19,244
16,551
Cash and cash equivalents at 31 December
37
12,444
19,244
Notes to the Consolidated Financial Statements
1. Reporting entity
Arbuthnot Banking Group PLC is a company domiciled in the United Kingdom. The registered address of the Arbuthnot Banking Group PLC is 7 Wilson Street, London, EC2M 2SN. The consolidated financial statements of the Arbuthnot Banking Group PLC as at and for the year ended 31 December 2015 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 16 March 2016.
(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
The accounting policies adopted are consistent with those of the previous financial year. There were no new or amended standards or interpretations that resulted in a change in accounting policy.
(f) Going concern
The financial statements have been prepared on the 'going concern' basis as disclosed in the Directors' Report.
3. Significant accounting policies
The accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
3.1. Consolidation
(a) Subsidiaries
Subsidiaries are all investees (including special purpose entities) controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group's shares of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income as a gain on bargain purchase.
The Parent's investments in subsidiaries are recorded at cost less, where appropriate, provisions for impairment in value.
Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
(b) Changes in ownership and non-controlling interests
Changes in ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity transactions and no gain or loss is recognised. Adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary.
When control of a subsidiary is lost, the Group derecognises the assets, liabilities, non-controlling interest and all other components of equity relating to the former subsidiary from the consolidated statement of financial position. Any resulting gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is recognised at its fair value when control is lost.
(c) Special purpose entities
Special purpose entities ("SPEs") are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets or the execution of a specific borrowing or lending transaction. SPEs are consolidated when the investor controls the investee. The investor would only control the investee if it had all of the following:
power over the investee;
exposure, or rights, to variable returns from its involvement with the investee; and
the ability to use its power over the investee to affect the amount of the investor's returns.
The assessment of whether the Group has control over an SPE is carried out at inception and the initial assessment is only reconsidered at a later date if there were any changes to the structure or terms of the SPE, or there were additional transactions between the Group and the SPE.
(d) Associates
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method and are initially recognised at cost. The Group's investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group's share of the total comprehensive income and equity movements of equity accounted investees, from the date that significant influence commences until the date that significant influence ceases. When the Group's share of losses exceeds its interest in an equity accounted investee, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee.
3.2. Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Group Board. The Group Board, which is responsible for allocating resources and assessing performance of the operating segments, has been identified as the chief operating decision maker. All transactions between segments are conducted on an arm's length basis. Income and expenses directly associated with each segment are included in determining segment performance. There are three main operating segments:
Retail Banking
Private Banking
Group Centre
3.3. Foreign currency translation
Foreign currency transactions are translated into the functional currency using the spot exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income. Foreign exchange differences arising from translation of available-for-sale equity instruments are recognised in the Statement of Comprehensive Income.
3.4. Interest income and expense
Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost using the effective interest method.
The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the impaired carrying amount.
3.5. Fee and commission income
Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accrual basis when the service has been provided.
Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party - such as the issue or the acquisition of shares or other securities or the purchase or sale of businesses - are recognised on completion of the underlying transaction. Asset and other management, advisory and service fees are recognised on an accruals basis as the related services are performed. The same principle is applied for financial planning and insurance services that are continuously provided over an extended period of time.
3.6. Discontinued operations
A discontinued operation is a component of the Group's business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which:
represents a separate major line of business or geographical area of operations;
is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or
is a subsidiary acquired exclusively with a view to re-sale.
Classification as a discontinued operation occurs on disposal or when the operation meets the criteria to be classified as held for sale (see note 3.12), if earlier. When an operation is classified as a discontinued operation, the comparative Statement of Comprehensive Income is re-presented as if the operation had been discontinued from the start of the comparative year.
3.7. Financial assets and financial liabilities
The Group classifies financial assets and financial liabilities in the following categories: financial assets and financial liabilities at fair value through profit or loss; loans and receivables; held-to-maturity investments; available-for-sale financial assets and other financial liabilities. Management determines the classification of its investments at acquisition. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue.
(a) Financial assets and financial liabilities at fair value through profit or loss
This category comprises listed securities and derivative financial instruments. Derivative financial instruments utilised by the Group include embedded derivatives and derivatives used for hedging purposes. Financial assets and liabilities at fair value through profit or loss are initially recognised on the date from which the Group becomes a party to the contractual provisions of the instrument. Subsequent measurement of financial assets and financial liabilities held in this category are carried at fair value through profit or loss.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans are recognised when cash is advanced to the borrowers. Loans and receivables are carried at amortised cost using the effective interest method.
(c) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group has the positive intent and ability to hold to maturity and that has not been designated at fair value through profit or loss or as available-for-sale investments. Held-to-maturity investments are carried at amortised cost using the effective interest method, less any impairment loss.
(d) Available-for-sale
Available-for-sale ('AFS') investments are those not classified as another category of financial assets. These include investments in special purpose vehicles and equity investments in unquoted vehicles. They may be sold in response to liquidity requirements, interest rate, exchange rate or equity price movements. AFS investments are initially recognised at cost, which is considered as the fair value of the investment including any acquisition costs. AFS securities are subsequently measured at fair value in the statement of financial position. Fair value changes on the AFS securities are recognised directly in equity (AFS reserve) until the investment is sold or impaired. Once sold or impaired, the cumulative gains or losses previously recognised in the AFS reserve are recycled to the profit or loss.
(e) Other financial liabilities
Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date.
Amortised cost measurement
The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal payments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, less any reduction for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's length basis.
If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis. In the instance that fair values of assets and liabilities cannot be reliably measured, they are carried at cost.
For measuring derivatives that might change classification from being an asset to a liability or vice versa such as interest rate swaps, fair values take into account both credit valuation adjustment (CVA) and debit valuation adjustment (DVA) when market participants take this into consideration in pricing the derivatives.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the Statement of Financial Position. In transactions which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. There have not been any instances where assets have only been partially derecognised.
The Group derecognises a financial liability when its contractual obligations are discharged, cancelled, expire, are modified or exchanged.
3.8. 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 whentheir fair value is negative.
(a) 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.
(b) Embedded derivatives
Embedded derivatives arise from contracts ('hybrid contracts') containing both a derivative (the 'embedded derivative') and a non-derivative (the 'host contract'). Where the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract, and the host contract is not at fair value through profit or loss, the embedded derivative is bifurcated and reported at fair value and gains or losses are recognised in the Statement of Comprehensive Income.
3.9. Impairment of financial assets
(a) Assets carried at amortised cost
On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. Objective evidence is the occurrence of a loss event, after the initial recognition of the asset, that impact on the estimated contractual future cash flows of the financial asset or group of financial assets, and can be reliably estimated.
The criteria that the Group uses to determine that there is objective evidence of an impairment loss include, but are not limited to, the following:
Delinquency in contractual payments of principal or interest;
Cash flow difficulties experienced by the borrower;
Initiation of bankruptcy proceedings;
Deterioration in the value of collateral;
Deterioration of the borrower's competitive position;
If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Statement of Comprehensive Income. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
The Group considers evidence of impairment for loans and advances at both a specific asset and collective level. All individually significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. In assessing collective impairment the Group uses historical trends of the probability of default, emergence period, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends.
When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the Statement of Comprehensive Income.
A customer's account may be modified to assist customers who are in or have recently overcome financial difficulties and have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Loans that have renegotiated or deferred terms, resulting in a substantial modification to the cash flows, are no longer considered to be past due but are treated as new loans recognised at fair value, provided the customers comply with the renegotiated or deferred terms.
(b) Assets classified as available-for-sale
The Group assesses at each Statement of Financial Position date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and recognised in the profit or loss. Impairment losses recognised in the profit or loss on equity instruments are reversed through other comprehensive income.
(c) Renegotiated loans
Loans that are neither subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans.
(d) Forbearance
Under certain circumstances, the Group may use forbearance measures to assist borrowers who are experiencing significant financial hardship. Any forbearance support is assessed on a case by case basis in line with best practice and subject to regular monitoring and review. The Group seeks to ensure that any forbearance results in a fair outcome for both the customer and the Group.
3.10. Impairment of non-financial assets
The carrying amounts of the Group's non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. Impairment for goodwill is discussed in more detail under note 3.14.
3.11. Funding for Lending Scheme
Under the applicable International Accounting Standard, IAS 39, if a security is lent under an agreement to return it to the transferor, as is the case for eligible securities lent by institutions to the Bank of England under the FLS, then the security is not derecognised because the transferor retains all the risks and rewards of ownership. The UK Treasury Bills borrowed from the Bank of England under the FLS are not recognised on the Statement of Financial Position of the institution until such time as they are subject to a repurchase agreement with a third party, as they will not meet the criteria for derecognition by the Bank of England. When the UK Treasury Bills are pledged as part of a sale and repurchase agreement with a third party, amounts borrowed from the third party are recognised on the Statement of Financial Position.
3.12. Inventory
Land acquired through repossession of collateral which is subsequently held in the ordinary course of business with a view to develop and sell is accounted for as inventory.
Inventory is measured at the lower of cost or net realisable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
3.13. Assets classified as held for sale
Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. These assets and liabilities are subsequently measured at the lower of its carrying amount and fair value less costs to sell. Once classified as held for sale, intangible assets and property, plant and equipment are no longer amortised or depreciated.
3.14. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries or associates is included in 'intangible assets'. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
The Group reviews the goodwill for impairment at least annually or more frequently when events or changes in economic circumstances indicate that impairment may have taken place and carry goodwill at cost less accumulated impairment losses. Assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit" or "CGU"). For impairment testing purposes goodwill cannot be allocated to a CGU that is greater than a reported operating segment. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. The test for impairment involves comparing the carrying value of goodwill with the present value of pre-tax cash flows, discounted at a rate of interest that reflects the inherent risks of the CGU to which the goodwill relates, or the CGU's fair value if this is higher.
(b) Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives (three to ten years).
Costs associated with maintaining computer software programs are recognised as an expense as incurred.
Costs associated with developing computer software which are assets in the course of construction, which management has assessed to not be available for use, are not amortised.
(c) Other intangibles
Other intangibles include trademarks, customer relationships, broker relationships, technology and banking licences acquired. These costs are amortised on the basis of the expected useful lives (three to ten years).
3.15. 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
Leasehold improvements are depreciated over the term of the lease (until the first break clause). Gains and losses on disposals are determined by deducting carrying amount from proceeds. These are included in the Statement of Comprehensive Income. Depreciation on revalued freehold buildings is calculated using the straight-line method over the remaining useful life. Revaluation of assets and any subsequent disposals are addressed through the revaluation reserve and any changes are transferred to retained earnings.
3.16. 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.
3.17. 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.
3.18. 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.
3.19. 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.
3.20. Issued debt and equity securities
Issued financial instruments or their components are classified as liabilities where the contractual arrangement results in the Group having a present obligation to either deliver cash or another financial asset to the holder, to exchange financial instruments on terms that are potentially unfavourable. Issued financial instruments, or their components, are classified as equity where they meet the definition of equity and confer on the holder a residual interest in the assets of the Company. The components of issued financial instruments that contain both liability and equity elements are accounted for separately with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component.
Financial liabilities, other than trading liabilities at fair value, are carried at amortised cost using the effective interest method as set out in policy 3.4. Equity instruments, including share capital, are initially recognised as net proceeds, after deducting transaction costs and any related income tax. Dividend and other payments to equity holders are deducted from equity, net of any related tax.
3.21. 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.
3.22. Financial guarantee and loan commitments
Financial guarantees represent undertakings that the Group will meet a customer's obligation to third parties if the customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments, however, the likely amount of loss is expected to be significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards. Liabilities under financial guarantee contracts are initially recorded at their fair value, and the initial fair value is amortised over the life of the financial guarantee. Subsequently, the financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure to settle obligations.
3.23. 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.
3.24. 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 2016 or later periods, but the Group has not early adopted them:
IFRS 9, 'Financial instruments' (effective from 1 January 2018). This standard deals with the classification and measurement of financial assets and will replace IAS 39. Phase one of this standard deals with the classification and measurement of financial assets and represents a significant change from the existing requirements in IAS 39. The standard contains three primary measurement categories for financial assets: 'amortised cost', 'fair value through other comprehensive income' and 'fair value through profit or loss' and eliminates the existing categories of 'held to maturity', 'available for sale' and 'loans and receivables'. Phase two of the standard covers impairment, with a new expected loss impairment model that will require expected credit losses to be accounted for from when financial instruments are first recognised and lowers the threshold for the recognition of full lifetime expected losses. Phase three covers general hedge accounting and introduces a substantially reformed model for hedge accounting with enhanced disclosure about risk management activity. The new model aligns the accounting treatment with risk management activities.
IFRS 15, 'Revenue from contracts with customers' (effective 1 January 2017). This standard establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. This standard is unlikely to have a material impact on the Group. (This standard has not yet been endorsed by the EU.)
IFRS 16, 'Leases' (effective from 1 January 2019). The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract i.e. the customer ('lessee') and the supplier ('lessor'). IFRS 16 replaces the previous leases Standards, IAS 17 Leases, and related Interpretations. IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a lessee. Instead all leases are treated in a similar way to finance leases applying IAS 17. Leases are 'capitalised' by recognising the present value of the lease payments and showing them either as lease assets (right-of-use assets) or together with property, plant and equipment. If lease payments are made over time, a company also recognises a financial liability representing its obligation to make future lease payments. The most significant effect of the new requirements in IFRS 16 will be an increase in lease assets and financial liabilities. Accordingly, for companies with material off balance sheet leases, there will be a change to key financial metrics derived from the company's assets and liabilities (for example, leverage ratios).
4. Critical accounting estimates and judgements in applying accounting policies
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
4.1 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 3.9. 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.
Any change in timing of estimated future cash flows (other than impairment) will adjust carrying value with gain or loss in profit or loss. The revised carrying amount will be recalculated by discounting the revised estimated future cash flows at the portfolios original effective interest rate.
