ARBUTHNOT BANKING GROUP PLC Annual Report & Accounts 2023 Arbuthnot Banking Group PLC Report & Accounts 2023 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 – 2023 by David Lascelles, 2nd edition) 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 and Sustainability Information Statement Strategic Report – Stakeholder Engagement and s.172 Report Strategic Report – Sustainability Report 30 44 Board of Directors 47 Group Directors’ Report 52 Corporate Governance Independent Auditor’s Report 60 Remuneration Report 63 70 Consolidated Statement of Comprehensive Income 71 Consolidated Statement of Financial Position 72 Company Statement of Financial Position 73 Consolidated Statement of Changes in Equity 75 Company Statement of Changes in Equity 76 Consolidated Statement of Cash Flows 77 Company Statement of Cash Flows 78 Notes to the Consolidated Financial Statements 159 Five Year Summary 160 Notice of Annual General Meeting 164 Corporate Contacts and Advisers 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 191 year history of serving its customers, Arbuthnot has proven its ability to adapt 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 and motivation. 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 workplace will provide a rewarding as well as challenging environment. Sir Henry Angest Chairman & CEO 27 March 2024 Arbuthnot Banking Group PLCReport & Accounts 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. Arbuthnot Banking Group PLCReport & Accounts 2023 3 Financial Highlights 2023 £178.9m 2022 £137.4m 2021 £88.7m 2023 £51.4m 2022 £31.1m 2021 £17.0m 2023 £47.1m 2022 £20.0m 2021 £4.6m Operating income Underlying profit before tax Profit before tax 2023 46.0p 2022 42.0p 2021 38.0p 2023 £4.3bn 2022 £3.6bn 2021 £3.4bn 2023 £260.0m 2022 £213.0m 2021 £213.0m Total ordinary dividend per share Total assets Regulatory capital £2.3bn customer loans at December 2023* £3.8bn of deposit funding at December 2023 £1.7bn funds under management and administration at December 2023 * This balance includes both Customer loans and assets available for lease. Arbuthnot Banking Group PLCReport & Accounts 2023 4 Chairman’s Statement Arbuthnot Banking Group (“ABG” or “The Group”) is pleased to report a profit before tax of £47.1m. This represents a continued trend of improved financial performance compared to the prior years and an increase of 135% over 2022 which was £20.0m. The Group continues to make good progress Arbuthnot Banking Group PLCReport & Accounts 2023 5 Asset Alliance, our vehicle leasing business, also delivered outstanding growth with its assets available for lease growing to £327m from £189m in the prior year, an increase of 73%. This growth was enabled not only by the improvements in the supply chain for new trucks, but also the fact that it now has access to the Group’s funding resources. This allowed it to complete the purchase of a £50m portfolio of buses used in the Transport for London network. Asset Alliance now has an 8% market share of buses used in London. Finally, I would like to highlight the performance of our Wealth Management division that grew its Funds Under Management and Administration by 29% to close at £1.7bn, exhibiting strong investment performance against peers, despite uncertain markets across the globe. 20 Finsbury Circus As previously announced, we are all looking forward to the next phase of the Group’s future; in 2023 we celebrated our 190th anniversary given that Arbuthnot Latham was founded in 1833. Our confidence in the future is demonstrated by the fact that we have secured an impressive new head office located at 20 Finsbury Circus, situated in the heart of the city not far from our current location. The new building offers us 45% more space to grow and will allow us to bring our London operations together under one roof. This should provide more collaboration and allow the next generation of Arbuthnot Bankers to develop and perhaps even set an example for more workers in the City to return to working more frequently in such a vibrant global financial centre, that is the City of London. While the Group has been developing its business in accordance with the “Future State 2” strategic plan, the financial results have also benefited from the continued upward movement in the Bank of England (“BOE”) base rate which increased from 3.5% to 5.25% in 2023. The impact of this has been two-fold. Firstly, the significant surplus liquidity balances that the Bank holds at the BOE have earned more income in line with the higher rates. Secondly, the lending balances that are linked to the base rate have repriced immediately, while the cost of deposits has naturally lagged behind, despite the Bank quickly adjusting its rates in favour of depositors. This is due to the fact that fixed rate deposits have to reach their maturity in order to be able to take advantage of the higher rates. Typically, it takes 12 months for the lag to completely catch up with current pricing levels. Clearly, the reverse will be the case in a falling rate environment. We have begun a strategy of locking in higher rates by offering more fixed rate lending products and also switching some of our surplus liquidity into high quality fixed income assets such as Gilts with a short maturity date. This, we hope, will soften the impact of any rate reductions in the near future. Highlights My long-held belief that has been borne out in the strategy of the Group over the years is that of diversification and I was pleased to see this evidenced during the year. The Bank continued its strong growth, especially in its ability to attract new deposits. This has been particularly apparent within the Commercial Banking division, where the fact that customers enjoy private banking levels of service seems to resonate well in this market, where the larger banks have left companies underserved. Deposit balances ended the year at £3.8bn, an increase of 21%. During the year we opened up relationships in new sectors such as the construction and computer gaming industries. This gave us the ability to allow non-relationship deposits to mature, without us needing to compete on price to retain the balances. Elsewhere in the Group, our asset finance business, Renaissance Asset Finance (“RAF”), delivered a strong increase in its customer balances which grew from £134m to close the year at £199m, an increase of 49% with both of its business sectors, “flow” and “block discounting”, seeing good levels of new loan originations. Continuing the theme of diversification RAF has added “wholesale financing” to its product set and this will come online in 2024. Arbuthnot Banking Group PLCReport & Accounts 2023 6 Chairman’s Statement continued Capital Raise Regulation The continuing theme for regulators of the increasing requirement for banks to hold more capital, coupled with the current market opportunities that are presenting themselves to the Group, led us to decide to push ahead with a capital raise via a conditional placing. Initially we intended to raise £10m but we were pleasantly surprised to find that demand for the publicly available allocation was heavily oversubscribed, so the issue was increased to £12m to satisfy some of this excess demand. This capital raise was completed on 5 May. Later in the year we were also pleased to agree the early refinancing of the Tier 2 debt instrument that we had previously issued to P Capital Partners, a Swedish debt fund, in 2019. We appreciate their confidence in both our business and management team, which resulted in the extension of this loan for another 10 years at a lower margin than before. We hope this relationship can continue into the future beyond even this new issue. As we have become accustomed in recent years, the pace of regulatory change has not slowed and there are a number of significant issues in consultation for which we need to be prepared. Basel 3.1 is likely to become applicable to the Group in 2026. This is later than the generally applicable date as we will be a late adopter, given that we have applied to become part of the new Small Domestic Deposit Takers (“SDDT”) regime which is the evolution of “Strong and Simple”. We are waiting for the capital rules for such to be revealed in the second quarter of this year. While many of the rules have been sign-posted, we continue to hold out hope that the capital buffer regime will be altered to address the unintended consequences of the counter cyclical buffer. It is clear from evidence during COVID that no bank will utilise this buffer in its current form in down turns for fear of the speed at which it is brought back. This means about 20% of the industry’s capital has been sterilised and is unproductive. A change in status of this buffer could provide economic growth without creating undue risk in the banking sector. The Group will move into new offices this year Arbuthnot Banking Group PLCReport & Accounts 2023 7 Outlook The interest rate environment appears to have reached the top of the current cycle and many analysts are now predicting reductions in the future. Whilst this will have an impact on the profitability of the Group; in the long run, the opportunities for Arbuthnot to grow and prosper continue to be undiminished. Therefore, we remain focused on delivering on our strategic plan. Sir Henry Angest Chairman & CEO 27 March 2024 I never doubted the need for strong regulation to promote safety and soundness of the banking industry and I believe confidence in the sector continues to grow. It is my hope that this confidence will empower regulators to permit the development of a diverse set of banks with different business models, which is likely to create less inherent risk in the industry. Board Changes and Personnel During the year I was pleased to welcome Jayne Almond, Angela Knight, and Lord Sassoon to the Board. We are delighted to attract such notable directors to our company. They bring with them a wealth of knowledge and experience gained through their respective careers. I look forward to receiving their advice and counsel on how we can further develop the Group. As always, the continued success of the Group reflects the hard work and commitment of our members of staff, who are our greatest asset. On behalf of the Board, I extend our thanks to all of them for their contribution in 2023. Finally, I would like to thank my fellow directors on both Boards for their help and advice during the year. Dividend In 2022 we increased the trajectory of growth in the dividend, and given the continued positive outlook for the Group, this is maintained. The Board therefore are recommending a final dividend of 27p per share. This is an increase of 2p compared to the final dividend of 2022. The final dividend, if approved at the 2024 AGM, will be paid on 31 May 2024 to shareholders on the register at the close of business on 19 April 2024. Together with the interim dividend of 19p per share, this gives a total dividend for the year of 46p per share, which compares to the total dividend of 42p per share paid in 2022. Arbuthnot Banking Group PLCReport & Accounts 2023 8 Strategic Report Business Review The Bank of England Base Rate (BBR) continued to rise throughout 2023 starting the year at 3.50% and finishing at a 15-year high of 5.25% with a rise of 1.75% in the year. Although it seems that inflation has stabilised and in response the Bank of England has steadied its base rate, the effect of the higher interest rate environment and the rate of increase has significantly contributed to the Group’s income. As a consequence of the rate rises the Bank has passed on the increases to its depositors, however two factors have reduced the cost to the Bank. Firstly, the rate of the Bank’s fixed term deposits lag behind the base rate rises, with balances placed at lower rates in previous periods yet to mature. Secondly, high levels of call balances were held for much of the year. However, towards the end of the year, the Bank saw increased activity of depositors switching balances to higher yielding term products, based on the expectation that interest rates have peaked. These factors will increase the cost of deposits going forward, while the rate of increase in BBR compared to that of deposit pricing has contributed significantly to an increased net interest income for 2023. As signalled in the prior year’s Annual Report, the current economic environment has resulted in economy-wide headwinds for borrowers. However, the non-performing loan book has reduced to its lowest level in over three years with credit metrics showing no signs of material stress. The average loan to value (“LTV”) against the loan book remains low at 47.8% (2022: 52.5%), giving significant levels of security to withstand and minimise the effect of any potential falls in the property markets. Despite higher inflation and interest rates, the prospect of further increases in interest rates and inflation has receded. Consequently, the outlook for economic conditions has improved over the last twelve months, notably with the outlook for residential property values expected to fall 6.4% compared to 11.6% the prior year and commercial property values expected to fall 4.9% compared to 21.2% the prior year. These factors have resulted in a release of £0.2m from the expected credit loss provision. Private Banking Relationship banking model continues to be successful Arbuthnot Banking Group PLCReport & Accounts 2023 9 Counteracting the benefit from the base rate increases, inflation has produced upward pressure on the cost base. Notably salary costs have increased due to not only growth in headcount but also increases in annual pay awards, as the cost-of-living crisis started to interact with full employment and the competition for talent intensified. The Bank finished the year with total deposits of £3.8bn compared to £3.1bn for the prior year and 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. Lending balances (including lease assets) finished the year at £2.3bn, compared to £2.2bn in the previous year. However, as mentioned in the previous year’s Annual Report and Accounts, the Bank tightened its credit appetite and reduced LTVs for new lending below its historic guidance of 60% which has reduced lending volumes. However, the increased levels of profitability, mean the Bank is well positioned to retain financial resources for future opportunities that are expected to arise given the market dislocation. In April 2023, the Group carried out a successful capital raise of £12m with demand heavily oversubscribed against the original target of £10m. The capital raise has allowed the Group to maintain growth momentum, whilst continuing to pursue its strategic objectives. Included on the balance sheet is the Right of Use Asset for the Group’s new London Office at 20 Finsbury Circus. The building is approximately 75,000 square feet, which equates to an increase of 45% compared to the current office space. Given the robust position in which the Group finds itself and its predicted future growth prospects, it has secured a new long-term solution for its office premises. The planned fit-out, due to be completed in the third quarter of 2024, will provide both high specification working space and also new client meeting and entertainment suites, which will help to deepen the relationship banking offering that is proving successful in both our Private and Commercial banking businesses. The increased footprint and depreciation of the fit-out costs will increase the annual expenditure on premises by approximately £5.0m on a steady state basis. During 2024 the Group will also incur the additional cost of running both premises until the lease on our current office ends in October 2024. 2023 £178.9m 2022 £137.4m 2023 £2.5m 2022 £1.6m 2023 £131.1m 2022 £108.9m 2023 £47.1m 2022 £20.0m 2023 £2.3bn 2022 £2.2bn Operating income Other income Operating expenses Profit / (loss) before tax Customer loans* 2023 £3.8bn 2022 £3.1bn 2023 £4.3bn 2022 £3.6bn 2023 £1.7bn 2022 £1.3bn 2023 5.7% 2022 5.1% 2023 62.0% 2022 71.4% Customer deposits Total assets Funds under management and administration 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: Customer loans divided by customer deposits (prior year restated to include assets available for lease) Arbuthnot Banking Group PLCReport & Accounts 2023 10 Strategic Report Business Review continued As in prior years, the Group’s profit excludes the profit on the sale of trucks generated by Asset Alliance of £4.3m (2022: £6.5m), following the acquisition accounting in 2021. At the year end the uplift on the portfolio of assets from the acquisition has been fully realised through sales, meaning any gains or losses for future disposals will be recognised in the income statement as and when they are sold. Banking The Banking business continued to deliver growth in client acquisition, for both lending and deposit products, leveraging off the underlying relationship management franchise whilst supporting the strategic aims of the wider group. The Bank continued to focus on existing segments across Private & Commercial Banking, as well as entering new emerging segments with long term growth opportunities such as Technology and E-games where the Bank’s capability and relationship management focus fits well with the needs of the market. Deposits finished the year at £3.8bn, equating to growth in excess of 23% compared to £3.1bn the previous year end, generating liquidity to be deployed across the Group. This was despite a number of non-relationship deposits that were exited during the year. Given the higher interest rate environment, there was a trend with clients being more proactive in managing deposits transferring to time from current and call products for improved returns. Despite this, strong client acquisition in the year continued to contribute to growth in current balances. It is expected that the competitive environment for low-cost deposits will increase, however, the Bank’s client service led model is well placed against potential headwinds albeit at a lower growth rate than the current year. The cost of deposits has increased steadily throughout the year, as the effect of increases in interest rates lag behind as fixed rate deposits are repriced when they mature, ultimately narrowing the Bank’s net interest margin. Deposit pricing stabilised towards the latter part of the year, however, the full year effect of the increased pricing will cause downward pressure on the 2024 financial result. The Bank’s relationship banking model combined with competitive pricing supports the strategy to grow relationship deposits rather than rely on more expensive best buy table deposit rates. Over the long term, this will provide material value to the Group in a normalised interest rate environment. Commercial Banking Relationship banking to commercial clients Arbuthnot Banking Group PLCReport & Accounts 2023 11 The loan book was £1.4bn at the year-end (2022: £1.5bn). Despite the inherent credit risk in the current environment, the book continued to perform robustly, supported by the Bank’s conservative credit appetite, which was tightened over a year ago in the wake of economic uncertainty. The pressure of a higher interest rate environment on clients has resulted in reduced debt levels that businesses can raise and sustain, however there has been a trend of clients opting to pay down debt from surplus liquidity in order to mitigate the effect of higher interest rates. The Bank will continue to operate its long held principle of operating a conservative credit appetite, and deploying capital only where disciplined risk and return hurdles are met. Wealth Management Funds Under Management and Administration increased by 29% during 2023, to £1.7bn (2022: £1.3bn), with gross inflows of £437m, representing 33% of balances at the start of the year. The year’s backdrop of rising interest rates negatively impacted outflows as clients elected to pay down debt secured against investments and accelerate gifts to children when acquiring property to mitigate the need to take out more costly mortgages, resulting in gross outflows of £165m for the period. Wealth Planning issued advice on £151m of new assets, a similar value compared with 2022, representing approximately 64% of discretionary asset inflows. A total of 139 clients were onboarded during 2023, broadly consistent with the prior year. The business made good progress against a key strategic objective, to stream-line the investment suitability process which is expected to improve client outcomes and generate internal process efficiencies. Mortgage Portfolios Balances for the Bank’s acquired mortgage portfolio was £123.7m at the year-end (2022: £149.0m). The portfolio continues to perform in line with expectations. Arbuthnot Commercial Asset Based Lending (“ACABL”) ACABL reported a profit of £8.5m (2022: £5.2m), an increase of 63% compared to the prior year which was largely generated through higher client volume generating increased interest charges and service fees. ACABL completed 17 new transactions in 2023 (2022: 30) with £73.1m of facilities written. Despite the increase in profitability, at the year-end, the business reported drawn balances of £239.8m with a further £115m available for drawdown (2022: £268.8m with further £91.8m available for drawdown) equating to a fall of 11% year on year. The fall was driven by a combination of lower origination due to the macro-economic environment, along with expected attrition, as the business entered its sixth year and some of the original client’s facilities reached maturity. This was compounded by some clients holding higher levels of undrawn availability than historically seen. Inflationary pressures, a higher interest rate environment and ongoing supply chain challenges resulted in a significant reduction in the number of event-driven transactions in the marketplace in addition to fewer Private Equity backed buy-outs, with the latter being traditionally the mainstay of new business. The business also wrote fewer refinancing deals given the market challenges and cautious risk appetite with extensions favouring existing lenders. As expected in the context of the current macro-economic environment, the business observed a higher number of watchlist clients compared to previous periods. However, the business model of lending against high-quality realisable assets along with a low ratio of clients to client manager resulted in no incurred losses for the year. The expected credit loss rate on the book remains low at 9.8bps. The average deal size increased from £5.1m to £5.8m with a total client base of 104 at year-end. (2022: 102). Facility limits of £536m (2022: £523m) remained relatively flat, with clients continuing to operate in a broad range of sectors, underlining the spread and diverse nature of the portfolio. In line with the reported strong growth in profits, the business processed £2.3bn of invoices during the year, an increase of 15% on the prior year. Arbuthnot Banking Group PLCReport & Accounts 2023 12 Strategic Report Business Review continued Renaissance Asset Finance (“RAF”) Arbuthnot Specialist Finance Limited (“ASFL”) The ASFL loan book reduced from £14.9m as at 31 December 2022 to £3.1m at the year end. ASFL was closed for new business early in 2023, with the book being run-down for the remainder of 2023. Repayments are currently ahead of schedule. RAF reported a profit before tax of £1.6m (2022: £0.2m) with a loan book of £198.8m equating to an increase of 49% compared to the prior year end balance of £133.8m. The average margin achieved on new business grew strongly in the higher interest rate environment along with the volume of new deals written being at the highest level seen in RAF since the business was acquired in 2017. The new Block Discounting business launched in late 2021 began to mature with strong growth in the latter part of the year, delivering a positive contribution to the profitability of the business. The increase in forbearance cases and problem accounts seen during the pandemic period has now been worked through, with a majority of positive outcomes and whilst the economic environment has caused some client strain, particularly in sectors such as construction, the loan book performance remains well within tolerance levels. RAF does provide finance via brokers to enable our borrowers to purchase motor vehicles. However, the business does not have regulatory permissions to carry out regulated lending, so this is carried out on an unregulated basis. Specialist lending divisions continue to provide diversification to our lending portfolio Arbuthnot Banking Group PLCReport & Accounts 2023 13 Asset Alliance Group (“AAG”) Operations AAG reported a loss before tax of £3.2m (2022: £2.1m loss). As at 31 December 2023 the business had assets available for lease and finance leases totalling £326.8m (2022: £189.1m), with strong growth in new lending equating to an increase of 73% over the year. Strategic diversification into new lending channels particularly in the Bus & Coach sector, including a dedicated Bus Rental Division launched towards the end of 2023, contributed to the portfolio’s growth. During the year the supply of new commercial vehicles gradually returned to a degree of normality, albeit the cost per unit remains significantly higher than pre-COVID levels and is unlikely to reduce in the foreseeable future. New vehicle leases were subdued in the first half of the year, with a recovery in the latter part of the year. The market for the disposal of previously leased vehicles was lower than historically seen, particularly in the second half of 2023. This was not entirely unexpected given the increased supply of used assets into the market the previous year and the increased supply of new assets in 2023. Whilst demand for used assets slowed, encouragingly margins remained in line with previous years. During the year the remaining fair value adjustment of £6.8m at the start of the year, recognised at acquisition of the business, was fully realised following the sale of assets; along with the remaining residual value provision of £2.5m. Future gains or losses from asset disposals will be recognised in the income statement as and when they are sold. Owned Properties The Bank retains four assets in its property portfolio of which one is overseas. As a result of higher interest rates, property investment yields have also risen. However, the effect of inflationary increases in rental income delayed until scheduled rent reviews, has resulted in property values being marked down. £2.6m of impairments have been charged to the income statement for the Group’s property portfolio. The Bank has continued to drive positive momentum in the acquisition of clients from its target markets. Net growth in new clients has been strong with over 1,200 new banking clients onboarded in 2023, of which 62% were non-personal clients. This growth has seen operational aspects of the business continue to increase, with over 1 million inbound and outbound payments processed in 2023, a growth of 12% on the previous year. 98% of outbound payments were originated online, underpinning the need for continued investment in the Bank’s digital strategy. During 2023, the Bank achieved a 97% increase in the volume of fixed term deposits as clients took advantage of the increase in interest rates to lock in a guaranteed low risk return on their money by moving from instant access accounts and placing their money into longer term fixed rate deposits. Work continued on meeting the regulatory requirements under Statement (SS) 1/21: Impact Tolerances for Important Business Services, with a focus on further embedding continuity plans and enhancing technology resilience, as well as further investment in the Bank’s Investment Management Operations, focusing on increasing automation and streamlining of processes which supported an increase in trading of 9% with the total value of trades up 38% to nearly £2bn. In 2023, the Bank continued to invest in systems and infrastructure, initiating the final phase of its migration to the cloud along with developing a digital roadmap aimed at improving the customer experience and organisational efficiency over the coming years. Additionally, work commenced in 2023 on a significant transformation project to upgrade the Bank’s online and mobile banking offering. 