Final Results

Arbuthnot Banking Group PLC 13 March 2008 ARBUTHNOT BANKING GROUP PLC Final results for the year to 31 December 2007 Arbuthnot Banking Group PLC ('Arbuthnot') today announces audited final results for the year ended 31 December 2007. Arbuthnot is the holding company for Arbuthnot Securities Limited, Arbuthnot Latham & Co., Limited and Secure Trust Bank PLC. Financial Highlights restated 2007 2006 Increase Operating income Â£68.8m Â£58.2m +18% Profit before tax and exceptional items Â£8.6m Â£7.6m +13% Profit before tax Â£8.6m Â£14.1m -39% Basic earnings per share (pre exceptional items) 23.8p 32.0p -26% Basic earnings per share 23.8p 63.0p -62% Total dividend per share 33.0p 32.5p +2% Total assets Â£414m Â£365m +13% Total equity Â£42.5m Â£42.2m +1% Tier 1 & 2 Capital Â£46.7m Â£48.2m -3% Commenting on the results, Henry Angest, Chairman and Chief Executive of Arbuthnot, said: 'Arbuthnot Banking Group made good progress in 2007 with underlying profits increasing from 2006. We are particularly pleased that Arbuthnot Securities again substantially raised its profits and that the liquidity of the two banking subsidiaries remained strong throughout the year. ' Press enquiries: Arbuthnot Banking Group PLC: Tel: 020 7012 2400 Henry Angest, Chairman and Chief Executive Andrew Salmon, Chief Operating Officer Paul Sheriff, Group Finance Director Maitland: Tel: 020 7379 5151 Emma Burdett Lydia Pretzlik Operational Highlights Investment Banking - Arbuthnot Securities â€¢ Operating income up 35% to Â£29.3m (2006: Â£21.7m) â€¢ Profit before tax and exceptional items up 62% to Â£8.1m (2006: Â£5.0m) â€¢ 49 transactions including five IPOs in 2007 â€¢ Corporate client list increased from 71 to 85 Private Banking - Arbuthnot Latham â€¢ Operating income up 27% to Â£17.3m (2006: Â£13.6m) â€¢ Profit before tax and exceptional items increased to Â£1.5m (2006: Â£0.3m) â€¢ 8% asset growth, 12% deposit growth and 22% loan book growth â€¢ Customer deposits to loan ratio 1.9:1. Committed bank lines undrawn throughout 2007 Retail Banking - Secure Trust Bank â€¢ Operating income reduced by 3% to Â£22.8m (restated 2006: Â£23.6m) â€¢ Unsecured loan book reduced by 30% to Â£21.2m (restated 2006: Â£30.4m) â€¢ Profit before tax and exceptional items reduced by 25% to Â£4.6m (restated 2006: Â£6.1m) Switzerland â€¢ Regulatory submission made in December 2007 The 2007 Annual Report will be posted and available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com/Presentations.aspx on 26 March 2008. Copies may be obtained from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 20 Ropemaker Street, London EC2Y 9AR. CONSOLIDATED INCOME STATEMENT Profit Profit before Year before Exceptional Year exceptional Exceptional ended exceptional items ended items items 31 December items 31 December 2007 2007 2007 2006 2006 2006 restated restated Note Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Interest and similar income 23,758 - 23,758 18,973 - 18,973 Interest expense and similar charges (12,314) - (12,314) (9,042) - (9,042) -------- -------- -------- -------- -------- -------- Net interest income 11,444 - 11,444 9,931 - 9,931 -------- -------- -------- -------- -------- -------- Fee and commission income 5 54,014 - 54,014 48,417 - 48,417 Fee and commission expense (1,107) - (1,107) (4,241) - (4,241) -------- -------- -------- -------- -------- -------- Net fee and commission income 52,907 - 52,907 44,176 - 44,176 -------- -------- -------- -------- -------- -------- Gains less losses from dealing in securities 4,442 - 4,442 4,102 - 4,102 -------- -------- -------- -------- -------- -------- Operating income 68,793 - 68,793 58,209 - 58,209 -------- -------- -------- -------- -------- -------- Gain on sale of Arbuthnot House - - - - 12,623 12,623 Impairment losses on loans and advances 15 (2,237) - (2,237) (1,986) (2,900) (4,886) Operating expenses 6 (57,977) - (57,977) (48,672) (3,212) (51,884) -------- -------- -------- -------- -------- -------- Profit before income tax 8,579 - 8,579 7,551 6,511 14,062 Income tax expense 8 (2,792) (2,792) (1,531) (1,953) (3,484) -------- -------- -------- -------- -------- -------- Profit for the year 5,787 - 5,787 6,020 4,558 10,578 -------- -------- -------- -------- -------- -------- Attributable to: Equity holders of the Company 3,555 - 3,555 4,716 4,558 9,274 Minority interest 2,232 - 2,232 1,304 - 1,304 -------- -------- -------- -------- -------- -------- 5,787 - 5,787 6,020 4,558 10,578 -------- -------- -------- -------- -------- -------- Earnings per share for profit attributable to the equity holders of the Company during the year (expressed in pence per share): - basic and fully diluted 10 23.8p - 23.8p 32.0p 31.0p 63.0p The notes on pages 22 to 49 are an integral part of these consolidated financial statements As announced in the Pre Close Trading Statement on 11 January 2007, there are prior year adjustments relating primarily to income recognition on the unsecured loan book at Secure Trust Bank. This has resulted in 2006 opening retained earnings being restated downwards by Â£1.0 million, pre tax profits being restated downwards by Â£0.7 million in 2006 and post tax profits being restated downwards by Â£0.1 million in 2006. The impact of this restatement on 2006 earnings per share is 0.8p, being a 1% reduction. CONSOLIDATED BALANCE SHEET At 31 December 2007 2006 restated Note Â£000 Â£000 Assets Cash 11 520 181 Loans and advances to banks 12 39,708 54,214 Trading securities - long positions 13 23,070 9,095 Loans and advances to customers 14 171,953 153,538 Debt securities held-to-maturity 16 122,306 105,961 Current tax asset 2,198 - Financial investments 17 6,201 5,856 Intangible assets 18 3,138 3,025 Property, plant and equipment 19 11,451 10,638 Other assets 20 33,558 22,397 -------- -------- Total assets 414,103 364,905 -------- -------- Liabilities Deposits from banks 21 12,726 7,729 Trading securities - short positions 13 5,105 2,303 Deposits from customers 22 300,920 270,448 Other liabilities 23 41,884 29,886 Current tax liabilities - 2,575 Debt securities in issue 24 10,708 9,773 Deferred tax liabilities 25 274 35 -------- -------- Total liabilities 371,617 322,749 -------- -------- Equity Share capital 27 150 150 Share premium account 27 21,085 21,085 Retained earnings 28 15,419 16,721 Other reserves 28 1,402 1,402 -------- -------- Capital and reserves attributable to equity holders of the parent 38,056 39,358 Minority interest 32 4,430 2,798 -------- -------- Total equity 42,486 42,156 -------- -------- Total equity and liabilities 414,103 364,905 -------- -------- The notes on pages 22 to 49 are an integral part of these consolidated financial statements CHAIRMAN'S STATEMENT This year Arbuthnot Latham & Co., the cornerstone of our Group, celebrates its 175th anniversary. For the name to have survived for such a long time and through many turbulent years is due to the achievements and sometimes sheer determination of past and present management. The fortunes of the Company have fluctuated with that of London and the City in particular. Yet again we seem to be at a tipping point. In February, as Senior Warden of the Worshipful Company of International Bankers, I spoke at this year's Bankers' Banquet at the Guildhall. I first attended this function some 30 years ago when I came to work in the City of London. Since then we have seen a tremendous transformation in the prosperity and success of the British financial services industry from which Arbuthnot, as many others, have benefited. In the presence of the Chancellor of the Exchequer and a large number of leading City personalities I used the opportunity, perhaps not in accordance with normal City practice, to express my deep concern about a number of recent issues which could lead to a large part of the progress achieved over the last 30 years being irreversibly damaged. The reason for my current concern is that I believe the City's pre-eminent position is very fragile. Threats include the high cost of living, an inadequate transport system, a worrying crime rate, as well as competitive pressure from other financial centres. But the two most important issues are: First, the increasing number of complex and sometimes counterproductive and costly regulations, such as the proliferating labour laws, excessive health and safety rules, and the EU's extensive financial services legislation. Second, there is the increasingly uncompetitive and ever changing tax system. The proposed changes for Capital Gains Tax are controversial and, regarding the new tax for non domiciled residents, the Daily Telegraph warned: 'talk about killing the golden goose'. The non-dom tax is particularly dangerous because it damages confidence and, once people have left the UK, they are unlikely to return. If these threats are not adequately addressed, London's position could be seriously jeopardised. I hope the authorities recognise the seriousness of the situation and that the City, as it has in the past, will rise again to the challenge in order to safeguard its pre-eminent position. Against this background Arbuthnot Banking Group had a very successful 2007. The Group's pre tax pre exceptional profits increased by 13% to Â£8.6 million. Capital ratios and liquidity were strong throughout 2007. The results are characterised by an outstanding performance in Investment Banking and satisfactory results from the Retail and Private Banks that are going through a period of transition. The investment banking subsidiary, Arbuthnot Securities, had another excellent year with pre tax pre exceptional profits rising by 62%. During the year Arbuthnot Securities acted on a total of 49 transactions. These included 29 fund raisings (including 5 IPOs) which raised a total of Â£672 million for clients. In addition, Arbuthnot Securities advised on 20 M&A deals with a combined value of approximately Â£1 billion. Notwithstanding the challenging market, the business successfully completed all the fund raisings it embarked upon in 2007. At the end of the year the retained corporate client list had grown to 85 with an average market capitalisation of Â£130 million. Due to the conservative philosophy of the Group, the two banking subsidiaries, Secure Trust Bank and Arbuthnot Latham, were not adversely affected by events in the money markets. Both are funded through retail deposits and not through the wholesale markets. These businesses collectively placed Â£163 million into the money markets at the year end. The deposit to loan ratio for the Group was about 2:1 at the year end, and the substantial and confirmed banking lines available to the business have not been utilised throughout the year. The secured loan book of Â£124 million in Arbuthnot Latham, being the largest loan book in the Group, has an average loan to collateral value of 37%. In Secure Trust Bank, the decision to reduce the level of activity in unsecured lending, taken in 2006, resulted in the loan book reducing by 30% to Â£21.2 million. At Secure Trust Bank, the new management team appointed at the end of 2006, have started implementing their strategy to arrest the decline and restore growth. In 2007, the core OneBill proposition was strengthened through the addition of ancillary benefits for customers, the business was rebranded to Moneyway and the majority of new unsecured lending was brokered to EveryDay Loans. At Arbuthnot Latham, significant profits were generated through facilitation of property transactions. The core banking business remained profitable with the wealth management offering still to reach breakeven. In October, Mike Bussey was appointed as Chief Executive to continue to drive the business towards enhanced profitability. Another important factor for the growth of Arbuthnot Latham's franchise is the development of its own offshore capability through the establishment of a bank in Switzerland. The application for a banking licence was submitted to the regulators in Switzerland in December 2007 and a response is anticipated in the first half of this year. The Group has successfully made the transition to the new Basel II regime, and was advised by the Financial Services Authority of its formal Individual Capital Guidance assessment in December 2007. The Group has sufficient capital to meet its requirements. Board Changes and Personnel There have been a number of changes to the Arbuthnot Banking Group PLC Board during 2007. Mike Bussey was appointed Chief Executive of Arbuthnot Latham and joined the Board in October 2007. Sir Christopher Meyer and Sir Michael Peat were appointed non executive directors and joined the Board in October 2007 and January 2008 respectively. These results once again reflect the continuing hard work and dedication of our employees. On behalf of the Board I extend our thanks to all staff for their commitment which contributed to the Group's success in 2007. Dividend The Board is proposing an increased final dividend per share of 22.5p, up from 22p last year, bringing the total dividend per share for the year to 33p (2006: 32.5p). If approved, the final dividend will be paid on 28 May 2008 to shareholders on the register at 28 March 2008. This year we are, for the first time, introducing a scrip dividend for half of the final dividend. We believe this enables shareholders