ARBUTHNOT BANKING GROUP PLC Annual Report & Accounts 2022 Arbuthnot Banking Group PLC Report & Accounts 2022 The importance of history and Sun Tzu The importance of previous experience cannot be overstated. “Those who are not willing to learn from history are doomed to repeat the mistakes of previous generations.” A good place to start, therefore, is with the famous Chinese General, Sun Tzu and his writings in “The Art of War” c. 2500 years ago. He established some basic truths such as: “He whose ranks are united in purpose will be victorious.” “The commander will surely choose those who are most fortunate.” “The traits of a true commander are: courage, wisdom, humanity and integrity.” Origins of Arbuthnot Latham George Arbuthnot (1772 – 1843) was a son of the Edinburgh banker Robert Arbuthnot. He started in 1803 as a partner in Latour & Co. in Madras (today Chennai), Southern India. Latour & Co. had been set up in 1780 by Count Francis Joseph Louis Latour de Quercy, who died in 1808. In 1807 Latour & Co. became Arbuthnot & Co. and George Arbuthnot became the leading partner until he retired in 1824. In his farewell letter to the partners he said: “…not only give the constituent (client) the assurance that his money is safe, but also give him the feeling that he is benefitting himself by dealing with the House.” In 1826 John Alves Arbuthnot started as a clerk at Arbuthnot & Co. and in 1831 became a partner. He married the daughter of George Arbuthnot. Upon his return to London he established, together with Alfred Latham, the trading house Arbuthnot & Latham on 13 March 1833. (For more details, read the book: Arbuthnot Latham 1833 – 2013 by David Lascelles) 1 2 3 4 8 14 26 28 Corporate Philosophy Business Overview Financial Highlights Chairman’s Statement Strategic Report – Business Review Strategic Report – Financial Review Strategic Report – Non-Financial Information Statement Strategic Report – Stakeholder Engagement and s.172 Report Strategic Report – Sustainability Report 30 40 Board of Directors 42 Group Directors’ Report 46 Corporate Governance Independent Auditor’s Report 54 Remuneration Report 57 64 Consolidated Statement of Comprehensive Income 65 Consolidated Statement of Financial Position 66 Company Statement of Financial Position 67 Consolidated Statement of Changes in Equity 69 Company Statement of Changes in Equity 70 Consolidated Statement of Cash Flows 71 Company Statement of Cash Flows 72 Notes to the Consolidated Financial Statements 152 Five Year Summary 153 Notice of Annual General Meeting 157 Corporate Contacts and Advisers Arbuthnot Banking Group PLC Report & Accounts 2022 1 Arbuthnot Banking Group PLC The Seven Principles Ever since George Arbuthnot first gave guidance about corporate behaviour, it has been the culture of Arbuthnot to follow his advice. The Seven Principles summarise Arbuthnot’s corporate philosophy and ethics. During the 190 year history of serving its customers, Arbuthnot has proven its ability to adopt and grow by applying such principles with pragmatism and common sense. 1. Arbuthnot serves its shareholders, 3. Arbuthnot is independent, and 6. Arbuthnot does not sacrifice long its customers and its employees with integrity and high ethical standards. This is demonstrated in a progressive dividend policy, in fair pricing and in 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 business is conducted in an innovative, flexible and entrepreneurial manner, with an opportunistic and counter-cyclical attitude. 5. Arbuthnot’s approach is based on diversification to spread the risk, a long-term view to further growth, empowerment of management and a culture of rewards for achievements to engender loyalty. term prospects for short term gains – nor sacrifice stability for quick profits, and it will never put the whole company at risk. 7. Ultimately, the success of Arbuthnot depends on the teamwork, commitment, and performance of its employees, combined with the determination to win. 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. To this end an inclusive and balanced work environment will provide a rewarding as well as challenging multiplicity. Sir Henry Angest Chairman & CEO 29 March 2023 2 Business Overview Private Banking Commercial Banking Arbuthnot Latham provides a high quality private banking and wealth management service, consisting of three core elements: Arbuthnot Latham provides a bespoke commercial banking service which includes: 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. Financial Planning Built on long-term relationships and bespoke financial strategies. The service is independent and fee, not commission based. Investment Management Comprises asset management, developing tailored investment strategies to ensure that each client’s specific investment objectives are met. Banking Property Finance Other finance Comprising current accounts, deposits, overdrafts, guarantees and charge cards. Clients have a dedicated Banker who is key to managing the relationship. Comprises tailored lending to enable funding of both property investments and developments. Comprises individual secured lending which is designed around the needs of each commercial client. Asset Finance Provides asset finance funding in particular for high value and classic cars but also business assets. Asset Based Lending Provides finance secured on either invoices, assets or stock of the borrower. Provides vehicle finance and related services, predominantly in the truck & trailer and bus & coach markets. Deposits Provides deposit products directly to the retail market via a newly created internet platform, with rates advertised on the best buy tables. Specialist Finance Provides short term secured lending solutions to professional and entrepreneurial property investors. Arbuthnot Banking Group PLCReport & Accounts 2022 Arbuthnot Banking Group PLC Report & Accounts 2022 Financial Highlights 3 2022 £137.4m 2021 £88.7m 2020 £72.5m 2022 £31.1m 2021 £17.0m 2020 £5.1m 2022 £20.0m 2021 £4.6m 2020 (£1.1m) Operating income Underlying profit before tax Profit / (Loss) before tax 2022 42.0p 2021 38.0p 2020 0.0p 2022 £3.6bn 2021 £3.4bn 2020 £2.9bn 2022 £213.0m 2021 £213.0m 2020 £218.2m Total ordinary dividend per share Total assets Regulatory capital £2.2bn customer loans at December 2022* £3.1bn of deposit funding at December 2022 £1.3bn assets under management at December 2022 * This balance includes both Customer loans and assets available for lease. 4 Chairman’s Statement Arbuthnot Banking Group PLC Report & Accounts 2022 Arbuthnot Banking Group (“ABG” or “the Group”) is pleased to report a profit before tax of £20.0m. This represents a significant increase over the prior year result of £4.6m and is due to a number of factors but the most important of those is the increase of the Bank of England (“BoE”) base rate during the year. The Group has seen a significant increase in profit in 2022 Arbuthnot Banking Group PLC Report & Accounts 2022 5 I always thought that after nearly 15 years of historically low interest rates, that once rates started to rise, they would move at a speed and quantum greater than anybody expected. This has proven to be the case in 2022 with eight separate rate increases, with BoE base rate finishing the year at 3.5% compared to 0.25% at the start of the year. close the year at £3.1bn. With the onset of a more negative sentiment in the economy, we decided to exercise greater caution in our underwriting processes on residential property. As a result, our lending volumes reduced in the second half of the year but the overall customer lending balances, including leased assets, increased by 11% during the year. I have consistently believed that the strength of a bank should be measured on the quality and diversity of its deposit base and as a result of this philosophy we have spent the last few years developing and investing in the Bank’s business model that is based on good quality relationship driven deposits. This approach was taken in the belief that interest rates would normalise in due course. We are now seeing the benefits of this business model. I should however add a word of caution; given that we have regularly maintained a very prudent approach to the amount of excess liquidity that we deposit at the BoE, this asset has no natural hedge in our balance sheet, so the revenues that relate to this cash will be subject to further changes to the base rate both up and down. Given the improved longer term prospects of the Group we plan to increase the dividend payment by adding an additional 2p to the usual 1p increase in the final dividend of 2022. This takes the final dividend to 25p per share (2021: 22p). Highlights The clear highlight of 2022 is the financial performance of the Group recording more than a 400% increase in profit before tax despite having recognised a loss of £4.6m on the sale of our commercial property located in King Street in the heart of the West End. Given that commercial property indices are forecast to fall by over 20% over the next two years we were pleased to complete this sale. Along with the continued exclusion of the profit on sale of trucks in our subsidiary Asset Alliance of £6.5m, which continues to be excluded from our financial results, this means the underlying profitability of the Group was approximately £31m. I was also pleased with the continued progress against our medium term “Future State Plan”. We are on course to achieve the most important milestone in that plan, namely the pre-tax return on capital, during 2023. This is considerably earlier than we had initially hoped and enables us to revise this plan with more ambitious targets for future growth. Having noted that deposits are the life blood of any bank, I was delighted that our customer deposits exceeded £3 billion during the third quarter of the year and continued to grow strongly to Much of the planned evolution in our Future State Plan was the growth in our specialist divisions, giving us access to higher margin lending markets and also bringing greater diversity to the assets held by the Group. As a result of the conflict in Ukraine, Asset Alliance Group continued to see further disruption to supply chains which affected the availability of new trucks. However, despite this, the business was able to display strong growth in its customer balances, which grew by 47% to end the year at £189.1m. Renaissance Asset Finance experienced strong demand for its range of financing solutions and saw its customer balances increase by nearly 40% to close at £133.8m. Arbuthnot Commercial Asset Based Lending saw strong growth in both client acquisition and balances. Customer balances grew by 48% finishing the year at £268.8m. Five years after opening for business, ACABL delivered a profit before tax of £5.2m after paying internal financing costs of £7.9m. Our Wealth Management division continued to display strong performance in attracting criteria clients. The gross inflows for the year were in excess of £200m, an increase of 21% on the prior year. We hope that these inflows will be supplemented in 2023 by business generated in the Independent Financial Advisor (IFA) sector following the launch by the division of its Platform Model Portfolio Service Proposition in the final quarter of the year. Although we are proud to provide a personalised banking service to our clients, it must not be forgotten that our Bank is also founded on a suite of modern operating platforms and we continued to invest in this foundation during the year, successfully upgrading our Oracle banking platform to the latest version and adding the Ncino loan system. This continuous programme of investment has allowed us to process nearly one million of inbound and outbound payments in the year, an increase of 24% on 2021. In light of the cost of living crisis I was pleased that we were able to help our employees through these difficult times by making a cost of living payment to all employees in September of £1,500 amounting to approximately £1 million across the Group. 6 Arbuthnot Banking Group PLC Report & Accounts 2022 Chairman’s Statement continued As with all banks and market participants, we have noted the developments which have followed Silicon Valley Bank’s failure in the US and the sale of its subsidiary to HSBC. Throughout our history of serving clients, Arbuthnot Latham has proven its ability to adapt and to grow, even during times of market turbulence. Core to our bank’s ability to do this is a sustained focus on the long-term. It is when faced with circumstances such as those we have witnessed in the last few weeks that the characteristics which make Arbuthnot Latham attractive to our clients, and which have made the Bank successful, show their benefit. Arbuthnot Latham adopts a conservative operating model that targets long-term stability over short-term gain. We maintain strong levels of capital and liquidity and maintain a high-quality loan book. This strong underlying position means our bank is well placed to endure any continued economic uncertainty. Board Changes and Personnel At the last AGM Sir Christopher Meyer retired from the Board after fourteen years of valuable service; however, we were saddened to learn of his sudden passing last July and I would like to express my condolences to his wife Baroness Meyer. Also, as previously indicated, Ruth Lea retired as a Senior Economic Advisor to our Board after sixteen years’ service to the Group and I am happy to report that she has recently been elevated to the House of Lords. Lastly in September I was pleased to welcome Frederick Angest to the Group Board. As always, the continued success of the Group reflects the hard work and commitment of our members of staff. On behalf of the Board, I extend our thanks to all of them for their contribution in 2022. Finally, I would like to thank my fellow directors on both Boards for their help and advice during the year. Our relationship-based banking model is proving to be successful Arbuthnot Banking Group PLC Report & Accounts 2022 7 Dividend Given the increased profits of the Group in 2022 and the improving outlook, the Board has decided to accelerate the growth trajectory of the dividend and is recommending a final dividend of 25p per share. This is an increase of 3p compared to the final dividend of 2021 and an additional increase of 2p over the normalised 1p increase. The final dividend, if approved at the 2023 AGM, will be paid on 2 June 2023 to shareholders on the register at close of business on 21 April 2023. Together with the interim dividend of 17p per share, it gives a total dividend for the year of 42p per share, which compares to the total dividend of 59p per share paid in 2021 which included a special dividend of 21p per share. Outlook During 2022, the increase in the Bank of England base rate clearly provided a significant and positive impact on the performance of the Group. There has already been further rate increases in 2023 which will have a further beneficial impact on revenues. However, the prospects for the UK economy are less clear; the increase in the cost of living will almost certainly have an impact on the Group’s cost base and could also affect the ability of our borrowers to maintain payments on loan facilities. We remain alert to these headwinds, but remain optimistic as we continue to focus on developing and diversifying the Group. Sir Henry Angest Chairman & CEO 29 March 2023 8 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Business Review The Group has seen a significant increase in profitability in 2022 reporting profit before tax of £20.0m compared to £4.6m for the prior year. Multiple successive increases in the Bank of England Base Rate have increased interest income generated from not only the Bank’s lending balances, but also its treasury assets, including those held at the Bank of England. In response the Bank has increased its rates payable on deposits in line with the market. However, unexpired fixed term deposits raised in prior periods at lower rates, have resulted in interest payable by the Bank being suppressed until the deposits mature and are renewed at current higher rates, therefore deposit pricing has increased at a slower pace compared to the loan book and treasury assets. As the economy enters a new economic cycle, the Bank continues to maintain its long-held credit principles and discipline as a key strategy to mitigate credit losses. However with any lending business, credit losses are inevitable. The IFRS9 impairment charge for the year is made up of two factors: firstly, more pessimistic economic assumptions due to the economy’s performance and medium-term outlook resulting in adjustments totalling £0.9m; in this regard, the Bank has applied an average 11.6% fall in residential property values and a 21.2% fall in commercial property values compared to a 1.2% increase and 1.7% fall respectively in 2021 for its UK property-based lending business. The second element of the impairment charge comprises two specific bad debt cases totalling £3.0m, of which one was the first credit loss incurred by Arbuthnot Commercial Asset Based Lending – the specialist invoice discounting business launched in 2018. Despite these two cases, the non-performing loan book has reduced to its lowest level for over two years and is showing no signs of material stress in the credit metrics. The average loan to value (“LTV”) against the loan book remains low at 52.5%, giving significant levels of security to withstand and minimise the effect of any potential falls in the property markets. As the business model has benefitted from improved conditions resulting from the base rate increases, the major headwind on the horizon for the Group is the upward pressure on its cost base. Although higher inflation will affect all costs, the most significant will be accelerated increases in staff costs, as the cost-of-living crisis starts to interact with full employment and competition for talent intensifies. In September the Board took the decision to award a one-off cost of living payment to all employees of £1,500. The cost of this payment was approximately £1m. Private Banking Provides full service banking and dedicated Wealth Management to criteria clients Arbuthnot Banking Group PLC Report & Accounts 2022 9 During 2022, deposit balances exceeded £3bn for the first time in the Bank’s history. The Bank finished the year with total deposits of £3.1bn compared to £2.8bn for the prior year. Deposit growth for 2022 was lower than in recent years. The Bank continued to pursue its strategy of funding the specialist lending divisions with cheaper yet sticky balances from relationship driven deposit account clients. Whilst the Bank experienced upward pressure on rates, it did not compete for deposits on the non-relationship aggregator platforms. Consequently, during the year up to £100m of non-relationship deposits matured and were not renewed, to be ultimately replaced by direct relationship balances. Overall demand for lending products has continued across the divisions with balances (including lease assets) growing to £2.2bn, an increase of 10% from the previous year end 2021 balance of £2.0bn. However, given the current market uncertainty, the Bank has tightened its credit appetite, particularly in its real estate lending business, as well as stressing the affordability of interest payments to levels in excess of the 2% increase in rates as prescribed by the Prudential Regulation Authority. The effect of this reduces the LTV for new lending below the Bank’s historic guidance of 60%. It is also expected that the change in appetite will reduce lending volumes in the short term. However, given the increased levels of profitability, the Bank is well positioned to retain financial resources for future opportunities that are expected to arise given the market dislocation. Included in the result for the year is a charge of £4.6m, following the sale of the King Street property in the second half of the year. The building was valued at £60m based on a yield of 3.75%. However, following an extensive refurbishment and upgrade, the building was in the process of being let out and so two subsequent purchase price adjustments were made; firstly, any tenant incentives outstanding at the time of completion were deducted from the proceeds and secondly, an adjustment for the void period required to find the remaining tenants to fill the building was made via an escrow account and limited to 12 months of the expected rental income for each vacant floor. As in the prior year, the Group’s profit also needs to be reduced for the profit on the sale of trucks generated by Asset Alliance of £6.5m (2021: £5.8m), which is required to be excluded from our accounts as a result of the acquisition accounting in the prior year. It is expected that the majority of the remaining vehicles which were acquired and subject to the adjustment 2022 £137.4m 2021 £88.7m 2022 £1.6m 2021 £4.0m 2022 £108.9m 2021 £93.4m 2022 £20.0m 2021 £4.6m 2022 £2.2bn 2021 £2.0bn Operating income Other income Operating expenses Profit / (loss) before tax Customer loans* 2022 £3.1bn 2021 £2.8bn 2022 £3.6bn 2021 £3.4bn 2022 £1.3bn 2021 £1.4bn 2022 5.1% 2021 4.1% 2022 65.8% 2021 65.9% Customer deposits Total assets Assets under management Average net margin** Loan to deposit ratio*** * This balance includes both Customer loans and assets available for lease. ** Average net margin: Gross interest income yield less average interest rate on customer deposits. *** Loan to deposit ratio: Loans and advances at amortised cost divided by deposits at amortised cost. 10 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Business Review continued will be disposed of over the coming year, resulting in any gains or losses on disposal recognised in the income statements for future periods, as and when they are sold. Following a strategic review of its portfolio of businesses in 2023, the Bank announced its intention to cease new business for Arbuthnot Specialist Finance Ltd, its specialist lending division. All committed facilities will be honoured and the book will be wound down over the next 12 to 24 months. Banking The Banking business continued its track record of recent years, delivering growth in client acquisition, deposits and lending in 2022. The acquisition of criteria clients continued to support growth in relationship call/current deposit products as well as growth in fixed term deposits, which has supported our cost of deposits in the changing market. During 2022, deposits increased by £255m to £3.1bn, equating to 9% year on year growth. Given the increased interest rate environment, the importance of continuing to attract and retain criteria clients who value the Bank’s service led proposition remains a key priority. Loan balances across Private & Commercial Banking increased to £1.5bn in 2022. In addition to this, £35m of Commercial Real Estate loans were originated under the forward flow arrangement with a third party. The strategy allows the Bank to support clients with more capital-intensive borrowing needs, whilst continuing to pursue its objectives of the “Future State” plan. Following the global pandemic in the previous periods, the Bank tightened its credit appetite. Given the turbulent economic environment and global macro-economic developments in 2022, the Bank continued this strategy throughout the year to ensure new loans were appropriately structured. Additionally, the Bank proactively worked with existing clients to review loan structures in order to navigate the new higher rate interest rate environment. During 2022 the Bank launched a review of its Customer Value Proposition. The outputs from this project, which encompass client feedback along with external insights are guiding key strategic initiatives for 2023. Areas of focus include improving digital capability, automation and efficiency, and enhancing client engagement, which demonstrate the Bank’s commitment to its service-led proposition. Commercial Banking The bank continues to develop its highly focused SME offering whilst maintaining a personalised service Arbuthnot Banking Group PLC Report & Accounts 2022 11 Wealth Management Assets Under Management (AUM) finished the year at £1.3bn, resulting in a 2% decrease over the year. This was despite strong gross inflows of £209m, representing 16% of AUM at the start of the year, and an increase of 21% compared to the previous year. After taking into account outflows, there was a net increase in AUMs of £72m. However, market turbulence in part as a consequence of the Russia’s war in Ukraine, along with domestic inflationary pressure resulted in adverse market performance, offsetting the net inflows during the year. Following the pandemic, the business returned to a new normal of agile working both in the office and virtually. The business remains committed to delivering advice through a combination of face to face and virtual client meetings, with client service as the priority. New business distribution momentum developed further with the delivery of a new strategic initiative for external Independent Financial Advisers. In the fourth quarter the Wealth Management business launched its Platform MPS proposition and Discretionary Portfolio Service for high-net-worth private clients, which has received positive initial feedback from intermediaries. Mortgage Portfolios Balances for the Bank’s acquired mortgage portfolio was £149m at the year-end. The portfolio continues to perform in line with expectations. Arbuthnot Commercial Asset Based Lending (“ACABL”) ACABL reported a profit before tax of £5.2m (2021: £4.7m). In its fifth year the ACABL business recorded strong growth in both client acquisition and lending. At the year-end, the business reported drawn balances of £268.8m with a further £91.8m available for drawdown, equating to a 47% increase from the prior year. ACABL completed 30 new transactions in 2022 with £155m of facilities written. Notably, 60% of these were alongside Private Equity firms where the business saw continued demand for its products in the transactional acquisition space where ACABL has a strong reputation. The average deal size increased from £4.8m to £5.1m with a total client base of 102 at year-end, an increase of 40% from the prior year, supported by lower than expected client attrition. This was partly a result of Private Equity firms remaining invested for longer due to the impact of the pandemic, supply chain challenges and the current economic outlook. Facility limits increased 36% on the prior year to £523m across a broad range of sectors, underlining the spread and diverse nature of the portfolio. The business continued to participate in the Government sponsored lending schemes and was approved during the year to participate in the Recovery Loan Scheme Phase 3. The amount issued under these schemes in 2022 represented a small proportion of overall lending but allowed the business to support both existing clients and be incorporated into financing structures for new clients. In line with the reported strong growth, the business processed £2bn of invoices during the year, up from £1.3bn and made in excess of 13,000 client payments totalling £1.85bn. Included in the result is a £2m impairment charge for an exposure that was placed into administration by the directors of the business in December 2022. 12 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Business Review continued Renaissance Asset Finance (“RAF”) Arbuthnot Specialist Finance Limited (“ASFL”) ASFL made progress during 2022 with year end balances at £15m, up £5m year on year. However, with the current economic climate, rising interest rates and a more uncertain property market, the decision was taken to exit this market and ASFL is now closed for new business. All committed facilities will be honoured and the book is expected to be wound down over the next 12 to 24 months. RAF continues to experience strong demand for its asset finance facilities. The business delivered strong balance sheet growth in 2022 with the loan book increasing by nearly 40%, finishing the year at £133.8m. The Block Discounting business held back profitability in the year due to the investment cost of setting up this business and the time taken for new business to draw. However, overall RAF delivered a profitable outcome for the year and with balances now at the highest level ever seen, revenue in 2023 should grow. RAF benefits from scale in its cost base, and therefore is set to make another positive contribution in 2023. During the pandemic the business saw a sharp increase in watchlist clients, notably in the Black-Taxi cab sector. This trend has since stabilised, with some accounts now being reclassified to performing. Our specialist lending divisions have seen significant growth in 2022 Arbuthnot Banking Group PLC Report & Accounts 2022 13 Asset Alliance Group (“AAG”) Operations As at 31 December 2022 AAG had assets available for lease totalling £171.7m. The global economy limited the scale of growth in what was a strong year for AAG. The continued worldwide computer chip shortage and the immediate consequences of Russia’s War in Ukraine had an adverse effect on the availability of new commercial vehicles. This was exacerbated by fuel price increases and general economic recession impacting orders. Delays in pre-ordered stock from manufacturers limited the fleet growth potential of AAG. Consequently, the leasing strategy re-focussed on contract extensions and prioritising oldest asset replacement to mitigate increasing maintenance costs. This was successfully implemented with 40% of the managed fleet replaced during the year, with the fleet size showing modest growth to over 4,100 assets. The shortage of new assets did however result in a continued high demand for good quality, second-hand assets, which was a key factor in driving strong performance from the truck sales division, generating an underlying net profit of £12.4m from the sale of 1410 end-of lease trucks and trailers during the year. £6.5m of this profit has already been included in the bargain purchase calculation as part of the fair value uplift at acquisition and is therefore excluded from the consolidated Group accounts. Owned Properties During the year the Bank sold three properties from its Owned Property portfolio. Firstly, following the major refurbishment completed in 2021, the King Street property was sold with gross sale proceeds of £60m. After deductions for unexpired incentives of £2.4m and void periods of £0.96m, a charge of £4.6m was recognised in the income statement. Secondly, the Bank completed the sale of two of its overseas properties. The Bank retains four assets in its property portfolio of which one is overseas. The Bank continues to see strong growth in the acquisition of new banking clients with over 1,000 new clients onboarded during 2022 and 5,000 new accounts opened. Nearly 1 million inbound and outbound payments were processed in 2022, a growth of 24% on the previous year, with 98% of outbound payments originating online. In addition, there were over 870,000 card transactions in 2022, an increase of nearly 35% on the previous year. Confirmation of Payee capability was added to the Bank’s online banking proposition in the first quarter, further strengthening the Bank’s anti-fraud controls. In respect of the regulatory requirements under the Supervisory Statement (SS) 1/21: Impact Tolerances for Important Business Services, the Bank completed the required self-assessment of compliance with the expected standards in March 2022. This continues to be an important area of focus as the Bank continues its investment in new IT systems. November 2022 saw the successful implementation of a significant upgrade to the Bank’s Oracle Banking Platform following an 18-month project. The new platform supports more efficient payment processes and ensures payments are compatible with future payment standards. The platform has been delivered in a new cloud hosted environment, improving resilience and agility, and enabling the Bank to more readily adapt to future market changes. Another major programme delivered in 2022 saw the launch of a new lending automation system improving the loan origination process for commercial and private clients streamlining the operations and management of key lending artefacts. Further investment was made in the investment operations, continuing to focus on increasing automation and streamlining of processes. Sustainability The business has made a commitment to reduce its environmental impact and to improve its environmental performance as an integral part of its business strategy. In 2022 the business continued its sustainability project with focus around five pillars to ensure a more sustainable Group: Governance, Employees, Community, Environment and Clients. Further information is given in the Sustainability Report on pages 30 to 39. 14 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Financial Review Arbuthnot Banking Group adopts a pragmatic approach to risk taking and seeks to maximise long term revenues and returns. Given its relative size, it is nimble and able to remain entrepreneurial and capable of taking advantage of favourable market opportunities when they arise. In the prior year the Group acquired Asset Alliance Group Holdings Limited, which completed on 1 April 2021. The business was acquired at a discount to its fair valued net assets resulting in a bargain purchase of £8.6m. In 2022 £6.5m (2021: £5.8m) of profits earned on the sale of trucks were consolidated out, as it formed part of the bargain purchase, when these assets were measured at fair value on date of acquisition. In 2022, the King Street property was sold at a loss of £4.6m. The offer price took into consideration outstanding tenant incentives and expected void periods while tenants were found for vacant areas of the building. Underlying profit/(loss) reconciliation 31 December 2022 Profit before tax and group recharges Profits realised on sale of trucks previously included in bargain purchase Loss on sale of King Street property Arbuthnot Latham & Co. £000 Group Centre £000 Arbuthnot Banking Group £000 32,865 (12,856) 20,009 6,479 4,590 – – 6,479 4,590 Underlying profit 43,934 (12,856) 31,078 Underlying basic earnings per share (pence) 169.2 The Group provides a range of financial services to clients and customers in its chosen markets of Banking, Wealth Management, Asset Finance, Asset Based Lending, Specialist Lending and Commercial Vehicle Finance. The Group’s revenues are derived from a combination of net interest income from lending, deposit taking and treasury activities, fees for services provided and commission earned on the sale of financial products. The Group also earns rental income on its properties and holds financial investments for income. The Group has reported a profit before tax of £20.0m (2021: £4.6m). The underlying profit before tax was £31.1m (2021: £17.0m). There are a number of specific items which are included in the result for the year that should be noted. These are detailed and compared to the equivalent adjusted amount for the prior year in the tables below. Highlights Summarised Income Statement Net interest income Net fee and commission income Operating income from banking activities Revenue Cost of goods sold Operating income from leasing activities Total group operating income Gain from a bargain purchase Other income Loss on sale of commercial property held as inventory Operating expenses Impairment losses - loans and advances to customers Profit before tax Income tax expense Profit after tax 2022 £000 2021 £000 99,081 21,049 120,130 99,367 (82,109) 17,258 64,075 18,123 82,198 74,500 (68,023) 6,477 137,388 88,675 – 1,627 (4,590) 8,626 3,955 – (108,913) (93,422) (5,503) 20,009 (3,551) 16,458 (3,196) 4,638 2,148 6,786 Basic earnings per share (pence) 109.6 45.2 Arbuthnot Banking Group PLC Report & Accounts 2022 15 The credit provisions of £5.5m under IFRS 9, include more pessimistic economic assumptions and also two specific bad debt cases totalling £3m. In 2021 there was one case of £2.1m incurred by one of the Group’s specialist businesses, Renaissance Asset Finance. The provision was against the total exposure to Arena TV, a highly publicised business collapse, which reportedly had up to £285m of outstanding debt to 55 lenders. Total operating income earned by the Group was £137.4m compared to £88.7m for the prior year. The average net margin on client assets was 5.1% (2021: 4.1%). Included in operating income is revenue from AAG leased assets. This has contributed 0.2% (2021: 0.5%) to the average yield generated from the Group’s assets. The Group’s operating expenses increased to £113.5m compared to £93.4m for the prior year, with staff costs increasing by £13.6m mainly due to the accrual for bonuses. Total assets increased by £0.2bn to £3.6bn (2021: £3.4bn); £165m was due to loan book growth from both the Core Bank and the Specialist Lending subsidiaries, while leased assets in AAG and treasury assets increased by £50.1m and £99.1m respectively. The Group maintained its conservative funding policy of relying only on retail deposits and targeting a loan to deposit ratio of between 65-80%. Included in other assets is the Group’s investment property, which is held at fair value of £6.6m (2021: £6.6m). Also included in other assets are £19.6m of properties classified as inventory (2021: £87.1m). The net assets of the Group now stand at £14.11 per share (2021: £13.37). Balance Sheet Strength Summarised Balance Sheet Assets Loans and advances to customers Assets available for lease Liquid assets Other assets Total assets Liabilities Customer deposits Other liabilities Total liabilities Equity Total equity and liabilities 2022 £000 2021 £000 2,036,077 171,738 1,288,269 117,963 1,870,962 121,563 1,189,188 177,154 3,614,047 3,358,867 3,092,549 309,520 3,402,069 211,978 2,837,869 320,119 3,157,988 200,879 3,614,047 3,358,867 Underlying profit reconciliation 31 December 2021 Profit before tax and group recharges Exceptional reduction in BoE Base Rate* Write down of repossessed property in Majorca Arena TV Ltd impairment Gain on sale of Tay mortgage portfolio Gain from bargain purchase Profits earned on sale of trucks included in bargain purchase Arbuthnot Latham & Co. £000 Group Centre £000 Arbuthnot Banking Group £000 15,270 (10,632) 4,638 11,492 3,835 2,055 (2,239) (8,626) 5,830 – – – – – – 11,492 3,835 2,055 (2,239) (8,626) 5,830 Underlying profit 27,617 (10,632) 16,985 Underlying basic earnings per share (pence) 108.2 * The Bank of England Base Rate which was at 0.1% for most of 2021 was estimated to have cost the Group £11.5m of interest earnings in 2021, compared to when the base rate was at 75 basis points, which is where it was prior to the onset of the COVID-19 pandemic. No pro-rata adjustment was made for lost interest income in 2022. The base rate has now moved past the pre-pandemic level. 16 Arbuthnot Banking Group PLC Report & Accounts 2022 The analysis presented below, and in the business review, is before any consolidation adjustments to reverse the impact of the intergroup operating activities and also intergroup recharges and is a fair reflection of the way the Directors manage the Group. Strategic Report Financial Review continued Segmental Analysis The segmental analysis is shown in more detail in Note 46. The Group is organised into nine operating segments as disclosed below: 1. Banking – Includes Private and Commercial Banking. Private Banking – Provides traditional private banking services. Commercial Banking – Provides bespoke commercial banking services and tailored secured lending against property investments and other assets. 2. Wealth Management – Financial planning and investment management services. 3. Mortgage Portfolios – Acquired mortgage portfolios. 4. RAF – Specialist asset finance lender mainly in high value cars but also business assets. 5. ACABL – Provides finance secured on either invoices, assets or stock of the borrower. 6. ASFL – Provides short term secured lending solutions to professional and entrepreneurial property investors. 7. AAG – Provides vehicle finance and related services, predominantly in the truck & trailer and bus & coach markets. 8. All Other Divisions – All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Investment property and Central costs) 9. Group Centre – ABG Group management. Arbuthnot Banking Group PLC Report & Accounts 2022 17 Banking Wealth Management Wealth Management reported a loss before tax of £4.1m (2021: loss of £2.1m), but made a £1m profit before contributing to overheads, but remains a key pillar in building and maintaining relationships with clients. Fee income remained flat year on year, while AUMs decreased by 2%, mainly due to market performance, and finished the year at £1.3bn (2021: £1.4bn). Banking reported a profit before tax of £19.1m (2021: £6.5m). This equated to a near threefold increase from the prior year. Net interest income grew by 43%, while lending increased by 4% and deposit balances by 17%. The significantly higher net interest income is the result of successive increases in the Bank of England Base Rate, with the Bank earning higher income from both customer loans and excess deposits held mainly at the Bank of England reserve account. This was partly offset by higher interest paid on deposit balances. However, this rate increase was at a slower pace as fixed term deposits only reprice at maturity. There was a net impairment charge of £1.5m compared to a release of £0.4m for the prior year. This was due to revised economic scenarios applied in the expected credit loss models due to a more negative future outlook. The most significant and relevant to the Banking book was a net decline of 11.6% for residential property values and a net decline of 21.2% for commercial property values compared to a 1.2% increase and 1.7% fall respectively for the prior year. Operating costs increased by £5.4m largely due to higher staff costs from higher bonus accrual. Customer loan balances increased by £56.6m to £1.5bn and customer deposits also increased to £3.1bn (2021: £2.7bn). The average loan to value was 52.5% (2021: 51.7%). Banking Summarised Income Statement Wealth Management Summarised Income Statement Net interest income Net fee and commission income Operating income Operating expenses - direct costs Operating expenses - indirect costs Impairment losses - loans and advances to customers Profit before tax 2022 £000 2021 £000 64,565 2,803 67,368 (14,795) (31,888) 45,011 2,482 47,493 (13,812) (27,503) (1,547) 19,138 354 6,532 Net fee and commission income Operating income Operating expenses - direct costs Operating expenses - indirect costs Loss before tax 2022 £000 2021 £000 10,689 10,689 (9,237) (5,553) 10,563 10,563 (7,634) (5,050) (4,101) (2,121) 18 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Financial Review continued Mortgage Portfolios RAF The Mortgage Portfolios reported a profit of £3.8m (2021: £5.6m). The decrease against the prior year is due to £2.2m of other income which related to the net profit on sale of the Tay Portfolio in February 2021. The remaining Santiago mortgage portfolio performed as expected and the year-end balance was £149.0m (2021: £178.1m). Renaissance Asset Finance returned a profit of £0.2m (2021: loss before tax of £0.1m). Net interest income reduced by 6% to £5.5m (2021: £5.9m) as it paid £3.3m to the Bank for internal cost of funding. Operating expenses increased by £0.8m, mainly due to higher staff costs from increased staff numbers. A more pessimistic economic outlook under the IFRS9 expected credit loss assessment resulted in higher credit provisions in 2022. However, the prior year also included a £2.2m charge for Arena TV Limited. Customer loan balances increased by 38% to £133.8m (2021: £97.1m). The average yield for 2022 was 8.1% (2021: 8.9%). Mortgage Portfolios Summarised Income Statement RAF Summarised Income Statement Net interest income Operating income Other income Operating expenses - direct costs Impairment losses - loans and advances to customers Profit before tax 2022 £000 5,110 5,110 – (935) (415) 3,760 2021 £000 4,735 4,735 2,239 (1,154) (186) 5,634 Net interest income Net fee and commission income Operating income Other income Operating expenses - direct costs Impairment losses - loans and advances Profit/(loss) before tax 2022 £000 2021 £000 5,545 32 5,577 82 (4,697) (768) 194 5,929 166 6,095 78 (3,943) (2,292) (62) Arbuthnot Banking Group PLC Report & Accounts 2022 19 ACABL ASFL ACABL recorded a £5.2m profit before tax (2021: £4.7m). ASFL recorded a loss before tax of £0.9m (2021: loss of £1.0m). Client loan balances increased 48% to £268.8m at the end of the year (2021: £182.1m), with issued facilities increasing to £523m (2021: £384m). The higher client balances throughout the year resulted in an increase in operating income of £3.2m after paying an increased £5.2m for internal funding. Operating expenses increased by £0.7m, mainly due to an increase in staff costs. The impairment charge increase mainly due to £2m charge relating to one client that was placed into administration. The decision was taken to exit this market in early 2023. Customer loan balances closed the year at £15.0m (2021: £10.1m). ACABL Summarised Income Statement ASFL Summarised Income Statement Net interest income Net fee and commission income Operating income Operating expenses - direct costs Impairment losses - loans and advances to customers Profit before tax 2022 £000 2021 £000 6,762 5,976 12,738 (5,463) (2,082) 5,193 5,311 4,224 9,535 (4,748) (50) 4,737 Net interest income Net fee and commission income Operating income Operating expenses - direct costs Impairment losses - loans and advances to customers Loss before tax 2022 £000 2021 £000 713 10 723 (1,489) 578 7 585 (1,590) (179) (945) (21) (1,026) 20 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Financial Review continued AAG Other Divisions The business generated a loss before tax of £2.1m (2021: profit of £3.8m for the period). The aggregated profit before tax of other divisions was £11.7m (2021: loss of £2.3m). The prior period of 9 months included a bargain purchase credit to the income statement of £8.6m. As part of the bargain purchase at acquisition the carrying value of the truck fleet was adjusted by an overall average increase of 15.95% resulting in an uplift totalling £19.5m. £6.5m (2021: £5.8m) of this uplift has been realised through sales in the year, but this has been excluded from the consolidated result. The current year includes £4.9m internal cost of funding compared to £2.3m in the prior 9 months. Operating expenses increased by £6.6m from the prior period. The prior period only included 9 months of expenditure and the current year also includes higher costs with the expansion of the business, mainly relating to staff. Credit provisions reduced by £0.6m. As at 31 December 2022 the business had £171.7m (2021: £121.6m) of assets available for lease. Operating income increased by £17.3m to £25.5m (2021: £8.2m), mostly due to the increase in the Bank of England Base Rate, with higher income from intercompany accounts and treasury assets. Reported within the other divisions in other income was rental income on our property portfolio of £0.5m (2021: £0.3m). The prior year also included an adjustment to the RAF deferred consideration of £0.6m, along with dividends received totalling £0.1m. Operating expenses increased mainly due to higher staff costs from higher staff numbers and increased bonus provisions. AAG Summarised Income Statement Other Divisions Summarised Income Statement Net interest income Revenue Cost of goods sold Operating income Gain from bargain purchase Operating expenses - direct costs Impairment losses - loans and advances to customers 2022 £000 2021 £000 (4,456) 99,367 (82,109) 12,802 – (14,507) (369) (2,401) 74,500 (68,023) 4,076 8,626 (7,872) (1,001) Net interest income Net fee and commission income Operating income Other income Operating expenses - direct costs Impairment losses - loans and advances to customers 2022 £000 2021 £000 23,993 1,539 25,532 2,385 (16,074) (143) 7,555 681 8,236 2,081 (12,570) – Loss before tax 11,700 (2,253) (Loss)/profit before tax (2,074) 3,829 Arbuthnot Banking Group PLC Report & Accounts 2022 21 Group Centre Capital The Group costs increased to £12.9m (2021: £10.6m). Subordinated loan interest increased by £0.5m due to the rising interest rate environment. The Group received £0.4m dividends from STB in 2021, while there was no dividend in 2022 as all shares were sold in the prior year. The increase in operating expenses of £1.3m is mainly due to higher staff costs with the accrual for bonuses including national insurance increasing by £1m. 