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. Arbuthnot Banking Group PLCReport & Accounts 2023 14 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. 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 £47.1m (2022: £20.0m). The underlying profit before tax was £51.4m (2022: £31.1m). Total operating income earned by the Group was £178.9m compared to £137.4m for the prior year. The higher interest rate environment has significantly contributed to the Group’s income. This was as a result of significant excess liquidity held at the BOE, together with lending linked to the BOE base rate that has repriced immediately, while fixed rate deposits naturally lag behind as these are only repriced on maturity. With the general consensus in the market that rates are expected to fall, the Group has shifted its focus to longer term fixed rate lending products and also started to invest some of the excess liquidity into high quality and short dated fixed income assets, such as gilts. This will hopefully soften the impact as interest rates start to come down in the near future. The average net margin on client lending was 5.7% (2022: 5.1%). Also included in operating income is revenue from AAG leased assets of £19.9m (2022: £17.3m). The Group’s operating expenses increased to £131.1m compared to £108.9m for the prior year. Higher staff costs (£8.2m), further investment in information technology (£6.7m higher than in 2022), a combined impairment of £2.6m on the remaining investment property, property held for sale and held as inventory, and the general expansion of all businesses contributed to the increase. Highlights Summarised Income Statement Underlying profit/(loss) reconciliation Net interest income Net fee and commission income Operating income from banking activities Revenue Cost of goods sold Operating income from leasing activities 2023 £000 2022 £000 136,619 22,402 159,021 100,952 (81,074) 19,878 99,081 21,049 120,130 99,367 (82,109) 17,258 31 December 2023 Profit before tax and group recharges Profits realised on sale of trucks previously included in bargain purchase Total group operating income 178,899 137,388 Underlying profit Arbuthnot Latham & Co. £000 Group Centre £000 Arbuthnot Banking Group £000 62,694 (15,577) 47,117 4,267 – 4,267 66,961 (15,577) 51,384 Underlying basic earnings per share (pence) 244.6 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 2,522 – 1,627 (4,590) (131,113) (108,913) (3,191) 47,117 (11,738) (5,503) 20,009 (3,551) 35,379 16,458 Basic earnings per share (pence) 222.8 109.6 Arbuthnot Banking Group PLCReport & Accounts 2023 15 Capital Raise An intended £10m capital raise through a conditional placing was significantly oversubscribed and resulted in £12m (£11.6m after costs) of extra capital. The capital raise was completed on 5 May. Later in the year the Tier 2 debt instrument from P Capital Partners was refinanced early and extended for a further 10 years at a lower margin than before. The facility was also increased from £25m to £26m and is due to draw down in 2024. 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. In 2021, the Group acquired Asset Alliance Group Holdings Limited. The business was acquired at a discount to its fair value resulting in a bargain purchase of £8.6m. Included in the fair value adjustments at acquisition was an uplift to the valuation of lease assets, together with a residual value provision. The remaining fair value uplift of £6.8m at the beginning of the year, has been realised through sales of vehicles in the year (2022: £6.9m realised). Similarly, the remaining residual value provision at the beginning of the year of £2.5m was released (2022: £0.4m released). In future years, no adjustment will therefore be required. Total assets increased by £0.7bn to £4.3bn (2022: £3.6bn). Loans and advances to customers together with assets available for lease increased by 6% from the prior year. Customer deposits increased by 22% in the year and contributed to the 44% increase in liquid assets. The net assets of the Group now stand at £15.47 per share (2022: £14.11). Underlying profit reconciliation Balance Sheet Strength Summarised Balance Sheet 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 Assets Loans and advances to customers Assets available for lease Liquid assets Other assets 6,479 4,590 – 6,479 Total assets 4,590 Underlying profit 43,934 (12,856) 31,078 Underlying basic earnings per share (pence) 169.2 Liabilities Customer deposits Other liabilities Total liabilities Equity Total equity and liabilities 2023 £000 2022 £000 2,064,217 267,591 1,848,377 163,655 2,036,077 171,738 1,288,269 117,963 4,343,840 3,614,047 3,759,567 331,833 4,091,400 252,440 3,092,549 309,520 3,402,069 211,978 4,343,840 3,614,047 Arbuthnot Banking Group PLCReport & Accounts 2023 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. 16 Strategic Report Financial Review continued Segmental Analysis The segmental analysis is shown in more detail in Note 45. 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. This segment is being wound down. 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 PLCReport & Accounts 2023 17 Banking Wealth Management Wealth Management reported a loss of £4.3m (2022: loss of £4.1m). Fee and commission income increased by £0.6m and was more than offset by a £0.8m increase in costs. Funds Under Management and Administration increased by £0.4bn to £1.7bn, with most of the increase in the latter part of the final quarter. Banking reported a profit before tax of £63.4m (2022: £19.1m). This equated to a more than threefold increase from the prior year. Net interest income grew by 77%, while lending remained flat and deposit balances increased by 21%. The significantly higher net interest income is the result of successive increases in the BOE 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. There was a net impairment charge of £1.2m compared to £1.5m for the prior year. The lower charge in the year was as a result of revised economic scenarios applied in the expected credit loss models due to a more positive future outlook, most notably a reduction in the expected fall in property values (both residential and commercial). Indirectly allocated operating costs increased by £4.9m, mainly as a result of increased staff costs in support departments and further investment in information technology. Customer loan balances reduced by £13m to remain flat from the prior year at £1.4bn and customer deposits increased to £3.8bn (2022: £3.1bn). The average loan to value was 47.8% (2022: 52.5%). 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 2023 £000 2022 £000 114,131 2,617 116,748 (15,318) (36,755) 64,565 2,803 67,368 (14,795) (31,888) (1,227) (1,547) 63,448 19,138 Net fee and commission income Operating income Operating expenses - direct costs Operating expenses - indirect costs Loss before tax 2023 £000 2022 £000 11,328 11,328 (10,097) (5,487) 10,689 10,689 (9,237) (5,553) (4,256) (4,101) Arbuthnot Banking Group PLCReport & Accounts 2023 18 Strategic Report Financial Review continued Mortgage Portfolios RAF The Mortgage Portfolios reported a profit of £2.6m (2022: £3.8m). Net interest income reduced by £0.9m, as the loan book went down by £24.8m in the year. The Santiago mortgage portfolio performed as expected and the year-end balance was £123.7m (2022: £148.5m). Renaissance Asset Finance returned a profit of £1.6m (2022: £0.2m). Interest income increased by £3.7m from higher balances and higher rates, which was partly offset by higher funding costs of £1.2m. Operating expenses were £0.9m higher than in 2022 due to higher staff costs and general expansion of the business. Customer loan balances increased by 49% to £198.8m (2022: £133.8m). The average yield for 2023 was 8.2% (2022: 8.1%). Mortgage Portfolios Summarised Income Statement RAF Summarised Income Statement Net interest income Operating income Operating expenses - direct costs Impairment losses - loans and advances to customers Profit before tax 2023 £000 4,245 4,245 (833) (821) 2,591 2022 £000 5,110 5,110 (935) (415) 3,760 Net interest income Net fee and commission income Operating income Other income Operating expenses - direct costs Impairment losses - loans and advances Profit before tax 2023 £000 2022 £000 8,044 34 8,078 170 (5,634) (982) 1,632 5,545 32 5,577 82 (4,697) (768) 194 Arbuthnot Banking Group PLCReport & Accounts 2023 19 ACABL ASFL ACABL recorded a profit before tax of £8.5m (2022: £5.2m). ASFL recorded a loss before tax of £0.7m (2022: loss of £0.9m). Client loan balances were £239.8m at the end of the year (2022: £268.8m), with issued facilities increasing to £536m (2022: £523m). Despite a 11% reduction in loan balances, operating income increased by £2.8m. Higher interest income of £8.6m was partially offset by higher internal funding costs of £6.7m, while fee and commission income also increased by £0.9m. Operating expenses increased by £1.3m, mainly due to an increase in staff costs. The prior year impairment charge included £2m relating to one client that was placed into administration. The decision was taken to exit this market early in 2023. Customer loan balances closed the year at £3.1m (2022: £15.0m). 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 2023 £000 2022 £000 8,642 6,911 15,553 (6,777) 6,762 5,976 12,738 (5,463) (234) (2,082) Net interest income Net fee and commission income Operating income Operating expenses - direct costs Impairment losses - loans and advances to customers Profit before tax 8,542 5,193 Loss before tax 2023 £000 2022 £000 751 13 764 (1,507) 713 10 723 (1,489) 46 (697) (179) (945) Arbuthnot Banking Group PLCReport & Accounts 2023 20 Strategic Report Financial Review continued AAG The business generated a loss before tax of £3.2m (2022: loss of £2.1m for the period). As part of the bargain purchase at acquisition, the carrying value of the truck and trailer fleet was adjusted by an overall average increase of 15.95% resulting in an uplift totalling £19.5m. At the same point a provision of £2.9m was booked relating to residual values, also forming part of the bargain purchase recognised in 2021. The remaining fair value uplift of £6.8m at the beginning of the year, has been realised through sales in the year (2022: £6.9m). Similarly, the remaining residual value provision at the beginning of the year of £2.5m was released (2022: £0.4m released). In future years, no adjustment will therefore be required. It should be noted that the current year includes £10.2m internal funding costs compared to £4.9m in the prior year. While the increasing interest rate environment in 2023 resulted in higher funding costs, the adjustment to income earned on lending and assets available for lease will lag behind, as contracts are only re-priced at the end of their fixed term. The supply of new commercial vehicles gradually returned to a degree of normality, although the cost per unit remains significantly higher than pre-COVID and is not expected to reduce in the foreseeable future. New vehicle leases were subdued but started to recover in the second half of the year. The market for the disposal of second-hand vehicles was lower than historically seen, especially towards the end of the year. This was expected due to the increased supply of used assets into the market, as new assets became more readily available. In May 2023, AAG acquired a portfolio of circa 400 buses for £41.3m. All these assets are on contract to operators within the Transport for London network, and the portfolio has a range of asset specifications including electric, hybrid and diesel buses. Following the transaction, AAG are now one of the main funders of buses within the TfL network, which leaves them well placed to capitalise on future opportunities, including the on-going transition to electric. Operating expenses increased by £0.6m from the prior year. Credit provisions were £0.1m (2022: £0.4m). As at 31 December 2023 the business had a total of £326.8m (2022: £189.1m) of assets available for lease and finance leases, which is a 73% increase on the prior year. Other Divisions The aggregated loss before tax of other divisions was £5.4m (2022: profit of £11.7m). Operating income reduced by £10.7m to £14.9m (2022: £25.5m), as a result of higher internal funding costs. Reported within the other divisions in other income was rental income on our property portfolio of £0.7m (2022: £0.5m). Operating expenses increased mainly due to higher staff costs, further investment in information technology and the £2.6m impairment of owned properties (investment property, property held for sale and held as inventory). AAG Summarised Income Statement Other Divisions Summarised Income Statement Net interest expense Net fee and commission income Revenue Cost of goods sold Operating income Operating expenses - direct costs Impairment losses - loans and advances to customers 2023 £000 2022 £000 (7,864) (12) 100,952 (81,074) 12,002 (15,093) (98) (4,456) – 99,367 (82,109) 12,802 (14,507) (369) Net interest income Net fee and commission income Operating income Other income Operating expenses - direct costs Impairment losses - loans and advances to customers 2023 £000 2022 £000 13,371 1,511 14,882 3,191 (23,575) 125 23,993 1,539 25,532 2,385 (16,074) (143) (Loss)/profit before tax (5,377) 11,700 Loss before tax (3,189) (2,074) Arbuthnot Banking Group PLCReport & Accounts 2023 21 Group Centre Capital The Group costs increased to £15.6m (2022: £12.9m). Subordinated loan interest increased by £1.7m due to the rising interest rate environment. The increase in operating expenses of £1.2m is mainly due to higher staff costs. 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 pm 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 Operating expenses Loss before tax 2023 £000 2022 £000 (220) (4,481) (4,701) (10,877) (363) (2,788) (3,151) (9,705) (15,578) (12,856) Arbuthnot Banking Group PLCReport & Accounts 2023 22 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 PRA regulated entity is also the principal trading subsidiary as detailed in Note 44. 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. 2023 £000 2022 £000 252,705 (30,414) 222,291 37,726 212,501 (37,126) 175,375 37,594 260,017 212,969 13.0% 15.2% 11.6% 14.0% Arbuthnot Banking Group PLCReport & Accounts 2023 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 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, climate change, strategic, credit, market, liquidity, operational, cyber, residual value, 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 risks that may arise from 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, the Israel-Hamas war in Gaza, 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 stabilised, however geo-political volatility and uncertainty remains high with the potential to adversely affect the UK economy, as well as the Group’s customers and assets. Arbuthnot Banking Group PLCReport & Accounts 2023 24 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 £2.1bn (2022: £2.0bn). 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. Interest rate and currency risk 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 £827m. The cost of hedging is prohibitive. Cash is held at the BOE and with the general consensus in the market that rates are expected to fall, the Group has shifted its focus to longer term fixed rate lending products and also started to invest some of the excess liquidity into high quality short dated fixed income assets, such as gilts. Property and equity market risk The Group is exposed to changes in the market value of its properties. The current carrying value of Investment Property is £6.0m, properties held for sale £3.3m, and properties classified as inventory £14.7m. 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. The Group is also exposed to changes in the value of equity investments. The current carrying value of financial investments is £3.9m. Any changes in the value of financial investments will be accounted for in Other Comprehensive Income. 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, together with drawings from the Bank of England Term Funding Scheme and capital 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 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. 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. Arbuthnot Banking Group PLCReport & Accounts 2023 25 Financial Crime The Group is exposed to risk due to financial crime including money laundering, sanctions evasion, bribery and corruption, market abuse, tax evasion and fraud. The Group operates policies and controls which are designed to ensure that financial crime risks are identified, appropriately mitigated and managed. 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. Residual value risk Residual value risk equals the difference in the residual value of a leased asset set at lease inception and the lower salvage value realised upon its disposal or re-lease at the end of the lease term. The Group is exposed to residual value risk in its AAG business. Normal residual value risk is managed through the process set out below, and it should be noted that the transition to greener technology may further impact residual values in two ways. Firstly, residual values could decrease due to assets becoming obsolete; climate related regulations might change, which could result in legal restrictions on the use of assets or technological advances could lead to preferred environmental technologies. Secondly, the lack of historical information on green vehicles could lead to inaccurate measurement of residual values at inception of leases. The AAG business manage Residual Value setting through its Residual Value Committee that comprises representatives from its Asset Management, Procurement, Sales and Leasing divisions and is chaired by the Residual Value Manager. Assets are valued using either an approved Residual Value matrix or individually, dependent upon the nature of the asset and current market conditions. The strategy for Residual Value setting and oversight of the Residual Value Committee is conducted by the AAG Residual Risk Committee, which in turn reports into Asset Alliance Group Holdings Limited board. The Residual Risk Committee, chaired by the AAG Group Risk Director, includes AAG CEO, AL Group Risk Director, AAG Managing Director, AAG Finance Director and heads of Asset Management, Sales and Leasing divisions in AAG. Conduct risk As a financial services provider the Group faces 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. Arbuthnot Banking Group PLCReport & Accounts 2023 26 Strategic Report Non-Financial and Sustainability 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 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 43 • Corporate Governance Report page 55 Employees • Agile Working Policy • Board Diversity Policy • Dignity at Work Policy • Stakeholder Engagement and S. 172 (1), pages 28 and 29 • Sustainability Report, pages 30 to 32 and 37 • Equality, Diversity and Inclusion Policy • Directors Report, page 49 • Corporate Governance Report, page 54 • 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, 31 and 35 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, Diversity and Inclusion Policy • Personal Data Protection Policy pages 28 and 29 • Sustainability Report, pages 30, 32, 35 and 37 • Anti-Bribery and Corruption Policy • Sustainability Report, pages 30 and 35 • Anti-Money Laundering Policy • Client Acceptance Policy • Cyber Strategy • Group Market Abuse and Insider Dealing Policy • Physical Security Policy Arbuthnot Banking Group PLCReport & Accounts 2023 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 • Sustainability Report, pages 30 and 31 Arbuthnot Banking Group PLCReport & Accounts 2023 28 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. 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 49 and in the Corporate Governance Report on page 54. 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 March 2023, the Board gave approval for management to agree terms for a lease on new office premises at 20 Finsbury Circus in the City of London. The decision was made, taking a long-term view, because the building offers a more flexible and modern working environment which should retain and attract talented staff, and enhance the client and staff experience. It would allow the Group to progress with its future growth plans in one location. It will assist the Group in achieving its ESG targets and all London staff will be housed in one location. The Board regarded its decision as a significant step forward, maintaining the Group’s reputation with its customers and employees, and a statement of confidence in its future. In July 2023, as part of its succession planning and of its consideration of diversity, the Board appointed Jayne Almond, Angela Knight and Lord Sassoon as non-executive directors with effect from 1 September 2023, subject to the approval of Grant Thornton as Nominated Adviser and Aquis Stock Exchange (AQSE) Corporate Adviser which was given towards the end of August. Interests of the Company’s employees As explained above, the decision to move London offices was driven partly by the intention to enhance the staff experience. 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 September 2023, which received a 73% response rate. It noted that on most measures the Group scored around 60 to 70 with the exception of the measure of Arbuthnot as an Employer, scoring 87. In November 2023 an engagement survey was launched to focus on other important topics that matter to employees, including their personal growth, wellbeing, communication from senior leaders, reward and recognition as well as the important measure of the Group’s engagement score and the results will be considered by the Board in due course. 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 continue to 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 (“AL”) business and crucial for client retention. The decision to move offices Arbuthnot Banking Group PLCReport & Accounts 2023 29 was driven partly by the intention to enhance the client experience. As regards customers, the Board reviewed the continuing Consumer Duty project, which is overseen by the AL Risk Committee, from regular reports to it and updates from its Board Champion, Angela Knight. 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 an Anti-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. 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 2023 to continue its progressive dividend policy, resolving to pay an interim dividend of 19p per share to shareholders. This was an increase of 2p per share from the interim dividend paid in 2022. Given the increased profits of the Group in 2023, the Board has decided to recommend a final dividend of 27p per share; this is an increase of 2p per share compared to the final dividend of 2022. A further example of the balancing of stakeholders’ interests was the decision in December 2023 to renew the private issue of the Company’s subordinated loan issued on a bilateral basis to P Capital Partners, a Swedish Debt fund. The loan, which is being increased by £1 million to £26 million before fees and expenses, is expected to be drawn on 3 June 2024 which is the fifth anniversary of the initial loan. It is expected to be classified as Tier 2 for capital purposes which will maintain the current levels of capital to support the strategic plans of the Group. 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 Sustainability / 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. This dashboard sets out climate-change measures and actions. 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, clients, employees, community and environment (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 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 in the Sustainability Report on pages 42 and 43. In September 2023 the Board approved the enterprise-wide climate change risk appetite, risk assessments, and stress test scenarios and results. It also considered climate change risk in major change decisions, including in the case of the planned 2024 London premises relocation initiated during 2023. 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. This need to treat all shareholders equally was an important consideration in limiting the amount of the fundraising in May 2023 to £12m, a rights issue to all shareholders not being practicable due to the additional complexity and associated high costs. As a consequence for practical reasons, in addition to the subscription by Sir Henry Angest, only institutional shareholders were approached in conjunction with the Company’s stockbroker, Shore Capital, and invited to participate in the placing of shares. The newly subscribed and placed shares represented just over 8% of the Company’s issued share capital which was approved by Ordinary shareholders at the General Meeting held on 4 May 2023. Arbuthnot Banking Group PLCReport & Accounts 2023 30 Strategic Report Sustainability Report Introduction The Group has continued to embed sustainable practices across the business and remains 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. Climate change is an important topic for consumers and investors alike. In parallel, inclusive growth and the impact organisations have on society are increasingly a focus. More than ever before, organisations are being held accountable for their impact. We focus on how we can improve to build a future that delivers growth, sustainability and inclusion. Our responsible business initiatives enable us to monitor and measure our social impact by considering the impact of our practices and outputs across five pillars: governance, clients, community, environment and employees as explained on pages 35 to 37. Governance The Group has a solid system of governance in place, endorsing the principles of openness, integrity, and accountability that 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. 