to buy additional shares at a low dealing cost and it provides greater flexibility to the Group in order to maintain its long held policy of paying a significant dividend while at the same time pursuing a long term investment strategy. The policy means that earnings and dividend cover can fluctuate significantly. Outlook We believe 2008 will be a challenging year for Arbuthnot Banking Group given the uncertainty in the business and economic environment. The Group will continue to review carefully the efficiency of its businesses and will contain costs at an appropriate level in response to the business environment. Whilst income for the first two months in Arbuthnot Securities is lower than the corresponding period in 2007, the corporate pipeline is in line with this time last year. BUSINESS REVIEW PRIVATE BANKING - ARBUTHNOT LATHAM 2007 2006 Increase Operating income Â£17.3m Â£13.6m +27% Customer deposits Â£273.6m Â£244.0m +12% Customer loans Â£146.6m Â£120.1m +22% Total assets Â£309.2m Â£286.0m +8% The past year saw a marked improvement in income and profits for Arbuthnot Latham with pre tax pre exceptional profits increasing from Â£0.3 million to Â£1.5 million. These results are characterised by profits from the banking business and transactional services business. Arbuthnot Latham has always had a philosophy of funding its lending operations through retail deposits and not being reliant on the wholesale money markets. At the end of 2007, the customer deposit to loan ratio was 1.9:1 with Â£140 million being placed into the wholesale money markets. As a result of this strategy, liquidity has remained strong throughout 2007 and the substantial committed banking lines remained undrawn throughout 2007. The underlying profitability of the banking business has proved resilient and the bank is well placed for 2008. In 2007, customer deposits grew by 12% to Â£274 million and the loan book grew by 22% to Â£147 million. Arbuthnot Latham continued to expand its transaction services capability and facilitated a number of property transactions. This resulted in significant income and profit. Although 2007's performance represented progress, Arbuthnot Latham has still to deliver profits in line with its potential, especially on the wealth management side, which remains loss making. During the year, significant changes have been made to the management team in Arbuthnot Latham. In October, Mike Bussey joined as Chief Executive, having previously been Chief Executive of the Private Banking and Trust business of N.M. Rothschild. In addition, Steve Hicks has been appointed as Chief Operating Officer having previously worked at Barclays. A strategic review of Arbuthnot Latham in the first quarter of 2008 has concluded that the business should be refocused on the provision of Banking, Investment Management and Financial Planning services mainly to the 'Affluent' segment (investable assets of Â£0.5 million to Â£10 million). The back office and support infrastructure of the Musical Instrument Finance Company is to be relocated shortly from London to Hastings in order to realise synergies with Arbuthnot Commercial Finance. In addition, management is assessing the division's cost base with a view to identifying opportunities for savings in 2008. INVESTMENT BANKING - ARBUTHNOT SECURITIES 2007 2006 Increase Operating income Â£29.3m Â£21.7m +35% Corporate clients 85 71 +20% Gross trading & commission income Â£10.4m Â£9.6m +8% Corporate finance fees Â£19.2m Â£12.1m +59% Despite markedly more difficult market conditions in 2007, Arbuthnot Securities continued to make strong progress reflecting the momentum that the business has built up over the last three years. Profit before tax and exceptional items rose by 62% to Â£8.1 million compared to a Â£5.0 million profit in 2006, a Â£2.8 million profit in 2005 and a Â£1.6 million loss in 2004. Corporate fee and retainer income amounted to Â£19.2 million (2006: Â£12.1 million). During the year Arbuthnot Securities acted on a total of 49 transactions (2006: 35 transactions). These included 29 fund raisings (including 5 IPOs) which raised a total of Â£672 million for clients. In addition, Arbuthnot Securities advised on 20 M&A deals which had a combined value of approximately Â£1 billion. Notwithstanding the challenging market, the business successfully completed all the fund raisings it embarked upon in 2007, including a Â£85 million C share issue for Utilico Emerging Markets, a Â£50 million C share issue for CQS Oil Rig Fund and a Â£64 million rights issue for Costain. The corporate client list also grew significantly from 71 at the start of the year to 85 at the year end with an average market capitalisation of Â£130 million. New client wins during the year included a third FTSE 250 client. The FTSE small cap index ended the year 12% down, while the AIM market has been in a 'bear' market since May 2006. Secondary commission and trading income increased by 8% during the year to Â£10.4 million (2006: Â£9.6 million) despite the downturn in markets. Total headcount ended 2007 where it started the year at 74. Notwithstanding this prudent stance on headcount, the research offering has been broadened and deepened during the year by adding coverage of oil and gas and renewable energy sectors. The performance of Arbuthnot Securities has been transformed over the last four years. In 2004, the first full year in which this business was owned by Arbuthnot Banking Group, the business recorded a loss of Â£1.6 million. In that year, revenues were Â£12.3 million and headcount peaked at 98. The transformed performance has been achieved by more than doubling revenue, whilst reducing both costs and headcount significantly. At the same time, corporate client numbers have nearly doubled from a low of 45 in early 2005. As a result of these achievements, Arbuthnot Securities is now a robust business strongly positioned to grow further in its highly competitive marketplace. Market conditions have deteriorated further in the first months of 2008, and if the volatility shown by the market so far continues through the year then the performance of Arbuthnot Securities, cannot avoid being affected. However, the successful turnaround programme of the last three years has put Arbuthnot Securities in a strong position to emerge from the current market turbulence with a stronger market position. RETAIL BANKING - SECURE TRUST BANK restated 2007 2006 Increase Operating income Â£22.8m Â£23.6m -3% Unsecured lending Â£21.2m Â£30.4m -30% Expenses Â£16.8m Â£16.0m +5% Customer numbers ('000) 44 46 -4% Despite the increasingly competitive environment and the continuing reduction in customer numbers, the Retail Banking Division delivered operating income of Â£22.8 million and profits before tax and exceptional items of Â£4.6 million. The new management team completed a strategic review of the business in early 2007 and produced a strategy to arrest the decline and restore growth. Key themes include a move towards participation in the market for debt management, reduced risk in unsecured lending outside of the OneBill account, arresting the decline in OneBill customer numbers and growing the mortgage broking business. As a result of the changing landscape for unsecured personal lending in the UK, Secure Trust Bank reduced its appetite for new lending outside the OneBill account in 2006. In June 2007, Secure Trust Bank formed a broking arrangement with EveryDay Loans which has seen the majority of new unsecured loans being written without financial risk to Secure Trust Bank. This decision has resulted in a significant reduction in the unsecured loan book of 30% during 2007. Overall unsecured exposures, after allowing for impairment provisions, reduced by 32% to Â£16.4 million. The OneBill account has seen a fall in the number of closures of accounts in the year. Prior to the rebranding in the middle of the year, the marketing activity was reduced resulting in a lower number of new customers in the first half. A key component of growing the number of OneBill customers is through affinity arrangements and a number of arrangements are under discussion. The business has historically traded under a number of different brands including OneBill, Secure Trust Bank, Secure Homes and Secure Direct leading to confusion within the customer base. In 2007, the business was rebranded Moneyway with the core product being branded 'OneBill from Moneyway'. The core 'OneBill' product was further strengthened with the addition of ancillary benefits including free ID Theft insurance and home emergency cover. In debt management, the business has re-entered this market through Moneyfreedom and recruited a new senior manager towards the end of the year. Early indications are encouraging although the impact on the 2008 financials is likely to be marginal. The investment programme in 2007 delivered the enhanced proposition for OneBill, the brand relaunch and various new systems. This resulted in an income statement expense of Â£0.8 million. The focus for 2008 will be improving this division's profitability by aligning the cost base and processes with the current scale of the business. FINANCIAL REVIEW Highlights Summarised Income Statement Â£'000 restated 2007 2006 Net interest income 11,444 9,931 Net fee and commission income 52,907 44,176 Gains less losses from dealing in securities 4,442 4,102 Operating income 68,793 58,209 Operating expenses (57,977) (48,672) Impairment losses (2,237) (1,986) Exceptional items - 6,511 Profit on continuing activities before tax 8,579 14,062 Basic earnings per share (pence) 23.8 63.0 Summarised Balance Sheet Â£'000 restated 2007 2006 Assets Loans and advances to customers 171,953 153,538 Liquid assets 162,534 160,356 Other assets 79,616 51,011 ----------- ----------- Total assets 414,103 364,905 Liabilities Customer deposits 300,920 270,448 Other liabilities 70,697 52,301 Total liabilities 371,617 322,749 Equity 42,486 42,156 Total equity and liabilities 414,103 364,905 The aim of Arbuthnot Banking Group is to maximise revenues and profits through providing a range of financial services to customers and clients in its three chosen niche markets of private banking (Arbuthnot Latham), investment banking (Arbuthnot Securities) and retail banking (Secure Trust Bank/OBC Insurance Consultants). The Group's revenues are derived from a combination of net interest income from its lending, deposit-taking and money market activities; fees for services provided to customers and clients; commissions earned on the sale of financial instruments and products and equity market-making profits. Background market conditions were challenging for financial services companies in 2007. The events of August and September led to a re-pricing of risk across the industry, a tightening of liquidity and significant losses being incurred by many banks. Due to the Group's philosophy of funding loans through customer deposits and adopting a risk based approach to lending, liquidity and capital ratios have remained strong throughout 2007. The decision to scale back exposure to unsecured credit at Secure Trust Bank in 2006, whilst reducing short term profitability, should result in lower bad debt charges going forward. Despite deteriorating market conditions in investment banking during the second half of 2007, Arbuthnot Securities was able to maintain first half performance in the second half and produce significant growth in both revenue and profits compared to 2006. The statutory profit before tax for the Group is shown above. The Board believes a truer reflection of the Group's on-going business is given by 'Adjusted profit before tax' and 'Adjusted earnings per share' that excludes items that are one-off or non-recurring and not part of the on-going business profitability. Â£'000 restated 2007 2006 Operating income 68,793 58,209 Operating expenses (57,977) (48,672) Impairment losses (2,237) (1,986) Adjusted profit before tax 8,579 7,551 Adjusted earnings per share (pence) 23.8 32.0 Adjusted profit before tax rose by 13% to Â£8.6 million giving an adjusted basic earnings per share of 23.8p. The reduction in adjusted earnings per share reflects the increased profits at Arbuthnot Securities leading to a higher level of minority interest and the full year effect of the rights issue in 2006. Although the Group's total operating income increased by 18% to Â£68.8 million, profit before tax reduced by 39% to Â£8.6 million principally due to the sale and leaseback transaction in 2006. Earnings per share reduced by 62% to 23.8p as a result of the sale and leaseback transaction in 2006, an increased contribution from Arbuthnot Securities giving a higher minority interest and the full year effect of the rights issue in 2006. Balance Sheet Strength and Cash flow Total assets of the Group increased by 13% to Â£414.1 million (2006: Â£364.9 million) as a result of the ability to attract customer deposits in the private bank. Net assets of the Group remained broadly unchanged at Â£42.5 million (2006: Â£42.2 million). The Group's total liquid resources (including longer duration certificates of deposit) remained broadly unchanged at Â£162.5 million (2006: Â£160.4 million). Prior Year Adjustments Prior year adjustments decreased prior year retained earnings by Â£1.0 million