Arbuthnot Banking Group PLC Annual Report 2013

Plain-text annual report

ARBUTHNOT BANKING GROUP PLC Annual Report & Accounts 2013 A R B U T H N O T B A N K I N G G R O U P P L C A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 “ He whose ranks are united in purpose will be victorious” “ Sun Tzu The Art of War circa 500 BC 1 Corporate Philosophy 2 Group Highlights 4 Chairman’s Statement 8 Strategic Report - Business Review 12 Strategic Report - Financial Review 18 Board of Directors 20 Group Directors’ Report 22 Corporate Governance 24 Remuneration Report 26 Independent Auditor’s Report 28 Consolidated Statement of Comprehensive Income 29 Consolidated Statement of Financial Position 30 Company Statement of Financial Position 31 Consolidated Statement of Changes in Equity 33 Company Statement of Changes in Equity 34 Consolidated Statement of Cash Flows 35 Company Statement of Cash Flows 36 Notes to the Consolidated Financial Statements 84 Five Year Summary 86 Notice of Meeting 88 Corporate Contacts & Advisers ARBUTHNOT BANKING GROUP PLC … of serving its customers, as well as a long track record of progress against the background of a continually changing environment. The ability of Arbuthnot to adapt and grow has come from managing the business through seven key principles developed over time. These principles, always applied with pragmatism and common sense, govern the activities of the Group, ranging from major strategic issues to smaller day-to-day operational matters. The continued application of these principles will allow the business to pursue growth in a controlled manner, providing a high quality service to its customers whilst delivering good returns to shareholders and securing the well-being of its employees. Henry Angest Chairman & CEO 19 March 2014 corporate philosophy 1. Arbuthnot serves its shareholders, 3. Arbuthnot is independent, and its customers and its employees with integrity and high ethical standards. This is expressed in a progressive dividend policy, in fair pricing and pay for performance. 2. Arbuthnot attaches great importance to good relations with customers and business partners, and treating them fairly and promptly. Arbuthnot believes in reciprocity. profit and growth oriented while maintaining a controlled risk profile. 4. Arbuthnot’s approach is based on diversification, a long-term view, empowerment of management and a culture of rewards for achievements. 5. Arbuthnot’s business is conducted in an innovative, flexible and entrepreneurial manner, with an opportunistic and counter-cyclical attitude. 6. Arbuthnot does not sacrifice long term prospects for short term gains – nor sacrifice stability for quick profits. 7. Ultimately, the success of Arbuthnot depends on the teamwork, commitment, and performance of its employees, combined with the determination to win. 1 REPORT & ACCOUNTS 2013THe GROUP Private Banking – Arbuthnot Latham Arbuthnot Latham provides a high quality private banking and wealth management service, consisting of four core elements: Private Banking comprises current accounts, deposit accounts, loans, overdrafts and foreign exchange. Each client deals with a dedicated Private Banker who is key to providing an individual service. The wealth planning service is built on long-term relationships and bespoke financial strategies. The service is independent and fee, not commission based, with clients receiving a service covering estate and tax planning, pensions and wealth preservation and generation. Our discretionary investment management service comprises asset management, developing tailored investment strategies to ensure that each client’s specific investment objectives are met. Gilliat Financial Solutions designs, packages and distributes structured products to financial intermediaries. Retail Banking – Secure Trust Bank Secure Trust Bank is an established UK retail bank. Its core business is to provide banking services including a range of lending solutions and deposits. It also provides fee-based current accounts to UK customers who may not be adequately served by other banks. Motor Finance A multi-channel offering through motor dealers and brokers. The hire purchase agreements are fixed rate, fixed term and secured mainly against used cars with finance term periods varying from 24 to 60 months with a maximum loan size of £15,000. Retail Point of Sale Finance Lending solutions for store and online retailers and an “e”-tailer proposition. Unsecured, fixed rate and fixed term loans with payments received monthly. Loans vary in term from six months to 48 months and range from £250 to £12,000. Personal Unsecured Lending Fixed rate, fixed term products with payments received monthly. Loan terms are between 12 months and 60 months with advances varying from £500 to £15,000. Current Account A current account with a prepaid card. The account charges a monthly fee of £12.50 but customers have the ability to earn rewards at participating retailers. Savings A combination of instant access accounts, notice deposits and deposit bonds with competitive interest rates. 2012 £65.6m 2013 £100.0m 2012 £12.6m 2013 £15.7m 2012 £8.0m 2013 £7.9m Operating income Profit before tax Profit attributable to Equity holders of the Company 2012 25.0p 2013 44.0p 2012 £1.0bn 2013 £1.1bn 2012 £73.3m 2013 £89.7m Total dividend per share Total assets Regulatory capital 2 ARBUTHNOT BANKING GROUP PLC For over 180 years we have, through determined teamwork, nurtured the long-term view to growth and prosperity. 3 REPORT & ACCOUNTS 2013CHAIRMAN’S STATeMeNT This has been another significant year. Both banks have made good progress. We have substantially increased the net assets of the Group and at the same time been able to pay shareholders a special dividend. Henry Angest Chairman & CEO 19 March 2014 4 ARBUTHNOT BANKING GROUP PLCProfit before tax increased by 25% and both banks have been realising their ambitions for growth. I am pleased to report that Arbuthnot Banking Group (“ABG” or “the Group”) has delivered a profit before tax of £15.7m (2012: £12.6m) which represents a 25% increase on 2012. But more importantly, I note that both banks have been realising their ambitions for growth. It has always been a philosophy of the Group to build a varied source of income streams and to spread its risks, rather than become overly reliant or concentrated on a small number of business lines. Notably, Secure Trust Bank (“STB”) continued its diversification, as it completed the acquisitions of V12 Finance Group and Debt Managers Ltd early in 2013. These were complementary to the purchase of Everyday Loans made in 2012. All of these businesses have been successfully integrated into the Group. At the same time Arbuthnot Latham (“AL”) opened for business in Dubai, agreed a client custody arrangement with Pictet, one of the largest Private Banks in Geneva, that allows Arbuthnot Latham’s clients to use their services in Switzerland, Singapore and Hong Kong, installed a new operating platform for its investment management business and grew its total customer account balances to £1.05bn (2012: £872.3m). During the year the Group took further steps to underpin the long term growth potential of both businesses by completing two significant transactions. First, we entered into a sale and lease back agreement on the Group’s new headquarters at 7-21 Wilson Street. Having purchased the freehold in August 2012 for £15.7m, we could not refuse an offer that produced a net profit of £6.5m only a year later. Secondly, the Group continued to provide more liquidity to the market, by selling 580,000 shares in STB on 13 December 2013. Although we are prevented from showing the transaction as a profit by those curious accounting rules, the gain on sale of £14.4m has further increased the financial strength of the Group. Such is this strength and confidence for the future, the Directors were able to declare a special dividend of 18p to mark the 180 year anniversary of Arbuthnot Latham. In last year’s Chairman’s Statement, I made reference to the regulatory environment in which both our banks operate and how the rules create a “glass ceiling” which prevents small banks becoming true challengers. During this year I have been pleased to detect a change in sentiment. In October the Governor of the Bank of England announced that it was open for business and would play its part in helping the banking industry with the introduction of new liquidity support mechanisms. These would be made available to all banks and not just the large lenders, who were usually the only ones able to offer mainstream forms of collateral, that were previously required to participate. The Bank’s view is now that as long as the Bank could assess the credit risk of assets, they would be welcome as collateral. This may seem like a small step forward, but to a well-managed banking Group such as ours, that has for years been excluded from such schemes, the news was welcome. We trust that the Bank of England truly understands the important role that the small banks can play in delivering an excellent service to its customers and also in helping to sustain the economic recovery. During the year, Arbuthnot Latham celebrated its 180 year anniversary. I am proud of the history of our Private Bank, having been involved in shaping the City of London into one of the pre-eminent financial centres of the world. As part of the celebrations we published a book that recorded this history and I was particularly delighted that the Mayor of London, Boris Johnson, accepted our invitation to write the foreword to the book. He observed that despite its lack of natural resources, the City has built its success based on entrepreneurial spirit and free market forces. I am, however, alarmed at the recent developments and rhetoric that have been aimed at restricting the free market. These have included wage control, caps on interest rates charged, limits on market share, regulating profitability, breaking up bank branch networks and raising the tax burden levied on the entrepreneurial classes and finally the threat of a financial transaction tax, all of which creates uncertainty for investors. This can only be unhelpful in maintaining the economic recovery, which is clearly underway. 5 REPORT & ACCOUNTS 2013CHAIRMAN’S STATeMeNT Continued With the economic recovery underway, both banks have worked hard to be in a position to prosper as the economy grows. Private Banking – Arbuthnot Latham & Co., Ltd The Private Banking business has reported a pre-tax profit of £7.7m (2012: £2.1m). This result was clearly flattered by the gain of £6.5m that was generated from the sale and lease back transaction on the Wilson Street property. However, this should not overshadow the real progress that was made by Arbuthnot Latham during the year. As mentioned previously, we took the conscious decision to invest for the long term future. These investments are clearly coming to fruition when I reflect on the momentum that is being generated. We have always held a long term ambition to develop our distribution capabilities to cover overseas markets. I feel we reached a major milestone this year, when we opened for business in Dubai. The predominately wealth management service appears to have been well received by the market in Dubai. The generation of new business there has exceeded our initial expectations. We have also added further options for our customers who wish to gain exposure to other overseas markets, via our custody arrangements with Pictet, which were initiated during the year. In order to keep pace with the growing scale of our Investment Management business, the operating platform was replaced with new technology. This now offers the customers online facilities, which allows them immediately to review their portfolios. Early in 2014 we also launched our new mobile banking application as we continue to respond to the ever increasing needs of our clients. Retail Banking – Secure Trust Bank PLC The reported pre-tax profits of Secure Trust Bank were £17.2m (2012: £17.3m). However, once again the reported numbers do not tell the entire story of the progress being made by our retail bank. The underlying profits for STB were £25.2m, which is a record for the bank. The business has maintained its focus on serving customers well and meeting their needs with simple straight forward banking solutions. This resulted in our customer numbers growing by 51% to close the year at 350,861 (2012: 231,713). STB has continued to diversify its operations by adding to the acquisition of Everyday Loans in 2012 with further purchases this year of V12 Finance Group and Debt Managers Ltd. All these entities have been successfully integrated into the Group and the existing businesses have begun to leverage their expertise. The retail finance offering has been consolidated onto the V12 operating platform. Our personal loan portfolios are being managed as one business, to ensure we have an attractive offering to all our customers regardless of their standing. We have also transferred some of our existing impaired loans to Debt Managers Ltd to improve the financial returns involved in recovering these assets. Board Changes and Personnel The Board has remained unchanged throughout the year. I would like to take this opportunity to express my thanks to my colleagues on the Board for their generous support and the dedication they have given to the Group and me personally. The results of the Group reflect the hard work and commitment of both existing and new members of staff who, with few exceptions, have performed well. On behalf of the Board I extend our thanks to all of them for their contributions in 2013. Dividend The Board is proposing a final dividend of 15p, an increase of 1p on last year, together with the interim dividend of 11p and the special dividend of 18p making a total dividend for the year of 44p (2012: 25p). If approved, the dividend will be paid on 16 May 2014 to shareholders on the register at close of business on 22 April 2014. Outlook With the economic recovery underway, both banks have worked hard to be in a position to prosper as the economy grows. We are therefore optimistic that we can continue to make good steady progress, while remaining focussed on the needs and aspirations of our customers. The outlook is bright, the economy is improving and business is prospering. This will last as long as politics does not interfere with it. 6 ARBUTHNOT BANKING GROUP PLCIn all our dealings with customers and business partners we strive to build constructive, mutually beneficial relationships. 7 REPORT & ACCOUNTS 2013STRATeGIC RePORT – BUSINeSS RevIew Arbuthnot Latham & Co. Arbuthnot Latham celebrated its 180th anniversary in 2013 and during the year made good progress across many areas of business. The core business of private banking and wealth management, grew all key components of its business during the year and finished with a strong underlying momentum. The first international office for Arbuthnot Latham was opened in Dubai and through the establishment of international custody arrangements with Pictet, the Bank is now able to offer its services to wealthy clients from overseas who wish to have a private banking relationship in London. In addition, the sale and leaseback arrangement concluded for our new headquarters building produced a profit of £6.5m. The year-end reported profit for Arbuthnot Latham was £7.7m with the core private banking and wealth management business delivering a profit of £4.9m (2012: £3.5m) before credit provisions. The strategy to grow the private banking and wealth management business through the addition of several experienced bankers and the overall strengthening of the client proposition began to produce positive results during the year. With the recent upheaval across the financial services industry caused by the financial crisis, there is a significant opportunity for a client focused bank such as Arbuthnot Latham to benefit from clients looking to establish a new financial relationship. This growth in new clients was reflected in the financial results. Client deposits ended the year at £521.2m (2012: £495.7m), an increase of 5%. The Bank was also able to draw on the Funding for Lending Scheme and by the year end had drawn £40m under this scheme. The overall cost of deposits fell during the year thereby enhancing the net interest income position of the Bank. The loan book grew in 2013 by 18% to end the year at £341.0m (2012: £289.3m). The Bank continued its focus towards supporting the objectives of the client base with good quality lending transactions. The loan to deposit ratio at the end of the year was 66% (2012: 59%) which continued to reflect our prudent approach to the management of our balance sheet. In the wealth management business, the strengthening of the client proposition and the attraction to clients of the independent approach of the Bank in its investment management services resulted in a 40% increase in assets under management which finished the year at £527.9m (2012: £376.6m). Following the strategic decision to open an office in Dubai, the Bank received its licence to operate in the Dubai International Financial Centre from the Dubai Financial Services Authority in late July 2013. The business in Dubai is focused towards international private banking and wealth management services. Since opening the office, an encouraging and positive foundation has been established with several new accounts opened and the business is proceeding to plan. Dubai is a growing market for international financial services and Arbuthnot Latham is now well placed to share in the growth that this market is expected to experience over the next few years. Our structured product distribution business, Gilliat Financial Solutions, experienced a challenging year with resulting weaker income margins across the business. While the UK distribution base continued to grow and the offshore business established some very positive distribution relationships, the business made a loss for the year of £0.4m (2012: £0.6m profit). The business has undertaken a review of its activities and we are confident that 2014 will see a return to profit. Arbuthnot Latham & Co. 2012 £18.9m 2013 £21.7m 2012 £17.9m 2013 £21.3m 2012 £2.1m 2013 £7.7m 2012 £289.3m 2013 £341.0m Operating income Operating expenses Profit before tax Customer loans 2012 £495.7m 2013 £521.2m 2012 £568.6m 2013 £619.7m 2012 3.3% 2013 4.4% 2012 59% 2013 66% Customer deposits Total assets Customer net margin Loan to deposit ratio 8 ARBUTHNOT BANKING GROUP PLCWe balance an innovative and entrepreneurial approach to growth and development with a vigilant and thorough approach to risk. 9 REPORT & ACCOUNTS 2013STRATeGIC RePORT - BUSINeSS RevIew Continued Secure Trust Bank Secure Trust Bank (“STB”) has reported pre-tax profits of £17.2m (2012: £17.3m). The fact that the reported number is largely unchanged from the previous year does not reflect the true growth in profitability that is being generated by the bank. Shareholders will recall that the 2012 statutory profit included a fair value adjustment arising from the acquisition of Everyday Loans. The underlying profit of STB for 2013 is £25.2m, which represents a 51% increase on the prior year underlying profit of £16.8m. It should also be noted that since the IPO in November 2011, the bank’s underlying profit before tax has increased by 220% from £7.9m. Ultimately the success of the business will depend on the ability of STB to attract and serve its customers. During 2013 its strategy of providing simple and straight forward banking solutions has proved successful, as the number of customers grew by 51% to close the year at 350,861. This figure also represents a 142% increase since the flotation on the AIM market. As the opportunity to provide credit solutions remains attractive, given the reduced level of funding available from the high street banks, the lending operations of the bank have become the engine for growth in recent times. Once again this was the case in 2013. Overall, new business lending volumes grew by 50% to £304.7m (2012: £202.5m). In turn, this resulted in an increase of 31% in total customer loans at £391m (2012: £297.6m). The Motor finance business, which focusses on the near prime market segments, continues to service the majority of the top 100 UK car dealer groups. The growth in the portfolio for the year was 28%, as balances closed at £114.6m (2012: £89.6m). The personal unsecured loan portfolio increased by 14% to £77.9m (2012: £68.2m). The rate of growth in this portfolio was partly constrained by a significant delay in the commencement of a new bank to bank loan referral arrangement. This activity is now operational with Sainsbury’s Bank and should deliver benefits in 2014. Secure Trust Bank This year saw STB take a significant step forward in developing its retail point of sale business. The growth in balances was as a result of strong demand from retailers and also the acquisition of V12 Finance. Accordingly, the customer balances grew by 78% to close the year at £114.4m (2012: £64.2m). The business made good progress in integration, creating a single retail finance offering. The existing STB relationships have been transferred to the V12 platform. This has allowed the bank to offer a compelling proposition and has led to greater success in attracting retailers, notably including the recently announced Halfords agreement. Everyday Loans portfolio grew to £81.4m (2012: £73.8m). This branch based unsecured lending portfolio serves relatively high credit risk customers with low average balance (£2,700) accounts. Given the higher risk in this business, the strategy has been to grow the portfolio in a controlled fashion, concentrating on profit maximisation rather than simply growth in volumes. Once again the overall growth in the bank’s lending portfolios has resulted in a higher level in the value of reported impairments. Given our prudent underwriting criteria, the actual rate of impairments remains lower than the level anticipated at origination and therefore below the rates at which the loans were priced. The robust growth in the customer loan portfolios has continued to be matched by customer deposits. The balance sheet remains entirely funded by retail deposits with the year end loan to deposit ratio being 90%. However, as the markets begin to signal an eventual rise in interest rates, the profile of the average tenor of the bank’s deposits has been extended. Fixed term deposits now represent 44% of the total deposit book, compared to 39% in the prior year. Finally, to initiate the next phase of growth, the bank is in the process of entering the SME lending markets. The bank has already written a number of good quality real estate finance transactions and is exploring asset based finance opportunities. All of these are expected to develop further in 2014. 2012 £47.0m 2013 £79.0m 2012 £30.7m 2013 £46.6m 2012 £17.3m 2013 £17.2m 2012 £297.6m 2013 £391.0m Operating income Operating expenses Profit before tax Customer loans – Unsecured 2012 £398.9m 2013 £436.6m 2012 231,713 2013 350,861 2012 15.0% 2013 16.9% 2012 0.59 2013 0.55 Customer deposits Customer numbers Net interest margin Cost income ratio 10 ARBUTHNOT BANKING GROUP PLCWe have, and will always serve our shareholders, customers and employees with the highest ethical standards. 