Secure Trust Bank 2021 Annual Financial Report

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Secure Trust Bank (STB)

UK 100

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	Full Year 2021	Full Year Restated¹ 2020	Change² %
Statutory profit before tax	£56.0m	£19.1m	193.2
Basic earnings per share	244.7p	82.7p	195.9
Ordinary dividend per share	61.1p	44.0p	38.9

Return on average equity	15.9%	5.9%	10.0pp
Net interest margin	6.4%	6.3%	0.1pp
Cost of risk	0.1%	2.3%	(2.2)pp
Cost income ratio	63.2%	55.7%	7.5pp

	31 Dec 2021	31 Dec 2020	Change² %
Loan Book	£2,531.9m	£2,358.9m	7.3
Loan Book - Core	£2,530.6m	£2,266.7m	11.6
Deposits	£2,103.2m	£1,992.5m	5.6
CET 1 capital ratio	14.5%	14.0%	0.5pp
Total capital ratio	16.8%	16.3%	0.5pp

	2021 Actual	Medium Term
Net Interest Margin	6.4%	>5.5%
Cost income ratio	63.2%	<50%
Return on Average Equity	15.9%	14% - 16%
CET 1	14.5%	>12.0%
Compound Annual Growth Rate³	11.6%	>15.0%

	2021	2020	2019
Grow
Net interest margin (%)	6.4	6.3	6.5
Why we measure this: Shows the interest margin earned on the Group's lending balances, net of funding costs
Loans and advances to customers¹ (£million)	2,531.9	2,358.9	2,450.1
Why we measure this: Shows the growth in the Group's lending balances, which generate income
Annual growth rate² (%)	11.6	(1.8)	23.5
Why we measure this: Shows the rate of growth in the Group's lending balances
Return on average equity (%)	15.9	5.9	12.0
Why we measure this: Measures the Group's ability to generate profit from the equity available to it
Sustain
Cost of risk³ (%)	0.1	2.3	1.4
Why we measure this : Measures how effectively the Group manages the credit risk of its lending portfolios
Common Equity Tier 1 (CET 1) ratio (%)	14.5	14.0	12.6
Why we measure this: The Common Equity Tier 1 ('CET 1') ratio demonstrates the Group's capital strength
Cost to income ratio⁴ (%)	63.2	55.7	58.5
Why we measure this: Measures how efficiently the Group utilises its cost base to produce income
Care
Customer Feefo ratings (Stars)	4.6	4.7	4.7
(mark out of 5 based on star rating from 937 reviews, 2020: 1,466, 2019: 1,754)
Why we measure this : Indicator of customer satisfaction with the Group's products and services
Employee survey trust index score (%)	80	82	79
(based on 2021 all employee survey)
Why we measure this: Indicator of employee engagement and satisfaction
Environmental intensity indicator	3.0	3.1	4.7
(tonnes of carbon dioxide equivalent per £1 million Group income)
Why we measure this : Indicator of the Group's impact on the environment

Income statement	2021 £million	Restated 2020 £million	Movement %
Interest income and similar income	180.0	192.5	(6.5)
Interest expense and similar charges	(29.2)	(41.6)	(29.8)
Net interest income	150.8	150.9	(0.1)
Fee and commission income	14.3	16.0	(10.6)
Fee and commission expense	(0.6)	(0.8)	(25.0)
Net fee and commission income	13.7	15.2	(9.9)
Operating income	164.5	166.1	(1.0)
Net impairment charge on loans and advances to customers	(4.5)	(51.3)	(91.2)
Gains/(losses) on modification of financial assets	1.5	(3.1)	(148.4)
Loss on disposal of loan books	(1.4)	-	-
Losses from derivatives and hedge accounting	(0.1)	-	-
Operating expenses	(104.0)	(92.6)	12.3
Profit before income tax	56.0	19.1	193.2
Income tax expense	(10.4)	(3.7)	181.1
Profit for the year	45.6	15.4	196.1
Basic earnings per share (pence)	244.7	82.7	195.9

Selected Key Performance Indicators and performance metrics
Net interest margin	6.4%	6.3%	0.1pp
Cost of funds	1.3%	1.8%	(0.5)pp
Cost to income ratio	63.2%	55.7%	7.5pp
Cost of risk	0.1%	2.3%	(2.2)pp
Return on average equity	15.9%	5.9%	10.0pp
Common Equity Tier 1 ('CET 1') ratio	14.5%	14.0%	0.5pp
Total capital ratio	16.8%	16.3%	0.5pp

