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DJ Arbuthnot Banking Group PLC Audited Final Results

TIDMARBB

RNS Number : 6499H

Arbuthnot Banking Group PLC

26 March 2020

26 March 2020

For immediate release

ARBUTHNOT BANKING GROUP ("Arbuthnot", "the Group" or "ABG")

Audited Final Results for the year to 31 December 2019

Continued diversification, whilst maintaining a strong capital position and financial discipline in these uncertain times.

Arbuthnot Banking Group today announces a profit before tax of GBP7m.

Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited.

FINANCIAL HIGHLIGHTS

   --      Profit Before Tax GBP7.0m (2018: GBP6.8m) 
   --      Underlying profit before tax GBP5.8m (2018: GBP4.4m) 
   --      Operating income increased by 7% to GBP72.5m (2018: GBP67.9m) 
   --      Earnings per share 41.2p (2018: negative 134.5p)* 
   --      Underlying earnings per share 32.8p (2018: 22.7p) 
   --      Second interim dividend in lieu of a final dividend of 21p (2018: 20p), an increase of 5%** 
   --      Total full year dividend per share 37p (2018: 35p) 
   --      Bonus share issue on 17 May 2019 creating new class of non-voting shares 
   --      Net assets GBP208m (2018: GBP196m) 
   --      Net assets per share 1364p (2018: 1283p) 
   --      Total capital ratio 17.3% (2018: 17.2%) 

OPERATIONAL HIGHLIGHTS

Arbuthnot Latham

   --      Profit before tax and group recharges of GBP16.2m (2018: GBP14.6m) an increase of 11%*** 
   --      Average net margin at 4.2% (2018: 4.7%) 
   --      Customer loans increased 31% to GBP1,599m (2018: GBP1,225m) 
   --      Written loan volume decreased 8% to GBP430m (2018: GBP469m) 
   --      Acquisition of GBP265m loan book 
   --      Customer deposits increased 22% to GBP2,085m (2018: GBP1,714m) 
   --      Assets under management increased 12% to GBP1,107m (2018: GBP985m) 

-- Arbuthnot Commercial Asset Based Lending which launched in May 2018 achieved profitability in 2019

   --      Arbuthnot Specialist Finance delayed launch, with full profitability expected in 2021 
   --      Arbuthnot Direct established raising GBP83m of deposits direct from the retail market 

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "Since the financial year end the global economy has been significantly impacted by the spread of the coronavirus and the drastic measures taken by governments to contain the outbreak. Every business will experience the effects of this, including Arbuthnot. We have taken immediate steps to protect our staff and all are now homeworking wherever possible, while our recent investment in technology has enabled us to remain in close contact with clients. In the short term, the cut in base rates will have a material impact on our profitability and while the removal of the countercyclical capital buffer will benefit us, it is difficult to provide any detailed guidance for the year. Longer term however Arbuthnot is a very well capitalised bank, with excellent management and staff and a conservative loan book. We are well positioned to withstand these headwinds and potentially take advantage of opportunities as we eventually emerge from this."

 
 Note:   *     Prior year results include GBP25.7m net loss on derecognition 
                of Secure Trust Bank associate recorded in discontinued operations. 
         **    The Directors recommend the payment of a second interim dividend 
                in lieu of a final dividend of 21p (2018: 20p) per share. This 
                is in light of the current circumstances, which means we are unable 
                to schedule the AGM as previously planned. 
         ***   Includes an adjustment to RAF earn out liability giving a profit 
                increase of GBP1.5m (2018: GBP2.6m). 
 

The Directors of the Company accept responsibility for the contents of this announcement.

 
 ENQUIRIES: 
 
                                                                        0207 012 
 Arbuthnot Banking Group                                                 2400 
 Sir Henry Angest, Chairman and Chief Executive 
 Andrew Salmon, Chief Operating Officer 
 James Cobb, Group Finance Director 
 
 Grant Thornton UK LLP (Nominated Adviser and NEX Exchange Corporate    0207 383 
  Adviser)                                                               5100 
 Colin Aaronson 
 Samantha Harrison 
 Niall McDonald 
 
                                                                        0207 260 
 Numis Securities Ltd (Joint Broker)                                     1000 
 Stephen Westgate 
 
                                                                        0207 408 
 Shore Capital Stockbrokers Ltd (Joint Broker)                           4090 
 Hugh Morgan 
 Daniel Bush 
 
                                                                        0207 379 
 Maitland (Financial PR)                                                 5151 
 Neil Bennett 
 Sam Cartwright 
 Jonathan Cook 
 

The 2019 Annual Report will be available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 8 April 2020.

The AGM, associated Hard Copy of the Annual Report and Notice of meeting will be arranged when current restrictions are relaxed. Copies will then be available from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN. We will update the market as dates for these are confirmed.

Consolidated statement of comprehensive income

 
                                                                    Year ended 31 
                                                                       December 
                                                                     2019       2018 
                                                          Note     GBP000     GBP000 
-------------------------------------------------------  -----  ---------  --------- 
 Interest income                                          8        76,870     65,290 
 Interest expense                                                (18,233)   (10,107) 
-------------------------------------------------------  -----  ---------  --------- 
 Net interest income                                               58,637     55,183 
-------------------------------------------------------  -----  ---------  --------- 
 Fee and commission income                                9        13,935     12,956 
 Fee and commission expense                                         (107)      (234) 
-------------------------------------------------------  -----  ---------  --------- 
 Net fee and commission income                                     13,828     12,722 
-------------------------------------------------------  -----  ---------  --------- 
 Operating income                                                  72,465     67,905 
-------------------------------------------------------  -----  ---------  --------- 
 Net impairment loss on financial assets                  10        (867)    (2,731) 
 Other income                                             11        5,599      6,588 
 Operating expenses                                       12     (70,186)   (64,982) 
-------------------------------------------------------  -----  ---------  --------- 
 Profit before tax from continuing operations                       7,011      6,780 
 Income tax expense                                       13        (835)    (1,121) 
-------------------------------------------------------  -----  ---------  --------- 
 Profit after tax from continuing operations                        6,176      5,659 
 Profit from discontinued operations after tax            14            -   (25,692) 
-------------------------------------------------------  -----  ---------  --------- 
 Profit / (loss) for the year                                       6,176   (20,033) 
-------------------------------------------------------  -----  ---------  --------- 
 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                               10,707   (13,893) 
 Tax on other comprehensive income                                   (77)       (26) 
-------------------------------------------------------  -----  ---------  --------- 
 Other comprehensive income / (loss) for the period, 
  net of tax                                                       10,630   (13,919) 
-------------------------------------------------------  -----  ---------  --------- 
 Total comprehensive income / (loss) for the period                16,806   (33,952) 
-------------------------------------------------------  -----  ---------  --------- 
 
 Profit attributable to: 
 Equity holders of the Company                                      6,176   (20,033) 
 Profit / (loss) for the year                                       6,176   (20,033) 
-------------------------------------------------------  -----  ---------  --------- 
 
 Total comprehensive income attributable to: 
 Equity holders of the Company                                     16,806   (33,952) 
 Total comprehensive income / (loss) for the period                16,806   (33,952) 
-------------------------------------------------------  -----  ---------  --------- 
 
 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 - Continuing operations         16         41.2       38.0 
 Basic earnings per share - Discontinued operations       16            -    (172.5) 
-------------------------------------------------------  -----  ---------  --------- 
 Basic earnings per share                                 16         41.2    (134.5) 
-------------------------------------------------------  -----  ---------  --------- 
 
 Diluted earnings per share - Continuing operations       16         41.2       38.0 
 Diluted earnings per share - Discontinued operations     16            -    (172.5) 

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DJ Arbuthnot Banking Group PLC Audited Final Results -2-

-------------------------------------------------------  -----  ---------  --------- 
 Diluted earnings per share                               16         41.2    (134.5) 
-------------------------------------------------------  -----  ---------  --------- 
 

Consolidated statement of financial position

 
                                                          At 31 December 
                                                            2019        2018 
                                                Note      GBP000      GBP000 
 ASSETS 
 Cash and balances at central banks               17     325,908     405,325 
 Loans and advances to banks                      18      46,258      54,173 
 Debt securities at amortised cost                19     442,960     342,691 
 Assets classified as held for sale               20       7,617       8,002 
 Derivative financial instruments                 21       1,804       1,846 
 Loans and advances to customers                  22   1,599,053   1,224,656 
 Other assets                                     24      86,443      12,716 
 Financial investments                            25      30,919      35,351 
 Deferred tax asset                               26       1,815       1,490 
 Intangible assets                                27      20,082      16,538 
 Property, plant and equipment                    28       5,813       5,304 
 Right-of-use assets                              29      19,944           - 
 Investment property                              30       6,763      67,081 
---------------------------------------------  -----  ----------  ---------- 
 Total assets                                          2,595,379   2,175,173 
---------------------------------------------  -----  ----------  ---------- 
 EQUITY AND LIABILITIES 
 Equity attributable to owners of the parent 
 Share capital                                    37         154         153 
 Retained earnings                                38     209,171     209,083 
 Other reserves                                   38       (990)    (13,280) 
---------------------------------------------  -----  ----------  ---------- 
 Total equity                                            208,335     195,956 
---------------------------------------------  -----  ----------  ---------- 
 LIABILITIES 
 Deposits from banks                              31     230,421     232,675 
 Derivative financial instruments                 21         319         188 
 Deposits from customers                          32   2,084,903   1,714,286 
 Current tax liability                                       633         236 
 Other liabilities                                33      13,500      18,549 
 Lease liabilities                                34      20,431           - 
 Debt securities in issue                         35      36,837      13,283 
---------------------------------------------  -----  ----------  ---------- 
 Total liabilities                                     2,387,044   1,979,217 
---------------------------------------------  -----  ----------  ---------- 
 Total equity and liabilities                          2,595,379   2,175,173 
---------------------------------------------  -----  ----------  ---------- 
 

Chairman's statement

I am pleased to report that Arbuthnot Banking Group ("ABG" or "the Group") has had a successful year of franchise growth and along the way realised several notable achievements. Overall the customer loan balances increased by 31%, while at the same time deposits grew by 22%. This growth rate would identify the Group as one of the fastest growing banks in the UK, which was achieved while still adhering to our philosophy of controlled and conservative decision making that takes a long term view, rather than fast growth in an uncontrolled and perhaps reckless manner.

Arbuthnot Latham continued to strengthen its controls and enhanced the three lines of defence model. We appointed Stephen Kelly, previously Finance Director of Arbuthnot Latham, to be the Bank's Chief Risk Officer ("CRO"). This has allowed our principles of risk management, which we have instilled in all of our businesses over the years, to be properly articulated in a robust risk structure and framework. This should enable us to maintain our pace of growth and remain a well run and tightly controlled organisation.

During 2019, the strategy of returning the Private Bank to focussing on attracting and developing deeper relationships with criteria clients started slowly, but the success of the work being done manifested itself in the second half of the year, where for six consecutive months the Investment Management division recorded positive net inflows of client monies. This was a significant turnaround story and continues to demonstrate that the market remains open to the provision of high quality banking services to clients who demand a personalised offering rather than homogeneous service centre banking. It is this strategy that we have been developing in our Commercial Banking division. To that end we had hoped to increase the pace of delivery of this to the SME market via our application to take part in the RBS Remedies process, in particular by submitting an application to the Capabilities and Innovation Fund. Our application was realistic and truly deliverable. It would have helped us to accelerate the development of our personalised approach to business banking for the wider market.

Across the Group there were many notable achievements that have all added to the progress that we made during the year, however, I would like to highlight five in particular that I feel are worth mentioning. These will help to lay a good foundation for the next phase of our evolution.

Highlights

Firstly, in August we completed the purchase of a residential mortgage portfolio. The mortgages totalled GBP265m in customer balances. After careful due diligence, analysis and strategic negotiation, we were able to acquire this portfolio at a discount of GBP7m or 2.7% of balances. The loans were generally all performing, well seasoned and at attractive loan to values (an average of 68%). This was our largest portfolio acquisition to date, following on from the purchase we made from the Dunfermline Building Society in 2014. Since completion of the deal, the portfolio has outperformed our model assumptions and should provide a good source of revenue for the next few years.

Secondly, we were able to enter the acquisition process for the mortgages as we were confident that we could restore our surplus liquidity resources to their normal conservative levels, as our new internet deposit raising platform "Arbuthnot Direct" had come on stream in May. As the mortgage portfolio purchase became certain we began to offer competitive market rates which resulted in increased deposits. This new offering was noticed by ITV's Martin Lewis, who mentioned the Direct platform on the "This Morning" programme and we then raised GBP50m of deposits in the following 3 weeks.

Thirdly, the Asset Based Lending business celebrated its first anniversary in 2019 and has already issued facilities of GBP76m. During the year the business made payments of GBP450m and processed GBP485m of invoice volumes, with the fourth quarter being double the volume of the first quarter. This business has grown the right way, with excellent service to its customers at the centre of everything it does. In 2020 we expect it to be profitable in each month, after having reached break even in 2019.

Fourthly, I would like to mention the progress we have been making in developing our technology platforms. Not only do we take the threat of cybercrime seriously, we have also been enhancing our core systems and delivering new platforms. In 2019 major investment was made in the soon to be established Customer Relationship Management ("CRM") system provided by Salesforce. The total investment will be in excess of GBP12m, but will enhance our interaction with clients and customers and when linked to our reshaped internet platform, should allow us to be active across all digital platforms. Thus, we will be able to live up to our assertion that "we are a longstanding relationship and service led bank powered by modern technology".

Finally, in November the Bank was awarded the "Best Bank" accolade at the City AM awards ceremony. While we don't usually place much emphasis on such events, it is good to see that the Bank and the progress it is making is now being recognised by the wider market.

Capital

As a fast growing bank, we have by definition been deploying our capital resources at an equal pace. Thus, the following capital transactions that we successfully completed during the year were important in maintaining sufficient capital levels to ensure our growth rates can continue.

Firstly, following a good set of financial results, the market opened up to the fact that Secure Trust Bank ("STB") shares had been oversold after following the challenger bank market downturn during 2018. We saw that demand existed for us to sell a further 1,050,000 of our STB shares at a price of GBP14.60. This sale was completed in April and created an additional GBP13.6m of regulatory capital for the Group. However, at the same time we did forgo a dividend of GBP0.9m that we would have received on these shares during 2019.

Secondly, we were finally able to issue the Arbuthnot Banking Group Ordinary Non-Voting shares. We did this via a bonus issue of 1 share for every 100 Ordinary shares, with the shares being listed on the NEX Exchange Growth Market ("NEX") alongside our Ordinary voting shares. Although this did not raise any additional capital, it could prove important in the future as we have now created a new "currency" that we may be able to use to complete transactions. If these shares were used for this purpose, we would probably also offer them via the AIM market in addition to NEX.

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DJ Arbuthnot Banking Group PLC Audited Final Results -3-

Finally, in June we agreed a bilateral sub-ordinated loan with Proventus Capital Partners ("Proventus"). The GBP25m loan was structured in such a way that it forms part of our capital resources as Tier 2. We were pleased to find Proventus as a lending partner and we developed a good understanding of their investment strategy during the negotiations. We hope that this will grow into a supportive long term relationship.

Business Activity

From the beginning of the second half of the year it was clear that the uncertainty caused by the political unrest was reducing the appetite of our clients to complete on lending deals. By the end of the third quarter, the uncertainty grew to a peak as the Brexit stalemate brought about an unexpected general election. As I had previously indicated, I believed that a hard left government with its tax and spend philosophy had the potential to cause a much greater negative impact on the UK economy than Brexit could ever have done.

However, I have previously observed, and this was repeated once again, that the British people do not believe in such radical policies and returned an emphatic result that now leaves the Government in a good position to carry out its manifesto promises. Immediately after the result, the economic sentiment improved and we noticed an uplift in confidence and accordingly customer activity began to increase.

Auditors

I can further report that during the year we carried out a mandatory tender for our audit services. This was after our incumbent auditors, KPMG, reached ten years of continuous service. Given the current focus on the audit sector, we carried out a thorough process involving the audit committees of both the Group and Arbuthnot Latham. We were pleased that following this process we were able to appoint Mazars LLP as our new auditors. As is the trend within the industry, this leaves us now in a position to select from a number of professional firms for the provision of other services, as these have become more homogeneous, rather than being delivered by one firm leveraging its relationship as auditor.

Board Changes and Personnel

During the year we were delighted to welcome Nigel Boardman to the Group Board. He had a long and distinguished career with Slaughter and May where he was legal advisor to more than a dozen FTSE 100 firms. We look forward to working with him in the coming years.

I also would like to thank my colleagues on the Board for their helpful and committed collaboration. As always, the performance of the Group reflects the hard work and commitment of all the members of staff. On behalf of the Board I extend our thanks to all of them for their dedicated efforts in 2019.

Dividend

In light of the current circumstances that will prevent us holding the AGM within our normal timeframes, where the shareholders would have been be able to approve a final dividend, the Board is proposing a second interim dividend in lieu of a final dividend of 21p, an increase of 1p on last year. Together with the first interim dividend of 16p it gives a total dividend of 37p (2018: 35p), which represents an increase of 2p on the total ordinary dividend of the previous year.

The second interim dividend will be paid, as planned, on 22 May 2020 to shareholders on the register at close of business on 24 April 2020.

Outlook

The macro economic outlook is now increasingly difficult to predict. Following the result of the general election, the UK appeared to have increased business confidence and also a growing appetite for investment.

However, recent events have completely overtaken this as the global economy is being significantly impacted by the spread of the coronavirus. Together with the geopolitical unrest among the oil producers, this has had a dramatic effect on financial markets around the world.

In response to the economic situation, the Bank of England recently implemented a number of measures to boost the economy. The withdrawal of the countercyclical capital buffer and the effective extension of the TFS liquidity scheme will in the short term be helpful to the Group. However, the reduction in the base rate will have a material impact on the Group's net interest income in 2020 and possibly beyond, as earnings on our customer loans and assets we hold at the Bank of England will be substantially lower than the benefit we can achieve by lowering our cost of funding.

We have taken substantial steps in terms of business continuity and a large proportion of our staff are now homeworking, in line with Government guidelines. Our recent investment in technology has aided this process enormously and enabled us to keep in close contact with clients, who remain our first priority.

It is difficult to give any further guidance for 2020 as these events unfold. However we remain well capitalised and hold significant levels of surplus liquidity, while our loan book is conservative and we have good levels of security. Overall the Board feels we are well positioned to withstand the headwinds that all banks will experience in 2020, and potentially to take advantage of any opportunities as we emerge from this.

 
 Strategic Report 
 
 Business Review 
 
 
 Arbuthnot Latham & Co., Ltd 
                                                      2019          2018 
 Operating income                                 GBP74.2m      GBP68.4m 
 Other income                                      GBP5.0m       GBP6.8m 
 Operating expenses                               GBP62.2m      GBP57.8m 
 Profit before tax (before Group recharges)       GBP16.2m      GBP14.6m 
 Customer loans                                GBP1,599.1m   GBP1,224.7m 
 Customer deposits                             GBP2,084.9m   GBP1,714.3m 
 Total assets                                  GBP2,584.8m   GBP2,172.3m 
 Assets under management                       GBP1,107.3m     GBP985.1m 
 Average net margin                                   4.5%          4.7% 
 Loan to deposit ratio                               76.7%         71.4% 
 

Arbuthnot Latham

Arbuthnot Latham & Co., Ltd has reported a profit before tax and Group recharges of GBP16.2m (2018: GBP14.6m), which is an increase of 11%. Once again this result includes the impact of a further adjustment to the expected liability due on the management earn out of Renaissance Asset Finance ("RAF"). The reassessment required a release of GBP1.5m to profit. If this item is excluded and the same adjustment made in 2018 of GBP2.6m, then the increase in profit would be 23%. Despite this adjustment, RAF continued to perform well increasing its customer balances by 20% during the year.

Overall the Bank saw good growth in all of its leading indicators, namely customer balances. Customer loans increased by 31% and deposits grew by 22%, while Asset Under Management ("AUM") increased by 12%.

On 8 August 2019 the Bank completed the purchase of a performing portfolio of residential mortgages ("Santiago Portfolio"). This acquisition was added to the previous portfolio that was acquired in 2014 from the administrators of the Dunfermline Building Society ("Tay Portfolio"). This brings the total of purchased mortgage portfolios to GBP362m.

During 2019 the Bank launched its direct to customer deposit platform "Arbuthnot Direct", this proved successful and has so far raised GBP83m of deposits. Notably after being mentioned by Martin Lewis in the media, the platform was "stress tested" collecting an average of GBP6m per day for a week.

Arbuthnot Commercial Asset Based Lending continued to make good progress reaching profitability and GBP76m of drawn balances at the year end, only nineteen months after commencing trading.

The average net margin for the Bank fell by 20bps from 4.7% to 4.5%. This was as a result of the average cost of deposits increasing by more than 10bps as the market for fixed term and notice deposits proved to be competitive.

As the Bank now has a deposit base in excess of GBP2bn, a small increase in the deposit rates can result in a material increase in the interest expense of the Bank.

Credit losses in the year reduced to GBP867k (2018: GBP2,731k) as the Bank now had another year of loss experience on which to base its IFRS 9 credit models. The requirement of these adjusted models resulted in a release of Stage 1 provisions of GBP1.1m. These were offset by normal impairments under the models (due to increased lending and changes in circumstances/the Stages of loans).

The Bank continued to reduce the small number of legacy non-performing loans including it has now taken vacant possession of a villa in Majorca and is developing plans to recover the money owed under the original loan.

Private Banking

The Private Bank continued to experience a fall in customer loan balances seeing a reduction of GBP27m or 4% from the prior year. However, despite this reduction, the Private Bank managed to write GBP96m of new loans in the year. In fact, the decline in the loan balances of the Private Bank were as a result of resolving the non-performing loans or watch list loans that had been given notice to refinance, thus preventing the possibility of future losses.

The Customer deposits remained unchanged at approximately GBP1.04bn.

However, the new strategy to refocus the private bankers on attracting new criteria clients who would require Investment Management Services appears to be gaining traction. In the second half of the year, the Investment Management division saw net inflows of client assets (excluding market movement) in every month. AUMs closed the year at GBP1.1bn, an increase of 12%.

The Wealth Planning division contributed a loss of GBP1.8m to the Private Bank. This was due to a change to its business proposition. At the end of the first half the business ceased charging clients for ongoing annual reviews, instead the planners now concentrate on providing event based financial advice and thus charge the clients for each piece of specific advice on a transactional basis.

Commercial Banking

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DJ Arbuthnot Banking Group PLC Audited Final Results -4-

The Commercial Bank increased its loan book to GBP532m, an increase of 20%. The emphasis of this lending has gradually switched away from commercial real estate towards professional buy to let landlords. The bankers generated GBP170m of new lending volumes. During the fourth quarter the team completed the largest loan deal in the history of the bank. The loan totalled GBP40m to be drawn in two tranches, GBP29m in 2019 and the remaining GBP11m in 2020. The security against the loan is a well diversified portfolio of flats in central London with a loan to value ("LTV") of 60%.

At the same time the Commercial Bank had notable success in attracting new deposits, increasing the total of deposits by 45% to GBP824m.

Mortgage Portfolio

Following the completion of the acquisition of the residential mortgage portfolio in August, the total of the combined portfolio now stands at GBP306m.

Both portfolios have performed better than expected during the year with gross yields of 4.1% on the Tay Portfolio and 3.8% on Santiago. The two portfolios have average LTVs of 59.1% and 67.5% respectively.

Renaissance Asset Finance ("RAF")

RAF made good progress during the year and grew its customer loan balances by 20% to exceed GBP100m for the first time in its history. The volume of new loans written in the year increased by 21% to reach GBP68m, which was as a result of receiving an additional 10% of new loan proposals. In fact, the network of introducers increased to 107 brokers (2018: 85), an increase of 26%.

The new business saw average yields hold steady at 8% (2018: 8%).

However, RAF was subject to a number of credit losses, which appear to be isolated incidents rather than a systematic issue with the underwriting processes. The result of these losses saw the credit losses increase by nearly 100% to be GBP708k in the year.

Arbuthnot Commercial Asset Based Lending ("ACABL")

ACABL recorded a full year profit of GBP24k, which is a creditable performance given that the business only commenced trading in May 2018.

The customer loan balances ended the year at GBP76m, an increase of 200%. The client base now stands at 35, with total facility limits totalling GBP130m. These facilities were generated from 26 different business introducers.

The borrowers are 50% UK manufacturers, 30% of the client base are exporters and they are from 18 industrial sectors and 19 geographical counties. 54% are backed by private equity and the remainder are privately owned.

During the year the business made payments of GBP450m and processed GBP485m of invoice volumes. These volumes grew to the extent that the levels processed in the final quarter of the year were double of that in the first quarter.

Arbuthnot Specialist Finance Limited ("ASFL")

ASFL was delayed in starting business due to complications in completing the installation of its operating platform. Once these were resolved the business fully opened itself to receiving proposals from the market. Thus, the business was not able to extend any material volumes to customers until the fourth quarter of the year. The customer loan balance closed at GBP7.4m.

However, during the year the business received over GBP600m in enquiries from the market, which resulted in GBP43m of applications.

This business was shortlisted for the NACFB awards in two categories, namely, short term lender of the year and Patron of the year.

Operations & Technology

During the year the banking services provided continued to grow. The number of new accounts opened was 56% higher than in 2018 and the number of active cards increased by 10%, as did the value of spend on those cards. Non card payments increased by 9.6% and as a result the Bank processed over 340,000 transactions with a total value in excess of GBP4.5bn. Over 92% of these transactions were instructed via our online banking system.

To facilitate this increase in transactional flow, the online banking system was significantly upgraded in October. Also, the delivery of Payments Services Directive (PSD2) has seen ongoing enhancements to our payments security and the delivery of our new Open Banking channel, which required further investment and enhancement of our Oracle Banking Platform.

The Bank has continued to upgrade the underlying IT Infrastructure and Networks, with a phased adoption of cloud services and delivery of an upgrade to the Wide Area Network. This is helping to further improve the Bank's resilience and security, forming part of the overall investment in Cyber Security.

Following on from the launch of the new Arbuthnot Direct Business in February 2019, the Bank has continued to invest in its digital capability, with the start of a significant multi-year investment programme in a new Salesforce CRM platform. It will enable far greater personalisation of the Bank's offering and a more efficient fulfilment of customers' needs. The initial phase of this programme will be launched in the first half of 2020, with further enhancements planned later in the year and beyond.

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 Private and Commercial Banking, Asset Finance, Asset Based Lending and Specialist 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 assets under management. The Group also earns rental income on its investment property and receives dividends from financial investments.

 
 Highlights 
                                                                    2019       2018 
 Summarised Income Statement                                      GBP000     GBP000 
-------------------------------------------------------------  ---------  --------- 
 Net interest income                                              58,637     55,183 
 Net fee and commission income                                    13,828     12,722 
-------------------------------------------------------------  ---------  --------- 
 Operating income                                                 72,465     67,905 
 Other income                                                      5,599      6,588 
 Operating expenses                                             (70,186)   (64,982) 
 Impairment losses - loans and advances to customers               (867)    (2,731) 
-------------------------------------------------------------  ---------  --------- 
 Profit before tax from continuing operations                      7,011      6,780 
 Income tax expense                                                (835)    (1,121) 
-------------------------------------------------------------  ---------  --------- 
 Profit after tax from continuing operations                       6,176      5,659 
 Loss from discontinued operations after tax                           -   (25,692) 
-------------------------------------------------------------  ---------  --------- 
 Profit / (loss) for the year                                      6,176   (20,033) 
-------------------------------------------------------------  ---------  --------- 
 
 Basic earnings per share (pence) - Continuing operations           41.2       38.0 
 Basic earnings per share (pence) - Discontinuing operations           -    (172.5) 
-------------------------------------------------------------  ---------  --------- 
 Basic earnings per share (pence)                                   41.2    (134.5) 
-------------------------------------------------------------  ---------  --------- 
 
 
                                                 Arbuthnot              Arbuthnot 
                                                    Latham      Group     Banking 
 Underlying profit reconciliation                    & Co.     Centre       Group 
 31 December 2019                                   GBP000     GBP000      GBP000 
----------------------------------------------  ----------  ---------  ---------- 
 Profit before tax and group recharges              16,156    (9,145)       7,011 
 Cost of establishing new ventures                   1,208          -       1,208 
 RAF deferred consideration adjustment             (1,495)          -     (1,495) 
 Subordinated debt as if from 1 January 2019*            -      (924)       (924) 
----------------------------------------------  ----------  ---------  ---------- 
 Underlying profit                                  15,869   (10,069)       5,800 
----------------------------------------------  ----------  ---------  ---------- 
 
 Underlying basic earnings per share (pence)                                 32.8 
----------------------------------------------  ----------  ---------  ---------- 
 * Subordinated debt charge accounted for as if from 1 January, rather 
  than 3 June (date of issue). 
 
 
                                                             Arbuthnot             Arbuthnot 
                                                                Latham     Group     Banking 
 Underlying profit reconciliation                                & Co.    Centre       Group 
 31 December 2018                                               GBP000    GBP000      GBP000 
----------------------------------------------------------  ----------  --------  ---------- 
 Profit before tax and group recharges from continuing 
  operations                                                    14,574   (7,794)       6,780 
 Cost of establishing new ventures                               1,579         -       1,579 
 STB dividend income full year at 2019 shareholding*               160       641         801 
 RAF deferred consideration adjustment                         (2,584)         -     (2,584) 

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March 26, 2020 03:00 ET (07:00 GMT)

DJ Arbuthnot Banking Group PLC Audited Final Results -5-

 Subordinated debt charge as if applicable from 1 
  January 2018**                                                     -   (2,188)     (2,188) 
----------------------------------------------------------  ----------  --------  ---------- 
 Underlying profit                                              13,729   (9,341)       4,388 
----------------------------------------------------------  ----------  --------  ---------- 
 
 Underlying basic earnings per share (pence) - Continuing 
  operations                                                                            22.7 
----------------------------------------------------------  ----------  --------  ---------- 
 Underlying basic earnings per share (pence)                                         (149.8) 
----------------------------------------------------------  ----------  --------  ---------- 
 * - STB dividend income adjusted, as if received for full year at 2019 
  shareholding. 
 ** - Ongoing subordinated debt charge accounted for as if applicable 
  from 1 January 2018. 
 

The Group has reported a profit before tax on continuing operations of GBP7.0m (2018: GBP6.8m). This is an increase on the prior year of 3%. The underlying profit before tax was GBP5.8m (2018: GBP4.4m), an increase of 32%.

The Group continues to deploy surplus capital, while also building operational scale for future growth by investing in IT infrastructure, people and support departments. Once again the reported results contain certain one off items that need explanation.

Firstly, further investment into Specialist Finance, one of the "New Ventures" (Asset Based Lending, Specialist Finance and Arbuthnot Direct) mentioned in last year's Annual Report, lowered the reported profits by GBP1.2m. The start-up costs for new staff and operating systems was absorbed by the profit of the Group. Encouragingly, Asset Based Lending reached profitability by the end of 2019, ahead of management expectation.

Secondly, as was the case in the prior year, the results contain an adjustment to the predicted future liability for the amount payable to the RAF management team. Loan balances increased by GBP17m to GBP103m, an increase of 20%. However, the profit for the year was flat compared to the prior year at GBP1.9m. Accordingly, the liability has been reduced by a further GBP1.5m (2018:GBP2.6m) and the corresponding amount recorded as a one off profit in the Income Statement. The earn out agreement comes to an end in 2020.

Finally, on 3 June 2019, the Group completed a private issue of a subordinated loan with Proventus Capital Partners, a Swedish Debt Fund, raising GBP25m (before expenses) of Tier 2 regulatory capital. The loan matures on 3 June 2029, but can be repaid early by ABG after the fifth anniversary. As this is an ongoing cost for the Group, the full year impact of the interest liability is shown in the underlying profit reconciliation, reducing the current year by GBP0.9m and the prior year by GBP2.2m.

The Group has total Basic Earnings per share ("EPS") of 41.2p (2018: negative 134.5p) and also continuing EPS of 41.2p (2018: 38.0p), an increase of 5% or on an underlying basis the continuing EPS is 32.8p (2018: 22.7p), an increase of 44%.

Total operating income earned by the Group increased by 7%. The average net margin on lending was 4.5%, down from the 4.7% recorded in 2018. The average cost of deposits increased by more than 10bps as the market for fixed and notice accounts proved to be competitive. Also as announced on 3 July 2019, the Group purchased a mortgage portfolio of GBP265m loans, with average yield of 3.6%. The lower yield on this portfolio, together with yield compression in the overall mortgage market and the higher cost of funding from deposits, resulted in the lower net margins compared to 2018. Fees and commissions increased by GBP1.1m to GBP13.8m, due to an increase of GBP1.2m from ACABL. Assets Under Management ("AUM") increased to GBP1.1bn (2018: GBP1.0bn), however, the increase was not reflected in the fee and commission income for the Private Bank, as poor market conditions existed throughout the period, which only started to recover towards the end of the year.

The Group's expense base increased by 8%, which is slightly higher than the increase in operating income, however, it does include the cost absorbed for Specialist Finance. During the year the Group impairment losses decreased to GBP0.9m (2018: GBP2.7m). In 2018 IFRS 9 was applied for the first time. Since then, the Group reviewed the assumptions applied and also compared those used by market peers, which resulted in some adjusted assumptions being applied in the current year. This resulted in a GBP1.1m reduction for impairments.

Overall the return on equity for the Group was 3.0% (2018: 3.0% on continuing basis), which is still distorted by the surplus capital. This return when calculated on the capital required is 4.3% (2018: 5.6%). The target return on equity remains in the mid-teen range when the surplus capital has been deployed, the cost income ratio is reduced as the benefits of scale are realised by the additional lending, and once Base Rate returns to normal levels.

