Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Registered number: 00947662 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 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 Non-Executive Directors John Callender David Soskin Peter Cartwright Jayne Almond Secretary Dionne Simpson 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 2012 Contents Chairman‟s overview Directors‟ report Statement of Directors‟ responsibilities Independent Auditor‟s report Profit and loss account Balance sheet Page 3 - 6 7 - 13 14 15 16 17 Notes to the financial statements 18 - 42 2 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Chairman’s overview Our prime objective during 2012 has been to transform Aldermore into the Number One „Challenger Bank‟ in the United Kingdom, with low cost technically sophisticated infrastructure, providing short and medium term financing to Small and Medium enterprises (SMEs) and to those owning property and homes. We have seen expansion across all areas of the Bank. Our proven ability to raise deposits has enabled us to achieve strong balance sheet growth through Commercial Mortgages, Invoice Finance, Asset Finance and Residential and Buy to Let Mortgages. We always strive to deliver a personal service, underpinned as a deposit funded UK regulated Bank, by our determination to be Reliable, Expert, Dynamic and Straightforward (REDS). During the year we passed the milestone of reaching £1bn of lending to SMEs, with a further £1bn lent to homeowners. Our total balance sheet reached £2.5bn by the end of the year and was almost £1bn higher than that of 12 months previously. In May the Bank announced that it had successfully raised a further £36m of capital to fund further growth. Throughout this year of growth, our progress has been nurtured, encouraged and challenged by our lead investor and sponsor, AnaCap. Aldermore‟s senior leadership team has worked closely with the Financial Services Authority, HM Treasury, and Politicians, to initiate changes which will enable us to provide more lending into the British Economy. We have embraced various Government schemes, participating in the National Loan Guarantee Scheme and the Funding for Lending Scheme (FLS). Figures released by the Bank of England showed that Aldermore was in the top six net lenders for the second half of 2012, thus providing the UK SME and housing market with much needed new finance. The Government‟s NewBuy Scheme was launched during 2012 to stimulate the residential housing market. Aldermore was pleased to announce that it was the first of the „Challenger Banks‟ to join the scheme, with Housing Minister Grant Shapps publicly supporting our involvement, a clear indication that Government recognises our dynamic approach and understands what the Bank is striving to achieve. I was also delighted to welcome the Chancellor of the Exchequer, George Osborne, to our Cheshire offices in 2012, which further served to demonstrate the Bank‟s importance in the eyes of the UK Government. Looking now in detail at the Bank‟s operations: Lending to SMEs Commercial Mortgages The level of lending in Commercial Mortgages has increased by 59% this year and we now have over 1,600 customers, helping SMEs expand their growth by offering an extensive commercial mortgage range. Our dynamic state-of-the-art processing system is cited time and again by intermediaries as an excellent operational platform, significantly expediting the application procedure from inception to conclusion. This provides exceptional customer service and makes Aldermore straightforward and easy to do business with at every level. The Commercial Mortgage Division can offer an end to end reliable service in the Buy to Let market. Whether a customer is a first time landlord or has an extensive portfolio, Aldermore is able to provide a funding facility to meet a specific need. Invoice Finance The Invoice Finance Division provides working capital through 11 regional offices across the UK and grew its client base to more than 1,000, with invoices of over £1.8 billion funded during 2012. Recognising the need for SMEs to be able to budget reliably, the Bank offers the Aldermore Business Confidence (ABC), a fixed fee and straightforward factoring package. ABC enables small businesses with a turnover of up to £500,000 to immediately access and utilise cash tied-up in unpaid invoices. There are no set-up or administration charges and both the servicing and discounting fees are fixed for two years from inception. During 2012, we launched an innovative funding package through our Fuel Card to help commercial transport companies across the UK to manage cash flow and ease the cost of fuel – this means firms can release cash tied-up in unpaid invoices, as well as receive up to 14 days free credit on all their fuel purchases. 3 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Chairman’s overview (continued) Lending to SMEs (continued) Asset Finance The Asset Finance Division provides cash flow against hard assets, as well as a range of lease funding facilities. Contract Hire, Hire Purchase and Lease Finance all reduce the need for capital expenditure, thus providing SMEs with working capital which is not tied up in equipment, but can be used to grow their business. We grew our customer base to more than 5,500 through 2012 as Aldermore accelerated its growth plans to take account of the withdrawal of a major UK leasing company from the asset finance sector. We continue to work closely with our intermediaries and we have expanded our panel extensively during this past year. Our asset finance team are experts in sectors important for Britain‟s growth, such as manufacturing and materials handling. Next year the team‟s expertise will be widened to encompass other markets which will further support SMEs and help to stimulate the economy. Lending to Homeowners and Buy To Let Following its launch in 2010, Aldermore‟s Residential Mortgage Division has continued to grow, with mortgages more than doubled from 2011‟s figure of £465m to £961m in 2012, with more than 7,000 customers. Residential Mortgages was built from scratch enabling Aldermore to introduce leading edge technology which enables a quick decision, as well as the ability for the intermediary or broker to track the progress of their client‟s application. Most banks depend solely on the use of credit scoring, however, at Aldermore every application is reviewed by an expert underwriter, who will take a pragmatic approach to creditworthy homeowners. In 2012 Aldermore was one of the first to announce an increase in its loan-to-value on Buy-to-Let, rising from 75 per cent to 80 per cent, with the majority of the market subsequently following us. In addition to developing a range of innovative Buy-to-Let products, to suit the needs of SMEs and consumers, whom we recognised as being underserved, Aldermore has launched many innovative consumer mortgage products. We have been recognised in the consumer and mortgage industry with numerous awards throughout 2012, including the prestigious „FT Financial Adviser Five Star Award‟ for the second consecutive year. Savings Our UK savings business has continued to provide straightforward products which, with no bonuses or gimmicks, are reliable saving vehicles for the consumer. The retail funds that come in from the consumer are all lent out to British SMEs and homeowners. We offer consistently good value and service on our range of retail products. For the third year running, Aldermore‟s Cash ISA was voted as „Best Consumer Cash ISA‟ in the MoneyFacts Awards. 2012 saw the launch of Business Savings, with the first of our SME Business Savings Accounts coming to the market in May. After much research into this market, Aldermore recognised that business savings were poorly served, with a general perception of too much effort for too little reward. The SME Business Savings product from Aldermore not only offers a great rate, but it is the only genuine online account which can be opened and funded within 15 minutes, a clear demonstration of the Bank‟s dynamic approach to offering excellent customer service to the SME industry. There are now more than 80,000 accounts for retail and business customers. Aldermore is regulated by the UK Financial Services Authority (FSA) and its successor bodies. The Bank‟s retail depositors benefit from the Financial Services Compensation Scheme, which protects and guarantees deposits of up to £85,000 per person, or twice that for joint accounts. Small businesses also benefit up to the £85,000 level of protection per business. 