In determining whether an impairment loss should be recorded in the Statement of Comprehensive Income, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans or held-to-maturity investments with similar credit characteristics, before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the Group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate.
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 5.1m (2014: 3.2m).
4.2 Goodwill impairment
The accounting policy for goodwill is described in note 3.14 (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 (2014: three) with goodwill attached; the core Arbuthnot Latham CGU (1.7m), the Music Finance CGU (0.3m) and the V12 Group CGU (0.7m; subsidiary of Secure Trust Bank).
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 (2014: 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 2018 as per the approved 3 year plan. A growth rate of 19% (2014: 10%) was used for income and 16% (2014: 10%) for expenditure from 2016 to 2018 (these rates were the best estimate of future forecasted performance), while a 3% (2014: 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 (2014: 5 years). Income and expenditure were kept flat (2014: 0%) over the 5 year period.
Cash flows were discounted at a pre-tax rate of 12% (2014: 12%) to their net present value. The discount rate of 12% is considered to be appropriate after evaluating current market assessments of the time value of money and the risks specific to the assets or CGUs. Currently the value in use and fair value less costs to sell far exceeds the carrying value and as such no sensitivity analysis was done.
At the time of the impairment testing, if the future expected cash flows decline and/or the cost of capital has increased, then the recoverable amount will reduce.
4.3 Taxation
The Group is subject to direct and indirect taxation in a number of jurisdictions. There may be some transactions and calculations for which the ultimate tax determination has an element of uncertainty during the ordinary course of business. The Group recognises liabilities based on estimates of the quantum of taxes that may be due. Deferred tax assets on carried forward losses are recognised where it is probable that future taxable profits will be available to utilise it. Where the final tax determination is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax expense in the year in which the determination is made.
4.4 Acquisition of loan book
Acquired loan books are initially recognised at fair value. Significant judgement is exercised in calculating their effective interest rate ("EIR") using cash flow models which include assumptions on the likely macroeconomic environment, including HPI, unemployment levels and interest rates, as well as loan level and portfolio attributes and history used to derive prepayment rates, the probability and timing of defaults and the amount of incurred losses.
4.5 Effective Interest Rate
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.
Uncertainties in the regulatory environment continue. Any tightening of capital requirements will impact on the ability of the Company to exploit future market opportunities and furthermore may inhibit its ability to maintain the required growth in distributions. Taking these into account, the probability of pay-out has been judged as 100% for the remaining share options (SOS2) which vest on 2 November 2016.
Although one participant in the Share Option Scheme left the Company during 2012 and was consequently withdrawn from the Scheme, the directors consider that there is no further uncertainty surrounding whether the remaining participants will all still be in situ and eligible at the vesting date. Therefore the directors have assumed no attrition rate for the remaining share options over the scheme period.
The valuation of the cash settled Share Option Scheme was determined at 31 December 2015 using Black-Scholes valuation models. In the opinion of the directors the terms of the scheme are such that there remains a number of key uncertainties to be considered when calculating the probability of pay-out, which are considered to be similar to those set out above.
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 PPI provisions
The Group provides for its best estimate of redress payable in respect of historical sales of PPI, by considering the likely future uphold rate for claims, in the context of confirmed issues and historical experience. The likelihood of potential new claims is projected forward to 2018, as management believe this to be an appropriate time horizon, recognising the significant decline in recent claims experience and the increasing subjectivity beyond that. The accuracy of these estimates would be affected, were there to be a significant change in either the number of future claims or, the incidence of claims upheld by the Financial Ombudsman. The amounts are included within accruals.
4.9 Valuation of financial instruments
The Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions. If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis. The objective of valuation techniques is to determine the fair value of the financial instrument at the reporting date as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In the instance that fair values of assets and liabilities cannot be reliably measured, they are carried at cost.
The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:
Level 1: Quoted prices in active markets for identical assets or liabilities
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e.
as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active
markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active;
or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.
Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs
not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category
includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable
adjustments or assumptions are required to reflect differences between the instruments.
The consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads, assist in the judgement as to whether a market is active. If in the opinion of management, a significant proportion of the instrument's carrying amount is driven by unobservable inputs, the instrument in its entirety is classified as valued using significant unobservable inputs. 'Unobservable' in this context means that there is little or no current market data available from which to determine the level at which an arm's length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).
Visa Europe Limited investment
Following the public announcement on 2 November 2015 of the proposed sale of Visa Europe Ltd ("Visa Europe") to Visa Inc., the fair value of the Company's equity interest in Visa Europe has been established by reference to the consideration being offered by Visa Inc. A gain has being recognised in other comprehensive income for the revised valuation.
The deal values Visa Europe at up to 21.2bn, payable as 11.5bn in cash and 5bn in Visa Inc. preferred stock, plus a potential future earn-out of up to 4.7bn. The valuation of the Company's investment includes a haircut on the preference share element to take account of contingent legal liabilities of Visa Europe and uncertainty over the transferability of these shares. No value has been attributed to the contingent earn-out due to uncertainty as its nature, valuation, and the Company's share.
Other level 3 financial investments
For other financial investments measured at fair value, the Group uses proprietary valuation models which are developed from recognised valuation techniques. Management judgement is usually required for the selection of the appropriate valuation model to be used. Some or all of the significant inputs into these models may not be observable in the market. Valuation models that employ significant unobservable inputs require a higher degree of management judgement and estimation in the determination of fair value.
The Group has established a valuation methodology for measuring level 3 financial investments which are categorised as available for sale. Unobservable inputs used include: yield (5.75%), annual rental value (265/m2) and occupancy rate (94.2%). Significant increases in the yield or decreases in annual rental value or occupancy rate would result in lower fair values. Management analyse and investigate any significant movements to the unobservable inputs which impact the valuation of level 3 instruments.
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 2015
000
000
000
000
ASSETS
Derivative financial instruments
-
1,490
-
1,490
Financial investments
137
-
2,548
2,685
Asset
137
1,490
2,548
4,175
LIABILITIES
Derivative financial instruments
-
135
-
135
Liability
-
135
-
135
Level 1
Level 2
Level 3
Total
At 31 December 2014
000
000
000
000
ASSETS
Derivative financial instruments
-
2,707
-
2,707
Financial investments
171
-
1,106
1,277
Asset
171
2,707
1,106
3,984
LIABILITIES
Derivative financial instruments
-
1,067
-
1,067
Liability
-
1,067
-
1,067
There were no transfers between level 1 and level 2 during the year.
The following table reconciles the movement in level 3 financial instruments measured at fair value (financial investments) during the year:
2015
2014
Movement in level 3
000
000
At 1 January
1,106
1,796
Disposals
(44)
(243)
Movements recognised in other comprehensive income
1,559
-
Movements recognised in the profit and loss
(73)
(447)
At 31 December
2,548
1,106
The tables below analyses financial instruments not measured at fair value by the level in the fair value hierarchy into which the measurement is categorised:
Level 1
Level 2
Level 3
Total
At 31 December 2015
000
000
000
000
ASSETS
Cash and balances at central banks
-
368,611
-
368,611
Loans and advances to banks
-
28,578
-
28,578
Debt securities held-to-maturity
-
87,728
-
87,728
Assets classified as held for sale
-
-
118,456
118,456
Loans and advances to customers
-
-
1,579,512
1,579,512
Other assets
-
-
2,625
2,625
Asset
-
484,917
1,700,593
2,185,510
LIABILITIES
Deposits from banks
-
55,305
-
55,305
Deposits from customers
-
-
1,929,838
1,929,838
Liabilities relating to assets classified as held for sale
-
-
8,700
8,700
Other liabilities
-
-
14,581
14,581
Debt securities in issue
-
-
10,834
10,834
Liability
-
55,305
1,963,953
2,019,258
Level 1
Level 2
Level 3
Total
At 31 December 2014
000
000
000
000
ASSETS
Cash and balances at central banks
-
115,938
-
115,938
Loans and advances to banks
-
31,844
-
31,844
Debt securities held-to-maturity
-
91,683
-
91,683
Loans and advances to customers
-
106,285
1,052,698
1,158,983
Other assets
-
-
5,522
5,522
Asset
-
345,750
1,058,220
1,403,970
LIABILITIES
Deposits from banks
-
27,657
-
27,657
Deposits from customers
-
-
1,194,285
1,194,285
Other liabilities
-
-
12,024
12,024
Debt securities in issue
-
-
11,448
11,448
Liability
-
27,657
1,217,757
1,245,414
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 2015:
Due within one year
Due after more than one year
Total
At 31 December 2015
000
000
000
ASSETS
Cash
368,611
-
368,611
Loans and advances to banks
28,578
-
28,578
Debt securities held-to-maturity
56,145
31,583
87,728
Assets classified as held for sale
118,456
-
118,456
Derivative financial instruments
59
1,431
1,490
Loans and advances to customers
691,315
888,197
1,579,512
Other assets
16,544
350
16,894
Financial investments
-
2,685
2,685
Deferred tax asset
-
1,784
1,784
Investment in associate
-
943
943
Intangible assets
-
10,874
10,874
Property, plant and equipment
-
14,004
14,004
Total assets
1,279,708
951,851
2,231,559
LIABILITIES
Deposits from banks
55,305
-
55,305
Derivative financial instruments
135
-
135
Deposits from customers
1,373,297
556,541
1,929,838
Liabilities classified as held for sale
8,700
-
8,700
Current tax liability
3,366
-
3,366
Other liabilities
28,319
3,658
31,977
Debt securities in issue
-
10,834
10,834
Total liabilities
1,469,122
571,033
2,040,155
The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2014:
Due within one year
Due after more than one year
Total
At 31 December 2014
000
000
000
ASSETS
Cash
115,938
-
115,938
Loans and advances to banks
31,844
-
31,844
Debt securities held-to-maturity
62,839
28,844
91,683
Derivative financial instruments
1,209
1,498
2,707
Loans and advances to customers
444,594
714,389
1,158,983
Other assets
16,516
350
16,866
Financial investments
-
1,277
1,277
Deferred tax asset
992
1,596
2,588
Investment in associate
-
943
943
Intangible assets
-
11,318
11,318
Property, plant and equipment
-
12,475
12,475
Total assets
673,932
772,690
1,446,622
LIABILITIES
Deposits from banks
27,657
-
27,657
Derivative financial instruments
1,067
-
1,067
Deposits from customers
911,579
282,706
1,194,285
Current tax liability
3,612
-
3,612
Other liabilities
30,679
4,305
34,984
Debt securities in issue
-
11,448
11,448
Total liabilities
974,594
298,459
1,273,053
The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2015:
Due within one year
Due after more than one year
Total
At 31 December 2015
000
000
000
ASSETS
Due from subsidiary undertakings - bank balances
12,444
-
12,444
Financial investments
-
125
125
Deferred tax asset
-
418
418
Property, plant and equipment
-
204
204
Other assets
641
350
991
Shares in subsidiary undertakings
-
46,466
46,466
Total assets
13,085
47,563
60,648
LIABILITIES
Other liabilities
4,235
-
4,235
Debt securities in issue
-
10,834
10,834
Total liabilities
4,235
10,834
15,069
The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2014:
Due within one year
Due after more than one year
Total
At 31 December 2014
000
000
000
ASSETS
Due from subsidiary undertakings - bank balances
19,244
-
19,244
Financial investments
-
158
158
Deferred tax asset
-
406
406
Intangible assets
-
4
4
Property, plant and equipment
-
127
127
Other assets
622
4,850
5,472
Shares in subsidiary undertakings
-
39,966
39,966
Total assets
19,866
45,511
65,377
LIABILITIES
Other liabilities
4,132
-
4,132
Debt securities in issue
-
11,448
11,448
Total liabilities
4,132
11,448
15,580
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:
2015
2014
000
000
Credit risk exposures relating to on-balance sheet assets are as follows:
Cash and balances at central banks
368,611
115,938
Loans and advances to banks
28,578
31,844
Debt securities held-to-maturity
87,728
91,683
Assets classified as held for sale
118,456
-
Derivative financial instruments
1,490
2,707
Loans and advances to customers - Arbuthnot Latham
618,902
536,488
Loan and advances to customers - Secure Trust Bank
960,610
622,495
Other assets
2,625
5,522
Financial investments
2,685
1,277
Credit risk exposures relating to off-balance sheet assets are as follows:
Guarantees
56
714
Loan commitments and other credit related liabilities
178,863
139,423
At 31 December
2,368,604
1,548,091
The Company's maximum exposure to credit risk before collateral held or other credit enhancements is as follows:
2015
2014
000
000
Credit risk exposures relating to on-balance sheet assets are as follows:
Due from subsidiary undertakings - bank balances
12,444
19,244
Financial investments
125
158
Other assets
891
5,365
Credit risk exposures relating to off-balance sheet assets are as follows:
At 31 December
13,460
24,767
The above tables represents the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2015 and 2014 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 2015
31 December 2014
Loan Balance
Collateral
Loan Balance
Collateral
Loan to value
000
000
000
000
Less than 60%
486,256
1,256,642
300,384
824,044
60% - 80%
340,781
507,852
179,527
269,673
80% - 100%
80,762
98,792
28,176
29,899
Greater than 100%
36,486
25,738
23,497
18,382
Total
944,285
1,889,024
531,584
1,141,998
The table below represents an analysis of the loan commitments compared to the values of the properties for the Group:
31 December 2015
31 December 2014
Committed
Collateral
Committed
Collateral
Loan commitments and other credit related liabilities
000
000
000
000
Less than 60%
74,576
171,108
71,575
172,804
60% - 80%
56,702
81,765
57,223
79,899
80% - 100%
2,278
2,848
-
-
Total
133,556
255,721
128,798
252,703
Renegotiated loans and forbearance
The contractual terms of a loan may be modified due to factors that are not related to the current or potential credit deterioration of the customer (changing market conditions, customer retention, etc.). In such cases, the modified loan may be derecognised and the renegotiated loan recognised as a new loan at fair value.