11 REPORT & ACCOUNTS 2013STRATeGIC RePORT – fINANCIAL RevIew Arbuthnot Banking Group PLC adopts a pragmatic approach to risk taking and seeks to maximise long term revenues and returns. Given its relative size, it is able to remain entrepreneurial and capable of taking advantage of favourable market opportunities when they arise. The Group provides a range of financial services to customers and clients in its chosen markets of Private Banking (Arbuthnot Latham & Co., Limited) and Retail Banking (Secure Trust Bank PLC). The Group’s revenues are derived from a combination of net interest income from lending, deposit-taking and money market activities, fees for services provided to customers and clients and commission earned on the sale of financial instruments and products. Highlights Summarised Income Statement 2013 £000 2012 £000 Net interest income Net fee and commission income Operating income Gain from a bargain purchase Gain from sale of building Other income Gain on sale of subsidiary Operating expenses Impairment losses - financial investments Impairment losses - loans and advances to customers Profit on continuing operations before tax Income tax Profit on continuing operations after tax Loss from discontinued operations after tax Profit after tax 73,050 26,970 100,020 413 6,535 1,183 – (73,631) (1,073) (17,734) 15,713 (4,198) 11,515 – 11,515 44,786 20,769 65,555 9,830 – 396 839 (53,043) – (10,984) 12,593 (1,128) 11,465 (347) 11,118 Basic earnings per share (pence) 51.9 52.6 Underlying profit reconciliation 31 December 2013 Profit before tax Gain on sale of building 180th Year anniversary Dubai office investment ELL fair value amortisation STB acquisition costs STB share options V12 fair value amortisation Acquired portfolios Underlying profit Basic earnings per share (pence) 12 Arbuthnot Latham & Co. £000 Secure Trust Bank £000 Arbuthnot Banking Group £000 7,728 (6,535) – 879 – – – – – 2,072 17,193 – – – 4,066 854 2,221 893 1 25,228 15,713 (6,535) 436 879 4,066 854 2,221 893 1 18,528 42.3 Underlying profit reconciliation 31 December 2012 £000 £000 £000 Arbuthnot Latham & Co. Secure Trust Bank Arbuthnot Banking Group Profit before tax Bargain purchase gain on acquisition of ELL ELL fair value amortisation ELL management incentives Excess funding costs of acquisition STB acquisition costs STB share options Acquired portfolios Gain on sale of Switzerland subsidiary AL hire of new executives Underlying profit Basic earnings per share (pence) 2,058 17,253 12,593 – – – – – – – (9,830) 3,056 1,700 1,900 1,428 1,610 (363) – 300 2,358 – – 16,754 (9,830) 3,056 1,700 1,900 1,428 1,610 (363) (839) 300 11,555 38.2 Once again the Group has continued to trade robustly in 2013 and has reported a profit before tax of £15.7m (2012: £12.6m), which on a statutory basis represents an increase of 25%. However, the financial results for 2013 and those of 2012 contain a number of individually significant items. The Annual Report and Accounts for 2012 detail the bargain purchase gain that arose from the acquisition of Everyday Loans. This year the Group has recognised a £6.5m gain from the sale and lease back of the new head office building. Once the impact of these and a small number of other non-recurring items such as the recognition of the 180 year anniversary (£0.4m) are excluded from the results, the Group has underlying earnings of £18.5m (2012: £11.6m), which represents an increase in excess of 60%. Similarly, the statutory Earnings Per Share (“EPS”) is 51.9p (2012: 52.6p), but the underlying EPS has increased by 11% to 42.3p (2012: 38.2p). The Operating Income for the Group has exceeded £100m for the first time in the Group’s history increasing by 53% as the full year impact of the acquisitions and the strong organic growth have emerged in the financial results. The largest component of the operating income remains Net Interest Income, which is now 73% of the total income. The approximate blended yield of Net Interest Income compared to average customer loans has increased to 11% against the prior year 9%. This is mainly as a result of the increasing proportion that Secure Trust Bank’s higher yielding loan portfolios represent of the Group’s asset base. Net Interest Income has also benefitted from lower deposit rates prevalent in the market, which has been brought about by the introduction of the Funding for Lending Scheme (“FLS”). ARBUTHNOT BANKING GROUP PLC The overall expense base increased to £73.6m (2012: £53m), which is an increase of 39%. Once again, the increase is mainly due to the full year impact of acquisitions and the cost of investment for growth. Relative to the growth in operating income, the Group has produced a positive operating leverage of 14%. As expected, given the growth in the Group’s lending portfolios, the impairment costs have increased by 60% in total. However, the total impairment charge compared to the total customer loan portfolio has held steady at a blended rate of below three percent (2013: 2.6%, 2012: 2.2%). The Group tax charge has returned to a more normal level in 2013 following the significantly reduced amount of 2012 which was caused by the impact the bargain purchase gain had on the overall tax rate. Also, shareholders should note that the net assets of the Group increased by £18.2m (27%) even after the payment of the special dividend. Contributing to this increase was not only the record earnings, but also the gain that arose on the sale by the Group of 580,000 shares in STB. This generated a tax free gain of £14.4m that is required to be accounted for in the Statement of Changes in Equity. The net asset value per share of the Group is now 570.5p (2012: 449.3p). Segmental Analysis The segmental analysis in note 43 to the Consolidated Financial Statements of the Annual Report highlights the disclosures required under IFRS 8 ‘Operating Segments’. The operating segments are Private Banking (Arbuthnot Latham & Co., Limited) and Retail Banking (Secure Trust Bank PLC). Group costs and intercompany elimination journals are shown separately (Group Centre) to reconcile back to the Group consolidated result. 2013 £000 2012 £000 The analysis presented below, and in the business review, is before any consolidation adjustments to reverse the impact of intergroup operating activities and also intergroup recharges and is a fair reflection of the way the Directors manage the Group. Balance Sheet Strength Summarised Balance Sheet Assets Loans and advances to customers Liquid assets Other assets Total assets Liabilities Customer deposits Other liabilities Total liabilities Equity Total equity and liabilities 732,009 317,573 42,905 1,092,487 586,968 361,600 51,441 1,000,009 957,791 47,782 1,005,573 86,914 1,092,487 894,545 36,816 931,361 68,648 1,000,009 In the previous year the Group’s total assets exceeded £1bn for the first time in its history. Once again the Group delivered strong growth in its total assets posting an increase of 9%. This was despite the fact that the level of liquid assets reduced by 13% in the year. The assets growth was as a result of the performance of the lending portfolios. In aggregate, customer loans increased by 25% to £732.0m (2012: £587m). The acquisition of V12 Finance contributed £36.8m. The Group’s lending remains entirely funded by customer deposits, which increased by 7% to £957.8m (2012: £894.5m). As a result, the overall loan to deposit ratio closed the year at 76.4% (2012: 65.6%). This increase was largely planned as both the Group’s banks have been admitted into the Funding for Lending Scheme, which has provided access to a valuable source of new liquidity. Private Banking – Arbuthnot Latham Summarised Income Statement Net interest income Net fee and commission income Operating income Gain from sale of building Other income Operating expenses Impairment losses - financial investments Impairment losses - loans and advances to customers Profit before tax 2013 £000 2012 £000 12,778 8,873 21,651 6,535 3,765 (21,309) (824) 10,708 8,187 18,895 – 3,072 (17,871) – (2,090) 7,728 (2,038) 2,058 The profit before tax increased to £7.7m (2012: £2.1m). However, as previously discussed, the results of the bank include the gain that arose on the sale of the Wilson Street property, which generated £6.5m. Also, as part of the year end analysis, the business took a more pessimistic view on its small number of equity investments that have been held in its Available-for-Sale portfolio. This resulted in incremental losses of £0.8m. The remaining equity investment portfolio now totals £1.8m. 13 REPORT & ACCOUNTS 2013 STRATeGIC RePORT – fINANCIAL RevIew Continued As indicated to the market throughout 2013, the bank benefitted from a 20% increase in Net Interest Income, which was as a result of not only a larger customer asset portfolio but also a widening of customer margins of over 100 basis points. This was brought about by the impact of FLS on the market for deposit rates. The investment made in the upgrade of the private banking front office began to pay off, resulting in growth in the assets under management of 40%. Accordingly, the bank saw an increase in the fees and commissions earned of 7%. With greater confidence that the business model has sustainable momentum, further investments were made, not only in the front office but also the Dubai office which officially opened midway through the year. Additionally, a new investment management operating platform came online in the year, all of which resulted in an increase in operating expenses of 19%. The credit losses remained at £2.0m which, on a larger portfolio, saw the actual loss rate fall to 0.6%. The loan book remains well secured and of high quality, with an overall LTV of 50% with negligible losses emerging from the front book that has been developed in recent years. Finally, Gilliat Financial Solutions reversed its financial progress made in the previous year by posting a loss of £0.4m (2012: profit £0.6m). This was due to overtrading during the year. Sales volumes actually increased by more than 20%, but in response to the positive signs from the IFA market, the business over purchased its stock of products and in the end had to discount its margins heavily. This strategy has been revised for 2014 and products are being purchased in line with demand from the IFAs rather than in advance. This should see the unit return to profitability in 2014. Summarised Balance Sheet 2013 £000 2012 £000 Assets Loans and advances to customers Liquid assets Other assets (including Group balances) Total assets 340,982 239,168 39,523 619,673 Liabilities Customer deposits Other liabilities (including Group balances) Total liabilities Equity Total equity and liabilities 521,183 71,438 592,621 27,052 619,673 289,337 231,209 48,069 568,615 495,654 48,509 544,163 24,452 568,615 Customer assets increased by 18% to close the year at £341.0m (2012: £289.3m), which was another year of robust growth, but still managed within our conservative risk appetite. Other assets reduced following the disposal of the Wilson Street property. Customer deposits again saw good inflows with balances increasing by 5%. But more importantly, the mix of deposits was rebalanced, with a number of higher yielding term balances maturing during the year being replaced by accounts with lower rates. The loan to deposit ratio closed the year at 66% (2012: 59%) as the bank now has access to the FLS liquidity resources. This does allow the bank to operate a higher ratio, while maintaining a conservative policy with regard to liquidity. The Private Bank remains highly liquid and well capitalised with a total capital ratio of 12.8% (2012: 12.4%) and a core tier 1 ratio of 10.5% (2012: 9.9%). Retail Banking – Secure Trust Bank Summarised Income Statement Net interest income Net fee and commission income Operating income Gain from a bargain purchase Other income Operating expenses Impairment losses - loans and advances to customers Profit before tax 2013 £000 2012 £000 60,885 18,097 78,982 413 – (46,558) 34,426 12,582 47,008 9,830 37 (30,676) (15,644) 17,193 (8,946) 17,253 14 ARBUTHNOT BANKING GROUP PLC The reported profit before tax is £17.2m (2012: £17.3m) which is largely unchanged on a statutory basis, however, the prior year results included a gain arising from the bargain purchase of Everyday Loans. The underlying profits have grown to £25.2m (2012: £16.8m) for the year, an increase of 51%. The bank generated a 68% increase in operating income as the continued organic growth in the portfolios was augmented with the full year impact of the acquisitions made in 2012 and early 2013. An increase in high yielding customer assets and lower funding costs resulted in a 199 basis point widening of the blended customer net margin to 16.9% (2012: 15%). Operating expenses increased by 52%, giving a positive operational leverage ratio of 16%. Included in expenses for the year were £1.2m (2012: £0.7m) related to the amortisation of the Everyday Loans intangible, £0.9m (2012: £nil) from the amortisation of the V12 intangible and £2.9m (2012: £2.4m) related to the unwind of the fair value adjustment to the Everyday Loans acquired loan portfolio. Also, the cost of the STB share options was £2.2m (2012: £1.6m). Finally, STB also incurred acquisition costs of £0.9m (2012: £1.4m) during the year. The increase in the impairment losses was expected given the growth in the credit portfolios and the continued seasoning of customer accounts. However, the blended average loss rate was 4.3% (2012: 3.9%), still well below the levels anticipated at origination, but higher as a result of the change in mix toward the higher yielding accounts. The Current Account ended the year with 22,860 accounts (2012: 20,962) and Onebill with 24,297 (2012: 26,154). Summarised Balance Sheet 2013 £000 2012 £000 Assets Asset finance Motor vehicles Cycles Musical instruments V12 Personal computers Pay4Later DFS Total asset finance Personal lending ELL Commercial lending Other lending Acquired portfolios Total loans and advances to customers Liquid assets Other assets (including Group balances) Total assets 114,570 15,357 8,818 36,846 25,549 26,899 917 228,956 77,889 81,368 1,784 921 110 391,028 71,958 56,611 519,597 Liabilities Customer deposits Other liabilities (including Group balances) Total liabilities Equity Total equity and liabilities 436,608 21,368 457,976 61,621 519,597 89,620 13,938 6,700 – 26,306 16,776 469 153,809 68,175 73,806 - 1,587 254 297,631 130,442 46,526 474,599 398,891 19,787 418,678 55,921 474,599 During the year the asset finance portfolio increased by 49% with only the personal computer portfolio not growing. V12 added £36.8m during the year. Personal loans increased by 14% but growth was held back by delays in implementing the referral arrangement agreed with Sainsbury’s Bank. Everyday Loans portfolio increased by 10% as caution has been exercised in the progression of this portfolio. The bank remains entirely funded by retail deposits which increased by 9% to close the year at £436.6m (2012: £398.9m). The offering by the bank still remains attractive with market leading rates despite some downward corrections to rates during the year. 15 REPORT & ACCOUNTS 2013 STRATeGIC RePORT – fINANCIAL RevIew Continued Group Centre Summarised Income Statement Net interest income Subordinated loan stock interest Operating income Other income Gain on sale of subsidiary Operating expenses Impairment on financial investments Loss before tax 2013 £000 2012 £000 (195) (418) (613) 18 - (8,364) (249) (9,208) 122 (463) (341) 25 839 (7,235) – (6,712) Total Group costs increased to £9.2m (2012: £6.7m). This was a result of firstly, a lower level of operating income due to the conversion of the subordinated loan issued by STB into equity as part of the placing carried out in November 2012 and, secondly, the prior year containing a one off gain that arose on the sale of the Swiss banking subsidiary (£0.8m). Group operating expenses increased by £1.1m due to higher salary and bonus awards along with the recognition of the 180 year anniversary (£0.4m) and additional provisions made in the Group’s captive insurance cell (£0.3m). Capital The Group’s capital management policy is focused on optimising shareholder value over the long term. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position. In accordance with the EU’s Capital Requirements Directive (CRD) and the required parameters set out in the PRA Handbook (BIPRU 2.2), the Individual Capital Adequacy Assessment Process (ICAAP) is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. The Group’s regulated entities are also the principal trading subsidiaries as detailed in note 42. Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a “Pillar I plus” approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations deliver a sufficient capital sum adequate to cover management’s anticipated risks. Where the Board considers that the Pillar I calculations does not reflect the risk, an additional capital add-on in Pillar II is applied. The Group’s regulatory capital is divided into two tiers: • Tier 1 comprises mainly shareholders’ funds and non-controlling interest, after deducting goodwill and other intangible assets. • Lower Tier 2 comprises qualifying subordinated loan capital and revaluation reserves. Lower Tier 2 capital cannot exceed 50% of tier 1 capital. The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. All regulated entities have complied with all of the externally imposed capital requirements to which they are subject. Capital ratios Core Tier 1 capital Deductions Tier 1 capital after deductions Tier 2 capital Total capital 2013 £000 87,270 (11,405) 75,865 13,832 89,697 2012 £000 68,508 (7,309) 61,199 12,120 73,319 Core Tier 1 capital ratio (Net Core Tier 1 capital/Basel 2 RWAs*) 15.8% 15.5% Total Capital Ratio (Capital/Basel 2 RWAs*) * Risk Weighted Assets (RWAs) 18.7% 18.5% In June 2013, the PRA published a final regulation to give effect to the Basel III framework, which amends the definition of Tier 1 capital. This comes into effect on 1 January 2014. The Group’s current capital position is sufficient to meet the Tier 1 capital ratio based on the Tier 1 capital definition under the new regulation. 16 ARBUTHNOT BANKING GROUP PLC Risks and Uncertainties The Group regards the monitoring and controlling of risks and uncertainties as a fundamental part of the management process. Consequently, senior management are involved in the development of risk management policies and in monitoring their application. A detailed description of risk management and their associated policies is set out in note 6 to the financial statements. The principal risks inherent in the Group’s business are credit, market, liquidity, operational and regulatory compliance. Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. This risk exists mainly in Arbuthnot Latham & Co., Limited and Secure Trust Bank PLC, which currently have loan books of £341.0m and £391.0m respectively. The lending portfolio in Arbuthnot Latham is extended to private banking clients, the majority of which is secured against cash, property or other assets. The portfolios within Secure Trust are extended to retail customers and are largely unsecured. Credit risk is managed through the Credit Committees of each bank with significant exposures also being approved by the Group Risk Committee. Market risk arises in relation to movements in interest rates, currencies and equity markets. The Group’s treasury function operates mainly to provide a service to clients and does not take significant unmatched positions in any market for its own account. Hence, the Group’s exposure to adverse movements in interest rates and currencies is limited to interest earnings on its free cash and interest rate re-pricing mismatches. Liquidity risk is the risk that the Group cannot meet its liabilities as they fall due. The Group takes a conservative approach to managing its liquidity profile. It has placed no reliance on the wholesale lending markets and is entirely funded by retail customer deposits. The loan to deposit ratios are maintained at prudent levels. Following introduction of the new liquidity regime, which came into force on 1 October 2010, the Group now maintains liquidity asset buffers which comprise high quality, unencumbered assets such as Government Securities, which can be called upon to meet the Group’s liabilities. Operational risk is the risk that the Group may be exposed to financial losses from conducting its business. The largest exposure to this risk exists in Arbuthnot Latham as mis-selling risk via its wealth management advisory service and its structured product distribution business. The Group is exposed to operational risks from its Information Technology and Operations platforms. There are additional internal controls in these processes that are designed to protect the Group from these risks. The Group’s overall approach to managing internal control and financial reporting is described in the Corporate Governance section of the Annual Report. As a financial services provider we face conduct risk, including selling products to customers which do not meet their needs; failing to deal with customers’ complaints effectively; not meeting customers’ expectations; and exhibiting behaviours which do not meet market or regulatory standards. The Group maintains clear compliance guidelines and provides ongoing training to all staff. Periodic spot checks and internal audits are performed to ensure these guidelines are being maintained. The Group also has insurance policies in place to cover any claims that may arise. Regulatory compliance risk is the risk that the Group will have insufficient capital resources to support the business or does not comply with regulatory requirements. The Group adopts a conservative approach to managing the capital of the Group. The principal regulated entities maintain capital ratios in excess of the minimum level set by the regulator. Capital requirements are forecast as part of the annual budgeting process and these are regularly monitored. Annually, the Group Board assesses the robustness of the capital requirements as part of the Individual Capital Adequacy Assessment Process (ICAAP) where stringent stress tests are performed to ensure that capital resources are adequate over a future three year horizon. Dividend The Board proposes a final dividend of 15p per share to be paid on 16 May 2014, giving a total dividend for the year of 44p (2012: 25p) per share, which includes a special dividend of 18p paid in November 2013. Going Concern After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see note 6) and capital resources (see note 7), the directors are satisfied that the Company and the Group have adequate resources to continue in operation for the foreseeable future. The financial statements are therefore prepared on the going concern basis. James Cobb Group Finance Director 19 March 2014 17 REPORT & ACCOUNTS 2013BOARD Of DIReCTORS 18 ARBUTHNOT BANKING GROUP PLCI. Henry Angest Chairman and Chief Executive of the Group and Chairman of Secure Trust Bank PLC and Arbuthnot Latham & Co., Limited. He is a past Master of the Worshipful Company of International Bankers. Previously he was an International Executive with The Dow Chemical Company and Dow Banking Corporation in Switzerland, USA, Brazil, Hong Kong and the UK. He has a law degree from University of Basel and is an Hon. Fellow of UHI (University of the Highlands and Islands). II. James Cobb ACA James Cobb joined the Board on 1 November 2008 as Group Finance Director. He was previously Deputy Chief Financial Officer and Controller of Citigroup’s Global Consumer Group in Europe, Middle East and Africa and qualified as a Chartered Accountant with Price Waterhouse. III. James Fleming James Fleming joined the Board on 1 March 2012 as Chief Executive Officer of Arbuthnot Latham & Co., Limited. He joined from Coutts & Co where he held the position of Head of International Private Banking and more recently was Managing Director of the UK Entrepreneurs, Landowners and Inpatriates businesses. Prior to Coutts, James was Managing Director of SG Hambros UK. He has over 25 years experience of private banking. IV. Ruth Lea Independent non-executive director since 1 November 2005 and Economic Adviser to the Group. She was previously the Director of Global Vision, Director of the Centre for Policy Studies, Head of the Policy Unit at the Institute of Directors, Economics Editor at ITN, Chief UK Economist at Lehman Brothers and Chief Economist at Mitsubishi Bank. She also spent 16 years in the Civil Service in the Treasury, the Department of Trade and Industry, the Central Statistical Office and the Civil Service College. V. Paul Lynam Paul Lynam joined the Board on 13 September 2010 as Chief Executive of Secure Trust Bank PLC. Prior to his appointment, Paul spent 22 years in a variety of roles with RBS and NatWest. These included Managing Director, Banking; Chief Executive, UK Business Banking and Managing Director, Lombard North Central PLC. Paul holds degree level Banking and Corporate Treasury qualifications. VI. Sir Christopher Meyer Independent non-executive director since 1 October 2007. He had a distinguished diplomatic career, culminating in 1997 as Ambassador to the USA. Between 1994 and 1996, he was Press Secretary to Prime Minister John Major. From 2003 to 2009 he was Chairman of the Press Complaints Commission. He is also on the International Advisory Board of British American Business Inc. and Chairman of the Advisory Board of Pagefield. VII. Andrew Salmon ACA Appointed a director on 8 March 2004. He joined the Company in 1997 and is Chief Operating Officer and Head of Business Development. He was previously a director of Hambros Bank Limited and qualified as a Chartered Accountant with KPMG. VIII. Robert Wickham Deputy Chairman and senior independent non-executive director. He was formerly on the Management Board of Bank of Scotland. He is also an independent non-executive director of Arbuthnot Latham & Co., Limited. IX. Jeremy Robin Kaye FCIS Company Secretary. vIII vII vI I IX II III v Iv 19 REPORT & ACCOUNTS 2013 GROUP DIReCTORS’ RePORT Remuneration Shareholders will be asked to approve an Ordinary Resolution permitting bonus payments to be made to executive directors or senior managers not exceeding two times that director’s annual basic salary if required by forthcoming regulation. It is the practice of the Company to pay fair and reasonable salaries and to reward exceptional performance under a bonus scheme. The Company seeks to keep down fixed overhead costs but does not welcome the principle of wage control. Financial Risk Management Details of how the Group manages risk are set out in the Strategic Report and in note 6. Substantial Shareholders The Company was aware at 18 March 2014 of the following substantial holdings in the ordinary shares of the Company, other than those held by one director shown below: Holder Ordinary Shares Prudential plc Mr. R Paston Directors H Angest J R Cobb J W Fleming Ms R J Lea P A Lynam Sir Christopher Meyer A A Salmon R J J Wickham 625,161 529,130 % 4.2 3.5 Chairman & CEO Finance Director Chief Operating Officer Deputy Chairman All directors served throughout the year. Mr. A.A. Salmon and Mr. P.A. Lynam retire under Article 78 of the Articles of Association and, being eligible, offer themselves for re-election. Both directors have service agreements terminable on twelve months’ notice. The Directors submit their annual report and the audited consolidated financial statements for the year ended 31 December 2013. Principal Activities and Review The principal activities of the Group are banking and financial services. A strategic review in accordance with Section 414 C of the Companies Act 2006 forming part of this report is set out on pages 8 to 17. Results and Dividends The results for the year are shown on page 28. The profit after tax for the year of £11.5 million (2012: £11.1 million) is included in reserves. The Company sold 580,000 ordinary 40p shares (3.7%) in its subsidiary Secure Trust Bank PLC on 13 December 2013 at a price of £25 per share. This resulted in a net gain of £14.4m which is also included in the Group’s reserves. The Directors recommend the payment of a final dividend of 15p on the ordinary shares which, together with the interim dividend of 11p paid on 4 October 2013 and a special dividend of 18p paid on 22 November 2013, represents total dividends for the year of 44p (2012: 25p). The final dividend, if approved by members at the Annual General Meeting, will be paid on 16 May 2014 to shareholders on the register at close of business on 22 April 2014. Going Concern After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see note 6) and capital resources (see note 7), the directors are satisfied that the Company and the Group have adequate resources to continue in operation for the foreseeable future. The financial statements are therefore prepared on the going concern basis. Share Capital Shareholders will be asked to approve a Special Resolution renewing the authority of the Directors to make market purchases of shares not exceeding 10% of the existing issued share capital. The Directors will keep the position under review in order to maximise the Company’s resources in the best interests of shareholders. 