4 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Chairman’s overview (continued) Effective Risk Management Effective risk management is central to how the Bank operates. Our risk framework works well and is designed to help protect the Bank against risks beyond our risk appetite, but recognising we have to operate in a competitive environment. The Bank has adopted a “three lines of defence” model against key risks, such as credit, liquidity, operational and market risks. The first line is the core of our ability to manage risk, and this is where risk is considered and managed by everyone across the Bank working in a risk-aware way and using the policies and controls designed to protect the business. The second line is our governance structure, where the committees and Board oversee the Bank‟s activities. The third line is where we get independent assurance from our audit team that risk controls are effective. The credit performance for 2012 was well within the Bank‟s overall risk appetite and the underlying trends on new origination remain very positive. Building a Modern Bank We have continued to invest in our technology and operating platforms. The lack of legacy infrastructure is a major benefit in terms of developing and expanding our business. During the year we completed the implementation of our banking platform which has enabled us to launch our highly innovative Business Savings offering for SMEs. During the year, we have invested heavily in on-line marketing and have established a small team of digital experts. This has enabled us to drive the majority of our promotional spend online and improve our customer acquisition costs, especially in the Savings businesses. Our digital presence is growing in scale and sophistication; a 'Ratings and Reviews' capability is now live, along with 'Ask and Answer' which allows customers to pose questions directly to our own experts. We see on-line engagement with our SME customers, in particular, as a key area of focus in the coming year. Our People I want to end by thanking our over 500 people for their hard work and dedication, and the major part they have all played in helping to grow the Bank so successfully over the past year. There are many obstacles to be overcome in building a truly innovative and dynamic Challenger Bank. We are fortunate to have a great team of people, ably led by Phillip Monks and his executive team. My thanks go to them, to our Non Executive Directors, and to our investors. Our staff have risen magnificently to the task of building a new bank. With them lies Aldermore‟s success so far, and our prospects for further growth. We shall continue to be Reliable, Expert, Dynamic and Straightforward and to contribute further to the delivery of the aspirations of our customers and the success of UK Plc. Sir David Arculus Chairman Aldermore Bank PLC 5 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Chairman’s overview (continued) Our awards In 2010 the business won 2 awards In 2011 the business won 11 awards. Key highlights include: Specialist Lender of the Year by the National Association of Commercial Finance Brokers (NACFB) Consumer MoneyFacts Best ISA Provider FT Financial Advisor 5 Star Service Award. In 2012 the business won 20 awards. Key highlights include: Commercial Mortgage Provider of the Year by the NACFB Three awards from MoneyFacts (Best Fixed Rate Savings account, Consumer MoneyFacts Best ISA Provider for the second year running and ISA Provider of the year) Best Specialist Lender at the Mortgage Strategy awards Personal Finance Award for Best Cash ISA FT Financial Advisor 5 Star Service award for the second year running. 6 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Directors’ report The directors present their report and the financial statements of Aldermore Bank PLC („the Bank‟) for the year ended 31 December 2012. Results and Dividends The results for the year are set out in the profit and loss account on page 16. The directors do not recommend the payment of a dividend (2011: £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 2012 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 small business and residential mortgage markets, funded by capital, retail and small business deposits. The profit before taxation for the year ended 31 December 2012 was £0.8 million (2011 loss: £0.9 million). As at 31 December 2012 the Bank had 521 employees (2011: 445). The Bank continued to build out and improve its infrastructure throughout 2012; investing in its people and technology as well as driving for efficiencies. The Bank had regulatory Tier 1 capital at 31 December 2012 of £162.7 million (2011: £158.2 million) and a Tier 1 capital ratio of 11.8% (2011: 18.5%). Performance analysis based on Key Performance Indicators The following metrics represent the core key performance indicators for the Bank: 31 December 2012 31 December 2011 Tier 1 capital ratio 11.8% 18.5% Annual growth in loans and advances to customers 77.4% (£899.2 million) 144.3% (£685.5 million) Annual growth in retail deposits 58.9% (£793.7 million) 112.3% (£712.7 million) Liquidity buffer (as a % of total deposits) Profit/(loss) for the year 18.2% £0.8 million 19.8% (£0.9 million) Capital Injections The Bank‟s immediate parent company is Aldermore Holdings Limited. In March 2012 £1.7 million was invested in the Bank by Aldermore Holdings Limited via subscription of equity share capital. Subordinated loan In May 2012, the Bank issued a £40 million subordinated loan note at a discount to nominal value. Funding for Lending Scheme The Bank has made use of the Funding for Lending Scheme (FLS), a scheme launched by the Bank of England and HM Treasury in July 2012 which provides loans to banks and building societies at below market rates with the aim of stimulating lending within the economy. The Bank has pre-positioned £648 million of residential mortgages with the FLS, which are available for use as collateral for the Bank„s participation in the FLS. At 31 December 2012 the Bank had FLS drawings of £205 million. 7 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Directors’ report (continued) Liquidity At 31 December 2012, the Bank held a 18% liquidity buffer (liquid assets excluding encumbered cash as a percentage of total funding liabilities). 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 Financial Services Authority (FSA) stress requirements. Investment in the Business Systems and Support Structure Fixed asset additions in the year of £6.3 million were mainly focused on new IT systems and infrastructure. Commercial Finance Division Asset Finance – 2012 was a period of strong controlled growth in the key areas of vendor and broker introduced business. The asset finance business grew in balance sheet terms by 96%. The number of Small and Medium Sized Enterprise („SME‟) customers that we serve grew by 46% and the business line increased overall market share, consolidating its position as one of the leading independent providers of asset finance. Invoice Finance – the Bank‟s Invoice Finance division provides working capital funding to SME businesses throughout the UK. 2012 saw lending grow by 21% confirming the Bank‟s position as one of the fastest growing providers in the UK invoice finance market. Mortgages Division The Mortgages Division has gone from strength to strength during 2012 with asset balances increasing by 80% during the year. Commercial Mortgages – the Bank has implemented a new mortgages processing system, which includes an industry leading broker portal. Lending remains first charge, low loan-to-value, primarily against commercial/industrial premises, professionally managed residential buy-to-let, and retail premises. Residential Mortgages – the Bank continues to offer residential owner occupied and buy-to-let mortgage products via intermediaries, and in 2012 the Bank launched a direct to consumer proposition. During the year the Bank introduced a number of products which proved highly successful. Property Development – the Bank‟s focus is on residential development lending since returning to this market at the start of the year. Summary of lending asset values by Division Division As at 31 December 2012 As at 31 December 2011 Net Change £’000 554,116 1,505,487 2,059,603 £’000 341,303 819,132 1,160,435 £’000 212,813 686,355 899,168 Commercial Finance Mortgages Total Performance Summary Strong growth in assets across both business segments triggered growth in income levels. Income in both segments was suppressed due to unexpected changes in market rates (LIBOR/Swap), resulting in a higher cost of funds. The bank continued with its investment in terms of building out of the infrastructure, people and technology to support future growth. 