REG - Secure Trust BankArbuthnot Banking - 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 : 3659SSecure Trust Bank PLC17 March 201617 March 2016
SECURE TRUST BANK PLC
Audited Final Results for the year to 31 December 2015
Growth and diversification drives record profits
Secure Trust Bank PLC ("STB" or "the Company" or "the Bank") today announces continued strong progress during 2015. An increase in customer lending balances of 73% and growth in overall customer numbers of 33% evidence strong ongoing customer demand. Pretax profits, including Everyday Loans Group, of 36.5m are 40% higher than the prior year figure of 26.1m and are a new record high.
The agreed disposal of Everyday Loans Group announced on 4 December 2015 is progressing as planned and is expected to transfer ownership before the end of April 2016, following approval by the Regulatory Authorities. The Board is proposing a special dividend for 2016 of 165p per ordinary share at a total cost of 30m which is contingent on the completion* of the transaction at which time further details will be announced.
Financial Highlights
Completion of agreed sale of Everyday Loans Group should generate an estimated 115m post-tax profit to be reported in the H1 2016 profit and loss account
Proposed special dividend per share of 165p on completion* of Everyday Loans Group sale
Proposed final dividend per share of 55p to be paid on 6 May 2016 (2014: 52p)
Statutory profit before tax (including discontinued operations) increased by 40% to 36.5m (2014: 26.1m)
Operating income (including discontinued operations) increased by 35% to 132.5m (2014: 97.9m)
Post-tax return on average equity (including discontinued operations) 21.8% (2014: 23.1%)
Reported earnings per share 157.8p (2014: 122.3)
Core Equity Tier 1 Capital ratio at year end of 13.6% (2014: 18.7%) increases to 24.1% post Everyday Loans Group sale completion
Loan to deposit ratio 104% (2014: 102%)**
Operational Highlights
Customer lending balances increased by 73% to 1,075m
Customer deposits increased by 70% to 1,033m.
Customer numbers grew 33% to 570,759
Impairments have continued to be lower than the level expected at origination
Strong contribution from consumer lending activities
In first full year of operation SME division made a material contribution to profits
Renewal of Customer Service Excellence Award, introduced by the Cabinet Office in 2010 to replace the Kite Mark
Renewal of Fairbanking Foundation 4 star mark in respect of the current account product
Note: all figures quoted above include discontinued operations.
* Completion includes i) Regulatory approval of the change of control; ii) Transfer of ownership; iii) Recognition of the gain in the regulatory capital base of the Company.
** This excludes the UK Treasury Bills borrowed from the Bank of England under the Funding for Lending Scheme, which have subsequently been pledged as part of a sale and repurchase agreement. If these were included the loan to deposit ratio would be 100% (2014: 100%).
Sir Henry Angest, Chairman, said:
"The diligent implementation of our strategic plan has produced another year of record profits. The Bank has continued to develop its business model and now serves over half a million consumer and business customers. The agreed sale of the Everyday Loans Group will, once completed, strengthen the company's capital base and position us well for the next stage in our development."
Paul Lynam, Chief Executive Officer, said:
"2015 was a very successful year for Secure Trust Bank. Our team delivered another record year of profits and we have positioned ourselves strongly for the next phase in our development. It is very pleasing to see customer numbers growing by 33% and our lending balances increase by 73%. Our SME division made a material contribution to profits in its first full year of operation which is very encouraging and further diversifies our offering. Upon completion, the sale of Everyday Loans Group will generate an estimated 115m of post-tax profit which evidences how our highly disciplined approach to M&A activity is conducive to substantial shareholder value creation. Whilst there is likely to be considerable uncertainty ahead of the UK's vote on EU membership, I expect consumer and business confidence to improve after the vote. We are adopting a more cautious stance ahead of the referendum, and only plan to enter the mortgage market in the second half of this year, but we believe that our business model, coupled with significantly increased capital resources, is extremely well positioned to make further positive progress during 2016."
-ENDS-
Enquiries:
Secure Trust Bank PLC
Henry Angest, Non-Executive Chairman
Andrew Salmon, Non-Executive Director
Tel: 020 7012 2400
Paul Lynam, Chief Executive Officer
Neeraj Kapur, Chief Financial Officer
Tel: 0121 693 9100
David Marshall, Director of Communications
Tel: 020 7012 2400
Canaccord Genuity Limited
(Nominated Adviser and Joint Broker)
Tel: 020 7523 8000 / 020 7665 4500Roger Lambert
Sunil Duggal
Stifel Nicolaus Europe Limited
(Joint Broker)
Rob Mann
Gareth Hunt
Bell Pottinger
Tel: 020 7710 7479
Tel: 020 3772 2566
Ben Woodford
Dan de Belder
The 2015 Annual Report and Notice of Meeting will be posted and available on the Secure Trust Bank website http://www.securetrustbank.com/general/results-presentations by 8 April 2016. Copies may also be obtained from the Company Secretary, Secure Trust Bank PLC, One Arleston Way, Solihull, West Midlands, B90 4LH.
Chairman's statement
I am pleased to report that Secure Trust Bank made further progress during 2015. Our commitment to offering outstanding customer service and providing good outcomes for customers via our straightforward transparent banking solutions remains at the forefront of our proposition. Customer satisfaction levels have been consistently high and the appeal of our products and services saw overall customer numbers continuing to expand from 429,507 to 570,759 during 2015, an increase of 33%.
Our strategy of growing our overall customer lending balances whilst simultaneously expanding into secured SME lending is being successfully implemented. Overall customer lending grew by 73%. As at the year end 53% of the balances are in unsecured consumer lending (2014: 70%) and 44% are in SME lending (2014: 23%). Our long term ambition remains to have a diverse and growing lending portfolio that is balanced across consumer finance, SME finance and residential mortgage assets.
In December 2015 we announced the sale of ELG to Non Standard Finance PLC. Their unsolicited approach at a compelling valuation presented an attractive option to accelerate our strategy of proportionately reducing our exposure to personal unsecured loan products whilst we invest in our strongly growing Motor, Retail and SME lending activities. The Board therefore believes that the disposal is in the interests of the Group and represents an excellent opportunity to realise value for shareholders and for reinvestment into STB's existing profitable consumer and business lending divisions, in line with the Group's stated ambition to shift, over time, the majority of the Group's balance sheet lending into secured lending assets.
Our management philosophy of exercising prudence in respect of capital, funding and lending remains unchanged. The Bank remains well capitalised and liquidity and interest basis risks continue to be mitigated by our strategy to broadly match lending and deposits of the same tenor and term. The Bank's funding and capital positions will be significantly strengthened upon the completion of the sale of ELG. There are significant organic and external business development opportunities. As ever, we will exercise discipline and caution when considering any potential acquisitions.
I am confident that the Group will continue to demonstrate sustainable growth over the coming period. The Board proposes to pay a final dividend of 55 pence per share. This, when added to the interim dividend of 17 pence would mean a full year dividend of 72 pence per share. If approved, the final dividend will be paid on 6 May 2016 to shareholders on the register as at 8 April 2016.
The sale of the ELG, when completed, will result in significant profit and cash being generated for the benefit of the Group. We estimate the transaction will give rise to a post-tax profit of circa 115 million. Given this sizeable gain, the Board intends to propose a special interim dividend of 30 million following completion of the sale. The timing of any such interim dividend will depend on when the sale completes and receipt of the sale proceeds by the Company. Completion includes regulatory approval of the change of control, transfer of ownership and inclusion of the gain within the Company's capital reserves. The Board would, in the normal course, also review the financial position and prospects of the Company further before formally declaring any such special dividend. However, the Board believes that, following payment of the special dividend, the Company would retain sufficient capital resources to support its ongoing growth.
Finally my Board and I would like to thank all of our employees for their commitment and hard work during 2015. At the end of 2015, Carol Sergeant retired as a Non-Executive Director having made an important contribution to the development of the Bank. I would like to express my gratitude to Carol and to my fellow directors for their support during the year.
Chief Executive's statement
2015 has been another year of progress across the Secure Trust Bank Group. We have proactively managed the shape of the group and the composition of the asset portfolio finishing the year, as intended, with a good balance between consumer and SME lending assets. Notwithstanding the ongoing investment in the new SME division, the growth and strong performance of the lending book has driven record levels of profits and underlying earnings. The combination of these profits and the significant one off gain arising upon completion of the ELG divestment will provide a strong capital base and the continuing ability to pay progressive dividends. In addition, as noted in the Chairman's statement the Board intends to propose a one-off special dividend of 30 million following completion of the ELG disposal.
Customer base increasing against background of high satisfaction levels
We are serving a record number of customers across our savings, motor finance, retail point of sale finance, unsecured personal lending, asset finance, invoice finance and real estate finance markets. Across the Group the total customer base grew by 33% during 2015 to 570,759.
We remain committed to delivering consistently good outcomes for our existing and future customers and specifically design our products to be as easy as possible for customers to understand and appropriate for their needs. From a conduct and behaviour perspective we do not cross subsidise losses on some products with super profits on others. Nor do we discriminate between customers by, for example, offering lower deposit rates to existing loyal customers than to new ones. We believe this is the appropriate way to interact with our customers for the long term benefit of all parties.
We continue to measure customer satisfaction in a number of ways, including being the only bank that uses FEEFO (Feedback Forum). This rich data reflects how our customers actually experience us and given its importance this remains the first thing we discuss at our weekly management meeting. I am pleased to note that we have consistently achieved customer satisfaction ratings in excess of 90% across all of our products during the year.
For the fourth year running we received confirmation that the Fairbanking Foundation had renewed our 4 star mark in respect of our current account product. We remain the only bank in the UK to hold the Customer Service Excellence award (CSE) which was reaffirmed in 2015. This award was introduced by the Cabinet Office in 2010 to replace the Kite Mark. The CSE is a strong independent endorsement of the way customer focus is embedded in the culture of the business and the improvements we continue to make to our products and services.
We are pleased with these external accolades and the high customer satisfaction scores but are in no way complacent. We remain highly focused on improving our existing service and products and introducing new ones via the targeted investment in people, systems and processes.
Controlling growth
The Board's top strategic priority is, as ever, to safeguard the reputation and sustainability of STB through prudent balance sheet management, investment for growth and robust risk and operational controls. The regulatory environment has continued to evolve in 2015 and we have proactively responded by investing further in our 'Three Lines of Defence' business model. Our Credit Risk, Operational Risk and Internal Audit capabilities continue to be enhanced. Our consumer facing businesses are all now regulated by the Financial Conduct Authority (FCA) reflecting the transfer of regulation from the Office of Fair Trading to the FCA.
All aspects of risk are monitored closely with particular attention paid to the performance of our lending book. Our impairment levels have remained below the level which we had assumed within our pricing models when originating the business. We continue to adopt a robust and dynamic formulaic approach to impairment provisioning. Where appropriate, the Group has looked to support customers who are in financial difficulty and we seek to engage in early communication with borrowers experiencing difficulty in meeting their repayments.
Regulatory environment
Notwithstanding regular calls for greater competition from media, consumer groups and politicians, tangible progress to create a more proportionate approach to the regulation of non-systemic banks in 2015 has been limited. The overall tone especially from Government and the Prudential Regulation Authority (PRA) / Bank of England is encouraging. I hope to see words and actions becoming more aligned in the coming period and I appreciate the work that has commenced in this regard.
Despite the Competition and Markets Authority (CMA) clearly acknowledging some of the root causes of the ineffective competition in UK Banking, their provisional findings and possible remedies were largely superficial in nature. Notwithstanding the initial disappointment, I have drawn confidence from the significant and sustained pressure the Treasury Select Committee (TSC) has put on the CMA to reconsider their initial findings. I believe that in response to this, in January 2016 the CMA announced that it was extending its review into Retail Banking competition. In February 2016 it was widely reported that the National Audit Office (NAO) had added to this pressure via a report they issued which referred to the CMA investigation into banking and stated 'the ability of the CMA to present a credible market analysis and formulate effective remedies, if appropriate, will have a significant effect on its reputation'. The timescales for the next CMA report are unclear but we are tracking developments very closely.
Secure Trust Bank and the British Bankers Association have continued to campaign throughout 2015 for a level competitive playing field. It is clear that key stakeholders now better understand the barriers to growth faced by small and challenger banks. In late 2015 the Bank of England published a paper making the case to the EU for a more proportionate approach to bank regulation. This was echoed in February by Andrea Enria, chairman of the European Banking Authority (EBA) who said, "I acknowledge the framework is fiendishly complicated, especially for banks with very simple business models. Regulators have a duty to ask if simpler ways can be found to achieve the same outcomes the complexity of regulation should match the complexity of business models". As noted above the TSC continues to promote the competition agenda and in the final quarter of 2015 the Chancellor announced that he had formed a Challenger Bank High Level Advisory Group comprising senior HM Treasury officials and the CEOs of the challenger banks. This group will aim to work with HM Treasury to bring about the changes needed to create a more level playing field which will enable more effective competition across the broader market.
We will continue to closely monitor the operating and regulatory environment and adapt our business model to mitigate risk and maximise opportunities going forward. I remain confident that the regulatory environment will further evolve and a more proportionate approach will be applied to smaller banks. This will help us to make greater progress with our strategic plans and offer more of our existing and new products to a larger number of consumer and SME customers.
Prudent funding profile
Our funding strategy is unchanged. We seek to limit exposure to short term wholesale funding and interbank markets and to broadly match fixed term fixed rate customer lending with customer deposits of the same tenor and interest rate basis. This helps us to minimise maturity transformation and interest rate basis risk. During 2015 our lending activities were again funded primarily by customer deposits with only very modest use made of the Funding for Lending scheme. Our year end loan to deposit ratio was 104% (2014: 102%). To achieve a broadly matched asset to liability position we increased the average tenor of our deposits over the year with fixed term deposits rising to 57% of total deposits. This compares to 54% as at 31 December 2014. Our overall cost of funds have benefitted from market forces which have enabled us to replace maturing term deposits with new deposits of the same tenor but at lower fixed rates.
At the time of writing the outlook for interest rates suggests they will remain low for an extended period. I do not anticipate negative interest rates in the UK. Whilst such a move would not directly impact on STB, given our funding structure, lower or negative base rates would be very injurious to the largest banks and the small building societies. Overall I envisage funding conditions remaining benign for the foreseeable future.
Robust capital ratios and modest leverage
Our year end Common Equity Tier 1 (CET1) Capital levels remain healthy and reflect the successful deployment of capital raised in the second half of 2014. On a solo-consolidated basis the CET1 ratio of 13.6% compares with the 2014 year end position of 18.7%.
As at 31 December 2015 STB's leverage ratio was 10.4% (excluding the expected capital gain from the ELG disposal), which reduced over the year as the capital raised in H2 2014 was invested in the strong growth in customer loan balances. This ratio is comfortably ahead of minimum requirements.
The estimated impact of the ELG transaction is to increase the CET1 ratio to 24% and the leverage ratio to 18% (as at 31 December 2015).This serves to highlight the scope we have to increase our lending activities whilst remaining modestly leveraged.
Profit levels and return on equity building
Including discontinued operations, the Group's operating income grew by 35% to a record level of 132.5m (2014: 97.9m) whilst operating costs, which continue to be robustly managed, rose 27% to 71.7m from 56.5m in 2014, with the cost: income ratio of 51.3% (2014: 51.4%) remaining stable notwithstanding the very significant investment in the new SME division. Loan impairments of 24.3m (2014: 15.3m) rose by 59% which compares to the 73% growth in customer lending balances to 1,074.9m (2014: 622.5m). The level of impairments remains below the levels expected when the loans were originated.
Pre-tax profits, including ELG, for 2015 of 36.5m are 40% higher than the prior year of 26.1m. The underlying profit for 2015 of 39.3m represents an 18% increase on the 33.3m underlying profit before tax in 2014.
In order to support the creation of the SME division additional capital of 50m was raised in H2 2014 and as a result STB entered 2015 with very significant capital surpluses. The mathematical impact of this is to dampen returns on equity whilst this surplus equity is deployed. As expected, as 2015 progressed the return on equity improved albeit the overall return for the full year is 21.8% (2014: 23.1%).
Customer lending activities grew as planned
Once again, strong double digit growth was achieved across the group's loan portfolio in 2015. Total new business lending volumes grew 67% to 903.2m (2014: 540.9m) which translated to an increase of 73% in overall balance sheet lending assets to 1,074.9m (2014: 622.5m).
Our strategy was to focus growth in our consumer finance lending in Retail Finance and Motor Finance with a more tempered approach to unsecured personal loans. Reflecting this, the Retail Finance point of sale business, net of provisions, grew strongly as intended, with balances at 31 December 2015 increasing 89% to 220.4m (2014: 116.7m). Our Retail Finance business has evolved as our balance sheet has strengthened. In addition to a very strong position in the cycle and music sectors, we have been able to pitch for, and win, larger retailer relationships across the leisure and home furnishing sectors. As a result we are writing a broader spectrum of business including increased levels of interest bearing lending. This lending has higher levels of impairments compared with interest free finance and this is factored into our pricing to ensure we achieve our targeted risk adjusted return.
Motor Finance lending balances, net of provisions, grew 20% to 165.7m at 31 December 2015 (2014: 137.9m). 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 extremely strong relationships with a number of specialist motor intermediaries. We have written greater volumes of prime lending during 2015. The early indications are that this is attractive business so we will be increasing our activities at this end of the market.
Personal unsecured lending balances, net of provisions, increased by 4% to 188.6m at 31 December 2015 (2014: 181.4m). We have previously highlighted our unease at the competitive dynamics in the highly prime end of the personal unsecured loan market and had tempered our appetite as a result. During H2 2015 the Financial Policy Committee at the Bank of England began expressing their concerns. I do not find this surprising noting some of the larger lenders are now offering prime five year unsecured personal loans at rates which are lower than a typical standard variable rate mortgage. Our focus going forward will remain on returns rather than dramatic personal unsecured loan book growth.
The Group's SME lending operations have also grown as planned. Real Estate Finance increased by 175% to 368.0m at 31 December 2015 (2014: 133.8m). This lending is split roughly equally between residential development funding and residential investment finance. STB has a very limited appetite for commercial property lending as we recognise the difficulties lending to this sector has caused to some banks in the past. Our experience in the residential development space thus far is that the properties being developed are selling faster and for higher prices than anticipated when we made the original loans. This is obviously a positive feature albeit it does mean that loans are being repaid sooner than scheduled. 2015 saw significant fiscal changes in the buy to let (BTL) property market with changes to tax relief on interest payments made by individuals / couples and the introduction of a 3% stamp duty surcharge on BTL properties for landlords with 15 or fewer units. It is unclear how these changes will affect the housing market in the near term. The range of possibilities include; 1) smaller amateur landlords flooding the market with properties for sale, 2) rents being increased to mitigate the financial impact of the changes, 3) individuals and couples moving portfolios into incorporated structures, 4) professional landlords and corporates unaffected by these changes buying up stock put on the market by amateurs, 5) a mix of all these possibilities. Our residential investment lending is not regulated mortgage lending and is not targeted at amateur landlords; as such the professionals and corporates we lend to could benefit from these taxation changes. In the short term while we wait for the impacts of the BTL changes on the housing market to become clearer and given the potential uncertainties arising from the EU referendum we have tempered our lending to residential property developers, especially in Central London. We remain confident about the medium term prospects of this sector given fundamental supply and demand dynamics.