Summarised balance sheet	2021 £million	Restated 2020 £million
Assets
Cash and balances at central banks	235.7	181.5
Loans and advances to banks	50.3	63.3
Debt securities	25.0	-
Loans and advances to customers¹	2,530.6	2,358.9
Derivative financial instruments	3.8	4.8
Other assets	40.5	52.7
	2,885.9	2,661.2
Liabilities
Due to banks	390.8	276.4
Deposits from customers	2,103.2	1,992.5
Tier 2 subordinated liabilities	50.9	50.8
Derivative financial instruments	6.2	6.1
Other liabilities	32.4	67.8
	2,583.5	2,393.6

Capital	2021 £million	Restated 2020 £million
CET 1 capital	303.6	280.8
Tier 2 capital	47.0	45.1
Total capital	350.6	325.9
Total risk exposure	2,087.4	1,999.7

Capital ratios	2021 %	Restated 2020 %
CET 1 capital ratio	14.5	14.0
Total capital ratio	16.8	16.3
Leverage ratio	10.3	10.3

	2021 £million	Restated 2020 £million
Total Capital Requirement	196.7	191.4
Capital conservation buffer	51.9	50.0
Countercyclical buffer	-	-
Total	248.6	241.4

Liquid assets	2021	2020
Aaa - Aa3	259.0	180.5
A1 - A3	38.9	46.5
Unrated	5.1	5.1
	303.0	232.1

Customer Deposits	2021 %	2020 %
Fixed term bonds	46	54
Notice accounts	37	35
ISA	12	7
Access accounts	5	4
	100	100

	2021 £million	2020 £million	Movement £million	Movement %
Lending balance	764.8	658.4	106.4	16.2
Total revenue	67.7	70.7	(3.0)	(4.2)
Impairment charge	5.0	14.5	(9.5)	(65.5)

Principal risk	Change to the risk profile over 2021
Credit risk Credit risk is the risk that a counterparty will be unable to satisfy their debt servicing commitments when due.	Improving
Liquidity and Funding risk The risk that the Group is unable to meet its obligations as they fall due or can only do so at excessive cost.	Stable
Capital risk Capital risk is the risk that the Group will have insufficient capital resources to meet minimum regulatory requirements and to support the business.	Stable
Market risk The risk that the value of, or revenue generated from, the Group's assets and liabilities is impacted as a result of market movements, predominantly interest rates.	Stable
Operational risk Operational risk is the risk that the Group may be exposed to direct or indirect loss arising from inadequate or failed internal processes, personnel and succession, technology or infrastructure, or from external factors.	Stable
Conduct risk The risk that the Group's products and services, and the way they are delivered, result in poor outcomes for customers, or harm to the Group.	Stable
Regulatory risk The risk that the Group fails to be compliant with all relevant regulatory requirements.	Stable
Financial Crime risk The risk that the Group fails to prevent the facilitation of financial crime by not having effective systems and controls and does not meet regulatory requirements.	Stable
Climate Change risk The risk of the potential 'physical' effects of climate change and the 'transitional' risks from the UK's adjustment towards a carbon neutral economy on the Group's strategy, performance and operational resilience.	Stable