8 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Directors’ report (continued) Investment Securities The Bank has increased its investment securities holdings from £228 million at December 2011 to £312 million at December 2012, primarily via liquid asset buffer securities comprising UK gilts and supranational bonds issued by multilateral development banks. The additional investments were made to increase the level of liquidity in the Bank, in line with its regulatory requirements. Customer Deposits The primary source of funding for the Bank is retail and growing small business deposits. Retail deposit products are offered to consumers and small businesses via the internet with telephone and postal support. The recent growth in assets has been funded through the deposits base. Deposit balances have increased from £1,347 million at 31 December 2011 to £2,141 million at 31 December 2012. 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 2013 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 FSA, and has firm backing from its current investors, one of whom has signed a commitment letter relating to a capital injection of £20 million. 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, interest rate risk, liquidity risk, regulatory risk, funding 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, which has been 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 Board meetings. The Bank has an Audit and 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 non-payment of mortgage, lease and loan contracts. Credit risks are managed through the use of detailed lending criteria and suitable product and pricing structures. The business 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, supported by a dedicated team within each business which assesses credit risk. Group Risk has oversight of credit management and lending activities. The Management Credit Committee meets monthly and is responsible for monitoring portfolio performance and reviewing policy issues, such as provisioning and lending policies, and recommending these to the Board or Board Credit Committee. It is also responsible for approving credit proposals that have been presented to it by the business lines pursuant to its delegated authority. 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. 9 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Directors’ report (continued) Forbearance On occasions, borrowers experience difficulties which impact on their ability to meet their mortgage or commercial finance obligations. The Bank seeks to identify borrowers who are experiencing financial difficulties as well as contacting borrowers whose loans have gone into arrears, consulting with them in order to ascertain the reason for the difficulties, and to establish the best course of action that can be taken to bring the account up to date. In certain circumstances where the borrower is experiencing significant financial distress, the Bank may use 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 the best outcome for both the customer and the Bank by dealing with financial difficulties and 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. During 2012, the Bank undertook forbearance measures as follows: Mortgages Division Commercial Finance Division Total Number Loan Balance £'000 Year end arrears £'000 Number Loan Balance £'000 Year end arrears £'000 Number Capitalisation Temporary or permanent switch to interest only Reduced monthly payments Loan term extension Total Total forborne* - 10 - 1 11 - 1,087 - 307 1,394 0.09% * as a percentage of the total divisional lending book - 1 - - 1 5 - 8 11 24 260 - 424 1,026 1,710 0.31% - - 8 20 28 5 10 8 12 35 Loan Balance £'000 260 1,087 424 1,333 3,104 0.15% The total loan balances in forbearance has decreased from £3,527,000 at 31 December 2011 to £3,104,000 at 31 December 2012. Market risk The impact of market risk is managed under the bank‟s liquidity risk, as the bank does not hold any positions that would require to be marked to market. The Bank does not carry out any proprietary trading. 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. 10 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Directors’ report (continued) Liquidity risk Liquidity risk is the risk that the Bank is not able to meet its liabilities when they are due under normal conditions, and under a 91- day liquidity stress as defined by the Bank‟s internal stress requirements and FSA stress requirements, or can do so only at excessive cost. The Bank maintains a liquidity buffer of eligible liquid assets, such as UK government treasury bills, gilts, multinational development bank bonds and unencumbered cash. The Bank‟s liquidity buffer includes only sterling denominated instruments. The Bank monitors the adequacy of its liquidity buffer on a regular basis to ensure it is sufficient at all times to meet the Bank‟s liquidity risk appetites as stated above. The Asset and Liability Committee (ALCo) 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. At 31 December 2012, the Bank held a 18.2% liquidity buffer (liquid assets excluding encumbered cash as a percentage of total funding liabilities) which meets its risk appetites as defined above. Regulatory risk Regulatory risk is the risk that the Bank does not adhere to the changing regulatory environment in which it operates. Key changes on the horizon include the implementation of those recommendations made by the Independent Commission on Banking reforms which the UK government chooses to bring into law, the imminent implementation of the „Twin Peaks‟ regulatory approach, the replacement of Basel II by CRD IV (Basel III) and the impact upon the Bank‟s capital base, the practical impact of the Retail Distribution Review and the Mortgage Market Review. The Bank has allocated resource to ensure continued compliance in these and other areas and the directors consider the Bank is well placed to meet the new requirements. Funding risk 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. The Bank raises an appropriate retail and SME deposit mix to meet on-going asset creation and replacement of maturing deposits. The deposits raised are fit for purpose and meet all of the requirements as governed in the Bank‟s risk appetite framework, and go further to conform to forward looking early warning indicators as governed by the Bank‟s ALCo. 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. 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 works to a defined operational risk appetite, and operated within this appetite during the year. 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 a Senior Operational Risk Manager who has specific responsibility for managing operational risks. 11 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Directors’ report (continued) 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 financial instruments risk management is contained within note 35. 