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 and Sustainability Information Statement on page 26. Human Rights commitments The Group is committed to operating in an ethical manner, and ensuring the relationships we have with all our stakeholders adhere to high standards. These are reflected in both our Anti-Modern Slavery Policy and in our Supplier Code of Conduct. The Group is committed to finding and reducing the risk of slavery or human trafficking in every part of our supply chain. Clients Relationships with our clients is at the heart of what we do. We take the time to understand what is important to our clients so that 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 to guide and support them. This is supported by our strong Net Promoter Score (NPS) (Non-financial Key Performance Indicator) which is reviewed every two years. Our most recent, 2022, NPS increased to 64%, up from 47% in 2020, a reflection of our clients’ support. Our bankers have been engaging pro-actively with clients, 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. Consumer Duty Our approach to the Financial Conduct Authority’s Consumer Duty means continuing to ensure that clients are at the heart of everything we do. Over the past year, we have undertaken a large-scale assessment of the Consumer Duty outcomes by reviewing our products and services, pricing structure, communications and support infrastructure. Arbuthnot Banking Group PLCReport & Accounts 2023 31 Client support As a relationship-led bank, our purpose is to help our clients go further. This means ensuring that they receive a bespoke service, tailored to their needs, helping them achieve their financial goals. As part of our product reviews, we have assessed the level of support provided to clients and the channels available to access this support. The review spanned the entire client base and we have concluded that the range of support channels provided to clients, including those with characteristics of vulnerability, enables them to pursue their financial goals and receive good outcomes. Vulnerable clients The term ‘vulnerability’ captures a range of circumstances our clients can face. To ensure we are treating vulnerable clients fairly, we have implemented vulnerable client guidance focused on identifying and supporting vulnerable clients and recording information about them. We have a Vulnerable Client Committee to ensure we continue to support our staff with treating vulnerable clients; this includes providing training resources. Employees We continually focus on creating an outstanding culture and workplace for all our employees. Our high engagement scores are a testament to this. In the most recent employee engagement survey (Non-Financial Key Performance Indicator), conducted in November 2023, our overall engagement score maintained a very high-level of 83. Once again, benchmarking across the industry showcases our significant lead over competitors. 84% of employees would recommend Arbuthnot as a great place to work, up 5% from last year and 17% against the benchmark. This achievement is something we take pride in and solidifies our reputation as a high-performing organisation. Wellbeing Our work environment fosters and enhances the wellbeing of our employees. Aligned with our mission and core values - Integrity, Respect, Empowerment, Energy & Drive and Collaboration, our wellbeing strategy is designed to resonate with the recognition that our employees constitute our greatest asset. Our wellbeing strategy focuses on four pillars: mental, physical, social and financial. Through these pillars, we provide our employees with a range of resources and tools to support their wellbeing, including resources provided by BUPA, Headspace, Hargreaves Lansdown and our Employee Assistance Programme. We work with external provider Activehub to encourage and incentivise our employees to get active, with 322 employees downloading the app in 2023 to keep active. In June we held a headline event with Activehub, rewarding employees activity with tree planting. Through Eden Reforestation Project we pledged to plant 7,696 trees. Early Careers and Young Professionals 2023 saw the continuation of our Structured Graduate and Apprenticeship Programme, with a total of 16 participants, along with the third 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 continued our Leadership Development Academy, with 13 new participants, 28 participants in total, and have more programmes scheduled for 2024 for existing and aspiring leaders. We partner with Young Professionals, an organisation which works with schools across the UK from different socio-economic backgrounds to provide an insight and introduction to different industries, in order to grow the quality and diversity of our Early Careers talent pool. Arbuthnot Banking Group PLCReport & Accounts 2023 32 Strategic Report Sustainability Report continued In February 2023, we hosted an evening inviting female students interested in a career in banking, 40 Year 13 students from the Young Professionals network and 20 female student referrals from employees. A further female student event was hosted in October, this time attended by 90 Year 13 student from the Young Professionals network and referrals from employees. Employee development As a rapidly growing business, we encourage career progression and seek to develop our people’s skills to help them grow within the organisation. Mentoring We support our employees’ continued developed through our internal mentoring programme between our employees. We partner with Pushfar, an internal mentoring platform to ensure mentees can find a suitable mentor to assist them in their careers. Cost-of-living To support our employees with the economic uncertainties over the last year and to help alleviate some of the burden of these increased costs on employees, we provided further cost-of-living payments of £750 in both April and September to those employees earning salaries of up to £50,000 pa. and who joined the Group before 1 January 2023. Benefits We offer our employees an array of benefits. The annual benefits window offers a benefits package which includes the opportunity for eligible employees to enhance at favourable rates their cover for certain benefits including life assurance. Workplace pension scheme The Group offers all eligible employees membership of a contributory defined contribution plan, which is operated by Hargreaves Lansdown who present six-monthly to the Pension Scheme Governance Committee. The matters discussed at this Committee’s meetings are communicated to employees, continuing the focus on their financial wellbeing. Employee networking forum: Connect 2023 marked the launch of our employee network, Connect. The purpose of Connect is to: 1. Promote a safe and supportive workplace for all to work, learn and thrive. 2. Understand the challenges faced in our workplace in order to effect change to increase diversity. 3. Attract and retain a diverse workforce. Our Connect network hosted a range of events covering Diversity, Equity and Inclusion (“DEI”) educational topics, including Eid al-Fitr, conscious inclusion, and invisible illnesses. Diversity, Equity, and Inclusion In September 2023 we conducted an employee survey to form a long-term DEI strategy. 73% of employees completed the survey and the responses have been used to form our strategy. Our ambition is to create an environment which enables everyone to perform to the best of their potential. We know that by leading a culture which reduces groupthink, draws on everyone’s diverse mindsets, skills, backgrounds and perspectives we will develop the best leaders and teams. We also understand that this will support our product and service offering, tailoring these to reflect the differing needs of our client base and ensuring that we provide good customer outcomes. This will enable us to achieve our ambition to be the leading full-service, human-scale relationship bank powered by modern technology. Therefore, we will continue to create a culture where everyone is committed and empowered to create a diverse and inclusive environment for all. An ambitious, high performing culture where we support, enable and inspire our people to be their best selves. Together we will learn, collaborate and challenge each other to create an organisation where everyone can contribute towards our shared ambition and collectively operate with a professional attitude towards our colleagues and external stakeholders alike. Arbuthnot Banking Group PLCReport & Accounts 2023 33 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. Environment We have made a commitment to reduce our environmental impact and to improve our environmental performance as an integral part of our business strategy. We are committed to achieving net-zero by 2050 and effective management of our carbon footprint is an important part of our strategy. Our corporate responsibility strategy expanded in 2023 with the formation of a CSR Steering Committee to ensure our CSR activities are focused on the Bank’s goals. In 2023, the strategy focused on both quality education and no poverty. Volunteering and Philanthropy We partnered with The Felix Project, a charity fighting hunger and food waste, and The Whitechapel Mission, a homeless shelter in East London. We also partnered with Surrey Docks Farm, a working city farm in the heart of London, providing opportunities for local communities to learn about farming and food production. To assist with our skills-based volunteering and to ensure we support education and financial education, we partnered with The Switch, offering our employees the opportunity to volunteer in schools in Tower Hamlets. Sessions here included CV-writing workshops, Money Matter workshops and interview preparation. At The Felix Project, our employees have volunteered in their warehouses and kitchens, preparing and packaging meals made from surplus food. We also had employees help sort clothes for homeless people in East London, supporting the Whitechapel Mission. Supported by the Worshipful Company of Farmers, at Surrey Docks Farm, we have had large teams of employees help with the running of the farm, including cleaning out the goats, mucking out the sheep, hedge trimming, installing raised beds, creating dead hedges, clearing overgrown areas and more. In 2024 we will work more closely at our impact in our regional offices and aligning their philanthropy and community impact with the Group’s wider social impact goals. Pound for Pound and Payroll giving We provide pound for pound matching of up to £250 for UK registered charity fundraising events each year. We also offer our employees the opportunity to donate regularly from their gross pay to charities of their choice. As a consequence, we have in place an Environmental Management policy which sets out our high-level approach to managing environmental issues and provides requirements to help the Bank to achieve its commitments. Enhancing transparency within our own supply chains is part of our mission to work closely with our third-party relationships. In doing so, working together will help us establish how we can better engage and be held accountable. Due to the nature of the Group’s business, we are primarily a consumer of services rather than goods and materials. However, we are still committed to reducing the impact of our supply chain. As a minimum, we expect our suppliers to provide evidence towards their environmental status, where relevant and appropriate. Ahead of the relocation of our London headquarters in the summer of 2024, we have been presented with the opportunity to review and reduce our environmental impact. Scope 1 and 2 emissions will be managed through energy efficiency, renewable energy sourcing, and moving our company car fleet to be fully electric or hybrid by 2035. We are also reviewing our waste management; we currently send zero waste to landfill but need to reduce the waste we produce across the business. We will be managing paper use, printing, improving waste facilities and raising recycling awareness across the workplace. 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 PLCReport & Accounts 2023 34 Strategic Report Sustainability Report continued 20 Finsbury Circus In 2024, we will be relocating our London offices to a new site at 20 Finsbury Circus. As well as creating a modern and collaborative workplace, sustainability and our environmental impact have been taken into consideration for the relocation. 20 Finsbury Circus is a BREEAM-excellent-rated building that has undergone a new CAT fit-out. The building itself is fitted with a modern building management system and heating and cooling technology. We will have access to a new lighting control system that will allow us to create our own lighting zones and determine when and how each zone operates on weekdays and weekends. Electricity consumption is recorded for every circuit in the building, allowing us to analyse consumption data to increase our efficiency. While working on the fit-out design, we have made efforts to re-use existing fixtures where possible, such as lighting and ceilings in the staff working areas. For example, the tea point worktops that are being installed are made from 100% post-consumer plastic waste, the barista bar is made from 65% wood waste, the acoustic panels in meeting rooms are made from recycled plastic bottles, and the carpets are 71% recycled content and carbon neutral. We have endeavoured to reuse existing furniture where possible. We have also reviewed our refuse management process, including the installation of a compactor, which will reduce the number of waste collections. Over the next few years, the plan is to roll out initiatives in our regional locations as well. Arbuthnot Banking Group PLCReport & Accounts 2023 35 Summary across our five pillars We are taking steps, guided by our five pillars of governance, clients, community, environment and employees, to help us become more sustainable. Pillar Current status Ensure responsible and transparent corporate governance which aligns to business goals while making a positive societal impact • We have embedding sustainability into our business practices by recording, monitoring, and publishing performance. • We have policies in place, such as our: – Anti-Money Laundering Policy – Board and Senior Management Diversity Policy – Anti-Bribery and Corruption Policy – Client Acceptance Policy – Group Market Abuse and Insider Dealing Policy – Whistleblowing Policy – Anti-Modern Slavery Policy • 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 have effective risk management which underpins our strong risk culture supporting the Group’s vision. • We have a Supplier Code of Conduct that promotes equal opportunities and diversity, acting with integrity, endorsement of sustainable procurement within the supply chain, safe working practices, and data, cyber and privacy protection. Ensuring best outcomes for our clients • We seek regular feedback from our clients to reinforce our proposition and service. • As reported last year, we conducted an in-depth review of our client value proposition in 2022 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 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 continued to invest in the Bank’s core banking system, 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. • We implemented the FCA’s Consumer Duty requirements for all relevant products and services from 31 July 2023. We continue to consider ways that we can improve outcomes for our customers. • We have initiated a Digital Transformation Project to further enhance the Bank’s services to clients. • We have policies in place, such as our: – Complaints Handling Policy – Fraud Policy – Personal Data Protection Policy – Physical Security Policy – Vulnerable Clients Policy • We provide all our employees access to our extensive Learning and Development Programme. We also have a Leadership Development Academy and Early Careers Programme. • We have a Pension Governance Committee to manage and communicate our workplace pension scheme. Arbuthnot Banking Group PLCReport & Accounts 2023 36 Strategic Report Sustainability Report continued Pillar Current status Having a positive impact on the community in which we operate • We support philanthropy through matching charity donations, payroll giving, and volunteer days. In 2023 we supported The Felix Project, The Whitechapel Mission, The Switch and Surrey Docks Farm. • We will continue to encourage skills-based and team-based volunteering, increasing our focus on education and financial literacy. • We continue to encourage employees fundraising and challenges. • We have established a CSR Steering Committee that ensures the Bank’s community impact is aligned with the Bank’s goals and objectives. • We aim to secure new accreditations and signatories that align with our CSR activities and values. Ensuring that our business practices have a positive impact on the environment • We will set goals and progress against these with a view to reaching net-zero carbon emissions as a business by 2050. • We have reported this year in line with the requirements of the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022. • We assess both direct and indirect climate-related risks and opportunities. • We incorporate annual sustainability reporting into our annual reports and accounts. • We have an Environmental Management Policy to help us achieve our commitments. • We have established a Sustainable investment Service (SPS). Energy and Waste • With the relocation of our London headquarters we will be reviewing our energy consumption and emissions across Scope 1, 2, and 3. We are actively reviewing our premises strategy with specific reference to environmental factors and agile working. • We have updated our Supplier Management Framework to reflect the AL Environmental Management Policy. • We ensure the responsible disposal of computer equipment and have a waste recycling programme in place. Transport • 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. • We provided ESG training to relationship managers and credit managers. Arbuthnot Banking Group PLCReport & Accounts 2023 37 Pillar Current status Creating a supportive and diverse workplace in which employees can thrive. • We promote a working environment that seeks to develop employee skills, and ensures employees are treated fairly and supports their wellbeing. Policies to support this include: – Agile Working Policy – Flexible Working Policy – Health and Safety Policy – Parental Leave Policy – Remuneration Policy – Training & Development Policy – Dignity at Work Policy – Equality, Diversity and Inclusion Policy • We have invested in new offices and working environments in Bristol and in our London headquarters. • We operate an internal recognition scheme: Arbuthnot Achievers. • We conduct annual 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. • All eligible employees may receive a bonus, in addition to pension contribution, absence pay and other core and flex benefits. We 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. • We will launch a Group-wide DEI strategy in 2024. And in 2023 we launched our internal staff networking forum: Connect. • We have an internal colleague wellbeing programme and wellbeing support resources. • We provide all our staff access to our extensive Learning and Development Programme. We also have a Leadership Development Academy and Early Careers Programme. • We have a colleague Pension Governance Committee to manage and communicate our workplace pension scheme. Metrics Disclosures around metrics are given in the section on Climate-related Financial Disclosures above. Arbuthnot Banking Group PLCReport & Accounts 2023 As stated in the section on Risks and Uncertainties on page 23, we have assessed the Group against the TCFD recommended disclosures and we set out below our assessments. 38 Strategic Report Sustainability Report continued Climate-related Financial Disclosures This section of the Strategic Report describes how the Directors have implemented the requirements of the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 which amended the Companies Act 2006 to introduce Task Force on Climate-related Financial Disclosures’ (“TCFD”) aligned disclosure requirements into the existing non-financial information requirements. These regulations apply to the Group from its financial year ended 31 December 2023 and are broadly in line with the recommendations of the global TCFD, information on which was given voluntarily in last year’s Report. This report covers 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. Requirement Response Governance The Board annually review and approve the enterprise-wide climate change Describe the board’s oversight of climate- related risks and opportunities. Describe management’s role in assessing and managing climate- related risks and opportunities. • Risk appetite, • Risk assessments, and • Stress test scenarios and results. The Board review the ESG dashboard (that includes Climate Change) at each meeting. This dashboard details climate-change measures and actions. The tolerances are partly based on the climate change stress test scenarios outputs. Climate change risk is considered as falling within two categories: Physical Risk: Arising from longer-term changes in the climate and weather-related events, rising average temperatures, heatwaves, droughts, floods, storms, sea-level rise, coastal erosion and subsidence. Transition Risk: Arising from the adjustment towards a low-carbon economy and could lead to changes in risk appetite, strategy, policy, technology and sentiment. The Board also consider climate change risk in major change decisions, most recently in the case of the planned 2024 London premises relocation initiated this year. The Senior Management Function (“SMF”) accountability for the financial risks of climate change sits with Stephen Kelly, the AL CRO. Climate change is managed within the Group’s governance and risk management frameworks which includes the consideration of both current and emerging risks. Arbuthnot Banking Group PLCReport & Accounts 2023 39 Requirement Response Strategy Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term. Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning. Describe the resilience of the organisation’s strategy, taking into consideration different climate- related scenarios, including a 2°C or lower scenario. The Board considers the Group’s business model to be resilient to the financial risks from climate-related risks based on the risk assessments and stress test scenario results. The existing income streams are not materially impacted by either transitional or physical risks. The business strategy is also positioned to capture opportunities and support the transition to a low carbon economy. The key risks and opportunities are: Short and medium term (0-5 years) • Growing investor, client, and employee preference to work with, or for companies promoting a low-carbon economy • AL Core transition risk and opportunity on the rising EPC expectations for buy to let 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. Long term (5-30 years) • AL Core physical risk (flood risk) on residential property. These risks are mitigated as follows: • Residential property loan risks are mitigated by the loan durations (typically less than 5 years) and strong loan to values. • RAF combustion engine risks are mitigated by the short loan durations (typically less than five years). • AAG heavy goods vehicles combustion engine risks are mitigated by the short leasing durations (typically less than five 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. Asset residual values and lifespans are monitored considering possible technology changes. • The Group exposure to the Energy or Utility sectors is less than 1% of the portfolio. The Group is positively minded toward supporting the transition to a low carbon economy and seeks to capitalise on opportunities as follows: • AL looks more positively on lending applications with property collateral that is C or better. The business is also piloting a green lending product aimed at attracting higher EPC portfolios and funding EPC improvements. • RAF is supporting clients by financing leases on electric and hybrid vehicles. It has had success in financing hybrid London taxis and smaller electric vehicles. • AAG finances electric buses and is working with the industry on transition pathways to cleaner technology alternatives for heavy goods vehicles. • AL has offered clients the option to invest funds in a Sustainable Investment Service since 2021. This service seeks to incorporate environmental, social and governance (“ESG”) factors to achieve a positive impact without sacrificing long-term financial returns. Arbuthnot Banking Group PLCReport & Accounts 2023 40 Strategic Report Sustainability Report continued Requirement Response Risk Management The Board approve the climate change risk assessment and stress test scenarios prepared by risk management. Describe the organisation’s processes for identifying and assessing climate- related risks. Describe the organisation’s processes for managing climate- related risks. Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management. The risk assessments identify and assesses the transition and physicals risk to the business model and lending book. They consider the existing and emerging regulatory requirements and other relevant factors, as well as the potential size and scope of climate-related risks. The stress test scenarios inform the risk assessments. The scenarios are tailored versions of the 2021 Climate Biennial Exploratory Scenario (“CBES”) as outlined in the BOE “Key elements of the 2021 Biennial Exploratory Scenario: Financial risks from climate change”. Three scenarios are considered which are plausible representations of what might happen based on different future paths of governments’ climate policies. They cover the period to 2050 and assume either early action (in current year), late action (ten years’ time) or no additional action. Two scenarios consider routes to net-zero carbon dioxide emissions globally by 2050: an Early Action scenario and a Late Action scenario. These scenarios primarily explore transition risks from climate change: • Early Action: Under this scenario, climate policy is ambitious from the beginning, with a gradual intensification of carbon taxes and other policies over time. Global carbon dioxide emissions are reduced to net-zero by around 2050 and global warming (relative to pre-industrial levels) is successfully limited to 1.8°C by the end of the scenario, falling to around 1.5°C by the end of century. The required adjustment in the economy creates a temporary headwind to growth but this dissipates in the latter half of the scenario once a significant portion of the required transition has occurred, and the productivity benefits of green technology investments begin to be realised. • Late Action: The implementation of policy to drive the transition to a net-zero economy is assumed to be delayed by a decade under this scenario. Policy measures are then more sudden and disorderly as a result of the delay. Global warming is limited to 1.8°C by the end of the scenario (2050) relative to pre-industrial levels, but then remains around this level at the end of the century. The more compressed nature of the reduction in emissions also results in material short-term macroeconomic and financial markets disruption. UK unemployment rises to 8.5% and the economy goes into recession for a short period. Falls in output are particularly concentrated in emissions-intensive sectors. The third scenario is based on the physical risks that would begin to materialise if governments around the world fail to enact policy responses to global warming and no additional action is taken to address climate change. This is considered a severe scenario, being based on climate outcomes that would only occur later this century under the assumption that no additional action is taken to address climate change, and represents a worse than expected outcome even under such conditions. The absence of transition policies in this scenario leads to a growing concentration of greenhouse gas emissions in the atmosphere and, as a result, global temperature levels continue to increase, reaching 3.3°C higher relative to pre-industrial levels by the end of the scenario. This leads to chronic changes in precipitation, ecosystems and sea-levels, which are unevenly distributed globally, and in some cases irreversible. There is also a rise in the frequency and severity of extreme weather events. There are permanent impacts on living and working conditions, buildings and infrastructure. As a result, UK and global GDP growth is permanently lower and macroeconomic uncertainty increases. Reflecting the fact that the future looks materially worse at the end of the scenario, with the adverse effects of climate change set to worsen further, UK and US equity prices are respectively just under 20 and 25% lower than they might otherwise be. Climate change is managed within the Group’s governance and risk management frameworks. Specifically, the: • AL Risk Committee oversees ESG and the financial risks of climate change. • AL Credit Committee considers implications of climate change on new and existing lending. • AL Investment Committee considers implications of climate change on investment decisions. • AL Product Governance Committee considers climate change on propositions. Climate Change is referenced in key documents including the: • ICAAP. • Risk appetite framework. • AL risk hierarchy. • Credit policy. Arbuthnot Banking Group PLCReport & Accounts 2023 41 Metrics and Targets Aspirations Metrics Describe the targets used by the organisation to manage climate- related risks and opportunities and performance against targets. Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process. Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (“GHG”) emissions and the related risks. All Buy To Let properties to be either EPC C, or have valid exemption by 2035. AL want to lend against high quality residential collateral. Typically these properties are EPC C. AL also support Landlords to improve the quality of their collateral, including EPC gradings, where they are currently beneath C. Following systems upgrade, EPC ratings are now collected on all new lending and this metric will be shared going forward. All leases to be for electric, or clean alternative, vehicles by 2050 with exception of classic cars. AL want to support clients as they transition to the low carbon economy and recognise the transition will occur at different speeds. However, AL will cease providing financing on petrol and diesel cars and vans from 2035, and non-zero emission heavy goods vehicles from 2040. Energy & utility exposure to be maintained at less than 1% of AL lending portfolio (0.22%, June 2023). • % of Buy To Let properties EPC C and above. • Current year % of new electric and hybrid of total vehicles financed. • Energy and Utility Exposure as a % of portfolio. Be Net Zero by 2050 • Scope 1 and 2 intensity ratios. By reducing carbon emissions and minimising waste • General Waste Recycling %. • Complete switch to new London building which is rated “Excellent”. • Company car fleet to be fully electric or hybrid by 2035. • Company heavy goods fleet (AAG) to be powered by non-combustion engines by 2040. • Improve recycling rates to 60% by 2025. Scope 1,2 and 3 emissions are reported on page 42. (Scope 3 emissions will remain as per 2022. We have investigated and decided against extending Scope 3 emissions reporting to the lending and investment portfolios. The Scope 3 emissions methodology and data would not be reliable and would give an illusion of accuracy that would not help decision making.) Arbuthnot Banking Group PLCReport & Accounts 2023 42 Strategic Report Sustainability Report continued Streamlined Energy & Carbon Reporting (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 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 2023. 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 The Base Year for the organisation is a rolling annual comparison. Reporting Methodology • Data has been collected for electricity, gas and transport. • GHG Protocol Corporate Accounting and Reporting Standard has been followed where relevant. • Data was collected specifically for the purpose of SECR. • The 2022 and 2023 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 2023: • Dominion Street, London Natural Gas Gas use is included in the rent for the property and sub-metering is not available, estimates are based on floor area. • Bristol and Gatwick Energy is included in the rent, and sub-metering for the office is not available, estimates are based on floor area. Note that the floor area, occupied by the business in Bristol, increased this year as has the estimated electricity for this property. • 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 whole Group as required by SECR. Reporting Summary 2023 2022 Scope One Natural Gas - 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 1,545 68,985 384,242 407,063 57,345 336,008 293,381 273,464 1,367,261 75 0.0130 14 0.0090 80 70 0.0010 64 0.0002 303 5,779 1,545 90,720 314,699 397,824 61,926 287,841 397,340 269,795 1,414,726 73 0.0130 15 0.0100 69 96 0.0017 65 0.0002 318 12,400 1,693,514 3,063 17,106 1,696,577 351 0.0283 – 1 352 14,274 1,703,083 8,317 19,656 1,711,401 329 0.0231 2 0.0001 331 272,158 272,158 294,941 294,941 69 0.0003 69 0.0003 270,683 270,683 337,205 337,205 80 0.0003 80 0.0003 3,358,778 724 3,463,331 729 18% 15% Arbuthnot Banking Group PLCReport & Accounts 2023 43 Energy Efficiency Actions Further improvement in transport emissions have been made with Arbuthnot Latham running 100% electric company cars and driving fewer company miles in 2023, representing a 62.5% reduction in tCO2e. AAG have also continued to improve the emissions of vehicles in the fleet, moving significantly to petrol hybrid vehicles; however, increased mileage in company vehicles means savings have only led to a drop of one tCO2e. Following the decision to relocate the offices at Wilson Street and Dominion Street later in the year to new head office premises at 20 Finsbury Circus, there has been no further investment in energy savings in 2023 at these buildings. James Cobb Group Finance Director 27 March 2024 Corrective Actions The prior year numbers have been restated due to further details about diesel use at Wolverhampton being identified during the Energy Savings Opportunity Scheme (“ESOS”) audit. The calculation in 2022 for HGVs was assessed as average laden, but the ESOS audit revealed that this should be unladen. The audit also showed that the value used for on-site transport was under reported. Both of these numbers have been corrected and restated for 2022, representing an overall increase of one tonne of carbon for the prior year. Changes from 2022 Scope One There was a 2.6% increase in carbon tonnes for Natural Gas. This is attributed to an increase at Wilson Street for heating and hot water. AAG fuels show improved control in 2023 with an 7.2% decrease in Kerosene, but Diesel used on-site has increased by 15.7%, an overall increase in these fuels of 9.8 tCO2e. The carbon tonnes for AAG HGVs have reduced by 27.1% due to a reduction in miles of 24%. Scope Two There have been small changes in the portfolio of properties compared to last year. Whilst electricity measured in kWh shows a small decrease compared to 2022, the conversion factor for electricity has risen this year due to the mix of fuels generating electricity for the grid. This has caused a 6% increase in tCO2e in 2023, compared to 2022. Scope Three Transport Mileage driven by employees in their own vehicles on behalf of the business has remained reasonably similar in 2023 compared to 2022 with a 0.5% increase. The significant drop in tCO2e of 13.9% is related to the type of vehicles being driven with a higher number of miles driven in petrol hybrid and electric vehicles. Intensity Ratio An intensity ratio is used to enable year on year comparison. As Arbuthnot is an office-based business 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. Arbuthnot Banking Group PLCReport & Accounts 2023 44 Board of Directors Sir Henry Angest James Cobb Andrew Salmon Jayne Almond The Hon Sir Nigel Boardman Ian Dewar Angela Knight CBE Lord Sassoon Sir Alan Yarrow Frederick Angest Nicholas Jennings Company Secretary Arbuthnot Banking Group PLCReport & Accounts 2023 45 Sir Henry Angest Chairman 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 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 Group Finance Director 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 a director of Secure Trust Bank PLC and 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 Chief Operating Officer 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. Jayne Almond Independent Non-Executive Director Appointed a Director in September 2023, Ms Almond is also a director of Arbuthnot Latham & Co., Limited. She is a highly experienced professional in the banking, mortgages and financial services arenas and is Chairman of Bluestep Bank AB. She was previously Chairman, Chief Executive or NED in a wide range of organisations including Butterfield Mortgages Limited and Kensington Mortgages, a subsidiary of Barclays Bank UK plc. The Hon Sir Nigel Boardman Independent Non-Executive Director Appointed a Director in June 2019, Sir Nigel is also chairman and a director of Arbuthnot Latham & Co., Limited. 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, a director and Vice-Chair of the London Philharmonic Orchestra 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, and a director of its UK subsidiary, Consello Digital Limited. Sir Nigel was previously a non-executive director of the Department for Business, Energy and Industrial Strategy and chaired its audit committee. Ian Dewar FCA Independent Non-Executive Director Appointed a 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 was previously Senior Independent Director of Brewin Dolphin Holdings PLC and a non-executive director of Manchester Building Society. Angela Knight CBE Independent Non-Executive Director Appointed a Director in September 2023, Ms Knight is also a director of Arbuthnot Latham & Co., Limited. She is Senior Independent Director of Vanquis Banking Group plc, Chair of the Board of Pool Reinsurance Company Limited, a director of Encore Capital Group, Inc and a non-executive independent member of the board of the Astana Financial Services Authority of Kazakhstan. She is also Master of the Worshipful Company of International Bankers. She has a wealth of commercial and financial experience from her time in government as a Treasury Minister and as Chief Executive of the British Bankers’ Association (now UK Finance) and of Energy UK. She was Member of Parliament for Erewash from 1992 to 1997. Her previous non-executive roles include Lloyds TSB plc, Scottish Widows, LogicaCMG plc, Transport for London, Port of London Authority, Brewin Dolphin Holdings plc, TP ICAP plc and Taylor Wimpey PLC. She was also Chair of the Office of Tax Simplification, an independent body of HM Treasury. Arbuthnot Banking Group PLCReport & Accounts 2023 Nicholas Jennings FCA Company Secretary Appointed Group Company Secretary in July 2018, Mr. Jennings was previously company secretary of Daily Mail and General Trust plc and of Close Brothers Group plc. He is a Chartered Accountant. 46 Board of Directors continued Lord Sassoon FCA Independent Non-Executive Director Appointed a Director in September 2023, Lord Sassoon is also a director of Arbuthnot Latham & Co., Limited. He began his career at KPMG, before joining SG Warburg (latterly UBS Warburg) where he led the firm’s global privatisation business, ending as Vice-Chairman, Investment Banking. From 2002 to 2013 he served in HM Treasury as Managing Director, Finance, Regulation and Industry before acting as President of the Financial Action Task Force and was then Commercial Secretary to the Treasury. He is currently a non-executive director of Barco NV, a listed Belgian visualisation technology company, and of China Construction Bank Corporation, Chair of Sir John Soane’s Museum, President of the China-Britain Business Council and Member of the International Advisory Council of the China Investment Corporation. He was an executive director of Jardine Matheson Holdings from 2013 to 2020 and was previously a non-executive director of The Merchants Trust plc and of Jardine Lloyd Thompson Group plc. Sir Alan Yarrow FCSI (Hon) Independent Non-Executive Director Appointed a 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 Non-Executive Director Appointed a 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. Arbuthnot Banking Group PLCReport & Accounts 2023 47 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. arbuthnotlatham.co.uk/group/investor-relations/announcements. 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 2026. 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 to the financial statements. 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. Group Directors’ Report The Directors present their report for the year ended 31 December 2023. 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 43. Corporate Governance The Corporate Governance report on pages 52 to 59 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 70 of the financial statements. The profit after tax for the year of £35.4m (2022: £16.5m) is included in reserves. The Directors recommend the payment of a final dividend of 27p (2022: 25p) per share which, together with the interim dividend of 19p (2022: 17p) paid on 22 September 2023 represents total dividends for the year of 46p (2022: 42p). The final dividend, if approved by members at the 2024 Annual General Meeting (“AGM”), will be paid on 31 May 2024 to shareholders on the register at close of business on 19 April 2024. Directors The names of the Directors of the Company at the date of this report, together with biographical details, are given on pages 44 to 46 of this Annual Report. Ms J.D. Almond, Ms A.A. Knight and Lord Sassoon were appointed to the Board on 1 September 2023. All the other Directors listed on those pages were directors of the Company throughout the year. Ms Almond, Ms Knight and Lord Sassoon offer themselves for election under Article 75 of the Articles of Association. Messrs Cobb and Dewar being eligible, offer themselves for re-election under Article 78 of the Articles of Association. Mr. Cobb has a service agreement terminable on twelve months’ notice. Mr. Dewar, an independent non-executive director, has a letter of appointment terminable on three months’ notice. Arbuthnot Banking Group PLCReport & Accounts 2023 48 Group Directors’ Report continued Going Concern Share Capital 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. The key Idiosyncratic Risks for the stress testing included: • 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. The Company has in issue two classes of shares, Ordinary shares and Ordinary Non-Voting shares, each with a nominal value of 1p each. 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. During the year the Company’s issued share capital increased by 1,297,297 ordinary shares through the allotment and issue of ordinary shares through the placing of and subscription for new voting Ordinary shares in the Company, raising approximately £12.0 million in a fundraising. The shares were allotted and issued on 5 May 2023 at the placing price on a non-pre-emptive basis pursuant to authorities granted to the directors of the Company at the general meeting held on 4 May 2023. As a result of the issue, the Company’s issued share capital increased by 8.64%. In the three year period prior to the issue, the Company did not issue any other shares for cash on a non-pre-emptive basis. Related Party Transaction Of these newly issued shares, Sir Henry Angest subscribed for 729,843 shares at a cost of £6,751,047.75 which is disclosed in accordance with Rule 19 of the AIM Rules for Companies. Authority to Purchase Shares 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 160 and 161. 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. Arbuthnot Banking Group PLCReport & Accounts 2023 49 Financial Risk Management Directors’ Indemnities 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 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. Beneficial Interests - Ordinary shares Employee Engagement Beneficial Interests 2023 2023 2024 % 1 January 31 December 22 March Sir Henry Angest 8,376,401 9,176,185 9,276,185 57.3 Sir Nigel Boardman J.D. Almond J.R. Cobb A.A. Salmon 26,062 –* 6,000 51,699 26,062 11,617 6,000 51,699 26,062 11,617 6,000 51,699 0.2 0.1 – 0.3 Beneficial Interests - Ordinary Non-Voting shares Beneficial Interests 2023 2023 2024 % 1 January 31 December 22 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 *At date of appointment Substantial Shareholders The Company was aware at 12 March 2024 of the following substantial holdings in the Ordinary shares of the Company, other than those held by one director shown above: Holder Liontrust Asset Management Slater Investments Mr. R Paston Ordinary Shares 1,643,954 1,190,376 529,130 % 10.2 7.4 3.3 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 2023, one Director had a loan from Arbuthnot Latham & Co., Limited amounting to £1.5m (2022: £1.4m) and four directors had deposits amounting to £3.2m (2022: £4.4m), all on normal commercial terms as disclosed in Note 43 of the financial statements. 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 31 and 32. The Company has a policy in place to ensure that it applies the Equality Act 2010 which makes it unlawful to discriminate on the grounds of disability and other protected characteristics. At the recruitment stage, reasonable adjustments are made to ensure that no candidate is disadvantaged because of their disability. Should existing employees become disabled, every effort is made to retain them within the workforce wherever reasonable and practicable. The Group also endeavours to provide equal opportunities in the training, promotion and general career development of disabled employees. Engagement with Suppliers, Customers and Others Information on engagement with suppliers, customers and other stakeholders is given in the Strategic Report on pages 28 and 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 42 and 43. These Regulations implement the Government’s policy on Streamlined Energy and Carbon Reporting (SECR) to support business in understanding its responsibility for carbon emissions and to help establish plans to become Net Zero by 2050. Arbuthnot Banking Group PLCReport & Accounts 2023 50 Group Directors’ Report continued Political Donations The Company made political donations of £7,500 during the year (2022: £30,000), being payment for attendance at political functions. An Ordinary resolution will be proposed at the forthcoming AGM to renew the authority, last given in June 2020, to make such donations in accordance with Sections 366 and 367 of the Companies Act 2006. This resolution is for the total amount donated or expended not to exceed £250,000, which is the same level as the current authority granted in June 2020, over a further four years to 22 May 2028. Shareholders may recall that at the AGM in June 2020 74.6% of total votes cast were in favour of the resolution and so, in line with the UK Corporate Governance Code, the Company consulted with five institutional shareholders, comprising almost all of the votes of those which it identified as not having supported the resolution, in order to understand why they had voted against the resolution. The renewal of the resolution in 2020 followed an exceptional amount of expenditure of £77,000 being incurred during 2019, being donations to the Conservative Party ahead of the 2019 General Election in view of the significant adverse impact that a Labour government under Jeremy Corbyn would have had on the Group’s clients and business. Having explained its position, the Board was encouraged by the continued support of its major shareholders. Since June 2020, aggregated political donations have been well within the authorised amount, totalling £67,500 (£10,000 in 2020, £20,000 in 2021, £30,000 in 2022 and £7,500 in 2023). These payments were made for payment mainly for attendance at political functions associated with the Conservative Party for which, as publicly disclosed in the Electoral Commission register, Arbuthnot Latham & Co., Limited acts as a banker. The Board continues to believe that it is in the interests of shareholders that it has the flexibility to make such payments in light of prevailing political circumstances over the next few years. It accepts that institutional shareholders may have a policy of voting against political donations, but believes the Company’s circumstances justify a different approach. The Board therefore recommends approval of the resolution which is for a further four-year period in order to retain this flexibility. It welcomes engagement with shareholders and continues to maintain communications via one-to-one meetings as appropriate. Events after the Balance Sheet Date There were no material post balance sheet events. Annual General Meeting (“AGM”) The Company’s AGM will be held on Wednesday 22 May 2024 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 160 to 163. 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. 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. Arbuthnot Banking Group PLCReport & Accounts 2023 51 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 Accounting Standards 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. 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 27 March 2024 Arbuthnot Banking Group PLCReport & Accounts 2023 52 Corporate Governance Introduction and Overview Leadership and Purpose 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 applies the principles of the UK Corporate Governance Code, published by the Financial Reporting Council in July 2018 (“the FRC Code”), and complies with its provisions in so far as they are considered 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 authorised and 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 decided in 2018 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. In January 2024 the FRC made limited revisions to its Code, publishing a UK Corporate Governance Code 2024 (“the 2024 Code”). The 2024 Code is not applicable to the Company until its year beginning 1 January 2025 and for one provision until its year beginning 1 January 2026. The Company will be reviewing its procedures to enable the Board to report under the 2024 Code, as required, in due course. The Company is led by the Board which comprises ten members: Sir Henry Angest, the Executive Chairman and Chief Executive; two other executive directors, Andrew Salmon and James Cobb; six independent non-executive directors, Sir Nigel Boardman, Angela Knight, Ian Dewar, Sir Alan Yarrow, Jayne Almond and Lord Sassoon; and one other non-executive Director, Frederick Angest. This means that more than 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 The Board met regularly throughout the year. In total it held eight scheduled meetings, six of which were held jointly with the Board of Arbuthnot Latham with the other two being held to approve the Annual and Interim Reports, and two ad-hoc meetings relating to the fundraising. It also held a separate strategy meeting, together with the AL 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 PLCReport & Accounts 2023 53 In addition to overseeing the management of the Group, the Board has determined certain items which are reserved for decision by itself, as set out in the Schedule of Matters Reserved to the Board which is reviewed annually and is published on the Company’s website at https://www. arbuthnotlatham.co.uk/group/about/corporate-governance. 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 AL Chief Compliance Officer or by an external firm of lawyers, accountants and other subject matter experts. Risk management training is provided, including that in relation to the ICAAP and ILAAP, by the AL Chief Risk Officer with an overview of credit and its associated risks and mitigation by the AL Chief Credit Officer. Board Evaluation The annual Board Effectiveness Review was conducted internally. The 2023 evaluation took the form of a confidential online questionnaire which assessed the performance of the Board and its Committees. The questions were set 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. They also covered clarity of the business, strategy and risk and accountability. The results were discussed by the Board in February 2024 and proposed actions arising will be considered in due course. 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. 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 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 align completely 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, which has had a positive impact on the Company. Arbuthnot Banking Group PLCReport & Accounts 2023 54 Corporate Governance continued 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 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 Jayne Almond, Sir Nigel Boardman, Angela Knight and Lord Sassoon to be independent, notwithstanding their directorships and, in the case of Sir Nigel his chairmanship, at Arbuthnot Latham since their 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 independent directors 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 2024 AGM are James Cobb and Ian Dewar, who have served on the Board for 15 years and 8½ years respectively. The contribution of Mr. Cobb as the Group Financial Director has been invaluable in managing the capital and liquidity requirements of the Group. He has also played a pivotal role in sourcing and delivering the acquisitions that have shaped the strategy of the Group. Mr. Dewar, with a wealth of experience as a partner in a major accounting firm, has successfully chaired the Audit Committee. Jayne Almond, Angela Knight and Lord Sassoon, appointed to the Board by the Directors on 1 September 2023, 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, Diversity and Inclusion 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 32, though the gender balance of senior management and their direct reports has not been given. Provision 32 – Sir Henry Angest is Chairman of the Remuneration Committee, as is appropriate in the context of his majority shareholding. Arbuthnot Banking Group PLCReport & Accounts 2023 55 Internal Control and Financial Reporting 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 AL Risk Committee reports to the 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. 