Credit risk
Description Credit risk is the risk that a counterparty will be unable to satisfy their debt servicing commitments when due. Counterparties include the consumers to whom the Group lends on a secured and unsecured basis and the small and medium size enterprises ('SME') to whom the Group lends on a secured basis as well as the market counterparties with whom the Group deals.
Mitigation The Group manages credit risk through internal controls and through a three lines of defence model. The Consumer Credit Risk Committee and SME Credit Committees, which are the monitoring committees for credit risk, report to the Risk Committee. The ERC approves lending authorities in respect of SME lending. Each consumer lending product has a monthly portfolio review which reviews business performance. Policy and scorecard changes are approved at the Consumer Credit Risk Committee. For Real Estate Finance and Commercial Finance, lending decisions are made by their respective Credit Committees, using expert judgement and assessment against criteria set out in the lending policies. Exposure to credit risk is also managed in part by obtaining security. Vehicle Finance loans are secured against motor vehicles. Real Estate Finance loans are secured against property. Commercial Finance advances are secured against a debtor book, inventory, plant and machinery or property if a commercial mortgage is provided. Management monitors the credit ratings of the counterparties in relation to the Group's loans and advances to banks. There is no direct exposure to the Eurozone and peripheral Eurozone countries. Forbearance The Group does not routinely reschedule contractual arrangements where customers default on their repayments. It may offer the customer the option to reduce or defer payments for a short period, in which cases the loan will retain the normal contractual payment due dates and will be treated the same as any other defaulting cases for impairment purposes.
Consumer Finance credit risk Application, arrears and loss trends for the Retail Finance and Vehicle Finance portfolios are monitored monthly by the Credit Risk function. Since the end of lockdown Retail Finance business volumes have returned to pre-pandemic levels. Portfolio quality continues to improve driven by the proportion of new business in the lower risk furniture and jewellery sectors. Arrears cases remain below expectations as reflected by the higher quality business being written. Vehicle Finance has seen volumes steadily increasing, particularly in the second half of the year, as credit policy has returned to pre-pandemic standards. The Prime Hire Purchase product is starting to see higher volumes as introducers are aware of our risk appetite, and the Prime PCP product was launched in December 2021. Impairments are performing well and are lower than expectation. The increase in inflation in the second half of 2021 resulting in rising energy prices and the cost of living will impact customers that had low levels of disposable income, meaning that they will have to prioritise the debts that they pay. This is likely to result in increased impairments on the Consumer portfolios. The Group has implemented an Expert Credit Judgement overlay to account for the heightened risk of default from the highest risk, lowest income customers. Business Finance credit risk New business origination activities in Business Finance returned to business as usual as the UK exited lockdown during the year. New business in Real Estate Finance was driven in part by the launch of the Greener Home Scheme product, which against some large scheduled repayments saw the balances grow modestly throughout the year. In Real Estate Finance, the majority of customers impacted by the COVID-19 pandemic saw rental income recover and as a result there was no need to extend the forbearance measures previously agreed; with loans moved back to original terms. In Commercial Finance the Government guaranteed loan schemes (CBILS, CLBILS, RLS) were deployed in response to COVID-19. The business has successfully provided circa £65.9 million of loans and has received circa 30% in repayments so far. Commercial Finance took the conscious decision not to participate in the UK Government's Bounce Back Loan Scheme. The overall Commercial Finance portfolio has grown through the year, despite significant unutilised headroom. The Group has not relaxed any of its key risk appetite parameters during the year. Management continues to monitor each of the portfolios closely and regularly reviews the external events and changes to the wider environment that could have a material impact on any of them. Concentration risk Management assesses the potential concentration risk from geographic, product and individual loan concentration. Due to the well diversified nature of its lending operations, the Group does not consider there to be a material exposure arising from concentration risk. Model risk and the impact of IFRS 9 The IFRS 9 models have been monitored closely throughout the year and found to be working effectively. A new Probability of Default model was implemented for the Real Estate Finance business in the second half of 2021 and has performed well. Minor enhancements have been made to the models where appropriate ahead of a routine full review, and where appropriate, redevelopment in 2022. The extreme economic conditions brought about by COVID-19 have required particular focus on the macroeconomic variables that drive the forward-looking elements of the IFRS 9 models (the Economic Response Model). Unemployment rate has the largest influence on the Economic Response Model element of IFRS 9, with House Price Index also playing an influence in the Real Estate Portfolio. Throughout the year the Bank has continued to stress the IFRS 9 models with a number of unemployment scenarios, to assist with business planning and forecasting. Payment holidays have kept the provision levels produced by the IFRS 9 models artificially low in the first half of 2021, so where necessary overlays were used to maintain provision cover at appropriate levels.
Change during the year - Improving Given the positive response seen from the portfolios to the pandemic and the robust credit appetite controls that continue to be applied, the overall assessment of credit risk improved during the year. Despite the low numbers of defaults experienced throughout the year, however, difficult economic conditions are expected in 2022. Inflation is expected to rise and labour shortages and supply chain disruption are expected to continue.