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 2012 of £0.2 million (2011: £0.8 million). Trade creditors‟ days at 31 December 2012 was 4 days (2011: 19 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. Employee Communication In 2012 through a series of road shows and stakeholder interviews, the Bank learned that employees across the firm saw employee communications as having a leading role to play by articulating the vision, strategy, and values in a consistently memorable and compelling way. Since then, the Bank has implemented an Internal Communications framework, positioning employee communication as an integral function within Aldermore. The Bank established a Communications Steering Group and Communications Network which underpins the importance placed on two-way communication with employees. The results of the 2012 employee survey confirmed that employees understand the Bank, with 88% of people saying they receive regular information on how Aldermore is performing. Furthermore, our employees are even stronger advocates of Aldermore than previously, and are proud of, and confident in the Bank. A Staff Conference in March brought together everyone across the Bank to learn about Aldermore‟s brand values and to understand how working together as „One Aldermore‟ would deliver commercial advantage. In 2013 the focus will be on engaging and mobilising people towards greater loyalty, engagement, better ideas, and better products which will drive the growth of the Bank. 12 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Directors’ report (continued) Directors The directors who held office during the year were as follows: Phillip Monks Jayne Almond Sir David Arculus John Baines (resigned 26 February 2013) Stephen Barry John Callender Peter Cartwright Finlay McFadyen (resigned 26 March 2012) Paul Myers David Soskin (appointed 7 June 2012) Mark Stephens Ian Wilkins (resigned 31 January 2013) Certain directors benefited from qualifying third party indemnity provisions in place during the year ended 31 December 2012 and at the date of this report. Political and Charitable Donations The Bank made charitable donations of £5,000 in 2012 (2011: £1,000). The Bank made no political donations during the year (2011: £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 13 Western House Lynch Wood Peterborough PE2 6FZ 28 March 2013 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 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 2013 and was signed on its behalf by: Phillip Monks Director and Chief Executive Officer 14 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 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 2012 set out on pages 16 to 42. 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 14, 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 Financial Reporting Council‟s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the financial statements: give a true and fair view of the state of the company's affairs as at 31 December 2012 and of its profit 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. John Ellacott (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants Leeds 28 March 2013 15 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Profit and loss account For the year ended 31 December 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 Gains on disposal of debt securities Profit/(loss) on ordinary activities before taxation Taxation on profit/(loss) on ordinary activities Profit / (loss) on ordinary activities after taxation Note 2012 £’000 2011 £’000 3 4 5 6 7 11 12 16 17 13 14 103,004 53,190 (68,482) __________ (30,555) __________ 34,522 24,167 (10,238) 22,635 18,184 (6,656) 7,102 __________ 8,476 __________ 55,553 (50,614) (2,767) (4,644) 42,639 (40,681) (1,852) (1,005) 3,231 __________ - __________ 759 (899) - __________ 7 __________ 759 __________ (892) __________ The notes and information on pages 18 to 42 form part of these financial statements. There were no recognised gains and losses other than the profit for the year. The result for the year is derived entirely from continuing activities. 16 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Balance Sheet At 31 December 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 Due to banks Customers accounts Other liabilities Accruals and deferred income Subordinated notes Total liabilities Called up share capital Share premium account Capital contribution reserve 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 28 29 29 29 30 32 32 2012 £’000 1,654 83,086 2011 £’000 125 123,122 2,059,603 1,160,435 312,156 227,958 7,467 11,386 22,395 7,915 7,367 14,311 21,841 __________ 12,894 __________ 2,519,588 __________ 1,554,127 __________ 115,079 - 2,141,198 1,347,470 10,417 47,816 8,448 32,066 34,148 __________ - __________ 2,348,658 __________ 1,387,984 __________ 3,300 171,822 2,339 3,300 170,133 - (6,531) __________ (7,290) __________ 170,930 __________ 166,143 __________ 2,519,588 __________ 1,554,127 __________ £’000 £’000 - - 213,639 190,555 These financial statements were approved by the Board of directors on 28 March 2013 and were signed on its behalf by: Phillip Monks Director and Chief Executive Officer Registered number: 00947662 The notes and information on pages 18 to 42 form part of the financial statements. 17 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements 1 Accounting policiesx 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 2013, 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 FSA, and has firm backing from its current investors, one of whom has signed a commitment letter relating to a capital injection of £20 million. 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 amount 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. 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. 18 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 1 Accounting policies (continued) f) Provisions for loan losses Provisions for finance agreements and loan losses are based on a regular 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 any appropriate 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 or economic 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 performing 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 - - 5 years 1 to 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. Commissions receivable from the sale of third party insurance products is recognised on sale of the product with a provision for future repayment in the event of early termination by the customer. 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. 19 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 1 Accounting policies (continued) 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 debt securities and stated at cost less provision for any permanent diminution in value. (i) Asset backed securities Where asset backed securities are purchased at a discount, the discount is amortised through the profit and loss account on an effective yield basis to give a constant rate of return on the underlying assets. (ii) Other debt securities Other debt securities: where other debt 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 expected 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. 20 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 1 Accounting policies (continued) 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. 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. 21 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 1 Accounting policies (continued) 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. v) Capital raising costs Costs directly incremental to the raising of share capital are netted against the share premium account. w) Repurchase agreements Securities sold under agreements to repurchase at a specified future date are not derecognised from the balance sheet as the Bank retains substantially all the risks and rewards of ownership. The cash received is recognised in the balance sheet as an asset with the corresponding obligation to return it recognised as a liability within „Due to banks‟. Interest is accrued over the life of the agreement on a straight line basis. x) Subordinated notes Subordinated notes issued by the Bank are assessed to whether they should be treated as equity or financial liabilities. Where there is a contractual obligation to deliver cash or other financial assets they are treated as a financial liability and measured at amortised cost using the effective interest rate after taking account of any discount or premium on the issue and costs that are an integral part of the effective interest rate. The amount of any discount or premium is amortised over the period to the next call date. All subordinated notes issued by the Bank are classified as financial liabilities; however, the subordinated notes issued also included a share warrant to the holders of the subordinated notes for shares in AC Acquisitions Limited, the Bank‟s ultimate parent. Any amount of value attributable to this warrant is included as a capital contribution in reserves. 