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2023 ReportAldermore Bank PLC Financial statements for the year ended 31 December 2011 Registered number: 00947662 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Company Information Board of Directors Non Executive Chairman Sir David Arculus Executive Directors Phillip Monks - Chief Executive Mark Stephens - Deputy CEO Paul Myers - Chief Operating Officer Stephen Barry – Chief Risk Officer John Baines – Chief Financial Officer Ian Wilkins - Group Managing Director - Commercial Finance Non Executive Directors John Callender Finlay McFadyen Peter Cartwright Jayne Almond Secretary Dionne Baldwin Registered Office 1st Floor, Block B Western House Lynch Wood Peterborough PE2 6FZ Auditors KPMG Audit Plc 1 The Embankment Neville Street Leeds LS1 4DW Registered number 00947662 www.aldermore.co.uk Authorised and regulated by the Financial Services Authority. Member of British Bankers’ Association. Member of Finance and Leasing Association. Member of Asset Based Finance Association. 1 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Contents Chairman’s overview Directors’ report Statement of directors’ responsibilities Page 3 - 4 5 - 11 12 Independent Auditor’s report 13 - 14 Profit and loss account Balance sheet 15 16 Notes to the financial statements 17 - 40 2 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 CHAIRMAN’S OVERVIEW EXPERTISE. APPLIED A year ago, I said that for Aldermore, 2010 was a transformational year. Now, after my first full year as Chairman, I can report that there has been no pause in Aldermore’s astonishing progress. Aldermore has established itself as the champion of British savers, British SME’s and British homeowners. Aldermore is backing Britain with a straightforward and reliable service that brings together our expertise and dynamic approach to life. 2011 has been marked by a series of important milestones. In June, the Bank broke even for the first time two months ahead of forecast and has been profitable each quarter since. Given that the Bank launched in May 2009, this was a great achievement in a short period of time. This was rapidly followed in July by the announcement that gross assets had exceeded £1 billion. In September, Aldermore was successful in raising a further £62 million of capital from a consortium of blue chip investors, underpinning the Bank’s mission to lend to small and medium sized enterprises (SMEs), and householders. The Bank’s liquidity position also remains excellent, as we continue to provide simple, good value and gimmick-free products to savers. Despite the current, and planned, tightening of the regulatory, capital and liquidity environment, the Bank is extremely well placed to meet these requirements without any need to modify our business model. Aldermore’s Commercial Finance division continues to thrive despite a difficult economy. It has doubled in size during 2011. Asset finance is focused on medium term lending against assets through hire purchase and leasing products. Asset finance continues to grow in its specialist sectors including, materials handling, construction, professional practices, and wholesale finance. Invoice finance provides finance for early growth trading, refinancing, acquisitions, turnaround finance and post-insolvency trading to British SMEs, secured against the borrower’s sales receivables. In 2011 the Bank’s invoice finance division launched ‘Aldermore Business Confidence’ offering businesses with a turnover of up to £500,000 a fixed fee funding facility. We also created a Structured Finance team, to specifically assist businesses requiring asset and invoice finance, as well as a commercial mortgage or any combination of these SME services. We strive to make it easy and straightforward to do business with Aldermore - a great demonstration of acting as SME champion. Aldermore continued to make excellent progress in its Mortgage Division. It, too, has more than doubled in size in 2011. The residential mortgage business was launched in May 2010 and has fully proved its innovative, leading-edge technology platform, delivering quick decision making and allowing skilled underwriters to ensure that creditworthy customers’ needs can be met. Over a dozen new mortgage products were launched to market, providing much needed support to those seeking a mortgage for their home or an investment property. Aldermore’s Family Guarantee Mortgage is unique in the market and sets out to provide much needed help to first time buyers making that difficult first step on to the housing ladder. These achievements are recognised in our marketplace and the mortgage business won the prestigious Financial Adviser 5 Star Service Award and in addition to this, four other national mortgage awards, as well as being highly commended twice. In a very short period of time our residential mortgage business has become a force to be reckoned with. The commercial mortgage business goes from strength to strength and in 2011 we became sponsor of the National Association of Commercial Finance Brokers (NACFB) and launched our new state-of-the-art commercial mortgage processing system. The 3 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 CHAIRMAN’S OVERVIEW (continued) system was designed and launched in less than a year and places our entire mortgage division on the same operational platform taking service levels to be amongst the best in the industry. Use of leading edge technology in this way really differentiates us in the marketplace and provides unparalleled customer service, with fast decision making, and a totally on-line broker service, making Aldermore straightforward and efficient to do business with. It was rewarding to be recognised as Best Specialist Lender for Commercial Mortgages for the second consecutive year, and in 2011 we provided our 1,000th commercial mortgage. Our Mortgage Division ‘came of age’ in 2011 and the foundations are now laid for further growth in 2012 supporting home owners, residential and commercial property investments and businesses throughout the UK. Our UK Savings business continues to provide good value, with simple products. Over 50,000 depositors have trusted us with more than £1 billion of their hard earned savings. Our savings products regularly appear in the national media’s best buy tables and we pride ourselves on offering no tricks or gimmicks on any of our savings accounts, just consistently good value and efficient, reliable service. This has resonated with our customers and Aldermore won the highly acclaimed Consumer Moneyfacts Best ISA Provider for 2011, which is voted on by the public. Savers can sign-up online in approximately 10 minutes, or over the phone or by post, and our bespoke system enables the customer to scan in their verification documents, eradicating errors, as well as offering a dynamic and straightforward service. Aldermore is regulated by the UK Financial Services Authority and so Aldermore’s depositors benefit from the Financial Services Compensation Scheme which guarantees deposits up to £85,000 or twice that for joint accounts. But it is clear that what is really bringing deposit customers to the Bank is good value for money, and straightforward uncomplicated products. The customer feedback has been fantastic on a service which allows customers to deal with us in a way which suits them. Our no-nonsense products, with no hidden terms or conditions, have been a huge success. While the Financial Services Compensation Scheme is of real reassurance to many of our customers, it is of course the directors’ mission to ensure it is never required. We continue to lend within our risk appetite, and loan portfolios continue to perform better than our expectations. In line with current Government thinking, all of the Executive Management team and some other senior staff have their compensation tied to the long term fortunes of the Bank, and thus are incentivised to make sure that they are prepared to live with the consequences of decisions they make now, and well into the future. This helps underpin a risk management culture at the most senior level of the Bank, which provides the ultimate protection to our depositors. Our shareholders have always had a seat on our Remuneration Committee, to help ensure the long term interests of the Bank are protected. Finally, I turn to the most important ingredient of our success – the people who work for us who are experts in their field. This team of experienced executives, managers and staff brings expertise, strategic vision and a strong risk management ethic which prevails throughout the DNA of Aldermore. It is also very satisfying to be creating many new jobs, as we continue to build the skills and capability which will allow the Bank to continue to grow safely in the future. Sir David Arculus Chairman 4 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 DIRECTORS’ REPORT The directors present their report and the financial statements of Aldermore Bank PLC (‘the Bank’) for the year ended 31 December 2011. Results and Dividends The results for the year are set out in the profit and loss account on page 15. The directors do not recommend the payment of a dividend (2010: £nil). Principal Activities and Business Review The Bank is authorised to accept deposits under the Financial Services & Markets Act 2000 and the Bank’s principal activities during 2011 were the provision of banking and related services. The strategic objective of the Bank is to be a provider of secured financial products to the SME and residential mortgage markets, funded by capital and retail deposits. The loss before taxation for the year ended 31 December 2011 was £0.9m (2010: £8.8m). As at 31 December 2011 the Bank had 445 employees (2010: 377). As the Bank