Liquidity and Funding risk
Description Liquidity and funding risk is the risk that the Group is unable to meet its obligations as they fall due or can only do so at excessive cost. The Group maintains adequate liquidity resources and a prudent, stable funding profile at all times to cover liabilities as they fall due in normal and stressed conditions. The Group manages its liquidity in line with internal and regulatory requirements, and at least annually assesses the robustness of the liquidity requirements as part of the Group's Internal Liquidity Adequacy Assessment Process ('ILAAP').
Mitigation Risk tolerance and stress testing The Board sets and approves the Group's liquidity and funding risk appetite. Liquidity and funding risk is managed by the Group's Treasury function and is overseen by the Assets & Liabilities Committee ('ALCO'). The Group's ALCO monitors compliance with the Group's policies and oversees the overall strategy, guidelines and limits so that the Group's future plans and strategy can be achieved within risk appetite. The Liquidity Working Group ('LWG'), a working group of ALCO including representation from Business Unit Finance Directors, embeds the identification, monitoring, measurement and management of liquidity and funding risks in the day-to-day activities of the Group. The Risk Function is responsible for ensuring that appropriate risk management processes and controls are in place, and that they are sufficiently robust to ensure that key risks are identified, assessed, monitored and mitigated. Liquidity and funding metrics are monitored daily through daily liquidity reporting and on an ongoing basis through monthly ALCO meetings. Metrics are also included in the monthly information pack presented at the Group's ExCo, the BRC and the Board. The aim is not to measure liquidity and funding with a single metric but rather a range of principles and metrics which, when taken together, helps ensure that the Group's liquidity and funding risk is maintained at an acceptable level. The primary measures used by management to assess the adequacy of liquidity is the Overall Liquidity Adequacy Rule ('OLAR') (which is the Board's own view of the Group's liquidity needs as set out in the Board-approved ILAAP), the Liquidity Coverage Ratio ('LCR'), and the Funding to Loan Ratio. The Group manages liquidity by working to ensure compliance with the most binding metric. In line with the Prudential Regulation Authority's ('PRA') self-sufficiency rule (the OLAR) the Group seek at all times to maintain liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due under stressed conditions. The Group defines liquidity adequacy as the: · Ongoing ability to accommodate the refinancing of liabilities upon maturity and other means of withdrawal at acceptable cost; · Ability to fund asset growth; and · Capacity to otherwise meet contractual obligations through unconstrained access to funding at reasonable market rates. To meets its liquidity requirements the Group maintains a buffer of unencumbered High Quality Liquid Assets ('HQLA'). The Group conducts regular and comprehensive liquidity stress testing to identify sources of potential liquidity strain and to ensure that the Group's liquidity position remains within the Board Risk Appetite and prudential regulatory requirements and limits. Stress testing covers idiosyncratic, market-wide, and combined stress scenarios, with additional stress scenarios including reverse stresses and combinations of sensitivity analysis across individual items. Contingency funding plans If for reasons which may be beyond the business' control, the Group was to encounter a significant and sustained outflow of deposits or other stress on liquidity resource, the Recovery Plan incorporates the Group's plans to ensure that it remains sufficiently liquid to remain a viable independent financial institution during a severe liquidity stress event. Recovery Plan Early Warning Indicators and Invocation Trigger Points are regularly monitored and reported against. The Recovery Plan is applied consistently with the Group's ILAAP as part of the overall liquidity risk management framework dealing with contingent funding requirements as they arise. The Group also retains access to the Bank of England liquidity schemes, including the Discount Window Facility.
Change during the year - Stable The Group has maintained its liquidity ratios in excess of regulatory requirements throughout the year and continues to hold significant levels of HQLA. A number of enhancements were made to the liquidity and funding risk management in 2021. These included a further review of the quantum of liquidity the Group holds to support its franchise in business-as-usual and stressed conditions. A thorough review of the Group's regulatory liquidity reporting has also been completed. The stress tests performed as part of the ILAAP confirmed that the Group has sufficient funds to satisfy the OLAR requirement and there is no significant risk that liabilities cannot be met as they fall due. The Group's LCR as at 31 December 2021 was significantly higher than the regulatory requirement.