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 AL 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 AL 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 2023, the Board received a separate report from the AL 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. Arbuthnot Banking Group PLCReport & Accounts 2023 56 Corporate Governance continued Audit Committee Membership and meetings Membership of the Audit Committee comprises Ian Dewar (as Chairman), Sir Nigel Boardman, Sir Alan Yarrow and, since September 2023, Jayne Almond, Angela Knight and Lord Sassoon. All of the Committee’s members are therefore independent non-executive Directors. Mr. Dewar and Lord Sassoon have 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 2023 The Audit Committee held five meetings during the year, four 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 final results announcement. Internal Audit On behalf of the Board, the Audit Committee monitors the effectiveness of systems and controls. To this end, Internal Audit provides the Committee and the Board with detailed independent and objective assurance on the effectiveness of governance, risk management and internal controls. It additionally provides assurance to the Board that the culture throughout the business is aligned with the Group’s values, incorporating within each internal audit an assessment of culture in the area under review. 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. In April 2023, the incumbent moved into a new senior internal position after six years in the role and was succeeded by an external candidate who had previously been Senior Manager of the Group’s Internal Audit, thereby providing a seamless transition. He provides reports on the outcomes of Internal Audit work directly to the Committee which monitors progress against actions identified in these reports. The Committee received a self-assessment report on Internal Audit from the Head of Internal Audit in September 2023 and 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. 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. Arbuthnot Banking Group PLCReport & Accounts 2023 57 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 Audit Committee reviewed and discussed the minutes of meetings of the Financial Regulatory Reporting Committee whose main responsibility is to ensure that the Group meets the PRA’s regulatory reporting expectations. The Committee performs this role since it is concerned with financial reporting as well as with external reporting. During the year, it also reviewed the FRC Publication: Audit Committees and the External Audit: Minimum Standard in particular around audit tendering, albeit that the report is only applicable to premium listed FTSE 350 companies. In November 2023, Committee members contributed to the review of the Committee’s effectiveness as part of its evaluation by the Board. In February 2024, the Committee reviewed its performance and agreed that it continued to operate effectively. In March 2024 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 Audit 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. 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 £3.2m for the year ended 31 December 2023. The disclosures relating to impairment provisions are set out in Note 4.2(a) to the financial statements. Property Portfolio The Group 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 held for sale are measured 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 measured 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 2023, the Group’s total property portfolio totalled £23.9m. 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 4.2(c), 4.2(d), 20, 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 at that time was deemed sufficient to cover the shortfall between the value of the portfolio and the estimated net sales value. This provision has since been realised through sales, with no remaining balance at year-end. Arbuthnot Banking Group PLCReport & Accounts 2023 58 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. A majority of the Committee’s members are therefore independent non-executive Directors. The Company Secretary 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 2023 The Nomination Committee met twice during the year. It met first to assess and recommend the appointment of Jayne Almond, Lord Sassoon and Angela Knight as three new independent Non-Executive Directors as part of succession planning and of its consideration of diversity as directors of the Company. Jayne Almond is a highly experienced professional in the banking, mortgages and financial services arenas, with past and present appointments as Chairman, Chief Executive and NED in a wide range of organisations. Angela Knight has a wealth of commercial and financial experience from her time in government as a Treasury Minister, as Chief Executive of the British Bankers’ Association (now UK Finance) and of Energy UK and as a non-executive director of a range of listed companies over many years. Lord Sassoon is a highly experienced professional in the banking and financial services industry. It was not considered appropriate to widen the search to include other banking and financial services experts for the roles, given the status and profile of these individuals, and their exceptional knowledge of the sector and, in the case of Ms Knight, her knowledge of the Group as a director of Arbuthnot Latham since October 2016. In each case, it was regarded that their careers and reputation demonstrably reflected a good cultural fit with the Group and its Principles, Values and ESG Pillars. For all of these reasons, each individual was approached directly and it not being considered necessary to widen the search to comprise other experts for the role, and so neither advertising nor an external consultancy was used for these appointments. The Committee also met to assess and confirm the collective and individual suitability of the existing 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 is deepening his knowledge about the business, working at Arbuthnot Latham as a private banker, having worked previously 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 2023 and noted that Directors had been able to carry out sufficient training both in person and online. In November 2023, 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 PLCReport & Accounts 2023 59 Remuneration Committee Membership and meetings Membership is detailed in the Remuneration Report on page 60. The Committee meets once a year and otherwise as required. The Remuneration Report on pages 60 to 62 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 Company Secretary 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 2023 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. 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. In December 2023, the Board approved a proposal to combine the Committee with that of the Arbuthnot Latham Policy Committee. In addition to Mr. Salmon and its other members, James Cobb and the AL Chief Compliance Officer, two other members of the AL Committee, being the AL Chief Risk Officer and an AL non-executive director were appointed to it. A member of the Operational Risk team acts as its Secretary. Activity in 2023 The Policy Committee met three times during the year to review and approve Company policies. By order of the Board N D Jennings Secretary 27 March 2024 Arbuthnot Banking Group PLCReport & Accounts 2023 60 Remuneration Report Remuneration Committee Activity in 2023 The Remuneration Committee met four times 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 reviewed the level of fees for non-executive Directors which it decided to standardise, reflecting the appropriate level of fee to continue to secure the services of a high level non-executive director. It also reviewed and approved the Executive Directors’ remuneration. The Committee also met to approve the payment to Jayne Almond, and Lord Sassoon of the standardised director’s fee for a non-executive director, and to Angela Knight who receives an extra amount being for her additional role as the Board’s Consumer Duty Champion, her fee already being received in her capacity as a non-executive director of Arbuthnot Latham. In March 2024, the Committee met again to review the Executive Directors’ remuneration, approving, after due consideration of comparable market rates, salary rises for each of them and the award of bonuses to Messrs Salmon and Cobb for exceptional performance in the year. As in previous years, Sir Henry Angest waived his right to be considered for receipt of a bonus. It decided to increase by £5,000 p.a. with effect from June 2024 the additional fee payable for chairing the Audit Committee, whilst leaving unchanged the basic fee for acting as a non-executive director. The Committee also agreed that it continued to operate effectively with its overall performance and the performance of its individual members effective throughout the 2023 year. Membership of the Remuneration Committee is limited to non-executive directors together with Sir Henry Angest as Chairman. The other members of the Committee are Sir Nigel Boardman and Sir Alan Yarrow. As such, a majority of the Committee’s members are therefore independent non-executive Directors. The Company Secretary acts as its Secretary. The Committee normally meets twice a year and otherwise, as required. 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 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. Arbuthnot Banking Group PLCReport & Accounts 2023 61 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 lapsed on 14 June 2023 when not exercised at 1591p. The second tranche had 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 990 pence, being the mid-market share price at close of business on 23 July 2021. An increase in the value of an Ordinary Share over 990 pence 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, as set out in note 40 to the financial statements. 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 at 31 December 2023 was £0.1m (2022: £0.1m). Details of outstanding options are set out on page 62. Arbuthnot Banking Group PLCReport & Accounts 2023 62 Remuneration Report continued Phantom Options AA Salmon JR Cobb Directors’ Emoluments Fees (including benefits in kind) Salary payments (including benefits in kind) Pension contributions Sir Henry Angest JD Almond F Angest The Hon Sir Nigel Boardman JR Cobb IA Dewar AA Knight Sir Christopher Meyer AA Salmon Lord Sassoon Sir Alan Yarrow At 1 January 2023 At 31 December 2023 Exercise Price £ Date from which exercisable Expiry 100,000 100,000 100,000 – 100,000 100,000 300,000 200,000 £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 £15.90 £9.90 15-Jun-19 23-Jul-24 14-Jun-23 23-Jul-28 £9.90 23-Jul-26 23-Jul-28 150,000 100,000 450,000 300,000 2023 £000 416 6,094 73 6,583 Salary £000 1,200 – 68 – 850 – – – 2022 £000 301 5,197 71 5,569 Bonus £000 Benefits £000 Pension £000 Fees £000 Total 2023 £000 Total 2022 £000 – – 20 – 1,000 – – – 61 – 1 – 20 – – – 24 – – – – 3 – 35 – – – 35 – – 73 – 23 34 158 – 83 25 – – 23 70 416 1,261 23 126 158 1,905 83 25 – 1,278 – 37 121 1,498 75 – 25 2,909 2,465 23 70 – 70 6,583 5,569 1,350 1,500 – – – – 3,468 2,520 106 Details of any shares or options held by directors are presented above. The emoluments of the Chairman were £1,261,000 (2022: £1,278,000). The emoluments of the highest paid director were £2,909,000 (2022: £2,465,000) including pension contributions of £35,000 (2022: £35,000). The emoluments reported above for Ms Knight and in the prior year for Mr. F Angest are pro-rated from the date they became Directors of the Company. Retirement benefits are accruing under money purchase schemes for three directors who served during 2023 (2022: three directors). Sir Henry Angest Chairman of the Remuneration Committee 27 March 2024 Arbuthnot Banking Group PLCReport & Accounts 2023 63 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 2023 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 material accounting policy information. 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 and of the Parent Company’s affairs as at 31 December 2023 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 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 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; • Obtaining an understanding of the relevant controls relating to the directors’ going concern assessment; • 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 the Parent Company’s future financial performance; • Evaluating management’s going concern assessment of the Group and the Parent Company and challenging the appropriateness of the key assumptions used in and mathematical accuracy 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 (‘ICAAP’) and Internal Liquidity Assessment Process (‘ILAAP’) performed by Arbuthnot Latham & Co., Ltd, a wholly owned subsidiary within the Group which is a bank regulated by the Prudential Regulation Authority (‘PRA’), and evaluating the results of management’s scenarios 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 and the Parent Company’s ability to continue as a going concern; Arbuthnot Banking Group PLCReport & Accounts 2023 64 Independent Auditor’s Report to the members of Arbuthnot Banking Group PLC continued • Considering the consistency of management’s forecasts with other areas of the financial statements and our audit; and Key Audit Matter - Allowances for impairment of loans and advances • Evaluating the appropriateness of the disclosures in the financial statements related to going concern. Group - £6.8m; 2022: £6.6m (refer to notes 4, 23 and 24) 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 at least twelve months from when the financial statements are authorised for issue. 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. 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 directors 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. As set out in note 3.4, ECL is measured using a three-stage model. ECL is determined based on Probability of Default (‘PD’) and the present value of future cash flows arising primarily from the sale of or repossession of security which determines the Loss Given Default (‘LGD’) and the Exposure at Default (‘EAD’). For loans with no significant deterioration in credit risk since origination (stage l), ECL is determined using collective portfolio assumptions. For loans that have experienced a significant deterioration in credit risk since origination (stage 2) or have defaulted (stage 3), key assumptions are determined on a case-by-case basis. The model used by the Group to determine the ECL provision requires judgement to the input parameters and assumptions, in particular, uncertainty around macro-economic assumptions. The most significant areas where we identified greater levels of management judgement and estimate are: • Staging of loans and advances to customers and the identification of significant increase in credit risk; • Stage 3 impairment assessments; • Key LGD assumptions around adjustments to collateral when estimating the present value of future recoverable cashflows; and • Use of macro-economic variables reflecting a range of future scenarios. Further detail on the key judgements and estimates involved are set out within the critical accounting estimates and judgements in applying accounting policies (note 4) and in notes 23 and 24 to the financial statements. We consider the risk to have increased in the year given the sustained impact of high interest rates and inflation, as well as the sustained economic impact of the rising cost of living on the ECL provision. Arbuthnot Banking Group PLCReport & Accounts 2023 65 Key Audit Matter - Allowances for impairment of loans and advances Group - £6.8m; 2022: £6.6m (refer to notes 4, 23 and 24) (continued) How our scope addressed this matter Our audit procedures included but were not limited to: Staging of loans We have: • Assessed the methodology of identifying significant increase in credit risk to ensure compliance with IFRS 9; • Tested the design and implementation and tested the operating effectiveness of the key controls in relation to credit monitoring, including missed payments monitoring, covenants monitoring and annual reviews; • Tested management’s controls to allocate loans to the respective staging categories; • Tested the appropriateness of staging movements throughout the year; • Back tested the staging criteria to assess previous effectiveness of the criteria; and • Assessed loans that have cured during the year, including ensuring the curing is in line with policy and IFRS 9. Stage 3 impairment assessments We have: • Performed credit file reviews to test data used in the determination of LGD assumptions; Key LGD assumptions We have: • Tested and challenged the key assumptions applied to LGD; and • Back tested key assumptions to assess appropriateness. Use of macro-economic variables We have: • Involved our in-house credit risk specialists and economist experts in the assessment of model approach and assumptions, including assessing the impact on commercial and residential property prices, the completeness and appropriateness of key economic variables and the appropriateness of the economic scenarios and the probability weightings applied by management. Stand back assessment We have: • Performed a 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. • Re-calculated the ECL provision for a sample of higher risk loans, including consideration of multiple economic scenarios; and Disclosures We have assessed the adequacy and appropriateness of the disclosures in the financial statements in relation to ECL. • Involved our in-house valuation specialist to independently assess the underlying collateral used in the ECL calculations for a sample of higher risk loans. However, in some cases, we relied on management’s external valuation experts with indexing applied and, in this situation, we assessed the capabilities, professional competence, and objectivity of the experts. Our observations We found the approach taken in respect to ECL is materially in accordance with the requirements of IFRS 9 and determined that the allowance for impairment of loans and advances is not materially misstated at 31 December 2023. Arbuthnot Banking Group PLCReport & Accounts 2023 66 Independent Auditor’s Report to the members of Arbuthnot Banking Group PLC continued 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: Group materiality Overall materiality £2.4m (2022: £1.0m) Reporting threshold We agreed with the directors that we would report to them misstatements identified during our audit above £71k (2022: £30k) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Parent company materiality Overall materiality £0.8m (2022: £0.2m) How we determined it 0.5% of net assets (2022: 0.5% of net assets but capped at component materiality levels). How we determined it 5% of profit before tax (2022: 0.5% of net assets but capped at component materiality levels) Rationale for benchmark applied Rationale for benchmark applied Performance materiality Our materiality benchmark for the Group has changed during the year from net assets to profit before tax. We consider profit before tax to be the appropriate benchmark as the Group’s profits have now established a track record following the pandemic and the low interest rate environment, and profit is increasingly a key focus for the users of the financial statements in assessing the performance of the Group. 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 £1.6m (2022: £0.7m), which represents 70% of overall materiality (2022: 70%). 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. Performance materiality Reporting threshold Given that the Parent Company’s primary purpose is to be an investment holding entity, we consider net assets to be the most appropriate benchmark to apply in our determination of materiality. The Parent Company does not have significant revenue generating activities and therefore a profit-based measure was not considered to be appropriate. 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 £0.6m (2022: £0.1m), which represents 70% of overall materiality (2022: 70%). 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 £24k (2022: £6k) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Arbuthnot Banking Group PLCReport & Accounts 2023 67 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, six components of the Group, including the Parent Company, were subject to full scope audit. We used a Mazars UK component audit team as component auditor for one component (2022: one component). All other components were audited by the Group audit team. Our component performance materiality ranged from £0.05m to £1.5m (2022: £0.02m to £0.7m). Full scope audits carried out on six components (2022: eight components), including the Parent Company, account for 99.5% of interest income (2022: 100%), 97.3% of profit before tax (2022: 100%), 99.1% of net assets (2022: 100%) and 99.8% of total assets (2022: 100%). 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. 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: 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 aggregated financial information. • 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 Working with our component audit team We determined the level of involvement we needed as the Group team in the work of the component audit team 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 team, 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 team and interacted with them throughout the audit process. In the absence of component visits, we reviewed electronic work papers remotely which were prepared by the component audit team and held meetings with component management. • 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 Arbuthnot Banking Group PLCReport & Accounts 2023 68 Independent Auditor’s Report to the members of Arbuthnot Banking Group PLC continued • 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. 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 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 48; • 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 47; • Directors’ statement on fair, balanced and understandable, set out on page 51; • Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks, set out on page 55; • The section of the annual report that describes the review of effectiveness of risk management and internal control systems, set out on page 55; and; • The section describing the work of the audit committee, set out on pages 56 and 57. 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 51, 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 their industry, we considered that non-compliance with the following laws and regulations might have a material effect on the financial statements: regulations and supervisory requirements of the PRA and the Financial Conduct Authority (‘FCA’), Alternative Investment Market (‘AIM’) rules, Aquis Stock Exchange (‘AQSE’) rules, Streamlined Energy and Carbon Reporting (‘SECR’) requirements, Anti Money Laundering regulations (‘AML’), General Data Protection Regulation (‘GDPR’) and the UK Corporate Governance Code. 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 2023 69 • 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 up until the date of approval of the financial statements; • Discussing amongst the engagement team the laws and regulations listed above, and remaining alert to any indications of non-compliance; and • Focusing on areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience and through discussions with those charged with governance and senior management, review of regulatory and legal correspondence, and review of minutes of meetings of the Board of Directors and the Audit Committee during the year and up until the date of the approval of the financial statements. We also considered those laws and regulations that have a direct effect on the preparation of the financial statements, such as UK tax legislation, pension 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, 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. 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 five years, covering the years ended 31 December 2019 to 31 December 2023. 