invested in its infrastructure and people and built out its capabilities, 2011 saw a loss- making first half with the Bank achieving profitability in both the 3rd and 4th quarters. Significant releases of provisions taken in prior years were made, as detailed in note 16 to the financial statements, as the credit performance of acquired portfolios was much better than expected. The Bank had Tier 1 capital at 31 December 2011 of £158.2m (2010: £83.3m) and a Tier 1 capital ratio of 18.5% (2010: 19.0%). Capital Injections The Bank’s ultimate holding company is AC Acquisitions Limited. During 2011 capital injections were made by AnaCap Financial Partners, L.P., AnaCap Financial Partners II, L.P., AnaCap Derby Co-Investment (No. 1) L.P. and AnaCap Derby Co-Investment (No.2) L.P. in the share capital of AC Acquisitions Limited. During 2011 £77.9 million was invested in the Bank by AC Acquisitions Limited via subscription of equity share capital in the intermediate holding company Aldermore Holdings Limited which in turn invested in equity share capital of the Bank. Liquidity At 31 December 2011, the Bank held a 19.8% liquidity buffer (liquid assets excluding encumbered cash as a % of total deposits). Based on the available buffer, the Bank has sufficient liquidity to meet its liabilities when they are due, and sufficient liquidity under a 91-day liquidity stress for both the internal and FSA BIPRU 12 stress requirements. As at the reporting date, the Bank complied with its liquidity risk limits and risk appetite, and BIPRU 12. 5 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 DIRECTORS’ REPORT (continued) Investment in the Business Systems and Support Structure Fixed asset additions in the year of £5.0m were mainly focused on new IT systems and infrastructure. This investment is ongoing and the business is forecast to spend over £4.5m during 2012 on enhancing the technology infrastructure further. Commercial Finance Division Asset Finance - during 2011, the Bank saw a significant level of demand for its asset finance services and the business grew significantly through the provision of funding to the corporate and SME sectors as well as to the public sector and professional firms. The Bank sources new business from specialist brokers and vendor partnerships. Invoice Finance – the Bank’s Invoice Finance division provides working capital funding to SME businesses throughout the UK. 2011 saw a significant increase in demand for these services with the Bank being one of the fastest growing providers in the UK invoice finance market. Mortgages Division Commercial Mortgages - the Bank is now an established UK SME commercial mortgage lender offering residential investment and commercial mortgages products and solutions via intermediaries. Lending is first charge, low loan-to-value, primarily against commercial/industrial premises, professionally managed residential buy to let, and retail premises. Residential Mortgages – the Bank offers residential owner occupied and buy-to-let mortgage products via intermediaries. Property Development - the Bank has decided to re-commence lending in the property development sector. The Bank will focus on residential development lending. Summary of lending asset values by Division Division As at 31 December 2011 As at 31 December 2010 Net Change £’000 341,303 819,132 1,160,435 £’000 169,197 305,755 474,952 £’000 172,106 513,377 685,483 Commercial Finance Mortgages Total Investment Securities The Bank has increased its investment securities holdings from £35.8m at December 2010 to £61.1m at December 2011, primarily via asset backed securities. The additional investments were made to increase the level of liquidity in the Bank, whilst achieving a reasonable return on such assets. The investment assets are primarily residential mortgage asset backed securities, AAA/AA rated bonds, where adequate loss cover is available to absorb high default rates before the bond itself defaults. 6 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 DIRECTORS’ REPORT (continued) Customer Deposits The primary source of funding for the Bank is retail deposits. Retail deposit products are offered to the general public via the internet, post, and telephone. The recent growth in assets has been funded through the deposits base. Deposit balances have increased from £635m at 31 December 2010 to £1,347m at 31 December 2011. Going Concern As referred to in Note 1(b), the directors have made a full assessment of the current state of the balance sheet of the Bank and the longer term strategy of the business. Capital and liquidity plans have been reviewed by the directors and are reported against at least monthly, including stress tests. The directors believe that the Bank has sufficient resources to continue lending and deposit taking throughout 2012 and to continue its expansion. The Bank has sufficient capital to enable it to continue to meet its regulatory capital requirements as set out by the Financial Services Authority, has firm backing from its current investors, and one new investor has signed a commitment letter relating to a capital injection of over £30m, subject to FSA approval. Principal Risks and Uncertainties A core objective for the Bank is the effective management of risk. Given the nature of the activities undertaken, the principal risks faced are credit risk, market risk, liquidity risk, interest rate risk and operational risk. Each risk has a detailed documented policy and is overseen by a robust governance process including regular and detailed management information. The Bank has a Chief Risk Officer who is responsible for ensuring each risk is adequately monitored, managed and mitigated. A detailed analysis of all key risks has been documented in the Internal Capital Adequacy Assessment Process report, and approved by the board. The board has ultimate responsibility for setting the Bank’s strategy, risk appetite and control framework and key risks are reviewed at the monthly board meeting. The Bank has an Audit & Risk Committee which meets on a quarterly basis. The committee monitors and considers the internal control environment focusing on operational risks, internal and external audits and compliance matters. Credit Risk Credit risk is the risk of principal loss arising from defaults and losses in the event of default or fraud relating to mortgage, lease and loan contracts. Credit risks are managed through the use of a detailed lending criteria, careful assessment and suitable product structures. The Bank has credit policies for each line of business which details the approach to lending. Each lending division has a Risk director who is responsible for managing credit risk within the business lines and there is a dedicated team within each business which assesses credit risk. Group Risk has oversight of credit management and lending activities. The Management Credit Committee is responsible for reviewing credit policy issues, such as provisioning and lending policies and recommending these to the board or Board Credit Committee. To monitor key performance areas and asset quality, the committee meets monthly and reviews credit management information, portfolio performance reports and provisioning analysis. The Management Credit Committee is responsible for approving credit proposals that have been presented to it by the business lines within its delegated authority. 7 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 DIRECTORS’ REPORT (continued) The Board Credit Committee meets on a quarterly basis to agree policy issues, such as provisioning and lending policies which have been proposed by the Management Credit Committee. The committee also reviews management information and carefully monitors the portfolio performance and lending environment. Forbearance On occasions, borrowers experience difficulties which impact on their ability to meet their mortgage or commercial finance obligations. The Bank identifies borrowers whose mortgages or commercial finance loans have gone into arrears and consults with them in order to ascertain the reason for the arrears, and to establish what course of action can be taken to bring the account up to date. In certain circumstances where the borrower is experiencing significant financial distress, the Bank uses forbearance measures to assist them. These are all considered on a case by case basis and must be in the best interest of the customer. The forbearance measures are undertaken in order to achieve a reduction in long term arrears and allow the best outcome for both the customer and the Bank by dealing with arrears at an early stage. The most widely used methods of forbearance are reduced monthly payments, loan term extension and a temporary or permanent transfer to interest only payments to reduce the borrowers’ financial pressures. Where the arrangement is temporary, the borrowers are expected to resume normal payments within six months. Since July 2011, the Bank undertook forbearance measures as follows: Mortgages Division Commercial Finance Division Total Number Loan Balance £'000 Yearend arrears £'000 Number Loan Balance £'000 Yearend arrears £'000 Number Capitalisation Temporary or permanent switch to interest only Reduced monthly payments Loan term extension Total Total forborne* 0 11 1 0 12 0 1,860 70 0 1,930 0.24% * as a percentage of the total divisional lending book General provision Specific provision 7 5 12 1 4 5 0 0 7 0 7 1 0 3 7 11 7 4 11 989 0 318 290 1,597 0.47% 1 274 275 2 0 8 8 18 1 11 4 7 23 14 9 23 Loan Balance £'000 989 1,860 388 290 3,527 0.30% 2 278 280 The provisions against forborne cases in the Mortgages Division are not significant given the nature of the forbearance arrangements. The measures undertaken relate to a change in the contractual cash flows which have eased the borrower's financial stress to enable them to continue to repay their mortgage in line with the arrangement. Forbearance arrangements have been considered in conjunction with other loan characteristics when performing the impairment review. 