 
 Balance Sheet Strength 
                                         2019        2018 
 Summarised Balance Sheet              GBP000      GBP000 
---------------------------------  ----------  ---------- 
 Assets 
 Loans and advances to customers    1,599,053   1,224,656 
 Liquid assets                        815,126     802,189 
 Other assets                         181,200     148,328 
---------------------------------  ----------  ---------- 
 Total assets                       2,595,379   2,175,173 
---------------------------------  ----------  ---------- 
 
 Liabilities 
 Customer deposits                  2,084,903   1,714,286 
 Other liabilities                    302,141     264,931 
---------------------------------  ----------  ---------- 
 Total liabilities                  2,387,044   1,979,217 
 Equity                               208,335     195,956 
---------------------------------  ----------  ---------- 
 Total equity and liabilities       2,595,379   2,175,173 
---------------------------------  ----------  ---------- 
 

Total assets increased to GBP2.6bn (2018: GBP2.2bn), which was as a result of our ongoing growth of customer loan balances. As mentioned, during the year a GBP265m mortgage portfolio was acquired for cash consideration of GBP258m. The Group maintained its conservative funding policy of relying only on retail deposits and targeting a loan to deposit ratio of between 65-80%. Included in other assets is the Group's investment property, which is held at fair value of GBP6.8m. Also included in other assets are GBP75.2m of inventory, which include GBP62.2m of properties previously classified as investment property. They were transferred at fair value, but now will be accounted for at the lower of cost and net realisable value. These properties are being refurbished with a view to sell. Other assets and other liabilities also include GBP19.4m and GBP19.8m respectively relating to right-of-use assets and lease liabilities. This is as the result of the implementation of IFRS 16 (leases).

The net assets of the Group now stand at GBP13.64 per share (2018: GBP12.83). The increase is mainly attributable to the GBP10.2m uplift in the value of the Secure Trust Bank ("STB") shares (held as a financial investment) recorded through Other Comprehensive Income.

Segmental Analysis

The segmental analysis is shown in more detail in Note 44. The Group is organised into eight operating segments as disclosed below:

1) Private Banking - Provides traditional private banking services as well as offering financial planning and investment management services. This segment includes Dubai.

2) Mortgage Portfolios - Acquired mortgage portfolios.

3) Commercial Banking - Provides bespoke commercial banking services and tailored secured lending against property investments and other assets.

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) All Other Divisions - All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Investment property and Central unallocated items)

8) Group Centre - ABG Group management.

During the year the Group changed the way indirect costs are allocated to divisions. Treasury income and expenditure and the cost relating to certain support departments are no longer allocated out to divisions. This is in accordance with how the divisions are managed internally. The Mortgage Portfolios were previously included as part of Private Banking. ACABL and ASFL are now also reported separately (previously included in All Other Divisions). The comparative numbers for the divisions have been restated to reflect the new allocation method.

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.

 
 Private Banking 
                                                            2019       2018 
 Summarised Income Statement                              GBP000     GBP000 
-----------------------------------------------------  ---------  --------- 
 Net interest income                                      25,107     28,243 
 Net fee and commission income                            10,687     10,831 
-----------------------------------------------------  ---------  --------- 
 Operating income                                         35,794     39,074 
 Other income                                                  -          2 
 Operating expenses - direct costs                      (16,673)   (17,272) 
 Operating expenses - indirect costs                    (15,700)   (15,227) 

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DJ Arbuthnot Banking Group PLC Audited Final Results -6-

 Impairment losses - loans and advances to customers       (485)    (1,966) 
-----------------------------------------------------  ---------  --------- 
 Profit before tax                                         2,936      4,611 
-----------------------------------------------------  ---------  --------- 
 

Private Banking reported a profit before tax of GBP2.9m (2018: GBP4.6m). This is a decrease of GBP1.7m or 37%. This decrease is largely due to reduced lending and higher losses in Wealth Planning, with operating income reducing by 8%. At the end of the first half the Wealth Planning business ceased charging clients for ongoing annual reviews, instead the planners now concentrate on providing event based financial advice and thus charge clients for specific advice on a transactional basis.

Increased competition in the retail lending market and uncertainty in the macro economic outlook led to lower than anticipated loan drawdowns. The Group continues to maintain strong discipline in pricing lending risk, as it expects the current heightened competition in the retail lending markets to pass.

The Wealth Planning division was loss making as a result of a fundamental change in its business proposition and hence its charging structure. In July the business ceased charging clients for ongoing annual advice reviews and moved to an event based model, where clients are charged wealth planning fees when they need specific advice. This resulted in GBP0.4m reduced fee income.

The change in strategy to focus the Private Bank on identifying and attracting new criteria clients is beginning to show results. AUMs closed the year at GBP1.1bn (2018: GBP1.0bn). Poor market conditions during 2019 only started to recover towards the end of the year. As a result, fee and commission income remained fairly flat year on year at GBP10.7m (2018: GBP10.8m).

Costs stayed flat, with a decrease in direct costs offset by an increase in indirect costs. The average customer yield was 4.5% (2018: 4.9%).

As mentioned under the Business Review, there was a change in assumptions which resulted in a release of impairments. For the Private Banking division, this was just under GBP0.3m. Excluding this release, the impairment charge for the year was GBP0.8m, compared to GBP2.0m in the prior year. The GBP1.2m decrease relates to higher than normal impairments in the prior year as the back book of legacy loans continued to be resolved.

The customer loan balances of the Private Bank reduced by GBP26.7m or 4% during the year. The deposits also decreased to GBP1,039m (2018: GBP1,041m). The average loan to value of the Private Banking loans was 54% (2018: 52%).

 
 Mortgage Portfolios 
                                        2019     2018 
 Summarised Income Statement          GBP000   GBP000 
-----------------------------------  -------  ------- 
 Net interest income                   4,113    2,135 
 Operating income                      4,113    2,135 
 Operating expenses - direct costs     (807)    (235) 
 Profit before tax                     3,306    1,900 
-----------------------------------  -------  ------- 
 

The Mortgage Portfolios reported a profit of GBP3.3m (2018: GBP1.9m). This is an increase on the prior year of 74%.

In August the Group completed the purchase of the residential mortgage portfolios which added GBP265m of mortgages acquired at a discount of 2.7%. The acquired portfolios have average loan to values of 68%. The transition of the portfolios took place smoothly and continue to perform better than indicated by the models used as part of the assessment of the transaction.

 
 Commercial Banking 
                                                           2019      2018 
 Summarised Income Statement                             GBP000    GBP000 
-----------------------------------------------------  --------  -------- 
 Net interest income                                     20,151    15,145 
 Net fee and commission income                            1,114       727 
-----------------------------------------------------  --------  -------- 
 Operating income                                        21,265    15,872 
 Operating expenses - direct costs                      (5,237)   (5,536) 
 Operating expenses - indirect costs                    (9,075)   (7,258) 
 Impairment losses - loans and advances to customers        320     (278) 
-----------------------------------------------------  --------  -------- 
 Profit before tax                                        7,273     2,800 
-----------------------------------------------------  --------  -------- 
 

The Commercial Bank generated a profit before tax of GBP7.3m (2018: GBP2.8m), an increase of GBP4.5m. This was mainly due to a GBP5m increase in net interest income, as a result of higher lending balances in 2019 as well as the full year impact from significant growth in loans recorded in the prior year.

The increase in income was partially offset by higher costs. Direct costs reduced slightly due to lower staff costs, while indirect costs increased in line with the greater significance of the business.

As mentioned under the Business Review, there was a change in assumptions which resulted in a release of impairments. For the Commercial book, this was just over GBP0.8m. Excluding this release, the impairment charge for the year was GBP0.5m, compared to GBP0.3m in the prior year. The GBP0.2m increase relates to the maturing nature and growing value of the loan book and is in line with management expectations.

The customer loan book closed at GBP532m (2018: GBP443m), an increase of 20%, while deposits increased by 45% to GBP824m. The average customer loan yield was 4.7% (2018: 4.6%).

The average loan to value of the Commercial Bank loan portfolio was 44% (2018: 50%).

 
 RAF 
                                              2019      2018 
 Summarised Income Statement                GBP000    GBP000 
----------------------------------------  --------  -------- 
 Net interest income                         5,873     5,344 
 Net fee and commission income                 207       137 
----------------------------------------  --------  -------- 
 Operating income                            6,080     5,481 
 Other income                                   64        73 
 Operating expenses - direct costs         (3,577)   (3,169) 
 Impairment losses - loans and advances      (708)     (437) 
----------------------------------------  --------  -------- 
 Profit before tax                           1,859     1,948 
----------------------------------------  --------  -------- 
 

Renaissance Asset Finance recorded a profit before tax of GBP1.9m (2018: GBP1.9m), which is flat from the previous year.

The increase in net interest income of GBP0.6m was offset by an increase in costs of GBP0.4m and higher impairments of GBP0.3m.

The customer loan balances increased by 20% to close the year at GBP102.9m (2018: GBP86m) and the average yield for 2019 was 9.1%, compared to 9.6% for 2018.

 
 Arbuthnot Commercial Asset Based Lending ("ACABL") 
                                                           2019      2018 
 Summarised Income Statement                             GBP000    GBP000 
-----------------------------------------------------  --------  -------- 
 Net interest income                                      1,345       224 
 Net fee and commission income                            1,377       212 
-----------------------------------------------------  --------  -------- 
 Operating income                                         2,722       436 
 Operating expenses - direct costs                      (2,708)   (1,500) 
 Impairment losses - loans and advances to customers         10      (50) 
-----------------------------------------------------  --------  -------- 
 Profit / (loss) before tax                                  24   (1,114) 
-----------------------------------------------------  --------  -------- 
 

ACABL recorded a GBP24k profit before tax (2018: loss of GBP1.1m), as the start-up division managed to achieve profitability ahead of schedule.

There was a small write back on impairment losses in the year, as part of the review of assumptions applied in the Group's IFRS 9 model, as highlighted earlier in the report. ACABL currently only have loans classified as Stage 1, which is where the revised assumptions resulted in a credit applied across the Group.

Customer loan balances increased threefold to close the year at GBP75.9m (2018: GBP25.3m), with issued facilities increasing to GBP104m from GBP43m in 2018.

 
 Arbuthnot Specialist Finance ("ASFL") 
                                                           2019     2018 
 Summarised Income Statement                             GBP000   GBP000 
-----------------------------------------------------  --------  ------- 
 Net interest income                                         71        - 
 Operating income                                            71        - 
 Operating expenses - direct costs                      (1,275)    (345) 
 Impairment losses - loans and advances to customers        (4)        - 
-----------------------------------------------------  --------  ------- 
 Loss before tax                                        (1,208)    (345) 
-----------------------------------------------------  --------  ------- 
 

ASFL recorded a loss before tax of GBP1.2m (2018: loss of GBP0.3m), as the Group continue to fund the start-up costs for this business.

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DJ Arbuthnot Banking Group PLC Audited Final Results -7-

Customer loan balances closed the year at GBP7.4m (2018: GBPnil).

 
 Other Divisions 
                                         2019      2018 
 Summarised Income Statement           GBP000    GBP000 
-----------------------------------  --------  -------- 
 Net interest income                    3,738     4,563 
 Net fee and commission income            443       815 
-----------------------------------  --------  -------- 
 Operating income                       4,181     5,378 
 Other income                           4,955     6,683 
 Operating expenses - direct costs    (7,170)   (7,287) 
 Profit before tax                      1,966     4,774 
-----------------------------------  --------  -------- 
 

The aggregated profit before tax of other divisions was GBP2.0m (2018: GBP4.8m).

Reported within the other divisions were Investment Properties GBP0.7m (2018: GBP1.0m) and central items, which this year contains the GBP1.5m (2018: GBP2.6m) adjustment to the RAF management earn out liability and rental income earned on space in our Wilson Street offices of GBP0.2m (2018: GBP0.7m). The rental income relates to Secure Trust Bank, which moved out at the beginning of the year to occupy their own office space in the City.

 
 Group Centre 
                                        2019      2018 
 Summarised Income Statement          GBP000    GBP000 
----------------------------------  --------  -------- 
 Net interest income                   (141)     (105) 
 Subordinated loan stock interest    (1,620)     (366) 
----------------------------------  --------  -------- 
 Operating income                    (1,761)     (471) 
 Other income                          1,420       760 
 Operating expenses                  (8,804)   (8,083) 
 Profit before tax                   (9,145)   (7,794) 
----------------------------------  --------  -------- 
 

The Group costs increased to GBP9.1m (2018: GBP7.8m) mainly due to GBP1.3m of interest costs relating to the subordinated loan issued on 3 June 2019 to Proventus Capital Partners for GBP25m.

Other income increased by GBP0.7m, due to dividends received from STB. This was due to the fact that the previous year only included the interim dividend, after the investment changed from an associate to a financial investment.

The increase in other income was offset by an increase in costs of GBP0.8m.

Capital

The Group's capital management policy is focused on optimising shareholder value over the long term. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.

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") 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 EU's Capital Requirements Directive (EU No.36/2013) and the required 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.

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 are no longer adequate. The ICAAP brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. The Group's regulated entity is also the principal trading subsidiary as detailed in Note 43.

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, deferred tax assets that do not arise from temporary differences, and a portion of the Group's non-significant investment in a financial institution, Secure Trust Bank ("STB"). The portion of the STB investment deducted from CET1 capital is calculated in accordance with EU CRR thresholds.

-- 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.

 
                                                              2019       2018 
 Capital ratios                                             GBP000     GBP000 
-------------------------------------------------------  ---------  --------- 
 CET1 Capital Instruments*                                 219,627    214,024 
 Deductions                                               (41,983)   (48,740) 
-------------------------------------------------------  ---------  --------- 
 CET1 Capital after Deductions                             177,644    165,284 
 Tier 2 Capital                                             36,837     13,283 
-------------------------------------------------------  ---------  --------- 
 Own Funds                                                 214,481    178,567 
-------------------------------------------------------  ---------  --------- 
 
 CET1 Capital Ratio (CET1 Capital/Total Risk Exposure)       14.4%      15.9% 
-------------------------------------------------------  ---------  --------- 
 Total Capital Ratio (Own Funds/Total Risk Exposure)         17.3%      17.2% 
-------------------------------------------------------  ---------  --------- 
 * Includes year-end verified profit. 
 

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 strategic, credit, market, liquidity, operational, cyber, conduct, regulatory and macroeconomic.

Macroeconomic and competitive environment

The Group is also exposed to indirect risks that may arise from the macroeconomic and competitive environment.

Coronavirus

The economic environment is currently unstable and difficult to predict in the UK. This is also the case on the International landscape as many of the developed nations have taken unprecedented steps to completely shut down the normal functioning of their economies. The impact from the coronavirus has already had an adverse effect on the stock markets around the world.

The significant business risks that may arise from the economic shock in addition to the reduction in interest rates as detailed in the Chairman's statement are:

a) Increased credit risk as borrowers are unable to continue to meet their interest obligations as they fall due. It is also currently unclear precisely how the Government's announced package of measures will interact with this clear risk. The mortgage payment holiday for three months will allow borrowers some grace to return to normal payments and may also result in some form of Government guarantee, which would possibly reduce this risk to the Group

b) The uncertainty in the economy could result in a significant fall in the collateral values of our security held against the loans. The Royal Institute of Charter Surveyors ("RICS") has issued a statement suggesting that any valuations they may produce in the current environment would be subject to a warning that the values vary significantly. However, the average loan to value of our property backed lending book is 51.1%, so to have any material impact, this fall in collateral values would have to be severe and prolonged.

c) A prolonged reduction in business activity will affect our ability to generate new business opportunities and it is highly likely that repayments in our current lending portfolios will be greater than new originations, which will lead to an overall fall in the Group's customer lending balances and the associated revenue that this generates.

d) The economic shock could also lead to a fall in valuations in the Groups investment properties and those properties held in inventory.

e) As the revenues earned by the Group's Investment Management business are directly linked to the balances managed on behalf of our customers, any reduction in these values due to market movements will have a corresponding impact on these revenues.

Brexit

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DJ Arbuthnot Banking Group PLC Audited Final Results -8-

Despite the decisive result in the General Election, which gave a clear mandate to complete the Article 50 withdrawal provision, there still remains the uncertainty over the transitional arrangements and negotiation of the final trade deal relating to Brexit, with the UK due to formally exit from the EU rules on 31 December 2020. The Group has tried to anticipate the risks that it may face if an economic shock arises as a result. It has also examined how business activities may be affected if free provision of services cross borders is prohibited. The Group's only overseas operation is in Dubai, so the vast majority of the Group's income and expenditure is based in the UK.

Strategic risk

Strategic risk is the risk that may affect the Group's ability to achieve its corporate and strategic objectives. This risk is 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 Board of Directors meets once a year to hold a two day board meeting 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 GBP1,599m (2018: GBP1,225m). The lending portfolio in AL 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 AL.

Market risk

Market risk arises in relation to movements in interest rates, currencies and equity markets. The Group's treasury function operates mainly to provide a service to clients and does not take significant unmatched positions in any market for its own account. 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.

The Group is exposed to changes in the market value of properties. The current carrying value of Investment Property is GBP6.8m and properties classified as inventory are carried at GBP75.2m. 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 has a 9.85% interest in STB. This is currently recorded in the Group's balance sheet as a Financial Investment. The carrying value is adjusted to market value at each balance sheet date, according to the share price of STB. Any gains or losses that arise are recorded 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 and drawings from the Bank of England Term Funding Scheme fund the Group. The loan to deposit ratio is maintained at a prudent level, and consequently the Group maintains a high level of liquidity. The AL 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.

Cyber risk

Cyber risk is an increasing risk that the Group is subject to within its operational processes. This is the risk that the Group is subject to some form of disruption arising from an interruption to its IT and data infrastructure. The Group regularly test the infrastructure to ensure that it remains robust to a range of threats, and has continuity of business plans in place including a disaster recovery plan.

Conduct risk

As a financial services provider we face conduct risk, including selling products to customers which do not meet their needs, failing to deal with customers' complaints effectively, not meeting customers' expectations, and exhibiting behaviours which do not meet market or regulatory standards.

The Group adopts a low risk appetite for any unfair customer outcomes. It maintains clear compliance guidelines and provides ongoing training to all staff. Periodic spot checks, compliance monitoring and internal audits are performed to ensure these guidelines are being followed. The Group also has insurance policies in place to provide some cover for any claims that may arise.

Regulatory risk

Regulatory risk includes the risk that the Group will have insufficient capital resources to support the business or does not comply with regulatory requirements. The Group adopts a conservative approach to managing its capital. The Board 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 the 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.

Stakeholder Engagement and S. 172 (1) Statement

From 2019 directors of public limited companies, such as Arbuthnot Banking Group, are required to publish a statement explaining how they have performed their duty under section 172 of the Companies Act 2006 to have regard to a range of factors when making decisions. 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) and forms the Directors' statement required under section 414CZA of the Companies Act 2006.

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 stakeholders we consider in this regard are our shareholders, our employees, our customers, our suppliers, our regulators and the environment in which we operate.

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 22 and in the Corporate Governance Report on page 27.

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 gains. As an example, this was demonstrated in the year by the decision to make further significant investment in modern technology to grow the Group's businesses, the cost of which is likely to precede the benefits in the Income Statement. A further illustration of the balancing of the interests of our stakeholders in the long term interest of the Company is dividend policy where the Board approved increased dividends to shareholders in the context of its decisions on capital allocation.

Interests of the Company's employees

The Company has fewer than 20 employees, all of whom have direct access to Board members. As such, it has not been deemed necessary to appoint an employee representative to the Board, nor a formal workforce advisory panel, nor a designated non-executive Director. As explained in the section 172 (1) Statement of Arbuthnot Latham ("AL"), the Company's operating subsidiary, one of that company's non-executive directors and its Whistleblowing Champion, has been designated by its board as the director to engage with the Group's workforce.

The Board receives an update on Human Resource ("HR") matters of AL at each of its meetings. The Employee Survey undertaken in the year received high engagement and positive responses with 83% of employees proud to work for Arbuthnot Latham. To make AL a better place to work, the following key themes were identified through the survey results and comments: Reward and Recognition; Employee Wellbeing; Communication; and IT. Each of these themes has been and will be areas of focus.

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The workforce is able to raise concerns in confidence to the HR Team, with grievances followed up in line with a specified process which satisfies all legal requirements. Additionally, there is an anonymous whistleblowing service via an external provider. There is also protection for employees deriving from the Public Interest Disclosure Act 1998. Whistleblowing events are notified to the Board and to the applicable regulator.

Our people are a vital asset and the Board is committed to ensuring all staff are treated fairly and with respect. Staff were asked for suggestions on what AL could do to demonstrate its commitment to diversity and inclusion. A consistent message was to review Maternity/Adoption and Paternity Pay, as a consequence of which an enhanced policy was implemented and communicated to staff.

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 customers are central to our business and forging and maintaining client relationships are core to the Group's business and crucial for client retention. Our commercial and private bankers are in regular contact with them. As clients' needs and expectations are changing, meaningful relationships with their bankers are more important than ever. Clients now demand access to their bank and relationship managers through a variety of channels and expect efficient and streamlined processes supported by state of the art technology. Accordingly during 2019 a decision was taken to invest in the adoption of modern and integrated Client Relationship Management (CRM) technology with the potential to improve significantly front-office operations and help us support our existing and new clients better.

The Group is committed to following agreed supplier payment terms. There is a Supplier Management Framework in place covering governance around the Group's procurement and supplier management activities. For due diligence and compliance purposes, suppliers are assessed through an external registration system. The Board has adopted a Modern Slavery Statement which sets out the steps 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.

Other stakeholders include the Group's regulators, the PRA and the FCA, with whom open and continuous dialogue is maintained. The Board received and considered feedback, following the PRA's review of the Group's risk governance, the Bank's ILAAP and the Periodic Summary Meeting.

Impact of the Company's operations on the community and the environment

As a financial services company our impact on the environment is limited. Nevertheless there is growing consensus that an orderly transition to a low-carbon economy will bring structural adjustments to the global economy which will have financial implications, bringing both risks and opportunities. Accordingly, in November the Board of AL adopted a Climate Change Framework, reflecting the PRA's expectation.

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 on page 1 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. It was encouraging in this respect when the Bank won the City A.M. Bank of the Year Award in November 2019.

Acting fairly as between members of the Company

The majority shareholder, Sir Henry Angest, is Chairman and CEO of ABG. There is continuing engagement with other major shareholders and the Directors make their decisions on behalf of all shareholders. As an example, a decision was made in March 2019 to recommend to shareholders a bonus issue of one new Non-Voting share for every 100 Ordinary shares held. As explained in last year's Annual Report, the purpose of the creation of this new class of share was to provide us with the means to raise further capital, to continue to develop the business and to fund suitable inorganic deals should opportunities arise, whilst enabling us to maintain the control structure for the benefit of all shareholders. The new class of shares was approved by shareholders and the shares duly issued to eligible shareholders in May 2019, and the Non-Voting shareholders have the right to receive the same dividend per share as the Ordinary shareholders.

Group Directors' Report

The Directors present their report for the year ended 31 December 2019.

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 5 to 18.

Corporate Governance

The Corporate Governance report on pages 25 to 31 contains information about the Group's corporate governance arrangements, including in relation to the Board's decision to apply the UK Corporate Governance Code, published by the Financial Reporting Council ("FRC") in July 2018, in response to a change in the AIM Rules.

Results and Dividends

The results for the year are shown on page 41 of the financial statements. The profit after tax for the year of GBP6.2m (2018: loss of GBP20.0m) is included in reserves. The Directors recommend the payment of a second interim dividend in lieu of a final dividend of 21p (2018: 20p) per share. This is in light of the fact we are currently unable to schedule the AGM as previously planned. Together with the interim dividend of 16p (2018: 15p) paid on 16 August 2019, this makes a total dividend per share for the year of 37p (2018: 35p).

Directors

The names of the Directors of the Company at the date of this report, together with biographical details, are given on page 20 of this Annual Report. Mr. N.P.G. Boardman was appointed to the Board on 3 June 2019. All the other Directors listed on those pages were directors of the Company throughout the year.

Mr. Boardman offers himself for election under Article 75 of the Articles of Association. Mr. A.A. Salmon and Sir Alan Yarrow being eligible, offer themselves for re-election under Article 78 of the Articles of Association. Mr. Salmon has a service agreement terminable on twelve months' notice. Mr. Boardman and Sir Alan Yarrow, independent non-executive directors, each has a letter of appointment terminable on three months' notice.

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 2022. 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 9 to 18;

-- the Group's key principles - please see Corporate Philosophy on page 1; and

-- the Group's risk management framework and associated policies, as explained in Note 6.

-- the asset classes that the Group is exposed to via its lending portfolios, which is almost all secured on property or other assets and may have personal guarantees attached.

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 Group's ICAAP is embedded in the risk management framework of the Group and is subject to ongoing 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.

The Board have made assessments via a number of economic scenarios which have included the impact of the Bank of England base rate falling to zero and along with significant falls in residential and commercial property values and at the same time a substantial fall in equity markets. Also the Board has examined how the limitations of the Group could be tested to extremes via a reverse stress test scenario. Given the secured nature of the Groups lending and the modest LTVs associated with this lending the Board is satisfied, that after it has applied any mitigating actions that are readily available to it, such as reducing bonus payouts, altering its dividend strategy and reducing its appetite to lend, the Group can remain viable over the foreseeable future.

Going Concern

After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see Note 6 to the financial statements) and capital resources (see Note 7), and conducting a number of stress scenarios as mentioned above, the directors are satisfied that the Company and the Group have adequate resources to continue in operation for the foreseeable future. The financial statements are therefore prepared on the going concern basis.

Share Capital

In May 2019 shareholders approved a bonus issue of one new Non-Voting share for every 100 Ordinary shares. The Company now has in issue two classes of shares. The new class of Non-Voting shares rank pari passu with the Ordinary shares, including the right to receive the same dividends as Ordinary shares, except that they do not have the right to vote in shareholder meetings.

Authority to Purchase Shares

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Shareholders will also 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 resolution renewing this authority will be included in the Notice of Meeting. During the year the Company issued 3,902 Ordinary Non-Voting shares as Treasury shares as part of the bonus issue of shares. It subsequently purchased 7,408 Ordinary Non-Voting shares as Treasury shares. The maximum number of Treasury shares held at any time during the year was 390,274 Ordinary shares and 11,310 Ordinary Non-Voting shares of 1p each.

Financial Risk Management

Details of how the Group manages risk are set out in 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:

 
 Beneficial Interests - Ordinary    1 January   31 December    25 March 
  shares                                 2019          2019        2020      % 
---------------------------------  ----------  ------------  ----------  ----- 
 Sir Henry Angest                   8,351,401     8,351,401   8,351,401   56.1 
 J.R. Cobb                              6,000         6,000       6,000      - 
 A.A. Salmon                           51,699        51,699      51,699    0.3 
 
 Beneficial Interests - Ordinary    1 January   31 December    25 March 
  Non-Voting shares                      2019          2019        2020      % 
---------------------------------  ----------  ------------  ----------  ----- 
 Sir Henry Angest                         N/A        83,513      83,513   59.1 
 J.R. Cobb                                N/A            60          60      - 
 A.A. Salmon                              N/A           516         516    0.4 
 

Substantial Shareholders

The Company was aware at 9 March 2020 of the following substantial holdings in the Ordinary shares of the Company, other than those held by one director shown above:

 
                                 Ordinary 
 Holder                            Shares     % 
----------------------------   ----------  ---- 
 Liontrust Asset Management     1,357,175   9.1 
 Slater Investments               585,638   3.9 
 Mr. R Paston                     529,130   3.6 
 M&G Investment Management        529,216   3.6 
 Unicorn Asset Management         484,522   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 2019, one Director had a loan from Arbuthnot Latham & Co., Limited amounting to GBP502,000 (2018: GBP515,000) and four directors had deposits with Arbuthnot Latham amounting to GBP3,066,000 (2018: GBP1,884,000), all on normal commercial terms as disclosed in Note 42 of the financial statements.

Directors' Indemnities

The Company's Articles of Association provide that, subject to the provisions of the Companies Act 2006, the Company may indemnify any Director or former Director in respect of liabilities (and associated costs and expenses) incurred in connection with the performance of their duties as a Director of the Company or any subsidiary and may purchase and maintain insurance against any such liability. The Company maintained directors and officers liability insurance throughout the year.

Employee Engagement

The Company gives due consideration to the employment of disabled persons and is an equal opportunities employer. It also regularly provides employees with information on matters of concern to them, consults on decisions likely to affect their interests and encourages their involvement in the performance of the Company through regular communications and in other ways. Further information on employee engagement is given in the Strategic Report on page 18.

Engagement with Suppliers, Customers and Others

Information on engagement with suppliers, customers and other stakeholders is given in the Strategic Report on page 19, under the S. 172 statement.

Political Donations

The Company made political donations of GBP77,000 to the Conservative Party during the year (2018: GBP6,000).

Branches outside of the UK

During the year Arbuthnot Latham & Co., Limited operated a branch in Dubai which is regulated by the Dubai Financial Services Authority.

Non-adjusting events after the Balance Sheet Date

Details of material post balance sheet events are given in Note 47.

Annual General Meeting ("AGM")

It has not been possible to arrange a date for the AGM, due to the restrictions that are currently in place, the meeting will be arranged as soon as we are able to do so. At the AGM, Ordinary Shareholders will be asked to vote on a number of resolutions. The resolutions will be put to the shareholders via a Notice of Meeting that will be sent to them in due course.

Auditor

During the year KPMG LLP resigned as auditors to the Company and Mazars LLP were appointed by the Directors. 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.

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 of the London Stock Exchange and in accordance with the NEX Exchange Growth Market - Rules for Issuers, they are required to prepare the Group Financial Statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the EU and applicable law 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 IFRSs as adopted by the EU; 

-- 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

25 March 2020

Corporate Governance

Introduction and Overview

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Arbuthnot Banking Group has a strong and effective corporate governance framework. The Board endorses the principles of openness, integrity and accountability which underlie good governance and takes into account the provisions of the UK Corporate Governance Code, published by the Financial Reporting Council ("FRC") in July 2018 ("the Code"), in so far as they are considered applicable to and appropriate for it, given its size and circumstances, and the role and overall shareholding of its majority shareholder. Moreover, the Group contains two subsidiaries authorised to undertake regulated business under the Financial Services and Markets Act 2000, one of which (Arbuthnot Latham & Co., Limited) is regulated by the Prudential Regulatory Authority and the Financial Conduct Authority and is an authorised deposit-taking business. It in turn has a subsidiary, Renaissance Asset Finance Limited, which is regulated by the Financial Conduct Authority. Arbuthnot Latham & Co., Limited ("AL") also operates a branch in Dubai, which is regulated by the Dubai Financial Services Authority. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such a business.

In March 2018, the AIM Rules were amended to require AIM companies to state which corporate governance code they had decided to apply, how the AIM company complies with that code, and where it departs from its chosen code an explanation of the reasons for doing so. This information is published, as required, on the Company's website and the Company reviews it each year as part of its annual reporting cycle.

The Board decided to report against the UK Corporate Governance Code. This section of the Annual Report summarises how the Company applies the 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.

The Company is led by the Board which, following a new appointment in June 2019, comprises seven members: the executive Chairman, two other executive directors, Andrew Salmon and James Cobb, and four independent non-executive directors who thereby constitute at least half of the Board in line with the Code. 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.

In 2016 an independent Board Effectiveness Review was carried out by an external consultant. In 2017, 2018 and again in October 2019 it was determined to carry out the annual Board Effectiveness Review internally. The 2019 evaluation took the form of a confidential questionnaire which assessed the performance of the Board and its Committees. The questions were set to explore the themes developed the previous year, including Board effectiveness, Board composition, Board dynamics, alignment of the Board and executive team, interaction with major shareholders, induction, performance and training, Board Committees and the Secretariat. The feedback was collated by the Company Secretary and discussed by the Board in November 2019. 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.

The Board

The Board met regularly throughout the year, holding six scheduled meetings as well as two ad-hoc meetings respectively to consider the acquisition of a mortgage portfolio and to approve the appointment of new external auditors as well as a two-day off-site strategy meeting. 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.

In addition to overseeing the management of the Group, the Board has determined certain items which are reserved for decision by itself. These matters include approval of the Group's long-term objectives and commercial strategy, ensuring a sound system of internal control, risk management strategy, approval of major investments, acquisitions and disposals, any changes to the capital structure and the overall review of corporate governance.

The Company Secretary is responsible for ensuring that the Board processes and procedures are appropriately followed and support effective decision making. All directors have access to the Company Secretary's advice and services. There is an agreed procedure for directors to obtain independent professional advice in the course of their duties, if necessary, at the Company's expense.

All directors receive induction training upon joining the Board, with individual AIM and NEX Exchange training provided by the Company's Nominated Adviser and Corporate Adviser. Regulatory and compliance training is provided by the Group Head of Compliance or an external firm of lawyers. 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.

Overview of Compliance with the FRC Code, together with Exceptions

The Board focuses not only on the provisions of the Code but 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 completely align with the Code, it is generally as a result of the role of its overall majority shareholder, itself adding a level of protection to long-term shareholder interests, and it has had no negative impact on the Company.

All divergences from the Code, with an explanation of the reasons for doing so are set out below:

Provision 3 - The majority shareholder is Chairman and Chief Executive of ABG. Engagement with other major shareholders is carried out as appropriate by the Chairman, the Group Chief Operating Officer or the Group Finance Director. There has been no requirement to date to consult with them on matters delegated to Board committees, but if appropriate/when requested, this would be arranged.

Provision 5 - The Board has regard to the interests of all its key stakeholders in its decision making. The Company has fewer than 20 employees, all of whom have direct access to Board members. As such, it has not been deemed necessary to appoint an employee representative to the Board, nor a formal workforce advisory panel, nor a designated non-executive Director. As stated in the s172 Statement on page 18, 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 Group's workforce.