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 27 March 2024 Arbuthnot Banking Group PLCReport & Accounts 2023 70 Consolidated Statement of Comprehensive Income Note 8 9 10 10 10 11 12 13 14 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 Loss on sale of commercial property held as inventory Other income Operating expenses Profit before tax Income tax expense 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 2023 £000 Year ended 31 December 2022 £000 231,836 (95,217) 136,619 23,170 (768) 22,402 159,021 100,952 (81,074) 19,878 178,899 (3,191) – 2,522 (131,113) 47,117 (11,738) 35,379 412 (91) 321 35,700 120,013 (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 16,957 109.6 109.6 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 16 16 222.8 222.8 The notes on pages 78 to 158 are an integral part of these consolidated financial statements Arbuthnot Banking Group PLCReport & Accounts 2023 Consolidated Statement of Financial Position 71 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 Share premium Retained earnings Other reserves Total equity LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Current tax liability Other liabilities Deferred tax liability Lease liabilities Debt securities in issue Total liabilities Total equity and liabilities Note At 31 December 2023 £000 At 31 December 2022 £000 17 18 19 20 21 23 25 26 27 28 29 30 31 38 38 39 39 32 21 33 34 27 35 36 826,559 79,381 942,437 3,281 4,214 2,064,217 57,150 3,942 – 29,587 274,306 52,816 5,950 4,343,840 167 11,606 240,606 61 252,440 193,410 1,032 3,759,567 294 40,700 4,910 53,761 37,726 4,091,400 4,343,840 732,729 115,787 439,753 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 The financial statements on pages 70 to 158 were approved and authorised for issue by the Board of directors on 27 March 2024 and were signed on its behalf by: A.A. Salmon Director J.R. Cobb Director Registered Number: 1954085 The notes on pages 78 to 158 are an integral part of these consolidated financial statements Arbuthnot Banking Group PLCReport & Accounts 2023 72 Company Statement of Financial Position ASSETS Loans and advances to banks Debt securities at amortised cost Deferred tax asset Intangible assets Property, plant and equipment Other assets Interests in subsidiaries Total assets EQUITY AND LIABILITIES Equity Share capital Share premium account Other reserves Retained earnings* Total equity LIABILITIES Current tax liability Other liabilities Debt securities in issue Total liabilities Total equity and liabilities Note 18 19 27 28 29 25 44 38 38 39 39 34 36 At 31 December 2023 £000 At 31 December 2022 £000 623 38,129 520 – 130 1,449 164,354 205,205 167 11,606 (1,280) 148,809 159,302 2,641 5,536 37,726 45,903 205,205 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 * 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 £3,551k (2022: £4,446k). The financial statements on pages 70 to 158 were approved and authorised for issue by the Board of directors on 27 March 2024 and were signed on its behalf by: A.A. Salmon Director J.R. Cobb Director Registered Number: 1954085 The notes on pages 78 to 158 are an integral part of these consolidated financial statements Arbuthnot Banking Group PLCReport & Accounts 2023 Consolidated Statement of Changes in Equity 73 Attributable to equity holders of the Group Share capital £000 Share premium £000 Capital redemption reserve £000 Fair value reserve £000 Treasury shares £000 Retained earnings £000 Total £000 Balance at 31 December 2022 Total comprehensive income for the period Profit for 2023 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 Issue of new ordinary shares Final dividend relating to 2022 Interim dividend relating to 2023 Total contributions by and distributions to owners 154 – – – – – – 13 – – 13 – – – – – – – 11,606 – – 11,606 Balance at 31 December 2023 167 11,606 19 1,067 (1,299) 212,037 211,978 – – – 35,379 35,379 – – – – – – – – – 19 412 (47) (91) 274 274 – – – – – – – – – – – – – – 47 – 47 412 – (91) 321 35,426 35,700 – (3,756) (3,101) 11,619 (3,756) (3,101) (6,857) 4,762 1,341 (1,299) 240,606 252,440 The notes on pages 78 to 158 are an integral part of these consolidated financial statements Arbuthnot Banking Group PLCReport & Accounts 2023 74 Consolidated Statement of Changes in Equity continued 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 78 to 158 are an integral part of these consolidated financial statements Arbuthnot Banking Group PLCReport & Accounts 2023 Company Statement of Changes in Equity 75 Attributable to equity holders of the Company Share capital £000 Share premium £000 Capital redemption reserve £000 Fair value reserve £000 Treasury shares £000 Retained earnings £000 Total £000 Balance at 1 January 2022 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 Total comprehensive income for the period Profit for 2023 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 Issue of new ordinary shares Final dividend relating to 2022 Interim dividend relating to 2023 Total contributions by and distributions to owners 154 – – – – – 154 – – 13 – – 13 – – – – – – – 11,606 – – 11,606 Balance at 31 December 2023 167 11,606 19 – – – – – 19 – – – – – – 19 – (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 – 3,551 3,551 – 3,551 3,551 – – – – – (3,756) (3,101) 11,619 (3,756) (3,101) (6,857) 4,762 (1,299) 148,809 159,302 The notes on pages 78 to 158 are an integral part of these consolidated financial statements Arbuthnot Banking Group PLCReport & Accounts 2023 76 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 expense - 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 decrease/(increase) in derivative financial instruments - net increase in loans and advances to customers - net increase in assets held for leasing - net (increase)/decrease 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 intangible assets Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Purchase of debt securities Proceeds from redemption of debt securities Net cash outflow from investing activities Cash flows from financing activities Issue of new ordinary shares Decrease in borrowings Lease payments Dividends paid Net cash outflow from 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 29,28,30 24 28 29 29 42 The notes on pages 78 to 158 are an integral part of these consolidated financial statements Year ended 31 December 2023 £000 Year ended 31 December 2022 £000 47,117 9,819 208 564 8,712 155 (11,738) 54,837 3,005 (28,347) (95,853) (1,176) 667,018 18,013 617,497 (174) 63 (1,523) (4,846) (5) (1,582,889) 1,071,232 (518,132) 11,619 (43,049) (3,654) (6,857) (41,941) 57,424 848,516 905,940 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 Arbuthnot Banking Group PLCReport & Accounts 2023 Company Statement of Cash Flows Note 28, 29 Cash flows from operating activities Profit before tax Adjustments for: - Depreciation and amortisation - Net interest (income) / expense - 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 (increase)/decrease in other assets - net increase in other liabilities Net cash inflow from operating activities Cash flows from investing activities Issue of subordinated debt to Arbuthnot Latham Receipt on dissolution of People's Trust & Savings PLC Capital contribution to Arbuthnot Latham Net cash (outflow)/inflow from investing activities Cash flows from financing activities Issue of new shares Dividends paid Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 42 77 Year ended 31 December 2023 £000 Year ended 31 December 2022 £000 6,856 1 (523) (170) 84 (3,305) 2,943 (93) (1,372) 3,900 5,378 (12,951) – (5,000) (17,951) 11,619 (6,857) 4,762 (7,811) 8,434 623 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 The notes on pages 78 to 158 are an integral part of these consolidated financial statements Arbuthnot Banking Group PLCReport & Accounts 2023 78 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 2023 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 27 March 2024. (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. 3. Material 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. Arbuthnot Banking Group PLCReport & Accounts 2023 79 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. (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. Arbuthnot Banking Group PLCReport & Accounts 2023 80 Notes to the Consolidated Financial Statements continued 3. Material accounting policies (continued) 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. Certain debt securities are held by the Group Central Treasury in a separate portfolio for long-term yield. These securities may be sold, but such sales are not expected to be more than infrequent. The Group considers that these securities are held within a business model whose objective is to hold assets to collect the contractual cash flows. 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. (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. Arbuthnot Banking Group PLCReport & Accounts 2023 81 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. Modification of financial assets If the terms of financial assets are modified, then the Group evaluates whether the cash flow of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value plus any eligible transaction costs. Any fees received as part of the modification are accounted as follows: • fees that are considered in determining the fair value of the new asset and fees that represent reimbursement of eligible transaction costs are included in the initial measurement of the asset; and • other fees are included in profit or loss as part of gain or loss on derecognition. 3.4 Impairment for financial assets at amortised cost 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’). Arbuthnot Banking Group PLCReport & Accounts 2023 82 Notes to the Consolidated Financial Statements continued 3. Material accounting policies (continued) 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 in other circumstances such as forbearance measures. 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; downside 2; downside 1 and upside. The Group has derived an approach for factoring probability weighted macroeconomic forecasts into ECL calculations, adjusting PD and LGD estimates. 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 The Group has elected, as an accounting policy choice permitted under IFRS 9 ‘Financial Instruments’, to continue to apply the hedge accounting rules set out in IAS 39 ‘Financial Instruments – Recognition and measurement’. However, additional hedge accounting disclosures introduced by IFRS 9’s consequential amendments to IFRS 7 are provided. 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. Arbuthnot Banking Group PLCReport & Accounts 2023 83 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 28. 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 2023 or later periods, that will have any material impact on the Group’s financial statements. 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 2023 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. • International Tax Reform - Pillar Two Model Rules (Amendments to IAS 12, effective for annual periods beginning on or after 23 May 2023). • Non-current Liabilities with Covenants (Amendments to IAS 1, effective for annual periods beginning on or after 1 January 2024). • Classification of Liabilities as Current or Non-Current (Amendments to IAS 1, effective for annual periods beginning on or after 1 January 2024). • Lease Liability in a Sale and Leaseback (Amendments to IFRS 16, effective for annual periods beginning on or after 1 January 2024). • Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7, effective for annual periods beginning on or after 1 January 2024). • Lack of Exchangeability (Amendments to IAS 21, effective for annual periods beginning on or after 1 January 2025). • Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28, available for optional adoption/ effective date deferred indefinitely). Arbuthnot Banking Group PLCReport & Accounts 2023 84 Notes to the Consolidated Financial Statements continued 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 Critical accounting judgements Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in the consolidated financial statements is included in the following notes: • Notes 3.4 and 6(a): establishing the criteria for determining whether credit risk on a financial asset has increased significantly since initial recognition. • Notes 3.4 and 6(a): establishing the criteria to determine whether an account meets the definition of default and as a result moves into Stage 3. • Notes 3.3 and 6(f): classification of financial assets: assessment of the business model within which the assets are held and assessment of whether the contractual terms of financial asset are SPPI on the principal amount outstanding. 4.2 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 PLCReport & Accounts 2023 85 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 2023 2022 46.0% 16.0% 18.0% 12.0% 8.0% 53.0% 13.0% 12.0% 11.0% 11.0% The tables below show the five-year forecasted average for property prices growth, UK unemployment rate and UK real GDP growth: 31 December 2023 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 1.5% 1.5% 4.9% 1.3% 5.8% 3.6% 3.9% 2.1% (0.4%) (0.7%) 5.7% 0.9% (2.3%) (2.8%) 6.5% 0.4% 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% Extreme downside (4.2%) (4.9%) 7.3% 0.0% Extreme downside (4.2%) (4.9%) 7.3% 0.0% Arbuthnot Banking Group PLCReport & Accounts 2023 86 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 2023 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 2024 2025 2026 2027 2028 5 year average UK Commercial real estate price - four quarter growth Year 2024 2025 2026 2027 2028 5 year average UK Unemployment rate - annual average Year 2024 2025 2026 2027 2028 5 year average UK GDP - annual growth Year 2024 2025 2026 2027 2028 5 year average Baseline Upside Downside 1 Downside 2 (2.3%) (2.2%) 2.1% 5.0% 5.1% 1.5% 5.5% 3.8% 4.8% 7.7% 7.2% 5.8% (5.2%) (7.1%) (0.9%) 5.7% 5.6% (0.4%) (8.1%) (12.0%) (3.8%) 6.4% 6.1% (2.3%) Baseline Upside Downside 1 Downside 2 0.8% 1.5% 1.9% 1.6% 1.6% 1.5% 7.5% 3.9% 3.1% 1.9% 1.9% 3.6% (9.5%) (5.2%) 3.6% 3.9% 3.9% (0.7%) (19.8%) (11.9%) 5.3% 6.2% 6.3% (2.8%) Baseline Upside Downside 1 Downside 2 4.7% 4.7% 4.9% 5.2% 5.0% 4.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 5.1% 5.9% 5.9% 5.9% 5.6% 5.7% 5.5% 7.2% 6.9% 6.6% 6.1% 6.5% Baseline Upside Downside 1 Downside 2 0.4% 1.4% 1.7% 1.6% 1.6% 1.3% 1.9% 2.0% 2.4% 2.2% 2.1% 2.1% (1.4%) 1.3% 1.5% 1.5% 1.5% 0.9% (3.2%) 1.4% 1.4% 1.3% 1.3% 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% 0.0% Arbuthnot Banking Group PLCReport & Accounts 2023 87 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 UK unemployment UK GDP The table below compares the 31 December 2023 ECL provision using the 31 December 2023 economic scenarios and the 31 December 2023 ECL provision using the 31 December 2022 economic scenarios. Group ECL Provision Stage 1 Stage 2 Stage 3 At 31 December 2023 Economic scenarios as at 2023 £000 900 429 5,479 6,808 2022 £000 852 429 5,642 6,923 Arbuthnot Banking Group PLCReport & Accounts 20230.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%201920202021202220232024202520262027202820292030203320322031BaselineUpsideDownside 1Downside 2Extreme downside507090110130150170201920202021202220232024202520262027202820292030203320322031BaselineUpsideDownside 1Downside 2Extreme downside406080100120140160180201920202021202220232024202520262027202820292030203320322031BaselineUpsideDownside 1Downside 2Extreme downside2019202020212022202320242025202620272028202920302033203220318595105115125BaselineUpsideDownside 1Downside 2Extreme downside 88 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 2023 £m 0.8 1.6 (1.7) (8.1) (24.0) 2022 £m 0.7 1.0 (2.0) (7.5) (19.1) (b) Effective Interest Rate Loans and advances to customers are initially recognised at fair value. The fair value of a loan on initial recognition is generally its transaction price. 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 2023 the Group recognised £28k (2022: £Nil) 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 £0.5m (2022: £0.7m), due to acceleration of fee income. In 2023 the Group recognised £13k additional (2022: additional £0.1m) 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 2023 by £0.03m (2022: £0.1m) while a 10% increase in principal repayments will increase interest income in 2023 by £0.1m (2022: £0.2m) 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 (2022: one) investment property, as outlined in Note 31. 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 PLCReport & Accounts 2023 89 Crescent Office Park in Bath with value of £6.0m (2022: £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 2023 with the Group receiving rental income. In accordance with IAS 40, the property is measured at fair value, with its carrying value at year end of £5.95m equal to its fair value. The valuation of the property has the following key inputs: • yield: 7.48% • 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. Management have assessed that should the fair value of the investment property reduce by 5% this would impact profit or loss by £0.3m and a reduction of 10% would impact profit or loss by £0.6m. (d) Inventory The Group owns one commercial property (2022: one property) and one repossessed property (2022: one property), classified as inventory and presented as part of other assets in the Statement of Financial Position. 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 £0.7m and a reduction of 10% would impact profit or loss by £1.5m (or 10% 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. Management have assessed that should the residual value decrease by 5% this would impact profit or loss by £2.1m and a reduction of 10% would impact profit or loss by £4.2m. 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 29 for further detail. Arbuthnot Banking Group PLCReport & Accounts 2023 90 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 2023: At 31 December 2023 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 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 Deferred tax liability Lease liabilities Debt securities in issue Due within one year £000 826,559 79,381 859,430 3,281 4 563,244 32,619 – 6,116 107,600 5,987 – 2,484,221 3,410 66 3,687,489 294 40,700 – 2,559 – 3,734,518 Due after more than one year £000 – – 83,007 – 4,210 1,500,973 24,531 3,942 23,471 166,706 46,829 5,950 1,859,619 190,000 966 72,078 – – 4,910 51,202 37,726 356,882 Total £000 826,559 79,381 942,437 3,281 4,214 2,064,217 57,150 3,942 29,587 274,306 52,816 5,950 4,343,840 193,410 1,032 3,759,567 294 40,700 4,910 53,761 37,726 4,091,400 Arbuthnot Banking Group PLCReport & Accounts 2023 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 91 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 PLCReport & Accounts 2023 92 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 2023: At 31 December 2023 ASSETS Loans and advances to banks Loans and advances to banks - due from subsidiary undertakings Debt securities at amortised cost Deferred tax asset 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 7 616 – – – 1,449 – 2,072 2,641 5,536 – 8,177 – – 38,129 520 130 – 164,354 203,133 – – 37,726 37,726 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 Total £000 7 616 38,129 520 130 1,449 164,354 205,205 2,641 5,536 37,726 45,903 Total £000 6 8,427 24,437 522 1 130 73 159,354 192,950 879 3,490 37,594 41,963 Arbuthnot Banking Group PLCReport & Accounts 2023 93 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 Arbuthnot Banking Group PLCReport & Accounts 2023 94 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: 2023 Group Credit risk exposures (all Stage 1, unless otherwise stated) Banking £000 Mortgage Portfolios £000 RAF £000 ACABL £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 Assets classified as held for sale 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 – – – – – 1,442,827 1,333,006 59,681 50,140 – – 2,051 156,027 – – – – – 124,905 95,231 10,084 19,590 – – – – – – – 200,606 194,571 2,267 3,768 – – – – – – – 240,178 223,912 10,432 5,834 – – – – – – – 3,113 3,113 – – – – – – – – – – 294,399 113 – – – – – 59,396 59,109 287 – – – – – 826,397 79,381 942,437 3,281 4,214 826,397 79,381 942,437 3,281 4,214 – 2,071,025 – 1,908,942 82,751 – 79,332 – 22,361 22,361 3,942 3,942 – – 2,051 450,539 At 31 December 1,600,905 124,905 200,606 534,577 3,226 59,396 1,882,013 4,405,628 Arbuthnot Banking Group PLCReport & Accounts 2023 95 Group Credit risk exposures (all Stage 1, unless otherwise stated) Banking £000 Mortgage Portfolios £000 RAF £000 ACABL £000 ASFL £000 AAG £000 All Other Divisions £000 Total £000 2022 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 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 2023 £000 623 38,129 38,752 2022 £000 8,434 24,437 32,871 The above tables represent the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2023 and 2022 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. Arbuthnot Banking Group PLCReport & Accounts 2023 96 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 2023 Loan Balance £000 1,029,694 961,118 48,766 19,810 332,632 308,321 8,578 15,733 23,236 23,236 – – 20,952 3,350 1,978 15,624 Collateral £000 2,374,285 2,225,190 102,890 46,205 528,678 491,617 13,530 23,531 27,603 27,603 – – 9,843 2,583 260 7,000 Loan Balance £000 Collateral £000 Loan Balance £000 82,690 64,514 7,530 10,646 27,929 20,814 1,649 5,466 8,466 6,132 350 1,984 5,820 3,772 554 1,494 202,310 158,253 18,493 25,564 43,196 32,103 2,655 8,438 10,710 7,608 496 2,606 6,354 3,895 691 1,768 1,112,384 1,025,632 56,296 30,456 360,561 329,135 10,227 21,199 31,702 29,368 350 1,984 26,772 7,122 2,532 17,118 Collateral £000 2,576,595 2,383,443 121,383 71,769 571,874 523,720 16,185 31,969 38,313 35,211 496 2,606 16,197 6,478 951 8,768 1,406,514 2,940,409 124,905 262,570 1,531,419 3,202,979 * 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 £1.0m in the form of cash deposits and security over Arbuthnot Latham Investment Management Portfolios and personal guarantees of £7.0m. Non-property collateral reduces loan to value below 100% for all such exposures in the Banking segment. Arbuthnot Banking Group PLCReport & Accounts 2023 97 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. The table below represents an analysis of loan commitments compared to the values of property collateral for the Group (all Stage 1): Group Less than 60% 60%-80% Greater than 100% Total Group Less than 60% 60%-80% 80%-100% Greater than 100% Total 2023 Loan commitments £000 34,105 22,261 9,042 65,408 2022 Loan commitments £000 122,582 35,807 11,100 31,347 200,836 Collateral £000 178,155 31,524 2,992 212,671 Collateral £000 387,942 51,828 12,432 19,606 471,808 Arbuthnot Banking Group PLCReport & Accounts 2023 98 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 2023, loans for which forbearance measures were in place totalled 3.45% (2022: 3.0%) of total value of loans to customers for the Group. These are set out in the following table: Group Time for asset sale Term extension Time for refinance with third party Payment holiday Covenant waived Switch to interest only Modification in terms and conditions Restructure Total forbearance 2023 Stage 1 Stage 2 Stage 3 Total Number Loan Balance £000 Number – – – – – – – – – – – – – – – – – – – 11 – 13 1 2 39 2 68 Loan Balance £000 – 3,701 – 23,771 8,205 1,882 10,212 1,236 49,007 Number 2 2 1 3 – – 41 3 52 Loan Balance £000 4,157 796 2,360 5,490 – – 8,868 457 22,128 Number 2 13 1 16 1 2 80 5 120 Loan Balance £000 4,157 4,497 2,360 29,261 8,205 1,882 19,080 1,693 71,135 Arbuthnot Banking Group PLCReport & Accounts 2023 99 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 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 2023 £000 2022 £000 239,777 257,547 11,464 125,193 16,697 1,302,177 92,004 19,358 2,064,217 24,837 754,291 102,907 66,039 84,675 3,293 13,555 255,597 181,286 14,621 563,116 268,825 148,788 14,143 156,250 24,485 1,339,789 69,433 14,364 2,036,077 28,668 759,584 86,442 42,897 94,341 3,593 20,220 236,658 179,034 15,174 569,466 2,064,217 2,036,077 2023 £000 294,399 113 8,500 7,660 1,458 103,643 8,710 26,056 450,539 1,938 55,175 12,433 8,535 11,342 – 50 18,757 9,646 2,007 330,656 450,539 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 * Mixed collateral is where there is no single, overall majority collateral type. ** Included within unsecured are £7.8m (2022: £9.0m) of loans which are backed by the government guarantee scheme for BBLs. Arbuthnot Banking Group PLCReport & Accounts 2023 100 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. 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. (c) Macroeconomic and competitive environment The Group is exposed to risks that may arise from 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 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 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. Arbuthnot Banking Group PLCReport & Accounts 2023 101 (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 26, a stress test scenario of a 10% (2022: 10%) decline in market prices, would result in a £Nil (2022: £Nil) decrease in the Group’s income and a decrease of £0.4m (2022: £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 26, a stress test scenario of a 10% (2022: 10%) decline in market prices, would result in a £Nil (2022: £Nil) decrease in the Company’s income and a decrease of £Nil (2022: £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 2023. Included in the table below are the Group’s assets and liabilities at carrying amounts, categorised by currency. At 31 December 2023 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 (£) £000 826,132 13,622 697,902 – 4,213 2,060,235 19,129 – 3,621,233 193,410 1,020 3,453,720 18,303 24,720 3,691,173 (69,940) 450,539 USD ($) £000 133 27,832 161,991 – 1 (139) – 3,942 193,760 – 1 190,052 – – 190,053 3,707 – Euro (€) £000 – 30,845 82,543 3,281 – 3,210 3,232 – 123,111 – – 108,053 239 13,006 121,298 1,813 – Other £000 294 7,082 1 – – 911 – – 8,288 – 11 7,742 – – 7,753 535 – Total £000 826,559 79,381 942,437 3,281 4,214 2,064,217 22,361 3,942 3,946,392 193,410 1,032 3,759,567 18,542 37,726 4,010,277 (63,885) 450,539 Arbuthnot Banking Group PLCReport & Accounts 2023 102 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) The table below summarises the Group’s exposure to foreign currency exchange risk at 31 December 2022: At 31 December 2022 ASSETS Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Assets classified as held for sale Derivative financial instruments Loans and advances to customers Other assets Financial investments LIABILITIES Deposits from banks Derivative financial instruments Deposits from customers Other liabilities Debt securities in issue Net on-balance sheet position Credit commitments GBP (£) £000 732,577 18,144 280,956 – 6,216 2,004,654 13,657 – 3,056,204 236,026 7 2,814,786 3,824 24,437 3,079,080 (22,876) 471,078 USD ($) £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 Derivative financial instruments (see Note 21) 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 £11k increase (2022: £35k decrease) in Group profits and equity, while a 10% weakening of the pound against the US dollar would lead to the same decrease (2022: increase) in Group profits and equity. Additionally, the Group holds a property classified as asset held for sale and measured at £3.3m (2022: £3.3m). The property is located in the EU and relates to a Euro denominated loan where the property was repossessed and is being held for sale. Including this Euro asset, the net Euro exposure is positive £2.9m (2022: £3.3m). The table below summarises the Company’s exposure to foreign currency exchange rate risk at 31 December 2023: At 31 December 2023 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 (£) £000 623 24,989 1,391 27,003 1,796 24,720 26,517 487 Euro (€) £000 – 13,140 – 13,140 – 13,006 13,006 134 Total £000 623 38,129 1,391 40,143 1,796 37,726 39,522 621 Arbuthnot Banking Group PLCReport & Accounts 2023 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 14 103 Total £000 8,434 24,437 32,871 470 37,594 38,064 (5,193) A 10% strengthening of the pound against the Euro would lead to £12k increase (2022: £9k increase) in the Company profits and equity, conversely a 10% weakening of the pound against the Euro would lead to a £15k decrease (2022: £8k decrease) 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 both assets and liabilities. 