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. The Group and the individual banking operation are authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and are subject to EU Capital Requirement Regulation (EU No.575/2013) (“CRR”) which forms part of the retained EU legislation (EU legislation which applied in the UK before 11.00 p.m. on 31 December 2020 has been retained in UK law as a form of domestic legislation known as ‘retained EU legislation’) and the PRA Rulebook for CRR firms. One of the requirements for the Group and the individual banking operation is that capital resources must be in excess of capital requirements at all times. In accordance with the parameters set out in the PRA Rulebook, the Internal Capital Adequacy Assessment Process (“ICAAP”) is embedded in the risk management framework of the Group. The ICAAP identifies and assesses the risks to the Group, considers how these risks can be mitigated and demonstrates that the Group has sufficient resources, after mitigating actions, to withstand all reasonable scenarios. Group Centre Summarised Income Statement Net interest income Subordinated loan stock interest Operating income Other income Operating expenses Loss before tax 2022 £000 2021 £000 (363) (2,788) (3,151) – (9,705) (309) (2,334) (2,643) 397 (8,386) (12,856) (10,632) 22 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Financial Review continued 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 requirement for credit, market and operational risk as a starting point, and then considers whether each of the calculations delivers a sufficient amount of capital to cover risks to which the Group is, or could be, exposed. Where the Board considers that the Pillar 1 calculations do not adequately cover the risks, an additional Pillar 2A capital requirement is applied. The PRA will set a Pillar 2A capital requirement in light of the calculations included within the ICAAP. The Group’s Total Capital Requirement, as issued by the PRA, is the sum of the minimum capital requirements under the CRR (Pillar 1) and the Pillar 2A requirement. The ICAAP document will be updated at least annually, or more frequently if changes in the business, strategy, nature or scale of the Group’s activities or operational environment suggest that the current level of capital resources is no longer adequate. The ICAAP 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 entity is also the principal trading subsidiary as detailed in Note 45. Capital ratios CET1 Capital Instruments* Deductions CET1 Capital after Deductions Tier 2 Capital Own Funds CET1 Capital Ratio (CET1 Capital/Total Risk Exposure) Total Capital Ratio (Own Funds/Total Risk Exposure) * Includes year-end audited result. The Group’s regulatory capital is divided into two tiers: • Common equity Tier 1 (“CET1”), which comprises shareholder funds less regulatory deductions for intangible assets, including Goodwill and deferred tax assets that do not arise from temporary differences. • Tier 2 comprises qualifying subordinated loans. Capital ratios are reviewed on a monthly basis to ensure that external requirements are adhered to. All regulated trading entities have complied with all of the externally imposed capital requirements to which they are subject. 2022 £000 2021 £000 212,501 (37,126) 175,375 37,594 202,479 (26,244) 176,235 36,772 212,969 213,007 11.6% 14.0% 12.3% 14.9% Arbuthnot Banking Group PLC Report & Accounts 2022 23 Climate change Climate change presents financial and reputational risks for the banking industry. The Board consider Climate change a material risk as per the Board approved risk appetite framework which provides a structured approach to risk taking within agreed boundaries. The assessment is proportional at present but will develop over time as the Group generates further resources and industry consensus emerges. The assessment is maintained by the Chief Risk officer and has been informed by the ICAAP review and workshops for employees. Whilst it is difficult to assess how climate change will unfold, the Group is continually assessing various risk exposures. The UK has a legally binding target to cut its greenhouse gas emissions to “net-zero” by 2050. There is growing consensus that an orderly transition to a low-carbon economy will bring substantial adjustments to the global economy which will have financial implications while bringing risks and opportunities. The risk assessment process has been integrated into existing risk frameworks and will be governed through the various risk governance structures including review and recommendations by the Arbuthnot Latham Risk Committee. Arbuthnot Latham has been assessed against the Task Force on Climate-related Financial Disclosures’ (“TCFD”) recommended disclosures and where appropriate the FCA/PRA guidance as per the Supervisory Statements. In accordance with the requirements of the PRA’s Supervisory Statement ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’, the Group has allocated responsibility for identifying and managing the risks from climate change to the relevant existing Senior Management Function. The Bank is continuously developing a suitable strategic approach to climate change and the unique challenges it poses. The FCA have issued ‘Climate Change and Green Finance: summary of responses and next steps’. In addition to the modelling of various scenarios and various governance reviews, the Group will continue to monitor requirements through the relationship with UK Finance. 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 the risk management framework and associated policies is set out in Note 6. The principal risks inherent in the Group’s business are reputational, macroeconomic and competitive environment, strategic, credit, market, liquidity, operational, cyber, conduct and, regulatory and capital. Reputational risk Reputational risk is the risk to the Group from a failure to meet reasonable stakeholder expectations as a result of any event, behaviour, action or inaction by ABG itself, its employees or those with whom it is associated. This includes the associated risk to earnings, capital or liquidity. ABG seeks to ensure that all of its businesses act consistently with the seven corporate principles as laid out on page 1 of the Annual Report and Accounts. This is achieved through a central Risk Management framework and supporting policies, the application of a three-lines of defence model across the Group and oversight by various committees. Employees are supported in training, studies and other ways and encouraged to live out the cultural values within the Group of integrity, energy and drive, respect, collaboration and empowerment. In applying the seven corporate principles, the risk of reputational damage is minimised as the Group serves its shareholders, customers and employees with integrity and high ethical standards. Macroeconomic and competitive environment The group is exposed to indirect risk that may arise for the macroeconomic and competitive environment. In recent years there have been a number of global and domestic events which have had significant implications on the Group’s operating environment, namely: Russia’s War in the Ukraine, Coronavirus and Brexit. The culmination of these events has led to significant turmoil in both global and domestic markets. The most significant economic effect from these events includes record inflation driven by high fuel costs, leading to sharp and significant increases in the cost of borrowing. Indicators suggest that conditions may have improved since the year end however there still remains significant uncertainty around the state of the UK economy which may have an impact on the group’s customers and assets. 24 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Financial Review continued Strategic risk Strategic risk is the risk that the Group’s ability to achieve its corporate and strategic objectives may be compromised. This risk is particularly important to the Group as it continues its growth strategy. However, the Group seeks to mitigate strategic risk by focusing on a sustainable business model which is aligned to the Group’s business strategy. Also, the Directors normally meet once a year outside a formal Board setting to ensure that the Group’s strategy is appropriate for the market and economy. Credit risk Credit risk is the risk that a counterparty (borrower) will be unable to pay amounts in full when due. This risk exists in Arbuthnot Latham, which currently has a loan book of £2.2bn (2021: £1.9bn). The lending portfolio in Arbuthnot Latham is extended to clients, the majority of which is secured against cash, property or other high quality assets. Credit risk is managed through the Credit Committee of Arbuthnot Latham. Market risk Market risk arises in relation to movements in interest rates, currencies, property 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. As a result, 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. The Group actively monitors its exposure to future changes in interest rates. However, at the current time the Group does not hedge the earnings from the free cash which currently totals £732.7m. The cost of hedging is prohibitive. The Group is exposed to changes in the market value of its properties. The current carrying value of Investment Property is £6.6m and properties classified as inventory are carried at £19.6m. Any changes in the market value of the property will be accounted for in the Income Statement for the Investment Property and could also impact the carrying value of inventory, which is at the lower of cost and net realisable value. As a result, it could have a significant impact on the profit or loss of the Group. Liquidity risk Liquidity risk is the risk that the Group, although solvent, either does not have sufficient financial resources to enable it to meet its obligations as they fall due, or can only secure such resources at an excessive cost. The Group takes a conservative approach to managing its liquidity profile. Retail client deposits and drawings from the Bank of England Term Funding Scheme fund the Bank. The loan to deposit ratio is maintained at a prudent level, and consequently the Group maintains a high level of liquidity. The Arbuthnot Latham Board annually approves the Internal Liquidity Adequacy Assessment Process (“ILAAP”). The Directors model various stress scenarios and assess the resultant cash flows in order to evaluate the Group’s potential liquidity requirements. The Directors firmly believe that sufficient liquid assets are held to enable the Group to meet its liabilities in a stressed environment. Operational risk Operational risk is the risk that the Group may be exposed to financial losses from conducting its business. The Group’s exposures to operational risk include its Information Technology (“IT”) 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. In line with further guidance issued by the Regulator, the Bank has continued to focus on ensuring that the design of systems and operational plans are robust to maintain operational resilience in the face of unexpected incidents. During 2021 the Bank continued to review these plans and undertook tests to ensure backup and recovery processes were effective even when working in a hybrid working model. During the year the FCA, PRA and BoE published their final policy papers on building operational resilience. The Bank completed the required self-assessment of compliance with the expected standards in March 2022. This continues to be an important area of focus as the Bank continues its investment in new IT systems. Arbuthnot Banking Group PLC Report & Accounts 2022 25 Cyber risk Cyber risk is an increasing risk for the Group within its operational processes. It is the risk that the Group is subject to some form of disruption arising from an interruption to its IT and data infrastructure. The Group regularly tests the infrastructure to ensure that it remains robust to a range of threats and has continuity of business plans in place including a disaster recovery plan. Conduct risk As a financial services provider we face conduct risk, including selling products to customers which do not meet their needs, failing to deal with clients’ complaints effectively, not meeting clients’ expectations, and exhibiting behaviours which do not meet market or regulatory standards. The Group adopts a low risk appetite for any unfair customer outcomes. It maintains clear compliance guidelines and provides ongoing training to all employees. Periodic spot checks, compliance monitoring and internal audits are performed to ensure these guidelines are followed. The Group also has insurance policies in place to provide some cover for any claims that may arise. Regulatory and capital risk Regulatory and capital risk includes the risk that the Group will have insufficient capital resources to support the business and/or does not comply with regulatory requirements. The Group adopts a conservative approach to managing its capital. The Board of Arbuthnot Latham approves an ICAAP annually, which includes the performance of stringent stress tests to ensure that capital resources are adequate over a three year horizon. Capital and liquidity ratios are regularly monitored against the Board’s approved risk appetite as part of the risk management framework. Regulatory change also exists as a risk to the Group’s business. Notwithstanding the assessments carried out by the Group to manage regulatory risk, it is not possible to predict how regulatory and legislative changes may alter and impact the business. Significant and unforeseen regulatory changes may reduce the Group’s competitive situation and lower its profitability. 26 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Non-Financial Information Statement The table below sets out where stakeholders can find information on non-financial matters, as required by Sections 414CA and 414CB of the Companies Act 2006, enabling them to understand the impact of the Group’s key policies and activities. Reporting Requirement Environmental Matters Employees Policies and Standards Information Necessary to Understand Impact of Activities and Outcome of Policies • Credit Policy • Financial Review, page 23 • Managing Financial Risks of Climate • Stakeholder Engagement and S. 172 (1) Statement, Change Framework pages 28 and 29 • Environmental Management Policy • Sustainability Report, pages 30 to 39 • Corporate Governance Report page 49 • Stakeholder Engagement and S. 172 (1), pages 28 and 29 • Sustainability Report, pages 30 to 33 • Directors Report, page 44 • Corporate Governance Report, page 48 • Agile Working Policy • Board Diversity Policy • Dignity at Work Policy • Equality and Diversity Policy • Flexible Working Policy • Health and Safety Policy • Long Service Awards Policy • Parental Leave Policy • Personal Appearance Policy • Remuneration Policy • Training & Development Policy • Whistleblowing Policy Social Matters • Complaints Handling Policy • Arbuthnot Principles, page 1 • Fraud Policy • Tax Strategy • Vulnerable Clients Policy • Stakeholder Engagement and S. 172 (1) Statement, pages 28 and 29 • Sustainability Report, pages 30 to 33 Respect for Human Rights Anti-Corruption and Anti-Bribery • Anti-Modern Slavery Policy • Stakeholder Engagement and s.172 (1) Statement, • Dignity at Work Policy • Equality and Diversity Policy • Personal Data Protection Policy pages 28 and 29 • Sustainability Report, pages 30 to 33 • Anti-Bribery and Corruption Policy • Sustainability Report, pages 30 and 33 • Anti-Money Laundering Policy • Client Acceptance policy • Cyber Strategy • Group Market Abuse and Insider Dealing Policy • Physical Security Policy Arbuthnot Banking Group PLC Report & Accounts 2022 27 Reporting Requirement Policies and Standards Information Necessary to Understand Impact of Activities and Outcome of Policies Description of Principal Risks and Impact of Business Activity Description of the Business Model Non-Financial Key Performance Indicators • Strategic Report, pages 23 to 25 • Business Overview, page 2 • Sustainability Report, pages 30 and 31 28 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Stakeholder Engagement and s.172 Report This section of the Strategic Report describes how the Directors have had regard to the matters set out in section 172 (1) (a) to (f) of the Companies Act 2006 when making decisions. It forms the Directors’ statement required by ABG as a large-sized company under section 414CZA of the Act. In July 2022, as part of its succession planning, the Board appointed Frederick Angest as a Director, subject to the approval of Grant Thornton as Nominated Adviser and Aquis Stock Exchange (AQSE) Corporate Adviser which was given at the end of August. The Directors have acted in a way that they considered, in good faith, to be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so had regard, amongst other matters, to: • the likely consequences of any decision in the long term; • the interests of the Company’s employees; • the need to foster the Company’s business relationships with suppliers, customers and others; • the impact of the Company’s operations on the community and the environment; • the desirability of the Company maintaining a reputation for high standards of business conduct; and • the need to act fairly as between members of the Company. The Arbuthnot Principles and Values set out on page 1 explain the Board’s approach to its stakeholders. Details of how the Directors had regard to the interests of its key stakeholders during the year are set out below, in the Group Directors Report on page 44 and in the Corporate Governance Report on page 48. The Board has regard to the interests of all its key stakeholders in its decision making since the Directors are conscious that their decisions and actions have an impact on them. The stakeholders we consider in this regard are our shareholders, employees, customers, suppliers, regulators and the environment in which we operate. Likely consequences of any decision in the long term The Directors make their decisions to ensure that long-term prospects are not sacrificed for short term gain, reflecting the values and support of Sir Henry Angest, Chairman and Chief Executive and majority shareholder, which have proved successful in creating and maintaining value for all shareholders for over 40 years. This was demonstrated in the year by a number of Board decisions. In February 2022, the Board considered a number of options to manage the capital resources of the Group, without slowing its lending plans as the divisions build towards the “future state” strategy. This was necessary because of the reintroduction by the Financial Policy Committee of the Bank of England of the countercyclical capital buffer at 1% from December 2022 with a further increase to 2% in July 2023. As a consequence, a decision was taken to allocate capital away from non-core assets and accordingly to sell the Group’s long leasehold West End office property situated at 20 King Street in July with completion in October. Interests of the Company’s employees Also in July 2022, the Directors endorsed the decision of the Remuneration Committee to approve a one-off payment to all executive directors and employees in the Group of £1,500 in order to assist them with the increased costs of living being experienced. It was determined that the payment would be reduced pro rata to part time employees and for those who had been with the business less than one year. The Directors were able to agree to this payment of c. £1m, having assured themselves that the business had the resources to make it because of its trading considerably in excess of the planned budget. Executive Directors and senior management are fully engaged with the workforce, most of whom interact on a daily basis. Employees are also able to raise concerns in confidence with the HR Team, with grievances followed up in line with a specified process which satisfies all legal requirements. As explained in the section 172 (1) Statement of Arbuthnot Latham, the Company’s banking subsidiary, one of its non-executive directors has been designated by its board as the director to engage with Arbuthnot Latham group’s workforce whereas the Company itself has fewer than 20 employees, all of whom have direct access to Board members. As set out in the Whistleblowing Policy, Ian Dewar, a non-executive director and chairman of the Audit Committee, is the Company’s Whistleblowing Champion and is available at all times in this role. There is an anonymous whistleblowing service via an external provider. There is also protection for employees deriving from the Public Interest Disclosure Act 1998. Any material whistleblowing events are notified to the Board and to the applicable regulator. The Board receives an update on human resource matters at each of its meetings. It is also kept informed of the results of employee surveys including one on Diversity & Inclusion, conducted in November 2021, which received a 76% response rate. In November 2022 it considered the results of the engagement survey, launched in September 2022 to assess how engaged employees felt with the business, obtaining feedback on key areas that affect engagement including Leadership, ‘My Manager’, Wellbeing, Cultural Values, Diversity & Inclusion, Reward & Recognition and employees’ views in relation to 2022 ways of working and effectiveness of the Agile Working approach which was established and endorsed by the Board in 2021 to enable the business and its employees to benefit from a practical combination of office and Arbuthnot Banking Group PLC Report & Accounts 2022 29 remote working. The Agile Working Policy resumed at the end of February 2022 with all employees on average working in the office for a minimum of three days per week. This followed its suspension in mid-December 2021 with the introduction of temporary working arrangements in light of the Government’s request in response to the Covid-19 Omicron variant that individuals should work from home where possible. The engagement survey received an 82% response rate from employees, 87% of whom were proud to work for the business. The Board regards the maintenance of a high level of employee engagement as key to the Company’s future success as an organisation on every level and the focus will be to develop our working environment to achieve this aim. Company’s business relationships with suppliers, customers and others The Directors attach great importance to good relations with customers and business partners. In particular, our clients are integral to our business and forging and maintaining client relationships are core to Arbuthnot Latham’s business and crucial for client retention. Regular contact was maintained with clients throughout the year, including with the resumption again of meetings in the office in February 2022. The Company is committed to following agreed supplier payment terms. There is a Supplier Management Framework in place covering governance around the Company’s procurement and supplier management activities. For due diligence and compliance purposes, suppliers are assessed through an external registration system. The Modern Slavery Statement, approved by the Board in March as part of its annual review of the Company’s stance and approach to the Modern Slavery Act, explains the risk-based approach that the Company has taken to give assurance that slavery and human trafficking are not taking place in its supply chains or any part of its business. The Board requires that Arbuthnot Latham implements a Modern Slavery Policy, procedures and processes in relation to the AL Group, which reflects the commitment to act ethically and with integrity, in all their respective business relationships and additionally, to ensure that slavery and human trafficking are not taking place anywhere in the AL Group or in the AL Group’s supply chain. Other stakeholders include the Company’s Regulators, the PRA and the FCA, with whom open and regular dialogue is maintained. Balancing stakeholder interests An illustration of the balancing of the interests of our stakeholders in their long-term interest was the Board’s decision in July 2022 to return to its progressive dividend policy, resolving to pay an interim dividend of 17p per share to shareholders. This was an increase of 1p per share from the normal interim dividend paid in 2021. Given the increased profits of the Group in 2022 and the improving outlook, the Board have decided to accelerate our growth trajectory of the dividend and are recommending a final dividend of 25p; this is an increase of 3p compared to the final dividend of 2021 and an additional increase of 2p over the normalised 1p increase. Impact of the Company’s operations on the community and the environment As part of the management information reviewed at its regular meetings, the Board receives a Risk Management report, containing a report on Environmental, Social and Governance (ESG) matters which includes a Climate Change Dashboard, monitoring climate change measures in place including Scope 1, 2 and 3 GHG emissions. The Board is updated on the steps the Group is taking to become more sustainable, given its exposure to climate change transition risk as the UK evolves to a low carbon economy. It is also kept informed of the formal approach to ESG established to develop over time, which will underpin the Arbuthnot Principles and Values within the workplace under five ‘pillars of sustainability’ – governance, employees, community, environment and clients (ESG Pillars). The ESG actions taken are in recognition of the Group’s responsibility to make a positive societal impact and the political, regulatory and legal pressure with clients and investors increasingly interested in the Group’s ESG stance. The Board has again approved an energy and carbon report meeting the requirements of the Streamlined Energy and Carbon Reporting standards, as set out on page 38 of the Sustainability Report. Desirability of the Company maintaining a reputation for high standards of business conduct The Directors believe that the Arbuthnot culture set out in the Arbuthnot Principles and Values manifests itself at Board level and in the external view of the Group as a whole. The importance of the Group’s reputation is considered at each Board meeting. These Principles are encapsulated in five Group cultural values, embedded into day-to-day activities. These values are integrity, respect, empowerment, energy and drive, and collaboration. Acting fairly as between members of the Company The majority shareholder, Sir Henry Angest, is the Company’s Chairman and Chief Executive. There is continuing engagement with other major shareholders and the Directors make their decisions on behalf of all shareholders. The Board welcomes engagement with them and will continue to maintain communications via one-to-one meetings as appropriate. The Directors treat all shareholders equally, albeit that holders of non-voting shares do not have the right to vote in shareholder meetings. 30 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Sustainability Report Introduction The Group is committed to ensuring its business activities have a positive impact not just for clients and shareholders, but also for employees, society and the environment. Two of our key business principles, reciprocity and stability, rely on recognising our own responsibility to make a positive societal impact. The world is in the middle of a profound transition when it comes to sustainability and we recognise the role we must play in that transition. Climate change is an important topic for consumers and investors alike. In parallel, inclusive growth and the impact organisations have on society is increasingly a focus. More than ever before, organisations are being held accountable for their impacts on society. We focus on how we can improve to build a future that delivers growth, sustainability and inclusion. This means operating with a strong emphasis on our environmental and societal impact and on our governance procedures. The Group approaches ESG by considering the impact from our practices and outputs across five categories of sustainability - Governance, Employees, Community, Environment and Clients. Governance The Group has a solid system of governance in place, endorsing the principles of openness, integrity and accountability which underpin good corporate governance. The Group operates to high standards of corporate accountability with an effective Board and Board committees. This, together with the role and overall holding of Sir Henry Angest, the ultimate majority shareholder, and compliance with PRA and FCA regulations and with those of the London Stock Exchange Alternative Investment Market and the Aquis Exchange, is fundamental to our success as a business. Employees Our employees and culture set us apart from others in our industry. Our high engagement scores are a testament to this: from a response rate of 89% to the most recent employee engagement survey1, conducted in September 2022, 87% of employees state they are proud to work for the Group. As a relationship-led bank, our employees are at the heart of everything we do. We are committed to providing a healthy working environment and improving the quality of working lives for all our employees. Our wellbeing strategy and offering aims to support and reflect the Group’s mission and core values of Integrity, Respect, Empowerment, Energy & Drive and Collaboration in the recognition that our employees are our greatest asset. 1 Non-Financial Key Performance Indicator February 2022 saw the resumption of the Group’s Agile Working Policy, introduced in October 2021 to enable the business and its employees to benefit from a practical combination of office and remote working. The policy reflects the Board’s view that there are substantial benefits from balancing office working with working from home. The policy resumed following its suspension during January 2022 owing to the necessity for employees to work from home in line with the Government’s advice regarding the Covid-19 Omicron variant. The vast majority of employees indicated their support for the policy. In July 2022, following a review of the policy, a small adjustment was made to it with the Senior Leadership Team attending the office four days a week and for key governance meetings to be held in the office, given our culture to be mainly office based. As a service and relationship business, it is important that we meet clients and that our employees meet on a regular and frequent basis. At the same time the Board agreed to make a cost of living payment to all employees in September 2022 due to the prevailing high inflation rate in order to help alleviate some of the burden of these increased costs on employees. A further cost of living payment is to be made in 2023 to those employees earning salaries of up to £50,000 pa. and who joined the Group before 1 January 2023. Flexibility is applied to the Agile Working Policy, as shown by its relaxation at the time of the Met Office extreme weather warnings in mid-July 2022, during teachers’ strikes and during the regular rail and underground strikes which have affected the London office since June 2022. On strike days, employees unable to travel to the London office are encouraged to work from home, thereby mitigating the disruption that would previously have been caused, the pandemic having demonstrated the ability of the business to function remotely when necessary. Our wellbeing strategy focuses on the physical, financial, mental and social wellbeing of our employees. We have a range of structured internal wellbeing programmes and established an Active Hub to set up team challenges for health wellbeing, building on the solo initiatives launched during the pandemic. In February 2023 we launched the Champion Health app, our new all-in-one wellbeing platform. The platform was created by more than sixty health professionals to make one unified platform that covers all areas of wellbeing for employees and up to three of their friends or family members. We also hold employee webinars on financial wellbeing and education. A Pension Scheme Governance Committee was established in January 2022 and the matters discussed at its six-monthly meetings are communicated to employees, continuing the focus on their financial wellbeing. Arbuthnot Banking Group PLC Report & Accounts 2022 31 In November 2022, the existing benefits package was increased as part of the annual benefits window by giving eligible employees the opportunity to enhance at favourable rates their cover for certain benefits including life assurance. Community The Group recognises that we must commit to driving positive community impact, creating an impact within the communities in which we exist and operate, and connecting the dots between the charities we support and the social initiatives we run. Our Corporate Social Responsibility activities are being reviewed with plans for a new strategy to accelerate our effort. Once this new CSR strategy is in place our primary community focus for 2023 will be around financial education and literacy. We will also expand our place-based and skills-based outreach, with greater promotion and engagement from employees. The Group continues to promote philanthropy and fundraising, supported by our volunteer days and pound for pound matching scheme. We are also looking to expand our partnerships with others to help facilitate positive change. Clients Relationships with our clients are at the heart of what we do. We take the time to understand what is important to our clients so we can be confident that we are working in their best interests, for business, for family, for life. Being a relationship-led bank, every single one of our clients has a dedicated relationship manager there to guide and support them. This is supported by our strong Net Promoter Score (NPS)1 which is reviewed every two years. Our 2022 NPS increased to 64%, up from 47% in 2020, a reflection of our clients’ advocacy. Our bankers have been engaging pro-actively with customers, following the tightening of Credit appetite in order to help those struggling due to the impact of increasing interest rates, inflation and high cost of living. As a rapidly growing business, we encourage career progression and seek to develop our people’s skills to help them grow within the organisation. We strive to create a working environment that ensures people are treated fairly and that their wellbeing is supported. The feedback from our first Diversity & Inclusion Survey, conducted in November 2021, is being used to create an even better working environment for employees and to help attract the best talent. The Group’s D&I strategy, approved and communicated to employees during 2022, sets out the value put on the difference people bring and how we are consciously inclusive in all aspects of the way we work, recognising the commercial advantage this brings. We are committed to fostering a more inclusive and dynamic environment, allowing everyone to achieve their full potential. Employees are encouraged to speak about what matters to them and to give feedback on our performance in this area. The objectives of this strategy are to develop a culture and environment that allow people of various backgrounds, mindsets and ways of thinking to work effectively together and to perform to their highest potential to achieve their objectives and ours; to improve diversity in the Senior Leadership Team; and to increase diversity at all levels. Pilot management D&I programme workshops have been launched in three specific business areas as part of the wider HR agenda and, as part of the Group-wide training strategy, we will include a D&I module each quarter. Our current gender mix emphasises the need for us to develop internal talent to enable internal progression, whilst continuing to attract diverse talent into roles at all levels. Early Careers: 2022 saw the launch of our first Structured Graduate and Apprenticeship Programmes for a total of 14 participants, along with the second year of our Industrial Placement and Summer internship programmes. The Group now offers five different Early Careers Programmes, including work experience, summer internships, one-year placements, graduate placements and apprenticeships. We also launched our Leadership Development Academy in October 2022, with 14 participants, and have more programmes scheduled for 2023 for existing and aspiring leaders. In January 2023, we hosted an evening inviting 100 female students interested in a career in banking, providing 80 spaces to Year 13 students from the Young Professionals network and 20 for female student referrals from employees. We have partnered with the Young Professionals network, an organisation which works with schools across the UK from different social backgrounds to provide an insight and introduction to different industries, in order to grow the quality and diversity of our Early Careers talent pool. 1 Non-Financial Key Performance Indicator 32 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Sustainability Report continued Policies The Group has adopted a wide range of policies that straddle the five pillars to ensure that employees and management are aware of their responsibilities towards our customers and comply with all regulatory requirements. Some of the key policies are set out below and in the Non-Financial Statement on page 26. Environment The Group takes a long-term view. We recognise as a business that our carbon footprint needs to move towards net-zero over time. This reduction is not just an environmental imperative, but a business one as well. We are committed to having net zero carbon emissions by 2050. As a consequence, we have in place an Environmental Management policy which sets outs the Group’s high-level approach to managing environmental issues and provides requirements in helping the Bank work towards achieving its commitments. The Bank’s Credit Policy sets out the Group’s limited appetite for financial and reputational risk emanating from climate change, which includes physical risk (extreme weather, flooding etc.) and transitional risk (changes to law, policy, regulation, and culture). The Bank adopts a favourable stance towards a low carbon economy and lending propositions that have a neutral or positive impact on the environment / climate. The Bank will also consider the impact on public perception and potential impact on continuing demand for clients’ products and services, as well as any impact on its underlying security. These factors are assessed as part of the credit application process and at least once a year through the annual review process. Arbuthnot Banking Group PLC Report & Accounts 2022 33 Our transition towards sustainability We are taking steps, guided by our five pillars, to help us become more sustainable. Further information is given on the Group’s website at Sustainability | Arbuthnot Latham. Pillar Current status Ensure responsible and transparent corporate governance which aligns to business goals while making a positive societal impact Creating a supportive and diverse workplace in which employees can thrive Having a positive impact on the community in which we operate • We are developing a transparent framework for embedding sustainability into our business practices by recording, monitoring, and publishing performance against pre-defined targets. • We have policies in place, such as our: – Anti- Money Laundering Policy, written to ensure a consistent approach across the Group to assist with the deterrence and detection of those suspected of laundering the proceeds of crime or those involved in the funding or execution of terrorism, and the disclosure to the relevant authorities. In May 2022, governance in this vital area was further enhanced by the appointment of the former Head of Compliance as the dedicated Head of Financial Crime and Money Laundering Reporting Officer. – Anti-Bribery and Corruption Policy, expressing our condemnation of such practice, prohibiting employees from engaging in it and expecting third parties providing services to have similar commitments. • We have a published Tax Strategy, which sets out the Group’s commitment to compliance with tax law and practice in the UK, which includes paying the correct amount of tax at the right place and right time and having a transparent and constructive relationship with the tax authority. • We promote a working environment that seeks to develop employee skills, and ensures employees are treated fairly and supports their wellbeing. • In January 2023, we were named as a Five Star Employer by WorkBuzz for the second year running for sustained high levels of employee engagement. • We operate an Arbuthnot Achievers employee recognition scheme • We conduct annual and pulse employee surveys (conducted anonymously) • We have adopted agile and flexible working policies • We pay all employees a living wage and have market aligned job families. We are also considering applying for Living Wage accreditation. • All employees are eligible for a bonus, pension contribution, sick pay and other benefits. From 2023 we have also offered eligible employees the opportunity to enhance at favourable rates their cover for life assurance and related cover. • We publish details of our gender pay gap annually. Diversity & Inclusion • We are committed to the promotion of a workplace culture that provides an equitable, diverse, and inclusive environment. • In 2022 we communicated a Diversity & Inclusion strategy, following the first survey for employees the previous year. Corporate Social Responsibility (CSR) • We currently support philanthropy through matching charity donations, payroll giving, and volunteer days. • Our CSR activities are being reviewed for 2023, with plans for a new strategy to accelerate our efforts. • We are increasing our community and volunteer offering, with a focus for 2023 on financial education and literacy. • We aim to secure new accreditations and signatories that align with our CSR activities and values. Suppliers • We developed a Supplier Code of Conduct, engaging with suppliers to build mutually sustainable relationships in line with our values. • We currently screen suppliers with regards to ethical standards. • The Group’s Modern Slavery Policy sets out our zero-tolerance approach to modern slavery, and any instance of modern slavery in our business or supply chain is a breach of the core values of our business. 34 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Sustainability Report continued Pillar Current status Ensuring that our business practices have a positive impact on the environment • We will set targets and progress against these with a view to reaching net-zero carbon emissions as a business by 2050. Energy • As part of the review of our working environment and practices to reduce our energy consumption, we signed up for a green tariff for our main office in Wilson Street, London in February 2022. The introduction of agile working is continuing to have a positive impact on our energy usage. We are actively reviewing our premises strategy with specific reference to environmental factors and agile working. • Our Wilson Street office has an Energy efficiency B rating. Waste • We have reduced paper usage in the office by issuing laptops to all employees and in 2022 by reducing the number of our photocopiers by more than a quarter. • We continue to reduce the printing of client communications and marketing materials. • We ensure the responsible disposal of computer equipment and have a waste recycling programme in place. Transport • Our carbon footprint decreased substantially with the introduction of agile working. • We have developed our virtual meeting facilities and will continue to do this, reducing the need for travel between offices. • Our benefits include a cycle to work scheme and season ticket loan. • We continue to finance electric vehicles through our RAF subsidiary while AAG strives to finance the most environmentally friendly trucks in the UK which we seek to keep as up to date as possible. AAG is actively considering how the market in renewable energy develops. Ensuring best outcomes for our clients • We seek regular feedback from our clients to reinforce our proposition and service. • In 2022 we conducted an in-depth review of our client value proposition which included a client survey and deep-dive individual client interviews. • We also have a robust complaints process and take dissatisfaction seriously, remediating issues promptly. • We take the protection of our client data seriously and have robust measures in place to protect client data in line with our legal and regulatory requirements. • We offer a Sustainable Investment Service which incorporates environmental, social, and governance factors to achieve a positive impact without sacrificing long-term financial returns. • We make regular anti-fraud communications to clients, alerting them to the different techniques used by criminals to seek to steal people’s data and money. • We have set up a project, planning for the implementation of the FCA’s new Consumer Duty for all new and existing products and services that will be on sale at the end of July 2023. The aim is to deliver good outcomes for retail customers, reflecting the new, higher standard of the Consumer Duty. • In 2022 Aon on behalf of the Group conducted an in-depth client experience survey, as part of the wider Client Value Proposition project. • We have continued to invest in the Bank’s core banking system, completing a major project in 2022, thereby demonstrating that operational resilience and the ability to make services available to our clients is of the utmost importance. • We continue to invest in our risk management capabilities across Credit, Compliance, Operational Risk and Financial Crime with a view to ensuring good client outcomes through the continuing stability of the Bank. Arbuthnot Banking Group PLC Report & Accounts 2022 35 Progress Towards Task Force on Climate-related Financial Disclosures’ (TCFD) Alignment During the year, further progress was made in preparation for reporting on the Group’s climate-related risks in line with the recommendations of the global TCFD. For AIM listed companies, new regulations will come into force for the Annual Report for the year ending December 2023, requiring us to provide information on climate change related risks and opportunities, where material. The information to be given will cover how climate change is addressed in corporate governance; the impacts on strategy; how climate related risks and opportunities are managed; and on the performance measures and targets applied in managing these issues. The TCFD encourages consistent, reliable and clear measurement and reporting of climate-related financial risks. Its recommendations provide a framework for understanding and analysing how climate change affects our customers, our own operations and our strategy. The recommendations are to assess disclosures around governance, strategy, risk management and metrics and targets. As stated in the section on Risks and Uncertainties on page 23 above, we have assessed the Group against the TCFD recommended disclosures and in preparation for the new requirements coming into force next year, we set out below our initial assessments. Section Requirement Response Governance a. Describe the board’s oversight of climate-related risks and opportunities. Governance b. Describe management’s role in assessing and managing climate- related risks and opportunities. The “Climate Change Risk Appetite, Risk Assessment and Scenarios” are reviewed annually and approved by the AL Risk Committee on behalf of the Board. • The ESG dashboard (that includes Climate Change) is a standing item on the Risk Committee agenda and forms part of the AL Chief Risk Officer’s regular update to the Board. • The ESG dashboard details climate-change related actions and performance against risk tolerances. The tolerances are partly based on the climate change scenarios outputs. • Climate change risk is considered in acquisitions or divestitures decisions, most recently in the case of the acquisition of AAG in 2021. First Line • Accountability for managing the financial risks of climate change sits with the CEO of AL, Andrew Salmon. Second line • The Senior Management Function (SMF) accountability for the financial risks of climate change sits with Stephen Kelly, the AL CRO. He has responsibility for assessing climate- related issues. • Climate change is managed within the Group’s existing governance and risk management frameworks. It is not proportionate to operate further structures. • The AL Risk Committee has oversight for Climate Change and it is included in its Terms of Reference. • The AL Credit Committee considers implications of climate change on new and existing lending. All new lending includes a climate change assessment. • The AL Investment Committee considers implications of climate change on investment decisions. • The Product Governance Committee considers climate change on propositions • The ICAAP includes climate change scenarios. 