Provision 9 - 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 Group Chief Operating Officer and the Group Finance Director provide a strong, independent counterbalance, ensuring challenge and independence from a business perspective, against the stakeholder focus of the Chairman carrying out his Chairman's role. The Company follows the US model that is very successful in ensuring commercial success with strong corporate governance and stakeholder awareness, having a shared Chairman and CEO, with a separate, empowered, Chief Operating Officer.

Provision 10 -- The Board considers Sir Christopher Meyer to be independent, notwithstanding his serving more than nine years, since his views and any challenge to executive management remain firmly independent.

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Provision 12 - The Board has not appointed a Senior Independent Director, as major shareholders talk openly with the Chairman, the Group Chief Operating Officer and the Group Finance Director on request.

Provision 14 - Attendance at meetings is not reported as, should a Director be 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 - For the purposes of stability and continuity, the Company continues to offer Directors for re-election on a three-year rolling basis in accordance with the Company's Articles of Association and company law. The Directors seeking re-election at the 2020 AGM are Mr. Salmon, an executive Director, and Sir Alan Yarrow. Mr. Boardman is seeking election, having been appointed by the Board during the year. The contributions of Mr. Salmon, Sir Alan and Mr. Boardman have been invaluable in the successful development of the Company. Accordingly, the Board fully supports the resolutions for their reappointment.

Provision 19 - Sir Henry Angest's role as Chairman has extended over nine years and is expected to continue indefinitely, given his key role as majority shareholder both in protecting the stability of his and other shareholder interests and in overseeing a balanced and risk-managed approach to growing the business with a view to the longer-term.

Provision 20 - The Board did not deem it necessary to use advertising or an external consultancy in identifying during the year Mr. Boardman as a suitable new non-executive director with legal expertise, given his credibility, knowledge and reputation and his availability following the announcement of his retirement from partnership.

Provision 32 - Sir Henry Angest is Chairman of the Remuneration Committee, as is appropriate in the context of his majority shareholding.

Internal Control and Financial Reporting

The Board of directors has overall responsibility for the Group's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable, but not absolute, assurance against the risk of material misstatement or loss.

The Directors and senior management of the Group review and approve the Group's Risk Management Policy and Risk Appetite framework. The Risk Management Policy describes and articulates the risk management and risk governance framework, methodologies, processes and infrastructure required to ensure due attention to all material risks for Arbuthnot Latham, including compliance with relevant regulatory requirements.

The Risk Appetite framework sets out the Board's risk attitude for the principal risks through a series of qualitative statements and quantitative risk tolerance metrics. These guide decision-making at all levels of the organisation, and form the basis of risk reporting. The key business risks and emerging risks are continuously identified, evaluated and managed by means of limits and controls at an operational level by AL management, and are governed through AL Committees.

At its offsite meeting, the Board discussed the principal risks pertinent to the Group's strategic objectives over the three-year budget period and the operation of the Risk Management Framework and Policy in managing and providing oversight in relation to them. In November 2019, the Board carried out its annual review of the effectiveness of the Group's risk management and internal control systems.

Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are well-established budgeting procedures in place and reports are presented regularly to the Board detailing the results, 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 any risk matters that need to be brought to its attention, enabling it to assess the Group's emerging and principal risks.

Shareholder Communications

The Company maintains communications via one to one meetings as appropriate with its major shareholders and makes full use of the AGM to communicate with shareholders. 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 established Audit, Nomination, Remuneration and Donations 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. 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.

Audit Committee

Membership and meetings

Membership of the Audit Committee is restricted to non-executive Directors and comprises Ian Dewar (as Chairman), Sir Christopher Meyer and Sir Alan Yarrow. Mr. Dewar has recent and relevant financial experience and the Committee as a whole has competence relevant to the financial sector in which the Company operates. The Company Secretary acts as its Secretary. The Committee met five times during the year, including one ad-hoc meeting held to consider the outcome of the audit tender.

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 Audit Committee also reviews whistleblowing arrangements for employees to raise concerns in confidence.

External Audit

During the year the Audit Committee conducted a competitive audit tender, as required by the EU Audit Regulation 2014. Following this tender, the Committee recommended to the Board that Mazars LLP be appointed as auditor in place of KMPG LLP who had held office since 2009. The Committee assesses the independence and objectivity, quali cations 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 2019

Internal Audit

On behalf of the Board, the Audit Committee monitors the effectiveness of systems and controls. To this end, Internal Audit provides the Audit Committee and the Board with detailed independent and objective assurance on the effectiveness of governance, risk management and internal controls. Since Arbuthnot Latham, the Company's operating subsidiary, has its own Audit Committee, the role of the Group Audit Committee is mainly supervisory in relation to internal audit matters, though it receives items of material note deriving from Arbuthnot Latham's internal audits, including an assessment of culture which forms part of every internal audit.

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 provides reports on the outcomes of Internal Audit work directly to the Committee and the Committee monitors progress against actions identified in these reports.

The Committee received a Quality Assessment report on Internal Audit, carried out by an external assessor, in September 2019 and it is satisfied with Internal Audit arrangements during 2019.

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;

-- The Chairman of the Committee attended, as an observer, Audit Committee meetings of Arbuthnot Latham;

-- The Committee monitored the changes to financial reporting requirements which came in effect on 1 January 2019, being IFRS 16, Leases, where it was determined to use a modified retrospective approach, as explained in Note 2;

-- It approved a recommendation that the layout of the accounting policies within the financial statements be amended to integrate them within the relevant note.

-- In addition the Committee discussed correspondence between the Company and the FRC, following review by the FRC of the Group's 2018 Accounts, as a consequence of which disclosures have been enhanced in the 2019 Accounts.

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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.

Significant areas of judgement

The Audit Committee considered the following significant issues and accounting judgements in relation to the Financial Statements:

Impairment of loans and advances to customers

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, were appropriate.

The charge for impaired loans and advances totalled GBP0.9m for the year ended 31 December 2019. The disclosures relating to impairment provisions are set out in Note 4.1(a) to the financial statements.

Effective Interest rate

Interest earned on loans and receivables is recognised using the Effective Interest Rate ("EIR") method. The EIR is calculated on the initial recognition of a loan through a discounted cash flow model that incorporates fees, costs and other premiums or discounts. There have been no changes to the EIR accounting policies during the year.

The Committee considered and challenged the EIR methodology applied by management and specifically in relation to acquired loan portfolios. The Committee considered management assumptions including expected future customer behaviours and concluded that the EIR methodology was appropriate as at 31 December 2019.

The disclosures relating to EIR are set out in Note 4.1(b) to the financial statements.

Valuation of Investment Property

The investment property is held at fair value. The Committee reviewed and challenged the key assumptions used in the valuation of the property including yields and rental income. Two other investment properties were transferred to inventory during the year. The Committee reviewed the appropriateness of this accounting treatment.

As at 31 December 2019, the Group's property investment portfolio totalled GBP6.8m, as detailed in Note 31. The disclosures relating to the fair value of the investment property is set out in Note 4.1(c) to the financial statements.

Inventory

As mentioned above, two investment properties were transferred to inventory during the year. These are carried at the lower of cost and net realisable value. The Committee reviewed the appropriateness of the carrying value.

The disclosures relating to the carrying value of the inventory is set out in Note 4.1(d) to the financial statements.

Going Concern and Viability Statement

The financial statements are prepared on the basis that the Group and Company are each a going concern. The Audit Committee reviewed management's assessment and is satisfied that the going concern basis and assessment of the Group's longer-term viability is appropriate.

Other Committee activities

In November 2019, Committee members contributed to the review of the Committee's effectiveness as part of its evaluation by the Board. There were no issues or concerns raised by them in regard to discharging their responsibilities.

On behalf of the Board, the Committee reviewed the financial statements as a whole in order to assess whether they were fair, balanced and understandable. The Committee discussed and challenged the balance and fairness of the overall report with the executive directors and also considered the views of the external auditor. The Committee was satisfied that the Annual Report could be regarded as fair, balanced and understandable and proposed that the Board approve the Annual Report in that respect.

Nomination Committee

Membership and meetings

The Nomination Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Sir Alan Yarrow. The General Counsel acts as its Secretary. The Committee met twice during the year. It is required to meet formally at least once per 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 succession planning, taking into account the skills and expertise that will be needed on and beneficial to the Board in the future.

Activity in 2019

During the year, the Nomination Committee was involved in the identification, assessment and appointment of an additional independent Non-Executive Director. In April 2019 it met to recommend that Mr. Boardman, a highly-regarded corporate lawyer, having spent many years as a partner of Slaughter and May, be appointed as a director. The Committee continually considers the question of diversity and had considered for some time that the appointment of a legal expert, particularly one of Mr. Boardman's credibility, knowledge and reputation to the Board would be a real benefit both in terms of collective and individual suitability, but also when third parties are considering dealings with the wider group. For this reason, Mr. Boardman was approached following the announcement of his retirement from partnership. It was not considered necessary to widen the search to comprise other legal experts for the role, given Mr. Boardman's status and profile and so neither advertising nor an external consultancy was used for this appointment.

The Committee reviewed policies on Board Diversity, Board Suitability and Board Training and Development. It also assessed and confirmed the collective and individual suitability of Board members. The contribution of Sir Henry Angest remains invaluable in the successful development of the Company. As regards the non-executive Directors' skill sets, Ian Dewar, with a wealth of experience as a partner in a major accounting firm, has successfully chaired the Audit Committee. Sir Christopher Meyer's wide-ranging experience including as a diplomat at the highest level has provided an important independent measure of challenge to executive management. The Board has benefitted from Sir Alan Yarrow's wise counsel, challenge to management and many years' experience in the City of London.

In November 2019, the 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 there was a sensible and strong plan in place. In terms of any new hires, it noted that account would be taken of provisions in the Board Diversity Policy. The Committee also agreed that it continued to operate effectively and, as such, no changes to its membership, composition or activities were proposed to the Board.

Remuneration Committee

Membership and meetings

Membership is detailed in the Remuneration Report on page 32. The Committee met twice during the year. It is required to meet formally at least once per year and otherwise as required.

The Remuneration Committee assists the Board in determining its responsibilities in relation to remuneration 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.

The Committee also deals with remuneration-related issues under the Prudential Regulation Authority's Remuneration Code applicable to the Company. The Remuneration Report on pages 32 and 33 gives further information and 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 Sir Christopher Meyer and Sir Alan Yarrow. The Committee met once during the year.

The Committee considers any political donation or expenditure as defined within sections 366 and 367 of the Companies Act 2006.

Remuneration Report

Remuneration Committee

Membership of the Remuneration Committee is limited to non-executive directors together with Sir Henry Angest as Chairman. The members of the Committee are Sir Henry Angest, Sir Christopher Meyer and Sir Alan Yarrow. The General Counsel acts as its Secretary. The Committee met twice during the year.

The Committee has responsibility for producing recommendations on the overall remuneration policy for directors for review by the Board and for setting the remuneration of individual directors. Members of the Committee do not vote on their own remuneration.

Remuneration Policy

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The Remuneration Committee determines the remuneration of individual directors having regard to the size and nature of the business; the importance of attracting, retaining and motivating management of the appropriate calibre without paying more than is necessary for this purpose; remuneration data for comparable positions, in particular the rising remuneration packages at challenger banks; the need to align the interests of executives with those of shareholders; and an appropriate balance between current remuneration and longer-term performance-related rewards. The remuneration package can comprise a combination of basic annual salary and benefits (including pension), a discretionary annual bonus award related to the Committee's assessment of the contribution made by the executive during the year and longer-term incentives, including executive share options. Pension benefits take the form of annual contributions paid by the Company to individual money purchase schemes. The Remuneration Committee reviews salary levels each year based on the performance of the Group during the preceding financial period. This review does not necessarily lead to increases in salary levels. For the purposes of the FCA Remuneration Code, all the provisions of which have been implemented, the Group and its subsidiaries are all considered to be Tier 3 institutions.

Activity in 2019

The Remuneration Committee undertook its regular activities during the year including reviewing the operation of the Remuneration Policy, having regard to the performance of the Company during the year, with particular regard to the level of discretionary bonus awarded and the level of inflation impacting on salaries.

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 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, which remained outstanding at 31 December 2019. The fair value of these options at the grant date was GBP1.0m.

 
 Directors' Emoluments 
                                                   2019     2018 
                                                 GBP000   GBP000 
----------------------------------------------  -------  ------- 
 Fees (including benefits in kind)                  240      205 
 Salary payments (including benefits in kind)     4,334    4,387 
 Pension contributions                               70       93 
                                                  4,644    4,685 
----------------------------------------------  -------  ------- 
 
 
                                                                                  Total    Total 
                                 Salary    Bonus   Benefits   Pension     Fees     2019     2018 
                                 GBP000   GBP000     GBP000    GBP000   GBP000   GBP000   GBP000 
------------------------------  -------  -------  ---------  --------  -------  -------  ------- 
 Sir Henry Angest                 1,200        -         93         -        -    1,293    1,279 
 JR Cobb                            650      550         17        35        -    1,252      977 
 IA Dewar                             -        -          -         -       75       75       75 
 IA Henderson (to 31/08/2018)         -        -          -         -        -        -      367 
 Sir Christopher Meyer                -        -          -         -       60       60       60 
 AA Salmon                        1,200      600         24        35        -    1,859    1,857 
 Sir Alan Yarrow                      -        -          -         -       70       70       70 
 Nigel Boardman                       -        -          -         -       35       35        - 
                                  3,050    1,150        134        70      240    4,644    4,685 
------------------------------  -------  -------  ---------  --------  -------  -------  ------- 
 

Details of any shares or options held by directors are presented on page 32 and 121.

The emoluments of the Chairman were GBP1,293,000 (2018: GBP1,279,000). The emoluments of the highest paid director were GBP1,857,000 (2018: GBP1,857,000) including pension contributions of GBP35,000 (2018: GBP35,000).

Secure Trust Bank was paid a fee of GBP36,000 up to 8 August 2018 for the services of Mr. Lynam rendered as a non-executive director.

Retirement benefits are accruing under money purchase schemes for two directors who served during 2019 (2018: three directors).

Independent Auditor's Report

Opinion

We have audited the financial statements of Arbuthnot Banking Group PLC (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended which comprise: the Consolidated Statement of Comprehensive Income; Consolidated Statement of Financial Position; Company Statement of Financial Position; Consolidated Statement of Changes in Equity; Company Statement in Changes in Equity; Consolidated Statement of Cash Flows; Company Statement of Cash Flows; and, notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

In our opinion:

-- the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2019 and of the Group's profit for the year then ended;

-- the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

-- the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

-- the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

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 Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's 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.

The impact of uncertainties due to both the COVID-19 coronavirus and the United Kingdom exiting the European Union on our audit

The Directors' view on the impacts of the COVID-19 coronavirus and Brexit are disclosed on page 16 and Note 47.

The full impact following the recent emergence of the global coronavirus is still unknown. It is therefore not currently possible to evaluate all the potential implications to the Group and Parents Company's trade, customers, suppliers and the wider economy.

The United Kingdom withdrew from the European Union on 31 January 2020 and entered into an Implementation Period which is scheduled to end on 31 December 2020. However the terms of the future trade and other relationships with the European Union are not yet clear, and it is therefore not currently possible to evaluate all the potential implications to the Group and Parent Company's trade, customers, suppliers and the wider economy.

We considered the impacts of Brexit on the Group and Parent Company as part of our audit procedures, applying a standard firm wide approach in response to the uncertainty associated with the Group's and Parent Company's future prospects and performance.

However, no audit should be expected to predict the unknowable factors or all possible implications for the Group and Parent Company and this is particularly the case in relation to both COVID-19 coronavirus and Brexit."

Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

-- the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or

-- the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group's or the Parent Company's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

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.

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We summarize below the key audit matters in forming our audit opinion above, together with an overview of the principal audit procedures performed to address each matter and, where relevant, key observations arising from those procedures.

Loan Loss Provisions

Group - GBP4.8 million; 2018: GBP6.6 million (See Note 23)

 
 Risk                                                               Our Response 
      Credit risk is an inherently judgmental                            Planning 
      area due to the use of subjective                                  We have performed a risk assessment 
      assumptions and a high degree of                                   over the Group and Parent Company's 
      estimation. The impairment provision                               loan portfolio to identify areas 
      relating to the Group's loan portfolio                             of heightened risk. 
      requires the Directors to make judgements 
      over the ability of the Groups' customers                          We have assessed the methodology 
      to make future loan repayments.                                    of identifying Significant Increase 
                                                                         in Credit Risk. 
      The Group adopted IFRS 9 from 1 January 
      2018. IFRS 9 requires loan loss provisions                         Controls Testing 
      to be determined on an Expected Credit                             We have tested the design and operating 
      Loss ("ECL") basis.                                                effectiveness of the key controls 
                                                                         operating across the Group in relation 
      The largest element of credit risk                                 to credit processes (including underwriting, 
      relates to Loans and Advances to                                   monitoring, collections and provisioning). 
      Customers where the bank is exposed                                This also included attendance at 
      to secured and unsecured lending                                   a Non-Performing Loan Committee meeting, 
      to private and commercial clients.                                 missed payments monitoring, credit 
                                                                         reviews at origination and annual 
      Individual impairment assessments                                  review, watch list movements through 
      are made for loans classified as                                   the year, and revaluation controls. 
      Stage 3 and 2. This is based on assumptions 
      around probability of default and                                  Test of detail 
      the present value of future cash 
      flows arising primarily from the                                   We have reviewed credit files in 
      sale or repossession of collateral.                                order to verify data used in the 
      For loans classified as stage 1 ECL                                determination of PD and LGD assumptions 
      is determined through the use of                                   . This was performed for all loans 
      a model.                                                           in Stage 3 and Stage 2 and for a 
                                                                         sample of loans in Stage 1 with characteristics 
      The model used by the Group to determine                           of heightened credit risk (e.g. high 
      expected losses requires judgement                                 Loan-to-Value secured exposures and 
      to the input parameters and assumptions                            unsecured exposures). 
      as set out in Notes 3.4 and 4.1 of 
      the financial statements.                                          Expected Credit Loss Models 
                                                                         We have assessed the models used 
      The most significant areas where                                   by management to determine expected 
      we identified greater levels of management                         loss calculations. We have: 
      judgement are:                                                      *    Considered the methodology used by management; 
       *    staging of loans and the identification of 
            Significant Increase in Credit Risk; 
                                                                          *    Tested the data inputs used in applying the 
                                                                               methodology adopted and assessed for reasonableness; 
       *    key assumptions in the model including probability of 
            default ("PD") and loss given default ("LGD") 
            including the present value of future cash flows from         *    Tested the completeness of the loan portfolio applied 
            collateral;                                                        to the model; 
 
 
       *    Use of macro-economic variables reflecting a range of         *    Tested the process in place to allocate loans to the 
            future scenarios.                                                  respective risk categories (Staging); 
 
 
                                                                          *    Reviewed the key assumptions applied to determine 
      Disclosures regarding the Group's                                        probability of default and loss given default; 
      and Parent Company's measurement 
      and classification of financial instruments 
      held under IFRS 9 are key to understanding                          *    We have included in-house Credit Risk and Economic 
      the key judgements and inputs.                                           specialists in the assessment of model approach and 
                                                                               assumptions. 
 
 
 
                                                                         Disclosures 
                                                                         We evaluated whether the disclosures 
                                                                         are a clear true and fair reflection 
                                                                         of managements approach to classification 
                                                                         and measure under IFRS 9 and key 
                                                                         assumptions made. 
 
                                                                         Key observations 
                                                                         We found the approach taken in respect 
                                                                         of loan loss provisions to be consistent 
                                                                         with the requirements of IFRS 9 and 
                                                                         judgements made were reasonable. 
 
                                                                         Disclosures were appropriate. 
                                                                   ----------------------------------------------------------------- 
 

Revenue Recognition: Effective Interest Rate

Group - GBP76.9 million; 2018: GBP65.3 million (See Note 8)

 
 Risk                                                               Our Response 
      The financial reporting fraud risk                            Acquired Portfolios 
       over revenue recognition specifically                         We have assessed the design and tested 
       relates to income recognised on an                            the operating effectiveness of controls 
       effect interest method (EIR) on Loans                         in place in the Group relating to 
       and Advances to Customers including                           acquired portfolios and monitoring 
       originated and acquired loan portfolios.                      of expected cash flows when determining 
                                                                     effective interest. 
       The EIR takes into account cash flows 
       that are an integral part of the                              We have tested controls in place 
       instrument's yield including: premiums,                       at service providers where acquired 
       discounts and acquisition costs which                         portfolios are managed by third parties. 
       are spread over the expected life 
       of the loan.                                                  We have assessed the basis for recognising 
                                                                     revenue of acquired portfolios against 
       Models adopted to calculate EIR are                           the requirements of IFRS 9. 
       prepared manually and are therefore 
       have an increased risk of error or                            We have assessed key judgements over 
       fraud.                                                        expected future cash flows including 
                                                                     estimations over early repayments 
       Judgement is required to determine                            and credit losses. 
       whether fees are recognised as EIR 
       or recognised when a service has                              We have performed tests of detail 
       been performed.                                               relating to loan information and 
                                                                     security valuations on a sample of 
       The most significant areas where                              exposures in the acquired portfolios. 
       we identified greater levels of management 
       judgement are: 

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       -                                                             Originated Portfolios 
        *    Unwinding of the discount on acquired portfolios        We have assessed the design of controls 
             where estimations are made to adjust expected future    in place over models used within 
             cash flows;                                             the EIR calculation. 
 
                                                                     We have re-performed model data inputs 
        *    assumptions over the timing of cash flows used in       to identify instances of error. Over 
             revenue recognition of originated exposures.            a sample of instruments we have verified 
                                                                     details to underlying agreements. 
 
                                                                     We have assessed the EIR model calculation 
                                                                     for compliance with IFRS 9. Where 
                                                                     approximations have been adopted 
                                                                     in the EIR model we have assessed 
                                                                     impact. 
 
                                                                     Key observations 
                                                                     We identified discrepancies in the 
                                                                     application of EIR adjustments in 
                                                                     acquired portfolios which were discussed 
                                                                     with management and the Audit Committee; 
                                                                     however we gained assurance we required 
                                                                     in this area. 
                                                                   -------------------------------------------- 
 

Investment Properties

Group - GBP6.8 million; 2018: GBP67.1 million (See Note 30)

 
 Risk                                        Our Response 
 The Group has an accounting policy          We have assessed accounting classification 
  to hold Investment Properties at            of all Investment Property and Property 
  fair value.                                 Held for Sale held by the Group. 
 
  Management engage third party experts       In assessing fair value, either at 
  to provide observations and market          the balance sheet date or at the 
  data e.g. property rental yields.           date of reclassification, we have 
  This data is included in models built       agreed data inputs in the fair value 
  in-house.                                   models to source. 
 
  The outcome of the model is highly          We have engaged external property 
  sensitive to assumptions made.              valuation specialists as audit experts 
                                              to assist us in our review of the 
  Where there is a change in use and          valuation approach and assumptions. 
  the property developed with a view 
  to sell, Investment Properties are          Key observations 
  reclassified as inventory. IAS 40 
  sets criteria for reclassification          We found the methodology and approach 
  which can results in misclassification      in assessing fair value of Investment 
  if the criteria is not met.                 Property and Property reclassified 
                                              as held for sale to be in line with 
  Where property is reclassified as           IFRS. 
  inventory it is held at cost, calculated 
  as being the fair value on date of 
  reclassification using the same in-house 
  models 
                                            ------------------------------------------- 
 

Impact of the outbreak of COVID 19 on the assessment of going concern

The financial statements have been prepared on a going concern basis (See Basis of Preparation Page 49)

 
 Risk                                          Our Response 
 
   Since the outbreak of COVID 19 in             In forming our conclusions over going 
   the UK, the Directors have considered         concern, we evaluated whether management's 
   the impact this could have on the             going concern assessment robustly 
   Group's and Parent Company's ability          considered impacts arising from COVID-19. 
   to continue as a going concern. 
                                                 We reviewed management's going concern 
   In performing this assessment, they           assessment. 
   considered a range of stress scenarios 
   In a range of scenarios which included        We made enquiries of management to 
   the impact of reductions in the Bank          understand the potential impact of 
   of England base rate to zero, significant     COVID-19 on the Group and Parent 
   falls in residential and commercial           Company's financial performance, 
   property values and the impact of             business operations, and regulatory 
   substantial falls in equity markets           and liquidity positions. 
   could have on revenue. Furthermore, 
   reverse stress scenarios were examined        We reviewed the Group's most recent 
   to understand the limitations of              Internal Capital Adequacy Assessment 
   the Group.                                    Process and Internal Liquidity Adequacy 
                                                 Process which contain the results 
   Consideration has also been given             of the company's latest stress tests. 
   to mitigation actions that could 
   be implemented such as reducing bonus         We challenged key assumptions and 
   payments, altering dividend strategy          substantively re-performed key calculations. 
   and reducing lending appetite. 
                                                 Our reporting on Going Concern is 
   The Directors concluded that the              set out above. 
   Group can remain viable and the going 
   concern basis is appropriate. 
                                              ----------------------------------------------- 
 

Our application of materiality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

 
 Overall materiality               Group: GBP1,042,000 
                                    Parent Company: GBP800,000 
 How we determined it              Group and Parent Company: 0.5% of Net Assets 
                                  ------------------------------------------------ 
 Rationale for benchmark applied   We selected a Net Assets benchmark because 
                                    the principle activity of the Group and Parent 
                                    Company is the investment of capital. 
                                  ------------------------------------------------ 
 Performance materiality           Group: GBP625,000 
                                    Parent Company: GBP480,000 
                                  ------------------------------------------------ 
 Reporting threshold               Group: GBP31,000 
                                    Parent Company: GBP24,000 
                                  ------------------------------------------------ 
 

An overview of the scope of our audit, including extent to which the audit was considered capable of detecting irregularities, including fraud

As part of designing our audit, we determined materiality and 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 making 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 a risk assessment, our understanding of the Group and Parent Company, its 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 audit procedures were designed to respond to those identified risks, including non-compliance with laws and regulations (irregularities) and fraud that are material to the financial statements.

In identifying and assessing risks of material misstatement in respect to irregularities including non-compliance with laws and regulations, our procedures included but were not limited to:

-- at planning stage, we gained an understanding of the legal and regulatory framework applicable to the Group and Parent Company, the structure of the Group, the industry in which they operate and considered the risk of acts by the Group and Parent Company which were contrary to the applicable laws and regulations;

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-- during the audit, we focused 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 the Directors (as required by auditing standards), from inspection of the Group's regulatory and legal correspondence and review of minutes of Directors' meetings in the year. We identified that the principal risks of non-compliance with laws and regulations related to breaches of regulatory requirements of the Group's regulators, the Prudential Regulatory Authority and the Financial Conduct Authority. We also considered those other laws and regulations that have a direct impact on the preparation of financial statements, such as the Companies Act 2006 and UK tax legislation;

-- we discussed with the Directors the policies and procedures in place regarding compliance with laws and regulations. We discussed amongst the engagement team the identified laws and regulations, and remained alert to any indications of non-compliance; and

-- during the audit, we focused 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 the directors (as required by auditing standards), from inspection of the Parent Company's/ and Group's regulatory and legal correspondence and review of minutes of directors' meetings in the year.

Our procedures in relation to fraud included but were not limited to:

-- inquiries of management whether they have knowledge of any actual, suspected or alleged fraud;

-- gaining an understanding of the internal controls established to mitigate risk related to fraud;

-- discussion amongst the engagement team regarding risk of fraud such as opportunities for fraudulent manipulation of financial statements, and determined that the principal risks were related to posting manual journal entries to manipulate financial performance, management bias through judgements and assumptions in significant accounting estimates, in particular in relation loan impairments, and the effective interest rate method of income recognition, and significant one-off or unusual transactions; and

-- addressing the risk of fraud through management override of controls by performing journal entry testing.

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.

As a result of our procedures, we did not identify any "Key audit matters" relating to irregularities. The risks of material misstatement that had the greatest effect on our audit, including fraud, are discussed under "Key audit matters" within this report.

As a result of the directors' voluntary reporting on how the UK Corporate Governance Code (the "Code") has been applied, we are required to report to you if we have anything material to add or draw attention to regarding:

-- the disclosures in the annual report Set out on page 16 that describe the principal risks and explain how they are being managed or mitigated;

-- the directors' confirmation set out on page 64 in the annual report that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity;

-- the directors' statement set out on page 21 in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in repairing the financial statements and the directors' identification of any material uncertainties to the group and the Parent Company's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; or

-- the directors' explanation set out on page 21 in the annual report as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

We have nothing to report in this regard.

As a result of the directors' voluntary reporting on how the Code has been applied, we are required to report on the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:

-- Fair, balanced and understandable set out on page 24 - the statement by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or

-- Audit committee reporting set out on page 28 - the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee.

We have nothing to report in this regard.

Other information

The Directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. 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.

In connection with our audit of the financial statements, 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 audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. 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, based on the work undertaken in the course of the audit:

-- the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

-- the Strategic Report and the Directors' Report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

In light of the knowledge and understanding of the group and the Parent Company and its 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 are not in agreement with the accounting records and returns; or

   --       certain disclosures of directors' remuneration specified by law are not made; or 
   --       we have not received all the information and explanations we require for our audit. 

Responsibilities of Directors

As explained more fully in the Directors' responsibilities statement set out on page 23, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, 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.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at www.frc.org.uk/auditorsresponsibilities . This description forms part of our auditor's report.

Use of the audit report

(MORE TO FOLLOW) Dow Jones Newswires

March 26, 2020 03:00 ET (07:00 GMT)

DJ Arbuthnot Banking Group PLC Audited Final Results -18-

This report is made solely to the Parent 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 Parent 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 Parent Company and the Parent 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

Tower Bridge House, St Katherine's Dock

London

25 March 2020

Company statement of financial position

 
                                                            At 31 December 
                                                              2019        2018 
                                                  Note      GBP000      GBP000 
---------------------------------------------  -------  ----------  ---------- 
 ASSETS 
 Loans and advances to banks                        18      15,316      17,008 
 Debt securities at amortised cost                  19      24,239           - 
 Financial investments                              25      25,913      19,313 
 Current tax asset                                               -          52 
 Deferred tax asset                                 26         391         113 
 Intangible assets                                  27           5           6 
 Property, plant and equipment                      28         184         208 
 Other assets                                       24         115          42 
 Interests in subsidiaries                          43     134,004     134,614 
---------------------------------------------  -------  ----------  ---------- 
 Total assets                                              200,167     171,356 
---------------------------------------------  -------  ----------  ---------- 
 EQUITY AND LIABILITIES 
 Equity 
 Share capital                                      37         154         153 
 Other reserves                                     38     (1,618)     (8,133) 
 Retained earnings                                  38     161,556     162,729 
---------------------------------------------  -------  ----------  ---------- 
 Total equity                                              160,092     154,749 
---------------------------------------------  -------  ----------  ---------- 
 LIABILITIES 
 Current tax liability                                         175           - 
 Other liabilities                                  33       3,063       3,324 
 Debt securities in issue                           35      36,837      13,283 
---------------------------------------------  -------  ----------  ---------- 
 Total liabilities                                          40,075      16,607 
---------------------------------------------  -------  ----------  ---------- 
 Total equity and liabilities                              200,167     171,356 
---------------------------------------------  -------  ----------  ---------- 
 
 The Company has elected to take the exemption under section 408 of the 
  Companies Act 2006 not to present the Parent Company profit and loss 
  account. The profit for the Parent Company for the year is presented 
  in the Statement of Changes in Equity. 
 

Consolidated statement of changes in equity

 
                                                                 Attributable to equity 
                                                                  holders of the Group 
                                               --------------------------------------------------------- 
                                                               Capital       Fair 
                                                   Share    redemption      value   Treasury    Retained 
                                                 capital       reserve    reserve     shares    earnings     Total 
                                                  GBP000        GBP000     GBP000     GBP000      GBP000    GBP000 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  -------- 
 Balance at 31 December 2018                         153            20   (12,169)    (1,131)     209,083   195,956 
 
 Total comprehensive income for the period 
 Profit for 2019                                       -             -          -          -       6,176     6,176 
 
 Other comprehensive income, net of tax 
 Changes in fair value of equity investments 
  at fair value through other comprehensive 
  income*                                              -             -     10,707          -           -    10,707 
 Tax on other comprehensive income                     -             -       (77)          -           -      (77) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  -------- 
 Total other comprehensive income                      -             -     10,630          -           -    10,630 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  -------- 
 Total comprehensive income for the period             -             -     10,630          -       6,176    16,806 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  -------- 
 
 Transactions with owners, recorded directly 
  in equity 
 Contributions by and distributions to 
  owners 
 Unwind Employee Trust                                 -             -          -          -       1,083     1,083 
 Sale of Secure Trust Bank shares                      -             -      1,744          -     (1,744)         - 
 Issue non-voting shares                               1           (1)          -          -        (44)      (44) 
 Purchase of own shares                                -             -          -       (83)           -      (83) 
 Final dividend relating to 2018                       -             -          -          -     (2,978)   (2,978) 
 Interim dividend relating to 2019                     -             -          -          -     (2,405)   (2,405) 
 Total contributions by and distributions 
  to owners                                            1           (1)      1,744       (83)     (6,088)   (4,427) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  -------- 
 Balance at 31 December 2019                         154            19        205    (1,214)     209,171   208,335 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  -------- 
 * Mainly relate to movement in STB share price. There is currently no 
  tax implications to the movement as the shareholding still qualifies 
  for significant shareholding exemption. 
 