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. The current position of the balance sheet is such that it results in an favourable impact on the economic value of equity of £2.8m (2022: adverse impact of £0.3m) for a positive 200bps shift and an adverse impact of £3.3m (2022: favourable impact of £0.3m) for a negative 200bps movement. Arbuthnot Banking Group PLCReport & Accounts 2023 104 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 2023 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 AND EQUITY 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 £000 826,559 79,381 352,617 4,214 1,717,677 – – – – 220,504 – 19,485 – – – – 286,309 – 50,758 – – – – 83,007 – 256,348 – – 2,980,448 239,989 337,067 339,355 193,410 1,032 2,789,024 – 37,726 50,236 – – 420,826 – – 8,609 – – 477,639 – – 12,275 – – 66,328 – – 121,802 3,071,428 429,435 489,914 188,130 – – – – 7,120 – – 7,120 – – 5,750 – – 15,051 20,801 – – – – – 12,829 423,090 3,942 826,559 79,381 942,437 4,214 2,064,217 423,090 3,942 439,861 4,343,840 – – – 99,665 – 44,467 193,410 1,032 3,759,567 99,665 37,726 252,440 144,132 4,343,840 – Impact of derivative instruments 61,220 – – (61,220) Interest rate sensitivity gap (29,760) (189,446) (152,847) 90,005 (13,681) 295,729 Cumulative gap (29,760) (219,206) (372,053) (282,048) (295,729) – * 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 PLCReport & Accounts 2023 105 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 – – – 2,580,708 353,107 240,934 188,556 – – 3,000 – – – 3,000 – 2,633 – – – 35,764 – 211,979 236,027 135 3,092,549 35,764 37,594 211,979 247,743 3,614,048 – 51,299 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 AND EQUITY Deposits from banks Derivative financial instruments Deposits from customers Other liabilities** Debt securities in issue Equity Impact of derivative instruments 51,376 – – (51,376) Interest rate sensitivity gap 474,960 (323,970) (117,109) (87,813) 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 PLCReport & Accounts 2023 106 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) Company As at 31 December 2023 ASSETS Loans and advances to banks Loans and advances to banks - due from subsidiary Debt securities at amortised cost Other assets* LIABILITIES AND EQUITY Other liabilities** Debt securities in issue Equity Interest rate sensitivity gap Cumulative 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 7 580 38,129 – 38,716 – 37,726 – 37,726 990 990 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 7 36 – 166,453 616 38,129 166,453 166,489 205,205 8,176 – 159,303 8,176 37,726 159,303 167,479 205,205 (990) 990 990 990 990 – * 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 2022 ASSETS Loans and advances to banks Loans and advances to banks - due from subsidiary Debt securities at amortised cost Other assets* LIABILITIES AND EQUITY 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 6 8,377 24,437 – 32,820 – 37,594 – 37,594 (4,774) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 6 50 – 160,081 8,427 24,437 160,081 160,131 192,951 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. Arbuthnot Banking Group PLCReport & Accounts 2023 107 (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. 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. Arbuthnot Banking Group PLCReport & Accounts 2023 108 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 2023: At 31 December 2023 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 2023 Financial asset by type Non-derivative assets Cash and balances at central banks Loans and advances to banks Debt securities at amortised cost Assets classified as held for sale 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 £000 193,410 3,759,567 18,542 37,726 – – (212,267) (3,831,717) (20,085) (50,223) (2,051) (450,539) (5,904) (2,877,406) (18,542) (1,077) (2,051) (450,539) (7,481) (879,887) – (26,238) – – (198,882) (68,351) – (3,575) – – – (6,073) (1,543) (19,333) – – 4,009,245 (4,566,882) (3,355,519) (913,606) (270,808) (26,949) 1,032 1,032 (1,032) (1,032) (66) (66) – – (966) (966) – – 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 £000 826,559 79,381 942,437 3,281 2,064,217 22,361 3,942 826,559 79,381 954,382 3,281 2,497,314 22,361 3,942 826,559 79,381 356,957 – 477,308 22,361 3,942 – – 513,922 3,281 281,451 – – – – 83,503 – 1,595,366 – – – – – – 143,189 – – 3,942,178 4,387,220 1,766,508 798,654 1,678,869 143,189 4,214 4,214 4,214 4,214 4 4 – – 4,210 4,210 – – Arbuthnot Banking Group PLCReport & Accounts 2023 109 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 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) (11,027) (2,329,095) (4,954) (892) (3,253) (470,870) – (758,870) – (2,719) – – (225,000) (76,488) – (14,540) – – – – (11) (46,747) – – 3,371,124 (3,944,466) (2,820,091) (761,589) (316,028) (46,758) 135 135 (135) (135) (135) (135) – – – – – – * Prior year figures have been restated to present cash flows on the same basis as maturity analysis in Note 5. 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 £000 732,728 115,788 439,753 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 PLCReport & Accounts 2023 110 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 2023 31 December 2022 Amount £000 826,559 79,381 942,437 Fair value £000 826,559 79,381 943,231 Amount £000 732,729 115,787 439,753 Fair value £000 732,729 115,787 439,389 1,848,377 1,849,171 1,288,269 1,287,905 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 2023 were £253m (2022: £225m). Assets are encumbered due to the Term Funding Scheme (Note 32). 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 2023: At 31 December 2023 Financial liability by type Non-derivative liabilities Other liabilities Debt securities in issue At 31 December 2023 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 1,796 37,726 39,522 (1,796) (50,223) (52,019) (256) (1,077) (1,333) – (26,238) (26,238) – (3,575) (3,575) (1,540) (19,333) (20,873) 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 £000 623 38,129 38,752 623 50,356 50,979 623 1,080 1,703 – 26,247 26,247 – 3,632 3,632 – 19,397 19,397 Arbuthnot Banking Group PLCReport & Accounts 2023 111 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) (470) (46,747) (47,217) 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 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, because the assets do not meet the recognition criteria. 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 £1.7bn (2022: £1.3bn). Additionally, the Group provides investment advisory services. Arbuthnot Banking Group PLCReport & Accounts 2023 112 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: FVPL £000 FVOCI £000 At 31 December 2023 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 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 Amortised cost £000 826,559 79,381 942,437 – 2,064,217 22,361 – Total carrying amount £000 826,559 79,381 942,437 4,214 2,064,217 22,361 3,942 Fair value £000 826,559 79,381 943,231 4,214 2,058,780 22,361 3,942 – – – – – – 3,942 3,942 3,934,955 3,943,111 3,938,468 – – – – – – 193,410 – 3,759,567 18,542 37,726 193,410 1,032 3,759,567 18,542 37,726 193,410 1,032 3,759,567 18,542 37,726 4,009,245 4,010,277 4,010,277 Amortised cost £000 732,729 115,787 439,753 – 2,036,077 14,160 – Total carrying amount £000 732,729 115,787 439,753 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 3,338,506 3,348,232 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 – – – 4,214 – – – 4,214 – 1,032 – – – 1,032 – – – 6,322 – – – 6,322 – 135 – – – 135 FVPL £000 FVOCI £000 Arbuthnot Banking Group PLCReport & Accounts 2023 113 Total carrying amount £000 623 38,129 1,391 40,143 1,796 37,726 Fair value £000 623 38,129 1,391 40,143 1,796 37,726 FVPL £000 FVOCI £000 Amortised cost £000 – – – – – – – – – – – – – – 623 38,129 1,391 40,143 1,796 37,726 39,522 39,522 39,522 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 The tables below set out the Company’s financial assets and financial liabilities into their respective classifications: At 31 December 2023 ASSETS Loans and advances to banks Debt securities at amortised cost Other assets LIABILITIES Other liabilities Debt securities in issue At 31 December 2022 ASSETS Loans and advances to banks Debt securities at amortised cost LIABILITIES Other liabilities Debt securities in issue 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. Arbuthnot Banking Group PLCReport & Accounts 2023 114 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 2023 ASSETS Derivative financial instruments Financial investments LIABILITIES Derivative financial instruments At 31 December 2022 ASSETS Derivative financial instruments Financial investments LIABILITIES Derivative financial instruments Level 1 £000 – – – – – Level 1 £000 – – – – – Level 2 £000 4,214 – 4,214 1,032 1,032 Level 2 £000 6,322 – 6,322 135 135 Level 3 £000 – 3,942 3,942 – – Level 3 £000 – 3,404 3,404 – – Total £000 4,214 3,942 8,156 1,032 1,032 Total £000 6,322 3,404 9,726 135 135 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: Group Movement in level 3 At 1 January Purchases Disposals Movements recognised in Other Comprehensive Income At 31 December 2023 £000 3,404 177 (51) 412 3,942 2022 £000 3,169 53 (640) 822 3,404 Arbuthnot Banking Group PLCReport & Accounts 2023 115 Visa Inc. investment Arbuthnot Latham currently holds preference shares in Visa Inc., valued at £2.4m (2022: £2.0m) as at 31 December 2023. 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. The haircut is classified as a significant unobservable input. Management have assessed that should the haircut increase by 5 percentage points this would impact equity by £46k and an increase of 10 percentage points would impact equity by £92k. 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 2023 Arbuthnot Latham & Co., Ltd had made capital contributions into the Fund of USD2.0m (2022: USD1.8m). The investment is classified as FVOCI and is valued at fair value by Hetz Ventures, L.P. at £1.5m (2022: £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. The fair values provided by the Hetz Ventures funds are classified as significant unobservable inputs. Management have assessed that should the fund valuation decrease by 5% this would impact equity by £77k and a reduction of 10% would impact equity by £153k. 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 2023 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 – – – – – – – – – – – 826,559 79,381 943,231 – – 1,849,171 193,410 3,759,567 – – 3,952,977 – – – 2,058,780 22,361 2,081,141 – – 18,542 37,726 56,268 826,559 79,381 943,231 2,058,780 22,361 3,930,312 193,410 3,759,567 18,542 37,726 4,009,245 Arbuthnot Banking Group PLCReport & Accounts 2023 116 Notes to the Consolidated Financial Statements continued 6. Financial risk management (continued) 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 Company At 31 December 2023 ASSETS Loans and advances to banks Debt securities at amortised cost LIABILITIES 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 Level 1 £000 Level 2 £000 Level 3 £000 Total £000 – – – – – – – – – – – Level 1 £000 – – – – – – Level 1 £000 – – – – – – 732,729 115,788 439,389 – – 1,287,906 236,027 3,092,549 – – 3,328,576 Level 2 £000 7 38,129 38,136 – – – Level 2 £000 6 24,437 24,443 – – – – – – 1,996,966 14,160 2,011,126 – – 4,954 37,594 42,548 Level 3 £000 616 – 616 1,796 37,726 39,522 Level 3 £000 8,427 – 8,427 470 37,594 38,064 732,729 115,788 439,389 1,996,966 14,160 3,299,032 236,027 3,092,549 4,954 37,594 3,371,124 Total £000 623 38,129 38,752 1,796 37,726 39,522 Total £000 8,433 24,437 32,870 470 37,594 38,064 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 PLCReport & Accounts 2023 117 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. Arbuthnot Banking Group PLCReport & Accounts 2023 118 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 Pillar 1 and the Pillar 2A capital requirements. The current Total Capital Requirement 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 Share premium 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 2023 £000 2022 £000 167 11,606 19 (1,299) 240,606 265 1,341 (5,202) (24,385) (818) (9) 222,291 37,726 37,726 154 – 19 (1,299) 212,037 523 1,067 (5,202) (27,347) (4,567) (10) 175,375 37,594 37,594 Own Funds (sum of Tier 1 and Tier 2) 260,017 212,969 CET1 Capital Ratio (CET1 Capital / Total Risk Exposure)* Total Capital Ratio (Own Funds / Total Risk Exposure)* * Includes current year audited profit. 13.0% 15.2% 11.6% 14.0% 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 resources, risk exposures and risk assessment processes. Our Pillar 3 disclosures for the year ended 31 December 2023 are published as a separate document on the Group’s website under Investor Relations. Arbuthnot Banking Group PLCReport & Accounts 2023 119 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. Net interest income is analysed as follows. 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 2023 £000 34,275 4,990 29,929 162,642 231,836 (9,032) (80,413) (4,506) (1,266) (95,217) 2022 £000 8,681 6 6,374 104,952 120,013 (3,334) (14,243) (2,723) (632) (20,932) 136,619 99,081 Arbuthnot Banking Group PLCReport & Accounts 2023 120 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. Foreign exchange fees - Provides foreign currencies for our clients to purchase/sell. Fees are 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 2023 Banking commissions Foreign exchange fees Investment management fees Wealth planning fees Total fee and commission income Group At 31 December 2022 Banking and services fees Foreign exchange fees Investment management fees Wealth planning fees Total fee and commission income Banking £000 Wealth Management £000 1,621 1,307 – – 2,928 – – 10,909 456 11,365 Banking £000 Wealth Management £000 2,233 1,296 – – 3,529 – – 10,285 307 10,592 RAF £000 ACABL £000 ASFL £000 45 – – – 45 6,911 – – – 6,911 13 – – – 13 RAF £000 ACABL £000 ASFL £000 32 – – – 32 6,178 – – – 6,178 10 – – – 10 All other divisions £000 1,022 886 – – 1,908 All other divisions £000 405 840 – – 1,245 Total £000 9,612 2,193 10,909 456 23,170 Total £000 8,858 2,136 10,285 307 21,586 Arbuthnot Banking Group PLCReport & Accounts 2023 121 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 sale 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 2023 £000 57,529 31,440 11,244 739 100,952 (40,367) (29,772) (10,935) (81,074) 2022 £000 42,456 44,385 12,088 438 99,367 (31,218) (38,259) (12,632) (82,109) Gross profit from leasing activities 19,878 17,258 Arbuthnot Banking Group PLCReport & Accounts 2023 122 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 17), loans and advances to banks (Note 18) and debt securities at amortised cost (Note 19). 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. Arbuthnot Banking Group PLCReport & Accounts 2023 123 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. 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 / (reversals) on financial assets Of which: Stage 1 Stage 2 Stage 3 Impairment losses / (reversals) on financial investments 2023 £000 3,191 (279) 299 3,301 (130) 3,191 2022 £000 5,503 1,078 53 4,231 142 5,503 During the year, the Group recovered £24k (2022: £55k) of loans which had previously been written off. 12. Other income Included in other income is £0.9m recognised on a non-refundable deposit from a property owned by the Group and £0.4m in relation to a negligent property valuation. Other items reflected in other income include rental income from the investment property of £0.7m (2022: £0.9m). 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 PLCReport & Accounts 2023 124 Notes to the Consolidated Financial Statements continued 13. Operating expenses Operating expenses comprise: Staff costs, including Directors: Wages, salaries and bonuses Social security costs Pension costs Share based payment transactions (Note 40) Amortisation of intangibles (Note 28) Depreciation (Note 29, 30) Profit on disposals of property, plant and equipment Financial Services Compensation Scheme Levy Charitable donations Expenses relating to short-term leases Write down of repossessed and commercial properties Other administrative expenses Total operating expenses from continuing operations Details on Directors remuneration are disclosed in the Remuneration Report on page 62. 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 Audit of the accounts of subsidiaries Audit related assurance services Total fees payable 2023 £000 68,414 7,960 3,335 222 4,924 4,635 (15) 240 70 635 2,616 38,077 2022 £000 61,359 7,534 2,861 (18) 4,026 1,772 (9) 174 118 550 647 30,017 131,113 109,031 2023 £000 131 591 121 843 2022 £000 123 564 116 803 Arbuthnot Banking Group PLCReport & Accounts 2023 125 14. 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 23.5% (2022: 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 Tax reconciliation Profit before tax Tax at 23.5% (2022: 19%) Other permanent differences Tax rate change Prior period adjustments Corporation tax charge for the year 2023 £000 4,650 25 4,675 7,152 (89) 7,063 11,738 47,117 11,073 297 433 (65) 11,738 2022 £000 3,769 246 4,015 286 (750) (464) 3,551 20,009 3,802 (225) 477 (503) 3,551 Prior year permanent differences predominantly due to the disallowed costs on the sale of the King Street property and Super Deduction allowances. 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. Arbuthnot Banking Group PLCReport & Accounts 2023 126 Notes to the Consolidated Financial Statements continued 15. Average number of employees Banking RAF ACABL ASFL AAG All Other Divisions Group Centre 2023 254 47 31 1 138 310 18 799 2022 251 37 28 9 125 250 18 718 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. Arbuthnot Banking Group PLCReport & Accounts 2023 127 16. 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 15,879,200 (2022: 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 17. Cash and balances at central banks Group Cash and balances at central banks ECL has been assessed to be insignificant. 2023 £000 2022 £000 35,379 16,458 2023 p 222.8 2023 £000 2022 p 109.6 2022 £000 826,559 732,729 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. 18. Loans and advances to banks Group Placements with banks included in cash and cash equivalents (Note 42) 2023 £000 79,381 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 A3 None of the loans and advances to banks are past due (2022: nil). ECL has been assessed as insignificant. Company Placements with banks included in cash and cash equivalents (Note 42) 2023 £000 79,381 – 79,381 2023 £000 623 2022 £000 115,787 2022 £000 115,595 193 115,788 2022 £000 8,434 Loans and advances to banks include bank balances of £Nil (2022: £11.5m) with Arbuthnot Latham & Co., Ltd. ECL has been assessed as insignificant. Arbuthnot Banking Group PLCReport & Accounts 2023 128 Notes to the Consolidated Financial Statements continued 19. 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 2023 £000 439,753 (8,973) 1,582,889 (1,071,232) 942,437 2022 £000 301,052 9,524 799,341 (670,164) 439,753 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 (2022: 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 Redemptions At 31 December 2023 £000 401,524 76,543 94,759 294,471 75,140 942,437 2023 £000 24,437 16,801 (3,109) 38,129 2022 £000 41,907 89,805 44,902 50,000 213,139 439,753 2022 £000 24,367 2,396 (2,326) 24,437 The exposure relates to Arbuthnot Latham & Co., Limited, which is unrated. The £25m subordinated loan notes were issued on 3 June 2019 and are denominated in Pound Sterling. The principal amount outstanding at 31 December 2023 was £25m (2022: £25m). The notes carry interest at 7.75% over 3 month average SONIA and are repayable at par in June 2029 unless redeemed or repurchased earlier by the Arbuthnot Latham & Co., Limited. On 24 May 2023 an additional €15m subordinated loan notes were issued and denominated in EURO. The principal amount outstanding at 31 December 2023 was €15m / £13m (2022: £nil). The notes carry interest at 3% over 3 Month EURIBOR and are repayable at par in August 2035. ECL has been assessed as immaterial. Arbuthnot Banking Group PLCReport & Accounts 2023 129 20. 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. 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 2023 £000 3,281 3,281 2022 £000 3,279 3,279 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. 21. 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 2023 2022 Contract/notional amount £000 Fair value assets £000 Fair value liabilities £000 Contract/notional amount £000 Fair value assets £000 Fair value liabilities £000 4,670 61,220 65,890 4 4,210 4,214 66 966 1,032 3,049 51,376 54,425 113 6,209 6,322 135 – 135 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. Arbuthnot Banking Group PLCReport & Accounts 2023 130 Notes to the Consolidated Financial Statements continued 21. Derivative financial instruments (continued) 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 2023 £000 – 65,890 – 65,890 2022 £000 250 52,840 1,335 54,425 22. 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 2023 2022 Fair value assets £000 Fair value liabilities £000 Fair value assets £000 Fair value liabilities £000 4,220 4,220 976 976 6,184 6,184 – – 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. Arbuthnot Banking Group PLCReport & Accounts 2023 131 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. 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 2023 and 31 December 2022, the Group held the following interest rate swaps as hedging instruments in fair value hedges of interest risk. Group Maturity 2023 Maturity 2022 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 – – 61,220 2.51% – – – – 48,120 1.79% – – Arbuthnot Banking Group PLCReport & Accounts 2023 132 Notes to the Consolidated Financial Statements continued 22. Derivatives held for risk management and hedge accounting (continued) The amounts relating to items designated as hedging instruments and hedge ineffectiveness at 31 December 2023 were as follows: Group Interest rate risk Interest rate swaps – hedge of loans and advances 2023 Nominal amount Carrying amount £000 Assets £000 Liabilities £000 61,220 4,220 976 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 The amounts relating to items designated as hedged items at 31 December 2023 were as follows: Group Loans and advances The amounts relating to items designated as hedged items at 31 December 2022 were as follows: Group Loans and advances 2022 Nominal amount Carrying amount £000 Assets £000 Liabilities £000 48,120 6,184 – 2023 Carrying amount Assets £000 Liabilities £000 58,323 – 2022 Carrying amount Assets £000 Liabilities £000 42,383 – Arbuthnot Banking Group PLCReport & Accounts 2023 133 Group 2023 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 (2,940) (100) Net interest income Group 2022 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 4,549 303 Net interest income Change in value used for calculating hedge ineffectiveness £000 2,840 Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item Assets £000 (3,839) Liabilities £000 942 2023 2022 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 (4,246) Assets £000 (5,737) Liabilities £000 – Arbuthnot Banking Group PLCReport & Accounts 2023 134 Notes to the Consolidated Financial Statements continued 23. Loans and advances to customers Analyses of loans and advances to customers: Group Gross loans and advances at 1 January 2023 Originations and repayments Write-offs Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Gross loans and advances at 31 December 2023 Less allowances for ECLs (see Note 24) Net loans and advances at 31 December 2023 Group Gross loans and advances at 1 January 2022 Originations and repayments Repayments and 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 24) Net loans and advances at 31 December 2022 * Originations include further advances and drawdowns on existing commitments. For a maturity profile of loans and advances to customers, refer to Note 6. Stage 1 £000 1,917,907 85,665 – 2,420 (66,605) (30,445) 1,908,942 (900) 1,908,042 Stage 1 £000 1,737,909 217,525 – 30,323 (57,245) (10,605) 1,917,907 (1,147) 1,916,760 2023 Stage 2 £000 74,514 (42,029) – (2,185) 66,895 (14,443) 82,752 (429) 82,323 2022 Stage 2 £000 95,463 (36,398) – (29,720) 59,912 (14,743) 74,514 (130) 74,384 Stage 3 £000 Total £000 50,258 2,042,679 (14,067) (1,223) (235) (290) 44,888 29,569 (1,223) – – (2) 79,331 2,071,025 (5,479) 73,852 (6,808) 2,064,217 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 Arbuthnot Banking Group PLCReport & Accounts 2023 135 AAG £000 58,923 287 – 59,210 AAG £000 17,016 376 – 17,392 All Other Divisions £000 Total £000 – – – – 1,908,042 82,323 73,852 2,064,217 All Other Divisions £000 Total £000 – – – – 1,916,760 74,382 44,935 2,036,077 ASFL £000 3,078 – – 3,078 ASFL £000 13,675 1,001 193 14,869 2023 ACABL £000 ASFL £000 All Other Divisions £000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Total £000 83,082 61,835 20,992 255 6,748 6,530 218 3,631 3,231 400 73,506 3,969 69,537 166,967 Loans and advances to customers by division (net of ECL): Group Stage 1 Stage 2 Stage 3 2023 Banking £000 1,332,535 59,472 47,607 Mortgage Portfolios £000 95,218 10,063 18,466 RAF £000 194,423 2,146 2,221 ACABL £000 223,865 10,355 5,558 At 31 December 2023 1,439,614 123,747 198,790 239,778 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 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 77,211 56,487 20,678 46 1,815 1,797 18 421 50 371 50,258 3,969 46,289 Mortgage Portfolios £000 3,902 3,476 261 165 4,687 4,508 179 3,030 3,030 – 19,992 – 19,992 RAF £000 1,969 1,872 53 44 246 225 21 180 151 29 3,256 – 3,256 At 31 December 2023 129,705 31,611 5,651 Arbuthnot Banking Group PLCReport & Accounts 2023 136 Notes to the Consolidated Financial Statements continued 23. 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 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 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 2022 ACABL £000 – – – – – – – – – – – – – – ASFL £000 – – – – 1,001 1,001 – – – – 193 – 193 1,194 All Other Divisions £000 – – – – – – – – – – – – – – 2023 £000 99,863 195,538 394 295,795 (37,795) 258,000 78,509 179,108 383 258,000 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 2022 £000 54,086 117,179 748 172,013 (20,798) 151,215 43,537 106,979 699 151,215 (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 (2022: £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 £125.8m (2022: £69.2m), against loans of £79.3m (2022: £50.3m). The weighted average loan-to-value of loans and advances in Stage 3 is 63.0% (2022: 73%). Arbuthnot Banking Group PLCReport & Accounts 2023 24. Allowances for impairment of loans and advances An analysis of movements in the allowance for ECLs (2023): Group At 1 January 2023 Transfer to Stage 2 Transfer to Stage 3 Current year charge Change in assumptions Repayments and write-offs At 31 December 2023 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 25. Other assets Group Trade receivables Inventory Prepayments and accrued income Trade receivables Gross balance Allowance for bad debts Net receivables Stage 1 £000 Stage 2 £000 1,147 (241) (23) (29) 48 – 902 130 241 (14) 90 1 (21) 427 Stage 1 £000 Stage 2 £000 388 15 (57) (8) 208 601 – 1,147 77 (15) 57 (70) 18 63 – 130 Stage 3 £000 5,324 – 37 3,510 (162) (3,230) 5,479 Stage 3 £000 5,922 – – 78 4,080 218 (4,974) 5,324 2023 £000 22,361 24,917 9,872 57,150 22,511 (150) 22,361 137 Total £000 6,601 – – 3,571 (113) (3,251) 6,808 Total £000 6,387 – – – 4,306 882 (4,974) 6,601 2022 £000 14,160 29,210 8,815 52,185 14,506 (346) 14,160 Arbuthnot Banking Group PLCReport & Accounts 2023 138 Notes to the Consolidated Financial Statements continued 25. 