pre 2006 and Â£0.1 million in 2006. The adjustments relate to unsecured lending at Secure Trust Bank and tax. The adjustments to unsecured lending at Secure Trust Bank have resulted in retained earnings being overstated pre 2006 by Â£1.0 million and pre tax profits being overstated by Â£0.7 million in 2006 (Â£0.5 million post tax). This is principally as a result of income having been recognised on non performing loans over a number of years. The tax adjustment relates to the utilisation of tax losses previously not recognised and the subsequent re-allocation of group relief. The overall adjustment is to decrease the tax charge in 2006 by Â£0.4 million. The impact of this restatement on 2006 earnings per share is 0.8p, being a 1% reduction. Segmental Analysis The segmental analysis in note 34 to the Consolidated Financial Statements to the Annual Report highlights the disclosures required under IAS 14, 'Segmental Reporting'. The primary business segments are Private Banking (Arbuthnot Latham and Arbuthnot Commercial Finance), International Private Banking (Arbuthnot AG), Investment Banking (Arbuthnot Securities), Retail Banking (Secure Trust Bank and OBC Insurance Consultants) and Group costs. Arbuthnot Latham (including Arbuthnot Commercial Finance) Â£'000 2007 2006 Net interest income 7,921 5,910 Net fee and commission income 9,343 7,645 Operating income 17,264 13,555 Operating expenses (15,070) (13,428) Impairment losses (740) (43) Profit on disposal of Arbuthnot House - 12,623 Profit before tax 1,454 12,707 Profit on disposal of Arbuthnot House - (12,623) Restructuring costs - 257 ----------- ----------- Adjusted profit before tax 1,454 341 ----------- ----------- Â£'000 2007 2006 Assets Advances (including Group companies) 146,551 120,082 Liquid assets 140,189 149,442 Other assets 22,486 16,465 ----------- ----------- Total assets 309,226 285,989 Liabilities Customer deposits (including Group companies) 273,580 243,975 Other liabilities 8,488 13,988 Total liabilities 282,068 257,963 Capital 27,158 28,026 309,226 285,989 Note: The above balance sheet is for Arbuthnot Latham only Operating income rose by 27% as a result of a 34% rise in net interest income and a 22% rise in fee and commission income. The net interest income increase is principally as a result of the 22% increase in the loan book, a 12% increase in deposits and increased deposit interest margin. The fee and commission increase is primarily due to the fees earned on property transactions in 2007. The continued investment in new staff led to a 12% rise in expenses. Adjusted profit before tax in 2007 increased to Â£1.5 million compared to Â£0.3 million in 2006. Total assets increased by 8% to Â£309.2 million (2006: Â£286.0 million) with loans increasing by 22% and customer deposits by 12%. Arbuthnot Latham's liquidity remained strong throughout 2007 and the Â£40 million of available bank lines remained unutilised throughout 2007. The secured loan book at Arbuthnot Latham, representing 84% of the total loan book, had an average loan to collateral value of 37% at the end of 2007. Switzerland Costs associated with establishing the Swiss bank were Â£0.3 million in 2007. Arbuthnot Securities Â£'000 2007 2006 Net interest income (324) 338 Net fee and commission income 25,328 17,304 Gains less losses from dealing in securities 4,342 4,102 Operating income 29,346 21,744 Operating expenses (21,270) (17,059) Profit before tax 8,076 4,685 Restructuring costs - 274 Adjusted profit before tax 8,076 4,959 Operating income rose 35% to Â£29.3 million with expenses rising 25% to Â£21.3 million. Adjusted profit before tax rose 62% to Â£8.1 million in 2007. Under the terms of the Arbuthnot Securities Long Term Incentive Plan, the Group has sold 40.4% of the issued ordinary share capital in Arbuthnot Securities Limited to its staff via the Arbuthnot No. 2 ESOP Trust. Secure Trust Bank (including OBC Insurance Consultants) Â£'000 restated 2007 2006 Net interest income 4,600 4,331 Net fee and commission income 18,236 19,227 Operating income 22,836 23,558 Operating expenses (16,839) (15,992) Impairment losses (1,447) (4,843) Profit before tax 4,550 2,723 Restructuring costs - 458 Bad debt provision (affinity bad debt) - 2,900 Adjusted profit before tax 4,550 6,081 Operating income fell by 3% to Â£22.8 million with operating expenses (before restructuring and investment costs) broadly unchanged. Adjusted profit before tax fell 25% to Â£4.6 million. The adjusted profit for 2007 includes a charge of Â£0.8 million for investment expenditure. If this is excluded, the underlying performance of the business fell by 12%. Impairment losses (before affinity bad debt) fell by 26% to Â£1.4 million as a result of lower arrears on the unsecured loan book. The unsecured loan book reduced by 30% from Â£30.4 million to Â£21.2 million. The exposure to unsecured lending, including impairment provisions, reduced by 32% to Â£16.4 million. Group & Other Costs Â£'000 2007 2006 Operating Income 100 - Group costs (3,022) (3,104) Group head office property costs (1,560) (78) Subordinated loan stock (753) (648) Long Term Bonus - (1,900) Restructuring Costs - (323) Total group & other costs (5,335) (6,053) Loss before tax (5,235) (6,053) Long Term Bonus - 1,900 Restructuring Costs - 323 Adjusted loss before tax (5,235) (3,830) Total group and other costs decreased by 12% in 2007 primarily due to the increased property costs following the sale and leaseback of Arbuthnot House in 2006 offset by the non recurrence of the long term bonus in 2006. Group costs decreased by 3% to Â£3.0 million in 2007. Capital The international measure for capital adequacy under BASEL I is the risk asset ratio which relates regulatory capital to on and off balance sheet assets. These rules applied to the Group in 2007. In 2008, the new requirements of BASEL II were implemented in the UK through the Capital Requirements Directive. The FSA reviewed the Group's capital requirements in December 2007 and gave the Group and its subsidiaries guidance on the level of capital the Group is required to hold under the new rules from January 2008. The Group's regulatory capital is divided into two tiers defined by the European Community Banking Consolidation Directive as implemented in the UK by the FSA's Capital Requirements Directive. Tier 1 comprises mainly shareholders' funds and minority interest, after deducting goodwill and other intangible assets. Tier 2 comprises qualifying subordinated loan capital and revaluation reserves. Tier 2 capital cannot exceed 50% of tier 1 capital. Total capital is reduced by deducting investments in subsidiaries that are not consolidated for regulatory purposes. Risk weighted assets are determined according to a broad categorisation of the nature of each asset or exposure and counterparty. Â£'000 2007 2006 Tier 1 35,292 37,543 Tier 2 12,205 11,456 Less deductions (828) (828) ---------- --------- Total capital 46,669 48,171 Total risk weighted assets 220,790 211,423 Risk asset ratio 21.1% 22.8% The Group's capital position has largely remained unchanged during 2007, as a result of retained earnings being used to fund the Group's dividend. The Group has capacity to raise further Tier 2 capital should this be required. The Group's capital management policy is to optimise shareholder value. There is a clear focus on delivering organic growth and capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position. The Board has reviewed the capital position and concluded that the Group currently has sufficient capital following the implementation of the BASEL II regime. Risk Management The Group regards the monitoring and controlling of risks 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. The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance section of the Annual Report. The principal non-operational risks inherent in the Group's business are credit, liquidity and market risks. A detailed description of the risk management policies in these areas is set out in Note 3 to the financial statements. Credit risk is managed through the Credit Committees of Secure Trust Bank and Arbuthnot Latham & Co., with significant exposures also being approved by the Group Risk Committee. Of the total gross loan book of Â£177.7 million at 31 December 2007, some Â£21.2 million represents largely unsecured loans to customers of Secure Trust Bank and Â£156.5 million represents the lending portfolio, most of which is well secured against cash, property, factored debts or other assets. A provision of Â£5.7 million (3.2% of total lending) is carried against the loan book. 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 markets for its own account. Hence, the Group's exposure to adverse movements in interest rates and currencies is limited to the interest earnings on its free cash and interest rate repricing mismatches. Through Arbuthnot Securities the Group is also involved in market-making and underwriting in UK equities. The market-making book is well controlled and net long positions outstanding at 31 December 2007 were Â£18.0 million. The market-making book is subject to Group-approved limits, both in aggregate and in relation to individual stocks. Outstanding positions are monitored against these limits both intraday and overnight. All significant underwriting transactions are individually approved by the Group Risk Committee. A conservative approach is also taken to managing the liquidity profile and capital of the Group. Both of the banking subsidiaries operate with liquidity margins and risk asset ratios in excess of the minimum levels set by the regulators. Dividend The Board proposes a final dividend of 22.5 pence per share to be paid on 28 May 2008, giving a total dividend for the year of 33 pence (2006: 32.5 pence) per share. This is consistent with the progressive dividend policy of previous years. A scrip dividend alternative will be available in respect of half of the final dividend. Accounting Policies This is the third set of Group consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS). This is the first set of accounts to include the disclosure requirements under IFRS 7 Financial Instruments. Going Concern After making appropriate enquiries, 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. Statement of changes in equity Attributable to equity holders of the Company Share Share premium Other Retained Minority Consolidated capital account reserves earnings interest Total Note Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Balance at 1 January 2006 143 17,115 3,395 11,111 1,312 33,076 Restatement of loans to customers and tax 9b - - - (1,028) - (1,028) -------- -------- -------- -------- -------- ------- Restated balance at 1 January 2006 143 17,115 3,395 10,083 1,312 32,048 Issue of shares 7 3,970 - - - 3,977 Release on sale of freehold premises - - (2,828) 2,828 - - Release of deferred tax on sale of freehold premises - - 835 (835) - - Sale of minority interest in Arbuthnot Securities Limited - - - - 187 187 Profit for 2006 - - - 9,274 1,304 10,578 Final dividend relating to 2005 (3,060) (5) (3,065) Interim dividend relating to 2006 - - - (1,569) - (1,569) -------- -------- -------- -------- -------- -------- At 1 January 2007 150 21,085 1,402 16,721 2,798 42,156 Purchase of minority interest in Arbuthnot Commercial Finance Limited - - - - (73) (73) Sale of minority interest in Arbuthnot Securities Limited - - - - 64 64 Profit for 2007 - - - 3,555 2,232 5,787 Final dividend relating to 2006 - - - (3,287) (591) (3,878) Interim dividend relating to 2007 - - - (1,570) - (1,570) -------- -------- -------- -------- -------- -------- At 31 December 2007 150 21,085 1,402 15,419 4,430 42,486 -------- -------- -------- -------- -------- -------- Attributable to equity holders of the Company Company Share capital Share premium Other reserves Retained Total account earnings Â£000 Â£000 Â£000 Â£000 Â£000 Balance at 1 January 2006 143 17,115 20 9,493 26,771 Restatement of tax liabilities 9a - - - (901) (901) -------- -------- -------- -------- -------- Restated balance at 1 January 2006 143 17,115 20 8,592 25,870 Issue of shares 7 3,970 - - 3,977 Profit for 2006 - - - 5,112 5,112 Final dividend relating to 2005 - - - (3,060) (3,060) Interim dividend relating to 2006 - - - (1,569) (1,569) -------- -------- -------- -------- -------- At 1 January 2007 150 21,085 20 9,075 30,330 Profit for 2007 - - - 782 782 Final dividend relating to 2006 - - - (3,287) (3,287) Interim dividend relating to 2007 - - - (1,570) (1,570) -------- -------- -------- -------- -------- At 31 December 2007 150 21,085 20 5,000 26,255 -------- -------- -------- -------- -------- Company balance sheet At 31 December 2007 2006 restated Note Â£000 Â£000 Current assets Due from subsidiary undertakings 1,607 8,708 Financial investments 17 1,773 3,902 Other debtors 2,145 2,767 Non-current assets Shares in subsidiary undertakings 33 29,121 28,989 Property, plant and equipment 19 102 136 Due from subsidiary undertakings 8,350 7,350 -------- -------- Total assets 43,098 51,852 -------- -------- Current liabilities Borrowings 1,276 - Due to subsidiary undertakings 3,650 8,892 Accruals 1,209 2,857 Non-current liabilities Debt securities in issue 24 10,708 9,773 -------- -------- Total liabilities 16,843 21,522 -------- -------- Net