In its first full year of operation, Secure Trust Bank Commercial Finance, the invoice finance division of the Bank, funded over 220m of customers' invoices. Customer lending balances, net of provisions grew 486% to 29.3m at 31 December 2015 (2014: 5.0m). Our customer proposition is relationship focused which means this division will take time to achieve critical mass as we are being very selective with the clients being accepted in the early stages of this business.
The Asset Finance strategic partnership with Haydock Finance has proven to be very successful thus far, with clear benefits to both parties. Haydock are a long established and very well regarded asset finance company operating across the UK. They provide a full business process outsourcing service to STB. This is governed by a detailed operating agreement which includes auditing and oversight arrangements. All of the lending written fully conforms to STB's credit policies and risk appetite and is assessed by STB staff based in Haydock's premises. Customer lending balances, net of provisions grew 1,471% to 70.7m at 31 December 2015 (2014: 4.5m).
Disposal of Everyday Loans Group
In December 2015 we announced the proposed sale of ELG to Non Standard Finance PLC (NSF) following an unsolicited approachfor a total consideration and debt repayment of 235 million. We did not set out to sell ELG and all things being equal would be very happy to continue owning and developing the business. However the nature of the acquirer and the agreed consideration is such that the transaction should work well for ELG staff whilst allowing accelerated development of other parts of the STB Group. The NSF executive is extremely experienced in the non-prime segment of the unsecured personal loan market and has very impressive track records at their previous businesses. They are focused on a growth agenda and will be looking to serve a wider range of customers via a broader range of products than the STB risk appetite would allow. There is no question that there is a huge non-standard market that requires the important services and access to credit that ELG provides. Under NSF's ownership I expect ELG to grow considerably, which I would hope will benefit ELG staff and NSF shareholders, which will include STB, alike.
The decision to sell ELG demonstrates the Board's willingness to make and execute decisions which we believe are in the best longer term interests of shareholders. As stated previously we estimate the post-tax profit on the sale of ELG will be in the region of 115 million and this will be recognised in 2016. Subject to the transaction completing as expected the Board have decided to retain the majority of this one off profit to support the strategic priorities detailed below whilst also proposing a special dividend payment of 30 million. While in the short term the sale is expected to reduce earnings, given the disposal of ELG's profit streams, we are confident that the proceeds can be reinvested to accelerate the Group's growth prospects and secure new income streams.
Fee based accounts
Current account customer numbers further declined during 2015 reflecting the reduced focus on this product whilst we concentrated our investment in more profitable areas. Consistent with trends seen in 2014 customer satisfaction levels remained high but achieving significant growth in customer numbers has been difficult, in part because the operational costs arising from accessing the payments infrastructure make the product appear to be uncompetitive compared with 'free if in credit' current accounts from other banks. In December 2015 the High Street banks, under pressure from HM Government, launched basic bank account propositions to open up access to banking to underserved communities. We are monitoring the impact of these developments on our current account proposition which remains an immaterial part of our business model.
As expected, the OneBill customer numbers continue to decline over time, following its closure to new accounts in 2009, with 6.5m of income generated in 2015 compared with 7.1m in 2014.
Debt Managers
The markets for debt collection agencies remained difficult during 2015. Many lenders reported improving impairments trends as fewer customers defaulted. Debt purchasers have therefore been less active which has impacted on the volume of business they have placed with debt collectors. Given these dynamics Debt Managers did not trade profitably in 2015 and incurred a modest loss before tax of 0.5m. This is a market which is undergoing structural changes heavily influenced by the transition of regulatory oversight from the OFT to the FCA. Debt Managers has now received full FCA authorisation and we believe it is one of the first debt collection agencies to be authorised. Given the relatively benign outlook for the UK economy, barring a shock, we anticipate that market conditions will remain tough and have adapted the Debt Managers business to reflect the subdued market.
Our people
I am delighted that following another in-depth review and external assessment of the Group, we have retained the Customer Service Excellence standard. This Government standard of excellence for customer service benchmarks us against other high-performing organisations. I am very proud of the feedback received about our teams' professionalism, honesty and positivity about working at the Bank, as well as our ethics towards customers. These demonstrate the investments that we have made in creating the right culture and following a clear set of company values.
It is also rewarding to receive various new awards including Best Savings Provider from Savings Champion. They provide independent and unbiased information on the UK savings market.
Our charitable activities have meant we have raised in excess of 50,000 over a 2 year period for Birmingham Children's Hospital, through a number of organised events, including an annual flagship cycling event. Our team has also been involved in ward decorating during the Christmas period. I again applaud my colleagues for both their charitable work and sheer commitment to delivering great service in a very friendly manner to our customers throughout the year.
Our ongoing overall growth continues to support job security and create career progression opportunities for our team. This is reflected in full time equivalent employee numbers rising to 773 during the year (2014: 625).
Strategic priorities
Secure Trust Bank PLC undertook its IPO in November 2011 to provide access to the capital it required to support a clear growth strategy focused on three strategic priorities: (i) organic growth, (ii) diversification and (iii) M&A activity. In the four years since, the Bank has diligently executed its strategy as reflected in the growth in customer numbers of 309% (2011: 139,693, 2015: 570,759), growth in customer lending balances of 690% (2011: 136m, 2015: 1,075m), creation of a new SME division, acquisitions of V12 Retail Finance, Debt Managers and the acquisition, investment in and subsequent sale of ELG. Statutory profits before tax have increased 400% from 7.3m in 2011 to 36.5m in 2015.
Evaluating the effectiveness of this strategy, I note that at the time of the IPO the Bank had shareholders' equity of circa 19.6m. The IPO raised 10m of additional capital and shareholders subsequently invested a further 71.5m of capital (circa 19m in December 2012, 49m in June 2014 and 3.5m in November 2014). At the year-end shareholders' equity stood at 141.2m. Following the completion of the sale of ELG, and prior to the impact of any final and special dividends payable during 2016, shareholders' equity will increase to circa 226m. In simple terms assuming completion of the ELG sale, in the period from IPO to date, the Company has been able to use the circa 101m of equity brought forward, plus that invested by shareholders, to create additional equity of 163m. This is represented in the increased shareholders' equity of 125m and dividends paid since IPO of 37.8m.
Looking ahead we see plenty of opportunities to progress this three pronged growth strategy whilst proactively adapting the business model to reflect market conditions. However in the short term there is likely to be considerable uncertainty ahead of the UK's vote on EU membership. STB operates only in the UK and has no direct exposure to the EU economy. The UK economy is services led and the majority of this is internally generated. We have no way of knowing the outcome of the referendum so it is prudent to proceed with caution whilst clarity on this very important issue emerges. STB enters this uncertain period with very significant capital reserves, a short duration loan book and a broadly matched funding profile that minimises liquidity risks. We believe we are very well placed to navigate any uncertainty that may arise from the referendum and are constantly monitoring developments.
Our working assumption is that matters will settle down quite quickly after the referendum because that will be in the best interests of all concerned. This will allow us to continue to progress our strategy with certainty. We will continue to prioritise the growth of our Retail Point of Sale and Motor propositions in the Consumer Finance sector whilst tempering our appetite for unsecured personal loans. As stated above this is an area we feel is showing signs of overheating with some lenders now offering unsecured loans at cheaper margins than some secured mortgage lending. That does not feel sustainable to us. We believe we have a very strong proposition in Retail Finance and see considerable scope to further increase the number of retailers we work with. During 2015 we wrote a limited volume of prime Motor Finance business in order to assess the attractiveness of this sector of the market. The initial indications are positive. We intend to write higher volumes of prime Motor Finance going forward. As most of the prime dealers commit to financing partnerships in Q4 each year, whilst we will write more prime Motor Finance in 2016, there will not be a step change in volumes until 2017, assuming the market dynamics remain broadly stable.
The diversification into SME lending has proved successful thus far. As at 31 December 2015 SME customer lending balances stood at 468.0m representing 44% of the total lending book. In their first full year of operation Real Estate Finance and Asset Finance traded well and in aggregate provided a material profit contribution. Invoice Finance, as expected, incurred losses as it scales and builds up critical mass. We expect Invoice Finance to turn profitable this summer.
We see plenty of opportunity to expand our SME activities further in the coming years. Demand for asset finance to fund business investment and demand for invoice finance to help fund working capital cycles is strong. This is likely to remain the case given the ongoing growth of the UK economy. In Real Estate Finance, the residential investment assets have performed well reflecting strong demand for rental properties. Our lending here is not regulated mortgages and we do not expect to be directly impacted by the BTL taxation changes announced in 2015. On the residential development side, those units being built which are nearing completion have been selling faster and for higher prices than anticipated when the loans were granted. The Government has reiterated its commitment to doubling the rate of house building in the UK. Mortgage finance is readily available and with the economy continuing to grow and interest rates remaining low, consumers are able to obtain and service mortgages. These are clearly positive dynamics. However, in the short term whilst we wait for the impacts of the BTL changes on the housing market to become clearer and given the potential uncertainties arising from the UK EU referendum we have tempered our residential development lending appetite.
Our longer term ambition remains to grow a broad based portfolio, balanced across consumer finance, SME finance and residential mortgage lending. During 2015 we have recruited a number of key personnel to develop our mortgage proposition. We will not be competing in the mass market low LTV low margin products dominated by the High Street banks. Instead our focus will be on specialist lending where we expect to compete against other challenger banks that are generating attractive returns from their mortgage lending. As we develop our proposition here we are mindful of the Basel Committee proposals in respect of standardised capital methodologies and the recent BTL taxation and stamp duty changes. We anticipate entering the mortgage market in the second half of 2016 and will provide a further update in due course.
We see a constant flow of M&A opportunities and give serious consideration to a number of these. Given the significant capital surpluses at our disposal we have an appetite to potentially acquire businesses that would enhance the growth of our consumer and SME lending activities. Shareholders know that we will continue to exercise discipline, caution and prudence when assessing M&A opportunities and remain extremely focused on ensuring such activity is in the long term interests of shareholders, staff and customers.
Current trading and outlook
There has been no material change to the underlying performance of the business in the early months of 2016. We continue to see potential to grow our lending portfolio in line with our ambition and have a clear growth strategy and a pipeline of organic and external new business opportunities.
I am optimistic that the increasingly vocal support for a more proportionate approach to regulation from a wide range of parties including the Treasury Select Committee, the Competition and Markets Authority, The Bank of England and latterly the European Banking Authority, will result in tangible changes to make it possible for smaller banks to compete more effectively with the dominant incumbents across a broader range of products. I am continuing to lobby extensively for the creation of a truly level competitive playing field as I firmly believe it is in best interests of UK consumers and SMEs to have a much greater choice and less concentration in the UK banking market.
As ever STB will seek to maximise the value of any opportunities that may arise. Whilst the pace of the UK economic recovery has slowed the economy continues to expand. Low inflation and a strong jobs market are sustaining high levels of consumer confidence, which should benefit our Motor and Retail Finance businesses. The UK continues to have a chronic shortage of housing and notwithstanding the short term uncertainties arising from taxation changes in the BTL market; fundamental supply and demand factors will further drive the need for an increase in the UK's housing stock. We expect consumer and business confidence and demand for credit from businesses to moderate ahead of the EU referendum before recovering thereafter. So whilst we are adopting a more cautious stance ahead of the referendum, we believe that our business model, coupled with significantly increased capital resources, is extremely well positioned to make further positive progress during 2016.
Strategic report Business review
This section of the Report and Accounts contains the Strategic Report required by the Companies Act 2006 to be prepared by the directors of the Bank. It describes the component parts of the Group's business; the principal risks and uncertainties; the development and performance of the business during the financial year; and the position of the business at the end of the year.
Financial and other key performance indicators are used where appropriate. Reference is made to and additional explanations provided about amounts that are included in the Group's Accounts.
Business finance Real Estate Finance
Revenue and lending performance vs prior years
Real Estate Finance lending revenue
2015 20.3 million
2014 2.4 million
2013 0.1 million
Real Estate Finance lending balance
at 31 December
2015 368.0 million
2014 133.8 million
2013 1.8 million
2015 performance
The Real Estate Finance business continued to show significant growth during 2015, increasing its book by 175% to 368m which led to an eightfold increase in revenue in the year. This reflected the strong pipeline of business brought in from 2014, coupled with the impact of increasing our complement of experienced Real Estate professionals and broadening the geographical profile beyond the South East. The business continues to focus primarily on residential property, with the book being evenly split between investment and development deals. Credit Performance has also been encouraging, with no losses arising so far. In addition, we have also seen a number of residential development deals written in 2014 reaching a successful conclusion and being repaid ahead of expectations.
Looking forward
The current book provides a base for further growth in revenues in 2016, and the business retains a strong appetite for well-structured transactions, but without stretching its agreed risk positions. Market conditions are kept under close scrutiny to ensure we can respond quickly to any changes that may occur.
Business finance Asset Finance
Revenue and lending performance vs prior years
Asset Finance lending revenue
2015 2.4 million
2014 nil
2013 nil
Asset Finance lending balance
at 31 December
2015 70.7 million
2014 4.5 million
2013 nil
2015 performance
The Asset Finance business has been in place for the whole of 2015, compared to just one month in 2014. Overall gross new lending was 72.8m in 2015, exceeding the target set for the business for the year. The overall yield from this new business was in line with target, contributing to the revenue growing to 2.4m in the year. Credit performance has been encouraging with no losses recorded to date.
Looking forward
The focus will remain in building the book in partnership with Haydock Finance, whilst maintaining excellent service levels and credit quality. We will continue to investigate products that complement the current profile, provided they are within our risk appetite and meet return requirements.
Business finance Commercial Finance
Revenue and lending performance vs prior years
Commercial Finance lending revenue
2015 1.6 million
2014 0.1 million
2013 nil
Commercial Finance lending balance
at 31 December
2015 29.3 million
2014 5.0 million
2013 nil
2015 performance
The end of 2015 sees the first full 12 month trading period for the Commercial Finance business and we are already in the top 20 providers of Asset Based Lending facilities in the UK, with facilities agreed in excess of 55m. This progress has been underpinned by a growing reputation for flexibility but above all else, for having a customer centric approach. We have handpicked a team of twenty people and whilst the Head Office is domiciled in Manchester we have both origination and client servicing capability across the UK. Credit performance has been encouraging with no losses recorded to date.
Looking forward
It has been a key strategic objective to foster strong relationships with the professional community and specifically those involved in the Private Equity market. This has enabled us to build the portfolio with a range of tailored lending solutions which are genuinely solution led. New technology will increasingly allow us to enhance the client experience and at the same time ensure that we have a fully compliant process.
Consumer finance Personal Lending
Revenue and lending performance vs prior years
Personal Lending revenue
2015 57.9 million
49.4 million
2013 41.8 million
Personal Lending balance
at 31 December
2015 188.6 million
2014 181.4 million
2013 159.2 million
2015 performance
The Group's lending operations continued to grow in a controlled way, with new personal lending volumes in the year, including Everyday Loans, increasing to 135.9 million from 127.7 million in the previous year, an increase of 6%. This generated an increase in personal lending balances during the year, which at the year end, including Everyday Loans, totalled 188.6 million (December 2014: 181.4 million).
The growth in Group personal lending new business volumes has again not been at the expense of price or quality. Income from personal lending increased by 5% to 57.9 million whilst impairment losses were 12.3 million compared to 9.9 million in 2014.
In November 2015, the Group agreed to the conditional sale of ELG to Non Standard Finance Plc for an expected post tax profit of approximately 115 million.
At the year end, lending balances in the continuing operation under the Moneyway brand were 74.3 million (2014: 87.5 million) and income during the year increased by 14% to 17.2 million. Impairment losses were 4.8 million compared to 3.3 million in 2014.
The levels of credit impairments on all portfolios have been below the levels priced for when the loans were originated. The credit risks in the lending book are continually scrutinised with this data being used to inform changes in risk appetites and pricing.
Looking forward
Following the conditional sale of ELG, the Group will continue to provide personal loans under its Moneyway brand through its existing network of experienced UK based advisors.
Consumer finance Motor Finance
Lending performance v prior years
Motor Finance lending revenue
2015 33.3 million
2014 27.2 million
2013 23.0 million
Motor Finance lending balance
at 31 December
2015 165.7 million
2014 137.9 million
2013 114.7 million
2015 performance
New business volumes for motor lending increased from 71.4 million to 85.7m, an increase of 20% year on year. This generated a significant increase in lending assets during the year. Income has increased by 22% to 33.3 million.
2015 growth has been achieved through a combined focus on widening the lending parameters and criteria of our product as well as restructuring our offer to create a wholly transparent product for consumers based around fixed rates and the removal of all fees with the exception of a 10.00 option to purchase fee at the end of the agreement. This approach supported our growth and contributed to Moneyway receiving the prestigious awards in the industry for subprime lender of the year (Motor Finance Awards) and Treating Customers Fairly (F and I Awards).
Moneyway has also continued to establish strong relationships with all our customers whilst promoting our brand. 2015 saw an increase in the sales headcount from 7 to11 with a wider geographical coverage than ever before.
Impairment losses for the year increased from 3.9 million to 7.3 million. This reflects the continued growth and maturity of the loan book, and refinement of the provisioning methodology, as the Bank moves closer to IFRS 9 implementation.
Looking Forward
Into 2016 Moneyway will complete the launch of the prime product across all our introducer channels to complement our non-prime products providing introducers with a true "one stop shop" solution and a product for every customer. Operational processes will continue to evolve by introducing enhanced technology to provide a prime service across the entire risk curve.
Our "one stop shop approach" will create a true point of difference in the market as we will operate across a wider reach of the risk curve. This will enable us to offer a product for every customer and our intermediaries a first string solution that we could not offer before. This strategy is designed to enable us to widen our reach of supporting dealers and intermediaries and will be our primary strategy towards achieving further growth.
One stop shop will continue to be supported by exceptional operational service using technology to enable us to offer a prime service across the entire risk curve within which we operate.
Consumer finance Retail Finance
Revenue and lending performance vs prior years
Retail Finance revenue
2015 24.2 million
2014 13.6 million
2013 8.3 million
Retail Finance balance
at 31 December
2015 220.4 million
2014 116.7 million
2013 70.1 million
2015 performance
The three largest sub-markets for retail financeare the provision of finance for the purchase of sports and leisure equipment (including cycles), furniture and consumer electronics. Cycle finance has seen positive new business levels influenced by the success of British cyclists in the Tour de France, the Olympics and Paralympics.
The Retail Finance business has continued to grow strongly, with new lending volumes increasing to 293.9 million (an increase of 90% on the previous year). Each of the core business sectors (sports and leisure, furniture and consumer electronics) have contributed towards this growth which has been achieved through a combination of gaining increased market share and sector growth (as seen in the cycle market). This growth has generated a significant increase in lending assets during the year, which at the year end totalled 220.4 million (December 2015: 116.7 million).
Income from retail lending increased by 78% to 24.2 million. Impairment losses were well controlled at 5.2 million in 2015.
Looking forward
The Group plans continued growth in Retail Finance during 2016 with the focus on acquiring increased market share within its existing target markets. A number of initiatives are underway to further enhance systems capabilities to ensure that quality of service to both retailers and customers is maintained as the business continues to expand. To further support the maintenance of service levels the business intends to continue the expansion of its workforce whilst investing in additional office and support facilities.