36 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Sustainability Report continued Section Requirement Response Strategy a. Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term. The Climate Change Risk Appetite, Risk Assessment and Scenarios consider the risks and opportunities for the business model and lending book over following time periods: • Short term (0-1 years); • Medium term (1-5 years); and • Long term (5-30 years) The key opportunities and risks are as follows: Strategy Strategy Risk Management b. Describe the impact of climate- related risks and opportunities on the organisation’s businesses, strategy, and financial planning. c. Describe the resilience of the organisation’s strategy, taking into consideration different climate- related scenarios, including a 2°C or lower scenario. a. Describe the organisation’s processes for identifying and assessing climate- related risks. • AL Core transition risk and opportunity on the rising EPC requirements for buy to let residential property • AL Core physical risk (flood risk) on residential property. • RAF transition risk and opportunity from the demise of combustion engines and switch to electric engines. • AAG transition risk and opportunity from the demise of combustion engines and switch to alternatives. • The Group has minimal exposure to the Energy or Utility sectors. • AL Core residential property loan risks are mitigated by the loan durations (typically less than 5 years) and strong loan to values. New lending includes a costing to get properties to EPC ‘C’. In addition, the business is planning to launch green lending products aimed at attracting higher EPC portfolios and financing EPC improvements. • RAF combustion engine risk is mitigated by the short loan durations (typically less than 5 years). In addition, RAF captures the opportunity by financing electric and hybrid vehicles. • AAG combustion engine risk is mitigated by the short leasing durations (typically less than 5 years), lack of viable alternate technologies and by the strategic objective to keep the fleet focused on latest Euro 6 models and as young as possible. AAG is well positioned to finance the transition to cleaner technology vehicles. Based on the risk assessment, the Group’s business model is considered resilient to climate- related risks and opportunities. • The “Climate Change Risk Appetite, Risk Assessment and Scenarios” are reviewed annually and approved by the AL Risk Committee on behalf of the Board. • The risk assessment and scenarios consider existing and emerging regulatory requirements and other relevant factors, as well as the potential size and scope of climate-related risks. • The scenarios are informed by the Bank of England “Key elements of the 2021 Biennial Exploratory Scenario: Financial risks from climate change” published on 8 June 2021. • The risk assessment is informed by the scenarios. It identifies and assesses the transition and physical risks to the business model and lending book. Climate Change is referenced in the: • ICAAP • Risk Appetite Framework • Credit Policy Arbuthnot Banking Group PLC Report & Accounts 2022 37 Section Requirement Response Risk Management b. Describe the organisation’s processes for managing climate- related risks. • The AL Credit Committee considers implications of climate change on new and existing lending. All new lending includes a climate change assessment. • The Investment Committee considers implications of climate change on investment decisions. • The AL Product Governance Committee considers climate change on propositions. Risk Management Metrics and Targets Metrics and Targets Metrics and Targets c. Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management. a. Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process. b. Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks. c. Describe the targets used by the organisation to manage climate- related risks and opportunities and performance against targets. • The AL Risk Hierarchy includes Climate Change as a risk within the Enterprise & Strategic Risk Category as per the Board-approved Risk Appetite Framework. The ESG dashboard details climate-change related actions, metrics and performance against risk tolerances. Metrics are disclosed on energy usage. It is not considered proportionate to disclose metrics on water, land use and waste management. Climate-related performance metrics are not incorporated into remuneration policies, based on the inherent risk to the Group. The Group does not operate an internal carbon price mechanism on the basis of proportionality. The Risk Assessment documents the Group’s exposure to carbon-related assets (defined as Energy and Utility sectors) as <1% at June 2022. This analysis was based on the Regulatory Reporting Sector Analysis (SIC code based). Scope 1,2 and 3 emissions are reported on page 38 below and have been reported in the ABG Annual Report since 2020. Scope 1, 2 and 3 emissions are also reported on the ESG dashboard. The Group is committed to the following: • To be Net Zero by 2050. • For AAG vehicles, this will require technology advances as emissions are expected to increase in line with business growth. • As part of our London premises strategy, we will consider energy efficiency as one of the criteria with further gains expected. The remaining gap to Net Zero post the premises review will be addressed by further initiatives and potentially carbon off-setting. 38 Arbuthnot Banking Group PLC Report & Accounts 2022 Strategic Report Sustainability Report continued Streamlined Energy & Carbon Reporting (SECR) • Data was collected specifically for the purpose of SECR. The Group has worked again with a specialist energy management consultancy, Carbon Decoded, to gather the information required to be reported by large unquoted companies under the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018: • All energy in line with Greenhouse Gas Reporting (GHG) Scope One - gas and owned transport, Scope Two - electricity and Scope Three - non-owned transport. • An intensity metric to enable year on year improvements to be tracked. The report covers data from 1 January to 31 December 2022 for the Company and its subsidiaries. The Group has reported all sources of environmental impact, as required in SECR, over which it has financial control, being the Company and its subsidiaries. Base Year This year the Base Year has been changed to a rolling annual comparison. The acquisition of Asset Alliance Group (AAG) in 2021 significantly affected the energy use of the business, making comparisons to the previous 2019 baseline ineffective for energy reduction purposes. The removal of restrictions as a result of the Covid-19 pandemic has also continued to have an impact on a changing picture of energy use in 2022. Reporting Methodology • Data has been collected for electricity, gas and transport. • GHG Protocol Corporate Accounting and Reporting Standard has been followed where relevant. • The 2021 and 2022 UK Government Conversion Factors for Company Reporting were used for all calculations of Carbon emissions. • Data was estimated where necessary, as set out below. Estimated Data The following data was estimated in 2022: • Dominion Street, London Natural Gas Gas use is included in the rent and sub-metering is not available; estimates are based on floor area • Bristol and Gatwick Energy is included on the rent and sub-metering for the office is not available; estimates are based on floor area • On-site Transport Diesel used for Forklift Trucks and Refrigerated Vehicles held on site at Wolverhampton has been estimated. Operational Scopes The report contains all Scope One and Two energy use and Scope Three Grey Fleet for the Group as required by SECR. Energy consumption for the commercial office properties owned by the Group has been further improved to provide more actual data in 2022 where floors in buildings were unoccupied by tenants and the responsibility for energy consumption returned to the Group. The Group is actively reviewing its premises strategy with specific reference to environmental factors. Reporting Summary 2022 2021 Scope One Natural Gas - Intensity Ratio tCO2e/m2 Gas Oil - Intensity Ratio tCO2e/m2 Kerosene - Intensity Ratio tCO2e/m2 Diesel - Mixed Onsite Use No Metric Available Company HGVs Intensity Ratio tCO2e/miles Company Cars Intensity Ratio tCO2e/miles Total Scope One Scope Two Electricity - Intensity Ratio tCO2e/m2 Company Cars Intensity Ratio tCO2e/miles Total Scope Two Scope Three Grey Fleet Vehicles Intensity Ratio tCO2e/miles Total Scope Three Total of all Scopes Estimated Data Measure kWh Carbon Tonnes tCO2e Intensity Ratio tCO2e Measure Carbon Tonnes tCO2e Intensity Ratio tCO2e kWh 5,779 397,824 73 0.013 5,779 1,545 90,720 314,699 61,926 38,185 643,279 269,795 1,411,009 0.010 1,545 15 9 155 0.0017 65 0.0002 317 43,582 365,010 305,708 12,923 57,356 255,865 352,752 984,604 56 3 14 0.010 0.002 0.009 61 0.0014 84 0.0002 218 14,274 1,703,083 8,317 19,656 1,711,400 329 0.023 2 0.0001 14,117 1,797,245 382 0.027 331 14,117 1,797,245 382 0.027 270,683 270,683 337,205 337,205 80 0.0003 80 0.0003 173,316 173,316 212,618 212,618 50 0.0003 50 0.0003 3,459,614 728 2,994,467 649 7% 20% Arbuthnot Banking Group PLC Report & Accounts 2022 39 Corrective Actions Data improvement work completed this year has identified a duplication in reporting the diesel carbon tonnes for AAG. In 2021, two sources of information were provided for diesel use; the mileage for HGVs and the amount of diesel held in a tank at Wolverhampton. However, the fuel used by AAG owned HGVs had already been accounted for in the mileage data leading to an overstatement of the amount of diesel tonnes in 2021 which has been restated in the 2021 details above. Intensity Ratio An intensity ratio is used to enable year on year comparison. As Arbuthnot is an office-based business and the recognised standard measure is kilowatt-hour per square metre (kWh/m2). This enables the energy use to be compared to industry standard benchmarks. Similarly for transport, the metric is kilowatt-hour per mile (kWh/mile). For reporting purposes, the Carbon Tonnes/floor area and miles have also been reported as required by the Regulations. Changes from 2021 Energy Efficiency Actions Scope One Natural gas and kerosene are used to heat buildings within the portfolio. This has increased from 2021 due to the return to office working and a particularly cold December from 70 to 88 tonnes. In April 2022 the Government changed the law to restrict the use of gas oil (red oil) which has led to diesel now being used for Fork Lift Trucks and on-site needs. Therefore, gas oil is not reported in 2022 and a new line for diesel – Mixed Onsite Use has been reported. As this is for Fork Life Trucks and refrigerated lorries no metric is available. For 2022 the on-site fuel data has been estimated. In 2021 AAG owned two HGVs and this has doubled in 2022, which together with an increase in demand, has increased the carbon tonnes from 61 to 155. Company car use has decreased from 84 to 65 tonnes with 60% of the AL fleet now fully electric. The metric has benefited from AAG ensuring the CO2 emissions of their fleet are monitored. The Group is actively reviewing its premises strategy with specific reference to environmental factors. The Wilson Street head office profile data demonstrates that there is improved control of out of office electricity. To improve the understanding of energy use at Wilson Street, sub-metering is being reviewed to enable the site to look for further savings. Lighting reviews were undertaken for Wilson Street and these are now being considered. AAG have implemented sub-metering effectively at Wolverhampton and have also taken steps to clarify the Diesel used by the business and by clients when HGVs are leased. They have also looked at possible energy savings during the cleaning processes for vehicles. In terms of improvement in transport emissions AL have changed 60% of their company cars to electric vehicles. AAG are continuing to improve the emissions of their company vehicles. Scope Two The electricity use has fallen over 2021 as overnight energy use is being better controlled. Electric cars feature for the first time in this section. James Cobb Group Finance Director 29 March 2023 Scope three This section relates to employees using their own cars on company business and is known as grey fleet. This has increased from 2021 as employees have returned to face-to-face meetings, following the lifting of all COVID-19 related restrictions. 40 Board of Directors Arbuthnot Banking Group PLC Report & Accounts 2022 Sir Henry Angest James Cobb Andrew Salmon The Hon Sir Nigel Boardman Ian Dewar Sir Alan Yarrow Frederick Angest Nicholas Jennings Company Secretary Arbuthnot Banking Group PLC Report & Accounts 2022 41 Sir Henry Angest Ian Dewar FCA Appointed a Non-Executive Director in August 2015, Mr. Dewar is Chairman of the Audit Committee. He was a partner for 19 years in the Financial Services Practice of KPMG from which he retired in 2012 after 32 years at the firm. He is a non-executive director of Manchester Building Society and was previously senior independent director of Brewin Dolphin Holdings PLC. Sir Alan Yarrow FCSI (Hon) Appointed a Non-Executive Director in June 2016, Sir Alan spent 37 years with Dresdner Kleinwort until 2009, latterly as group vice chairman and chairman of the UK Bank. He is a director of Institutional Protection Services Ltd. He is also vice president of the Royal Mencap Society, Independent Partnership Advisor to James Hambro & Partners, an advisor to Zeamo Inc. (USA), a Council Member of the Commonwealth Investment and Enterprise Council and a member of the Property Trust Board, City & Guilds Art School. He is an Alderman, Magistrate and HM Lieutenant of the City of London, a member of the Court of the Fishmongers’ Company and a member of the Takeover Appeal Board. He was Lord Mayor of the City of London for the year 2014-15 and was previously chairman of the Chartered Institute for Securities & Investment. Frederick Angest Appointed a Non-Executive Director in September 2022, Mr. Angest works at Arbuthnot Latham & Co., Limited, currently as a Private Banker, having previously worked within Wealth Management and Credit Risk. Nicholas Jennings FCA Appointed Group Company Secretary in July 2018, he was previously company secretary of Daily Mail and General Trust plc and of Close Brothers Group plc. He is a Chartered Accountant. Appointed to the Board in December 1985, Sir Henry is Chairman and Chief Executive. He is also President and a director of Arbuthnot Latham & Co., Limited of which he was Chairman from 1994 to July 2022. He gained extensive national and international experience as an executive of The Dow Chemical Company and Dow Banking Corporation. He was previously chairman and a director of Secure Trust Bank PLC, chairman of the Banking Committee of the London Investment Banking Association and a director of the Institute of Directors. He is a Past Master of the Worshipful Company of International Bankers, where he is still a member of the Court. James Cobb FCA Appointed to the Board in November 2008 as Group Finance Director, Mr. Cobb is also Finance Director and Deputy Chief Executive of Arbuthnot Latham & Co., Limited. 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. Andrew Salmon FCA Appointed to the Board in March 2004, Mr. Salmon is Group Chief Operating Officer and Head of Business Development, having joined the Company in 1997. He is also Chief Executive of Arbuthnot Latham & Co., Limited. He was previously a director of Secure Trust Bank PLC and of Hambros Bank Limited and qualified as a Chartered Accountant with KPMG. The Hon Sir Nigel Boardman Appointed a Non-Executive Director in June 2019, Sir Nigel is also a director of Arbuthnot Latham & Co., Limited and, since August 2022, its chairman. He was a partner at the law firm, Slaughter and May from 1982 to 2019. He is also a non-executive director of Aston Martin Lagonda Global Holdings plc and a director of Mile Group Unlimited and of Glyde Group Unlimited, the holding companies for ABP Foods Jersey. Sir Nigel is Chair of the charity Help for Heroes, a director and chair designate of The Medical College of Saint Bartholomew’s Hospital Trust, a charity funding medical research, and is Trustee Emeritus and a member of the audit committee for the British Museum. He is also an adviser to the Consello Group, a specialised investing and financial services platform. Sir Nigel was previously a non-executive director of the Department for Business, Energy and Industrial Strategy and chaired its audit committee. 42 Arbuthnot Banking Group PLC Report & Accounts 2022 Group Directors’ Report The Directors present their report for the year ended 31 December 2022. Business Activities The principal activities of the Group are banking and financial services. The business review and information about future developments, key performance indicators and principal risks are contained in the Strategic Report on pages 8 to 39. Corporate Governance The Corporate Governance report on pages 46 to 53 contains information about the Group’s corporate governance arrangements, including in relation to the Board’s application of the UK Corporate Governance Code. Results and Dividends The results for the year are shown on page 64 of the financial statements. The profit after tax for the year of £16.5m (2021: £6.8m) is included in reserves. The Directors recommend the payment of a final dividend of 25p (2021: 22p) per share which, together with the interim dividend of 17p (2021: 16p) paid on 23 September 2022 represents total dividends for the year of 42p (2021: 59p). This compares with a total dividend in 2021 of 59p which comprised a regular total dividend of 38p together with a special dividend for the year of 21p relating to 2019 that had been cancelled following guidance from the PRA. The final dividend, if approved by members at the 2023 Annual General Meeting (“AGM”), will be paid on 2 June 2023 to shareholders on the register at close of business on 21 April 2023. Directors The names of the Directors of the Company at the date of this report, together with biographical details, are given on pages 40 and 41 of this Annual Report. Mr. F.A.H. Angest was appointed to the Board on 1 September 2022. All the other Directors listed on those pages were directors of the Company throughout the year. The late Sir Christopher Meyer was also a Director during the year prior to his retirement from the Board on 25 May 2022. Mr. F.A.H. Angest offers himself for election under Article 75 of the Articles of Association. Sir Nigel Boardman and Sir Alan Yarrow being eligible, offer themselves for re-election under Article 78 of the Articles of Association. Sir Alan, Sir Nigel and Mr. Angest each has a letter of appointment terminable on three months’ notice. Articles of Association The Company’s articles of association may only be amended by a special resolution of the Ordinary shareholders. They were last amended at the AGM in May 2017 and can be viewed at www.arbuthnotgroup.com/corporate_governance.html. Viability Statement In accordance with the UK Corporate Governance Code, the Directors confirm that there is a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for the three-year period up to 31 December 2025. A period of three years has been chosen because it is the period covered by the Group’s strategic planning cycle and also incorporated in the Individual Capital Adequacy Assessment Process (“ICAAP”), which forecasts key capital requirements, expected changes in capital resources and applies stress testing over that period. The Directors’ assessment has been made with reference to: • the Group’s current position and prospects – please see the Financial Review on pages 14 to 25; • the Group’s key principles – please see Corporate Philosophy on page 1; and • the Group’s risk management framework and associated policies, as explained in Note 6. The Group’s strategy and three-year plan are evaluated and approved by the Directors annually. The plan considers the Group’s future projections of profitability, cash flows, capital requirements and resources, and other key financial and regulatory ratios over the period. The ICAAP is embedded in the risk management framework of the Group and is subject to continuing updates and revisions when necessary. The ICAAP process is used to stress the capital position of the Group over the three-year planning period. It is updated at least annually as part of the business planning process. Arbuthnot Banking Group PLC Report & Accounts 2022 43 Going Concern Authority to Purchase Shares In assessing the Company’s and the Group’s Going Concern position, the Directors have made appropriate enquiries which assessed the following factors: • the Group’s strategy, profitability and funding; • the Group’s risk management (see Note 6 to the financial statements) and capital resources (see Note 7); • the results of the Group’s capital and liquidity stress testing; • the results of the Group’s reverse stress testing and the stress levels that have the potential to cause its business plan failure; and • the Group’s recovery plan and potential management actions to mitigate stress impacts on capital and liquidity. The key Macro-Economic Risks for the stress testing included: • Property market falls of up to 45% in property values; • Stock market falls of up to 45% in UK equity prices; • Interest rate rise/fall; and • Regulation change. 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 issued Ordinary and Ordinary Non-Voting share capital. The Directors will keep the position under review in order to maximise the Company’s resources in the best interests of shareholders. Details of the resolutions renewing this authority are included in the Notice of Meeting on pages 153 and 154. No shares were purchased during the year. The maximum number of Treasury shares held at any time during the year was 390,274 Ordinary shares and 19,040 Ordinary Non-Voting shares of 1p each. Financial Risk Management Details of how the Group manages risk are set out in the Strategic Report and in Note 6 to the financial statements. Directors’ Interests The interests of current Directors and their families in the shares of the Company at the dates shown, together with the percentage of the current issued share capital held (excluding treasury shares), were as follows: The key Idiosyncratic Risks for the stress testing included: Beneficial Interests - Ordinary shares • Credit losses; • Operational events (i.e. fraud, cyber event, etc.); • Decline in profitability; and • Liquidity event (i.e. significant deposit outflow). As a result of the assessment, the Directors are satisfied that the Company and the Group have adequate resources to continue in operation for a period of at least twelve months from when the financial statements are authorised for issue. The financial statements are therefore prepared on the going concern basis. Share Capital The Company has in issue two classes of shares, Ordinary shares and Ordinary Non-Voting shares. The Non-Voting shares rank pari passu with the Ordinary shares, including the right to receive the same dividends as the Ordinary shares, except that they do not have the right to vote in shareholder meetings. Beneficial Interests 2022 2022 2023 % 1 January 31 December 24 March Sir Henry Angest 8,351,401 8,376,401 8,376,401 56.3 Sir Nigel Boardman J.R. Cobb A.A. Salmon 16,313 6,000 51,699 26,062 6,000 51,699 26,062 6,000 51,699 0.2 – 0.3 Beneficial Interests - Ordinary Non-Voting shares Beneficial Interests 2022 2022 2023 % 1 January 31 December 24 March Sir Henry Angest 86,674 86,674 86,674 64.9 J.R. Cobb A.A. Salmon 60 516 60 516 60 516 – 0.4 44 Arbuthnot Banking Group PLC Report & Accounts 2022 Group Directors’ Report continued Substantial Shareholders The Company was aware at 13 March 2023 of the following substantial holdings in the Ordinary shares of the Company, other than those held by one director shown on page 43: Holder Liontrust Asset Management Slater Investments Mr. R Paston Ordinary Shares 1,785,878 1,094,971 529,130 % 11.9 7.4 3.6 Significant Contracts 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 2022, one Director had a loan from Arbuthnot Latham & Co., Limited amounting to £1.4m (2021: £0.5m) and five directors had deposits amounting to £4.4m (2021: £4.0m), all on normal commercial terms as disclosed in Note 44 of the financial statements. Directors’ Indemnities The Company’s Articles of Association provide that, subject to the provisions of the Companies Act 2006, the Company may indemnify any Director or former Director in respect of liabilities (and associated costs and expenses) incurred in connection with the performance of their duties as a Director of the Company or any subsidiary and may purchase and maintain insurance against any such liability. The Company maintained directors and officers liability insurance throughout the year. Employee Engagement 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 regular communications and in other ways. Further information on employee engagement is given in the Strategic Report on pages 30 to 33. Engagement with Suppliers, Customers and Others Information on engagement with suppliers, customers and other stakeholders is given in the Strategic Report on page 29. Streamlined Energy & Carbon Reporting The information required by the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 is set out in the Sustainability Report on pages 38 and 39. These Regulations implement the Government’s policy on Streamlined Energy and Carbon Reporting (SECR) to support businesses in understanding their Carbon emissions and to help them establish plans to become Net Zero by 2050. Political Donations The Company made political donations of £30,000 during the year (2021: £20,000), being payment for attendance at political functions. Events after the Balance Sheet Date Details of material post balance sheet events are given in Note 49. Annual General Meeting (“AGM”) The Company’s AGM will be held on Wednesday 24 May 2023 at which Ordinary Shareholders will be asked to vote on a number of resolutions. Shareholders are encouraged to submit their votes in respect of the business to be discussed via proxy, appointing the Chairman of the meeting as their proxy. This will ensure that votes will be counted if shareholders are unable to attend the meeting in person. The resolutions, together with explanatory notes about voting arrangements, are set out on pages 153 to 156. Auditor A resolution for the re-appointment of Mazars LLP as auditor will be proposed at the forthcoming AGM in accordance with section 489 of the Companies Act 2006. Arbuthnot Banking Group PLC Report & Accounts 2022 45 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 are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company 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. The Directors confirm that the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and Parent Company’s position, performance, business model and strategy. By order of the Board N D Jennings Secretary 29 March 2023 Disclosure of Information to the Auditor Each of the persons who are Directors at the date of approval of this Annual Report confirm that: • so far as each director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and • they have taken all the steps they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. 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, 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 for Companies and in accordance with the Rules of the AQSE Growth Market, they are required to prepare the Group Financial Statements in accordance with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006 and have elected to prepare the Parent Company Financial Statements on the same basis. Financial Statements 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 the Company and of the Group 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 then apply them consistently; • make judgements and estimates that are reasonable, relevant and reliable; • state whether they have been prepared in accordance with UK-adopted International Financial Reporting Standards (IFRSs) in conformity with the requirements of the Companies Act 2006; • assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • use the going concern basis of accounting unless they intend either to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. 46 Corporate Governance Arbuthnot Banking Group PLC Report & Accounts 2022 Introduction and Overview The Company has a strong and effective corporate governance framework. The Board endorses the principles of openness, integrity and accountability which underlie good governance and takes into account the provisions of the UK Corporate Governance Code, published by the Financial Reporting Council in July 2018 (“the FRC Code”), in so far as they are considered applicable to and appropriate for the Company, given its size and circumstances, and the role and overall shareholding of its majority shareholder. The Company has been approved by the Prudential Regulation Authority (“PRA”) as a parent financial holding company of its banking subsidiary, Arbuthnot Latham & Co., Limited. Arbuthnot Latham is authorised by the PRA and regulated by the Financial Conduct Authority (“FCA”) and by the PRA. Three of its subsidiaries, Asset Alliance Leasing Limited, Forest Asset Finance Limited and Renaissance Asset Finance Limited, are regulated by the FCA. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such a business. The Board has decided to report against the FRC Code. This decision was made in light of the requirement in the AIM Rules for Companies that AIM listed companies state which corporate governance code they have decided to apply, how the company complies with that code, and where it departs from its chosen code an explanation of the reasons for doing so. The Rules of the AQSE Growth Market also require the Company to adopt, as far as possible, the principles and standards set down in a recognised UK corporate governance code. This information is published on the Company’s website and the Company reviews it each year as part of its annual reporting cycle. This section of the Annual Report summarises how the Company applies the FRC Code and in broad terms how it has complied with its provisions throughout the year, giving explanations where it has chosen not to do so. Leadership and Purpose The Company is led by the Board which comprises seven members: Sir Henry Angest, the Executive Chairman and Chief Executive; two other executive directors, Andrew Salmon and James Cobb; three independent non-executive directors, Sir Nigel Boardman, Ian Dewar and Sir Alan Yarrow; and one other non-executive Director, Frederick Angest. This means that half of the Board, excluding the Chairman, comprises independent non-executive directors. The Board sets the long-term focus and customer-oriented culture of the Group. The responsibilities of Sir Henry Angest as Chairman include leading the Board, ensuring its effectiveness in all aspects of its role, ensuring effective communication with shareholders, setting the Board’s agenda and ensuring that all Directors are encouraged to participate fully in the activities and decision-making process of the Board. The Board has for many years led a company which focuses on sustainable growth over the longer-term with a culture to match. Investment in resources has been strong and has continued where and as appropriate, with the focus on the benefit this will bring to bear for stakeholders over time. The aim continues to be for a culture of openness among the workforce which combines with the prudent and effective technological and individual controls in place across the business to ensure strong risk management in the Company’s continued long-term success. The Group’s cultural values are reflected in a brand values document linking the Arbuthnot Principles to the Group’s culture as a way of communicating culture across the business. These cultural Principles are encapsulated in five Group values which are fully embedded into day-to-day activities. These are integrity, respect, empowerment, energy and drive, and collaboration. A formal approach to Environmental, Social and Governance (ESG) is in place to develop over time under five ‘pillars of sustainability’ – governance, employees, community, environment and clients. The Board A number of key decisions are reserved for the Board. The Schedule of Matters Reserved to the Board is reviewed annually and is published on the Company’s website at http://www.arbuthnotgroup.com/corporate_governance.html. The Board met regularly throughout the year, holding seven scheduled meetings, five of which were held jointly with the Board of Arbuthnot Latham with the other two being held to approve the Annual and Interim Reports. It also held a separate strategy meeting, together with the Arbuthnot Latham Directors, in September. Substantive agenda items have briefing papers, which are circulated in a timely manner before each meeting. The Board ensures that it is supplied with all the information that it requires and requests in a form and of a quality to fulfil its duties. Arbuthnot Banking Group PLC Report & Accounts 2022 47 Overview of Compliance with the FRC Code, together with Exceptions The Board focuses not only on the provisions of the Code but on its principles, ensuring as follows: • The Company’s purpose, values and strategy as a prudently managed organisation align with its culture, with a focus on fairness and long-term shareholder returns. • The Board has an appropriate combination of executive and non-executive directors, who have both requisite knowledge and understanding of the business and the time to commit to their specific roles. • The Board comprises directors with the necessary combination of skills to ensure the effective discharge of its obligations, with an annual evaluation of the capability and effectiveness of each director as well as the Board as a composite whole; appropriate succession plans are also in place and reviewed annually, or more frequently if appropriate. • The Board and Audit Committee monitor the procedures in place to ensure the independence and effectiveness of both external and internal auditors, and the risk governance framework of the Company, with all material matters highlighted to the relevant forum (Board/Committee). • Remuneration policies and practices are designed to support strategy and promote long-term sustainable success, with a Remuneration Committee in place to oversee director and senior management pay. In addition to overseeing the management of the Group, the Board has determined certain items which are reserved for decision by itself. These matters include approval of the Group’s long-term objectives and commercial strategy, ensuring a sound system of internal control, risk management strategy, approval of major investments, acquisitions and disposals, any changes to the capital structure and the overall review of corporate governance. The Company Secretary is responsible for ensuring that the Board processes and procedures are appropriately followed and support effective decision making. All directors have access to the Company Secretary’s advice and services. 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. New directors receive induction training upon joining the Board, with individual listed company training provided by the Company’s AIM Nominated Adviser and AQSE Corporate Adviser. Regulatory and compliance training is provided by the Heads of Compliance and Financial Crime or by an external lawyers, accountants and other subject matter experts. Risk management training is provided, including that in relation to the ICAAP and ILAAP, by the Arbuthnot Latham Chief Risk Officer with an overview of credit and its associated risks and mitigation by the Arbuthnot Latham Chief Credit Officer. Board Evaluation The annual Board Effectiveness Review was conducted internally. The 2022 evaluation took the form of a confidential online questionnaire which assessed the performance of the Board and its Committees. The questions were augmented, particularly those concerning clarity of the business, strategy and risk and accountability, whilst continuing to explore the themes developed over recent years including Board effectiveness, Board composition, Board dynamics, alignment of the Board and executive team, interaction with major shareholders, induction, performance and training, Board Committees and the Secretariat. The results were discussed by the Board in November 2022 and proposed actions arising were considered in February 2023. The responses were positive, confirming that the Board was of the view that it receives the correct level of insight into and oversight of the Company, both directly to it and in terms of management information and oral updates provided during meetings. Directors also agreed that the Arbuthnot culture set out in the Arbuthnot Principles and Values manifests itself at Board level and in the external view of the Group as a whole. 48 Arbuthnot Banking Group PLC Report & Accounts 2022 Corporate Governance continued In respect of the Code’s specific provisions, an annual review is carried out, comparing the Company’s governance arrangements and practices against them. Any divergences are noted, with relevant rationale considered carefully to determine whether it is appropriate. Consideration is also given to guidance issued, which may require a review of the relevant reasoning intra-year. In line with the FRC’s Guidance on Board Effectiveness, the Board additionally takes into account its suggestions of good practice when applying the Code focusing on the five key principles specified in the Code. Where the Company’s governance does not completely align with the Code, it is generally as a result of the role of its overall majority shareholder, itself adding a level of protection to long-term shareholder interests, and it has had no negative impact on the Company. All divergences from the Code, with an explanation of the reasons for doing so are set out below: Provision 5 – The Board has regard to the interests of all its key stakeholders in its decision making. Executive Directors and senior management are fully engaged with the workforce, all of whom interact on a daily basis. Mr. Dewar is the Company’s Whistleblowing Champion and is available at all times in this role. It has not been deemed necessary to appoint an employee representative to the Board as the Company has fewer than 20 employees, all of whom have direct access to the Board including its Non-Executive Directors. Given its size, as stated in the s.172 Statement on page 28, one of the non-executive directors of Arbuthnot Latham and its Whistleblowing Champion, has been designated by its board as the director to engage with the Arbuthnot Latham Group’s workforce. Provision 9 – The Chairman was not independent on appointment, though he was appointed prior to the introduction of the provision. Sir Henry Angest carries out the role of Chairman and Chief Executive, given his long- term interest as majority shareholder, itself aligning with the interests of other shareholders. The Company follows the US model that is very successful in ensuring commercial success with strong corporate governance and stakeholder awareness, having a shared Chairman and CEO, with a separate, empowered, Chief Operating Officer. In his role as CEO, Sir Henry Angest is responsible for the effective operation and delivery of the business and ensures that he is surrounded by an exceptional management team which ensures the strong leadership required. In particular, ABG has a strong Group Chief Operating Officer and Group Finance Director ensuring challenge and independence from a business perspective, against the stakeholder focus of the Chairman carrying out his Chairman’s role. Provision 10 – The Board considers Sir Nigel Boardman to be independent, notwithstanding his chairmanship at Arbuthnot Latham since his views and any challenge are firmly independent from executive management in both companies. The Board is of the view that the dual directorships complement one another and that there is a benefit to be derived from the appointment of one independent director to both Boards simultaneously. Provision 12 – The Board has not appointed a Senior Independent Director, as the main shareholder is the Chairman and other large independent shareholders communicate frequently with the Chairman, the Group Chief Operating Officer and the Group Finance Director and with the Company’s stockbroker, Shore Capital. Provision 14 – Attendance at meetings is not reported. In the event that a Director is unable to attend a meeting, that Director receives relevant papers in the normal manner and relays any comments in advance of the meeting to the Chairman. The same process applies in respect of the Board Committees. Provision 18 –Directors retire by rotation every three years in accordance with the Company’s Articles of Association and company law. The Directors seeking re-election at the 2023 AGM are Sir Nigel Boardman and Sir Alan Yarrow who have served on the Board for 3½ and 6½ years respectively. The contributions of Sir Nigel and Sir Alan have been invaluable in the successful development of the Company. Mr. Frederick Angest, appointed to the Board by the Directors on 1 September 2022 as part of succession planning, will be seeking election by Ordinary shareholders. Accordingly, the Board fully supports the resolutions for their respective reappointment and appointment of these Directors. Provision 19 - Sir Henry Angest’s role as Chairman is critical to and reflective of the overall group structure. It is through the responsibilities that derive from this role that he is able to consider and protect not only the interests of other shareholders, but also his own interests as a majority shareholder as their interests are aligned. It is for this reason that he surrounds himself with notably strong directors who individually, and as a group, ensure the protection of not only his investments, but also those of other shareholders. As such, he remains as Chairman notwithstanding the length of his tenure. Provision 23 – The Nomination Committee takes into account the provisions of the Board Diversity Policy and in terms of succession planning the Equality and Diversity Policy which promotes equality of opportunity for all staff. Further information on diversity and inclusion is given in the Sustainability Report on pages 31 and 33, though the gender balance of senior management and their direct reports has not been given. Arbuthnot Banking Group PLC Report & Accounts 2022 49 Provision 32 – Sir Henry Angest is Chairman of the Remuneration Committee, as is appropriate in the context of his majority shareholding. 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 review and approve the Group’s Risk Management Policy and Risk Appetite framework. The Risk Management Policy describes and articulates the risk management and risk governance framework, methodologies, processes and infrastructure required to ensure due attention to all material risks for Arbuthnot Latham, including compliance with relevant regulatory requirements. The Risk Appetite framework sets out the Board’s risk attitude for the principal risks through a series of qualitative statements and quantitative risk tolerance metrics. These guide decision-making at all levels of the organisation and form the basis of risk reporting. The key business risks and emerging risks are continuously identified, evaluated and managed by means of limits and controls at an operational level by Arbuthnot Latham management, and are governed through Arbuthnot Latham committees. There are well-established budgeting procedures in place and reports are presented regularly to the Board detailing the results, in relation to Arbuthnot Latham, of each principal business unit, variances against budget and prior year, and other performance data. The Board receives regular reports on risk matters that need to be brought to its attention, enabling it to assess the Group’s principal and emerging risks. Material items are presented to the Board in the Risk Report, which includes a risk dashboard, from the Arbuthnot Latham Chief Risk Officer, who attends the Board meetings held concurrently with those of Arbuthnot Latham. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. The risk dashboard covers key management actions which have included the climate change agenda and its potential longer-term impact on property and other asset classes and on management’s approach to sustainability. In November 2022, the Board received a separate report |from the Arbuthnot Latham CRO enabling it to monitor the company’s risk management and internal control systems and to carry out its annual review of the effectiveness of the Group’s risk management and internal control systems. The report explained the Risk Management Policy, together with principal risks, risk appetite, policies, three lines of defence, systems, processes, procedures and controls and the risk board dashboard. Following its review, the Board confirms the effectiveness of the Company’s risk management and internal control systems. Shareholder Communications The majority shareholder is Sir Henry Angest, Chairman and Chief Executive. The Company maintains communications with its major external shareholders via one-to-one meetings, as appropriate, by the Chairman and Chief Executive, the Group Chief Operating Officer or the Group Finance Director on governance and other matters. When practicable it also makes use of the AGM to communicate with shareholders in person. The Company aims to present a balanced and understandable assessment in all its reports to shareholders, its regulators, other stakeholders and the wider public. Key announcements and other information can be found at www.arbuthnotgroup.com. Board Committees The Board has Audit, Nomination, Remuneration, Donations and Policy Committees, each with formally delegated duties and responsibilities and with written terms of reference, which require consideration of the committee’s effectiveness. The Board keeps the governance arrangements under review. Further information in relation to these committees is set out below and the terms of reference of the Audit, Nomination and Remuneration Committees are published on the Company’s website. The Board maintains direct responsibility for issues of Risk without the need for its own Risk Committee, since responsibility for large lending proposals is a direct responsibility of its subsidiary, Arbuthnot Latham. Additionally the Chairman of the Arbuthnot Latham Risk Committee reports to the ABG Board at its regular meetings, held jointly with the Arbuthnot Latham Board, on the activities of that Committee which is responsible for monitoring the status of the Arbuthnot Latham group against its principal risks. 