8 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 DIRECTORS’ REPORT (continued) There are relatively higher provisions against the Commercial Finance division in respect of forborne cases. Whilst the use of forbearance measures has been modest, the measures undertaken include a limited level of arrears capitalisation and loan term extensions. Market Risk The Bank does not carry out proprietary trading or hold any positions that would require to be marked to market, nor does it have any intention to do so in the foreseeable future. Any investments in assets or equity are not actively traded. Interest Rate Risk Interest rate risk is the risk of loss through un-hedged or mismatched asset and liability positions sensitive to changes in interest rates. Where possible, the Bank seeks to match the interest rate structure of assets with liabilities, or deposits, creating a natural hedge. Where this is not possible, the Bank will enter into swap agreements to convert fixed interest rate liabilities into variable rate liabilities, which are then matched with variable interest rate assets. Liquidity Risk Liquidity risk is the risk that the Bank is not able to meet its financial obligations as they fall due, or can do so only at excessive cost. The Bank maintains a liquidity buffer of eligible liquid assets such as UK Government Treasury Bills, which is monitored on a regular basis to ensure there are sufficient liquid assets at all times to cover cash flow imbalances and fluctuations in funding and to enable the Bank to meet all financial obligations and support the asset growth. The Asset & Liability Committee meets on a monthly basis to consider market, interest rate and liquidity risks, and to ensure that the Bank adheres to the interest rate risk and liquidity policies and objectives set down by the board. It also has responsibility for ensuring that the policies that are implemented are adequate to meet operational, prudential and regulatory requirements. Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This risk includes IT, information security, project, outsourcing, tax, legal, fraud and compliance risks. The Bank aims to accept a low level of operational risk. Through the establishment and investment in sound systems, controls and audit functions, the Bank minimises operational failures. The Operating Committee meets monthly to ensure that a quality and robust IT, operations and compliance service is delivered at all times and is capable of supporting the changing business requirements of the Bank. It has responsibility for monitoring all the key operational risks facing the organisation, including compliance and operational risks. As part of the Group Risk function, the Bank has an Operational Risk Manager who has specific responsibility for managing operational risks. Other Risks To manage business, operational and regulatory risks, the Bank has a sound risk management framework and governance structure in place and applies a standard three lines of defence model. Committees have been established to monitor operational performance, credit risk and also audit and risk matters. The Compliance and Internal Audit departments also help to review and monitor operational and regulatory issues to help ensure the Bank is operating in accordance with internal policies and procedures and provide assurance to the board. The Bank has a business continuity plan in place. Further information on risk management is contained within note 33. 9 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 DIRECTORS’ REPORT (continued) Performance analysis based on Key Performance Indicators The following metrics represent the core key performance indicators for the Bank: 31 December 2011 31 December 2010 Tier 1 capital ratio 18.5% 19.0% Annual growth in loans and advances to customers 144.3% (£685.5m) 195% (£314.4m) Annual growth in retail deposits 112.3% (£712.7m) 176% (£405.1m) Liquidity buffer (as a % of total deposits) Loss for the year 19.8% £0.9m 34.5% £8.8m Payment Policy It is the Bank’s policy to pay suppliers as they fall due, in accordance with the negotiated terms of business. The Bank had trade creditors at 31 December 2011 of £0.8m (2010: £1.6m). Trade creditors’ days at 31 December 2011 was 19 days (2010: 35 days). Equal Opportunities for Disabled People The Bank is committed to ensuring that disabled people are afforded equality of opportunity in respect of entering and continuing employment within the business. This includes all stages from recruitment and selection, terms and conditions of employment, access to training and career development. Staff Communication The Bank provides regular updates to all employees using face to face meetings, conference calls, email and the intranet. Two staff feedback surveys were conducted in 2011 and management communicated the findings to staff, together with action plans to address issues identified in the survey. The multi-media communication framework continues to evolve and has been embraced by staff and management alike. 10 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 DIRECTORS’ REPORT (continued) Directors The directors who held office during the year were as follows: Phillip Monks Mark Stephens Peter Cartwright Finlay McFadyen John Callender Paul Myers Stephen Barry Sir David Arculus John Baines Ian Wilkins Jayne Almond (appointed 4 April 2011) Certain directors benefited from qualifying third party indemnity provisions in place during the year ended 31 December 2011 and at the date of this report. Political and Charitable Donations The Bank made no political or charitable donations during the year (2010: Nil). Disclosure of Information to Auditors The directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Bank’s auditors are unaware; and each director has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to establish that the Bank’s auditors are aware of that information. Auditors In accordance with section 489 of the Companies Act 2006, a resolution for the re-appointment of KPMG Audit Plc as auditors of the Bank is to be proposed at the forthcoming Annual General Meeting. By order of the board Phillip Monks Director and Chief Executive Officer 11 Western House Lynch Wood Peterborough PE2 6FZ 28 March 2012 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Statement of Directors’ responsibilities in respect of the Directors’ report and the financial statements The directors are responsible for preparing the Directors' Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Bank and of the profit or loss of the Bank for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Bank will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Bank’s transactions and disclose with reasonable accuracy at any time the financial position of the Bank and enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Bank and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Bank’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. This report was approved by the Board on 28 March 2012 and was signed on its behalf by: Phillip Monks Director and Chief Executive Officer 12 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Independent Auditor’s report to the members of Aldermore Bank PLC We have audited the financial statements of Aldermore Bank PLC for the year ended 31 December 2011 set out on pages 15 to 40. The financial reporting framework that has been applied in their preparation is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors' Responsibilities Statement set out on page 12, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm Opinion on financial statements In our opinion the financial statements: give a true and fair view of the state of the company's affairs as at 31 December 2011 and of its loss for the year then ended; have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors' remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. 13 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Independent Auditor’s report to the members of Aldermore Bank PLC (continued) J L Ellacott (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants 1 The Embankment Neville Street Leeds LS1 4DW 28 March 2012 14 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Profit and loss account For the year ended 31 December 2011 Interest receivable Interest payable Net interest income Fees and commissions receivable Fees and commissions payable Other operating income Net operating income Administrative expenses Depreciation and amortisation Provision for bad and doubtful debts Loss on ordinary activities before taxation Taxation on loss on ordinary activities Loss on ordinary activities after taxation Note 3 4 5 6 7 11 12 16 13 14 2011 £’000 2010 £’000 53,190 24,474 (30,555) __________ (12,497) __________ 22,635 18,184 (6,656) 11,977 12,264 (3,075) 8,476 __________ 7,080 __________ 42,639 (40,681) (1,852) 28,246 (34,295) (1,267) (1,005) __________ (1,490) __________ (899) (8,806) 7 __________ - __________ (892) __________ (8,806) __________ The notes and information on pages 17 to 40 form part of these financial statements. There were no recognised gains and losses other than the loss for the year. The result for the year is derived entirely from continuing activities. 