Savings
Savings balances vs prior years
Notice deposits
2015 405 million
2014 239 million
2013 207 million
Deposit bonds
2015 589 million
2014 331 million
2013 193 million
Current/sight accounts
2015 39 million
2014 38 million
2013 36 million
2015 performance
The Bank's customer deposits primarily comprise notice deposits, term deposits and fee-based accounts, being fee-based current accounts and OneBill accounts. At 31 December 2015 customer deposits totalled 1,033 million. This represents an increase of 425 million since the last year end.
The Bank's notice deposits totalled 405 million at the year end (December 2014: 239 million). New 120 day notice accounts were introduced during the year and were successful, raising additional new deposits of 95 million predominantly during the second half of the year.
During the year, the Bank launched further fixed rate deposit bonds, with one to seven year maturities which enable it to match broadly the new lending activities. These again were very successful as the Group raised new deposits of over 333 million, achieving its desired funding maturity profile. At the year end term deposit bond balances totalled 589 million.
Strategic report Financial review
Summarised income statement
2015
2015
2015
2014
2014
2014
Continuing operations
Discontinued operations
Total
Continuing operations
Discontinued operations
Total
Income statement
million
million
million
million
million
million
Interest, fee and commission income
117.4
40.7
158.1
79.5
34.3
113.8
Interest, fee and commission expense
(25.3)
(0.3)
(25.6)
(15.8)
(0.1)
(15.9)
Operating income
92.1
40.4
132.5
63.7
34.2
97.9
Impairment losses
(16.8)
(7.5)
(24.3)
(8.7)
(6.6)
(15.3)
Operating expenses
(50.5)
(21.2)
(71.7)
(37.5)
(19.0)
(56.5)
Profit before tax
24.8
11.7
36.5
17.5
8.6
26.1
Costs of acquisition
-
-
-
0.2
-
0.2
Fair value amortisation
0.9
0.9
1.8
4.4
0.9
5.3
Share based incentive scheme
0.7
-
0.7
1.5
-
1.5
Net ABG management recharges
0.3
-
0.3
0.2
-
0.2
Underlying adjustments to profit
1.9
0.9
2.8
6.3
0.9
7.2
Underlying profit before tax
26.7
12.6
39.3
23.8
9.5
33.3
Tax
(5.5)
(2.3)
(7.8)
(3.6)
(2.0)
(5.6)
Tax on underlying adjustments
(0.4)
(0.1)
(0.5)
(1.4)
(0.2)
(1.6)
Underlying tax
(5.9)
(2.4)
(8.3)
(5.0)
(2.2)
(7.2)
Profit after tax
19.3
9.4
28.7
13.9
6.6
20.5
Underlying adjustments after tax
1.5
0.8
2.3
4.9
0.7
5.6
Underlying profit after tax
20.8
10.2
31.0
18.8
7.3
26.1
Underlying basic earnings per share (pence)
114.3
56.1
170.4
112.3
43.5
155.8
Income analysis
Operating income increased by 35% to 132.5 million. Growth was achieved through increased levels of activity in all lending sectors. At 903 million, new lending volumes increased in total by 362 million representing an increase of 67% on 2014. New lending volumes in Real Estate Finance, Asset Finance and Commercial Finance increased by 230 million and, Personal Lending, Motor Finance and Retail Finance businesses increased in total by 162 million, representing increases of 164% and 46% respectively on 2014.
Real Estate Finance income increased by 712% to 20.3 million during the year with Asset Finance and Commercial Finance businesses generating income of 2.4 million and 1.6 million respectively in their first full year of trading. Income from Retail Finance under the V12 brand increased by 78% to 24.2m, through maintaining a strong position in existing retail markets whilst establishing new relationships in the home furnishing and leisure sectors. Motor Finance income increased by 22% to 33.3 million as the Bank increased its activities in prime lending. The Bank intends to create further diversified and balanced growth in its lending portfolios during 2016.
Income from the current account with a prepaid card declined in 2015 following the Bank's decision to close the product to new accounts during 2015. The decline in income from the OneBill product following its closure to new accounts in 2009 continued as expected.
Impairment losses during the year were 24.3 million (2014: 15.3 million). This increase is broadly in line with overall growth in consumer lending balances and is also partly driven by a refinement in provisioning methodology as the Bank moves closer to IFRS9 implementation in the Motor and Personal Lending portfolios.
Operating expenses have increased, in line with expectations, as significant investments have been made in the infrastructure and human capital of the Group to achieve our growth targets within the Group's risk appetite. This investment will continue to generate further returns in the future.
Underlying profit before tax was 39.3 million, which is an increase of 18% on 2014. Underlying profit removes the effects from the income statement of acquisition costs, fair value amortisation arising from acquisitions, share option scheme costs and net ABG management recharges.
Taxation
The effective underlying tax rate is 21.1% (2014: 21.5%), which is broadly in line with the weighted average corporate tax rate during the year. The prior year's tax rate reflected the effects of acquisition adjustments relating to deferred tax. The Bank's effective tax rate will increase in 2016 as a result of the new Bank Corporation tax surcharge of 8%, which is effective from 1 January 2016.
Distributions to shareholders
The directors recommend the payment of a final dividend of 55 pence per share which, together with the interim dividend of 17 pence per share paid on 18 September 2015, represents a total dividend for the year of 72 pence per share (2014: 68 pence per share).
The Board is also proposing to pay a special dividend of 165 pence per share for 2016. The dividend is dependent on the completion of the sale of ELG, which includes regulatory approval of the change of control, transferral of ownership and the inclusion of the gain within the Company's capital resources. Following completion, the Board would also review the financial position and prospects of the Company further before declaring any such special dividend.
Earnings per share
Detailed disclosures of earnings per ordinary share are shown in Note 11 to the financial statements. Basic earnings per share increased by 29% to 157.8 pence per share (2014: 122.3p), whilst the underlying basic earnings per share increased by 9% to 170.4 pence per share (2014: 155.8p per share).
Summarised balance sheet
2015
2015
2015
2014
Continuing operations
Discontinued operations
Total
Total
million
million
million
million
Assets
Cash and balances at central banks
131.8
-
131.8
81.2
Debt securities held-to-maturity
3.8
-
3.8
16.3
Loans and advances to banks
9.8
1.7
11.5
39.8
Loans and advances to customers
960.6
114.3
1,074.9
622.5
Other assets
22.9
2.5
25.4
22.5
1,128.9
118.5
1,247.4
782.3
Liabilities
Due to banks
35.0
-
35.0
15.9
Deposits from customers
1,033.1
-
1,033.1
608.4
Other liabilities
29.4
8.7
38.1
33.1
1,097.5
8.7
1,106.2
657.4
The total assets of the Group increased by 59% to 1,247.4 million reflecting the continued growth in both Business and Consumer lending. Real Estate Finance lending balances increased by 175% to 368.0 million at the year-end after just 2 years of lending. Asset Finance lending balances increased from 4.5 million to 70.7 million and Commercial Finance from 5.0 million to 29.3 million in their first full year. During the year the Retail Finance business increased lending balances by 89% to close at 220.4 million, as the Group continues to profit from the synergistic benefits of aligning its Retail Finance businesses under the V12 brand. Motor Finance increased its portfolio size by 20% to 165.7 million through continued growth in the number of dealer relationships and through developing its prime lending offering. Everyday Lending Group personal lending balances increased by 22% during the year prior to its divestment (subject to FCA approval) from the group.
Customer deposits grew by 70% during the year to close at 1,033.1 million, to fund the increased lending balances. The Group also held 35.0 million of wholesale deposits at the year-end, following the sale and repurchase of FLS Treasury Bills.
Funding for Lending Scheme
In 2013 the Bank was admitted to the Funding for Lending Scheme (FLS). The FLS is a scheme launched by the Bank of England and HM Treasury, designed initially to incentivise banks and building societies to boost their lending to UK households and SME's. The FLS does this by facilitating funding to banks and building societies for an extended period, at below current market rates, with both the price and quantity of funding provided linked to the institution's performance in lending to the SME sector.
Strategic report Principal risks and uncertainties
The monitoring and control of risks is a fundamental part of the management process. The Board considers that the principal risks inherent in the Group's business are credit, market, liquidity, operational, capital, conduct and regulatory risks. A description of the risk management policies in these areas is set out in Note 5 to the financial statements.
A short description of the principal risks, the ways in which the Group's management seek to manage these risks and some examples of developments that took place in 2015 are set out below.
Risk appetite
The risk appetite statements below have been approved by the Board:
Profitability
We are profit and growth oriented whilst seeking to maintain a conservative and controlled risk profile. The Bank manages credit risk through a pricing for risk model which drives a potential return on equity in excess of 20% on aggregate.
Financial Strength
Our financial strength is safeguarded by a strong capital base and a prudent approach to liquidity management. Capital levels will not fall below the Individual Capital Guidance ("ICG") requirements.
Liquidity is maintained at a level above the Overall Liquidity Adequacy Requirement (see 'Liquidity risk' below) with all loans funded typically by retail deposits.
Conduct with Customers & Reputation
As a result of the way we conduct our business we seek to avoid negative outcomes by consistently treating our customers fairly.
We are straightforward and fair with our customers and seek to achieve excellent customer service standards. Our aim is to be seen as a sound and professional business in the marketplace. We have no appetite for reputational risk arising from the way in which we or our partners behave.
We seek to remain compliant with all relevant regulatory requirements.
Business Processes and Our People
Our appetite for operational risk is to have well defined, scalable and controlled processes, running on robust and resilient systems, effective delivery of change and business continuity management.
We do not tolerate operational losses above our pillar 1 capital requirement.
Risk appetite measures
The Board Risk Committee uses a set of measures to assess the Group's position against its risk appetite. These measures are also cascaded to individual business units for monitoring and reporting purposes. The key measures are set out in the relevant sections below.
Credit risk
Credit risk is the risk that a counterparty will be unable to pay amounts in full, when due. Counterparties include the consumers to whom the Group lends unsecured and the small and medium sized enterprises to whom the Group lends secured as well as the market counterparties with whom the Group deals.
This risk is managed through the Group's internal controls and credit risk policies. The risk is monitored by the Credit Risk Committee, with oversight provided by the Board Risk Committee. Larger exposures are also approved by the Arbuthnot Banking Group Risk Committee.
For STB, credit risk arises principally from its lending activities. Details of exposures, concentration risk, allowances for impairment and arrears are given in Notes 5, 13 and 14. At the year-end, 94% of loans and advances tocustomers by value were neither past due nor impaired, compared with 89% at 31 December 2014.
Credit risk also arises in respect of the Group's loans and advances to banks, and counterparty risk is monitored using the ratings of the respective counterparties. Further details are given in Notes 5 and 12.
Across the different product markets in which the Group operates, credit risk management oversee the application of the Group's risk related policies and consider the impact of market changes and business opportunities. At the end of the financial year the Group was within risk appetite across a range of measures covering bad debt rates, concentration risk and automated credit decisioning.
Key developments during 2015 in the credit risk management of the consumer and commercial business areas of the Group are described below.
Consumer credit risk
In 2015, the Group commissioned a market leading risk consultancy to review its near prime Motor Finance credit risk management. This work will result in more appropriate risk based pricing.
The Group has also developed its methodology for its unsecured personal loan businesses. These changes are expected to deliver more accurate credit risk assessment and improved risk based pricing, whilst maintaining credit quality.
Retail Finance has seen considerable growth from both existing retailers and new additions to the retail panel. The addition of new retailers, coupled with significant growth from existing introducers and buoyant consumer confidence resulted in significant year on year growth. This growth has been managed through the existing scorecard and rule set without compromising credit quality. The performance of all the consumer portfolios continue to be monitored closely through monthly Credit Committee governance meetings which review scorecard and rule performance and new application quality and delinquency trends.
Commercial credit risk
The growth in lending to the SME sector has been built around strong risk management practices. The Group has employed experienced bankers who have operated through both positive and challenging economic cycles, and have brought their experience to bear alongside the application of robust risk governance, credit appetite and lending policies.
For Real Estate Finance and Commercial Finance, lending decisions are made on an individual transaction basis, using expert judgement and assessment against criteria set out in the lending policies. Asset Finance lending is outsourced to Haydock Finance, who operate in line with the Group's credit policies and risk appetite. Secure Trust Bank employees based in Haydock's premises assess this lending for compliance with policy. A programme to develop probability of default (PD) modelling for each of the SME businesses commenced in 2015 and is expected to be delivered in the second half of 2016. These models will be IFRS 9 compliant.
With the SME businesses in the early stage of their growth, impairments and arrears have been minimal to date. Of particular note is the positive performance of the Real Estate Finance book, where property developments financed have seen repayments achieved both ahead of time and above expected valuations, in part assisted by the positive housing market throughout 2015. Management continue to closely monitor the SME portfolios and the external events and environment that could impact on each of them.
Future development - implementation of IFRS 9
The new accounting standard governing the impairment of financial assets, IFRS 9, is effective for annual reporting periods beginning on or after 1 January 2018. The standard fundamentally changes the calculation and recognition of credit losses, by introducing the requirement to base impairment provisions on expected credit losses over the life of the financial asset. It also requires credit losses to be recognised for all loans, in contrast to the current standard (IAS 39) which requires recognition of losses only when there is evidence of impairment. The models used to calculate expected credit losses need to include forward looking factors including macro-economic variables.
The key differences between the two approaches are:
Status of loan
Current standard (IAS 39)
New standard (IFRS 9, effective from 1 January 2018)
No evidence of specific impairment
No specific impairment charge, but assessed at portfolio level for collective impairment
Charge for expected credit loss applied for all loans, based on probability of default over a 12 month period
Evidence of significant increase in credit risk, but not impaired
No specific impairment charge, but assessed at portfolio level for collective impairment
Charge for expected credit loss applied, based on lifetime probability of default
Impaired
Specific impairment charge applied, equating to lifetime credit losses
Charge for expected credit loss applied, based on lifetime probability of default
The Group has initiated a project to develop and implement the modelling, data, processes, systems and disclosures required to comply with IFRS 9. The Group intends to run the provision modelling and accounting processes over the course of 2017 to assess the impact of the standard.
Market risk
Market risk is the risk that the value of, or revenue generated from, the Group's assets and liabilities is impacted as a result of market movements. For Secure Trust Bank Group this is primarily limited to interest rate risk.
This is managed by the STB treasury function and overseen by the Board Assets and Liabilities Committee (ALCO). The policy is not to take significant unmatched own account positions in any market. The key measure used to monitor the risk is the Interest Rate Risk Sensitivity Gap, information about which is provided in Note 5. The Group was within its appetite for this risk at the year-end.
The principal currency in which the Bank operates is Sterling, although a small number of transactions are completed in US Dollars and Euro in the Commercial Finance business. All such currency exposures are fully hedged using short term swaps of no more than 30 days in length, which ensures that the Group and the Bank have no exposures to currency fluctuations.
Liquidity risk
Liquidity risk is the risk that the Group cannot meet its liabilities as they fall due, due to insufficient liquid assets.
The Group takes a conservative approach to managing its liquidity profile, by closely monitoring and remaining within risk appetite limits, and holding high quality liquid assets; primarily UK Treasury Bills and the Bank of England Reserve Account. The Group is primarily funded by retail customer deposits, having limited exposure to the wholesale lending markets. ALCO oversees liquidity risk and monitors the activities of management in managing liquidity risk. 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 as described below.
The primary measures used by management to assess the adequacy of liquidity are the Overall Liquidity Adequacy Requirement (OLAR), which is the Board's own view of the Group's liquidity needs as set out in the ILAAP, and the regulatory requirement to meet the Liquidity Coverage Ratio (LCR). The Group has maintained liquidity in excess of the OLAR throughout 2015.
The 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. STB has set a more prudent internal limit. The actual LCR has significantly exceeded both limits throughout the year.
ALCO also uses the funding to loan ratio to assess liquidity adequacy, against a minimum target. The ratio exceeded this minimum target throughout the year.
Operational risk
Operational risk is the risk that the Group may be exposed to financial losses from inadequate or failed internal processes, people and systems or from external events.
The Group has a defined set of Operational Risk Appetite measures covering such matters as operational losses, IT resilience, information security, complaints and more generally the level of operational risks the Group is prepared to accept. These appetite measures are cascaded to individual business units which monitor and track their level of risks within their local governance forums.
In 2015, the Group invested in resource, expertise and systems to support the development of its operational risk capabilities. A formal Operational Risk Management System is being introduced along with an enhanced Operational Risk Framework covering all the key principles for the sound management of Operational Risk as defined by the Basel Committee.
Key areas of focus in 2015 have been:
Developing and clearly defining the governance structure and procedures over how key business decisions are made and operational risks are managed, controlled and escalated within the business;
Developing our systems and controls over the management of our third party suppliers and how the services they support are maintained, secured and improved;
Enhancing our IT systems so that they are resilient in order to continue to provide the service expectations of our customers;
Developing our Business Continuity Plans so that they are robust and responsive to a range of potential internal and external issues the Group could face;
Managing change effectively and ensuring any new developments meet the high standards set for our customers and the services we provide.
In 2016 we will continue to monitor the effectiveness of our controls and respond to new and emerging threats to the business.
Cyber risk
There is an increased risk that the Group is subject to cyber risk within its operational processes. 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. The Group continues to improve its defences against cyber risk through the use of enhanced monitoring and response tools and procedures.
Capital risk
Capital risk is the risk that the Group will have insufficient capital resources to support the business.
The Group adopts a conservative approach to managing its capital and at least annually assesses the robustness of the capital requirements as part of the Group's Individual Capital Adequacy Process (ICAAP), which is then aggregated into the Arbuthnot Banking Group's ICAAP. Stringent stress tests are performed to ensure that capital resources are adequate over a future three year horizon.
At the year-end, the Common Equity Tier 1 (CET1) Ratio was 13.6% (2014: 18.7%) and the Leverage Ratio was 10.4% (2014: 14.7%) on a solo-consolidated basis. Both ratios are significantly higher than regulatory requirements. The decreases in the ratios are driven by the growth in assets, and therefore total risk exposure, over the year. The solo-consolidated capital resources increased slightly to 138.9m at 31 December 2015 (31 December 2014: 123.4m).
The conditional sale of ELG is expected to significantly increase the Group's capital ratios, providing a very strong capital base and enabling further growth of lending portfolios. In assessing the Group's future capital position, management is mindful of the Basel Committee proposals relating to standardised risk weighting and is watching developments closely. Further details of the Group's capital position are provided in the capital, leverage and liquidity section of the Strategic Report.
Conduct risk
Conduct risk reflects the potential for customers (and the business) to suffer financial loss or other detriment through the actions and decisions made by the business and its staff.
We define conduct risk as the risk that STB's products / services, and the way they are delivered, result in poor outcomes for customers or markets in which we operate, or harm to STB. This could be as a direct result of poor or inappropriate execution of our business activities or behaviour from our staff.
The Group takes a principles based approach and includes retail and commercial customers in its definition of 'customer', which covers all business units and both regulated and unregulated activities.
