Aldermore Bank PLC Annual Report & Accounts 2013 Our best year so far (by the people who made it our best year so far) James Cain Invoice Finance Customer Company information Annual Report and Accounts for the year ended 31 December 2013 Executive Committee Phillip Monks – Chief Executive Officer Mark Stephens – Deputy Chief Executive Officer and Group Commercial Director Paul Myers – Chief Operating Officer James Mack – Chief Financial Officer Stephen Barry – Chief Risk Officer Ali Humphries – Group HR Director Non-Executive Directors John Callender Peter Cartwright David Soskin Chris Stamper Secretary Dionne Simpson Registered Office 1st Floor, Block B Western House Lynch Wood Peterborough PE2 6FZ Registered number 00947662 www.aldermore.co.uk n o i t a m r o n f i y n a p m o C | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 2 John Callender, Non-Executive Director Peter Cartwright, Non-Executive Director David Soskin, Non-Executive Director Chris Stamper, Non-Executive Director Auditors KPMG Audit Plc Leeds Executive Committee Phillip Monks – Chief Executive Officer Mark Stephens – Deputy Chief Executive Officer and Group Commercial Director Paul Myers – Chief Operating Officer James Mack – Chief Financial Officer Stephen Barry – Chief Risk Officer Ali Humphries – Group HR Director Non-Executive Directors John Callender Peter Cartwright David Soskin Chris Stamper Secretary Dionne Simpson 1st Floor, Block B Western House Lynch Wood Peterborough PE2 6FZ Registered Office Registered number 00947662 www.aldermore.co.uk Phillip Monks, Chief Executive Officer Mark Stephens, Deputy Chief Executive Officer and Group Commercial Director Paul Myers, Chief Operating Officer James Mack, Chief Financial Officer Stephen Barry, Chief Risk Officer Ali Humphries, Group HR Director Aldermore Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Member of British Bankers’ Association Member of Finance and Leasing Association Members of The Asset Based Finance Association (ABFA) C o m p a n y i f n o r m a t i o n | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 3 Our business i s s e n s u b r u O | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 4 Aldermore is a UK bank providing retail and SME savings accounts, commercial and residential mortgages, and asset and invoice finance. Aldermore raises deposits from British savers and lends to British businesses and homeowners. Aldermore Bank PLC is a UK regulated deposit-taking institution. We are authorised by the Prudential Regulation Authority, regulated by the Financial Conduct Authority and Prudential Regulation Authority and registered under the Financial Services Compensation Scheme. Established in 2009, Aldermore provides modern, straightforward and competitive products to British consumers and small and medium sized businesses (SMEs). We focus on delivering products and services via our digital distribution model in association with specialist brokers across the UK. Our expert, data-driven credit underwriting processes are supported by a modern, scalable IT infrastructure which enables us to deliver increasing operating efficiency as we continue to grow. Aldermore was founded by an experienced management team with capital provided by funds advised by private equity firm AnaCap Financial Partners LLP. Since then, Aldermore has raised additional equity capital from a number of leading blue chip global investors. Our funding comes primarily from the deposits made with us by British savers and businesses in a range of straightforward saving products, which we then lend on a secured basis to British SMEs and homeowners. We have been proud to champion the cause of SMEs during the last few difficult years. As such we participate in the UK government’s Funding for Lending Scheme (FLS), which provides loans to banks and building societies to stimulate lending within the economy. Our markets We serve the funding needs of British businesses and homeowners across four market segments. These markets have been selected where we believe customers have been underserved by established providers and provide growth opportunities at sustainable risk adjusted returns. Residential Mortgages We offer prime residential and buy-to-let mortgages both through intermediaries and direct to customers. SME Commercial Mortgages We meet the property finance needs of professional, residential and commercial property investors, and owner-occupier SMEs. Invoice Finance We provide working capital for SMEs by lending against outstanding invoices in the form of factoring and invoice discounting. Asset Finance We offer lease and hire purchase finance to fund SME capital investment in machinery, plant and equipment. O u r b u s n e s s i | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 5 #peoplewhomade2013 Contents z Financial highlights 2013 z Strategic report z Corporate governance z Directors’ report z Statement of directors’ responsibilities z Independent Auditor’s report z Profit and loss account z Statement of total recognised gains and losses z Balance sheet z Notes to the financial statements 8 11 35 39 51 52 55 56 57 58 C o n t e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 7 Financial highlights 2013 Profit on ordinary activities before tax of £22.4 million (£1.5m in 20121) Total balance sheet assets up 66% to £4.2 billion (2012: £2.5 billion) Gross loans up 64% to £3.4 billion (2012: £2.1 billion) Total customer deposits up 61% to £3.4 billion (2012: £2.1 billion) Lending to SMEs up 53% to £1.69 billion (2012: £1.10 billion) Lending to homeowners up 76% to £1.68 billion (2012: £0.96 billion) 66% INCREASE IN TOTAL B A L A N C E S H E E T ASSETS 3 1 0 2 s t h g i l h g H i l 64%INCREASE IN GROSS LOANS 61%INCREASE IN TOTAL CUSTOMER D E P O S I T S £22.4 million P R O F I T ON ORDINARY A C T I V I T I E S BEFORE TAX Tier 1 capital ratio 11.7% 2013 Return on equity 10.9% 2013 i a c n a n F i | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 8 £2.5bn £4.2bn £2.1bn £3.4bn £2.1bn £3.4bn 2012 2013 2012 2013 2012 2013 0.9% 2012 11.5% 2012 1 Restated for a change in accounting policy for IFRIC 21, as explained in Note 1 of the financial statements. Organic loan origination up 42% to £1.71 billion (2012: £1.20 billion) Number of customers rises 36% to 136,000 (2012: 99,700) Staff numbers up 27% to 664 (2012: 521) Net interest margin up to 2.95% (2012: 2.14%) Cost/income ratio falls to 67% (89% in 2012) Charge for bad and doubtful debts 0.36% of average net loans (0.29% in 2012) Return on equity 10.9% (0.9% in 2012) Tier 1 capital ratio of 11.7% (11.5% in 2012) CHARGE FOR BAD & DOUBTFUL DEBTS 0.36% of average net loans O R G A N I C LOAN ORIGINATION UP 42% £1.71bn NUMBER OF CUSTOMERS UP 36% 136,000 COST/INCOME R A T I O DOWN TO 67% 53% INCREASE IN LENDING TO SMEs 2013 £1.69bn 76%INCREASE IN LENDING TO HOMEOWNERS 2013 £1.68bn 27% INCREASE IN STAFF NUMBERS 664 i F n a n c a i % % NET INTEREST M A R G I N UP TO 2.95% l i H g h l i g h t s 2 0 1 3 | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 9 #peoplewhomade2013 Strategic report This was another year of growth for Aldermore, which demonstrated the strength of our business franchise and its ability to satisfy the needs of British businesses, savers and homeowners. Aldermore was established to provide reliable, expert, dynamic and, above all, straightforward and transparent banking for its customers. Our current 700 employees are not only proud to champion the cause of UK SMEs and UK homeowners but also incredibly proud of the bank we have all built. CEO review Financial performance We have invested in, and built, a banking franchise with a sustainable, straightforward and modern business model, supported by an efficient and scalable digital platform. We are now seeing strong, sustainable and growing returns for our shareholders. Operating profits before taxation rose to £22.4 million (2012: £1.5 million)2 while lending increased by 64% to £3.4 billion. This balance sheet expansion goes hand-in-hand with a disciplined approach to lending which has meant we were able to maintain the credit quality of our assets, with a loan loss ratio of 0.4% (2012: 0.3%). Our capital position remained robust, with a Core Tier 1 capital ratio of 11.7% (2012: 11.5%), and a leverage ratio of 5.4% – both above minimum regulatory requirements. To support this increased lending volume we increased customer deposits by 61% to £3.4 billion. We have diversified our sources of deposits by providing SMEs with the same “great value, delivered effortlessly” that we provide for personal customers. Active management of our funding requirements, including the use of the FLS, has delivered at a reduced average cost of funds across the Bank and our net interest margin therefore grew from 2.14% to 2.95%. 2 Restated for a change in accounting policy for IFRIC 21, as explained in Note 1 of the financial statements. Growing the business required further investment in people and systems but this was more than offset by the increased operating income we generated. As a result, our cost/income ratio reduced to 66.96% (2012: 88.78%) and we expect this will continue to fall as the business grows and the efficiency of our scalable systems and infrastructure drives increased operating leverage. Our four SME/retail segments are carefully chosen where we believe there are opportunities to provide products and services which generate strong and sustainable risk-adjusted margins. We believe that these customer segments are in general poorly served by other providers, even more so through the last six years since the credit crisis. Indeed, figures from the British Bankers’ Association show that in the last 12 months alone, the volume of SME loan approval in the UK contracted by 12%. Against this backdrop, we are well placed to provide expert and reliable financial solutions for our customers and, at the same time, achieve strong market positions, good returns based on secured lending, and sustainable growth. i S t r a t e g c r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 1 1 Strategic report Residential Mortgages Aldermore targets poorly served homeowners, would-be homeowners and investors in the residential property market where we have demonstrated our ability to generate attractive returns within our credit appetite. Total loans increased by 76% to £1,683.6 million (2012: £957.3 million), supported by strong and responsive human underwriting and credit management. We were pleased to be amongst the first lenders to support the Government’s “Help to Buy” initiative, aimed at providing improved access to mortgage finance for customers with a lower deposit. During the year we also expanded into the Scottish housing market, and continued to develop our broker and direct to consumer channels. This business has won nine awards in 2013, most notably being awarded the FT Financial Advisor 5 Star Service Award for the third year in a row. SME Commercial Mortgages In our business supporting SME commercial mortgage customers lending rose 40% to £765 million during the year supported by our specialist team of experienced underwriters. This growth was supported by investment in our people and systems to improve further our ability to respond quickly and consistently to our customers. Asset Finance In 2013 our Asset Finance business has capitalised on the £1.2 billion market opportunity presented by the withdrawal of ING Lease (UK) from the broker market due to the EU deleveraging pressure. Aldermore’s origination amounted to £609.8 million in 2013, an increase of 74% compared with 2012, against the backdrop of a flat overall market. t r o p e r c g e t a r t S i | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 2 1 We also increased the size of our specialist teams and built out our broker proposition during the year to ensure that we continue to be able to deliver a superior service to our customers and brokers. We were proud therefore to be announced winner of the “Asset Finance Firm of the Year” at the Credit Today 2013 awards in recognition of our continued expansion in the asset finance sector. Invoice Finance Invoice Finance remains a key working capital product to support SME’s demand for cashflow. In 2013 our regional, industry focused distribution model provided differentiated local expertise and funded client turnover of £2.4 billion, lending our clients £212.0 million (up 19%) and confirming our position as one of the UK’s fastest growing invoice finance providers. We continue to develop our product offering, and expand both our geographic presence and direct distribution model. A clear and sustainable business model We have been able to build a reliable, expert, dynamic and straightforward, business model. By carefully choosing the segments of the market that offer favourable returns we are able to control risk and increase profitability. In 2013 we increased loan origination and profitability while reducing our cost/income ratio. We believe that a strength of our model is the transparency it provides over future earnings. The long-term nature of our assets means they are expected to generate recurring and highly visible income. As a result, 75% of 2014 expected gross interest income is already embedded in our 2013 closing balance sheet. An efficient and scalable operating platform Aldermore employs modern and purpose built, scalable IT platforms to support the Bank’s operations and future growth. This flexible IT architecture is centred around a data warehouse feeding credit, customer and financial information, and a suite of sophisticated management information. The Bank’s IT platforms support and enable superior customer service, strong credit management and dynamic management information. Aiming to exceed customers’ expectations Service is a key differentiator at Aldermore, helping us to attract and retain customers. Our customers tell us that they have had bad experiences in their dealings with high street banks – from inconvenient opening times to opaque products and slow response times. In contrast we focus on enabling customers to open accounts quickly and simply, get expert help and receive quick decisions on lending. This is provided largely online or by phone, making it more convenient for our customers and more cost effective for our business. We measure the quality of our service with a number of metrics, including complaints and ratings and reviews. We regularly survey our customers on their awareness of our brand, and how they think we are performing against our brand pillars. We also use Net Promoter Scores – a measure of whether a customer would recommend Aldermore to others to measure customer advocacy and are pleased to report a positive score of 25 in contrast to the industry average score of 0 (Source: Satmetrix). We won 20 industry awards during the year in recognition of our outstanding customer proposition. We also continued to attract positive media attention averaging 132 pieces of media coverage each month across various national, regional and trade publications. i S t r a t e g c r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 1 3 Strategic report Diversifying our funding Our loan to deposit ratio was 98% in 2013 (2012: 96%). this with our recently launched Customised Fixed Interest Rate account product – the only one of its type in the UK – which allows SMEs to set their own maturity date and has already attracted funds of £4.3 million. Aldermore also continued to support government initiatives to stimulate economic growth whilst not becoming dependent on them. We were amongst the first banks to participate in Funding for Lending Scheme (FLS), which provides loans to UK banks and building societies, targeted at stimulating lending within the economy. We were delighted when the Chancellor, in his Autumn Statement, announced the launch of the Help to Buy mortgage guarantee scheme, in which