15 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Balance Sheet At 31 December 2011 Assets Cash and balances at central banks Loans and advances to banks Loans and advances to customers Debt securities Intangible assets Tangible fixed assets Other assets Prepayments and accrued income Total assets Liabilities Customers accounts Other liabilities Accruals and deferred income Total Liabilities Called up share capital Share premium account Profit and loss account Shareholders’ funds Total liabilities and shareholders’ funds Contingent liabilities Commitments Note 15 16 17 19 20 21 22 23 24 25 26 27 27 28 30 30 2011 £’000 125 123,122 1,160,435 227,958 7,915 7,367 14,311 2010 £’000 - 219,346 474,952 35,803 8,361 3,781 4,318 12,894 __________ 5,771 __________ 1,554,127 __________ 752,332 __________ 1,347,470 8,448 634,719 7,881 32,066 __________ 18,105 __________ 1,387,984 __________ 660,705 __________ 3,300 3,300 170,133 (7,290) __________ 94,725 (6,398) __________ 166,143 __________ 91,627 __________ 1,554,127 __________ 752,332 __________ £’000 £’000 - - 190,555 148,088 These financial statements were approved by the board of directors on 28 March 2012 and were signed on its behalf by: Phillip Monks Director and Chief Executive Officer Registered number: 00947662 The notes and information on pages 17 to 40 form part of the financial statements. 16 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the Financial Statements 1 Accounting policies a) Accounting basis The financial statements have been prepared under the historical cost convention and are in accordance with applicable United Kingdom law, Accounting Standards (United Kingdom Generally Accepted Accounting Practice), and relevant British Bankers’ Association and Finance and Leasing Association Statements of Recommended Practice, which have been applied consistently. b) Going concern The financial statements have been prepared on a going concern basis. The directors have made a full assessment of the current state of the balance sheet of the Bank and the longer term strategy of the business. Capital and liquidity plans have been reviewed by the directors and are reported against at least monthly, including stress tests. The directors believe that the Bank has sufficient resources to continue lending and deposit taking throughout 2012, and for the 12 months from the date these financial statements are approved. The Bank has sufficient capital to enable it to continue to meet its regulatory capital requirements as set out by the Financial Services Authority, has firm backing from its current investors, and one new investor has signed a commitment letter relating to a capital injection of over £30m, subject to FSA approval. On this basis the directors believe that it is appropriate to prepare the financial statements on a going concern basis. c) Finance leases and hire purchase agreements Interest receivable from finance leases and hire purchase agreements is credited to the profit and loss account to give a constant periodic rate of return after tax on the net cash investment. Investments in finance leases and hire purchase agreements are shown in the balance sheet as assets within loans and receivables, and represent the total rentals receivable less the income allocated to future periods. d) Loan agreements Interest receivable from fixed profile loan agreements is credited to the profit and loss account to give a constant periodic rate of return on the net cash investment over the life of the loan agreement. Interest from revolving loans is credited on an accrued basis. Loan assets in the balance sheet represent the amount of total repayments receivable less the income allocated to future periods, net of provisions for bad and doubtful debts. e) Invoice financing Income comprises the fair value receivable for the provision of invoice financing services, net of value-added tax, and is recognised as follows: i) Interest income The Bank charges its clients interest each day on the balance of their outstanding loan. This interest income is recognised in the profit and loss account as it is added to the clients’ borrowings. ii) Fee and related income The Bank charges its clients a factoring fee for managing their sales ledgers. This fee is recognised over the period in which the ledger management service is provided. Other fee income, which includes disbursements, is credited to the profit and loss account when the service has been provided or the disbursement expenditure incurred. 17 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the Financial Statements (continued) 1 Accounting policies (continued) e) Invoice financing (continued) iii) Unallocated cash This relates to a liability for receipts of unallocated cash, which are held on the Bank’s balance sheet until the expiry of the six-year period. Any unclaimed receipts subsequent to the expiry date are recognised as income. f) Provisions for loan losses Provisions for finance agreements and loan losses are based on a year end appraisal of recoverability of all advances. Specific provision is made against exposures which have been identified as bad or doubtful to reduce the carrying amount, including interest in arrears. The Bank estimates the ultimate net realisable value and incorporates a forced sale discount into that valuation. Bad debts are written-off in part or in full when the extent of loss has been confirmed and there is no realistic prospect of recovery. A general provision has been applied to loan balances not specifically provided for. Potential exposures (those that are impaired at the balance sheet date but are not individually identified) are provided for against the clean book based on the incurred losses of each relevant line of business. The losses are provided for as a percentage of the loan book. This percentage is reviewed and adjusted accordingly as experience and economic and market conditions change. Interest recognition is normally suspended once a customer’s loan is impaired and/or three months or more in arrears. g) Consolidation The Bank has taken advantage of the exemption, allowed under section 400 of the Companies Act 2006, not to prepare group accounts as it is wholly owned subsidiary of AC Acquisitions Limited a company incorporated in England and is included in the consolidated accounts of AC Acquisitions Limited. h) Cashflow statement Under Financial Reporting Standard 1 the Bank is exempt from the requirement to prepare a cashflow statement on the grounds that its ultimate parent company, AC Acquisitions Limited, includes the Bank in its own published consolidated financial statements. i) Tangible fixed assets and depreciation Tangible fixed assets, other than freehold land, are stated at cost less accumulated depreciation and any provision for impairment. Depreciation is provided on all tangible fixed assets, other than equipment held for use in operating leases, at rates calculated to write off the cost of each asset on a straight-line basis over its expected useful life, as follows: Fixtures, fittings and equipment Computer systems Motor vehicles - - - 5 years 1 to 5 years 5 years Equipment held for use in operating leases is written down to its estimated residual value on a straight-line basis over the period of the underlying lease agreement. j) Fees and commissions receivable and payable Fees and commissions receivable and payable directly incremental to a loan are amortised over the period of the loan to a maximum of five years. 18 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the Financial Statements (continued) 1 Accounting policies (continued) k) Rentals receivable under operating leases Rental income from operating leases is recognised on a straight line basis over the lease term of the relevant lease. l) Foreign currencies Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities held at the balance sheet date are translated into sterling at the exchange rates ruling at the balance sheet date. Exchange differences are charged or credited to the profit and loss account. m) Taxation Corporation tax payable is provided on taxable profits at the current rate, as reduced by losses surrendered by group undertakings at nil cost. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Bank’s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements. A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not there will be suitable taxable profits from which the future of the underlying timing differences can be deducted. To date, no deferred tax asset has been recognised as there is insufficient certainty over the ability to use the amounts in the future. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis. n) Pension costs The cost of providing retirement pensions is charged to the profit and loss account at the amount of the defined contributions payable for each year. Differences between contributions payable and those actually paid are shown as accruals or prepayments. The Bank has no defined benefit pension scheme. o) Segmental information In the opinion of the directors, the Bank has two main lines of business in a variety of geographical locations within the UK. The performance of the Mortgages and Commercial Finance divisions is shown in note 2. p) Securities Securities intended for use on a continuing basis in the Bank’s activities are classified as investment securities and stated at cost less provision for any permanent diminution in value. Asset backed securities: where purchased at a discount the discount is amortised through the profit and loss account on an effective yield basis, which is a change in accounting estimate from the prior period. This is considered more appropriate as the 19 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the Financial Statements (continued) 1 Accounting policies (continued) p) Securities (continued) discount is now recognised to give a constant rate of return on the underlying assets. This has resulted in an additional £0.6m of income being recognised in the profit and loss account in the current year. Other debt securities: where other investment securities have been purchased at a premium or discount these premiums and discounts are amortised through the profit and loss account from the date of purchase over the remaining life of the investment. An impairment review is undertaken periodically to assess whether there has been any permanent diminution in value. The amortisation of premium and discounts is included within interest income. q) Impairment of assets The carrying amounts of the Bank’s assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the fixed asset may not be recoverable. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its income-generating unit exceeds its recoverable amount. Impairment losses are recognised in the profit and loss account unless they arise on a previously revalued fixed asset. An impairment loss on a revalued fixed asset is recognised in the profit and loss account if it is caused by a clear consumption of economic benefits. Otherwise impairments are recognised in the statement of total recognised gains and losses until the carrying amount reaches the asset’s depreciated historic cost. Impairment losses recognised in respect of income-generating units are allocated first to reduce the carrying amount of any goodwill allocated to income-generating units, then to any capitalised intangible asset and finally to the carrying amount of the tangible assets in the unit on a pro rata or more appropriate basis. An income generating unit is the smallest identifiable group of assets that generates income that is largely independent of the income streams from other assets or groups of assets. Calculation of recoverable amount The recoverable amount of fixed assets is the greater of their net realisable value and value in use. In assessing value in use, the expected future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the rate of return expected on an equally risky investment. For an asset that does not generate largely independent income streams, the recoverable amount is determined for the income-generating unit to which the asset belongs. Reversals of impairment An impairment loss is reversed on intangible assets and goodwill only if subsequent external events reverse the effect of the original event which caused the recognition of the impairment or the loss arose on an intangible asset with a readily ascertainable market value and that market value has increased above the impaired carrying amount. For other fixed assets where the recoverable amount increases as a result of a change in economic conditions or in the expected use of the asset then the resultant reversal of the impairment loss should be recognised in the current period. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 20 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the Financial Statements (continued) 1 Accounting policies (continued) r) Goodwill Positive goodwill arising on acquisitions is capitalised, classified as an asset on the balance sheet and amortised on a straight line basis over its useful economic life up to a presumed maximum of 20 years. It is reviewed for impairment at the end of the first full financial year following the acquisition and in other periods if events or changes in circumstances indicate that the carrying value may not be recoverable. If a business is subsequently sold or closed, any goodwill arising on acquisition that was written off directly to reserves or that has not been amortised through the profit and loss account is taken into account in determining the profit or loss on sale or closure. s) Fair value adjustments on acquisition The fair value adjustment arising on acquisition is unwound in the profit and loss account within interest receivable over the expected remaining life of the instrument to which it relates. At each reporting date, an assessment is made as to whether there is any indication that the amount of adjustment unwound is inappropriate given the expected remaining life and any potential impairment. t) Leasing – as lessee Leases of property, plant and equipment where the Bank has substantially all the risks and rewards of ownership are classified as finance leases. Assets held under finance leases or hire purchase contracts are capitalised on inception of the agreement at an amount equal to their fair value or, if lower, the present value of the minimum lease payments. The interest element of the lease cost is charged to the profit and loss account, within other operating expenses, over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Liabilities under finance leases and hire purchase contracts are included within other liabilities in the balance sheet. Property, plant and equipment acquired under finance leases or hire purchase contracts is depreciated over the shorter of the period of the agreement and the estimated useful lives of the assets. Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases, net of any incentives received from the lessor, are charged to the profit and loss account, within other operating expenses or staff costs (in case of company cars), on a straight line basis over the period of the lease. u) Off-balance sheet financial derivatives Off-balance sheet financial derivatives are entered into by the Bank for hedging purposes to reduce the risks arising on transactions entered into in the normal course of business. The income and expense arising from off-balance sheet financial derivatives entered into for hedging purposes is recognised in the accounts in accordance with the accounting treatments of the underlying transactions or transactions being hedged. All off-balance sheet financial derivatives are held for the period in which the underlying hedged items mature, and are not closed out before maturity. v) Capital raising costs Cost directly incremental to the raising of share capital are netted against the share premium account. 21 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the Financial Statements (continued) 2 Segmental information 2011 Commercial Finance £’000 Mortgages Other £’000 £’000 Total £’000 Net interest income 11,214 10,692 729 22,635 Net fees and other income 17,781 __________ 2,115 __________ 108 __________ 20,004 __________ Net operating income Operating costs 28,995 12,807 837 42,639 (23,384) __________ (15,977) __________ (4,177) __________ (43,538) __________ Segmental profit/(loss) before taxation 5,611 __________ (3,170) __________ (3,340) __________ (899) __________ Assets Liabilities Net assets 2010 Net interest income Net fees and other income Net operating income Operating costs Segmental profit/(loss) before taxation Assets Liabilities Net assets 341,303 819,132 393,692 1,554,127 - __________ - __________ (1,387,984) __________ (1,387,984) __________ 341,303 819,132 (994,292) 166,143 Commercial Finance £’000 Mortgages Other £’000 £’000 Total £’000 9,392 3,684 (1,099) 11,977 15,729 _________ 603 __________ (63) __________ 16,269 __________ 25,121 4,287 (1,162) 28,246 (19,617) __________ (8,813) __________ (8,622) __________ (37,052) __________ 5,504 __________ (4,526) __________ (9,784) __________ (8,806) __________ 169,197 305,755 277,379 752,332 - - (660,705) (660,705) __________ __________ __________ __________ 169,197 305,755 (383,326) 91,627 The Bank is structured into two main segments – Commercial Finance and Mortgages. Commercial Finance consists of asset finance and invoice finance business lines while Mortgages comprises residential and commercial lending. The remainder of the Bank’s business, mainly central support functions, is included in ‘Other’. Operating costs include depreciation charges and provision for bad and doubtful debts. 22 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the Financial Statements (continued) 3 Interest receivable Bank deposits and treasury bills Debt securities Loans and advances secured on property 2011 £’000 993 3,112 18,346 2010 £’000 944 1,836 6,662 Loans and advances to commercial finance customers 27,180 11,843 Amortisation of discounts on acquired portfolios 4 Interest payable Customer deposits Net income on derivative financial instruments 5 Fees and commissions receivable Invoice finance fees Mortgage arrangement fees Other 6 Fees and commissions payable Introducer commissions Legal and valuation fees Credit protection and insurance charges Company searches and other fees 23 3,559 __________ 3,189 __________ 53,190 __________ 24,474 __________ 2011 £’000 2010 £’000 33,125 15,347 (2,570) __________ (2,850) __________ 30,555 __________ 12,497 __________ 2011 £’000 2010 £’000 13,142 10,761 4,465 551 577 __________ 952 __________ 18,184 __________ 12,264 __________ 2011 £’000 3,591 1,282 588 2010 £’000 1,389 858 468 1,195 __________ 360 __________ 6,656 __________ 3,075 __________ Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 7 Other operating income Disbursements, collect out and other invoice finance income 8 Staff costs Wages and salaries Social security costs Other pension costs 2011 £’000 2010 £’000 8,476 __________ 7,080 __________ 8,476 __________ 7,080 __________ 2011 £’000 21,740 2,753 2010 £’000 16,791 1,779 493 __________ 404 __________ 24,986 __________ 18,974 __________ The average number of persons employed by the Bank during the year, including non-executive directors, was 415 (2010: 318). 9 Remuneration of directors Directors’ emoluments Bank contributions to money purchase schemes 2011 £’000 2,164 2010 £’000 1,280 61 __________ 42 __________ 2,225 __________ 1,322 __________ The Bank made payments of £21,000 to two directors’ individual personal pension plans during the year (2010: £19,000). During 2011 certain directors were given the option to purchase B ordinary shares of £0.10 in the ultimate parent company, AC Acquisitions Limited, at a discount to market value. 