20 ARBUTHNOT BANKING GROUP PLCAccording to the information kept under Section 3 of the Disclosure and Transparency Rules 2006, the interests of directors and their families in the ordinary 1p shares of the Company at the dates shown were, and the percentage of the current issued share capital held is, as follows: had deposits with Arbuthnot Latham & Co., Limited amounting to £2,257,000, all on normal commercial terms as disclosed in note 41 to the financial statements. Beneficial Interests 1 January 2012 31 December 2012 19 March 2013 H Angest J W Fleming P A Lynam A A Salmon R J J Wickham 8,186,901 4,500 10,000 51,699 3,600 8,200,901 4,500 10,000 51,699 3,600 8,200,901 4,500 10,000 51,699 3,600 % 53.7 – 0.1 0.3 – The Company maintains insurance to provide liability cover for directors and officers of the Company. Board Committees The report of the Remuneration Committee on pages 24 and 25 will be the subject of an Ordinary Resolution at the Annual General Meeting. Information on the Audit, Nomination, Risk and Donations Committees is included in the Corporate Governance section of the Annual Report on page 22 to 23. At the year end Mr. Lynam held 9,110 and Mr. Salmon 7,500 ordinary 40p shares in Secure Trust Bank PLC, a 67% subsidiary of the Company. On 16 April 2013 Mr. Salmon exercised the option granted to him on 21 May 2008 to subscribe for 100,000 ordinary 1p shares in the Company at 337.5p and Mr. Cobb exercised the option granted to him on 5 November 2008 to subscribe for 50,000 ordinary 1p shares in the Company at 320p. The exercise price was 930p per share and the Board agreed to make a cash settlement rather than allot new shares. On the same day Mr. Salmon and Mr. Cobb were granted new options to subscribe between April 2016 and April 2021 for 100,000 and 50,000 ordinary 1p shares respectively in the Company at 930p. The fair value of the options at grant date was £125k. On 2 November 2011 Mr. Lynam and Mr. Salmon were each granted options to subscribe for 141,666 ordinary 40p shares in Secure Trust Bank PLC at 720p between 2 November 2014 and 1 November 2021, and a further 141,667 shares at 720p between 2 November 2016 and 1 November 2021. The fair value of the options at grant date was £1.6m. Apart from the interests disclosed above, no director was interested at any time in the year in the share capital of Group companies. No director, either during or at the end of the financial year, was materially interested in any contract with the Company or any of its subsidiaries, which was significant in relation to the Group’s business. At 31 December 2013 three directors had loans from Arbuthnot Latham & Co., Limited amounting to £5,188,000, on normal commercial terms as disclosed in note 41 to the financial statements. At 31 December 2013 three directors had deposits with Secure Trust Bank PLC amounting to £265,000 and five directors Employees The Company gives due consideration to the employment of disabled persons and is an equal opportunities employer. It also regularly provides employees with information on matters of concern to them, consults on decisions likely to affect their interests and encourages their involvement in the performance of the Company through share participation and in other ways. Political Donations The Company made a political donation of £27,000 to the Conservative Party during the year (2012: £50,000). Auditors Following a review of their corporate structure, our auditors KPMG Audit Plc, have instigated an orderly wind down of business, with future audit work being undertaken by KPMG LLP. The Board has decided to nominate KPMG LLP as auditors and a resolution for their appointment will be proposed at the forthcoming Annual General Meeting at a fee to be agreed in due course by the directors. There is no difference in liability terms between KPMG Audit Plc and KPMG LLP. The Directors have disclosed to the auditors to the best of their knowledge and belief all relevant information necessary to assist the auditors in the preparation of their report. By order of the Board J R Kaye Secretary 19 March 2014 21 REPORT & ACCOUNTS 2013 CORPORATe GOveRNANCe AIM companies are not required to comply with The UK Corporate Governance Code (“The Code”). Nevertheless, the Board endorses the principles of openness, integrity and accountability which underlie good corporate governance and intends to take into account the provisions of The Code in so far as they are appropriate to the Group’s size and circumstances. Moreover, the Group contains subsidiaries authorised to undertake regulated business under the Financial Services and Markets Act 2000 and regulated by the Prudential Regulatory Authority, including two which are authorised deposit taking businesses. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such businesses. Directors The Group is led and controlled by an effective Board which comprises five executive directors and three non-executive directors. The senior independent non-executive director is Robert Wickham, who in addition is Deputy Chairman. Although Mr. Wickham has served on the Board for twenty years from the date of his first election, he displays independence in both character and judgement and there are no other relationships or circumstances which could affect his judgement. Accordingly, the Board considers him to be independent. The Board The Board meets regularly throughout the year. Substantive agenda items have briefing papers, which are circulated in a timely manner before each meeting. The Board is satisfied that it is supplied with all the information that it requires and requests, in a form and of a quality to enable it to discharge its duties. In addition to ongoing matters concerning the strategy and management of the Company and of the Group, the Board has determined certain items which are reserved for decision by itself. These matters include the acquisition and disposal of other than minor businesses, the issue of capital by any Group company and any transaction by a subsidiary company that cannot be made within its own resources, or that is not in the normal course of its business. The Company Secretary is responsible for ensuring that Board processes and procedures are appropriately followed and support effective decision making. All directors have access to the Company Secretary’s advice and services and there is an agreed procedure for directors to obtain independent professional advice in the course of their duties, if necessary, at the Company’s expense. The Board has delegated certain of its responsibilities to Committees. All Committees have written terms of reference. Audit Committee Membership of the Audit Committee is limited to non-executive directors and comprises Ruth Lea (as Chairman), Sir Christopher Meyer and Robert Wickham. The Audit Committee provides a forum for discussing with the Group’s external auditors their report on the annual accounts, reviewing the scope, results and effectiveness of the internal audit work programme and considering any other matters which might have a financial impact on the Company, including the Group’s arrangements by which staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The Audit Committee’s responsibilities include reviewing the Group’s system of internal control and the process for evaluating and monitoring risk. The Committee also reviews the appointment, terms of engagement and objectivity of the external auditors, including the level of non-audit services provided, and ensures that there is an appropriate audit relationship. Remuneration Committee Information on the Remuneration Committee and details of the Directors’ remuneration are set out in the separate Remuneration Report. Nomination Committee The Nomination Committee is chaired by Henry Angest and its other members are Robert Wickham and Ruth Lea. Before a Board appointment is made the skills, knowledge and experience required for a particular appointment are evaluated and a recommendation made to the Board. Risk Committee The Risk Committee is chaired by Henry Angest and its other members are James Cobb, James Fleming, John Reed (non-executive of Arbuthnot Latham), Paul Lynam (appointed 27 February 2014), Andrew Salmon and Robert Wickham. The role of the Risk Committee is to approve specific risk policies for Group subsidiaries and significant individual credit or other exposures. Donations Committee The Donations Committee is chaired by Henry Angest and its other members are Robert Wickham and Ruth Lea. The Committee considers any political donation or expenditure as defined within the Political Parties, Elections and Referendums Act 2000. Shareholder Communications The Company maintains a regular dialogue with its shareholders and makes full use of the Annual General Meeting and any other General Meetings to communicate with investors. 22 ARBUTHNOT BANKING GROUP PLCThe Company aims to present a balanced and understandable assessment in all its reports to shareholders, its regulators and the wider public. Key announcements and other information can be found at: www.arbuthnotgroup.com. Internal Control and Financial Reporting The Board of directors has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable but not absolute assurance against the risk of material misstatement or loss. The Directors and senior management of the Group have formally adopted a Group Risk and Controls Policy which sets out the Board’s attitude to risk and internal control. Key risks identified by the Directors are formally reviewed and assessed at least once a year by the Board, in addition to which key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are well-established budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data. The effectiveness of the internal control system is reviewed regularly by the Board and the Audit Committee, which also receives reports of reviews undertaken by the internal audit function which was outsourced to Ernst & Young. The Audit Committee also receives reports from the external auditors, KPMG Audit Plc, which include details of internal control matters that they have identified, as part of the Financial Statement audit. Certain aspects of the system of internal control are also subject to regulatory supervision, the results of which are monitored closely by the Board. Statement of Directors’ Responsibilities in Respect of the Strategic Report and the Directors’ Report and the Financial Statements The directors are responsible for preparing the Strategic Report and the Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent Company financial statements on the same basis. 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 Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to: • • • • select suitable accounting policies and consistently; then apply them make judgments and estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs as adopted by the EU; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its 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 Group 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 Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Statement of Disclosure of Information to Auditors The Directors confirm that: • • so far as each director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and the Directors have taken all the steps they ought to have taken as directors to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and shall be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. 23 REPORT & ACCOUNTS 2013ReMUNeRATION RePORT Remuneration Committee Membership of the Remuneration Committee is limited to non– executive directors together with Henry Angest as Chairman. The present members of the Committee are Henry Angest, Robert Wickham and Ruth Lea. The Committee has responsibility for producing recommendations on the overall remuneration policy for directors and for setting the remuneration of individual directors, both for review by the Board. Members of the Committee do not vote on their own remuneration. Remuneration Policy The Remuneration Committee determines the remuneration of individual directors having regard to the size and nature of the business; the importance of attracting, retaining and motivating management of the appropriate calibre without paying more than is necessary for this purpose; remuneration data for comparable positions; the need to align the interests of executives with those of shareholders; and an appropriate balance between current remuneration and longer term performance–related rewards. The remuneration package can comprise a combination of basic annual salary and benefits (including pension), a discretionary annual bonus award related to the Committee’s assessment of the contribution made by the executive during the year and longer term incentives, including executive share options. Pension benefits take the form of annual contributions paid by the Company to individual money purchase schemes. The Remuneration Committee reviews salary levels each year based on the performance of the Group during the preceding financial period. This review does not necessarily lead to increases in salary levels. During 2011 the Group implemented all the provisions required under the FCA Remuneration Code. Accordingly the Group and its subsidiaries are all considered to be Tier 3 institutions. Remuneration Resolution Shareholders will be asked to approve an Ordinary Resolution permitting bonus payments to be made to executive directors or senior managers not exceeding two times that director’s annual basic salary if required by forthcoming regulation. It is the practice of the Company to pay fair and reasonable salaries and to reward exceptional performance under a bonus scheme. The company seeks to keep down fixed overhead costs but does not welcome the principle of wage control. Directors’ Service Contracts Henry Angest, James Fleming, Paul Lynam and Andrew Salmon each have service contracts terminable at any time on 12 months’ notice in writing by either party. James Cobb has a service contract terminable at any time on 6 months’ notice in writing by either party. 24 Share Option and Long Term Incentive Schemes This part of the remuneration report is audited information. In May 2005, the Company extended its Unapproved Executive Share Option Scheme for a further period of 10 years. The Company has an ESOP (“the Arbuthnot ESOP Trust”) under which trustees may purchase shares in the Company to satisfy the exercise of share options by employees including executive directors. On 16 April 2013 Mr. Salmon exercised the option granted to him on 21 May 2008 to subscribe for 100,000 ordinary 1p shares in the Company at 337.5p and Mr. Cobb exercised the option granted to him on 5 November 2008 to subscribe for 50,000 ordinary 1p shares in the Company at 320p. The exercise price was 930p per share and the Board agreed to make a cash settlement rather than allot new shares. On the same day Mr. Salmon and Mr. Cobb were granted new options to subscribe between April 2016 and April 2021 for 100,000 and 50,000 ordinary 1p shares respectively in the Company at 930p. The fair value of the options at grant date was £125k. At the date of this remuneration report, the only outstanding options to directors under the Unapproved Executive Share Option Scheme are those in relation to 100,000 shares for Andrew Salmon and 50,000 shares for James Cobb. 150,500 shares are held in the Arbuthnot ESOP Trust. Under the Unapproved Executive Share Option Scheme of the Company’s subsidiary, Secure Trust Bank PLC, established in November 2011, Paul Lynam and Andrew Salmon were each granted options over 283,333 shares in that company. The fair value of the options at grant date was £1.6m. Directors’ Emoluments This part of the remuneration report is audited information. Fees (including benefits in kind) Salary payments (including benefits in kind) Pension contributions Long term incentive 2013 £000 215 3,328 140 897 4,580 2012 £000 215 3,027 137 – 3,379 ARBUTHNOT BANKING GROUP PLC H Angest JR Cobb JW Fleming (from 01/03/12) PA Lynam DM Proctor (to 01/03/12) AA Salmon Ms RJ Lea Sir Christopher Meyer RJJ Wickham Salary £000 Bonus £000 Benefits £000 Pension £000 475 235 230 475 – 475 – – – 1,890 – 200 225 500 – 400 – – – 1,325 40 16 15 21 – 21 – – – 113 – 35 35 35 – 35 – – – 140 Fees £000 – – – – – – 120 45 50 215 Long term incentive £000 – 305 – – – 592 – – – 897 Total 2013 £000 515 791 505 1,031 – 1,523 120 45 50 4,580 Total 2012 £000 519 436 458 870 49 832 120 45 50 3,379 Details of any shares or options held by directors are presented on page 21. The emoluments of the Chairman were £515,000 (2012: £519,000). The emoluments of the highest paid director were £1,523,000 (2012: £870,000) including pension contributions of £35,000 (2012: £35,000). Mr. R J J Wickham is a director of Calando Finance Limited which received an annual fee of £50,000 (2012: £50,000) in respect of his services to the Group. These amounts are included in the table above. Retirement benefits are accruing under money purchase schemes for five directors who served during 2013 (2012: six directors). Henry Angest Chairman of the Remuneration Committee 19 March 2014 25 REPORT & ACCOUNTS 2013 INDePeNDeNT AUDITOR’S RePORT to the members of arbuthnot banking group plc Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2013 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; • the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 and under the terms of our engagement 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. We have audited the financial statements of Arbuthnot Banking Group PLC for the year ended 31 December 2013 set out on pages 28 to 83. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. 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 auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 23, 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. 26 ARBUTHNOT BANKING GROUP PLCMatters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Richard Gabbertas (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 19 March 2014 27 REPORT & ACCOUNTS 2013Consolidated statement of Comprehensive inCome Note 8 9 10 11 12 13 15 17 14 Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income Operating income Net impairment loss on financial assets Gain from a bargain purchase Gain on sale of building Gain on sale of subsidiary Other income Operating expenses Profit before income tax from continuing operations Income tax expense Profit after income tax from continuing operations Loss from discontinued operations after tax Profit for the year Other comprehensive income Items that are or may be reclassified to profit or loss Foreign currency translation reserve Revaluation reserve Cash flow hedging reserve – Effective portion of changes in fair value Available-for-sale reserve Other comprehensive income for the period, net of tax Total comprehensive income for the period Profit attributable to: Equity holders of the Company Non-controlling interests Profit for the year Total comprehensive income attributable to: Equity holders of the Company Non-controlling interests Total comprehensive income for the period Year ended 31 December 2013 £000 93,329 (20,279) 73,050 31,816 (4,846) 26,970 100,020 (18,807) 413 6,535 – 1,183 (73,631) 15,713 (4,198) 11,515 – 11,515 – (15) (250) (265) 11,250 7,930 3,585 11,515 7,681 3,569 11,250 Year ended 31 December 2012 £000 62,300 (17,514) 44,786 24,116 (3,347) 20,769 65,555 (10,984) 9,830 – 839 396 (53,043) 12,593 (1,128) 11,465 (347) 11,118 570 (34) 81 617 11,735 8,041 3,077 11,118 8,658 3,077 11,735 Earnings per share for profit attributable to the equity holders of the Company during the year (expressed in pence per share): – basic and fully diluted 18 51.9 52.6 The notes on pages 36 to 83 are an integral part of these consolidated financial statements 28 ARBUTHNOT BANKING GROUP PLC Consolidated statement of finanCial position ASSETS Cash Loans and advances to banks Debt securities held-to-maturity Derivative financial instruments Loans and advances to customers Other assets Financial investments Deferred tax asset Investment in associate Intangible assets Property, plant and equipment Total assets EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital Retained earnings Other reserves Non-controlling interests Total equity LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Current tax liability Other liabilities Deferred tax liability Debt securities in issue Total liabilities Total equity and liabilities Note 19 20 21 22 23 25 26 27 28 29 30 36 37 37 31 22 32 33 27 34 At 31 December 2013 £000 193,046 105,061 19,466 508 732,009 17,267 1,975 3,954 943 13,103 5,522 1,092,854 153 67,901 (1,467) 20,327 86,914 2,003 371 957,791 1,427 31,017 1,099 12,232 1,005,940 1,092,854 At 31 December 2012 £000 203,683 144,391 13,526 648 586,968 11,666 3,257 5,057 – 8,326 22,487 1,000,009 153 53,372 (1,253) 16,376 68,648 373 462 894,545 346 23,021 634 11,980 931,361 1,000,009 The financial statements on pages 28 to 83 were approved and authorised for issue by the Board of directors on 19 March 2014 and were signed on their behalf by: H Angest Director JR Cobb Director Registered Number: 1954085 The notes on pages 36 to 83 are an integral part of these consolidated financial statements 29 REPORT & ACCOUNTS 2013 Company statement of finanCial position ASSETS Due from subsidiary undertakings – bank balances Financial investments Deferred tax asset Intangible assets Property, plant and equipment Other assets Investment in subsidiary undertakings Total assets EQUITY AND LIABILITIES Equity Share capital Other reserves Retained earnings Total equity LIABILITIES Bank overdraft Other liabilities Debt securities in issue Total liabilities Total equity and liabilities Note 26 29 30 25 42 36 37 37 33 34 At 31 December 2013 £000 At 31 December 2012 £000 16,551 165 441 12 130 5,415 30,995 53,709 153 (1,030) 31,325 30,448 2,000 9,029 12,232 23,261 53,709 – 413 447 20 134 5,662 30,847 37,523 153 (1,030) 20,768 19,891 100 5,552 11,980 17,632 37,523 The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Parent Company profit and loss account. The profit for the Parent Company for the year is presented in the Statement of Changes in Equity. The financial statements on pages 28 to 83 were approved and authorised for issue by the Board of directors on 19 March 2014 and were signed on their behalf by H Angest Director JR Cobb Director Registered Number: 1954085 The notes on pages 36 to 83 are an integral part of these consolidated financial statements 30 ARBUTHNOT BANKING GROUP PLC Consolidated statement of Changes in equity Attributable to equity holders of the Group Share Foreign currency Share premium translation Revaluation redemption reserve £000 account £000 reserve £000 reserve £000 capital £000 Capital Available- Cash flow for-sale hedging reserve reserve £000 £000 Non- Treasury Retained controlling interests earnings £000 £000 shares £000 Total £000 Balance at 1 January 2013 153 – – 140 20 81 (363) (1,131) 53,372 16,376 68,648 Total comprehensive income for the period Profit for 2013 Other comprehensive income, net of tax Revaluation reserve – Adjustment Cash flow hedging reserve – Effective portion of changes in fair value Available-for-sale reserve Total other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Equity settled share based payment transactions Sale of shares Secure Trust Bank Final dividend relating to 2012 Interim dividend relating to 2013 Special dividend relating to 2013 Total contributions by and distributions to owners Balance at 31 December 2013 – – – – – – – – 7,930 3,585 11,515 – – – 51 – – – – (35) (16) – – – – – – – – – – – 153 – – – – – – – – – – – – – – – – – – – – – – – – 51 51 – – – – – – – – – (250) (250) (15) – (15) – – – – – (35) – – (16) (15) (250) (265) – (250) (15) – 7,895 3,569 11,250 – – – – – – – – – – – – – – – 901 – 770 1,671 – 12,135 2,270 14,405 (1,970) (4,054) – (2,084) (688) (2,326) – (1,638) – (2,680) – (2,680) – 191 – 20 – (169) – 382 7,016 (378) (1,131) 67,901 20,327 86,914 – 6,634 The notes on pages 36 to 83 are an integral part of these consolidated financial statements 31 REPORT & ACCOUNTS 2013 Consolidated statement of Changes in equity Continued Attributable to equity holders of the Group Share Foreign currency Share premium translation Revaluation redemption reserve £000 account £000 reserve £000 reserve £000 capital £000 Capital Available- Cash flow for-sale hedging reserve reserve £000 £000 Non- Treasury Retained controlling interests earnings £000 £000 shares £000 Total £000 Balance at 1 January 2012 153 21,085 (570) 140 20 – (329) (1,097) 21,571 5,998 46,971 Total comprehensive income for the period Profit for 2012 Other comprehensive income, net of tax Foreign currency translation reserve Revaluation reserve Cash flow hedging reserve – Effective portion of changes in fair value Available-for-sale reserve Total other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Cancellation of share premium Purchase of own shares Equity settled share based payment transactions Share placing Secure Trust Bank Final dividend relating to 2011 Interim dividend relating to 2012 Total contributions by and distributions to owners Balance at 31 December 2012 – – – – – – – – 8,041 3,077 11,118 – – 570 – – – – – – – 570 – – – – – – – – – 570 – 570 – (21,085) – – – – – – – – – – – (21,085) – 153 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 81 81 (34) – (34) – – – – – – – – – (34) 81 617 81 (34) – 8,041 3,077 11,735 – – – – – – – – – – – – – 21,085 – (34) – – – (34) – (70) – (70) – 6,881 7,371 14,252 – (2,082) – (2,082) – (2,124) – (2,124) – 140 – 20 – 81 – (34) 23,760 7,301 9,942 (363) (1,131) 53,372 16,376 68,648 The notes on pages 36 to 83 are an integral part of these consolidated financial statements 32 ARBUTHNOT BANKING GROUP PLC Company statement of