we became the first bank to make the scheme available not only to new purchasers but to those looking to move further up the housing ladder. Capital As we have grown we have raised further capital to support this expansion. During 2013 we welcomed new funding from respected institutional investors Toscafund and Lansdowne Partners. Our founding sponsor, funds advised by AnaCap Financial Partners LLP, also continued to support the business and in total £62 million of new capital was invested in the Bank. This further strengthens our capital position and demonstrates investor appetite for Aldermore, which delivered a return on shareholder funds, or return on equity of 10.9% in 2013 (2012: 0.9%). The vast majority of our funding remains deposit led and we took action during the year to further broaden this funding mix, which includes ISA, Fixed, Easy Access and Notice savings accounts. To achieve this diversification we further developed our SME savings proposition which was launched in 2012 with simple and transparent products that offer competitive rates, simple and efficient sign-up and the flexibility these customers demand. This was highly successful, with SME customer balances totalling £516 million (up over 400% since end 2012). We followed Rigorous credit management Our approach to risk and our underwriting expertise ensures that we carefully manage credit risks. Firstly, we only operate in markets where we have extensive industry and credit knowledge. Secondly, we focus on products with asset security and excellent risk-adjusted returns. Thirdly, we apply our underwriting expertise to make decisions based on local t r o p e r c g e t a r t S i | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 4 1 and sector knowledge. Finally, we centrally monitor credit decisions and portfolio performance, supported by our modern reporting infrastructure, credit analytics and experienced Group Risk team. The discipline we apply to each stage of the lending process has allowed the underlying credit quality of our assets to be maintained as the balance sheet has grown. We remain committed to maintaining the quality of our loan book as we continue to grow the Bank. Board changes Sir David Arculus stepped down as Chairman during the year, deciding the time was right for a new Chair to lead the next stage of Aldermore’s development. I am personally grateful to Sir David for his contribution and would also like to thank Senior Non-Executive Director John Callender for acting as Interim Chair. We are delighted to announce Glyn Jones as his successor with effect from 21 March 2014. Well positioned for growth We expect growth to continue to be driven primarily by organic origination and believe that all four of our market segments have potential to deliver this in 2014. The scalability of our platform means that increases in volume can be accommodated cost effectively and without compromising service quality. Steps taken to increase and diversify our funding base can support this increased lending while maintaining attractive margins. We expect the broader market context to also remain supportive. Many traditional banks remain distracted by legacy issues and are still in the process of rebuilding capital through balance sheet reductions. The Breedon Report forecasts the gap between supply and demand for SME funding widening to between £80 billion and £190 billion over the next five years. With GDP accelerating in 2013, the need for SMEs to source capital may also be expected to rise, while the risks to their business may reduce. The improving UK economy may also encourage further confidence in the housing market, providing further opportunities in our residential and SME commercial mortgage lines. The regulatory environment continues to be favourable, with the UK government continuing to promote competition in domestic banking, particularly SME and residential mortgage lending, by supporting challengers to the incumbent high street banks. As the current low interest rate environment persists, savers continue to look to improve returns and this may further support our ability to raise funds ahead. Outlook Having made significant progress in 2013, which firmly established the value and efficacy of our scalable business model, we believe the Bank is well positioned for further profitable growth in 2014. Our headcount increased by 27% during the year and I would like to finish by thanking all our people, old and new, for their hard work, commitment and dedication. They are our most important asset. I am also fortunate to be supported by a strong management team and my thanks go to them, to our Non-Executive Directors and to our investors. But perhaps the last word should go to our customers, whom we regularly ask for feedback. In their ratings and reviews of our services during 2013, a recurring theme is evident when they described Aldermore: “Banking as it should be”. Phillip Monks Chief Executive Officer Aldermore Bank PLC i S t r a t e g c r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 1 5 Business review Overview The Bank is authorised to accept deposits under the Financial Services & Markets Act 2000 and the Bank’s principal activities during 2013 were the provision of banking and related services. Our strategy is to deliver a direct and differentiated customer service through innovation and operational transparency. By leveraging diversified sources of funding, robust risk management and market leading operational efficiency we believe we can do this and deliver strong, sustainable growth and shareholder value. 2013 has seen Aldermore build on the momentum of prior years and continue to deliver against our strategy, with good contributions from all of our businesses. We reported a profit before tax of £22.4 million (2012: £1.5 million restated3) driven by strong organic asset growth coupled with improved margins and strong cost and risk management. The growth of our lending businesses, with gross loans at 31 December 2013 of £3,390 million (2012: £2,071 million) underscores the growth of our franchise and market presence, as does our ability to fund this growth through stable retail and SME deposits. At 31 December 2013, our loan to deposit ratio stood at 98% (2012: 96%). With such strong organic growth in our balance sheet in 2013, robust capital and liquidity management has been central to our plans. At 31 December 2013, the Bank had Core Tier 1 capital of £250.4 million (2012: £164.8 million), and our Core Tier 1 capital ratio was 11.7% (2012: 11.5%). 3 Restated for a change in accounting policy for IFRIC 21, as explained in Note 1 of the financial statements. The following metrics represent the core key performance indicators for the Bank: Tier 1 capital ratio Organic loan originations (£m) Return on equity Net interest margin Cost to income ratio 31 December 2013 31 December 2012 11.7% 1,709.2 10.9% 2.95% 67% 11.5% 1,199.9 0.9% 2.14% 89% Summary profit and loss account Summary profit and loss account 2013 (£m) Restated 2012 (£m) Change (%) Net interest income Other income Total operating income Administrative expenses Depreciation and amortisation Provision for bad and doubtful debts Provisions for liabilities Profit before taxation 80.1 23.7 103.8 (65.2) (4.3) (9.8) (2.1) 22.4 34.5 24.3 58.8 (49.4) (2.8) (4.6) (0.5) 1.5 132% (2%) 77% 32% 54% 113% 320% 1,393% Operating income increased 77% to £103.8 million (2012: £58.8 million) reflecting strong asset growth in the Residential and SME Commercial Mortgages divisions and in Asset Finance. The improved asset margin on lending, combined with an improvement in our cost of funds, drove an increase in net interest margin to 2.95% (2012: 2.14%). A central part of Aldermore’s strategy is funding our lending through retail and SME deposit gathering. Our weighted average cost of funds across the whole portfolio decreased to 1.67% (2012: 2.32%). t r o p e r c g e t a r t S i | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 6 1 #peoplewhomade2013 Ask the customer – Invoice Finance The Water Brands Group owns and manages the Harrogate Spring Water and Thirsty Planet brands, supplying more than 65 million bottles a year to customers. When they were looking for a banking partner that really understood their business and supported their growth ambitions, they chose Aldermore. “Having worked with our existing bank for more than 10 years, the prospect of moving our working capital finance facilities was not a decision to be made lightly, but the transfer process was efficient and the finance facilities give us a solid financial base to realise our strategic objectives.” James Cain, Managing Director, Water Brands Group, Harrogate Business review Operating expenses increased 32% to £65.2 million (2012: £49.4 million) as we continued to invest in strengthening the capacity of our businesses. The increase in the year reflected volume related costs primarily in the Asset Finance and Residential Mortgages divisions where we have seen the strongest growth in lending. Central costs increased 37% to £34.7 million (2012: £25.4 million) largely due to the continued build of our support functions, primarily Risk, Compliance and Finance, in line with the ongoing growth of the Bank. Overall, the cost income ratio improved to 67% (2012: 89%). Full-time equivalent staff numbers increased 27% to 664 (2012: 521) at the year end. Aldermore continues to apply robust underwriting criteria when originating loans. The charge for losses and provisions increased in the year to £9.8 million (2012: £4.6 million) due to the growth of the business but also the impact of two individually significant fraud cases in SME Commercial Mortgages and Invoice Finance. Consequently, the bad debt ratio increased in 2013 to 0.36% of lending assets (2012: 0.29%). However, excluding the impact of these two cases, the underlying performance across the business was stable, reflecting the consistency of underwriting and credit quality of our organic originations. Aldermore’s profit before tax for 2013 was £22.4 million (2012: £1.5 million), resulting in a return on equity of 10.9% (2012: 0.9%), calculated on average of opening and closing shareholders’ funds. Excluding the impact of capital raised in late December 2013 of £38 million, the Bank’s return on equity was 11.9%. In 2013 there was a tax credit of £1.0 million (2012: £nil). This represented the net effect of corporation tax on the taxable profit in the year of £2.5 million (2012: £nil), offset by deferred tax assets of £3.5 million (2012: £nil) relating to timing differences on capital allowances, and brought forward tax losses whilst the business has been growing. Balance sheet review 2013 (£m) Restated 2012 (£m) Change (%) Assets Cash and balances at central banks Loans and advances to banks 192.8 223.9 1.7 83.1 11,241% 169% Loans and advances to customers 3,370.8 2,059.6 Debt securities Intangible assets Tangible fixed assets Other assets Total assets Liabilities Due to banks Customers’ accounts Other liabilities Subordinated notes Total liabilities Shareholders’ funds 339.4 312.2 7.0 12.9 47.5 7.5 11.4 44.1 4,194.3 2,519.6 384.3 3,444.4 73.1 35.1 115.1 2,141.2 56.9 34.1 3,936.9 2,347.3 257.4 172.3 64% 9% (7%) 13% 8% 66% 234% 61% 28% 3% 68% 49% Building a strong, simple and transparent balance sheet Aldermore is focused on delivering a strong, sustainable franchise whilst maintaining rigorous control over the quality of our assets. During 2013 total assets increased by 66% to £4,194.3 million (2012: £2,519.6 million) driven by strong growth in loans across all our business lines. Our customer loans and high quality liquid assets held to meet the liquidity requirements of our operations, including cash and government securities, account for 96.5% of Aldermore’s total assets (2012: 94.9%). t r o p e r c g e t a r t S i | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 8 1 Loans and advances to customers increased 64% to £3,370.8 million (2012: £2,059.6 million), accounting for 80% of total assets. We are committed to maintaining the high quality of our loan book through the application of consistent lending principles supported by underwriting expertise based on in-depth knowledge of the customer and the underlying asset on which our lending is secured. Aldermore has maintained consistent and prudent loan-to-value ratios, closely monitoring these against market movements. The discipline we apply to each stage of the lending process allows the credit quality of our assets to be maintained as the balance sheet grows significantly. Our lending varies from short term invoice financing to medium term fixed rate mortgages and has a contractual average maturity of 136 months. We hold liquidity principally in the form of high quality liquid assets. In the year, cash and loans and advances to banks increased to £416.7 million (2012: £84.8 million), reflecting an increase in deposits at the Bank of England to £192.8 million (2012: £1.7 million) and cash on deposit to £223.9 million (2012: £83.1 million). Overall, non-trading debt securities, including supranational bank bonds, gilts and asset backed securities, increased to £339.4 million (2012: £312.2 million). The additional investments were made to increase the level of liquidity in the Bank, in line with its regulatory requirements. At 31 December 2013, the Bank held a 19.3% liquidity buffer, up from 18.2% in 2012 (liquid assets excluding encumbered cash as a percentage of total funding liabilities). Based on the liquidity buffer held, the Bank has sufficient liquidity to meet its day to day cash flow needs, with consideration being given to both normal and stressed conditions as well as internal and regulatory liquidity requirements. Our liabilities principally reflect funding for the loan book in the form of retail and small business deposits. Retail deposit products are offered to consumers and small businesses via the internet with telephone and postal support, and in the year deposits by customers increased 61% to £3,444.4 million (2012: £2,141.2 million). We have continued to make use of the Funding for Lending Scheme (FLS), a scheme launched by the Bank of England and HM Treasury in 2012 which provides loans to banks and building societies with the aim of stimulating lending within the economy. The Bank has pre-positioned £822.9 million of residential and commercial mortgages with the FLS, which are available for use as collateral for our participation in the FLS (2012: £647.6 million). At 31 December 2013 the Bank had FLS drawings of £485.0 million (2012: £205.0 million). Total Shareholders’ funds increased by 49% in 2013 to £257.4 million (2012: £172.3 million), reflecting retained profit for the year of £23.4 million (2012: £1.5 million) and the premium on shares issued in the year of £61.6 million (2012: £1.7 million) representing investment via subscription of equity share capital by the Bank’s immediate parent company, Aldermore Holdings Limited. In the year, Core Tier 1 capital increased by 52% to £250.4 million (2012: £164.8 million), reflecting the profit attributable to shareholders and other positive movements in reserves. Our Core Tier 1 capital ratio remained broadly in line with 2012 at 11.7% (2012: 11.5%). Risk weighted assets increased by 50% in 2013 to £2,146.6 million (2012: £1,427.3 million), as a result of the substantial growth in the loan book. The average risk weighting on our assets has remained stable at 48.0% (2012: 52.0%), reflecting the consistency of our underwriting approach and business mix. This robust capital management has, and will continue, to enable us to grow our business in a controlled, prudent and sustainable way. Investment in the business systems and support structure Fixed asset additions in the year of £5.3 million (2012: £6.3 million) were mainly focused on new IT systems and infrastructure. i S t r a t e g c r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 1 9 #peoplewhomade2013 “The people that made Aldermore such a success are the people that go the extra mile day in, day out in their roles. Whether on the senior management team or a in a more operational role, there is no difference in the application and dedication to exceed customer expectations. The key to our success is employing the right people with the right attitude and commitment to the cause.” Nick Hughes Aldermore Senior Underwriter #peoplewhomade2013 Divisional performance To provide a better understanding about our business in this strategic report, the Bank is broken down into four lending divisions, all of which are supported by Central Functions. 