No forbearance measures were undertaken for Arbuthnot Latham & Co., Ltd in 2014. As at 31 December 2015, loans for which forbearance measures were undertaken totalled 0.14% of total loans to customers for the Bank. Six loans with a total balance of 764,000 were transferred to interest only, while historic arrears on one loan of 147,000, were moved to capital.
Secure Trust Bank ("STB") does not reschedule contractual arrangements where customers default on their repayments. Under its Treating Customers Fairly ("TCF") policies, however, STB 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.
The policy on forbearance for Everyday Loans is that a customer's account may be modified to assist customers who are in or, have recently overcome, financial difficulties and have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. These may be modified by way of a reschedule or deferment of repayments. Rescheduling of debts retains the customers' contractual due dates, whilst the deferment of repayments extends the payment schedule up to a maximum of four payments in a twelve month period. As at 31 December 2015 the gross balance of rescheduled loans included in the Consolidated Statement of Financial Position was 14.9m, with an allowance for impairment on these loans of 1.0m. The gross balance of deferred loans was 3.4m with an allowance for impairment on these of 0.6m. (31 December 2014: the gross balance of rescheduled loans was 14.7m, with an allowance for impairment of 1.0m. The gross balance of deferred loans was 3.0m with an allowance for impairment of 0.4m).
Concentration risk
The Group is well diversified in the UK, being exposed to retail banking and private banking. Management assesses the potential concentration risk from a number of areas including:
product concentration
geographical concentration; and
high value residential properties
Due to the well diversified nature of the Group and the significant collateral held against the loan book, the Directors do not consider there to be a potential material exposure arising from concentration risk. The table below show the concentration in the loan book.
Loans and advances to customers
Loan Commitments
2015
2014
2015
2014
000
000
000
000
Concentration by product
Cash collateralised
15,987
19,934
-
-
Commercial Lending
Real estate finance
367,999
133,738
109,033
95,790
Asset finance
70,685
4,541
20,081
-
Commercial finance
52,222
25,875
9,277
-
Residential mortgages
521,256
451,645
40,230
43,428
Non-Performing
9,839
11,940
-
-
Other Collateral
55,211
32,587
-
-
Unsecured
Personal lending
79,706
192,638
-
-
Motor
165,697
137,853
242
205
Retail
220,418
116,734
-
-
Other
20,492
31,498
-
-
At 31 December
1,579,512
1,158,983
178,863
139,423
Concentration by location
East Anglia
99,340
44,359
28,091
7,195
East Midlands
49,222
44,869
1,088
-
London
600,254
463,333
79,523
64,329
Midlands
7,811
13,208
-
-
North East
29,239
39,292
564
17,638
North West
90,496
76,349
4,863
-
Northern Ireland
8,301
8,622
-
-
Scotland
74,635
53,177
2,000
-
South East
245,647
174,912
40,738
17,845
South West
87,429
58,627
6,204
10,825
Wales
42,436
32,799
1,427
-
West Midlands
69,162
44,146
4,787
1,262
Yorkshire & Humber
59,210
38,176
3,033
-
Overseas
74,627
28,849
5,667
-
Other
41,703
38,265
878
20,329
At 31 December
1,579,512
1,158,983
178,863
139,423
For unsecured lending, concentration by location is based on the customer's country of domicile and for lending secured by property it is based on the location of the collateral.
(b) Operational risk (unaudited)
The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and to avoid control procedures that restrict initiatives and creativity. Operational risk arises from all of the Group's operations.
The primary responsibility for the development and implementation of controls to address operational risk is assigned to the senior management within each subsidiary.
Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of the Internal Audit reviews are discussed with senior management, with summaries submitted to the Arbuthnot Banking Group Audit Committee.
(c) Market risk
Price risk
The Company and Group is exposed to equity securities price risk because of investments held by the Group and classified in the Consolidated Statement of Financial Position either as available-for-sale or at fair value through the profit and loss. The Group is not exposed to commodity price risk. To manage its price risk arising from investments in equity securities, the Group diversifies its portfolio. Diversification of the portfolio is done in accordance with the limits set by the Group.
Based upon the financial investment exposure in Note 23, a stress test scenario of a 10% (2014: 10%) decline in market prices, with all other things being equal, would result in a 11,000 (2014: 127,000) decrease in the Group's income and a decrease of 215,000 (2014: 103,000) 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 23, a stress test scenario of a 10% (2014: 10%) decline in market prices, with all other things being equal, would result in a 11,000 (2014: 15,000) decrease in the Company's income and a decrease of 10,000 (2014: 13,000) in the Company's equity.
Currency risk
The Company and Group take on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure for both overnight and intra-day positions, which are monitored daily. The table below summarises the Group's exposure to foreign currency exchange rate risk at 31 December 2015. Included in the table below are the Group's assets and liabilities at carrying amounts, categorised by currency.
GBP ()
USD ($)
Euro ()
Other
Total
At 31 December 2015
000
000
000
000
000
ASSETS
Cash and balances at central banks
365,165
3,405
35
6
368,611
Loans and advances to banks
10,045
14,527
1,925
2,081
28,578
Debt securities held-to-maturity
80,952
6,776
-
-
87,728
Assets classified as held for sale
118,456
-
-
-
118,456
Derivative financial instruments
1,490
-
-
-
1,490
Loans and advances to customers
1,522,893
17,231
39,344
44
1,579,512
Other assets
2,625
-
-
-
2,625
Financial investments
172
-
2,513
-
2,685
2,101,798
41,939
43,817
2,131
2,189,685
LIABILITIES
Deposits from banks
54,963
-
342
-
55,305
Derivative financial instruments
135
-
-
-
135
Deposits from customers
1,865,078
39,220
23,255
2,285
1,929,838
Liabilities relating to assets classified as held for sale
8,700
-
-
-
8,700
Other liabilities
14,581
-
-
-
14,581
Debt securities in issue
-
-
10,834
-
10,834
1,943,457
39,220
34,431
2,285
2,019,393
Net on-balance sheet position
158,341
2,719
9,386
(154)
170,292
Credit commitments
178,919
-
-
-
178,919
The table below summarises the Group's exposure to foreign currency exchange risk at 31 December 2014:
GBP ()
USD ($)
Euro ()
Other
Total
At 31 December 2014
000
000
000
000
000
ASSETS
Cash and balances at central banks
115,891
17
28
2
115,938
Loans and advances to banks
22,381
5,428
3,099
936
31,844
Debt securities held-to-maturity
76,124
15,559
-
-
91,683
Derivative financial instruments
2,707
-
-
-
2,707
Loans and advances to customers
1,107,440
8,437
43,106
-
1,158,983
Other assets
5,522
-
-
-
5,522
Financial investments
158
-
1,119
-
1,277
1,330,223
29,441
47,352
938
1,407,954
LIABILITIES
Deposits from banks
27,489
168
-
-
27,657
Derivative financial instruments
1,067
-
-
-
1,067
Deposits from customers
1,147,299
28,081
18,146
759
1,194,285
Other liabilities
12,024
-
-
-
12,024
Debt securities in issue
-
-
11,448
-
11,448
1,187,879
28,249
29,594
759
1,246,481
Net on-balance sheet position
142,344
1,192
17,758
179
161,473
Credit commitments
140,137
-
-
-
140,137
A 10% strengthening of the pound against the US dollar would lead to a 3,000 decrease (2014: 1,000 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 52,000 (2014: 6,000 increase) in Group profits and equity, while a 10% weakening of the pound against the Euro would lead to the same increase in Group profits and equity. The above results are after taking into account the effect of derivative financial instruments (see note 19), 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 2015:
GBP ()
Euro ()
Total
At 31 December 2015
000
000
000
ASSETS
Due from subsidiary undertakings - bank balances
1,087
11,357
12,444
Financial investments
125
-
125
Other assets
789
-
789
2,001
11,357
13,358
LIABILITIES
Other liabilities
3,068
-
3,068
Debt securities in issue
-
10,834
10,834
3,068
10,834
13,902
Net on-balance sheet position
(1,067)
523
(544)
The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2014:
GBP ()
Euro ()
Total
At 31 December 2014
000
000
000
ASSETS
Due from subsidiary undertakings - bank balances
7,276
11,968
19,244
Financial investments
158
-
158
Other assets
5,365
-
5,365
12,799
11,968
24,767
LIABILITIES
Other liabilities
3,028
-
3,028
Debt securities in issue
-
11,448
11,448
3,028
11,448
14,476
Net on-balance sheet position
9,771
520
10,291
A 10% strengthening of the pound against the Euro would lead to 52,000 (2014: 28,000) 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 0.4m to 1.8m (2014: 0.3m to 1.1m) for the Group, with the same impact to equity pre-tax. The Company has no fixed rate exposures, but a upward change of 50 basis points on variable rates would increase pre-tax profits and equity by 7,000 (2014: increase pre-tax profits and equity by 60,000).
The following tables summarise the re-pricing periods for the assets and liabilities in the Company and Group, including derivative financial instruments which are principally used to reduce exposure to interest rate risk. Items are allocated to time bands by reference to the earlier of the next contractual interest rate re-price and the maturity date.
Group
Within 3 months
More than 3 months but less than 6 months
More than 6 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
Non interest bearing
Total
As at 31 December 2015
000
000
000
000
000
000
000
ASSETS
Cash and balances at central banks
368,611
-
-
-
-
-
368,611
Loans and advances to banks
28,578
-
-
-
-
-
28,578
Assets classified as held for sale
-
-
-
-
-
118,456
118,456
Debt securities held-to-maturity
54,472
14,481
18,775
-
-
-
87,728
Derivative financial instruments
-
-
-
-
1,490
-
1,490
Loans and advances to customers
637,301
267,464
176,227
534,201
15
(35,696)
1,579,512
Other assets
-
-
-
-
-
44,499
44,499
Financial investments
-
-
-
-
-
2,685
2,685
Total assets
1,088,962
281,945
195,002
534,201
1,505
129,944
2,231,559
LIABILITIES
Deposits from banks
387
35,000
19,918
-
-
-
55,305
Derivative financial instruments
135
-
-
-
-
-
135
Deposits from customers
675,327
534,562
184,758
497,416
37,775
-
1,929,838
Liabilities classified as held for sale
-
-
-
-
-
8,700
8,700
Other liabilities
-
-
-
-
-
35,343
35,343
Debt securities in issue
10,834
-
-
-
-
-
10,834
Equity
-
-
-
-
-
191,404
191,404
Total liabilities
686,683
569,562
204,676
497,416
37,775
235,447
2,231,559
Impact of derivative instruments
3,800
-
-
(3,800)
-
-
Interest rate sensitivity gap
406,079
(287,617)
(9,674)
32,985
(36,270)
(105,503)
Cumulative gap
406,079
118,462
108,788
141,773
105,503
-
Group
Within 3 months
More than 3 months but less than 6 months
More than 6 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
Non interest bearing
Total
As at 31 December 2014
000
000
000
000
000
000
000
ASSETS
Cash and balances at central banks
115,938
-
-
-
-
-
115,938
Loans and advances to banks
31,844
-
-
-
-
-
31,844
Debt securities held-to-maturity
86,462
-
-
5,221
-
-
91,683
Derivative financial instruments
1,209
-
-
-
1,498
-
2,707
Loans and advances to customers
615,599
74,042
116,012
383,698
200
(30,568)
1,158,983
Other assets
-
-
-
-
-
44,190
44,190
Financial investments
-
-
-
-
-
1,277
1,277
Total assets
851,052
74,042
116,012
388,919
1,698
14,899
1,446,622
LIABILITIES
Deposits from banks
27,657
-
-
-
-
-
27,657
Derivative financial instruments
1,067
-
-
-
-
-
1,067
Deposits from customers
615,005
119,973
138,515
253,360
29,670
37,762
1,194,285
Other liabilities
-
-
-
-
-
38,596
38,596
Debt securities in issue
11,448
-
-
-
-
-
11,448
Equity
-
-
-
-
-
173,569
173,569
Total liabilities
655,177
119,973
138,515
253,360
29,670
249,927
1,446,622
Impact of derivative instruments
(16,200)
20,000
-
(3,800)
-
-
Interest rate sensitivity gap
179,675
(25,931)
(22,503)
131,759
(27,972)
(235,028)
Cumulative gap
179,675
153,744
131,241
263,000
235,028
-
Company
Within 3 months
More than 3 months but less than 6 months
More than 6 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
Non interest bearing
Total
As at 31 December 2015
000
000
000
000
000
000
000
ASSETS
Due from subsidiary undertakings - bank balances
12,444
-
-
-
-
159
12,603
Other assets
-
-
-
-
-
47,920
47,920
Financial investments
-
-
-
-
-
125
125
Total assets
12,444
-
-
-
-
48,204
60,648
LIABILITIES
Other liabilities
-
-
-
-
-
4,235
4,235
Debt securities in issue
10,834
-
-
-
-
-
10,834
Equity
-
-
-
-
-
45,579
45,579
Total liabilities
10,834
-
-
-
-
49,814
60,648
Interest rate sensitivity gap
1,610
-
-
-
-
(1,610)
Cumulative gap
1,610
1,610
1,610
1,610
1,610
-
Company
Within 3 months
More than 3 months but less than 6 months
More than 6 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
Non interest bearing
Total
As at 31 December 2014
000
000
000
000
000
000
000
ASSETS
Due from subsidiary undertakings - bank balances
19,244
-
-
-
-
-
19,244
Other assets
-
-
-
-
-
45,975
45,975
Financial investments
-
-
-
-
-
158
158
Total assets
19,244
-
-
-
-
46,133
65,377
LIABILITIES
Other liabilities
-
-
-
-
-
4,132
4,132
Debt securities in issue
11,448
-
-
-
-
-
11,448
Equity
-
-
-
-
-
49,797
49,797
Total liabilities
11,448
-
-
-
-
53,929
65,377
Interest rate sensitivity gap
7,796
-
-
-
-
(7,796)
Cumulative gap
7,796
7,796
7,796
7,796
7,796
-
(d) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.