	Share capital £million	Share premium £million	Cash flow hedge reserve £million	Revaluation reserve £million	Retained earnings £million	Total £million
Balance at 1 January 2020 (as previously stated)	7.4	81.2	-	1.1	164.4	254.1
Software-as-a-Service adjustment net of tax (see Note 1.3)	-	-	-	-	(2.1)	(2.1)
Balance at 1 January 2020 (as restated)	7.4	81.2	-	1.1	162.3	252.0
Total comprehensive income for the period
Profit for 2020	-	-	-	-	15.4	15.4

Other comprehensive income, net of income tax
Revaluation reserve	-	-	-	(0.4)	-	(0.4)
Tax on revaluation reserve	-	-	-	0.2	-	0.2
Total other comprehensive income	-	-	-	(0.2)	-	(0.2)
Total comprehensive income for the period	-	-	-	(0.2)	15.4	15.2

Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Issue of ordinary shares	0.1	1.0	-	-	-	1.1
Share-based payments	-	-	-	-	(0.3)	(0.3)
Tax on share-based payments	-	-	-	-	(0.4)	(0.4)
Total contributions by and distributions to owners	0.1	1.0	-	-	(0.7)	0.4
Balance at 31 December 2020	7.5	82.2	-	0.9	177.0	267.6

Total comprehensive income for the period
Profit for 2021	-	-	-	-	45.6	45.6
Other comprehensive income, net of income tax
Cash flow hedge reserve	-	-	(0.4)	-	-	(0.4)
Tax on cash flow hedge reserve	-	-	0.1	-	-	0.1
Revaluation reserve	-	-	-	0.5	-	0.5
Tax on revaluation reserve	-	-	-	(0.1)	-	(0.1)
Total other comprehensive income	-	-	(0.3)	0.4	-	0.1
Total comprehensive income for the period	-	-	(0.3)	0.4	45.6	45.7

Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends	-	-	-	-	(11.9)	(11.9)
Share-based payments	-	-	-	-	1.0	1.0
Total contributions by and distributions to owners	-	-	-	-	(10.9)	(10.9)
Balance at 31 December 2021	7.5	82.2	(0.3)	1.3	211.7	302.4

	Share capital £million	Share premium £million	Cash flow hedge reserve £million	Revaluation reserve £million	Retained earnings £million	Total £million
Balance at 1 January 2020 (as previously stated)	7.4	81.2	-	0.7	150.0	239.3
Software-as-a-Service adjustment net of tax (see Note 1.3)	-	-	-	-	(2.1)	(2.1)
Balance at 1 January 2020 (as restated)	7.4	81.2	-	0.7	147.9	237.2
Total comprehensive income for the period
Profit for 2020	-	-	-	-	22.0	22.0

Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Issue of ordinary shares	0.1	1.0	-	-	-	1.1
Share-based payments	-	-	-	-	(0.3)	(0.3)
Tax on share-based payments	-	-	-	-	(0.4)	(0.4)
Total contributions by and distributions to owners	0.1	1.0	-	-	(0.7)	0.4
Balance at 31 December 2020	7.5	82.2	-	0.7	169.2	259.6

Total comprehensive income for the period
Profit for 2021	-	-	-	-	45.8	45.8

Other comprehensive income, net of income tax
Cash flow hedge reserve	-	-	(0.4)	-	-	(0.4)
Tax on cash flow hedge reserve	-	-	0.1	-	-	0.1
Total other comprehensive income	-	-	(0.3)	-	-	(0.3)
Total comprehensive income for the period	-	-	(0.3)	-	45.8	45.5

Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends	-	-	-	-	(11.9)	(11.9)
Share-based payments	-	-	-	-	1.0	1.0
Total contributions by and distributions to owners	-	-	-	-	(10.9)	(10.9)
Balance at 31 December 2021	7.5	82.2	(0.3)	0.7	204.1	294.2