2013 Net interest income Other income Total income Directly attributable administrative expenses Provision for bad and doubtful debts Provisions for liabilities and charges Segmental profit Loans and advances to customers, net of provisions Loan origination 2012 Net interest income Other income Total income Directly attributable administrative expenses Provision for bad and doubtful debts Provisions for liabilities and charges Segmental profit Loans and advances to customers, net of provisions Loan origination Residential Mortgages (£m) SME Commercial Mortgages (£m) Asset Finance (£m) Invoice Finance (£m) 28.6 5.2 33.8 (6.9) (0.6) – 26.3 1,683.6 739.5 23.4 2.1 25.5 (4.8) (1.3) – 19.4 765.0 291.9 28.0 (3.5) 24.5 (9.0) (2.3) (0.5) 12.7 710.2 609.8 5.0 18.3 23.3 (14.0) (5.6) – 3.7 212.0 68.0 Residential Mortgages (£m) SME Commercial Mortgages (£m) Asset Finance (£m) Invoice Finance (£m) 8.1 2.9 11.0 (4.7) (0.4) – 5.9 957.3 536.6 11.3 1.2 12.5 (3.9) (0.7) – 7.9 548.2 231.8 14.0 (1.7) 12.3 (5.1) (1.0) – 6.2 375.4 349.7 3.3 18.8 22.1 (13.1) (2.5) – 6.5 178.7 81.8 i S t r a t e g c r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 2 1 Divisional performance Residential Mortgages SME Commercial Mortgages 2013 (£m) 2012 (£m) Change (%) 2013 (£m) 2012 (£m) Change (%) Net interest income Other income Total income Directly attributable administrative expenses Provision for bad and doubtful debts Segmental profit Loans and advances to customers, net of provisions Loan origination 28.6 5.2 33.8 (6.9) (0.6) 26.3 1,683.6 739.5 8.1 2.9 11.0 (4.7) (0.4) 5.9 957.3 536.6 253% 79% 207% 47% 50% Net interest income Other income Total income Directly attributable administrative expenses Provision for bad and doubtful debts 346% Segmental profit 76% 38% Loans and advances to customers, net of provisions Loan origination 23.4 2.1 25.5 (4.8) (1.3) 19.4 765.0 291.9 11.3 1.2 12.5 (3.9) (0.7) 7.9 548.2 231.8 107% 75% 104% 23% 86% 146% 40% 26% The Residential Mortgages business grew substantially in 2013, helping over 5,000 customers and increasing our lending by 76% to £1,683.6 million (2012: £957.3 million) through our broker and direct to consumer channels. In June, we expanded into the Scottish housing market for residential and buy-to-let properties. Included in the growth for 2013 was the acquisition of a £125.3 million portfolio of residential mortgages. Our SME Commercial Mortgage lending targets first charge, low loan-to-value loans, primarily against commercial/industrial premises, professionally managed residential buy-to-let portfolios, and retail premises. In addition, we finance a modest amount of property development with a focus on residential development by established regional developers with a proven franchise. Aldermore was amongst the first adopters of the government’s Help-To- Buy scheme in December 2013, a guarantee scheme enabling customers to buy or re-mortgage homes where only a small deposit was available. Total income increased 207% to £33.8 million (2012: £11.0 million), due to the increase in gross loans in the year, resulting in a segmental profit of £26.3 million (2012: £5.9 million). The quality of our lending was maintained during 2013 as provisions for bad and doubtful debts rose from £0.4 million to £0.6 million representing a loan loss ratio of 0.05% (2012: 0.05%). Our SME Commercial Mortgages business originated £291.9 million in 2013 (2012: £231.8 million). To achieve this level of growth we made an investment in our people and systems, growing our team of experts and enabling brokers to progress their deals quickly on behalf of customers. We also extended our lending to the private rental sector, supporting landlords in the buy-to-let market and continued to work closely with the National Association of Commercial Finance Brokers to support finance SME’s. Total lending for SME Commercial Mortgages stands at £765.0 million, an increase of 40% from 2012 (£548.2 million). Total income increased t r o p e r c g e t a r t S i | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 2 2 104% to £25.5 million (2012: £12.5 million) and segmental profit increased to £19.4 million (2012: £7.9 million). The loan loss ratio has deteriorated to 0.20% (2012: 0.16%) due to the impact of a third party fraud on completion of a mortgage. However this was substantially offset by recoveries on loans previously provided. On an underlying basis the credit performance in this book remains stable. Asset Finance 2013 (£m) 2012 (£m) Change (%) Net interest income Other income Total income Directly attributable administrative expenses Provision for bad and doubtful debts Provisions for liabilities Segmental profit Loans and advances to customers, net of provisions Loan origination 28.0 (3.5) 24.5 (9.0) (2.3) (0.5) 12.7 710.2 609.8 14.0 (1.7) 12.3 (5.1) (1.0) – 6.2 375.4 349.7 100% 106% 99% 76% 130% – 105% 89% 74% 2013 was a year of strong growth for our Asset Finance team, who originated £609.8 million in the year (2012: £349.7 million), up 74% and grew the balance sheet to £710.2 million (2012: £375.4 million) and over 20,000 contracts. In doing so, the business capitalised on the £1.2 billion market opportunity presented by ING Lease (UK)’s withdrawal from the broker market due to the EU deleveraging pressure. The business has firmly established itself as a strong player in the broker-driven asset finance market place to support UK SME’s funding needs through a growing network of dealers, vendors and brokers. We successfully broadened our broker proposition and established an agricultural finance offering during the year. Investment in our people supported this significant growth with the Asset Finance team growing by nearly double in size. We also invested in our technology and infrastructure to make it easier for both intermediaries and customers to do business with us. As a result, total income almost doubled to £24.5 million (2012: £12.3 million). The charge for impairments rose to £2.3 million in the year, representing a loan loss ratio of 0.42%, up marginally from 2012 (0.36%) as we strengthened our collective provisions. A provision of £0.5 million was also raised to cover a small number of contracts and statements which were not compliant with the Consumer Credit Act (CCA) following an industry wide challenge from the Office of Fair Trading (OFT). After these changes, segmental profit increased to £12.7 million (2012: £6.2 million). Invoice Finance Net interest income Other income Total income Directly attributable administrative expenses Provision for bad and doubtful debts Segmental profit Loans and advances to customers, net of provisions Loan origination 2013 (£m) 2012 (£m) Change (%) 5.0 18.3 23.3 (14.0) (5.6) 3.7 212.0 68.0 3.3 18.8 22.1 (13.1) (2.5) 6.5 178.7 81.8 52% (3%) 5% 7% 124% (43%) 19% (17%) Our Invoice Finance business funded client turnover of £2.4 billion in 2013, an increase of 33% on the same period last year. Our lending to clients increased by 19% to £212.0 million (2012: £178.7 million) with client numbers up by 7%. i S t r a t e g c r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 2 3 Divisional performance We have consolidated our support functions into two operating centres and now have seven commercial centres focusing on developing multi- channel origination and improving the client service experience. We established a specialist finance division which will help to develop our product offering and simplify our overall invoice finance proposition. value. Following a thorough review of the business line, certain control improvements have been identified and implemented, with further improvements being made following the year end. The improvements in client audits, risk management processes and controls should reduce the risk of future losses arising from bad and doubtful debts, including fraud. Total income grew by 5% to £23.3 million (2012: £22.1 million), with segmental profit dropping to £3.7 million (2012: £6.5 million). The segmental profit decreased due to higher bad debt charges, primarily driven by a small number of client facilities which contained an element of fraud which makes recovery uncertain with respect to timing and Funding through customer deposits Our savings businesses grew strongly in 2013 with total balances increasing by 61% to £3.4 billion. Retail deposits We now look after the savings of over 100,000 retail customers, an increase of 23.9% since December 2012. New inflows amounted to £2.1 billion and balances retained from maturing fixed rate accounts reached £785 million. Over 70% of customers with maturing fixed rate term deposits chose to reinvest their funds with us for a further period. Our retail savers value the simplicity and convenience of our savings proposition, underlined by the strongly positive customer feedback we receive. Our products are simple, transparent and easy to open and service. We do not offer ‘teaser’ or bonus-type products. SME deposits Our business savings products proved attractive to SMEs looking for better returns. We have developed an innovative service proposition, enabling SMEs to open and fund an account on-line in under 15 minutes. We’ve been pleased with the response from SMEs. By the end of December 2013 we had over 7,000 SME customers, with balances totalling £516 million (up over 400% since end 2012). We continued to innovate with the launch of our Customised Fixed Rate Account. This proposition enables customers to select the exact maturity dates and interest rates to suit their saving needs. t r o p e r c g e t a r t S i | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 4 2 #peoplewhomade2013 “Working for Aldermore has not only given me the opportunity to develop my own skills, but has also allowed me to contribute towards shaping the culture and values that the Bank stands for. I am passionate about being part of a motivated and happy team that continues to provide a level of service for our customers that is unaffected by increasing business volumes.” Adrian Brocklehurst Aldermore Senior Underwriter #peoplewhomade2013 Our customers Delivering exceptional service is vital to our business – it helps differentiate us from our competitors, and attract and retain customers. Digital experience Over 80% of retail savings applications and over 90% of SME savings applications are now taken online; and customers can apply or get in touch directly online for all business lines. During 2013 we introduced a new Invoice Finance site with a ‘quick quote’ tool and an enhanced site for Residential Mortgages with ‘live chat’ capabilities. These measures helped to drive a 67% increase in visits to our website, which registered over 1.5 million hits in 2013. A number of key developments were also undertaken to expand our core capability and strengthen the brand, including customer “Ratings and Reviews”, “Ask and Answer”, user generated stories, “Aldermore Resource Centre”, the Aldermore newsletter, a centralised login centre for our customers and a tablet optimised website. We continue to invest in the infrastructure with the aim of delivering an increasing quality of product, service and support as we continue to build a digital bank. Ratings and Reviews We believe that transparency is key to providing our customers with exceptional service. So in 2013 we began publishing un-edited ratings and reviews on our website. These offer customers independent insight into our products and services. The reviews also provide us with valuable feedback to help us improve our processes. Retail Savings 1,354 reviews and overall star rating of 4.75 out of 5 SME Savings 271 reviews and overall star rating of 4.75 out of 5 Invoice Finance 9 reviews and overall star rating of 4.85 out of 5 4.75/5 4.75/5 4.85/5 When our customers leave a review they are asked whether they’d be willing to recommend the product and 98% of customers answered positively to this question during 2013. Ask and Answer Our new online Ask and Answer service was also launched this year and enables customers to submit questions which will either be answered by Aldermore or by another customer. In addition, as part of Small Business Saturday, a UK-wide campaign dedicated to small businesses, we encouraged our SME customers to tell us their Small Business Story and then published the winning entry. t r o p e r c g e t a r t S i | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 6 2 Turning feedback into action In total we received almost 3,500 pieces of feedback from our customers in 2013, enabling us to make a number of improvements. For example, some of our savings customers pointed out that when making the first transfer to their new account, the payment options available on the form weren’t clear enough. We responded by altering our savings application form to make it more transparent, communicating the change back to customers, then monitoring their response to check that it had been effective. The responses we continue to secure through this digital channel underline how much our customers value the Aldermore product and service offering. Complaints We take complaints seriously. Each one is investigated and responded to directly by the relevant business line and then reported monthly to our Executive Committee. The total number of complaints received during 2013 was 1,166 which are broken down below by category. We continue to focus on understanding the root causes of all complaints and continually improving our processes to reduce them. General administration or customer service 49% Advising, selling and arranging Terms and disputed sums or charges Arrears Other 19% 19% 4% 9% i S t r a t e g c r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 2 7 Awards The Bank has been highly recognised by both industry and customer bodies, including the following awards: Residential Mortgages z FT Financial Adviser – 5 Star Service award 2013, 2012, 2011 z Mortgageforce – Best Specialised Lender 2013, 2012, 2011 z The Mortgage Strategy – Best Specialised Lender 2013, 2012 z Finance Gazette – Best Buy to Let Lender 2013, 2012 z Personal Finance – Best Buy to Let Mortgage Provider 2013 z Pink home loans – Best Specialised Lender 2013, 2011 z Your Mortgage – Best Intermediary Mortgage Lender 2013, 2012 z What Mortgage – Best Specialist Product Provider 2013 z Moneyfacts – Best Service from a BTL Mortgage Provider 2013 SME Commercial Mortgages z Bridging and Commercial – Best Commercial Proposition z The National Association of Commercial Finance Brokers – Best Buy-to-Let Lender and Most Supportive Lender t r o p e r c g e t a r t S i | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 8 2 RESIDENTIAL MORTGAGES FT Financial Adviser – 5 Star Service award COMMERCIAL MORTGAGES NACFB – Best Buy-to-Let Lender INVOICE FINANCE Yorkshire Insider Deal Makers Award – Asset Based Lender of the Year SAVINGS Consumer Moneyfacts – ISA Provider of the year RESIDENTIAL MORTGAGES Mortgageforce – Best Specialised Lender ASSET FINANCE Credit Today – Asset Finance Firm of the Year Asset Finance z Credit Today – Asset Finance Firm of the Year 2013 Invoice Finance z Yorkshire Insider Deal Makers Award – Asset Based Lender of the Year 2013 Retail deposits z