50 Arbuthnot Banking Group PLC Report & Accounts 2022 Corporate Governance continued Audit Committee Membership and meetings Membership of the Audit Committee comprises Ian Dewar (as Chairman), Sir Nigel Boardman (since May 2022) and Sir Alan Yarrow. All of the Committee’s members are therefore independent non-executive Directors. The late Sir Christopher Meyer was a member until his retirement as a director on 25 May 2022. Mr. Dewar has recent and relevant financial experience and the Committee as a whole has competence relevant to the financial sector in which the Company operates. The Company Secretary acts as its Secretary. The Audit Committee oversees, on behalf of the Board, financial reporting, the appropriateness and effectiveness of systems and controls, the work of Internal Audit and the arrangements for and effectiveness of the external audit. The ultimate responsibility for reviewing and approving the Annual Report and Accounts and the Interim Report lies with the Board. The Committee also reviews procedures for detecting fraud and preventing bribery, reviews whistleblowing arrangements for employees to raise concerns in confidence, and reviews, as necessary, arrangements for outsourcing significant operations. External Audit The external auditors, Mazars LLP, have held office since their appointment in 2019 following a competitive tender. The Committee assesses the independence and objectivity, qualifications and effectiveness of the external auditors on an annual basis as well as making a recommendation to the Board on their reappointment. The Committee received a report showing the level of non-audit services provided by the external auditors during the year and members were satisfied that the extent and nature of these did not compromise auditor independence. The Committee has concluded that Mazars are independent and that their audit is effective. Activity in 2022 The Audit Committee held four meetings during the year, three of which were held jointly with the Audit Committee of Arbuthnot Latham with the other one being held to review the Annual Report & Accounts and draft results announcement. Internal Audit Internal Audit provides the Audit Committee and the Board with detailed independent and objective assurance on the effectiveness of governance, risk management and internal controls. The ultimate responsibility for reviewing and approving the annual report and accounts rests with the Board. The Audit Committee approves the Internal Audit risk-based programme of work and monitors progress against the annual plan. The Committee reviews Internal Audit resources and the arrangements that: ensure Internal Audit faces no restrictions or limitations to conducting its work; that it continues to have unrestricted access to all personnel and information; and that Internal Audit remains objective and independent from business management. The Head of Internal Audit reports directly to the Chairman of the Arbuthnot Latham Audit Committee. He provides reports on the outcomes of Internal Audit work directly to the Company’s Committee and the Committee monitors progress against actions identified in these reports. Most of the Audit Committee’s meetings are now held concurrently with those of the Arbuthnot Latham Audit Committee and, as such, it discusses Arbuthnot Latham’s internal audits, all of the reports on which include an assessment of culture. The Committee received a self-assessment report on Internal Audit from the Head of Internal Audit in September 2022 and it is satisfied with Internal Audit arrangements during the year. Integrity of Financial Statements and oversight of external audit The Committee: • Received and agreed the Audit Plan prepared by the external auditors; • Considered and formed a conclusion on the critical judgements underpinning the Financial Statements, as presented in papers prepared by management. In respect of all of these critical judgements, the Committee concluded that the treatment in the Financial Statements was appropriate. • Received reports from the external auditors on the matters arising from their work, the key issues and conclusions they had reached; and • Reviewed closely the detailed work carried out by management in respect of Going Concern and Viability. The reports from the external auditors include details of internal control matters that they have identified as part of the annual statutory financial statements audit. Certain aspects of the system of internal control are also subject to regulatory supervision, the results of which are monitored closely by the Committee and the Board. In addition, the Committee receives by exception reports on the ICAAP and ILAAP which are key control documents that receive detailed consideration by the board of Arbuthnot Latham. Arbuthnot Banking Group PLC Report & Accounts 2022 51 The Committee approved the terms of engagement and made a recommendation to the Board on the remuneration to be paid to the external auditors in respect of their audit services. Significant areas of judgement and estimation The Audit Committee considered the following significant issues and accounting judgements and estimates in relation to the Financial Statements: Impairment of financial assets The Committee reviewed presentations from management detailing the provisioning methodology across the Group as part of the full year results process. The Committee considered and challenged the provisioning methodology applied by management, including timing of cash flows, valuation and recoverability of supporting collateral on impaired assets. The Committee concluded that the impairment provisions, including management’s judgements and estimates, were appropriate. The charge for impaired financial assets totalled £5.5m for the year ended 31 December 2022. The disclosures relating to impairment provisions are set out in Note 4.1(a) to the financial statements. Property Portfolio The Group currently owns two commercial office properties and two repossessed properties. Of these properties, two are held as inventory, one is held for sale and one as an investment property. The properties held as inventory and for sale are held at the lower of cost and net realisable value on the basis of internal discounted cash flow models and external valuation reports. The investment property is held at fair value on the basis of an external valuation report. The Committee discussed the bases of valuation with management and with the auditors who had engaged an internal expert to review management’s valuations. As at 31 December 2022, the Group’s total property portfolio totalled £29.4m. The disclosures relating to the carrying value of the investment property and the properties held as inventory and for sale are set out in Notes 4.1(c), 4.1(d), 21, 25 and 31 to the financial statements. Residual Value Risk The Committee discussed the fair value adjustment for the portfolio of leased assets of Asset Alliance Group where an uplift had been applied to represent markets at the time of acquisition at 31 March 2021. The Committee also reviewed the maintenance provision, recognised to eliminate temporarily inflated values. It established that the uplift in lease values at that date appeared to have been completely justified by the subsequent asset sales experience where in aggregate losses had not been made on sales of trucks at the uplifted values. It also established that the residual value provision was deemed sufficient to cover the shortfall between the value of the portfolio and the estimated net sales value. Going Concern and Viability Statement The financial statements are prepared on the basis that the Group and Company are each a going concern for a period of at least twelve months from when the financial statements are authorised for issue. The Audit Committee reviewed management’s assessment, which incorporated analysis of the ICAAP and ILAAP approved by the Board of Arbuthnot Latham and of relevant metrics, focusing on liquidity, capital, and the stress scenarios. It is satisfied that the going concern basis and assessment of the Group’s longer-term viability is appropriate. Other Committee activities The Committee reviewed and discussed the minutes of meetings of the Financial Regulatory Reporting Committee whose main responsibility is to ensure that the Company meets the PRA’s regulatory reporting expectations. The Audit Committee performs this role since it is concerned with financial reporting as well as with external reporting. In November 2022, Committee members contributed to the review of the Committee’s effectiveness as part of its evaluation by the Board. The outcome of the review was positive and there were no issues or concerns raised by them in regard to discharging their responsibilities. In March 2023 the Committee met separately with each of the Head of Internal Audit and the Senior Statutory Auditor without any other executives present. There were no concerns raised by them in regard to discharging their responsibilities. On behalf of the Board, the Committee reviewed the financial statements as a whole in order to assess whether they were fair, balanced and understandable. The Committee discussed and challenged the balance and fairness of the overall report with the executive directors and also considered the views of the external auditor. The Committee was satisfied that the Annual Report could be regarded as fair, balanced and understandable and that it provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. It proposed that the Board approve the Annual Report in that respect. 52 Arbuthnot Banking Group PLC Report & Accounts 2022 Corporate Governance continued Nomination Committee Membership and meetings The Nomination Committee is chaired by Sir Henry Angest and its other members are Sir Nigel Boardman and Sir Alan Yarrow. Two thirds of the Committee’s members are therefore independent non-executive Directors. The late Sir Christopher Meyer was a member until his retirement as a director on 25 May 2022. The Group General Counsel, Nicole Smith, acts as its Secretary. The Committee meets once a year and otherwise as required. The Nomination Committee assists the Board in discharging its responsibilities relating to the composition of the Board. The Nomination Committee is responsible for and evaluates on a regular basis the balance of skills, experience, independence and knowledge on the Board, its size, structure and composition, retirements and appointments of additional and replacement directors and will make appropriate recommendations to the Board on such matters. The Nomination Committee also considers performance, training requirements and succession planning, taking into account the skills and expertise that will be needed on and beneficial to the Board in the future. Activity in 2022 The Nomination Committee met three times during the year. It met first to consider a replacement Non-Executive Director to the Audit, Nomination, Remuneration and Donations Committees ahead of the retirement of the late Sir Christopher Meyer. It determined that Sir Nigel Boardman would be a suitable appointment to each Committee, given his significant experience. It further recommended that Mr. Salmon be appointed as a replacement member of the Donations Committee, all with effect from 25 May 2022. The Committee held a further meeting to consider the appointment of Frederick Angest as a non-executive director, noting that it was appropriate in the context of long-term succession planning in order that the ultimate majority shareholder has representation at all times and in the interests of long-term stability in line with the Arbuthnot Principles. Sir Henry Angest did not participate in the vote in relation to the proposed appointment on the basis that Mr. Angest is his son and as such there was or might be a conflict or perceived conflict of interests in relation to the decision. The Nomination Committee, being Sir Nigel and Sir Alan for this purpose, agreed that it was appropriate to recommend to the Board the appointment of Mr. Angest as an additional non-executive director. The Committee also met to assess and confirm the collective and individual suitability of Board members. The contribution of Sir Henry Angest remains invaluable in the successful development of the Company. As regards the non-executive Directors’ skill sets, Sir Nigel Boardman’s credibility, knowledge and reputation have been a real benefit to the Board both in terms of collective and individual suitability and when third parties are considering dealings with the wider group. Ian Dewar, with a wealth of experience as a partner in a major accounting firm, has successfully chaired the Audit Committee. The Board has benefitted from Sir Alan Yarrow’s wise counsel, challenge to management and many years’ banking experience in the City of London. Frederick Angest, appointed to the Board as part of succession planning, is deepening his knowledge about the business, working at Arbuthnot Latham currently as a private banker, having previously worked within Wealth Management and Credit Risk. In terms of individual performance, the Chairman confirmed that his assessment of all Directors was that they were performing well, with the Executive Directors additionally being formally reviewed in the context of the Senior Managers’ Regime applicable to Arbuthnot Latham which confirmed continued strong performance. The Committee agreed with this assessment individually in relation to all members of the Board. Collectively, it was agreed that the Board had operated effectively with a wide range of experience and knowledge. As noted, in the responses to the Board Effectiveness Questionnaire, Non-Executives had provided appropriate challenge and guidance. In terms of the performance of the Company’s Board generally, the Committee noted that it takes into account the provisions of the Board Diversity Policy and the Board Suitability Policy. It reviewed the summary of training carried out by each Director during 2022 and noted that Directors had been able to carry out sufficient training both in person and online. In November 2022, the Nomination Committee confirmed that the Board’s current composition provides the Company with a balanced, knowledgeable, diverse and informed group of directors, bringing strategic acumen, foresight and challenge to the executive, commensurate with the size of the business. The Committee reviewed succession planning and agreed that a sensible and strong plan remained in place. It also agreed that it continued to operate effectively and, as such, no further changes to its membership, composition or activities were proposed to the Board. Arbuthnot Banking Group PLC Report & Accounts 2022 53 Remuneration Committee Membership and meetings Membership is detailed in the Remuneration Report on page 54. The Committee meets once a year and otherwise as required. The Remuneration Report on pages 54 to 56 gives information on the Committee’s responsibilities, together with details of each Director’s remuneration. Donations Committee Membership and meetings The Donations Committee is chaired by Sir Henry Angest and its other members are Andrew Salmon and Sir Alan Yarrow. The late Sir Christopher Meyer was a member until his retirement as a director on 25 May 2022. The Group General Counsel acts as its Secretary. The Committee considers any political donation or expenditure as defined within sections 366 and 367 of the Companies Act 2006. It meets as necessary. Activity in 2022 The Donations Committee met once during the year. It agreed that the Committee was constituted and continued to operate efficiently with its overall performance and the performance of its individual members effective throughout the year. As such, no changes to its membership or activities were proposed to the Board. Policy Committee Membership and meetings The Policy Committee is chaired by Andrew Salmon and its other members are James Cobb and Nicole Smith who also acts as its Secretary. Amongst its responsibilities, the Committee reviews the content of policy documentation to ensure that it meets legal and regulatory requirements and approves it on behalf of the Board. Activity in 2022 The Policy Committee met five times during the year to review and approve Company policies. By order of the Board N D Jennings Secretary 29 March 2023 54 Arbuthnot Banking Group PLC Report & Accounts 2022 Remuneration Report Remuneration Committee Activity in 2022 Membership of the Remuneration Committee is limited to non-executive directors together with Sir Henry Angest as Chairman. The members of the Committee are Sir Henry Angest, Sir Nigel Boardman and Sir Alan Yarrow. Two thirds of its membership therefore comprises independent non- executive Directors. The late Sir Christopher Meyer was also a member until his retirement as a director on 25 May 2022. The Group General Counsel, Nicole Smith, acts as its Secretary. The Committee met twice during the year. The Remuneration Committee has responsibility for approving the overall remuneration policy for directors for review by the Board. The Committee is also responsible for remuneration more generally including, inter alia, in relation to the Company’s policy on executive remuneration determining, the individual remuneration and benefits package of each of the Executive Directors and the fees for Non-Executive Directors. Members of the Committee do not vote on their own remuneration. The Committee also deals with remuneration-related issues, taking into account the requirements established by the PRA and the FCA. 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, in particular the rising remuneration packages at challenger banks; 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 contributions paid by the Company to individuals in the form of cash allowances, and, where applicable, 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. For the purposes of the requirements established by the PRA and the FCA, the Company and its subsidiaries are all considered to be Tier 3 institutions. The Remuneration Committee met twice during the year. It undertook its regular activities including reviewing the operation of the Remuneration Policy, having regard to the performance of the Company during the year. It also met to approve a single payment of £1,500 to all Group employees and executive directors in order to help them with the increased costs of living. The Committee determined that a set amount would be most beneficial to those on lower salaries where the increased cost of living being experienced was likely to be causing the most difficulty. The payment was also intended to aid employee retention at a time when recruitment was proving more challenging. Sir Henry did not participate in the vote in relation to the payment in respect of himself noting his conflict of interest. Additionally, the Committee, being Sir Nigel and Sir Alan for this purpose, approved the payment to Frederick Angest of a director’s fee of £30,000 per annum, being half of the standard fee for a non-executive director, Mr. Angest already receiving a salary in respect of his employment with Arbuthnot Latham. This followed the precedent of a reduced fee in relation to the previous appointments of Sir Nigel as a director of both the Company and of Arbuthnot Latham. Sir Henry did not participate in this decision on the basis that Mr. Angest is his son and as such there was or might be a conflict or perceived conflict of interests in relation to the decision. The Committee met again to review the Company’s Remuneration Policy, the level of fees for Non-Executive Directors and the Executive Directors’ remuneration, approving the award of bonuses to Messrs Salmon and Cobb for exceptional performance in the year and, after due consideration of comparable market rates salary rises for Messrs Salmon and Cobb. As in previous years, Sir Henry Angest waived his right to be considered for receipt of a bonus. The Remuneration Committee agreed that it continued to operate effectively with its overall performance and the performance of its individual members effective throughout the year. In March 2023, the Committee decided to standardise the fees for non-executive directors, reflecting the appropriate level of fee to continue to secure the services of a high level non-executive director. Arbuthnot Banking Group PLC Report & Accounts 2022 55 Directors’ Service Contracts Sir Henry Angest, Mr. Salmon and Mr. Cobb each have service contracts terminable at any time on 12 months’ notice in writing by either party. Long Term Incentive Schemes Grants were made to Messrs Salmon and Cobb on 14 June 2016 under Phantom Option Scheme introduced on that date, to acquire ordinary 1p shares in the Company at 1591p exercisable in respect of 50% on or after 15 June 2020 and in respect of the remaining 50% on or after 15 June 2021 when a cash payment would be made equal to any increase in market value. Under this Scheme, these directors were granted a phantom option to acquire 200,000 and 100,000 ordinary 1p shares respectively in the Company. The value of each phantom option is related to the market price of an Ordinary Share. The fair value of these options at the grant date was £1m. The first tranche of share options remained outstanding at 31 December 2022, but will lapse if not exercised at 1591p before 14 June 2023. The second tranche has not vested and so lapsed in 2020 as one of the performance conditions was not met, being the payment of dividends which was not possible in 2020 due to the regulators’ response to the pandemic, requiring banks to cease payment of dividends, and to its economic impact. On 23 July 2021, Messrs Salmon and Cobb were granted further phantom options relating to 200,000 and 100,000 ordinary shares respectively. The fair value of these options at the grant date was £1.4m. The value of each Ordinary Share for the purposes of this grant of phantom options is 990p, being the mid-market share price at close of business on 23 July 2021. An increase in the value of an Ordinary Share over 990p will give rise to an entitlement to a cash payment by the Company on the exercise of a phantom option. The right to exercise phantom options is subject to the satisfaction of performance conditions. 50% of each director’s individual holding of phantom options is exercisable after 23 July 2024 and the other 50% is exercisable after 23 July 2026. These phantom options will lapse if not exercised within seven years of the date of grant, i.e. by 23 July 2028. The fair value of the outstanding options as at 31 December 2022 was £0.1m (2021: £0.1m). Details of outstanding options are set out on page 56. 56 Remuneration Report continued Phantom Options AA Salmon JR Cobb Arbuthnot Banking Group PLC Report & Accounts 2022 At 1 January 2022 At 31 December 2022 Exercise Price £ Date from which exercisable Expiry 100,000 100,000 100,000 100,000 100,000 100,000 300,000 300,000 £15.90 £9.90 15-Jun-19 23-Jul-24 14-Jun-23 23-Jul-28 £9.90 23-Jul-26 23-Jul-28 50,000 50,000 50,000 50,000 50,000 50,000 £15.90 £9.90 15-Jun-19 23-Jul-24 14-Jun-23 23-Jul-28 £9.90 23-Jul-26 23-Jul-28 150,000 150,000 450,000 450,000 Directors’ Emoluments Fees (including benefits in kind) Salary payments (including benefits in kind) Pension contributions Sir Henry Angest Sir Alan Yarrow F Angest JR Cobb IA Dewar Sir Christopher Meyer AA Salmon The Hon Sir Nigel Boardman 2022 £000 301 5,197 71 5,569 Salary £000 1,200 – 20 700 – – 1,200 – 3,120 2021 £000 265 4,109 70 4,444 Bonus £000 Benefits £000 Pension £000 Fees £000 Total 2022 £000 Total 2021 £000 – – 5 745 – – 1,200 – 1,950 78 – 1 18 – – 30 – 127 – – 1 35 – – 35 – 71 – 70 10 – 75 25 – 121 301 1,278 70 37 1,498 75 25 2,465 121 5,569 1,268 70 – 1,052 75 60 1,859 60 4,444 Details of any shares or options held by directors are presented above. The emoluments of the Chairman were £1,278,000 (2021: £1,268,000). The emoluments of the highest paid director were £2,465,000 (2021: £1,859,000) including pension contributions of £35,000 (2021: £35,000). Retirement benefits are accruing under money purchase schemes for three directors who served during 2022 (2021: two directors). Sir Henry Angest Chairman of the Remuneration Committee 29 March 2023 57 Independent Auditor’s Report to the members of Arbuthnot Banking Group PLC Opinion We have audited the financial statements of Arbuthnot Banking Group PLC (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the year ended 31 December 2022 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Company Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Company Statement of Changes in Equity, the Consolidated Statement of Cash Flows, the Company Statement of Cash Flows, and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and UK-adopted international accounting standards and as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. 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 2022 and of the Group’s profit for the year then ended; • have been properly prepared in accordance with UK-adopted international accounting standards and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006; and • have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the “Auditor’s responsibilities for the audit of the financial statements” section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (“FRC”) Ethical Standard as applied to listed entities and public interest entities and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our audit procedures to evaluate the directors’ assessment of the Group’s and the Parent Company’s ability to continue to adopt the going concern basis of accounting included but were not limited to: • Undertaking an initial assessment at the planning stage of the audit to identify events or conditions that may cast significant doubt on the Group’s and the Parent Company’s ability to continue as a going concern; • Making enquiries of the directors to understand the period of assessment considered by them, the assumptions they considered and the implication of those when assessing the Group’s and Parent Company’s future financial performance; • Evaluating management’s going concern assessment of the Group and Parent Company and challenging the appropriateness of the key assumptions used in and mathematical integrity of management’s forecasts, including assessing the historical accuracy of management’s forecasting and budgeting; • Assessing the sufficiency of the Group’s capital and liquidity taking into consideration the most recent Internal Capital Adequacy Assessment Process and Internal Liquidity Assessment Process performed by Arbuthnot Latham & Co., Ltd, a PRA regulated bank and wholly owned subsidiary of the Group, and evaluating the results of management’s scenario and reverse stress testing which includes sensitivity analysis, and including consideration of principal and emerging risks on liquidity and regulatory capital; • Assessing the accuracy of management’s forecast through a review of post year end performance; • Evaluating the Group’s Resolution and Recovery plans which includes possible cost saving measures that could be taken in the event circumstances prevent forecast results from being achieved; • Reading regulatory correspondence, minutes of meetings of the Audit Committee and the Board of Directors, and post balance sheet events to identify events of conditions that may impact the Group’s and the Parent Company’s ability to continue as a going concern; • Considering the consistency of management’s forecasts with other areas of the financial statements and our audit; and • Evaluating the appropriateness of the directors’ disclosures in the financial statements on going concern. Arbuthnot Banking Group PLCReport & Accounts 2022 58 Independent Auditor’s Report to the members of Arbuthnot Banking Group PLC continued Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group’s and the Parent Company’s ability to continue as a going concern for a period of twelve months from when the financial statements are authorised for issue. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. In relation to Arbuthnot Banking Group PLC’s reporting on how it has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the director’s considered it appropriate to adopt the going concern basis of accounting. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We summarise below the key audit matters in forming our opinion above, together with an overview of the principal audit procedures performed to address each matter and our key observations arising from those procedures. These matters, together with our findings, were communicated to those charged with governance through our Audit Completion Report. Key Audit Matter - Allowances for expected credit losses Group - £6.6m; 2021: £6.4m (note 4, note 24 and 25) The determination of Expected Credit Loss (‘ECL’) under IFRS 9 is an inherently judgmental area due to the use of subjective assumptions and a high degree of estimation. ECL relating to the Group’s loan portfolio requires the Directors to make judgements over the ability of the Groups’ customers to make future loan repayments. The most significant risk relates to loans and advances to customers where the Group is exposed to secured and unsecured lending to private and commercial customers. As set out in note 3.4, ECL is measured based on a three- stage model. For loans with no significant deterioration in credit risk since origination (stage l), ECL is determined through the use of a model. The model used by the Group to determine expected losses requires judgement to the input parameters and assumptions; in particular, uncertainty around macro-economic assumptions. For loans that have experienced a significant deterioration in credit risk since origination (stage 2) or have defaulted (stage 3), the ECL is determined based on Probability of Default (‘PD’) and the present value of future cash flows arising primarily from the sale or repossession of security which determines the Loss Given Default (‘LGD’) and the Exposure at Default (‘EAD’). The most significant areas where we identified greater levels of management judgement and estimate are: • Staging of loans and the identification of significant increase in credit risk • Key assumptions in the model including PD and LGD including the present value of future cash flows from collateral; and • Use of macro-economic variables reflecting a range of future scenarios. • Post model adjustments to capture uncertainties not captured by the models. Refer to Note 3 for the accounting policies note, Note 4 for the critical accounting estimates and judgements in applying accounting policies note and Note 24 and Note 25 disclosures in the financial statements. We consider the risk to have increased in the year given the economic uncertainty. Arbuthnot Banking Group PLCReport & Accounts 2022 59 Key Audit Matter - Allowances for expected credit losses Group - £6.6m; 2021: £6.4m (note 4, note 24 and 25) (continued) How our scope addressed this matter Our audit procedures included but were not limited to: Planning We have assessed the methodology of identifying significant increase in credit risk. As part of our audit of the methodology, we tested the model design and model implementation. We also performed benchmarking and sensitivity analysis. Controls We have evaluated the design and implementation and tested the operating effectiveness of the key controls operating across the Group in relation to credit processes (including underwriting, monitoring, collections and provisioning). This also included: ECL models We have assessed the models used by management to determine ECL calculations. We have: • considered the methodology used by management; • tested the data inputs used in applying the methodology adopted and assessed for reasonableness; • tested the completeness of the loan portfolio applied to the model; • tested the process in place to allocate loans to the respective risk categories (staging); • tested and challenged the key assumptions applied to • attendance at the Potential & Problem Debt Management determine probability of default and loss given default; Committee meetings • missed payments monitoring • credit reviews at origination and annual review • review of watch list movements throughout the year • controls testing over collateral revaluations Test of detail We have performed credit file reviews in order to verify data used in the determination of PD and LGD assumptions. This was performed for all loans in Stage 3 and Stage 2 and for a sample of loans in Stage 1 with characteristics of heightened credit risk (e.g. high Loan-to-Value secured exposures and unsecured exposures). • on sample of higher risk individually assessed loans (stage 3), we involved our in-house valuation specialist to independently assess the underlying collateral used in the ECL calculations. However, in some cases we relied on management’s external valuation experts and, in this situation, we assessed the capabilities, professional competence, and objectivity of the experts; • we have involved our in-house credit risk specialists and economists in the assessment of model approach and assumptions, including macro- economic scenarios and the impact on commercial and residential property prices; • we have assessed the valuation, completeness and appropriateness of post model adjustments; • tested the compliance of the model in line with IFRS 9; and • performed a re-calculation of the key components such as PD, LGD, EAD and final ECL. Stand back assessment • We performed stand back analysis to assess the overall adequacy of the ECL coverage. In performing this procedure, we considered the credit quality of the portfolio and performed benchmarking across similar banks considering both staging percentages and provision coverage ratios; and Disclosures • We assessed the adequacy and appropriateness of disclosures made within the financial statements. Our observations We found the approach taken in respect of loan loss provisions to be consistent with the requirements of IFRS 9 and judgements made were reasonable. Arbuthnot Banking Group PLCReport & Accounts 2022 60 Independent Auditor’s Report to the members of Arbuthnot Banking Group PLC continued In the prior year, our audit report included key audit matters in relation to the acquisition of Asset Alliance Group (AAG) and investment property valuation. We determined that the nature and complexity of these areas no longer contribute significantly to our audit efforts and therefore are no longer considered as key audit matters. Performance materiality continued In determining the performance materiality, we considered a number of factors, including the level and nature of uncorrected and corrected misstatements in the prior year and the robustness of the control environment, and concluded that an amount toward the upper end of our normal range was appropriate. We agreed with the directors that we would report to them misstatements identified during our audit above £30,000 (2021: £30,000) for the Group and £6,000 (2021: £6,000) for the Parent Company as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Reporting threshold As part of designing our audit, we assessed the risk of material misstatement in the financial statements, whether due to fraud or error, and then designed and performed audit procedures responsive to those risks. In particular, we looked at where the directors made subjective judgements, such as assumptions on significant accounting estimates. We tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the financial statements as a whole. We used the outputs of our risk assessment, our understanding of the Group and the Parent Company, their environment, controls and critical business processes, to consider qualitative factors in order to ensure that we obtained sufficient coverage across all financial statement line items. Our Group audit scope included an audit of the Group and the Parent Company financial statements. Based on our risk assessment, all components of the Group, including the Parent Company, were subject to full scope audit performed by the Group and component audit teams. We performed a full scope audit on all entities within the Group which is consistent with the prior year. We used Mazars UK component audit teams as component auditors for five components (2021: one component). Our component performance materiality ranged from £0.02m to £0.7m (2021: £0.02m to £0.7m). Full scope audits were carried out on all companies in the Group and therefore, account for 100% (2021: 100%) of the Group’s net interest income, profit before tax, net assets and total assets. Our application of materiality and an overview of the scope of our audit The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall materiality Group financial statements: £1.0m (2021: £1.0m) Parent Company financial statements: £0.2m (2021: £0.2m) How we determined it 0.5% of Net assets but capped at component materiality levels for the Parent Company (2021: 0.5% of net assets but capped at component materiality levels). Rationale for benchmark applied Performance materiality We consider net assets to be the main focus for the users of the financial statements given net assets approximate regulatory capital resources and it reflects the importance of regulatory capital to the Parent Company’s solvency. Also, the principal activity of the Group is the investment of capital. Performance materiality is set to reduce, to an appropriately low level, the probability that the aggregate of uncorrected and undetected misstatements in the financial statements exceeds materiality for the financial statements as a whole. We set performance materiality at £0.7m (2021: £0.7m) for the Group and £0.14m (2021: £0.14m) for the Parent Company, which represents 70% of overall materiality (2021: 70%). Arbuthnot Banking Group PLCReport & Accounts 2022 61 Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • 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; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which 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 and the part of the directors’ remuneration report to be audited 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; At the Parent Company level, the Group audit team also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the consolidated financial information. Working with our component audit teams We determined the level of involvement we needed as the Group team in the work of the component audit teams to be able to conclude whether sufficient and appropriate audit evidence was obtained to provide a basis for our opinion on the Group financial statements as a whole. We maintained oversight of the component audit teams, directing and supervising their activities related to our audit of the Group. The Group team maintained frequent communications to monitor progress. The Senior Statutory Auditor and senior members of the Group team attended component meetings, which were held via video conference. We issued instructions to our component audit teams and interacted with them throughout the audit process. In the absence of component visits, we used video conferencing to review key workpapers prepared by the component teams and held meetings with component management. Other information The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Arbuthnot Banking Group PLCReport & Accounts 2022 62 Independent Auditor’s Report to the members of Arbuthnot Banking Group PLC continued Corporate Governance Statement We have reviewed the directors’ statement in relation to going concern, longer term viability and that part of the Corporate Governance Statement relating to the Group’s and the Parent Company’s voluntary compliance with the provisions of the UK Corporate Governance Code. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit: • Directors’ statement with regards the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified, set out on page 43; • Directors’ explanation as to its assessment of the entity’s prospects, the period this assessment covers and why they period is appropriate, set out on page 42; • Directors’ statement on fair, balanced and understandable, set out on page 45; • Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks, set out on page 49; • The section of the annual report that describes the review of effectiveness of risk management and internal control systems, set out on page 49; and; • The section describing the work of the audit committee, set out on pages 50 and 51. Responsibilities of Directors As explained more fully in the ‘Statement of Directors’ Responsibilities in Respect of the Strategic Report and the Directors’ Report and the Financial Statements’ set out on page 45, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. Based on our understanding of the Group and the Parent Company and its industry, we identified that the principal risks of non compliance relate to regulations and supervisory requirements of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), Anti Money Laundering regulations (AML), General Data Protection Regulation (GDPR), Corporate Governance Code and other laws and regulations, such as the Companies Act 2006, that have a direct impact on the preparation of the financial statements, and UK tax legislation. To help us identify instances of non-compliance with these laws and regulations, and in identifying and assessing the risks of material misstatement in respect to non-compliance, our procedures included, but were not limited to: • Gaining an understanding of the legal and regulatory framework applicable to the Group and the Parent Company, the industry in which they operate, and the structure of the Group, and considering the risk of acts by the Group and the Parent Company which were contrary to the applicable laws and regulations, including fraud; • Inquiring of the directors, management and, where appropriate, those charged with governance, as to whether the Group and the Parent Company is in compliance with laws and regulations, and discussing their policies and procedures regarding compliance with laws and regulations; Arbuthnot Banking Group PLCReport & Accounts 2022 63 Other matters which we are required to address Following the recommendation of the Audit Committee, we were appointed by the Board of Directors on 6 December 2019 to audit the financial statements for the year ended 31 December 2019 and subsequent financial periods. The period of total uninterrupted engagement is four years, covering the years ended 31 December 2019 to 31 December 2022. The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company and we remain independent of the Group and the Parent Company in conducting our audit. Our audit opinion is consistent with our additional report to the Audit Committee. Use of the audit report 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. Greg Simpson (Senior Statutory Auditor) for and on behalf of Mazars LLP, Chartered Accountants and Statutory Auditor 30 Old Bailey London EC4M 7AU 29 March 2023 • Inspecting correspondence with relevant licensing or regulatory authorities including the PRA and FCA; • Review of minutes of meetings of the Board of Directors and the Audit Committee held during the year; and • Discussing amongst the engagement team the laws and regulations listed above, and remaining alert to any indications of non-compliance. We also considered those laws and regulations that have a direct effect on the preparation of the financial statements, such as AIM rules, AQSE rules, Streamlined Energy & Carbon Reporting requirements, tax legislation and the Companies Act 2006. In addition, we evaluated the directors’ and management’s incentives and opportunities for fraudulent manipulation of the financial statements, including the risk of management override of controls, and determined that the principal risks related to posting manual journal entries to manipulate financial performance, management bias through judgements and assumptions in significant accounting estimates, in particular in relation to ECL (as described in the “Key audit matters” section of our report) and significant one-off or unusual transactions. Our procedures in relation to fraud included but were not limited to: • Making enquiries of the Directors and management on whether they had knowledge of any actual, suspected or alleged fraud; • Gaining an understanding of the internal controls established to mitigate risks related to fraud; • Discussing amongst the engagement team the risks of fraud; • Addressing the risks of fraud through management override of controls by performing journal entry testing on a sample basis; and • Being sceptical to the potential of management bias through judgements and assumptions in significant accounting estimates. The primary responsibility for the prevention and detection of irregularities, including fraud, rests with both those charged with governance and management. As with any audit, there remained a risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations or the override of internal controls. The risks of material misstatement that had the greatest effect on our audit are discussed in the “Key Audit Matters” section of this report. A further description of our responsibilities is available on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Arbuthnot Banking Group PLCReport & Accounts 2022 64 Arbuthnot Banking Group PLC Report & Accounts 2022 Consolidated Statement of Comprehensive Income Note 8 9 10 10 10 11 12 13 14 15 Income from banking activities Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income Operating income from banking activities Income from leasing activities Revenue Cost of goods sold Gross profit from leasing activities Total group operating income Net impairment loss on financial assets Gain from bargain purchase Loss on sale of commercial property held as inventory Other income Operating expenses Profit before tax Income tax (expense) / credit Profit after tax Other comprehensive income Items that will not be reclassified to profit or loss Changes in fair value of equity investments at fair value through other comprehensive income Tax on other comprehensive income Other comprehensive income for the period, net of tax Total comprehensive income for the period Year ended 31 December 2022 £000 Year ended 31 December 2021 £000 120,013 (20,932) 99,081 21,586 (537) 21,049 120,130 99,367 (82,109) 17,258 137,388 (5,503) – (4,590) 1,627 (108,913) 20,009 (3,551) 16,458 627 (128) 499 16,957 77,102 (13,027) 64,075 18,472 (349) 18,123 82,198 74,500 (68,023) 6,477 88,675 (3,196) 8,626 – 3,955 (93,422) 4,638 2,148 6,786 5,626 2 5,628 12,414 45.2 45.2 Earnings per share for profit attributable to the equity holders of the Company during the year (expressed in pence per share): Basic earnings per share Diluted earnings per share 17 17 109.6 109.6 The notes on pages 72 to 151 are an integral part of these consolidated financial statements Arbuthnot Banking Group PLC Report & Accounts 2022 65 Consolidated Statement of Financial Position ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Assets