Changes in equity Attributable to equity holders of the Company Share capital £000 Share premium account £000 Capital redemption reserve £000 Available- for-sale reserve £000 Treasury shares £000 Retained earnings £000 Total £000 Balance at 1 January 2012 153 21,085 20 – (1,097) 8,517 28,678 Total comprehensive income for the period Loss for 2012 Other comprehensive income, net of income tax Available-for-sale reserve Total other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Cancellation of share premium Purchase of own shares Final dividend relating to 2011 Interim dividend relating to 2012 Total contributions by and distributions to owners Balance at 1 January 2013 Total comprehensive income for the period Profit for 2013 Other comprehensive income, net of income tax Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Share based payments settled in cash Equity settled share based payment transactions Final dividend relating to 2012 Interim dividend relating to 2013 Special dividend relating to 2013 Total contributions by and distributions to owners Balance at 31 December 2013 – – – – – – – – – – – – (21,085) – – – – 153 (21,085) – – – – – – – – – – 20 – – (5,260) (5,260) 81 81 81 – – – – – 81 – – – – – 81 81 (5,260) (5,179) – (34) – – (34) (1,131) 21,085 – (1,936) (1,638) 17,511 20,768 – (34) (1,936) (1,638) (3,608) 19,891 – – – – – 17,828 17,828 – – – – – 17,828 17,828 – – – – – – 153 – – – – – – – – – – – – – 20 – – – – – – 81 – – – – – (897) (897) 28 (2,084) (1,638) (2,680) 28 (2,084) (1,638) (2,680) – (1,131) (7,271) 31,325 (7,271) 30,448 The notes on pages 36 to 83 are an integral part of these consolidated financial statements 33 REPORT & ACCOUNTS 2013 Consolidated statement of Cash flows Note Year ended 31 December 2013 £000 Year ended 31 December 2012 £000 Cash flows from operating activities Interest received Interest paid Fees and commissions received Net trading and other income Cash payments to employees and suppliers Taxation paid Cash flows from operating profits before changes in operating assets and liabilities Changes in operating assets and liabilities: – net decrease in derivative financial instruments – net increase in loans and advances to customers – net (increase)/decrease in other assets – net increase in deposits from banks – net increase in amounts due to customers – net increase in other liabilities Net cash (outflow)/inflow from operating activities Cash flows from investing activities Borrowings repaid on acquisition of subsidiary undertakings Cash acquired on purchase of subsidiary undertakings Purchase of subsidiary undertakings Acquisition of financial investments Disposal of financial investments Purchase of computer software Disposal of computer software Purchase of property, plant and equipment Investment in associate Proceeds from sale of property, plant and equipment Purchases of debt securities Proceeds from redemption of debt securities Net cash from investing activities Cash flows from financing activities Purchase of treasury shares Increase in borrowings Dividends paid Proceeds from share placing by Secure Trust Bank Proceeds from sale of Secure Trust Bank shares Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 10, 44 10, 44 10, 44 29 29 30 28 40 91,075 (20,085) 26,325 7,718 (81,157) (2,543) 21,333 49 (122,682) (3,572) 1,630 61,945 6,990 (34,307) (36,922) 1,512 (4,026) – 63 (1,162) 1,900 (746) (943) 23,259 (9,844) 3,904 (23,005) – 2,000 (9,060) – 14,405 7,345 (49,967) 348,074 298,107 The notes on pages 36 to 83 are an integral part of these consolidated financial statements 34 61,957 (13,405) 20,769 11,065 (64,182) (4,083) 12,121 765 (132,312) 3,616 365 200,745 5,096 90,396 (71,618) 991 – (93) – (662) – (17,661) – 12 (51,523) 78,076 (62,478) (34) – (4,206) 14,252 – 10,012 37,930 310,144 348,074 ARBUTHNOT BANKING GROUP PLC Company statement of Cash flows Note Year ended 31 December 2013 £000 Year ended 31 December 2 0 1 2 £000 Cash flows from operating activities Dividends received from subsidiaries Interest received Interest paid Net trading and other income Cash payments to employees and suppliers Taxation received Cash flows from operating profits/(losses) before changes in operating assets and liabilities Changes in operating assets and liabilities: – net decrease in group company balances – net decrease/(increase) in other assets – net increase/(decrease) in other liabilities Net cash inflow/(outflow) from operating activities Cash flows from investing activities Increase in loans to subsidiary companies Repayment of loans to subsidiary companies Increase investment in subsidiary Disposal of share in subsidiaries Purchase of property, plant and equipment Net cash from investing activities Cash flows from financing activities Purchase of treasury shares Dividends paid Increase in borrowings Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 30 11,418 99 (714) 1,364 (8,089) (160) 3,918 3,128 254 348 7,648 – – (1,000) 14,405 – 13,405 – (6,402) 2,000 (4,402) 16,651 (100) 16,551 The notes on pages 36 to 83 are an integral part of these consolidated financial statements 1,947 278 (631) 1,075 (8,298) (7) (5,636) 1,061 (357) (3,762) (8,694) (2,000) 6,500 (6,000) 386 (13) (1,127) (34) (3,574) 100 (3,508) (13,329) 13,329 – 35 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements 1. Reporting entity Arbuthnot Banking Group PLC is a company domiciled in United Kingdom. The registered address of the Arbuthnot Banking Group PLC is One Arleston Way, Solihull B90 4LH. The consolidated financial statements of the Arbuthnot Banking Group PLC as at and for the year ended 31 December 2013 comprise the Arbuthnot Banking Group PLC and its subsidiaries (together referred to as the “Group” and individually as “subsidiaries”). The Company is primarily involved in banking and financial services. 2. Basis of preparation (a) Statement of compliance The Group’s consolidated financial statements and the Company’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs as adopted and endorsed by the EU) and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements were authorised for issue by the Board of Directors on 19 March 2014. (b) Basis of measurement The consolidated and company financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets, financial assets and financial liabilities at fair value through profit or loss, and derivatives assets and liabilities. (c) Functional and presentational currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Pound Sterling, which is the Company’s functional and the Group’s presentational currency. (d) Use of estimates and judgements The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4. (e) Accounting developments • IAS 1 (Revised), ‘Presentation of Financial Statements – Presentation of items of other comprehensive income’ (effective 1 July 2012). The revised standard require the split of other comprehensive income between items which may subsequently be reclassified to profit or loss and items that will not be reclassified to profit or loss. The disclosure of other comprehensive income on the face of the Statement of Comprehensive Income in these financial statements has been changed to reflect this split. • IFRS 7 (Revised), ‘Disclosures – Offsetting Financial Assets and Financial Liabilities’ (effective 1 January 2013). The revised standard amend the required disclosures to include information that will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with the entity’s recognised financial assets and recognised financial liabilities, on the entity’s financial position. This change did not have any material impact on the financial statements. • IFRS 13, ‘Fair Value Measurement’ (effective 1 January 2013). This standard replaces the existing guidance on fair value measurement in different IFRSs with a single definition of fair value, a framework for measuring fair values and disclosures about fair value measurements. (f) Going concern The Group’s business activities and financial position, its objectives and policies in managing the financial risks to which it is exposed, and its capital, the factors likely to affect its future development and performance, is discussed in the Financial Review. The Directors have assessed, in the light of current and anticipated economic conditions, the Group’s ability to continue as a going concern. The Directors confirm they are satisfied that the Company and the Group have adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the ‘going concern’ basis for preparing accounts. 36 ARBUTHNOT BANKING GROUP PLC3. Significant accounting policies The accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 3.1. Consolidation (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s shares of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income. The Parent’s investments in subsidiaries are recorded at cost less, where appropriate, provisions for impairment in value. Changes in the Parent’s ownership interest in a subsidiary that do not result in a loss of control are treated as transactions between equity holders and are reported in equity. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (b) Special purpose entities Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets, or the execution of a specific borrowing or lending transaction. SPEs are consolidated when the substance of the relationship between the Group and the entity and the evaluation of the Group’s exposure to the risks and rewards of the SPE indicates control. The following circumstances may indicate control by the Group and would therefore require consolidation of the SPE: • • • • in substance, the activities of the SPE are being conducted on behalf of the entity according to its specific business needs so that the entity obtains benefits from the SPE’s operation; in substance, the entity has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by setting up an ‘autopilot’ mechanism, the entity has delegated these decision-making powers; in substance, the entity has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks incident to the activities of the SPE; or in substance, the entity retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities. The assessment of whether the Group has control over an SPE is carried out at inception and the initial assessment is only reconsidered at a later date if there were any changes to the structure or terms of the SPE, or there were additional transactions between the Group and the SPE. 37 REPORT & ACCOUNTS 2013notes to the Consolidated finanCial statements Continued 3.1. Consolidation (continued) (c) Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method and are initially recognised at cost. The Group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group’s share of the total comprehensive income and equity movements of equity accounted investees, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee. (d) Transactions and non-controlling interests Changes in ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity transactions and no gain or loss is recognised. Adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary. 3.2. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Group Board. The Group Board, which is responsible for allocating resources and assessing performance of the operating segments, has been identified as the chief operating decision maker. All transactions between segments are conducted on an arm’s length basis. Income and expenses directly associated with each segment are included in determining segment performance. There are three main operating segments: • Retail Banking • Private Banking • Group Centre 3.3. Foreign currency translation (a) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income. (b) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentational currency are translated into the presentation currency as follows: • • assets and liabilities for each Statement of Financial Position presented are translated at the closing rate at the date of that Statement of Financial Position; income and expenses for each Statement of Comprehensive Income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and • all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the Statement of Comprehensive Income as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 38 ARBUTHNOT BANKING GROUP PLC3.4. Interest income and expense Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost using the effective interest method. The effective interest method calculates the amortised cost of a financial asset or a financial liability and allocates the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the new carrying amount. 3.5. Fee and commission income Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accrual basis when the service has been provided. Loan commitment fees are deferred and recognised as an adjustment to the effective interest rate on the loan. Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party – such as the issue or the acquisition of shares or other securities or the purchase or sale of businesses – are recognised on completion of the underlying transaction. Asset and other management, advisory and service fees are recognised based on the applicable service contracts, usually on a time apportioned basis. The same principle is applied for financial planning and insurance services that are continuously provided over an extended period of time. Commissions arising from the sale of structured products are recognised at the point of sale as there are no further services provided or due. 3.6. Financial assets and financial liabilities The Group classifies financial assets and financial liabilities in the following categories: financial assets and financial liabilities at fair value through profit or loss; loans and receivables; held-to-maturity investments; available-for-sale financial assets and other financial liabilities. Management determines the classification of its investments at acquisition. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. (a) Financial assets and financial liabilities at fair value through profit or loss This category comprises listed securities and derivative financial instruments. Derivative financial instruments utilised by the Group include embedded derivatives and derivatives used for hedging purposes. Financial assets and liabilities at fair value through profit or loss are initially recognised on the date from which the Group becomes a party to the contractual provisions of the instrument. Subsequent measurement of financial assets and financial liabilities held in this category are carried at fair value through profit or loss. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans are recognised when cash is advanced to the borrowers. Loans and receivables are carried at amortised cost using the effective interest method. (c) Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. Held-to-maturity investments are carried at amortised cost using the effective interest method. 39 REPORT & ACCOUNTS 2013notes to the Consolidated finanCial statements Continued 3.6. Financial assets and financial liabilities (continued) (d) Available-for-sale Available-for-sale (‘AFS’) investments are those not classified as another category of financial assets. These include investments in special purpose vehicles and equity investments in unquoted vehicles. They may be sold in response to liquidity requirements, interest rate, exchange rate or equity price movements. AFS investments are initially recognised at cost, which is considered as the fair value of the investment including any acquisition costs. AFS securities are subsequently carried at fair value in the statement of financial position. Fair value changes on the AFS securities are recognised directly in equity (AFS reserve) until the investment is sold or impaired. Once sold or impaired, the cumulative gains or losses previously recognised in the AFS reserve are recycled to the profit or loss. (e) Other financial liabilities Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date. Derecognition Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the Statement of Financial Position. In transactions which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. There have not been any instances where assets have only been partially derecognised. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled, expire, are modified or exchanged. Amortised cost measurement The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal payments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, less any reduction for impairment. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis. If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis. In the instance that fair values of assets and liabilities cannot be reliably measured, they are carried at cost. 3.7. Derivative financial instruments and hedge accounting All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets, including recent arm’s length transactions or using valuation techniques such as discounted cash flow models. Derivatives are shown in the Statement of Financial Position as assets when their fair value is positive and as liabilities when their fair value is negative. (a) Fair value hedges Fair value hedges are used to hedge against the change in fair value of a recognised asset or liability or a firm commitment that could affect profit or loss. Changes in the fair value of the derivative are recognised immediately in profit or loss together with changes in the fair value of the hedged item that are attributable to the hedged risk (in the same line item in the profit or loss as the hedged item). 40 ARBUTHNOT BANKING GROUP PLC3.7. Derivative financial instruments and hedge accounting (continued) If the hedging derivative expires or is sold, terminated or exercised, or the hedging relationship no longer meets the criteria for hedge accounting, the carrying amount of the hedged item is amortised over the residual period to maturity, as part of the newly calculated effective interest rate. However, if the hedged item has been derecognised, it is immediately released to the profit or loss. (b) Cash flow hedges Cash flow hedges are used to hedge against fluctuations in future cash flows from interest rate movements on variable rate customer deposits. On initial purchase the derivative is valued at fair value and then the effective portion of the change in the fair value of the hedging instrument is recognised in equity (cash flow hedging reserve) until the gain or loss on the hedged item is realised, when it is amortised; the ineffective portion of the hedging instrument is recognised immediately in the profit or loss. If a hedging derivative expires or is sold, terminated, or exchanged, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. In a discontinued hedge of a forecast transaction the cumulative amount recognised in other comprehensive income from the period when the hedge was effective is reclassified from equity to profit or loss as a reclassification adjustment when the forecast transaction occurs and affects profit or loss. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is reclassified immediately to profit or loss as a reclassification adjustment. Hedge effectiveness testing On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and the hedged items, including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, as to whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125%. The Group makes an assessment for a cash flow hedge of a forecast transaction, as to whether the forecast transaction is highly probable to occur and presents an exposure to variations in cash flows that could ultimately affect profit or loss. (c) Embedded derivatives Embedded derivatives arise from contracts (‘hybrid contracts’) containing both a derivative (the ‘embedded derivative’) and a non-derivative (the ‘host contract’). Where the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract, and the host contract is not at fair value through profit or loss, the embedded derivative is bifurcated and reported at fair value and gains or losses are recognised in the Statement of Comprehensive Income. 3.8. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the Statement of Financial Position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 3.9. Impairment of financial assets (a) Assets carried at amortised cost On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. Objective evidence is the occurrence of a loss event, after the initial recognition of the asset, that impact on the estimated future cash flows of the financial asset or group of financial assets, and can be reliably estimated. The criteria that the Group uses to determine that there is objective evidence of an impairment loss include, but are not limited to, the following: • Delinquency in contractual payments of principal or interest; • Cash flow difficulties experienced by the borrower; • Initiation of bankruptcy proceedings; • Deterioration in the value of collateral; • Deterioration of the borrower’s competitive position; 41 REPORT & ACCOUNTS 2013notes to the Consolidated finanCial statements Continued 3.9. Impairment of financial assets (continued) If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Statement of Comprehensive Income. If a loan or held-to maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. When a loan is uncollectible, it is written off against the related provision for loan impairment. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the Statement of Comprehensive Income. (b) Assets classified as available-for-sale The Group assesses at each Statement of Financial Position date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the Statement of Comprehensive Income. Impairment losses recognised in the Statement of Comprehensive Income on equity instruments are not reversed through the Statement of Comprehensive Income. (c) Renegotiated loans Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. (d) Forbearance Forbearance is available to support customers who are in financial difficulty and help them re-establish their contractual payment plan. The main option offered by the Group is an arrangement to clear outstanding arrears. If the forbearance request is granted the account is monitored in accordance with the Group’s policy and procedures. All debts however retain the customer’s normal contractual payment due dates. Arrears tracking and the allowance for impairment is based on the original contractual due dates for both the secured and unsecured lending channels. 3.10 Inventory Land acquired through repossession of collateral which is subsequently held in the ordinary course of business with a view to develop and sell is accounted for as inventory. Inventory is measured at the lower of cost or net realisable value. The cost of inventories comprise of all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. 3.11. Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries or associates is included in ‘intangible assets’. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken place and carry goodwill at cost less accumulated impairment losses. Assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash- generating unit” or “CGU”). For impairment testing purposes goodwill cannot be allocated to a CGU that is greater than a reported operating segment. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. The test for impairment involves comparing the carrying value of goodwill with the present value of pre-tax cash flows, discounted at a rate of interest that reflects the inherent risks of the CGU to which the goodwill relates, or the CGU’s fair value if this is higher. 42 ARBUTHNOT BANKING GROUP PLC3.11. Intangible assets (continued) (b) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives (three to five years). Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. (c) Other intangibles Other intangibles include trademarks, customer relationships, broker relationships, technology and banking licences acquired. These costs are amortised on the basis of the expected useful lives (three to ten years). 3.12. Property, plant and equipment Land and buildings comprise mainly branches and offices and are stated at the latest valuation with subsequent additions at cost less depreciation. Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, applying the following annual rates, which are subject to regular review: Freehold buildings Office equipment Computer equipment Motor vehicles 50 years 6 to 20 years 3 to 5 years 4 years Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the Statement of Comprehensive Income. Depreciation on revalued freehold buildings is calculated using the straight-line method over the remaining useful life. Revaluation of assets and any subsequent disposals are addressed through the revaluation reserve and any changes are transferred to retained earnings. 3.13. Leases (a) As a lessor Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets are held subject to finance leases, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return. Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating leases. When assets are held subject to operating leases, the underlying assets are held at cost less accumulated depreciation. The assets are depreciated down to their estimated residual values on a straight line basis over the lease term. Lease rental income is recognised on a straight line basis over the lease term. (b) As a lessee Rentals made under operating leases are recognised in the Statement of Comprehensive Income on a straight line basis over the term of the lease. Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Leased assets by way of finance leases are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. 43 REPORT & ACCOUNTS 2013notes to the Consolidated finanCial statements Continued 3.14. Cash and cash equivalents For the purposes of the Statement of Cash Flows, cash and cash equivalents comprises cash on hand and demand deposits, and cash equivalents are deemed highly liquid investments that are convertible into cash with an insignificant risk of changes in value with a maturity of three months or less at the date of acquisition. 