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. The Group’s intention is to develop and sell the property and this has therefore been recognised as inventory. The value of inventory for repossessed collateral at 31 December 2023 is £4.8m (2022: £9.4m). 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 2023 the remaining property was valued at net realisable value less costs to sell of £9.9m (2022: the remaining property valued at cost of £10.2m). Company Trade receivables Prepayments and accrued income 26. Financial investments Group Designated at fair value through other comprehensive income – Unlisted securities Total financial investments 2023 £000 1,391 58 1,449 2023 £000 3,942 3,942 2022 £000 – 74 74 2022 £000 3,404 3,404 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 £2.4m (2022: £2.0m). 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 £12k (2022: £Nil). A further investment in an unlisted investment vehicle was made in 2023. The carrying value at year end is £1.5m (2022: £1.4m) and the Group received a distribution of £0.1m (2022: £0.6m) which included a gain of £0.1m (2022: £0.5m) 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 PLCReport & Accounts 2023 139 27. 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 (liability)/asset At 1 January 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 (liability)/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 Deferred tax asset at 31 December 2023 £000 (5,639) (300) 819 210 (4,910) 2,425 (91) (3,443) (3,748) (53) (4,910) 2023 £000 7 147 366 520 523 (3) 520 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 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. Arbuthnot Banking Group PLCReport & Accounts 2023 140 Notes to the Consolidated Financial Statements continued 28. 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. Expenditure on internally developed software is recognised as an asset when the Group is able to demonstrate: that the product is technically and commercially feasible, its intention and ability to complete the development and use the software in a manner that will generate future economic benefits, and that it can reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs directly attributable to developing the software, and are amortised over its useful 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 2022 Additions Disposals At 31 December 2022 Additions Disposals At 31 December 2023 Accumulated amortisation At 1 January 2022 Amortisation charge At 31 December 2022 Amortisation charge At 31 December 2023 Net book amount At 31 December 2022 At 31 December 2023 Goodwill £000 Computer software £000 Other intangibles £000 5,202 – – 5,202 – – 30,486 6,524 – 37,010 985 – 5,202 37,995 – – – – – 5,202 5,202 (11,103) (2,964) (14,067) (3,906) (17,973) 22,943 20,022 6,978 – (687) 6,291 888 (350) 6,829 (1,699) (188) (1,887) (579) (2,466) 4,404 4,363 Total £000 42,666 6,524 (687) 48,503 1,873 (350) 50,026 (12,802) (3,152) (15,954) (4,485) (20,439) 32,549 29,587 Arbuthnot Banking Group PLCReport & Accounts 2023 141 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 (2022: 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 (2022: 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 4.6% (2022: 3.1%) was used for income and 7.4% (2022: 8.1%) for expenditure from 2023 to 2025 (these rates were the best estimate of future forecasted performance), while a 3% (2022: 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% (2022: 3%) was used (this rate was the best estimate of future forecasted performance). Cash flows were discounted at a pre-tax rate of 14.7% (2022: 14.7%) 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 2022 At 31 December 2022 At 31 December 2023 Accumulated amortisation At 1 January 2022 Amortisation charge At 31 December 2022 Amortisation charge At 31 December 2023 Net book amount At 31 December 2022 At 31 December 2023 Computer software £000 7 7 7 (5) (1) (6) (1) (7) 1 – Arbuthnot Banking Group PLCReport & Accounts 2023 142 Notes to the Consolidated Financial Statements continued 29. 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. Leasehold improvements £000 Commercial vehicles £000 Plant and machinery £000 Computer and other equipment £000 Motor Vehicles £000 Group Cost or valuation At 1 January 2022 Additions Disposals At 31 December 2022 Additions Disposals Accumulated depreciation At 1 January 2022 Depreciation charge Disposals At 31 December 2022 Depreciation charge Disposals At 31 December 2023 Net book amount At 31 December 2022 At 31 December 2023 7,656 92 – 7,748 3,979 – 124,317 115,170 (28,918) 210,569 161,235 (62,181) (4,962) (825) – (5,787) (857) – (2,754) (36,885) 808 (38,831) (40,219) 37,018 13 – – 13 4 – 17 (1) (8) – (9) (3) – 5,739 507 – 6,246 627 – 6,873 (4,286) (848) – (5,134) (680) – (6,644) (42,032) (12) (5,814) 1,961 5,083 171,738 267,591 4 5 1,112 1,059 Total £000 138,048 116,236 (29,085) 225,199 166,080 (62,191) 329,088 (12,158) (38,684) 916 (49,926) (41,880) 37,024 (54,782) 175,273 274,306 323 467 (167) 623 235 (10) 848 (155) (118) 108 (165) (121) 6 (280) 458 568 At 31 December 2023 11,727 309,623 Arbuthnot Banking Group PLCReport & Accounts 2023 143 Total £000 308 1 309 (1) 308 (170) (9) (179) (1) (178) 130 130 2022 £000 35,848 46,583 1,095 83,526 Computer and other equipment £000 Motor Vehicles £000 217 1 218 (1) 217 (88) – (88) – (88) 130 129 91 – 91 – 91 (82) (9) (91) (1) (90) – (1) 2023 £000 55,763 70,225 5,131 131,119 Company Cost or valuation At 1 January 2022 Additions At 31 December 2022 Additions At 31 December 2023 Accumulated depreciation At 1 January 2022 Depreciation charge At 31 December 2022 Depreciation charge At 31 December 2023 Net book amount At 31 December 2022 At 31 December 2023 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 30. 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. Arbuthnot Banking Group PLCReport & Accounts 2023 144 Notes to the Consolidated Financial Statements continued 30. Right-of-use assets (continued) (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. 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 2022 Additions Amortisation Derecognition At 31 December 2022 Additions Amortisation Derecognition At 31 December 2023 Properties £000 Equipment £000 15,516 1,254 (2,565) (6,796) 7,409 49,228 (3,524) (476) 52,637 158 365 323 (543) 303 23 (149) – 177 Total £000 15,674 1,619 (2,242) (7,337) 7,714 49,251 (3,673) (476) 52,816 Additions for 2023 include £48.3m in relation to the 15-year lease on the new Finsbury Circus office, signed for in September 2023. In the year, the Group received £Nil (2022: £Nil) of rental income from subleasing right-of-use assets through operating leases. The Group recognised £1.3m (2022: £0.7m) of interest expense related to lease liabilities. The Group also recognised £0.6m (2022: £0.6m) of expense in relation to leases with a duration of less than 12 months. Arbuthnot Banking Group PLCReport & Accounts 2023 145 31. 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 Fair value adjustment At 31 December 2023 2023 £000 6,550 (600) 5,950 2022 £000 6,550 – 6,550 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 4.2 (c)). The fair value of the investment property was determined by an external, independent property valuer, having appropriate recognised professional qualifications and recent experience in the location and category of property being valued. The fair value measurements for the investment property have been categorised as Level 3 fair value measurement. The Group recognised £0.7m (2022: £0.5m) rental income during the year and incurred £0.7m (2022: £0.07m) of direct operating expenses. The property remained tenanted during 2023. 32. Deposits from banks Group 2023 £000 2022 £000 193,410 236,027 Deposits from banks include £190m (2022: £225m) obtained through the Bank of England Term Funding Scheme with additional incentives for small and medium-sized enterprises (“TFSME”). £177.6m of TFSME is maturing in 2025, with the remaining £12.4m maturing in 2027. 33. Deposits from customers Group Current / demand accounts Notice accounts Term deposits 2023 £000 2,161,285 180,854 1,417,428 3,759,567 2022 £000 1,924,035 296,400 872,114 3,092,549 Included in customer accounts are deposits of £32.6m (2022: £15.4m) 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. Arbuthnot Banking Group PLCReport & Accounts 2023 146 Notes to the Consolidated Financial Statements continued 34. Other liabilities Group Trade payables Accruals and deferred income Company Trade payables Accruals and deferred income 35. Lease liabilities 2023 £000 18,542 22,158 40,700 2023 £000 1,796 3,740 5,536 2022 £000 4,954 21,190 26,144 2022 £000 470 3,021 3,491 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 2022 Additions Interest expense Lease payments Derecognition At 31 December 2022 Additions Interest expense Lease payments At 31 December 2023 Properties £000 Equipment £000 16,099 848 709 (3,089) (6,980) 7,587 48,175 1,336 (3,496) 53,602 5,177 186 9 (5,087) – 285 23 9 (158) 159 Total £000 21,276 1,034 718 (8,176) (6,980) 7,872 48,198 1,345 (3,654) 53,761 Arbuthnot Banking Group PLCReport & Accounts 2023 147 2022 £000 3,675 3,502 8,560 15,737 7,872 3,398 4,474 2023 £000 2,734 20,239 67,497 90,470 53,761 2,559 51,202 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 36. Debt securities in issue 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 2023 £000 2022 £000 37,726 37,594 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 2023 was €15.0m / £13.0m (2022: €15.0m / £13.3m). 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 amount that will be required to be paid at maturity of the above debt securities is €15.0m. The fair value of these Euro subordinated loan notes approximates their carrying value. Pounds Sterling 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 2023 was £25.0m (2022: £25.0m). The notes carry interest at 7.75% over three month average GBP SONIA and are repayable at par in June 2029 unless redeemed or repurchases earlier by the Company. The contractual amount that will be required to be paid at maturity of the above debit securities is £25.0m. On 19 December 2023 Arbuthnot Banking Group renewed its subordinated loan notes. The new facility principal was increased to £26.0m and will be used to redeem the existing facility, expected 3 June 2024 which is the fifth anniversary of the initial loan. The facility currently remains undrawn. The notes will carry interest at 7.25% over 3 month average GBP SONIA. The fair value of these subordinated loan notes approximates their carrying value. Arbuthnot Banking Group PLCReport & Accounts 2023 148 Notes to the Consolidated Financial Statements continued 37. 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 2023, the Group had capital commitments of £0.4m (2022: £0.5m) in respect of a contribution in an equity investment. 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 2023 £000 2,051 450,539 452,590 2022 £000 3,253 471,078 474,331 Arbuthnot Banking Group PLCReport & Accounts 2023 149 31 December 2023 £000 31 December 2022 £000 167 11,606 11,773 Number of shares 15,279,322 1,297,297 16,576,619 Number of shares 152,621 152,621 Number of shares 15,431,943 1,297,297 16,729,240 154 – 154 Share capital £000 153 13 166 Share capital £000 1 1 Share capital £000 154 13 167 38. Share capital and share premium Group and Company Share capital Share premium Share capital and share premium Ordinary share capital Group and Company At 1 January 2023 Issue of shares At 31 December 2023 Ordinary non-voting share capital Group and Company At 1 January 2023 At 31 December 2023 Total share capital Group and Company At 1 January 2023 Issue of shares At 31 December 2023 (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 (2022: 1p per share). At 31 December 2023 the Company held 409,314 shares (2022: 409,314) in treasury. This includes 390,274 (2022: 390,274) Ordinary shares and 19,040 (2022: 19,040) Ordinary Non-Voting shares. During the year the Company’s issued share capital increased by 1,297,297 ordinary shares through the allotment and issue of ordinary shares through the placing of and subscription for new voting Ordinary shares in the Company, raising approximately £12.0 million in a fundraising. The shares were allotted and issued on 5 May 2023 at the placing price on a non-pre-emptive basis pursuant to authorities granted to the directors of the Company at the general meeting held on 4 May 2023. Arbuthnot Banking Group PLCReport & Accounts 2023 150 Notes to the Consolidated Financial Statements continued 39. Reserves and retained earnings Group Capital redemption reserve Fair value reserve Treasury shares Retained earnings Total reserves at 31 December 2023 £000 19 1,341 (1,299) 240,606 240,667 2022 £000 19 1,067 (1,299) 212,037 211,824 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 40. Share-based payment options 2023 £000 19 (1,299) 148,809 147,529 2022 £000 19 (1,299) 152,115 150,835 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 had vested but lapsed as not exercised at 1591p before 14 June 2023. The second tranche of the share options had not vested as performance conditions had not been met, due to the non-payment of dividends, which was not possible in 2020 due to the regulatory response to the economic impact of COVID. 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 these options as at 31 December 2023 was £Nil (2022: £Nil). 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 2024 and the other 50% is exercisable at any time after 23 July 2026. All share options awarded on 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 2023 was £0.36m (2022: £0.13m). The performance conditions of the Scheme are that, 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 the Company or any of its subsidiaries which has a material impact on the business of Group and for the duration of the vesting period, there has been satisfactory growth in the dividends paid by the Company. Arbuthnot Banking Group PLCReport & Accounts 2023 151 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. 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 2024 and July 2026. The attrition rate will increase by 3% per year until the vesting date. ABG had a cost £0.22m in relation to share based payments during 2023 (2022: £0.02m cost), as disclosed in Note 13. 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) 41. Dividends per share 2023 31.8% 4.2% 1.56 2022 33.6% 2.5% 1.36 The Directors recommend the payment of a final dividend of 27p (2022: 25p) per share. This represents total dividends for the year of 46p (2022: 42p). The final dividend, if approved by members at the 2023 AGM, will be paid on 31 May 2024 to shareholders on the register at close of business on 19 April 2024. 42. 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 17) Loans and advances to banks (Note 18) Company Loans and advances to banks 2023 £000 826,559 79,381 905,940 2023 £000 623 2022 £000 732,729 115,787 848,516 2022 £000 8,434 Arbuthnot Banking Group PLCReport & Accounts 2023 152 Notes to the Consolidated Financial Statements continued 43. 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 2023 £000 1,409 457 (416) 1,450 38 2022 £000 502 1,013 (106) 1,409 2 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 (2022: £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 2023 £000 4,422 4,118 (5,350) 3,190 72 2022 £000 4,018 6,707 (6,303) 4,422 2 Details of directors’ remuneration are given in the Remuneration Report on pages 61 and 62. The Directors do not believe that there were any other transactions with key management or their close family members that require disclosure, other than the subscription of shares by Sir Henry Angest at a cost of £6,751,047.75 as reported in the Directors Report on page 48. Arbuthnot Banking Group PLCReport & Accounts 2023 153 Details of principal subsidiaries are given in Note 44. 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 2023 2022 Highest balance during the year £000 Balance at 31 December £000 Highest balance during the year £000 Balance at 31 December £000 12,843 38,129 164,354 215,326 1,339 1,339 616 38,129 164,354 203,099 4,198 1,540 1,540 223 8,429 24,885 159,404 192,718 776 776 8,427 24,437 159,354 192,218 5 243 243 369 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 Total 2023 £000 896 3,543 (2,100) (9,764) (5,814) 2022 £000 896 1,127 (675) (6,993) (5,862) (13,239) (11,507) Arbuthnot Banking Group PLCReport & Accounts 2023 154 Notes to the Consolidated Financial Statements continued 44. Interests in subsidiaries Company At 1 January 2023 Capital Contribution At 31 December 2023 Company Subsidiary undertakings: Bank Other Total Investment at cost £000 159,354 5,000 164,354 Impairment provisions £000 – – – 2023 £000 162,814 1,540 164,354 Net £000 159,354 5,000 164,354 2022 £000 157,814 1,540 159,354 (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 2023: % 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 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. Arbuthnot Banking Group PLCReport & Accounts 2023 155 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. Arbuthnot Specialist Finance Limited is exempt from the requirement to prepare audited accounts under section 479A of the Companies Act 2006. (b) Non-controlling interests in subsidiaries There were no non-controlling interests at the end of 2023 or 2022. (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 £4.3bn and £4.1bn respectively (2022: £3.6bn and £3.4bn respectively). (d) Risks associated with interests During the year Arbuthnot Banking Group PLC made £5.0m 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. In 2022 Arbuthnot Banking Group PLC did not make capital contributions to Arbuthnot Latham & Co., Ltd. 45. 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. Arbuthnot Banking Group PLCReport & Accounts 2023 156 Notes to the Consolidated Financial Statements continued 45. Operating segments (continued) Year ended 31 December 2023 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 £000 107,986 – 107,986 3,168 – – – 10,593 – 12,584 – 23,300 – – 11,417 – 10,593 – – 12,584 45 – 23,300 6,911 – ASFL £000 1,103 – 1,103 13 – All Other Divisions £000 AAG £000 Group Centre £000 Total £000 2,390 – 73,380 – 3 (3) 231,839 (3) 2,390 – 100,952 73,380 1,616 – – – – – 231,836 23,170 100,952 355,958 (90,739) (81,074) 3 (4,481) (768) 178,899 (3,191) 2,522 (131,113) 47,117 (11,738) Revenue from external customers 111,154 11,417 10,593 12,629 30,211 1,116 103,342 75,496 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 6,145 – – – (551) 116,748 (1,227) – (52,073) 63,448 – – – – – (89) 11,328 – – (15,584) (4,256) – (6,348) – – – – 4,245 (821) – (833) 2,591 – (4,540) – – – (11) 8,078 (982) 170 (5,634) 1,632 (391) (14,658) – – – – 15,553 (234) – (6,777) 8,542 (2,017) (352) – – – – 764 46 – (1,507) (697) 118 (10,254) (81,074) – – (12) 12,002 (98) – (15,093) (3,189) (488) (60,509) – – – (105) 14,882 125 3,191 (23,575) (5,377) (5,655) (223) – 3 (4,481) – (4,701) – (839) (10,037) (15,577) (3,305) Segment profit / (loss) after tax 63,448 (4,256) 2,591 1,241 6,525 (579) (3,677) (11,032) (18,882) 35,379 Loans and advances to customers Assets available for lease 1,439,655 – Other assets Segment total assets Customer deposits Other liabilities Segment total liabilities Other segment items: Capital expenditure Depreciation and amortisation – 1,439,655 3,760,199 – 3,760,199 – – – – – – – – – – – 123,747 198,790 239,777 – – – 3,078 – 59,210 267,591 – – – – – – – 2,017,916 (40) 2,064,217 267,591 (5,884) 2,012,032 – 123,747 198,790 239,777 3,078 326,801 2,017,916 (5,924) 4,343,840 – – – – – – – – – – – – – – – – – – – – – – – – 329,879 (632) 3,759,567 331,833 1,954 329,879 1,322 4,091,400 – – (167,954) (46,365) 1 – (167,953) (46,365) The “Group Centre” segment above includes the parent entity and all intercompany eliminations. Arbuthnot Banking Group PLCReport & Accounts 2023 157 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) 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 – 664 – 16,840 – 664 – 99,367 16,840 1,539 – All Other Divisions £000 AAG £000 Group Centre £000 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) 5 (5) – – – – 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 – – – – – – 1,409,231 (11,500) 2,036,077 171,738 (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) Segment profit is shown prior to any intra-group eliminations. All operations of the Group are conducted wholly within the United Kingdom and geographical information is therefore not presented. Arbuthnot Banking Group PLCReport & Accounts 2023 158 Notes to the Consolidated Financial Statements continued 46. 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 2023 Location UK 31 December 2022 Location UK Turnover (£m) 178.9 Turnover (£m) 137.4 FTE employees Number 799 FTE employees Number 749 Profit/(loss) before tax (£m) 47.1 Profit/(loss) before tax (£m) 20.0 Tax paid (£m) 11.7 Tax paid (£m) 3.6 No public subsidies were received during 2023 or 2022. 47. Ultimate controlling party The Company regards Sir Henry Angest, the Group Chairman and Chief Executive Officer, who has a beneficial interest in 57.3% 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 43 of the consolidated financial statements includes related party transactions with Sir Henry Angest. 48. Events after the balance sheet date There were no material post balance sheet events to report. Arbuthnot Banking Group PLCReport & Accounts 2023 Five Year Summary 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: 159 2019 £000 6,176 7,011 41.2 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 2022 £000 16,458 20,009 2023 £000 35,379 47,117 109.6 222.8 109.6 42.0 – 222.8 46.0 – Net asset value per share (p) 1,363.5 1,291.5 1,337.2 1,411.1 1,546.8 2019 2020 2021 2022 2023 Arbuthnot Banking Group PLCReport & Accounts 2023 160 Notice of Annual General Meeting NOTICE IS HEREBY GIVEN that the thirty eighth 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, 22 May 2024 at 3 p.m. for the purpose of transacting the following business as ordinary resolutions (as regards resolutions 1 to 10 and 13) and as special resolutions (as regards resolutions 11 and 12). ORDINARY RESOLUTIONS 1. To receive and adopt the Annual Report and Accounts for the year ended 31 December 2023. 2. To receive the report of the Remuneration Committee. 3. To declare a final dividend in respect of the year ended 31 December 2023 which the directors propose should be 27p per Ordinary Share or Ordinary Non-Voting Share, payable on 31 May 2024 to shareholders on the register of members at the close of business on 19 April 2024. 4. To elect Ms J.D. Almond as a Director who, having been appointed as a Director since the last annual general meeting, offers herself for election in accordance with Article 75 of the Articles of Association. 5. To elect Ms A.A. Knight as a Director who, having been appointed as a Director since the last annual general meeting, offers herself for election in accordance with Article 75 of the Articles of Association. 6. To elect Lord Sassoon 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. 7. To re-elect Mr. J.R. Cobb as a Director who retires by rotation in accordance with Article 78 of the Articles of Association and offers himself for re-election. 8. To re-elect Mr. I.A. Dewar as a Director who retires by rotation in accordance with Article 78 of the Articles of Association and offers himself for re-election. 9. To re-appoint Mazars LLP as Auditor of the Company. 10. To authorise the Directors to determine the remuneration of the Auditor. To consider and, if thought fit, pass the following resolutions which will in the case of resolutions 11 and 12 be proposed as special resolutions and in the case of resolution 13 as an ordinary resolution: SPECIAL RESOLUTIONS 11. 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 1,657,000 (being approximately 10% of the number of issued Ordinary Shares in the Company as at 31 March 2024); 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 22 August 2025 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. Arbuthnot Banking Group PLCReport & Accounts 2023 161 12. 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 2024); 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 22 August 2025 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. ORDINARY RESOLUTION 13. That the Company be authorised in accordance with Sections 366 and 367 of the Companies Act 2006 to make or procure an existing or future subsidiary to: a. make political donations to political parties or independent election candidates; b. make political donations to political organisations other than political parties; and c. incur political expenditure. During the period of four years commencing on 23 May 2024 provided that in each case and in aggregate the total amount donated or expended shall not exceed £250,000. This resolution replaces the resolution passed on 16 June 2020. By order of the Board N.D. Jennings Secretary 27 March 2024 Registered Office Arbuthnot House 7 Wilson Street London EC2M 2SN Arbuthnot Banking Group PLCReport & Accounts 2023 162 Notice of Annual General Meeting continued 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. LinkVote+ is a free app for smartphone and tablet provided by Link Group (the Company’s registrar). It offers shareholders the option to submit a proxy appointment quickly and easily online, as well as real-time access to your shareholding records. 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 3 p.m. on 20 May 2024 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 20 May 2024 (“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 2023 163 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 20 May 2024. 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, Proxymity 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 20 May 2024 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. Before you can appoint a proxy via this process you will need to have agreed to Proxymity’s associated terms and conditions. It is important that you read these carefully as you will be bound by them and they will govern the electronic appointment of your proxy. An electronic proxy appointment via the Proxymity platform may be revoked completely by sending an authenticated message via the platform instructing the removal of your proxy vote. 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 2024 (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 16,186,345 Ordinary Shares carrying one vote each. Therefore, the total voting rights in the Company as at 31 March 2024 are 16,186,345. 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 PLCReport & Accounts 2023 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 Central Square 29 Wellington Street Leeds Yorkshire LS1 4DL 164 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 PLCReport & Accounts 2023 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