 
                                                                 Attributable to equity 
                                                                  holders of the Group 
                                               --------------------------------------------------------- 
                                                               Capital       Fair 
                                                   Share    redemption      value   Treasury    Retained 
                                                 capital       reserve    reserve     shares    earnings      Total 
                                                  GBP000        GBP000     GBP000     GBP000      GBP000     GBP000 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Balance at 31 December 2017                         153            20        162    (1,131)     237,171    236,375 
 IFRS 9 adjustment net of tax                          -             -          -          -     (2,090)    (2,090) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Balance at 1 January 2018                           153            20        162    (1,131)     235,081    234,285 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 
 Total comprehensive income for the period 
 Loss for 2018                                         -             -          -          -    (20,033)   (20,033) 
 
 Other comprehensive income, net of tax 
 Changes in fair value of equity investments 
  at fair value through other comprehensive 
  income*                                              -             -   (13,893)          -           -   (13,893) 
 Tax on other comprehensive income                     -             -       (26)          -           -       (26) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Total other comprehensive income                      -             -   (13,919)          -           -   (13,919) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Total comprehensive income for the period             -             -   (13,919)          -    (20,033)   (33,952) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 
 Transactions with owners, recorded directly 
  in equity 
 Contributions by and distributions to 
  owners 
 Unwind Employee Trust                                 -             -          -          -         685        685 
 Sale of Secure Trust Bank shares                      -             -      1,588          -     (1,588)          - 
 Final dividend relating to 2017                       -             -          -          -     (2,829)    (2,829) 

(MORE TO FOLLOW) Dow Jones Newswires

March 26, 2020 03:00 ET (07:00 GMT)

DJ Arbuthnot Banking Group PLC Audited Final Results -19-

 Interim dividend relating to 2018                     -             -          -          -     (2,233)    (2,233) 
 Total contributions by and distributions 
  to owners                                            -             -      1,588          -     (5,965)    (4,377) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Balance at 31 December 2018                         153            20   (12,169)    (1,131)     209,083    195,956 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 * Mainly relate to movement in STB share price. There is currently no 
  tax implications to the movement as the shareholding still qualifies 
  for significant shareholding exemption. 
 

Company statement of changes in equity

 
                                                             Attributable to equity holders 
                                                                     of the Company 
                                               --------------------------------------------------------- 
                                                               Capital       Fair 
                                                   Share    redemption      value   Treasury    Retained 
                                                 capital       reserve    reserve     shares    earnings      Total 
                                                  GBP000        GBP000     GBP000     GBP000      GBP000     GBP000 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Balance at 1 January 2018                           153            20          -    (1,131)     124,659    123,701 
 
 Total comprehensive income for the 
  period 
 Loss for 2018                                         -             -          -          -      46,049     46,049 
 
 Other comprehensive income, net of 
  income tax                                           -             -          -          -           -          - 
 Changes in fair value of equity investments 
  at fair value through other comprehensive 
  income*                                              -             -   (10,624)          -           -   (10,624) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Total other comprehensive income                      -             -   (10,624)          -           -   (10,624) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Total comprehensive income for the 
  period                                               -             -   (10,624)          -      46,049     35,425 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 
 
 Transactions with owners, recorded 
  directly in equity 
 Contributions by and distributions 
  to owners 
 Equity settled share based payment 
  transactions                                         -             -          -          -         685        685 
 Sale of Secure Trust Bank shares                      -             -      1,588          -     (1,588)          - 
 Transfer of Secure Trust Bank shares 
  to AL                                                -             -      2,014          -     (2,014)          - 
 Final dividend relating to 2017                       -             -          -          -     (2,829)    (2,829) 
 Interim dividend relating to 2018                     -             -          -          -     (2,233)    (2,233) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Total contributions by and distributions 
  to owners                                            -             -      3,602          -     (7,979)    (4,377) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Balance at 31 December 2018                         153            20    (7,022)    (1,131)     162,729    154,749 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 
 Total comprehensive income for the 
  period 
 Profit for 2019                                       -             -          -          -       3,170      3,170 
 
 Other comprehensive income, net of 
  income tax                                           -             -          -          -           -          - 
 Changes in fair value of equity investments 
  at fair value through other comprehensive 
  income*                                              -             -      6,599          -           -      6,599 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Total other comprehensive income                      -             -      6,599          -           -      6,599 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Total comprehensive income for the 
  period                                               -             -      6,599          -       3,170      9,769 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 
 Transactions with owners, recorded 
  directly in equity 
 Contributions by and distributions 
  to owners 
 Unwind Employee Trust                                 -             -          -          -       1,083      1,083 
 Issue of non-voting shares                            1           (1)          -          -        (43)       (43) 
 Purchase of own shares                                -             -          -       (83)           -       (83) 
 Final dividend relating to 2018                       -             -          -          -     (2,978)    (2,978) 
 Interim dividend relating to 2019                     -             -          -          -     (2,405)    (2,405) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Total contributions by and distributions 
  to owners                                            1           (1)          -       (83)     (4,343)    (4,426) 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 Balance at 31 December 2019                         154            19      (423)    (1,214)     161,556    160,092 
---------------------------------------------  ---------  ------------  ---------  ---------  ----------  --------- 
 * Mainly relate to movement in STB share price. There is currently no 
  tax implications to the movement as the shareholding still qualifies 
  for significant shareholding exemption. 
 
 

Consolidated statement of cash flows

 
                                                                        Year           Year 
                                                                       ended          ended 
                                                                 31 December    31 December 
                                                                        2019           2018 
                                                         Note         GBP000         GBP000 
------------------------------------------------------  -----  -------------  ------------- 
 Cash flows from operating activities 
 Interest received                                                    63,500         73,879 
 Interest paid                                                      (15,088)        (8,290) 
 Fees and commissions received                                        13,757         13,669 
 Other income                                                          5,599          6,588 
 Cash payments to employees and suppliers                           (63,887)       (84,216) 
 Taxation paid                                                         (841)        (1,217) 
------------------------------------------------------  -----  -------------  ------------- 
 Cash flows from operating profits before changes 
  in operating assets and liabilities                                  3,040            413 
 Changes in operating assets and liabilities: 
  - net decrease/(increase) in derivative financial 
   instruments                                                           173           (38) 
  - net increase in loans and advances to customers                (372,612)      (180,600) 
  - net (increase)/decrease in other assets                         (10,123)          4,758 
  - net increase in amounts due to customers                         370,617        323,505 
  - net (decrease)/increase in other liabilities                     (5,049)          2,310 
------------------------------------------------------  -----  -------------  ------------- 
 Net cash (outflow)/inflow from operating activities                (13,954)        150,348 
------------------------------------------------------  -----  -------------  ------------- 
 Cash flows from investing activities 
 Acquisition of financial investments                                  (182)              - 
 Disposal of financial investments                                    15,330          9,301 
 Purchase of computer software                             27        (5,552)        (2,294) 
 Purchase of property, plant and equipment                 28        (1,950)        (2,482) 
 Proceeds from sale of property, plant and equipment       28              -             97 
 Purchase of investment property                           30        (2,901)          (879) 
 Purchase of debt securities                                       (815,223)      (467,772) 
 Proceeds from redemption of debt securities                         719,737        356,883 
------------------------------------------------------  -----  -------------  ------------- 

(MORE TO FOLLOW) Dow Jones Newswires

March 26, 2020 03:00 ET (07:00 GMT)

DJ Arbuthnot Banking Group PLC Audited Final Results -20-

 Net cash outflow from investing activities                         (90,741)      (107,146) 
------------------------------------------------------  -----  -------------  ------------- 
 Cash flows from financing activities 
 Issue subordinated debt                                              25,000              - 
 Increase/(decrease) in borrowings                                   (2,254)         37,578 
 Dividends paid                                                      (5,383)        (5,062) 
------------------------------------------------------  -----  -------------  ------------- 
 Net cash inflow from financing activities                            17,363         32,516 
------------------------------------------------------  -----  -------------  ------------- 
 Net (decrease)/increase in cash and cash equivalents               (87,332)         75,718 
 Cash and cash equivalents at 1 January                              459,498        383,780 
------------------------------------------------------  -----  -------------  ------------- 
 Cash and cash equivalents at 31 December                  41        372,166        459,498 
------------------------------------------------------  -----  -------------  ------------- 
 

Company statement of cash flows

 
                                                                        Year           Year 
                                                                       ended          ended 
                                                                 31 December    31 December 
                                                                        2019           2018 
                                                         Note         GBP000         GBP000 
------------------------------------------------------  -----  -------------  ------------- 
 Cash flows from operating activities 
 Dividends received from subsidiaries                                  3,766          3,056 
 Interest received                                                        65             84 
 Interest paid                                                       (1,829)          (559) 
 Other income                                                         10,605         52,260 
 Cash payments to employees and suppliers                            (8,129)       (50,316) 
 Taxation paid                                                         (370)          (402) 
------------------------------------------------------  -----  -------------  ------------- 
 Cash flows from operating profits before changes in 
  operating assets and liabilities                                     4,108          4,123 
 Changes in operating assets and liabilities: 
  - net (increase)/decrease in group company balances                  (742)            155 
  - net increase in other assets                                        (73)            (1) 
  - net increase in other liabilities                                    481            187 
------------------------------------------------------  -----  -------------  ------------- 
 Net cash inflow from operating activities                             3,774          4,464 
------------------------------------------------------  -----  -------------  ------------- 
 Cash flows from investing activities 
 Increase investment in subsidiary                         43              -       (18,500) 
 Issue of subordinated debt to Arbuthnot Latham                     (25,000)              - 
 Disposal of property, plant and equipment                                 -             97 
 Purchase of property, plant and equipment                 28              -           (94) 
------------------------------------------------------  -----  -------------  ------------- 
 Net cash outflow from investing activities                         (25,000)       (18,497) 
------------------------------------------------------  -----  -------------  ------------- 
 Cash flows from financing activities 
 Purchase of treasury shares                                            (83)              - 
 Issue subordinated debt                                              25,000              - 
 Dividends paid                                                      (5,383)        (5,062) 
 Net cash used in financing activities                                19,534        (5,062) 
------------------------------------------------------  -----  -------------  ------------- 
 Net decrease in cash and cash equivalents                           (1,692)       (19,095) 
 Cash and cash equivalents at 1 January                               17,008         36,103 
------------------------------------------------------  -----  -------------  ------------- 
 Cash and cash equivalents at 31 December                  41         15,316         17,008 
------------------------------------------------------  -----  -------------  ------------- 
 

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 2019 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 International Financial Reporting Standards (IFRSs as adopted and endorsed by the EU) and the Companies Act 2006 applicable to companies reporting under IFRS.

The consolidated financial statements were authorised for issue by the Board of Directors on 25 March 2020.

(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) and capital resources (see Note 7), the directors are satisfied that the Company and the Group have adequate resources to continue in operation for the foreseeable future. The financial statements are therefore prepared on the going concern basis.

(f) Accounting developments

The accounting policies adopted are consistent with those of the previous financial year, except for the following:

IFRS 16 'Leases'

The Group has adopted IFRS 16 under the modified retrospective transition approach from 1 January 2019 and has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The Group's accounting as a lessor under IFRS 16 is substantially unchanged from its approach under IAS 17; however for lessee accounting there is no longer a distinction between finance and operating leases. The total impact of IFRS 16 over the life of a lease will be neutral on the income statement, however its implementation will result in a higher charge in the earlier years following implementation with a lower charge in later years.

On adoption of IFRS 16, the Group recognised a right-of-use asset and a corresponding liability in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases.

These liabilities were measured at present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2019. The Group has calculated an incremental borrowing rate for each individual lease only using a single incremental borrowing rate where the leases share reasonably similar characteristics. The aggregate of the Group's leases equates to a weighted incremental borrowing rate of 4.8%.

The associated right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the Statement of Financial Position as at 31 December 2018. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

 
 The recognised right-of-use assets relate 
  to the following types of assets: 
                                                      1-Jan 
                                                       2019 
 Group                                               GBP000 
----------------------------------------------     -------- 
 Investment properties                                8,108 
 Properties                                          14,036 
 Total Right-of-use assets                           22,144 
-------------------------------------------------  -------- 
 
 Operating lease liability: 
 Group                                               GBP000 
----------------------------------------------     -------- 

(MORE TO FOLLOW) Dow Jones Newswires

March 26, 2020 03:00 ET (07:00 GMT)

DJ Arbuthnot Banking Group PLC Audited Final Results -21-

 Operating lease commitment as at 31 December 
  2018                                               16,654 
 Discount using the incremental borrowing 
  rate at 1 January 2019                            (1,906) 
 Investment property finance leases                   8,108 
 Exemption for leases with terms less than 
  12 months at transition                             (124) 
-------------------------------------------------  -------- 
 Total lease liability as at 1 January 2019          22,732 
-------------------------------------------------  -------- 
 

There was no impact to retained earnings due to the modified retrospective approach being used.

Practical expedients

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the Standard:

-- the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;

-- reliance on previous assessments on whether leases are onerous immediately before 1 January 2019 as an alternative to performing an impairment review of the right-of-use asset;

-- the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases;

   --      low-value assets where the value of the underlying asset is less than GBP5,000; 

-- the exclusion of initial direct costs for the measurement of the right-of-use asset immediately before 1 January 2019; and

-- the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying IAS 17 and IFRS 4 Determining whether an Arrangement contains a Lease.

The Group's leasing activities

The Group has leasehold investment property, offices and equipment all under operating leases. Rental contracts are typically made for fixed periods but may have extension or termination options. Extension and termination options are included in a number of property and equipment leases across the Group. These terms are used to maximise operational flexibility in terms of managing contracts. The extension and termination options held are exercisable only by the Group and not by the respective lessor.

Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

Until the 2018 financial year, leases of investment property and property, plant and equipment were classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.

From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

-- fixed payments less any lease incentives receivable

-- the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and

-- payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

The lease payments are discounted using the lessee's incremental borrowing rate, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.

Right-of-use assets are measured at cost comprising the following:

-- the amount of the initial measurement of the lease liability

-- any lease payments made at or before the commencement date less any lease incentives received, and

-- any restoration costs payable.

Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less.

3. Significant accounting policies

The accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

3.1. Consolidation

(a) Subsidiaries

Subsidiaries are all investees (including special purpose entities) controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group's shares of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income as a gain on bargain purchase. Contingent consideration related to an acquisition is initially recognised at the date of acquisition as part of the consideration transferred, measured at its acquisition date fair value and recognised as a liability. The fair value of a contingent consideration liability recognised on acquisition is remeasured at key reporting dates until it is settled, changes in fair value are recognised in the profit or loss.

The Company's investments in subsidiaries are recorded at cost less, where appropriate, provisions for impairment in value.

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

(b) Changes in ownership and non-controlling interests

Changes in ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity transactions and no gain or loss is recognised. Adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary.

When control of a subsidiary is lost, the Group derecognises the assets, liabilities, non-controlling interest and all other components of equity relating to the former subsidiary from the consolidated statement of financial position. Any resulting gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is recognised at its fair value at the date when control is lost.

(c) 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

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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 instruments measured at amortised cost

Financial assets that are held to collect contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. A basic lending arrangement results in contractual cash flows that are solely payments of principal and interest ("SPPI") on the principal amount outstanding. Financial assets measured at amortised cost are predominantly loans and advances and debt securities.

Loans and advances

Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable and the SPPI criteria are met. Loans are recognised when cash is advanced to the borrowers inclusive of transaction costs. Loans and advances, other than those relating to assets leased to customers, are carried at amortised cost using the effective interest rate method.

Debt securities at amortised cost

Debt securities at amortised cost are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group has determined meets the SPPI criteria. Debt security investments are carried at amortised cost using the effective interest rate method, less any impairment loss.

(b) Financial assets and financial liabilities at FVPL

Financial assets and liabilities are classified at FVPL where they do not meet the criteria to be measured at amortised cost or FVOCI or where financial assets are designated at FVPL to reduce an accounting mismatch. They are measured at fair value in the statement of financial position, with fair value gains/losses recognised in the income statement.

Financial assets that are held for trading or managed within a business model that is evaluated on a fair value basis are measured at FVPL, because the business objective is neither hold-to-collect contractual cash flows nor hold-to-collect-and-sell contractual cash flows.

This category comprises derivative financial instruments and financial investments. Derivative financial instruments utilised by the Group include structured notes and derivatives used for hedging purposes.

Financial assets and liabilities at FVPL are initially recognised on the date from which the Group becomes a party to the contractual provisions of the instrument, including any acquisition costs. Subsequent measurement of financial assets and financial liabilities held in this category are carried at FVPL until the investment is sold.

(c) Financial instruments 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).

A debt instrument is measured at fair value through other comprehensive income if it meets both of the following conditions:

-- the asset is held within a business model whose objective is achieved by collecting contractual cash flows and selling financial assets; and

   --      the contractual terms of the financial asset meet the SPPI criterion. 

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 debt instruments, changes in fair value are recognised in OCI. The assets are subject to impairment testing under IFRS 9 and a loss allowance provision is recognised for such assets. The portion of changes in fair value which reflect ECL shall to be taken to the profit or loss.

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.

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.

3.4 Impairment for financial assets and liabilities

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 - entities are required to recognise a lifetime ECL allowance for financial assets that are expected to default in the following 12 months, where there is no indication of significant increase in credit risk since initial recognition and are not credit impaired.

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-- Stage 2 - a lifetime loss allowance is held for financial assets where a significant increase in credit risk has been identified since initial recognition for financial assets that are not credit impaired. The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period for the life of the loan.

-- Stage 3 - a lifetime ECL allowance is required for financial assets that are credit impaired at the reporting date.

Measurement of ECL

The assessment of credit risk and the estimation of ECL are unbiased and probability weighted. ECL is measured on either a 12 month (Stage 1) or lifetime (Stage 2) basis depending on whether a significant increase in credit risk has occurred since initial recognition or where an account meets the Group's definition of default (Stage 3).

The ECL calculation is a product of an individual loan's probability of default ('PD'), exposure at default ('EAD') and loss given default ('LGD') discounted at the effective interest rate ('EIR').

Significant increase in credit risk ("SICR") (movement to Stage 2)

The Group's transfer criteria determines what constitutes a significant increase in credit risk, which results in a financial asset being moved from Stage 1 to Stage 2. The Group has determined that a significant increase in credit risk arises when an individual borrower is more than 30 days past due or if forbearance measures have been put in place.

The Group monitors the ongoing appropriateness of the transfer criteria, where any proposed amendments will be reviewed and approved by the Groups Credit Committees at least annually and more frequently if required.

A borrower will move back into stage 1 conditional upon both a minimum of 6 months' 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 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 an internally approved period.

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 a bespoke macroeconomic model to determine the most significant factors which may influence the likelihood of an exposure defaulting in the future. At present, the most significant macroeconomic factor relates to property prices. The Group currently consider five probability weighted scenarios. The model adopts five probability weighted scenarios no change, severe decline, moderate decline, decline and growth. 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' expected life is equal to the contractual loan term. This approach will continue to be monitored and enhanced if and when deemed appropriate.

3.5. 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 3.15(a).

3.6. 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.

3.7. New standards and interpretations not yet adopted

There are no standards, interpretations and amendments to existing standards that have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2020 or later periods, that will have any material impact on the Group's financial statements.

4. Critical accounting estimates and judgements in applying accounting policies

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

4.1 Estimation uncertainty

(a) Expected credit losses ("ECL") on financial assets

The Group reviews its loan portfolios and debt security investments to assess impairment at least on a quarterly basis. The basis for evaluating impairment losses is described in note 10. The measurement of ECL required by 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 no change, upside case, downside case, moderate decline and severe decline, 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 ("LGD") having consideration for collateral. Life time 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.

During the year, the ECL model and the assumptions were reviewed resulting in a revised basis for estimating LGD after taking account collateral values, this has resulted in a release of ECL provision of GBP1.3m in Stage 1 and an increase in ECL provision in Stage 3 of GBP0.2m.

Management considered a range of variables in determining the level of future ECL. The two of the key judgements were in relation to "time to collect" and "collateral valuations". Sensitivity analysis was carried out based on what was considered reasonably possible in the current market conditions.

If time to collect increased by six months across all client exposures, this would lead to a negative GBP0.6m (2018: negative GBP0.4m) impact through the Profit or Loss. A six month reduction in time to collect would lead to a GBP0.1m favourable (2018: GBP0.3m favourable) impact on Profit or Loss.

If the collateral valuations increased by 10% across client exposures, this would lead to a positive GBP1.4m (2018: positive GBP1.3m) impact through Profit or Loss. If the collateral valuations decreased by 10% across all Stage 3 client exposures, this would lead to a GBP2.1m adverse (2018: GBP1.9m adverse) impact on Profit or Loss.

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 only collateral values/property prices have a material impact on ECL.

The five macroeconomic scenarios modelled on future property prices were as follows:

   --      Severe decline 
   --      Moderate decline 
   --      Decline 
   --      No change 
   --      Growth 

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Other than collateral values/property prices, no other assumptions were assessed to have a material impact on ECL. The table below therefore reflects the expected changes in collateral/property prices in each of the macroeconomic scenarios and the probability weighting applied for each scenario:

 
                                                      Change in property 
                        Probability weighting               prices 
                                                              Rest 
                             2019         2018    London     of UK   Overseas 
--------------------  -----------  -----------  --------  --------  --------- 
 Economic Scenarios 
 
 Severe decline              1.0%         1.0%   (40.0%)   (40.0%)    (40.0%) 
 Moderate decline            3.0%         3.0%   (20.0%)   (20.0%)    (20.0%) 
 Decline                    50.0%        50.0%    (2.0%)    (1.5%)     (1.0%) 
 No Change                  26.0%        21.0%         -         -          - 
 Growth                     20.0%        25.0%      0.5%      0.5%       2.3% 
 
 

The above table reflects the 5 year average expected change in collateral values/property prices in each economic scenario, which were applied over the full term the Group is exposed to credit risk (also an average of 5 years). The expected change in property prices under each scenario, were weighted according to the probability of each scenario, to arrive at a probability weighted change in property prices. These adjusted property values are then used to assess the future expected cash flows, which are considered along with the loan exposures at default to calculate the expected credit loss. No other long term averages are used in the calculation of ECL, as the above changes are in effect modelled over the full term of the Group's exposure to credit risk.

Management assess a range of scenarios and in the current economic climate it is reasonably possible that the severe decline scenario could increase to 5%, the moderate decline scenario could increase to 20% probability and the decline scenario increase to 65% probability. This would lead to a negative GBP1.4m (2018: negative GBP0.2m) impact through Profit or Loss.

Management have additionally assessed the impact of assigning a 100% probability to of each of the economic scenarios, which would have the following impact on the Profit or Loss of the Group:

   --       Severe decline              (GBP30.4m) 
   --       Moderate decline         (GBP7.4m) 
   --       Decline                           - 
   --       No change                     GBP0.4m 
   --       Growth                           GBP0.6m 

(b) Effective Interest Rate

Acquired loan books are initially recognised at fair value. Subsequently, they are measured under the effective interest rate method. Management review the expected cash flows against actual cash flows to ensure future assumptions on customer behaviour and future cash flows remain valid. If the estimates of future cash flows are revised, the gross carrying value of the financial asset is recalculated as the present value of the estimated future contractual cash flows discounted at the original effective interest rate, or in the case of the acquired books the credit-adjusted effective interest rate. The adjustment to the carrying value of the loan book is recognised in the Statement of Comprehensive Income.

Management must therefore use judgement to estimate the expected life of each instrument. The accuracy of the effective interest rate would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.

If customer loans repaid 6 months earlier than anticipated on the originated loan book, interest income would increase by GBP0.4m (2018: GBP0.8m), due to acceleration of fee income.

In 2019 the Group recognised GBP0.4m (2018: GBP0.9m) of additional interest income to reflect actual cash flows received on the acquired mortgage books being in excess of 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 and loss rates 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 to be reasonably possible.

If the acquired loan books were modelled to accelerate cash flows by 6 months, it would increase interest income in 2019 by GBP0.3m (2018: GBP0.3m) while a 10% increase in principal repayments will increase interest income in 2019 by GBP0.8m (2018: GBP0.3m) through a cash flow reset adjustment.

(c) Investment property

The valuations that the Group places on its investment properties are subject to a degree of uncertainty and are calculated on the basis of assumptions in relation to prevailing market rents and effective yields. These assumptions may not prove to be accurate, particularly in periods of market volatility. The uncertainty due to Brexit has had the effect of reducing the activity in the property market, which, has in turn 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 (2018: three) investment property, as outlined in note 30.

During 2019, two properties were reclassified to inventory due to being under development with the intention to sell.

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.

Crescent Office Park in Bath with value of GBP6.8m (2018: GBP6.8m)

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.

It was recognised as held for sale under IFRS 5 and therefore not consolidated in the financial statements in 2017. 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 2019 with the Group receiving rental income.

In accordance with IAS 40, the property is recognised at fair value, with its carrying value at year end of GBP6.8m equal to its fair value.

The valuation of the property has the following key inputs:

   --      yield: 6.50% 
   --      future rent increases (every five years): 4.00% 
 
                                                            Revised fair 
                                                             value gain 
                                                              / (loss) 
                                                Variable   GBP'm        % 
---------------------------------------------  ---------  ------  ------- 
 Model Yield                                       6.50% 
  - Yield 0.25% lower                              6.25%     0.2     2.8% 
  - Yield 0.25% higher                             6.75%   (0.1)   (1.6%) 
 
 Model Future Rent Increases (Every 5 Years)       4.00% 
 - Positive +25%                                   5.00%     0.1     0.8% 
 - Negative -25%                                   3.00%       -     0.2% 
---------------------------------------------  ---------  ------  ------- 
 

(d) Inventory

During 2019, two properties were reclassified from investment property to inventory due to being under development with the intention to sell. The properties are transferred at fair value and subsequently measured at the lower of cost and net realisable value (NRV) less costs to sell. Cost is deemed to be fair value on the date of transfer. The properties are valued at the reporting date to assess for impairment.

The 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. The uncertainty due to Brexit has had the effect of reducing the activity in the property market, which, has in turn resulted in less market evidence being available for Management in making its judgement on the key assumptions of property yield and market rent.

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.

King Street, London with value of GBP53.7m (2018: GBP53.7m);

The King Street property's main lease ended in 2019 at which point a comprehensive refurbishment development was started on the office space. The valuation assessment considers the gross development value of the property less expected development costs. The gross development value is discounted using risk-adjusted discount rates. Among other factors, the discount rate estimation considers the quality of a building and its location, and potential lease terms. Management judgement is required for the inputs used in the gross development value assessment, which have been assessed as follows:

   --      yield: 3.67% 

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-- future rent forecast (per square ft.) GBP95.40 (Office space GBP110.80 and Retail space GBP45.75)

   --      estimated refurbishment costs: GBP8.1m 
 
                                                        Change to 
                                                         carrying 
                                                           value 
                                           Variable   GBP'm        % 
----------------------------------------  ---------  ------  ------- 
 Forecast yield                               3.67% 
  - Yield 0.17% lower                         3.50%     3.3     6.2% 
  - Yield 0.42% lower                         3.25%     8.4    15.6% 
  - Yield 0.08% higher                        3.75%   (1.0)   (1.9%) 
  - Yield 0.33% higher                        4.00%   (4.8)   (8.9%) 
 
 Future forecast rent (Per Square Foot)     GBP95.4 
 - Positive 5%                             GBP100.2     3.5     6.5% 
 - Negative 5%                              GBP90.6   (2.7)   (5.1%) 
 
 

4 St Philips Place in Birmingham with value of GBP9.5m (2018: GBP7m)

The St Philips Place property was acquired on 24 November 2017. The property has recently completed a comprehensive refurbishment and was partially tenanted at the end of the financial year.

The gross development has the following key inputs:

   --      forecast yield: 6.5% 
   --      future rent forecast (per square ft.) GBP30.20 
 
                                                        Change in 
                                                         carrying 
                                                           value 
                                           Variable   GBP'm        % 
----------------------------------------  ---------  ------  ------- 
 Forecast yield                               6.50% 
  - Yield 0.25% lower                         6.25%     0.5     4.9% 
  - Yield 0.25% higher                        6.75%   (0.3)   (2.9%) 
 
 Future forecast rent (Per Square Foot)    GBP30.20 
  - Positive 5%                            GBP31.71     0.6     6.4% 
  - Negative 5%                            GBP28.69   (0.4)   (4.7%) 
 
 
 
 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 2019: 
                                                                     Due 
                                                                   after 
                                                         Due        more 
                                                      within        than 
                                                         one         one 
                                                        year        year       Total 
 At 31 December 2019                                  GBP000      GBP000      GBP000 
------------------------------------------------  ----------  ----------  ---------- 
 ASSETS 
 Cash and balances at central banks                  325,908           -     325,908 
 Loans and advances to banks                          46,258           -      46,258 
 Debt securities at amortised cost                   337,807     105,153     442,960 
 Assets classified as held for sale                    7,617           -       7,617 
 Derivative financial instruments                        105       1,699       1,804 
 Loans and advances to customers                     659,176     939,877   1,599,053 
 Other assets                                         86,262         181      86,443 
 Financial investments                                 3,203      27,716      30,919 
 Deferred tax asset                                        -       1,815       1,815 
 Intangible assets                                     7,037      13,045      20,082 
 Property, plant and equipment                         1,458       4,355       5,813 
 Right-of-use assets                                   2,757      17,187      19,944 
 Investment property                                       -       6,763       6,763 
------------------------------------------------  ----------  ----------  ---------- 
                                                   1,477,588   1,117,791   2,595,379 
------------------------------------------------  ----------  ----------  ---------- 
 LIABILITIES 
 Deposits from banks                                   5,421     225,000     230,421 
 Derivative financial instruments                        101         218         319 
 Deposits from customers                           1,873,326     211,577   2,084,903 
 Current tax liability                                   633           -         633 
 Other liabilities                                    13,500           -      13,500 
 Lease liabilities                                        63      20,368      20,431 
 Debt securities in issue                                  -      36,837      36,837 
------------------------------------------------  ----------  ----------  ---------- 
                                                   1,893,044     494,000   2,387,044 
------------------------------------------------  ----------  ----------  ---------- 
 
 
 The table below shows the maturity analysis of assets and liabilities 
  of the Group as at 31 December 2018: 
                                                              Due 
                                                            after 
                                                 Due         more 
                                              within         than 
                                                 one          one 
                                                year         year       Total 
 At 31 December 2018                          GBP000       GBP000      GBP000 
---------------------------------------  -----------  -----------  ---------- 
 ASSETS 
 Cash and balances at central banks          405,325            -     405,325 
 Loans and advances to banks                  54,173            -      54,173 
 Debt securities at amortised cost           203,211      139,480     342,691 
 Assets classified as held for sale            8,002            -       8,002 
 Derivative financial instruments                192        1,654       1,846 
 Loans and advances to customers             388,603      836,053   1,224,656 
 Other assets                                  8,257        4,459      12,716 
 Financial investments                        14,976       20,375      35,351 
 Deferred tax asset                                -        1,490       1,490 
 Intangible assets                                 -       16,538      16,538 
 Property, plant and equipment                     -        5,304       5,304 
 Investment property                               -       67,081      67,081 
---------------------------------------  -----------  -----------  ---------- 
                                           1,082,739    1,092,434   2,175,173 
---------------------------------------  -----------  -----------  ---------- 
 LIABILITIES 
 Deposits from banks                           7,675      225,000     232,675 
 Derivative financial instruments                188            -         188 
 Deposits from customers                   1,624,978       89,308   1,714,286 
 Current tax liability                           236            -         236 
 Other liabilities                            18,549            -      18,549 
 Debt securities in issue                          -       13,283      13,283 
---------------------------------------  -----------  -----------  ---------- 
                                           1,651,626      327,591   1,979,217 
---------------------------------------  -----------  -----------  ---------- 
 
 
 The table below shows the maturity analysis of assets and liabilities 
  of the Company as at 31 December 2019: 
                                                                    Due 
                                                                  after 
                                                          Due      more 
                                                       within      than 
                                                          one       one 
                                                         year      year     Total 
 At 31 December 2019                                   GBP000    GBP000    GBP000 
---------------------------------------------------  --------  --------  -------- 
 ASSETS 
 Loans and advances to banks                                6         -         6 
 Loans and advances to banks - due from subsidiary 
  undertakings                                         15,310         -    15,310 
 Debt securities at amortised cost                          -    24,239    24,239 
 Financial investments                                      -    25,913    25,913 
 Deferred tax asset                                         -       391       391 
 Intangible assets                                          -         5         5 
 Property, plant and equipment                             25       159       184 
 Other assets                                             115         -       115 
 Interests in subsidiaries                                      134,004   134,004 
---------------------------------------------------  --------  --------  -------- 
                                                       15,456   184,711   200,167 
---------------------------------------------------  --------  --------  -------- 
 LIABILITIES 
 Current tax liability                                    175         -       175 
 Other liabilities                                      3,063         -     3,063 
 Debt securities in issue                                   -    36,837    36,837 
---------------------------------------------------  --------  --------  -------- 
                                                        3,238    36,837    40,075 
---------------------------------------------------  --------  --------  -------- 
 

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DJ Arbuthnot Banking Group PLC Audited Final Results -26-

 The table below shows the maturity analysis of assets and liabilities 
  of the Company as at 31 December 2018: 
                                                                    Due 
                                                                  after 
                                                          Due      more 
                                                       within      than 
                                                          one       one 
                                                         year      year     Total 
 At 31 December 2018                                   GBP000    GBP000    GBP000 
---------------------------------------------------  --------  --------  -------- 
 ASSETS 
 Loans and advances to banks                                6         -         6 
 Loans and advances to banks - due from subsidiary 
  undertakings                                         17,002         -    17,002 
 Financial investments                                      -    19,313    19,313 
 Current tax asset                                         52         -        52 
 Deferred tax asset                                         -       113       113 
 Intangible assets                                          -         6         6 
 Property, plant and equipment                              -       208       208 
 Other assets                                              42         -        42 
 Interests in subsidiaries                                  -   134,614   134,614 
---------------------------------------------------  --------  --------  -------- 
                                                       17,102   154,254   171,356 
---------------------------------------------------  --------  --------  -------- 
 LIABILITIES 
 Other liabilities                                      3,324         -     3,324 
 Debt securities in issue                                   -    13,283    13,283 
---------------------------------------------------  --------  --------  -------- 
                                                        3,324    13,283    16,607 
---------------------------------------------------  --------  --------  -------- 
 

6. Financial risk management

Strategy

By their nature, the Group's activities are principally related to the use of financial instruments. The Directors and senior management of the Group have formally adopted a Group Risk and Controls Policy which sets out the Board's attitude to risk and internal controls. Key risks identified by the Directors are formally reviewed and assessed at least once a year by the Board, in addition to which key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data.