	Note	2021 £million	Restated 2020 £million
Cash flows from operating activities
Profit for the year		45.8	22.0
Adjustments for:
Income tax expense	10	9.5	2.8
Depreciation of property, plant and equipment	21	0.8	1.0
Depreciation of right-of-use assets	22	0.5	0.5
Loss on disposal of intangible assets		-	0.5
Amortisation of intangible assets	23	1.2	1.6
Impairment charge on loans and advances to customers		2.7	41.0
(Gains)/losses on modification of financial assets	5	(1.5)	3.1
Share-based compensation	35	0.8	(0.3)
Revaluation (gain)/impairment	20,21.22	(0.4)	1.0
Investment income		(4.8)	-
Loss on disposal of loan books	6	1.4	-
Other non-cash items included in profit before tax		0.5	1.5
Cash flows from operating profits before changes in operating assets and liabilities		56.5	74.7
Changes in operating assets and liabilities:
- loans and advances to customers		(244.1)	40.4
- loans and advances to banks and balances at central banks		4.7	(3.5)
- other assets		11.7	(3.2)
- deposits from customers		110.7	(27.8)
- provisions for liabilities and charges		(0.8)	(0.7)
- other liabilities		(19.4)	19.8
Income tax paid		(11.1)	(3.5)
Net cash (outflow)/inflow from operating activities		(91.8)	96.2
Cash flows from investing activities
Consideration on sale of loan books	6	60.4	-
Redemption of debt securities		90.0	130.0
Purchase of debt securities		(90.0)	(105.0)
Purchase of property, plant and equipment	21	-	(0.3)
Purchase of intangible assets	23	(0.8)	(0.9)
Net cash inflow from investing activities		59.6	23.8
Cash flows from financing activities
Drawdown/(repayment) of amounts due to banks		114.4	(31.7)
Issue of ordinary shares		-	1.1
Dividends paid	12	(11.9)	-
Repayment of lease liabilities	29	(0.7)	(0.7)
Net cash inflow/(outflow) from financing activities		101.8	(31.3)
Net increase in cash and cash equivalents		69.6	88.7

Capital risk
Description Capital risk is the risk that the Group will have insufficient capital resources to meet minimum regulatory requirements and to support the business. The Group adopts a conservative approach to managing its capital and at least annually assesses the robustness of the capital requirements as part of the Group's Internal Capital Adequacy Assessment Process ('ICAAP').
Mitigation Capital Management is defined as the operational and governance processes by which capital requirements are established and capital resources maintained and allocated, such that regulatory requirements are met while maximising returns. These processes and associated roles and responsibilities are set out in the Group's Capital Management Policy, which is approved by the BRC. The Board regularly reviews the current and forecast capital position to ensure capital resources are sufficient to support planned levels of growth. In accordance with the EU's Capital Requirements Directive V ('CRD V') and the required parameters set out in the EU's Capital Requirement Regulation, which have been prescribed into UK law following Brexit, the Group maintains an ICAAP which is updated at least annually. The ICAAP is a process that brings together the management framework (i.e. the policies, procedures, strategies and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted an approach to determine the level of capital we need to hold. This method takes the Pillar 1 capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations delivers a sufficient capital sum adequate to cover management's assessment of anticipated risks. Where it is considered that the Pillar 1 calculations do not reflect the risk, an additional capital add-on in Pillar 2 is applied, as per the Total Capital Requirement issued by the PRA. A complete assessment of the Group's capital requirement is contained in its Pillar 3 disclosures. Pillar 3 disclosures for the Group for the year ended 31 December 2021 are published as a separate document on our website.
Change during the year - Stable As set out in the Financial review, the Group's capital position improved in 2021, reflecting the growth in profits. The Group continues to meet its capital ratio measures. Details of the CET 1, total capital ratio and leverage ratio are included in the Financial review on page 16. The 2021 ICAAP showed that the Group continues to be able to meet its minimum capital requirements, even under extreme stress scenarios. In addition to the ICAAP, the Group performs regular budgeting and reforecasting exercises which consider a five-year time horizon. These forecasts are used to plan for future lending growth at a rate that both increases year-on-year profits and maintains a healthy capital surplus. They considered the impact of known and anticipated future regulatory changes including the estimated impact of the re-introduction of the countercyclical capital buffer ('CCyB') prior to its announcement in December 2021. The PRA's proposed increases in CCyB explained on page 25 will not challenge the Group's minimum regulatory capital position. The Group will continue to monitor its future capital requirements as it grows its risk weighted assets over the reporting period. The Group also models a number of stressed scenarios looking over a five-year time horizon, which consider a range of growth rates over those years as part of the viability and going concern assessments. The 2020 pandemic demonstrated the benefit of the relatively short duration of the Group's lending portfolios. As the crisis took hold, the reduction in certain of our markets and our tightening of credit risk appetite led to a swift reduction in our balance sheet, thereby reducing pressure on capital levels. This feature of our balance sheet allows us to flex future growth rates in response to changing economic conditions. The Group adopted transitional provisions in respect of the implementation of IFRS 9. These provisions allow the capital impact of the standard to be phased in over a five-year period. As a response to the pandemic, further capital relief was made available, and the Group's reported capital position takes account of this relief. Further details are provided in the Financial review on page 16.