In 2015, management embedded a Conduct Risk Management Framework in the business. This is a set of activities establishing the governance and oversight protocols, providing training and awareness on the Conduct Risk Policy, and enhancing and developing relevant key risk indicators (KRIs). Conduct risk exposure is managed via monthly review and challenge of KRIs at the Customer Focus Committee, which was set up to oversee complaints, FEEFO and Customer Service Excellence (CSE) as well as conduct risk. Conduct risk management information is also reviewed at Executive Committee meetings at product level, at STB ExCo and STB Board. The KRIs vary across the business units to reflect the relevant conduct risks. The business units' KRIs are aggregated for measurement against the Group's risk appetite.
Senior Managers Regime
A new regime, to enhance the accountability of individuals operating in banks, insurers and PRA-authorised investment firms, was implemented in the Financial Services (Banking Reform) Act 2013 and commenced from 7 March 2016. This regime was proposed in the Parliamentary Commission on Banking Standards Report (June 2013) and replaced the Approved Persons regime.
The new requirements introduce conduct rules which apply to all bank employees and additional rules for senior management. A specific Senior Manager Regime applies to the Bank's Board members and certain executive and senior managers, requiring these individuals to have regulatory approval, specific prescribed responsibilities and ongoing assessment by the Bank to ensure these persons remain "fit and proper". A further Certification Regime applies to other employees who pose a "risk of significant harm" to the firm, requiring the fit and proper test to be applied before the individual commences the role and then on an ongoing basis.
The Bank has embraced the new regime and made the changes required to comply. Senior Manager functions have been mapped across, responsibilities allocated and job descriptions amended where required. Training has been delivered across the Bank and an annual certification framework put in place. Changes to governance arrangements that have resulted from the change in regime are set out in the Corporate Governance statement. Secure Trust Bank submitted its application for the "grandfathering application" on 2 February 2016, setting out responsibilities for existing Approved Persons who migrated to their equivalent Senior Management Functions on 7 March 2016.
Regulatory Risk
Regulatory risk is the risk that the Group fails to be compliant with all relevant regulatory requirements. This could occur if the Group failed to interpret, implement and embed processes and systems to address regulatory requirements, emerging risks, key focus areas and initiatives or deal properly with new laws and regulations.
The Group seeks to manage regulatory risks through the following elements of the Group wide risk management framework:
Governance and control processes for new products and services;
Advice and guidance on the application and interpretation of laws and regulations applicable to the Group's products, new initiatives and projects;
Investment in the infrastructure and ongoing enhancement of the regulatory training programme.
Additional training has been delivered for key focus areas in 2015 including:
Vulnerable customers and complaints handling;
Horizon scanning to identify regulatory developments which are managed through impact assessment and implementation programmes;
Liaison with regulatory bodies regarding authorisations and permissions;
Information requests and reporting requirements;
Consumer Rights Act implementation;
Risk based monitoring and assurance programmes to ensure the Group remains compliant with regulatory requirements.
Strategic report Capital, leverage and liquidity
Capital
The Group's capital management policy is focused on optimising shareholder value over the long-term. Processes exist to ensure that capital is allocated to achieve targeted risk adjusted returns whilst ensuring appropriate surpluses are held above the minimum regulatory requirements. The Board reviews the capital position at every Board meeting.
In accordance with the EU's Capital Requirements Directive (CRD) and the required parameters set out in the EU's Capital Requirements Regulation (CRR), the Group's Internal Capital Adequacy Assessment Process (ICAAP), which is aggregated into the Arbuthnot Banking Group's ICAAP, is embedded in the risk management framework of the Group. It is subject to ongoing updates and revisions where necessary, but as a minimum an annual review is undertaken as part of the business planning process. The ICAAP brings together the risk management framework, including stress testing using a range of scenarios, and the financial disciplines of business planning and capital management.
Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a 'Pillar I plus' approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations as a starting point, and then considers whether each of the calculations delivers a sufficient capital sum adequate to cover anticipated risks. Where it is considered that the Pillar I calculations do not reflect the risk, an additional capital add-on in Pillar 2 is applied, as per the Individual Capital Guidance (ICG) issued to the Bank by the PRA.
The Group's regulatory capital is divided into:
Common Equity Tier 1 which comprises shareholders' funds, after deducting intangible assets and deferred tax assets which have arisen due to losses.
Tier 2 which comprises the collective allowance for impairment.
The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. All regulated entities within the Group have complied during the financial year with all of the externally imposed capital requirements to which they are subject.
The Group operates the standardised approach to credit risk, whereby risk weightings are applied to the Group's on and off balance sheet exposures. The weightings applied are those stipulated in the CRR.
The Group is required by the PRA to report its capital on a solo consolidated basis. The solo-consolidated group includes all entities where a solo consolidation waiver has been received from the PRA; this excludes the V12 Finance Group and the Debt Managers Group. At the year end the solo-consolidated group had the following capital resources and Total Risk Exposure (TRE). In accordance with CRR, the TRE reflects both credit risks and operational risks.
2015
2014
m
m
Capital
Common Equity Tier 1 (CET1) capital
135.8
121.4
Total Tier 2 capital
3.1
2.0
Total capital
138.9
123.4
Total Risk Exposure (TRE)
998.6
649.2
2015
2014
%
%
CRD IV ratios
Common Equity Tier 1 (CET1) capital (solo consolidated)
13.6
18.7
Leverage ratio
10.4
14.7
The increase in CET1 capital has been driven by retained profit marginally offset by an increase in intangibles. An analysis of CET1 capital can be found in Note 6 to the financial statements.
Total Risk Exposure has increased by 54% to 998.6 million reflecting the significant growth in both Business Finance and Consumer Lending.
The CET1 capital ratio is the ratio of CET1 divided by the TRE and was 13.6% at the year end. This compares to 18.7% at the end of 2014 again reflecting the growth in lending resulting in an increase in TRE during 2015. The conditional sale of ELG is expected to increase the CET1 capital ratio and provide additional capital for future planned growth.
Leverage
The Basel III framework introduced a relatively simple, transparent, non-risk based leverage ratio to act as a supplementary measure to the risk-based capital requirements. The leverage ratio is intended to restrict the build-up of leverage in the banking sector to avoid destabilising deleveraging processes that can damage the broader financial system and the economy, whilst reinforcing the risk-based requirements with a complementary simple, non-risk based 'backstop' measure.
The Basel III leverage ratio is defined by the CRR as Tier 1 capital divided by on and off sheet asset exposure values, expressed as a percentage. The minimum leverage ratio requirement of 4% will be imposed on the Bank from 2018, subject to a review in 2017.
As shown in the table above, the Bank has a leverage ratio at 31 December 2015 of 10.4%, comfortably ahead of the minimum requirement.
Liquidity
The Group continues to manage its liquidity on a conservative basis by holding high quality liquid assets (HQLA) and utilising predominantly retail funding from customer deposits, with only limited funding coming from the wholesale markets. In December 2012, Secure Trust Bank was admitted as a participant in the Bank of England's Sterling Money Market Operations under the Sterling Monetary Framework, to participate in the Discount Window Facility. From July 2013, the Group was permitted to draw down facilities under the Funding for Lending Scheme (FLS). FLS monies are maintained as a liquidity buffer, above that required to support lending.
At 31 December 2015 and throughout the year, the Group had significant surplus liquidity over the minimum requirements due to its stock of HQLA, in the form of the Bank of England Reserve Account and Bank of England Treasury Bills. As shown in the table below, total liquid assets increased by 20% to 147.1 million, with the HQLA balance of 135.6m representing a proportional increase from 67% to 92% of total liquid assets.
2015
2014
m
m
Liquid assets
Aaa - Aa3
135.6
82.5
A1 - A3
6.2
19.8
Unrated
5.3
20.0
147.1
122.3
Less assets held for sale
(1.7)
-
Statutory balance sheet total
145.4
122.3
The Group has no liquid asset exposures outside of the United Kingdom and no amounts that are either past due or impaired.
The Liquidity Coverage Ratio (LCR), introduced by the Basel Committee on Banking Supervision in 2013, applied to the Group from 1 October 2015. The objective of the LCR is to promote the short term resilience of the liquidity risk profile of banks, by ensuring that they have an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario.
The PRA completed its consultation on the minimum LCR requirements to apply in the United Kingdom in 2015, and set levels marginally higher than those prescribed in the CRR during the transition period. The PRA have set the minimum at 80% from 1 October 2015, 90% from 1 January 2017 and 100% from 1 January 2018, coming into line with the CRR at this point.
The Group's LCR, and other measures used by management to manage liquidity risk, are described in the Principal Risks and Uncertainties section of the Strategic Report.
Consolidated statement of comprehensive income
Year ended
31 December
Year ended
31 December
2015
2014
Note
million
million
Interest receivable and similar income
100.5
63.4
Interest expense and similar charges
(21.6)
(14.2)
Net interest income
7
78.9
49.2
Fee and commission income
16.9
16.1
Fee and commission expense
(3.7)
(1.6)
Net fee and commission income
13.2
14.5
Operating income
92.1
63.7
Net impairment losses on loans and advances to customers
(16.8)
(8.7)
Operating expenses
8
(50.5)
(37.5)
Profit before income tax
24.8
17.5
Income tax expense
10
(5.5)
(3.6)
Profit for the period - Continuing operations
19.3
13.9
Profit for the period - Discontinued operations
33
9.4
6.6
Profit for the period
28.7
20.5
Other comprehensive income, net of income tax:
Cash flow hedging reserve
- Net amount transferred to profit or loss
-
0.4
Other comprehensive income for the period, net of income tax
-
0.4
Total comprehensive income for the period
28.7
20.9
Profit attributable to:
Equity holders of the Company
28.7
20.5
Total comprehensive income attributable to:
Equity holders of the Company
28.7
20.9
Earnings per share for profit attributable to the equity holders of the Company during the period
(expressed in pence per share):
Basic earnings per share - Continuing operations
106.1
82.8
Basic earnings per share - Discontinued operations
51.7
39.5
Basic earnings per share
11
157.8
122.3
Diluted earnings per share - Continuing operations
104.1
81.2
Diluted earnings per share - Discontinued operations
50.7
38.7
Diluted earnings per share
11
154.8
119.9
Consolidated statement of financial position
At 31 December
2015
2014
Note
million
million
ASSETS
Cash and balances at central banks
131.8
81.2
Loans and advances to banks
12
9.8
39.8
Loans and advances to customers
13
960.6
622.5
Debt securities held-to-maturity
15
3.8
16.3
Property, plant and equipment
18
8.5
8.1
Intangible assets
16
7.0
8.2
Deferred tax assets
24
0.3
1.0
Other assets
20
7.1
5.2
Assets held for sale
33
118.5
-
Total assets
1,247.4
782.3
LIABILITIES AND EQUITY
Liabilities
Due to banks
21
35.0
15.9
Deposits from customers
22
1,033.1
608.4
Current tax liabilities
3.2
3.6
Other liabilities
23
26.2
29.5
Liabilities held for sale
33
8.7
-
Total liabilities
1,106.2
657.4
Equity attributable to owners of the parent
Share capital
26
7.3
7.3
Share premium
79.3
79.3
Retained earnings
54.4
38.1
Revaluation reserve
0.2
0.2
Total equity
141.2
124.9
Total liabilities and equity
1,247.4
782.3
Company statement of financial position
At 31 December
2015
2014
Note
million
million
ASSETS
Cash and balances at central banks
131.8
81.2
Loans and advances to banks
12
9.2
37.9
Loans and advances to customers
13
932.7
500.1
Debt securities held-to-maturity
15
3.8
16.3
Property, plant and equipment
18
4.2
3.7
Intangible assets
16
3.2
1.3
Investments
17
3.7
3.7
Deferred tax assets
24
0.6
0.3
Other assets
20
146.0
116.2
Total assets
1,235.2
760.7
LIABILITIES AND EQUITY
Liabilities
Due to banks
21
36.4
15.9
Deposits from customers
22
1,033.1
608.4
Current tax liabilities
0.3
1.5
Other liabilities
23
30.2
22.2
Total liabilities
1,100.0
648.0
Equity attributable to owners of the parent
Share capital
26
7.3
7.3
Share premium
79.3
79.3
Retained earnings
48.6
26.1
Total equity
135.2
112.7
Total liabilities and equity
1,235.2
760.7
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 Company Statement of Changes in Equity.
Consolidated statement of changes in equity
Share capital
Share premium
Revaluation reserve
Cash flow hedging reserve
Retained earnings
Total
million
million
million
million
million
million
Balance at 1 January 2014
6.3
28.2
0.2
(0.4)
27.3
61.6
Total comprehensive income for the period
Profit for 2014
-
-
-
-
20.5
20.5
Other comprehensive income, net of income tax
Cash flow hedging reserve
- Net amount transferred to profit and loss
-
-
-
0.4
-
0.4
Total other comprehensive income
-
-
-
0.4
-
0.4
Total comprehensive income for the period
-
-
-
0.4
20.5
20.9
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends
-
-
-
-
(10.2)
(10.2)
Charge for share based payments
-
-
-
-
0.5
0.5
Issue of ordinary shares
1.0
52.3
-
-
-
53.3
Transaction costs on issue of shares
-
(1.2)
-
-
-
(1.2)
Total contributions by and distributions to owners
1.0
51.1
-
-
(9.7)
42.4
Balance at 31 December 2014
7.3
79.3
0.2
-
38.1
124.9
Total comprehensive income for the period
Profit for 2015
-
-
-
-
28.7
28.7
Other comprehensive income, net of income tax
Total comprehensive income for the period
-
-
-
-
28.7
28.7
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends
-
-
-
-
(12.6)
(12.6)
Charge for share based payments
-
-
-
-
0.2
0.2
Total contributions by and distributions to owners
-
-
-
-
(12.4)
(12.4)
Balance at 31 December 2015
7.3
79.3
0.2
-
54.4
141.2
Company statement of changes in equity
Share capital
Share premium
Cash flow hedging reserve
Retained earnings
Total
million
million
million
million
million
Balance at 1 January 2014
6.3
28.2
(0.4)
12.8
46.9
Total comprehensive income for the period
Profit for 2014
-
-
-
23.0
23.0
Cash flow hedging reserve
- Net amount transferred to profit or loss
-
-
0.4
-
0.4
Total other comprehensive income
-
-
0.4
-
0.4
Total comprehensive income for the period
-
-
0.4
23.0
23.4
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends
-
-
-
(10.2)
(10.2)
Charge for share based payments
-
-
-
0.5
0.5
Issue of ordinary shares
1.0
52.3
-
-
53.3
Transaction costs on issue of shares
-
(1.2)
-
-
(1.2)
Total contributions by and distributions to owners
1.0
51.1
-
(9.7)
42.4
Balance at 31 December 2014
7.3
79.3
-
26.1
112.7
Total comprehensive income for the period
Profit for 2015
-
-
-
34.9
34.9
Total comprehensive income for the period
-
-
-
34.9
34.9
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends
-
-
-
(12.6)
(12.6)
Charge for share based payments
-
-
-
0.2
0.2
Total contributions by and distributions to owners
-
-
-
(12.4)
(12.4)
Balance at 31 December 2015
7.3
79.3
-
48.6
135.2
Consolidated statement of cash flows
Year ended 31 December
Year ended 31 December
2015
2014
Note
million
million
Cash flows from operating activities
Profit for the year
19.3
13.9
Adjustments for:
Income tax expense
10
5.5
3.6
Depreciation of property, plant and equipment
18
0.5
0.4
Amortisation of intangible assets
16
1.3
1.2
Impairment losses on loans and advances to customers
16.8
8.7
Share based compensation
0.2
0.5
Cash flows from operating profits before changes in operating assets and liabilities
43.6
28.3
Changes in operating assets and liabilities:
- net decrease in debt securities held to maturity
12.5
-
- net decrease/(increase) in loans and advances to banks
15.0
(11.3)
- net increase in loans and advances to customers
(448.8)
(227.7)
- net (increase)/decrease in other assets
(2.6)
2.9
- net increase in amounts due to banks
19.1
15.8
- net increase in deposits from customers
424.7
171.8
- net decrease in other liabilities
(6.0)
(1.3)
Income tax paid
(4.2)
(0.8)
Net cash inflow/(outflow) from operating activities
53.3
(22.3)
Cash flows from investing activities
Purchase of property, plant and equipment
18
(1.1)
(3.5)
Purchase of computer software
16
(2.3)
(0.8)
Net cash flows from investing activities
(3.4)
(4.3)
Cash flows from financing activities
Net inflow on issue of share capital
-
52.1
Dividends paid
(12.6)
(10.2)
Net cash flows from financing activities
(12.6)
41.9
Net increase in cash and cash equivalents - Continuing operations
37.3
15.3
Net increase in cash and cash equivalents - Discontinued operations
-
0.7
Cash and cash equivalents at 1 January
106.0
90.0
Cash and cash equivalents at 31 December
28
143.3
106.0
Company statement of cash flows
Year ended 31 December
Year ended 31 December
2015
2014
Note
million
million
Cash flows from operating activities
Profit for the year
34.9
23.0
Adjustments for:
Income tax expense
2.0
4.8
Depreciation of property, plant and equipment
18
0.3
0.2
Amortisation of intangible assets
16
0.3
0.3
Impairment losses on loans and advances to customers
17.1
8.7
Share based compensation
0.2
0.5
Cash flows from operating profits before changes in operating assets and liabilities
54.8
37.5
Changes in operating assets and liabilities:
- net decrease in debt securities held to maturity
12.5
-
- net decrease/(increase) in loans and advances to banks
15.0
(11.3)
- net increase in loans and advances to customers
(449.7)
(224.9)
- net increase in other assets
(29.8)
(15.2)
- net increase in amounts due to banks
20.5
15.8
- net increase in deposits from customers
424.7
171.8
- net increase in other liabilities
7.7
7.0
Income tax paid
(3.2)
(2.9)
Net cash inflow/(outflow) from operating activities
52.5
(22.2)
Cash flows from investing activities
Purchase of property, plant and equipment
18
(0.8)
(3.4)
Purchase of computer software
16
(2.2)
(0.7)
Net cash flows from investing activities
(3.0)
(4.1)
Cash flows from financing activities
Net inflow on issue of share capital
-
52.1
Dividends paid
(12.6)
(10.2)
Net cash flows from financing activities
(12.6)
41.9
Net increase in cash and cash equivalents
36.9
15.6
Cash and cash equivalents at 1 January
104.1
88.5
Cash and cash equivalents at 31 December
28
141.0
104.1
Notes to the consolidated financial statements
1. Accounting policies
The principal 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.
1.1 Reporting entity
Secure Trust Bank PLC is a company incorporated in the United Kingdom (referred to as 'the Company'). The registered address of the Company is One Arleston Way, Solihull, West Midlands, B90 4LH. The consolidated financial statements of the Company as at and for the year ended 31 December 2015 comprise Secure Trust Bank PLC and its subsidiaries (together referred to as 'the Group' and individually as 'subsidiaries'). The Group is primarily involved in banking and financial services.
1.2 Basis of presentation
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 or early adopted by the Group and endorsed by the EU) and the Companies Act 2006 applicable to companies reporting under IFRS. They have been prepared under the historical cost convention, as modified by the revaluation of land and buildings and financial instruments at fair value through profit or loss. The consolidated financial statements are presented in pounds sterling, which is the Group's functional and presentational currency.
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 2.
The directors have assessed, in the light of current and anticipated economic conditions, the Group's ability to continue as a going concern. The directors confirm they are satisfied that the Company and the Group have adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the 'going concern' basis for preparing accounts.