The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The liquidity requirements of the Group are met through withdrawing funds from its Bank of England Reserve Account to cover any short-term fluctuations and, longer term funding to address any structural liquidity requirements.
The Group has formal governance structures in place to manage and mitigate liquidity risk on a day to day basis. The Board of each bank sets and approves the liquidity risk management strategy for each subsidiary. The Assets and Liabilities Committees ("ALCO"), comprising senior executives of each Company, monitors liquidity risk. Key liquidity risk management information is reported by the finance teams and monitored by the Chief Executive Officer and Chief Financial Officer on a daily basis. The ALCO meets monthly to review liquidity risk against set thresholds and risk indicators including early warning indicators, liquidity risk tolerance levels and Individual Liquidity Adequacy Assessment Process ("ILAAP") metrics.
The PRA requires a firm to maintain at all times liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due. There is also a requirement that a firm ensures its liquidity resources contain an adequate buffer of high quality, unencumbered assets (i.e. Government Securities in the liquidity asset buffer); and it maintains a prudent funding profile. The liquidity assets buffer is a pool of highly liquid assets that can be called upon to create sufficient liquidity to meet liabilities on demand, particularly in a period of liquidity stress. The liquidity resources outside the buffer must either be marketable assets with a demonstrable secondary market that the firm can access, or a credit facility that can be activated in times of stress.
Arbuthnot Latham & Co., Limited ("AL") and Secure Trust Bank PLC ("STB") have Board approved ILAAPs. The liquidity buffer required by the ILAAP has been put in place and maintained since that time. Liquidity resources outside of the buffer are made up of deposits placed at the Bank of England. The ILAAP is updated annually.
The Liquidity Coverage Ratio ("LCR") regime has applied to the Group from 1 October 2015, requiring management of net 30 day cash outflows as a proportion of high quality liquid assets. The actual LCR has significantly exceeded the regulatory minimum throughout the year.
The Group is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan draw-downs. The Group maintains significant cash resources to meet all of these needs as they fall due. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain term and of different types.
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates.
The tables below show the undiscounted contractual maturity analysis of the Group's financial liabilities and assets as at 31 December 2015:
Carrying amount
Gross nominal inflow/ (outflow)
Not more than 3 months
More than 3 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
At 31 December 2015
000
000
000
000
000
000
Financial liability by type
Non-derivative liabilities
Deposits from banks
55,305
(55,305)
(35,387)
(19,918)
-
-
Deposits from customers
1,929,838
(2,059,721)
(1,099,222)
(376,705)
(540,890)
(42,904)
Other liabilities
14,581
(14,581)
(12,992)
(125)
-
(1,464)
Debt securities in issue
10,834
(12,442)
(80)
(241)
(1,287)
(10,834)
Liabilities relating to assets classified as held for sale
8,700
(8,700)
(8,700)
-
-
-
Issued financial guarantee contracts
-
(56)
(56)
-
-
-
Unrecognised loan commitments
-
(178,863)
(178,863)
-
-
-
2,019,258
(2,329,668)
(1,335,300)
(396,989)
(542,177)
(55,202)
Derivative liabilities
Risk management:
135
-
-
-
-
-
- Outflows
-
(135)
(135)
-
-
-
135
(135)
(135)
-
-
-
Carrying amount
Gross nominal inflow/ (outflow)
Not more than 3 months
More than 3 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
At 31 December 2015
000
000
000
000
000
000
Financial asset by type
Non-derivative assets
Cash and balances at central banks
368,611
368,611
368,611
-
-
-
Loans and advances to banks
28,578
28,578
28,578
-
-
-
Debt securities held-to-maturity
87,728
88,887
29,333
27,302
32,252
-
Assets classified as held for sale
118,456
(118,456)
(118,456)
-
-
-
Loans and advances to customers
1,579,512
1,913,124
245,450
506,808
1,093,755
67,111
Other assets
2,625
2,625
2,625
-
-
-
Financial investments
2,685
2,685
2,561
-
124
-
2,188,195
2,286,054
558,702
534,110
1,126,131
67,111
Derivative assets
- Inflows
1,490
1,490
59
-
-
1,431
1,490
1,490
59
-
-
1,431
The tables below show the undiscounted contractual maturity analysis of the Group's financial liabilities and assets as at 31 December 2014:
Carrying amount
Gross nominal inflow/ (outflow)
Not more than 3 months
More than 3 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
At 31 December 2014
000
000
000
000
000
000
Financial liability by type
Non-derivative liabilities
Deposits from banks
27,657
(27,657)
(12,627)
(15,030)
-
-
Deposits from customers
1,194,285
(1,227,753)
(510,423)
(382,230)
(299,841)
(35,259)
Other liabilities
12,024
(18,674)
(17,084)
(125)
-
(1,465)
Debt securities in issue
11,448
(13,248)
(90)
(270)
(1,440)
(11,448)
Issued financial guarantee contracts
-
(714)
(714)
-
-
-
Unrecognised loan commitments
-
(139,423)
(139,423)
-
-
-
1,245,414
(1,427,469)
(680,361)
(397,655)
(301,281)
(48,172)
Derivative liabilities
Risk management:
1,067
-
-
-
-
-
- Outflows
-
(1,067)
(1,067)
-
-
-
1,067
(1,067)
(1,067)
-
-
-
Carrying amount
Gross nominal inflow/ (outflow)
Not more than 3 months
More than 3 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
At 31 December 2014
000
000
000
000
000
000
Financial asset by type
Non-derivative assets
Cash and balances at central banks
115,938
115,938
115,938
-
-
-
Loans and advances to banks
31,844
31,843
31,843
-
-
-
Debt securities held-to-maturity
91,683
92,511
50,832
12,359
29,320
-
Loans and advances to customers
1,158,983
1,353,592
205,066
319,221
800,860
28,445
Other assets
5,522
5,522
5,522
-
-
-
Financial investments
1,277
1,277
-
1,119
158
-
1,405,247
1,600,683
409,201
332,699
830,338
28,445
Derivative assets
Risk management:
2,707
-
-
-
-
-
- Inflows
-
2,707
1,209
-
-
1,498
2,707
2,707
1,209
-
-
1,498
The table below sets out the components of the Group's liquidity reserves:
31 December 2015
31 December 2014
Amount
Fair value
Amount
Fair value
Liquidity reserves
000
000
000
000
Cash and balances at central banks
368,611
368,611
115,938
115,938
Loans and advances to banks
28,578
28,578
31,844
31,844
Debt securities held-to-maturity
87,728
87,594
91,683
91,683
Undrawn credit lines
38,500
38,500
38,500
38,500
523,417
523,283
277,965
277,965
Assets pledged as collateral or encumbered
The total financial assets recognised in the statement of financial position that had been pledged as collateral for liabilities at 31 December 2015 was 226.2m (2014: 159.3m).
Financial assets are pledged as collateral as part of sales and repurchases, securities borrowing and securitisation transactions under terms that are usual and customary for such activities. In addition, as part of these transactions, the Group has received collateral that is permitted to sell or repledge in the absence of default.
The table below analyses the contractual maturity analysis of the Company's financial liabilities and assets as at 31 December 2015:
Carrying amount
Gross nominal inflow/ (outflow)
Not more than 3 months
More than 3 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
At 31 December 2015
000
000
000
000
000
000
Financial liability by type
Non-derivative liabilities
Other liabilities
3,068
(3,068)
(1,479)
(125)
-
(1,464)
Debt securities in issue
10,834
(12,442)
(80)
(241)
(1,287)
(10,834)
13,902
(15,510)
(1,559)
(366)
(1,287)
(12,298)
Carrying amount
Gross nominal inflow/ (outflow)
Not more than 3 months
More than 3 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
At 31 December 2015
000
000
000
000
000
000
Financial asset by type
Non-derivative assets
Due from subsidiary undertakings - bank balances
12,444
12,444
11,965
-
-
479
Financial investments
125
125
-
-
125
-
Other assets
891
891
891
-
-
-
12,569
12,569
11,965
-
125
479
The table below analyses the contractual maturity analysis of the Company's financial liabilities and assets as at 31 December 2014:
Carrying amount
Gross nominal inflow/ (outflow)
Not more than 3 months
More than 3 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
At 31 December 2014
000
000
000
000
000
000
Financial liability by type
Non-derivative liabilities
Other liabilities
3,028
(3,028)
(1,438)
(125)
-
(1,465)
Debt securities in issue
11,448
(13,248)
(90)
(270)
(1,440)
(11,448)
14,476
(16,276)
(1,528)
(395)
(1,440)
(12,913)
Carrying amount
Gross nominal inflow/ (outflow)
Not more than 3 months
More than 3 months but less than 1 year
More than 1 year but less than 5 years
More than 5 years
At 31 December 2014
000
000
000
000
000
000
Financial asset by type
Non-derivative assets
Due from subsidiary undertakings - bank balances
19,244
19,244
3,776
15,000
-
468
Financial investments
158
158
-
-
158
-
Other assets
5,365
5,365
5,365
-
-
-
24,767
24,767
9,141
15,000
158
468
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 739m (2014: 666m). 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 2015
000
000
000
000
000
000
000
ASSETS
Cash and balances at central banks
-
-
368,611
-
-
368,611
368,611
Loans and advances to banks
-
-
28,578
-
-
28,578
28,578
Debt securities held-to-maturity
-
87,728
-
-
-
87,728
87,594
Assets classified as held for sale
-
-
-
118,456
-
118,456
118,456
Derivative financial instruments
1,490
-
-
-
-
1,490
1,490
Loans and advances to customers
-
-
1,579,512
-
-
1,579,512
1,570,932
Other assets
-
-
2,625
-
-
2,625
2,625
Financial investments
-
-
-
2,685
-
2,685
2,685
1,490
87,728
1,979,326
121,141
-
2,189,685
2,180,971
LIABILITIES
Deposits from banks
-
-
-
-
55,305
55,305
55,305
Derivative financial instruments
135
-
-
-
-
135
135
Deposits from customers
-
-
-
-
1,929,838
1,929,838
1,929,838
Liabilities relating to assets classified as held for sale
-
-
-
8,700
-
8,700
8,700
Other liabilities
-
-
14,581
-
-
14,581
14,581
Debt securities in issue
-
-
-
-
10,834
10,834
10,834
135
-
14,581
8,700
1,995,977
2,019,393
2,019,393
Fair value through profit or loss
Held-to-maturity
Loans and receivables
Available-for-sale
Other amortised cost
Total carrying amount
Fair value
At 31 December 2014
000
000
000
000
000
000
000
ASSETS
Cash and balances at central banks
-
-
115,938
-
-
115,938
115,938
Loans and advances to banks
-
-
31,844
-
-
31,844
31,844
Debt securities held-to-maturity
-
91,683
-
-
-
91,683
91,683
Derivative financial instruments
2,707
-
-
-
-
2,707
2,707
Loans and advances to customers
-
-
1,158,983
-
-
1,158,983
1,162,554
Other assets
-
-
5,522
-
-
5,522
5,522
Financial investments
171
-
-
1,106
-
1,277
1,277
2,878
91,683
1,312,287
1,106
-
1,407,954
1,411,525
LIABILITIES
Deposits from banks
-
-
-
-
27,657
27,657
27,657
Derivative financial instruments
1,067
-
-
-
-
1,067
1,067
Deposits from customers
-
-
-
-
1,194,285
1,194,285
1,203,613
Other liabilities
-
-
12,024
-
-
12,024
12,024
Debt securities in issue
-
-
-
-
11,448
11,448
11,448
1,067
-
12,024
-
1,233,390
1,246,481
1,255,809
7. Capital management
The Group's capital management policy is focused on optimising shareholder value. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.
The Group's lead regulator, the Prudential Regulatory Authority ('PRA'), sets and monitors capital requirements for the Group as a whole and for the individual banking operations. The lead regulator adopted the Basel III capital requirements with effect from 1 January 2014. As a result, the Group's regulatory capital requirements were based on Basel III in 2014.
In accordance with the EU's Capital Requirements Directive (CRD) and the required parameters set out in the Prudential Regulation Authority ('PRA') Handbook (BIPRU 2.2), the Individual Capital Adequacy Assessment Process (ICAAP) is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. The Group's regulated entities are also the principal trading subsidiaries as detailed in Note 39.
Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar 1 plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar 1 capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations delivers a sufficient capital sum adequately to cover management's anticipated risks. Where the Board considered that the Pillar 1 calculations did not reflect the risk, an additional capital add-on in Pillar 2 is applied, as per the Individual Capital Guidance (ICG) issued by the PRA.
The Group's regulatory capital is divided into two tiers:
Tier 1 comprises mainly shareholders' funds, non-controlling interests and revaluation reserves, after deducting goodwill and
other intangible assets.
Lower Tier 2 comprises qualifying subordinated loan capital and collective provisions. Lower Tier 2 capital cannot exceed 50%
of Tier 1 capital.
The following table shows the regulatory capital resources as managed by the Group:
2015
2014
000
000
Tier 1
Share capital
153
153
Retained earnings
123,330
114,641
Other reserves
(1,111)
(1,111)
Non-controlling interests
67,887
60,038
Deduction for non-controlling interests
(23,047)
(28,835)
Goodwill
(2,695)
(2,695)
Deductions for other intangibles
(8,179)
(8,623)
Revaluation reserve
1,145
(152)
Total tier 1 capital resources
157,483
133,416
Tier 2
Collective provisions
2,031
2,031
Debt securities in issue
10,834
11,448
Total tier 2 capital resources
12,865
13,479
Total tier 1 & tier 2 capital resources
170,348
146,895
The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. The PRA sets ICG for each UK bank calibrated by reference to its Capital Resources Requirement, broadly equivalent to 8 percent of risk weighted assets and thus representing the capital required under Pillar 1 of the Basel III framework. The ICAAP is a key input into the PRA's ICG setting process, which addresses the requirements of Pillar 2 of the Basel III framework. The PRA's approach is to monitor the available capital resources in relation to the ICG requirement. Each entity maintains an extra internal buffer and capital ratios are reviewed on a monthly basis to ensure that external requirements are adhered to. All regulated entities have complied with all of the externally imposed capital requirements to which they are subject.
Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). Its aim is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm's capital, risk exposures and risk assessment processes. Our Pillar 3 disclosures for the year ended 31 December 2015 are published as a separate document on the Group website under Investor Relations (Announcements & Shareholder Info).
8. Interest income
Re-presented*
2015
2014
000
000
Cash and balances at central banks
1,351
1,026
Loans and advances to banks
240
52
Debt securities held-to-maturity
567
530
Loans and advances to customers
130,874
85,790
133,032
87,398
* Prior year numbers have been re-presented to exclude discontinuing operations (see note 11).
9. Fee and commission income
Re-presented*
2015
2014
000
000
Banking commissions
1,666
5,014
Trust and other fiduciary fee income
5,946
5,210
Financial Planning fees and commissions
1,969
1,557
Structured product commissions
-
1,218
Other fee income**
17,285
12,842
26,866
25,841
* Prior year numbers have been re-presented to exclude discontinuing operations (see note 11).
** This mainly includes fee and commission income received on OneBill, insurance sales and commission earned on debt recovery activities at Secure Trust Bank.
10. Net impairment loss on financial assets
Re-presented*
2015
2014
000
000
Net Impairment losses on loans and advances to customers
18,032
11,606
Impairment losses on financial investments
34
347
18,066
11,953
* Prior year numbers have been re-presented to exclude discontinuing operations (see note 11).
11. Discontinued operations
On 4 December 2015 Secure Trust Bank agreed to the conditional sale of its non-standard consumer lending business, Everyday Loans Group (ELG), which comprises Everyday Loans Holdings Limited and subsidiary companies Everyday Lending Limited and Everyday Loans Limited, to Non Standard Finance PLC (NSF) for 107 million in cash subject to a net asset adjustment and 20 million in NSF ordinary shares. The Disposal is conditional on NSF shareholder approval of its equity fundraising, admission of the new NSF shares to the main market of the London Stock Exchange, regulatory approval and satisfaction of the conditions to the NSF financing. Completion is expected by 30 April 2016. On completion, NSF will repay the current intercompany debt of 108 million to STB.
Year ended 31 December
Year ended 31 December
2015
2014
Note
000
000
Interest income
39,230
30,226
Net interest income
39,230
30,226
Fee and commission income
1,523
4,122
Fee and commission expense
(358)
(111)
Net fee and commission income
1,165
4,011
Operating income
40,395
34,237
Impairment of LTIP loans, illiquid stocks and outstanding receivable
(7,537)
(6,638)
Operating expenses
(21,195)
(19,016)
Profit before tax
11,663
8,583
Tax expense
(2,271)
(2,054)
Profit after tax
9,392
6,529
Profit attributable to:
Equity holders of the Company
4,876
3,390
Non-controlling interests
4,516
3,139
Profit after tax
9,392
6,529
Earnings per share for profit attributable to the equity holders of the Company from discontinued operations during the year
(expressed in pence per share):
- basic
15
33.1
26.1
- diluted
15
32.1
24.5
Assets classified as held for sale
2015
000
Loans and advances to banks
1,661
Loans and advances to customers
114,266
Other assets
509
Intangible assets
1,182
Property, plant and equipment
448
Deferred tax asset
390
118,456
Liabilities relating to assets classified as held for sale
2015
000
Current tax liability
3,383
Other liabilities
5,317
8,700
Cash flow from discontinued operations
Year ended 31 December
Year ended 31 December
2015
2014
Note
000
000
Cash flows from operating activities
Interest received
40,595
33,727
Fees and commissions received
1,165
4,511
Cash payments to employees and suppliers
(21,197)
(18,313)
Taxation (paid)/received
(130)
-
Cash flows from operating profits before changes in operating assets and liabilities
20,433
19,925
Changes in operating assets and liabilities:
- net increase in loans and advances to customers
(27,788)
(22,070)
- net decrease in other assets
654
60
- net increase in other liabilities
7,027
3,010
Net cash inflow from operating activities
326
925
Cash flows from investing activities
Purchase of computer software
26
(33)
(43)
Purchase of property, plant and equipment
27
(253)
(80)
Net cash from investing activities
(286)
(123)
Cash flows from financing activities
Increase in borrowings
Dividends paid
Net increase in cash and cash equivalents
40
802
Cash and cash equivalents at 1 January
1,621
819
Cash and cash equivalents at 31 December
37
1,661
1,621
12. Operating expenses
Re-presented*
2015
2014
Operating expenses comprise:
000
000
Staff costs, including Directors:
Wages and salaries
43,094
31,748
Social security costs
4,195
3,120
Pension costs
1,663
1,269
Share based payment transactions (note 35)
1,889
1,583
Amortisation of intangibles (note 26)
1,824
1,688
Depreciation (note 27)
1,323
685
Financial Services Compensation Scheme Levy
160
-
Operating lease rentals
3,167
4,254
Acquisitions costs
422
198
Other administrative expenses
28,322
21,620
Total operating expenses from continuing operations
86,059
66,165
* Prior year numbers have been re-presented to exclude discontinuing operations (see note 11).
Details on Directors remuneration is disclosed in the Remuneration Report on page 23.
2015
2014
Remuneration of the auditor and its associates, excluding VAT, was as follows:
000
000
Fees payable to the Company's auditor for the audit of the Company's annual accounts
95
95
Fees payable to the Company's auditor and its associates for other services:
Audit of the accounts of subsidiaries
399
329
Audit related assurance services
82
65
Taxation compliance services
114
82
Taxation advisory services
48
61
Other assurance services
87
321
Corporate finance services
-
115
Other non-audit services
59
13
Total fees payable
884
1,081
Other assurance services include regulatory assessments. Corporate finance services include due diligence work on a potential corporate transaction.
13. Average number of employees
2015
2014
Retail banking
706
608
Private banking
210
175
Group
21
17
937
800
14. Income tax expense
2015
2014
United Kingdom corporation tax at 20.25% (2014: 21.5%)
000
000
Current taxation
Corporation tax charge - current year
5,492
3,318
Corporation tax charge - adjustments in respect of prior years
648
43
6,140
3,361
Deferred taxation
Origination and reversal of temporary differences
(627)
366
Adjustments in respect of prior years
(77)
(283)
(704)
83
Income tax expense
5,436
3,444
Tax reconciliation
Profit before tax
22,568
13,931
Tax at 20.25% (2014: 21.5%)
4,570
2,995
Permanent differences
288
630
Tax rate change
8
59
Prior period adjustments
570
(240)
Corporation tax charge for the year
5,436
3,444
A tax charge of 0.3m was recognised in other comprehensive income during the year (2014: nil) in respect of available for sale financial investments.
Prior year adjustments mainly relate to the reallocation of costs between continuing and discontinuing operations.
The tax charge on discontinuing operations is disclosed in note 11.
The UK corporation tax rate reduced from 23% to 21% with effect from 1 April 2014 and to 20% with effect from 1 April 2015. On 26 October 2015 the Government substantively enacted a further reduction to the UK corporation tax rate to 19% from 1 April 2017 and to 18% from 1 April 2020. In addition, the Chancellor announced the introduction of a corporation tax surcharge applicable to banking companies with effect from 1 January 2016. The surcharge will be levied at a rate of 8% on the profits of banking companies, after taking into account an annual allowance of 25m. This will increase the Group's future current tax charge accordingly.
15. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the profit after tax attributable to equity holders of the Company by the weighted average number of ordinary shares 14,738,548 (2014: 14,738,548) in issue during the year. The weighted average number of ordinary shares has been restated for 2014 from 15,279,322, after taking into account treasury shares (390,274) and shares held in an ESOP trust (150,500).
Diluted
Diluted earnings per ordinary share are calculated by dividing the dilutive profit after tax attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, as well as the number of dilutive share options in issue during the year. The number of dilutive share options in issue at the year end was 200,000 (2014: 187,500).
2015
2014
Profit attributable
000
000
Total profit after tax attributable to equity holders of the Company
12,726
8,634
Profit after tax from continuing operations attributable to equity holders of the Company
7,850
4,780
Profit after tax from discontinuing operations attributable to equity holders of the Company
4,876
3,854
2015
2014
Dilutive profit attributable
000
000
Total profit after tax attributable to equity holders of the Company
12,448
7,884
Profit after tax from continuing operations attributable to equity holders of the Company
7,663
4,269
Profit after tax from discontinuing operations attributable to equity holders of the Company
4,785
3,615
2015
2014
Basic Earnings per share
p
p
Total Basic Earnings per share
86.3
58.6
Basic Earnings per share from continuing operations
53.3
32.4
Basic Earnings per share from discontinuing operations
33.1
26.1
2015
2014
Diluted Earnings per share
p
p
Total Diluted Earnings per share
83.3
52.8
Diluted Earnings per share from continuing operations
51.3
28.6
Diluted Earnings per share from discontinuing operations
32.0
24.2
16. Cash and balances at central banks
2015
2014
Group
000
000
Cash and balances at central banks
368,611
115,938
Surplus funds are mainly held in the Bank of England reserve account, with the remainder held in certificates of deposit, fixed rate notes and money market deposits in highly rated banks (the majority held in UK clearing banks).
17. Loans and advances to banks
2015
2014
Group
000
000
Placements with banks included in cash and cash equivalents (note 37)
28,578
31,844
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:
2015
2014
Group
000
000
Aa1
220
-
A1
15,972
3,216
A2
6,258
26,242
A3
5,366
-
Baa1
762
2,386
28,578
31,844
None of the loans and advances to banks are either past due or impaired.
18. Debt securities held-to-maturity
Debt securities represent certificates of deposit. The Group's intention is to hold them to maturity and, therefore, they are stated in the Statement of Financial Position at amortised cost.
The movement in debt securities held to maturity may be summarised as follows:
2015
2014
Group
000
000
At 1 January
91,683
19,466
Exchange difference on monetary assets
808
188
Additions
145,880
85,244
Redemptions
(150,643)
(13,215)
At 31 December
87,728
91,683
The table below presents an analysis of debt securities by rating agency designation at 31 December, based on Moody's long term ratings:
2015
2014
Group
000
000
Aaa
42,618
48,714
Aa1
23,317
22,284
Aa2
8,913
5,001
Aa3
1
3,747
A1
6,311
3,922
A2
4,554
3,507
A3
2,000
-
Baa1
14
4,508
87,728
91,683
None of the debt securities held-to-maturity are either past due or impaired.
19. Derivative financial instruments
2015
2014
Contract/ notional amount
Fair value assets
Fair value liabilities
Contract/ notional amount
Fair value assets
Fair value liabilities
Group
000
000
000
000
000
000
Currency swaps
34,459
59
135
81,898
1,209
1,067
Interest rate caps
-
-
-
20,000
-
-
Structured notes
1,607
1,431
-
1,607
1,498
-
36,066
1,490
135
103,505
2,707
1,067
The principal derivatives used by the Group are over the counter exchange rate contracts and interest rate caps (used for cash flow hedges). Exchange rate related contracts include currency swaps and cash flow hedges include interest rate caps.
A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; exchange of principal can be notional or actual. The currency swaps are settled net and therefore the fair value is small in comparison to the contract/notional amount.
An interest rate cap is an option contract which puts an upper limit on a floating exchange rate. The writer of the cap has to pay the holder of the cap the difference between the floating rate and the reference rate when that reference rate is breached. The holder pays a premium for the cap.
Also included in derivative financial instruments are structured notes. These notes contain embedded derivatives (embedded options to buy and sell indicies) and non-derivative host contracts (discounted bonds). Both the host and embedded derivatives are presented net within derivative financial instruments.
The Group only uses investment graded banks as counterparties for derivative financial instruments. None of the contracts are collateralised.
The table below presents an analysis of derivative financial instruments contract/notional amounts by rating agency designation of
counterparty bank at 31 December, based on Moody's long term ratings:
2015
2014
Group
000
000
Aa3
34,459
81,898
A2
-
20,000
Baa1
1,607
1,607
36,066
103,505
20. Loans and advances to customers
2015
2014
Group
000
000
Gross loans and advances
1,615,208
1,197,394
Less: allowances for impairment on loans and advances (note 21)
(35,696)
(38,411)
1,579,512
1,158,983
On 18 December 2014 AL completed the purchase of a residential mortgage portfolio acquired from the administrators of the Dunfermline Building Society ("DBS") for a consideration of 106.3m. The portfolio is included in loans and advances to customers at fair value. The portfolio has performed according to our expectations and at 31 December 2015 had a remaining balance of 95.1m.
For a maturity profile of loans and advances to customers, refer to note 6.