557,813 discounted B ordinary shares were purchased (2010: nil). These shares give rise to a benefit of £97,000 (2010: £nil), of which the current year charge is £33,000 (2010: £nil). Directors’ emoluments includes £122,000 of deferred bonus (2010: £nil) Highest paid director The above amounts include the following in respect of the highest paid director: Emoluments Bank contributions to money purchase scheme 2011 £’000 430 2010 £’000 312 13 __________ 443 __________ 10 __________ 322 322 __________ During 2011, the highest paid director purchased 360,272 B Ordinary shares in AC Acquisitions Limited at a discount to market value, giving rise to a benefit of £69,532 (2010: £nil). 24 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 10 Pension and other post-retirement benefit commitments Defined Contributions The Bank operates two defined contribution pension schemes. The assets of the schemes are held separately from those of the Bank in independently administered funds. Pension contributions of £492,000 (2010: £404,000) were charged to the profit and loss account during the year in respect of these schemes. The Bank made payments amounting to £21,000 (2010: £19,000) to certain employees’ individual personal pension plans during the period. There were outstanding contributions of £78,000 at the year end (2010: £77,000). 11 Administrative expenses Staff costs (see note 8) Office costs Information technology Legal and professional and other services Other 12 Depreciation and amortisation Depreciation Amortisation of goodwill 13 Loss on ordinary activities before taxation The loss on ordinary activities is arrived at after charging/(crediting): Operating lease rentals – land and buildings Operating lease rentals – plant and equipment Foreign exchange gain Fees payable to the Bank’s auditors for the audit of the annual accounts (excluding VAT) Fees payable to the Bank’s auditors and its associates for other services (excluding VAT): Tax compliance services Tax advisory services Corporate finance services Other assurance services 25 2011 £’000 Year ended 24,986 31 December 2,770 2011 2,484 5,769 Year ended 2010 31 December £’000 2010 18,974 2,132 2,126 5,230 4,672 __________ 5,833 __________ 40,681 __________ 34,295 __________ 2011 £’000 1,406 2010 £’000 810 446 __________ 457 __________ 1,852 __________ 1,267 __________ £’000 1,014 443 1,414 (13) £’000 768 443 (40) £’000 162 £’000 159 30 18 425 57 42 84 - - __________ __________ 692 285 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 14 Taxation (i) Analysis of tax charge on ordinary activities: Current tax on profits of the year Over provision in previous year Total current tax (credit)/charge Deferred tax: Origination and reversal of timing differences Taxation (credit)/charge on loss on ordinary activities (ii) Factors affecting tax charge for the current year: 2011 2010 £’000 £’000 - (7) - - __________ __________ (7) - - - __________ __________ - - __________ __________ (7) - The tax assessed for the year is different to that resulting from applying the standard rate of corporation tax in the UK of 26.5% (2010: 28%). The differences are explained below: 2011 2010 £’000 (899) £’000 (8,806) __________ __________ (238) (2,465) (25) 209 (156) 210 - - (7) 227 185 56 1,997 - - __________ __________ (7) - Loss on ordinary activities before tax Tax at 26.5% (2010: 28%) thereon Effects of: Movements on provisions Expenses not deductible for tax purposes Capital allowances less than depreciation Losses carried forward and not recognised Deferred tax assets transferred in Depreciation written back Over provision in previous year Current tax (credit)/charge for year 26 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 14 Taxation (continued) (iii) Deferred tax asset Movement on deferred taxation balance in the year Opening balance (Charge)/credit to profit and loss account Closing balance 2011 £’000 - - 2010 £’000 - - __________ __________ - - A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not there will be suitable taxable profits from which the future of the underlying timing differences can be deducted. To date, no deferred tax asset has been recognised as there is insufficient certainty over the ability to use the amounts in the future. The 2012 Budget on 21 March 2012 announced that the UK corporation tax rate will reduce from 26% to 22% by April 2014. A reduction in the UK corporation tax rate from 26% to 25% was initially enacted on 5 July 2011 and was expected to be effective from 1 April 2012. However, after the Budget on 21 March 2012 it was announced that the rate will decrease from 26% to 24% on 1 April 2012 instead; though this rate has not yet been enacted. This will reduce the Bank’s future current tax charge accordingly. The tax disclosures for the period reflect the deferred tax at the 25% substantively enacted rate. It has not yet been possible to quantify the full anticipated effect of the further rate reductions, although this will further reduce the Bank’s future tax charge and reduce the Bank’s deferred tax assets / liabilities accordingly. (iv) Analysis of recognised deferred tax balance Capital allowances less than depreciation Short term timing differences Closing balance (v) Analysis of unrecognised deferred tax balance Capital allowances less than depreciation Other timing differences Losses carried forward Closing balance not recognised 27 2011 £’000 - - 2010 £’000 - - __________ __________ - - £’000 £’000 165 679 266 615 6,916 9,311 __________ __________ 7,760 10,192 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 15 Loans and advances to banks Repayable on demand Repayable in three months or less 2011 £’000 2010 £’000 28,284 149,522 94,838 _________ 69,824 __________ 123,122 219,346 There were no general or specific doubtful debt provisions against loans and advances to banks. 16 Loans and advances to customers Repayable in not more than three months Repayable in more than three months but not more than one year Repayable in more than one year but not more than five years Repayable in more than five years Specific and general doubtful debt provisions Amounts include: Repayable on demand or at short notice Non-performing loans and advances to customers: - loans and advances before provisions - loans and advances after provisions Specific and general doubtful debt provisions 2011 1 January 2011 Write off in year net of recoveries Charge /(credit) to profit and loss account 31 December 2011 2011 £’000 194,119 67,938 161,532 748,069 2010 £’000 137,423 40,350 70,180 241,563 (11,223) __________ (14,564) __________ 1,160,435 __________ 474,952 __________ 177,018 __________ 136,302 __________ 28,611 __________ 22,489 __________ 18,762 __________ 10,015 __________ Specific £’000 General £’000 Total £’000 12,474 2,090 14,564 (4,346) - (4,346) 1,721 __________ (716) __________ 1,005 __________ 9,849 __________ 1,374 __________ 11,223 __________ The general provision on an acquired portfolio was reduced by £0.8m in the Mortgages Division, while a reduction was made in the Commercial Finance Division of £0.2m to reflect lower incurred losses and better performance than expected. 28 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 16 Loans and advances to customers (continued) 2010 1 January 2010 Purchases as part of acquisition Write off in year net of recoveries Charge to profit and loss account 31 December 2010 Loans and advances to customers comprise: Gross finance receivables Less unearned finance charges Invoice financing Mortgage loans 17 Debt securities Specific General £’000 £’000 10,761 3,410 (2,032) 935 - - Total £’000 11,696 3,410 (2,032) 335 __________ 1,155 __________ 1,490 __________ 12,474 __________ 2,090 __________ 14,564 __________ 2011 £’000 218,657 2010 £’000 71,858 (26,990) __________ (6,925) __________ 191,667 149,636 64,933 104,264 819,132 __________ 305,755 __________ 1,160,435 __________ 474,952 __________ Total 2011 2010 Asset backed securities Other debt securities 2010 2010 2011 2011 £’000 £’000 £’000 £’000 £’000 £’000 40,920 41,550 42,679 - 13,512 167,375 - - 40,920 208,925 42,679 13,512 (15,271) (12,062) _______ _________ _________ _________ _________ _________ (12,062) (15,271) - - 40,920 _________ _________ _________ _________ _________ _________ 237,783 167,375 40,920 70,408 - 5,117 6,421 5,318 1,139 (2,224) (1,340) - 496 15 - - - 5,117 6,917 5,318 1,139 (2,209) (1,340) _________ _________ _________ _________ _________ _________ 5,117 _________ _________ _________ _________ _________ _________ 9,825 9,314 5,117 511 - _________ _________ _________ _________ _________ _________ 35,803 _________ _________ _________ _________ _________ _________ 227,938 35,803 227,958 166,864 35,803 61,094 - Cost 1 January Additions Capital repayments 31 December Discount/(premium) on purchase 1 January Additions Amortisation of (discount)/premium 31 December Book value 31 December 29 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 18 Investment in subsidiaries Holdings of more than 20% The Bank holds more than 20% of the share capital of the following companies. They are all dormant subsidiaries. Company Principal Country of Shares held % activity Incorporation Principal subsidiary undertakings are as follows: Aldermore Invoice Finance (Holdings) Limited Dormant England Ordinary Base Commercial Mortgages Holdings Limited Dormant England Ordinary 100 100 Aldermore Bank Nominees Limited Dormant England Ordinary 100 19 Intangible assets Cost: At 31 December 2010 and 31 December 2011 Amortisation: At 1 January 2011 Amortisation for the year At 31 December 2011 Net book value at 31 December 2011 Net book value at 31 December 2010 Goodwill 2011 £’000 8,962 __________ 601 446 __________ 1,047 __________ 7,915 __________ 8,361 __________ Goodwill arising on the acquisition and hive up of Base Commercial Mortgages Holdings Limited and goodwill arising on the acquisition and hive up of Aldermore Invoice Finance (Holdings) Limited are being amortised evenly over their presumed useful economic lives of 20 years. 