The consolidated financial statements were authorised for issue by the Board of Directors on 16 March 2016.
The following International Financial Reporting Standards have been issued which are not yet effective and which have not been adopted early:
IFRS 9 'Financial instruments' (effective for annual periods beginning after 1 January 2018). This is the IASB's replacement of IAS 39 'Financial Instruments: Recognition and Measurement'. 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. The expected impact of this standard on the Group is set out in Principal risks and uncertainties.
IFRS 15 'Revenue from contracts with customers' (effective for annual periods beginning after 1 January 2018). This standard replaces a number of existing standards and interpretations and applies to contracts with customers, but does not apply to insurance contracts, financial instruments or lease contracts, which are in the scope of other IFRSs. It also does not apply if two companies in the same line of business exchange non-monetary assets to facilitate sales to other parties. The standard specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative relevant disclosures. It introduces a new revenue recognition model that recognises revenue either at a point in time or over time. The model features a principles-based five-step model to be applied to all contracts with customers. This standard is unlikely to have a material impact on the Group.
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 standard, 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).
The above standards have not yet been endorsed by the EU.
1.3 Consolidation
Subsidiaries
Subsidiaries are all investees 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.
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 and 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 share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income.
The parent company's investments in subsidiaries are recorded at cost less, where appropriate, provision for impairment in value.
Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
Non-current assets held for sale and discontinued operations
Subsidiaries are de-consolidated from the date that control ceases. Under IFRS5, the Group classifies a non-current asset as held-for-sale if its carrying amount will be recovered mainly through selling the asset rather than through usage. The classification also applies to disposal groups, which are a group of assets and liabilities which an entity intends to dispose of in a single transaction.
The conditions for a non-current asset or disposal group to be classified as held-for-sale are as follows:
the assets must be available for immediate sale in their present condition and its sale must be highly probable;
the asset must be currently marketed actively at a price that is reasonable in relation to its current fair value;
the sale should be completed, or expected to be so, within a year from the date of the classification; and
the actions required to complete the planned sale will have been made, and it is unlikely that the plan will be significantly changed or withdrawn.
1.4 Interest income and expense
Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost and held to maturity using the effective interest method.
The effective interest method calculates the amortised cost of a financial asset or a financial liability and allocates the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
1.5 Net fee and commission income
Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accruals basis when the service has been provided. Fees and commissions income consists principally of weekly and monthly fees from the OneBill and Current Account products, arrears fees in the Everyday Loans business along with associated insurance commissions and commissions earned on debt collection activities in the Debt Managers business. Fee and commission expenses consist primarily of fees and commission relating to the Current Account product.
1.6 Financial assets and financial liabilities
The Group classifies its financial assets at fair value through profit or loss, loans and receivables or held-to-maturity and classifies its financial liabilities as other financial liabilities. Management determines the classification of its investments at initial recognition. 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 at fair value through profit or loss
This category comprises derivative financial instruments which are utilised by the Group for hedging purposes. Financial assets 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 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 the funds are advanced to customers. Loans and receivables are carried at amortised cost using the effective interest method (see below).
(c) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold to maturity. Held-to-maturity investments are carried at amortised cost using the effective interest method.
(d) Other financial liabilities
Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all of the risks and rewards of ownership. In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. There have not been any instances where assets have only been partially derecognised. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire.
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, minus 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. The fair value of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market for a financial instrument is not active the Group establishes a fair value by using an appropriate 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.
1.7 Foreign currencies
Transactions in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated into the Company's functional currency at the rates prevailing on the balance sheet date. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the profit and loss account for the period.
1.8 Derivative financial instruments and hedge accounting
For the Group, these comprise cash flow hedges. These are recognised at their fair value and are shown in the Statement of Financial Position as assets when their face value is positive and as liabilities when their face value is negative.
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 items is realised, when it is amortised; the ineffective portion of the hedging instrument is recognised immediately in profit or loss.
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.
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.
1.9 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the Statement of Financial Position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
1.10 Impairment of financial assets
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 impacts on the estimated future cash flows of the financial asset or group of financial assets, and can be reliably estimated.
The criteria that the Group uses to determine that there is objective evidence of an impairment loss include, but are not limited to, the following:
Delinquency in contractual payments of principal or interest;
Breach of financial covenants or contractual obligations;
Cash flow difficulties experienced by the borrower; and
Initiation of bankruptcy proceedings.
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.
1.11 Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of the acquisition over the fair value of the Group's share of the net identifiable assets acquired at the date of acquisition. Goodwill is held at cost less accumulated impairment losses and is deemed to have an infinite life.
The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken place. Impairment losses are recognised in the Statement of Comprehensive Income if the carrying amount exceeds the recoverable amounts.
(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, which are between three to ten years.
Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred unless it is probable that the expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance.
(c) Other intangibles
The acquisition of subsidiaries is accounted for in accordance with IFRS 3 'Business Combinations', which requires the recognition of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. As part of this process, it is necessary to recognise certain intangible assets which are separately identifiable and which are not included on the acquiree's balance sheet.
Other intangible assets include trademarks, customer relationships, broker relationships and technology. The intangible assets recognised as part of the Everyday Loans and V12 Finance Group acquisitions have been recorded at fair value and are being amortised over their expected useful lives, which are between five and ten years, apart from Everyday Loans broker relationships, which are being amortised over three years. The intangible asset relating to Everyday Loans has been reclassified as an asset held for sale and has not been amortised since the conditional sale was agreed.
1.12 Property, plant and equipment
Property is held at historic cost as modified by subsequent revaluations less depreciation. The Group has elected under IAS 16.31 to measure its property at fair value. Revaluations are kept up to date such that the carrying amount does not differ materially from its fair value as required by IAS 16.34. Revaluation of assets and any subsequent disposal are addressed through the revaluation reserve and any changes are transferred to retained earnings.
Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, which are subject to regular review:
Land
not depreciated
Freehold buildings
50 years
Leasehold improvements
shorter of life of lease or 7 years
Computer equipment
3 to 5 years
Other equipment
5 to 10 years
Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the Statement of Comprehensive Income.
1.13 Leases
(a) As a lessor
Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets are held subject to finance leases, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return.
(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.
1.14 Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash equivalents comprise cash in hand and demand deposits, and cash equivalents comprise highly liquid investments which 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, including certain loans and advances to banks and short-term highly liquid debt securities.
1.15 Employee benefits
(a) Post-retirement obligations
The Group contributes to 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 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.
1.16 Share issue costs
Incremental costs directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments. Costs associated with the listing of shares are expensed immediately.
1.17 Taxation
Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.
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. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially 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 assets and liabilities, 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.
1.18 Dividends
Dividends on ordinary shares are recognised in equity in the period in which they are approved.
1.19 Significant items
Items which are material by both size and nature (i.e. outside of the normal operating activities of the Group) are treated as significant items and disclosed separately on the face of the Statement of Comprehensive Income. The separate reporting of these items helps to provide an indication of the Group's underlying business performance.
1.20 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.
2. Critical judgements and estimates
The Group makes certain judgements and estimates which affect the reported amounts of assets and liabilities. Critical judgements and the assumptions used in calculating estimates 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.
2.1 Impairment losses on loans and advances to customers
The Group reviews its loan portfolios to assess impairment at least on a half-yearly basis. The basis for evaluating impairment losses is described in accounting policy 1.10. 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 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. Loans and advances are identified as impaired by taking account of the age of the debt's delinquency and the product type. The impairment provision is calculated by applying a percentage rate to the balance of different ages and categories of impaired debt. 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 recent actual loss experience.
Within the Real Estate Finance and Asset Finance businesses, accounts which are impaired are assessed against the discounted cashflows expected to arise in order to identify any impairment provisions. Collective provisions are assessed only to the extent that there is sufficient data to justify an inherent level of losses within the current portfolios.
For specific Invoice Finance clients assessment is made as to the collectability of outstanding invoices in relation to the amounts lent against them. If there is a deficit against outstanding invoices then other security is considered in terms of value and collectability. If there is an overall shortfall then the unsecured amount is assessed as to whether a provision is required. For collective provisions a view of the overall level of non-collectability in the portfolio is taken. The level of provision required is under review as the product is new to the Bank therefore data is developing, so we have estimated a level appropriate based on other data available in the industry.
Where financial assets are individually evaluated for impairment, management uses their best estimates in calculating the net present value of future cash flows. Management has to make judgements on the financial position of the counterparty and the net realisable value of collateral (where held), in determining the expected future cash flows.
In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends.
As described in Note 1.10, certain customers' accounts may be modified to such an extent that they are no longer considered to be past due but, rather, are treated as new loans. There is judgement involved in determining the level of modification that results in this reassessment and with regard to the fair value at which the renegotiated loans are recorded. The Group makes these judgements based on analyses of the loans involved and consideration of market rates of interest.
To the extent that the default rates differ from those estimated by 10%, the allowance for impairment on loans and advances would change by an estimated 5.1 million.
2.2 Share Option Scheme valuations
The valuation of the 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 remains 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.
2.3 Average life of lending
IAS 39 requires interest earned from lending to be measured under the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset.
Management must therefore use judgement to estimate the expected life of each instrument and hence the expected cash flows relating to it. The accuracy of these estimates 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.
2.4 PPI Provisioning
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.
3. Maturity analysis of consolidated assets and liabilities
The table below shows the contractual maturity analysis of the Group's assets and liabilities as at 31 December 2015:
Due within one year
Due after more than one year
Total
At 31 December 2015
million
million
million
ASSETS
Cash and balances at central banks
131.8
-
131.8
Loans and advances to banks
9.8
-
9.8
Loans and advances to customers
439.7
520.9
960.6
Debt securities held-to-maturity
3.8
-
3.8
Property, plant and equipment
-
8.5
8.5
Intangible assets
-
7.0
7.0
Deferred tax assets
-
0.3
0.3
Other assets
7.1
-
7.1
Assets held for sale
118.5
-
118.5
Total assets
710.7
536.7
1,247.4
LIABILITIES
Due to banks
35.0
-
35.0
Deposits from customers
563.3
469.8
1,033.1
Current tax liabilities
3.2
-
3.2
Other liabilities
22.5
3.7
26.2
Liabilities held for sale
8.7
-
8.7
Total liabilities
632.7
473.5
1,106.2
The table below shows the contractual maturity analysis of the Group's assets and liabilities as at 31 December 2014:
Due within one year
Due after more than one year
Total
At 31 December 2014
million
million
million
ASSETS
Cash and balances at central banks
81.2
-
81.2
Loans and advances to banks
39.8
-
39.8
Loans and advances to customers
220.7
401.8
622.5
Debt securities held-to-maturity
16.3
-
16.3
Property, plant and equipment
-
8.1
8.1
Intangible assets
-
8.2
8.2
Deferred tax assets
1.0
-
1.0
Other assets
5.2
-
5.2
Total assets
364.2
418.1
782.3
LIABILITIES
Due to banks
15.9
-
15.9
Deposits from customers
342.4
266.0
608.4
Current tax liabilities
3.6
-
3.6
Other liabilities
25.2
4.3
29.5
Total liabilities
387.1
270.3
657.4
The directors do not consider that the behavioural maturity is significantly different to the contractual maturity.
The table below shows the contractual maturity analysis of the Company's assets and liabilities as at 31 December 2015:
Due within one year
Due after more than one year
Total
At 31 December 2015
million
million
million
ASSETS
Cash and balances at central banks
131.8
-
131.8
Loans and advances to banks
9.2
-
9.2
Loans and advances to customers
423.2
509.5
932.7
Debt securities held-to-maturity
3.8
-
3.8
Property, plant and equipment
-
4.2
4.2
Intangible assets
-
3.2
3.2
Investments
-
3.7
3.7
Deferred tax assets
-
0.6
0.6
Other assets
146.0
-
146.0
Total assets
714.0
521.2
1,235.2
LIABILITIES
Due to banks
36.4
-
36.4
Deposits from customers
563.3
469.8
1,033.1
Current tax liabilities
0.3
-
0.3
Other liabilities
30.2
-
30.2
Total liabilities
630.2
469.8
1,100.0
The table below shows the contractual maturity analysis of the Company's assets and liabilities as at 31 December 2014:
Due within one year
Due after more than one year
Total
At 31 December 2014
million
million
million
ASSETS
Cash and balances at central banks
81.2
-
81.2
Loans and advances to banks
37.9
-
37.9
Loans and advances to customers
172.8
327.3
500.1
Debt securities held-to-maturity
16.3
-
16.3
Property, plant and equipment
-
3.7
3.7
Intangible assets
-
1.3
1.3
Investments
-
3.7
3.7
Deferred tax asset
-
0.3
0.3
Other assets
116.2
-
116.2
Total assets
424.4
336.3
760.7
LIABILITIES
Due to banks
15.9
-
15.9
Deposits from customers
342.4
266.0
608.4
Current tax liabilities
1.5
-
1.5
Other liabilities
22.2
-
22.2
Total liabilities
382.0
266.0
648.0
The directors do not consider that the behavioural maturity is significantly different to the contractual maturity.
4. Classification of financial assets and liabilities
The tables below set out the Group's financial assets and financial liabilities into the respective classifications:
Held to maturity
Loans and receivables
Other financial assets and liabilities
Total carrying amount
Fair value
Fair value hierarchy level
At 31 December 2015
million
million
million
million
million
Cash and balances at central banks
-
131.8
-
131.8
131.8
Level 1
Loans and advances to banks
-
9.8
-
9.8
9.8
Level 2
Loans and advances to customers
-
960.6
-
960.6
960.6
Level 3
Debt securities held-to-maturity
3.8
-
-
3.8
3.8
Level 1
Other financial assets
-
-
2.9
2.9
2.9
Level 3
Assets held for sale
-
-
118.5
118.5
118.5
Level 3
3.8
1,102.2
121.4
1,227.4
1,227.4
Due to banks
-
-
35.0
35.0
35.0
Level 2
Deposits from customers
-
-
1,033.1
1,033.1
1,033.1
Level 3
Other financial liabilities
-
-
13.8
13.8
13.8
Level 3
Liabilities held for sale
-
-
8.7
8.7
8.7
Level 3
-
-
1,090.6
1,090.6
1,090.6
Held to maturity
Loans and receivables
Other financial assets and liabilities
Total carrying amount
Fair value
Fair value hierarchy level
At 31 December 2014
million
million
million
million
million
Cash
-
81.2
-
81.2
81.2
Level 1
Loans and advances to banks
-
39.8
-
39.8
39.8
Level 2
Loans and advances to customers
-
622.5
-
622.5
630.1
Level 3
Debt securities held-to-maturity
16.3
-
-
16.3
16.3
Level 1
16.3
743.5
-
759.8
767.4
Due to banks
-
-
15.9
15.9
15.9
Level 2
Deposits from customers
-
-
608.4
608.4
617.7
Level 3
Other financial liabilities
-
-
17.8
17.8
17.8
Level 3
-
-
642.1
642.1
651.4
All assets and liabilities are carried at amortised cost. Therefore the fair value hierarchy noted above relates to the disclosure in this note only.
The directors consider that the fair value of financial assets and liabilities is not materially different to their carrying value, with the exception of assets and liabilities held for sale, which are disclosed in note 33.
The tables below set out the Company's financial assets and financial liabilities into the respective classifications:
Held to maturity
Loans and receivables
Other financial assets and liabilities
Total carrying amount
Fair value
Fair value hierarchy level
At 31 December 2015
million
million
million
million
million
Cash and balances at central banks
-
131.8
-
131.8
131.8
Level 1
Loans and advances to banks
-
9.2
-
9.2
9.2
Level 2
Loans and advances to customers
-
932.7
-
932.7
932.7
Level 3
Debt securities held-to-maturity
3.8
-
-
3.8
3.8
Level 1
Other financial assets
-
-
142.7
142.7
142.7
Level 3
3.8
1,073.7
142.7
1,220.2
1,220.2
Due to banks
-
-
36.4
36.4
36.4
Level 2
Deposits from customers
-
-
1,033.1
1,033.1
1,033.1
Level 3
Other financial liabilities
-
-
8.3
8.3
8.3
Level 3
-
-
1,077.8
1,077.8
1,077.8
Held to maturity
Loans and receivables
Other financial assets and liabilities
Total carrying amount
Fair value
Fair value hierarchy level
At 31 December 2014
million
million
million
million
million
Cash and balances at central banks
-
81.2
-
81.2
81.2
Level 1
Loans and advances to banks
-
37.9
-
37.9
37.9
Level 2
Loans and advances to customers
-
500.1
-
500.1
507.6
Level 3
Debt securities held-to-maturity
16.3
-
-
16.3
16.3
Level 1
16.3
619.2
-
635.5
643.0
Due to banks
-
-
15.9
15.9
15.9
Level 2
Deposits from customers
-
-
608.4
608.4
617.7
Level 3
Other financial liabilities
-
-
15.5
15.5
15.5
Level 3
-
-
639.8
639.8
649.1
All assets and liabilities are carried at amortised cost. Therefore the fair value hierarchy noted above relates to the disclosure in this note only
The directors consider that the fair value of assets and liabilities is not materially different to their carrying value.
Fair value classification
The tables above include the fair values and fair value hierarchies of the Group and Company's financial assets and liabilities. The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:
Level 1: Quoted prices in active markets for identical assets or liabilities
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Details of the measurement of the fair values is disclosed below:
Cash and balances at central banks
The fair value of cash and balances at central banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
At the end of December 2015 the fair value of cash and balances at central banks was calculated to be equivalent to their carrying value.
Loans and advances to banks
The fair value of loans and advances to banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
At the end of December 2015 the fair value of loans and advances to banks was calculated to be equivalent to their carrying value.
Loans and advances to customers
The fair value of loans and advances to customers was calculated based upon the present value of the expected future principal and interest cash flows. Prudent assumptions were applied regarding the risk of default. The rate used to discount the cash flows was the credit adjusted market rate of interest at the balance sheet date.
Debt securities held-to-maturity
The fair value of debt securities held-to-maturity was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
At the end of December 2015 the fair value of debt securities held-to-maturity was calculated to be equivalent to their carrying value.
Due to banks
The fair value of amounts due to banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
At the end of December 2015 the fair value of amounts due to banks was calculated to be equivalent to their carrying value due to the short maturity term of the amounts due.
Deposits from customers
The fair value of deposits from customers was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date for the notice deposits and deposit bonds, given that the Group offers competitive interest rates on its savings products.
Other financial liabilities
The fair value of other financial liabilities was calculated based upon the present value of the expected future principal cash flows.
At the end of December 2015 the fair value of other financial liabilities was calculated to be equivalent to their carrying value due to the short maturity term of the other liabilities. The other financial liabilities include all other liabilities other than non-interest accruals.
5. 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 Appetite Statement 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.
A more detailed description of the risk governance structure is contained in the Corporate Governance Statement.
The principal risks inherent in the Group's business are credit, market, liquidity and operational risk.
(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. A formal Credit Risk Policy has been agreed by the Board whilst credit risk is monitored on a monthly basis by the Credit Risk Committee which reviews performance of key portfolios including new business volumes, collections performance, provisioning levels and provisioning methodology. A credit risk department within the Bank ensures that the Credit Risk Policy is being adhered to, implements risk tools to manage credit risk and evaluates business opportunities and the risks and opportunities they present to the Bank whilst ensuring the performance of the Bank's existing portfolios is in line with expectations.