classified as held for sale Derivative financial instruments Loans and advances to customers Other assets Financial investments Deferred tax asset Intangible assets Property, plant and equipment Right-of-use assets Investment property Total assets EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital Retained earnings Other reserves Total equity LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Current tax liability Other liabilities* Lease liabilities* Debt securities in issue Total liabilities Total equity and liabilities Note At 31 December 2022 £000 At 31 December 2021 £000 18 19 20 21 22 24 26 27 28 29 30 31 32 39 40 40 33 22 34 35 36 37 732,729 115,787 439,753 3,279 6,322 2,036,077 52,185 3,404 2,425 32,549 175,273 7,714 6,550 3,614,047 154 212,037 (213) 211,978 236,027 135 3,092,549 1,748 26,144 7,872 37,594 3,402,069 3,614,047 814,692 73,444 301,052 3,136 1,753 1,870,962 110,119 3,169 2,562 29,864 125,890 15,674 6,550 3,358,867 154 201,026 (301) 200,879 240,333 171 2,837,869 413 21,154 21,276 36,772 3,157,988 3,358,867 * The hire purchase and finance lease liabilities of £5,062k at 31 December 2021 have been reclassified from other liabilities to lease liabilities to reflect the presentation in notes 35 and 36. The financial statements on pages 64 to 151 were approved and authorised for issue by the Board of directors on 29 March 2023 and were signed on its behalf by: A.A. Salmon Director J.R. Cobb Director Registered Number: 1954085 The notes on pages 72 to 151 are an integral part of these consolidated financial statements 66 Arbuthnot Banking Group PLC Report & Accounts 2022 Company Statement of Financial Position ASSETS Loans and advances to banks Debt securities at amortised cost Current tax asset Deferred tax asset Intangible assets Property, plant and equipment Other assets Interests in subsidiaries Total assets EQUITY AND LIABILITIES Equity Share capital Other reserves Retained earnings* Total equity LIABILITIES Current tax liability Other liabilities Debt securities in issue Total liabilities Total equity and liabilities Note 19 20 28 29 30 26 45 39 40 40 35 37 At 31 December 2022 £000 At 31 December 2021 £000 8,434 24,437 – 523 1 130 74 159,354 192,953 154 (1,280) 152,115 150,989 879 3,491 37,594 41,964 192,953 7,587 24,367 239 523 2 137 56 159,404 192,315 154 (1,280) 153,528 152,402 – 3,141 36,772 39,913 192,315 * 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 Parent Company recorded a profit after tax for the year of £4,446k (2021: £5,541k). The financial statements on pages 64 to 151 were approved and authorised for issue by the Board of directors on 29 March 2023 and were signed on its behalf by: A.A. Salmon Director J.R. Cobb Director Registered Number: 1954085 The notes on pages 72 to 151 are an integral part of these consolidated financial statements Arbuthnot Banking Group PLC Report & Accounts 2022 67 Consolidated Statement of Changes in Equity Balance at 31 December 2021 Total comprehensive income for the period Profit for 2022 Other comprehensive income, net of tax Changes in fair value of equity investments at fair value through other comprehensive income (FVOCI) Sale of financial assets carried at FVOCI Tax on other comprehensive income Total other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Final dividend relating to 2021 Interim dividend relating to 2022 Total contributions by and distributions to owners Balance at 31 December 2022 Attributable to equity holders of the Group Capital redemption reserve £000 Fair value reserve £000 Treasury shares £000 Retained earnings £000 Total £000 19 – – – – – – – – – 19 979 (1,299) 201,026 200,879 – – 16,458 16,458 628 (412) (128) 88 88 – – – – – – – – – – – – 412 – 412 628 – (128) 500 16,870 16,958 (3,305) (2,554) (3,305) (2,554) (5,859) (5,859) 1,067 (1,299) 212,037 211,978 Share capital £000 154 – – – – – – – – – 154 The notes on pages 72 to 151 are an integral part of these consolidated financial statements 68 Arbuthnot Banking Group PLC Report & Accounts 2022 Consolidated Statement of Changes in Equity continued Attributable to equity holders of the Group Share capital £000 Capital redemption reserve £000 Fair value reserve £000 Treasury shares £000 Retained earnings £000 Total £000 Balance at 31 December 2020 154 19 (12,690) (1,299) 207,839 194,023 Total comprehensive income for the period Profit for 2021 Other comprehensive income, net of tax Changes in fair value of equity investments at fair value through other comprehensive income Tax on other comprehensive income Total other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Sale of Secure Trust Bank shares Special dividend relating to 2019* Interim dividend relating to 2021 Total contributions by and distributions to owners Balance at 31 December 2021 – – – – – – – – – 154 – – – – – – – – – 19 – – 6,786 6,786 5,626 2 5,628 5,628 8,041 – – 8,041 – – – – – – – – – – – 5,626 2 5,628 6,786 12,414 (8,041) (3,155) (2,403) – (3,155) (2,403) (13,599) (5,558) 979 (1,299) 201,026 200,879 * On 19 March 2021 the Group paid a special dividend of 21p per share to replace the dividend that was withdrawn at the request of the regulators at the outset of the pandemic. The notes on pages 72 to 151 are an integral part of these consolidated financial statements Arbuthnot Banking Group PLC Report & Accounts 2022 69 Company Statement of Changes in Equity Balance at 1 January 2021 154 19 (12,164) (1,299) 160,721 147,431 Attributable to equity holders of the Company Share capital £000 Capital redemption reserve £000 Fair value reserve £000 Treasury shares £000 Retained earnings £000 Total £000 Total comprehensive income for the period Profit for 2021 Other comprehensive income, net of income tax Changes in fair value of equity investments at fair value through other comprehensive income Total other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Sale of Secure Trust Bank shares Special dividend relating to 2019* Interim dividend relating to 2021 Total contributions by and distributions to owners Balance at 31 December 2021 Total comprehensive income for the period Profit for 2022 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 Final dividend relating to 2021 Interim dividend relating to 2022 Total contributions by and distributions to owners Balance at 31 December 2022 – – – – – – – – 154 – – – – – 154 – – – – – – – – 19 – – – – – 19 – – 5,541 5,541 4,988 4,988 4,988 7,176 – – 7,176 – – – – – – – – 4,988 4,988 5,541 10,529 (7,176) (3,155) (2,403) – (3,155) (2,403) (12,734) (5,558) – (1,299) 153,528 152,402 – – – – – – – – – – – 4,446 4,446 4,446 4,446 (3,305) (2,554) (3,305) (2,554) (5,859) (5,859) (1,299) 152,115 150,989 * On 19 March 2021 the Group paid a special dividend of 21p per share to replace the dividend that was withdrawn at the request of the regulators at the outset of the pandemic. The notes on pages 72 to 151 are an integral part of these consolidated financial statements 70 Arbuthnot Banking Group PLC Report & Accounts 2022 Consolidated Statement of Cash Flows Cash flows from operating activities Profit before tax Adjustments for: - Depreciation and amortisation - Impairment loss on loans and advances - Net interest income - Elimination of exchange differences on debt securities - Gain from bargain purchase - Other non-cash or non-operating items included in profit before tax - Tax expense Cash flows from operating profits before changes in operating assets and liabilities Changes in operating assets and liabilities: - net increase in derivative financial instruments - net increase in loans and advances to customers - net (increase)/decrease in assets held for leasing - net decrease/(increase) in other assets - net increase in amounts due to customers - net increase in other liabilities Net cash inflow from operating activities Cash flows from investing activities Acquisition of financial investments Disposal of financial investments Purchase of computer software Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Acquisition of Asset Alliance Group Holdings Limited Cash balance acquired through Asset Alliance Holdings Limited acquisition Purchase of debt securities Proceeds from redemption of debt securities Net cash (outflow)/inflow from investing activities Cash flows from financing activities Decrease in borrowings Lease payments Dividends paid Net cash outflow from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Note 29, 30, 31 25 12 29 30 30 12 12 43 * Prior year values have been represented using the indirect method in accordance with IAS 7. The notes on pages 72 to 151 are an integral part of these consolidated financial statements Year ended 31 December 2022 £000 Year ended 31 December 2021* £000 20,009 7,193 214 80 (8,783) – 163 (3,551) 15,325 (4,605) (165,328) (50,175) 57,563 254,680 6,323 113,783 (53) 640 (6,174) (1,065) 50 – – (799,341) 670,164 (135,779) (4,306) (7,458) (5,860) (17,624) (39,620) 888,136 848,516 4,638 7,957 1,759 71 (1,978) (8,626) 20 2,148 5,989 (388) (280,646) 14,855 (3,554) 472,662 4,604 213,522 (621) 21,547 (5,100) (702) 2 (9,998) 3,883 (590,492) 635,155 53,674 (117,675) (2,893) (5,558) (126,126) 141,070 747,066 888,136 Arbuthnot Banking Group PLC Report & Accounts 2022 71 Company Statement of Cash Flows Cash flows from operating activities Profit before tax Adjustments for: - Depreciation and amortisation - Net interest income - Elimination of exchange differences on debt securities - Other non-cash or non-operating items included in profit before tax - Tax expense Cash flows from operating profits before changes in operating assets and liabilities Changes in operating assets and liabilities: - net increase in group company balances - net decrease in other assets - net increase in other liabilities Net cash inflow from operating activities Cash flows from investing activities Receipt on dissolution of People's Trust & Savings PLC Capital contribution to Arbuthnot Latham Disposal of financial investments Net cash (outflow)/inflow from investing activities Cash flows from financing activities Dividends paid 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 Note 29, 30 45 43 * Prior year values have been represented using the indirect method in accordance with IAS 7. Year ended 31 December 2022 £000 Year ended 31 December 2021* £000 5,850 10 80 741 (71) (1,404) 5,206 (1,013) 221 2,242 6,656 50 – – 50 (5,859) (5,859) 847 7,587 8,434 5,550 25 71 (955) 43 (9) 4,725 (1,655) 47 1,237 4,354 – (25,500) 19,129 (6,371) (5,558) (5,558) (7,575) 15,162 7,587 The notes on pages 72 to 151 are an integral part of these consolidated financial statements 72 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements 1. Reporting entity Arbuthnot Banking Group PLC is a company domiciled in the United Kingdom. The registered address of Arbuthnot Banking Group PLC is 7 Wilson Street, London, EC2M 2SN. The consolidated financial statements of Arbuthnot Banking Group PLC as at and for the year ended 31 December 2022 comprise Arbuthnot Banking Group PLC and its subsidiaries (together referred to as the “Group” and individually as “subsidiaries”). The Company is the holding company of a group 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 UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006. The consolidated financial statements were authorised for issue by the Board of Directors on 29 March 2023. (b) Basis of measurement The consolidated and company financial statements have been prepared under the historical cost convention, as modified by investment property and derivatives, financial assets and financial liabilities at fair value through profit or loss or other comprehensive income. (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 Pounds 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) Going concern After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see Note 6), capital resources (see Note 7) and the potential impact of climate-related risks, the directors are satisfied that the Company and the Group have adequate resources to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. The Audit Committee reviewed management’s assessment, which incorporated analysis of the ICAAP and ILAAP approved by the Board of AL and of relevant metrics, focusing on liquidity, capital, and the stress scenarios. It is satisfied that the going concern basis and assessment of the Group’s longer-term viability is appropriate. The financial statements are therefore prepared on the going concern basis. (f) Accounting developments The accounting policies adopted are consistent with those of the previous financial year. Arbuthnot Banking Group PLC Report & Accounts 2022 73 3. 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 investees (including special purpose entities) controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. 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. 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 as a gain on bargain purchase. Contingent consideration related to an acquisition is initially recognised at the date of acquisition as part of the consideration transferred, measured at its acquisition date fair value and recognised as a liability. The fair value of a contingent consideration liability recognised on acquisition is remeasured at key reporting dates until it is settled, changes in fair value are recognised in the profit or loss. The Company’s investments in subsidiaries are recorded at cost less, where appropriate, provisions for impairment in value. 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 investor controls the investee. The investor would only control the investee if it had all of the following: • power over the investee; • exposure, or rights, to variable returns from its involvement with the investee; and • the ability to use its power over the investee to affect the amount of the investor’s returns. 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. 3.2. Foreign currency translation Foreign currency transactions are translated into the functional currency using the spot 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. Foreign exchange differences arising from translation of equity instruments, where an election has been made to present subsequent fair value changes in Other Comprehensive Income (“OCI”), will also be recognised in OCI. 3.3. Financial assets and financial liabilities IFRS 9 requires financial assets and liabilities to be measured at amortised cost, fair value through other comprehensive income (“FVOCI”) or fair value through the profit and loss (“FVPL”). Liabilities are measured at amortised cost or FVPL. The Group classifies financial assets and financial liabilities in the following categories: financial assets and financial liabilities at FVPL; FVOCI, financial assets and liabilities at amortised cost and other financial liabilities. Management determines the classification of its financial instruments at initial recognition. A financial asset or financial liability is measured initially at fair value plus, transaction costs that are directly attributable to its acquisition or issue with the exception of financial assets at FVPL where these costs are debited to the income statement. 74 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 3. Significant accounting policies (continued) (a) Financial assets measured at amortised cost Financial assets that are held to collect contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. A basic lending arrangement results in contractual cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. Financial assets measured at amortised cost are predominantly loans and advances and debt securities. Loans and advances Loans and advances 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 and the SPPI criteria are met. Loans are recognised when cash is advanced to the borrowers inclusive of transaction costs. Loans and advances, other than those relating to assets leased to customers, are carried at amortised cost using the effective interest rate method. Debt securities at amortised cost Debt securities at amortised cost are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group has determined meets the SPPI criteria. Debt security investments are carried at amortised cost using the effective interest rate method, less any impairment loss. (b) Financial assets and financial liabilities at FVPL Financial assets and liabilities are classified at FVPL where they do not meet the criteria to be measured at amortised cost or FVOCI or where financial assets are designated at FVPL to reduce an accounting mismatch. They are measured at fair value in the statement of financial position, with fair value gains/losses recognised in the income statement. Financial assets that are held for trading or managed within a business model that is evaluated on a fair value basis are measured at FVPL, because the business objective is neither hold-to-collect contractual cash flows nor hold-to-collect-and-sell contractual cash flows. This category comprises derivative financial instruments and financial investments. Derivative financial instruments utilised by the Group include structured notes and derivatives used for hedging purposes. Financial assets and liabilities at FVPL are initially recognised on the date from which the Group becomes a party to the contractual provisions of the instrument, including any acquisition costs. Subsequent measurement of financial assets and financial liabilities held in this category are carried at FVPL until the investment is sold. (c) Financial assets at FVOCI These include investments in special purpose vehicles and equity investments. They may be sold in response to liquidity requirements, interest rate, exchange rate or equity price movements. Financial investments are initially recognised at cost, which is considered as the fair value of the investment including any acquisition costs. The securities are subsequently measured at fair value in the statement of financial position. Fair value changes in the securities are recognised directly in equity (OCI). There is a rebuttable presumption that all equity investments are FVPL, however on initial recognition the Group may make an irrevocable election to present the fair value movement of equity investments that are not held for trading within OCI. The election can be made on an instrument by instrument basis. For equity instruments, there are no reclassifications of gains and losses to the profit or loss statement on derecognition and no impairment recognised in the profit or loss. Equity fair value movements are not reclassified from OCI under any circumstances. (d) Financial guarantees and loan commitments 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 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, where the amount of loss exceeds the total unused commitments an ECL is recognised. 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 ECL of the obligations. Arbuthnot Banking Group PLC Report & Accounts 2022 75 (e) Financial liabilities at amortised cost Financial liabilities at amortised cost are non-derivative financial liabilities with fixed or determinable payments. These liabilities are recognised when cash is received from the depositors and carried at amortised cost using the effective interest rate method. The fair value of these liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date. Basis of measurement for financial assets and liabilities 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 rate 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. Derecognition Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or when 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 in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. There have not been any instances where assets have only been partially derecognised. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled, expire, are modified or exchanged. Offsetting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as the Group’s trading activity. 76 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 3. Significant accounting policies (continued) 3.4 Impairment for financial assets and lease receivables IFRS 9 impairment model adopts a three stage expected credit loss approach (“ECL”) based on the extent of credit deterioration since origination. The three stages under IFRS 9 are as follows: • Stage 1 – if, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, an entity shall measure the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses. • Stage 2 – a lifetime loss allowance is held for financial assets where a significant increase in credit risk has been identified since initial recognition for financial assets that are not credit impaired. The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period for the life of the loan. • Stage 3 – a lifetime ECL allowance is required for financial assets that are credit impaired at the reporting date. Measurement of ECL The assessment of credit risk and the estimation of ECL are unbiased and probability weighted. ECL is measured on either a 12 month (Stage 1) or lifetime (Stage 2) basis depending on whether a significant increase in credit risk has occurred since initial recognition or where an account meets the Group’s definition of default (Stage 3). The ECL calculation is a product of an individual loan’s probability of default (‘PD’), exposure at default (‘EAD’) and loss given default (‘LGD’) discounted at the effective interest rate (‘EIR’). Significant increase in credit risk (“SICR”) (movement to Stage 2) The Group’s transfer criteria determines what constitutes a significant increase in credit risk, which results in a financial asset being moved from Stage 1 to Stage 2. The Group has determined that a significant increase in credit risk arises when an individual borrower is more than 30 days past due or if forbearance measures have been put in place. The Group monitors the ongoing appropriateness of the transfer criteria, where any proposed amendments will be reviewed and approved by the Group’s Credit Committees at least annually and more frequently if required. A borrower will move back into Stage 1 conditional upon a period of good account conduct and the improvement of the Client’s situation to the extent that the probability of default has receded sufficiently and a full repayment of the loan, without recourse to the collateral, is likely. Definition of default (movement to Stage 3) The Group uses a number of qualitative and quantitative criteria to determine whether an account meets the definition of default and as a result moves into Stage 3. The criteria are as follows: • The rebuttable assumption that more than 90 days past due is an indicator of default. The Group therefore deems more than 90 days past due as an indicator of default except for cases where the customer is already within forbearance. This will ensure that the policy is aligned with the Basel/Regulatory definition of default. • The Group has also deemed it appropriate to classify accounts where there has been a breach in agreed forbearance arrangements, recovery action is in hand or bankruptcy proceedings have been initiated or similar insolvency process of a client, or director of a company. A borrower will move out of Stage 3 when their credit risk improves such that they are no longer past due and remain up to date for a minimum period of six months and the improvement in the borrower’s situation to the extent that credit risk has receded sufficiently and a full repayment of the loan, without recourse to the collateral, is likely. Forward looking macroeconomic scenarios IFRS 9 requires the entity to consider the risk of default and impairment loss taking into account expectations of economic changes that are reasonable. The Group uses bespoke macroeconomic models to determine the most significant factors which may influence the likelihood of an exposure defaulting in the future. At present, the most significant macroeconomic factors relate to property prices, UK real GDP growth and unemployment rate. The Group currently consider five probability weighted scenarios: baseline; extreme downside (2021: “severe decline”); downside 2 (2021: “moderate decline”); downside 1 (2021: “decline”) and upside. The Group has derived an approach for factoring probability weighted macroeconomic forecasts into ECL calculations, adjusting PD and LGD estimates. Arbuthnot Banking Group PLC Report & Accounts 2022 77 Expected life IFRS 9 requires lifetime expected credit losses to be measured over the expected life. Currently the Group considers the loans’ contractual term as the maximum period to consider credit losses. This approach will continue to be monitored and enhanced if and when deemed appropriate. Government guarantees During March and April 2020, the UK government launched a series of temporary schemes designed to support businesses deal with the impact of Covid-19. The BBLS, CBILS, CLBILS and RLS lending products were originated by the Group but are covered by government guarantees. These are to be set against the outstanding balance of a defaulted facility after the proceeds of the business assets have been applied. The government guarantee is 80% for CBILS, CLBILS and RLS and 100% for BBLS. Arbuthnot Latham recognises lower LGDs for these lending products as a result, with 0% applied to the government guaranteed part of the exposure. 3.5 Derivatives held for risk management purposes and hedge accounting Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets or liabilities. All derivatives are measured at fair value in the statement of financial position. The Group designates certain derivatives held for risk management as hedging instruments in qualifying hedging relationships. Policy applicable generally to hedging relationships On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), 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 on inception of the hedging relationship and on an ongoing basis, of whether the hedging instrument(s) is (are) expected to be highly effective in offsetting the changes in the fair value of the respective hedged item(s) during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80–125%. Fair value hedges When a derivative is designated as the hedging instrument in a hedge of 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. The change in fair value of the hedged item attributable to the hedged risk is recognised in profit or loss. If the hedged item would otherwise be measured at cost or amortised cost, then its carrying amount is adjusted accordingly. If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. However, if the derivative is novated to a central counterparty by both parties as a consequence of laws or regulations without changes in its terms except for those that are necessary for the novation, then the derivative is not considered expired or terminated. Any adjustment up to the point of discontinuation to a hedged item for which the effective interest method is used is amortised to profit or loss as an adjustment to the recalculated effective interest rate of the item over its remaining life. On hedge discontinuation, any hedging adjustment made previously to a hedged financial instrument for which the effective interest method is used is amortised to profit or loss by adjusting the effective interest rate of the hedged item from the date on which amortisation begins. If the hedged item is derecognised, then the adjustment is recognised immediately in profit or loss when the item is derecognised. 3.6. Impairment of non-financial assets The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Impairment for goodwill is discussed in more detail under Note 29. 3.7. Fiduciary activities The Group commonly acts as trustee 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. 3.8. Adoption of new and revised reporting standards There are no standards, interpretations or amendments to existing standards that have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2022 or later periods, that will have any material impact on the Group’s financial statements. 78 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 3. Significant accounting policies (continued) 3.9. Standards issued but not yet effective A number of new standards and amendments to standards are effective for annual periods beginning after 1 January 2022 and earlier application is permitted; however, the Group has not early adopted the new and amended standards in preparing these consolidated financial statements. Other standards The following new and amended standards are not expected to have a significant impact on the Group’s consolidated financial statements. • Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12, effective for annual periods beginning on or after 1 January 2023). • Classification of Liabilities as Current or Non-Current (Amendments to IAS 1, effective for annual periods beginning on or after 1 January 2023). • IFRS 17 Insurance Contracts and amendments to IFRS 17 Insurance Contracts. (effective for annual reporting periods beginning on or after 1 January 2023). • Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2). • Definition of Accounting Estimates (Amendments to IAS 8, effective for annual periods beginning on or after 1 January 2023). 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 Estimation uncertainty (a) Expected credit losses (“ECL”) on financial assets The Group reviews its loan portfolios and debt security investments to assess impairment at least on a quarterly basis. The basis for evaluating impairment losses is described in Note 11. The measurement of ECL required by the implementation of IFRS 9, necessitates a number of significant judgements. Specifically, judgements and estimation uncertainties relate to assessment of whether credit risk on the financial asset has increased significantly since initial recognition, incorporation of forward-looking information (“FLI”) in the measurement of ECLs and key assumptions used in estimating recoverable cash flows. These estimates are driven by a number of factors that are subject to change which may result in different levels of ECL allowances. The Group incorporates FLI into the assessment of whether there has been a significant increase in credit risk. Forecasts for key macroeconomic variables that most closely correlate with the Bank’s portfolio are used to produce five economic scenarios, comprising of a base case, which is the central scenario, developed internally based on consensus forecast, and four less likely scenarios, one upside and three downside scenarios (downside 1, downside 2 and extreme downside), and the impacts of these scenarios are then probability weighted. The estimation and application of this FLI will require significant judgement supported by the use of external information. 12-month ECLs on loans and advances (loans within Stage 1) are calculated using a statistical model on a collective basis, grouped together by product and geographical location. The key assumptions are the probability of default, the economic scenarios and loss given default having consideration to collateral. Lifetime ECLs on loans and advances (loans within Stage 2 and 3) are calculated based on an individual valuation of the underlying asset and other expected cash flows. For financial assets in Stage 2 and 3, ECL is calculated on an individual basis and all relevant factors that have a bearing on the expected future cash flows are taken into account. These factors can be subjective and can include the individual circumstances of the borrower, the realisable value of collateral, the Group’s position relative to other claimants, and the likely cost to sell and duration of the time to collect. The level of ECL is the difference between the value of the recoverable amount (which is equal to the expected future cash flows discounted at the loan’s original effective interest rate), and its carrying amount. Five economic scenarios were modelled. A probability was assigned to each scenario to arrive at an overall weighted impact on ECL. Management judgment is required in the application of the probability weighting for each scenario. The Group considered the impact of various assumptions on the calculation of ECL (changes in GDP, unemployment rates, inflation, exchange rates, equity prices, wages and collateral values/property prices) and concluded that collateral values/property prices, UK GDP and UK unemployment rate are key drivers of credit risk and credit losses for each portfolio of financial instruments. Arbuthnot Banking Group PLC Report & Accounts 2022 79 Using an analysis of historical data, management has estimated relationships between macro-economic variables and credit risk and credit losses. The Group estimates each key driver for credit risk over the active forecast period of between two and five years. This is followed by a period of mean reversion of five years. The five macroeconomic scenarios modelled on future property prices and macroeconomic variables were as follows: • Baseline • Upside • Downside 1 • Downside 2 • Extreme downside The tables below therefore reflect the expected probability weightings applied for each macroeconomic scenario: Group Economic Scenarios Baseline Upside Downside 1 Downside 2 Extreme downside Probability weighting 2022 2021 53.0% 13.0% 12.0% 11.0% 11.0% 52.0% 25.0% 16.0% 5.0% 2.0% Due to changes in the UK economic outlook the baseline scenario used at 31 December 2022 is less optimistic than the baseline scenario at 31 December 2021. The tables below show the five-year forecasted average for property prices growth, UK unemployment rate and UK real GDP growth: 31 December 2022 Group Base Upside Downside 1 Downside 2 Five-year summary UK House price index - average growth UK Commercial real estate price - average growth UK Unemployment rate - average UK GDP - average growth (0.8%) (2.6%) 4.3% 1.2% 1.7% 0.2% 2.8% 2.1% (1.9%) (3.4%) 5.3% 0.8% (3.0%) (4.1%) 6.3% 0.4% 31 December 2021 Group Base Upside Downside 1 Downside 2 Five-year summary UK House price index - average growth UK Commercial real estate price - average growth UK Unemployment rate - average UK GDP - average growth 2.0% 1.4% 4.2% 2.3% 5.6% 5.1% 3.8% 3.9% (0.7%) (1.2%) 5.7% 1.3% (2.8%) (1.8%) 7.5% 0.6% Extreme downside (4.2%) (4.9%) 7.3% 0.0% Extreme downside (4.8%) (2.4%) 9.4% (0.1%) 80 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 4. Critical accounting estimates and judgements in applying accounting policies (continued) The tables below list the macroeconomic assumptions at 31 December 2022 used in the base, upside and downside scenarios over the five-year forecast period. The assumptions represent the absolute percentage unemployment rates and year-on-year percentage change for GDP and property prices. UK House price index - four quarter growth Year 2023 2024 2025 2026 2027 5 year average UK Commercial real estate price - four quarter growth Year 2023 2024 2025 2026 2027 5 year average UK Unemployment rate - annual average Year 2023 2024 2025 2026 2027 5 year average UK GDP - annual growth Year 2023 2024 2025 2026 2027 5 year average Baseline Upside Downside 1 Downside 2 (6.8%) (3.2%) 1.1% 2.2% 2.8% (0.8%) Baseline (14.0%) (3.0%) – 2.0% 2.0% (2.6%) (3.9%) (0.7%) 3.2% 4.8% 4.9% 1.7% (8.2%) (7.8%) (1.5%) 3.9% 4.1% (1.9%) (9.6%) (12.3%) (4.1%) 5.5% 5.3% (3.0%) Upside Downside 1 Downside 2 (4.0%) – 1.0% 2.0% 2.0% 0.2% (19.3%) (8.2%) 2.3% 4.2% 4.2% (3.4%) (24.7%) (13.4%) 4.7% 6.3% 6.4% (4.1%) Baseline Upside Downside 1 Downside 2 4.6% 4.3% 4.1% 4.2% 4.2% 4.3% 3.2% 2.8% 2.5% 2.5% 2.8% 2.8% 5.1% 5.7% 5.4% 5.3% 5.0% 5.3% 5.5% 7.0% 6.7% 6.3% 5.9% 6.3% Baseline Upside Downside 1 Downside 2 (0.9%) 1.4% 2.0% 1.8% 1.8% 1.2% 0.7% 2.4% 2.7% 2.5% 2.3% 2.1% (2.3%) 1.3% 1.7% 1.6% 1.6% 0.8% (3.7%) 1.3% 1.5% 1.4% 1.4% 0.4% Extreme downside (11.0%) (16.9%) (6.8%) 7.2% 6.6% (4.2%) Extreme downside (30.0%) (18.6%) 7.0% 8.5% 8.6% (4.9%) Extreme downside 6.0% 8.4% 8.0% 7.4% 6.7% 7.3% Extreme downside (5.0%) 1.2% 1.2% 1.2% 1.2% – Arbuthnot Banking Group PLC Report & Accounts 2022 81 The graphs below plot the historical data for HPI, Commercial real estate price, unemployment rate and GDP growth rate in the UK as well as the forecasted data under each of the five scenarios. UK House Price Index UK Commercial Real Estate Price 150 130 110 90 70 50 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 150 140 130 120 110 100 90 80 70 60 50 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Baseline Upside Downside 1 Downside 2 Extreme downside Baseline Upside Downside 1 Downside 2 Extreme downside UK unemployment UK GDP 130 120 110 100 90 80 70 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Baseline Upside Downside 1 Downside 2 Extreme downside Baseline Upside Downside 1 Downside 2 Extreme downside The table below compares the 31 December 2022 ECL provision using the 31 December 2022 economic scenarios and the 31 December 2022 ECL provision using the 31 December 2021 economic scenarios. Group ECL Provision Stage 1 Stage 2 Stage 3 At 31 December 2022 Economic scenarios as at 2022 £000 1,147 130 5,325 6,602 2021 £000 546 67 5,107 5,720 82 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 4. Critical accounting estimates and judgements in applying accounting policies (continued) Additionally, management have assessed the impact of assigning a 100% probability to each of the economic scenarios, which would have the following impact on the Profit or Loss of the Group: Group Impact of 100% scenario probability Baseline Upside Downside 1 Downside 2 Extreme downside 2022 £m 0.7 1.0 (2.0) (7.5) (19.1) 2021 £m 0.1 0.1 (0.8) (4.0) (13.6) (b) Effective Interest Rate Loans and advances to customers are initially recognised at fair value. Subsequently, they are measured under the effective interest rate method. Management review the expected cash flows against actual cash flows to ensure future assumptions on customer behaviour and future cash flows remain valid. If the estimates of future cash flows are revised, the gross carrying value of the financial asset is recalculated as the present value of the estimated future contractual cash flows discounted at the original effective interest rate. The adjustment to the carrying value of the loan book is recognised in the Statement of Comprehensive Income. The accuracy of the effective interest rate is affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions. In 2022 the Group recognised £Nil (2021: £0.1m) additional interest income to reflect a revision in the timing of expected cash flows on the originated book, reflecting a shortening of the expected life of originated loan book. If customer loans repaid 6 months earlier than anticipated on the originated loan book, interest income would increase by £0.7m (2021: £0.6m), due to acceleration of fee income. In 2022 the Group recognised £0.1m additional (2021: reversal £0.3m) of interest income to reflect actual cash flows received on the acquired mortgage books being less than forecast cash flows. The key judgements in relation to calculating the net present value of the acquired mortgage books relate to the timing of future cash flows on principal repayments. Management have considered an early and delayed 6-month sensitivity on the timing of repayment and a 10% increase and decrease of principal repayments to be reasonably possible. If the acquired loan books were modelled to accelerate cash flows by 6 months, it would increase interest income in 2022 by £0.1m (2021: £0.1m) while a 10% increase in principal repayments will increase interest income in 2022 by £0.2m (2021: £0.3m) through a cash flow reset adjustment. (c) Investment property The valuations that the Group places on its investment properties are subject to a degree of uncertainty and are calculated on the basis of assumptions in relation to prevailing market rents and effective yields. These assumptions may not prove to be accurate, particularly in periods of market volatility. The uncertainty due to Brexit, rising inflation and interest rates has resulted in less market evidence being available for Management in making its judgement on the key assumptions of property yield and market rent. The Group currently owns one (2021: one) investment property, as outlined in Note 32. Management valued the investment property utilising externally sourced market information and property specific knowledge. The valuations were reviewed by the Group’s in-house surveyor. Arbuthnot Banking Group PLC Report & Accounts 2022 83 Crescent Office Park in Bath with value of £6.6m (2021: £6.6m) In December 2017, the office building was acquired with the intention to be included within a new property fund initiative that the Group had planned to start-up. The property had tenants in situ with the Fund recognising rental income. The property was initially recognised as held for sale under IFRS 5. In 2018 the launch of the property fund was placed on hold and as a result it was reclassified as an investment property as the property no longer met the IFRS 5 criteria. The property remained occupied as at 31 December 2022 with the Group receiving rental income. In accordance with IAS 40, the property is recognised at fair value, with its carrying value at year end of £6.55m equal to its fair value. The valuation of the property has the following key inputs: • yield: 6.75% • total topped up rental income per annum: £0.47m The external valuation that the Group places on its investment property is subject to a degree of uncertainty and is calculated on the basis of assumptions in relation to prevailing market conditions and subject to comparable properties for sale. This valuation is therefore susceptible to uncertainty particularly where there is a limited level of activity in the property market. (d) Inventory The Group owns one commercial property (2021: two properties) and one repossessed properties (2021: four), classified as inventory. The properties are assessed at the reporting date for impairment. The internal valuations that the Group places on its properties are subject to a degree of uncertainty and are calculated on the basis of assumptions in relation to prevailing market rents and effective yields. These assumptions may not prove to be accurate, particularly in periods of market volatility. Similarly to investment property, the uncertainty due to Brexit, rising inflation and interest rates resulted in less market evidence being available for Management in making its judgement on the key assumptions of property yield and market rent. The external valuations that the Group places on its properties are subject to a degree of uncertainty and are calculated on the basis of assumptions in relation to prevailing market conditions and subject to comparable properties for sale. These valuations are therefore susceptible to uncertainty particularly where there is a limited level of activity in the property market. Management have assessed that should the net realisable value less cost to sell of each of the combined property inventory reduce by 5% this would impact profit or loss by £0.3m and a reduction of 10% would impact profit or loss by £1.1m (or 5.6% of cost). (e) Residual value At the end of lease terms, assets may be sold to third parties or leased for further terms. Rentals are calculated to recover the cost of assets less their residual value (“RV”), and earn finance income. RV’s represent the estimated value of the leased asset at the end of lease period. Residual values are calculated after analysing the market place and the company’s own historical experience in the market. Expected residual values of leased assets are prospectively adjusted for through the depreciation adjustments which are charged to the income statement each year. The key estimates and judgements that arise in relation to RV’s are timing of lease terminations and expected residual value of returned vehicles. The profitability of the Group’s operating lease contracts is highly dependent on the RV of the vehicle at the end of the agreement. On inception of the lease, the Group uses its knowledge and experience of the market and industry to estimate the final RV of the vehicle. The Group is exposed to the risk that the RV of the vehicle may be less than anticipated at the outset of the contract impacting profitability. The Group manages the risk through effective and robust procedures by continually monitoring historic, current and forecast RV performance. Expected residual values underlying the calculation of depreciation of leased assets are kept under review to take account of any change in circumstances. Refer to Note 30 for further detail. 84 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 4. Critical accounting estimates and judgements in applying accounting policies (continued) (f) Climate change The Group has considered the potential impact of climate change on the Group’s financial position and performance. This included performing an assessment over the Group’s financial and non-financial assets and evaluating information about the observable effects of physical and transition risk of climate change on the Group’s financial position and performance. Many of the effects of climate change will be less significant in the short term and will have limited impact on accounting estimates and judgements in the current year. The following items represent the most significant effects: • The Group’s loan portfolio is exposed to the potential impact of climate-related risks, due to the ECL implications and expectations on the ability of the borrowers to meet their loan obligations. As the Group has limited appetite for financial and reputational risk emanating from climate change, the potential ECL impact as a result of climate change is not expected to be material in the short term. • The assessment of asset impairment and the Group’s deferred tax asset depends on the Group’s future performance and cash flows. The Group has incorporated market expectations on climate risk it its profitability and cash flow forecasts and doesn’t consider any additional adjustments are required. 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 2022: At 31 December 2022 ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Assets classified as held for sale Derivative financial instruments Loans and advances to customers Other assets Financial investments Deferred tax asset Intangible assets Property, plant and equipment Right-of-use assets Investment property LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Current tax liability Other liabilities Lease liabilities Debt securities in issue Due within one year £000 Due after more than one year £000 732,729 115,788 328,988 3,279 113 690,145 31,034 – – 8,716 77,599 3,134 – 1,991,525 11,027 135 3,041,084 1,748 26,144 3,325 – 3,083,463 – – 110,765 – 6,209 1,345,932 21,151 3,404 2,425 23,833 97,674 4,580 6,550 1,622,523 225,000 – 51,465 – – 4,547 37,594 318,606 Total £000 732,729 115,788 439,753 3,279 6,322 2,036,077 52,185 3,404 2,425 32,549 175,273 7,714 6,550 3,614,048 236,027 135 3,092,549 1,748 26,144 7,872 37,594 3,402,069 Arbuthnot Banking Group PLC Report & Accounts 2022 85 The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2021: At 31 December 2021 ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Assets classified as held for sale Derivative financial instruments Loans and advances to customers Other assets Financial investments Deferred tax asset Intangible assets Property, plant and equipment Right-of-use assets Investment property LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Current tax liability Other liabilities Lease Liabilities Debt securities in issue Due within one year £000 Due after more than one year £000 814,692 73,444 147,696 3,136 118 646,507 109,741 124 – 7,340 78,897 2,729 – 1,884,424 15,333 132 1,640,627 413 21,126 5,802 – 1,683,433 – – 153,356 – 1,635 1,224,455 378 3,045 2,562 22,524 46,993 12,945 6,550 1,474,443 225,000 39 1,197,242 – 28 15,474 36,772 1,474,555 Total £000 814,692 73,444 301,052 3,136 1,753 1,870,962 110,119 3,169 2,562 29,864 125,890 15,674 6,550 3,358,867 240,333 171 2,837,869 413 21,154 21,276 36,772 3,157,988 86 Arbuthnot Banking Group PLC Report & Accounts 2022 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 2022: At 31 December 2022 ASSETS Loans and advances to banks Loans and advances to banks - due from subsidiary undertakings Debt securities at amortised cost Deferred tax asset Intangible assets Property, plant and equipment Other assets Interests in subsidiaries LIABILITIES Current tax liability Other liabilities Debt securities in issue Due within one year £000 Due after more than one year £000 6 8,427 – – – – 73 – 8,506 879 3,490 – 4,369 – – 24,437 522 1 130 – 159,354 184,444 – – 37,594 37,594 The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2021: At 31 December 2021 ASSETS Loans and advances to banks Loans and advances to banks - due from subsidiary undertakings Debt securities at amortised cost Current tax asset Deferred tax asset Intangible assets Property, plant and equipment Other assets Interests in subsidiaries LIABILITIES Other liabilities Debt securities in issue Due within one year £000 Due after more than one year £000 6 7,581 – 239 – – – 55 – 7,881 3,142 – 3,142 – – 24,367 – 523 2 137 – 159,404 184,433 – 36,772 36,772 Total £000 6 8,427 24,437 522 1 130 73 159,354 192,950 879 3,490 37,594 41,963 Total £000 6 7,581 24,367 239 523 2 137 55 159,404 192,314 3,142 36,772 39,914 Arbuthnot Banking Group PLC Report & Accounts 2022 87 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, macroeconomic, market, liquidity and capital. (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. 