Consumer Moneyfacts – ISA Provider of the year, 4 consecutive years (2011-2014) z Your Money – Best Online Savings Account Provider 2013, Best Online Cash ISA Provider z Moneyfacts – Best Bank Savings Provider 2013, Best No Notice Account 2013 z Personal Finance – Best Cash ISA 2013 SME deposits z Savings Champion – Best Business Savings Account Provider 2014 z Also nominated for 2 innovation awards in 2014 by Business Moneyfacts i S t r a t e g c r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 2 9 Employee diversity The Bank is committed to diversity and encourages equality of opportunity for all. Employee communication In 2013 the Bank significantly increased communication activity to employees. We evolved the Internal Communications framework introduced in 2012 to ensure the Bank remains focused on communicating strategic and performance updates to staff in a transparent and timely manner. The Bank has a digital ethos at its core and as such there’s a desire to embrace social networking which led to the introduction of Yammer in 2013. Yammer is a leading enterprise social network for businesses and helps bring our people together and encourage a social culture across the Bank. Yammer also fosters an environment for two-way feedback and collaboration across our different offices and business lines. We saw 76% of employees sign up to Yammer within the first six months. A comprehensive CEO and Executive Committee site visit programme was also introduced in 2013 with 82% of staff indicating it was a valuable form of face-to-face communication and would like to see this increased in 2014. Our people Dynamic growth depends on dynamic people. We increased our permanent headcount by 27% in 2013, and nearly doubled the size of our Asset Finance team in Reading in response to the opportunities in that market. We plan further expansion into new locations and offices to support our growth strategy in 2014. Our ability to retain and develop talented people can be seen in the fact that 29% of our vacancies were filled internally; but we continued to focus on this area with new career development initiatives in 2013. We use our yearly employee feedback surveys to gauge employee satisfaction and provide ideas for improvement, as we move towards our ambition of earning external recognition for Aldermore as a great place to work. It is clear that our people are excited by the Bank’s vision, the fact that we are building a new bank that is challenging the competition, championing the causes of our customers, and building a bank to be proud of. We are committed to maintaining an engaged and motivated workforce. For managers, key initiatives included creating a Manager Community Space on our intranet to provide additional training and development materials, and ‘Train the Trainer’ workshops to deliver more local and on-demand training. We also raised awareness about our employee assistance programme which provides guidance and advice for staff and their families. Our ‘walk the walk’ initiative promoted health and fitness through a walking challenge and was supported by many of our offices across the UK. 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. t r o p e r c g e t a r t S i | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 0 3 More than 40 of our people volunteered their time to act as corporate mentors to over 170 students at the workshops held in Manchester, Reading and Birmingham. We also held an online competition asking our Twitter followers to vote for the best student idea and awarded the winning school a cash prize of £1,000 to donate to a local charity or community project of their choice. Our communities Supporting local communities where we work and live We maintain active programmes of engagement with local communities, encouraging all our staff to take part in initiatives and regularly matching the funds they raise for charities. £ 4 £ scheme By matching the charitable commitment of our people we encourage them to be active in the community and increase the value of their efforts. In 2013, we donated £5,300 to charities and causes important to our people as part of our £ 4 £ scheme. In addition we also contributed more than £1,000 to local charities during the Christmas period. Charities supported through our £ 4 £ scheme in 2013 included Children in Need, where fundraising activities at our Reading office included a silent auction and bake sales; and the Great Ormond Street Hospital Children’s Charity and Breast Cancer Care, for which our Twickenham, Glasgow and Manchester offices organised fundraising activities such as ‘Pink Fridays’ and a ‘Bake Off’ between offices. Our Manchester office took part in the Factory 100 Business Challenge, organising a Village Fete day to raise much-needed funds for the Factory Youth Zone which offers leisure, mentoring, employability and enterprise programmes to support disadvantaged young people. SKILL! In 2013 we supported the training and development of budding young entrepreneurs through our involvement with the SKILL! programme, a series of interactive workshops for students aged 14-16. The workshop is designed to teach students the valuable skills they need on top of their academic ones such as communication, working together as part of a team and presentation skills. i S t r a t e g c r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 3 1 Risk Management 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, interest rate risk, liquidity and funding risk, regulatory 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 Chief Risk Officer 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. The principal categories of risk facing the Bank are regulatory risk, operational risk, credit risk, market risk and economic risk. A description of regulatory and operational risk and how they are managed is set out below. Further details of the Risk Management framework and how the Bank measures and manages the risks associated with lending and financial instruments are detailed in Note 37 to the financial statements. 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 replacement of Basel II by CRD IV (Basel III) and the impact upon the Bank’s capital base (see Capital Management disclosures in the Directors’ report), and the practical impact of the t r o p e r c g e t a r t S i | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 2 3 Mortgage Market Review. The Bank has allocated resource to ensure continued regulatory compliance and the directors consider the Bank is compliant with the new requirements. Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This risk includes IT, information security, project, outsourcing, tax, legal, fraud and compliance risks. The Board has defined its operational risk appetite, and the Bank operated within this appetite during the year. Through the establishment of, 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. Principal risks and uncertainties As a growing bank, a key risk is maintaining a sound operating environment. Therefore the Board considers and reviews regularly operational risks and emerging risks which relate to the Bank’s business model and plans. As part of this the Board reviews key risk registers which cover both operational and strategic risks. The key strategic risks which the Bank currently faces include: z Originating loan assets of a quality consistent with the Bank’s risk appetite. The quality and performance of the loan portfolios are actively monitored using key performance indicators and credit scores to ensure that the performance of the existing portfolio remains within expectations and that the quality of new lending is consistent with existing loan assets z Maintaining a sufficient net interest margin having regards to the competitive and economic environment. We actively track the margins at which both new lending is originated and deposits are raised, as well as the product mix of lending and funding, against our business plan. Our pricing models ensure that lending margins appropriately reflect the full cost of raising funds, including liquidity and hedging costs. The Bank’s exposure to changes in interest rates is mitigated through conservative hedging policies and limits, with regular stress testing carried out z Ensuring the Bank’s operating environment remains robust and keeps pace with the growth plans and customer base of the business. We continually invest in our systems and controls which includes the use of an Enterprise Risk Management system which allows the Bank to effectively manage operational risks through detailed operational risk registers and control monitoring z Ensuring that the Bank’s plans appropriately reflect the impacts of the emerging regulatory agenda. We regularly perform stress testing on the adequacy of the Bank’s capital and liquidity position to assist in managing this risk. Our forecasts take into account known regulatory developments and the Bank’s business plan includes conservative transitional assumptions This report was approved by the Board and was signed on its behalf by: James Mack Chief Financial Officer Aldermore Bank PLC 1 April 2014 i S t r a t e g c r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 3 3 #peoplewhomade2013 Corporate governance Standards for good practice are laid out in the UK Corporate Governance Code (the Code) and are the responsibility of the Board of Directors (the Board). Our Board is fully committed to ensuring that these standards are applied across our business in a way that is appropriate to our size and unlisted status. Corporate governance framework The Board Audit & Risk Committee Board Credit Committee Executive Committee Remuneration Committee Nomination Committee The Board The principal objectives of the Board are to ensure that the business of the Bank is conducted in an efficient and effective manner which promotes its success, within a robust framework of systems of internal control, risk management and compliance, and in accordance with all relevant statutory and regulatory requirements. The Board is made up of nine members: the Chairman, five Executive Directors and three Non-Executive Directors. Details of the Directors in office at the date of this Annual Report are set out in the Director’s report on page 39. There are various matters reserved for the Board, a number of which also require shareholder consent; day-to-day operational decisions are made by the Chief Executive Officer assisted by the Executive Committee. C o r p o r a t e g o v e r n a n c e | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 3 5 Corporate governance The primary responsibilities of the Board include: z review and challenge the actions and judgements of management in z setting the Bank’s strategy, taking into account stakeholder interests z ensuring that the business has an effective system of internal controls and management of business risks and is conducted in accordance with the PRA’s principles of business z monitoring financial information and reviewing the overall financial condition of the Bank and its position as a going concern z reviewing major developments in business lines and support units z monitoring of compliance and reputational issues relation to financial reporting z review procedures for detecting fraud and the effectiveness of systems for internal financial control, financial reporting and risk management z review the Internal Audit programme and ensure that the Internal Audit function is adequately resourced and has appropriate standing within the Bank z consider the appointment, reappointment and removal of the external auditor, their effectiveness and independence and review regularly the findings of their work z reviewing the market, credit and liquidity risks and exposures z review and approve the risk management reporting framework z reviewing the priorities for allocating capital and operating resources z approving all individual transactions of 5% or more of the Bank’s capital base z reviewing operational performance against strategic objectives and related strategic plans Audit and Risk Committee The Committee is made up of three Non-Executive Directors all of whom have relevant financial experience: John Callender (interim Chairman), Peter Cartwright and Chris Stamper. At the invitation of the Chair of the Committee, other Directors, the Internal Audit Director and representatives from the risk and finance functions regularly attend meetings. Board Credit Committee The Committee is made up of three Non-Executive Directors – John Callender (interim Chairman), Chris Stamper and Peter Cartwright, and two Executive Directors – Phillip Monks (Chief Executive Officer) and Stephen Barry (Chief Risk Officer). The purpose of the Committee is to oversee all credit risks, ensuring that the Bank operates within its stated risk appetite. The primary responsibilities of the Committee are to: z review and approve credit policies z review lending product performance z monitor large exposures and provisioning for non-performing loans The primary responsibilities of the Committee are to: z monitor portfolio and sector concentration risks z encourage and safeguard the highest standards of integrity, financial reporting, corporate governance, risk management and internal control z monitor business growth z monitor credit quality trends e c n a n r e v o g e t a r o p r o C | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 6 3 Executive Committee The primary responsibilities of the Committee are to: The Committee is made up of six members: the Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Risk Officer, Group Commercial Director and Group Human Resources Director. The purpose of the Committee is to assist the Chief Executive Officer in the performance of his day-to-day duties. The Committee, whilst retaining ultimate responsibility for the actions taken, has at its discretion delegated certain responsibilities to the following sub-committees: z Group Operating Committee z Management Credit Committee z Asset and Liability Committee z Mortgages Division Board z Commercial Finance Division Board z Retail and Business Savings Board Remuneration Committee The Committee is made up of three Non-Executive Directors: John Callender (interim Chairman), Chris Stamper and Peter Cartwright. The purpose of the Committee is to determine and agree with the Board the policy for remuneration of the Bank’s Executive Directors and members of the Executive Committee. The objective of the remuneration policy is to ensure that appropriate incentives are awarded for individual contributions to the success of the Bank and encourage enhanced performance. z review the appropriateness and relevance of the remuneration policy z determine and review regularly the policy, terms, objectives and content of Executive Directors’ service contracts z approve the design of and determine targets for any performance- related pay schemes applying to the Executive Directors z determine the policy and scope of pension arrangements for the Executive Directors z oversee any major changes to the Bank’s employee benefits structures Nominations Committee The Committee is made up of three Non-Executive Directors: John Callender (interim Chairman), Peter Cartwright and Jayne Almond, who stepped down as a Committee member on 16 January 2014. The purpose of the Committee is to ensure that the Board comprises individuals with the necessary skill, knowledge and experience to discharge effectively its responsibilities. The primary responsibilities of the Committee are to: z identify and nominate, for approval by the Board, candidates for appointment to the Board and its committees z regularly review succession planning z regularly review the structure, size and composition of the Board C o r p o r a t e g o v e r n a n c e | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 3 7 #peoplewhomade2013 Ask the customer – Commercial Mortgages Property developer John Hesler had been working for a range of clients but decided the time was right to strike out on his own. Having identified a commuter belt site with great potential he applied to Aldermore for a property development loan in order to build 10 apartments. “Being in the construction industry for 15 years, I have worked with many companies. However I have been particularly impressed with Aldermore’s helpful attitude and knowledge. Given some of the obstacles encountered along the way they did a great job and I would highly recommend them.” John Hesler, Property Developer, Brentwood, Essex Directors’ report The directors present their report and the financial statements of Aldermore Bank PLC (‘the Bank’) for the year ended 31 December 2013. Results and dividends Capital injections The results for the year are set out in the profit and loss account on page 55. The directors do not recommend the payment of a dividend (2012: £nil). The Bank’s immediate parent company is Aldermore Holdings Limited. During 2013 £61.6 million was invested in the Bank by Aldermore Holdings Limited via subscription of equity share capital. 