22 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 1 Accounting policies (continued) y) Share-based payment transactions Employees (including senior executives) of the Bank receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments in the ultimate parent company („equity-settled transactions‟). The cost of these transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award. The expense recognised in the profit and loss account for the period represents the movement in cumulative expense recognised at the beginning and end of that period. Where the Bank‟s parent grants rights to its equity instruments to the Bank‟s employees, which are accounted for as equity-settled in the consolidated accounts of the parent, the Bank accounts for these share-based payments as equity-settled. 2 Segmental information 2012 Net interest income Net fees and other income Net operating income Operating costs Gain on sale of investment securities Segmental profit/(loss) before taxation Assets Liabilities Net assets 2011 Net interest income Net fees and other income Net operating income Operating costs Segmental profit/(loss) before taxation Assets Liabilities Net assets 23 Commercial Mortgages Other Total Finance £’000 16,342 £’000 16,849 £’000 1,331 £’000 34,522 17,045 __________ 4,045 __________ (59) __________ 21,031 __________ 33,387 (29,270) 20,894 (28,522) 1,272 (233) 55,553 (58,025) - __________ - __________ 3,231 __________ 3,231 __________ 4,117 __________ (7,628) __________ 4,270 __________ 759 __________ 554,116 1,505,487 459,985 2,519,588 - __________ - __________ (2,348,658) __________ (2,348,658) __________ 554,116 __________ 1,505,487 __________ (1,888,673) __________ 170,930 __________ Commercial Mortgages Other Total Finance £’000 11,214 £’000 10,692 £’000 729 £’000 22,635 17,781 __________ 2,115 __________ 108 __________ 20,004 __________ 28,995 12,807 837 42,639 (22,852) __________ (20,626) __________ (60) __________ (43,538) __________ 6,143 __________ (7,819) __________ 777 __________ (899) __________ 341,303 819,132 393,692 1,554,127 - __________ - __________ (1,387,984) __________ (1,387,984) __________ 341,303 __________ 819,132 __________ (994,292) __________ 166,143 __________ Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 2 Segmental information (continued) 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 treasury is included in „Other‟. The method of allocation of costs has changed in 2012 and management information now allows for a more refined allocation to the two divisions. As such, the 2011 cost allocation has been restated to be on a comparable basis and has resulted in an increase in segmental profit for Commercial Finance of £532,000, an increased loss of £4,649,000 in the Mortgages division and corresponding change in „Other‟ from a £3,340,000 loss to £777,000 profit. 2012 £’000 56,661 32,362 11,251 2,099 2011 £’000 27,180 18,346 3,112 3,559 631 __________ 993 __________ 103,004 __________ 53,190 __________ 2012 £’000 62,010 3,875 2,262 296 2011 £’000 33,125 - (2,570) - 39 __________ - __________ 68,482 __________ 30,555 __________ 2012 £’000 14,533 7,993 767 2011 £’000 13,142 4,465 - 874 __________ 577 __________ 24,167 __________ 18,184 __________ 3 Interest receivable Loans and advances secured on property Loans and advances to commercial finance customers Debt Securities Amortisation of discounts and premiums on acquired portfolios Bank deposits and treasury bills 4 Interest payable Customer deposits Issued debt Net interest payable/(receivable) on derivative financial instruments Securities lent and repurchase agreements Other 5 Fees and commissions receivable Invoice finance fees Mortgage arrangement fees Insurance income receivable Other 24 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 6 Fees and commissions payable Introducer commissions Legal and valuation fees Company searches and other fees Credit protection and insurance charges Insurance commissions payable 7 Other operating income Disbursements, collect out and other invoice finance income Other 8 Staff costs Wages and salaries Social security costs Other pension costs 2012 £’000 6,158 1,671 1,598 469 2011 £’000 3,591 1,282 1,195 588 342 __________ - __________ 10,238 __________ 6,656 __________ 2012 £’000 7,078 2011 £’000 8,476 24 __________ - __________ 7,102 __________ 8,476 __________ 2012 £’000 25,985 3,071 2011 £’000 21,740 2,753 705 __________ 493 __________ 29,761 __________ 24,986 __________ The average number of persons employed by the Bank during the year, including non-executive directors, was 492 (2011: 415). 9 Remuneration of directors Directors‟ emoluments Compensation for loss of office Bank contributions to money purchase scheme 2012 £’000 2,072 348 2011 £’000 2,164 - 61 __________ 61 __________ 2,481 __________ 2,225 __________ Compensation for loss of office of £348,000 relates to one director and includes £75,000 pension plan contribution. In addition, the Bank‟s controlling party repurchased that director‟s shares in the Bank‟s ultimate parent undertaking for an amount £34,000 in excess of the initial purchase price. The Bank made payments of £22,000 to two directors‟ individual personal pension plans during the year (2011: £21,000). 25 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 9 Remuneration of directors (continued) During 2012 five 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. 1,104,568 discounted B ordinary shares were purchased (2011: 557,813). The shares issued in the year give rise to a benefit of £174,000 (2011: £97,000). A charge of £139,000 has been recognised in the year in relation to the total share based payments amount. Directors‟ emoluments includes £nil of deferred bonus (2011: £122,000). Highest paid director The above amounts include the following in respect of the highest paid director: Emoluments Bank contributions to money purchase scheme 2012 £’000 418 2011 £’000 430 13 __________ 13 __________ 431 __________ 443 __________ During 2012, the highest paid director purchased 713,401 B Ordinary shares in AC Acquisitions Limited at a discount to market value, giving rise to a benefit of £127,913 (2011: £69,532). 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 £705,000 (2011: £492,000) were charged to the profit and loss account during the year in respect of these schemes. The Bank made payments amounting to £22,000 (2011: £21,000) to certain employees‟ individual personal pension plans during the period. There were outstanding contributions of £114,000 at the year end (2011: £78,000). 11 Administrative expenses Staff costs (see note 8) Legal and professional and other services Information Technology Office costs Other 12 Depreciation and amortisation Depreciation (see note 20) Amortisation of intangible assets (see note 19) 26 2012 £’000 29,761 8,952 3,283 2,956 2011 £’000 24,986 5,769 2,484 2,770 5,662 __________ 4,672 __________ 50,614 __________ 40,681 __________ 2012 £’000 2,319 2011 £’000 1,406 448 __________ 446 __________ 2,767 __________ 1,852 __________ 2012 £’000 1,248 451 2011 £’000 1,014 443 (3) __________ (13) __________ 185 22 4 - 52 162 30 18 425 57 39 __________ __________ 302 __________ 692 __________ 2012 £’000 - 2011 £’000 - - __________ (7) __________ - (7) - __________ - __________ - __________ - __________ - __________ (7) __________ Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 13 Profit on ordinary activities before taxation The profit on ordinary activities is arrived after charging/(crediting): Operating lease rentals – land and buildings Operating lease rentals – plant and equipment Foreign exchange gain Fees payable to the Bank‟s auditor for the audit of the annual accounts (excluding VAT) Fees payable to the Bank‟s auditor and its associates for other services (excluding VAT) Taxation compliance services Other taxation advisory services Corporate finance services Other assurance services All other services 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 on profit on ordinary activities 27 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 14 Taxation (continued) (ii) Factors affecting tax charge for the current year: The tax assessed for the year is different to that resulting from applying the standard rate of corporation tax in the UK of 24.5% (2011: 26.5%). The differences are explained below: Profit/(loss) on ordinary activities before tax Tax at 24.5% (2011: 26.5%) thereon Effects of: Movements on provisions Expenses not deductible for tax purposes