The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to individual borrowers or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The limits on the level of credit risk are approved periodically by the Board of Directors and actual exposures against limits monitored daily.
Impairment provisions are provided for losses that have been incurred at the Statement of Financial Position date. Significant changes in the economy could result in losses that are different from those provided for at the Statement of Financial Position date. Management therefore carefully manages its exposures to credit risk as they consider this to be the most significant risk to the business.
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. The assets undergo a scoring process to mitigate risk and are monitored by the Board. Disclosures relating to arrears on loans and advances to customers are disclosed in Note 13.
The Board monitors the ratings of the counterparties in relation to the Group's loans and advances to banks. Disclosures of these at the year end are contained in Note 12. There is no direct exposure to the Eurozone and peripheral Eurozone countries.
Motor Finance loans are secured against motor vehicles. The new SME lending products, Real Estate Finance and Asset Finance loans, are secured against property and tangible assets respectively. Details of the collateral held in respect of these loans are detailed in Note 13.
The maximum exposure to credit risk for the Company and the Group was as follows:
Group
Company
2015
2014
2015
2014
million
million
million
million
Credit risk exposures relating to on-balance sheet assets are as follows:
Cash and balances at central banks
131.8
81.2
131.8
81.2
Loans and advances to banks
9.8
39.8
9.2
37.9
Loan and advances to customers
960.6
622.5
932.7
500.1
Debt securities held-to-maturity
3.8
16.3
3.8
16.3
Trade receivables
1.5
0.9
1.4
0.6
Amounts due from related companies
1.3
0.8
142.0
114.6
Assets held for sale
118.5
-
-
-
Credit risk exposures relating to off-balance sheet assets are as follows:
Loan commitments
138.6
96.0
138.6
96.0
At 31 December
1,365.9
857.5
1,359.5
846.7
The above table represents the maximum credit risk exposure (net of impairment) to the Company and Group 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.
Concentration risk
Management assesses the potential concentration risk from geographic, product and individual loan concentration. Due to the well diversified nature of the Group's lending operations the directors do not consider there to be a material exposure arising from concentration risk. The increase in lending balances and loan commitments in the London region is principally due to the increase in Real Estate Finance activities during the year. This lending does not give rise to a material exposure due to the security held against each individual loan. The concentration by product and location of the Group and Company's lending to customers and loan commitments are detailed below:
Group
Loans and advances to customers
Loan commitments
2015
2015
2015
2014
2015
2014
Continuing operations
Discontinued operations
Total
Total
Continuing operations and Total
Total
million
million
million
million
million
million
Concentration by product:
Business lending
Real estate finance
368.0
-
368.0
133.8
109.0
95.8
Asset finance
70.7
-
70.7
4.5
20.1
-
Commercial finance
29.3
-
29.3
5.0
9.3
-
Unsecured lending:
Personal lending
74.3
114.3
188.6
181.4
-
-
Motor
165.7
-
165.7
137.9
0.2
0.2
Retail
220.4
-
220.4
116.7
-
-
Other
32.2
-
32.2
43.2
-
-
At 31 December
960.6
114.3
1,074.9
622.5
138.6
96.0
Concentration by region:
East Anglia
89.4
10.4
99.8
41.3
28.1
7.2
East Midlands
41.4
11.3
52.7
36.0
1.1
-
London
300.6
17.0
317.6
177.5
55.0
41.6
North East
24.5
-
24.5
36.4
0.6
17.6
North West
73.4
7.6
81.0
60.9
4.9
-
Northern Ireland
8.3
15.6
23.9
8.6
-
-
Scotland
62.7
3.0
65.7
42.4
2.0
-
South East
125.5
5.8
131.3
82.2
28.4
17.8
South West
44.2
8.4
52.6
34.7
4.4
10.5
Wales
35.1
5.3
40.4
25.7
1.4
-
West Midlands
59.0
4.9
63.9
44.1
4.0
1.3
Yorkshire and the Humber
52.4
13.5
65.9
32.7
3.0
-
Overseas
44.1
11.5
55.6
-
5.7
-
At 31 December
960.6
114.3
1,074.9
622.5
138.6
96.0
The above table relates to the location of the borrower. The majority of the overseas borrowers are Real Estate Finance clients. All of the property secured against Real Estate Finance loans is based in the United Kingdom.
Company
Loans and advances to customers
Loan commitments
2015
2014
2015
2014
million
million
million
million
Concentration by product:
Business lending
Real estate finance
368.0
133.7
109.0
95.8
Asset finance
70.7
4.5
20.1
-
Commercial finance
29.3
5.0
9.3
-
Unsecured lending:
Personal lending
74.3
87.6
-
-
Motor
165.7
137.9
0.2
0.2
Retail
220.4
116.7
-
-
Other
4.3
14.7
-
-
At 31 December
932.7
500.1
138.6
96.0
Concentration by region:
East Anglia
87.0
35.6
28.1
7.2
East Midlands
39.4
24.7
1.1
-
London
297.5
149.3
55.0
41.6
North East
23.2
17.8
0.6
17.6
North West
69.9
43.5
4.9
-
Northern Ireland
7.8
6.0
-
-
Scotland
59.5
36.0
2.0
-
South East
122.2
74.5
28.4
17.8
South West
42.6
29.2
4.4
10.5
Wales
33.5
20.6
1.4
-
West Midlands
56.4
32.4
4.0
1.3
Yorkshire and the Humber
50.0
30.5
3.0
-
Overseas
43.7
-
5.7
-
At 31 December
932.7
500.1
138.6
96.0
Forbearance
Secure Trust Bank does not reschedule contractual arrangements where customers default on their repayments. Under its Treating Customers Fairly (TCF) policies, however, the Company may offer the customer the option to reduce or defer payments for a short period. If the request is granted, the account continues to be monitored in accordance with the Group's impairment provisioning policy. Such debts retain the customer's normal contractual payment due dates and will be treated the same as any other defaulting cases for impairment purposes. Arrears tracking will continue on the account with any impairment charge being based on the original contractual due dates for all products.
The Everyday Loans policy on forbearance is that a customer's account may be modified to assist customers who are in or, have recently overcome, financial difficulties and have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. These may be modified by way of a reschedule or deferment of repayments. Rescheduling of debts retains the customers' contractual due dates, whilst the deferment of repayments extends the payment schedule up to a maximum of four payments in a twelve month period. As at 31 December 2015 the gross balance of rescheduled loans included in the Consolidated Statement of Financial Position was 14.9 million, with an allowance for impairment on these loans of 1.0 million. The gross balance of deferred loans was 3.4 million with an allowance for impairment on these of 0.6 million. (31 December 2014: the gross balance of rescheduled loans was 14.7 million, with an allowance for impairment of 1.0 million. The gross balance of deferred loans was 3.0 million with an allowance for impairment of 0.4 million).
(b) Market risk
Market risks arise from open positions in interest rate and currency products, all of which are exposed to general and specific market movements. The Group and Company have no significant exposures to foreign currencies and therefore there is no significant currency risk.
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 deposits of a fixed rate nature, fixed rate loans and fixed rate savings products. The Group monitors the interest rate mismatch on a daily basis in conjunction with liquidity and capital.
The interest rate mismatch is monitored, throughout the maturity bandings of the book on a parallel scenario for 50 and 200 basis points movements. The Group considers the 50 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 1.0m or less (2014: 0.8m or less) for the Company and Group, with the same impact to equity pre-tax.
Interest rate sensitivity gap
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 hedge 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
million
million
million
million
million
million
million
ASSETS
Cash and balances at central banks
131.8
-
-
-
-
-
131.8
Loans and advances to banks
9.8
-
-
-
-
-
9.8
Debt securities held-to-maturity
3.8
-
-
-
-
-
3.8
Loans and advances to customers
163.4
138.4
172.2
520.9
-
(34.3)
960.6
Other assets
-
-
-
-
-
22.9
22.9
Assets held for sale
118.5
-
-
-
-
-
118.5
Total assets
427.3
138.4
172.2
520.9
-
(11.4)
1,247.4
LIABILITIES AND EQUITY
Due to banks
-
35.0
-
-
-
-
35.0
Deposits from customers
97.9
371.0
94.4
432.0
37.8
-
1,033.1
Other liabilities
-
-
-
-
-
29.4
29.4
Liabilities held for sale
8.7
-
-
-
-
-
8.7
Equity
-
-
-
-
-
141.2
141.2
Total liabilities and equity
106.6
406.0
94.4
432.0
37.8
170.6
1,247.4
Interest rate sensitivity gap
320.7
(267.6)
77.8
88.9
(37.8)
(182.0)
Cumulative gap
320.7
53.1
130.9
219.8
182.0
-
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
million
million
million
million
million
million
million
ASSETS
Cash
81.2
-
-
-
-
-
81.2
Loans and advances to banks
24.8
15.0
-
-
-
-
39.8
Loans and advances to customers
102.1
69.9
114.2
366.8
0.2
(30.7)
622.5
Debt securities held-to-maturity
16.3
-
-
-
-
-
16.3
Other assets
-
-
-
-
-
22.5
22.5
Total assets
224.4
84.9
114.2
366.8
0.2
(8.2)
782.3
LIABILITIES AND EQUITY
Due to banks
15.9
-
-
-
-
-
15.9
Deposits from customers
248.9
18.2
37.3
236.5
29.7
37.8
608.4
Other liabilities
-
-
-
-
-
33.1
33.1
Equity
-
-
-
-
-
124.9
124.9
Total liabilities and equity
264.8
18.2
37.3
236.5
29.7
195.8
782.3
Impact of derivative instruments
(20.0)
20.0
-
-
-
-
Interest rate sensitivity gap
(60.4)
86.7
76.9
130.3
(29.5)
(204.0)
Cumulative gap
(60.4)
26.3
103.2
233.5
204.0
-
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
million
million
million
million
million
million
million
ASSETS
Cash and balances at central banks
131.8
-
-
-
-
-
131.8
Loans and advances to banks
9.2
-
-
-
-
-
9.2
Debt securities held-to-maturity
3.8
-
-
-
-
-
3.8
Loans and advances to customers
145.7
133.2
164.9
509.5
-
(20.6)
932.7
Other assets
-
-
-
-
-
157.7
157.7
Total assets
290.5
133.2
164.9
509.5
-
137.1
1,235.2
LIABILITIES AND EQUITY
Due to banks
-
35.0
-
-
-
1.4
36.4
Deposits from customers
97.9
371.0
94.4
432.0
37.8
-
1,033.1
Other liabilities
-
-
-
-
-
30.5
30.5
Equity
-
-
-
-
-
135.2
135.2
Total liabilities and equity
97.9
406.0
94.4
432.0
37.8
167.1
1,235.2
Interest rate sensitivity gap
192.6
(272.8)
70.5
77.5
(37.8)
(30.0)
Cumulative gap
192.6
(80.2)
(9.7)
67.8
30.0
-
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
million
million
million
million
million
million
million
ASSETS
Cash and balances at central banks
81.2
-
-
-
-
-
81.2
Loans and advances to banks
22.9
15.0
-
-
-
-
37.9
Loans and advances to customers
59.6
43.9
69.2
345.9
0.3
(18.8)
500.1
Debt securities held-to-maturity
16.3
-
-
-
-
-
16.3
Other assets
-
-
-
-
-
125.2
125.2
Total assets
180.0
58.9
69.2
345.9
0.3
106.4
760.7
LIABILITIES AND EQUITY
Due to banks
15.9
-
-
-
-
-
15.9
Deposits from customers
248.9
18.2
37.3
236.5
29.7
37.8
608.4
Other liabilities
-
-
-
-
-
23.7
23.7
Equity
-
-
-
-
-
112.7
112.7
Total liabilities and equity
264.8
18.2
37.3
236.5
29.7
174.2
760.7
Impact of derivative instruments
(20.0)
20.0
-
-
-
-
Interest rate sensitivity gap
(104.8)
60.7
31.9
109.4
(29.4)
(67.8)
Cumulative gap
(104.8)
(44.1)
(12.2)
97.2
67.8
-
(c) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting 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 Company has a formal governance structure in place to manage and mitigate liquidity risk on a day to day basis. The Board sets and approves the Company's liquidity risk management strategy. The Assets and Liabilities Committee ('ALCO'), comprising senior executives of the Company, monitors liquidity risk. Key liquidity risk management information is reported by the Treasury function 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 ILAAP metrics.
The Group relies on deposits from customers. During the current year the Company issued over 172 million of fixed rate deposit bonds to customers over terms ranging from 1 to 7 years. These were issued to broadly match the term lending by the Company.
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.
The Group has a Board approved ILAAP. The liquidity buffer required by the ILAAP has been put in place and maintained since that time. Liquidity resources outside of the buffer are made up of deposits placed at the Bank of England. The ILAAP is updated annually.
The Liquidity Coverage Ratio (LCR) regime has applied to the Group from 1 October 2015, requiring management of net 30 day cash outflows as a proportion of high quality liquid assets. STB has set a more prudent internal limit. The actual LCR has significantly exceeded both limits 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 key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered to be loans and advances to banks and cash and balances at central banks. At the year end this ratio was 14.1% (2014: 19.9%).
The tables below analyse the contractual undiscounted cash flows for the Group's financial liabilities and assets into relevant maturity groupings:
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
million
million
million
million
million
million
Non-derivative financial liabilities
Due to banks
(35.0)
(35.0)
(35.0)
-
-
-
Deposits from customers
(1,033.1)
(1,078.0)
(442.9)
(142.7)
(449.5)
(42.9)
Other financial liabilities
(13.8)
(13.8)
(13.8)
-
-
-
Liabilities held for sale
(8.7)
(8.7)
(8.7)
-
-
-
(1,090.6)
(1,135.5)
(500.4)
(142.7)
(449.5)
(42.9)
Non-derivative financial assets
Cash and balances at central banks
131.8
131.8
131.8
-
-
-
Loans and advances to banks
9.8
9.8
9.8
-
-
-
Debt securities held to maturity
3.8
3.8
3.8
-
-
-
Loans and advances to customers
960.6
1,194.5
130.8
335.6
728.1
-
Other financial assets
2.9
2.9
2.9
-
-
-
Assets held for sale
118.5
118.5
118.5
1,227.4
1,461.3
397.6
335.6
728.1
-
Liquidity mismatch
136.8
325.8
(102.8)
192.9
278.6
(42.9)
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
million
million
million
million
million
million
Non-derivative financial liabilities
Due to banks
(15.9)
(15.9)
(15.9)
-
-
-
Deposits from customers
(608.4)
(635.2)
(87.3)
(257.6)
(255.0)
(35.3)
Other financial liabilities
(17.8)
(17.8)
(17.8)
-
-
-
(642.1)
(668.9)
(121.0)
(257.6)
(255.0)
(35.3)
Non-derivative financial assets
Cash and balances at central banks
81.2
81.2
81.2
-
-
-
Loans and advances to banks
39.8
39.8
24.8
15.0
-
-
Debt securities held to maturity
16.3
16.3
11.3
5.0
-
-
Loans and advances to customers
622.5
788.4
109.9
186.2
486.1
6.2
759.8
925.7
227.2
206.2
486.1
6.2
Liquidity mismatch
117.7
256.8
106.2
(51.4)
231.1
(29.1)
The tables below analyse the contractual undiscounted cash flows for the Company's financial liabilities and assets into relevant maturity groupings:
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
million
million
million
million
million
million
Non-derivative financial liabilities
Due to banks
(36.4)
(36.4)
(36.4)
-
-
-
Deposits from customers
(1,033.1)
(1,078.0)
(442.9)
(142.7)
(449.5)
(42.9)
Other financial liabilities
(8.3)
(8.3)
(8.3)
-
-
-
(1,077.8)
(1,122.7)
(487.6)
(142.7)
(449.5)
(42.9)
Non-derivative financial assets
Cash and balances at central banks
131.8
131.8
131.8
-
-
-
Loans and advances to banks
9.2
9.2
9.2
-
-
-
Debt securities held to maturity
3.8
3.8
3.8
-
-
-
Loans and advances to customers
932.7
1,160.9
127.1
321.7
712.1
-
Other assets
1.4
1.4
1.4
-
-
-
1,078.9
1,307.1
273.3
321.7
712.1
-
Liquidity mismatch
1.1
184.4
(214.3)
179.0
262.6
(42.9)
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
million
million
million
million
million
million
Non-derivative financial liabilities
Due to banks
(15.9)
(15.9)
(15.9)
-
-
-
Deposits from customers
(608.4)
(635.2)
(87.3)
(257.6)
(255.0)
(35.3)
Other financial liabilities
(15.5)
(15.5)
(15.5)
-
-
-
(639.8)
(666.6)
(118.7)
(257.6)
(255.0)
(35.3)
Non-derivative financial assets
Cash and balances at central banks
81.2
81.2
81.2
-
-
-
Loans and advances to banks
37.9
37.9
22.9
15.0
-
-
Loans and advances to customers
500.1
622.5
68.2
172.5
381.8
-
Debt securities held to maturity
16.3
16.3
11.3
5.0
-
-
635.5
757.9
183.6
192.5
381.8
-
Liquidity mismatch
(4.3)
91.3
64.9
(65.1)
126.8
(35.3)
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing financial liabilities as they mature are important factors in assessing the liquidity of the Company and Group and its exposure to changes in interest rates and exchange rates.
Other financial liabilities, as shown above, do not include non-interest accruals as these are not classed as financial liabilities.
(d) Operational risk (unaudited)
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group's processes, personnel, technology and infrastructure, and from external factors other than the risks identified above. Operational risks arise from all of the Group's operations.
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 innovation. In all cases, the Group's policy requires compliance with all applicable legal and regulatory requirements.
The Corporate Governance statement describes the Group's system of internal controls which are used to mitigate against operational risk. An operational risk department within the Bank also supports and provides assurance to the business in recognising, assessing and managing risk. Compliance with Group standards is supported by a programme of periodic reviews undertaken by an internal audit function. The results of the internal audit reviews are discussed with the Company's senior management with summaries submitted to the Group Audit Committee.
6. Capital management
The Group's capital management policy is focused on optimising shareholder value, in a safe and sustainable manner. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.
In accordance with the EU's Capital Requirements Directive IV (CRD IV) and the required parameters set out in the EU's Capital Requirements Regulation (CRR), the Group's Internal Capital Adequacy Assessment Process (ICAAP), which is aggregated into the Arbuthnot Banking Group's 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.
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 it is considered that the Pillar 1 calculations do not reflect the risk, an additional capital add-on in Pillar 2 should be applied, as per the Individual Capital Guidance (ICG) issued by the PRA.
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 would allow market participants to assess key pieces of information on a firm's capital, risk exposures and risk assessment processes. Pillar 3 disclosures for the Arbuthnot Banking Group for the year ended 31 December 2015 are published as a separate document on the Arbuthnot Banking Group website.