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 2013 were the provision of banking and related services. The profit before taxation for the year ended 31 December 2013 was £22.4 million (2012: £1.5 million4). As at 31 December 2013 the Bank had 664 employees (2012: 521). The Bank had regulatory Tier 1 capital at 31 December 2013 of £250.4 million (2012: £164.8 million) and a Tier 1 capital ratio of 11.7% (2012: 11.5%). Strategic report The Companies Act 2006 requires the directors to present a strategic report containing a fair review of the business of the Bank during the financial year ended 31 December 2013 and a description of the principal risks and uncertainties facing the Bank. The strategic report can be found on pages 11 to 33. Going concern The financial statements are prepared on a going concern basis, as the directors are satisfied that the Bank has the resources to continue in business for the foreseeable future. In making this assessment, the directors have considered a wide range of information relating to present and future conditions, including the current state of the balance sheet, future projections of profitability, cash flows and capital resources and the longer term strategy of the business. The Bank’s capital and liquidity plans have been reviewed by the directors and are reported against at least monthly, including stress tests. The Bank’s forecasts and projections show that it will be able to operate at adequate levels of both liquidity and capital for the foreseeable future, including a range of stressed scenarios, taking management actions as appropriate if the additional capital needed to continue the forecast growth strategy is not forthcoming. After making due enquiries, the directors believe that the Bank has sufficient resources to continue its activities throughout 2014 and to continue its expansion, and the Bank has sufficient capital to enable it to continue to meet its regulatory capital requirements as set out by the PRA. The Bank’s business activities and financial position, together with the factors likely to affect its future development, performance and position are set out in the strategic report on pages 11 to 33. 4 Restated for a change in accounting policy for IFRIC 21, as explained in Note 1 of the financial statements. D i r e c t o r s ’ r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 3 9 Directors’ report Capital management The Board is required to consider all material risks which the Bank faces and determines whether additional capital is required in order to provide additional protection to depositors and borrowers and to ensure the Bank is sufficiently well capitalised to withstand a severe economic downturn. The Board manages its internal capital levels for both current and future activities and documents its risk appetite and capital requirements during stress scenarios as part of the Internal Capital Adequacy Assessment Process (“ICAAP”). The ICAAP represents the aggregated view on risk for the Bank and is used by the Board, management and shareholders to understand the levels of capital required to be held over the near and medium term. The ICAAP is reviewed and refreshed at least annually and following approval by the Board in February 2014 the Bank submitted its last ICAAP to the PRA in February 2014. The Bank is required to maintain a certain level of capital to meet several requirements: z To meet minimum regulatory capital requirements z To ensure the Bank can meet its objectives, including growth objectives z To ensure the Bank can withstand future uncertainty, such as a severe economic downturn z To provide assurance to depositors, customers, shareholders and other third parties The Bank produces regular reports on the current and forecasted level of capital, as well as the results of stress scenarios, to the Board and to the Audit and Risk Committee. The Bank has complied with all externally imposed capital requirements throughout 2013. The key assumptions and risk drivers used to create the ICAAP are regularly monitored and reported and any material deviation from the forecast and risk profile of the Bank will mean the ICAAP will need to be up-dated. The principal risks which are considered as part of the ICAAP are detailed in the Principal Risks and Uncertainties section of the strategic report and in Note 37 to the financial statements. 4 Restated for a change in accounting policy for IFRIC 21, as explained in Note 1 of the financial statements. t r o p e r ’ s r o t c e r i D | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 0 4 The Bank’s regulatory capital position (Basel II) as at 31 December was as follows: Tier 1 Called up share capital Share premium account Capital contribution reserve Profit and loss account Less: Intangible assets Total Tier 1 capital (all Core Tier 1) Tier 2 Subordinated notes Collective impairment allowance Total Tier 2 capital Total regulatory capital Total risk weighted assets Key capital ratios Tier 1 (all Core Tier 1) Total Capital 2013 £’000 3,300 233,380 2,503 18,216 (7,017) 250,382 35,119 4,154 39,273 Restated 2012 £’000 3,300 171,822 2,339 (5,162) (7,467) 164,832 34,148 2,059 36,207 289,655 201,039 2,146,579 1,427,275 11.7% 13.5% 11.5% 14.1% D i r e c t o r s ’ r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 4 1 Directors’ report Transition to CRD IV In June 2013, the European Commission published the final regulation and directive, known collectively as CRD IV, to give effect to the Basel III framework. The objective of the reforms are to improve the banking sector’s ability to absorb shocks arising from financial and/or economic stress, and therefore reduce the risk of spill-over from the financial sector into the rest of the economy. CRD IV legislation was implemented with effect from 1 January 2014. The key elements of CRD IV are as follows: z Changes to the definition of capital resources. Over the period 2014 to 2018, there will be changes and additions to capital deductions from Core Tier 1 and Tier 2 capital z New limits and capital buffers. Higher thresholds for all forms of capital with an increased focus on Core Tier 1, with a potential requirement to hold capital conservation, countercyclical and systemic risk buffers z Introduction of the Leverage Ratio. The Basel Committee is using a period to 2017 to test a minimum Tier 1 leverage ratio of 3% The Bank’s capital position at 31 December 2013 calculated on current regulatory rules and also estimated on a pro forma basis, applying the CRD IV rules is shown in the table below. The Group’s capital position is reported in the published financial statements of the Bank’s ultimate parent company, AC Acquisitions Limited. The pro forma CRD IV capital resources and risk weighted assets shown reflect estimates of the impact of the CRD IV rules on both a transitional basis applying the rules applicable as of 1 January 2014, and on a fully loaded basis (referred to as the CRD IV end-point definition in the PRA documentation) which applies the rules without applying any of the transitional provisions. t r o p e r ’ s r o t c e r i D | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 2 4 At 31 December 2013 Common equity Tier 1 (CET1) Current rules £’000 Pro-forma CRD IV rules Transitional and fully loaded estimate £’000 Shareholders’ equity per the statement of financial position 257,399 257,399 Regulatory adjustments to CET1 Goodwill and other intangible assets Total common equity tier 1 (CET1) Tier 2 Subordinated notes Collective impairment allowance Total tier 2 capital Total capital resources Risk weighted assets Common equity tier 1 ratio Tier 1 capital ratio Total capital ratio (7,017) 250,382 (7,017) 250,382 35,119 4,154 39,273 35,119 4,154 39,273 289,655 289,655 2,146,579 1,992,443 11.7% 11.7% 13.5% 12.6% 12.6% 14.5% D i r e c t o r s ’ r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 4 3 Directors’ report Leverage ratio on a CRD IV basis The Basel III reforms include the introduction of a capital leverage measure defined as the ratio of tier 1 capital to total exposures measured on a Group consolidated basis. The purpose of the proposed measure is as a non-risk based backstop limit to supplement the risk based capital requirements and which acts as a constraint on the build-up of excess leverage within the banking sector. The Basel Committee have proposed that final adjustments to the definition and calibration of the leverage ratio be carried out in 2017, with a view to migrating to a Pillar 1 requirement from 1 January 2018. In the interim, the PRA has asked banks to report an estimated leverage ratio on a fully loaded CRD IV basis to indicate the approximate leverage ratio that the Bank would have now if the CRD IV rules were fully implemented. As required the numerator of the leverage ratio has been calculated using the definition of Tier 1 capital set out in the text of the June 2013 regulation and the exposure measure has been calculated on the basis of the original December 2010 Basel III proposals, as interpreted through guidance issued in 2012. The Bank’s estimates of its leverage ratio at 31 December 2013 are shown in the table below on two different bases. The Group’s estimates are reported in the published consolidated financial statements of the Bank’s ultimate parent company, AC Acquisitions Limited. The ‘CRD IV transitional’ basis with Tier 1 capital calculated by applying the CRD IV transitional rules applicable as at 1 January 2014 to the position as at 31 December 2013; and The ‘CRD IV fully loaded’ basis with Tier 1 capital calculated by applying the CRD IV rules without applying any transitional provisions. t r o p e r ’ s r o t c e r i D | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 4 4 At 31 December 2013 Total Tier 1 capital for the leverage ratio Common equity tier 1 (CET1) Goodwill and other intangible assets Total Tier 1 capital Exposures for the leverage ratio Total statutory balance sheet assets Removal of accounting value for derivatives and securities financing transactions Exposure value for derivatives and securities financing transactions Off balance sheet including unconditionally cancellable commitments Other regulatory adjustments Total exposures Leverage ratio Pro forma CRD IV rules Transitional estimate £’000 Fully loaded estimate £’000 257,399 (7,017) 250,382 257,399 (7,017) 250,382 4,194,338 4,194,338 (2,475) 106,291 343,652 (2,862) (2,475) 106,291 343,652 (2,862) 4,638,944 4,638,944 5.4% 5.4% D i r e c t o r s ’ r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 4 5 Directors’ report 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, borrowers are expected to resume normal payments within six months. As at 31 December 2013, the Bank had undertaken forbearance measures as follows in each of its lending divisions: t r o p e r ’ s r o t c e r i D | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 6 4 Loan Balances as at 31 December 2013 Capitalisation Temporary or permanent switch to interest only Reduced monthly payments Loan term extension Deferred payment 31 December Total forborne as a percentage of the total divisional lending book Loan Balances as at 31 December 2012 Capitalisation Temporary or permanent switch to interest only Reduced monthly payments Loan term extension Deferred payment 31 December Total forborne as a percentage of the total divisional lending book Residential Mortgages £’000 SME Commercial Mortgages £’000 – 3,724 946 638 – 5,308 0.32% – 6,900 – – – 6,900 0.90% Residential Mortgages £’000 SME Commercial Mortgages £’000 – 791 – 307 – 1,098 0.11% – 296 – – – 296 0.05% Asset Finance £’000 902 123 2,016 622 16 3,679 0.52% Asset Finance £’000 260 – 424 1,026 – 1,710 0.46% Invoice Finance £’000 – – – – – – – Invoice Finance £’000 – – – – – – – Total £’000 902 10,747 2,962 1,260 16 15,887 0.47% Total £’000 260 1,087 424 1,333 – 3,104 0.15% The total of loan balances in forbearance has increased from £3,104,000 at 31 December 2012 to £15,887,000 at 31 December 2013. D i r e c t o r s ’ r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 4 7 Directors’ report Directors Political donations The directors who held office during the year were as follows: The Bank made no political donations during the year (2012: £nil). Phillip Monks * Jayne Almond (resigned 16 January 2014) *** Sir David Arculus (resigned 30 July 2013) ** John Baines (resigned 26 February 2013) * Stephen Barry * John Callender *** Peter Cartwright James Mack (appointed 27 June 2013) * Paul Myers * David Soskin *** Chris Stamper (appointed 29 May 2013) *** Mark Stephens * Ian Wilkins (resigned 31 January 2013) * 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. Auditor Our auditor, KPMG Audit Plc, has instigated an orderly wind-down of business and is not seeking reappointment. The Board has decided to put KPMG LLP forward to be appointed as auditor and a resolution concerning their appointment will be put to the forthcoming Annual General Meeting of the Bank. By order of the Board Subsequent to 31 December 2013, Glyn Jones was appointed as non- executive Chairman with effect from 21 March 2014. Certain directors benefited from qualifying third party indemnity provisions in place during the year ended 31 December 2013 and at the date of this report. * indicates Executive Director ** Chairman *** Independent Non-Executive Phillip Monks Director and Chief Executive Officer Aldermore Bank PLC 1 April 2014 t r o p e r ’ s r o t c e r i D | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 8 4 #peoplewhomade2013 Ask the customer – Residential Mortgages Rebecca, a secondary school English teacher and Adam, who is a coach builder, had tired of being turned away for a mortgage. Having found the perfect property, they then turned to Aldermore. “We approached Aldermore who were so helpful and our mortgage adviser, Gemma, was lovely. They really listened and understood our frustrations with the previous lender. They turned our case around really quickly and we were able to buy our dream house. We are absolutely over the moon at finally having a chance to own a property. We’d like to say a big thank-you to Aldermore and particularly to our mortgage adviser Gemma.” Rebecca Wood, Sandbach, Cheshire #peoplewhomade2013 Statement of Directors’ responsibilities Statement of Directors’ responsibilities in respect of the Strategic Report, the Directors’ report and the financial statements The directors are responsible for preparing the Strategic Report, 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: z select suitable accounting policies and then apply them consistently z make judgements and estimates that are reasonable and prudent z state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements z 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 and was signed on its behalf by: Phillip Monks Director and Chief Executive Officer 1 April 2014 S t a t e m e n t o f D i r e c t o r s ’ r e s p o n s b i i l i t i e s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 5 1 Independent Auditor’s report 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 2013 set out on pages 55 to 94. 