3.15. Employee benefits (a) Post-retirement obligations The Group contributes to a defined contribution scheme and to individual defined contribution schemes for the benefit of certain employees. The schemes are funded through payments to insurance companies or trustee-administered funds at the contribution rates agreed with individual employees. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. There are no post-retirement benefits other than pensions. (b) Share-based compensation The fair value of equity settled share-based payment awards are calculated at grant date and recognised over the period in which the employees become unconditionally entitled to the awards (the vesting period). The amount is recognised as personnel expenses in the profit or loss, with a corresponding increase in equity. The Group adopts a Black-Scholes valuation model in calculating the fair value of the share options as adjusted for an attrition rate of members of the scheme and a probability of pay-out reflecting the risk of not meeting the terms of the scheme over the vesting period. The number of share options that are expected to vest are reviewed at least annually. The fair value of cash settled share-based payments is recognised as personnel expenses in the profit or loss with a corresponding increase in liabilities over the vesting period. The liability is remeasured at each reporting date and at settlement date based on the fair value of the options granted, with a corresponding adjustment to personnel expenses. When share-based payments are changed from cash settled to equity settled and there is no change in the fair value of the replacement award, it is seen as a modification to the terms and conditions on which the equity instruments were granted and is not seen as the settlement and replacement of the instruments. Accordingly, the liability in the Statement of Financial Position is credited to equity and the prospective charge to the profit or loss from the modification reflects the spreading of the initial grant date fair value of the award over the remaining vesting period in line with the policy on equity settled awards. 3.16. Taxation Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise. Income tax recoverable on tax allowable losses is recognised as an asset only to the extent that it is regarded as recoverable by offset against current or future taxable profits. Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not accounted for if it arises from the initial recognition of goodwill, the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the Statement of Financial Position date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, when they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary differences can be utilised. 44 ARBUTHNOT BANKING GROUP PLC3.17. Issued debt and equity securities Issued financial instruments or their components are classified as liabilities where the contractual arrangement results in the Group having a present obligation to either deliver cash or another financial asset to the holder, to exchange financial instruments on terms that are potentially unfavourable. Issued financial instruments, or their components, are classified as equity where they meet the definition of equity and confer on the holder a residual interest in the assets of the Company. The components of issued financial instruments that contain both liability and equity elements are accounted for separately with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component. Financial liabilities, other than trading liabilities at fair value, are carried at amortised cost using the effective interest method as set out in policy 3.4. Equity instruments, including share capital, are initially recognised at net proceeds, after deducting transaction costs and any related income tax. Dividend and other payments to equity holders are deducted from equity, net of any related tax. 3.18. Share capital (a) Share issue costs Incremental costs directly attributable to the issue of new shares or options or the acquisition of a business by Arbuthnot Banking Group or its subsidiaries, are shown in equity as a deduction, net of tax, from the proceeds. (b) Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the period in which they are approved. (c) Share buybacks Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. 3.19. Financial guarantee contracts Financial guarantees represent undertakings that the Group will meet a customer’s obligation to third parties if the customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments, however, the likely amount of loss is expected to be significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards. Liabilities under financial guarantee contracts are initially recorded at their fair value, and the initial fair value is amortised over the life of the financial guarantee. Subsequently, the financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure to settle obligations. 3.20. Fiduciary activities The Group commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Group. 3.21. New standards and interpretations not yet adopted The following standards, interpretations and amendments to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2014 or later periods, but the Group has not early adopted them: • • • IFRS 10, ‘Consolidated Financial Statements’ and IAS 27 (Revised), ‘Separate Financial Statements’ (effective 1 January 2013). IFRS 10 supersedes IAS 27 and SIC-12, and provides a single model to be applied in the control analysis for all investees. There are some minor clarifications in IAS27, and the requirements of IAS 28 and IAS 31 have been incorporated into IAS 27. ¹ IFRS 11, ‘Joint Arrangements’ (effective 1 January 2013). This standard replaces the existing accounting for subsidiaries and joint ventures (now joint arrangements) and removes the choice of equity or proportionate accounting for jointly controlled entities, as was the case under IAS 31.¹ IFRS 12, ‘Disclosure of Interests in Other Entities’ (effective 1 January 2013). This standard replaces the existing accounting for subsidiaries and joint ventures (now joint arrangements) and contains the disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. ¹ 45 REPORT & ACCOUNTS 2013notes to the Consolidated finanCial statements Continued 3.21. New standards and interpretations not yet adopted (continued) • IAS 32 (Revised), ‘Offsetting Financial Assets and Financial Liabilities’ (effective 1 January 2014). This standard was amended to clarify the offsetting criteria, specifically when an entity currently has a legal right of set off; and when gross settlement is equivalent to net settlement. • IFRIC 21, ‘Levies’ (effective 1 January 2014). The interpretation defines a levy as an outflow from an entity imposed by a government in accordance with legislation. That levy is recognised as a liability when, and only when, the triggering event specified in the legislation occurs. ² The above standards are unlikely to have a material impact on the Group. • IFRS 9, ‘Financial instruments’ (effective from 1 January 2015). This standard deals with the classification and measurement of financial assets and will replace IAS 39. The requirements of this standard represent a significant change from the existing requirements in IAS 39. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. The standard eliminates the existing IAS 39 categories of ‘held to maturity’, ‘available for sale’ and ‘ loans and receivables’. Further development phases for IFRS 9 are scheduled to cover key areas such as impairment and hedge accounting. The potential effect of this standard together with the further development phases are currently being evaluated but it is expected to have a material impact on the Group’s financial statements, due to the nature of the Group’s operations. ² ¹ These standards have been endorsed by the EU for periods from 1 January 2014. ² These standards have not yet been endorsed by the EU. 4. Critical accounting estimates and judgements in applying accounting policies The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 4.1 Credit losses The Group reviews its loan portfolios and held-to-maturity investments to assess impairment at least on a half-yearly basis. The basis for evaluating impairment losses is described in accounting policy 3.9. Where financial assets are individually evaluated for impairment, management uses their best estimates in calculating the net present value of future cash flows. Management has to make judgements on the financial position of the counterparty and the net realisable value of collateral, in determining the expected future cash flows. In determining whether an impairment loss should be recorded in the Statement of Comprehensive Income, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans or held-to-maturity investments with similar credit characteristics, before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the Group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Where financial assets are individually evaluated for impairment, management uses their best estimates in calculating the net present value of future cash flows. Management has to make judgements on the financial position of the counterparty and the net realisable value of collateral (where held), in determining the expected future cash flows. In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends. To the extent that the default rates differ from that estimated by 10%, the allowance for impairment on loans and advances would change by an estimated £2.6m (2012: £1.6m). 46 ARBUTHNOT BANKING GROUP PLC4.2 Goodwill impairment The accounting policy for goodwill is described in note 3.11 (a). The Company reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken place. Significant management judgements are made in estimations, to evaluate whether an impairment of goodwill is necessary. Impairment testing is done at CGU level and the following two items, with judgements surrounding them, have a significant impact on the estimations used in determining the necessity of an impairment charge: • Future cash flows – Cash flow forecasts reflect management’s view of future business forecasts at the time of the assessment. A detailed three year budget is done every year and management also uses judgement in applying a growth rate. The accuracy of future cash flows is subject to a high degree of uncertainty in volatile market conditions. During such conditions, management would do impairment testing more frequently than annually to ensure that the assumptions applied are still valid in the current market conditions. • Discount rate – Management also apply judgement in determining the discount rate used to discount future expected cash flows. The discount rate is derived from the cost of capital for each CGU. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. There are currently three CGU’s (2012: two) with goodwill attached; the core Arbuthnot Latham CGU, the Music Finance CGU and the V12 Group CGU (subsidiary of Secure Trust Bank acquired in the year). Management considers the value in use for the core Arbuthnot Latham CGU to be the discounted cash flows over 5 years with a terminal value (2012: 5 years with a terminal value). The 5 year discounted cash flows with a terminal value is considered to be appropriate as the goodwill relates to an ongoing well established business and not underlying assets with finite lives. The terminal value is calculated by applying a discounted perpetual growth model to the profit expected in 2016 as per the approved 3 year plan. A growth rate of 9% (2012: 9%) was used for income and 7% (2012: 5%) for expenditure from 2014 to 2016 (these rates were the best estimate of future forecasted performance), while a 3% (2012: 3%) percent growth rate for income and expenditure (a more conservative approach was taken for latter years as these were not budgeted for in detail as per the three year plan approved by the Board of Directors) was used for cash flows after the approved three year plan. Management considers the value in use for the Music Finance CGU and V12 Group CGU to be the discounted cash flows over 5 years (2012: 5 years). Income and expenditure were kept flat (2012: 0%) over the 5 year period. Cash flows were discounted at a pre-tax rate of 12% (2012: 12%) to their net present value. The discount rate of 12% is considered to be appropriate after evaluating current market assessments of the time value of money and the risks specific to the assets or CGUs. Currently the value in use and fair value less costs to sell far exceeds the carrying value and as such no sensitivity analysis was done. At the time of the impairment testing, if the future expected cash flows decline and/or the cost of capital has increased, then the recoverable amount will reduce. 4.3 Taxation The Group is subject to direct and indirect taxation in a number of jurisdictions. There may be some transactions and calculations for which the ultimate tax determination has an element of uncertainty during the ordinary course of business. The Group recognises liabilities based on estimates of the quantum of taxes that may be due. Where the final tax determination is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax expense in the year in which the determination is made. 4.4 Acquisition accounting The Group recognises identifiable assets and liabilities at their acquisition date fair values. The exercise of attributing a fair value to the balance sheet of the acquired entity requires the use of a number of assumptions and estimates, which are documented at the time of the acquisition. These fair value adjustments are determined from the estimated future cash flows generated by the assets. Loans and advances to customers The methodology of attributing a fair value to the loans and advances to customers involves discounting the estimated future cash flows after impairment losses, using a risk adjusted discount factor. A fair value adjustment is then applied to the carrying value in the acquiree’s Statement of Financial Position. 47 REPORT & ACCOUNTS 2013notes to the Consolidated finanCial statements Continued 4.4 Acquisition accounting (continued) Intangible assets Identifying the separately identifiable intangible assets of an acquired company is subjective and based upon discussions with management and a review of relevant documentation. During the current and prior years the acquisition of Everyday Loans and the V12 Finance Group indicated that there were four separately identifiable intangible assets which met the criteria for separation from goodwill, these being Trademarks/Tradenames, Customer Relationships, Broker Relationships and Technology. Trademarks and Tradenames are valued by estimating the fair value of the estimated costs savings resulting from the ownership of trade names as opposed to licensing them. Customer Relationships are valued through the application of a discounted cash flow methodology to net anticipated renewal revenues. The valuation of Broker Relationships is derived from a costs avoided methodology, by reviewing costs incurred on non-broker platforms versus costs which are incurred in broker commission. Technology is valued by the market derived royalty rate applied to the related cash flows to arrive at estimated savings resulting from the use of the acquired credit decisioning technology. 4.5 Average life of lending IAS 39 requires interest earned from lending to be measured under the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset. Management must therefore use judgement to estimate the expected life of each instrument and hence the expected cash flows relating to it. The accuracy of the effective interest rate would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions. 4.6 Share option scheme valuation The valuation of the Secure Trust Bank equity-settled share option scheme was determined at the original grant date of 2 November 2011 using Black-Scholes valuation models. In the opinion of the directors the terms of the scheme are such that there remain a number of key uncertainties to be considered when calculating the probability of pay out, which are set out below. The directors also considered the probability of option holder attrition prior to the vesting dates, details of which are also set out below. Much of the bank’s lending is in the near and sub-prime categories, with performance of the book heavily influenced by employment trends. With the UK economy remaining fragile, the impact of a further downturn would be increasing unemployment, potentially causing impairments to rise and new business levels to fall, thereby affecting the bank’s ability to sustain the levels of dividend growth required under the terms of the scheme. Depending on the product type, market and customer demographics, the bank’s current product range includes expected lifetime losses of between 1% and 20%. Uncertainties in the regulatory environment continue, with pressure on the government to further constrain the activities of banks following the well reported catalogue of recent issues in the industry. Any tightening of capital requirements will impact on the ability of the Company to exploit future market opportunities and furthermore may inhibit its ability to maintain the required growth in distributions. Taking these into account, the probability of pay out has been judged as 95% for the first tranche of share options (SOS1) which vest on 2 November 2014 and 80% for the second tranche of share options (SOS2) which vest on 2 November 2016. One participant in the share option scheme left the Company during 2012 and was consequently withdrawn from the scheme. The directors consider that there is further uncertainty surrounding whether the remaining participants will all still be in situ and eligible at the vesting date. The directors have assumed an attrition rate of 8% for the 2014 options and an attrition rate of 15% for the 2016 options over the scheme period. 4.7 Impairment of equity securities A significant or prolonged decline in the fair value of an equity security is objective evidence of impairment. The Group regards a decline of more than 20 percent in fair value as “significant” and a decline in the quoted market price that persists for nine months or longer as “prolonged”. 48 ARBUTHNOT BANKING GROUP PLC4.8 Valuation of financial instruments The Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions. If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis. The objective of valuation techniques is to determine the fair value of the financial instrument at the reporting date as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In the instance that fair values of assets and liabilities cannot be reliably measured, they are carried at cost. The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements: • Level 1: Quoted prices in active markets for identical assets or liabilities • Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads, assist in the judgement as to whether a market is active. If in the opinion of management, a significant proportion of the instrument’s carrying amount is driven by unobservable inputs, the instrument in its entirety is classified as valued using significant unobservable inputs. ‘Unobservable’ in this context means that there is little or no current market data available from which to determine the level at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used). The tables below analyses financial instruments measured at fair value by the level in the fair value hierarchy into which the measurement is categorised: At 31 December 2013 Derivative financial instruments Financial investments Assets Derivative financial instruments Liabilities At 31 December 2012 Derivative financial instruments Financial investments Assets Derivative financial instruments Liabilities There were no significant transfers between level 1 and level 2 during the year. Level 1 £000 Level 2 £000 – 179 179 – – 508 – 508 371 371 Level 1 £000 Level 2 £000 – 489 489 – – 648 – 648 462 462 Level 3 £000 – 1,796 1,796 – – Level 3 £000 – 2,768 2,768 – – Total £000 508 1,975 2,483 371 371 Total £000 648 3,257 3,905 462 462 49 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 4.8 Valuation of financial instruments (continued) The following table reconciles the movement in level 3 financial instruments during the year: Movement in level 3 At 1 January Purchases Losses recognised in available-for-sale reserve Losses recognised in the profit or loss At 31 December 5. Maturity analysis of assets and liabilities The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2013: Due within one year £000 193,046 105,061 19,466 488 419,694 13,699 – – – – – 751,454 2,003 371 781,468 1,427 26,702 – – 811,971 At 31 December 2013 ASSETS Cash Loans and advances to banks Debt securities held-to-maturity Derivative financial instruments Loans and advances to customers Other assets Financial investments Deferred tax asset Investment in associate Intangible assets Property, plant and equipment Total assets LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Current tax liability Other liabilities Deferred tax liability Debt securities in issue Total liabilities 50 2013 £000 2,768 – (250) (722) 1,796 Due after more than one year £000 – – – 20 312,315 3,568 1,975 3,954 943 13,103 5,522 341,400 – – 176,323 – 4,315 1,099 12,232 193,969 2012 £000 2,746 81 – (59) 2,768 Total £000 193,046 105,061 19,466 508 732,009 17,267 1,975 3,954 943 13,103 5,522 1,092,854 2,003 371 957,791 1,427 31,017 1,099 12,232 1,005,940 ARBUTHNOT BANKING GROUP PLC 5. Maturity analysis of assets and liabilities (continued) The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2012: At 31 December 2012 ASSETS Cash Loans and advances to banks Debt securities held-to-maturity Derivative financial instruments Loans and advances to customers Other assets Financial investments Deferred tax asset Intangible assets Property, plant and equipment Total assets LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Current tax liability Other liabilities Deferred tax liability Debt securities in issue Total liabilities Due within one year £000 203,683 144,391 13,526 623 347,460 9,080 – – – 100 718,863 373 462 749,672 346 18,416 – – 769,269 Due after more than one year £000 – – – 25 239,508 2,586 3,257 5,057 8,326 22,387 281,146 – – 144,873 – 4,605 634 11,980 162,092 Total £000 203,683 144,391 13,526 648 586,968 11,666 3,257 5,057 8,326 22,487 1,000,009 373 462 894,545 346 23,021 634 11,980 931,361 51 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 5. Maturity analysis of assets and liabilities (continued) The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2013: At 31 December 2013 ASSETS Due from subsidiary undertakings – bank balances Financial investments Deferred tax asset Intangible assets Property, plant and equipment Other assets Shares in subsidiary undertakings Total assets LIABILITIES Bank overdraft Other liabilities Debt securities in issue Total liabilities Due within one year £000 Due after more than one year £000 16,551 – – – – 565 – 17,116 2,000 9,029 – 11,029 – 165 441 12 130 4,850 30,995 36,593 – – 12,232 12,232 The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2012: Due within one year £000 Due after more than one year £000 – 421 – – 812 – 1,233 100 5,552 – 5,652 413 26 20 134 4,850 30,847 36,290 – – 11,980 11,980 At 31 December 2012 ASSETS Financial investments Deferred tax asset Intangible assets Property, plant and equipment Other assets Shares in subsidiary undertakings Total assets LIABILITIES Due to subsidiary undertakings – bank balances Other liabilities Debt securities in issue Total liabilities 52 Total £000 16,551 165 441 12 130 5,415 30,995 53,709 2,000 9,029 12,232 23,261 Total £000 413 447 20 134 5,662 30,847 37,523 100 5,552 11,980 17,632 ARBUTHNOT BANKING GROUP PLC 6. Financial risk management Strategy By their nature, the Group’s activities are principally related to the use of financial instruments. The Directors and senior management of the Group have formally adopted a Group Risk and Controls Policy which sets out the Board’s attitude to risk and internal controls. Key risks identified by the Directors are formally reviewed and assessed at least once a year by the Board, in addition to which key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data. The principal non-operational risks inherent in the Group’s business are credit, market and liquidity risks. (a) Credit risk The Company and Group take on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Impairment provisions are provided for losses that have been incurred at the Statement of Financial Position date. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Company and Group’s portfolio, could result in losses that are different from those provided for at the Statement of Financial Position date. Credit risk is managed through the Credit Committees of the banking subsidiaries, with significant exposures also being approved by the Group Risk Committee. The Company and Group structure the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The limits are approved periodically by the Board of Directors and actual exposures against limits are monitored daily. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees. The Group employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of collateral to secure advances, which is common practice. The principal collateral types for loans and advances include, but are not limited to: • Charges over residential and commercial properties; • Charges over business assets such as premises, inventory and accounts receivable; • Charges over financial instruments such as debt securities and equities; • Personal guarantees; and • Charges over other chattels Upon initial recognition of loans and advances, the fair value of collateral is based on valuation techniques commonly used for the corresponding assets. In order to minimise any potential credit loss, the Group will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Repossessed collateral, not readily convertible into cash, is made available for sale in an orderly fashion, with the proceeds used to reduce or repay the outstanding indebtedness, or held as inventory where the Group intends to develop and sell in the future. Where excess funds are available after the debt has been repaid, they are available either for other secured lenders with lower priority or are returned to the customer. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. 53 REPORT & ACCOUNTS 2013notes to the Consolidated finanCial statements Continued 6. Financial risk management (continued) The Group’s maximum exposure to credit risk before collateral held or other credit enhancements is as follows: Credit risk exposures relating to on-balance sheet assets are as follows: Cash Loans and advances to banks Debt securities held-to-maturity Derivative financial instruments Loans and advances to customers – Arbuthnot Latham Loan and advances to customers – Secure Trust Bank Financial investments Other assets Credit risk exposures relating to off-balance sheet assets are as follows: Guarantees Loan commitments and other credit related liabilities At 31 December The Company’s maximum exposure to credit risk before collateral held or other credit enhancements is as follows: Credit risk exposures relating to on-balance sheet assets are as follows: Due from subsidiary undertakings – bank balances Financial investments Other assets Credit risk exposures relating to off-balance sheet assets are as follows: Guarantees At 31 December 2013 £000 2012 £000 193,046 105,061 19,466 508 340,981 391,028 1,975 6,135 203,683 144,391 13,526 648 289,337 297,631 3,257 3,393 805 37,094 1,096,099 879 21,491 978,236 2013 £000 2012 £000 16,551 165 5,310 2,500 24,526 – 413 5,309 2,500 8,222 The above table represents the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2013 and 2012 without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures are based on the net carrying amounts as reported in the Statement of Financial Position. The table below represents an analysis of the loan to values of the property book for the Group: Loan to value Less than 60% 60% – 80% 80% – 100% Greater than 100% Total 54 31 December 2013 31 December 2012 Loan Balance £000 176,713 94,295 24,188 17,089 312,285 Collateral £000 464,460 136,786 26,907 13,816 641,969 Loan Balance £000 144,250 82,462 21,407 25,000 273,119 Collateral £000 344,543 121,832 25,463 19,433 511,271 ARBUTHNOT BANKING GROUP PLC 6. Financial risk management (continued) Forbearance Arbuthnot Latham and Secure Trust Bank generally do not reschedule contractual arrangements where customers default on their repayments. Under its Treating Customers Fairly policies however, the company may offer the customer the option to reduce or defer payments for a short period. If the request is granted, the account continues to be monitored in accordance with the Group’s impairment provisioning policy. Such debts retain the customer’s normal contractual payment due dates and will be treated the same as any other defaulting cases for impairment purposes. Arrears tracking will continue on the account with any impairment charge being based on the original contractual due dates for all products. In June 2012, the Group acquired Everyday Loans whose policy on forbearance is that a customers’ account may be modified to assist customers who are in or, have recently overcome, financial difficulties and have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. These may be modified by way of a reschedule or deferment of repayments. Rescheduling of debts retains the customers contractual due dates, whilst the deferment of repayments extends the payment schedule up to a maximum of four payments in a 12 month period. As at 31 December 2013 the gross balance of rescheduled loans included in the Consolidated Statement of Financial Position was £13.9 million, with an allowance for impairment on these loans of £1.1 million. The gross balance of deferred loans was £2.8 million with an allowance for impairment on these of £0.4 million (2012: the gross balance of rescheduled loans was £12.3 million, with an allowance for impairment on these loans of £1.2 million and the gross balance of deferred loans was £2.9 million with an allowance for impairment on these of £0.4 million). Concentration risk The Group is well diversified in the UK, being exposed to retail banking and private banking. Management assesses the potential concentration risk from a number of areas including: • • • geographical concentration product concentration; and high value residential properties Due to the well diversified nature of the Group and the significant collateral held against the loan book, the Directors do not consider there to be a potential material exposure arising from concentration risk. (b) Operational risk The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiatives and creativity. Operational risk arises from all of the Group’s operations. The primary responsibility for the development and implementation of controls to address operational risk is assigned to the senior management within each subsidiary. Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of the Internal Audit reviews are discussed with the Company’s senior management, with summaries submitted to the Arbuthnot Banking Group Audit Committee. (c) Market risk Price risk The Company and Group is exposed to equity securities price risk because of investments held by the Group and classified on the Consolidated Statement of Financial Position either as available-for-sale or at fair value through the profit or loss. The Group is not exposed to commodity price risk. To manage its price risk arising from investments in equity securities, the Group diversifies its portfolio. Diversification of the portfolio is done in accordance with the limits set by the Group. Based upon the financial investment exposure (in note 26), a stress test scenario of a 10% (2012: 10%) decline in market prices, with all other things being equal, would result in a £394,000 (2012: £17,000) decrease in the Group’s income and a decrease of £140,000 (2012: £255,000) in the Group’s equity. The Group consider a 10% stress test scenario appropriate after taking the current values and historic data into account. Based upon the financial investment exposure given in note 26, a stress test scenario of a 10% (2012: 10%) decline in market prices, with all other things being equal, would result in a £15,000 (2012: £17,000) decrease in the Company’s income and a decrease of £13,000 (2012: £13,000) in the Company’s equity. 55 REPORT & ACCOUNTS 2013notes to the Consolidated finanCial statements Continued 6. Financial risk management (continued) Currency risk The Company and Group takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure for both overnight and intra-day positions, which are monitored daily. The table below summarises the Group’s exposure to foreign currency exchange rate risk at 31 December 2013. Included in the table below are the Group’s assets and liabilities at carrying amounts, categorised by currency. At 31 December 2013 ASSETS Cash Loans and advances to banks Debt securities held-to-maturity Derivative financial instruments Loans and advances to customers Other assets Financial investments LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Other liabilities Debt securities in issue Net on-balance sheet position Credit commitments GBP (£) £000 USD ($) £000 Euro (€) £000 Other £000 Total £000 192,972 85,365 16,423 508 682,925 9,678 179 988,050 2,003 371 916,465 10,152 – 928,991 59,059 37,899 53 16,703 3,043 – 3,748 – – 23,547 – – 20,292 – – 20,292 3,255 – 20 1,160 – – 45,336 – 1,796 48,312 – – 19,388 – 12,232 31,620 16,692 – 1 1,833 – – – – – 1,834 – – 1,646 – – 1,646 188 – 193,046 105,061 19,466 508 732,009 9,678 1,975 1,061,743 2,003 371 957,791 10,152 12,232 982,549 79,194 37,899 The table below summarises the Group’s exposure to foreign currency exchange rate risk at 31 December 2012: At 31 December 2012 ASSETS Cash Loans and advances to banks Debt securities held-to-maturity Derivative financial instruments Loans and advances to customers Other assets Financial investments LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Other liabilities Debt securities in issue Net on-balance sheet position Credit commitments 56 GBP (£) £000 USD ($) £000 Euro (€) £000 Other £000 Total £000 203,638 132,202 13,526 648 541,745 11,604 515 903,878 373 462 861,329 23,021 – 885,185 18,693 22,370 16 9,713 – – 4,236 62 – 14,027 – – 14,469 – – 14,469 (442) – 27 738 – – 40,985 – 2,742 44,492 – – 17,019 – 11,980 28,999 15,493 – 2 1,738 – – 2 – – 1,742 – – 1,728 – – 1,728 14 – 203,683 144,391 13,526 648 586,968 11,666 3,257 964,139 373 462 894,545 23,021 11,980 930,381 33,758 22,370 ARBUTHNOT BANKING GROUP PLC 6. Financial risk management (continued) A 10% strengthening of the pound against the US dollar would lead to a £5,000 increase (2012: £44,000 decrease) in Group profits and equity, while a 10% weakening of the pound against the US dollar would lead to the same decrease in Group profits and equity. Similarly a 10% strengthening of the pound against the Euro would lead to a £20,000 increase (2012: £86,000 decrease) in Group profits and equity, while a 10% weakening of the pound against the Euro would lead to the same increase in Group profits and equity. The above results are after taking into account the effect of derivative financial instruments (see note 22), which covers most of the net exposure in each currency. The table below summarises the Company’s exposure to foreign currency exchange rate risk at 31 December 2013: At 31 December 2013 ASSETS Due from subsidiary undertakings – bank balances Financial investments Other assets Investment in subsidiary undertakings LIABILITIES Bank overdraft Other liabilities Debt securities in issue Net on-balance sheet position GBP (£) £000 Euro (€) £000 Total £000 3,827 165 5,310 30,995 40,297 2,000 7,768 – 9,768 30,529 12,724 – – – 12,724 – – 12,232 12,232 492 16,551 165 5,310 30,995 53,021 2,000 7,768 12,232 22,000 31,021 The table below summarises the Company’s exposure to foreign currency exchange rate risk at 31 December 2012: At 31 December 2012 ASSETS Financial investments Other assets Investment in subsidiary undertakings LIABILITIES Due to subsidiary undertakings – bank balances Other liabilities Debt securities in issue Net on-balance sheet position GBP (£) £000 Euro (€) £000 Total £000 413 5,309 30,847 36,569 12,600 4,639 – 17,239 19,330 – – – – (12,500) – 11,980 (520) 520 413 5,309 30,847 36,569 100 4,639 11,980 16,719 19,850 A 10% strengthening of the pound against the Euro would lead to £24,000 (2012: £26,000) decrease in the Company profits and equity, conversely a 10% weakening of the pound against the Euro would lead to the same increase in the Company profits and equity. 57 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 6. Financial risk management (continued) Interest rate risk Interest rate risk is the potential adverse impact on the Company and Group’s future cash flows from changes in interest rates; and arises from the differing interest rate risk characteristics of the Company and Group’s assets and liabilities. In particular, fixed rate savings and borrowing products expose the Group to the risk that a change in interest rates could cause either a reduction in interest income or an increase in interest expense relative to variable rate interest flows. The Group seeks to “match” interest rate risk on either side of the Statement of Financial Position. However, this is not a perfect match and interest rate risk is present on: Money market transactions of a fixed rate nature, fixed rate loans and fixed rate savings accounts. There is interest rate mismatch in Arbuthnot Latham and Secure Trust Bank. This is monitored on a daily basis in conjunction with liquidity and capital. The interest rate mismatch is daily monitored, throughout the maturity bandings of the book on a parallel shift scenario for 50, 100 and 200 basis points movement. The Group consider the 50, 100 and 200 basis points movement to be appropriate for scenario testing given the current economic outlook and industry expectations. This typically results in a pre-tax mismatch of £0.5m to £1.8m (2012: £0.6m to £2.4m) for the Group, with the same impact to equity pre-tax. The Company has no fixed rate exposures, but a upward change of 50 basis points on variable rates would increase pre-tax profits and equity by £12,000 (2012: decrease pre-tax profits and equity by £37,000). (d) Liquidity risk The current Liquidity regime came into force on 1 October 2010. The PRA requires a firm to maintain at all times liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due. There is also a requirement that a firm ensures its liquidity resources contain an adequate buffer of high quality, unencumbered assets (i.e. Government securities in the liquidity asset buffer); and it maintains a prudent funding profile. The liquid assets buffer is a pool of highly liquid assets that can be called upon to create sufficient liquidity to meet liabilities on demand, particularly in a period of liquidity stress. The liquidity resources outside the buffer must either be marketable assets with a demonstrable secondary market that the firm can access, or a credit facility that can be activated in times of stress. The banking entities both prepared and approved their Individual Liquidity Adequacy Assessment (“ILAA”). The liquidity buffers required by the ILAA have all been put in place and maintained since. Liquidity resources outside of the buffer are made up of certificates of deposit and fixed rate notes (debt securities). The Company and Group also maintain long-term committed bank facilities. The table below analyses the contractual undiscounted cash flows for the Group into relevant maturity groupings at 31 December 2013: Gross nominal inflow/ (outflow) £000 Not more than 3 months £000 More than 3 months but less than 1 year £000 More than 1 year but less than 5 years £000 (2,003) (1,013,314) (8,892) (14,224) (805) (37,094) (1,076,332) (2,003) (435,868) (7,857) (100) (805) (37,094) (483,727) – (388,573) (1,025) (299) – – (389,897) – (185,953) (10) (1,593) – – (187,556) Carrying amount £000 2,003 957,791 10,152 12,232 982,178 More than 5 years £000 – (2,920) – (12,232) – – (15,152) 371 371 – (371) (371) – (371) (371) – – – – – – – – – At 31 December 2013 Non-derivative liabilities Deposits from banks Deposits from customers Other liabilities Debt securities in issue Issued financial guarantee contracts Unrecognised loan commitments Derivative liabilities Risk management: – Outflows 58 ARBUTHNOT BANKING GROUP PLC 6. Financial risk management (continued) The table below analyses the contractual undiscounted cash flows for the Group into relevant maturity groupings at 31 December 2012: At 31 December 2012 Non-derivative liabilities Deposits from banks Deposits from customers Other liabilities Debt securities in issue Issued financial guarantee contracts Unrecognised loan commitments Derivative liabilities Risk management: – Outflows Carrying amount £000 373 894,545 23,021 11,980 929,919 Gross nominal inflow/ (outflow) £000 Not more than 3 months £000 More than 3 months but less than 1 year £000 More than 1 year but less than 5 years £000 (373) (916,708) (23,409) (13,933) (879) (21,491) (976,793) (373) (396,331) (23,056) (98) (879) (21,491) (442,228) – (364,647) (207) (293) – – (365,147) – (153,320) (146) (1,562) – – (155,028) More than 5 years £000 – (2,410) – (11,980) – – (14,390) 462 462 – (462) (462) – (462) (462) – – – – – – – – – The table below analyses the contractual undiscounted cash flows for the Company into relevant maturity groupings at 31 December 2013: At 31 December 2013 Non-derivative liabilities Bank overdraft Other liabilities Debt securities in issue Issued financial guarantee contracts Carrying amount £000 2,000 7,768 12,232 22,000 Gross nominal inflow/ (outflow) £000 Not more than 3 months £000 More than 3 months but less than 1 year £000 More than 1 year but less than 5 years £000 (2,000) (7,768) (14,224) (2,500) (26,492) (2,000) (5,143) (100) (2,500) (9,743) – (1,025) (299) – (1,324) – (10) (1,593) – (1,603) More than 5 years £000 – (1,590) (12,232) – (13,822) The table below analyses the contractual undiscounted cash flows for the Company into relevant maturity groupings at 31 December 2012: At 31 December 2012 Non-derivative liabilities Due to subsidiary undertakings – bank overdraft Other liabilities Debt securities in issue Issued financial guarantee contracts Carrying amount £000 100 5,552 11,980 17,632 Gross nominal inflow/ (outflow) £000 Not more than 3 months £000 More than 3 months but less than 1 year £000 More than 1 year but less than 5 years £000 (100) (5,552) (13,933) (2,500) (22,085) (100) (4,639) (98) (2,500) (7,337) – (913) (293) – (1,206) – – (1,562) – (1,562) More than 5 years £000 – – (11,980) – (11,980) The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates. 59 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 6. Financial risk management (continued) Fiduciary activities The Group provides investment management and advisory services to third parties, which involve the Group making allocation and purchase and sale decisions in relation to a wide range of financial instruments. Those assets that are held in a fiduciary capacity are not included in these financial statements. These services give rise to the risk that the Group may be accused of maladministration or underperformance. At the Statement of Financial Position date, the Group had investment management accounts amounting to approximately £528m (2012: £377m). Additionally the Group provides investment advisory services. (e) Financial assets and liabilities The tables below set out the Group’s financial assets and financial liabilities into the respective classifications: Fair value through profit or loss £000 Held-to- maturity £000 Loans and receivables £000 Available- for-sale £000 Other amortised cost £000 Total carrying amount £000 Fair value £000 At 31 December 2013 ASSETS Cash Derivative financial instruments Loans and advances to banks Loans and advances to customers Debt securities held-to-maturity Financial investments LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Debt securities in issue At 31 December 2012 ASSETS Cash Derivative financial instruments Loans and advances to banks Loans and advances to customers Debt securities held-to-maturity Financial investments LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Debt securities in issue – 508 – – – 152 660 – 371 – – 371 – – – – 19,466 – 19,466 193,046 – 105,061 732,009 – – 1,030,116 – – – – – – – – – – – – – – – 1,823 1,823 – – – – – Fair value through profit or loss £000 Held-to- maturity £000 Loans and receivables £000 Available- for-sale £000 – 648 – – – 169 817 – 462 – – 462 – – – – 13,526 – 13,526 203,683 – 144,391 586,968 – – 935,042 – – – – – 3,088 3,088 – – – – – – – – – – – – – – – 373 – 894,545 11,980 906,898 – – – – – – – 193,046 508 105,061 732,009 19,466 1,975 1,052,065 193,046 508 105,061 730,706 19,547 1,975 1,050,843 2,003 – 957,791 12,232 972,026 Other amortised cost £000 – – – – – – – 2,003 371 957,791 12,232 972,397 Total carrying amount £000 203,683 648 144,391 586,968 13,526 3,257 952,473 373 462 894,545 11,980 907,360 2,003 371 957,791 12,232 972,397 Fair value £000 203,683 648 144,391 585,924 13,623 3,257 951,526 373 462 894,545 11,980 907,360 Cash, loans and advances to banks, debt securities held-to-maturity, deposits from banks and deposits from customers are classified as level 2 financial instruments, on the basis that they are liquid but not traded in an active market. Loans and advances to customers and debt securities in issue are classified as level 3 as there is no observable market data for these instruments. 60 ARBUTHNOT BANKING GROUP PLC 7. Capital management The Group’s capital management policy is focused on optimising shareholder value. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position. In accordance with the EU’s Capital Requirements Directive (CRD) and the required parameters set out in the Prudential Regulatory Authority (‘PRA’) Handbook (BIPRU 2.2), the Individual Capital Adequacy Assessment Process (ICAAP) is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. The Group’s regulated entities are also the principal trading subsidiaries as detailed in note 42. Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a “Pillar 1 plus” approach to determine the level of capital the Group needs to hold. This method takes the Pillar 1 capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations delivers a sufficient capital sum adequately to cover management’s anticipated risks. Where the Board considered that the Pillar 1 calculations did not reflect the risk, an additional capital add-on in Pillar 2 is applied, as per the Individual Capital Guidance (ICG) issued by the PRA. The Group’s regulatory capital is divided into two tiers: • • Tier 1 comprises mainly shareholders’ funds, non-controlling interests, after deducting goodwill and other intangible assets. Lower Tier 2 comprises qualifying subordinated loan capital, collective provisions and revaluation reserves. Lower Tier 2 capital cannot exceed 50% of tier 1 capital. The following table shows the regulatory capital resources as managed by the Group: Tier 1 Share capital Retained earnings Other reserves Non-controlling interests Goodwill Deductions for other intangibles Total tier 1 capital Tier 2 Revaluation reserve Collective provisions Debt securities in issue Total tier 2 capital Total tier 1 & tier 2 capital 2013 £000 2012 £000 153 67,901 (1,111) 20,327 (2,695) (8,710) 75,865 22 1,578 12,232 13,832 153 53,372 (1,393) 16,376 (1,991) (5,318) 61,199 140 – 11,980 12,120 89,697 73,319 The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. The PRA sets ICG for each UK bank calibrated by references to its Capital Resources Requirement, broadly equivalent to 8 percent of risk weighted assets and thus representing the capital required under Pillar 1 of the Basel II framework. The ICAAP is a key input into the PRA’s ICG setting process, which addresses the requirements of Pillar 2 of the Basel II framework. The PRA’s approach is to monitor the available capital resources in relation to the ICG requirement. Each entity maintains an extra internal buffer and capital ratios are reviewed on a monthly basis to ensure that external requirements are adhered to. All regulated entities have complied with all of the externally imposed capital requirements to which they are subject. 61 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 7. Capital management (continued) In June 2013, the PRA published a final regulation to give effect to the Basel III framework, which amends the definition of Tier 1 capital. This comes into effect on 1 January 2014. The Group’s current capital position is sufficient to meet the Tier 1 capital ratio based on the Tier 1 capital definition under the new regulation. Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). Its aim is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm’s capital, risk exposures and risk assessment processes. Our Pillar 3 disclosures for the year ended 31 December 2013 are published as a separate document on the Group website under Investor Relations (Announcements & Shareholder Information). 