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 balance sheet date. Credit risk is managed through the Credit Committee of the banking subsidiary. The Committee regularly reviews the credit risk profile of the Group, with a clear focus on performance against risk appetite statements and risk metrics. The Committee considered credit conditions during the year, and in particular the impact of the rising inflation and interest rates on performance against both credit risk appetite and a range of key credit risk metrics. The Company and Group structure the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to products, and 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 economic environment remains uncertain and future impairment charges may be subject to further volatility (including from changes to macroeconomic variable forecasts). Rising inflation and interest rates have created a challenge for ECL modelling, given the severity of economic shock and associated uncertainty for the future economic path coupled with the scale of government and central bank intervention that have altered the relationships between economic drivers and default. The Group has attempted to leverage stress test modelling insights to inform ECL model refinements to enable reasonable estimates. Management review of modelling approaches and outcomes continues to inform any necessary adjustments to the ECL estimates through the form of in-model adjustments, based on expert judgement including the use of available information. Management considerations included the potential severity and duration of the economic shock, including the mitigating effects of government support actions, as well the potential trajectory of the subsequent recovery. 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; • Charges over other chattels; and • Personal guarantees 88 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) 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. The Group incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. The key inputs into the measurement of the ECL are: • assessment of significant increase in credit risk • future economic scenarios • probability of default • loss given default • exposure at default The IFRS 9 impairment model adopts a three stage approach based on the extent of credit deterioration since origination, see Note 11. The Group’s maximum exposure to credit risk before collateral held or other credit enhancements is as follows: 2022 Group Credit risk exposures (all Stage 1, unless otherwise stated) Banking £000 Mortgage Portfolios £000 RAF £000 ABL £000 ASFL £000 AAG £000 All Other Divisions £000 Total £000 On-balance sheet: Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Derivative financial instruments Loans and advances to customers (Gross of ECL) Stage 1 Stage 2 Stage 3 Other assets Financial investments Off-balance sheet: Guarantees Loan commitments and other credit related liabilities – – – – 1,455,607 1,363,572 59,904 32,131 – – 2,591 219,490 – – – – 148,957 126,726 10,777 11,454 – – – – – – – – 134,724 128,807 2,454 3,463 – – – – – – 270,999 267,962 – 3,037 – – – – – – 14,950 13,756 1,001 193 – – – – – – 17,442 17,066 376 – – – 732,513 115,788 439,753 6,322 732,513 115,788 439,753 6,322 – 2,042,679 – 1,917,889 74,512 – 50,278 – 14,160 14,160 3,404 3,404 – – – 662 – 3,253 At 31 December 1,677,688 148,957 134,724 521,275 – 250,276 1,312 16,262 – – 471,078 18,104 1,311,940 3,828,950 Arbuthnot Banking Group PLC Report & Accounts 2022 89 Group Credit risk exposures (all Stage 1, unless otherwise stated) Banking £000 Mortgage Portfolios £000 RAF £000 ABL £000 ASFL £000 AAG £000 All Other Divisions £000 Total £000 2021 On-balance sheet: Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Derivative financial instruments Loans and advances to customers (Gross of ECL) Stage 1 Stage 2 Stage 3 Other assets Financial investments Off-balance sheet: Guarantees Loan commitments and other credit related liabilities – – – – 1,399,389 1,297,782 70,132 31,475 – – 2,931 261,797 – – – – 178,153 157,566 13,728 6,859 – – – – – – – – 99,969 82,952 11,374 5,643 – – – – – – 182,213 182,213 – – – – – – – – 10,125 9,896 229 – – – – – – – 7,500 7,500 – – – – 814,499 73,444 301,052 1,753 814,499 73,444 301,052 1,753 – 1,877,349 – 1,737,909 95,463 – 43,977 – 13,098 13,098 3,169 3,169 – – – 1,629 – 4,560 – 200,478 2,115 12,240 – – 464,390 9,129 1,207,015 3,553,314 At 31 December 1,664,117 178,153 99,969 382,691 The Company’s maximum exposure to credit risk (all stage 1) before collateral held or other credit enhancements is as follows: Credit risk exposures relating to on-balance sheet assets are as follows: Loans and advances to banks Debt securities at amortised cost At 31 December 2022 £000 8,434 24,437 32,871 2021 £000 7,587 24,367 31,954 The above tables represent the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2022 and 2021 without taking account of any collateral held or other credit enhancements attached. For financial assets, the balances are based on carrying amounts as reported in the Statement of Financial Position. For guarantees and loan commitments, the amounts in the table represent the amounts for which the group is contractually committed. 90 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) The table below represents an analysis of the loan to values of the exposures secured by property for the Group: Group Less than 60% Stage 1 Stage 2 Stage 3 60%-80% Stage 1 Stage 2 Stage 3 80%-100% Stage 1 Stage 2 Stage 3 Greater than 100%* Stage 1 Stage 2 Stage 3 Total Banking Mortgage Portfolios Total 2022 Loan Balance £000 844,024 797,219 38,781 8,024 553,383 525,296 20,900 7,187 11,911 9,776 – 2,135 24,182 11,142 – 13,040 Collateral £000 1,869,734 1,781,638 73,946 14,150 864,566 823,256 31,250 10,060 13,976 11,626 – 2,350 13,005 6,880 – 6,125 Loan Balance £000 Collateral £000 Loan Balance £000 53,759 45,833 4,037 3,889 62,113 53,692 4,295 4,126 20,961 17,109 1,231 2,621 17,142 13,191 1,741 2,210 131,561 113,996 10,277 7,288 92,996 80,529 6,209 6,258 23,563 19,136 1,426 3,001 13,925 10,623 1,586 1,716 897,783 843,052 42,818 11,913 615,496 578,988 25,195 11,313 32,872 26,885 1,231 4,756 41,324 24,333 1,741 15,250 Collateral £000 2,001,295 1,895,634 84,223 21,438 957,562 903,785 37,459 16,318 37,539 30,762 1,426 5,351 26,930 17,503 1,586 7,841 1,433,500 2,761,281 153,975 262,045 1,587,475 3,023,326 * In addition to property, other security is taken, including charges over Arbuthnot Latham Investment Management portfolios, other chattels and personal guarantees. The increase in loan to values greater than 100% is due to an increase in exposures collateralised by other assets. Additionally under the government scheme for BBLs, collateral is not required as the loans are 100% backed by the government. Loans in the Banking segment with a loan to value of greater than 100% have additional collateral of £9.4m in the form of cash deposits and security over Arbuthnot Latham Investment Management Portfolios and personal guarantees of £13.1m. Non-property collateral reduces loan to value below 100% for all such exposures in the Banking segment. Arbuthnot Banking Group PLC Report & Accounts 2022 91 The table below represents an analysis of the loan to values of the exposures secured by property for the Group: Group Less than 60% Stage 1 Stage 2 Stage 3 60%-80% Stage 1 Stage 2 Stage 3 80%-100% Stage 1 Stage 2 Stage 3 Greater than 100%* Stage 1 Stage 2 Stage 3 Total Banking Mortgage Portfolios Total 2021 Loan Balance £000 724,604 699,913 17,722 6,969 586,077 538,908 37,550 9,619 23,362 8,488 14,874 – 27,525 14,895 – 12,630 Collateral £000 1,606,614 1,557,704 34,470 14,440 916,749 847,769 55,255 13,725 27,223 10,088 17,135 – 22,002 12,914 – 9,088 Loan Balance £000 Collateral £000 Loan Balance £000 74,305 67,034 5,195 2,076 59,536 53,182 4,090 2,264 29,387 25,498 2,557 1,332 20,489 15,640 2,768 2,081 174,446 157,905 12,185 4,356 86,873 77,574 5,881 3,418 33,591 29,065 2,909 1,617 16,796 12,855 2,435 1,506 798,909 766,947 22,917 9,045 645,613 592,090 41,640 11,883 52,749 33,986 17,431 1,332 48,014 30,535 2,768 14,711 Collateral £000 1,781,060 1,715,609 46,655 18,796 1,003,622 925,343 61,136 17,143 60,814 39,153 20,044 1,617 38,798 25,769 2,435 10,594 1,361,568 2,572,588 183,717 311,706 1,545,285 2,884,294 * In addition to property, other security is taken, including charges over Arbuthnot Latham Investment Management portfolios, other chattels and personal guarantees. The increase in loan to values greater than 100% is due to an increase in exposures collateralised by other assets. Additionally under the government scheme for BBLs, collateral is not required as the loans are 100% backed by the government. Loans in the Banking segment with a loan to value of greater than 100% have additional collateral of £10.0m in the form of cash deposits and security over Arbuthnot Latham Investment Management Portfolios and personal guarantees of £5.0m. Non-property collateral reduces loan to value below 100% for all such exposures in the Banking segment. The table below represents an analysis of loan commitments compared to the values of collateral for the Group (all Stage 1): Group Less than 60% 60%-80% 80%-100% Greater than 100% Total Group Less than 60% 60%-80% 80%-100% Greater than 100% Total 2022 Loan commitments £000 122,582 35,807 11,100 31,347 200,836 2021 Loan commitments £000 125,147 69,960 9,573 20,660 225,340 Collateral £000 387,942 51,828 12,432 19,606 471,808 Collateral £000 437,385 105,781 10,331 15,017 568,514 92 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) Renegotiated loans and forbearance The contractual terms of a loan may be modified due to factors that are not related to the current or potential credit deterioration of the customer (changing market conditions, customer retention, etc.). In such cases, the modified loan may be derecognised and the renegotiated loan recognised as a new loan at fair value. When modification results in derecognition, a new loan is recognised and allocated to Stage 1 (assuming it is not credit-impaired at that time). The Group renegotiates loans to customers in financial difficulties (referred to as ‘forbearance’) to maximise collection opportunities and minimise the risk of default. Under the Group’s forbearance policy, loan forbearance is granted on a selective basis if the debtor is currently in default on its debt, or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms. The revised terms can include changing the timing of interest payments, extending the date of repayment of the loan, transferring a loan to interest only payments and a payment holiday. Both retail and corporate loans are subject to the forbearance policy. The Group Credit Committee regularly reviews reports on forbearance. For financial assets modified as part of the Group’s forbearance policy, the estimate of PD reflects whether the modification has improved or restored the Group’s ability to collect interest and principal and the Group’s previous experience of similar forbearance action. As part of this process, the Group evaluates the borrower’s payment performance against the modified contractual terms and considers various behavioural indicators. Whilst the customer is under forbearance, the customer will be classified as Stage 2 and the Group recognise a lifetime ECL. The customer will transfer to Stage 1 and revert to a 12 month ECL when they exit forbearance. This is conditional upon both a minimum six months’ good account conduct and the improvement to the client’s situation to the extent the probability of default has receded sufficiently and full repayment of the loan, without recourse to the collateral, is likely. Forbearance is a qualitative indicator of a SICR (see Notes 3.3 and 3.4) As at 31 December 2022, loans for which forbearance measures were in place totalled 3.0% (2021: 3.8%) of total value of loans to customers for the Group. These are set out in the following table: Stage 1 Stage 2 Stage 3 Total 2022 Number Loan Balance £000 Number Group Time for asset sale Term extension Time for refinance with third party Payment holiday Covenant waived Modification in terms and conditions Restructure Total forbearance – – – – – – – – – – – – – – – – Loan Balance £000 8,836 1,905 2,360 4,002 28,142 9,184 1,567 3 24 1 3 3 64 7 105 55,996 Number 1 – – – – 32 – 33 Loan Balance £000 35 – – – – 6,073 – 6,108 Number 4 24 1 3 3 96 7 Loan Balance £000 8,871 1,905 2,360 4,002 28,142 15,257 1,567 138 62,104 Arbuthnot Banking Group PLC Report & Accounts 2022 93 Group Interest capitalisation Time for asset sale Term extension Switch to interest only Reduced monthly payments Payment holiday More than one measure Total forbearance 2021 Stage 1 Stage 2 Stage 3 Total Number Loan Balance £000 Number – – – – – – – – – – – – – – – – 6 9 8 1 4 1 63 92 Loan Balance £000 7,586 18,875 14,867 1,651 7,384 10,681 9,809 70,853 Number 1 – – 2 – – 15 18 Loan Balance £000 43 – – 88 – – 915 1,046 Number 7 9 8 3 4 1 78 110 Loan Balance £000 7,629 18,875 14,867 1,739 7,384 10,681 10,724 71,899 Concentration risk The tables below show the concentration in the loan book based on the most significant type of collateral held for each loan. Loans and advances to customers Loan Commitments Concentration by product Asset based lending* Asset finance Cash collateralised Commercial lending Investment portfolio secured Residential mortgages Mixed collateral* Unsecured** At 31 December Concentration by location East Anglia London Midlands North East North West Northern Ireland Scotland South East South West Wales Non-property collateral At 31 December 2022 £000 2021 £000 268,825 148,788 14,143 156,250 24,485 1,339,789 69,433 14,364 2,036,077 28,668 759,584 86,442 3,593 42,897 94,341 20,220 236,658 179,034 15,174 569,466 182,306 104,613 177,697 209,617 26,353 1,107,301 37,250 25,825 1,870,962 25,350 767,968 97,102 4,707 50,276 111,400 33,952 230,384 189,685 16,179 343,959 2,036,077 1,870,962 2022 £000 250,276 1,312 611 25,720 2,086 109,948 44,590 36,535 471,078 2,776 178,576 4,778 18 3,531 – – 884 5,273 5,001 270,241 471,078 2021 £000 200,478 2,115 3,083 41,865 8,689 174,452 17,589 16,119 464,390 21,389 148,046 11,248 3,122 3,681 – 50 15,049 12,243 5,662 243,900 464,390 * Mixed collateral is where there is no single, overall majority collateral type. ** Included within unsecured are £9.0m (2021: £11.6m) of loans which are backed by the government guarantee scheme for BBLs. 94 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) (b) Operational risk Operational risk is the risk that the Group may be exposed to financial losses from conducting its business. The Group’s exposures to operational risk include its Information Technology (“IT”) 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. In line with further guidance issued by the Regulator, the Bank has continued to focus on ensuring that the design of systems and operational plans are robust to maintain operational resilience in the face of unexpected incidents. During 2021 and 2022 the Bank continued to review these plans and undertook tests to ensure backup and recovery processes were effective even when working in a hybrid working model. During 2021 the FCA, PRA and BoE published their final policy papers on building operational resilience. The Group complied with the initial requirements prior to the implementation date of 31 March 2022. Cyber risk Cyber risk is an increasing risk that the Group is subject to within its operational processes. This is the risk that the Group is subject to some form of disruption arising from an interruption to its IT and data infrastructure. The Group regularly tests the infrastructure to ensure that it remains robust to a range of threats, and has continuity of business plans in place including a disaster recovery plan. Conduct risk 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 adopts a zero risk appetite for any unfair customer outcomes. It 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 followed. The Group also has insurance policies in place to provide some cover for any claims that may arise. (c) Macroeconomic and competitive environment The group is exposed to indirect risk that may arise for the macroeconomic and competitive environment. In recent years there have been a number of global and domestic events which have had significant implications on the Group’s operating environment, namely: Russia’s War in the Ukraine, Coronavirus and Brexit. The culmination of these events has led to significant turmoil in both global and domestic markets. The most significant economic effect from these events includes record inflation driven by high fuel costs, leading to sharp and significant increases in the cost of borrowing. Conditions have improved since the year end however there still remains significant uncertainty around the recovery of the UK economy which may have an impact on the group’s customers and assets. Climate change Climate change presents financial and reputational risks for the banking industry. The Board consider Climate change a material risk as per the Board approved risk appetite framework which provides a structured approach to risk taking within agreed boundaries. The assessment is proportional at present but will develop over time as the Group generates further resources and industry consensus emerges. The assessment is maintained by the Chief Risk officer and has been informed by the ICAAP review and numerous workshops for staff. Whilst it is difficult to assess how climate change will unfold, the Group is continually assessing various risk exposures. The UK has a legally binding target to cut its greenhouse gas emissions to “net-zero” by 2050. There is growing consensus that an orderly transition to a low-carbon economy will bring substantial adjustments to the global economy which will have financial implications while bringing risks and opportunities. The risk assessment process has been integrated into existing risk frameworks and will be governed through the various risk governance structures including review and recommendations by the AL Risk Committee. Arbuthnot Latham governance has been assessed against the Task Force on Climate-related Financial Disclosures’ (“TCFD”) recommended governance disclosures and where appropriate the FCA/PRA guidance as per the Supervisory statements. In accordance with the requirements of the PRA’s Supervisory Statement ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’, the Group has allocated responsibility for identifying and managing the risks from climate change to the relevant existing Senior Management Function. The Bank is continuously developing a suitable strategic approach to climate change and the unique challenges it poses. The FCA have issued ‘Climate Change and Green Finance: summary of responses and next steps’. In addition to the modelling of various scenarios and various governance reviews, Arbuthnot Latham will continue to monitor requirements through the relationship with UK Finance. Arbuthnot Banking Group PLC Report & Accounts 2022 95 (d) Market risk Price risk The Company and Group are exposed to price risk from equity investments and derivatives held by the Group. The Group is not exposed to commodity price risk. Based upon the financial investment exposure in Note 27, a stress test scenario of a 10% (2021: 10%) decline in market prices, would result in a £Nil (2021: £12k) decrease in the Group’s income and a decrease of £0.3m (2021: £0.3m) in the Group’s equity. The Group considers 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 27, a stress test scenario of a 10% (2021: 10%) decline in market prices, would result in a £nil (2021: £nil) decrease in the Company’s income and a decrease of £nil (2021: £Nil) in the Company’s equity. Currency risk The Company and Group take on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. This is managed through the Group entering into forward foreign exchange contracts. 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 2022. Included in the table below are the Group’s assets and liabilities at carrying amounts, categorised by currency. At 31 December 2022 ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Assets classified as held for sale 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 (£) £000 732,577 18,144 280,956 – 6,216 2,004,654 13,657 – 3,056,204 236,026 7 2,814,786 3,824 24,437 3,079,080 (22,876) 471,078 USD ($) £000 78 13,581 158,797 – 100 8,451 – 3,404 184,411 – 107 180,483 188 – 180,778 3,633 – Euro (€) £000 71 75,787 – 3,279 6 22,104 503 – 101,750 – 8 87,787 942 13,157 101,894 (144) – Other £000 3 8,276 – – – 868 – – 9,147 1 13 9,494 – – 9,508 (361) – Total £000 732,729 115,788 439,753 3,279 6,322 2,036,077 14,160 3,404 3,351,512 236,027 135 3,092,550 4,954 37,594 3,371,260 (19,748) 471,078 96 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) The table below summarises the Group’s exposure to foreign currency exchange risk at 31 December 2021: At 31 December 2021 ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Derivative financial instruments Loans and advances to customers Other assets Financial investments LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Other liabilities Debt securities in issue Net on-balance sheet position Credit commitments GBP (£) £000 814,601 17,438 204,474 1,663 1,838,679 (17,075) – USD ($) £000 46 23,983 96,579 39 7,816 33,314 3,031 2,859,780 164,808 240,333 103 2,651,717 7,601 24,367 2,924,121 (64,341) 464,390 – – 128,667 – – 128,667 36,141 – Euro (€) £000 41 24,885 – – 24,870 (4,320) 138 45,614 – – 50,340 (495) 12,405 62,250 (16,636) – Other £000 4 7,138 (1) 51 (403) 1,179 – 7,968 – 68 7,145 – – 7,213 755 – Total £000 814,692 73,444 301,052 1,753 1,870,962 13,098 3,169 3,078,170 240,333 171 2,837,869 7,106 36,772 3,122,251 (44,081) 464,390 Derivative financial instruments (see Note 22) are in place to mitigate foreign currency risk on net exposures for each currency. A 10% strengthening of the pound against the US dollar would lead to a £35k decrease (2021: £4k decrease) in Group profits and equity, while a 10% weakening of the pound against the US dollar would lead to the same increase in Group profits and equity. Additionally the Group holds £3.3m of properties classified as assets held for sale (2021: £3.1m) and £Nil classified as inventory (2021: £7.7m). These properties are located in the EU and relate to Euro denominated loans where the properties were repossessed and are either being held for sale or being developed with a view to sell. Including these Euro assets, the net Euro exposure is positive £3.3m (2021: £6.1m). The table below summarises the Company’s exposure to foreign currency exchange rate risk at 31 December 2022: At 31 December 2022 ASSETS Loans and advances to banks Debt securities at amortised cost LIABILITIES Other liabilities Debt securities in issue Net on-balance sheet position GBP (£) £000 Euro (€) £000 (4,737) 24,437 19,700 470 24,437 24,907 (5,207) 13,171 – 13,171 – 13,157 13,157 14 Total £000 8,434 24,437 32,871 470 37,594 38,064 (5,193) Arbuthnot Banking Group PLC Report & Accounts 2022 The table below summarises the Company’s exposure to foreign currency exchange rate risk at 31 December 2021: At 31 December 2021 ASSETS Loans and advances to banks Debt securities at amortised cost Other assets LIABILITIES Other liabilities Debt securities in issue Net on-balance sheet position GBP (£) £000 Euro (€) £000 (4,923) 24,367 4 19,448 1,490 24,367 25,857 (6,409) 12,510 – – 12,510 – 12,405 12,405 105 97 Total £000 7,587 24,367 4 31,958 1,490 36,772 38,262 (6,304) A 10% strengthening of the pound against the Euro would lead to £9k increase (2021: £20k decrease) in the Company profits and equity, conversely a 10% weakening of the pound against the Euro would lead to a £8k decrease (2021: £25k increase) in the Company profits and equity. 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 in: Money market transactions of a fixed rate nature, fixed rate loans, fixed rate savings accounts and floating rate products dependent on when they re-price at a future date. Interest rate risk is measured throughout the maturity bandings of the book on a parallel shift scenario for a 200 basis points movement. Interest rate risk is managed to limit value at risk to be less than £0.5m. The current position of the balance sheet is such that it results in an adverse impact on the economic value of equity of £0.3m (2021: adverse impact of £0.3m) for a positive 200bps shift and a favourable impact of £0.3m (2021: favourable impact of £37k) for a negative 200bps movement. An upward change of 50bps on variable rates would decrease pre-tax profits and equity by £23k (2021: increase pre-tax profits and equity by £51k), while a downward change of 50bps (capped at 25bps) would increase pre-tax profits and equity by £23k (2021: increase pre-tax profits and equity by £29k). 98 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) The following tables summarise the re-pricing periods for the assets and liabilities in the Company and Group, including derivative financial instruments which are principally used to reduce exposure to interest rate risk. Items are allocated to time bands by reference to the earlier of the next contractual interest rate re-price and the maturity date. Group As at 31 December 2022 ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost 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 Equity More than 3 months but less than 6 months £000 More than 6 months but less than 1 year £000 More than 1 year but less than 5 years £000 Within 3 months £000 More than 5 years £000 Non interest bearing £000 Total £000 732,728 115,737 334,700 6,322 1,814,805 – – – 51 13,301 – 15,785 – – – – 85,752 – 38,073 – – – – 6,000 – 146,119 – – – – – – 5,633 – – – – – – 15,662 279,976 3,404 732,728 115,788 439,753 6,322 2,036,077 279,976 3,404 3,004,292 29,137 123,825 152,119 5,633 299,042 3,614,048 236,027 135 2,306,952 – 37,594 – – – 353,107 – – – – – 240,934 – – – – – 188,556 – – – – – 3,000 – – – – – – 35,764 – 211,979 236,027 135 3,092,549 35,764 37,594 211,979 2,580,708 353,107 240,934 188,556 3,000 247,743 3,614,048 Impact of derivative instruments 51,376 – – (51,376) – – Interest rate sensitivity gap 474,960 (323,970) (117,109) (87,813) 2,633 51,299 Cumulative gap 474,960 150,990 33,881 (53,932) (51,299) – * Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above. ** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above. Arbuthnot Banking Group PLC Report & Accounts 2022 99 Group As at 31 December 2021 ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost 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 Equity More than 3 months but less than 6 months £000 More than 6 months but less than 1 year £000 More than 1 year but less than 5 years £000 Within 3 months £000 More than 5 years £000 Non interest bearing £000 Total £000 814,692 73,120 262,943 118 1,674,763 – – – 324 7,403 – 17,040 – – – – 14,806 – 40,194 – – – – 15,900 1,635 102,488 – – – – – – 36,477 – – – – – – – 293,795 3,169 814,692 73,444 301,052 1,753 1,870,962 293,795 3,169 2,825,636 24,767 55,000 120,023 36,477 296,964 3,358,867 240,333 171 2,147,186 – 36,772 – – – 109,337 – – – – – 217,645 – – – – – 363,691 – – – 2,424,462 109,337 217,645 363,691 – – 10 – – – 10 – – – – 42,843 – 200,879 240,333 171 2,837,869 42,843 36,772 200,879 243,722 3,358,867 – Impact of derivative instruments 57,889 – – (57,889) Interest rate sensitivity gap 459,063 (84,570) (162,645) (303,192) 36,467 53,242 Cumulative gap 459,063 374,493 211,848 (89,709) (53,242) – * Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above. ** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above. 100 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) More than 3 months but less than 6 months £000 More than 6 months but less than 1 year £000 More than 1 year but less than 5 years £000 Within 3 months £000 More than 5 years £000 Non interest bearing £000 Company As at 31 December 2022 ASSETS Loans and advances to banks Debt securities at amortised cost Loans and advances to customers Other assets* LIABILITIES Other liabilities** Debt securities in issue Equity Interest rate sensitivity gap 6 24,437 8,377 – 32,820 – 37,594 – 37,594 (4,774) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Total £000 6 24,437 8,427 160,081 – – 50 160,081 160,131 192,951 4,369 – 150,988 4,369 37,594 150,988 155,357 192,951 4,774 Cumulative gap (4,774) (4,774) (4,774) (4,774) (4,774) – * Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above. ** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above. Company As at 31 December 2021 ASSETS Derivative financial instruments Loans and advances to banks Other assets* LIABILITIES Other liabilities** Debt securities in issue Equity Interest rate sensitivity gap More than 3 months but less than 6 months £000 More than 6 months but less than 1 year £000 More than 1 year but less than 5 years £000 Within 3 months £000 More than 5 years £000 Non interest bearing £000 Total £000 24,367 7,547 – 31,914 – 36,772 – 36,772 (4,858) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 40 160,361 24,367 7,587 160,361 160,401 192,315 3,142 – 152,401 3,142 36,772 152,401 155,543 192,315 4,858 Cumulative gap (4,858) (4,858) (4,858) (4,858) (4,858) – * Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above. ** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above. Arbuthnot Banking Group PLC Report & Accounts 2022 101 (e) Liquidity risk Liquidity risk is the risk that the Group, although solvent, either does not have sufficient financial resources to enable it to meet its obligations as they fall due, or can only secure such resources at excessive cost. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The liquidity requirements of the Group are met through withdrawing funds from its Bank of England Reserve Account to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements. The Group has formal governance structures in place to manage and mitigate liquidity risk on a day to day basis. The Board of AL sets and approves the liquidity risk management strategy. The Assets and Liabilities Committee (“ALCO”), comprising senior executives of the Group, monitors liquidity risk. Key liquidity risk management information is reported by the finance teams and monitored by the Chief Executive Officer, Finance Director and Deputy CEO on a daily basis. The ALCO meets monthly to review liquidity risk against set thresholds and risk indicators including early warning indicators, liquidity risk tolerance levels and Internal Liquidity Adequacy Assessment Process (“ILAAP”) metrics. The PRA requires the Board to ensure that the Group has adequate levels of liquidity resources and a prudent funding profile, and that it comprehensively manages and controls liquidity and funding risks. The Group maintains deposits placed at the Bank of England and highly liquid unencumbered assets that can be called upon to create sufficient liquidity to meet liabilities on demand, particularly in a period of liquidity stress. Arbuthnot Latham & Co., Limited (“AL”) has a Board approved ILAAP, and maintains liquidity buffers in excess of the minimum requirements. The ILAAP is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. At a minimum, the ILAAP is updated annually. The Liquidity Coverage Ratio (“LCR”) regime has applied to the Group from 1 October 2015, requiring management of net 30 day cash outflows as a proportion of high quality liquid assets. The LCR has exceeded the regulatory minimum of 100% throughout the year, following the steps taken by the Group to respond to possible future liquidity constraints arising from the COVID-19 pandemic. There has been an increase in deposits of 20%, which has accordingly improved the Bank’s liquidity. The Group is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan draw-downs. The Group maintains significant cash resources to meet all of these needs as they fall due. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain term and of different types. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates. 102 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) The tables below show the undiscounted contractual cash flows of the Group’s financial liabilities and assets as at 31 December 2022: At 31 December 2022 Financial liability by type 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 At 31 December 2022 Financial asset by type Non-derivative assets Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Loans and advances to customers Other assets Financial investments Derivative assets Risk management: – Inflows Carrying amount £000 Gross 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 More than 5 years £000 236,027 3,092,549 4,954 37,594 – – (236,027) (3,164,453) (4,965) (64,898) (3,253) (470,870) (236,027) (1,744,144) (4,954) (892) (3,253) (470,870) – (763,156) – (2,719) – – – (657,153) – (14,540) – – – – (11) (46,747) – – 3,371,124 (3,944,466) (2,460,140) (765,875) (671,693) (46,758) 135 – 135 (135) (135) (135) (135) – – – – – – Carrying amount £000 Gross 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 More than 5 years £000 732,728 115,788 439,753 2,036,077 14,161 3,404 732,728 115,788 443,409 2,520,811 14,161 3,404 732,728 115,788 336,299 505,691 14,161 3,404 – – 101,110 276,657 – – – – 6,000 1,285,151 – – – – – 453,312 – – 3,341,911 3,830,301 1,708,071 377,767 1,291,151 453,312 6,322 – 6,322 6,322 6,322 113 113 – – 6,209 6,209 – – Arbuthnot Banking Group PLC Report & Accounts 2022 103 The tables below show the undiscounted contractual cash flows of the Group’s financial liabilities and assets as at 31 December 2021: At 31 December 2021 Financial liability by type 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 At 31 December 2021 Financial asset by type Non-derivative assets Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Loans and advances to customers Other assets Financial investments Derivative assets Risk management: – Inflows Carrying amount £000 Gross 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 More than 5 years £000 240,333 2,837,869 7,106 36,772 – – (240,333) (2,894,435) (7,106) (56,567) (4,560) (463,783) (240,333) (1,717,377) (3,052) (586) (4,560) (463,783) – (672,029) (2,968) (1,788) – – – (505,029) (1,086) (9,560) – – – – – (44,633) – – 3,122,080 (3,666,784) (2,429,691) (676,785) (515,675) (44,633) 171 – 171 (171) (171) (171) (171) – – – – – – Carrying amount £000 Gross 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 More than 5 years £000 814,692 73,444 301,052 1,870,962 13,098 3,169 814,692 73,439 336,772 2,174,795 13,098 3,169 814,692 73,439 318,658 207,166 13,098 3,169 – – 9,666 296,957 – – – – 8,448 1,361,543 – – – – – 309,130 – – 3,076,417 3,415,965 1,430,222 306,623 1,369,991 309,130 1,753 – 1,753 1,753 1,753 118 118 – – 1,635 1,635 – – 104 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) The table below sets out the components of the Group’s liquidity reserves: Liquidity reserves Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost 31 December 2022 31 December 2021 Amount £000 732,729 115,787 439,753 Fair value £000 732,729 115,787 439,389 Amount £000 814,692 73,444 301,052 Fair value £000 814,692 73,444 303,337 1,288,269 1,287,905 1,189,188 1,191,473 Assets pledged as collateral or encumbered The total financial assets recognised in the statement of financial position that had been pledged as collateral for liabilities at 31 December 2022 were £225m (2021: £225m). Assets are encumbered due to the Term Funding Scheme (Note 33). Financial assets can be pledged as collateral as part of repurchases transactions under terms that are usual and customary for such activities. The table below analyses the contractual cash flows of the Company’s financial liabilities and assets as at 31 December 2022: At 31 December 2022 Financial liability by type Non-derivative liabilities Other liabilities Debt securities in issue At 31 December 2022 Financial asset by type Non-derivative assets Loans and advances to banks Debt securities at amortised cost Carrying amount £000 Gross 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 More than 5 years £000 470 37,594 38,064 (470) (64,898) (65,368) – (892) (892) – (2,719) (2,719) – (14,540) (14,540) (1,440) (46,747) (48,187) Carrying amount £000 Gross 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 More than 5 years £000 8,433 24,437 32,870 8,433 43,404 51,837 8,433 732 9,165 – 2,238 2,238 – 11,975 11,975 – 28,459 28,459 Arbuthnot Banking Group PLC Report & Accounts 2022 105 The table below analyses the contractual cash flows of the Company’s financial liabilities and assets as at 31 December 2021: At 31 December 2021 Financial liability by type Non-derivative liabilities Other liabilities Debt securities in issue At 31 December 2021 Financial asset by type Non-derivative assets Loans and advances to banks Debt securities at amortised cost Carrying amount £000 Gross 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 More than 5 years £000 1,490 36,772 38,262 (1,490) (56,567) (58,057) – (586) (586) – (1,788) (1,788) – (9,560) (9,560) (1,490) (44,633) (46,123) Carrying amount £000 Gross 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 More than 5 years £000 7,587 24,367 31,954 7,587 39,878 47,465 7,587 509 8,096 – 1,558 1,558 – 8,336 8,336 – 29,475 29,475 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. 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 balance sheet date, the Group had investment management accounts amounting to approximately £1.3bn (2021: £1.4bn). Additionally, the Group provides investment advisory services. 106 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) (f) Financial assets and liabilities The tables below set out the Group’s financial assets and financial liabilities into their respective classifications: At 31 December 2022 ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost 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 At 31 December 2021 ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost 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 FVPL £000 FVOCI £000 FVPL £000 FVOCI £000 – – – 6,322 – – – 6,322 – 135 – – – 135 – – – 1,753 – – 165 1,918 – 171 – – – 171 Amortised cost £000 732,729 115,788 439,753 – 2,036,077 14,160 – Total carrying amount £000 732,729 115,788 439,753 6,322 2,036,077 14,160 3,404 Fair value £000 732,729 115,788 439,389 6,322 1,996,966 14,160 3,404 – – – – – – 3,404 3,404 3,338,507 3,348,233 3,308,758 – – – – – – 236,027 – 3,092,549 4,954 37,594 236,027 135 3,092,549 4,954 37,594 236,027 135 3,092,549 4,954 37,594 3,371,124 3,371,259 3,371,259 Amortised cost £000 814,692 73,444 301,052 – 1,870,962 13,098 – Total carrying amount £000 814,692 73,444 301,052 1,753 1,870,962 13,098 3,169 Fair value £000 814,692 73,444 303,337 1,753 1,821,549 13,098 3,169 – – – – – – 3,004 3,004 3,073,248 3,078,170 3,031,042 – – – – – – 240,333 – 2,837,869 7,106 36,772 240,333 171 2,837,869 7,106 36,772 240,333 171 2,837,869 7,106 36,772 3,122,080 3,122,251 3,122,251 Arbuthnot Banking Group PLC Report & Accounts 2022 107 The tables below set out the Company’s financial assets and financial liabilities into their respective classifications: At 31 December 2022 ASSETS Loans and advances to banks Debt securities at amortised cost LIABILITIES Other liabilities Debt securities in issue At 31 December 2021 ASSETS Loans and advances to banks Debt securities at amortised cost Other assets LIABILITIES Other liabilities Debt securities in issue FVPL £000 FVOCI £000 Amortised cost £000 Total carrying amount £000 Fair value £000 – – – – – – – – – – – – 8,433 24,437 8,433 24,437 8,433 24,437 32,870 32,870 32,870 470 37,594 470 37,594 470 37,594 38,064 38,064 38,064 FVPL £000 FVOCI £000 Amortised cost £000 – – – – – – – – – – – – – – 7,587 24,367 4 31,958 1,490 36,772 Total carrying amount £000 7,587 24,367 4 31,958 1,490 36,772 Fair value £000 7,587 24,367 4 31,958 1,490 36,772 38,262 38,262 38,262 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. 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). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. • Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. 108 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) The consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads assists 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 analyse assets and liabilities measured at fair value by the level in the fair value hierarchy into which the measurement is categorised: At 31 December 2022 ASSETS Derivative financial instruments Financial investments Investment property LIABILITIES Derivative financial instruments At 31 December 2021 ASSETS Derivative financial instruments Financial investments Investment property LIABILITIES Derivative financial instruments Level 1 £000 Level 2 £000 – – – – – – 6,322 – – 6,322 135 135 Level 3 £000 – 3,404 6,550 9,954 – – Level 1 £000 Level 2 £000 Level 3 £000 – – – – – – 1,753 – – 1,753 171 171 – 3,169 6,550 9,719 – – Total £000 6,322 3,404 6,550 16,276 135 135 Total £000 1,753 3,169 6,550 11,472 171 171 There were no transfers between level 1 and level 2 during the year. For assets which are accounted at fair value under Level 3 the valuations are primarily based on Fund Manager valuations and are based on reasonable estimates. Applying reasonable alternative valuations would not lead to a significantly different fair value. The following table reconciles the movement in level 3 financial instruments measured at fair value during the year: Movement in level 3 At 1 January Purchases Disposals Movements recognised in Other Comprehensive Income Movements recognised in the Income Statement At 31 December 2022 £000 9,719 53 (640) 822 – 9,954 2021 £000 9,120 670 – (57) (14) 9,719 Arbuthnot Banking Group PLC Report & Accounts 2022 109 Visa Inc. investment Arbuthnot Latham currently holds preference shares in Visa Inc., valued at £2.0m (2021: £1.6m) as at 31 December 2022. These shares have been valued at their future conversion value into Visa Inc. common stock. In 2020, as part of the fourth anniversary of the closing of the Visa Europe transaction, an assessment was performed of the ongoing risk of liability to Visa. As part of the adjustment, Visa awarded the Group 59 preference shares with a carrying value of £920k. In 2022 Visa awarded the Group extra 28 preference shares with a carrying value of £501k. These can be automatically converted into freely tradeable Class A common stock. There is a haircut of 31% on the original shares comprising 25% due to a contingent liability disclosed in Visa Europe’s accounts in relation to litigation and 6% based on a liquidity discount. Hetz Ventures, L.P. Arbuthnot Latham currently holds an equity investment in Hetz Ventures, L.P. which was launched in January 2018. The primary objective was to generate attractive risk-adjusted returns for its Partners, principally through long-term capital appreciation, by making, holding and disposing of equity and equity-related investments in early stage revenue generating Israeli technology companies, primarily in cyber, fin-tech and the disruptive software sectors. The company has committed to a capital contribution of USD2.5m of the total closing fund capital of USD132.5m. At 31 December 2022 Arbuthnot Latham & Co., Ltd had made capital contributions into the Fund of USD1.8m (2021: USD1.8m). The investment is classified as FVOCI and is valued at fair value by Hetz Ventures, L.P. at £1.4m (2021: £1.4m). As at year end the fair value is deemed to be the Group’s share of the fund based on what a third party would pay for the underlying investments. Investment property Please see Note 4 (c) for investment property valuation detail. The tables below show the fair value of financial instruments carried at amortised cost by the level in the fair value hierarchy: Group At 31 December 2022 ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Loans and advances to customers Other assets LIABILITIES Deposits from banks Deposits from customers Other liabilities Debt securities in issue Level 1 £000 Level 2 £000 Level 3 £000 Total £000 – – – – – – – – – – – 732,729 115,788 439,389 – – 1,287,906 236,027 3,092,549 – – 3,328,576 – – – 1,996,966 14,160 2,011,126 – – 4,954 37,594 42,548 732,729 115,788 439,389 1,996,966 14,160 3,299,032 236,027 3,092,549 4,954 37,594 3,371,124 110 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) Group At 31 December 2021 ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Loans and advances to customers Other assets LIABILITIES Deposits from banks Deposits from customers Other liabilities Debt securities in issue Company At 31 December 2022 ASSETS Loans and advances to banks Debt securities at amortised cost LIABILITIES Other liabilities Debt securities in issue Company At 31 December 2021 ASSETS Loans and advances to banks Debt securities at amortised cost LIABILITIES Other liabilities Debt securities in issue Level 1 £000 Level 2 £000 Level 3 £000 Total £000 – – – – – – – – – – – Level 1 £000 – – – – – – Level 1 £000 – – – – – – 814,692 73,444 301,052 – – 1,189,188 240,333 2,837,869 – – 3,078,202 Level 2 £000 6 24,437 24,443 – – – Level 2 £000 6 24,367 24,373 – – – – – – 1,870,962 11,375 1,882,337 – – 7,106 36,772 43,878 Level 3 £000 8,427 – 8,427 470 37,594 38,064 Level 3 £000 7,581 – 7,581 1,490 36,772 38,262 814,692 73,444 301,052 1,870,962 11,375 3,071,525 240,333 2,837,869 7,106 36,772 3,122,080 Total £000 8,433 24,437 32,870 470 37,594 38,064 Total £000 7,587 24,367 31,954 1,490 36,772 38,262 All above assets and liabilities are carried at amortised cost. Therefore for these assets, the fair value hierarchy noted above relates to the disclosure in this note only. Cash and balances at central banks The fair value of cash and balances at central banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date. At the end of each year, the fair value of cash and balances at central banks was calculated to be equivalent to their carrying value. Arbuthnot Banking Group PLC Report & Accounts 2022 111 Loans and advances to banks The fair value of loans and advances to banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date. Loans and advances to customers The fair value of loans and advances to customers was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date, and the same assumptions regarding the risk of default were applied as those used to derive the carrying value. The Group provides loans and advances to commercial, corporate and personal customers at both fixed and variable rates. To determine the fair value of loans and advances to customers, loans are segregated into portfolios of similar characteristics. A number of techniques are used to estimate the fair value of fixed rate lending; these take account of expected credit losses based on historic trends and expected future cash flows. For the acquired loan book, the discount on acquisition is used to determine the fair value in addition to the expected credit losses and expected future cash flows. Debt securities at amortised cost The fair value of debt securities is based on the quoted mid-market share price. Derivatives Where derivatives are traded on an exchange, the fair value is based on prices from the exchange. Deposits from banks The fair value of amounts due to banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date. At the end of each year, the fair value of amounts due to banks was calculated to be equivalent to their carrying value due to the short maturity term of the amounts due. Deposits from customers The fair value of deposits from customers was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date for the notice deposits and deposit bonds. The fair value of instant access deposits is equal to book value as they are repayable on demand. Financial liabilities The fair value of other financial liabilities was calculated based upon the present value of the expected future principal cash flows. At the end of each year, the fair value of other financial liabilities was calculated to be equivalent to their carrying value due to their short maturity. The other financial liabilities include all other liabilities other than non-interest accruals. Debt Securities in Issue The fair value of debt securities in issue was calculated based upon the present value of the expected future principal cash flows. 