assets 26,255 30,330 -------- -------- Capital and reserves Share capital 27 150 150 Share premium account 27 21,085 21,085 Capital redemption reserve 28 20 20 Profit and loss account 28 5,000 9,075 -------- -------- Equity shareholders' funds 26,255 30,330 -------- -------- The Company has elected to take the exemption under section 230 of the Companies Act 1985 to not present the parent Company profit and loss account. The profit for the parent Company for the year is presented in note 28. Consolidated cash flow statement Year ended 31 December 2007 2006 restated Note Â£000 Â£000 -------- -------- Cash flows from operating activities Interest and similar income received 23,758 18,973 Interest and similar charges paid (12,314) (9,042) Fees and commissions received 52,907 44,176 Net trading and other income 4,442 4,102 Recoveries on loans previously written off 500 10 Cash payments to employees and suppliers (58,104) (51,816) Taxation paid (6,996) (2,470) -------- -------- Cash flows from operating profits before changes in operating assets and liabilities 4,193 3,933 Changes in operating assets and liabilities: - net increase in trading securities (11,173) (4,194) - net increase in loans and advances to customers (18,414) (17,874) - net (increase) / decrease in other assets (11,149) 3,797 - net increase / (decrease) in deposits from other banks 4,997 (1,461) - net increase in amounts due to customers 30,472 31,015 - net increase in other liabilities 11,870 2,927 -------- -------- Net cash from operating activities 10,796 18,143 -------- -------- Cash flows from investing activities Disposal of financial investments 3,772 - Purchase of financial investments (4,429) (3,435) Purchase of minority interest (110) - Disposal of minority interest 118 187 Purchase of computer software 18 (493) (428) Purchase of property, plant and equipment 19 (2,529) (2,253) Proceeds from sale of property, plant and equipment 501 34,244 Purchases of debt securities (301,560) (139,481) Proceeds from sale of debt securities 271,597 122,648 -------- -------- Net cash from investing activities (33,133) 11,482 -------- -------- Cash flows from financing activities Issue of shares 27 - 3,977 Repayment of debt securities - (2,610) Dividends paid (5,448) (4,633) -------- -------- Net cash used in financing activities (5,448) (3,266) -------- -------- Net (decrease)/increase in cash and cash equivalents (27,785) 26,359 Cash and cash equivalents at beginning of year 83,718 57,359 -------- -------- Cash and cash equivalents at end of year 30 55,933 83,718 -------- -------- Company cash flow statement Year ended 31 December 2007 2006 restated Note Â£000 Â£000 -------- -------- Cash flows from operating activities Dividends received from subsidiaries 4,545 9,100 Interest and similar income received 622 585 Interest and similar charges paid (753) (979) Net trading and other income 448 - Cash payments to employees and suppliers (5,505) (6,258) Taxation received 1,584 1,815 -------- -------- Cash flows from operating profits before changes in operating assets and liabilities 941 4,263 Changes in operating assets and liabilities: - net decrease / (increase) in Group company balances 1,706 (875) - net decrease / (increase) in other assets 497 (979) - net (increase) / decrease in other liabilities (1,648) 2,693 -------- -------- Net cash from operating activities 1,496 5,102 -------- -------- Cash flows from investing activities Loans to subsidiary companies (1,000) - Acquisition of subsidiary (42) - Purchase of minority interest (110) - Disposal of minority interest 118 187 Disposal of financial investments 3,772 - Purchase of financial investments (1,955) (2,002) Disposal of property, plant and equipment 69 - Purchase of property, plant and equipment 19 (43) (25) -------- -------- Net cash from investing activities 809 (1,840) -------- -------- Cash flows from financing activities Issue of shares 27 - 3,977 Repayment of debt securities - (2,610) Increase in borrowings 1,276 - Dividends paid (4,857) (4,629) -------- -------- Net cash used in financing activities (3,581) (3,262) -------- -------- Net decrease in cash and cash equivalents (1,276) - Cash and cash equivalents at beginning of year - - -------- -------- Cash and cash equivalents at end of year (1,276) - -------- -------- Principal accounting policies The principal 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. 1. Basis of presentation The Group's consolidated financial statements and the Company's financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRIC interpretations and the Companies Act 1985 applicable to Companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets, and financial assets and financial liabilities at fair value through profit or loss. The 2006 comparatives have been restated as described in note 9. Additionally certain expenses, in 2006, have been reclassified and consequently fee and commission income has increased by Â£1,113,000 and operating expenses have been reduced by the corresponding amount. In addition, a number of presentational changes have been made to the prior year numbers. 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 2. 1.a) Standards, amendments and interpretations effective in 2007 IFRS 7, 'Financial instruments: Disclosures', and the complementary amendment to IAS 1, 'Presentation of financial statements - Capital disclosures', introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Group or Company's financial instruments, or the disclosures relating to taxation and trade and other payables. IFRIC 8, 'Scope of IFRS 2', requires consideration of transactions involving the issuance of equity instruments, where the identifiable consideration received is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of IFRS 2. This standard does not have any impact on the Group or Company's financial statements. IFRIC 10, 'Interim financial reporting and impairment', prohibits the impairment losses recognised in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. This standard does not have any impact on the Group or Company's financial statements. 1.b) Standards, amendments and interpretations effective in 2007 but not relevant The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2007 but they are not relevant to the Group or Company's operations: â€¢ IFRS 4, 'Insurance contracts'; â€¢ IFRIC 7, 'Applying the restatement approach under IAS 29, Financial reporting in hyper-inflationary economies'; and â€¢ IFRIC 9, 'Re-assessment of embedded derivatives'. The application of these new interpretations will not have a material impact on the Group's financial statements in the period of initial application. 1.c) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group and Company The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2008 or later periods, but the Group and Company have not early adopted them: â€¢ IFRIC 11, 'IFRS 2 - Group and treasury share transactions' (effective from 1 March 2007). IFRIC 11 provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent's shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. The Group will apply IFRIC 11 from 1 January 2008, but it is not expected to have any impact on the Group or Company's accounts. â€¢ IAS 23 (Amendment), 'Borrowing costs' (effective from 1 January 2009). The amendment to the standard is still subject to endorsement by the European Union. It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. The Group will apply IAS 23 (Amended) from 1 January 2009, subject to endorsement by the EU but is currently not applicable to the Group or Company as there are no qualifying assets. â€¢ IFRS 8, 'Operating segments' (effective from 1 January 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, 'Disclosures about segments of an enterprise and related information'. The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply IFRS 8 from 1 January 2009. The expected impact is still being assessed in detail by management, but it appears likely that the reportable segments will remain unchanged. As goodwill is allocated to Groups of cash-generating units based on segment level, the change will also require management to reallocate goodwill to the newly identified operating segments. Management does not anticipate that this will result in any material impairment to the goodwill balance. â€¢ IFRIC 14, 'IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction' (effective from 1 January 2008). IFRIC 14 provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The Group will apply IFRIC 14 from 1 January 2008, but it is not expected to have any impact on the Group or Company's accounts. â€¢ IFRIC 12, 'Service concession arrangements' (effective from 1 January 2008). IFRIC 12 applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services IFRIC 12 is not relevant to the Group or Company's operations because none of the Group's companies provide for public sector services. â€¢ IFRIC 13, 'Customer loyalty programmes' (effective from 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. IFRIC 13 is not relevant to the Group or Company's operations because none of the Group's companies operate any loyalty programmes. 1.2. Consolidation (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and 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 minority 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 income statement. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (b) Transactions and minority interests The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests results in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary. 1.3. Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. 1.4. Foreign currency translation (a) Functional and presentation currency All Group entities, except Arbuthnot AG, operate primarily in the United Kingdom and items included in their financial statements are measured using pounds sterling ('the functional currency'). The consolidated financial statements are presented in pounds sterling, which is the Company's functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. 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 income statement. (c) Group companies The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: â€¢ assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; â€¢ income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and â€¢ all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 1.5. Interest income and expense Interest income and expense are recognised in the income statement for all instruments measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. 1.6. Fee and commission income Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accrual basis when the service has been provided. Loan commitment fees are deferred and recognised as an adjustment to the effective interest rate on the loan. Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party - such as the issue or the acquisition of shares or other securities or the purchase or sale of businesses - are recognised on completion of the underlying transaction. Asset and other management, advisory and service fees are recognised based on the applicable service contracts, usually on a time apportioned basis. The same principle is applied for financial planning and insurance services that are continuously provided over an extended period of time. 1.7. Gains less losses arising from dealing in securities This includes the net gains arising from both buying and selling securities and from positions held in securities, including related interest income and dividends, recognised on trade-date - the date on which the Group commits to purchase or sell the asset. 1.8. Exceptional items Exceptional items are events or transactions that fall within the activities of the Group and which by virtue of their size or incidence have been disclosed separately in order to improve a reader's understanding of the financial statements. 1.9. Financial assets The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition. (a) Financial assets at fair value through profit or loss This category comprises financial assets held for trading and listed securities. Purchases and sales of financial assets at fair value through profit or loss are recognised on trade-date - the date on which the Group commits to purchase or sell the asset. Financial assets at fair value through profit or loss are subsequently carried at fair value. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans are recognised when cash is advanced to the borrowers. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. (c) Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold to maturity. (d) Available-for-sale Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Included in available-for-sale are equity investments in special purpose vehicles set up to acquire and enhance the value of commercial properties. These investments are of a medium term nature. There is no open market for these securities and due to the nature of the underlying assets they cannot be reliably valued. Consequently, the Directors believe that it is appropriate to hold the investments at cost. Other financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are de-recognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. The Group has entered into equity investments in unquoted vehicles. There is no open market for these assets, therefore the Group has valued them using appropriate valuation methodologies. 