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 51, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the financial statements: z give a true and fair view of the state of the company’s affairs as at 31 December 2013 and of its profit for the year then ended; z have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and z 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 Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. t r o p e r s ’ r o t i d u A t n e d n e p e d n I | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 2 5 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: z adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or z the financial statements are not in agreement with the accounting records and returns; or z certain disclosures of directors’ remuneration specified by law are not made; or z 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 1 April 2014 I n d e p e n d e n t A u d i t o r ’ s r e p o r t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 5 3 #peoplewhomade2013 “Since starting at Aldermore, I have been encouraged to design and implement a career plan to work towards. This has given me the focus to achieve the next step within my career goals through a recent promotion, and I now look forward to being able to support the rest of the team in identifying and taking steps towards their individual career goals.” Catherine Casey Aldermore Sales Manager #peoplewhomade2013 Profit and loss account For the year ended 31 December Interest receivable Interest payable Net interest income Fees and commissions receivable Fees and commission payable Other operating income Gains on disposal of debt securities Total operating income Administrative expenses Depreciation and amortisation Operating profit before impairment losses and provisions Provision for bad and doubtful debts Provisions for liabilities Profit on ordinary activities before taxation Taxation credit on profit on ordinary activities Profit on ordinary activities after taxation The notes and information on pages 58 to 94 form part of these financial statements. The profit for the year is derived entirely from continuing activities. 2013 Restated 2012 Note 4 5 6 7 8 18 12 13 17 28 14 15 £’000 155,953 (75,867) 80,086 31,149 (16,221) 6,937 1,869 103,820 (65,242) (4,272) 34,306 (9,777) (2,111) 22,418 960 23,378 £’000 97,849 (63,327) 34,522 24,167 (10,238) 7,102 3,231 58,784 (49,424) (2,767) 6,593 (4,644) (483) 1,466 – 1,466 P r o fi t a n d l o s s a c c o u n t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 5 5 Statement of total recognised gains and losses For the year ended 31 December Profit on ordinary activities after taxation for the year Total recognised gains and losses relating to the financial year Prior year adjustment (as explained in Note 28) Total gains and losses recognised since the last annual report 2013 Restated 2012 £’000 1,466 1,466 £’000 23,378 23,378 1,369 24,747 s e s s o l i d n a s n a g d e s n g o c e r i l a t o t f o t n e m e t a t S | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 6 5 The notes and information on pages 58 to 94 form part of these financial statements. The profit for the year is derived entirely from continuing activities. 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 Deferred tax asset Total assets Liabilities Due to banks Customers’ accounts Other liabilities Taxation Accruals and deferred income Provisions 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 2013 £’000 Restated 2012 £’000 16 17 18 20 21 22 23 15 24 25 26 15 27 28 29 30 31 31 31 32 34 34 192,844 223,864 3,370,798 339,445 7,017 12,863 11,547 32,508 3,452 4,194,338 384,276 3,444,392 14,707 2,492 54,796 1,157 35,119 3,936,939 3,300 233,380 2,503 18,216 257,399 4,194,338 – 343,652 1,654 83,086 2,059,603 312,156 7,467 11,386 22,395 21,841 – 2,519,588 115,079 2,141,198 10,417 – 45,872 575 34,148 2,347,289 3,300 171,822 2,339 (5,162) 172,299 2,519,588 – 213,639 These financial statements were approved by the Board and were signed on its behalf by: Phillip Monks Director and Chief Executive Officer 1 April 2014 Registered number: 00947662 The notes and information on pages 58 to 94 form part of the financial statements. l B a a n c e S h e e t | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 5 7 Notes to the financial statements 1 Basis of preparation 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. During the year the following changes in accounting policy were adopted: (i) FSCS – Levies During the year the Bank changed its accounting policy for the contents of IFRIC 21 on the basis that it is a clarification of IAS 37, and consequently of FRS 12, since FRS 12 is identical to IAS 37. This caused the trigger date for the FSCS levy to change from 31 December each year to the following 1 April which resulted in an £662,000 increase in opening reserves at 1 January 2012 and a reduction in the prior year FSCS levy by £707,000, with a corresponding increase in prior year profit. Details of the prior year adjustment made as a consequence of this are included in Note 28. (ii) Reclassification of interest receivable and payable on derivatives In 2013 the Bank amended the presentation of interest on derivatives, which impacts the allocation of amounts between interest receivable and interest payable, but has no impact on net interest income. Under the amended presentation, interest on derivatives is included in interest receivable where the derivative is hedging interest income, and in interest payable where the derivative is hedging interest expense. The previous presentation included net derivative interest income or expense within interest payable, but the revised approach is considered to reflect asset yields more closely. The figures for 2012 have been restated accordingly. Details are included in Note 4 and Note 5. (iii) Presentation of business segments In 2013, the Bank amended the presentation of segmental performance in Note 3 to show each lending division as a reportable segment, and to disclose segmental profit before the deduction of common costs. This presentation is more appropriate given the significant growth of the Bank’s activities, and is consistent with the basis on which the Bank’s operating results are reviewed by the Board of Directors. Previously the segmental results were presented for only two distinct business segments: Commercial Finance (comprising Asset Finance and Invoice Finance) and Mortgages (Residential Mortgages and SME Commercial Mortgages, including Property Development). The 2012 segmental performance has also been restated. b) Going concern As stated in the Directors’ report, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing the accounts. c) Areas of significant judgement or estimate The preparation of these financial statements in conformity with UK Generally Accepted Accounting Practice requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amounts, actual results may differ ultimately from those estimates. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed within Note 2 Significant accounting policies, and the detailed notes to the financial statements, which the estimate or judgement relates to as follows: s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 8 5 1 Basis of preparation (continued) c) Areas of significant judgement or estimate (continued) Area of judgement or estimate Accounting policy note Financial statement note Income recognition Note 2 (a), (b), (c), (f), (g) and (n) Note 4 to 8 Provisions for bad and doubtful debts Note 2 (d) Taxation including deferred tax and VAT Note 2 (i) Note 17 Note 15 Impairment of assets Note 2 (l) Note 20 and 21 Carrying value of financial assets and liabilities Note 2 (k), (n) and (s) Note 17, 18 and 29 Provisions for liabilities Share based payment transactions Note 2 (t) Note 28 Note 10 d) 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. e) 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. 2 Significant accounting policies a) 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. N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 5 9 Notes to the financial statements 2 Significant accounting policies (continued) d) Provisions for loan losses b) 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. c) 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 a six-year period. Any unclaimed receipts subsequent to the expiry date are recognised as income. 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 to net realisable value. The Bank estimates the ultimate net realisable value and incorporates an appropriate forced sale discount and selling costs 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 provided against loan balances not specifically provided for in order to reflect any losses that have been incurred but not yet identified. In assessing the level of general provisions the Bank uses statistical modelling of historical trends of probability of default, the amount of loss incurred, and the emergence periods between losses being incurred and their identification. The outputs of this modelling are then adjusted for management’s judgement and best estimates as to whether current economic and credit conditions are such that actual losses are likely to be greater or less than suggested by historical statistical trends, including the application of scalars to probabilities of default and adjustments to emergence periods and losses given default. Information used in the statistical models is derived from both the Bank’s historical information and external sources. Default rates, loss rates and emergence periods are benchmarked against actual outcomes to ensure they remain appropriate. Interest recognition is normally suspended once a customer’s loan is impaired and/or three months or more in arrears. s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 0 6 2 Significant accounting policies (continued) e) 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: z Fixtures, fittings and equipment – 5 years z Computer systems – 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. f) 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 are recognised on sale of the product with a provision for future repayment in the event of early termination by the customer. g) 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. h) 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. i) Taxation Current tax The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred tax Deferred tax is recognised, without discounting, in respect of all timing differences between the treatment of certain items for taxation and accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS 19. Value added tax Most of the activities of the Bank are exempt from Value Added Tax (VAT) meaning output tax does not apply and input tax on purchases is not recoverable. Where output tax is charged or input VAT is incurred, the amounts recognised in the profit and loss account are net of VAT. The amount of irrecoverable VAT is calculated by the Bank applying the partial exemption method it has agreed with HM Revenue & Customs. Irrecoverable VAT is recognised in the profit and loss account within administrative expenses or is capitalised and included within the purchase cost where this relates to tangible fixed assets. j) 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. N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 6 1 Notes to the financial statements 2 Significant accounting policies (continued) k) 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 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. l) 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. s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 2 6 2 Significant accounting policies (continued) m) 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. 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. n) Discounts arising on the acquisition of loan portfolios p) Off-balance sheet financial derivatives Discounts arising on the acquisition of loan portfolios are recognised in profit and loss within interest receivable on a level yield basis over the expected life of the loan portfolio to which they relate. Any unamortised discount is offset against the gross loan balance included within loans to customers in the balance sheet. At each reporting date, management make an assessment of the expected remaining life of the loan portfolio and the remaining amount of unamortised discount is adjusted so that the discount may be recognised prospectively on the original level yield basis over the revised expected life of the loan portfolio. The adjustment arising is recognised within interest receivable in the current period profit and loss. o) 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. 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. Interest on derivatives is included in interest receivable where the derivative is hedging interest income, and in interest payable where the derivative is hedging interest expense. q) Capital raising costs Costs directly incremental to the raising of share capital are netted against the share premium account. N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 6 3 Notes to the financial statements 2 Significant accounting policies (continued) r) 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. s) 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 through interest payable. 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. t) 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 fair value of these transactions is determined at the grant date and 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. 