7. Capital management (unaudited) 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. The Group and the individual banking operation, are authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and are subject to the Capital Requirement Regulation (EU No.575/2013) (“CRR”), which forms part of the retained EU legislation, and the PRA Rulebook for CRR firms. One of the requirements for the Group and the individual banking operation is that capital resources must be in excess of capital requirements at all times. In accordance with the parameters set out in the PRA Rulebook, the Internal Capital Adequacy Assessment Process (“ICAAP”) is embedded in the risk management framework of the Group. The ICAAP identifies and assesses the risks to the Group, considers how these risks can be mitigated and demonstrates that the Group has sufficient resources, after mitigating actions, to withstand all reasonable scenarios. 112 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 7. Capital management (unaudited) (continued) 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 requirement for credit, market and operational risk as a starting point, and then considers whether each of the calculations delivers a sufficient amount of capital to cover risks to which the Group is, or could be, exposed. Where the Board considers that the Pillar 1 calculations do not adequately cover the risks, an additional Pillar 2A capital requirement is applied. The PRA will set a Pillar 2A capital requirement in light of the calculations included within the ICAAP. The Group’s Total Capital Requirement, as issued by the PRA, is the sum of the minimum capital requirements under the CRR (Pillar 1) and the Pillar 2A requirement. The current TCR of the Group is 8.32%. The Group’s regulatory capital is divided into two tiers: • Common equity Tier 1 which comprises shareholder funds less regulatory deductions for intangible assets, including goodwill, and deferred tax assets that do not arise from temporary differences. • Tier 2 comprises qualifying subordinated loans. The following table shows the regulatory capital resources as managed by the Group: CET1 Capital Share capital Capital redemption reserve Treasury shares Retained earnings* IFRS 9 - Transitional add back Fair value reserve Deduction for goodwill Deduction for other intangibles** Deduction for deferred tax asset that do not arise from temporary differences Deduction for Prudent valuation CET1 capital resources Tier 2 Capital Debt securities in issue Total Tier 2 capital resources 2022 £000 2021 £000 154 19 (1,299) 212,037 523 1,067 (5,202) (27,347) (4,567) (10) 175,375 37,594 37,594 154 19 (1,299) 201,026 1,600 979 (5,202) (18,667) (2,370) (5) 176,235 36,772 36,772 Own Funds (sum of Tier 1 and Tier 2) 212,969 213,007 CET1 Capital Ratio (CET1 Capital / Total Risk Exposure)* Total Capital Ratio (Own Funds / Total Risk Exposure)* * Includes current year audited profit. 11.6% 14.0% 12.3% 14.9% ** From 1 January 2022 the PRA requires the full carrying amount of software intangibles to be deducted from Common Equity Tier 1 capital. Capital ratios are reviewed on a monthly basis to ensure that external requirements are adhered to. During the period all regulated entities have complied with all of the externally imposed capital requirements to which they are subject. 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 2022 are published as a separate document on the Group website under Investor Relations. Arbuthnot Banking Group PLC Report & Accounts 2022 113 8. Net interest income Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost using the effective interest rate (“EIR”) method. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to: • the gross carrying amount of the financial asset; or • the amortised cost of the financial liability. The ‘gross carrying amount of a financial asset’ is the amortised cost of a financial asset before adjusting for any expected credit loss allowance. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider expected 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. For financial assets that have become credit impaired following initial recognition, interest income is calculated by applying the effective interest rate to the amortised cost of the financial asset. If the asset is no longer credit impaired, then the calculation of interest income reverts to the gross basis. The Group monitors the actual cash flows for each acquired book and where they diverge significantly from expectation, the future cash flows are reset. Expectation may diverge due to factors such as one-off payments or expected credit losses. In assessing whether to adjust future cash flows on an acquired portfolio, the Group considers the cash variance on an absolute and percentage basis. The Group also considers the total variance across all acquired portfolios. Where cash flows for an acquired portfolio are reset, they are discounted at the EIR to derive a new carrying value, with changes taken to the Statement of Comprehensive Income as interest income. The EIR rate is adjusted for events where there is a change to the reference interest rate (e.g. Bank of England base rate) affecting portfolios with a variable interest rate which will impact future cash flows. The revised EIR is the rate which exactly discounts the revised cash flows to the net carrying value of the loan portfolio. Cash and balances at central banks Loans and advances to banks* Debt securities at amortised cost Loans and advances to customers Total interest income Deposits from banks Deposits from customers Debt securities in issue Interest on lease liabilities Total interest expense Net interest income 2022 £000 8,681 6 6,374 104,952 120,013 (3,334) (14,243) (2,723) (632) (20,932) 2021 £000 521 (165) 1,156 75,590 77,102 69 (10,056) (2,016) (1,024) (13,027) 99,081 64,075 * Negative value is due to the fluctuation of interest rates which has led to an increased cost on the variable leg of interest rate swap, which is reported in interest income. 114 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 9. Fee and commission income Fee and commission income which is integral to the EIR of a financial asset are included in the effective interest rate (see Note 8). All other fee and commission income is recognised as the related services are performed, under IFRS 15, revenues from Contracts with Customers. Fee and commission income is reported in the below segments. Types of fee Description Banking commissions - Banking Tariffs are charged monthly for services provided. Investment management fees - Annual asset management fees relate to a single performance obligation that is continuously provided over an extended period of time. Wealth planning fees - Provision of bespoke, independent Wealth Planning solutions to Arbuthnot Latham’s clients. Fees are Foreign exchange fees - Provides foreign currencies for our clients to purchase/sell. recognised as the service is performed. The principles in applying IFRS 15 to fee and commission use the following 5 step model: • identify the contract(s) with a customer; • identify the performance obligations in the contract; • determine the transaction price; • allocate the transaction price to the performance obligations in the contract; and • recognise revenue when or as the Group satisfies its performance obligations. Asset and other management, advisory and service fees are recognised, under IFRS 15, as the related services are performed. The same principle is applied for wealth planning services that are continuously provided over an extended period of time. The Group includes the transaction price of variable consideration only when it is highly probable that a significant reversal in the amount recognised will not occur or when the variable element becomes certain. Fee and commission income is disaggregated below and includes a total for fees in scope of IFRS 15: Group At 31 December 2022 Banking commissions Foreign exchange fees Investment management fees Wealth planning fees Total fee and commission income Group At 31 December 2021 Banking and services fees Foreign exchange fees Investment management fees Wealth planning fees Total fee and commission income Banking £000 Wealth Management £000 2,233 1,296 – – 3,529 – – 10,285 307 10,592 Banking £000 Wealth Management £000 1,961 888 – – 2,849 – – 10,101 360 10,461 RAF £000 ACABL £000 ASFL £000 32 – – – 32 RAF £000 166 – – – 166 6,178 – – – 6,178 10 – – – 10 ACABL £000 ASFL £000 4,308 – – – 4,308 7 – – – 7 All other divisions £000 405 840 – – 1,245 All other divisions £000 – 681 – – 681 Total £000 8,858 2,136 10,285 307 21,586 Total £000 6,442 1,569 10,101 360 18,472 Arbuthnot Banking Group PLC Report & Accounts 2022 115 10. Gross profit from leasing activities Accounting for operating lease and related income: The statement of comprehensive income is credited with: • Income from operating leases recognised on a straight-line basis over the period of the lease. • The sales proceeds from the sale of vehicles at the end of operating lease agreements, when a vehicle is transferred to a buyer, and the buyer obtains control of the vehicle. • Income from service and maintenance contracts recognised on a straight-line method. Revenue from service and maintenance contracts is recognised in accordance with the principles of IFRS 15, Revenue from contracts with customers. Payments from customers for service and maintenance contracts are deferred on the balance sheet until the point they are recognised and when the performance obligations are met. Revenue is the aggregate of operating lease income and service and maintenance contracts. Revenue also includes the sales proceeds from the same of vehicles at the end of operating lease agreements and other returned vehicles. Amounts recognised within gross profit from leasing activities in the statement of comprehensive income are set out below: Group Income from lease or rental of commercial vehicles Sale of commercial vehicles Income from service and maintenance contracts Other income Revenue Depreciation and rental costs of commercial vehicles held for lease or rent Carrying amount of vehicles disposed Service & maintenance cost Cost of goods sold 2022 £000 42,456 44,385 12,088 438 99,367 (31,218) (38,259) (12,632) (82,109) 2021 £000 33,577 32,123 8,800 – 74,500 (25,197) (31,339) (11,487) (68,023) Gross profit from leasing activities 17,258 6,477 116 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 11. Net impairment loss on financial assets (a) Assets carried at amortised cost The Group recognises loss allowances on an expected credit loss basis for all financial assets measured at amortised cost, including loans and advances, debt securities and loan commitments. Credit loss allowances are measured as an amount equal to lifetime ECL, except for the following assets, for which they are measured as 12 month ECL: • Financial assets determined to have a low credit risk at the reporting date. The assets, to which the low credit risk exemption applies, include cash and balances at central banks (Note 18), loans and advances to banks (Note 19) and debt securities at amortised cost (Note 20). These assets are all considered investment grade. • Financial assets which have not experienced a significant increase in credit risk since their initial recognition. Impairment model The IFRS 9 impairment model adopts a three stage approach based on the extent of credit deterioration since origination: Stage 1: 12 month ECL applies to all financial assets that have not experienced a significant increase in credit risk (“SICR”) since origination and are not credit impaired. The ECL will be computed based on the probability of default events occurring over the next 12 months. Stage 1 includes the current performing loans (up to date and in arrears of less than 10 days) and those within Heightened Business Monitoring (“HBM”). Accounts requiring HBM are classified as a short-term deterioration in financial circumstances and are tightly monitored with additional proactive client engagement, but not deemed SICR. Stage 2: When a financial asset experiences a SICR subsequent to origination, but is not in default, it is considered to be in Stage 2. This requires the computation of ECL based on the probability of all possible default events occurring over the remaining life of the financial asset. Provisions are higher in this stage (except where the value of charge against the financial asset is sufficient to enable recovery in full) because of an increase in credit risk and the impact of a longer time horizon being considered (compared to 12 months in Stage 1). Evidence that a financial asset has experienced a SICR includes the following considerations: • A loan is in arrears between 31 and 90 days; • Forbearance action has been undertaken; • Any additional reasons whereby the Probability of Default is considered to have increased significantly since inception of the facility. Stage 3: Financial assets that are credit impaired are included in this stage. Similar to Stage 2, the allowance for credit losses will continue to capture the lifetime expected credit losses. At each reporting date, the Group will assess whether financial assets carried at amortised cost are in default. A financial asset will be considered to be in default when an event(s) that has a detrimental impact on estimated future cash flows have occurred. Evidence that a financial asset is within Stage 3 includes the following data: • A loan is in arrears in excess of 90 days; • Breach of terms of forbearance; • Recovery action is in hand; or • Bankruptcy proceedings or similar insolvency process of a client, or director of a company. The credit risk of financial assets that become credit impaired are not expected to improve, beyond the extent that they are no longer considered to be credit impaired. A borrower will move back into Stage 1 conditional upon both a minimum of six months’ good account conduct and the improvement of the Client’s situation to the extent that the credit risk has receded sufficiently and a full repayment of the loan, without recourse to the collateral, is likely. Presentation of allowance for ECL in the Statement of Financial Position For financial assets measured at amortised cost, these are presented as the gross carrying amount of the assets minus a deduction for the ECL. Arbuthnot Banking Group PLC Report & Accounts 2022 117 Write-off Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. This is the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the outstanding amount due. (b) Renegotiated loans Renegotiated loans are derecognised if the new terms are significantly different to the original agreement. Loans that have been modified to such an extent the renegotiated loan is a substantially different to the original loan, are no longer considered to be past due and are treated as new loans. (c) Forbearance Under certain circumstances, the Group may use forbearance measures to assist borrowers who are experiencing significant financial hardship. Any forbearance support is assessed on a case by case basis in line with best practice and subject to regular monitoring and review. The Group seeks to ensure that any forbearance results in a fair outcome for both the customer and the Group. (d) Assets classified as financial investments Equity instruments at fair value through Other Comprehensive Income Equity investments are not subject to impairment charges recognised in the income statement. Any fair value gains and losses are recognised in OCI which are not subject to reclassification to the income statement on derecognition. Net Impairment losses on financial assets Of which: Stage 1 Stage 2 Stage 3 Impairment losses on financial investments 2022 £000 5,503 1,078 53 4,231 142 5,503 2021 £000 3,196 664 (456) 2,966 22 3,196 During the year, the Group recovered £55k (2021: £60k) of loans which had previously been written off. 12. Acquisition of Asset Alliance Group Holdings Limited On 1st April 2021, following receipt of regulatory approval, Arbuthnot Latham completed the acquisition of 100% of the share capital of AAG from its former owners made up of institutional investors and the key management team. AAG provides vehicle finance and related services, predominantly in the truck & trailer and bus & coach markets. Operating from five locations, it is the UK’s leading independent end-to-end specialist in commercial vehicle financing and has over 4000 vehicles under management. The acquisition supported AL’s continued strategy to diversify its proposition within the specialist financial services sector. The consideration was paid in full in cash following completion. AL has also provided an intercompany loan to AAG at completion of £127.9m to re-finance its existing finance liabilities. The consideration and the refinancing of AAG’s funding liabilities have been satisfied from the Group’s current cash resources. The share capital was acquired at a discount to the fair value of net assets resulting in a bargain purchase gain recognised in the Statement of Comprehensive Income on acquisition as set out in the table on the next page. The fair value of intangibles acquired include £3.5m for the brand. The acquisition contributed £0.2m to interest income and £3.8m to profit before tax in the prior period. 118 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 12. Acquisition of Asset Alliance Group Holdings Limited (continued) Loans and advances to banks Loans and advances to customers Other assets Stock Deferred tax assets Intangible assets Property, plant and equipment Total assets Deposits from banks Deferred tax liabilities Corporation tax liability Other liabilities Total liabilities Net identifiable assets Cash consideration Negative Goodwill / Bargain Purchase 13. Other income Acquired assets/ liabilities £000 Fair value Recognised values adjustments £000 on acquisition £000 3,883 4,226 10,128 1,982 – 1,579 120,684 142,482 127,918 – 33 14,006 141,957 525 – – – 316 2,500 2,837 16,261 21,914 – 3,815 – – 3,815 18,099 3,883 4,226 10,128 2,298 2,500 4,416 136,945 164,396 127,918 3,815 33 14,006 145,772 18,624 9,998 (8,626) In prior year, other income mainly included the profit on sale of the Tay Mortgage portfolio of £2.2m, an adjustment of £0.6m gain to the contingent consideration for the acquisition of Renaissance Asset Finance Ltd and dividends received on the shares held in STB of £0.5m. Other items reflected in other income include rental income from the investment property (see Note 32) of £0.9m (2021: £0.3m). Accounting for rental income Rental income is recognised on a straight line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income over the term of the lease. Arbuthnot Banking Group PLC Report & Accounts 2022 14. Operating expenses Operating expenses comprise: Staff costs, including Directors: Wages, salaries and bonuses Social security costs Pension costs Share based payment transactions (Note 41) Amortisation of intangibles (Note 29) Depreciation (Note 30) Profit on disposals of property, plant and equipment Financial Services Compensation Scheme Levy Expenses relating to short-term leases Write down of repossessed properties Other administrative expenses Total operating expenses from continuing operations Details on Directors remuneration are disclosed in the Remuneration Report on page 56. 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 Total fees payable 119 2021 £000 49,754 5,861 2,578 (53) 3,211 1,814 3 430 608 3,835 25,381 93,422 2021 £000 112 481 113 706 2022 £000 61,359 7,534 2,861 (18) 4,026 1,772 (9) 174 550 647 30,017 108,913 2022 £000 123 564 116 803 120 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 15. Income tax expense 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. United Kingdom corporation tax at 19% (2021: 19%) 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/(credit) Tax reconciliation Profit before tax Tax at 19% (2021: 19%) Other permanent differences Tax rate change Prior period adjustments Corporation tax charge/(credit) for the year 2022 £000 3,769 246 4,015 286 (750) (464) 3,551 20,009 3,802 (225) 477 (503) 3,551 2021 £000 54 25 79 (2,165) (63) (2,228) (2,149) 4,638 881 (1,756) (1,237) (37) (2,149) Permanent differences in 2022 are predominantly due to the disallowed costs on the sale of the King Street property and Super Deduction allowances. Prior year permanent differences mainly relate to the acquisition of the Asset Alliance Group. In the Budget speech on 3 March 2021, the Chancellor of the Exchequer, announced the increase of corporation tax from 19% to 25% from 1 April 2023, which was enacted on 10 June 2021. This increased the deferred tax asset on the balance sheet (with expected utilisation after 1 April 2023) and similarly further increased the tax credit recorded in the profit and loss account in the year. 16. Average number of employees Banking RAF ACABL ASFL AAG All Other Divisions Group Centre 2022 251 37 28 9 125 250 18 718 2021 223 34 24 9 51 246 19 606 Arbuthnot Banking Group PLC Report & Accounts 2022 121 Accounting for 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 – cash settled The Group adopts a Black-Scholes valuation model in calculating the fair value of the share options as adjusted for an attrition rate for 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. (c) Deferred cash bonus scheme The Bank has a deferred cash bonus scheme for senior employees. The cost of the award is recognised to the income statement over the period to which the performance relates. (d) Short-term incentive plan The Group has a short-term incentive plan payable to employees of one of its subsidiary companies. The award of a profit share is based on a percentage of the net profit of a Group subsidiary. 17. Earnings per ordinary share Basic Basic earnings per ordinary share are calculated by dividing the profit after tax attributable to equity holders of the Company by the weighted average number of ordinary shares 15,022,629 (2021: 15,022,629) in issue during the year (this includes Ordinary shares and Ordinary Non-Voting shares). Diluted There are no convertible instruments, conditional ordinary shares or options or warrants that would create diluted earnings per share. Therefore the diluted earnings per share is equal to basic earnings per share. Profit after tax attributable to equity holders of the Company Basic Earnings per share 2022 £000 16,458 2022 p 109.6 2021 £000 6,786 2021 p 45.2 122 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 18. Cash and balances at central banks Group Cash and balances at central banks ECL has been assessed to be insignificant. 2022 £000 2021 £000 732,729 814,692 Surplus funds are mainly held in the Bank of England reserve account, with the remainder held in certificates of deposit, fixed and floating rate notes and money market deposits in investment grade banks. 19. Loans and advances to banks Group Placements with banks included in cash and cash equivalents (Note 43) 2022 £000 115,787 The table below presents an analysis of loans and advances to banks by rating agency designation as at 31 December, based on Moody’s short and long term ratings: Group A1 A2 A3 Unrated None of the loans and advances to banks are past due (2021: nil). ECL has been assessed as insignificant. Company Placements with banks included in cash and cash equivalents (Note 43) 2022 £000 115,595 – 193 – 115,788 2022 £000 8,434 2021 £000 73,444 2021 £000 61,527 11,909 – 8 73,444 2021 £000 7,587 Loans and advances to banks include bank balances of £11.5m (2021: £7.6m) with Arbuthnot Latham & Co., Ltd. ECL has been assessed as insignificant. 20. Debt securities at amortised cost Debt securities represent certificates of deposit. The movement in debt securities may be summarised as follows: Group At 1 January Exchange difference Additions Redemptions At 31 December 2022 £000 301,052 9,524 799,341 (670,164) 439,753 2021 £000 344,692 1,023 590,492 (635,155) 301,052 Arbuthnot Banking Group PLC Report & Accounts 2022 123 The table below presents an analysis of debt securities by rating agency designation at 31 December, based on Moody’s long term ratings: Group Aaa Aa1 Aa2 Aa3 A1 None of the debt securities are past due (2021: nil). ECL has been assessed as immaterial. The movement in debt securities for the Company may be summarised as follows: Company At 1 January Additions Interest Redemptions At 31 December 2022 £000 41,907 89,805 44,902 50,000 213,139 439,753 2022 £000 24,367 – 2,396 (2,326) 24,437 2021 £000 56,783 33,314 16,403 11,105 183,447 301,052 2021 £000 24,308 – 2,014 (1,955) 24,367 The exposure relates to Arbuthnot Latham & Co., Limited, which is unrated. The subordinated loan notes were issued on 3 June 2019 and are denominated in Pound Sterling. The principal amount outstanding at 31 December 2022 was £25m (2021: £25m). The notes carry interest at 7.75% over the three month LIBOR rate and are repayable at par in June 2029 unless redeemed or repurchased earlier by the Arbuthnot Latham & Co., Limited. ECL has been assessed as immaterial. With the discontinuation of LIBOR, the rate charged will reference to Synthetic LIBOR as administered by ICE Benchmark Administration Limited. 21. Assets classified as held for sale Assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. The criteria that the Group uses to determine whether an asset is held for sale under IFRS 5 include, but are not limited to the following: • Management is committed to a plan to sell • The asset is available for immediate sale • An active programme to locate a buyer is initiated • The sale is highly probable, within 12 months of classification as held for sale • The asset is being actively marketed for sale at a sales price reasonable in relation to its fair value Non-current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell in accordance with IFRS 5. Where investments that have initially been recognised as non-current assets held for sale, because the Group has been deemed to hold a controlling stake, are subsequently disposed of or diluted such that the Group’s holding is no longer deemed a controlling stake, the investment will subsequently be reclassified as fair value through profit or loss or fair value through other comprehensive income investments in accordance with IFRS 9. Subsequent movements will be recognised in accordance with the Group’s accounting policy for the newly adopted classification. 124 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 21. Assets classified as held for sale (continued) Once classified as held for sale, intangible assets and property, plant and equipment are no longer amortised or depreciated. Repossessed property held for sale Group 2022 £000 3,279 3,279 2021 £000 3,136 3,136 Repossessed property held for sale The repossessed property is expected to be sold within 12 months and can therefore be recognised as held for sale under IFRS 5. 22. Derivative financial instruments All derivatives are recognised at their fair value. Fair values are obtained using recent arm’s length transactions or calculated using valuation techniques such as discounted cash flow models at the prevailing interest rates, and for structured notes classified as financial instruments fair values are obtained from quoted market prices in active markets. 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. Group Currency swaps Interest rate swaps 2022 2021 Contract/notional amount £000 Fair value assets £000 Fair value liabilities £000 Contract/notional amount £000 Fair value assets £000 Fair value liabilities £000 3,049 51,376 54,425 113 6,209 6,322 135 – 135 8,686 57,889 66,575 118 1,635 1,753 132 39 171 The principal derivatives used by the Group are over the counter exchange rate contracts. Exchange rate related contracts include currency swaps and interest rate 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. Interest rate swaps are used to hedge against the Profit or Loss impact resulting from the movement in interest rates, due to some exposures having fixed rate terms. The Group primarily 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: Group Aa1 A1 Unrated 2022 £000 250 52,840 1,335 54,425 2021 £000 7,797 58,778 – 66,575 Arbuthnot Banking Group PLC Report & Accounts 2022 125 23. Derivatives held for risk management and hedge accounting See accounting policy in Note 3. Derivatives held for risk management The following table describes the fair values of derivatives held for risk management purposes by type of risk exposure. Group Interest rate - Designated fair value hedges Total interest rate derivatives 2022 2021 Fair value assets £000 Fair value liabilities £000 Fair value assets £000 Fair value liabilities £000 6,184 6,184 – – 1,635 1,635 – – Details of derivatives designated as hedging instruments in qualifying hedging relationships are provided in the hedge accounting section below. The instruments used principally include interest rate swaps. For more information about how the Group manages its market risks, see Note 6. Hedge accounting Fair value hedges of interest rate risk The Group uses interest rate swaps to hedge its exposure to changes in the fair values of fixed rate pound sterling loans to customers in respect of the SONIA (The Sterling Overnight Index Average) benchmark interest rate. Pay-fixed/receive-floating interest rate swaps are matched to specific fixed-rate loans and advances with terms that closely align with the critical terms of the hedged item. The Group’s approach to managing market risk, including interest rate risk, is discussed in Note 6. The Group’s exposure to interest rate risk is disclosed in Note 6. Interest rate risk to which the Group applies hedge accounting arises from fixed-rate loans and advances, whose fair value fluctuates when benchmark interest rates change. The Group hedges interest rate risk only to the extent of benchmark interest rates because the changes in fair value of a fixed-rate loan are significantly influenced by changes in the benchmark interest rate (SONIA). Hedge accounting is applied where economic hedging relationships meet the hedge accounting criteria. By using derivative financial instruments to hedge exposures to changes in interest rates, the Group also exposes itself to credit risk of the derivative counterparty, which is not offset by the hedged item. The Group minimises counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is not lower than A. Before fair value hedge accounting is applied by the Group, the Group determines whether an economic relationship between the hedged item and the hedging instrument exists based on an evaluation of the qualitative characteristics of these items and the hedged risk that is supported by quantitative analysis. The Group considers whether the critical terms of the hedged item and hedging instrument closely align when assessing the presence of an economic relationship. The Group evaluates whether the fair value of the hedged item and the hedging instrument respond similarly to similar risks. The Group further supports this qualitative assessment by using regression analysis to assess whether the hedging instrument is expected to be and has been highly effective in offsetting changes in the fair value of the hedged item. The Group establishes a hedge ratio by aligning the par amount of the fixed-rate loan and the notional amount of the interest rate swap designated as a hedging instrument. Under the Group policy, in order to conclude that a hedging relationship is effective, all of the following criteria should be met. • The regression co-efficient (R squared), which measures the correlation between the variables in the regression, is at least 0.8. • The slope of the regression line is within a 0.8–1.25 range. • The confidence level of the slope is at least 95%. In these hedging relationships, the main sources of ineffectiveness are: • the effect of the counterparty and the Group’s own credit risk on the fair value of the interest rate swap, which is not reflected in the fair value of the hedged item attributable to the change in interest rate; and • differences in payable/receivable fixed rates of the interest rate swap and the loans. There were no other sources of ineffectiveness in these hedging relationships. 126 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 23. Derivatives held for risk management and hedge accounting (continued) The effective portion of fair value gains on derivatives held in qualifying fair value hedging relationships and the hedging gain or loss on the hedged items are included in net interest income. At 31 December 2022 and 31 December 2021, the Group held the following interest rate swaps as hedging instruments in fair value hedges of interest risk. Group Maturity 2022 Maturity 2021 Less than 1 year 1–5 years More than 5 years Less than 1 year 1–5 years More than 5 years Risk category: Interest rate risk - Hedge of loans and advances Nominal amount (in £000) Average fixed interest rate – – 48,120 1.79% – – – – 5,335 0.88% 33,750 0.09% The amounts relating to items designated as hedging instruments and hedge ineffectiveness at 31 December 2022 were as follows: Group Interest rate risk Interest rate swaps – hedge of loans and advances 2022 Nominal amount Carrying amount £000 Assets £000 Liabilities £000 48,120 6,184 – The amounts relating to items designated as hedging instruments and hedge ineffectiveness at 31 December 2021 were as follows: Group Interest rate risk Interest rate swaps – hedge of loans and advances The amounts relating to items designated as hedged items at 31 December 2022 were as follows: Group Loans and advances The amounts relating to items designated as hedged items at 31 December 2021 were as follows: Group Loans and advances 2021 Nominal amount Carrying amount £000 Assets £000 Liabilities £000 39,085 1,635 – 2022 Carrying amount Assets £000 Liabilities £000 42,383 – 2021 Carrying amount Assets £000 Liabilities £000 39,085 – Arbuthnot Banking Group PLC Report & Accounts 2022 127 Group 2022 Line item in the statement of financial position where the hedging instrument is included Derivative financial instruments Change in fair value used for calculating hedge ineffectiveness £000 Ineffectiveness recognised in profit or loss £000 Line item in profit or loss that includes hedge ineffectiveness 4,549 303 Net interest income Group 2021 Line item in the statement of financial position where the hedging instrument is included Derivative financial instruments Group Line item in the statement of financial position in which the hedged item is included Loans and advances to customers Group Line item in the statement of financial position in which the hedged item is included Loans and advances to customers Change in fair value used for calculating hedge ineffectiveness £000 Ineffectiveness recognised in profit or loss £000 Line item in profit or loss that includes hedge ineffectiveness 1,635 144 Net interest income Change in value used for calculating hedge ineffectiveness £000 (4,246) Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item Assets £000 (5,737) Liabilities £000 – 2022 2021 Change in value used for calculating hedge ineffectiveness Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item £000 (1,490) Assets £000 (1,490) Liabilities £000 – 128 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 24. Loans and advances to customers Analyses of loans and advances to customers: Group Gross loans and advances at 1 January 2022 Originations and repayments Write-offs Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Gross loans and advances at 31 December 2022 Less allowances for ECLs (see Note 25) Net loans and advances at 31 December 2022 Group Stage 1 £000 1,737,909 217,525 – 30,323 (57,245) (10,605) 1,917,907 (1,147) 1,916,760 Stage 1 £000 2022 Stage 2 £000 95,463 (36,398) – (29,720) 59,912 (14,743) 74,514 (130) 74,384 2021 Stage 2 £000 Stage 3 £000 Total £000 43,977 1,877,349 (10,823) (4,974) (603) (2,667) 25,348 170,304 (4,974) – – – 50,258 2,042,679 (5,325) 44,933 (6,602) 2,036,077 Stage 3 £000 Total £000 Gross loans and advances at 1 January 2021 1,423,332 126,347 42,798 1,592,477 Originations Repayments and write-offs Acquired portfolio Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Gross loans and advances at 31 December 2021 Less allowances for ECLs (see Note 25) Net loans and advances at 31 December 2021 345,787 – 4,128 8,726 (40,132) (3,932) 1,737,909 (388) 1,737,521 (53,132) – – (8,726) 44,147 (13,173) 95,463 (77) 95,386 (11,297) (614) – – (4,015) 17,105 281,358 (614) 4,128 – – – 43,977 1,877,349 (5,922) 38,055 (6,387) 1,870,962 * Originations include further advances and drawdowns on existing commitments. For a maturity profile of loans and advances to customers, refer to Note 6. Arbuthnot Banking Group PLC Report & Accounts 2022 129 Loans and advances to customers by division (net of ECL): Group Stage 1 Stage 2 Stage 3 2022 Banking £000 1,362,950 59,844 29,855 Mortgage Portfolios £000 126,713 10,767 11,037 RAF £000 ACABL £000 128,594 2,394 2,837 267,812 – 1,013 At 31 December 2022 1,452,649 148,517 133,825 268,825 ASFL £000 13,675 1,001 193 14,869 Group Stage 1 Stage 2 Stage 3 2021 Banking £000 1,297,625 70,100 28,324 Mortgage Portfolios £000 157,561 13,719 6,802 RAF £000 ACABL £000 82,845 11,338 2,929 182,122 – – ASFL £000 9,868 229 – At 31 December 2021 1,396,049 178,082 97,112 182,122 10,097 Analyses of past due loans and advances to customers by division: Group Up to 30 days Stage 1 Stage 2 Stage 3 30 – 60 days Stage 2 Stage 3 60 – 90 days Stage 2 Stage 3 Over 90 days Stage 2 Stage 3 Banking £000 119,113 113,121 5,626 366 1,633 1,625 8 5,555 5,044 511 37,564 9,524 28,040 Mortgage Portfolios £000 9,216 8,056 1,013 147 2,277 2,147 130 1,135 898 237 8,302 – 8,302 RAF £000 2,240 1,858 215 167 43 43 – 116 52 64 3,214 – 3,214 At 31 December 2022 163,865 20,930 5,613 2022 ACABL £000 – – – – – – – – – – – – – – AAG £000 17,016 376 – 17,392 AAG £000 7,500 – – 7,500 ASFL £000 – – – – 1,001 1,001 – – – – 193 – 193 1,194 All Other Divisions £000 Total £000 – – – – 1,916,760 74,382 44,935 2,036,077 All Other Divisions £000 Total £000 – – – – 1,737,521 95,386 38,055 1,870,962 All Other Divisions £000 – – – – – – – – – – – – – – Total £000 130,569 123,035 6,854 680 4,954 4,816 138 6,806 5,994 812 49,273 9,524 39,749 191,602 130 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 24. Loans and advances to customers (continued) Analyses of past due loans and advances to customers by division: Group Up to 30 days Stage 1 Stage 2 Stage 3 30 – 60 days Stage 1 Stage 2 Stage 3 60 – 90 days Stage 2 Stage 3 Over 90 days Stage 2 Stage 3 Banking £000 Mortgage Portfolios £000 42,125 36,118 4,623 1,384 1,509 – 1,495 14 25,648 18,889 6,759 31,820 6,251 25,569 6,293 3,699 2,594 – 2,561 – 2,561 – 1,566 1,566 – 7,753 – 7,753 RAF £000 1,813 1,647 – 166 2,736 40 – 2,696 98 – 98 2,583 2 2,581 At 31 December 2021 101,102 18,173 7,230 Loans and advances to customers include finance lease receivables as follows: Group Gross investment in finance lease receivables: – No later than 1 year – Later than 1 year and no later than 5 years – 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 – Later than 5 years 2021 ACABL £000 – – – – – – – – – – – – – – – ASFL £000 1,890 1,890 – – – – – – – – – – – – 1,890 All Other Divisions £000 – – – – – – – – – – – – – – – 2022 £000 54,086 117,179 748 172,013 (20,798) 151,215 43,537 106,979 699 151,215 Total £000 52,121 43,354 7,217 1,550 6,806 40 4,056 2,710 27,312 20,455 6,857 42,156 6,253 35,903 128,395 2021 £000 45,368 72,392 119 117,879 (12,368) 105,511 38,609 66,777 125 105,511 (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 (2021: £nil). (c) Collateral held Collateral is measured at fair value less costs to sell. Most of the loans are secured by property. The fair value of the collateral held against loans and advances in Stage 3 is £69.2m (2021: £42.6m), against loans of £50.3m (2021: £38.3m). The weighted average loan-to-value of loans and advances in Stage 3 is 73% (2021: 73%). Arbuthnot Banking Group PLC Report & Accounts 2022 25. Allowances for impairment of loans and advances An analysis of movements in the allowance for ECLs (2022): Group At 1 January 2022 Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Current year charge Change in assumptions Repayments and write-offs At 31 December 2022 An analysis of movements in the allowance for ECLs (2021): Group At 1 January 2021 Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Current year charge Adjustment due to variation in expected future cash flows Change in assumptions Financial assets that have been derecognised Repayments and write-offs At 31 December 2021 26. Other assets Group Trade receivables Inventory Prepayments and accrued income Trade receivables Gross balance Allowance for bad debts Net receivables 131 Total £000 6,387 – – – 4,306 882 (4,974) 6,601 Total £000 4,628 – – – 3,651 (357) (340) (230) (965) 6,387 2021 £000 13,098 88,787 8,234 110,119 13,893 (795) 13,098 Stage 1 £000 Stage 2 £000 388 15 (57) (8) 208 601 – 1,147 77 (15) 57 (70) 18 63 – 130 Stage 3 £000 5,922 – – 78 4,080 218 (4,974) 5,324 Stage 1 £000 Stage 2 £000 Stage 3 £000 725 4 (13) (15) 194 (142) (191) – (174) 388 533 (4) 13 (82) (49) (280) (43) – (11) 77 3,370 – – 97 3,506 65 (106) (230) (780) 5,922 2022 £000 14,160 29,210 8,815 52,185 14,506 (346) 14,160 132 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 26. Other assets (continued) Inventory Inventory is measured at the lower of cost or net realisable value. The cost of inventories comprises 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. Pinnacle Universal is a special purpose vehicle, 100% owned by the Bank, which owns land that is currently in the process of being redeveloped with a view to selling off as individual residential plots. 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. In 2019 a property in Spain and in 2020 a property in France, held as collateral on loans, were repossessed. The Group’s intention is to develop and sell the properties and have therefore been recognised as inventory. The value of inventory for repossessed collateral at 31 December 2022 is £9.4m (2021: £16.7m). In 2019 two properties were reclassified from investment property to inventory due to being under development with a view to sell. The Group has sold its King Street property in 2022. At 31 December 2022 the remaining property was valued at cost of £10.2m (2021: the two properties valued at cost of £70.6m). Company Prepayments and accrued income 27. Financial investments Group Designated at fair value through profit and loss – Debt securities Designated at fair value through other comprehensive income – Unlisted securities Total financial investments 2022 £000 74 74 2022 £000 – 3,404 3,404 2021 £000 52 52 2021 £000 124 3,045 3,169 Unlisted securities On 23 June 2016 Arbuthnot Latham received €1.3m cash consideration following Visa Inc.’s completion of the acquisition of Visa Europe. As part of the deal Arbuthnot Latham also received preference shares in Visa Inc., these have been valued at their future conversion value into Visa Inc. common stock. During 2020, as part of the fourth anniversary of the closing of the Visa Europe transaction, an assessment was performed of the ongoing risk of liability to Visa. As part of the adjustment, Visa awarded the Group 59 preference shares with a carrying value of £920k. In 2022 Visa awarded the Group extra 28 preference shares with a carrying value of £501k. These can be automatically converted into freely tradeable Class A common stock. Management have assessed the sum of the fair value of the Group’s investment as £2.0m (2021: £1.6m). This valuation includes a 31% haircut on the original preference shares. The Group has designated its investment in the security as FVOCI. Dividends received during the year amounted to £Nil (2021: £Nil). A further investment in an unlisted investment vehicle was made in 2022. The carrying value at year end is £1.4m (2021: £1.4m) and the Group received a distribution of £0.6m (2021: £Nil) which included a gain of £0.5m (2021: £Nil) in the year. All unlisted securities have been designated as FVOCI as they are held for strategic reasons. These securities are measured at fair value in the Statement of Financial Position with fair value gains/losses recognised in OCI. Arbuthnot Banking Group PLC Report & Accounts 2022 133 28. Deferred taxation 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 the 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. The deferred tax asset comprises: Group Accelerated capital allowances and other short-term timing differences Movement in fair value of financial investments FVOCI Unutilised tax losses IFRS 9 adjustment* Deferred tax asset At 1 January On acquisition of AAG Other Comprehensive Income - FVOCI Profit and loss account - accelerated capital allowances and other short-term timing differences Profit and loss account - tax losses IFRS 9 adjustment* Deferred tax asset at 31 December * This relates to the timing difference on the adoption of IFRS 9 spread over 10 years for tax purposes. Company Accelerated capital allowances and other short-term timing differences Movement in fair value of financial investments Unutilised tax losses Deferred tax asset At 1 January 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 2022 £000 (2,196) (209) 4,567 263 2,425 2,562 – (57) (2,233) 2,198 (45) 2,425 2022 £000 10 147 366 523 523 – – 523 2021 £000 37 (152) 2,369 308 2,562 1,009 (1,315) (35) 1,923 945 35 2,562 2021 £000 10 147 366 523 395 40 88 523 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. 134 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 29. 