Loans and advances to customers include finance lease receivables as follows:
2015
2014
Group
000
000
Gross investment in finance lease receivables:
- No later than 1 year
41,906
18,262
- Later than 1 year and no later than 5 years
67,789
13,047
- Later than 5 years
873
-
110,568
31,309
Unearned future finance income on finance leases
(18,996)
(5,799)
Net investment in finance leases
91,572
25,510
The net investment in finance leases may be analysed as follows:
- No later than 1 year
31,684
13,729
- Later than 1 year and no later than 5 years
59,074
11,781
- Later than 5 years
814
-
91,572
25,510
Loans and advances to customers can be further summarised as follows:
2015
2014
Group
000
000
Neither past due nor impaired
1,516,236
1,082,580
Past due but not impaired
23,792
23,175
Impaired
75,180
91,639
Gross
1,615,208
1,197,394
Less: allowance for impairment
(35,696)
(38,411)
Net
1,579,512
1,158,983
(a) Loans and advances past due but not impaired
Gross amounts of loans and advances to customers that were past due but not impaired were as follows:
2015
2014
Group
000
000
Past due up to 30 days
643
4,763
Past due 30 - 60 days
1,714
1,145
Past due 60 - 90 days
1,706
1,233
Over 90 days
19,729
16,034
Total
23,792
23,175
Loans and advances typically fall into this category when there is a delay in either the sale of the underlying collateral or the completion of formalities to extend the credit facilities for a further period. Management have no material concerns regarding the quality of the collateral that secures the lending.
(b) Loans and advances renegotiated
Restructuring activities include external payment arrangements, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review. Renegotiated loans that would otherwise be past due or impaired totalled nil (2014: nil).
(c) Collateral held
Collateral is measured at fair value less costs to sell.
Arbuthnot Latham & Co., Ltd
Most of the loans are secured by property with an average LTV of 46% (2014: 43%). The fair value of the collateral held against past due but not impaired or impaired balances is 93.3m (2014: 89.5m) against loans of 43.2m (2014: 40.1m), giving an average loan-to-value of 46% (2014: 45%). The weighted average loan-to-value is 63% (2014: 57%). The net amount of individually impaired loans and advances to customers after impairment but before taking into account the cash flows from collateral held is 18.0m (2014: 12.8m).
Secure Trust Bank PLC
The majority of the loans are unsecured personal loans with an average size at inception of 5,000; therefore the portfolio does not have a significant concentration to any individuals, sectors or geographic locations. 0.2m (2014: 0.2m) relates to a standard mortgage loan secured upon residential property and this is neither past due nor impaired. The residential property over which the mortgage loan is secured has a fair value of 0.2m based on other recent property sales, and a loan to value ratio of 72% (2014: 76%).
368.0m (2014: 133.7m) of the loans are secured upon residential or commercial property and these are neither past due nor impaired. All loans secured are at a loan to value ratio of less than 80%.
165.7m (2014: 137.9m) of the loans are secured against motor vehicles where the security is discharged when the buyer exercises an option to buy the goods at a predetermined price at the end of the loan term. Management's estimate of the fair value of the motor vehicles was 127.1m (2014: 109.5m).
21. Allowances for impairment of loans and advances
Reconciliation of specific allowance for impairments:
2015
2014
Group
000
000
At 1 January
38,411
31,033
Adjustments for disposals
(5,812)
-
Impairment losses
26,654
18,669
Loans written off during the year as uncollectible
(23,590)
(11,003)
Amounts recovered during the year
33
(288)
At 31 December
35,696
38,411
Reconciliation of collective allowance for impairments:
2015
2014
Group
000
000
At 1 January
2,031
1,578
Impairment losses
1,110
453
At 31 December
3,141
2,031
A further analysis of allowances for impairment of loans and advances is as follows:
2015
2014
Group
000
000
Loans and advances to customers - UK Private Bank
1,411
4,355
Loan and advances to customers - Retail Bank
34,285
34,056
At 31 December
35,696
38,411
22. Other assets
2015
2014
Group
000
000
Trade receivables
2,625
5,522
Repossessed collateral - held as inventory
5,226
3,742
Prepayments and accrued income
9,043
7,602
16,894
16,866
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.
2015
2014
Company
000
000
Trade receivables
732
732
Due from subsidiary undertakings
159
4,633
Prepayments and accrued income
100
107
991
5,472
23. Financial investments
2015
2014
Group
000
000
Financial investments comprise:
- Securities (at fair value through profit and loss)
112
145
- Securities (available-for-sale)
2,573
1,132
Total financial investments
2,685
1,277
Debt securities
The Group has made equity investments in unlisted special purpose vehicles set up to acquire and enhance the value of commercial properties. These investments are of a medium term nature. There is no open market for these investments and therefore the Group has valued them using appropriate valuation methodologies, which include net asset valuations and discounted future cash flows. The Directors intend to dispose of these assets when a suitable buyer has been identified and when the Directors believe that the underlying assets have reached their maximum value.
Unlisted securities
Arbuthnot Latham & Co., Ltd holds an equity interest in Visa Europe. Following the public announcement on 2 November 2015 of the proposed sale of Visa Europe to Visa Inc., management has assessed the fair value of Group's investment as 1.3m. The valuation determined by management includes a haircut on the preference share element of the consideration, as referred to in Note 4.9.
2015
2014
Company
000
000
Financial investments comprise:
- Securities (at fair value through profit and loss)
112
145
- Securities (available-for-sale)
13
13
Total financial investments
125
158
24. Deferred taxation
The deferred tax asset comprises:
2015
2014
Group
000
000
Unrealised surplus on revaluation of freehold property
196
180
Accelerated capital allowances and other short-term timing differences
1,100
215
Tax losses
891
2,193
Transfer to assets classified as held for sale
(403)
-
Deferred tax asset
1,784
2,588
At 1 January
2,588
2,855
On acquisition of V12/ELL
-
282
Available-for-sale securities
(262)
-
Profit and loss account - accelerated capital allowances and other short-term timing differences
673
(549)
Profit and loss account - tax losses
(812)
-
Transfer to assets classified as held for sale
(403)
-
Deferred tax asset at 31 December
1,784
2,588
2015
2014
Company
000
000
Accelerated capital allowances and other short-term timing differences
418
406
Deferred tax asset
418
406
At 1 January
406
441
Profit and loss account - accelerated capital allowances and other short-term timing differences
12
(35)
Deferred tax asset at 31 December
418
406
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 23% to 21% with effect from 1 April 2014 and to 20% with effect from 1 April 2015. On 26 October 2015 the Government substantively enacted a further reduction to the UK corporation tax rate to 19% from 1 April 2017 and to 18% from 1 April 2020. In addition, the Chancellor announced the introduction of a corporation tax surcharge applicable to banking companies with effect from 1 January 2016. The surcharge will be levied at a rate of 8% on the profits of banking companies, after taking into account an annual allowance of 25m. This will increase the Group's future current tax charge accordingly.
25. Investment in associate
2015
2014
Group
000
000
Investment in associate
943
943
On 11 October 2013, Arbuthnot Latham & Co., Ltd together with Praxis (Holding) Limited, formed a special purpose vehicle in the form of a separate legal entity (Tarn Crag Limited). The purpose of this legal entity is to refurbish and re-let a property in Glasgow, with the intention to exit via a sale to an institutional investor in circa 5 years time. The investment is accounted for using the equity method.
During the year the associate recorded a loss of 331k. Due to the fact that the value of the outstanding loan notes (including accrued interest) exceeded the investment in associate, no loss has been recorded at Group level and the carrying value was left at cost. The summarised Statement of Financial Position of the associate is set out below:
2015
2014
At 31 December
000
000
ASSETS
Cash and balances at central banks
2,236
1,724
Other assets
1,010
8
Property, plant and equipment
15,412
10,416
18,658
12,148
EQUITY AND LIABILITIES
Deposits from banks
12,014
9,970
Other liabilities
667
865
Debt securities in issue
1,400
1,400
Revaluation reserve
4,995
-
Retained Earnings
(418)
(87)
18,658
12,148
(a) Significant restrictions
Praxis (Holding) Ltd receives 0.1m per annum in its capacity as property manager. Arbuthnot Latham & Co., Ltd subscribed to 0.9m of loan notes and Praxis (Holding) Ltd subscribed to 0.5m of loan notes, which carry interest at 15% and is rolled up and payable on redemption. The bank debt and interest and the loan notes and interest thereon as well as the property management fees need to be repaid, before further distributions to shareholders can take place.
(b) Risks associated with interests
Arbuthnot Latham & Co., Ltd agreed to subscribe to a further 0.2m of loan notes when required to fund working capital.
26. Intangible assets
Goodwill
Computer software
Other intangibles
Total
Group
000
000
000
000
Cost
At 1 January 2014
2,695
10,094
7,529
20,318
Additions
-
1,214
-
1,214
Disposals
-
(1,838)
-
(1,838)
At 31 December 2014
2,695
9,470
7,529
19,694
Additions
-
3,532
-
3,532
Transfer to assets classified as held for sale
-
(349)
(5,115)
(5,464)
At 31 December 2015
2,695
12,653
2,414
17,762
Accumulated amortisation
At 1 January 2014
-
(5,024)
(2,191)
(7,215)
Amortisation charge
-
(1,482)
(1,517)
(2,999)
Disposals
-
1,838
-
1,838
At 31 December 2014
-
(4,668)
(3,708)
(8,376)
Amortisation charge
-
(1,627)
(1,167)
(2,794)
Transfer to assets classified as held for sale
-
247
4,035
4,282
At 31 December 2015
-
(6,048)
(840)
(6,888)
Net book amount
At 31 December 2014
2,695
4,802
3,821
11,318
At 31 December 2015
2,695
6,605
1,574
10,874
Included within 2015 Computer Software additions is an amount of 903,000 which relates to intangible assets in the course of construction which management has assessed to not be available for use as at 31 December 2015 and are therefore not being amortised.
Computer software
Company
000
Cost
Additions
40
At 31 December 2014
40
At 31 December 2015
40
Accumulated amortisation
At 1 January 2014
(28)
Amortisation charge
(8)
At 31 December 2014
(36)
Amortisation charge
(4)
At 31 December 2015
(40)
Net book amount
At 31 December 2014
4
At 31 December 2015
-
Refer to note 4.2 for assumptions used in the impairment review of goodwill.
27. Property, plant and equipment
Freehold land and buildings
Leasehold improvements
Computer and other equipment
Motor Vehicles
Total
Group
000
000
000
000
Cost or valuation
At 1 January 2014
4,850
628
12,033
-
17,511
Additions
2,638
2,926
2,239
7,803
Disposals
-
-
(541)
(541)
At 31 December 2014
7,488
3,554
13,731
-
24,773
Additions
-
1,722
1,576
97
3,395
Disposals
-
-
(2,417)
-
(2,417)
Transfer to assets classified as held for sale
-
(590)
(447)
-
(1,037)
At 31 December 2015
7,488
4,686
12,443
97
24,714
Accumulated depreciation
At 1 January 2014
(840)
(247)
(10,902)
-
(11,989)
Depreciation charge
(89)
(234)
(485)
-
(808)
Disposals
-
-
499
-
499
At 31 December 2014
(929)
(481)
(10,888)
-
(12,298)
Depreciation charge
(108)
(399)
(891)
(22)
(1,420)
Disposals
-
-
2,419
-
2,419
Transfer to assets classified as held for sale
-
350
239
-
589
At 31 December 2015
(1,037)
(530)
(9,121)
(22)
(10,710)
Net book amount
At 31 December 2014
6,559
3,073
2,843
-
12,475
At 31 December 2015
6,451
4,156
3,322
75
14,004
The Group's opening freehold property is the Registered Office of Secure Trust Bank and is fully utilised for the Group's own purposes. In 2014, Secure Trust Bank acquired a further freehold property, Secure Trust House, Boston Drive, Bourne End SL8 5YS. The majority of this property is used for the Group's own purposes. However, the legacy tenant of the property has remained in situ. The cost of the property was 2.7m.
The directors have assessed the value of the Group's freehold property at the year end through comparison to current rental yields on similar properties in the same area and do not believe that the fair value of freehold property is materially different from its carrying value.
The carrying value of freehold land not depreciated is 1.7m (2014: 1.7m). The historical cost of freehold property included at valuation is as follows:
2015
2014
Group
000
000
Cost
7,628
7,470
Accumulated depreciation
(1,305)
(1,153)
Net book amount
6,323
6,317
Computer and other equipment
Motor Vehicles
Total
Company
000
000
000
Cost or valuation
At 1 January 2014
203
203
Additions
1
1
At 31 December 2014
204
-
204
Additions
5
97
102
At 31 December 2015
209
97
306
Accumulated depreciation
At 1 January 2014
(73)
(73)
Depreciation charge
(4)
(4)
At 31 December 2014
(77)
-
(77)
Depreciation charge
(3)
(22)
(25)
At 31 December 2015
(80)
(22)
(102)
Net book amount
At 31 December 2014
127
-
127
At 31 December 2015
129
75
204
28. Deposits from banks
2015
2014
Group
000
000
Deposits from other banks
55,305
27,657
For a maturity profile of deposits from banks, refer to Note 6.
29. Deposits from customers
2015
2014
Group
000
000
Current/demand accounts
499,022
354,095
Notice accounts
579,877
295,347
Term deposits
850,939
544,843
1,929,838
1,194,285
Included in customer accounts are deposits of 4,195,000 (2014: 9,947,000) 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.
30. Other liabilities
2015
2014
Group
000
000
Trade payables
14,581
12,024
Accruals and deferred income
17,396
22,960
31,977
34,984
Within trade payables at 31 December 2015 there is 3.7m (2014: 4.3m) collateral held from RentSmart. STB buys assets which are then leased to customers of RentSmart and STB pays RentSmart a commission, which is recognised within operating income. In return, RentSmart continues to operate the agreement, retains the credit risk and provides STB with a collateral amount that is based upon the balance of customer receivables and expected new agreements during the following month.
Within accruals and deferred income there is nil relating to accrued interest payable (2014: 6.6m).
Financial Ombudsman Scheme accrual
Accruals include a provision for outstanding potential PPI claims of 2.6m as at 31 December 2015 (2014: 2.0m). The increase in provision is a result of new claims emerging following an extension of the deadline for making claims. During 2015 1.5m of PPI provisions were utilised (2014: 0.3m).
The FCA is currently consulting on a proposed deadline for making PPI claims. The ruling is expected to come into force in Spring 2016 with a deadline of 2 years from the ruling, which would give consumers until Spring 2018 to make a claim.