The principal non-operational risks inherent in the Group's business are credit, market, 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 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 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 

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:

   --      future economic scenarios 
   --      probability of default 
   --      loss given default 
   --      exposure at default 

The Group's maximum exposure to credit risk before collateral held or other credit enhancements is as follows:

 
 
                                                                       2019 
                                                                                                       All 
                              Private   Commercial      Mortgage                                     Other 
 Group                        Banking      Banking    Portfolios       RAF       ABL     ASFL    Divisions       Total 
 Credit risk exposures 
 (all 
 stage 1, unless otherwise 
 stated)                       GBP000       GBP000        GBP000    GBP000    GBP000   GBP000       GBP000      GBP000 
--------------------------  ---------  -----------  ------------  --------  --------  -------  -----------  ---------- 
 On-balance sheet: 
 Cash and balances at 
  central 
  banks                             -            -             -         -         -        -      325,800     325,800 
 Loans and advances to 
  banks                             -            -             -         -         -        -       46,258      46,258 
 Debt securities at 
  amortised 
  cost                              -            -             -         -         -        -      442,960     442,960 
 Derivative financial 
  instruments                       -            -             -         -         -        -        1,804       1,804 
 Loans and advances to 
  customers 
  (net of ECL)                567,767      527,620       306,044   102,888    75,871    7,352       11,511   1,599,053 
                            ---------  -----------  ------------  --------  --------  -------  -----------  ========== 
   Stage 1                    498,220      505,518       306,044   100,981    75,871    7,352       11,511   1,505,497 
   Stage 2                     43,491       22,079             -       755         -        -            -      66,325 
   Stage 3                     26,056           23             -     1,152         -        -            -      27,231 
                            ---------  -----------  ------------  --------  --------  -------  -----------  ========== 
 Other assets                       -            -             -         -         -        -        4,625       4,625 
 Financial investments              -            -             -         -         -        -       30,919      30,919 
 
 Off-balance sheet: 
 Guarantees                     2,610        3,791             -         -         -        -            -       6,401 
 Loan commitments and 
  other 
  credit related 
  liabilities                  88,226       47,372             -         -    53,494      972            -     190,064 
--------------------------  ---------  -----------  ------------  --------  --------  -------  -----------  ---------- 
 At 31 December               658,603      578,783       306,044   102,888   129,365    8,324      863,877   2,647,884 
--------------------------  ---------  -----------  ------------  --------  --------  -------  -----------  ---------- 
 
 
 
                                                                        2018 

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DJ Arbuthnot Banking Group PLC Audited Final Results -27-

                                                                                                       All 
                                Private   Commercial      Mortgage                                   Other 
 Group                          Banking      Banking    Portfolios      RAF      ABL     ASFL    Divisions       Total 
 Credit risk exposures (all 
  stage 1, unless otherwise 
  stated)                        GBP000       GBP000        GBP000   GBP000   GBP000   GBP000       GBP000      GBP000 
----------------------------  ---------  -----------  ------------  -------  -------  -------  -----------  ---------- 
 On-balance sheet: 
 Cash and balances at 
  central 
  banks                               -            -             -        -        -        -      405,325     405,325 
 Loans and advances to banks          -            -             -      354        -        -       53,819      54,173 
 Debt securities at 
  amortised 
  cost                                -            -             -        -        -        -      342,691     342,691 
 Derivative financial 
  instruments                         -            -             -        -        -        -        1,846       1,846 
 Loans and advances to 
  customers 
  (net of ECL)                  670,464      443,108             -   85,957        -        -       25,127   1,224,656 
                              ---------  -----------  ------------  -------  -------  -------  -----------  ---------- 
   Stage 1                      618,487      431,630             -   84,275        -        -       25,127   1,159,519 
   Stage 2                       20,033       11,478             -    1,180        -        -            -      32,691 
   Stage 3                       31,944            -             -      502        -        -            -      32,446 
                              ---------  -----------  ------------  -------  -------  -------  -----------  ---------- 
 Other assets                         -            -             -      443        -        -        2,533       2,976 
 Financial investments                -            -             -        -        -        -       35,351      35,351 
 
 Off-balance sheet: 
 Guarantees                         435        1,309             -        -        -        -            -       1,744 
 Loan commitments and other 
  credit related liabilities     51,950       15,930             -        -        -        -       18,122      86,002 
----------------------------  ---------  -----------  ------------  -------  -------  -------  -----------  ---------- 
 At 31 December                 722,849      460,347             -   86,754        -        -      884,814   2,154,764 
----------------------------  ---------  -----------  ------------  -------  -------  -------  -----------  ---------- 
 
 
 The Company's maximum exposure to credit risk (all stage 1) before 
  collateral held or other credit enhancements is as follows: 
                                                                  2019     2018 
                                                                GBP000   GBP000 
-------------------------------------------------------------  -------  ------- 
 Credit risk exposures relating to on-balance sheet assets 
  are as follows: 
 Loans and advances to banks                                    15,316   17,008 
 Debt securities at amortised cost                              24,239        - 
 Financial investments                                          25,913   19,313 
 At 31 December                                                 65,468   36,321 
-------------------------------------------------------------  -------  ------- 
 

The above tables represent the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2019 and 2018 without taking account of any collateral held or other credit enhancements attached. For financial assets, the balances are based on gross 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.

 
 The table below represents an analysis of the loan to values of the exposures 
  secured by property for the Group: 
                                                                  2019 
                                                 Commercial 
                     Private Banking               Banking             Mortgage Portfolios              Total 
                      Loan                      Loan                      Loan                       Loan 
                   Balance   Collateral      Balance   Collateral      Balance   Collateral       Balance   Collateral 
 Group              GBP000       GBP000       GBP000       GBP000       GBP000       GBP000        GBP000       GBP000 
---------------  ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 Less than 60%     294,018      678,051      300,510      634,912       93,454      318,010       687,982    1,630,973 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
   Stage 1         266,706      620,496      299,642      631,792       93,454      318,010       659,802    1,570,298 
   Stage 2          17,785       35,150          868        3,120            -            -        18,653       38,270 
   Stage 3           9,527       22,405            -            -            -            -         9,527       22,405 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 60%-80%           197,907      302,202      204,798      320,687       46,333       67,372       449,038      690,261 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
   Stage 1         178,117      273,038      194,442      304,127       46,333       67,372       418,892      644,537 
   Stage 2          18,132       26,565       10,356       16,560            -            -        28,488       43,125 
   Stage 3           1,658        2,599            -            -            -            -         1,658        2,599 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 80%-100%           32,209       36,435        6,299        6,670       56,967       66,421        95,475      109,526 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
   Stage 1          20,670       23,340        4,871        4,920       56,967       66,421        82,508       94,681 
   Stage 2           8,434        9,800        1,428        1,750            -            -         9,862       11,550 
   Stage 3           3,105        3,295            -            -            -            -         3,105        3,295 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 Greater than 
 100%*              25,150       12,512        1,250          740      108,276       69,235       134,676       82,487 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
   Stage 1           5,133        2,410        1,250          740      108,276       69,235       114,659       72,385 
   Stage 2           4,775        2,000            -            -            -            -         4,775        2,000 
   Stage 3          15,242        8,102            -            -            -            -        15,242        8,102 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 
 Total             549,284    1,029,200      512,857      963,009      305,030      521,038     1,367,171    2,513,247 
---------------  ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 

*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.

 
 The table below represents an analysis of the loan to values of the exposures 
  secured by property for the Group: 
                                                                  2018 
                                                 Commercial 
                     Private Banking               Banking             Mortgage Portfolios              Total 
                      Loan                      Loan                      Loan                       Loan 
                   Balance   Collateral      Balance   Collateral      Balance   Collateral       Balance   Collateral 
 Group              GBP000       GBP000       GBP000       GBP000       GBP000       GBP000        GBP000       GBP000 
---------------  ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 Less than 60%     300,807      632,854      249,446      559,271       11,671       65,767       561,924    1,257,892 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
   Stage 1         286,003      593,883      238,071      532,671       11,671       65,767       535,745    1,192,321 
   Stage 2           8,701       25,830       11,375       26,600            -            -        20,076       52,430 
   Stage 3           6,103       13,141            -            -            -            -         6,103       13,141 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 60%-80%           204,689      281,487      165,954      259,917       20,093       27,842       390,736      569,246 

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DJ Arbuthnot Banking Group PLC Audited Final Results -28-

                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
   Stage 1         191,644      261,152      165,954      259,917       20,093       27,842       377,691      548,911 
   Stage 2           9,458       14,535            -            -            -            -         9,458       14,535 
   Stage 3           3,587        5,800            -            -            -            -         3,587        5,800 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 80%-100%           31,397       48,119        6,540        9,400       33,252       38,029        71,189       95,548 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
   Stage 1          19,716       35,540        6,540        9,400       33,252       38,029        59,508       82,969 
   Stage 2             531          550            -            -            -            -           531          550 
   Stage 3          11,150       12,029            -            -            -            -        11,150       12,029 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 Greater than 
 100%*              25,124       24,222        8,918        7,614        3,404        2,825        37,446       34,661 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
   Stage 1          13,250       15,607        8,918        7,614        3,404        2,825        25,572       26,046 
   Stage 3          11,874        8,615            -            -            -            -        11,874        8,615 
                 ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 
 Total             562,017      986,682      430,858      836,202       68,420      134,463     1,061,295    1,957,347 
---------------  ---------  -----------    ---------  -----------    ---------  -----------    ----------  ----------- 
 
 
 The table below represents an analysis of loan commitments compared to 
  the values of properties for the Group (all Stage 1): 
                                                       2019 
                                                    Commercial 
                        Private Banking               Banking                    Total 
                         Loan                      Loan                      Loan 
                      Balance   Collateral      Balance   Collateral      Balance   Collateral 
 Group                 GBP000       GBP000       GBP000       GBP000       GBP000       GBP000 
------------------  ---------  -----------    ---------  -----------    ---------  ----------- 
 Less than 60%         63,934      185,639       19,583      193,616       83,517      379,255 
 60%-80%                7,821       12,143        3,808        5,810       11,629       17,953 
 80%-100%               1,587        1,623            -            -        1,587        1,623 
 Greater than 100%        282          235          676          592          958          827 
------------------  ---------  -----------    ---------  -----------    ---------  ----------- 
 Total                 73,624      199,640       24,067      200,018       97,691      399,658 
------------------  ---------  -----------    ---------  -----------    ---------  ----------- 
 
                                                       2018 
                                                    Commercial 
                        Private Banking               Banking                    Total 
                         Loan                      Loan                      Loan 
                      Balance   Collateral      Balance   Collateral      Balance   Collateral 
 Group                 GBP000       GBP000       GBP000       GBP000       GBP000       GBP000 
------------------  ---------  -----------    ---------  -----------    ---------  ----------- 
 Less than 60%         30,289       83,603       14,880       32,097       45,169      115,700 
 60%-80%               15,467       23,295        1,050        1,615       16,517       24,910 
 Total                 45,756      106,898       15,930       33,712       61,686      140,610 
------------------  ---------  -----------    ---------  -----------    ---------  ----------- 
 

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 the terms of a financial asset are modified and the modification does not result in derecognition, the determination of whether the asset's credit risk has increased significantly reflects the comparison of:

   --      its remaining lifetime PD at the reporting date based on the modified terms; with 

-- the remaining lifetime PD estimated based on data on initial recognition and the original contractual terms.

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 life time 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 that the probability of default has receded sufficiently and full repayment of the loan, without recourse to the collateral, is likely.

Generally, the forbearance is a qualitative indicator of a SICR (see note 10)

As at 31 December 2019, loans for which forbearance measures were in place totalled 3.1% (2018: 2.2%) of total value of loans to customers for the Group. These are set out in the following table:

 
                                           2019                2018 
                                                  Loan                Loan 
                                     Number    Balance   Number    Balance 
                                                GBP000              GBP000 
----------------------------------  -------  ---------  -------  --------- 
 Transfer to interest only                -          -        1        175 
 Assistance with property sale            4        231        -          - 
 Move historic arrears to capital         1      1,719        -          - 
 Covenant waived                          6      7,473        -          - 
 Term extension                          18     32,780       17     25,814 
 Payment holiday                         32      6,795       16      1,189 
----------------------------------  -------  ---------  -------  --------- 
 Total forbearance                       61     48,998       34     27,178 
----------------------------------  -------  ---------  -------  --------- 
 

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 
                                        2019        2018        2019     2018 
                                      GBP000      GBP000      GBP000   GBP000 
--------------------------------  ----------  ----------  ----------  ------- 
 Concentration by product 
   Asset based lending*               75,871      25,128      53,494   18,122 
   Asset finance                     103,193      85,958         972        - 
   Cash collateralised                11,526       5,379       1,781        - 
   Commercial lending                269,590     248,042       3,941    4,806 
   Investment portfolio secured       40,127      45,182       2,984    3,136 
   Mixed collateral**                 45,432      91,167      17,282    4,867 
   Residential mortgages           1,035,395     713,095      93,749   54,346 
   Unsecured                          17,919      10,705      15,861      725 
--------------------------------  ----------  ----------  ----------  ------- 
 At 31 December                    1,599,053   1,224,656     190,064   86,002 
--------------------------------  ----------  ----------  ----------  ------- 
 
 Concentration by location 
   East Anglia                        39,997      32,960          10      294 

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DJ Arbuthnot Banking Group PLC Audited Final Results -29-

   London                            554,183     455,567      77,960   28,096 
   Midlands                          108,635      69,686       4,392    3,538 
   North East                         53,294      18,448         641    1,050 
   North West                        111,500      59,045       1,826    1,275 
   Northern Ireland                    9,061       2,813           -        - 
   Scotland                           28,197      10,793       1,064        - 
   South East                        224,915     219,890       7,188   15,522 
   South West                        169,343     140,560       4,513    9,201 
   Wales                              18,493       7,521          98      426 
   Overseas                           11,150      30,486           -    1,400 
   Non-property collateral           270,285     176,887      92,372   25,200 
--------------------------------  ----------  ----------  ----------  ------- 
 At 31 December                    1,599,053   1,224,656     190,064   86,002 
--------------------------------  ----------  ----------  ----------  ------- 
 

* In 2018 Q1, the Group began its asset-based lending business including invoice discounting, supported by stock, plant & machinery, property and cash flow lending.

   **   Mixed collateral is where there is no single, overall majority collateral type. 

(b) Operational risk (unaudited)

The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and to avoid control procedures that restrict initiatives and creativity. The Group is exposed to operational risks from its Information Technology and Operations platforms. There are additional internal controls in these processes that are designed to protect the Group from these risks. The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance section of the Annual Report.

Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of the Internal Audit reviews are discussed with senior management, with summaries submitted to the Arbuthnot Banking Group Audit Committee.

Cyber risk

Cyber risk is an increasing risk that the Group is subject to within its operational processes. This is the risk that the Group is subject to some form of disruption arising from an interruption to its IT and data infrastructure. The Group regularly test 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 provision.

Conduct risk

As a financial services provider we face conduct risk, including selling products to customers which do not meet their needs; failing to deal with customers' complaints effectively; not meeting customers' expectations; and exhibiting behaviours which do not meet market or regulatory standards.

The Group adopts a zero risk appetite for any unfair customer outcomes. It maintains clear compliance guidelines and provides ongoing training to all staff. Periodic spot checks and internal audits are performed to ensure these guidelines are being followed. The Group also has insurance policies in place to provide some cover for any claims that may arise.

(c) 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 25, a stress test scenario of a 10% (2018: 10%) decline in market prices, would result in a GBP16,000 (2018: GBP17,000) decrease in the Group's income and a decrease of GBP3.1m (2018: GBP3.5m) 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 25, a stress test scenario of a 10% (2018: 10%) decline in market prices, would result in a GBPnil (2018: GBPnil) decrease in the Company's income and a decrease of GBP2.6m (2018: GBP1.9m) 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 2019. Included in the table below are the Group's assets and liabilities at carrying amounts, categorised by currency.

 
                                             GBP       USD       Euro 
                                           (GBP)       ($)      (EUR)    Other       Total 
 At 31 December 2019                      GBP000    GBP000     GBP000   GBP000      GBP000 
------------------------------------  ----------  --------  ---------  -------  ---------- 
 ASSETS 
 Cash and balances at central banks      325,844        20         41        3     325,908 
 Loans and advances to banks               5,364    10,028     18,892   11,974      46,258 
 Debt securities at amortised cost       336,079   106,881          -        -     442,960 
 Derivative financial instruments          1,713         1          3       87       1,804 
 Loans and advances to customers       1,563,536     7,957     27,574     (14)   1,599,053 
 Other assets                              4,625         -          -        -       4,625 
 Financial investments                    29,113     1,637        169        -      30,919 
------------------------------------  ----------  --------  ---------  -------  ---------- 
                                       2,266,274   126,524     46,679   12,050   2,451,527 
------------------------------------  ----------  --------  ---------  -------  ---------- 
 LIABILITIES 
 Deposits from banks                     230,421         -          -        -     230,421 
 Derivative financial instruments            233         -          2       84         319 
 Deposits from customers               1,897,857   126,220     49,049   11,777   2,084,903 
 Other liabilities                         2,023         -          -        -       2,023 
 Debt securities in issue                 24,239         -     12,598        -      36,837 
------------------------------------  ----------  --------  ---------  -------  ---------- 
                                       2,154,773   126,220     61,649   11,861   2,354,503 
------------------------------------  ----------  --------  ---------  -------  ---------- 
 Net on-balance sheet position           111,501       304   (14,970)      189      97,024 
------------------------------------  ----------  --------  ---------  -------  ---------- 
 Credit commitments                      190,064         -          -        -     190,064 
------------------------------------  ----------  --------  ---------  -------  ---------- 
 
 
 The table below summarises the Group's exposure to foreign currency exchange 
  risk at 31 December 2018: 
 
                                             GBP       USD     Euro 
                                           (GBP)       ($)    (EUR)    Other       Total 
 At 31 December 2018                      GBP000    GBP000   GBP000   GBP000      GBP000 
------------------------------------  ----------  --------  -------  -------  ---------- 
 ASSETS 
 Cash and balances at central banks      405,244        30       47        4     405,325 
 Loans and advances to banks               8,856    13,794   19,714   11,809      54,173 
 Debt securities at amortised cost       243,680    99,011        -        -     342,691 
 Derivative financial instruments          1,655         4        3      184       1,846 
 Loans and advances to customers       1,169,157    16,122   39,377        -   1,224,656 
 Other assets                              2,861         -      115        -       2,976 
 Financial investments                    34,219       954      178        -      35,351 
------------------------------------  ----------  --------  -------  -------  ---------- 
                                       1,865,672   129,915   59,434   11,997   2,067,018 
------------------------------------  ----------  --------  -------  -------  ---------- 
 LIABILITIES 
 Deposits from banks                     232,675         -        -        -     232,675 
 Derivative financial instruments              3         4        1      180         188 
 Deposits from customers               1,526,623   130,061   46,068   11,534   1,714,286 
 Other liabilities                         1,782         -        -        -       1,782 
 Debt securities in issue                      -         -   13,283        -      13,283 
------------------------------------  ----------  --------  -------  -------  ---------- 
                                       1,761,083   130,065   59,352   11,714   1,962,214 
------------------------------------  ----------  --------  -------  -------  ---------- 
 Net on-balance sheet position           104,589     (150)       82      283     104,804 
------------------------------------  ----------  --------  -------  -------  ---------- 
 Credit commitments                       86,002         -        -        -      86,002 
------------------------------------  ----------  --------  -------  -------  ---------- 
 

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DJ Arbuthnot Banking Group PLC Audited Final Results -30-

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 GBP30,000 decrease (2018: GBP5,000 increase) in Group profits and equity, while a 10% weakening of the pound against the US dollar would lead to the same decrease in Group profits and equity. Additionally the Group holds GBP7.6m of properties as held for sale, while GBP7.8m has been classified as inventory. These properties are located in the EU and relate to Euro denominated loans where the properties were repossessed and are either held for sale or are being developed with a view to sell. Including these Euro assets, the net Euro exposure is positive GBP431k.

 
 The table below summarises the Company's exposure to foreign currency 
  exchange rate risk at 31 December 2019: 
 
                                                            GBP        Euro 
                                                          (GBP)       (EUR)    Total 
 At 31 December 2019                                     GBP000      GBP000   GBP000 
---------------------------------------------------  ----------  ----------  ------- 
 ASSETS 
 Loans and advances to banks                              2,414      12,902   15,316 
 Debt securities at amortised cost                       24,239           -   24,239 
 Financial investments                                   25,913           -   25,913 
                                                         52,566      12,902   65,468 
---------------------------------------------------  ----------  ----------  ------- 
 LIABILITIES 
 Other liabilities                                        1,113           -    1,113 
 Debt securities in issue                                24,239      12,598   36,837 
---------------------------------------------------  ----------  ----------  ------- 
                                                         25,352      12,598   37,950 
---------------------------------------------------  ----------  ----------  ------- 
 Net on-balance sheet position                           27,214         304   27,518 
---------------------------------------------------  ----------  ----------  ------- 
 
 
 The table below summarises the Company's exposure to foreign currency 
  exchange rate risk at 31 December 2018: 
 
                                                           GBP         Euro 
                                                         (GBP)        (EUR)    Total 
 At 31 December 2018                                    GBP000       GBP000   GBP000 
-------------------------------------------------  -----------  -----------  ------- 
 ASSETS 
 Loans and advances to banks                             3,437       13,571   17,008 
 Financial investments                                  19,313            -   19,313 
                                                        22,750       13,571   36,321 
-------------------------------------------------  -----------  -----------  ------- 
 LIABILITIES 
 Other liabilities                                       1,838            -    1,838 
 Debt securities in issue                                    -       13,283   13,283 
-------------------------------------------------  -----------  -----------  ------- 
                                                         1,838       13,283   15,121 
-------------------------------------------------  -----------  -----------  ------- 
 Net on-balance sheet position                          20,912          288   21,200 
-------------------------------------------------  -----------  -----------  ------- 
 

A 10% strengthening of the pound against the Euro would lead to GBP11,000 (2018: GBP3,000) decrease in the Company profits and equity, conversely a 10% weakening of the pound against the Euro would lead to a GBP13,000 (2018: GBP3,000) increase in the Company profits and equity.

Interest rate risk

Interest rate risk is the potential adverse impact on the Company and Group's future cash flows from changes in interest rates, and arises from the differing interest rate risk characteristics of the Company and Group's assets and liabilities. In particular, fixed rate savings and borrowing products expose the Group to the risk that a change in interest rates could cause either a reduction in interest income or an increase in interest expense relative to variable rate interest flows. The Group seeks to "match" interest rate risk on either side of the Statement of Financial Position. However, this is not a perfect match and interest rate risk is present in: Money market transactions of a fixed rate nature, fixed rate loans, fixed rate savings accounts and floating rate products dependent on when they re-price at a future date.

Interest rate risk is measured throughout the maturity bandings of the book on a parallel shift scenario for a 200 basis points movement. Interest rate risk is managed to limit value at risk to be less than GBP1.5m. The current position of the balance sheet is such that it results in a favourable impact on the economic value of equity of GBP3.1m (2018: GBP1.3m) for a positive 200bps shift and an adverse impact of GBP3.2m (2018: GBP1.4m) for a negative 200bps movement. The negative movement is capped at the Bank of England base rate of 75bps at year end (2018: 75bps), which result in a negative impact of GBP1.2m (2018: GBP0.5m). The Company has no fixed rate exposures, but an upward change of 50bps on variable rates would increase pre-tax profits and equity by GBP13,000 (2018: increase pre-tax profits and equity by GBP10,000), while a downward change of 50bps would increase pre-tax profits and equity by GBP54,000.

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.

 
                                                      More        More       More 
                                                      than        than       than 
                                                  3 months    6 months     1 year 
                                                       but         but        but 
                                                      less        less       less       More         Non 
                                        Within        than        than       than       than    interest 
 Group                                3 months    6 months      1 year    5 years    5 years     bearing       Total 
 As at 31 December 2019                 GBP000      GBP000      GBP000     GBP000     GBP000      GBP000      GBP000 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  ---------- 
 ASSETS 
 Cash and balances at central 
  banks                                325,908           -           -          -          -           -     325,908 
 Loans and advances to banks            45,836         188         234          -          -           -      46,258 
 Debt securities at amortised 
  cost                                 287,608     151,555       3,797          -          -           -     442,960 
 Derivative financial instruments          105           -           -      1,699          -           -       1,804 
 Loans and advances to customers     1,351,549      11,101      25,963    209,811        629           -   1,599,053 
 Other assets*                               -           -           -          -          -     148,477     148,477 
 Financial investments                       -           -           -          -          -      30,919      30,919 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  ---------- 
                                     2,011,006     162,844      29,994    211,510        629     179,396   2,595,379 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  ---------- 
 LIABILITIES 
 Deposits from banks                   230,421           -           -          -          -           -     230,421 
 Derivative financial instruments          319           -           -          -          -           -         319 
 Deposits from customers             1,403,728     233,716     211,956    235,503          -           -   2,084,903 
 Other liabilities**                         -           -           -          -          -      34,564      34,564 
 Debt securities in issue               36,837           -           -          -          -           -      36,837 
 Equity                                      -           -           -          -          -     208,335     208,335 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  ---------- 
                                     1,671,305     233,716     211,956    235,503          -     242,899   2,595,379 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  ---------- 
 Impact of derivative instruments       25,531           -           -   (25,531)          -           - 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ---------- 
 Interest rate sensitivity 
  gap                                  365,232    (70,872)   (181,962)   (49,524)        629    (63,503) 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ---------- 
 
 Cumulative gap                        365,232     294,360     112,398     62,874     63,503         (0) 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ---------- 
 
 * Other assets include all remaining assets in the Statement of Financial 
  Position, which are not shown separately above. 

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DJ Arbuthnot Banking Group PLC Audited Final Results -31-

 ** Other liabilities include all remaining liabilities in the Statement 
  of Financial Position, which are not shown separately above. 
 
 
                                                      More        More       More 
                                                      than        than       than 
                                                  3 months    6 months     1 year 
                                                       but         but        but 
                                                      less        less       less       More         Non 
                                        Within        than        than       than       than    interest 
 Group                                3 months    6 months      1 year    5 years    5 years     bearing       Total 
 As at 31 December 2018                 GBP000      GBP000      GBP000     GBP000     GBP000      GBP000      GBP000 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  ---------- 
 ASSETS 
 Cash and balances at central 
  banks                                405,325           -           -          -          -           -     405,325 
 Loans and advances to banks            54,115           -          58          -          -           -      54,173 
 Debt securities held-to-maturity      269,026      27,846      41,896      3,923          -           -     342,691 
 Derivative financial instruments          304           -           -      1,542          -           -       1,846 
 Loans and advances to customers     1,030,316       6,107      17,502    170,525        206           -   1,224,656 
 Other assets                                -           -           -          -          -     111,131     111,131 
 Financial investments                       -           -           -          -          -      35,351      35,351 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  ---------- 
                                     1,759,086      33,953      59,456    175,990        206     146,482   2,175,173 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  ---------- 
 LIABILITIES 
 Deposits from banks                   232,675           -           -          -          -           -     232,675 
 Derivative financial instruments          188           -           -          -          -           -         188 
 Deposits from customers             1,255,488     197,785      95,868    165,145          -           -   1,714,286 
 Other liabilities                           -           -           -          -          -      18,785      18,785 
 Debt securities in issue               13,283           -           -          -          -           -      13,283 
 Equity                                      -           -           -          -          -     195,956     195,956 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  ---------- 
                                     1,501,634     197,785      95,868    165,145          -     214,741   2,175,173 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  ---------- 
 Impact of derivative instruments       25,762           -           -   (25,762)          -           - 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ---------- 
 Interest rate sensitivity 
  gap                                  283,214   (163,832)    (36,412)   (14,917)        206    (68,259) 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ---------- 
 
 Cumulative gap                        283,214     119,382      82,970     68,053     68,259           - 
----------------------------------  ----------  ----------  ----------  ---------  ---------  ---------- 
 
 * 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. 
 
 
                                                  More        More       More 
                                                  than        than       than 
                                              3 months    6 months     1 year 
                                                   but         but        but 
                                                  less        less       less       More         Non 
                                    Within        than        than       than       than    interest 
 Company                          3 months    6 months      1 year    5 years    5 years     bearing     Total 
 As at 31 December 2019             GBP000      GBP000      GBP000     GBP000     GBP000      GBP000    GBP000 
------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  -------- 
 ASSETS 
 Debt securities at amortised 
  cost                              24,239           -           -          -          -           -    24,239 
 Loans and advances to banks        15,296           -           -          -          -          20    15,316 
 Other assets*                           -           -           -          -          -     134,699   134,699 
 Financial investments                   -           -           -          -          -      25,913    25,913 
------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  -------- 
                                    39,535           -           -          -          -     160,632   200,167 
------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  -------- 
 LIABILITIES 
 Other liabilities**                     -           -           -          -          -       3,238     3,238 
 Debt securities in issue           36,837           -           -          -          -           -    36,837 
 Equity                                  -           -           -          -          -     160,092   160,092 
------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  -------- 
                                    36,837           -           -          -          -     163,330   200,167 
------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  -------- 
 Interest rate sensitivity 
  gap                                2,698           -           -          -          -     (2,698) 
------------------------------  ----------  ----------  ----------  ---------  ---------  ---------- 
 
 Cumulative gap                      2,698       2,698       2,698      2,698      2,698           - 
------------------------------  ----------  ----------  ----------  ---------  ---------  ---------- 
 
 * 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. 
 
                                                  More        More       More 
                                                  than        than       than 
                                              3 months    6 months     1 year 
                                                   but         but        but 
                                                  less        less       less       More         Non 
                                    Within        than        than       than       than    interest 
 Company                          3 months    6 months      1 year    5 years    5 years     bearing     Total 
 As at 31 December 2018             GBP000      GBP000      GBP000     GBP000     GBP000      GBP000    GBP000 
------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  -------- 
 ASSETS 
 Loans and advances to banks        16,977           -           -          -          -          31    17,008 
 Other assets*                           -           -           -          -          -     135,035   135,035 
 Financial investments                   -           -           -          -          -      19,313    19,313 
------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  -------- 
                                    16,977           -           -          -          -     154,379   171,356 
------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  -------- 
 LIABILITIES 
 Other liabilities**                     -           -           -          -          -       3,324     3,324 
 Debt securities in issue           13,283           -           -          -          -           -    13,283 
 Equity                                  -           -           -          -          -     154,749   154,749 
------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  -------- 
                                    13,283           -           -          -          -     158,073   171,356 
------------------------------  ----------  ----------  ----------  ---------  ---------  ----------  -------- 
 Interest rate sensitivity 
  gap                                3,694           -           -          -          -     (3,694) 
------------------------------  ----------  ----------  ----------  ---------  ---------  ---------- 
 
 Cumulative gap                      3,694       3,694       3,694      3,694      3,694           - 
------------------------------  ----------  ----------  ----------  ---------  ---------  ---------- 
 
 * Other assets include all remaining assets in the Statement of Financial 
  Position, which are not shown separately above. 

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DJ Arbuthnot Banking Group PLC Audited Final Results -32-

 ** Other liabilities include all remaining liabilities in the Statement 
  of Financial Position, which are not shown separately above. 
 

(d) 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 actual LCR at 269% (2018: 282%) has significantly exceeded the regulatory minimum of 100% throughout the year.

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.