Depreciation in excess of capital allowances Losses utilised in the period Over provision in previous year Other short term timing differences 2012 £’000 2011 £’000 759 __________ (899) __________ 186 - 152 568 (816) - (238) (25) 209 (156) 210 (7) (90) __________ - __________ - __________ (7) __________ (iii) Deferred tax asset 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 2013 Budget on 20 March 2013 announced that the UK corporation tax rate will reduce to 20% by 2015. A reduction in the rate from 26% to 25% (effective from 1 April 2012) was substantively enacted on 5 July 2011, and further reductions to 24% (effective from 1 April 2012) and 23% (effective from 1 April 2013) were substantively enacted on 26 March 2012 and 3 July 2012 respectively. This will reduce the Bank‟s future current tax charge accordingly. The unrecognised deferred tax asset at 31 December 2012 has been calculated based on the rate of 23% substantively enacted at the balance sheet date. It has not yet been possible to quantify the full anticipated effect of the announced further 3% rate reduction. Although this will further reduce the Bank‟s future current tax charge and reduce the Bank‟s deferred tax asset accordingly. Analysis of unrecognised deferred tax balance: Capital allowances less than depreciation Other timing differences Losses carried forward Closing balance not recognised 28 2012 £’000 1,147 61 2011 £’000 165 679 5,646 __________ 6,916 __________ 6,854 __________ 7,760 __________ Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 15 Loan and advances to banks Repayable on demand Repayable in three months or less There were no general or specific doubtful debt provisions against loans and advances to banks. 16 Loans and advances to customers (Group) 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 2012 £’000 83,086 2011 £’000 28,284 - __________ 94,838 __________ 83,086 __________ 123,122 __________ 2012 £’000 238,529 115,156 316,161 1,401,257 2011 £’000 194,119 67,938 161,532 748,069 (11,500) __________ (11,223) __________ 2,059,603 __________ 1,160,435 __________ 202,694 __________ 177,018 __________ 28,246 __________ 28,611 __________ 18,805 __________ 18,762 __________ At 31 December 2012 loans and advances to customers of £648 million were pre-positioned with the Bank of England and HM Treasury Funding for Lending Scheme, and were available for use as collateral with the Scheme (2011: £nil). Non-performing loans are a default position equivalent to three or more missed monthly repayments, loans where litigation proceedings have commenced, loans which are the subject of an insolvency event or fraud. 2012 1 January Purchases as part of acquisition Write off in year net of recoveries Charge to profit and loss account 31 December 29 Specific General £’000 9,849 150 (4,517) £’000 1,374 - - Total £’000 11,223 150 (4,517) 3,959 __________ 685 __________ 4,644 __________ 9,441 __________ 2,059 __________ 11,500 __________ Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 16 Loans and advances to customers (Group) (continued) 2011 1 January Write off in year net of recoveries Charge to profit and loss account 31 December Gross finance receivables Less unearned finance charges Invoice financing Mortgage loans 17 Debt securities Cost 1 January Additions Specific General £’000 12,474 (4,346) £’000 2,090 - Total £’000 14,564 (4,346) 1,721 __________ (716) __________ 1,005 __________ 9,849 __________ 1,374 __________ 11,223 __________ 2012 £’000 2011 £’000 424,950 218,657 (49,574) __________ (26,990) __________ 375,376 178,740 191,667 149,636 1,505,487 __________ 819,132 __________ 2,059,603 __________ 1,160,435 __________ Asset backed securities Other debt securities 2012 2011 2012 2011 Total 2012 2011 £’000 £’000 £’000 £’000 £’000 £’000 70,408 54,920 40,920 167,375 - 237,783 40,920 41,550 95,115 167,375 150,035 208,925 Capital repayments (20,707) (12,062) (15,500) - (36,207) (12,062) Disposals 31 December Discount/(premium) on purchase 1 January Additions Amortisation of (discount)/premium Disposals 31 December Book value 31 December (34,315) - _________ _________ _________ _________ _________ _________ (34,315) - - - 237,783 _________ _________ _________ _________ _________ _________ 167,375 317,296 246,990 70,408 70,306 9,314 4,645 5,117 6,421 511 (821) - 496 9,825 3,824 5,117 6,917 (3,036) (2,224) 139 15 (2,897) (2,209) - _________ _________ _________ _________ _________ _________ (5,612) (5,612) - - - 9,825 _________ _________ _________ _________ _________ _________ 5,311 9,314 5,140 (171) 511 _________ _________ _________ _________ _________ _________ 227,958 _________ _________ _________ _________ _________ _________ 227,938 35,803 166,864 312,156 247,161 61,094 64,995 During the year the Bank disposed of asset backed securities with a book value of £28.7 million, resulting in a gain of £3.2 million (2011: £nil). 30 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 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 Percentage Principal subsidiary undertakings are as follows: Aldermore Invoice Finance (Holdings) Limited Base Commercial Mortgages Holdings Limited Aldermore Bank Nominees Limited 19 Intangible assets Cost: At 31 December 2011 and 31 December 2012 Amortisation: At 1 January 2012 Amortisation for the year At 31 December 2012 Net book value at 31 December 2012 Net book value at 31 December 2011 Activity Incorporation Dormant Dormant Dormant England England England Ordinary Ordinary Ordinary 100 100 100 Goodwill 2102 £’000 8,962 __________ 1,047 448 __________ 1,495 __________ 7,467 __________ 7,915 __________ 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. 31 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 20 Tangible fixed assets 1 January 2012 Additions Disposals 31 December 2012 Depreciation 1 January 2012 Disposals Charge for the period 31 December 2012 Net book value 31 December 2012 31 December 2011 21 Other assets Cash collateral on derivatives Other 22 Prepayments and accrued income Prepaid broker fees Accrued income Other prepayments 23 Due to banks Due to banks – repurchase agreements Due to banks – deposits Collateral given Fixtures, fittings and equipment £’000 1,384 504 Computer systems Motor vehicles £’000 8,975 5,834 £’000 23 - Total £’000 10,382 6,338 - __________ - __________ (23) __________ (23) __________ 1,888 __________ 14,809 __________ - __________ 16,697 __________ 852 - 2,140 - 23 (23) 3,015 (23) 189 __________ 2,130 __________ - __________ 2,319 __________ 1,041 __________ 4,270 __________ - __________ 5,311 __________ 847 __________ 10,539 __________ - __________ 11,386 __________ 532 __________ 6,835 __________ - __________ 7,367 __________ 2012 £’000 21,830 2011 £’000 12,857 565 __________ 1,454 __________ 22,395 __________ 14,311 __________ 2012 £’000 10,619 9,214 2011 £’000 6,477 5,018 2,008 __________ 1,399 __________ 21,841 __________ 12,894 __________ 2012 £’000 114,579 2011 £’000 - 500 __________ - __________ 115,079 __________ - __________ The face values of securities sold under agreements to repurchase at 31 December 2012 was £115 million (2011: £nil) of which securities with a face value of £115 million (2011: £nil) were drawn down from the Bank of England under the terms of the Funding for Lending Scheme. The Bank conducts these transactions under the terms of applicable General Master Repurchase Agreement (GMRA) guidelines. Consideration given is accounted for as a financial liability. 32 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 24 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 2012 £’000 449,713 379,110 1,037,395 2011 £’000 137,800 129,542 739,091 274,980 __________ 341,037 __________ 2,141,198 __________ 1,347,470 __________ Customer accounts repayable on demand include £nil payable to the immediate parent company, Aldermore Holdings Limited (2011: £1.0 million). 25 Other liabilities Other taxation and social security costs Amounts payable to Invoice Finance customers Unallocated cash Trade creditors Other payables 2012 £’000 4,508 3,210 1,919 211 2011 £’000 2,580 2,549 2,438 818 569 __________ 63 __________ 10,417 __________ 8,448 __________ 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. 