Financial Services Compensation Scheme Levy
In common with all regulated UK deposit takers, AL and STB pay levies to the Financial Services Compensation Scheme ("FSCS") to enable the FSCS to meet claims against them. The FSCS levy consists of two parts: a management expenses levy and a more significant compensation levy. The management expenses levy covers the costs of running the scheme and the compensation levy covers the amount of compensation and associated interest the scheme pays, net of any recoveries it makes using the rights that have been assigned to it.
The Group's FSCS provision reflects market participation up to the reporting date and the accrual of 0.3m (2014: 0.3m) relates to the interest levy for the scheme year 2015/16 which is payable in September 2016. This amount was calculated on the basis of the Group's share of protected deposits and the FSCS's estimate of total interest levies payable for each scheme year. The loan repayment relating to the scheme year 2015/16 was paid by the Group in September 2015.
Company
000
000
Due to subsidiary undertakings
3,068
3,028
Accruals and deferred income
1,167
1,104
4,235
4,132
31. Debt securities in issue
2015
2014
Group and Company
000
000
Subordinated loan notes
10,834
11,448
The subordinated loan notes were issued on 7 November 2005 and are denominated in Euros. The principal amount outstanding at 31 December 2015 was 15,000,000 (2014: 15,000,000). The notes carry interest at 3% over the interbank rate for three month deposits in euros and are repayable at par in August 2035 unless redeemed or repurchased earlier by the Company.
The contractual undiscounted amount that will be required to be paid at maturity of the above debt securities is 15,000,000.
Given the fact that the Group has never been subject to a published credit rating by any of the relevant agencies and the notes in issue are not quoted, it is not considered possible to approximate a fair value for these notes.
32. Contingent liabilities and commitments
Contingent liabilities
The Group is subject to extensive regulation in the conduct of its business. A failure to comply with applicable regulations could result in regulatory investigations, fines and restrictions on some of the Group's business activities or other sanctions. The Group seeks to minimise this risk through the adoption of compliance and other policies and procedures, continuing to refine controls over business practices and behaviour, employee training, the use of appropriate documentation, and the involvement of outside legal counsel where appropriate.
Capital commitments
At 31 December 2015, the Group had capital commitments of nil (2014: nil) in respect of equipment purchases.
Credit commitments
The contractual amounts of the Group's off-balance sheet financial instruments that commit it to extend credit to customers are as follows:
2015
2014
Group
000
000
Guarantees and other contingent liabilities
56
714
Commitments to extend credit:
- Original term to maturity of one year or less
178,863
139,423
178,919
140,137
Operating lease commitments
Where a Group company is the lessee, the future aggregate lease payments under non-cancellable operating leases are as follows:
2015
2014
Group
000
000
Expiring:
Within 1 year
3,710
3,766
Later than 1 year and no later than 5 years
9,974
8,715
Later than 5 years
7,790
8,876
21,474
21,357
In 2013, Arbuthnot Latham & Co., Ltd entered into a 16 year lease on 7 Wilson Street (the head office for Arbuthnot Banking Group PLC, the principal location for Arbuthnot Latham & Co., Ltd and London offices for Secure Trust Bank PLC), with a break at 11 years and rent reviews after 5, 10 and 15 years. The initial rent is 1.75 million per annum. This lease forms the most significant part of the operating leases disclosed in the table above.
33. Share capital
Number of shares
Ordinary share capital
Share premium
Group and Company
000
000
At 1 January 2014
15,279,322
153
-
At 31 December 2014 & December 2015
15,279,322
153
-
The Ordinary shares have a par value of 1p per share (2014: 1p per share). At 31 December 2015 the Company held 390,274 shares (2014: 390,274) in treasury.
34. Reserves and retained earnings
2015
2014
Group
000
000
Revaluation reserve
98
98
Capital redemption reserve
20
20
Available-for-sale reserve
1,047
(250)
Treasury shares
(1,131)
(1,131)
Retained earnings
123,330
114,641
Total reserves at 31 December
123,364
113,378
The revaluation reserve represents the unrealised change in the fair value of properties.
The capital redemption reserve represents a reserve created after the Company purchased its own shares which resulted in a reduction of share capital.
2015
2014
Company
000
000
Capital redemption reserve
20
20
Treasury shares
(1,131)
(1,131)
Retained earnings
46,537
50,755
Total reserves as 31 December
45,426
49,644
35. Share-based payment options
Company
The Company had the following equity settled share-based payment awards outstanding at 31 December 2015:
On 16 April 2013 Mr. Salmon was granted an option to subscribe for 100,000 ordinary 1p shares in the Company between April
2016 and April 2021 at 930p. The fair value of the option at grant date was 83,000.
On 16 April 2013 Mr. Cobb was granted an option to subscribe for 50,000 ordinary 1p shares in the Company between April
2016 and April 2021 at 930p. The fair value of the option at grant date was 41,000.
On 1 April 2014 Mr Fleming was granted an option to subscribe for 50,000 ordinary 1p shares in the Company between April
2017 and April 2022 at 1185p. The fair value of these shares at grant date was 53,000.
There are no other vesting conditions for these awards. No share options were granted, forfeited, exercised or expired during the year. ABG incurred an expense in relation to share based payments of 37,000 during 2015 (2014: 36,000), as disclosed in Note 12.
Measurement inputs and assumptions used in the Black-Scholes model are as follows:
2015
2014
Expected Stock Price Volatility
17%
17%
Expected Dividend Yield
2.7%
2.7%
Rick Free Interest Rate
1.20%
1.20%
Average Expected Life (in years)
0.53
1.53
Group - equity settled
Apart from the share-based payment awards for the Company listed above, the Group also include awards allocated under the Secure Trust Bank ("STB") Share Option Scheme, which was established on 17 October 2011 and entitles key management personnel and senior employees of STB to purchase shares in that company.
The performance conditions of the Scheme are that for the duration of the vesting period, the dividends paid by STB must have increased in percentage terms when compared to an assumed dividend of 8m in respect of the financial year ending 31 December 2012, by a minimum of the higher of the increase in the Retail Prices Index during that period or 5% per annum.
All dividends paid by STB each year during the vesting period must be paid from STB's earnings referable to that year. Also from the grant date to the date the Option is exercised, there must be no public criticism by any regulatory authority on the operation of STB or any of its subsidiaries which has a material impact on the business of STB.
Options are forfeited if they remain unexercised after a period of more than 10 years from the date of grant. If the participant ceases to be employed by the Group by reason of injury, disability, ill-health or redundancy; or because his employing company ceases to be a shareholder of the Group; or because his employing business is being transferred out of the Group, his option may be exercised within 6 months after such cessation. In the event of the death of a participant, the personal representatives of a participant may exercise an option, to the extent exercisable at the date of death, within 6 months after the death of the participant.
On cessation of employment for any other reason (or when a participant serves, or has been served with, notice of termination of such employment), the option will lapse although the Remuneration Committee has discretion to allow the exercise of the option for a period not exceeding 6 months from the date of such cessation.
In such circumstances, the performance conditions may be modified or waived as the Remuneration Committee, acting fairly and reasonably and taking due consideration of the circumstances, thinks fit. The number of Ordinary Shares which can be acquired on exercise will be pro-rated on a time elapsed basis, unless the Remuneration Committee, acting fairly and reasonably and taking due consideration of the circumstances, decides otherwise. In determining whether to exercise its discretion in these respects, the Remuneration Committee must satisfy itself that the early exercise of an option does not constitute a reward for failure.
On 2 November 2011 934,998 share options were granted at an exercise price of 720p per share. Approximately half of the share options were exercisable on 2 November 2014 with the remainder being exercisable on 2 November 2016, being classed as share option tranches SOS1 and SOS2 respectively. A total of 14,167 share options have been forfeited since their grant date. At the grant date these share options had a fair value of 1.6m. Of the share options granted on 2 November 2011, the following remaining share options (SOS2) were to Group directors:
Mr. Lynam was granted an option to subscribe for 141,667 shares at 720p between 2 November 2016 and 1 November 2021.
Mr. Salmon was granted an option to subscribe for 141,667 shares at 720p between 2 November 2016 and 1 November 2021.
The Share Option Scheme is an equity settled scheme. The original grant date valuation was determined to be 1.69 per option and this valuation has been used in the calculation. An attrition rate of option holders has been assumed of nil for the second tranche of share options. Due to the options being fully conditional knockout options, a probability of pay-out has been assigned based on the likelihood of meeting the performance criteria, which is 95% for SOS2. STB incurred an expense in relation to share based payments of 0.m during 2015 (2014: 1.5m), as disclosed in Note 12.
Summary details of the Secure Trust Bank Share Option Scheme are shown in the table below:
31 December 2015
31 December 2014
No.
SOS2
No.
SOS2
Key Management Personnel
3
318,751
3
318,751
Senior Management
5
141,668
5
141,668
Share Options in Issue
8
460,419
8
460,419
Exercise Price ()
7.20
7.20
Value per option ()
1.69
1.69
Total included in reserves (000)
778
778
Probability of payout
100%
95%
Assumed value of share options on exercise date (000)
739
739
Value of share options at 31 December (000)
468
468
Measurement inputs and assumptions used in the Black-Scholes model are as follows:
2015
2014
Expected Stock Price Volatility
30%
30%
Expected Dividend Yield
6%
6%
Rick Free Interest Rate
0.86%
0.86%
Average Expected Life (in years)
0.9
1.9
Group - cash settled
On 16 March 2015, a four year "phantom" share option scheme was established in order to provide effective long-term incentive to senior management of the Group. Under the scheme, no actual shares would be issued by STB, but those granted awards under the scheme would be entitled to a cash payment. The amount of the award is calculated by reference to the increase in the value of an ordinary share in STB over an initial value set at 25 per ordinary share, being the price at which the shares resulting from the exercise of the first tranche of share options under the Share Option Scheme were sold in November 2014.
As at 31 December 2015, 326,917 share options remained outstanding following the departure of one employee from the scheme. An additional 14,000 share options should lapse following the expected departure of a further three employees following the conditional sale of Everyday Loans Holdings Limited and its subsidiaries.
As at 31 December 2015, the estimated fair value has been prepared using the Black-Scholes model, which resulted in an expense being recognised in relation to the phantom option scheme of 1.2m (2014: nil). This has been included within staff costs as disclosed in Note 12.
Measurement inputs and assumptions used in the Black-Scholes model are as follows:
2015
Expected Stock Price Volatility
27%
Expected Dividend Yield
2%
Rick Free Interest Rate
0.72%
Average Expected Life (in years)
2.85
36. Dividends per share
Final dividends are not accounted for until they have been approved at the Annual General Meeting. At the meeting on 5 May 2016, a dividend in respect of 2015 of 17p per share (2014: actual dividend 16p per share) amounting to a total of 2.53m (2014: actual 2.38m) is to be proposed. The financial statements for the year ended 31 December 2015 do not reflect the final dividend which will be accounted for in shareholders' equity as an appropriation of retained profits in the year ending 31 December 2016.
37. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash equivalents are comprised of the following balances with less than three months maturity from the date of acquisition.
2015
2014
Group
000
000
Cash and balances at central banks (Note 16)
368,611
115,938
Loans and advances to banks (Note 17)
28,578
31,844
397,189
147,782
2015
2014
Company
000
000
Due from subsidiary undertakings - bank balances
12,444
19,244
38. Related party transactions
Related parties of the Company and Group include subsidiaries, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced, or for which significant voting power is held, by Key Management Personnel or their close family members.
Other than the directors' remuneration (see Remuneration Report pages 22 to 23), payment of dividends and transactions with subsidiaries, there were no related party transactions within the Parent Company. A number of banking transactions are entered into with related parties in the normal course of business on normal commercial terms. These include loans and deposits. Except for the directors' disclosures, there were no other Key Management Personnel disclosures; therefore the tables below relate to directors.
2015
2014
Group
000
000
Loans
Loans outstanding at 1 January
5,503
5,188
Loans advanced during the year
726
1,083
Loan repayments during the year
(3,106)
(768)
Loans outstanding at 31 December
3,123
5,503
Interest income earned
143
255
The loans to directors are mainly secured on property, shares or cash and bear interest at rates linked to base rate. No provisions have been recognised in respect of loans given to related parties (2014: nil). Details of directors' remuneration are given in the Remuneration Report. The Directors do not believe that any other key management disclosures are required.
2015
2014
Group
000
000
Deposits
Deposits at 1 January
2,665
2,522
Deposits placed during the year
2,721
3,531
Deposits repaid during the year
(2,694)
(3,388)
Deposits at 31 December
2,692
2,665
Interest expense on deposits
13
15
Details of principal subsidiaries are given in Note 39. Transactions and balances with subsidiaries are shown below:
2015
2014
Highest balance during the year
Balance at 31 December
Highest balance during the year
Balance at 31 December
000
000
000
000
ASSETS
Due from subsidiary undertakings
23,454
12,603
34,808
23,877
Shares in subsidiary undertakings
46,466
46,466
39,966
39,966
Total assets
69,920
59,069
74,774
63,843
LIABILITIES
Due to subsidiary undertakings
5,431
2,832
3,878
2,872
Total liabilities
5,431
2,832
3,878
2,872
Issued guarantee contracts
-
-
2,500
-
The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to represent the transactions during the year. The above transactions arose during the normal course of business and are on substantially the same terms as for comparable transactions with third parties.