The following table shows the regulatory capital resources as managed by the solo-consolidated Group:
2015
2014
million
million
Tier 1
Share capital
7.3
7.3
Share premium
79.3
79.3
Retained earnings
53.1
38.7
Revaluation reserve
0.2
0.2
Goodwill
(0.3)
(0.3)
Intangible assets net of attributable deferred tax
(3.8)
(2.8)
Deferred tax assets due to losses
-
(1.0)
Common Equity Tier 1 capital
135.8
121.4
Tier 2
Collective allowance for impairment of loans and advances
3.1
2.0
Total Tier 2 capital
3.1
2.0
Own Funds
138.9
123.4
Reconciliation to total equity:
Goodwill and other intangible assets net of attributable deferred tax
4.1
3.1
Collective allowance for impairment of loans and advances
(3.1)
(2.0)
Deferred tax assets due to losses
-
1.0
Net cumulative profits/(losses) of non-solo consolidated entities
1.3
(0.6)
Total equity
141.2
124.9
The Group forms part of the Arbuthnot Banking Group's ICAAP which 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% 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. The Group maintains an extra internal buffer and capital ratios are reviewed on a monthly basis to ensure that external and internal requirements are adhered to.
7. Net interest income
2015
2014
million
million
Cash and balances at central banks
0.7
0.3
Loans and advances to banks
0.2
0.1
Loans and advances to customers
99.6
62.8
Debt securities held-to-maturity
-
0.2
Interest receivable and similar income
100.5
63.4
Deposits from customers
(21.6)
(14.2)
Interest expense and similar charges
(21.6)
(14.2)
Net interest income
78.9
49.2
Net interest income shown above excludes 39.2 million (2014: 30.2 million) of interest on loans and advances to customers in respect of discontinued operations, as shown in note 33.
In the previous year 0.2 million of interest income arising from debt securities held-to-maturity was included as interest income on loans and advances to banks.
8. Operating expenses
2015
2015
2015
2014
2014
2014
Continuing
Discontinued
Total
Continuing
Discontinued
Total
million
million
million
million
million
million
Staff costs, including those of directors:
Wages and salaries
24.7
10.0
34.7
16.4
9.3
25.7
Social security costs
2.6
1.1
3.7
1.3
1.1
2.4
Pension costs
0.7
0.6
1.3
0.4
0.5
0.9
Share based payment transactions
1.4
-
1.4
1.5
-
1.5
Depreciation of property, plant and equipment (Note 18)
0.5
0.1
0.6
0.4
0.1
0.5
Amortisation of intangible assets (Note 16)
1.4
0.9
2.3
1.2
1.3
2.5
Operating lease rentals
1.2
0.8
2.0
0.7
0.9
1.6
Other administrative expenses
18.0
7.7
25.7
15.6
5.8
21.4
Total operating expenses
50.5
21.2
71.7
37.5
19.0
56.5
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
190
138
Fees payable to the Company's auditor for other services:
The audit of the Company's subsidiaries, pursuant to legislation
122
115
Audit related assurance services
21
17
Tax advisory services
49
47
Corporate finance services
-
115
All other non-audit services
146
292
528
724
All other non-audit services incurred during 2014 included 183,000 relating to advice received on the transitioning of consumer credit licencing from the Office of Fair Trading to the Financial Conduct Authority.
9. Average number of employees
2015
2014
Directors
7
7
Management
78
69
Administration
621
532
Total
706
608
10. Income tax expense
2015
2015
2015
2014
2014
2014
Continuing operations
Discontinued operations
Total
Continuing operations
Discontinued operations
Total
Current taxation
million
million
million
million
million
million
Corporation tax charge - current year
5.4
2.5
7.9
3.3
1.9
5.2
Corporation tax charge - adjustments in respect of prior years
0.6
(1.0)
(0.4)
-
-
-
6.0
1.5
7.5
3.3
1.9
5.2
Deferred taxation
Deferred tax charge - current year
(0.5)
(0.1)
(0.6)
0.2
-
0.2
Deferred tax charge - adjustments in respect of prior years
-
0.9
0.9
0.1
0.1
0.2
(0.5)
0.8
0.3
0.3
0.1
0.4
Income tax expense
5.5
2.3
7.8
3.6
2.0
5.6
Tax reconciliation
Profit before tax
24.8
11.7
36.5
17.5
8.6
26.1
Tax at 20.25% (2014: 21.5%)
5.0
2.4
7.4
3.8
1.8
5.6
Permanent differences
(0.3)
-
(0.3)
(0.2)
-
(0.2)
Prior period adjustments
0.8
(0.1)
0.7
-
0.2
0.2
Income tax expense for the year
5.5
2.3
7.8
3.6
2.0
5.6
At 31 December 2015 the Group had accumulated tax losses of nil (2014: 5.0 million). These tax losses were recovered in the current year, consequently the Group has no longer recognised a deferred tax asset (2014: 1.0 million).
On 2 July 2013 the Government substantively enacted a reduction in the main rate of UK corporation tax from 23% to 21% with effect from 1 April 2014 and then from 21% to 20% with effect from 1 April 2015. Further reductions to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015.This will reduce the Company's future current tax charge accordingly.
11. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the profit attributable to equity holders of the parent of 28.7 million (2014: 20.5 million) by the weighted average number of ordinary shares 18,191,894 (2014: 16,725,876) in issue during the year.
Diluted
Diluted earnings per ordinary share are calculated by dividing the profit attributable to equity holders of the parent of 28.7 million (2014: 20.5 million) by the weighted average number of ordinary shares in issue during the year, as noted above, as well as the number of dilutive share options in issue during the year.
The number of dilutive shares in issue at the year end was 352,147, being based on the number of options granted of 460,419, the exercise price of 720 pence per option and the average share price during the year of 3,061.75 pence.
12. Loans and advances to banks
2015
2014
Group
million
million
Placements with banks included in cash and cash equivalents (Note 28)
9.8
24.8
Other loans and advances to banks
-
15.0
9.8
39.8
Included within loans and advances to banks are amounts placed with Arbuthnot Latham & Co., Limited, a related company, of 5.3 million (31 December 2014: 20.0 million).
Moody's long-term ratings:
2015
2014
Group
million
million
A1
0.1
-
A2
(1.4)
19.8
A3
5.8
-
No rating
5.3
20.0
9.8
39.8
The 1.4 million negative balance above represents an overdraft attributable to continuing operations. When amounts included in loans and advances to banks attributable to discontinued operations are taken into account, the overall balance is in credit.
2015
2014
Company
million
million
Placements with banks included in cash and cash equivalents
3.9
22.9
Other loans and advances to banks included in cash and cash equivalents
5.3
-
Cash and cash equivalents (Note 28)
9.2
22.9
Other loans and advances to banks
-
15.0
9.2
37.9
Moody's long-term ratings:
2015
2014
Company
million
million
A1
0.1
-
A2
-
17.9
A3
3.8
-
No rating
5.3
20.0
9.2
37.9
None of the loans and advances to banks are either past due or impaired.
13. Loans and advances to customers
2015
2014
Group
million
million
Gross loans and advances
994.9
656.6
Less: allowances for impairment on loans and advances (Note 14)
(34.3)
(34.1)
960.6
622.5
The fair value of loans and advances to customers is shown in Note 4. For a maturity profile of loans and advances to customers, refer to Note 3.
Loans and advances to customers include finance lease receivables as follows:
2015
2014
Group
million
million
Gross investment in finance lease receivables:
- No later than 1 year
121.4
80.2
- Later than 1 year and no later than 5 years
244.0
164.4
- Later than 5 years
0.9
-
366.3
244.6
Unearned future finance income on finance leases
(109.0)
(81.2)
Net investment in finance leases
257.3
163.4
The net investment in finance leases may be analysed as follows:
- No later than 1 year
73.3
46.0
- Later than 1 year and no later than 5 years
183.2
117.4
- Later than 5 years
0.8
-
257.3
163.4
Loans and advances to customers can be further summarised as follows:
2015
2015
2014
2014
Group
million
%
million
%
Neither past due nor impaired
939.1
94.4%
581.9
88.7%
Past due but not impaired
-
0.0%
0.3
0.0%
Past due up to 90 days and impaired
24.8
2.5%
30.3
4.6%
Past due after 90 days and impaired
31.0
3.1%
44.1
6.7%
Gross
994.9
100.0%
656.6
100.0%
Less: allowance for impairment
(34.3)
(34.1)
Net
960.6
622.5
Gross amounts of loans and advances to customers that were past due up to 90 days were as follows:
2015
2014
Group
million
million
Past due up to 30 days
16.5
22.6
Past due 30 - 60 days
5.5
5.3
Past due 60 - 90 days
2.8
2.7
Total
24.8
30.6
Interest income on loans classified as impaired totalled 6.0 million (31 December 2014: 3.1 million).
2015
2014
Company
million
million
Gross loans and advances
953.3
518.1
Less: allowances for impairment on loans and advances (Note 14)
(20.6)
(18.0)
932.7
500.1
The fair value of loans and advances to customers is shown in Note 4.
For a maturity profile of loans and advances to customers, refer to Note 3.
2015
2014
Company
million
million
Gross investment in finance lease receivables
No later than 1 year
103.9
61.9
Later than 1 year and no later than 5 years
232.3
151.4
Later than 5 years
0.9
-
337.1
213.3
Unearned future finance income on finance leases
(103.3)
(75.4)
Net investment in finance leases
233.8
137.9
The net investment in finance leases may be analysed as follows:
No later than 1 year
60.3
32.1
Later than 1 year and no later than 5 years
172.7
105.8
Later than 5 years
0.8
-
233.8
137.9
The prior year finance lease receivables have been restated, as certain of the Company's loans and advances to customers have been
reclassified as finance leases. These changes had no effect on net assets or profits of the prior period.
Loans and advances to customers can be further summarised as follows:
2015
2015
2014
2014
Company
million
%
million
%
Neither past due nor impaired
916.0
96.1%
461.7
89.1%
Past due up to 90 days and impaired
24.5
2.6%
26.2
5.1%
Past due after 90 days and impaired
12.8
1.3%
30.2
5.8%
Gross
953.3
100.0%
518.1
100.0%
Less: allowance for impairment
(20.6)
(18.0)
Net
932.7
500.1
Gross amounts of loans and advances to customers that were past up to 90 days were as follows:
2015
2014
Company
million
million
Past due up to 30 days
16.3
20.4
Past due 30 - 60 days
5.5
4.0
Past due 60 - 90 days
2.7
1.8
Total
24.5
26.2
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.
At 31 December 2015 loans and advances to customers of 56.4 million were pre-positioned under the Bank of England's Funding for Lending Scheme and were available for use as collateral within the scheme (2014: 11.5 million).
At 31 December 2015, 36.0 million of UK Treasury Bills were drawn under the Funding for Lending Scheme (2014: 15.0 million). During the year, these Treasury Bills were pledged as part of a sale and repurchase agreement with an original maturity period of six months (2014: three months). Monies arising as a result are disclosed in note 21.
0.2 million (2014: 0.2 million) is 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 0.2 million based on other recent property sales, and a loan to value ratio of 72% (2014: 76%).
368.0 million (2014: 133.7 million) 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%. All property valuations at loan inception, and the majority of development stage valuations, are performed by independent Chartered Surveyors, who perform their work in accordance with the Royal Institution of Chartered Surveyors Valuation - Professional Standards.
165.7 million (2014: 137.9 million) 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 127.1 million (2014: 109.5 million), giving a loan to value ratio of 130.4% (2014: 125.9%).
14. Allowances for impairment of loans and advances
A reconciliation of the allowance accounts for losses on loans and advances is as follows:
Group
2015
2014
Specific allowances for impairment
million
million
At 1 January
32.1
25.5
Provision for impairment losses
24.3
15.1
Loans written off during the year as uncollectible
(19.4)
(8.5)
Transfer to assets held for sale
(4.7)
-
At 31 December
32.3
32.1
Collective allowances for impairment
At 1 January
2.0
1.6
Provision for impairment losses
1.1
0.4
Transfer to assets held for sale
(1.1)
-
At 31 December
2.0
2.0
Total allowances for impairment
34.3
34.1
Company
2015
2014
Specific allowances for impairment
million
million
At 1 January
16.9
21.9
Provision for impairment losses
16.5
8.5
Release of allowance for impairment on the sale of debt
(12.1)
(12.5)
Loans written off during the year as uncollectible
(2.8)
(1.0)
At 31 December
18.5
16.9
Collective allowances for impairment
At 1 January
1.1
1.0
Provision for impairment losses
1.0
0.1
At 31 December
2.1
1.1
Total allowances for impairment
20.6
18.0
15. Debt securities held-to-maturity
Debt securities of 3.8 million (31 December 2014: 16.3 million) represent UK Treasury Bills. The Group's intention is to hold them to maturity and, therefore, they are stated in the Statement of Financial Position at amortised cost.
All of the debt securities held-to-maturity had a rating agency designation at 31 December 2015, based on Moody's long-term ratings of Aa1. None of the debt securities held-to-maturity are either past due or impaired.
16. Intangible assets
Goodwill
Computer software
Other intangible assets
Total
Group
million
million
million
million
Cost or valuation
At 1 January 2014
1.0
6.5
7.3
14.8
Additions
-
0.8
-
0.8
At 31 December 2014
1.0
7.3
7.3
15.6
Additions
-
2.3
-
2.3
Transfer to assets held for disposal
-
(0.3)
(5.1)
(5.4)
At 31 December 2015
1.0
9.3
2.2
12.5
Accumulated amortisation
At 1 January 2014
-
(2.7)
(2.2)
(4.9)
Amortisation charge
-
(1.1)
(1.4)
(2.5)
At 31 December 2014
-
(3.8)
(3.6)
(7.4)
Amortisation charge
-
(1.2)
(1.1)
(2.3)
Transfer to assets held for disposal
-
0.2
4.0
4.2
At 31 December 2015
-
(4.8)
(0.7)
(5.5)
Net book amount
At 31 December 2014
1.0
3.5
3.7
8.2
At 31 December 2015
1.0
4.5
1.5
7.0
Goodwill
Computer software
Total
Company
million
million
million
Cost or valuation
At 1 January 2014
0.3
2.6
2.9
Additions
-
0.7
0.7
At 31 December 2014
0.3
3.3
3.6
Additions
-
2.2
2.2
At 31 December 2015
0.3
5.5
5.8
Accumulated amortisation
At 1 January 2014
-
(2.0)
(2.0)
Amortisation charge
-
(0.3)
(0.3)
At 31 December 2014
-
(2.3)
(2.3)
Amortisation charge
-
(0.3)
(0.3)
At 31 December 2015
-
(2.6)
(2.6)
Net book amount
At 31 December 2014
0.3
1.0
1.3
At 31 December 2015
0.3
2.9
3.2
An annual impairment review is undertaken on the carrying value of the Group's intangible assets to determine whether an impairment event has occurred.
17. Investments
Shares at cost
Impairment provisions
Net investments
Company
million
million
million
At 31 December 2014 and 1 January 2014
3.7
-
3.7
At 31 December 2015
3.7
-
3.7
Shares in subsidiary undertakings of Secure Trust Bank plc at 31 December 2015 are stated at cost less any provision for impairment. All subsidiary undertakings are unlisted and none are banking institutions. The subsidiary undertakings were all incorporated in the UK and wholly owned via Ordinary shares. All subsidiary undertakings are included in the consolidated financial statements and have an accounting reference date of 31 December.
Details are as follows:
Principal activity
Owned directly
Debt Managers (Services) Limited
Debt collection company
Everyday Loans Holdings Limited*
Holding company
Secure Homes Services Limited
Property rental
STB Leasing Limited
Leasing
V12 Finance Group Limited
Holding company
Owned indirectly via intermediate holding companies
Everyday Loans Limited*
Sourcing and servicing of unsecured and secured loans
Everyday Lending Limited*
Provider of unsecured and secured loans
V12 Personal Finance Limited
Dormant
V12 Retail Finance Limited
Sourcing and servicing of unsecured loans
*Included in assets held for sale.
18. Property, plant and equipment
Freehold land and buildings
Leasehold improvements
Computer and other equipment
Total
Group
million
million
million
million
Cost or valuation
At 1 January 2014
4.4
0.4
8.9
13.7
Additions
2.7
-
0.9
3.6
Disposals
-
-
(0.5)
(0.5)
At 31 December 2014
7.1
0.4
9.3
16.8
Additions
-
0.2
1.2
1.4
Transfer to assets held for disposal
-
(0.6)
(0.4)
(1.0)
At 31 December 2015
7.1
-
10.1
17.2
Accumulated depreciation
At 1 January 2014
(0.4)
(0.2)
(8.1)
(8.7)
Depreciation charge
(0.1)
(0.1)
(0.3)
(0.5)
Disposals
-
-
0.5
0.5
At 31 December 2014
(0.5)
(0.3)
(7.9)
(8.7)
Depreciation charge
(0.1)
(0.1)
(0.4)
(0.6)
Transfer to assets held for disposal
-
0.4
0.2
0.6
At 31 December 2015
(0.6)
-
(8.1)
(8.7)
Net book amount
At 31 December 2014
6.6
0.1
1.4
8.1
At 31 December 2015
6.5
-
2.0
8.5
Freehold property
Computer and other equipment
Total
Company
million
million
million
Cost
At 1 January 2014
-
8.5
8.5
Additions
2.7
0.7
3.4
Disposals
-
(0.5)
(0.5)
At 31 December 2014
2.7
8.7
11.4
Additions
-
0.8
0.8
At 31 December 2015
2.7
9.5
12.2
Accumulated depreciation
At 1 January 2014
-
(8.0)
(8.0)
Depreciation charge
-
(0.2)
(0.2)
Disposals
-
0.5
0.5
At 31 December 2014
-
(7.7)
(7.7)
Depreciation charge
-
(0.3)
(0.3)
At 31 December 2015
-
(8.0)
(8.0)
Net book amount
At 31 December 2014
2.7
1.0
3.7
At 31 December 2015
2.7
1.5
4.2
The Group's freehold properties are the Registered Office of the Company, which is fully utilised for the Group's own purposes, and Secure Trust House, Boston Drive, Bourne End SL8 5YS, the majority of which is also used for the Group's own purposes.
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 which is included in the total carrying value of freehold land and buildings and which is not depreciated is 1.7 million (2014: 1.7 million).
The historical cost of freehold property included at valuation is as follows:
2015
2014
million
million
Cost
7.5
7.5
Accumulated depreciation
(1.3)
(1.2)
Net book amount
6.2
6.3
19. Derivative financial instruments
In order to protect its floating rate deposit book from increases in Bank of England base rates above 1.5%, the Group entered into an interest rate cap on 30 June 2011, with a notional amount of 20 million and a maturity date of 30 June 2015. The losses recognised in other comprehensive income in relation to the interest rate cap previously are not expected to be recovered in future periods, therefore they were been transferred to profit or loss in 2014. The Moody's long term rating of the counterparty was A2.
20. Other assets
2015
2014
Group
million
million
Trade receivables
1.5
0.9
Amounts due from related companies
1.3
0.8
Prepayments and accrued income
4.3
3.5
7.1
5.2
2015
2014
Company
million
million
Trade receivables
1.4
0.6
Amounts due from related companies
142.0
114.6
Prepayments and accrued income
2.6
1.0
146.0
116.2
21. Due to banks
2015
2014
Group
million
million
Amounts due to other credit institutions
35.0
15.9
35.0
15.9
2015
2014
Company
million
million
Amounts due to other credit institutions
36.4
15.9
36.4
15.9
Amounts due to banks for the current year represent monies arising from the sale and repurchase of drawings under the Funding for Lending Scheme. These are due for repayment in March 2015.
22. Deposits from customers
2015
2014
Group and Company
million
million
Current/demand accounts
39.5
37.8
Term deposits
993.6
570.6
1,033.1
608.4
For a maturity profile of deposits from customers, refer to Note 3.