26 Accruals and deferred income Accrued interest payable to customers Prepaid arrangement fees Accruals Provisions (see below) Deferred income Fee creditors Amount payable to parent company Provisions: Financial Services Compensation Scheme: 1 January Utilised during the year Provided during the year 31 December 33 2012 £’000 20,536 13,640 10,197 1,944 976 523 2011 £’000 12,335 8,635 8,968 1,012 192 336 - __________ 588 __________ 47,816 __________ 32,066 __________ 2012 £’000 1,012 (258) 2011 £’000 426 (75) 1,190 __________ 661 __________ 1,944 __________ 1,012 __________ Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 26 Accruals and deferred income (continued) In common with all regulated UK deposit takers, the Bank pays levies to the 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 2012 of £1,944,000 represents management expense levies for the scheme triggered but not yet invoiced, and includes an estimate of the levy for the scheme years 2012/2013 and 2013/2014. The management expenses levy has been calculated using the agreed funding rate of 12 months LIBOR + 100bps. The provision includes the Bank‟s estimate of its share of the capital shortfalls on loans made to failed institutions by the FSCS. The current estimate of the industry shortfall to be recovered is £802 million and this will be recovered in three approximately equal instalments beginning in scheme year 2013/2014. 27 Subordinated notes Subordinated notes 2012 £’000 2011 £’000 34,148 __________ - __________ During the year the Bank issued £40 million subordinated 12.875% loan notes repayable in 2022, with an option for the Bank to redeem early after 5 years. The interest rate is fixed until May 2017. The loan notes were issued at a discount, and are carried in the balance sheet at amortised cost using the effective interest rate of 18.597%. In addition to the loan notes, a warrant was issued by the ultimate parent company, AC Acquisitions Limited, which is accounted for in the financial statements of that company. The warrant was valued at £2,200,000, and this was treated as a capital contribution to the Bank. 28 Share capital Allotted, called up and fully paid Ordinary shares of 1 each At 1 January Issued during the year 2012 £’000 2011 £’000 3,300 3,300 - __________ - __________ 3,300 __________ 3,300 __________ During the year one ordinary share of £1 each was issued for a total of £1,700,001 creating £1,700,000 share premium. At 31 December 2012 allotted, called up and fully paid shares totalled 3,300,010 (2011: 3,300,009). 34 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 29 Reconciliation of movements in shareholders’ funds Capital contribution Share premium account Profit and loss account Total £’000 2012 £’000 2011 £’000 2012 £’000 2011 £’000 2012 £’000 2011 £’000 2012 £’000 2011 1 January Profit/(loss) for the year Premium on share issued during the year Capital raising costs Capital contribution 31 December 170,133 94,725 (7,290) (6,398) 162,843 88,327 - - 759 (892) 759 (892) - - - - - - - - 1,700 77,935 (11) (2,527) - - 1,700 77,935 (11) (2,527) - _______ (7,290) _______ 2,339 _______ - _______ 167,630 _______ 162,843 _______ 2,339 - - - _________ ________ _________ ________ ________ (6,531) _________ ________ _________ ________ ________ 170,133 171,822 2,339 - During the year a non-returnable capital contribution of £2,200,000 was received on the issue of share warrants by the ultimate parent company AC Acquisitions Limited. This amount is distributable. In addition, five 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. This gives rise to a capital contribution reserve in the Bank of £139,000 which is distributable. Full details of the share based payment programme are contained in the financial statements of the Bank‟s ultimate parent undertaking. The charge in the Bank‟s profit and loss account for the year in relation to all share based payment transactions was £139,000. 30 Reconciliation of movements in shareholders’ funds Profit/(loss for the year) Shares issued during the year Premium on shares issued during the year Capital raising costs Capital contribution during the year Net additions to shareholders‟ funds Opening shareholders‟ funds Closing shareholders‟ funds 31 Financial commitments 2012 £’000 759 - 1,700 (11) 2011 £’000 (892) - 77,935 (2,527) 2,339 __________ - __________ 4,787 74,516 166,143 __________ 91,627 __________ 170,930 __________ 166,143 __________ At 31 December 2012 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 35 2012 £’000 357 913 2011 £’000 196 828 - __________ - __________ 1,270 __________ 1,024 __________ Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 31 Financial commitments (continued) Plant and equipment Operating leases which expire: In less than one year Between two and five years In over five years 2012 £’000 - 435 2011 £’000 - 437 - __________ - __________ 435 __________ 437 __________ At 31 December 2012 the majority of plant and equipment related to 74 cars that the Bank held under lease (2011: 82). The majority of these leases are due to expire in 2014. 32 Memorandum items At 31 December 2012 the Bank had contingent liabilities of £nil (2011: £nil). At 31 December 2012 the Bank had undrawn commitments of £213.6 million (2011: £190.6 million). These relate mostly to irrevocable lines of credit granted to customers. 33 Assets and liabilities denominated in foreign currency As at 31 December 2012, there were assets of £2,047,000 (2011: £1,851,000) and liabilities of £nil (2011: £84,000) denominated in Euros. There were assets of £2,331,000 (2011: £725,000) and liabilities of £229,000 (2011: £nil) denominated in US Dollars. There were no other foreign currency assets or liabilities at the balance sheet date. 34 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 2012 were £113,000 (2011: £39,000). Phillip Monks, a director of the Bank, received a loan during the year totalling £67,000 (2011: £36,000) for the purposes of enabling him to satisfy his personal tax liability in respect of shares issued. Interest was charged at a rate of 2.16% p.a. with the total amount outstanding at the year end being £105,000 (2011: £36,000) and no repayments were made during the year. Paul Myers, a director of the Bank, received a loan during the year totalling £5,000 (2011: £3,000) for the purposes of enabling him to satisfy his personal tax liability in respect of shares issued. Interest was charged at a rate of 2.16% p.a. with the total amount outstanding at the year end being £8,000 (2011: £3,000) and no repayments were made during the year. The Bank is controlled by AnaCap Financial Partners, II L.P. (52.3%) and AnaCap Financial Partners, L.P. (47.7%) who are the main shareholders of AC Acquisitions Limited. The following agreements are in place with a company under their common control. 36 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 34 Related parties (continued) The Bank provides £5 million of Block Discounting facilities to Syscap Limited. The facilities commenced in September 2009 and are secured by underlying receivables of short term loans, primarily to solicitors‟ practices which are funded at a discount to the face value of the loans. The facilities contain appropriate conditions relating to performance, non-performing deal substitution rights and default provisions in line with Aldermore‟s standard commercial policies. Pricing on the facilities is subject to normal commercial terms. During the year Syscap Limited introduced business of £32.3 million (2011: £49.2 million) and received commission of £0.4 million (2011: £0.4 million) of which £nil is outstanding at year end (2011: £nil). In addition the Bank has been charged investment monitoring fees and capital raising costs by AnaCap Financial Partners of £75,000 for the year (2011: £825,000). The balance outstanding at the year end is £120,150 (2011: £125,000). 35 Financial instruments The Bank‟s financial instruments comprise borrowings from banks, loan notes, 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, regulatory risk, funding 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. Credit exposures are reviewed 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. The Bank has no direct exposure to any distressed Eurozone countries. Liquidity risk Liquidity risk is the risk that the Bank is not able to meet its liabilities when they are due under normal conditions, and under a 91- day liquidity stress as defined by the Bank‟s internal stress requirements and FSA stress requirements, or can do so only at excessive cost. The Bank maintains a liquidity buffer of eligible liquid assets, such as UK government treasury bills, gilts, multinational development bank bonds and unencumbered cash. The Bank‟s liquidity buffer includes only sterling denominated instruments. The Bank monitors the adequacy of its liquidity buffer on a regular basis to ensure it is sufficient at all times to meet the Bank‟s liquidity risk appetites as stated above. The ALCo 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. 