 
 The tables below show the undiscounted contractual cash flows of the Group's 
  financial liabilities and assets as at 31 December 2019: 
 
                                                                                      More        More 
                                                                                      than        than 
                                                                                  3 months      1 year 
                                                           Gross                       but         but 
                                                         nominal      Not more        less        less       More 
                                          Carrying       inflow/          than        than        than       than 
                                            amount     (outflow)      3 months      1 year     5 years    5 years 
 At 31 December 2019                        GBP000        GBP000        GBP000      GBP000      GBP000     GBP000 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 Financial liability by type 
 Non-derivative liabilities 
 Deposits from banks                       230,421     (230,421)     (230,421)           -           -          - 
 Deposits from customers                 2,084,903   (2,105,676)   (1,243,332)   (550,128)   (312,216)          - 
 Other liabilities                           2,023       (2,023)       (2,023)           -           -          - 
 Debt securities in issue                   36,837      (63,292)         (626)     (1,893)    (12,325)   (48,448) 
 Issued financial guarantee contracts            -       (6,401)       (6,401)           -           -          - 
 Unrecognised loan commitments                   -     (190,064)     (190,064)           -           -          - 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
                                         2,354,184   (2,597,877)   (1,672,867)   (552,021)   (324,541)   (48,448) 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 
 Derivative liabilities 
 Risk management:                              319 
  - Outflows                                     -         (319)         (319)           -           -          - 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
                                               319         (319)         (319)           -           -          - 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 
                                                                                      More        More 
                                                                                      than        than 
                                                                                  3 months      1 year 
                                                           Gross                       but         but 
                                                         nominal      Not more        less        less       More 
                                          Carrying       inflow/          than        than        than       than 
                                            amount     (outflow)      3 months      1 year     5 years    5 years 
 At 31 December 2019                        GBP000        GBP000        GBP000      GBP000      GBP000     GBP000 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 Financial asset by type 
 Non-derivative assets 
 Cash and balances at central banks        325,908       325,908       325,908           -           -          - 
 Loans and advances to banks                46,258        46,270        45,844         426           -          - 
 Debt securities at amortised cost         442,960       447,424       141,897     197,811     107,716          - 
 Loans and advances to customers         1,599,053     1,764,491       337,215     168,224   1,117,246    141,807 
 Other assets                                4,624         4,624         4,624           -           -          - 
 Financial investments                      30,919        30,919         5,007           -      25,912          - 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
                                         2,449,722     2,619,637       860,495     366,461   1,250,874    141,807 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 
 Derivative assets 
 Risk management:                            1,804 
  - Inflows                                      -         1,804             -           -           -      1,804 
                                             1,804         1,804             -           -           -      1,804 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 
 
 The tables below show the undiscounted contractual cash flows of the 
  Group's financial liabilities and assets as at 31 December 2018: 
 
                                                                                      More        More 
                                                                                      than        than 
                                                                                  3 months      1 year 
                                                           Gross                       but         but 
                                                         nominal      Not more        less        less       More 
                                          Carrying       inflow/          than        than        than       than 
                                            amount     (outflow)      3 months      1 year     5 years    5 years 
 At 31 December 2018                        GBP000        GBP000        GBP000      GBP000      GBP000     GBP000 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 Financial liability by type 
 Non-derivative liabilities 
 Deposits from banks                       232,675     (232,675)     (232,675)           -           -          - 
 Deposits from customers                 1,714,286   (1,719,600)   (1,274,190)   (355,512)    (89,898)          - 

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DJ Arbuthnot Banking Group PLC Audited Final Results -33-

 Other liabilities                           1,782       (1,782)       (1,775)           -           -        (7) 
 Debt securities in issue                   13,283      (19,431)          (90)       (271)     (1,447)   (17,623) 
 Issued financial guarantee contracts            -       (1,744)       (1,744)           -           -          - 
 Unrecognised loan commitments                   -      (86,002)      (86,002)           -           -          - 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
                                         1,962,026   (2,061,234)   (1,596,476)   (355,783)    (91,345)   (17,630) 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 
 Derivative liabilities 
 Risk management:                              188 
  - Outflows                                     -         (188)         (188)           -           -          - 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
                                               188         (188)         (188)           -           -          - 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 
                                                                                      More        More 
                                                                                      than        than 
                                                                                  3 months      1 year 
                                                           Gross                       but         but 
                                                         nominal      Not more        less        less       More 
                                          Carrying       inflow/          than        than        than       than 
                                            amount     (outflow)      3 months      1 year     5 years    5 years 
 At 31 December 2018                        GBP000        GBP000        GBP000      GBP000      GBP000     GBP000 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 Financial asset by type 
 Non-derivative assets 
 Cash and balances at central banks        405,325       405,325       405,325           -           -          - 
 Loans and advances to banks                54,173        54,173        54,115          58           -          - 
 Debt securities held-to-maturity          342,691       346,694       129,604     101,449     115,641          - 
 Loans and advances to customers         1,224,656     1,382,857        46,646     173,077   1,038,465    124,669 
 Other assets                                2,976         2,976         2,976           -           -          - 
 Financial investments                      35,351        35,351        16,038           -      19,313          - 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
                                         2,065,172     2,227,376       654,704     274,584   1,173,419    124,669 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 
 Derivative assets 
 Risk management:                            1,846 
  - Inflows                                      -         1,846             -           -           -      1,846 
                                             1,846         1,846             -           -           -      1,846 
--------------------------------------  ----------  ------------  ------------  ----------  ----------  --------- 
 
 
 The table below sets out the components of the Group's liquidity reserves: 
 
                                                  31 December          31 December 
                                                      2019                 2018 
                                                             Fair                 Fair 
                                                Amount      value     Amount     value 
 Liquidity reserves                             GBP000     GBP000     GBP000    GBP000 
-----------------------------------------    ---------  ---------  ---------  -------- 
 Cash and balances at central banks            325,908    325,908    405,325   405,325 
 Loans and advances to banks                    46,258     46,258     54,173    54,173 
 Debt securities at amortised cost 
  / held-to-maturity                           442,960    442,926    342,691   344,001 
 Undrawn credit lines                                -          -     10,000    10,000 
-------------------------------------------  ---------  ---------  ---------  -------- 
                                               815,126    815,092    812,189   813,499 
  -----------------------------------------  ---------  ---------  ---------  -------- 
 

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 2019 were GBP259m (2018: GBP308.9m). Assets are encumbered due to the Term Funding Scheme (note 31).

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 2019: 
                                                                                  More       More 
                                                                                  than       than 
                                                                              3 months     1 year 
                                                         Gross         Not         but        but 
                                                       nominal        more        less       less       More 
                                         Carrying      inflow/        than        than       than       than 
                                           amount    (outflow)    3 months      1 year    5 years    5 years 
 At 31 December 2019                       GBP000       GBP000      GBP000      GBP000     GBP000     GBP000 
--------------------------------------  ---------  -----------  ----------  ----------  ---------  --------- 
 Financial liability by type 
 Non-derivative liabilities 
 Other liabilities                          1,113      (1,113)         477           -          -    (1,590) 
 Issued financial guarantee contracts      36,837     (63,292)       (626)     (1,893)   (12,325)   (48,448) 
--------------------------------------  ---------  -----------  ----------  ----------  ---------  --------- 
                                           37,950     (64,405)       (149)     (1,893)   (12,325)   (50,038) 
--------------------------------------  ---------  -----------  ----------  ----------  ---------  --------- 
 
                                                                                  More       More 
                                                                                  than       than 
                                                                              3 months     1 year 
                                                         Gross         Not         but        but 
                                                       nominal        more        less       less       More 
                                         Carrying      inflow/        than        than       than       than 
                                           amount    (outflow)    3 months      1 year    5 years    5 years 
 At 31 December 2019                       GBP000       GBP000      GBP000      GBP000     GBP000     GBP000 
--------------------------------------  ---------  -----------  ----------  ----------  ---------  --------- 
 Financial asset by type 
 Non-derivative assets 
 Loans and advances to banks               15,316       15,316      15,316           -          -          - 
 Debt securities at amortised cost         24,239       45,068         544       1,644     11,001     31,879 
 Financial investments                     25,913       25,913           -           -     25,913          - 
                                           65,468       86,297      15,860       1,644     36,914     31,879 
--------------------------------------  ---------  -----------  ----------  ----------  ---------  --------- 
 
 
 The table below analyses the contractual cash flows of the Company's 
  financial liabilities and assets as at 31 December 2018: 
 
                                                                                  More       More 
                                                                                  than       than 
                                                                              3 months     1 year 
                                                         Gross         Not         but        but 
                                                       nominal        more        less       less       More 
                                         Carrying      inflow/        than        than       than       than 
                                           amount    (outflow)    3 months      1 year    5 years    5 years 
 At 31 December 2018                       GBP000       GBP000      GBP000      GBP000     GBP000     GBP000 
--------------------------------------  ---------  -----------  ----------  ----------  ---------  --------- 
 Financial liability by type 
 Non-derivative liabilities 
 Other liabilities                          1,838      (1,838)       (248)           -          -    (1,590) 
 Issued financial guarantee contracts      13,283     (19,431)        (90)       (271)    (1,447)   (17,623) 

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--------------------------------------  ---------  -----------  ----------  ----------  ---------  --------- 
                                           15,121     (21,269)       (338)       (271)    (1,447)   (19,213) 
--------------------------------------  ---------  -----------  ----------  ----------  ---------  --------- 
 
                                                                                  More       More 
                                                                                  than       than 
                                                                              3 months     1 year 
                                                         Gross         Not         but        but 
                                                       nominal        more        less       less       More 
                                         Carrying      inflow/        than        than       than       than 
                                           amount    (outflow)    3 months      1 year    5 years    5 years 
 At 31 December 2018                       GBP000       GBP000      GBP000      GBP000     GBP000     GBP000 
--------------------------------------  ---------  -----------  ----------  ----------  ---------  --------- 
 Financial asset by type 
 Non-derivative assets 
 Loans and advances to banks               17,008       17,008      17,008           -          -          - 
 Financial investments                     19,313       19,313           -           -     19,313          - 
                                           36,321       36,321      17,008           -     19,313          - 
--------------------------------------  ---------  -----------  ----------  ----------  ---------  --------- 
 

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates.

Fiduciary activities

The Group provides investment management and advisory services to third parties, which involve the Group making allocation and purchase and sale decisions in relation to a wide range of financial instruments. Those assets that are held in a fiduciary capacity are not included in these financial statements. These services give rise to the risk that the Group may be accused of maladministration or underperformance. At the balance sheet date, the Group had investment management accounts amounting to approximately GBP1,107m (2018: GBP985m). Additionally, the Group provides investment advisory services.

 
 (e) Financial assets 
  and liabilities 
 
 The tables below set out the Group's financial assets and financial liabilities 
  into their respective classifications: 
 
                                                                              Total 
                                                             Amortised     carrying        Fair 
                                           FVPL     FVOCI         cost       amount       value 
 At 31 December 2019                     GBP000    GBP000       GBP000       GBP000      GBP000 
---------------------------------      --------  --------  -----------  -----------  ---------- 
 
 ASSETS 
 Cash and balances at 
  central banks                               -         -      325,908      325,908     325,908 
 Loans and advances to 
  banks                                       -         -       46,258       46,258      46,258 
 Debt securities at amortised 
  cost                                        -         -      442,960      442,960     442,926 
 Derivative financial 
  instruments                             1,804         -            -        1,804       1,804 
 Loans and advances to 
  customers                                   -         -    1,599,053    1,599,053   1,566,715 
 Other assets                             4,625         -            -        4,625       4,625 
 Financial investments                      165    30,754            -       30,919      30,919 
-------------------------------------  --------  --------  -----------  -----------  ---------- 
                                          6,594    30,754    2,414,179    2,451,527   2,419,155 
    ---------------------------------  --------  --------  -----------  -----------  ---------- 
 
 LIABILITIES 
 Deposits from banks                          -         -      230,421      230,421     230,421 
 Derivative financial 
  instruments                               319         -            -          319         319 
 Deposits from customers                      -         -    2,084,903    2,084,903   2,084,903 
 Other liabilities                        2,023         -            -        2,023       2,023 
 Debt securities in issue                     -         -       36,837       36,837      36,837 
-------------------------------------  --------  --------  -----------  -----------  ---------- 
                                          2,342         -    2,352,161    2,354,503   2,354,503 
    ---------------------------------  --------  --------  -----------  -----------  ---------- 
 
                                                                              Total 
                                                             Amortised     carrying        Fair 
                                           FVPL     FVOCI         cost       amount       value 
 At 31 December 2018                     GBP000    GBP000       GBP000       GBP000      GBP000 
---------------------------------      --------  --------  -----------  -----------  ---------- 
 
 ASSETS 
 Cash and balances at 
  central banks                               -         -      405,325      405,325     405,325 
 Loans and advances to 
  banks                                       -         -       54,173       54,173      54,173 
 Debt securities at amortised 
  cost                                        -         -      342,691      342,691     344,001 
 Derivative financial 
  instruments                             1,846         -            -        1,846       1,846 
 Loans and advances to 
  customers                                   -         -    1,224,656    1,224,656   1,187,408 
 Other assets                             2,976         -            -        2,976       2,976 
 Financial investments                      165    35,186            -       35,351      35,351 
-------------------------------------  --------  --------  -----------  -----------  ---------- 
                                          4,987    35,186    2,026,845    2,067,018   2,031,080 
    ---------------------------------  --------  --------  -----------  -----------  ---------- 
 
 LIABILITIES 
 Deposits from banks                          -         -      232,675      232,675     232,675 
 Derivative financial 
  instruments                               188         -            -          188         188 
 Deposits from customers                      -         -    1,714,286    1,714,286   1,714,286 
 Other liabilities                        1,782         -            -        1,782       1,782 
 Debt securities in issue                     -         -       13,283       13,283      13,283 
-------------------------------------  --------  --------  -----------  -----------  ---------- 
                                          1,970         -    1,960,244    1,962,214   1,962,214 
    ---------------------------------  --------  --------  -----------  -----------  ---------- 
 

Valuation of financial instruments

The Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions. If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis. The objective of valuation techniques is to determine the fair value of the financial instrument at the reporting date as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In the event that fair values of assets and liabilities cannot be reliably measured, they are carried at cost.

The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:

   --      Level 1: Quoted prices in active markets for identical assets or liabilities. 

-- Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). 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.

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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:

 
                                                  Level    Level    Level 
                                                      1        2        3    Total 
 At 31 December 2019                             GBP000   GBP000   GBP000   GBP000 
----------------------------------------------  -------  -------  -------  ------- 
 ASSETS 
 Derivative financial instruments                     -    1,804        -    1,804 
 Financial investments                           29,117        -    1,802   30,919 
 Investment properties                                -        -    6,763    6,763 
----------------------------------------------  -------  -------  -------  ------- 
                                                 29,117    1,804    8,565   39,486 
----------------------------------------------  -------  -------  -------  ------- 
 LIABILITIES 
 Derivative financial instruments                     -      319        -      319 
 Other liabilities (contingent consideration)         -        -    1,528    1,528 
----------------------------------------------  -------  -------  -------  ------- 
                                                      -      319    1,528    1,847 
----------------------------------------------  -------  -------  -------  ------- 
 
 
                                                  Level    Level    Level 
                                                      1        2        3     Total 
 At 31 December 2018                             GBP000   GBP000   GBP000    GBP000 
----------------------------------------------  -------  -------  -------  -------- 
 ASSETS 
 Derivative financial instruments                     -    1,846        -     1,846 
 Financial investments                           34,223        -    1,128    35,351 
 Investment properties                                -        -   67,081    67,081 
----------------------------------------------  -------  -------  -------  -------- 
                                                 34,223    1,846   68,209   104,278 
----------------------------------------------  -------  -------  -------  -------- 
 LIABILITIES 
 Derivative financial instruments                     -      188        -       188 
 Other liabilities (contingent consideration)         -        -    3,643     3,643 
----------------------------------------------  -------  -------  -------  -------- 
                                                      -      188    3,643     3,831 
----------------------------------------------  -------  -------  -------  -------- 
 
 
 There were no transfers between level 1 and level 2 during 
  the year. 
 
 The following table reconciles the movement in level 3 financial instruments 
  measured at fair value (financial investments) during the year: 
                                                                      2019      2018 
 Movement in level 3                                                GBP000    GBP000 
-------------------------------------------------------------    ---------  -------- 
 At 1 January                                                       68,209    61,642 
 Consideration received                                              3,083     7,805 
 Disposals                                                               -   (1,403) 
 Transfer to inventory                                            (63,219)         - 
 Movements recognised in Other Comprehensive 
  Income                                                               502       135 
 Movements recognised in the Income Statement                         (10)        30 
---------------------------------------------------------------  ---------  -------- 
 At 31 December                                                      8,565    68,209 
---------------------------------------------------------------  ---------  -------- 
 

Secure Trust bank investment

The Group currently holds equity shares in Secure Trust Bank plc, valued at GBP29.1m (2018: GBP34.2m). The shares are recognised at fair value using quoted prices on the London Stock Exchange.

Visa Inc. investment

Arbuthnot Latham currently holds preference shares in Visa Inc., valued at GBP1.2m (2018: GBP863k) as at 31 December 2019. These shares have been valued at their future conversion value into Visa Inc. common stock. The valuation includes a 31% haircut, comprising 25% due to a contingent liability disclosed in Visa Europe's accounts in relation to litigation and 6% based on a liquidity discount.

Investment in overseas property company

Arbuthnot Latham currently holds a debt and equity investment classified as FVPL in a property company which owns an office building through its 100% owned subsidiary. During 2018 the subsidiary company was sold. Under the terms of the sale agreement the buyer agreed to purchase 100% of the share capital and reimburse all outstanding loans. The proceeds of the sale have been distributed to the investors, except for the amount withheld for the general and specific warranties (which will be released in three instalments at 18 month intervals) included as a condition of the sale agreement. A loss of GBP8k (2018: gain of GBP75k) has been recognised in profit or loss during the year. The investment has been valued at GBP156k (2018: GBP165k) based on the discounted consideration outstanding less 11% hair cut for the warranties.

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 USD $1.0m of the total closing fund capital of USD$55.0m. At 31 December 2019 the company had made capital contributions into the Fund of $394k (2018: $168k).

The investment is classified as FVOCI and is valued at fair value by Hetz Ventures, L.P. at GBP0.5m (2018: GBP0.1m). As at year end the fair value is deemed to be cost less management fees due to the immature stage of investments that have been made by the Fund.

The tables below analyse financial instruments not measured at fair value by the level in the fair value hierarchy:

 
                                         Level       Level     Level 
 Group                                       1           2         3       Total 
 At 31 December 2019                    GBP000      GBP000    GBP000      GBP000 
------------------------------------  --------  ----------  --------  ---------- 
 ASSETS 
 Cash and balances at central banks          -     325,908         -     325,908 
 Loans and advances to banks                 -      46,258         -      46,258 
 Debt securities at amortised cost           -     442,960         -     442,960 
 Loans and advances to customers             -   1,296,427   302,626   1,599,053 
 Other assets                                -           -     4,625       4,625 
------------------------------------  --------  ----------  --------  ---------- 
                                             -   2,111,553   307,251   2,418,804 
 ---------------------------------------------  ----------  --------  ---------- 
 LIABILITIES 
 Deposits from banks                         -     230,421         -     230,421 
 Deposits from customers                     -   2,084,903         -   2,084,903 
 Other liabilities                           -           -     2,023       2,023 
 Debt securities in issue                    -           -    36,837      36,837 
------------------------------------  --------  ----------  --------  ---------- 
                                             -   2,315,324    38,860   2,354,184 
 ---------------------------------------------  ----------  --------  ---------- 
 
 
                                         Level       Level     Level 
 Group                                       1           2         3       Total 
 At 31 December 2018                    GBP000      GBP000    GBP000      GBP000 
------------------------------------  --------  ----------  --------  ---------- 
 ASSETS 
 Cash and balances at central banks          -     405,325         -     405,325 
 Loans and advances to banks                 -      54,173         -      54,173 
 Debt securities at amortised cost           -     342,691         -     342,691 
 Loans and advances to customers             -     996,198   228,458   1,224,656 
 Other assets                                -           -     2,976       2,976 
------------------------------------  --------  ----------  --------  ---------- 
                                             -   1,798,387   231,434   2,029,821 
 ---------------------------------------------  ----------  --------  ---------- 
 LIABILITIES 
 Deposits from banks                         -     232,675         -     232,675 
 Deposits from customers                     -   1,714,286         -   1,714,286 

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 Other liabilities                           -           -     1,782       1,782 
 Debt securities in issue                    -           -    13,283      13,283 
------------------------------------  --------  ----------  --------  ---------- 
                                             -   1,946,961    15,065   1,962,026 
 ---------------------------------------------  ----------  --------  ---------- 
 
 
                                       Level    Level    Level 
 Company                                   1        2        3    Total 
 At 31 December 2019                  GBP000   GBP000   GBP000   GBP000 
----------------------------------  --------  -------  -------  ------- 
 ASSETS 
 Loans and advances to banks               -        6   15,310   15,316 
 Debt securities held-to-maturity          -        -   24,239   24,239 
                                           -        6   39,549   39,555 
 -------------------------------------------  -------  -------  ------- 
 LIABILITIES 
 Other liabilities                         -        -    1,113    1,113 
 Debt securities in issue                  -        -   36,837   36,837 
----------------------------------  --------  -------  -------  ------- 
                                           -        -   37,950   37,950 
 -------------------------------------------  -------  -------  ------- 
 
 
                                  Level    Level    Level 
 Company                              1        2        3    Total 
 At 31 December 2018             GBP000   GBP000   GBP000   GBP000 
-----------------------------  --------  -------  -------  ------- 
 ASSETS 
 Loans and advances to banks          -        6   17,002   17,008 
                                      -        6   17,002   17,008 
 --------------------------------------  -------  -------  ------- 
 LIABILITIES 
 Other liabilities                    -        -    1,838    1,838 
 Debt securities in issue             -        -   13,283   13,283 
-----------------------------  --------  -------  -------  ------- 
                                      -        -   15,121   15,121 
 --------------------------------------  -------  -------  ------- 
 

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 individual banking operation, are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and are subject to EU Capital Requirement Regulation (EU No.575/2013) and the PRA Rulebook for Capital Requirement Regulation 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 EU's Capital Requirements Directive (EU No.36/2013) and the required parameters set out in the PRA Rulebook, the 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.

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar 1 plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar 1 capital requirement for credit, market and operational risk as a starting point, and then considers whether each of the calculations delivers a sufficient amount of capital to cover risks to which the Group is, or could be, exposed. Where the Board considers that the Pillar 1 calculations do not adequately cover the risks an additional Pillar 2A capital requirement is applied. The PRA will set a Pillar 2A capital requirement in light of the calculations included within the ICAAP. The Group's Total Capital Requirement, as issued by the PRA, is the sum of the minimum capital requirements under the CRR (Pillar 1) and the Pillar 2A requirement. The current TCR of the Group is 9.12%.

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, deferred tax assets that do not arise from temporary differences, and a portion of the Group's non-significant investment in a financial institution (STB). The portion of the STB investment deducted from common equity tier 1 capital is calculated in accordance with EU CRR thresholds.

-- Tier 2 comprises qualifying subordinated loans.

 
 The following table shows the regulatory capital resources 
  as managed by the Group: 
                                                                   2019       2018 
                                                                 GBP000     GBP000 
------------------------------------------------------------  ---------  --------- 
 CET1 Capital 
 Share capital                                                      154        153 
 Capital redemption reserve                                          19         20 
 Treasury shares                                                (1,214)    (1,131) 
 Retained earnings*                                             209,171    209,083 
 IFRS 9 - Transitional add back                                   1,109      1,986 
 Fair value reserve                                                 205   (12,169) 
 Deduction for goodwill                                         (5,202)    (5,202) 
 Deduction for other intangibles                               (14,880)   (11,336) 
 Deduction for deferred tax asset that do not arise from 
  temporary differences                                         (1,502)          - 
 Deduction for significant investment**                               -   (16,082) 
 Deduction for non-significant investment**                    (10,183)          - 
 Deduction for Prudent valuation                                   (33)       (38) 
------------------------------------------------------------  ---------  --------- 
 CET1 capital resources                                         177,644    165,284 
------------------------------------------------------------  ---------  --------- 
 Tier 2 Capital 
 Debt securities in issue                                        36,837     13,283 
------------------------------------------------------------  ---------  --------- 
 Total Tier 2 capital resources                                  36,837     13,283 
------------------------------------------------------------  ---------  --------- 
 
 Own Funds (sum of Tier 1 and Tier 2)                           214,481    178,567 
------------------------------------------------------------  ---------  --------- 
 
 CET1 Capital Ratio (CET1 Capital/Total Risk Exposure)*           14.4%      15.9% 
------------------------------------------------------------  ---------  --------- 
 Total Capital Ratio (Own Funds/Total Risk Exposure)*             17.3%      17.2% 
------------------------------------------------------------  ---------  --------- 
 
   *              Includes year-end verified profit. 

** At 31 December 2019 the Group's investment in STB is a non-significant investment in accordance with the CRR (2018: significant investment).

The ICAAP includes a summary of the capital required to mitigate the identified risks in the Group's regulated entities and the amount of capital that the Group has available. The PRA sets 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.

Capital ratios are reviewed on a monthly basis to ensure that external requirements are adhered to. During the period all regulated entities have complied with all of the externally imposed capital requirements to which they are subject.

Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). Its aim is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm's capital, risk exposures and risk assessment processes. Our Pillar 3 disclosures for the year ended 31 December 2019 are published as a separate document on the Group website under Investor Relations (Announcements & Shareholder Info).

8. Interest income and expense

Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost using the effective interest 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.

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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.

 
 8. Net interest income 
                                                               2019       2018 
                                                             GBP000     GBP000 
------------------------------------------------------    ---------  --------- 
 Cash and balances at central banks                           3,112      2,264 
 Loans and advances to banks                                    418      2,703 
 Debt securities at amortised cost / held-to-maturity         5,265      3,303 
 Loans and advances to customers                             68,075     57,020 
--------------------------------------------------------  ---------  --------- 
                                                             76,870     65,290 
  ------------------------------------------------------  ---------  --------- 
 
 Deposits from banks                                        (1,687)    (1,517) 
 Deposits from customers                                   (13,516)    (8,224) 
 Debt securities in issue                                   (2,054)      (366) 
 Interest on lease assets                                     (976)          - 
------------------------------------------------------    ---------  --------- 
 Interest expense                                          (18,233)   (10,107) 
--------------------------------------------------------  ---------  --------- 
 
 Net interest income                                         58,637     55,183 
--------------------------------------------------------  ---------  --------- 
 

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 to help them 
                               achieve their long-term 
                               financial goals. 
 Foreign exchange fees        - Provides foreign currencies for our 
                               clients to purchase/sell. 
---------------------------  ------------------------------------------ 
 

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: 
 
                                                                                         All 
                                Private   Commercial                                   other 
 Group                          Banking      Banking      RAF      ABL     ASFL    divisions    Total 
 At 31 December 2019             GBP000       GBP000   GBP000   GBP000   GBP000       GBP000   GBP000 
----------------------------  ---------  -----------  -------  -------  -------  -----------  ------- 
 
 Banking commissions                716          820      219    1,380        1            -    3,136 
 Foreign exchange fees              494          342        -        -        -          444    1,280 
 Investment management fees       8,474            -        -        -        -            -    8,474 
 Wealth planning fees             1,043            -        -        -        -            2    1,045 
----------------------------  ---------  -----------  -------  -------  -------  -----------  ------- 
 Total fee and commission 
  income                         10,727        1,162      219    1,380        1          446   13,935 
----------------------------  ---------  -----------  -------  -------  -------  -----------  ------- 
 
 
                                                                                         All 
                                Private   Commercial                                   other 
 Group                          Banking      Banking      RAF      ABL     ASFL    divisions    Total 
 At 31 December 2018             GBP000       GBP000   GBP000   GBP000   GBP000       GBP000   GBP000 
----------------------------  ---------  -----------  -------  -------  -------  -----------  ------- 
 
 Banking and services fees          747          617      151      220        -            -    1,735 
 Foreign exchange fees              558          232        -        -        -          537    1,327 
 Investment management fees       8,177            -        -        -        -            1    8,178 
 Wealth planning fees             1,404            -        -        -        -          312    1,716 
----------------------------  ---------  -----------  -------  -------  -------  -----------  ------- 
 Total fee and commission 
  income                         10,886          849      151      220        -          850   12,956 
----------------------------  ---------  -----------  -------  -------  -------  -----------  ------- 
 

10. 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.

A financial asset is within HBM where:

   --      A loan is in arrears between 10 and 30 days; 
   --      Bankers become aware of signs of potential future difficulties, such as 
   -       cash flow difficulties 
   -       unexpected hard core borrowing 
   -       regular requests for excesses 
   -       returned cheques 
   -       lack of engagement/failure to respond to information requests 
   -       breach of covenants/conditions 
   -       count court judgements 

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-- 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; 

-- 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 such that they are no longer considered credit impaired.

A borrower will move back into Stage 1 conditional upon both a minimum of 6 months' good account conduct and the improvement of the Client's situation to the extent that the credit risk has receded sufficiently and a full repayment of the loan, without recourse to the collateral, is likely.

Presentation of allowance for ECL in the statement of financial position

For financial assets measured at amortised cost, these are presented as the gross carrying amount of the assets minus a deduction for the ECL.

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

Loans that are not individually significant, and whose terms have been renegotiated, 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.

Debt instruments at FVOCI

Changes in fair value are recognised in OCI, the loss allowance will be recognised in OCI and shall not reduce the carrying amount of the financial asset in the statement of financial position. Impairment costs will be recognised in the profit or loss with a corresponding entry to OCI. On derecognition, cumulative gains and losses in OCI are reclassified to the profit or loss.

 
                                                                   2019     2018 
                                                                 GBP000   GBP000 
-------------------------------------------------------------  --------  ------- 
 Net Impairment losses on loans and advances to customers           867    2,731 
 
 Of which: 
   Stage 1                                                      (1,099)      821 
   Stage 2                                                         (37)        - 
   Stage 3                                                        1,929    1,910 
                                                                    867    2,731 
-------------------------------------------------------------  --------  ------- 
 
 During the year, the Group recovered GBP103k (2018: GBP41k) of loans which 
  had previously been written off. 
 

11. Other income

Other income includes a fair value adjustment of GBP1.5m (2018: GBP2.6m), to the contingent consideration for the acquisition of Renaissance Asset Finance Ltd. The fair value adjustment is based on management's assessment of the underlying performance of the business and reflects a reduction in the estimated future liability payable under the sale and purchase agreement.

Other items reflected in other income include rental income from the investment properties (see Note 30) of GBP2.1m (2018: GBP2.6m), premises recharges of GBP0.2m (2018: GBP0.7m) to STB for office space occupied and dividends received on the shares held in STB of GBP1.5m (2018: GBP0.7m), since de-recognition as an associate undertaking.

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.

 
 12. Operating expenses 
                                                          2019     2018 
 Operating expenses comprise:                           GBP000   GBP000 
-----------------------------------------------------  -------  ------- 
 Staff costs, including Directors: 
  Wages, salaries and bonuses                           39,169   37,051 
  Social security costs                                  4,313    4,176 
  Pension costs                                          1,980    1,842 
  Share based payment transactions (note 39)               249    (318) 
 Amortisation of intangibles (note 27)                   2,008    1,752 
 Depreciation (note 28)                                  1,441    1,122 
 Financial Services Compensation Scheme Levy               228      113 
 Operating lease rentals                                   368    3,143 
 Operating expenses for investment property                  -      282 
 Acquisitions costs                                      9,705      378 
 Other administrative expenses                          10,725   15,441 
-----------------------------------------------------  -------  ------- 
 Total operating expenses from continuing operations    70,186   64,982 
-----------------------------------------------------  -------  ------- 
 

Details on Directors remuneration are disclosed in the Remuneration Report on page ##RREP.

 
                                                                2019     2018 
 Remuneration of the auditor and its associates, excluding 
  VAT, was as follows:                                        GBP000   GBP000 
-----------------------------------------------------------  -------  ------- 
 Fees payable to the Company's auditor for the audit of 
  the Company's annual accounts                                  105      112 
 Fees payable to the Company's auditor and its associates 
  for other services: 
  Audit of the accounts of subsidiaries                          285      323 
  Audit related assurance services                               100      160 
  Other assurance services                                         -       10 
  Other non-audit services                                         -       10 
-----------------------------------------------------------  -------  ------- 
 Total fees payable                                              490      615 
-----------------------------------------------------------  -------  ------- 
 

The 2019 fee is payable to Mazars LLP and the 2018 fee was payable to KPMG LLP.

13. 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.

 
                                                               2019     2018 
 United Kingdom corporation tax at 19% (2018: 19%)           GBP000   GBP000 
----------------------------------------------------------  -------  ------- 
 Current taxation 
 Corporation tax charge - current year                        1,000      620 
 Corporation tax charge - adjustments in respect of prior 
  years                                                         148      132 
----------------------------------------------------------  -------  ------- 
                                                              1,148      752 
----------------------------------------------------------  -------  ------- 
 Deferred taxation 
 Origination and reversal of temporary differences            (105)      350 
 Adjustments in respect of prior years                        (208)       19 
----------------------------------------------------------  -------  ------- 
                                                              (313)      369 
----------------------------------------------------------  -------  ------- 
 Income tax expense                                             835    1,121 
----------------------------------------------------------  -------  ------- 
 Tax reconciliation 
 Profit before tax                                            7,011    6,780 
 Tax at 19% (2018: 19%)                                       1,332    1,288 
 Permanent difference - Tax on associate income                   -    (854) 

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 Other permanent differences                                  (437)      536 
 Prior period adjustments                                      (60)      151 
----------------------------------------------------------  -------  ------- 
 Corporation tax charge for the year                            835    1,121 
----------------------------------------------------------  -------  ------- 
 

Permanent differences mainly relate to deferred consideration adjustments for RAF and dividends received from STB.

The tax charge on discontinuing operations in 2018 is disclosed in note 14.

On 6 September 2016 the Government substantively enacted a reduction in the UK corporation tax rate from 19% to 17% (effective from 1 April 2020). However, before the general election that took place on 12 December 2019, the Conservative Party said that the corporation tax rate will no longer reduce, if they remained in government. It is expected that this will be enacted in early 2020, after being confirmed in the Budget speech on 11 March 2020.

14. Discontinued operations

A discontinued operation is a component of the Group's business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which:

   --              represents a separate major line of business or geographical area of operations; 

-- is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or

   --              is a subsidiary acquired exclusively with a view to re-sale. 

Classification as a discontinued operation occurs on disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative Statement of Comprehensive Income is re-presented as if the operation had been discontinued from the start of the comparative year.

The profit after tax from discontinued operations is made up as follows:

 
                                                                   Year           Year 
                                                                  ended          ended 
                                                            31 December    31 December 
                                                                   2019           2018 
 Discontinued operations                                         GBP000         GBP000 
-----------------------------------------------------    --------------  ------------- 
 Profit after tax from discontinued operations - STB 
  associate income (up to 8 August 2018)                              -          2,971 
 Loss after tax on de-recognition of STB                              -       (28,663) 
-------------------------------------------------------    ------------  ------------- 
 Loss after tax from discontinued operations                          -       (25,692) 
-------------------------------------------------------    ------------  ------------- 
 

During 2018 Sir Henry Angest and Andrew Salmon resigned their positions on the board of Secure Trust Bank PLC ("STB") and the Group does not have the right to appoint any future directors to the board of STB. As a result of this the Group was deemed to no longer have significant influence over the associated company and thus the shareholding was recognised as a financial investment. This required the investment to be marked to market since 2018. Given the decline in the share price of STB over the previous years, this assessment resulted in a mark to market loss of GBP28.7m. This loss, together with the profit from associate for the period up to 8 August 2018, was reflected as a discontinued operation as the income was previously shown as a separately reported operating segment.