1.10. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 1.11. Impairment of financial assets (a) Assets carried at amortised cost On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Group uses to determine that there is objective evidence of an impairment loss include, but are not limited to, the following: â€¢ Delinquency in contractual payments of principal or interest; â€¢ Cash flow difficulties experienced by the borrower; â€¢ Initiation of bankruptcy proceedings; â€¢ Deterioration in the value of collateral; â€¢ Deterioration of the borrower's competitive position; If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. If a loan or held-to maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement. (b) Assets classified as available for sale The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. The Group also makes equity investments in special purpose vehicles set up to acquire and enhance the value of commercial properties. These investments are likely to be of a medium term nature. There is no open market for these securities and due to the nature of the underlying assets any valuation would contain significant estimation. Consequently these investments are held at cost. (c) Renegotiated loans Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. In subsequent years, the asset is considered to be past due and disclosed only if renegotiated. 1.12. 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'. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. (b) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives (three to five years). Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. 1.13. Property, plant and equipment Land and buildings comprise mainly branches and offices and are stated at latest valuation with subsequent additions at cost less depreciation. Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, applying the following annual rates, which are subject to regular review: Freehold buildings 2% Office equipment 5% to 15% Computer equipment 20% to 33% Motor vehicles 25% Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. 1.14. Leases (a) As a lessor 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. When assets are held subject to operating leases, the underlying assets are held at cost less accumulated depreciation, The assets are depreciated down to their estimated residual values on a straight line basis over the lease term. Lease rental income is recognised on a straight line basis over the lease term. (b) As a lessee Rentals made under operating leases are recognised in the income statement on a straight line basis over the term of the lease. 1.15. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months' maturity from the date of acquisition, including cash, loans and advances to banks and building societies and short-term highly liquid debt securities. 1.16. Employee benefits (a) Post-retirement obligations The Group contributes to a defined contribution scheme and to individual defined contribution schemes for the benefit of certain employees. The schemes are funded through payments to insurance companies or trustee-administered funds at the contribution rates agreed with individual employees. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. There are no post-retirement benefits other than pensions. (b) Share-based compensation The Group operates a number of equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the investing period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity. 1.17. Deferred tax Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary differences can be utilised. 1.18. Borrowings Borrowings are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. 1.19. Share capital (a) Share issue costs Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business 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. 1.20. Fiduciary activities The Group commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Group. 2. 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. Impairment losses on loans and advances The Group reviews its loan portfolios to assess impairment at least on a half-yearly basis. In determining whether an impairment loss should be recorded in the income statement, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the Group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Taxation Significant estimates are required in determining the provision for taxation. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current tax and deferred tax provisions in the period in which such determination is made. 3. 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 well-established budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data. The principal non-operational risks inherent in the Group's business are credit, market and liquidity risks. a.) Credit risk The Group takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Impairment provisions are provided for losses that have been incurred at the balance sheet date. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the 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 Committees of the banking subsidiaries, with significant exposures also being approved by the Group Risk Committee. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Limits on the level of credit risk 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 for fund advances, which is common practice. The principal collateral types for loans and advances include, but are not limited to: â€¢ Charges over residential and commercial properties; â€¢ Charges over business assets such as premises, inventory and accounts receivable; â€¢ Charges over financial instruments such as debt securities and equities; â€¢ Personal guarantees; and â€¢ Charges over other chattels Upon initial recognition of loans and advances, the fair value of collateral is based on valuation techniques commonly used for the corresponding assets. In subsequent periods, the fair value is updated by reference to market price or indexes of similar assets. In order to minimise any potential credit loss the Group will seek additional capital from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. 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's maximum exposure to credit risk before collateral held or other credit enhancements is as follows: 2007 2006 Â£000 Â£000 -------- -------- Credit risk exposures relating to on-balance sheet assets are as follows: Loans and advances to banks 39,708 54,214 Loans and advances to customers - secured - Arbuthnot Latham 103,604 88,076 Loans and advances to customers - secured - Secure Trust Bank 225 241 Overdrafts - secured 20,219 18,611 Factoring debtors - Arbuthnot Commercial Finance 18,455 14,925 Loans and advances to customers - unsecured - Arbuthnot Latham 6,232 2,850 Loans and advances to customers - unsecured - Secure Trust Bank 16,398 24,126 Overdrafts - unsecured - Arbuthnot Latham 6,024 4,045 Credit cards - unsecured 796 664 Debt securities held-to-maturity 122,306 105,961 Financial investments 6,201 5,856 Other assets 33,558 22,397 Credit risk exposures relating to off-balance sheet assets are as follows: Financial guarantees 1,131 333 Loan commitments and other credit related liabilities 15,570 11,099 -------- -------- At 31 December 390,427 353,398 -------- -------- The above table represents the maximum credit risk exposure (net of impairment) to the Group at 31 December 2007 and 2006, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures are based on the net carrying amounts as reported in the balance sheet. As shown above, 10% of the total maximum exposure is derived from loans and advances to banks (2006: 15%); 31% represents investments in debt securities issued by banks (2006: 30%). Management is confident of its ability to continue to control the credit exposure to the Company resulting from both its loan and advances portfolio and debt securities based on the following: - All of the exposures to banks, including debt securities, have at least an A2 credit rating; - 75% of the loans are considered to be neither past due nor impaired (2006: 67%); - Only 4% of the loans and advances to customers are considered individually impaired (2006: 5%); - The average loan to collateral value of the loans and advances to customers is 37% (2006: 35%). b.) Market risk Price risk The Group is exposed to equity securities price risk because of investments held by the Group and classified on the consolidated balance sheet either as available-for-sale or at fair value through the income statement. The Group is not exposed to commodity price risk. To manage its price risk arising from investments in equity securities, the Group diversifies its portfolio. Diversification of the portfolio is done in accordance with the limits set by the Group. Based upon the trading book exposure given in note 13, a hypothetical fall of 10% in market prices would result in a Â£2,020,800 (2006: Â£1,154,000) decrease in the Group's income and net assets on the equity trading book. Currency risk The Group takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure for both overnight and intra-day positions, which are monitored daily. The table below summarises the Group's exposure to foreign currency exchange rate risk at 31 December 2007. Included in the table overleaf are the Group's assets and liabilities at carrying amounts, categorised by currency. Â£ US$ Euro Other Total At 31 December 2007 Â£000 Â£000 Â£000 Â£000 Â£000 -------- -------- -------- -------- -------- Assets Loans and advances to banks 31,045 5,814 2,799 50 39,708 Loans and advances to customers 165,373 898 5,682 - 171,953 Debt securities 117,321 4,985 - - 122,306 Financial investments 3,793 - 2,408 - 6,201 Other assets 72,724 993 218 - 73,935 -------- -------- -------- -------- -------- Total assets 390,256 12,690 11,107 50 414,103 -------- -------- -------- -------- -------- Liabilities Deposits from banks 12,679 42 5 - 12,726 Deposits from customers 287,531 11,742 1,641 6 300,920 Debt securities in issue - - 10,708 - 10,708 Other liabilities 46,792 37 405 29 47,263 -------- -------- -------- -------- -------- Total liabilities 347,002 11,821 12,759 35 371,617 -------- -------- -------- -------- -------- Net on-balance sheet position 43,254 869 (1,652) 15 42,486 -------- -------- -------- -------- -------- Credit commitments 15,221 27 322 - 15,570 -------- -------- -------- -------- -------- The table below summarises the Group's exposure to foreign currency exchange risk at 31 December 2006: Â£ US$ Euro Other Total Â£000 Â£000 Â£000 Â£000 Â£000 -------- -------- -------- -------- -------- At 31 December 2006 Total assets 345,084 7,934 11,856 31 364,905 Total liabilities 293,317 7,806 21,619 7 322,749 -------- -------- -------- -------- -------- Net on-balance sheet position 51,767 128 (9,763) 24 42,156 -------- -------- -------- -------- -------- Credit commitments 10,859 42 198 - 11,099 -------- -------- -------- -------- -------- Interest rate risk Interest rate risk is the potential adverse impact on the Group's future cash flows from changes in interest rates; and arises from the differing interest rate risk characteristics of the 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 balance sheet. However, this is not a perfect match and interest rate risk is present on: Money market deposits of a fixed rate nature, Fixed rate loans and Fixed rate savings accounts. The principal interest rate mismatch is in Arbuthnot Latham and this is monitored on a daily basis in conjunction with liquidity and capital. The interest rate mismatch is daily monitored, throughout the maturity bandings of the book, on both a parallel and worse case scenario of 50 basis points. This typically results in a mismatch of Â£0.1m to Â£0.2m. c.) Liquidity risk The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loandrawdowns and guarantees, and from margin and other calls on cash-settled trading securities. The Group does not maintain cash resources to meet all of these needs, as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Group's liquidity is therefore managed on a mismatch basis, the mismatch being the difference between the levels of assets and liabilities in the same maturity bands. The Group's aim is to maintain a prudent liquidity margin when compared with the mismatch criteria set by the regulators. The Group maintains long-term committed bank facilities and use is made of certificates of deposit (debt securities) in the management of liquidity. 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. An unmatched position potentially enhances profitability, but also increases the risk of losses. Arbuthnot Latham had committed banking lines of Â£40m at 31 December 2007, although these have not been required at any point during the year. 