3 Segmental information The Bank has five reportable segments which are based on the Bank’s four lending divisions plus a central functions segment as listed below. Each of the lending divisions offer groups of similar products and services and is managed separately based on the Bank’s management and internal reporting structure. For each of the reportable segments the Board of Directors reviews internal management reports on a monthly basis. z Residential Mortgages z SME Commercial Mortgages z Asset Finance z Invoice Finance z Central Functions Central Functions include the Bank’s Treasury and Savings functions which are responsible for raising finance on behalf of the lending divisions. The costs of raising finance are all recharged by Central Functions to operating divisions on the basis of lending assets, apart from those costs relating to the subordinated notes. Information regarding the results of each reportable segment and their reconciliation to the total results of the Bank are included below. Performance is measured based on the segmental result as included in the internal management reports. s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 4 6 3 Segmental information (continued) 2013 Net interest income Net fees and commissions receivable and other operating income Total operating income Attributable administrative expenses Provision for bad and doubtful debts Provisions for liabilities Segmental profit/(loss) Common costs Profit on ordinary activities before taxation Residential Mortgages £’000 SME Commercial Mortgages £’000 28,584 23,421 5,243 33,827 (6,946) (596) – 2,084 25,505 (4,791) (1,314) – 26,285 19,400 – – Asset Finance £’000 27,994 (3,470) 24,524 (9,049) (2,276) (450) 12,749 – Invoice Finance £’000 5,030 18,267 23,297 (13,993) (5,591) – 3,713 – Central Functions £’000 (4,943) 1,610 (3,333) – – (1,661) (4,994) (34,735) (39,729) Total for reportable segments £’000 80,086 23,734 103,820 (34,779) (9,777) (2,111) 57,153 (34,735) 22,418 Assets Liabilities Net assets 1,683,567 764,956 710,247 212,028 823,540 4,194,338 – – – – (3,936,939) (3,936,939) 1,683,567 764,956 710,247 212,028 (3,113,399) 257,399 N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 6 5 Notes to the financial statements 3 Segmental information (continued) 2012 (Restated) Net interest income Net fees and commissions receivable and other operating income Total operating income Attributable administrative expenses Provision for bad and doubtful debts Provisions for liabilities Segmental profit Common costs Profit on ordinary activities before taxation Residential Mortgages £’000 SME Commercial Mortgages £’000 8,128 11,344 2,869 10,997 (4,688) (387) – 5,922 – 1,175 12,519 (3,863) (743) – 7,913 – Asset Finance £’000 14,041 (1,715) 12,326 (5,092) (1,032) – Invoice Finance £’000 3,342 18,761 22,103 (13,114) (2,482) – 6,202 6,507 – – Central Functions £’000 (2,333) 3,172 839 – – (483) 356 (25,434) (25,078) Total for reportable segments £’000 34,522 24,262 58,784 (26,757) (4,644) (483) 26,900 (25,434) 1,466 Assets Liabilities Net assets 957,267 548,220 375,376 178,740 459,985 2,519,588 – – – – (2,347,289) (2,347,289) 957,267 548,220 375,376 178,740 (1,887,304) 172,299 In 2013, the presentation of segmental performance has been amended to show each lending division as a reportable segment, and to disclose segmental profit before the deduction of common costs. The 2012 segmental performance has been restated so that it is consistent with the basis on which the Bank’s operating results are reviewed by the Board of Directors. s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 6 6 4 Interest receivable On loans and advances to residential mortgages customers On loans and advances to SME commercial mortgages customers On loans and advances to asset finance customers On loans and advances to invoice finance customers On debt securities Amortisation of discounts and premiums on acquired portfolios Bank deposits and treasury bills On derivative financial instruments 2013 Restated 2012 £’000 61,516 36,130 42,254 9,348 9,528 3,942 1,206 (7,971) 155,953 £’000 32,864 23,797 24,061 8,301 11,251 2,099 631 (5,155) 97,849 Net interest payable on derivatives hedging interest receivable is included within interest receivable. In the previous year, the total net interest payable on derivatives was included within interest payable. The 2012 comparative figures have been re-stated. The impact is to decrease interest receivable for 2012 by £5,155,000. 5 Interest payable On customer accounts Due to banks On subordinated notes Other On derivative financial instruments 2013 Restated 2012 £’000 70,479 1,822 6,121 1,123 (3,678) 75,867 £’000 62,010 296 3,875 39 (2,893) 63,327 Net interest receivable on derivatives hedging interest payable is included within interest payable. In the previous year, the total net interest payable on derivatives was included within interest payable. The 2012 comparative figures have been re-stated. The impact is to decrease Interest payable for 2012 by £5,155,000. N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 6 7 Notes to the financial statements 6 Fees and commissions receivable Invoice finance fees Mortgage arrangement fees Asset finance fees Insurance commissions receivable Other 7 Fees and commissions payable Introducer commissions Legal and valuation fees Company searches and other fees Credit protection and insurance charges Insurance commissions payable 8 Other operating income Disbursements, collect out and other invoice finance income Other s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 8 6 2013 £’000 14,949 12,670 1,883 1,221 426 31,149 2013 £’000 10,401 1,941 2,296 762 821 16,221 2013 £’000 6,750 187 6,937 2012 £’000 14,533 7,993 692 767 182 24,167 2012 £’000 6,158 1,671 1,598 469 342 10,238 2012 £’000 7,078 24 7,102 9 Staff costs Wages and salaries Social security costs Other pension costs 2013 £’000 33,684 3,905 835 38,424 The average number of persons employed by the Bank during the year, including non-executive directors, was 621 (2012: 492). 10 Remuneration of directors Directors’ emoluments Compensation for loss of office Bank contributions to money purchase scheme 2013 £’000 2,747 195 60 3,002 2012 £’000 25,985 3,071 705 29,761 2012 £’000 2,072 348 61 2,481 Compensation for loss of office in 2013 of £195,000 (2012: £348,000) relates to two directors (2012: one director) and includes £nil (2012: £75,000) pension plan contribution. In addition, the Bank’s controlling party repurchased those directors’ shares in the Bank’s ultimate parent undertaking for an amount which was £94,000 (2012: £34,000) in excess of the initial purchase price. The Bank made payments of £25,000 to two directors’ individual personal pension plans during the year (2012: £22,000, two directors). During 2013 one director was 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. 303,347 discounted B ordinary shares were purchased (2012: five directors, 1,104,568). The shares issued in the year give rise to a benefit of £61,000 (2012: £174,000). A charge of £164,000 has been recognised in the year in relation to the total share based payments amount. N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 6 9 Notes to the financial statements 10 Remuneration of directors (continued) Highest paid director The above amounts include the following in respect of the highest paid director: Emoluments Bank contributions to money purchase scheme Share based payments 2013 £’000 653 10 61 724 2012 £’000 418 13 128 559 11 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 £810,000 (2012: £683,000) were charged to the profit and loss account during the year in respect of these schemes. The Bank made payments amounting to £25,000 (2012: £22,000) to certain employees’ individual personal pension plans during the period. There were outstanding contributions of £128,000 at the year end (2012: £114,000). 12 Administrative expenses Staff costs (see note 9) Legal and professional and other services Information Technology Office costs Other 2013 £’000 38,424 12,085 4,683 3,191 6,859 65,242 2012 £’000 29,761 8,952 3,283 2,956 4,472 49,424 s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 0 7 13 Depreciation and amortisation Depreciation (see note 21) Amortisation of intangible assets (see note 20) 14 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 loss/(gain) The remuneration of the Bank’s external auditors, KPMG Audit Plc and their associates is as follows (excluding VAT): Fees payable to the Bank’s auditor for the audit of the annual accounts Fees payable to the Bank’s auditor and its associates for other services Audit related assurance services Tax compliance services Other tax advisory services Other assurance services All other services 2013 £’000 3,822 450 4,272 2013 £’000 1,174 436 33 245 43 29 94 94 58 563 2012 £’000 2,319 448 2,767 2012 £’000 1,248 451 (3) 185 – 22 4 52 39 302 N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 7 1 Notes to the financial statements 15 Taxation (i) Analysis of tax credit on ordinary activities: Current tax charge on profits for the year Deferred tax credit Taxation credit for the period (ii) Factors affecting tax charge for the current year: 2013 £’000 2,492 (3,452) (960) 2012 £’000 – – – The tax assessed for the year is different to that resulting from applying the standard rate of corporation tax in the UK of 23.25% (2012: 24.5%). The differences are explained below: Profit before tax Tax at 23.25% (2012: 24.5%) thereon Effects of: Expenses not deductible for tax purposes Depreciation in excess of capital allowances on fixed assets and assets leased to customers Losses utilised in the period Other short term timing differences Current tax charge for the period 2013 £’000 22,418 5,212 76 761 (3,557) – 2,492 Restated 2012 £’000 1,466 359 152 568 (989) (90) – A corresponding liability of £2,492,000 has been recognised in the accounts in respect of the current period current tax charge. s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 2 7 15 Taxation (continued) (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. In 2012, no deferred tax asset was recognised as there was insufficient certainty over the ability to use the amounts in the future. Reductions in the UK corporation tax rate from 26% to 24% (effective from 1 April 2012) and to 23% (effective 1 April 2013) were substantively enacted on 26 March 2012 and 3 July 2012 respectively. Further reductions to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July 2013. This will reduce the Bank’s future current tax charge accordingly. The deferred tax asset at 31 December 2013 has been calculated based on the rate of 20% substantively enacted at the balance sheet date. Analysis of recognised deferred tax balance: 2013 Capital allowances in excess of depreciation Other temporary differences Analysis of unrecognised deferred tax balance: Capital allowances less than depreciation Other timing differences Losses carried forward Closing balance not recognised Balance at 1 January Recognised in profit or loss Used to reduce current tax Balance at 31 December £’000 – – – £’000 3,392 60 3,452 £’000 – – – 2013 £’000 – – – – £’000 3,392 60 3,452 2012 £’000 1,147 61 5,646 6,854 N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 7 3 Notes to the financial statements 16 Loans and advances to banks Repayable on demand There were no general or specific doubtful debt provisions against loans and advances to banks. 17 Loans and advances to customers Repayable in not more than three months Repayable in more than three months but not more than one year Repayable in more than one year but not more than five years Repayable in more than five years Specific and general bad and doubtful debt provisions Amounts include: Repayable on demand or at short notice 2013 £’000 223,864 223,864 2012 £’000 83,086 83,086 2013 £’000 293,182 200,095 607,288 2,289,577 (19,344) 3,370,798 2012 £’000 238,529 115,156 316,161 1,401,257 (11,500) 2,059,603 247,714 202,694 s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 4 7 17 Loans and advances to customers (continued) Analysis of loans and advances by lending type Finance lease receivables Less unearned finance charges Asset finance loans Residential mortgage loans SME Commercial mortgage loans Invoice financing 2013 £’000 801,099 (90,852) 710,247 1,683,567 764,956 212,028 3,370,798 2012 £’000 424,950 (49,574) 375,376 957,267 548,220 178,740 2,059,603 Loans include residential mortgages acquired at a discount during 2013 with a gross loan amount of £125.3 million. The discount to gross loan amount is being amortised on a level yield basis over the expected lives of the underlying loans. At 31 December 2013 loans and advances to customers of £822.9 million (2012: £647.6 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, of which £485.0 million had been drawn as at the reporting date (2012: £205.0 million). Non-performing loans and advances to customers Loans and advances before provisions Loans and advances after provisions 2013 £’000 52,561 37,371 2012 £’000 28,246 18,805 Non-performing loans are defined as a default position equivalent to three or more missed monthly repayments, loans where litigation proceedings have commenced and loans which are the subject of an insolvency event or fraud. N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 7 5 Notes to the financial statements 17 Loans and advances to customers (continued) Specific and general bad and doubtful debt provisions 2013 1 January Write off in year net of recoveries Charge to profit and loss account 31 December 2012 1 January Purchases as part of acquisition Write off in year net of recoveries Charge to profit and loss account 31 December Specific General £’000 9,441 (1,933) 7,682 15,190 £’000 2,059 – 2,095 4,154 Specific General £’000 9,849 150 (4,517) 3,959 9,441 £’000 1,374 – – 685 2,059 Total £’000 11,500 (1,933) 9,777 19,344 Total £’000 11,223 150 (4,517) 4,644 11,500 s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 6 7 18 Debt securities Cost 1 January Additions Capital repayments Disposals 31 December Discount/(premium) on purchase 1 January Additions Amortisation of (discount)/premium Disposals 31 December Book value 31 December Asset backed securities Other debt securities Total 2013 £’000 70,306 58,835 (14,893) (36,466) 77,782 5,311 (73) (1,827) (2,143) 1,268 2012 £’000 70,408 54,920 (20,707) (34,315) 70,306 9,314 4,645 (3,036) (5,612) 5,311 2013 £’000 2012 £’000 2013 £’000 2012 £’000 246,990 29,581 (9,000) (5,000) 167,375 95,115 (15,500) – 317,296 88,416 (23,893) (41,466) 262,571 246,990 340,353 (171) (397) 220 (12) (360) 511 (821) 139 – (171) 5,140 (470) (1,607) (2,155) 908 237,783 150,035 (36,207) (34,315) 317,296 9,825 3,824 (2,897) (5,612) 5,140 76,514 64,995 262,931 247,161 339,445 312,156 During the year the Bank disposed of asset backed securities with a book value of £34,323,000, resulting in a gain of £1,866,000 (2012: £3,231,000). In addition, the Bank disposed of other debt securities with a book value of £4,988,000, resulting in a gain of £3,000 (2012: £nil). N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 7 7 Notes to the financial statements 19 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 subsidiary undertakings are as follows: Aldermore Invoice Finance (Holdings) Limited Base Commercial Mortgages Holdings Limited Aldermore Bank Nominees Limited 20 Intangible assets Cost: At 31 December 2012 and 31 December 2013 Amortisation: At 1 January 2013 Amortisation for the year At 31 December 2013 Net book value at 31 December 2013 Net book value at 31 December 2012 Principal Activity Country of Incorporation Shares held Percentage % Dormant Dormant Dormant England England England Ordinary Ordinary Ordinary 100 100 100 Goodwill 2013 £’000 8,962 1,495 450 1,945 7,017 7,467 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. The directors do not consider the carrying value of the unamortised goodwill to be impaired. s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 8 7 21 Tangible fixed assets 1 January 2013 Additions 31 December 2013 Depreciation 1 January 2013 Charge for the period 31 December 2013 Net book value 31 December 2013 31 December 2012 22 Other assets Cash collateral on derivatives Other Fixtures, fittings and equipment Computer systems £’000 1,888 773 2,661 1,041 317 1,358 1,303 847 £’000 14,809 4,526 19,335 4,270 3,505 7,775 11,560 10,539 2013 £’000 11,350 197 11,547 Total £’000 16,697 5,299 21,996 5,311 3,822 9,133 12,863 11,386 2012 £’000 21,830 565 22,395 N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 7 9 Notes to the financial statements 23 Prepayments and accrued income Prepaid broker fees Accrued income Other prepayments 24 Due to banks Due to banks – repurchase agreements Due to banks – deposits 2013 £’000 19,754 8,899 3,855 32,508 2013 £’000 383,071 1,205 384,276 2012 £’000 10,619 9,214 2,008 21,841 2012 £’000 114,579 500 115,079 Collateral given under repurchase agreements The face values of securities sold under agreements to repurchase at 31 December 2013 was £385.0 million (2012: £115.0 million) of which securities with a face value of £385.0 million (2012: £115.0 million) were drawn down from the Bank of England under the terms of the Funding for Lending Scheme. The carrying value of these repurchase transactions at 31 December 2013 was £383.1 million (2012: £114.6 million). The Bank conducts these transactions under the terms of applicable General Master Repurchase Agreement (GMRA) guidelines. s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 0 8 25 Customers’ 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 26 Other liabilities Other taxation and social security costs Amounts payable on credit balances to