30 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 20 Tangible fixed assets 01 January 2011 Additions Disposals 31 December 2011 Depreciation 01 January 2011 Disposals Charge for the period 31 December 2011 Net book value 31 December 2011 31 December 2010 Fixtures, fittings and equipment £’000 1,213 171 - Computer systems £’000 4,154 4,821 - 1,384 8,975 617 235 852 532 596 969 1,171 2,140 6,835 3,185 Motor vehicles £’000 23 - - 23 23 - 23 - - Total £’000 5,390 4,992 - 10,382 1,609 1,406 3,015 7,367 3,781 Future capital expenditure At 31 December 2011 there was £4.5m capital expenditure authorised but not contracted for or contracted but not provided for (31 December 2010: £4.5m). 21 Other assets Corporation tax Cash collateral on derivatives Other 22 Prepayments and accrued income Accrued income Prepaid broker fees Other prepayments 31 2011 £’000 - 12,857 1,454 14,311 2011 £’000 5,018 6,477 1,399 12,894 2010 £’000 343 - 3,975 4,318 2010 £’000 2,270 2,404 1,097 5,771 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 23 Customer accounts Repayable on demand Repayable in not more than three months but not on demand Repayable in more than three months but not more than one year Repayable in more than one year but not more than five years 2011 £’000 137,800 129,542 739,091 2010 £’000 25,976 42,991 243,507 341,037 __________ 322,245 __________ 1,347,470 __________ 634,719 ___________ Customer accounts repayable on demand include £1.0 million payable to the immediate parent company, Aldermore Holdings Limited (2010: £1.0 million). 24 Other liabilities Amounts payable to Invoice Finance customers Unallocated cash Other taxation and social security costs Trade creditors Other payables 2011 £’000 2,549 2,438 2,580 818 63 8,448 2010 £’000 2,477 2,277 1,498 1,562 67 7,881 Unallocated cash primarily relates to a liability for unclaimed cash receipts, which are held on the Bank’s balance sheet until the expiry of the six-year period. Any unclaimed receipts subsequent to the expiry date are recognised as income. It is not possible to provide a maturity analysis of this liability due to the uncertainty surrounding any reimbursements. 32 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 25 Accruals and deferred income Accrued interest payable to customers Prepaid arrangement fees Accruals Provisions (see note below) Amount payable to parent company Fee creditors Deferred income Provisions: Financial Services Compensation Scheme 1 January Utilised during the year Provided during the year 31 December 2011 £’000 12,335 8,635 8,968 1,012 588 336 192 2010 £’000 5,742 3,290 8,081 426 - 467 99 ________ 32,066 _________ ________ 18,105 _________ 2011 £’000 426 (75) 661 1,012 2010 £’000 128 (65) 363 426 In common with all regulated UK deposit takers, the Bank 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 compensation levy. The management expenses levy covers the costs of running the scheme and the compensation levy covers the amount of compensation the scheme pays, net of any recoveries it makes using the rights that have been assigned to it. During 2008 and 2009 claims were triggered against the FSCS in relation to Bradford & Bingley plc, Kaupthing Singer & Friedlander Ltd, Heritable Bank plc, Landsbanki Islands hf, London Scottish Bank plc and Dunfermline Building Society. The FSCS provision at 31 December 2011 represents management expense levies for the scheme years triggered but not yet invoiced and the £1m provision at that date is an estimate of the levy for the scheme years 2011/2012 and 2012/2013. The management expenses levy for scheme year 2011/2012 has been calculated using the agreed funding rate of 12 months LIBOR + 30bps while the management expenses levy for scheme years 2012/2013 has been calculated using the agreed funding rate of 12 months LIBOR + 100bps. Furthermore, on 8 March 2012 HM Treasury and the FSCS announced that additional levies will be made on industry participants in order to recover expected capital shortfalls on loans made to failed institutions by the FSCS. The current estimate of the shortfall to be recovered is £802m and this will be recovered in three approximately equal instalments beginning in scheme year 2013/2014. As a result of this an increased provision for FSCS levies is likely to exist in the financial statements for the year ending 31 December 2012. 33 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 26 Share capital Allotted, called up and fully paid Ordinary shares of £1 each At 1 January Issued during the year At 31 December 2011 £’000 2010 £’000 3,300 3,300 - __________ - __________ 3,300 3,300 During the year six ordinary shares of £1 each were issued for a total of £77,934,926 creating £77,934,920 share premium. At 31 December 2011 allotted, called up and fully paid shares totalled 3,300,009. Share premium account £’000 Profit and loss account £’000 94,725 - 77,935 (6,398) (892) - (2,527) __________ - __________ 170,133 __________ (7,290) __________ 2011 £’000 (892) - 77,935 (2,527) 2010 £’000 (8,806) - 48,297 (966) __________ __________ 74,516 38,525 91,627 53,102 __________ __________ 166,143 91,627 27 Reconciliation of movements in shareholders’ funds 1 January 2011 Loss for the year Premium on shares issued during the year Capital raising costs 31 December 2011 28 Reconciliation of movements in shareholders’ funds Loss for the year Shares issued during the year Premium on shares issued during the year Capital raising costs Net additions to shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds 34 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 29 Financial commitments At 31 December 2011 the Bank was committed to making the following payments under non-cancellable operating leases: Land and buildings Operating leases which expire: In less than one year Between two and five years In over five years Plant and equipment Operating leases which expire: In less than one year Between two and five years In over five years 2011 £’000 196 828 2010 £’000 32 449 - __________ 523 __________ 1,024 1,004 2011 £’000 - 437 2010 £’000 - 445 - __________ - __________ 437 445 At 31 December 2011 the majority of plant and equipment related to 82 cars that the Bank held under lease (2010: 91). The majority of these leases are due to expire in 2014. 30 Memorandum items At 31 December 2011 the Bank had contingent liabilities of £Nil (2010: £Nil). At 31 December 2011 the Bank had undrawn commitments of £190.6m (2010: £148.1m). These relate mostly to irrevocable lines of credit granted to customers. 31 Assets and liabilities denominated in foreign currency As at 31 December 2011, there were assets of £1,851,000 (2010: £35,000) and liabilities of £84,000 (2010: £589,000) denominated in Euros. There were assets of £725,000 (2010: £212,000) and liabilities of £Nil (2010: £652,000) denominated in US Dollars. There were no other foreign currency assets or liabilities at the balance sheet date. 32 Related parties The Bank has taken advantage under Financial Reporting Standard 8 ‘Related Party Disclosures’ not to disclose transactions with members of the AC Acquisitions Limited group on the grounds that the Bank is a 100% subsidiary of AC Acquisitions Limited and the Bank is included in consolidated financial statements published by AC Acquisitions Limited. Certain directors and shareholders of the ultimate parent company and certain directors of the Bank, in their capacities as individuals, trustees, directors of other companies or members of pension schemes, have deposits and loans with, and fees from, the Bank. All deposit arrangements have been operated by the Bank on normal commercial terms and conditions. Directors’ loans at 31 December 2011 were £39,465 (2010: £nil). 35 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 32 Related parties (continued) Phillip Monks, a director of the Bank, received a loan during the year totalling £36,157 (2010: £Nil) for the purposes of enabling him to satisfy his personal tax liability in respect of shares issued. Interest was charged at a rate of 2.38% p.a. with the total amount outstanding at the year end being £36,328 (2010: £Nil) and no repayments were made during the year. Paul Myers, a director of the Bank, received a loan during the year totalling £3,122 (2010: £Nil) for the purposes of enabling him to satisfy his personal tax liability in respect of shares issued. Interest was charged at a rate of 2.38% p.a. with the total amount outstanding at the year end being £3,137 (2010: £Nil) and no repayments were made during the year. The Bank is controlled by AnaCap Derby Co-Investment (No.1) L.P. (27%), AnaCap Derby Co-Investment (No.2) L.P. (23%), AnaCap Financial Partners, II L.P. (25%) and AnaCap Financial Partners, L.P. (23%) who are the main shareholders of AC Acquisitions Limited. The following agreements are in place with a company under their common control: The Bank provides a £5m Block Discounting facility to Syscap Limited. The facility commenced in September 2009 and is secured by underlying blocks of short term loans primarily to solicitors’ practices which are funded at a discount to the face value of the loans. The facility is priced at 5% over 6 month Libor and committed over a 1 year period with appropriate conditions relating to performance, non-performing deal substitution rights and default provisions. Third party business is introduced to the Bank by Syscap Limited, under various Programme Agreements, including a Wholesale Funding Facility entered into on 28 September 2009 but these do not result in any lending by the Bank to Syscap Limited. During the year Syscap Limited introduced business of £49.2m (2010: £43.5m) and received commission of £0.4m (2010: £0.3m) of which £nil is outstanding at year end (2010: £nil). In addition the group has been charged investment monitoring fees and capital raising costs by AnaCap Financial Partners of £825,000 for the year (2010: £971,000) of which £75,000 is outstanding at the year end (2010: £150,000). 