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. The table below analyses the contractual undiscounted cashflows into relevant maturity groupings at balance sheet date: More than 3 More than 1 Not more months but year but than 3 less than 1 less than 5 More than 5 months year years years Total At 31 December 2007 Â£000 Â£000 Â£000 Â£000 Â£000 -------- -------- -------- -------- -------- Assets Loans and advances to banks 38,708 1,000 - - 39,708 Loans and advances to customers 109,785 33,028 23,887 5,253 171,953 Debt securities 57,082 65,224 - - 122,306 Other assets 62,053 3,113 2,594 12,376 80,136 -------- -------- -------- -------- -------- Total assets 267,628 102,365 26,481 17,629 414,103 -------- -------- -------- -------- -------- Liabilities Deposits from banks 12,726 - - - 12,726 Deposits from customers 238,537 61,762 621 - 300,920 Other liabilities 18,528 1,571 5 37,867 57,971 -------- -------- -------- -------- -------- Total liabilities 269,791 63,333 626 37,867 371,617 -------- -------- -------- -------- -------- Net liquidity gap (2,163) 39,032 25,855 (20,238) 42,486 -------- -------- -------- -------- -------- At 31 December 2006 Total assets 216,707 73,215 27,792 47,191 364,905 Total liabilities 251,971 60,826 179 9,773 322,749 -------- -------- -------- -------- -------- Net liquidity gap (35,264) 12,389 27,613 37,418 42,156 -------- -------- -------- -------- -------- Fair values of financial assets and liabilities The carrying amounts of those financial assets and liabilities not presented on the Group's balance sheet at fair value are not materially different from their fair values. Fiduciary activities The Group provides trustee, 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 Â£193 million (2006: Â£170 million).Additionally the Group provides investment advisory services. d.) Concentration risk The Group is well diversified in the UK, being exposed to retail banking, private banking and investment banking. Management assesses the potential concentration risk from a number of areas including: â€¢ geographical concentration â€¢ product concentration; and â€¢ high value residential properties Due to the well diversified nature of the Group and the significant collateral held against the loan book, the Directors do not consider there to be a potential material exposure arising from concentration risk. 4. Capital management The Group's capital management policy is focused on optimising shareholder value. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position. Capital adequacy and the use of regulatory capital are monitored daily by the Group's management, employing techniques based on the guidelines developed by the Basel Committee and the European Community Directives, as implemented by the Financial Services Authority (FSA), for supervisory purposes. For the year ended 31 December 2007, under Prudential Source Book for Banks, the FSA requires each bank or banking group to maintain a ratio of total regulatory capital to the risk weighted asset above the minimum amount set by the FSA. From 1 January 2008, the Capital Requirement Directive (CRD) that implements Basel II took effect. The Group agreed its Individual Capital Guidance ('ICG') with the FSA under the new regime in December 2007 and has moved to the new regime as of 1 January 2008. The Group's regulatory capital is divided into two tiers: â€¢ Tier 1 comprises mainly shareholders' funds, minority interest, after deducting goodwill and other intangible assets. â€¢ Tier 2 comprises qualifying subordinated loan capital and revaluation reserves. Tier 2 capital cannot exceed 50% of tier 1 capital. Total capital is reduced by deducting investments in subsidiaries that are not consolidated for regulatory purposes. Risk weighted assets are determined according to a broad categorisation of the nature of each asset or exposure and counterparty. The table below summarises the composition of regulatory capital and the ratios of the Group for the 2 years ended 31 December 2007. During those two years, the individual entities within the Group and the Group complied with all of the externally imposed capital requirements to which they are subject. 2007 2006 Â£000 Â£000 -------- -------- Tier 1 35,292 37,543 Tier 2 12,205 11,456 Deductions (828) (828) -------- -------- Total capital 46,669 48,171 -------- -------- Total risk weighted assets 220,790 211,423 -------- -------- Risk asset ratio 21.1% 22.8% -------- -------- 5. Fee and commission income Fee and commission income includes loan-related fees of Â£858,000 (2006: Â£958,000) which have been recognised under the effective interest method. 2007 2006 Â£000 Â£000 -------- -------- Fee and commission income: Trust and other fiduciary fees 1,944 1,442 Other fees 52,070 46,975 -------- -------- 54,014 48,417 -------- -------- 6. Operating profit on ordinary activities before tax Operating expenses comprise: 2007 2006 Â£000 Â£000 -------- -------- Staff costs, including Directors: Wages and salaries 29,500 26,062 Social security costs 3,540 3,093 Pension costs 2,123 1,769 Amortisation of computer software (Note 18) 417 403 Depreciation (Note 19) 1,248 1,557 Profit on disposals of property, plant and equipment (33) (119) Profit on sale of minority interest (Note 32) (54) - Charitable donations 35 10 Operating lease rentals 2,366 465 Other administrative expenses 18,835 15,432 -------- -------- 57,977 48,672 Exceptional operating expenses - 3,212 -------- -------- Total operating expenses 57,977 51,884 -------- -------- Exceptional operating expenses comprise in the Company Â£NIL (2006: Â£1,900,000) in respect of the long service bonus award made possible by the sale of Arbuthnot House and redundancy and reorganisation costs of Â£NIL (2006: Â£323,000) and further redundancy and reorganisation costs in Secure Trust Bank Â£NIL (2006: Â£458,000) , Arbuthnot Latham Â£NIL (2006: Â£257,000) and Arbuthnot Securities Â£NIL (2006: Â£274,000) . The total cost of Â£NIL (2006: Â£3,212,000) does not relate to the ongoing profitability of the Group and is accordingly disclosed as an exceptional item. Corporation tax relief at 30% applies to the total cost. The auditors' remuneration for the audit of the Company's accounts was Â£41,000 (2006: Â£7,000) and fees payable for the audit of the accounts of associates of the Company was Â£357,000 (2006: Â£307,000). Remuneration of the auditors for non-audit services was: services related to taxation Â£24,000 (2006: Â£30,000); corporate finance transactions Â£NIL (2006: Â£15,000) and all other services Â£46,000 (2006: Â£3,000). Interest income of Â£134,000 (2006: Â£99,000) has been accrued on impaired loans and advances. 7. Average number of employees 2007 2006 -------- -------- Retail banking 367 374 Private banking 160 163 Investment banking 78 75 Group 16 14 -------- -------- 621 626 -------- -------- 8. Income tax expense 2007 2006 Â£000 Â£000 -------- -------- United Kingdom corporation tax at 30% (2006: 30%) Current 2,563 3,757 Deferred 329 (432) Under/(over) provided in prior years Current (10) (21) Deferred (90) 180 -------- -------- Income tax expense 2,792 3,484 -------- -------- Tax reconciliation Profit before tax 8,579 14,062 Tax at 30% (2006: 30%) 2,574 4,219 Capital allowances in excess of depreciation - 5 Tax rate change 15 - Expenses not deductible for tax purposes 303 (541) Prior period adjustments (100) (199) -------- -------- Corporation tax charge for the year 2,792 3,484 -------- -------- During the year, as a result of the change in UK Corporation Tax rates which will be effective from 1 April 2008, deferred tax balances have been remeasured. Deferred tax relating to temporary differences which are expected to reverse prior to 1 April 2008 is measured at 30% and deferred tax relating to temporary differences expected to reverse after 1 April 2008 is measured at the tax rate of 28% as these are the tax rates that will apply on reversal. 9. Prior year adjustments a.) Restatement of tax liabilities As a result of the utilisation of tax losses previously not recognised and subsequent re-allocation of Group Relief, opening balances as at 1 January 2006 have been restated. The effect of this restatement on the closing balances as at 31 December 2005 is summarised in the table below. Disclosed Tax liabilities Loans to Restated customers 31/12/2005 31/12/2005 Company Â£000 Â£000 Â£000 Â£000 -------- -------- -------- -------- Due from subsidiary undertakings 6,453 (901) - 5,552 Retained earnings 9,493 (901) - 8,592 b.) Restatement of loans to customers and tax As a result of errors relating to income recognition on loans and advances to customers and unutilised tax losses, opening balances as at 1 January 2006 and 1 January 2007 have been restated. The effect of these restatements on the closing balances as at 31 December 2005 and 31 December 2006 is summarised in the tables below . Disclosed Tax liabilities Loans to Restated customers 31/12/2005 31/12/2005 Group Â£000 Â£000 Â£000 Â£000 -------- -------- -------- -------- Current tax liabilities (790) (63) 413 (440) Loans and advances to customers 140,151 - (1,378) 138,773 Retained earnings 11,111 (63) (965) 10,083 This restatement has an impact on profits attributable to equity holders for the year ended 31 December 2006 and reduces attributable profits from Â£4,833,000 to Â£4,716,000, the effect of this restatements on the closing balances as at 31 December 2006 is summarised below: Disclosed Adjusted Tax liabilities Loans to Restated 01/01/06 customers and tax 31/12/2006 31/12/2006 Group Â£000 Â£000 Â£000 Â£000 Â£000 -------- -------- -------- -------- -------- Current tax liabilities (3,486) 350 359 202 (2,575) Loans and advances to customers 155,594 (1,378) - (678) 153,538 Retained earnings 17,866 (1,028) 359 (476) 16,721 10. Earnings per ordinary share Basic and fully diluted Earnings per ordinary share are calculated on the net basis by dividing the profit attributable to equity holders of the Company of Â£3,555,000 (2006: Â£9,274,000) by the weighted average number of ordinary shares 14,943,944 (2006: 14,716,433) in issue during the year. There is no difference between basic and fully diluted earnings per ordinary share. 11. Cash 2007 2006 Â£000 Â£000 -------- -------- Cash in hand included in cash and cash equivalents (Note 30) 520 181 -------- -------- 12. Loans and advances to banks 2007 2006 Â£000 Â£000 -------- -------- Placements with banks included in cash and cash equivalents (Note 30) 39,708 54,214 -------- -------- The table below presents an analysis of loans and advances to banks by rating agency designation as at 31 December, based on Moody's long term ratings: 2007 2006 Â£000 Â£000 -------- -------- Aaa 3,257 1,466 Aa1 10,853 20,929 Aa2 18,832 16,506 Aa3 3,762 69 A1 1,004 5,244 A2 2,000 5,000 A3 - 5,000 -------- -------- 39,708 54,214 -------- -------- None of the loans and advances to banks is either past due or impaired. 13. Trading securities, all held at fair value through profit or loss 2007 2006 Â£000 Â£000 -------- -------- Unlisted equity securities: Long positions 1,532 330 -------- -------- Listed equity securities: Long positions 21,538 8,765 Short positions (5,105) (2,303) -------- -------- 16,433 6,462 -------- -------- The following table shows the Group's trading book exposure to market price risk for the year ended 31 December 2007: Highest Lowest exposure Average Exposure as at exposure exposure 31 December Â£000 Â£000 Â£000 Â£000 -------- -------- -------- -------- Equities: Long 26,910 9,049 16,182 23,070 Short (11,782) (2,495) (5,789) (5,105) -------- -------- -------- -------- The following table shows the Group's trading book exposure to market price risk for the year ended 31 December 2006: Highest Lowest exposure Average Exposure as at exposure exposure 31 December Â£000 Â£000 Â£000 Â£000 -------- -------- -------- -------- Equities: Long 12,280 4,836 8,385 9,095 Short (5,612) (930) (3,495) (2,303) -------- -------- -------- -------- The average exposure has been calculated on a daily basis. The highest and lowest exposures occurred on different dates and therefore a net position of these exposures does not reflect a spread of the trading book. The basis on which the trading book is valued each day is given in the accounting policies in note 1.9. 