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 at the date of acquisition. Goodwill on acquisitions of subsidiaries 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 more frequently when events or changes in economic circumstances indicate that impairment may have taken place and carries goodwill at cost less accumulated impairment losses. Assets are grouped together in 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. (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 a straight line basis over the expected useful lives (three to fifteen years). Costs associated with maintaining computer software programs are recognised as an expense as incurred. Costs associated with developing computer software which are assets in the course of construction, which management has assessed to not be available for use, are not amortised. During the year the company developed software for customer relationship management. Relevant costs have been capitalised accordingly and will be amortised across its useful economic life. (c) Other intangibles Other intangibles include trademarks, customer relationships, broker relationships, technology and banking licences acquired. These costs are amortised on a straight line basis over the expected useful lives (three to fourteen years). Group Cost At 1 January 2021 On acquisition of AAG Additions At 31 December 2021 Additions Disposals At 31 December 2022 Accumulated amortisation At 1 January 2021 Amortisation charge At 31 December 2021 Amortisation charge At 31 December 2022 Net book amount At 31 December 2021 At 31 December 2022 Goodwill £000 Computer software £000 Other intangibles £000 5,202 – – 5,202 – – 5,202 – – – – – 5,202 5,202 25,386 – 5,100 30,486 6,524 – 37,010 (8,388) (2,715) (11,103) (2,964) (14,067) 19,383 22,943 2,562 4,416 – 6,978 – (687) 6,291 (1,116) (583) (1,699) (188) (1,887) 5,279 4,404 Total £000 33,150 4,416 5,100 42,666 6,524 (687) 48,503 (9,504) (3,298) (12,802) (3,152) (15,954) 29,864 32,549 Arbuthnot Banking Group PLC Report & Accounts 2022 135 Significant management judgements are made in estimations, to evaluate whether an impairment of goodwill is necessary. Impairment testing is performed 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 perform 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 two CGUs (2021: two) with goodwill attached; the core Arbuthnot Latham CGU (£1.7m) and RAF CGU (£3.5m). Management considers the value in use for the Arbuthnot Latham CGU to be the discounted cash flows over 3 years with a terminal value (2021: 3 years with a terminal value). The 3 year discounted cash flows with a terminal value are 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 2024 as per the approved 3 year plan. A growth rate of 3.1% (2021: 3.6%) was used for income and 8.1% (2021: 4.5%) for expenditure from 2023 to 2025 (these rates were the best estimate of future forecasted performance), while a 3% (2021: 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 3 year plan. Management considers the value in use for the RAF CGU to be the discounted cash flows over 3 years with a terminal value. The 3 year discounted cash flows with a terminal value are 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 2024 as per the approved budget. A growth rate of 3% (2021: 3%) was used (this rate was the best estimate of future forecasted performance). The growth rates used are conservative and below the forecast UK growth rate of 2.5% (forecast baseline average for the following 5 years). Cash flows were discounted at a pre-tax rate of 14.7% (2021: 12%) to their net present value. The discount rate of 14.7% 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 of both CGUs exceed the carrying values of the associated goodwill and as a result no sensitivity analysis was performed. Company Cost At 1 January 2021 At 31 December 2021 At 31 December 2022 Accumulated amortisation At 1 January 2021 Amortisation charge At 31 December 2021 Amortisation charge At 31 December 2022 Net book amount At 31 December 2021 At 31 December 2022 Computer software £000 7 7 7 (3) (2) (5) (1) (6) 2 1 136 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 30. 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: Leasehold improvements Commercial vehicles Plant and machinery Computer and other equipment Motor vehicles 3 to 20 years 2 to 7 years 5 years 3 to 10 years 4 years Leasehold improvements are depreciated over the term of the lease (until the first break clause). Gains and losses on disposals are determined by deducting carrying amount from proceeds. These are included in the Statement of Comprehensive Income. Commercial vehicles are subject to operating leases. The other assets are owned and used by the Group. Group Cost or valuation At 1 January 2021 On acquisition of AAG Additions Disposals Transfer At 31 December 2021 Additions Disposals At 31 December 2022 Accumulated depreciation At 1 January 2021 Depreciation charge Disposals Transfer At 31 December 2021 Depreciation charge Disposals At 31 December 2022 Net book amount At 31 December 2021 At 31 December 2022 Leasehold improvements £000 Commercial vehicles £000 Plant and machinery £000 Computer and other equipment £000 Motor Vehicles £000 7,433 228 248 (253) – 7,656 92 – 7,748 (4,462) (753) 253 (4,962) (825) – (5,787) 2,694 1,961 – 136,418 35,228 (47,362) 33 124,317 115,170 (28,918) 210,569 – (30,487) 27,735 (2) (2,754) (36,885) 808 (38,831) 121,563 171,738 – 37 9 – (33) 13 – – 13 – (10) 7 2 (1) (8) – (9) 12 4 5,550 110 398 (319) – 5,739 507 – 6,246 (3,647) (957) 318 (4,286) (848) – (5,134) 1,453 1,112 91 193 47 (8) – 323 467 (167) 623 (60) (95) (155) (118) 108 (165) 168 458 Total £000 13,074 136,986 35,930 (47,942) – 138,048 116,236 (29,085) 225,199 (8,169) (32,302) 28,313 – (12,158) (38,684) 916 (49,926) 125,890 175,273 Arbuthnot Banking Group PLC Report & Accounts 2022 Company Cost or valuation At 1 January 2021 At 31 December 2021 Additions At 31 December 2022 Accumulated depreciation At 1 January 2021 Depreciation charge At 31 December 2021 Depreciation charge At 31 December 2022 Net book amount At 31 December 2021 At 31 December 2022 137 Total £000 308 308 1 309 (147) (23) (170) (9) (179) 138 130 2021 £000 25,675 25,439 476 51,590 Computer and other equipment £000 Motor Vehicles £000 217 217 1 218 (87) (1) (88) – (88) 129 130 91 91 – 91 (60) (22) (82) (9) (91) 9 – 2022 £000 35,848 46,583 1,095 83,526 Minimum lease payments receivable under operating and contract hire leases fall due as follows: Group Maturity analysis for operating lease receivables: - No later than 1 year - Later than 1 year and no later than 5 years - Later than 5 years 31. Right-of-use assets At inception or on reassessment of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether: • the contract involves the use of an identified asset. This may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified; • the Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and • the Group has the right to direct the use of the asset. The Group has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. At inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices. (a) As a lessee The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore it or its site, less any lease incentives received. 138 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 31. Right-of-use assets (continued) The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. Practical exemptions The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases of machinery that have a lease term of 12 months or less and leases of low value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. (b) 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. Breakdown of right-of-use assets: Group At 1 January 2021 Additions Amortisation At 31 December 2021 Additions Amortisation Derecognition At 31 December 2022 Investment property £000 Properties £000 Equipment £000 – – – – – – – – 17,430 738 (2,652) 15,516 1,254 (2,565) (6,796) 7,409 273 77 (192) 158 365 323 (543) 303 Total £000 17,703 815 (2,844) 15,674 1,619 (2,242) (7,337) 7,714 In the year, the Group received £Nil (2021: £Nil) of rental income from subleasing right-of-use assets through operating leases. The Group recognised £0.7m (2021: £0.8m) of interest expense related to lease liabilities. The Group also recognised £0.6m (2021: £0.6m) of expense in relation to leases with a duration of less than 12 months. 32. Investment property Investment property is initially measured at cost. Transaction costs are included in the initial measurement. Subsequently, investment property is measured at fair value, with any change therein recognised in profit and loss within other income. Group Opening balance At 31 December 2022 2022 £000 6,550 6,550 2021 £000 6,550 6,550 Arbuthnot Banking Group PLC Report & Accounts 2022 139 Crescent Office Park, Bath The property represents a freehold office building in Bath and comprises 25,528 square ft. over ground and two upper floors with parking spaces. The property was acquired for £6.35m. On the date of acquisition, the property was being multi-let to tenants and was at full capacity. The Group has elected to apply the fair value model (see Note 4.1 (c)). The Group recognised £0.5m (2021: £0.3m) rental income during the year and incurred £0.07m (2021: £0.08m) of direct operating expenses. The property remained tenanted during 2022. 33. Deposits from banks Group 2022 £000 2021 £000 236,027 240,333 Deposits from banks include £225m (2021: £225m) obtained through the Bank of England Term Funding Scheme with additional incentives for small and medium-sized enterprises (“TFSME”). For a maturity profile of deposits from banks, refer to Note 6. 34. Deposits from customers Group Current / demand accounts Notice accounts Term deposits 2022 £000 1,924,035 296,400 872,114 3,092,549 2021 £000 1,859,417 309,488 668,964 2,837,869 Included in customer accounts are deposits of £15.4m (2021: £14.7m) held as collateral for loans and advances. The fair value of these deposits approximates their carrying value. For a maturity profile of deposits from customers, refer to Note 6. 35. Other liabilities Group Trade payables Other creditors Accruals and deferred income Company Trade payables Due to subsidiary undertakings Accruals and deferred income 2022 £000 4,954 – 21,190 26,144 2022 £000 470 – 3,021 3,491 2021 £000 5,079 2,027 14,048 21,154 2021 £000 234 1,256 1,652 3,142 140 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 36. Lease liabilities The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Primarily, the Group uses its incremental borrowing rate as the discount rate. Lease payments included in the measurement of the lease liability comprise the following: • fixed payments, including in-substance payments; • variable lease payments that depend on an index or a rate, initially measured using the index or rates as at the commencement date; • amounts expected to be payable under a residual value guarantee. The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in the statement of comprehensive income if the carrying amount of the right-of-use asset has been reduced to zero. Group At 1 January 2021 Additions Interest expense Lease payments At 31 December 2021 Additions Interest expense Lease payments Derecognition At 31 December 2022 Maturity analysis Group Less than one year One to five years More than five years Total undiscounted lease liabilities at 31 December Lease liabilities included in the statement of financial position at 31 December Current Non-current 37. Debt securities in issue Properties £000 Equipment £000 18,070 725 807 (3,503) 16,099 848 709 (3,089) (6,980) 7,587 235 5,139 9 (206) 5,177 186 9 (5,087) – 285 2022 £000 3,675 3,502 8,560 15,737 7,872 3,398 4,474 Total £000 18,305 5,864 816 (3,709) 21,276 1,034 718 (8,176) (6,980) 7,872 2021 £000 6,669 8,592 57,893 73,153 21,276 5,802 15,474 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. Financial liabilities, other than trading liabilities at fair value, are carried at amortised cost using the effective interest rate method as set out in the policy in Note 8. Group and Company Subordinated loan notes 2022 £000 2021 £000 37,594 36,772 Arbuthnot Banking Group PLC Report & Accounts 2022 141 Euro subordinated loan notes The subordinated loan notes 2035 were issued on 7 November 2005 and are denominated in Euros. The principal amount outstanding at 31 December 2022 was €15,000,000 (2021: €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 Company 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. Subordinated loan notes The subordinated loan notes were issued on 3 June 2019 are denominated in Pounds Sterling. The principal amount outstanding at 31 December 2022 was £25,000,000 (2021: £25,000,000). The notes carry interest at 7.75% over the three month GBP ICE Synthetic LIBOR rate and are repayable at par in June 2029 unless redeemed or repurchases earlier by the Company. With the discontinuation of LIBOR the rate charged will reference SONIA from reference dates post 31 March 2023. The contractual undiscounted amount that will be required to be paid at maturity of the above debt securities is £25,000,000. Given the fact that the Company 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. 38. Contingent liabilities and commitments Financial guarantees and loan commitments policy 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. Provisions and contingent liabilities policy Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic resources will be required from the Group and amounts can be reliably measured. Onerous contract provisions are recognised for losses on contracts where the forecast costs of fulfilling the contract throughout the contract period exceed the forecast income receivable. In assessing the amount of the loss to provide on any contract, account is taken of the Group’s forecast results which the contract is servicing. The provision is calculated based on discounted cash flows to the end of the contract. Contingent liabilities are disclosed when the Group has a present obligation as a result of a past event, but the probability that it will be required to settle that obligation is more than remote, but not probable. Contingent liabilities The Group is subject to extensive regulation in the conduct of its business. A failure to comply with applicable regulations could result in regulatory investigations, fines and restrictions on some of the Group’s business activities or other sanctions. The Group seeks to minimise this risk through the adoption and compliance with policies and procedures, continuing to refine controls over business practices and behaviour, employee training, the use of appropriate documentation, and the involvement of outside legal counsel where appropriate. Capital commitments At 31 December 2022, the Group had capital commitments of £0.5m (2021: £0.5m) in respect of a contribution in an equity investment. 142 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 38. Contingent liabilities and commitments (continued) 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: Group Guarantees and other contingent liabilities Commitments to extend credit: – Original term to maturity of one year or less 39. Share capital Ordinary share capital Group and Company At 1 January 2021 At 31 December 2021 & 2022 Ordinary non-voting share capital Group and Company At 1 January 2021 At 31 December 2021 & 2022 Total share capital Group and Company At 1 January 2021 At 31 December 2021 & 2022 2022 £000 3,253 471,078 474,331 2021 £000 4,560 464,390 468,950 Number of shares 15,279,322 15,279,322 Number of shares 152,621 152,621 Number of shares 15,431,943 15,431,943 Share capital £000 153 153 Share capital £000 1 1 Share capital £000 154 154 (a) Share issue costs Incremental costs directly attributable to the issue of new shares or options by Company 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. The Ordinary shares have a par value of 1p per share (2021: 1p per share). At 31 December 2022 the Company held 409,314 shares (2021: 409,314) in treasury. This includes 390,274 (2021: 390,274) Ordinary shares and 19,040 (2021: 19,040) Ordinary Non-Voting shares. Arbuthnot Banking Group PLC Report & Accounts 2022 143 40. Reserves and retained earnings Group Capital redemption reserve Fair value reserve Treasury shares Retained earnings Total reserves at 31 December 2022 £000 19 1,067 (1,299) 212,037 211,824 2021 £000 19 979 (1,299) 201,026 200,725 The capital redemption reserve represents a reserve created after the Company purchased its own shares which resulted in a reduction of share capital. The fair value reserve relates to gains or losses on assets which have been recognised through other comprehensive income. Company Capital redemption reserve Treasury shares Retained earnings Total reserves at 31 December 41. Share-based payment options 2022 £000 19 (1,299) 152,115 150,835 2021 £000 19 (1,299) 153,528 152,248 Company – cash settled Grants were made to Messrs Salmon and Cobb on 14 June 2016 under Phantom Option Scheme introduced on that date, to acquire ordinary 1p shares in the Company at 1591p exercisable in respect of 50% on or after 15 June 2019 and in respect of the remaining 50% on or after 15 June 2021 when a cash payment would be made equal to any increase in market value. Under this Scheme, Mr. Salmon and Mr. Cobb were granted a phantom option to acquire 200,000 and 100,000 ordinary 1p shares respectively in the Company. The fair value of these options at the grant date was £1m. The first tranche of the share options has vested, but will lapse if not exercised at 1591p before 14 June 2023. The second tranche of the share options will not vest as the performance conditions have not been met, due to the non payment of dividends. The first tranche of share options remained outstanding at 31 December 2022. The valuation of the share options are considered as level 2 within the fair value hierarchy, with the Group adopting a Black-Scholes valuation model as adjusted for an attrition rate for 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 the options as at 31 December 2022 was £Nil (2021: £0.03m). On 23 July 2021 Mr. Salmon and Mr. Cobb were granted further phantom options to subscribe for 200,000 and 100,000 ordinary 1p shares respectively in the Company at 990p. 50% of each director’s individual holding of phantom options is exercisable at any time after 23 July 2023 and the other 50% is exercisable at any time after 23 July 2026. All share options awarded 23 July 2021, regardless of first exercise date, may not be exercised later than 23 July 2028 being the day before the seventh anniversary of the date of grant. The fair value of the options as at 31 December 2022 was £0.13m (2021: £0.09m). The performance conditions of the Scheme are that for the duration of the vesting period, the dividends paid by ABG must have increased in percentage terms when compared to an assumed dividend of 29p per share in respect of the financial year ending 31 December 2016, by a minimum of the increase in the Retail Prices Index during that period. 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 ABG or any of its subsidiaries which has a material impact on the business of ABG. Options are forfeited if they remain unexercised after a period of more than 7 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. 144 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 41. Share-based payment options (continued) 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. The probability of payout has been assigned based on the likelihood of meeting the performance criteria, which is 100%. The Directors consider that there is some uncertainty surrounding whether the participants will all still be in situ and eligible at the vesting date. Therefore the directors have assumed a 15% attrition rate for the share options vesting in June 2021, July 2023 and July 2026. The attrition rate will increase by 3% per year until the vesting date. ABG had a cost £0.02m in relation to share based payments during 2022 (2021: £0.01m income), as disclosed in Note 14. Measurement inputs and assumptions used in the Black-Scholes model are as follows: Expected Stock Price Volatility Risk Free Interest Rate Average Expected Life (in years) 42. Dividends per share 2022 33.6% 2.5% 1.36 2021 35.4% 0.5% 2.03 The Directors recommend the payment of a final dividend of 25p (2021: 22p) per share. This represents total dividends for the year of 42p (2021: 59p). The final dividend, if approved by members at the 2023 AGM, will be paid on 2 June 2023 to shareholders on the register at close of business on 21 April 2023. 43. 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. Group Cash and balances at central banks (Note 18) Loans and advances to banks (Note 19) Company Loans and advances to banks 2022 £000 732,729 115,787 848,516 2022 £000 8,434 2021 £000 814,692 73,444 888,136 2021 £000 7,587 Arbuthnot Banking Group PLC Report & Accounts 2022 145 44. Related party transactions Related parties of the Company and Group include subsidiaries, directors, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced, or for which significant voting power is held, by Key Management Personnel or their close family members. A number of banking transactions are entered into with related parties in the normal course of business on normal commercial terms. These include loans and deposits. Directors and Key Management includes solely Executive and Non-Executive Directors. Group - Directors and close family members Loans Loans outstanding at 1 January Loans advanced during the year Loan repayments during the year Loans outstanding at 31 December Interest income earned 2022 £000 502 1,013 (106) 1,409 2 2021 £000 502 39 (39) 502 1 The loans to directors are mainly 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 (2021: £nil). Group - Directors and close family members Deposits Deposits at 1 January Deposits placed during the year Deposits repaid during the year Deposits at 31 December Interest expense on deposits 2022 £000 4,018 6,707 (6,303) 4,422 2 2021 £000 3,928 1,709 (1,619) 4,018 – Details of directors’ remuneration are given in the Remuneration Report on pages 55 and 56. The Directors do not believe that there were any other transactions with key management or their close family members that require disclosure. Details of principal subsidiaries are given in Note 45. Transactions and balances with subsidiaries are shown below: ASSETS Due from subsidiary undertakings - Loans and advances to banks Due from subsidiary undertakings - Debt securities at amortised cost Shares in subsidiary undertakings Interest income LIABILITIES Due to subsidiary undertakings Interest expense 2022 2021 Highest balance during the year £000 Balance at 31 December £000 Highest balance during the year £000 Balance at 31 December £000 8,429 24,885 159,404 192,718 776 776 8,427 24,437 159,354 192,218 5 243 243 369 30,879 24,688 159,404 214,971 2,334 2,334 7,581 24,367 159,404 191,352 22 1,256 1,256 331 146 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 44. Related party transactions (continued) 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. The Company undertook the following transactions with other companies in the Group during the year: Arbuthnot Latham & Co., Ltd - Recharge of property and IT costs Arbuthnot Latham & Co., Ltd - Recharge for costs paid on the Company's behalf Arbuthnot Latham & Co., Ltd - Recharge of costs paid on behalf of Arbuthnot Latham & Co., Ltd Arbuthnot Latham & Co., Ltd - Group recharges for shared services Arbuthnot Latham & Co., Ltd - Group recharges for liquidity 2022 £000 896 1,127 (675) (6,993) (5,862) 2021 £000 891 364 (2,792) (5,560) (5,073) Total (11,507) (12,170) 45. Interests in subsidiaries Company At 1 January 2022 Receipt on dissolution of Peoples Trust & Savings PLC At 31 December 2022 Company Subsidiary undertakings: Bank Other Total Investment at cost £000 159,404 (50) 159,354 Impairment provisions £000 – – – 2022 £000 157,814 1,540 159,354 Net £000 159,404 (50) 159,354 2021 £000 157,814 1,590 159,404 Arbuthnot Banking Group PLC Report & Accounts 2022 147 (a) List of subsidiaries Arbuthnot Latham & Co., Limited is the only significant subsidiary of Arbuthnot Banking Group. Arbuthnot Latham is incorporated in the United Kingdom, has a principal activity of Private and Commercial Banking and is 100% owned by the Group. The table below provides details of other subsidiaries of Arbuthnot Banking Group PLC at 31 December 2022: % shareholding Country of incorporation Principal activity Direct shareholding Arbuthnot Fund Managers Limited Arbuthnot Investments Limited Arbuthnot Limited Arbuthnot Properties Limited Arbuthnot Unit Trust Management Limited Gilliat Financial Solutions Limited Indirect shareholding via intermediate holding companies Arbuthnot Commercial Asset Based Lending Limited Arbuthnot Latham (Nominees) Limited Arbuthnot Latham Real Estate PropCo 1 Limited Arbuthnot Securities Limited Arbuthnot Specialist Finance Limited Asset Alliance Finance Limited** Asset Alliance Group Finance No.2 Limited** Asset Alliance Group Holdings Limited** Asset Alliance Leasing Limited** Asset Alliance Limited** ATE Truck & Trailer Sales Limited** Forest Asset Finance Limited** Hanbury Riverside Limited** John K Gilliat & Co., Limited Pinnacle Universal Limited Renaissance Asset Finance Limited AAG Traffic Management Limited** The Peacocks Management Company Limited*** Valley Finance Limited** 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% UK UK UK UK UK UK UK UK Jersey UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK Dormant Dormant Dormant Dormant Dormant Dormant Asset Finance Dormant Property Investment Dormant Specialist Finance Commercial Vehicle Financing Commercial Vehicle Financing Commercial Vehicle Financing Commercial Vehicle Financing Commercial Vehicle Financing Dormant Commercial Vehicle Financing Dormant Dormant Property Development Asset Finance Dormant Property Management Dormant * On 22 February 2022, Arbuthnot Latham Real Estate Holdings Limited was dissolved. ** Entities acquired as part of the Asset Alliance Group acquisition on 1 April 2021. *** The Peacocks Management Company Limited was incorporated on 2 November 2022 as a subsidiary of Pinnacle Universal Limited. The following Jersey entities were dissolved during the year: • Arbuthnot Real Estate Investors Limited – dissolved 19 March 2021 • Arbuthnot Latham Real Estate Holdco Limited – dissolved 23 April 2021 • Arbuthnot Real Estate Investors GP 1 Limited – dissolved 30 April 2021 • Arbuthnot Real Estate Investors Funds 1 LP – dissolved 4 May 2021 The following entities were dissolved during the current year: • Pinnacle Universal Limited’s (BVI) was dissolved on 7 June 2022 • Peoples Trust and Savings PLC was dissolved on 22 September 2022. All the subsidiaries above were 100% owned during the current and prior year and are unlisted and none are banking institutions. All entities are included in the consolidated financial statements and have an accounting reference date of 31 December. The Jersey entity’s registered office is 26 New Street, St Helier, Jersey, JE2 3RA. All other entities listed above have their registered office as 7 Wilson Street, London, EC2M 2SN. 148 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 45. Interests in subsidiaries (continued) (b) Non-controlling interests in subsidiaries There were no non-controlling interests at the end of 2022 or 2021. (c) Significant restrictions The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those resulting from the supervisory frameworks within which banking subsidiaries operate. The supervisory frameworks require banking subsidiaries to keep certain levels of regulatory capital and liquid assets, limit their exposure to other parts of the Group and comply with other ratios. The carrying amounts of the banking subsidiary’s assets and liabilities are £3.6bn and £3.4bn respectively (2021: £3.4bn and £3.2bn respectively). (d) Risks associated with interests During the year Arbuthnot Banking Group PLC did not make capital contributions to Arbuthnot Latham & Co., Ltd. In 2021 Arbuthnot Banking Group PLC made £25.5m capital contributions to Arbuthnot Latham & Co., Ltd. The contributions were made to assist the Bank during a period of growth to ensure that all regulatory capital requirements were met. 46. Operating segments The Group is organised into nine operating segments as disclosed below: 1) Banking – Includes Private and Commercial Banking. Private Banking – Provides traditional private banking services. Commercial Banking – Provides bespoke commercial banking services and tailored secured lending against property investments and other assets. 2) Wealth Management – Offering financial planning and investment management services. 3) Mortgage Portfolios – Acquired mortgage portfolios. 4) RAF – Specialist asset finance lender mainly in high value cars but also business assets. 5) ACABL – Provides finance secured on either invoices, assets or stock of the borrower. 6) ASFL – Provides short term secured lending solutions to professional and entrepreneurial property investors. 7) AAG – Provides vehicle finance and related services, predominantly in the truck & trailer and bus & coach markets. 8) All Other Divisions – All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Investment property and Central costs) 9) Group Centre – ABG Group 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 loans and advances to customers and customer deposits, being the majority of the balance sheet. 149 Total £000 120,018 (5) 120,013 21,586 99,367 240,966 (18,149) (82,109) 5 (2,788) (537) 137,388 (5,503) 1,627 (113,503) 20,009 (3,551) Arbuthnot Banking Group PLC Report & Accounts 2022 Year ended 31 December 2022 Interest revenue Inter-segment revenue Interest revenue from external customers Fee and commission income Revenue Banking £000 Wealth Management £000 Mortgage Portfolios £000 70,545 – 70,545 3,138 – – – – 10,689 – 7,333 – 7,333 – – RAF £000 ACABL £000 8,898 – 14,665 – 8,898 32 – 14,665 6,178 – ASFL £000 1,068 – 1,068 10 – All Other Divisions £000 AAG £000 Group Centre £000 664 – 16,840 – 664 – 99,367 16,840 1,539 – 5 (5) – – – – Revenue from external customers 73,683 10,689 7,333 8,930 20,843 1,078 100,031 18,379 Interest expense Cost of goods sold Add back inter-segment revenue Subordinated loan note interest Fee and commission expense Segment operating income Impairment losses Other income Operating expenses Segment profit / (loss) before tax Income tax (expense) / income (5,980) – – – (335) 67,368 (1,547) – (46,683) 19,138 – – – – – – 10,689 – – (14,790) (4,101) – (2,223) – – – – 5,110 (415) – (935) 3,760 – (3,353) – – – – 5,577 (768) 82 (4,697) 194 23 (7,903) – – – (202) 12,738 (2,082) – (5,463) 5,193 (989) (355) – – – – 723 (179) – (1,489) (945) 236 (5,120) (82,109) – – – 12,802 (369) – (14,507) (2,074) (1,016) 7,153 – – – – 25,532 (143) 2,385 (16,074) 11,700 (401) (368) – 5 (2,788) – (3,151) – (840) (8,865) (12,856) (1,404) Segment profit / (loss) after tax 19,138 (4,101) 3,760 217 4,204 (709) (3,090) 11,299 (14,260) 16,458 Loans and advances to customers Assets available for lease 1,452,649 – Other assets Segment total assets Customer deposits Other liabilities Segment total liabilities Other segment items: Capital expenditure Depreciation and amortisation – 1,452,649 3,112,478 – 3,112,478 – – – – – – – – – – – 148,517 133,825 268,825 – – – 14,869 – 17,392 171,738 11,500 – (11,500) 2,036,077 171,738 – – – – – – 1,409,231 (2,999) 1,406,232 148,517 133,825 268,825 14,869 189,130 1,420,731 (14,499) 3,614,047 – – – – – – – – – – – – – – – – – – – – – – – – 293,531 (19,929) 3,092,549 309,520 15,989 293,531 (3,940) 3,402,069 – – (122,409) (41,826) (1) (10) (122,410) (41,836) The “Group Centre” segment above includes the parent entity and all intercompany eliminations. 150 Arbuthnot Banking Group PLC Report & Accounts 2022 Notes to the Consolidated Financial Statements continued 46. Operating segments (continued) Year ended 31 December 2021 Interest revenue Inter-segment revenue Interest revenue from external customers Fee and commission income Revenue Banking £000 Wealth Management £000 Mortgage Portfolios £000 RAF £000 ACABL £000 ASFL £000 48,281 – 48,281 2,747 – – – 6,805 – 8,300 – – 10,563 – 6,805 – – 8,300 166 – 8,010 – 8,010 4,308 – 803 – 803 7 – AAG £000 190 – 190 – 74,500 Revenue from external customers 51,028 10,563 6,805 8,466 12,318 810 74,690 5,394 Interest expense Cost of goods sold Add back inter-segment revenue Subordinated loan note interest Fee and commission expense Segment operating income Impairment losses Gain from a bargain purchase Other income Operating expenses Segment profit / (loss) before tax Income tax (expense) / income (3,270) – – – (265) 47,493 354 – – (41,315) 6,532 – – – – – – 10,563 – – – (12,684) (2,121) – (2,070) – – – – 4,735 (186) – 2,239 (1,154) 5,634 – (2,371) – – – – 6,095 (2,292) – 78 (3,943) (62) 52 (2,699) – – – (84) 9,535 (50) – – (4,748) 4,737 – (225) – – – – 585 (21) – – (1,590) (1,026) – (2,591) (68,023) – – – 4,076 (1,001) 8,626 – (7,872) 3,829 – 2,842 – – – – 8,236 – – 2,081 (12,570) (2,253) 2,105 All Other Divisions £000 Group Centre £000 Total £000 4,713 – 4,713 681 – 22 (22) 77,124 (22) – – – – (201) – 22 (2,464) – (2,643) – – (443) (7,546) (10,632) (9) 77,102 18,472 74,500 170,074 (10,585) (68,023) 22 (2,464) (349) 88,675 (3,196) 8,626 3,955 (93,422) 4,638 2,148 Segment profit / (loss) after tax 6,532 (2,121) 5,634 (10) 4,737 (1,026) 3,829 (148) (10,641) 6,786 Loans and advances to customers 1,396,049 Assets available for lease Other assets Segment total assets Customer deposits Other liabilities Segment total liabilities Other segment items: Capital expenditure Depreciation and amortisation – – 1,396,049 2,856,949 – 2,856,949 – – – – – – – – – – – 178,082 97,113 182,122 10,096 7,500 11,500 (11,500) 1,870,962 – – – – – – – 121,563 – – – 1,369,346 – 121,563 (3,004) 1,366,342 178,082 97,113 182,122 10,096 129,063 1,380,846 (14,504) 3,358,867 – – – – – – – – – – – – – – – – – – – – – – – – – – 306,398 (19,080) 2,837,869 320,119 13,721 306,398 (5,359) 3,157,988 (41,030) (35,575) – (25) (41,030) (35,600) Segment profit is shown prior to any intra-group eliminations. The Banking division had a branch in Dubai, which was closed in May 2021. In 2021 the Dubai branch generated £1.7m of income and had direct operating costs of £1.3m. All Dubai branch income was booked in the UK. Other than the Dubai branch, all operations of the Group are conducted wholly within the United Kingdom and geographical information is therefore not presented. Arbuthnot Banking Group PLC Report & Accounts 2022 151 47. Country by Country Reporting Article 89 of the EU Directive 2013/36/EU otherwise known as the Capital Requirements Directive IV (‘CRD IV’) was implemented into UK domestic legislation through statutory instrument 2013 No. 3118, the Capital Requirements (Country-by-Country Reporting) Regulations 2013 (the Regulations), which were laid before the UK Parliament on 10 December 2013 and which came into force on 1 January 2014. Article 89 requires credit institutions and investment firms in the EU to disclose annually, specifying, by Member State and by third country in which it has an establishment, the following information on a consolidated basis for the financial year: name, nature of activities, geographical location, turnover, number of employees, profit or loss before tax, tax on profit or loss and public subsidies received. 31 December 2022 Location UK 31 December 2021 Location UK Dubai Turnover (£m) 137.4 Turnover (£m) 88.7 – FTE employees Number 749 FTE employees Number 601 6 Profit/(loss) before tax (£m) 20.0 Profit/(loss) before tax (£m) 5.2 (0.6) Tax paid (£m) 3.6 Tax paid (£m) – – The Dubai branch income was booked through the UK, hence the turnover is nil in the above analysis. Offsetting this income against Dubai branch costs would result in a £Nil profit (2021: £0.4m). No public subsidies were received during 2022 or 2021. Following a strategic review of the Group’s operations, the Dubai branch was closed in May 2021. 48. Ultimate controlling party The Company regards Sir Henry Angest, the Group Chairman and Chief Executive Officer, who has a beneficial interest in 56.3% 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 44 of the consolidated financial statements includes related party transactions with Sir Henry Angest. 49. Events after the balance sheet date Following a strategic review of the business, the management has taken the decision to exit the short-term specialist lending market and as a result, Arbuthnot Specialist Finance Limited (ASFL) will be closed to new business with immediate effect as formally communicated at 11 January 2023. The exiting loan book will be managed down over the coming months and any current undrawn commitments will be honoured. The wind-down of the major part of the lending book is anticipated to take a number of months. 152 Five Year Summary Arbuthnot Banking Group PLC Report & Accounts 2022 Profit / (loss) for the year after tax Profit / (loss) before tax from continuing operations Total Earnings per share Basic (p) Earnings per share from continuing operations Basic (p) Dividends per share (p) – ordinary Dividends per share (p) – special Other KPI: 2018 £000 (20,033) 6,780 2019 £000 6,176 7,011 (134.5) 41.2 38.0 35.0 – 41.2 16.0 – 2020 £000 (1,332) (1,090) (8.9) (8.9) – – 2021 £000 6,786 4,638 45.2 45.2 38.0 21.0 2018 2019 2020 2021 Net asset value per share (p) 1,282.5 1,363.5 1,291.5 1,337.2 2022 £000 16,458 20,009 109.6 109.6 42.0 – 2022 1,411.1 Arbuthnot Banking Group PLC Report & Accounts 2022 153 Notice of Annual General Meeting NOTICE IS HEREBY GIVEN that the thirty seventh Annual General Meeting (“Meeting”) of Arbuthnot Banking Group PLC (the Company) will be held at Arbuthnot House, 7 Wilson Street, London EC2M 2SN on Wednesday, 24 May 2023 at 3 p.m. for the purpose of transacting the following business as ordinary resolutions (as regards resolutions 1 to 8) and as special resolutions (as regards resolutions 9 and 10). ORDINARY RESOLUTIONS 1. To receive and adopt the Annual Report and Accounts for the year ended 31 December 2022. 2. To receive the report of the Remuneration Committee. 3. To declare a final dividend in respect of the year ended 31 December 2022 which the directors propose should be 25p per Ordinary Share or Ordinary Non-Voting Share, payable on 2 June 2023 to shareholders on the register of members at the close of business on 21 April 2023. 4. To elect Mr. F.A.H. Angest as a Director who, having been appointed as a Director since the last annual general meeting, offers himself for election in accordance with Article 75 of the Articles of Association. 5. To re-elect Sir Nigel Boardman 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 re-elect Sir Alan Yarrow as a Director who retires by rotation in accordance with Article 78 of the Articles of Association and offers himself for re-election. 7. To re-appoint Mazars LLP as Auditor of the Company. 8. To authorise the Directors to determine the remuneration of the Auditor. To consider and, if thought fit, pass the following resolutions which will be proposed as special resolutions: SPECIAL RESOLUTIONS 9. 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 provided that: a. the maximum number of Ordinary Shares hereby authorised to be purchased shall be 1,527,000 (being approximately 10% of the number of issued Ordinary Shares in the Company as at 31 March 2023); b. the minimum price (excluding expenses) which may be paid for an Ordinary Share shall be £0.01; c. the maximum price (excluding expenses) 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 ten business days prior to the day the purchase is made; d. the authority hereby conferred shall expire on 24 August 2024 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. 154 Arbuthnot Banking Group PLC Report & Accounts 2022 Notice of Annual General Meeting continued 10. 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 Non-Voting Shares provided that: a. the maximum number of Ordinary Non-Voting Shares hereby authorised to be purchased shall be 15,200 (being approximately 10% of the number of issued Ordinary Non-Voting Shares in the Company as at 31 March 2023); b. the minimum price (excluding expenses) which may be paid for an Ordinary Non-Voting Share shall be £0.01; c. the maximum price (excluding expenses) which may be paid for an Ordinary Non-Voting Share shall be 5 per cent. above the average of the closing middle market price of the Ordinary Non-Voting Shares (as derived from the share information published by the AQSE Growth Market) for the ten business days prior to the day the purchase is made; d. the authority hereby conferred shall expire on 24 August 2024 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 Non-Voting 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 Non-Voting Shares pursuant to any such contracts. By order of the Board N.D. Jennings Secretary 31 March 2023 Registered Office Arbuthnot House 7 Wilson Street London EC2M 2SN 155 NOTES: 1. You may vote your shares by proxy. To be effective this must be submitted at www.signalshares.com so as to have been received by the Company’s registrars, Link Group, not less than 48 hours (excluding weekends and public holidays) before the time appointed for the meeting or any adjournment of it. By registering on the Signal shares portal at www.signalshares.com, you can manage your shareholding, including: – – cast your vote change your dividend payment instruction – update your address – select your communication preference. 2. Link Group, the company’s registrar, has launched a shareholder app: LinkVote+. It is free to download and use and gives shareholders the ability to access their shareholding record at any time and allows users to submit a proxy appointment quickly and easily online rather than through the post. The app is available to download on both the Apple App Store and Google Play, or by scanning the relevant QR code below. Apple App Store Google Play Your vote must be lodged by 3p.m. on 22 May 2023 in order to be considered valid or, if the meeting is adjourned, by the time which is 48 hours before the time of the adjourned meeting. 3. We recommend that Ordinary shareholders appoint the Chairman of the meeting as proxy. This will ensure that your vote will be counted if you are unable to attend the meeting in person. 4. Any power of attorney or other authority under which the proxy is submitted must be returned to Link Group, PXS1, Central Square, 29 Wellington Street, Leeds, LS1 4DL. 5. The Company is no longer sending paper forms of proxy to shareholders unless specifically asked to do so. If you need help with voting online, or require a paper proxy form, please contact Link Group by email at shareholderenquiries@linkgroup.co.uk, or by telephone on 0371 664 0300. Calls are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom will be charged at the applicable international rate. They are open between 9 a.m. and 5 p.m. Monday to Friday excluding public holidays in England and Wales. Submission of a Proxy vote shall not preclude a member from attending and voting in person at the meeting in respect of which the proxy is appointed or at any adjournment thereof. 6. If a paper form of proxy is requested from the Registrar, it should be completed and returned to Link Group at the address above to be received not less than 48 hours before the time of the meeting. 7. 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 close of business on 22 May 2023 (“the Specified Time”) will be entitled to attend or vote at the 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 Meeting. Should the 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 Meeting. Should the 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 Meeting, or, if the Company gives notice of the adjourned Meeting, at the time specified in the notice. Arbuthnot Banking Group PLCReport & Accounts 2022 156 Arbuthnot Banking Group PLC Report & Accounts 2022 Notice of Annual General Meeting continued 8. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the meeting and any adjournment(s) thereof by using the procedures described in the CREST Manual. CREST personal members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. 9. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a CREST Proxy Instruction) must be properly authenticated in accordance with Euroclear UK & International Limited’s specifications and must contain the information required for such instruction, as described in the CREST Manual (available via www.euroclear.com). The message, regardless of whether it constitutes the appointment of a proxy, or is an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the Company’s registrars (ID: RA10) by 3p.m. on 22 May 2023. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Application Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time, any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. 10. CREST members and, where applicable, their CREST sponsors or voting service providers should note that Euroclear UK & International Limited does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings (www.euroclear.com). 11. Unless otherwise indicated on the Form of Proxy, CREST voting or any other electronic voting channel instruction, the proxy will vote as they think fit or, at their discretion, withhold from voting. 12. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001 (as amended). 13. Institutional investors may also be able to appoint a proxy electronically via the Proxymity platform, a process which has been agreed by the Company and approved by the registrar. Further information regarding Proxymity can be found at www.proxymity.io. Your proxy must be lodged by 3 p.m. on 22 May 2023 in order to be considered valid. Before appointing a proxy by this process you will need to agree to the Proxymity terms and conditions. It is important that these are read carefully as they are binding and govern the electronic appointment of your proxy. 14. A corporation which is a member can appoint one or more corporate representatives who may exercise, on its behalf, all its powers as a member provided that no more than one corporate representative exercises power over the same share. 15. At 31 March 2023 (being the latest practicable date prior to the publication of this Notice and excluding shares held in Treasury) the Company’s issued Ordinary share capital consists of 14,889,048 Ordinary Shares carrying one vote each. Therefore, the total voting rights in the Company as at 31 March 2023 are 14,889,048. 16. 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 Meeting and at the place of the Meeting for 15 minutes prior to and during the Meeting. 17. Any electronic address provided either in this Notice or in any related documents may not be used to communicate with the Company for any purposes other than those expressly stated. Arbuthnot Banking Group PLC Report & Accounts 2022 157 Renaissance Asset Finance Limited 3rd Floor Phoenix Place Christopher Martin Road Basildon Essex SS14 3GQ T 01268 269500 E info@renaissanceaf.com www.renaissanceaf.com Advisers Auditor Mazars LLP Principal Bankers Barclays Bank PLC Lloyds Bank PLC National Westminster Bank PLC Stockbroker Shore Capital Stockbrokers Limited Nominated Adviser and AQSE Corporate Adviser Grant Thornton UK LLP Registrars Link Group 10th Floor Central Square 29 Wellington Street Leeds Yorkshire LS1 4DL Corporate Contacts and Advisers Group Address and Registered Office Arbuthnot Banking Group PLC Arbuthnot House 7 Wilson Street London EC2M 2SN T 020 7012 2400 E info@arbuthnotgroup.co.uk www.arbuthnotgroup.com Corporate Contacts London Arbuthnot Latham & Co., Limited Arbuthnot House 7 Wilson Street London EC2M 2SN T 020 7012 2500 E banking@arbuthnot.co.uk www.arbuthnotlatham.co.uk Bristol St Brandon’s House 27-29 Great George Street Bristol BS1 5QT T 01392 496061 Exeter The Senate Ground Floor Southernhay Gardens Exeter Devon EX1 1UG T 01392 496061 Manchester 8th Floor 82 King Street Manchester M2 4WQ T 0161 413 0030 Arbuthnot Commercial Asset Based Lending Limited The Beehive City Place Gatwick RH6 0PA E abl@arbuthnot.co.uk Asset Alliance Group Holdings Limited Edwin House Boundary Industrial Estate Stafford Road Wolverhampton WV10 7EL T 01902 625330 E enquiries@assetalliancegroup.co.uk www.assetalliancegroup.co.uk Arbuthnot Banking Group PLC Arbuthnot House 7 Wilson Street London EC2M 2SN T 020 7012 2400 E info@arbuthnotgroup.co.uk www.arbuthnotgroup.com Registration No. 1954085