 
 15. Average number of employees 
                                    2019   2018 
---------------------------------  -----  ----- 
 Private Banking                     134    135 
 Commercial Banking                   57     46 
 RAF                                  31     26 
 All Other Divisions                 229    182 
 Group Centre                         19     17 
---------------------------------  -----  ----- 
                                     470    406 
---------------------------------  -----  ----- 
 

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.

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 14,979,812 (2018: 14,889,048) in issue during the year (this includes Ordinary shares and Ordinary Non-Voting shares). On 17 May 2019 the Company issued 152,621 Ordinary Non-Voting shares, of which 3,902 were allocated to treasury shares. On 10 September the Company purchased another 7,408 Ordinary Non-Voting shares into treasury.

Diluted

Diluted earnings per ordinary share are calculated by dividing the dilutive profit after tax attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, as well as the number of dilutive share options in issue during the year. The number of dilutive share options in issue at the year end was nil (2018: nil).

 
                                                                     2019       2018 
 Profit & dilutive profit attributable                             GBP000     GBP000 
----------------------------------------------------------------  -------  --------- 
 Total profit / (loss) after tax attributable to equity holders 
  of the Company                                                    6,176   (20,033) 
 Profit after tax from continuing operations attributable 
  to equity holders of the Company                                  6,176      5,659 
 Loss after tax from discontinued operations attributable 
  to equity holders of the Company                                      -   (25,692) 
----------------------------------------------------------------  -------  --------- 
 
                                                                     2019       2018 
 Basic & Diluted Earnings per share                                     p          p 
----------------------------------------------------------------  -------  --------- 
 Total Basic Earnings per share                                      41.2    (134.5) 
 Basic Earnings per share from continuing operations                 41.2       38.0 
 Basic Earnings per share from discontinued operations                  -    (172.5) 
----------------------------------------------------------------  -------  --------- 
 
 
 17. Cash and balances at central banks 
                                               2019      2018 
 Group                                       GBP000    GBP000 
----------------------------------------  ---------  -------- 
 Cash and balances at central banks         325,908   405,325 
----------------------------------------  ---------  -------- 
 

ECL has been assessed to be immaterial.

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 
                                                                       2019     2018 
 Group                                                               GBP000   GBP000 
------------------------------------------------------------------  -------  ------- 
 Placements with banks included in cash and cash equivalents 
  (note 41)                                                          46,258   54,173 
------------------------------------------------------------------  -------  ------- 
 
 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: 
                                                                       2019     2018 
 Group                                                               GBP000   GBP000 

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------------------------------------------------------------------  -------  ------- 
 Aaa                                                                      -      709 
 Aa3                                                                 30,834   42,230 
 A1                                                                     306    8,880 
 A2                                                                  13,961    1,906 
 A3                                                                      20       10 
 Baa1                                                                   393      430 
 Baa2                                                                   736        - 
 Unrated                                                                  8        8 
------------------------------------------------------------------  -------  ------- 
                                                                     46,258   54,173 
------------------------------------------------------------------  -------  ------- 
 
 None of the loans and advances to banks are past due (2018: nil). ECL 
  has been assessed as immaterial. 
 
                                                                       2019     2018 
 Company                                                             GBP000   GBP000 
------------------------------------------------------------------  -------  ------- 
 Placements with banks included in cash and cash equivalents 
  (note 41)                                                          15,316   17,008 
------------------------------------------------------------------  -------  ------- 
 
 Loans and advances to banks include bank balances of GBP15.3m (2018: GBP17.0m) 
  with Arbuthnot Latham & Co., Ltd. ECL has been assessed as immaterial. 
 

19. Debt securities at amortised cost

Debt securities represent certificates of deposit.

 
 The movement in debt securities may be summarised as follows: 
                                                                       2019        2018 
 Group                                                               GBP000      GBP000 
---------------------------------------------------------------  ----------  ---------- 
 At 1 January                                                       342,691     227,019 
 Exchange difference                                               (27,372)       4,783 
 Additions                                                          847,378     467,772 
 Redemptions                                                      (719,737)   (356,883) 
---------------------------------------------------------------  ----------  ---------- 
 At 31 December                                                     442,960     342,691 
---------------------------------------------------------------  ----------  ---------- 
 
 
 The table below presents an analysis of debt securities by rating agency 
  designation at 31 December, based on Moody's long term ratings: 
 
                                                                   2019      2018 
 Group                                                           GBP000    GBP000 
------------------------------------------------------------  ---------  -------- 
 Aaa                                                            163,788    76,281 
 Aa1                                                             11,390    84,218 
 Aa2                                                            205,812    32,325 
 Aa3                                                             50,238    56,046 
 A1                                                              11,732    75,657 
 A2                                                                   -    18,164 
                                                                442,960   342,691 
------------------------------------------------------------  ---------  -------- 
 
 None of the debt securities are past due (2018: nil). ECL has been assessed 
  as immaterial. 
 
 The movement in debt securities for the Company may be 
  summarised as follows: 
                                                                   2019      2018 
 Company                                                         GBP000    GBP000 
------------------------------------------------------------  ---------  -------- 
 Additions                                                       25,000         - 
 Interest                                                         1,264         - 
 Redemptions                                                    (2,025)         - 
------------------------------------------------------------  ---------  -------- 
 At 31 December                                                  24,239         - 
------------------------------------------------------------  ---------  -------- 
 The exposure relates to Arbuthnot Latham & Co., Limited, which is unrated. 
  The subordinated loan notes were issued on 3 June 2019 and are denominated 
  in Pound Sterling. The principal amount outstanding at 31 December 2019 
  was GBP25,000,000 (2018: GBPnil). The notes carry interest at 7.75% over 
  the three month LIBOR rate and are repayable at par in June 2029 unless 
  redeemed or repurchased earlier by the Arbuthnot Latham & Co., Limited. 
  ECL has been assessed as immaterial. 
 

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

Current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell except where measurement and remeasurement is outside the scope of IFRS 5. Where investments that have initially been recognised as 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.

 
                                            Group 
                                      ---------------- 
                                         2019     2018 
                                       GBP000   GBP000 
------------------------------------  -------  ------- 
 Repossessed property held for sale     7,617    8,002 
------------------------------------  -------  ------- 
                                        7,617    8,002 
------------------------------------  -------  ------- 
 

Repossessed property held for sale

In 2017 a property in Spain held as collateral on a loan was repossessed. At the time of repossession, it was expected that the property would be sold in 12 months and so it was recognised as held for sale. A sale was not possible within during the year, due to factors outside of the Group's control, however as a sale is assessed to be probable within 12 months, it has been recognised as held for sale with a carrying value of GBP3.0m (2018: GBP3.1m)

In 2018 a further property in Spain held as collateral on a loan, valued in 2019 at GBP4.6m (2018: GBP4.9m) was repossessed. The Group's policy is to pursue timely realisation of the collateral in an orderly manner. The property is recognised as an asset held for sale.

All repossessed property is expected to be sold within 12 months and is therefore recognised as held for sale.

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.

 
                                       2019                                 2018 
                       -----------------------------------  ----------------------------------- 
                        Contract/      Fair           Fair   Contract/      Fair           Fair 
                         notional     value          value    notional     value          value 
                           amount    assets    liabilities      amount    assets    liabilities 
 Group                     GBP000    GBP000         GBP000      GBP000    GBP000         GBP000 
---------------------  ----------  --------  -------------  ----------  --------  ------------- 
 Currency swaps             8,671       105            101       4,929       192            188 
 Interest rate swaps       25,530         -            218      25,762       112              - 
 Structured notes           1,644     1,699              -       1,607     1,542              - 
---------------------  ----------  --------  -------------  ----------  --------  ------------- 
                           35,845     1,804            319      32,298     1,846            188 
---------------------  ----------  --------  -------------  ----------  --------  ------------- 
 

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The principal derivatives used by the Group are over the counter exchange rate contracts. Exchange rate related contracts include currency swaps and interest rate swaps.

A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; exchange of principal can be notional or actual. The currency swaps are settled net and therefore the fair value is small in comparison to the contract/notional amount. Interest rate swaps are used to hedge against the Profit or Loss impact resulting from the movement in interest rates, due to some exposures having fixed rate terms.

Also included in derivative financial instruments are structured notes. The Group invested in the structured notes, which are maturing in 2021.

The Group only uses investment graded banks as counterparties for derivative financial instruments.

 
 The table below presents an analysis of derivative financial instruments 
  contract/notional amounts by rating agency designation of 
 counterparty bank at 31 December, based on Moody's long 
  term ratings: 
                                                                 2019     2018 
 Group                                                         GBP000   GBP000 
------------------------------------------------------------  -------  ------- 
 A1                                                            35,837   29,601 
 A2                                                                 8    2,635 
 Baa1                                                               -       62 
------------------------------------------------------------  -------  ------- 
                                                               35,845   32,298 
------------------------------------------------------------  -------  ------- 
 
 
 22. Loans and advances to customers 
 
 Analyses of loans and advances to customers: 
                                                                2019 
                                                 Stage      Stage      Stage 
                                                     1          2          3       Total 
 Group                                          GBP000     GBP000     GBP000      GBP000 
-----------------------------------------   ----------  ---------  ---------  ---------- 
 
 Gross loans and advances at 1 January 
  2019                                       1,161,124     32,700     37,407   1,231,231 
------------------------------------------  ----------  ---------  ---------  ---------- 
 
 Originations and repayments                   147,411   (12,845)   (11,134)     123,432 
 Write-offs                                       (49)          -    (2,927)     (2,976) 
 Acquired portfolio                            252,156          -          -     252,156 
 Transfer to Stage 1                             3,659    (3,659)          -           - 
 Transfer to Stage 2                          (50,489)     50,489          -           - 
 Transfer to Stage 3                           (7,788)      (313)      8,101           - 
------------------------------------------  ----------  ---------  ---------  ---------- 
 Gross loans and advances at 31 December 
  2019                                       1,506,024     66,372     31,447   1,603,843 
------------------------------------------  ----------  ---------  ---------  ---------- 
 
 Less allowances for ECLs (see Note 23)          (526)       (47)    (4,217)     (4,790) 
 
 Net loans and advances at 31 December 
  2019                                       1,505,498     66,325     27,230   1,599,053 
------------------------------------------  ----------  ---------  ---------  ---------- 
 
 
                                                                2018 
                                                 Stage      Stage      Stage 
                                                     1          2          3       Total 
 Group                                          GBP000     GBP000     GBP000      GBP000 
-----------------------------------------   ----------  ---------  ---------  ---------- 
 
 Gross loans and advances at 1 January 
  2018                                         992,252     29,502     28,877   1,050,631 
------------------------------------------  ----------  ---------  ---------  ---------- 
 
 Originations                                  458,825          -          -     458,825 
 Repayments and write-offs                   (266,890)    (8,809)    (2,526)   (278,225) 
 Transfer to Stage 1                             7,975    (7,975)          -           - 
 Transfer to Stage 2                          (27,929)     28,975    (1,046)           - 
 Transfer to Stage 3                           (3,109)    (8,993)     12,102           - 
------------------------------------------  ----------  ---------  ---------  ---------- 
 Gross loans and advances at 31 December 
  2018                                       1,161,124     32,700     37,407   1,231,231 
------------------------------------------  ----------  ---------  ---------  ---------- 
 
 Less allowances for ECLs (see Note 23)        (1,606)        (8)    (4,961)     (6,575) 
 
 Net loans and advances at 31 December 
  2018                                       1,159,518     32,692     32,446   1,224,656 
------------------------------------------  ----------  ---------  ---------  ---------- 
 

For a maturity profile of loans and advances to customers, refer to note 6.

 
 Loans and advances to customers by division (net of ECL / impairments): 
                                                                  2019 
                                                                                                 All 
                         Private   Commercial      Mortgage                                    Other 
                         Banking      Banking    Portfolios       RAF      ABL     ASFL    Divisions       Total 
 Group                    GBP000       GBP000        GBP000    GBP000   GBP000   GBP000       GBP000      GBP000 
---------------------  ---------  -----------  ------------  --------  -------  -------  -----------  ---------- 
 Stage 1                 498,221      505,518       306,044   100,981   75,871    7,352       11,511   1,505,498 
 Stage 2                  43,491       22,079             -       755        -        -            -      66,325 
 Stage 3                  26,055           23             -     1,152        -        -            -      27,230 
---------------------  ---------  -----------  ------------  --------  -------  -------  -----------  ---------- 
 At 31 December 2018     567,767      527,620       306,044   102,888   75,871    7,352       11,511   1,599,053 
---------------------  ---------  -----------  ------------  --------  -------  -------  -----------  ---------- 
 
                                                                  2018 
                                                                                                 All 
                         Private   Commercial      Mortgage                                    Other 
                         Banking      Banking    Portfolios       RAF      ABL     ASFL    Divisions       Total 
 Group                    GBP000       GBP000        GBP000    GBP000   GBP000   GBP000       GBP000      GBP000 
---------------------  ---------  -----------  ------------  --------  -------  -------  -----------  ---------- 
 Stage 1                 618,486      431,630             -    84,276        -        -       25,126   1,159,518 
 Stage 2                  20,034       11,478             -     1,180        -        -            -      32,692 
 Stage 3                  31,944            -             -       502        -        -            -      32,446 
---------------------  ---------  -----------  ------------  --------  -------  -------  -----------  ---------- 
 At 31 December 2018     670,464      443,108             -    85,958        -        -       25,126   1,224,656 
---------------------  ---------  -----------  ------------  --------  -------  -------  -----------  ---------- 
 
 
 Analyses of past due loans and advances to customers by division: 
                                                           2019 
                                                                                           All 
                    Private   Commercial      Mortgage                                   Other 
                    Banking      Banking    Portfolios      RAF      ABL     ASFL    Divisions     Total 
 Group               GBP000       GBP000        GBP000   GBP000   GBP000   GBP000       GBP000    GBP000 
----------------  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 Up to 30 days       16,911       15,872         5,196    1,608        -        -            -    39,587 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
   Stage 1           13,525       15,864         5,196    1,395        -        -            -    35,980 
   Stage 2            3,386            8             -        1        -        -            -     3,395 
   Stage 3                -            -             -      212        -        -            -       212 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 30 - 60 days         1,899           35         2,404      526        -        -            -     4,864 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
   Stage 1                -           35         2,404      151        -        -            -     2,590 
   Stage 2            1,899            -             -      203        -        -            -     2,102 
   Stage 3                -            -             -      172        -        -            -       172 

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DJ Arbuthnot Banking Group PLC Audited Final Results -42-

                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 60 - 90 days            70            -         1,688      342        -        -            -     2,100 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
   Stage 1                -            -         1,688      110        -        -            -     1,798 
   Stage 2               70            -             -      128        -        -            -       198 
   Stage 3                -            -             -      104        -        -            -       104 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 Over 90 days        42,567       19,306        21,516    1,333        -        -            -    84,722 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
   Stage 1                -            -        21,516       69        -        -            -    21,585 
   Stage 2           19,705        8,959             -      258        -        -            -    28,922 
   Stage 3           22,862       10,347             -    1,006        -        -            -    34,215 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 
 At 31 December      61,447       35,213        30,804    3,809        -        -            -   131,273 
----------------  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 
 
 Analyses of past due loans and advances to customers by division: 
                                                           2018 
                                                                                           All 
                    Private   Commercial      Mortgage                                   Other 
                    Banking      Banking    Portfolios      RAF      ABL     ASFL    Divisions     Total 
 Group               GBP000       GBP000        GBP000   GBP000   GBP000   GBP000       GBP000    GBP000 
----------------  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 Up to 30 days       47,766       20,784             -    2,519        -        -            -    71,069 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
   Stage 1           47,766       20,784             -    2,078        -        -            -    70,628 
   Stage 2                -            -             -      154        -        -            -       154 
   Stage 3                -            -             -      287        -        -            -       287 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 30 - 60 days           662        2,300             -      775        -        -            -     3,737 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
   Stage 2              662        2,300             -      565        -        -            -     3,527 
   Stage 3                -            -             -      210        -        -            -       210 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 60 - 90 days           385        4,177             -      297        -        -            -     4,859 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
   Stage 2              385        4,177             -      175        -        -            -     4,737 
   Stage 3                -            -             -      122        -        -            -       122 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 Over 90 days        49,415            -             -      546        -        -            -    49,961 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
   Stage 2           12,901            -             -      272        -        -            -    13,173 
   Stage 3           36,514            -             -      274        -        -            -    36,788 
                  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 
 At 31 December      98,228       27,261             -    4,137        -        -            -   129,626 
----------------  ---------  -----------  ------------  -------  -------  -------  -----------  -------- 
 
 
 Loans and advances to customers include finance lease receivables 
  as follows: 
                                                                          2019       2018 
 Group                                                                  GBP000     GBP000 
-------------------------------------------------------------------  ---------  --------- 
 Gross investment in finance lease receivables: 
  - No later than 1 year                                                40,696     36,609 
  - Later than 1 year and no later than 5 years                         78,013     62,541 
  - Later than 5 years                                                     676        214 
-------------------------------------------------------------------  ---------  --------- 
                                                                       119,385     99,364 
 Unearned future finance income on finance leases                     (16,497)   (13,406) 
-------------------------------------------------------------------  ---------  --------- 
 Net investment in finance leases                                      102,888     85,958 
-------------------------------------------------------------------  ---------  --------- 
 The net investment in finance leases may be analysed as 
  follows: 
  - No later than 1 year                                                32,818     30,657 
  - Later than 1 year and no later than 5 years                         69,441     55,095 
  - Later than 5 years                                                     629        206 
-------------------------------------------------------------------  ---------  --------- 
                                                                       102,888     85,958 
-------------------------------------------------------------------  ---------  --------- 
 

(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 GBPnil (2018: GBPnil).

(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 GBP38.6m (2018: GBP43.0m) against loans (net of ECL) of GBP26.0m (2018: GBP37.4m). The weighted average loan-to-value is 75% (2018: 72.9%).

 
 23. Allowances for impairment of loans 
  and advances 
 
 An analysis of movements in the allowance 
  for ECLs (2019): 
                                                      Stage    Stage     Stage 
                                                          1        2         3     Total 
 Group                                               GBP000   GBP000    GBP000    GBP000 
------------------------------------------------   --------  -------  --------  -------- 
 At 1 January 2019                                    1,606        8     4,961     6,575 
-------------------------------------------------  --------  -------  --------  -------- 
 Transfer to Stage 2                                    (2)        2         -         - 
 Transfer to Stage 3                                    (5)      (1)         5       (1) 
 Current year charge                                    281       42       903     1,226 
 Adjustment due to variation in expected 
  future cash flows                                       -        -       134       134 
 Change in assumptions*                             (1,353)        -       223   (1,130) 
 Financial assets that have been derecognised             -        -     (853)     (853) 
 Repayments and write-offs                                -      (4)   (1,157)   (1,161) 
-------------------------------------------------  --------  -------  --------  -------- 
 At 31 December 2019                                    527       47     4,216     4,790 
-------------------------------------------------  --------  -------  --------  -------- 
 * The ECL model and assumptions were reviewed resulting in a revised basis 
  for estimating LGD after taking account collateral values, this has resulted 
  in a release of ECL provision of GBP1.3m in Stage 1 and an increase in 
  ECL provision in Stage 3 of GBP0.2m. 
 
 
 An analysis of movements in the allowance 
  for ECLs (2018): 
                                                Stage     Stage    Stage 
                                                    1         2        3    Total 
 Group                                         GBP000    GBP000   GBP000   GBP000 
-------------------------------------------   -------  --------  -------  ------- 
 At 1 January 2018                              1,244     1,178    1,520    3,942 
--------------------------------------------  -------  --------  -------  ------- 
 Transfer to Stage 2                            (378)       378        -        - 
 Transfer to Stage 3                             (81)   (1,548)    1,629        - 
 Current year charge                              821         -    1,871    2,692 
 Adjustment due to variation in expected 

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DJ Arbuthnot Banking Group PLC Audited Final Results -43-

  future cash flows                                 -         -       78       78 
 Repayments and write-offs                          -         -    (137)    (137) 
--------------------------------------------  -------  --------  -------  ------- 
 At 31 December 2018                            1,606         8    4,961    6,575 
--------------------------------------------  -------  --------  -------  ------- 
 
 
 24. Other assets 
                                     2019     2018 
 Group                             GBP000   GBP000 
--------------------------------  -------  ------- 
 Trade receivables                  4,625    2,976 
 Inventory                         75,221    4,058 
 Prepayments and accrued income     6,597    5,682 
--------------------------------  -------  ------- 
                                   86,443   12,716 
--------------------------------  -------  ------- 
 

As allowed by IFRS 9, the Group utilises the practical expedient for the stage allocation of particular financial instruments which are deemed 'low credit risk'. This practical expedient permits the Group to assume, without more detailed analysis, that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have 'low credit' at the reporting date. The low credit risk exemption is applied to Trade receivables. ECL has been assessed as immaterial.

Inventory

Land acquired through repossession of collateral which is subsequently held in the ordinary course of business with a view to develop and sell is accounted for as inventory. The land is currently in the process of being redeveloped and will ultimately be sold off as individual residential plots. The proceeds from the sale of these plots will be used to repay the outstanding loans. Pinnacle Universal is a special purpose vehicle, 100% owned by the Group, which owns this land.

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.

During the year two properties were reclassified from investment property to inventory due to being under development with a view to sale, at 31 December 2019 they were valued at cost of GBP63.2m. A further property in Spain, held as collateral on a loan was repossessed. The Group's intention is to develop and sell the property within 12 months and therefore it has been recognised as inventory.

 
                                     2019     2018 
 Company                           GBP000   GBP000 
--------------------------------  -------  ------- 
 Prepayments and accrued income       115       42 
--------------------------------  -------  ------- 
                                      115       42 
--------------------------------  -------  ------- 
 
 
 25. Financial investments 
                                                                  2019     2018 
 Group                                                          GBP000   GBP000 
-------------------------------------------------------------  -------  ------- 
 Designated at fair value through profit and loss 
  - Debt securities                                                156      165 
 Designated at fair value through other comprehensive income 
  - Listed securities                                           29,116   34,222 
  - Unlisted securities                                          1,647      964 
-------------------------------------------------------------  -------  ------- 
 Total financial investments                                    30,919   35,351 
-------------------------------------------------------------  -------  ------- 
 

Listed securities

The Group holds investments in listed securities which are valued based on quoted prices.

On 8 August 2018, ABG lost significant influence over STB. At this date the interest in associate was de-recognised and the shares held in STB were marked to market and disclosed as a financial investment. Since then the shareholding was reduced from 15.53% to 9.85%. The carrying value at year end is GBP29.1m (2018: GBP34.2m) and GBP1.5m (2018: GBP0.7m) of dividends were received in the year.

The shares were designated as FVOCI for strategic reasons. The shares are measured at fair value in the Statement of Financial Position with fair value gains/losses recognised in OCI.

Debt securities

The Group has made an investment in an unlisted special purpose vehicle, set up to acquire and enhance the value of a commercial property through its 100% owned subsidiary. During 2018 the subsidiary company was sold and under the terms of the sale agreement the buyer agreed to purchase 100% of the share capital and reimburse all outstanding loans. The proceeds of the sale have been distributed to the investors, except for the amount withheld for the general and specific warranties (which will be released in three instalments at 18 month intervals included as a condition of the sale agreement. A distribution of GBPnil (2018: GBP1.6m) was received and a loss of GBP9k (2018: gain of GBP75k) recognised in profit or loss during the year. The investment has been valued at GBP0.2m (2018: GBP0.2m). These securities are designated at FVPL. They are measured at fair value in the Statement of Financial Position with fair value gains/losses recognised in the profit or loss.

Unlisted securities

On 23 June 2016 Arbuthnot Latham received EUR1.3m 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. Management has assessed the fair value of the Group's investment as GBP1.2m (2018: GBP863k). This valuation includes a 31% haircut.

The Group has designated its investment in the security as FVOCI. Dividends received during the year amounted to GBP7k (2018: GBP7k).

A further investment in an unlisted investment vehicle was made in 2019. The carrying value at year end is GBP0.5m (2018: GBP0.1m) and no dividends were received in the year. The increase in value is due to additional contributions to the fund and the successful performance of the underlying investments.

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.

 
                                                         2019     2018 
 Company                                               GBP000   GBP000 
----------------------------------------------------  -------  ------- 
 Financial investments comprise: 
  - Listed securities (at fair value through OCI)      25,913   19,312 
  - Unlisted securities (at fair value through OCI)         -        1 
----------------------------------------------------  -------  ------- 
 Total financial investments                           25,913   19,313 
----------------------------------------------------  -------  ------- 
 

26. 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: 
                                                                 2019     2018 
 Group                                                         GBP000   GBP000 
------------------------------------------------------------  -------  ------- 
 Accelerated capital allowances and other short-term timing 
  differences                                                   (269)     (68) 
 Movement in fair value of financial investments FVOCI / 
  available-for-sale                                             (48)     (66) 
 Unutilised tax losses                                          1,740    1,134 
 IFRS 9 adjustment                                                392      490 
------------------------------------------------------------  -------  ------- 
 Deferred tax asset                                             1,815    1,490 
------------------------------------------------------------  -------  ------- 
 
 At 1 January                                                   1,490    1,527 
 Other Comprehensive Income - FVOCI / available-for-sale           18     (26) 
 Profit and loss account - accelerated capital allowances 
  and other short-term timing differences                       (202)     (96) 

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 Profit and loss account - tax losses                             729    (405) 
 IFRS 9 adjustment                                              (220)      490 
------------------------------------------------------------  -------  ------- 
 Deferred tax asset at 31 December                              1,815    1,490 
------------------------------------------------------------  -------  ------- 
 
 
                                                                 2019     2018 
 Company                                                       GBP000   GBP000 
------------------------------------------------------------  -------  ------- 
 Accelerated capital allowances and other short-term timing 
  differences                                                       1        2 
 Movement in faie value of financial investments                  112        - 
 Unutilised tax losses                                            278      111 
------------------------------------------------------------  -------  ------- 
 Deferred tax asset                                               391      113 
------------------------------------------------------------  -------  ------- 
 
 At 1 January                                                     113      641 
 Profit and loss account - accelerated capital allowances 
  and other short-term timing differences                         111        - 
 Profit and loss account - tax losses                             167    (528) 
------------------------------------------------------------  -------  ------- 
 Deferred tax asset at 31 December                                391      113 
------------------------------------------------------------  -------  ------- 
 

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.

27. 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 ten 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.

(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).

 
 
                                         Computer          Other 
                             Goodwill    software    intangibles     Total 
 Group                         GBP000      GBP000         GBP000    GBP000 
--------------------------  ---------  ----------  -------------  -------- 
 Cost 
 At 1 January 2018              5,202      11,148          2,562    18,912 
 Additions                          -       2,294              -     2,294 
 At 31 December 2018            5,202      13,442          2,562    21,206 
--------------------------  ---------  ----------  -------------  -------- 
 Additions                          -       5,552              -     5,552 
 At 31 December 2019            5,202      18,994          2,562    26,758 
--------------------------  ---------  ----------  -------------  -------- 
 
 Accumulated amortisation 
 At 1 January 2018                  -     (2,562)          (355)   (2,917) 
 Amortisation charge                -     (1,483)          (268)   (1,751) 
--------------------------  ---------  ----------  -------------  -------- 
 At 31 December 2018                -     (4,045)          (623)   (4,668) 
--------------------------  ---------  ----------  -------------  -------- 
 Amortisation charge                -     (1,761)          (247)   (2,008) 
 At 31 December 2019                -     (5,806)          (870)   (6,676) 
--------------------------  ---------  ----------  -------------  -------- 
 
 Net book amount 
--------------------------  ---------  ----------  -------------  -------- 
 At 31 December 2018            5,202       9,397          1,939    16,538 
--------------------------  ---------  ----------  -------------  -------- 
 At 31 December 2019            5,202      13,188          1,692    20,082 
--------------------------  ---------  ----------  -------------  -------- 
 

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 (2018: two) with goodwill attached; the core Arbuthnot Latham CGU (GBP1.7m) and RAF CGU (GBP3.5m).

Management considers the value in use for both CGUs to be the discounted cash flows over 5 years with a terminal value (2018: 5 years with a terminal value). The 5 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 2022 as per the approved 3 year plan. A growth rate of 8.1% (2018: 8.9%) was used for income and 10.8% (2018: 6.9%) for expenditure from 2020 to 2022 (these rates were the best estimate of future forecasted performance), while a 3% (2018: 3%) percent growth rate for income and expenditure (a more conservative approach was taken for latter years as these were not budgeted for in detail as per the three year plan approved by the Board of Directors) was used for cash flows after the approved three year plan.

Management considers the value in use for the RAF CGU to be the discounted cash flows over 5 years with a terminal value. The 5 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 2022 as per the approved budget. A growth rate of 3% (2018: 3%) was used (this rate was the best estimate of future forecasted performance).

The growth rates used are above the forecast UK growth rate of 1.5% to reflect the Bank's current growth strategy enabled by capital available at parent level.

Cash flows were discounted at a pre-tax rate of 12% (2018: 12%) to their net present value. The discount rate of 12% is considered to be appropriate after evaluating current market assessments of the time value of money and the risks specific to the assets or CGUs.

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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.

 
                              Computer 
                              software 
 Company                        GBP000 
--------------------------  ---------- 
 Cost 
 At 1 January 2018                   - 
 Additions                           7 
 At 31 December 2018                 7 
--------------------------  ---------- 
 At 31 December 2019                 7 
--------------------------  ---------- 
 
 Accumulated amortisation 
 At 1 January 2018                   - 
 Amortisation charge               (1) 
 At 31 December 2018               (1) 
--------------------------  ---------- 
 Amortisation charge               (1) 
 At 31 December 2019               (2) 
--------------------------  ---------- 
 
 Net book amount 
--------------------------  ---------- 
 At 31 December 2018                 6 
--------------------------  ---------- 
 At 31 December 2019                 5 
--------------------------  ---------- 
 

28. 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   3 to 20 years 
 Office equipment         3 to 10 years 
 Computer equipment        3 to 5 years 
 Motor vehicles                 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.

 
 
                           Freehold                     Computer 
                               land                          and 
                                and       Leasehold        other       Motor 
                          buildings    improvements    equipment    Vehicles     Total 
 Group                       GBP000          GBP000       GBP000                GBP000 
---------------------  ------------  --------------  -----------  ----------  -------- 
 Cost or valuation 
 At 1 January 2018                -           5,015        3,041          97     8,153 
 Additions                        -           1,764          627          91     2,482 
 Disposals                        -               -            -        (97)      (97) 
 At 31 December 2018              -           6,779        3,668          91    10,538 
---------------------  ------------  --------------  -----------  ----------  -------- 
 Additions                        -             609        1,341           -     1,950 
 At 31 December 2019              -           7,388        5,009          91    12,488 
---------------------  ------------  --------------  -----------  ----------  -------- 
 
 
 At 1 January 2018                -         (2,177)      (1,943)        (71)   (4,191) 
 Depreciation charge              -           (823)        (276)        (23)   (1,122) 
 Disposals                        -               -            -          79        79 
 At 31 December 2018              -         (3,000)      (2,219)        (15)   (5,234) 
---------------------  ------------  --------------  -----------  ----------  -------- 
 Depreciation charge              -           (778)        (640)        (23)   (1,441) 
 At 31 December 2019              -         (3,778)      (2,859)        (38)   (6,675) 
---------------------  ------------  --------------  -----------  ----------  -------- 
 
 Net book amount 
---------------------  ------------  --------------  -----------  ----------  -------- 
 At 31 December 2018              -           3,779        1,449          76     5,304 
---------------------  ------------  --------------  -----------  ----------  -------- 
 At 31 December 2019              -           3,610        2,150          53     5,813 
---------------------  ------------  --------------  -----------  ----------  -------- 
 
 
 
                               Computer 
                                    and 
                                  other       Motor 
                              equipment    Vehicles    Total 
 Company                         GBP000      GBP000   GBP000 
--------------------------  -----------  ----------  ------- 
 Cost or valuation 
 At 1 January 2018                  214          97      311 
 Additions                            3          91       94 
 Disposals                            -        (97)     (97) 
--------------------------  -----------  ----------  ------- 
 At 31 December 2018                217          91      308 
--------------------------  -----------  ----------  ------- 
 At 31 December 2019                217          91      308 
--------------------------  -----------  ----------  ------- 
 
 Accumulated depreciation 
 At 1 January 2018                 (84)        (70)    (154) 
 Depreciation charge                (1)        (24)     (25) 
 Disposals                            -          79       79 
--------------------------  -----------  ----------  ------- 
 At 31 December 2018               (85)        (15)    (100) 
--------------------------  -----------  ----------  ------- 
 Depreciation charge                (1)        (23)     (24) 
 At 31 December 2019               (86)        (38)    (124) 
--------------------------  -----------  ----------  ------- 
 
 Net book amount 
--------------------------  -----------  ----------  ------- 
 At 31 December 2018                132          76      208 
--------------------------  -----------  ----------  ------- 
 At 31 December 2019                131          53      184 
--------------------------  -----------  ----------  ------- 
 

29. Right-of-use assets

The Group has applied IFRS 16 using the modified retrospective approach option 2 from 1 January 2019 and has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard.

At inception or on reassessment of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether:

-- the contract involves the use of an identified asset. This may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified;

-- the Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and

-- the Group has the right to direct the use of the asset. The Group has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used.

At inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices.

(a) As a lessee

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore it or its site, less any lease incentives received.

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.

As a lessee (policy applicable before 1 January 2019)

Rentals made under operating leases are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease.

Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Leased assets by way of finance leases are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

(b) As a lessor

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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.

 
                                   Investment 
                                     property      Properties      Equipment       Total 
 Group                                 GBP000          GBP000         GBP000      GBP000 
----------------------------  ---------------  --------------  -------------  ---------- 
 At 1 January 2019                      8,108          14,036              -      22,144 
 Additions                                  -               -            543         543 
 Amortisation                               -         (2,654)           (89)     (2,743) 
 Transfers*                           (8,108)           8,108              -           - 
----------------------------  ---------------  --------------  -------------  ---------- 
 At 31 December 2019                        -          19,490            454      19,944 
----------------------------  ---------------  --------------  -------------  ---------- 
 *The leasehold investment properties were transferred to inventory during 
  2019 and as a result have been reclassified to properties within right-of-use 
  assets. 
 