14. Loans and advances to customers 2007 2006 Â£000 Â£000 -------- -------- Gross loans and advances 177,697 160,160 Less: allowances for impairment on loans and advances (Note 15) (5,744) (6,622) -------- -------- 171,953 153,538 -------- -------- For a maturity profile of loans and advances to customers, refer to Note 3. Loans and advances to customers include finance lease receivables as follows: 2007 2006 Â£000 Â£000 -------- -------- Gross investment in finance lease receivables: - No later than 1 year 2,239 1,228 - Later than 1 year and no later than 5 years 154 268 - Later than 5 years - - -------- -------- 2,393 1,496 Unearned future finance income on finance leases (120) (150) -------- -------- Net investment in finance leases 2,273 1,346 -------- -------- The net investment in finance leases may be analysed as follows: - No later than 1 year 2,133 1,109 - Later than 1 year and no later than 5 years 140 237 - Later than 5 years - - -------- -------- 2,273 1,346 -------- -------- Loans and advances to customers can be further summarised as follows: 2007 2006 Â£000 Â£000 -------- -------- Neither past due nor impaired 132,956 107,466 Past due but not impaired 37,393 44,624 Impaired 7,348 8,070 -------- -------- Gross 177,697 160,160 Less: allowance for impairment (5,744) (6,622) -------- -------- Net 171,953 153,538 -------- -------- a.) Loans and advances past due but not impaired Gross amounts of loans and advances to customers that were past due but not impaired were as follows: 2007 2006 Â£000 Â£000 -------- -------- Past due up to 30 days 8,508 8,136 Past due 30 - 60 days 6,681 6,603 Past due 60 - 90 days 3,541 3,524 Over 90 days 18,663 26,361 -------- -------- Total 37,393 44,624 -------- -------- Loans and advances normally fall into this category when there is a delay in either the sale of the underlying collateral or the completion of formalities to extend the credit facilities for a further period. Management have no material concerns regarding the quality of the collateral that secures the lending. b.) Loans and advances renegotiated Restructuring activities include external payment arrangements, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgement of local 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 Â£NIL (2006: Â£NIL). c.) Collateral held An analysis of loans and advances to customers by reference to the fair value of the underlying collateral is as follows: 2007 2006 Â£000 Â£000 -------- -------- Neither past due nor impaired 294,236 238,341 Past due but not impaired 43,185 62,793 Impaired 1,951 1,059 -------- -------- Fair value of collateral held 339,372 302,193 -------- -------- The fair value of the collateral held is Â£339,372,000 against Â£124,048,000 secured loans, giving an average loan-to-value of 37%. The gross amount of individually impaired loans and advances to customers before taking into account the cash flows from collateral held is Â£7,348,000 (2006: Â£8,070,000). 15. Allowances for impairment of loans and advances A reconciliation of the allowance account for losses on loans and advances by class is as follows: 2007 2006 Â£000 Â£000 -------- -------- At 1 January 6,622 3,017 Adjustments for disposals (2,627) - Exceptional provision for loan impairment - 2,900 Impairment losses 2,237 1,986 Loans written off during the year as uncollectable (988) (1,291) Amounts recovered during the year 500 10 -------- -------- At 31 December 5,744 6,622 -------- -------- A further analysis of allowances for impairment of loans and advances is as follows: 2007 2006 Â£000 Â£000 -------- -------- Loans and advances to customers - secured - Arbuthnot Latham 306 121 Loans and advances to customers - secured - Secure Trust Bank - - Overdrafts - secured 113 - Factoring debtors - Arbuthnot Commercial Finance 30 100 Loans and advances to customers - unsecured - Arbuthnot Latham 382 146 Loans and advances to customers - unsecured - Secure Trust Bank 4,815 6,127 Overdrafts - unsecured - Arbuthnot Latham 38 96 Credit cards - unsecured 60 32 -------- -------- At 31 December 5,744 6,622 -------- -------- 16. Debt securities held-to-maturity Debt securities represent certificates of deposit. The Group's intention is to hold them to maturity and, therefore, they are stated in the balance sheet at amortised cost. Amounts include Â£15,705,000 (2006: Â£29,323,000) with a maturity, when placed, of 3 months or less included in cash and cash equivalents (Note 30). The movement in debt securities held to maturity may be summarised as follows: 2007 2006 Â£000 Â£000 -------- -------- At 1 January 105,961 88,389 Exchange difference on monetary assets 102 (278) Additions 301,560 240,897 Redemptions (285,317) (223,047) -------- -------- At 31 December 122,306 105,961 -------- -------- The table below presents and analysis of debt securities by rating agency designation at 31 December, based on Moody's long term ratings: 2007 2006 Â£000 Â£000 -------- -------- Aaa 22,425 4,999 Aa1 26,385 12,035 Aa2 44,275 19,144 Aa3 1,221 35,748 A1 28,000 15,000 A2 - 19,035 -------- -------- 122,306 105,961 -------- -------- None of the debt securities held-to-maturity are either past due or impaired. 17. Financial investments 2007 2006 Group: Â£000 Â£000 -------- -------- Financial investments comprise: - Listed securities (at fair value through profit and loss) 3,793 3,902 - Unlisted securities (available-for-sale) 2,408 1,954 -------- -------- Total financial investments 6,201 5,856 -------- -------- Unlisted securities The Group has made equity investments in unlisted special purpose vehicles set up to acquire and enhance the value of commercial properties. These investments are of a medium term nature. There is no open market for these securities and due to the nature of the underlying assets any valuation would contain significant estimation. Consequently, the Directors believe that it is appropriate to hold these unlisted investments at cost. The Directors intend to dispose of these assets when a suitable buyer has been identified and when the Directors believe that the underlying assets have reached their maximum value. 2007 2006 Company: Â£000 Â£000 -------- -------- Financial investments comprise: - Listed securities (at fair value through profit and loss) 1,773 3,902 -------- -------- 18. Intangible assets Goodwill 2007 2006 Â£000 Â£000 -------- -------- Opening net book amount 2,005 2,005 Arising on acquisition (Note 32) 37 - -------- -------- Closing net book amount 2,042 2,005 -------- -------- Computer software At 1 January 2006 Cost 2,266 Accumulated amortisation (1,271) -------- Net book amount 995 -------- Year ended 31 December 2006 Opening net book amount 995 Additions 428 Amortisation charge (403) -------- Closing net book amount 1,020 -------- At 31 December 2006 Cost 2,694 Accumulated amortisation (1,674) -------- Net book amount 1,020 -------- Year ended 31 December 2007 Opening net book amount 1,020 Additions 493 Amortisation charge (417) -------- Closing net book amount 1,096 -------- At 31 December 2007 Cost 3,187 Accumulated amortisation (2,091) -------- Net book amount 1,096 -------- 2007 2006 Â£000 Â£000 -------- -------- Total intangible assets: Goodwill 2,042 2,005 Computer software 1,096 1,020 -------- -------- Net book amount at 31 December 3,138 3,025 -------- -------- 19. Property, plant and equipment Freehold land Computer and Operating Motor vehicles Total and buildings other equipment leases Group: Â£000 Â£000 Â£000 Â£000 Â£000 -------- -------- -------- -------- -------- At 1 January 2006 27,752 10,454 - 1,895 40,101 Accumulated depreciation (276) (7,296) - (1,071) (8,643) -------- -------- -------- -------- -------- Net book amount 27,476 3,158 - 824 31,458 -------- -------- -------- -------- -------- Year ended 31 December 2006 Opening net book amount 27,476 3,158 - 824 31,458 Additions - 873 888 492 2,253 Disposals (20,878) (396) - (242) (21,516) Depreciation charge (260) (903) (51) (343) (1,557) -------- -------- -------- -------- -------- Closing net book amount 6,338 2,732 837 731 10,638 -------- -------- -------- -------- -------- At 31 December 2006 Cost or valuation 6,581 10,614 888 1,637 19,720 Accumulated depreciation (243) (7,882) (51) (906) (9,082) -------- -------- -------- -------- -------- Net book amount 6,338 2,732 837 731 10,638 -------- -------- -------- -------- -------- Year ended 31 December 2007 Opening net book amount 6,338 2,732 837 731 10,638 Additions - 1,368 1,046 115 2,529 Disposals - - - (468) (468) Depreciation charge (122) (854) (110) (162) (1,248) -------- -------- -------- -------- -------- Closing net book amount 6,216 3,246 1,773 216 11,451 -------- -------- -------- -------- -------- At 31 December 2007 Cost or valuation 6,581 12,008 1,934 928 21,451 Accumulated depreciation (365) (8,762) (161) (712) (10,000) -------- -------- -------- -------- -------- Net book amount 6,216 3,246 1,773 216 11,451 -------- -------- -------- -------- -------- On 20 December 2006 the Group entered into a sale and leaseback of Arbuthnot House. The property was sold for Â£35 million, which resulted in a profit on sale (after costs) of Â£12,623,000. The Group has entered into an agreement to lease the premises for a period of up to 15 years (see note 26). Freehold property was professionally revalued at 31 December 2004 at market value by Grenville Smith & Duncan, Chartered Surveyors, and Fraser Wood Mayo & Pinson, Chartered Surveyors. These valuations were made in accordance with the RICS appraisal and valuation manual. The Directors do not believe that the fair value of freehold property is materially different from the carrying value. All freehold land and buildings are occupied and used by Group companies. The carrying value of freehold land not depreciated is Â£0.5 million (2006: Â£0.5 million). The historical cost of freehold property included at valuation is as follows: 2007 2006 restated Â£000 Â£000 -------- -------- Cost 3,980 3,980 Accumulated depreciation (641) (571) -------- -------- Net book amount 3,339 3,409 -------- -------- Computer and Motor Total other equipment vehicles Company: Â£000 Â£000 Â£000 -------- -------- -------- At 1 January 2006 103 271 374 Accumulated depreciation (32) (179) (211) -------- -------- -------- Net book amount 71 92 163 -------- -------- -------- Year ended 31 December 2006 Opening net book amount 71 92 163 Additions 10 22 32 Disposals - (7) (7) Depreciation charge (5) (47) (52) -------- -------- -------- Closing net book amount 76 60 136 -------- -------- -------- At 31 December 2006 Cost or valuation 113 259 372 Accumulated depreciation (37) (199) (236) -------- -------- -------- Net book amount 76 60 136 -------- -------- -------- Year ended 31 December 2007 Opening net book amount 76 60 136 Additions 3 40 43 Disposals - (36) (36) Depreciation charge (4) (37) (41) -------- -------- -------- Closing net book amount 75 27 102 -------- -------- -------- At 31 December 2007 Cost or valuation 116 164 280 Accumulated depreciation (41) (137) (178) -------- -------- -------- Net book amount 75 27 102 -------- -------- -------- 20. Other assets 2007 2006 restated Â£000 Â£000 -------- -------- Trade receivables 27,538 12,816 Prepayments and accrued income 6,020 9,581 -------- -------- 33,558 22,397 -------- -------- Prepayments and accrued income include Â£2,309,000 relating to interest earned on debt securities held to maturity. 21. Deposits from banks 2007 2006 Â£000 Â£000 -------- -------- Deposits from other banks 12,726 7,729 -------- -------- For a maturity profile of deposits from banks, refer to Note 3. 22. Deposits from customers 2007 2006 Â£000 Â£000 -------- -------- Retail customers: - current/demand accounts 153,185 106,726 - term deposits 147,735 163,722 -------- -------- 300,920 270,448 -------- -------- Included in deposits from customers are deposits of Â£11,289,000 (2006: Â£9,741,000) held as collateral for loans and advances. The fair value of these deposits approximates the carrying value. For a maturity profile of deposits from customers, refer to Note 3. 23. Other liabilities 2007 2006 restated Â£000 Â£000 -------- -------- Trade payables 27,874 14,057 Accruals and deferred income 14,010 15,829 -------- -------- 41,884 29,886 -------- -------- Accruals and deferred income include Â£643,000 relating to interest payable on time deposits within deposits from customers. 24. Debt securities in issue 2007 2006 restated Â£000 Â£000 -------- -------- Subordinated loan notes 2035 10,708 9,773 -------- -------- The subordinated loan notes 2035 were issued on 7 November 2005 and are denominated in Euros. The principal amount outstanding at 31 December 2007 was â‚¬15 million. 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 â‚¬15,000,000. There were no significant gains or losses attributable to changes in the credit risk for those financial liabilities designated at fair value in 2007 (2006: Â£NIL). 25. Deferred taxation 2007 2006 Â£000 Â£000 -------- -------- The deferred tax liability comprises: Unrealised surplus on revaluation of freehold property 478 611 Accelerated capital allowances (140) (475) Short-term timing differences (64) (101) -------- -------- 274 35 -------- -------- At 1 January 35 1,116 Profit and loss account 239 (246) Revaluation reserve - (835) -------- -------- At 31 December 274 35 -------- -------- 26. Contingent liabilities and commitments Capital commitments At 31 December 2007, the Group had capital commitments of Â£NIL (2006: Â£50,000) in respect of equipment purchases. Credit commitments The contractual amounts of the Group's off-balance sheet financial instruments that commit it to extend credit to customers are as follows: 2007 2006 Â£000 Â£000 -------- -------- Guarantees and other contingent liabilities 1,131 316 Documentary letters of credit - 13 Commitments to extend credit: - Original term to maturity of one year or less 15,570 11,099 -------- -------- 16,701 11,428 -------- -------- Operating lease commitments Where a Group company is the lessee, the future aggregate lease payments under non-cancellable operating leases are as follows: 2007 2006 Â£000 Â£000 -------- -------- Expiring: Within 1 year 2,040 2,145 Later than 1 year and no later than 5 years 6,156 8,046 Later than 5 years 673 504 -------- -------- 8,869 10,695 -------- -------- On 20 December 2006 the Group entered into a sale and leaseback transaction in respect of Arbuthnot House (see note 19). The term in respect of this lease is 15 years with a tenant only break clause on the fifth anniversary, with an annual commitment of Â£1.705 million. 