33 Financial instruments The Bank’s financial instruments comprise borrowings from banks, customer deposits, loans to customers, debt and government securities and cash held at banks. All these arise as a result of the Bank’s normal operations. The Bank does not enter transactions for speculative purposes and accordingly a note of instruments held for trading has not been provided. From time to time, the Bank may use interest rate derivatives such as swaps to manage part of its interest rate risk. The main risks arising from the Bank’s financial instruments are credit risk, liquidity risk and interest rate risk. The directors review and agree policies for managing each of these risks and these are summarised as follows. Credit risk Credit risk is the risk that a loss may occur from the failure of another party to perform according to the terms of a contract. Credit risk is the principal risk encountered by the Bank. Credit risk principally arises from lending activities, but can also arise from other on and off balance sheet activities such as the issue of guarantees. The Bank manages its credit risk by limiting its exposure to certain sectors of business and counterparties, by carrying out appropriate checks and taking appropriate security to protect itself in the event of a default. All exposures are allocated a risk grading which are revised quarterly by the board in conjunction with a review of specific provisions. Should any event occur between these reviews which indicates a provision is clearly needed then a provision will be made without waiting for the quarterly review process. The Bank has no direct exposure to any distressed Eurozone countries. 36 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 33 Financial instruments (continued) Liquidity risk Liquidity risk is the risk that an entity encounters difficulty in realising assets or otherwise raising funds to meet commitments associated with liabilities or financial obligations. There is a requirement to keep a balance between the funding maturity profile and the funding requirements derived from the run off of the loans receivable. Although the Bank is primarily funded from retail deposits, the gap between the deposit maturity profile and the lending assets maturity profile is kept within agreed limits. The Bank has always met its own and the FSA liquidity requirements as defined by BIPRU 12. The Bank monitors closely the profile of deposits and has the flexibility to quickly amend the deposit rates on offer to rebalance the profile of deposits in the prevailing market conditions. Fair Value Disclosure The Bank does not trade in financial instruments. Set out below is a comparison of book values and fair values of the Bank’s financial liabilities and non-trading derivatives used for hedging and funding purposes. Book Value 2011 Fair Value 2011 Book Value 2010 Fair Value 2010 £’000 £’000 £’000 £’000 On balance sheet instruments Asset Backed Securities Corporate bonds UK Government debt securities 61,094 5,473 60,102 60,875 5,473 65,190 Supranational bonds 101,289 109,392 Off balance sheet instruments Interest rate swaps Other off balance sheet 1,880 - (12,803) 22 Total 229,838 228,149 35,803 37,100 - - - 2,087 - 37,890 - - - 4,504 - 41,604 Interest rate related contracts represent interest rate swap transactions which generally involve the exchange of fixed and floating interest payment obligations without the exchange of the underlying principal amounts. Derivatives contracts are used for hedging purposes only and are executed with Bank counterparties for whom volume and settlement limits have been approved. Under the Bank's current treasury policy, derivatives contracts are restricted to interest rate swaps, currency swaps and forward rate agreements. At 31 December 2011, there were 75 swaps outstanding (2010: 47). There were unrealised losses outstanding at year end of £10.9m, of which £1.7m is expected to be realised in the year ending 31 December 2012. 37 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 33 Financial instruments (continued) 2011 Interest rate swaps Others Notional values Fair values Notional values Fair values £m £’000 £m £’000 Maturity 1 year or less 5 years or less but over 1 year More than 5 years 710.0 308.8 93.1 1,659 4,647 (19,109) 1,111.9 (12,803) 2.5 20.0 - 22.5 41 (19) - 22 2010 Interest rate swaps Others Notional values Fair values Notional values Fair values £’million £’000 £’million £’000 Maturity 1 year or less 5 years or less but over 1 year More than 5 years Interest rate risk 385.0 259.8 1.7 646.5 741 3,771 (8) 4,504 - - - - - - - - Interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank finances its loan book from its capital base and customer deposits. At present a minority of the Bank’s lending to customers is at fixed rates or subject to a minimum fixed rate (set with reference to the market at the time the loan is made) whilst in excess of 85% of customers’ deposits are at fixed rates. At present the Bank has a minimal level of repricing mismatches. The table below summarises the repricing mismatches on the Bank’s non-trading book as at 31 December 2011. Items are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and the maturity date. The table below summarises the repricing mismatches on the Bank’s non-trading book as at 31 December 2011. A positive interest rate sensitivity gap exists when more assets than liabilities reprice during a given period. A positive gap position tends to benefit net interest income in an environment where interest rates are rising. However, the actual effect will depend on a number of factors including actual repayment dates and interest rate sensitivities within the banding periods. 38 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 33 Financial instruments (continued) Less than 3 months 3 to 6 months 6 months to 1 year 1 to 5 years More than 5 years Total Non- interest bearing 31 December 2011 Balances with UK central banks Loans & advances to banks Debt securities Loans & advances to customers Other assets Total assets £’000 - £’000 - £’000 - £’000 - £’000 - £’000 125 £’000 125 115,774 - 130,908 5,000 - - - - 7,348 123,122 10,000 91,875 (9,825) 227,958 757,184 20,046 51,239 345,712 4,328 (18,074) 1,160,435 12,857 ________ ________ - ________ - ________ - ________ 29,630 ________ 42,487 ________ 1,016,723 ________ 25,046 ________ 51,239 ________ 355,712 ________ 96,203 ________ 9,204 ________ 1,554,127 ________ Customer accounts 263,846 181,050 558,045 341,032 - - - - - - 3,497 1,347,470 40,514 40,514 - ________ - ________ - ________ - ________ - ________ 166,143 ________ 166,143 ________ 263,846 ________ 181,050 ________ 558,045 ________ 341,032 ________ - ________ 210,154 ________ 1,554,127 ________ Other liabilities Shareholders’ funds Total liabilities Off balance sheet items Interest rate sensitivity gap (616,755) 182,943 521,887 3,976 (92,051) - 136,122 26,939 15,081 18,656 4,152 (200,950) - - Cumulative gap 136,122 ________ 163,061 ________ 178,142 ________ 196,798 ________ 200,950 ________ - ________ - ________ ________ ________ ________ ________ ________ ________ ________ 39 Aldermore Bank PLC Financial statements for the year ended 31 December 2011 Notes to the financial statements (continued) 33 Financial instruments (continued) 31 December 2010 Loans & advances to banks Debt securities Loans & advances to customers Less than 3 months £’000 219,346 3 to 6 months £’000 - 6 months to 1 year £’000 - 35,803 309,555 - 71,591 - 19,346 1 to 5 years More than 5 years Non- interest bearing £’000 - £’000 - Total £’000 219,346 - 620 - - 35,803 474,952 £’000 - - 73,840 Other assets Total assets Customer accounts Other liabilities Shareholders funds Total liabilities - ________ - ________ ________ - - ________ - ________ 22,231 ________ 22,231 ________ 564,704 ________ 71,591 19,346 ________ ________ 73,840 ________ 620 ________ 22,231 ________ 752,332 ________ 67,967 30,888 212,619 322,246 999 - 634,719 25,986 25,986 - ________ - ________ ________ - - ________ - ________ 91,627 ________ 91,627 ________ 67,967 ________ 30,888 212,619 ________ ________ 322,246 ________ 999 ________ 117,613 ________ 752,332 ________ Off balance sheet items (494,780) 17,000 218,000 259,780 - - Interest rate sensitivity gap 1,957 57,703 24,727 11,374 (379) (95,382) - - Cumulative gap 1,957 ________ 59,660 84,387 ________ ________ 95,761 ________ 95,382 ________ - ________ - ________ ________ ________ ________ ________ ________ ________ ________ 34 Ultimate parent company The ultimate parent company is AC Acquisitions Limited, a private limited company incorporated in England. AC Acquisitions Limited is controlled by AnaCap Derby Co-Investment (No.1) L.P. (27%), AnaCap Derby Co-Investment (No.2) L.P.(23%), AnaCap Financial Partners, II LP (25%) and AnaCap Financial Partners, L.P. (23%). The immediate parent company is Aldermore Holdings Limited, a private limited company incorporated in England. Consolidated accounts are prepared by AC Acquisitions Limited and copies are available to the public from AC Acquisitions Limited’s registered office c/o Aldermore Bank PLC, Fourth Floor, Apex Plaza, Forbury Road, Reading, Berkshire, RG1 1AX. 40
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