8. Fee and commission income Banking commissions Trust and other fiduciary fee income Financial Planning fees and commissions Structured product commissions Other fee income * 2013 £000 4,714 4,320 1,351 1,810 19,621 31,816 2012 £000 5,872 3,349 1,149 2,441 11,305 24,116 * This mainly includes fee and commission income received on OneBill, Current Accounts, PPI insurance and commission earned on debt recovery activities at Secure Trust Bank. 9. Net impairment loss on financial assets Net Impairment losses on loans and advances to customers Impairment losses on financial investments 2013 £000 17,734 1,073 18,807 2012 £000 10,984 – 10,984 10. Gain from a bargain purchase On 15 January 2013 Debt Managers (Services) Limited (“DMS”), a wholly owned subsidiary of Secure Trust Bank, acquired certain trade and assets from Debt Managers Holdings Ltd, Debt Managers (AB) Limited and Debt Managers Limited (together “Debt Managers”). Debt Managers collects debt on behalf of a range of clients including banks and utility companies. Key benefits of this acquisition to Secure Trust Bank include: • Broadening the income base of Secure Trust Bank without the requirement for large amounts of capital; • • The acquisition of a scalable collections platform through which Secure Trust Bank intends to channel its delinquent debt; and The acquisition of the latest call centre and collections technology, including market leading dialler capability, interactive voice response technology and payment websites. DMS acquired the Debt Managers business for an initial cash payment of £0.4 million paid on completion of the transaction. Deferred consideration of up to £0.3 million was payable by DMS one year after completion subject to the business achieving certain performance criteria. Of this, £0.1 million was paid by DMS in final settlement. The acquired assets included a software platform jointly developed with a third party. Upon completion the rights to this software were sold to that third party for consideration of £2 million. DMS then proceeded to lease back the internal rights to use this software. On completion Secure Trust Bank provided DMS with £2.2 million of funding to clear an outstanding overdraft of £1.8 million and to fund the working capital requirements of DMS. 62 ARBUTHNOT BANKING GROUP PLC 10. Gain from a bargain purchase (continued) The Consolidated Statement of Comprehensive Income includes revenue of £3.8 million and a loss before tax of £0.9 million attributable to DMS. Had the acquisition occurred at the start of the financial year, the Consolidated Statement of Comprehensive Income would have included revenue of £4.0 million and a loss before tax of £0.9 million attributable to DMS. Clients cash at bank Other assets Intangible assets Property, plant and equipment Total assets Bank overdraft Client account Other liabilities Total liabilities Net identifiable assets Consideration Goodwill Acquired assets/ liabilities £000 Fair value adjustments £000 Recognised values on acquisition £000 1,362 1,117 2,010 57 4,546 1,846 1,301 730 3,877 669 – 263 – – 263 – – – – 263 1,362 1,380 2,010 57 4,809 1,846 1,301 730 3,877 932 519 (413) On 8 June 2012 Secure Trust Bank PLC (“STB”) acquired 100% of the shares in Everyday Loans Holdings Limited and its wholly owned subsidiaries Everyday Loans Limited and Everyday Lending Limited (together “ELL”). STB acquired ELL for consideration of £1. Upon acquisition STB provided funding so that ELL could redeem the remaining £34 million of subordinated debt and also provided a loan facility of £37 million to refinance ELL’s existing bank debt and to fund future loans. A gain on acquisition of £9.8m arose from the difference between the acquisition price and the fair value of net assets acquired. This is expected to amortise through the profit and loss account over 3 to 5 years. Intangible assets Property, plant and equipment Loans and advances to customers Cash at bank Other assets Prepayments and accrued income Deferred tax asset Total assets Loans and debt securities Other liabilities Accruals and deferred income Deferred tax liabilities Total liabilities Net identifiable (liabilities)/assets Consideration – £1 Gain on acquisition Fair value adjustments £000 Recognised values on acquisition £000 Acquired assets/ liabilities £000 50 491 63,720 991 24 2,939 – 68,215 71,618 960 1,741 – 74,319 5,115 – 7,545 – – – 6,313 18,973 – – – 3,039 3,039 (6,104) 15,934 5,165 491 71,265 991 24 2,939 6,313 87,188 71,618 960 1,741 3,039 77,358 9,830 – 9,830 63 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 11. Gain on sale of building On 17 October 2013 Arbuthnot Latham & Co., Limited completed the sale and leaseback of 7-21 Wilson Street. The net book value of the property at the date of sale was £16.5m. Under the terms of the sale and leaseback agreement, the cash consideration received by Arbuthnot Latham was £26.2m paid on completion. The Buyer is also providing £5.4m to be drawn by Arbuthnot Latham to fund a renovation and fit out programme. After providing £3.0 million for the rent payable during the period of refurbishment prior to occupation and £0.2m of transaction costs, the net gain was £6.5m. 12. Disposals On 20 March 2012 Arbuthnot Banking Group PLC agreed terms for the sale of Arbuthnot AG. The company was sold to Ducartis Holding AG for a total cash consideration of CHF 2.0m (£1.4m) which resulted in a profit for the Group of £0.8m. 13. Other income Arbuthnot Latham received £1.2m of rental income in the year from the letting of the 7-21 Wilson Street property. The property was vacated by the tenants at the end of September 2013 and refurbishment works started soon afterwards in anticipation of the Group occupation of the building in 2015. Up to the date of sale of Arbuthnot AG, the purchaser funded most of the running costs for this entity, which is included in other income and amounted to £nil (2012: £0.3m). In Secure Trust Bank there was also some other sundry income amounting to £nil (2012: £0.1m). 14. Discontinued operations On 20 January 2012 the Group completed the sale of Arbuthnot Securities Limited resulting in an after tax loss of £0.3m. 15. Operating expenses Operating expenses comprise: Staff costs, including Directors: Wages and salaries Social security costs Pension costs Share based payment transactions (note 38) Amortisation of intangibles (note 29) Depreciation (note 30) Operating lease rentals Costs arising from acquisitions Other administrative expenses Total operating expenses Remuneration of the auditor and its associates, excluding VAT, was as follows: Fees payable to the Company’s auditor for the audit of the Company’s annual accounts Fees payable to the Company’s auditor and its associates for other services: Audit of the accounts of subsidiaries Audit related assurance services Taxation compliance services Taxation advisory services Other assurance services Corporate finance services Other non-audit services Total fees payable 2013 £000 2012 £000 33,262 3,553 1,509 2,249 2,803 1,015 4,617 535 24,088 73,631 2013 £000 82 356 104 73 62 56 – 28 761 25,016 2,686 1,084 1,610 1,062 899 2,463 1,397 16,826 53,043 2012 £000 82 263 104 178 48 – 250 47 972 Remuneration for corporate finance services in 2012 include £250,000 in relation to the acquisition of Everyday Loans Holdings Limited. Audit related assurance services include regulatory audits and interim profit verifications. Other non-audit services include fees for ad hoc accounting advice. 64 ARBUTHNOT BANKING GROUP PLC 16. Average number of employees Retail banking Private banking Group 17. Income tax expense United Kingdom corporation tax at 23.25% (2012: 24.5%) Current taxation Corporation tax charge – current year Corporation tax charge – adjustments in respect of prior years Deferred taxation Origination and reversal of temporary differences Adjustments in respect of prior years Income tax expense Tax reconciliation Profit before tax Tax at 23.25% (2012: 24.5%) Permanent differences Tax rate change Prior period adjustments Corporation tax charge for the year 2013 530 145 16 691 2013 £000 3,146 548 3,694 1,006 (502) 504 4,198 15,713 3,653 208 291 46 4,198 2012 399 144 16 559 2012 £000 1,068 481 1,549 (297) (124) (421) 1,128 12,593 3,085 (2,573) 259 357 1,128 Of the £2,573,000 permanent differences in 2012, £2,408,000 relates to the non-taxable gain from a bargain purchase. The UK corporation tax rate reduced from 26% to 24% with effect from 1 April 2012, to 23% with effect from 1 April 2013 and to 21% from 1 April 2014. On 2 July 2013 the Government substantively enacted a further reduction to the UK corporation tax rate to 20% from 1 April 2015. This will reduce the Company’s future current tax charge accordingly. 18. Earnings per ordinary share Basic and fully diluted Earnings per ordinary share are calculated by dividing the profit after tax attributable to equity holders of the Company of £7,930,000 (2012: £8,041,000) by the weighted average number of ordinary shares 15,279,322 (2012: 15,279,322) in issue during the year. There is currently no difference between basic and fully diluted earnings per ordinary share. 19. Cash Cash in hand included in cash and cash equivalents (note 40) 2013 £000 2012 £000 193,046 203,683 In 2010 a reserve account was opened at the Bank of England (BoE) to comply with the new liquidity regime that came into force on 1 October 2010. Surplus funds are now mainly held in the BoE reserve account, with the remainder held in certificates of deposit, fixed rate notes and money market deposits in highly rated banks (the majority held in UK clearing banks). 65 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 20. Loans and advances to banks 2013 £000 2012 £000 Placements with banks included in cash and cash equivalents (note 40) 105,061 144,391 The table below presents an analysis of loans and advances to banks by rating agency designation as at 31 December, based on Moody’s long term ratings: Aaa Aa3 A1 A2 A3 2013 £000 2012 £000 57,101 – – 44,327 3,633 105,061 68,783 23,082 13,373 39,153 – 144,391 None of the loans and advances to banks is either past due or impaired. 21. Debt securities held-to-maturity Debt securities represent certificates of deposit. The Group’s intention is to hold them to maturity and, therefore, they are stated in the Statement of Financial Position at amortised cost. The movement in debt securities held-to-maturity may be summarised as follows: At 1 January Additions Redemptions At 31 December 2013 £000 2012 £000 13,526 9,844 (3,904) 19,466 40,079 51,012 (77,565) 13,526 The table below presents an analysis of debt securities by rating agency designation at 31 December, based on Moody’s long term ratings: Aaa Aa1 Aa3 A3 None of the debt securities held-to-maturity is either past due or impaired. 2013 £000 14,120 3,044 2,302 – 19,466 2012 £000 8,026 – 1,500 4,000 13,526 66 ARBUTHNOT BANKING GROUP PLC 22. Derivative financial instruments Group and Company Currency swaps Interest rate caps Contract/ notional amount £000 39,850 20,000 59,850 2013 Fair value assets £000 488 20 508 Fair value liabilities £000 371 – 371 Contract/ notional amount £000 41,206 20,000 61,206 2012 Fair value assets £000 623 25 648 Fair value liabilities £000 462 – 462 The principal derivatives used by the Group are exchange rate contracts and interest rate caps (used for cash flow hedges). Exchange rate related contracts include currency swaps. A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; exchange of principal can be notional or actual. The currency swaps are settled net and therefore the fair value is small in comparison to the contract/notional amount. An interest rate cap is an option contract which puts an upper limit on a floating exchange rate. The writer of the cap has to pay the holder of the cap the difference between the floating rate and the reference rate when that reference rate is breached. The holder pays a premium for the cap. Also included in derivative financial instruments are structured notes not yet placed to investors. These notes contain embedded derivatives (embedded options to buy and sell indicies) and non-derivative host contracts (discounted bonds). Both the host and embedded derivatives are presented net within derivative financial instruments. The Group only uses investment graded banks as counterparties for derivative financial instruments. The table below presents an analysis of derivative financial instruments contract/notional amounts by rating agency designation of counterparty bank at 31 December, based on Moody’s long term ratings: Aa3 A1 23. Loans and advances to customers Gross loans and advances Less: allowances for impairment on loans and advances (note 24) For a maturity profile of loans and advances to customers, refer to note 6. 2013 £000 39,850 20,000 59,850 2012 £000 41,206 20,000 61,206 2013 £000 2012 £000 763,042 (31,033) 732,009 607,616 (20,648) 586,968 67 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 23. Loans and advances to customers (continued) Loans and advances to customers include finance lease receivables as follows: Gross investment in finance lease receivables: – No later than 1 year – Later than 1 year and no later than 5 years Unearned future finance income on finance leases Net investment in finance leases The net investment in finance leases may be analysed as follows: – No later than 1 year – Later than 1 year and no later than 5 years Loans and advances to customers can be further summarised as follows: Neither past due nor impaired Past due but not impaired Impaired Gross Less: allowance for impairment Net (a) Loans and advances past due but not impaired Gross amounts of loans and advances to customers that were past due but not impaired were as follows: Past due up to 30 days Past due 30 – 60 days Past due 60 – 90 days Over 90 days Total 2013 £000 2012 £000 16,386 16,053 32,439 (6,885) 25,554 12,905 12,649 25,554 2013 £000 684,783 19,210 59,049 763,042 (31,033) 732,009 2013 £000 2,681 4,369 3,439 8,721 19,210 22,188 13,047 35,235 (8,914) 26,321 10,509 15,812 26,321 2012 £000 550,640 14,756 42,220 607,616 (20,648) 586,968 2012 £000 1,160 4,584 5,354 3,658 14,756 Loans and advances normally fall into this category when there is a delay in either the sale of the underlying collateral or the completion of formalities to extend the credit facilities for a further period. Management have no material concerns regarding the quality of the collateral that secures the lending. (b) Loans and advances renegotiated Restructuring activities include external payment arrangements, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review. Renegotiated loans that would otherwise be past due or impaired totalled £nil (2012: £nil). 68 ARBUTHNOT BANKING GROUP PLC 23. Loans and advances to customers (continued) (c) Collateral held An analysis of loans and advances to customers past due or impaired by reference to the fair value of the underlying collateral is as follows: Past due but not impaired Impaired Fair value of collateral held 2013 £000 62,168 10,963 73,131 2012 £000 39,162 7,881 47,043 Collateral is shown at fair value less costs to sell. The fair value of the collateral held is £73,131,000 against £47,226,000 secured loans, giving an average loan-to-value of 65% (2012: 77%). The gross amount of individually impaired loans and advances to customers before taking into account the cash flows from collateral held is £28,016,000 (2012: £21,572,000). Interest income on loans classified as impaired totalled £2,574,000 (2012: £1,601,000). 24. Allowances for impairment of loans and advances Reconciliation of specific allowance for impairments: At 1 January Impairment losses Loans written off during the year as uncollectible Amounts recovered during the year At 31 December Reconciliation of collective allowance for impairments: At 1 January Impairment losses At 31 December A further analysis of allowances for impairment of loans and advances is as follows: Loans and advances to customers – UK Private Bank Loan and advances to customers – Retail Bank – unsecured At 31 December 25. Other assets Group Trade receivables Repossessed collateral – held as inventory Prepayments and accrued income 2013 £000 20,278 17,590 (8,413) – 29,455 2013 £000 370 1,208 1,578 2013 £000 3,973 27,060 31,033 2013 £000 6,135 3,543 7,589 17,267 2012 £000 11,250 11,248 (1,586) (634) 20,278 2012 £000 – 370 370 2012 £000 4,423 16,225 20,648 2012 £000 3,393 2,586 5,687 11,666 Land acquired through repossession of collateral which is subsequently held in the ordinary course of business with a view to develop and sell is accounted for as inventory. 69 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 25. Other assets (continued) Company Trade receivables Due from subsidiary undertakings Prepayments and accrued income 26. Financial investments Group Financial investments comprise: – Securities (at fair value through profit or loss) – Securities (available-for-sale) Total financial investments 2013 £000 731 4,579 105 5,415 2012 £000 731 4,578 353 5,662 2013 £000 2012 £000 152 1,823 1,975 169 3,088 3,257 Unlisted securities The Group has made equity investments in unlisted special purpose vehicles set up to acquire and enhance the value of commercial properties. These investments are of a medium term nature. There is no open market for these investments, therefore the Group has valued them using appropriate valuation methodologies, which include net asset valuations and discounted future cash flows. The Directors intend to dispose of these assets when a suitable buyer has been identified and when the Directors believe that the underlying assets have reached their maximum value. Company Financial investments comprise: – Securities (at fair value through profit or loss) – Securities (available-for-sale) Total financial investments 27. Deferred taxation The deferred tax asset comprises: Unrealised surplus on revaluation of freehold property Accelerated capital allowances and other short-term timing differences Fair value of derivatives Tax losses Deferred tax asset At 1 January On acquisition of V12/ELL Revaluation reserve Profit and loss account – accelerated capital allowances and other short-term timing differences Profit and loss account – tax losses Deferred tax asset at 31 December 70 2013 £000 152 13 165 2013 £000 173 (160) 100 2,742 2,855 4,423 (960) 242 589 (1,439) 2,855 2012 £000 169 244 413 2012 £000 (71) (673) 110 5,057 4,423 629 3,276 – 1,040 (522) 4,423 ARBUTHNOT BANKING GROUP PLC 27. Deferred taxation (continued) The above balance is made up as follows: Deferred tax assets within the Group Deferred tax liabilities within the Group 2013 £000 3,954 (1,099) 2,855 2012 £000 5,057 (634) 4,423 Deferred tax assets are recognised for tax losses to the extent that the realisation of the related tax benefit through future taxable profits is probable. The UK corporation tax rate reduced from 26% to 24% with effect from 1 April 2012, to 23% with effect from 1 April 2013 and to 21% with effect from 1 April 2014. This will reduce the Group’s future current tax charge accordingly. Deferred tax has been calculated based on a rate of 21% to the extent that the related temporary or timing differences are expected to reverse. On 2 July 2013 the Government substantively enacted a further reduction to the UK corporation tax rate to 20% from 1 April 2015. It has not yet been possible to quantify the full anticipated effect of the announced further 1% reduction, although this will further reduce the Group’s future tax charge and reduce the Group’s deferred tax assets and liabilities accordingly. 28. Investment in associate Investment in associate 2013 £000 943 2012 £000 – On 11 October 2013, Arbuthnot Latham & Co. together with Praxis (Holding) Limited, formed a special purpose vehicle in the form of a separate legal entity (Tarn Crag Limited). The purpose of this legal entity is to refurbish and re-let a property in Glasgow, with the intention to exit via a sale to an institutional investor in circa 5 years time. The investment is accounted for using the equity method. No profit or loss was recorded in the current year. The summarised financial information of the associate is set out below: At 31 December 2013 ASSETS Cash Property, plant and equipment LIABILITIES Bank loans Debt securities in issue £000 320 10,580 10,900 9,500 1,400 10,900 71 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 29. Intangible assets Group Cost At 1 January 2012 Additions On acquisition of ELL (note 10) At 31 December 2012 Additions On acquisition of V12 & DMS (note 10 and 44) Disposals At 31 December 2013 Accumulated amortisation At 1 January 2012 Amortisation charge At 31 December 2012 Amortisation charge At 31 December 2013 Net book amount At 31 December 2012 At 31 December 2013 Company Cost At 1 January 2012 At 31 December 2012 At 31 December 2013 Accumulated amortisation At 1 January 2012 Amortisation charge At 31 December 2012 Amortisation charge At 31 December 2013 Net book amount At 31 December 2012 At 31 December 2013 Refer to note 4.2 for assumptions used in the impairment review of goodwill. 72 Goodwill £000 Computer software £000 Other intangibles £000 1,991 – – 1,991 – 704 – 2,695 – – – – – 4,920 662 50 5,632 948 5,414 (1,900) 10,094 (3,350) (367) (3,717) (1,307) (5,024) – – 5,115 5,115 214 2,200 – 7,529 – (695) (695) (1,496) (2,191) Total £000 6,911 662 5,165 12,738 1,162 8,318 (1,900) 20,318 (3,350) (1,062) (4,412) (2,803) (7,215) 1,991 2,695 1,915 5,070 4,420 5,338 8,326 13,103 Computer software £000 40 40 40 (12) (8) (20) (8) (28) 20 12 ARBUTHNOT BANKING GROUP PLC 30. Property, plant and equipment Group Cost or valuation At 1 January 2012 Additions On acquisition of ELL (note 10) Disposals At 31 December 2012 Additions On acquisition of V12 & DMS (note 10 and 44) Disposals At 31 December 2013 Accumulated depreciation At 1 January 2012 Depreciation charge Disposals At 31 December 2012 Depreciation charge Disposals At 31 December 2013 Net book amount At 31 December 2012 At 31 December 2013 Freehold land and buildings £000 Leasehold improvements £000 Computer and other equipment £000 4,850 16,789 – – 21,639 – – (16,789) 4,850 (685) (199) – (884) (301) 345 (840) – 5 540 (32) 513 122 9 (16) 628 – (101) 22 (79) (168) – (247) 11,174 818 – (200) 11,792 624 78 (461) 12,033 (10,125) (567) 198 (10,494) (546) 138 (10,902) Total £000 16,024 17,612 540 (232) 33,944 746 87 (17,266) 17,511 (10,810) (867) 220 (11,457) (1,015) 483 (11,989) 20,755 4,010 434 381 1,298 1,131 22,487 5,522 The Group’s freehold property at 1 Arleston Way, Solihull, B90 4LH, was valued on 17 December 2008 by an Independent external valuer, who is a Fellow of the Royal Institute of Chartered Surveyors. The Valuation was in accordance with the requirements of the RICS Valuation Standards 6th Edition and the International Valuation Standards. The Valuation of the property was on the basis and assumption it is an Owner/Occupied property, valued to Market Value assuming that the property will be sold as part of the continuing business. The Valuer’s opinion of Market Value was primarily derived using comparable recent market transactions on arms-length terms. The Directors have assessed the value at year end through comparison to current rental yields on similar properties in the area and do not believe that the fair value of freehold property is materially different from the carrying value. On 3 August 2012 the Group acquired freehold premises at 7-21 Wilson Street, London, EC2M 2TD (“Wilson Street”) for £15.7 million plus acquisition costs (including stamp duty) of £1.1m. On 17 October 2013 the Group disposed of the property and leased it back from the purchaser. The carrying value of freehold land not depreciated is £0.5 million (2012: £1.7 million). The historical cost of freehold property included at valuation is as follows: Cost Accumulated depreciation Net book amount 2013 £000 4,832 (1,063) 3,769 2012 £000 20,567 (1,102) 19,465 73 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 30. Property, plant and equipment (continued) Company Cost or valuation At 1 January 2012 Additions At 31 December 2012 Additions At 31 December 2013 Accumulated depreciation At 1 January 2012 Depreciation charge At 31 December 2012 Depreciation charge At 31 December 2013 Net book amount At 31 December 2012 At 31 December 2013 31. Deposits from banks Deposits from other banks For a maturity profile of deposits from banks, refer to note 6. 32. Deposits from customers Current/demand accounts Term deposits Computer and other equipment £000 189 13 202 1 203 (62) (6) (68) (5) (73) 134 130 2012 £000 373 2013 £000 2,003 2013 £000 2012 £000 366,797 590,994 957,791 260,037 634,508 894,545 Included in customer accounts are deposits of £9,947,000 (2012: £8,578,000) held as collateral for loans and advances. The fair value of these deposits approximates the carrying value. For a maturity profile of deposits from customers, refer to note 6. 33. Other liabilities Group Trade payables Accruals and deferred income 2013 £000 10,152 20,865 31,017 2012 £000 7,656 15,365 23,021 The Financial Services Compensation Scheme (‘FSCS’) has provided compensation to consumers following the collapse of a number of deposit takers. The compensation paid out to consumers is currently funded through loans from the Bank of England and HM Treasury. 74 ARBUTHNOT BANKING GROUP PLC 33. Other liabilities (continued) In previous years the Company has applied a trigger date for recognition of FSCS liabilities of 31 December. During 2013 this was changed to 1 April. Included in accruals is a provision for non occupancy rent of £3m (2012: £nil). This was taken into account when calculating the profit on the sale and leaseback of the Wilson Street property (see note 11). Company Due to subsidiary undertakings Accruals and deferred income 34. Debt securities in issue Subordinated loan notes 2035 £000 £000 7,768 1,261 9,029 4,639 913 5,552 2013 £000 2012 £000 12,232 11,980 The subordinated loan notes 2035 were issued on 7 November 2005 and are denominated in Euros. The principal amount outstanding at 31 December 2013 was €15,000,000 (2012: €15,000,000). The notes carry interest at 3% over the interbank rate for three month deposits in Euros and are repayable at par in August 2035 unless redeemed or repurchased earlier by the Company. The contractual undiscounted amount that will be required to be paid at maturity of the above debt securities is €15,000,000. Given the fact that the Group has never been subject to a published credit rating by any of the relevant agencies and the notes in issue are not quoted, it is not considered possible to approximate a fair value for these notes. 35. Contingent liabilities and commitments Capital commitments At 31 December 2013, the Group had capital commitments of £nil (2012: £nil) in respect of equipment purchases. Credit commitments The contractual amounts of the Group’s off-balance sheet financial instruments that commit it to extend credit to customers are as follows: Guarantees and other contingent liabilities Commitments to extend credit: – Original term to maturity of one year or less 2013 £000 805 2012 £000 879 37,094 37,899 21,491 22,370 Operating lease commitments Where a Group company is the lessee, the future aggregate lease payments under non-cancellable operating leases are as follows: Expiring: Within 1 year Later than 1 year and no later than 5 years Later than 5 years 2013 £000 2012 £000 4,672 9,636 19,351 33,659 1,982 3,168 29 5,179 75 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 35. Contingent liabilities and commitments (continued) The lease on the Group’s current premises at 20 Ropemaker Street, London, EC2Y 9AR, costs £1.7 million per annum and has a break option in June 2015. The Group has exercised the break option and Wilson Street (see note 11) will become the head office for Arbuthnot Banking Group PLC, the principal location for Arbuthnot Latham & Co., Limited and London offices for Secure Trust Bank PLC. Arbuthnot entered into a 16 year lease on Wilson Street, with a break at 11 years and rent reviews after 5, 10 and 15 years. The initial rent is £1.75 million per annum. These two leases form the most significant part of the operating leases disclosed in the table above. 36. Share capital At 1 January 2012 Cancellation of share premium account At 31 December 2012 & 31 December 2013 During 2012 the share premium was cancelled and transferred to reserves. At 31 December 2013 the Company held 390,274 shares (2012: 390,274) in treasury. 