27. Share capital Number of Ordinary shares Share premium shares Â£000 Â£000 -------- -------- -------- At 1 January 2006 14,234,219 143 17,115 Proceeds of shares issued 709,725 7 3,970 -------- -------- -------- At 31 December 2006 / 1 January 2007 14,943,944 150 21,085 -------- -------- -------- Proceeds of shares issued - - - -------- -------- -------- At 31 December 2007 14,943,944 150 21,085 -------- -------- -------- The total authorised number of ordinary shares at 31 December 2007 and 31 December 2006 was 418,439,000 with a par value of 1 pence per share (2006: 1 pence per share). All issued shares are fully paid. 28. Reserves and retained earnings 2007 2006 Group Â£000 Â£000 -------- -------- Revaluation reserve 1,382 1,382 Capital redemption reserve 20 20 Retained earnings 15,419 16,721 -------- -------- Total reserves as 31 December 16,821 18,123 -------- -------- Movements in retained earnings were as follows: 2007 2006 Â£000 Â£000 -------- -------- At 1 January 16,721 11,111 Restatement of loans to customers - (1,028) -------- -------- Restatement of balance at 1 January 16,721 10,083 Profit for the year 3,555 9,274 Interim dividend for the year (1,570) (1,569) Final dividend for prior year (3,287) (3,060) Transfer from revaluation reserve - 1,993 -------- -------- At 31 December 15,419 16,721 -------- -------- 2007 2006 Company Â£000 Â£000 -------- -------- Capital redemption reserve 20 20 -------- -------- Movements in retained earnings were as follows: 2007 2006 Â£000 Â£000 -------- -------- At 1 January 9,075 9,493 Restatement of tax liabilities - (901) -------- -------- Restatement of balance at 1 January 9,075 8,592 Profit for the year 782 5,112 Interim dividend for the year (1,570) (1,569) Final dividend for prior year (3,287) (3,060) -------- -------- At 31 December 5,000 9,075 -------- -------- 29. Dividend Final dividends are not accounted for until they have been approved at the Annual General Meeting. At the meeting on 14 May 2008, a dividend in respect of 2007 of 22.5 pence per share (2006: actual dividend 22.0 pence per share) amounting to a total of Â£3,362,387 (2006: actual Â£3,287,668) is to be proposed. A scrip dividend alternative is proposed in respect of half of the final dividend. The financial statements for the year ended 31 December 2007 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 2008. 30. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprises the following balances with less than three months maturity from the date of acquisition. 2007 2006 Â£000 Â£000 -------- -------- Cash (Note 11) 520 181 Loans and advances to banks (Note 12) 39,708 54,214 Debt securities held to maturity (Note 16) 15,705 29,323 -------- -------- 55,933 83,718 -------- -------- 31. Related-party transactions Other than the Directors' remuneration and payment of dividends 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. The volumes of related-party transactions, outstanding balances at the year end, and relating expense and income for the year are as follows: Directors and key management personnel 2007 2006 Â£000 Â£000 -------- -------- Loans Loans outstanding at 1 January 1,399 1,060 Loans issued during the year 424 838 Loan repayments during the year (385) (499) -------- -------- Loans outstanding at 31 December 1,438 1,399 -------- -------- Interest income earned 121 60 -------- -------- The loans to directors are secured on property or shares and bear interest at rates linked to base rate. No provisions have been recognised in respect of loans given to related parties (2006: Â£NIL). Details of Directors' remuneration are given in the Remuneration Report in the Annual Report. The Directors do not believe that any other key management disclosures are required. Directors and key management personnel 2007 2006 Â£000 Â£000 -------- -------- Deposits Deposits at 1 January 1,607 1,575 Deposits received during the year 6,660 4,599 Deposits repaid during the year (6,698) (4,567) -------- -------- Deposits at 31 December 1,569 1,607 -------- -------- Interest expense on deposits 48 77 -------- -------- Arbuthnot Securities Limited received a fee of Â£15,000 (2006: Â£15,000) in its capacity as stockbroker to the Group. Arbuthnot Latham & Co., Limited received fees from the Group totalling Â£NIL (2006: Â£23,000) for advisory and administration services provided to the Trustees of the Secure Trust Pension Scheme. 32. Minority interests 2007 2006 Â£000 Â£000 -------- -------- At 1 January 2,798 1,312 Sale of minority interest in Arbuthnot Securities Limited 64 187 Purchase of minority interest in Arbuthnot Commercial Finance Limited (73) - Profit and loss account 2,232 1,304 Dividends paid (591) (5) -------- -------- 4,430 2,798 -------- -------- As described in Note 33, the Group sold 0.7% (2006: 3.9%) of the issued ordinary share capital in Arbuthnot Securities Limited to its staff via the Arbuthnot No. 2 ESOP Trust. The impact of the transaction on the Group's consolidated financial statements is summarised below: 2007 2006 Â£000 Â£000 -------- -------- Sale proceeds 118 187 Share of net assets sold (64) (187) -------- -------- Profit on sale 54 - -------- -------- As described in Note 33, the Group has bought 6.1% of the issued ordinary share capital in Arbuthnot Commercial Finance Limited The impact of the transaction on the Group's consolidated financial statements is summarised below: 2007 2006 Â£000 Â£000 -------- -------- Purchase price 110 - Share of net assets bought (73) - -------- -------- Goodwill 37 - -------- -------- 33. Shares in subsidiary undertakings Shares at cost Impairment Net provisions Â£000 Â£000 Â£000 -------- -------- -------- Arbuthnot Banking Group PLC: At 1 January 2007 (restated) 31,973 (2,984) 28,989 Sale of minority interest in Arbuthnot Securities Limited (25) 5 (20) Purchase of Arbuthnot AG 42 - 42 Purchase of minority interest in Arbuthnot Commercial Finance Limited 110 - 110 -------- -------- -------- At 31 December 2007 32,100 (2,979) 29,121 -------- -------- -------- 2007 2006 Â£000 Â£000 -------- -------- Subsidiary undertakings: Banks 24,486 24,444 Other 4,635 4,545 -------- -------- Total unlisted 29,121 28,989 -------- -------- On 17 September 2007, under the terms of the Arbuthnot Securities Long Term Incentive Plan, the Group sold 14,000 ordinary shares in Arbuthnot Securities Limited to its staff via the Arbuthnot No. 2 ESOP Trust for a total consideration of Â£118,300. These shares represent 0.7% of the issued ordinary share capital of Arbuthnot Securities Limited (see Note 32). On 16 April 2007, the Group purchased 30,625 ordinary shares in Arbuthnot Commercial Finance Limited for a total consideration of Â£110,106. These shares represent 6.1% of the issued ordinary share capital of Arbuthnot Commercial Finance Limited (see Note 32). The principal subsidiary undertakings of Arbuthnot Banking Group PLC at 31 December 2007 were: Country of Interest % Principal activity incorporation Secure Trust Bank PLC UK 100 Household cash management and banking OBC Insurance Consultants Limited UK 100 Motor and general insurance Arbuthnot Latham & Co., Limited UK 100 Private banking Arbuthnot AG Switzerland 100 Private banking Arbuthnot Commercial Finance Limited UK 98 Factoring Arbuthnot Securities Limited UK 59.6 Investment banking (i) All the above subsidiary undertakings are included in the consolidated financial statements and have an accounting reference date of 31 December. (ii) All the above interests relate wholly to ordinary shares. 34. Business segments The Group is organised into four main business segments: 1) Retail banking - incorporating household cash management, personal lending and banking and insurance services. 2) International Private banking - incorporating private banking and wealth management outside the UK 3) UK Private banking - incorporating private banking, wealth management and invoice factoring services. 4) Investment banking - incorporating institutional stockbroking, equity trading and corporate finance advice. Transactions between the business segments are on normal commercial terms. Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet. Retail banking International UK private Investment Group costs Subordinated Group total private banking banking banking loan stock Year ended 31 December 2007 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ------ -------- -------- -------- -------- -------- -------- Segment operating income 22,836 - 17,264 29,346 100 (753) 68,793 ------ -------- -------- -------- -------- -------- -------- Segment profit/(loss) 4,550 (266) 1,454 8,076 (4,482) - 9,332 Subordinated loan note interest - - - - - (753) (753) ------ -------- -------- -------- -------- -------- -------- Profit/(Loss) before exceptional items 4,550 (266) 1,454 8,076 (4,482) (753) 8,579 Exceptional items - - - - - - - ------ -------- -------- -------- -------- -------- -------- Profit/(Loss) before income tax 4,550 (266) 1,454 8,076 (4,482) (753) 8,579 ------ -------- -------- -------- -------- -------- -------- Segment net assets 7,903 - 28,387 12,049 4,855 (10,708) 42,486 ------ -------- -------- -------- -------- -------- -------- Segment total assets 50,889 - 327,741 44,347 (8,874) - 414,103 ------ -------- -------- -------- -------- -------- -------- Segment total liabilities 42,986 - 299,354 32,298 (13,729) 10,708 371,617 ------ -------- -------- -------- -------- -------- -------- Other segment items: Capital expenditure 1,238 - 1,660 77 47 - 3,022 Depreciation and amortisation 793 - 779 90 4 - 1,666 Impairment charge - loans 1,447 - 740 50 - - 2,237 ------ -------- -------- -------- -------- -------- -------- Retail banking International UK private Investment Group costs Subordinated Group total private banking banking banking loan stock Restated - Year ended 31 December 2006 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ------ -------- -------- -------- -------- -------- -------- Segment operating income 23,558 - 13,555 21,744 - (648) 58,209 ------ -------- -------- -------- -------- -------- -------- Segment profit/(loss) 6,081 - 341 4,959 (3,182) - 8,199 Subordinatedloan note interest - - - - - (648) (648) ------ -------- -------- -------- -------- -------- -------- Profit/(Loss) before exceptional items 6,081 - 341 4,959 (3,182) (648) 7,551 Exceptional items (3,358) - 12,366 (274) (2,223) - 6,511 ------ -------- -------- -------- -------- -------- -------- Profit/(Loss) before income tax 2,723 - 12,707 4,685 (5,405) (648) 14,062 ------ -------- -------- -------- -------- -------- -------- Segment net assets 6,558 - 29,224 7,915 8,232 (9,773) 42,156 ------ -------- -------- -------- -------- -------- -------- Segment total assets 50,800 - 302,912 23,835 (12,642) - 364,905 ------ -------- -------- -------- -------- -------- -------- Segment total liabilities 44,242 - 273,688 15,920 (20,874) 9,773 322,749 ------ -------- -------- -------- -------- -------- -------- Other segment items: Capital expenditure 754 - 1,879 16 32 - 2,681 Depreciation and amortisation 1,002 - 780 126 52 - 1,960 Impairment charge - loans 4,843 - 43 - - - 4,886 ------ -------- -------- -------- -------- -------- -------- Segment profit is shown prior to any intra-group eliminations. Other than the International private banking operations which are in Switzerland, all the Group's other operations are conducted wholly within the United Kingdom and geographical information is therefore not presented. 35. Ultimate controlling party The Company regards Henry Angest, the Group Chairman and Chief Executive Officer, who has a beneficial interest in 52.6% 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 31 to the consolidated financial statements includes related party transactions with Mr Angest. FIVE YEAR SUMMARY In the table below, the figures for 2005, 2006 and 2007 are presented in accordance with IFRS. Earlier years' figures have not been restated under IFRS and accordingly are shown on a UK GAAP basis. 2003 2004 2005 2006 2007 (i) (i) (i) Restated Â£000 Â£000 Â£000 Â£000 Â£000 -------- -------- -------- -------- -------- Profit before tax and exceptional items* 5,789 4,382 7,367 7,551 8,579 Profit before tax 3,878 2,996 7,676 14,062 8,579 Earnings per share Basic (p) 20.1 22.0 45.8 63.0 23.8 Adjusted* (p) 31.9 27.2 32.6 32.0 23.8 Dividends per share (p) 31.0 31.5 32.0 32.5 33.0 * The exceptional items and the adjusted earnings per share reflect, in 2003, redundancy and reorganisation costs together with the write-off of goodwill arising from the professional expenses of the acquisition of Arbuthnot Securities in 2004, redundancy and reorganisation costs together with the costs of the consolidation of the London offices into Arbuthnot House, in 2005 exceptional items included reorganisation and redundancy costs of Â£486,000, the costs of moving to AIM of Â£55,000 and a profit on the sale of minority interests of Â£850,000 and in 2006 exceptional items include the profit on disposal of Arbuthnot House of Â£12,623,000, long term bonuses of Â£1,900,000, restructuring costs of Â£1,312,000 and affinity bad debt of Â£2,900,000. (i) The prior year adjustments, referred to in Note 9, of Â£1,028,000 relating to years earlier than 2006 have not been included in the pre 2006 figures disclosed in the table above. This information is provided by RNS The company news service from the London Stock Exchange

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