Invoice Finance customers Cash collateral on derivatives Unallocated cash Trade creditors Other payables 2013 £’000 949,569 650,311 1,108,858 735,654 3,444,392 2013 £’000 3,967 3,738 1,675 2,098 848 2,381 14,707 2012 £’000 449,713 379,110 1,037,395 274,980 2,141,198 2012 £’000 4,508 3,210 – 1,919 211 569 10,417 Unallocated cash primarily relates to a liability for unclaimed cash receipts, which are held on the Bank’s balance sheet until the expiry of a six-year period. During this period, the Bank makes efforts to try to allocate or to return overpayments to customers. Any unclaimed receipts subsequent to the expiry date are recognised as income. N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 8 1 Notes to the financial statements 27 Accruals and deferred income Accrued interest payable to customers Prepaid arrangement fees Accruals Deferred income Fee creditors 28 Provisions 1 January as previously stated Prior year adjustment 1 January as restated Provided during the year as previously stated Prior year adjustment Provided during the year as restated Utilised during the year 31 December 2013 £’000 19,681 18,250 15,098 1,123 644 54,796 2012 £’000 20,536 13,640 10,197 976 523 45,872 FSCS levies Customer redress Total 2013 £’000 575 – 575 1,661 – 1,661 (1,529) 707 Restated 2012 £’000 1,012 (662) 350 1,190 (707) 483 (258) 575 2013 £’000 – – – 450 – 450 – 450 2012 £’000 – – – – – – – – 2013 £’000 575 – 575 2,111 – 2,111 (1,529) 1,157 Restated 2012 £’000 1,012 (662) 350 1,190 (707) 483 (258) 575 s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 2 8 28 Provisions (continued) Financial Services Compensation Scheme 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 2013 of £707,000 represents management expense levies for the scheme triggered but not yet invoiced, and includes an estimate of the levy for the scheme year 2013/2014. The management expenses levy has been calculated using the agreed funding rate of 12 months LIBOR + 100bps. As a consequence of the Bank’s change in accounting policy for IFRIC 21 Levies, the trigger date for each year’s FSCS levies is now 1 April, previously assumed to be 31 December. Accordingly the liability for the 2014/2015 scheme levies will not be recognised until April 2014. This change in accounting policy has resulted in a decrease of £662,000 in the opening provision balance as at 1 January 2012, and a reduction of £707,000 in the FSCS levy recognised as an expense for the year ended 31 December 2012. The comparatives have been restated accordingly. 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 £961 million and this is being recovered in three approximately equal instalments that began in scheme year 2013/2014. Customer redress A provision was recognised in 2013 in relation to Consumer Credit Act (CCA) non-compliance. The Bank has a small number of loans which are regulated under the CCA and has identified that, following changes to the CCA in 2008, certain letters and statements have been sent to customers that do not fully comply with the requirements prescribed by the CCA. Accordingly, these customers are entitled to redress for interest and fees charged on the relevant loans as a result of this technical non-compliance, notwithstanding there is unlikely to have been any customer detriment. The total cost of remediating the interest and fees charged to the affected customers is estimated at £450,000, and is reflected in these financial statements. The relevant customers do not need to take any action and will be contacted in due course by the Bank. The Bank is taking steps to ensure that all relevant customer documentation will in future contain the correct wording required by the CCA. N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 8 3 Notes to the financial statements 29 Subordinated notes Subordinated notes 2013 £’000 35,119 2012 £’000 34,148 During 2012 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. 30 Share capital Allotted, called up and fully paid ordinary shares of £1 each At 1 January Issued during the year 2013 £’000 3,300 – 3,300 2012 £’000 3,300 – 3,300 During the year five ordinary shares of £1 each were issued for a total of £61,557,543 creating £61,557,538 share premium. At 31 December 2013 allotted, called up and fully paid shares totalled 3,300,015 (2012: 3,300,010). s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 4 8 31 Reconciliation of movements in shareholders’ funds 2013 1 January as previously stated Prior year adjustment Profit for the year Premium on shares issued during the year Capital raising costs Capital contribution 31 December 2012 1 January as previously stated Prior year adjustment Profit for the year Premium on shares issued during the year Capital raising costs Capital contribution 31 December Share Capital £’000 3,300 – 3,300 – – – – 3,300 Share Capital £’000 3,300 – 3,300 – – – – 3,300 – – – 164 2,503 Capital Contribution Reserve £’000 – – – – – – 2,339 2,339 Capital Contribution Reserve £’000 2,339 – Share Premium Account £’000 171,822 – 2,339 171,822 Profit and Loss Account £’000 (6,531) 1,369 (5,162) – 23,378 61,558 – – – – – Total £’000 170,930 1,369 172,299 23,378 61,558 – 164 233,380 18,216 257,399 Share Premium Account £’000 170,133 – 170,133 – 1,700 (11) – Restated Profit and Loss Account £’000 (7,290) 662 (6,628) 1,466 – – – Restated Total £’000 166,143 662 166,805 1,466 1,700 (11) 2,339 171,822 (5,162) 172,299 N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 8 5 Notes to the financial statements 31 Reconciliation of movements in shareholders’ funds (continued) During 2012 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 2013, one director (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. This gives rise to a capital contribution reserve in the Bank of £164,000 (2012: £139,000) which is distributable. 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 £164,000 (2012: £139,000). As a consequence of the Bank’s change in accounting policy for IFRIC 21 Levies, opening reserves at 1 January 2012 have increased by £662,000, and retained profit for 2012 increased by £707,000. 32 Reconciliation of movements in shareholders’ funds Profit 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 At 1 January At 31 December s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 6 8 2013 £’000 23,378 – 61,558 – 164 85,100 172,299 257,399 Restated 2012 £’000 1,466 – 1,700 (11) 2,339 5,494 166,805 172,299 33 Financial commitments Annual commitments under non-cancellable operating leases are as follows: Land and buildings Operating leases which expire: In less than one year Between two and five years In over five years Plant and equipment Operating leases which expire: In less than one year Between two and five years In over five years 2013 £’000 165 671 524 1,360 2013 £’000 290 109 – 399 2012 £’000 357 913 – 1,270 2012 £’000 – 435 – 435 At 31 December 2013 the majority of plant and equipment related to 64 cars that the Bank held under lease (2012: 74). The majority of these leases are due to expire in 2014. 34 Memorandum items At 31 December 2013 the Bank had contingent liabilities of £nil (2012: £nil). At 31 December 2013 the Bank had undrawn commitments of £343.7 million (2012: £213.6 million). These relate mostly to lines of credit granted to customers. N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 8 7 Notes to the financial statements 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, Syscap Limited. 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 £27.7 million (2012: £32.3 million) and received commission of £0.3 million (2012: £0.4 million) of which £nil is outstanding at year end (2012: £nil). In addition the Bank has been charged investment monitoring fees by Anacap Derby Co-Investment GP Limited, AnaCap FP GP II Limited and AnaCap Financial Partners GP Limited totalling £150,000 for the year (2012: £75,000). The balance outstanding at the year-end is £195,150 (2012: £120,150). 35 Assets and liabilities denominated in foreign currency As at 31 December 2013, there were customer loans of £3,641,000 (2012: £2,047,000) and liabilities of £nil (2012: £nil) denominated in Euros. There were customer loans of £2,907,000 (2012: £2,331,000) and bank borrowings of £nil (2012: £229,000) denominated in US Dollars. There were customer loans of £132,000 (2012: £nil) and liabilities of £nil (2012: £nil) denominated in Canadian Dollars. There were no other foreign currency assets or liabilities at the balance sheet date. 36 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 2013 were £nil (2012: £113,000). Directors’ loans with outstanding amounts totalling £115,000 were assigned in July 2013 to the ultimate parent company AC Acquisitions Limited. Interest was charged from 1 January to 29 July at a rate of 1.75% p.a. No repayments were made during the year. s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 8 8 37 Financial instruments Liquidity risk The following tables summarise the classification of carrying amounts of the Bank’s financial assets and liabilities. 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. 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 PRA 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. Credit risk Market risk Credit risk is the risk that a borrower or counterparty fails to pay the interest or the capital on a loan or other financial instrument. 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 when loans are advanced 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 required then a provision will be made. The Bank has no direct exposure to any distressed Eurozone countries. Market risk is the risk that the value of, or net income arising from the Bank’s assets and liabilities changes as a result of movements in interest or exchange rates. Market risk arises only as a natural consequence of carrying out and supporting core business activities. Aldermore does not trade or make markets. Interest rate risk is the only material market risk for the Bank. N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 8 9 Notes to the financial statements The Bank also enters into basis interest rate swap contracts which involve the exchange of two floating rate instruments which reference to difference bases. The basis swap functions as a floating-floating interest rate swap under which the two difference bases instruments are transformed to a common base. 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 2013, there were 117 swaps outstanding (2012: 96). There were net unrealised mark to market losses outstanding at the year-end of £8.7 million (2012: £21.1 million), of which gains of £1.5 million (2012: £3.5 million) are expected to be realised in the year ending 31 December 2014. 37 Financial instruments (continued) Funding risk There is a requirement to keep a balance between the maturity profile of the Bank’s funding and the funding requirements for loans. The Bank raises retail and SME deposits to meet increased lending requirements as well as the replacement of maturing deposits. The Bank closely monitors the profile of deposits and has the flexibility to amend the products offered and deposit rates to rebalance the profile of deposits taking into account the prevailing market conditions as required. The Bank also participates 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 at the Bank of England 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 24. Interest rate risk Interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. 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. s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 0 9 37 Financial instruments (continued) Interest rate risk (continued) 2013 Maturity 1 year or less 5 years or less but over 1 year More than 5 years 2012 Maturity 1 year or less 5 years or less but over 1 year More than 5 years Interest Rate Swaps Others Notional Values £’million 899 1,268 87 2,254 Fair Values £’000 1,510 570 (10,754) (8,674) Notional Values £’million 14 – – 14 Interest Rate Swaps Others Notional Values £’million 962 809 87 1,858 Fair Values £’000 3,533 (4,972) (19,670) (21,109) Notional Values £’million 10 – – 10 Fair Values £’000 31 – – 31 Fair Values £’000 (6) – – (6) The Bank finances its loan book from its capital base, customer deposits and the FLS. 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 2013. 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. N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 9 1 Notes to the financial statements 37 Financial instruments (continued) Interest rate risk (continued) 31 December 2013 Cash and balances at central banks Loans and advances to banks Debt securities Less than 3 months £’000 189,015 223,864 137,782 3 to 6 months £’000 6 months to 1 year £’000 1 to 5 years £’000 More than 5 years £’000 – – – – – – – – – Non- interest bearing £’000 3,829 Total £’000 192,844 – 223,864 5,115 110,581 86,875 (908) 339,445 Loans and advances to customers 1,961,178 149,269 250,181 1,035,634 12,660 (38,124) 3,370,798 Other assets Total assets Due to banks Customer accounts Other liabilities Subordinated notes Shareholders’ funds Total liabilities Off balance sheet items Interest rate sensitivity gap Cumulative gap 11,349 – – – – 56,038 67,387 2,523,188 149,269 255,296 1,146,215 99,535 20,835 4,194,338 294,471 89,805 – – 1,594,874 521,806 587,051 735,653 1,675 – – – – – – – – – 35,119 – 1,891,020 611,611 587,051 770,772 – – – – – – – 384,276 5,008 3,444,392 71,477 – 73,152 35,119 257,399 257,399 333,884 4,194,338 (157,208) 309,443 278,387 (343,747) (86,875) – 474,960 (152,899) (53,368) 31,696 12,660 (313,049) 474,960 322,061 268,693 300,389 313,049 – – – – s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 2 9 37 Financial instruments (continued) Interest rate risk (continued) 31 December 2012 Cash and balances at central banks Loans and advances to banks Debt securities Less than 3 months £’000 500 83,086 139,306 Loans and advances to customers 1,117,303 52,316 161,776 735,793 3 to 6 months £’000 6 months to 1 year £’000 1 to 5 years £’000 More than 5 years £’000 – – – – – – – – 91,115 Non- interest bearing £’000 1,154 Restated Total £’000 1,654 – 83,086 – – 86,875 8,561 (5,140) 312,156 (16,146) 2,059,603 – – – 41,259 63,089 161,776 826,908 95,436 21,127 2,519,588 21,830 1,362,025 44,898 – 52,316 70,181 – – 828,710 409,439 627,956 274,943 – – – – – – – – – – 34,148 – 873,608 479,620 627,956 309,091 – – – – – – – 115,079 150 2,141,198 56,864 – 56,864 34,148 172,299 172,299 229,313 2,519,588 (135,982) 254,944 406,886 (438,973) (86,875) – 352,435 (172,360) (59,294) 78,844 8,561 (208,186) 352,435 180,075 120,781 199,625 208,186 – – – – Other assets Total assets Due to banks Customer accounts Other liabilities Subordinated notes Shareholders’ funds Total liabilities Off balance sheet items Interest rate sensitivity gap Cumulative gap N o t e s t o t h e fi n a n c a i l s t a t e m e n t s | A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 | 9 3 Notes to the financial statements 37 Financial instruments (continued) 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 38 Ultimate parent company 2013 2012 Book Value Fair Value Book Value Fair Value £’000 £’000 £’000 £’000 76,515 – 126,110 136,820 (35,119) 876 – 305,202 77,685 – 132,130 143,687 (35,119) (8,673) 31 309,741 64,995 – 131,176 115,985 (34,148) 2,418 – 280,426 68,655 – 144,699 126,931 (34,148) (21,109) (6) 285,022 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%). 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. 39 Post balance sheet events There have been no material post balance sheet events. s t n e m e t a t s l i a c n a n fi e h t o t s e t o N | 3 1 0 2 s t n u o c c A & t r o p e R l a u n n A | 4 9 #peoplewhomade2013 aldermore.co.uk Aldermore Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: 1st Floor, Block B, Western House, Lynch Wood, Peterborough PE2 6FZ. Registered in England no. 947662.