23. Other liabilities
2015
2014
Group
million
million
Trade payables
13.8
10.9
Amounts due to related companies
0.1
0.3
Accruals and deferred income
12.3
18.3
26.2
29.5
2015
2014
Company
million
million
Trade payables
8.3
4.2
Amounts due to related companies
10.4
4.6
Accruals and deferred income
11.5
13.4
30.2
22.2
Within Group trade payables at 31 December 2015 there is 3.7 million (2014: 4.3 million) collateral held from RentSmart. The Group buys assets which are then leased to customers of RentSmart and the Group pays RentSmart a commission, which is recognised within operating income. In return, RentSmart continues to operate the agreement, retains the credit risk and provides the Group with a collateral amount that is based upon the balance of customer receivables and expected new agreements during the following month.
Within Group and Company accruals and deferred income there is nil million relating to accrued interest payable (2014: 6.6 million).
Financial Ombudsman Scheme accrual
The Company's FOS accrual reflects a provision for outstanding potential PPI claims of 2.6m (2014: 2.0m) as at 31 December 2015. The increase in provision is a result of new claims emerging following an extension of the deadline for making claims.
The FCA are 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, the Company pays levies to the Financial Services Compensation Scheme ('FSCS') to enable the FSCS to meet claims against it. 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 Company's FSCS provision reflects market participation up to the reporting date and the accrual of 0.2 million 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 Company'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 Company in September 2015.
24. Deferred taxation
2015
2014
Group
million
million
Deferred tax liabilities:
Unrealised surplus on revaluation of freehold property
0.2
0.2
Other short term timing differences
(0.2)
(0.2)
Deferred tax assets:
Other short term timing differences
0.3
-
Carried forward losses
-
1.0
Deferred tax assets
0.3
1.0
Deferred tax liabilities:
At 1 January
-
(0.4)
Profit and loss account
-
0.4
Deferred tax assets:
At 1 January
1.0
1.9
Profit and loss account
(0.3)
(0.8)
Cash flow hedges
-
(0.1)
Transferred to assets held for sale
(0.4)
-
At 31 December
0.3
1.0
2015
2014
Company
million
million
Accelerated capital allowances and other short-term timing differences
0.6
0.3
Deferred tax assets
0.6
0.3
At 1 January
0.3
0.8
Profit and loss account - accelerated capital allowances and other short-term timing differences
0.3
(0.4)
Cash flow hedges
-
(0.1)
Deferred tax assets at 31 December
0.6
0.3
On 2 July 2013 the Government substantively enacted a reduction in the main rate of UK corporation tax from 21% to 20% with effect from 1 April 2015. This will reduce the Group's future current tax charge accordingly. Deferred tax has been calculated based on the enacted rates to the extent that the related temporary or timing differences are expected to reverse in the future periods.
25. Contingent liabilities and commitments
Capital commitments
At 31 December 2015, the Group had no capital commitments (2014: 0.1 million relating to the refurbishment of an Everyday Loans branch).
The Company had no capital commitments (2014: nil).
Credit commitments
At 31 December 2015, the Group and Company both had commitments of 138.6 million to extend credit to customers (2014: 96.0 million and 96.0 million respectively).
Operating lease commitments
The future aggregate lease payments for non-cancellable operating leases are as follows:
2015
2014
Land and buildings
Other
Land and buildings
Other
Group
million
million
million
million
Within 1 year
1.0
0.5
0.8
0.3
Between 1 year and 5 years
1.6
0.3
1.5
0.2
Over 5 years
0.3
-
0.1
-
2.9
0.8
2.4
0.5
2015
2014
Land and buildings
Other
Land and buildings
Other
Company
million
million
million
million
Within 1 year
0.1
0.3
-
0.3
Between 1 year and 5 years
0.6
0.2
-
0.1
Over 5 years
0.1
-
0.4
-
0.8
0.5
0.4
0.4
There are 35 leases classified as land and buildings in the Group (2014: 35). Other leases include motor vehicles and computer hardware.
Other commitments
At 31 December 2015 a commitment exists to make further payments with regard to the Financial Services Compensation Scheme Levy for 2015 and thereafter. Due to uncertainties regarding the elements in the calculation of the levy and the Group's share thereof, the directors consider this cost to be unquantifiable.
26. Share capital
Number of shares
Ordinary shares
million
At 1 January 2014
15,648,149
6.3
Shares issued during year
2,543,745
1.0
At 31 December 2014
18,191,894
7.3
At 31 December 2015
18,191,894
7.3
27. Share based payments
On 17 October 2011, the Group established the Share Option Scheme (SOS) entitling three directors and certain senior employees to purchase shares in the Company.
The performance conditions of the Scheme are that for the duration of the vesting period, the dividends paid by the Company must have increased in percentage terms when compared to an assumed dividend of 8 million 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 the Company each year during the vesting period must be paid from the Company'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 the Company or any of its subsidiaries which has a material impact on the business of the Company.
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 six 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 six 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 six 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 7.20 per share. Approximately half of the share options were exercised 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.
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 100% for SOS2. The Company incurred an expense in relation to share based payments of 0.2 million during 2015, as disclosed in Note 8.
2015
2015
2014
2014
No. of option holders
No. of option holders
SOS2
SOS2
Directors
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
Grant date value per option ()
1.69
1.69
Fair value of share options, if all share options were exercised (million)
0.8
0.8
Behavioural assumption (attrition)
-
-
Probability of pay-out
100%
95%
Assumed value of share options on exercise date (million)
0.8
0.8
Value of share options at 31 December 2015 (million)
0.6
0.5
Cash settled share based payments
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 the Company, 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 the Company 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 ELG.
As at 31 December 2015, the estimated fair value has been prepared using the Black-Scholes model. Measurement inputs and assumptions used were as follows:
2015
Expected stock price volatility
27.00%
Expected dividend yield
2.09%
Risk free interest rate
0.72%
Average expected life (years)
2.85
This resulted in the following being recognised in the financial statements:
2015
2014
million
million
Balance at 1 January
-
-
Charge for the year (included in staff costs - see Note 8 )
1.2
-
Balance at 31 December
1.2
-
Intrinsic value
0.8
-
28. Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with less than three months' maturity from the date of acquisition.
2015
2014
Group
million
million
Cash and balances at central banks
131.8
81.2
Loans and advances to banks (Note 12)
9.8
24.8
141.6
106.0
Included in assets held for sale
Loans and advances to banks (Note 33)
1.7
-
143.3
106.0
2015
2014
Company
million
million
Cash and balances at central banks
131.8
81.2
Loans and advances to banks (Note 12)
9.2
22.9
141.0
104.1
29. 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.
A number of banking transactions are entered into with related parties in the normal course of business on normal commercial terms. These include deposits only during 2015 and 2014. Except for the directors' disclosures, there were no other Key Management Personnel disclosures, therefore the tables below relate to directors only.
Directors
2015
2014
million
million
Loans advanced
0.2
-
Loans outstanding at 31 December
0.2
-
Deposits
Deposits outstanding at 1 January
0.4
0.3
Additional deposits made during the year
0.1
0.1
Deposits outstanding at 31 December
0.5
0.4
The above loan is part of a 2.5m facility agreed by the Real Estate Finance business with a company in which a director holds 50% of the voting shares, which is secured by property and personal guarantees.
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 Arbuthnot Banking Group:
2015
2014
million
million
Arbuthnot Latham & Co., Ltd - recharge income of shared services
(0.8)
(0.2)
Arbuthnot Banking Group PLC - group recharges
0.4
0.4
Everyday Loans Holdings Limited - dividends received
(11.5)
(5.0)
Everyday Loans Limited - management recharge income
-
8.7
Everyday Lending Limited - interest income on loan receivable
(2.9)
(2.6)
Everyday Lending Limited - property and leasing recharges
(0.2)
-
Debt Managers (Services) Limited - income from sale of debt portfolio
(2.4)
(3.1)
Secure Homes Services Limited - dividend received
(2.0)
-
Secure Homes Services Limited - building rental paid
0.4
0.4
STB Leasing Limited - dividend received
(4.0)
-
V12 Finance Group Limited - dividends received
(2.0)
-
V12 Retail Finance Limited - financial intermediary charges - applications proposed
1.7
1.5
V12 Retail Finance Limited - financial intermediary charges - applications accepted
3.4
0.8
V12 Retail Finance Limited - financial intermediary charges - loan set-up and processing
3.3
1.7
V12 Retail Finance Limited - loan book management and servicing fees
4.0
1.7
(12.6)
4.3
The loans and advances with, and amounts receivable and payable to, related companies are noted below:
2015
2014
Group
million
million
Loans and advances to related companies
-
20.0
Amounts receivable from ultimate parent undertaking
1.3
0.8
Amounts due to related companies
(0.1)
(0.3)
1.2
20.5
2015
2014
Company
million
million
Loans and advances to related companies
-
20.0
Amounts receivable from ultimate parent undertaking
1.3
0.8
Amounts receivable from subsidiary undertakings
140.1
113.8
Amounts due to related companies
(10.4)
(4.6)
131.0
130.0
Directors' remuneration
The directors' emoluments (including pension contributions and benefits in kind) for the year are disclosed in the Remuneration Report.
At the year end the ordinary shares held by the directors are disclosed in the Directors' Report. Details of the directors' holdings of share options, as well as details of those share options exercised during the year, are also disclosed in the Directors' Report.
The interests of any directors who hold shares in the ultimate parent company, Arbuthnot Banking Group PLC, are shown in the Directors' Report of the ultimate parent company.
30. Operating segments
The Group changed the structure of its internal organisation during the year, and as a result the reportable segments have been restated. The business is currently organised into six main operating segments, which consist of the different products available, disclosed below:
Business finance
1) Real Estate Finance: buy-to-let and development loans secured by UK real estate.
2) Asset Finance: loans to small and medium sized enterprises to acquire commercial assets.
3) Commercial Finance: invoice discounting and invoice financing.
Consumer finance
4) Personal Lending: Unsecured consumer loans sold to customers via brokers and affinity partners.
5) Motor Finance: Hire purchase agreements secured against the vehicle being financed.
6) Retail Finance: Point of sale unsecured finance for in-store and online retailers.
Other
Other includes Current Account, OneBill, Pay4later, Rentsmart and debt collection.
Management review these segments by looking at the income, size and growth rate of the loan books, impairments and customer numbers. Except for these items no costs or balance sheet items are allocated to the segments.
Interest receivable and similar income
Fee and commission income
Revenue from external customers
Net impairment losses on loans and advances to customers
Loans and advances to customers
Year ended 31 December 2015
million
million
million
million
million
Business finance
Real Estate Finance
20.2
0.1
20.3
-
368.0
Asset Finance
2.4
-
2.4
-
70.7
Commercial Finance
0.4
1.2
1.6
0.3
29.3
Consumer finance
Personal Lending
17.2
-
17.2
4.8
74.3
Motor Finance
33.2
0.1
33.3
7.3
165.7
Retail Finance
22.5
1.7
24.2
5.2
220.4
Other
4.6
13.8
18.4
(0.8)
32.2
100.5
16.9
117.4
16.8
960.6
Discontinued operations and assets held for sale
Personal Lending
39.2
1.5
40.7
7.5
114.3
139.7
18.4
158.1
24.3
1,074.9
Interest receivable and similar income
Fee and commission income
Revenue from external customers
Net impairment losses on loans and advances to customers
Loans and advances to customers
Year ended 31 December 2014
million
million
million
million
million
Business finance
Real Estate Finance
2.5
-
2.5
-
133.8
Asset Finance
-
-
-
-
4.5
Commercial Finance
-
0.1
0.1
-
5.0
Consumer finance
Personal Lending
15.1
-
15.1
3.3
87.5
Motor Finance
27.2
-
27.2
3.9
137.9
Retail Finance
12.8
0.8
13.6
1.2
116.7
Other
5.8
15.2
21.0
0.3
43.2
63.4
16.1
79.5
8.7
528.6
Discontinued operations and assets held for sale
Personal Lending
30.2
4.1
34.3
6.6
93.9
93.6
20.2
113.8
15.3
622.5
The 'other' segment above includes other products which are individually below the quantitative threshold for separate disclosure and fulfils the requirement of IFRS 8.28 by reconciling operating segments to the amounts reported in the financial statements.
As interest, fee and commission and operating expenses are not aligned to operating segments for day to day management of the business and cannot be allocated on a reliable basis, profit by operating segment has not been disclosed.
All of the Group's operations are conducted wholly within the United Kingdom and geographical information is therefore not presented.
31. Immediate and ultimate parent company
The Company regards Arbuthnot Banking Group PLC, a company registered in England and Wales, as the immediate and ultimate parent company. Sir Henry Angest, the Group Chairman and Chief Executive has a beneficial interest in 53.7% of the issued share capital of Arbuthnot Banking Group PLC and is regarded by the Company as the ultimate controlling party. A copy of the consolidated financial statements of Arbuthnot Banking Group PLC may be obtained from the Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.
32. Events after the balance sheet date
There were no material post balance sheet events in the Group.
33. Discontinued operations and assets and liabilities held for sale
On 4 December 2015, the Bank agreed to the conditional sale of its non-standard consumer lending business, 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 regulatory approval and satisfaction of the conditions to the NSF financing. Completion is expected in the near future. On completion, NSF will repay the current intercompany debt of 108 million to STB.
Under the Bank's ownership, ELG has achieved impressive growth, within the constraints imposed upon it as part of a highly regulated banking group. An unsolicited approach revealed that NSF was prepared to pay an attractive valuation for ELG.
The net effect of the Disposal will therefore be to nearly double the equity base of Group to circa 250 million. This substantially improves STB's capital resources and broadens the range of strategic options available to it.
Subject to confirmation by the regulator, the Disposal is expected to improve the Group's CET1 ratio and Leverage ratios to 24% and 18% respectively, on a proforma basis as if the Disposal had occurred on 31 December 2015 (from 15% and 12% on an unadjusted basis as at 30 June 2015). This represents a substantial capital surplus and significant headroom over PRA minimum leverage requirements and will support the strong growth in lending of the Group.
While in the short term the Disposal is expected to reduce earnings, given the disposal of ELG's profit streams, the Board is confident that the proceeds can be reinvested to accelerate the Group's growth prospects and secure new income streams.
Details of the discontinued operations profit for the current year and prior year, assets and liabilities held for sale and cash flow of discontinued operations is set out below.
Income statement
Year ended
31 December
Year ended
31 December
2015
2014
million
million
Interest receivable and similar income
39.2
30.2
Net interest income
39.2
30.2
Fee and commission income
1.5
4.1
Fee and commission expense
(0.3)
(0.1)
Net fee and commission income
1.2
4.0
Operating income
40.4
34.2
Net impairment losses on loans and advances to customers
(7.5)
(6.6)
Operating expenses
(21.2)
(19.0)
Profit before income tax
11.7
8.6
Income tax expense
(2.3)
(2.0)
Profit for the period - Discontinued operations
9.4
6.6
Group
At 31 December
2015
Assets and liabilities held for sale
million
ASSETS
Loans and advances to banks
1.7
Loans and advances to customers
114.3
Property, plant and equipment
0.4
Intangible assets
1.2
Deferred tax assets
0.4
Other assets
0.5
Total assets
118.5
LIABILITIES
Current tax liabilities
3.4
Other liabilities
5.3
Total liabilities
8.7
Net assets held for sale
109.8
Company
Assets held for sale comprises investment in subsidiary undertaking totalling 1.
Year ended 31 December
Year ended 31 December
2015
2014
Cash flows from discontinued operations
million
million
Cash flows from operating activities
Profit for the year
7.5
6.6
Adjustments for:
Income tax expense
2.3
2.0
Depreciation of property, plant and equipment
0.1
0.1
Amortisation of intangible assets
1.0
1.3
Impairment losses on loans and advances to customers
7.5
6.6
Cash flows from operating profits before changes in operating assets and liabilities
18.4
16.6
Changes in operating assets and liabilities:
- net increase in loans and advances to customers
(27.9)
(19.1)
- net (increase) in other assets
(0.1)
-
- net increase in other liabilities
10.0
5.6
Income tax paid
(0.1)
(2.3)
Net cash inflow from operating activities
0.3
0.8
Cash flows from investing activities
Purchase of property, plant and equipment
(0.3)
(0.1)
Net cash flows from investing activities
(0.3)
(0.1)
Net increase in cash and cash equivalents
-
0.7
Cash and cash equivalents at 1 January
1.7
1.0
Cash and cash equivalents at 31 December
1.7
1.7
34. Country by Country reporting
The Capital Requirements (Country-by-Country Reporting) Regulations 2013 introduced reporting obligations for institutions within the scope of the European Union's Capital Requirements Directive (CRD IV). The requirements aim to give increased transparency regarding the activities of institutions.
The Country-by-Country Information is set out below:
31 December 2015
Number of FTE
Profit before tax
Tax paid on profit
Name
Nature of activity
Location
Turnover
employees
000
000
Secure Trust Bank plc
Banking services
UK
158.1
706
36.5
4.2
31 December 2014
Number of FTE
Profit before tax
Tax paid on profit
Name
Nature of activity
Location
Turnover
employees
000
000
Secure Trust Bank plc
Banking services
UK
113.8
608
26.1
3.1
Five year summary
2015
2014
2013
2012
2011
million
million
million
million
million
Profit for the year
Interest and similar income
139.7
93.6
73.8
44.9
22.9
Interest expense and similar charges
(21.6)
(14.2)
(12.9)
(10.5)
(5.6)
Net interest income
118.1
79.4
60.9
34.4
17.3
Net fee and commission income
14.4
18.5
18.1
12.6
11.2
Operating income
132.5
97.9
79.0
47.0
28.5
Impairment losses on loans and advances
(24.3)
(15.3)
(15.6)
(8.9)
(4.6)
Gain from a bargain purchase
-
-
0.4
9.8
-
Other income
-
-
-
0.1
-
Exceptional costs
-
-
(0.9)
(1.4)
(0.5)
Arbuthnot Banking Group recharges
(0.8)
(0.2)
(0.1)
(0.1)
(1.8)
Operating expenses
(70.9)
(56.3)
(45.7)
(29.3)
(14.3)
Profit before income tax
36.5
26.1
17.1
17.2
7.3
Earnings per share for profit attributable to the equity holders of the Group during the year
(expressed in pence per share)
- basic
157.8
122.3
78.3
108.9
39.6
Financial position
Cash and balances at central banks
131.8
81.2
-
-
-
Loans and advances to banks
11.5
39.8
110.0
155.3
139.5
Loans and advances to customers
1,074.9
622.5
391.0
297.6
154.6
Debt securities held-to-maturity
3.8
16.3
-
-
-
Other assets
25.4
22.5
24.9
21.7
13.7
Total assets
1,247.4
782.3
525.9
474.6
307.8
Due to banks
35.0
15.9
0.1
-
-
Deposits from customers
1,033.1
608.4
436.6
398.9
272.1
Other liabilities
38.1
33.1
27.6
19.8
11.9
Total shareholders' equity
141.2
124.9
61.6
55.9
23.8
Total liabilities and shareholders' equity
1,247.4
782.3
525.9
474.6
307.8
This information is provided by RNSThe company news service from the London Stock ExchangeENDFR SFMEFMFMSESD
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