37. Reserves and retained earnings Group Revaluation reserve Capital redemption reserve Available-for-sale reserve Cash flow hedging reserve Treasury shares Retained earnings Total reserves at 31 December Number of shares 15,279,322 – 15,279,322 Ordinary share capital £000 153 – 153 Share premium £000 21,085 (21,085) – 2013 £000 191 20 (169) (378) (1,131) 67,901 66,434 2012 £000 140 20 81 (363) (1,131) 53,372 52,119 The revaluation reserve represents the unrealised change in the fair value of properties. The capital redemption reserve represents a reserve created after the Company purchased its own shares which resulted in a reduction of share capital. Company Capital redemption reserve Available-for-sale reserve Treasury shares Retained earnings Total reserves as 31 December 76 2013 £000 20 81 (1,131) 31,325 30,295 2012 £000 20 81 (1,131) 20,768 19,738 ARBUTHNOT BANKING GROUP PLC 38. Share-based payment options Company On 16 April 2013 Mr. Salmon exercised the option granted to him on 21 May 2008 to subscribe for 100,000 ordinary 1p shares in the Company at 337.5p and Mr. Cobb exercised the option granted to him on 5 November 2008 to subscribe for 50,000 ordinary 1p shares in the Company at 320p. The exercise price was 930p per share and the Board agreed to make a cash settlement rather than allot new shares. On the same day Mr. Salmon and Mr. Cobb were granted new options and as such the Company had the following equity settled share-based payment awards outstanding at 31 December 2013: • On 16 April 2013 Mr. Salmon was granted an option to subscribe for 100,000 ordinary 1p shares in the Company between April 2016 and April 2021 at 930p. The fair value of the option at grant date was £83k. • On 16 April 2013 Mr. Cobb was granted an option to subscribe for 50,000 ordinary 1p shares in the Company between April 2016 and April 2021 at 930p. The fair value of the option at grant date was £41k. There are no other vesting conditions for these awards. Group Apart from the share-based payment awards for the Company listed above, the Group also include awards allocated under the Secure Trust Bank Share Option Scheme, which was established on 17 October 2011 and entitles key management personnel and senior employees of Secure Trust Bank PLC to purchase shares in that company. The performance conditions of the Scheme are that for the duration of the vesting period, the dividends paid by Secure Trust Bank PLC must have increased in percentage terms when compared to an assumed dividend of £8 million in respect of the financial year ending 31 December 2012, by a minimum of the higher of: a) the increase in the Retail Prices Index during that period; or b) 5% per annum during that period. All dividends paid by Secure Trust Bank each year during the vesting period must be paid from Secure Trust Bank’s earnings referable to that year. Also from the grant date to the date the Option is exercised, there must be no public criticism by any regulatory authority on the operation of Secure Trust Bank or any of its subsidiaries which has a material impact on the business of the Company. Options are forfeited if they remain unexercised after a period of more than 10 years from the date of grant. If the participant ceases to be employed by the Group by reason of injury, disability, ill-health or redundancy; or because his employing company ceases to be a shareholder of the Group; or because his employing business is being transferred out of the Group, his option may be exercised within 6 months after such cessation. In the event of the death of a participant, the personal representatives of a participant may exercise an option, to the extent exercisable at the date of death, within 6 months after the death of the participant. On cessation of employment for any other reason (or when a participant serves, or has been served with, notice of termination of such employment), the option will lapse although the Remuneration Committee has discretion to allow the exercise of the option for a period not exceeding 6 months from the date of such cessation. In such circumstances, the performance conditions may be modified or waived as the Remuneration Committee, acting fairly and reasonably and taking due consideration of the circumstances, thinks fit. The number of Ordinary Shares which can be acquired on exercise will be pro-rated on a time elapsed basis, unless the Remuneration Committee, acting fairly and reasonably and taking due consideration of the circumstances, decides otherwise. In determining whether to exercise its discretion in these respects, the Remuneration Committee must satisfy itself that the early exercise of an option does not constitute a reward for failure. 77 REPORT & ACCOUNTS 2013notes to the Consolidated finanCial statements Continued 38. Share-based payment options (continued) On 2 November 2011 934,998 share options were granted at an exercise price of 720p per share. Half of the share options are exercisable on 2 November 2014 with the remainder exercisable on 2 November 2016, being SOS1 and SOS2 respectively. At the grant date these share options had a fair value of £1.6m. Of the share options granted on 2 November 2011, the following were to Group directors: • Mr. Lynam was granted an option to subscribe for 141,666 ordinary 40p shares in Secure Trust Bank at 720p between 2 November 2014 and 1 November 2021 and a further 141,667 shares at 720p between 2 November 2016 and 1 November 2021. • Mr. Salmon was granted an option to subscribe for 141,666 ordinary 40p shares in Secure Trust Bank at 720p between 2 November 2014 and 1 November 2021 and a further 141,667 shares at 720p between 2 November 2016 and 1 November 2021. During 2013, the Share Option Scheme was changed to become an equity settled scheme without a change in fair value. The original grant date valuation was previously determined to be £1.69 per option and this valuation has been used to determine the charge for the year. An attrition rate of option holders has been assumed of 8% for the first tranche of share options and 15% for the second tranche. Also due to the options being fully conditional knockout options, a probability of pay-out has been assigned based on the likelihood of meeting the performance criteria, which is 95% and 80% respectively for the two share option tranches. Summary details of the Secure Trust Bank Share Option Scheme are shown in the table below: Key Management Personnel Senior Management Share Options in Issue Exercise Price (£) Value per option (£) Total included in reserves (£000) Behavioural assumption (attrition) Probability of payout Total (£000) No. SOS1 SOS2 Total 31 December 2013 3 5 8 318,750 141,666 460,416 318,749 141,666 460,415 637,499 283,332 920,831 7.20 1.69 790 7.6% 95% 693 7.20 1.69 790 15.2% 80% 536 1,580 1,229 39. Dividends per share Final dividends are not accounted for until they have been approved at the Annual General Meeting. At the meeting on 8 May 2014, a dividend in respect of 2013 of 15 pence per share (2012: actual dividend 14 pence per share) amounting to a total of £2.23m (2012: actual £2.08m) is to be proposed. The financial statements for the year ended 31 December 2013 do not reflect the final dividend which will be accounted for in shareholders’ equity as an appropriation of retained profits in the year ending 31 December 2014. 40. Cash and cash equivalents For the purposes of the Statement of Cash Flows, cash and cash equivalents comprises of the following balances with less than three months maturity from the date of acquisition. Cash (note 19) Loans and advances to banks (note 20) 78 2013 £000 2012 £000 193,046 105,061 298,107 203,683 144,391 348,074 ARBUTHNOT BANKING GROUP PLC 41. Related-party transactions Related parties of the Company and Group include subsidiaries, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced, or for which significant voting power is held, by Key Management Personnel or their close family members. Other than the directors’ remuneration, payment of dividends and transactions with subsidiaries, there were no related party transactions within the Parent Company. A number of banking transactions are entered into with related parties in the normal course of business on normal commercial terms. These include loans and deposits. Except for the directors’ disclosures, there were no other Key Management Personnel disclosures; therefore the tables below relate to directors. Loans Loans outstanding at 1 January Loans advanced during the year Loan repayments during the year Loans outstanding at 31 December Interest income earned 2013 £000 2012 £000 2,648 3,160 (620) 5,188 138 2,377 391 (120) 2,648 118 The loans to directors are secured on property, shares or cash and bear interest at rates linked to base rate. No provisions have been recognised in respect of loans given to related parties (2012: £nil). Details of directors’ remuneration are given in the Remuneration Report. The Directors do not believe that any other key management disclosures are required. Deposits Deposits at 1 January Deposits placed during the year Deposits repaid during the year Deposits at 31 December Interest expense on deposits Details of principal subsidiaries are given in Note 42. Transactions and balances with subsidiaries are shown below: 2013 £000 2012 £000 1,767 3,237 (2,482) 2,522 20 1,273 1,332 (838) 1,767 97 ASSETS Due from subsidiary undertakings Shares in subsidiary undertakings Total assets LIABILITIES Due to subsidiary undertakings Total liabilities Issued guarantee contracts 2013 2012 Highest balance during the year £000 Balance at 31 December £000 Highest balance during the year £000 Balance at 31 December £000 21,130 31,847 52,977 8,003 8,003 2,500 21,130 30,995 52,125 7,768 7,768 2,500 24,009 30,847 54,856 10,738 10,738 2,500 4,928 30,847 35,775 4,740 4,740 2,500 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to represent the transactions during the year. The above transactions arose during the normal course of business and are on substantially the same terms as for comparable transactions with third-parties. 79 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 42. Investment in subsidiary undertakings Arbuthnot Banking Group PLC: At 1 January 2012 Sale of Arbuthnot Securities Limited Sale of Arbuthnot AG Capital contribution in Arbuthnot Latham & Co., Limited Allotment of shares in Secure Trust Bank PLC At 31 December 2012 Capital contribution in Arbuthnot Latham & Co., Limited Sale of shares in Secure Trust Bank PLC At 31 December 2013 Subsidiary undertakings: Banks Other Total Investment at cost £000 Impairment provisions £000 31,515 (4,062) (42) 1,000 5,000 33,411 1,000 (852) 33,559 (6,282) 3,718 – – – (2,564) – – (2,564) Net £000 25,233 (344) (42) 1,000 5,000 30,847 1,000 (852) 30,995 2013 £000 2012 £000 28,695 2,300 30,995 28,547 2,300 30,847 The principal subsidiary undertakings of Arbuthnot Banking Group PLC at 31 December 2013 were: Country of incorporation Interest % Principal activity Secure Trust Bank PLC Arbuthnot Latham & Co., Limited UK UK 67 100 Retail banking Private banking (i) All the above subsidiary undertakings are included in the consolidated financial statements and have an accounting reference date of 31 December. (ii) All the above interests relate wholly to ordinary shares. 43. Operating segments The Group is organised into three main operating segments as disclosed below: 1) Retail banking – incorporating household cash management, personal lending and banking and insurance services. 2) UK Private banking – incorporating private banking and wealth management. 3) Group Centre – ABG Group Centre management. Transactions between the operating segments are on normal commercial terms. Centrally incurred expenses are charged to operating segments on an appropriate pro-rata basis. Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet. 80 ARBUTHNOT BANKING GROUP PLC 43. Operating segments (continued) Year ended 31 December 2013 Interest revenue Inter-segment revenue Interest revenue from external customers Fee and commission income Revenue from external customers Interest expense Subordinated loan note interest Fee and commission expense Segment operating income Impairment losses Gain from a bargain purchase Gain on sale of building Other income Operating expenses Segment profit/(loss) before tax Income tax (expense)/income Segment profit/(loss) after tax Loans and advances to customers Other assets Segment total assets Customer deposits Other liabilities Segment total liabilities Other segment items: Capital expenditure Depreciation and amortisation Continuing operations Retail banking £000 UK Private banking £000 73,790 (62) 73,728 22,745 96,473 (12,905) – (4,648) 78,982 (15,644) 413 – – (46,558) 17,193 (4,832) 12,361 19,712 (209) 19,503 9,071 28,574 (6,934) – (198) 21,651 (2,914) – 6,535 1,165 (18,709) 7,728 794 8,522 Group Centre £000 101 (3) 98 – 98 (22) (418) – (613) (249) – – 18 (8,364) (9,208) (160) (9,368) Total £000 93,603 (274) 93,329 31,816 125,145 (19,861) (418) (4,846) 100,020 (18,807) 413 6,535 1,183 (73,631) 15,713 (4,198) 11,515 391,028 134,865 525,893 (436,608) (26,915) (463,523) 340,981 278,692 619,673 (521,183) (71,437) (592,620) – (52,712) (52,712) – 50,203 50,203 732,009 360,845 1,092,854 (957,791) (48,149) (1,005,940) (1,159) (3,103) (747) (702) (2) (13) (1,908) (3,818) The “Group Centre” segment above includes the parent entity and all intercompany eliminations. 81 REPORT & ACCOUNTS 2013 notes to the Consolidated finanCial statements Continued 43. Operating segments (continued) Discontinued operations Year ended 31 December 2012 Investment banking £000 Retail banking £000 UK Private banking £000 Continuing operations International private banking £000 Interest revenue Inter-segment revenue Interest revenue from external customers Fee and commission income Revenue from external customers Interest expense Subordinated loan note interest Fee and commission expense Segment operating income Gain from a bargain purchase Impairment losses Other income Gain on sale of subsidiary Operating expenses Segment (loss)/profit before tax Income tax income/(expense) Segment (loss)/profit after tax Loans and advances to customers Other assets Segment total assets Customer deposits Other liabilities Segment total liabilities Other segment items: Capital expenditure Depreciation and amortisation – – – – – – – – – – – – – (383) (383) 36 (347) 44,893 (121) 44,772 15,788 60,560 (10,467) – (3,206) 47,008 9,830 (8,946) 37 – (30,676) 17,253 (1,591) 15,662 17,494 (165) 17,329 8,328 25,657 (6,786) – (141) 18,895 – (2,038) – – (14,799) 2,058 507 2,565 297,631 176,968 474,599 (398,891) (19,758) (418,649) 289,337 279,278 568,615 (495,654) (48,506) (544,160) (810) (1,472) (17,451) (443) – – – – Segment profit is shown prior to any intra-group eliminations. – – – – – (7) – – (7) – – 334 – (333) (6) – (6) – – – – – – – – Group Centre £000 290 (91) 199 – 199 209 (463) – (341) – – 25 839 (7,235) (6,712) (44) (6,756) Total £000 62,677 (377) 62,300 24,116 86,416 (17,051) (463) (3,347) 65,555 9,830 (10,984) 396 839 (53,043) 12,593 (1,128) 11,465 – (43,205) (43,205) – 31,448 31,448 586,968 413,041 1,000,009 (894,545) (36,816) (931,361) Group Total £000 11,118 586,968 413,041 1,000,009 (894,545) (36,816) (931,361) (13) (14) (18,274) (1,929) (18,274) (1,929) The International private banking operations were in Switzerland. The UK private bank opened a branch in Dubai in the year, which generated £11k fee income and had operating costs of £890k. Other than the Switzerland operation that was sold in 2012 and the Dubai branch opened in 2013, all operations of the Group are conducted wholly within the United Kingdom and geographical information is therefore not presented. 82 ARBUTHNOT BANKING GROUP PLC 44. Acquisition of V12 Finance Group Limited On 2 January 2013 Secure Trust Bank acquired 100% of the ordinary share capital of V12 Finance Group Limited, which along with its wholly owned subsidiaries V12 Retail Finance Limited and V12 Personal Finance Limited provide retail loans, typically for 12 months on an unsecured basis to consumers who are predominantly classified as prime borrowers. The cash consideration for the companies of £3.5 million was paid on completion. The acquisition is complementary to the Group’s existing retail finance proposition and the V12 management team will continue in the business. As part of the acquisition Secure Trust Bank provided funding such that the V12 Finance Group could redeem £7.0 million of subordinated debt and repay existing bank finance amounting to £28.1 million. The acquisition of V12 Finance Group Limited is accounted for in accordance with IFRS 3 ‘Business Combinations’, which requires the recognition of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. As part of this process, it is also necessary to identify and recognise certain assets and liabilities which are not included on the acquiree’s balance sheet, for example intangible assets. The exercise to fair value the balance sheet is inherently subjective and required management to make a number of assumptions and estimates. The Consolidated Statement of Comprehensive Income includes revenue of £5.1 million and a profit before tax of £0.5 million attributable to V12. The following assets were acquired as part of the acquisition of the V12 Finance Group Limited and its wholly owned subsidiary entities: Cash Loans and advances to customers Other assets Deferred tax assets Intangible assets Property, plant and equipment Total assets Loans and debt securities Other liabilities Deferred tax liability Total liabilities Net identifiable (liabilities)/assets Consideration Goodwill arising on acquisition Acquired assets/ liabilities £000 150 32,744 619 292 17 176 33,998 35,076 276 34 35,386 Fair value adjustments £000 Recognised values on acquisition £000 – – – – 5,443 – 5,443 – – 1,252 1,252 150 32,744 619 292 5,460 176 39,441 35,076 276 1,286 36,638 2,803 3,507 704 (1,388) 4,191 45. Ultimate controlling party The Company regards Henry Angest, the Group Chairman and Chief Executive Officer, who has a beneficial interest in 53.7% of the issued share capital of the Company, as the ultimate controlling party. Details of his remuneration are given in the Remuneration Report and note 41 of the consolidated financial statements includes related party transactions with Mr Angest. 46. Events after the balance sheet date There were no material post balance sheet events. 83 REPORT & ACCOUNTS 2013 five year summary In the table below, all the figures are presented in accordance with IFRS. Profit before tax * Earnings per share Basic (p) ** Dividends per share (p) Other KPIs: 2009 £000 2010 £000 2011 £000 2012 £000 2013 £000 5,050 5,104 5,116 12,593 15,713 23.4 22.0 25.0 23.0 (33.3) 24.0 52.6 25.0 51.9 44.0 2009 £000 2010 £000 2011 £000 2012 £000 2013 £000 Net asset value per share (p) 227.6 227.7 312.2 449.3 570.5 * The profit before tax for 2011 is shown as the results of continuing operations. The previous years have not been restated but the contribution of the discontinued operation can be seen in the segmental analysis for those historical years. ** The earnings per share includes the effect of discontinued operations in 2011. 84 ARBUTHNOT BANKING GROUP PLC page left blank for your notes 85 REPORT & ACCOUNTS 2013notiCe of meeting NOTICE IS HEREBY GIVEN that the twenty-eighth Annual General Meeting of Arbuthnot Banking Group PLC (the Company) will be held at Arbuthnot House, 20 Ropemaker Street, London EC2Y 9AR on Thursday, 8 May 2014 at 3pm for the following purposes: Ordinary Business To consider and, if thought fit, pass the following resolutions which will be proposed as ordinary resolutions: 1. To receive and adopt the report of the directors and the financial statements for the year ended 31 December 2013. 2. To receive the report of the Remuneration Committee. 3. To declare a final dividend in respect of the year ended 31 December 2013 which the directors propose should be 15p per Ordinary Share, payable on 16 May 2014 to shareholders on the register of members at the close of business on 22 April 2014. 4. To re-elect Mr. A.A. Salmon as a Director who retires by rotation in accordance with Article 78 of the Articles of Association and offers himself for re-election. 5. To re-elect Mr. P.A. Lynam as a Director who retires by rotation in accordance with Article 78 of the Articles of Association and offers himself for re-election. 6. To appoint KPMG LLP as Auditors of the Company and to authorise the Directors to fix their remuneration. Special Business To consider and, if thought fit, pass the following resolutions which in the case of resolution 7 will be proposed as a special resolution and in the case of resolution 8 will be proposed as an ordinary resolution: 7. That the Company be and is hereby generally and unconditionally authorised to make market purchases (as defined in section 693(4) of the Companies Act 2006) of Ordinary Shares of 1p each in the capital of the Company (“Ordinary Shares”) provided that: (a) the maximum number of Ordinary Shares hereby authorised to be purchased shall be 1,488,000 (being approximately 10% of the issued share capital of the Company as at 19 March 2014); (b) the minimum price which may be paid for an Ordinary Share shall be £0.01; (c) the maximum price which may be paid for an Ordinary Share shall be 5 per cent. above the average of the closing middle market price of the Ordinary Shares (as derived from the London Stock Exchange Daily Official List) for the 10 business days prior to the day the purchase is made; (d) the authority hereby conferred shall expire on 31 May 2015 or, if earlier, on the conclusion of the next Annual General Meeting of the Company unless such authority is renewed prior to such time; and (e) the Company may enter into contracts to purchase Ordinary Shares under the authority hereby conferred prior to the expiry of such authority, which contracts will or may be executed wholly or partly after the expiry of such authority, and may make purchases of Ordinary Shares pursuant to any such contracts. 8. That, for the purposes of and to the extent required by the forthcoming regulatory rules, the Company be and is hereby authorised to pay a discretionary bonus to one or more executive directors or senior managers provided that in any case the payment does not exceed two times the annual basic salary of that director or manager for the year in question. By order of the Board J.R. Kaye Secretary 4 April 2014 86 Registered Office One Arleston Way Solihull B90 4LH ARBUTHNOT BANKING GROUP PLC Notes: 1. In accordance with Regulation 41 of the Uncertificated Securities Regulations 2001, the Company gives notice that only those shareholders entered on the relevant register of members (the Register) for certificated or uncertificated shares of the Company (as the case may be) at 6 p.m. on 6 May 2014 (“the Specified Time”) will be entitled to attend or vote at the Annual General Meeting in respect of the number of shares registered in their name at that time. Changes to entries on the Register after the Specified Time will be disregarded in determining the rights of any person to attend or vote at the Annual General Meeting. Should the Annual General Meeting be adjourned to a time not more than 48 hours after the Specified Time, that time will also apply for the purpose of determining the entitlement of members to attend and vote (and for the purpose of determining the number of votes they may cast) at the adjourned Annual General Meeting. Should the Annual General Meeting be adjourned for a longer period, then to be so entitled, members must be entered on the Register at the time which is 48 hours before the time fixed for the adjourned Annual General Meeting, or, if the Company gives notice of the adjourned Annual General Meeting, at the time specified in the notice. 2. Members who want to attend and vote should either attend in person or appoint a proxy or corporate representative to attend, speak and vote on his/her behalf. A member may appoint more than one proxy in relation to the Annual General Meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares of the member, but must attend the meeting in person. A proxy need not be a member. A paper Form of Proxy is enclosed. Please read carefully the instructions on how to complete the form. Forms of Proxy, together with the power of attorney or other authority (if any) under which it is signed or a notarially certified copy of such power of attorney or other authority, must be lodged with the Registrars or submitted not later than 48 hours before the time for which the Annual General Meeting is convened. Completion of the appropriate Form of Proxy does not prevent a member from attending and voting in person if he/she is entitled to do so and so wishes. 3. There are no service contracts of Directors other than ones which may be terminated on up to 12 months’ notice at any time. Copies of these service agreements will be available for inspection at the registered office during usual business hours on any weekday (Saturdays, Sundays and public holidays excepted) from the date of this notice until the date of the Annual General Meeting and at the place of the Annual General Meeting for 15 minutes prior to and during the Annual General Meeting. 87 REPORT & ACCOUNTS 2013Corporate ContaCts & advisers Advisers Auditors: KPMG Audit Plc Principal Bankers: Barclays Bank PLC Lloyds TSB Bank plc Stockbrokers: Numis Securities Limited Nominated Advisor: Canaccord Genuity Limited Registrars: Capita Asset Services The Registry 34 Beckenham Road Beckenham, Kent BR3 4TU Group Address Arbuthnot Banking Group PLC Arbuthnot House 20 Ropemaker Street London EC2Y 9AR T 020 7012 2400 E info@arbuthnotgroup.co.uk www.arbuthnotgroup.com Registered Office One Arleston Way Solihull B90 4LH T 0121 693 9100 F 0121 693 9124 Corporate Contacts Secure Trust Bank PLC One Arleston Way Solihull B90 4LH T 0121 693 9100 F 0121 693 9124 E banking@securetrustbank.com www.securetrustbank.com Arbuthnot Latham & Co., Limited Arbuthnot House 20 Ropemaker Street London EC2Y 9AR T 020 7012 2500 F 020 7012 2501 E banking@arbuthnot.co.uk www.arbuthnotlatham.co.uk 17 Southernhay West Exeter EX1 1PJ T 01392 496061 F 01392 413638 Dubai Branch PO Box 482007 Gate Precinct 4 Level 3 Office 308 Dubai International Financial Centre Dubai T +971 (4) 3770900 88 ARBUTHNOT BANKING GROUP PLCA R B U T H N O T B A N K I N G G R O U P P L C A n n u a l R e p o r t & A c c o u n t s 2 0 1 3 Arbuthnot Banking Group PLC Arbuthnot House 20 Ropemaker Street London EC2Y 9AR T 020 7012 2400 E info@arbuthnotgroup.co.uk www.arbuthnotgroup.com Registration No. 1954085

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