37 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 35 Financial instruments (continued) Regulatory risk Regulatory risk is the risk that the Bank does not adhere to the changing regulatory environment in which it operates. Key changes on the horizon include the implementation of those recommendations made by the Independent Commission on Banking reforms which the UK government chooses to bring into law, the imminent implementation of the „Twin Peaks‟ regulatory approach, the replacement of Basel II by CRD IV (Basel III) and the impact upon the Bank‟s capital base, the practical impact of the Retail Distribution Review and the Mortgage Market Review. The Bank has allocated resource to ensure continued compliance in these and other areas and the directors consider the Bank is well placed to meet the new requirements. Funding risk 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. The Bank raises an appropriate retail and SME deposit mix to meet on-going asset creation and replacement of maturing deposits. The deposits raised are fit for purpose and meet all of the requirements as governed in the Bank‟s risk appetite framework, and go further to conform to forward looking early warning indicators as governed by the Bank‟s ALCo. 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. The Bank is also participating in the Funding for Lending Scheme (FLS) launched by the Bank of England and HM Treasury, which expands the funding mix utilised by the Bank. In order to access the facility, the Bank pre-positions certain lending assets in exchange for UK government treasury bills (“FLS T-bills”) which are then converted to cash via repurchase agreements with other counterparties. The FLS T-bills have a fixed maturity of four years from drawdown. The volume of funding available from the scheme is dependent on the Bank‟s net new lending and on availability of collateral. The FLS Repurchase agreements encumber the FLS T-bills, and have variable maturity dates according to the Bank‟s liquidity requirements. Further information is contained within note 23. 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 2012, there were 96 swaps outstanding (2011: 75). There were unrealised losses outstanding at the year end of £21.1 million (2011: £12.8 million), of which £3.5 million (2011: £1.7 million) is expected to be realised in the year ending 31 December 2013. 38 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 35 Financial instruments (continued) Funding risk (continued) 2012 Maturity 1 year or less 5 years or less but over 1 year More than 5 years 2011 Maturity 1 year or less 5 years or less but over 1 year More than 5 years Interest rate risk Interest rate swaps Others Notional Fair values Notional Fair values values £’million 962.0 808.8 £’000 3,533 (4,972) values £’million 9.6 - £’000 (6) - 86.9 __________ (19,670) __________ - __________ - __________ 1,857.7 __________ (21,109) __________ 9.6 __________ (6) __________ Interest rate swaps Others Notional Fair values Notional Fair values values £’million values £’000 £’million £’000 710.0 308.8 1,659 4,647 2.5 20 41 (19) 93.1 __________ (19,109) __________ - __________ - __________ 1,111.9 __________ (12,803) __________ 22.5 __________ 22 __________ 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, the FLS and from customer deposits. At present the Bank has a minimal level of re-pricing mismatches. The table below summarises the re-pricing mismatches on the Bank‟s non-trading book as at 31 December 2012. Items are allocated to time bands by reference to the earlier of the next contractual interest rate re-pricing date and the maturity date. A positive interest rate sensitivity gap exists when more assets than liabilities re-price 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. 39 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 35 Financial instruments (continued) Interest rate risk (continued) 31 December 2012 Cash and balances at central banks Loans and advances to banks Debt securities Loans and advances to customers Other assets Total assets Less than 3 months 3 to 6 months 6 months to 1 year 1 to 5 years More than 5 years £’000 500 £’000 - £’000 - £’000 - £’000 - Non- interest bearing £’000 1,154 Total £’000 1,654 83,086 139,306 - - - - - - - 83,086 91,115 86,875 (5,140) 312,156 1,117,303 52,316 161,776 735,793 8,561 (16,146) 2,059,603 21,830 ________ - ________ 1,362,025 ________ 52,316 ________ - ________ 161,776 ________ - ________ 826,908 ________ - ________ 41,259 ________ 63,089 ________ 95,436 ________ 21,127 ________ 2,519,588 ________ Due to banks 44,898 70,181 - - Customer accounts 828,710 409,439 627,956 274,943 - - - - - - - 34,148 - - - - - 115,079 150 2,141,198 58,233 - 58,233 34,148 - ________ - ________ - ________ - ________ - ________ 170,930 ________ 170,930 ________ 873,608 ________ 479,620 ________ 627,956 ________ 309,091 ________ - ________ 229,313 ________ 2,519,588 ________ Other liabilities Subordinated notes Shareholders‟ funds Total liabilities Off balance sheet items (135,982) ________ 254,944 ________ 406,886 ________ (438,973) ________ (86,875) ________ - ________ - ________ Interest rate sensitivity gap 352,435 ________ (172,360) ________ (59,294) ________ 78,844 ________ 8,561 ________ (208,186) ________ - ________ Cumulative gap 352,435 ________ 180,075 ________ 120,781 ________ 199,625 ________ 208,186 ________ - ________ - ________ 40 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the financial statements (continued) 35 Financial instruments (continued) Interest rate risk (continued) 31 December 2011 Cash and balances at central banks Loans and advances to banks Debt securities Loans and advances to customers Other assets Total assets Customers accounts Other liabilities Shareholders‟ funds Total liabilities Less than 3 months £’000 - 3 to 6 months £’000 - 6 months to 1 year £’000 - 1 to 5 years More than 5 years £’000 - £’000 - Non- interest bearing £’000 125 Total £’000 125 115,774 - - - - 7,348 123,122 130,908 757,184 5,000 20,046 - 51,239 10,000 345,712 91,875 4,328 (9,825) (18,074) 227,958 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 ________ 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 ________ Off balance sheet items (616,755) 182,943 521,887 3,976 (92,051) - - Interest rate sensitivity gap 136,122 ________ 26,939 15,081 ________ ________ 18,656 ________ 4,152 ________ (200,950) ________ - ________ Cumulative gap 136,122 ________ 163,061 178,142 ________ ________ 196,798 ________ 200,950 ________ - ________ - ________ 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 assets and liabilities and non-trading derivatives used for hedging and funding purposes. On balance sheet instruments Asset backed securities Corporate bonds UK Government debt securities Supranational bonds Subordinated notes Off balance sheet instruments Interest rate swaps Other off balance sheet 36 Ultimate parent company Book Value Fair Value Book Value Fair Value 2012 £’000 2012 £’000 64,995 68,655 - 131,176 115,985 (34,148) - 144,699 126,931 (34,148) 2011 £’000 61,094 5,473 60,102 2011 £’000 60,875 5,473 65,190 101,289 109,392 - - 2,418 (21,109) 1,880 (12,803) - __________ (6) __________ - __________ 22 __________ 280,426 __________ 285,022 __________ 229,838 __________ 228,149 __________ The ultimate parent company is AC Acquisitions Limited, a private limited company incorporated in England. AC Acquisitions Limited is controlled by AnaCap Financial Partners, II LP (52.3%) and AnaCap Financial Partners, L.P. (47.7%). 41 Aldermore Bank PLC Financial statements for the year ended 31 December 2012 Notes to the Financial Statements (continued) 36 Ultimate parent company (continued) 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. 37 Post balance sheet events There have been no material post balance sheet events. 42