REG - Arbuthnot BankingSecure Trust Bank - Final Results <Origin Href="QuoteRef">ARBB.L</Origin> <Origin Href="QuoteRef">STBS.L</Origin> - Part 4
19/03/2015 07:01
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expected cash flows
relating to it. The accuracy of the effective interest rate would therefore be affected by unexpected market movements
resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect
assumptions.
4.7 Share option scheme valuation
The valuation of the Secure Trust Bank equity-settled share option scheme was determined at the original grant date of 2
November 2011 using Black-Scholes valuation models. In the opinion of the directors the terms of the scheme are such that
there remain a number of key uncertainties to be considered when calculating the probability of pay out, which are set out
below.The directors also considered the probability of option holder attrition prior to the vesting dates, details of which
are also set out below.
Much of the bank's lending is in the near and sub-prime categories, with performance of the book heavily influenced by
employment trends. With the UK economy remaining fragile, the impact of a further downturn would be increasing
unemployment, potentially causing impairments to rise and new business levels to fall, thereby affecting the bank's ability
to sustain the levels of dividend growth required under the terms of the scheme. Depending on the product type, market and
customer demographics, the bank's current product range includes expected lifetime losses of between 1% and 20%.
Uncertainties in the regulatory environment continue, with pressure on the government to further constrain the activities
of banks following the well reported catalogue of recent issues in the industry. Any tightening of capital requirements
will impact on the ability of the Company to exploit future market opportunities and furthermore may inhibit its ability to
maintain the required growth in distributions.
Taking these into account, the probability of pay out has been judged as 95% for the remaining share options (SOS2) which
vest on 2 November 2016.
Although one participant in the share option scheme left the Company during 2012 and was consequently withdrawn from the
scheme. The directors consider that there is no further uncertainty surrounding whether the remaining participants will all
still be in situ and eligible at the vesting date. Therefore the directors have assumed no attrition rate for the remaining
share options over the scheme period.
4.8 Impairment of equity securities
A significant or prolonged decline in the fair value of an equity security is objective evidence of impairment. The Group
regards a decline of more than 20 percent in fair value as "significant" and a decline in the quoted market price that
persists for nine months or longer as "prolonged".
4.9 Valuation of financial instruments
The Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is
regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market
transactions. If a market for a financial instrument is not active, the Group establishes fair value using a valuation
technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially
the same for which market observable prices exist, net present value and discounted cash flow analysis. The objective of
valuation techniques is to determine the fair value of the financial instrument at the reporting date as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
In the instance that fair values of assets and liabilities cannot be reliably measured, they are carried at cost.
The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in
making measurements:
• Level 1: Quoted prices in active markets for identical assets or liabilities
• Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly (i.e.
as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices
in active
markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less
than active;
or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.
• Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes
inputs
not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This
category
includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable
adjustments or assumptions are required to reflect differences between the instruments.
The consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the
size of bid/offer spreads, assist in the judgement as to whether a market is active. If in the opinion of management, a
significant proportion of the instrument's carrying amount is driven by unobservable inputs, the instrument in its entirety
is classified as valued using significant unobservable inputs. 'Unobservable' in this context means that there is little or
no current market data available from which to determine the level at which an arm's length transaction would be likely to
occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair
value (consensus pricing data may, for example, be used).
The tables below analyses financial instrument by the level in the fair value hierarchy into which the measurement is
categorised:
Level 1 Level 2 Level 3 Total
At 31 December 2014 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 115,938 - 115,938
Loans and advances to banks - 31,844 - 31,844
Debt securities held-to-maturity - 91,683 - 91,683
Derivative financial instruments - 2,707 - 2,707
Loans and advances to customers - 106,285 1,052,698 1,158,983
Other assets - - 5,522 5,522
Financial investments 171 - 1,106 1,277
Asset 171 348,457 1,059,326 1,407,954
LIABILITIES
Deposits from banks - 27,657 - 27,657
Derivative financial instruments - 1,067 - 1,067
Deposits from customers - - 1,194,285 1,194,285
Other liabilities - - 12,024 12,024
Debt securities in issue - - 11,448 11,448
Liability - 28,724 1,217,757 1,246,481
Level 1 Level 2 Level 3 Total
At 31 December 2013 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 193,046 - 193,046
Loans and advances to banks - 105,061 - 105,061
Debt securities held-to-maturity - 19,466 - 19,466
Derivative financial instruments - 508 - 508
Loans and advances to customers - - 732,009 732,009
Other assets - - 6,135 6,135
Financial investments 179 - 1,796 1,975
Asset 179 318,081 739,940 1,058,200
LIABILITIES
Deposits from banks - 2,003 - 2,003
Derivative financial instruments - 371 - 371
Deposits from customers - - 957,791 957,791
Other liabilities - - 10,152 10,152
Debt securities in issue - - 12,232 12,232
Liability - 2,374 980,175 982,549
5. Maturity analysis of assets and liabilities
The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2014:
Due within one year Due after more than one year Total
At 31 December 2014 £000 £000 £000
ASSETS
Cash 115,938 - 115,938
Loans and advances to banks 31,844 - 31,844
Debt securities held-to-maturity 62,839 28,844 91,683
Derivative financial instruments 1,209 1,498 2,707
Loans and advances to customers 444,594 714,389 1,158,983
Other assets 16,516 350 16,866
Financial investments - 1,277 1,277
Deferred tax asset 992 1,596 2,588
Investment in associate - 943 943
Intangible assets - 11,318 11,318
Property, plant and equipment - 12,475 12,475
Total assets 673,932 772,690 1,446,622
LIABILITIES
Deposits from banks 27,657 - 27,657
Derivative financial instruments 1,067 - 1,067
Deposits from customers 911,579 282,706 1,194,285
Current tax liability 3,612 - 3,612
Other liabilities 30,679 4,305 34,984
Debt securities in issue - 11,448 11,448
Total liabilities 974,594 298,459 1,273,053
The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2013:
Due within one year Due after more than one year Total
At 31 December 2013 £000 £000 £000
ASSETS
Cash 193,046 - 193,046
Loans and advances to banks 105,061 - 105,061
Debt securities held-to-maturity 19,466 - 19,466
Derivative financial instruments 488 20 508
Loans and advances to customers 419,694 312,315 732,009
Other assets 13,699 3,568 17,267
Financial investments - 1,975 1,975
Deferred tax asset - 3,954 3,954
Investment in associate - 943 943
Intangible assets - 13,103 13,103
Property, plant and equipment - 5,522 5,522
Total assets 751,454 341,400 1,092,854
LIABILITIES
Deposits from banks 2,003 - 2,003
Derivative financial instruments 371 - 371
Deposits from customers 781,468 176,323 957,791
Current tax liability 1,427 - 1,427
Other liabilities 26,702 4,315 31,017
Deferred tax liability - 1,099 1,099
Debt securities in issue - 12,232 12,232
Total liabilities 811,971 193,969 1,005,940
The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2014:
Due within one year Due after more than one year Total
At 31 December 2014 £000 £000 £000
ASSETS
Due from subsidiary undertakings - bank balances 19,244 - 19,244
Financial investments - 158 158
Deferred tax asset - 406 406
Intangible assets - 4 4
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