The Company undertook the following transactions with other companies in the Group during the year:
2015
2014
000
000
Arbuthnot Latham & Co., Ltd - Recharge of property and IT costs
1,587
2,089
Arbuthnot Latham & Co., Ltd - Recharge for costs paid on the Company's behalf
3,288
3,218
Arbuthnot Latham & Co., Ltd - Group recharges for shared services
(1,421)
(1,321)
OBC Insurance Consultants Ltd - Dividend received
(132)
-
Secure Trust Bank PLC - Group recharges for shared services
(412)
(308)
Secure Trust Bank PLC - Dividends received
(6,517)
(6,440)
West Yorkshire Insurance Company Ltd - Legal fees settled
25
55
Total
(3,582)
(2,707)
39. Investment in subsidiary undertakings
Investment at cost
Impairment provisions
Net
Company
000
000
000
At 1 January 2014
33,559
(2,564)
30,995
Capital contribution in Arbuthnot Latham & Co., Limited
10,500
-
10,500
Sale of shares in Secure Trust Bank PLC
(1,529)
-
(1,529)
At 31 December 2014
42,530
(2,564)
39,966
Capital contribution in Arbuthnot Latham & Co., Limited
6,500
-
6,500
At 31 December 2015
49,030
(2,564)
46,466
2015
2014
Company
000
000
Subsidiary undertakings:
Banks
44,166
37,666
Other
2,300
2,300
Total
46,466
39,966
(a) List of subsidiaries
The table below provides details of the significant subsidiaries of Arbuthnot Banking Group PLC at 31 December:
Country of incorporation
Ownership interest %
2015
2014
Principal activity
Arbuthnot Latham & Co., Limited
UK
100
100
Private banking
Secure Trust Bank PLC
UK
52
52
Retail banking
The table below provides details of other subsidiaries and related undertakings of Arbuthnot Banking Group PLC at 31 December:
Country of incorporation
Principal activity
Owned directly
Arbuthnot Fund Managers Limited
UK
Dormant
Arbuthnot Investments Limited
UK
Dormant
Arbuthnot Limited
UK
Dormant
Arbuthnot Properties Limited
UK
Dormant
Arbuthnot Unit Trust Management Limited
UK
Dormant
Gilliat Financial Solutions Limited
UK
Dormant
Peoples Trust and Savings Plc
UK
Dormant
West Yorkshire Insurance Company Limited
UK
Dormant
Windward Insurance Company PCC Limited
Guernsey
Insurance
Owned indirectly via intermediate holding companies
Arbuthnot Latham (Nominees) Limited
UK
Dormant
Arbuthnot Securities Limited
UK
Dormant
Artillery Nominees Limited
UK
Dormant
Debt Managers (Services) Limited
UK
Debt collection company
Everyday Lending Limited *
UK
Provider of unsecured and secured loans
Everyday Loans Holdings Limited *
UK
Holding company
Everyday Loans Limited *
UK
Sourcing and servicing of secured and unsecured loans
John K Gilliat & Co., Limited
UK
Dormant
Secure Homes Services Limited
UK
Property rental
STB Leasing Limited
UK
Leasing
Tarn Crag Limited
Isle of Man
Property management
V12 Finance Group Limited
UK
Holding company
V12 Personal Finance Limited
UK
Dormant
V12 Retail Finance Limited
UK
Sourcing and servicing of unsecured loans
* Included in assets classified as held for sale
All other subsidiary and related undertakings are unlisted and none banking institutions. The entities were all wholly owned via Ordinary shares, except for Tarn Crag in which the Company indirectly holds 50% of the Ordinary shares. All entities are included in the consolidated financial statements and have an accounting reference date of 31 December.
(b) Non-controlling interests in subsidiaries
The only subsidiary in the Group with non-controlling interests is Secure Trust Bank PLC, with external parties having 48.1% (2014: 48.1%) ownership interests in the bank. Summary financial information on the subsidiary is shown in the table below.
Year ended 31 December
Year ended 31 December
2015
2014
Summary of profit
000
000
Operating income
132,484
97,897
Profit after income tax
29,009
20,455
Total comprehensive income
29,009
20,831
Profit allocated to non-controlling interests
13,798
8,382
31 December
31 December
2015
2014
Summary of assets and liabilities
000
000
Loans and advances to customers
960,610
622,495
Other assets
286,721
159,769
Liabilities
(1,106,147)
(657,402)
Net assets
141,184
124,862
Carrying amount of non-controlling interests
67,887
60,038
Year ended 31 December
Year ended 31 December
2015
2014
Summary of cash flows
000
000
Cash flows from operating activities
53,188
(21,356)
Cash flows from investing activities
(3,397)
(4,533)
Cash flows from financing activities, before dividends to non-controlling interests
(12,552)
52,073
Cash flows from financing activities - cash dividends to non-controlling interests
(6,036)
(3,752)
Net increase in cash and cash equivalents
31,203
22,432
(c) Significant restrictions
The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those resulting from the supervisory frameworks within which banking subsidiaries operate. The supervisory frameworks require banking subsidiaries to keep certain levels of regulatory capital and liquid assets, limit their exposure to other parts of the Group and comply with other ratios. The carrying amounts of banking subsidiaries' assets and liabilities are 2,252m and 2,058m respectively (2014: 1,452m and 1,268m respectively).
(d) Risks associated with interests
During the year Arbuthnot Banking Group PLC made a 6.5m (2014: 10.5m) capital contribution to Arbuthnot Latham & Co., Ltd. The contribution was made to assist the private bank during a period of growth (which included the acquisition of a loan book in 2014 at fair value of 106m) to ensure that all regulatory capital requirements were met.
(e) Changes in ownership interest
On 9 July 2014, Secure Trust Bank PLC issued 2,083,333 new shares to external shareholders for 50m and at the same time Arbuthnot Banking Group PLC sold 1,041,667 shares for 25m, thereby reducing its shareholding in Secure Trust Bank PLC from 67% to 53.3%. The effect of these transactions on the Group's reserves can be seen in the Consolidated Statement of Changes in Equity. As can been seen from the table under paragraph (b) above, the full year equivalent profit attributable to equity holders of the Group had therefore reduced from 13.7m to 10.9m in 2014 due to these transactions.
On 4 November 2014, 460,416 share options issued by Secure Trust Bank, under its equity settled share option scheme were exercised (see Note 35). This resulted in the shareholding in Secure Trust Bank PLC reducing from 53.3% to 51.9%. The effect of the exercise of the share options on the Group's reserves can be seen in the Consolidated Statement of Changes in Equity. As can been seen from the table under paragraph (b) above, the full year equivalent profit attributable to equity holders of the Group had therefore reduced from 10.9m to 10.6m in 2014 due to these shares being issued.
40. Operating segments
The Group is organised into three main operating segments, arranged over two separate companies with each having its own specialised banking service, as disclosed below:
1) Retail banking - incorporating household cash management, personal lending and banking and insurance services.
2) UK Private banking - incorporating private banking and wealth management.
3) Group Centre - ABG Group Centre management
Transactions between the operating segments are on normal commercial terms. Centrally incurred expenses are charged to operating segments on an appropriate pro-rata basis. Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet.
Discontinued operations
Continuing operations
ELL
Retail banking
UK Private banking
Group Centre
Total
Group Total
Year ended 31 December 2015
000
000
000
000
000
000
Interest revenue
39,230
100,442
32,974
126
133,542
Inter-segment revenue
-
(211)
(181)
(118)
(510)
Interest revenue from external customers
39,230
100,231
32,793
8
133,032
Fee and commission income
1,523
16,867
9,999
-
26,866
Revenue from external customers
40,753
117,098
42,792
8
159,898
Interest expense
-
(21,560)
(7,691)
236
(29,015)
Add back inter-segment revenue
-
211
181
(392)
-
Subordinated loan note interest
-
-
-
(324)
(324)
Fee and commission expense
(358)
(3,660)
(206)
-
(3,866)
Segment operating income
40,395
92,089
35,076
(472)
126,693
Impairment losses
(7,537)
(16,782)
(1,250)
(34)
(18,066)
Other income
-
-
1,894
(1,894)
-
Operating expenses
(21,195)
(50,133)
(29,722)
(6,204)
(86,059)
Segment profit / (loss) before tax
11,663
25,174
5,998
(8,604)
22,568
34,231
Income tax (expense) / income
(2,271)
(5,557)
109
12
(5,436)
(7,707)
Segment profit / (loss) after tax
9,392
19,617
6,107
(8,592)
17,132
26,524
Loans and advances to customers
-
960,610
618,902
-
1,579,512
Other assets
118,066
168,655
385,547
(20,221)
533,981
Segment total assets
118,066
1,129,265
1,004,449
(20,221)
2,113,493
2,231,559
Customer deposits
1,033,073
896,766
-
1,929,839
Other liabilities
8,247
64,827
55,330
(18,088)
102,069
Segment total liabilities
8,247
1,097,900
952,096
(18,088)
2,031,908
2,040,155
Other segment items:
Capital expenditure
(3,639)
(3,186)
(102)
(6,927)
Depreciation and amortisation
(2,865)
(1,320)
(29)
(4,214)
The "Group Centre" segment above includes the parent entity and all intercompany eliminations.
Discontinued operations
Continuing operations
ELL
Retail banking
UK Private banking
Group Centre
Total
Group Total
Year ended 31 December 2014
000
000
000
000
000
000
Interest revenue
30,226
63,316
24,303
155
87,774
Inter-segment revenue
-
(51)
(177)
(148)
(376)
Interest revenue from external customers
30,226
63,265
24,126
7
87,398
Fee and commission income
4,122
16,082
9,759
-
25,841
Revenue from external customers
34,348
79,347
33,885
7
113,239
Interest expense
-
(14,170)
(4,916)
116
(18,970)
Add back inter-segment revenue
-
51
177
(228)
-
Subordinated loan note interest
-
-
-
(401)
(401)
Fee and commission expense
(111)
(1,568)
(251)
-
(1,819)
Segment operating income
34,237
63,660
28,895
(506)
92,049
Impairment losses
(6,638)
(8,650)
(3,378)
75
(11,953)
Other income
-
-
2,088
(2,088)
-
Operating expenses
(19,016)
(37,255)
(23,977)
(4,933)
(66,165)
Segment profit / (loss) before tax
8,583
17,755
3,628
(7,452)
13,931
22,514
Income tax (expense) / income
(2,054)
(3,618)
209
(35)
(3,444)
(5,498)
Segment profit / (loss) after tax
6,529
14,137
3,837
(7,487)
10,487
17,016
Loans and advances to customers
622,495
536,488
-
1,158,983
Other assets
159,504
162,984
(34,849)
287,639
Segment total assets
781,999
699,472
(34,849)
1,446,622
1,446,622
Customer deposits
608,418
585,867
-
1,194,285
Other liabilities
48,719
73,639
(43,590)
78,768
Segment total liabilities
657,137
659,506
(43,590)
1,273,053
1,273,053
Other segment items:
Capital expenditure
(4,533)
(4,482)
(2)
(9,017)
Depreciation and amortisation
(3,087)
(708)
(12)
(3,807)
Segment profit is shown prior to any intra-group eliminations.
The UK private bank opened a branch in Dubai in the year, which generated 1.85m (2014: 0.61m) fee income and had operating costs of 1.82m (2014: 1.59m). Other than the Dubai branch opened in 2013, all operations of the Group are conducted wholly within the United Kingdom and geographical information is therefore not presented.
41. Country by Country Reporting
Article 89 of the EU Directive 2013/36/EU otherwise known as the Capital Requirements Directive IV ('CRD IV') was implemented into UK domestic legislation through statutory instrument 2013 No. 3118, the Capital Requirements (Country-by-Country Reporting) Regulations 2013 (the Regulations), which were laid before the UK Parliament on 10 December 2013 and which came into force on 1 January 2014.
Article 89 requires credit institutions and investment firms in the EU to disclose annually, specifying, by Member State and by third country in which it has an establishment, the following information on a consolidated basis for the financial year: name, nature of activities, geographical location, turnover, number of employees, profit or loss before tax, tax on profit or loss and public subsidies received.
31 December 2015
Turnover
Number FTE
Profit/(loss)
Tax paid
Name
Nature of activity
Location
(m)
employees
before tax (m)
(m)
Arbuthnot Banking Group PLC
Banking Services
UK
167.1
924
36.0
7.4
Arbuthnot Banking Group PLC
Banking Services
Dubai
-
13
(1.8)
-
31 December 2014
Turnover
Number FTE
Profit/(loss)
Tax paid
Name
Nature of activity
Location
(m)
employees
before tax (m)
(m)
Arbuthnot Banking Group PLC
Banking Services
UK
126.3
791
23.9
3.0
Arbuthnot Banking Group PLC
Banking Services
Dubai
-
9
(1.4)
-
The Dubai branch income is booked through the UK branch, hence the turnover is nil in the above analysis. Reallocating this income to the Dubai branch would result in a 33k profit (2014: 1m loss). No public subsidies were received during 2015 or 2014.
42. Ultimate controlling party
The Company regards Sir Henry Angest, the Group Chairman and Chief Executive Officer, who has a beneficial interest in 53.7% of the issued share capital of the Company, as the ultimate controlling party. Details of his remuneration are given in the Remuneration Report and Note 38 of the consolidated financial statements includes related party transactions with Sir Henry Angest.
43. Events after the balance sheet date
On 15 January 2016 Arbuthnot Latham & Co., Ltd signed a contract with Oracle to replace its current banking system. The committed cost is 2m.
Five Year Summary
In the table below, all the figures are presented in accordance with IFRS.
2011
2012
2013
2014
2015
000
000
000
000
000
Profit before tax from continuing operations
5,116
11,146
11,780
13,931
22,568
Total Earnings per share
Basic (p)
(34.0)
54.6
53.8
58.6
86.3
Earnings per share from continuing operations
Basic (p)
37.1
47.0
44.1
32.4
53.3
Dividends per share (p)
- ordinary
24.0
25.0
26.0
27.0
29.0
- special
-
-
18.0
-
-
Other KPI:
2011
2012
2013
2014
2015
000
000
000
000
000
Net asset value per share (p)
312.2
449.3
570.5
1,136.0
1,252.7
This information is provided by RNSThe company news service from the London Stock ExchangeENDFR SFMFWMFMSEED
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