 The Group recognised GBP976k of interest expense related to lease liabilities. 
  The Group also recognised GBP439k of expense in relation to leases with 
  a duration of less than 12 months. 
 

30. 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.

If a change in use occurs and investment property is transferred to owner-occupied property, the property's deemed cost for subsequent reporting is its fair value at the date of change in use.

them:

 
                            2019     2018 
 Group                    GBP000   GBP000 
---------------------  ---------  ------- 
 Opening balance          67,081   59,439 
 Additions                 2,901      879 
 Transfer               (63,219)    6,763 
 At 31 December 2019       6,763   67,081 
---------------------  ---------  ------- 
 

During the year, two properties were reclassified from investment property to inventory due to being under development with a view to sell. At 31 December 2019 they were valued at cost of GBP63.2m. GBP2.9m (2018: GBP0.9m) of additions relate to development costs of the St Philips Place property, which is one of the properties now reclassified to inventory.

Crescent Office Park, Bath

In November 2017, a Property Fund, based in Jersey and owned by the Group, acquired a freehold office building in Bath. The property comprises 25,528 square ft. over ground and two upper floors with parking spaces. The property was acquired for GBP6.35m. On the date of acquisition, the property was being multi-let to tenants and was at full capacity.

In 2017, the Fund was recognised as an asset held for sale under IFRS 5 and therefore not consolidated in the financial statements. At 31 December 2019 it was consolidated into the Group as it no longer met the IFRS 5 criteria and is recognised as an investment property. The Group has elected to apply the fair value model.

The Group recognised GBP0.5m rental income during the year and incurred GBP0.5m of operating expenses.

 
 31. Deposits from banks 
                                                             2019            2018 
 Group                                                     GBP000          GBP000 
-------------------------------------------------  --------------  -------------- 
 Deposits from other banks                                230,421         232,675 
-------------------------------------------------  --------------  -------------- 
 
 The Term Funding Scheme ("TFS") was announced by the Bank of England on 
  4 August 2016 and became effective from 19 September 2016. The scheme 
  is now closed. The TFS allows participants to borrow central bank reserves 
  in exchange for eligible collateral. Deposits from banks include GBP225m 
  (2018: GBP225m) obtained through TFS. For a maturity profile of deposits 
  from banks, refer to Note 6. 
 
 
 32. Deposits from customers 
                                     2019        2018 
 Group                             GBP000      GBP000 
-----------------------------  ----------  ---------- 
 Current/demand accounts        1,134,021     944,564 
 Notice accounts                  102,567      75,879 
 Term deposits                    848,315     693,843 
-----------------------------  ----------  ---------- 
                                2,084,903   1,714,286 
-----------------------------  ----------  ---------- 
 

Included in customer accounts are deposits of GBP33.2m (2018: GBP24.5m) 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.

 
 33. Other liabilities 
                                   2019     2018 
 Group                           GBP000   GBP000 
------------------------------  -------  ------- 
 Trade payables                   2,023    1,782 
 Accruals and deferred income    11,477   16,767 
------------------------------  -------  ------- 
                                 13,500   18,549 
------------------------------  -------  ------- 
 

Financial Services Compensation Scheme Levy

In common with all regulated UK deposit takers, AL pays levies to the Financial Services Compensation Scheme ("FSCS") to enable the FSCS to meet claims against the Scheme. The FSCS levy consists of two parts: a management expenses levy and a more significant compensation levy. The management expenses levy covers the costs of running the scheme and the compensation levy covers the amount of compensation and associated interest the Scheme pays, net of any recoveries it makes using the rights that have been assigned to it.

The Group's FSCS provision reflects market participation up to the reporting date and the accrual of GBPnil (2018: GBPnil) relates to the interest levy for the Scheme. This amount was calculated on the basis of the Group's share of protected deposits and the FSCS's estimate of total interest levies payable for each Scheme year.

 
                                     2019     2018 
 Company                           GBP000   GBP000 
--------------------------------  -------  ------- 
 Trade payables                       289      272 
 Due to subsidiary undertakings       824    1,566 
 Accruals and deferred income       1,950    1,486 
--------------------------------  -------  ------- 
                                    3,063    3,324 
--------------------------------  -------  ------- 
 

34. Lease liabilities

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Primarily, the Group uses its incremental borrowing rate as the discount rate.

Lease payments included in the measurement of the lease liability comprise the following:

   --      fixed payments, including in-substance payments; 

-- variable lease payments that depend on an index or a rate, initially measured using the index or rates as at the commencement date;

   --      amounts expected to be payable under a residual value guarantee. 

The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in index or rate, if there is a change in the Group's estimate of the amount expected to be payable under a residual value guarantee.

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in the statement of comprehensive income if the carrying amount of the right-of-use asset has been reduced to zero.

 
                                                 Investment 
                                                   property   Properties   Equipment     Total 
 Group                                               GBP000       GBP000      GBP000    GBP000 
---------------------------------------------  ------------  -----------  ----------  -------- 
 At 1 January 2019                                        -       22,732           -    22,732 
 Additions                                                -            -         539       539 
 Interest expense                                         -          965          11       976 
 Lease payments                                           -      (3,677)       (139)   (3,816) 
---------------------------------------------  ------------  -----------  ----------  -------- 
 At 31 December 2019                                      -       20,020         411    20,431 
---------------------------------------------  ------------  -----------  ----------  -------- 
 

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DJ Arbuthnot Banking Group PLC Audited Final Results -47-

 Maturity analysis 
                                                                                          2019 
 Group                                                                                  GBP000 
---------------------------------------------  ------------  -----------  ----------  -------- 
 Less than one year                                                                        111 
 One to five years                                                                      12,174 
 More than five years                                                                    8,146 
-----------------------------------------------------------  -----------  ----------  -------- 
 Total undiscounted lease liabilities at 31 
  December 2019                                                                         20,431 
-----------------------------------------------------------  -----------  ----------  -------- 
 Lease liabilities included in the statement 
  of financial position at 31 December 2019                                                111 
-----------------------------------------------------------  -----------  ----------  -------- 
 Current                                                                                   111 
 Non-current                                                                            20,320 
-----------------------------------------------------------  -----------  ----------  -------- 
 

35. Issued debt securities

Issued financial instruments or their components are classified as liabilities where the contractual arrangement results in the Group having a present obligation to either deliver cash or another financial asset to the holder, to exchange financial instruments on terms that are potentially unfavourable.

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.

 
                              2019     2018 
 Group and Company          GBP000   GBP000 
-------------------------  -------  ------- 
 Subordinated loan notes    36,837   13,283 
-------------------------  -------  ------- 
 

Euro subordinated loan notes

The subordinated loan notes were issued on 7 November 2005 and are denominated in Euros. The principal amount outstanding at 31 December 2019 was EUR15,000,000 (2018: EUR15,000,000). The notes carry interest at 3% over the interbank rate for three month deposits in euros and are repayable at par in August 2035 unless redeemed or repurchased earlier by the Company.

The contractual undiscounted amount that will be required to be paid at maturity of the above debt securities is EUR15,000,000.

Given the fact that the Group has never been subject to a published credit rating by any of the relevant agencies and the notes in issue are not quoted, it is not considered possible to estimate a fair value for these notes.

Subordinated loan notes

The subordinated loan notes were issued on 3 June 2019 and are denominated in Pound Sterling. The principal amount outstanding at 31 December 2019 was GBP25,000,000 (2018: GBPnil). The notes carry interest at 7.75% over the three month LIBOR rate and are repayable at par in June 2029 unless redeemed or repurchased earlier by the Company.

The contractual undiscounted amount that will be required to be paid at maturity of the above debt securities is GBP25,000,000.

Given the fact that the Group has never been subject to a published credit rating by any of the relevant agencies and the notes in issue are not quoted, it is not considered possible to estimate a fair value for these notes.

36. 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 2019, the Group had capital commitments of US$0.6m (2018: US$0.7m) 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:

 
                                                                 2019     2018 
 Group                                                         GBP000   GBP000 
---------------------------------------------------------  ----------  ------- 
 Guarantees and other contingent liabilities                    6,401    1,744 
 Commitments to extend credit: 
  - Original term to maturity of one year or less             190,064   86,002 
---------------------------------------------------------  ----------  ------- 
                                                              196,465   87,746 
---------------------------------------------------------  ----------  ------- 
 
 Operating lease commitments 
 Where a Group company is the lessee, the future aggregate lease payments 
  under non-cancellable operating leases are as follows: 
 
                                                                 2019     2018 
 Group                                                         GBP000   GBP000 
---------------------------------------------------------  ----------  ------- 
 Expiring: 
 Within 1 year                                                    215    2,995 
 Later than 1 year and no later than 5 years                        -   11,446 
 Later than 5 years                                                 -    2,213 
---------------------------------------------------------  ----------  ------- 
                                                                  215   16,654 
---------------------------------------------------------  ----------  ------- 
 2018 has been restated to include an omitted lease identified during the 
  implementation of IFRS 16. 
 

On adoption of IFRS 16, the Group recognised a right-of-use asset and a corresponding liability in relation to leases which had previously been classified as "operating leases" under the principles of IAS 17 Leases.

The Group utilised the practical expedient, which allows for the accounting for operating leases, with a remaining lease term of less than 12 months as at 1 January 2019, as short-term leases.

 
 37. Share capital 
 
 Ordinary share capital 
                                            Number      Share      Share 
                                         of shares    Capital    premium 
 Group and Company                                     GBP000     GBP000 
-------------------------------------  -----------  ---------  --------- 
 At 1 January 2018                      15,279,322        153          - 
 At 31 December 2018 & December 2019    15,279,322        153          - 
-------------------------------------  -----------  ---------  --------- 
 
 Ordinary non-voting share capital 
                                            Number      Share      Share 
                                         of shares    Capital    premium 
 Group and Company                                     GBP000     GBP000 
-------------------------------------  -----------  ---------  --------- 
 At 1 January 2019                               -          -          - 
 Issue of shares                           152,621          1          - 
-------------------------------------  -----------  ---------  --------- 
 At 31 December 2019                       152,621          1          - 
-------------------------------------  -----------  ---------  --------- 
 
 Total share capital 
                                            Number      Share      Share 
                                         of shares    Capital    premium 
 Group and Company                                     GBP000     GBP000 

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DJ Arbuthnot Banking Group PLC Audited Final Results -48-

-------------------------------------  -----------  ---------  --------- 
 At 1 January 2018                      15,279,322        153          - 
 At 31 December 2018                    15,279,322        153          - 
-------------------------------------  -----------  ---------  --------- 
 Issue of shares                           152,621          1          - 
-------------------------------------  -----------  ---------  --------- 
 At 31 December 2019                    15,431,943        154          - 
-------------------------------------  -----------  ---------  --------- 
 

(a) Share issue costs

Incremental costs directly attributable to the issue of new shares or options by Arbuthnot Banking Group, 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 (2018: 1p per share). At 31 December 2019 the Company held 401,584 shares (2018: 390,274) in treasury. This includes 390,274 Ordinary shares and 11,310 Ordinary Non-Voting shares.

 
 38. Reserves and retained earnings 
                                          2019       2018 
 Group                                  GBP000     GBP000 
------------------------------------  --------  --------- 
 Capital redemption reserve                 19         20 
 Fair value reserve                        205   (12,169) 
 Treasury shares                       (1,214)    (1,131) 
 Retained earnings                     209,171    209,083 
------------------------------------  --------  --------- 
 Total reserves at 31 December         208,181    195,803 
------------------------------------  --------  --------- 
 

The capital redemption reserve represents a reserve created after the Company purchased its own shares which resulted in a reduction of share capital.

 
                                     2019      2018 
 Company                           GBP000    GBP000 
-------------------------------  --------  -------- 
 Capital redemption reserve            19        20 
 Fair value reserve                 (423)   (7,022) 
 Treasury shares                  (1,214)   (1,131) 
 Retained earnings                161,556   162,729 
-------------------------------  --------  -------- 
 Total reserves as 31 December    159,938   154,596 
-------------------------------  --------  -------- 
 

39. Share-based payment options

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, which remained outstanding at 31 December 2019. The fair value of these options at the grant date was GBP1m. At 31 December 2019, the fair value of the options was GBP0.3m (2018: GBP0.1m).

The performance conditions of the Scheme are that for the duration of the vesting period, the dividends paid by ABG must have increased in percentage terms when compared to an assumed dividend of 29p per share in respect of the financial year ending 31 December 2016, by a minimum of the increase in the Retail Prices Index during that period.

Also from the grant date to the date the Option is exercised, there must be no public criticism by any regulatory authority on the operation of ABG or any of its subsidiaries which has a material impact on the business of ABG.

Options are forfeited if they remain unexercised after a period of more than 7 years from the date of grant. If the participant ceases to be employed by the Group by reason of injury, disability, ill-health or redundancy; or because his employing company ceases to be a shareholder of the Group; or because his employing business is being transferred out of the Group, his option may be exercised within 6 months after such cessation. In the event of the death of a participant, the personal representatives of a participant may exercise an option, to the extent exercisable at the date of death, within 6 months after the death of the participant.

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. The attrition rate will increase by 3% per year until the vesting date. ABG had a GBP0.2m expense in relation to share based payments during 2019 (2018: GBP0.3m write back), as disclosed in Note 12.

 
 Measurement inputs and assumptions used in the Black-Scholes model are 
  as follows: 
                                                             2019       2018 
------------------------------------------------------  ---------  --------- 
 
 Expected Stock Price Volatility                            21.8%      19.8% 
 Expected Dividend Yield                                     2.9%       3.6% 
 Risk Free Interest Rate                                     0.7%       0.8% 
 Average Expected Life (in years)                            1.46       1.46 
 
 

40. Dividends per share

Final dividends are not accounted for until they have been approved at the Annual General Meeting. At the meeting on 22 May 2020, a dividend in respect of 2019 of 21p per share (2018: actual dividend 20p per share) amounting to a total of GBP3.16m (2018: actual GBP2.98m) is to be proposed. The financial statements for the year ended 31 December 2019 do not reflect the final dividend which will be accounted for in shareholders' equity as an appropriation of retained profits in the year ending 31 December 2020.

41. 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.

 
                                                    2019      2018 
 Group                                            GBP000    GBP000 
----------------------------------------------  --------  -------- 
 Cash and balances at central banks (Note 17)    325,908   405,325 
 Loans and advances to banks (Note 18)            46,258    54,173 
----------------------------------------------  --------  -------- 
                                                 372,166   459,498 
----------------------------------------------  --------  -------- 
 
                                                    2019      2018 
 Company                                          GBP000    GBP000 
----------------------------------------------  --------  -------- 
 Loans and advances to banks                      15,316    17,008 
----------------------------------------------  --------  -------- 
 

42. 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.

Other than the directors' remuneration (see Remuneration Report pages 32 to 33), payment of dividends and transactions with subsidiaries and associates, there were no related party transactions within the Parent Company. A number of banking transactions are entered into with related parties in the normal course of business on normal commercial terms. These include loans and deposits. Except for the directors' disclosures, there were no other Key Management Personnel disclosures; therefore the tables below relate to directors and their close family members.

 
                                           2019     2018 
 Group - subsidiaries                    GBP000   GBP000 
--------------------------------------  -------  ------- 
 Loans 
 Loans outstanding at 1 January             515      508 
 Loans advanced during the year             137      126 
 Loan repayments during the year          (144)      (2) 
 Transfer to deposits during the year       (5)        - 
 Transferred to loans with associates         -    (117) 
--------------------------------------  -------  ------- 

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DJ Arbuthnot Banking Group PLC Audited Final Results -49-

 Loans outstanding at 31 December           503      515 
--------------------------------------  -------  ------- 
 Interest income earned                      17       15 
--------------------------------------  -------  ------- 
 

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 (2018 : GBPnil).

 
                                               2019      2018 
 Group - subsidiaries                        GBP000    GBP000 
-----------------------------------------  --------  -------- 
 Deposits 
 Deposits at 1 January                        1,884     3,233 
 Deposits placed during the year              4,529     3,390 
 Deposits repaid during the year            (3,342)   (4,622) 
 Transfer to loans during the year              (6)         - 
 Transferred to deposits with associates          -     (117) 
-----------------------------------------  --------  -------- 
 Deposits at 31 December                      3,065     1,884 
-----------------------------------------  --------  -------- 
 Interest expense on deposits                     6         7 
-----------------------------------------  --------  -------- 
 

Details of directors' remuneration are given in the Remuneration Report. The Directors do not believe that there were any other transactions with key management or their close family members that require disclosure.

 
 Details of principal subsidiaries are given in Note 43. Transactions 
  and balances with subsidiaries are shown below: 
                                                     2019                    2018 
                                               Highest     Balance     Highest     Balance 
                                               balance       at 31     balance       at 31 
                                                during    December      during    December 
                                              the year                the year 
                                                GBP000      GBP000      GBP000      GBP000 
------------------------------------------  ----------  ----------  ----------  ---------- 
 ASSETS 
 Due from subsidiary undertakings - Loans 
  and advances to banks                         16,094      15,310      35,483      17,002 
 Due from subsidiary undertakings - Debt 
  securities at amortised cost                  24,741      24,239           -           - 
 Shares in subsidiary undertakings             134,614     134,004     134,614     134,614 
------------------------------------------  ----------  ----------  ----------  ---------- 
                                               175,449     173,553     170,097     151,616 
------------------------------------------  ----------  ----------  ----------  ---------- 
 LIABILITIES 
 Due to subsidiary undertakings                  1,039         824       2,097       1,566 
------------------------------------------  ----------  ----------  ----------  ---------- 
                                                 1,039         824       2,097       1,566 
------------------------------------------  ----------  ----------  ----------  ---------- 
 

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: 
                                                                   2019      2018 
                                                                 GBP000    GBP000 
-------------------------------------------------------------  --------  -------- 
 Arbuthnot Latham & Co., Ltd - Recharge of property and 
  IT costs                                                          930       930 
 Arbuthnot Latham & Co., Ltd - Recharge for costs paid 
  on the Company's behalf                                         1,890     1,520 
 Arbuthnot Latham & Co., Ltd - Recharge of costs paid           (1,226)         - 
  on behalf of Arbuthnot Latham & Co., Ltd 
 Arbuthnot Latham & Co., Ltd - Group recharges for shared 
  services                                                      (5,219)   (1,200) 
 Arbuthnot Latham & Co., Ltd - Group recharges for liquidity    (5,326)         - 
 Secure Trust Bank PLC (from 16 June 2016 to 8 August 
  2018 as associate) - Group recharges for shared services            -     (751) 
 Secure Trust Bank PLC (from 16 June 2016 to 8 August 
  2018 as associate) - Dividends received                             -   (2,101) 
-------------------------------------------------------------  --------  -------- 
 Total                                                          (8,951)   (1,602) 
-------------------------------------------------------------  --------  -------- 
 
 
 43. Interests in subsidiaries 
                                                       Investment    Impairment 
                                                          at cost    provisions       Net 
 Company                                                   GBP000        GBP000    GBP000 
----------------------------------------------------  -----------  ------------  -------- 
 At 1 January 2018                                        100,366       (2,564)    97,802 
 Capital contributions to Arbuthnot Latham & Co., 
  Limited                                                  36,812             -    36,812 
----------------------------------------------------  -----------  ------------  -------- 
 At 31 December 2018                                      137,178       (2,564)   134,614 
----------------------------------------------------  -----------  ------------  -------- 
 Receipt on dissolution of West Yorkshire Insurance 
  Company Limited                                         (3,174)         2,564     (610) 
----------------------------------------------------  -----------  ------------  -------- 
 At 31 December 2019                                      134,004             -   134,004 
----------------------------------------------------  -----------  ------------  -------- 
 
 
                                2019      2018 
 Company                      GBP000    GBP000 
--------------------------  --------  -------- 
 Subsidiary undertakings: 
 Bank                        132,314   132,314 
 Other                         1,690     2,300 
--------------------------  --------  -------- 
 Total                       134,004   134,614 
--------------------------  --------  -------- 
 
   (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: 
 
                                                                      Country 
                                           % shareholding    of incorporation       Principal activity 
  --------------------------------------  ---------------  ------------------    --------------------- 
 Direct shareholding 
   Arbuthnot Fund Managers Limited                 100.0%                  UK                  Dormant 
   Arbuthnot Investments Limited                   100.0%                  UK                  Dormant 
   Arbuthnot Limited                               100.0%                  UK                  Dormant 
   Arbuthnot Properties Limited                    100.0%                  UK                  Dormant 
   Arbuthnot Unit Trust Management                 100.0%                  UK 
    Limited                                                                                    Dormant 
   Gilliat Financial Solutions Limited             100.0%                  UK                  Dormant 
   Peoples Trust and Savings Plc                   100.0%                  UK                  Dormant 
   Windward Insurance Company PCC                  100.0%            Guernsey 
    Limited                                                                                  Insurance 
 
 Indirect shareholding via intermediate holding 
  companies 
   Arbuthnot Commercial Asset Based                100.0%                  UK 
    Lending Limited                                                                      Asset Finance 
   Arbuthnot Latham (Nominees) Limited             100.0%                  UK                  Dormant 
   Arbuthnot Latham Real Estate Holdco             100.0%              Jersey 
    Limited                                                                        Property Investment 
   Arbuthnot Latham Real Estate Holdings           100.0%                  UK 
    Limited                                                                        Property Investment 
   Arbuthnot Latham Real Estate PropCo             100.0%              Jersey 
    Limited                                                                        Property Investment 
   Arbuthnot Real Estate Capital Limited           100.0%              Jersey      Property Investment 
   Arbuthnot Real Estate Capital GP                100.0%              Jersey 
    1 Limited                                                                      Property Investment 
   Arbuthnot Real Estate Capital Fund              100.0%              Jersey 
    1 Limited                                                                      Property Investment 
   Arbuthnot Securities Limited                    100.0%                  UK                  Dormant 
   Arbuthnot Specialist Finance Limited            100.0%                  UK                  Dormant 

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   John K Gilliat & Co., Limited                   100.0%                  UK                  Dormant 
   Pinnacle Universal Limited                      100.0%                 BVI     Property development 
   Pinnacle Universal Limited                      100.0%                  UK     Property development 
   Renaissance Asset Finance Limited               100.0%                  UK            Asset Finance 
  --------------------------------------  ---------------  ------------------  ----------------------- 
 

All the subsidiary and related undertakings above 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. On 16 January 2018, Artillery Nominees Limited was dissolved.

All Jersey entities have their registered office as 26 New Street, St Helier, Jersey, JE2 3RA. Pinnacle Universal Limited's (BVI) registered office is 9 Columbus Centre, Pelican Drive, Road Town, Tortola, BVI. All other entities listed above have their registered office as 7 Wilson Street, London, EC2M 2SN.

(b) Non-controlling interests in subsidiaries

There were no non-controlling interests at the end of 2019 or 2018.

(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 GBP2,584m and GBP2,400m respectively (2018: GBP2,171m and GBP1,994m respectively).

(d) Risks associated with interests

During the year Arbuthnot Banking Group PLC made GBPnil (2018: GBP36.8m) 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.

44. Operating segments

The Group is organised into eight operating segments as disclosed below:

1) Private Banking - Provides traditional private banking services as well as offering financial planning and investment management services. This segment includes Dubai.

2) Mortgage Portfolios - Acquired mortgage portfolios.

3) Commercial Banking - Provides bespoke commercial banking services and tailored secured lending against property investments and other assets.

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) All Other Divisions - All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Investment property and Central costs)

8) Group Centre - ABG Group management.

During the year the Group changed the way indirect costs are allocated to divisions. Treasury income and expenditure and the cost relating to certain support departments are no longer allocated out to divisions. This is in accordance with how the divisions are managed internally. The Mortgage Portfolios were previously included as part of Private Banking. ACABL and ASFL are now also reported separately (previously included in All Other Divisions). The comparative numbers for the divisions have been restated to reflect the new allocation method.

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.

 
 
                                                                                            All 
                    Private     Mortgage   Commercial                                     Other      Group 
                    banking   Portfolios      Banking       RAF       ABL      ASFL   Divisions     Centre       Total 
 Year ended 31       GBP000       GBP000       GBP000    GBP000    GBP000    GBP000      GBP000     GBP000      GBP000 
 December 
 2019 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Interest 
  revenue            27,366        6,647       22,959     8,659     2,703       102       8,434         68      76,938 
 Inter-segment 
  revenue                 -            -            -         -         -         -           -       (68)        (68) 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Interest 
  revenue from 
  external 
  customers          27,366        6,647       22,959     8,659     2,703       102       8,434          -      76,870 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Fee and 
  commission 
  income             10,730            -        1,162       219     1,380         1         443          -      13,935 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Revenue from 
  external 
  customers          38,096        6,647       24,121     8,878     4,083       103       8,877          -      90,805 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Interest 
  expense           (2,259)      (2,534)      (2,808)   (2,786)   (1,358)      (31)     (4,696)      (209)    (16,681) 
 Add back 
  inter-segment 
  revenue                 -            -            -         -         -         -           -         68          68 
 Subordinated 
  loan note 
  interest                -                                                                        (1,620)     (1,620) 
 Fee and 
  commission 
  expense              (43)            -         (48)      (12)       (3)       (1)           -          -       (107) 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Segment 
  operating 
  income             35,794        4,113       21,265     6,080     2,722        71       4,181    (1,761)      72,465 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Impairment 
  losses              (485)            -          320     (708)        10       (4)           -          -       (867) 
 Other income             -            -            -        64         -         -       4,955        580       5,599 
 Operating 
  expenses         (32,373)        (807)     (14,312)   (3,577)   (2,708)   (1,275)     (7,170)    (7,964)    (70,186) 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Segment profit 
  / (loss) 
  before tax          2,936        3,306        7,273     1,859        24   (1,208)       1,966    (9,145)       7,011 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Income tax 
  (expense) / 
  income                  -            -            -     (371)         -         -         133      (597)       (835) 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Segment profit 
  / (loss) 
  after tax           2,936        3,306        7,273     1,488        24   (1,208)       2,099    (9,742)       6,176 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 
 Loans and 
  advances to 
  customers         579,267      306,044      527,620   102,888    75,871     7,352      11,511   (11,500)   1,599,053 
 Other assets             -            -            -         -         -         -     974,241     22,085     996,326 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Segment total 
  assets            579,267      306,044      527,620   102,888    75,871     7,352     985,752     10,585   2,595,379 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Customer 
  deposits        1,039,112            -      824,120         -         -         -     248,965   (27,294)   2,084,903 
 Other 
  liabilities             -            -            -         -         -         -     288,790     13,351     302,141 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Segment total 
  liabilities     1,039,112            -      824,120         -         -         -     537,755   (13,943)   2,387,044 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 Other segment 
 items: 
 Capital 
  expenditure             -            -            -         -         -         -     (7,503)          -     (7,503) 
 Depreciation 
  and 
  amortisation            -            -            -         -         -         -     (3,424)       (25)     (3,449) 
---------------  ----------  -----------  -----------  --------  --------  --------  ----------  ---------  ---------- 
 The "Group Centre" segment above includes the parent entity and all intercompany 
  eliminations. 
 
 
                                                                                            All 
                    Private     Mortgage   Commercial                                     Other      Group 
                    Banking   Portfolios      Banking       RAF       ABL     ASFL    Divisions     Centre       Total 

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 Year ended 31       GBP000       GBP000       GBP000    GBP000    GBP000   GBP000       GBP000     GBP000      GBP000 
 December 
 2018 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Interest 
  revenue            30,409        3,194       17,388     7,536       487        -        6,276         88      65,378 
 Inter-segment 
  revenue                 -            -            -         -         -        -            -       (88)        (88) 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Interest 
  revenue from 
  external 
  customers          30,409        3,194       17,388     7,536       487        -        6,276          -      65,290 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Fee and 
  commission 
  income             10,887            -          849       151       219        -          850          -      12,956 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Revenue from 
  external 
  customers          41,296        3,194       18,237     7,687       706        -        7,126          -      78,246 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Interest 
  expense           (2,166)      (1,059)      (2,243)   (2,192)     (263)        -      (1,713)      (199)     (9,835) 
 Add back 
  inter-segment 
  revenue                 -            -            -         -         -        -            -         88          88 
 Subordinated 
  loan note 
  interest                -            -            -         -         -        -            -      (360)       (360) 
 Fee and 
  commission 
  expense              (56)            -        (122)      (14)       (7)        -         (35)          -       (234) 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Segment 
  operating 
  income             39,074        2,135       15,872     5,481       436        -        5,378      (471)      67,905 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Impairment 
  losses            (1,966)            -        (278)     (437)      (50)        -            -          -     (2,731) 
 Other income             2            -            -        73         -        -        6,683      (170)       6,588 
 Operating 
  expenses         (32,499)        (235)     (12,794)   (3,169)   (1,500)    (345)      (7,287)    (7,153)    (64,982) 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Segment profit 
  / (loss) 
  before tax          4,611        1,900        2,800     1,948   (1,114)    (345)        4,774    (7,794)       6,780 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Income tax 
  (expense) / 
  income                  -            -            -     (431)         -        -           35      (725)     (1,121) 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Segment profit 
  / (loss) 
  after tax           4,611        1,900        2,800     1,517   (1,114)    (345)        4,809    (8,519)       5,659 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Loss from 
  discontinued 
  operations              -            -            -         -         -        -            -          -    (25,692) 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Segment profit 
  / (loss) 
  after tax           4,611        1,900        2,800     1,517   (1,114)    (345)        4,809    (8,519)    (20,033) 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 
 Loans and 
  advances to 
  customers         601,741       68,723      443,108    85,957    25,341        -       11,286   (11,500)   1,224,656 
 Other assets             -            -            -         -         -        -      936,370     14,147     950,517 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Segment total 
  assets            601,741       68,723      443,108    85,957    25,341        -      947,656      2,647   2,175,173 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Customer 
  deposits        1,041,208            -      566,748         -         -        -      136,092   (29,762)   1,714,286 
 Other 
  liabilities             -            -            -         -         -        -      251,437     13,494     264,931 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Segment total 
  liabilities     1,041,208            -      566,748         -         -        -      387,529   (16,268)   1,979,217 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 Other segment 
 items: 
 Capital 
  expenditure             -            -            -         -         -        -      (4,675)      (101)     (4,776) 
 Depreciation 
  and 
  amortisation            -            -            -         -         -        -      (2,847)       (26)     (2,873) 
---------------  ----------  -----------  -----------  --------  --------  -------  -----------  ---------  ---------- 
 

Segment profit is shown prior to any intra-group eliminations.

Prior year numbers have been represented according to the 2018 operating segments reported to management. The UK private bank has a branch in Dubai, which generated GBP4.4m (2017: GBP4.5m) of income and had direct operating costs of GBP2.9m (2017: GBP2.7m). All Dubai branch income is booked in the UK. Other than the Dubai branch, all operations of the Group are conducted wholly within the United Kingdom and geographical information is therefore not presented.

45. 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 2019            Turnover         Number      Profit/(loss)     Tax paid 
                                                 FTE 
 Location                      (GBPm)      employees             before       (GBPm) 
                                                             tax (GBPm) 
-----------------------  ------------  -------------  -----------------  ----------- 
 
 UK                              72.5            487                9.8          0.8 
 Dubai                              -             13              (2.8)            - 
 
 
 31 December 2018            Turnover         Number      Profit/(loss)     Tax paid 
                                                 FTE 
 Location                      (GBPm)      employees             before       (GBPm) 
                                                             tax (GBPm) 
-----------------------  ------------  -------------  -----------------  ----------- 
 
 UK                              67.9            423                9.7          1.2 
 Dubai                              -             14              (2.9)            - 
 
 The Dubai branch income is booked through the UK, hence the turnover 
  is nil in the above analysis. Offsetting this income against Dubai branch 
  costs would result in a GBP1.6m profit (2018: GBP0.9m). After indirect 
  cost allocation it results in a loss of GBP0.3m (2018: loss of GBP0.5m). 
  No public subsidies were received during 2018 
 

46. Ultimate controlling party

The Company regards Sir Henry Angest, the Group Chairman and Chief Executive Officer, who has a beneficial interest in 56.1% 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 42 of the consolidated financial statements includes related party transactions with Sir Henry Angest.

47. Non-adjusting events after the balance sheet date

The global economy has being significantly impacted by the spread of the coronavirus, this has had a dramatic effect on financial markets around the world.

The Government along with the Bank of England have implemented a number of measures to boost the economy. The extent to which these prevent the emergence of credit impairments in the Group is unknown.

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Five Year Summary

 
                                                     2015      2016      2017       2018      2019 
                                                   GBP000    GBP000    GBP000     GBP000    GBP000 
---------------------------  ------------------  --------  --------  --------  ---------  -------- 
 Profit \ (loss) for the year after 
  tax                                              26,524   227,569     6,523   (20,033)     6,176 
 (Loss) / profit before tax from continuing 
  operations*                                     (2,606)   (1,966)     2,534      6,780     7,011 
 Total Earnings per share 
  Basic (p)                                          86.3   1,127.2      43.9    (134.5)      41.2 
 Earnings per share from continuing 
  operations* 
  Basic (p)                                        (16.9)    (18.2)      14.0       38.0      41.2 
 Dividends per 
  share (p)                   - ordinary             29.0      31.0      33.0       35.0      37.0 
                              - special                 -     325.0         -          -         - 
 
 Other KPI: 
                                                     2015      2016      2017       2018      2019 
                                                   GBP000    GBP000    GBP000     GBP000    GBP000 
---------------------------  ------------------  --------  --------  --------  ---------  -------- 
 Net asset value 
  per share (p)                                   1,252.7   1,533.8   1,547.0    1,282.5   1,363.5 
 
 * - Prior year numbers have been restated for continuing operations. 
 

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