Market risk
Description The Group's market risk is primarily linked to interest rate risk. Interest rate risk refers to the exposure of the Group's financial position to adverse movements in interest rates. When interest rates change, the present value and timing of future cash flows change. This in turn changes the underlying value of the Group's assets, liabilities and off-balance sheet instruments and hence its economic value. Changes in interest rates also affect the Group's earnings by altering interest-sensitive income and expenses, affecting its net interest income. The principal currency in which the Group operates is Sterling, although a small number of transactions are completed in US dollars, Euros and other currencies in the Commercial Finance business. The Group has no significant exposures to foreign currencies and hedges any residual currency risks to Sterling.
Mitigation Risk tolerance and stress testing Market risk is managed by the Group's Treasury function and is overseen by the ALCO. The Group does not take significant unmatched positions and does not operate a trading book. The Group's risk management framework, policies and procedures are regularly reviewed and updated to ensure that they accurately identify the risks that the Group faces in its business activities and are appropriate for the nature, scale and complexity of the Group's business. The Group uses an interest rate sensitivity gap analysis which informs the Group of any significant mismatched interest rate risk positions that require hedging. The Group reports the interest rate mismatch on a monthly basis to ALCO, considering Market Value Sensitivity ('MVS') as a proportion of the overall capital position of the Group and Earnings at Risk as a proportion of forecast net interest income. These are mainly assessed against 200bps and 100bps parallel shifts in rates respectively. These measures also assess the Group's exposure to a potential negative interest rate environment. The Group also monitors its exposure to the Economic Value of Equity ('EVE') as a proportion of own funds and CET 1 against a 200bps parallel shift in rates, as well as the six standardised shocks prescribed by the Basel Committee on Banking Supervision ('BCBS'). The Group also monitors its exposure to basis risk, optionality, and any residual non-GBP positions. Processes are also in place to review and react to movements to the Bank of England Base Rate. All such exposures are maintained within the risk appetite set by the Board and are monitored by ALCO.
Change during the year - Stable The Group's exposure to market risk continues to be primarily focused on interest rate risk, with only modest exposures to foreign exchange risk. Performance against risk appetite is closely tracked and reviewed to align with Group Strategy. The Group remained within risk appetite in respect of market risk throughout the year. The Group has made further enhancements to market risk management in 2021 and regularly reviews the risk management framework.

Operational risk
Description Operational risk is the risk that the Group may be exposed to direct or indirect loss arising from inadequate or failed internal processes, personnel and succession, technology/ infrastructure, or from external factors. The scope of Operational risk is broad and includes business process, business continuity, third party, Financial Crime, Change, Human Resources, Information Security and IT risk, including Cyber risk. The Group's customers, operations, processes, products and people are exposed to these inherent risks so it has made significant investments to carefully manage and mitigate these risks and ensure there is a robust and effective Operational Risk Framework in operation across all areas of its business.
Mitigation The Group has an Operational Risk Framework designed in accordance with the 'Principles for the Sound Management of Operational Risk' issued by the Basel Committee on Banking Supervision. This Framework defines and facilitates the following activities: · A Risk and Control Self-Assessment process to identify, assess and mitigate risks across all business units through improvements to the control environment · The Governance arrangements for managing and reporting these risks · Risk appetite statements and associated thresholds and metrics · An incident management process that defines how incidents should be managed and associated remediation, reporting and root-cause analysis. The design and effectiveness of the Group's Operational Risk Framework is regularly audited by the Group's Internal Audit function. The Framework ensures appropriate governance is in place to provide adequate and effective oversight of the Group's operational risks. The governance framework includes the Group Operational Risk Committee, the ERC and the BRC. The Group has a defined set of qualitative and quantitative operational risk appetite measures. These measures cover all categories of operational risk and are reported and monitored monthly. In addition to the delivery of Framework requirements Operational Risk has also focused on these thematic areas in 2021: · COVID-19 (business disruption) - The pandemic has increased the inherent risks faced by our business across a number of operational risk categories and has remained a key area of focus in 2021. As well as working to minimise the operational implications through changes to our operating practices, the Group has also been focusing on the safe return of colleagues to the offices over the second half of the year. The threat of new variants remains, and we continue to closely monitor the situation. The pandemic has increased the competitiveness of the UK job market with hybrid working allowing recruiters to look nationally for new talent. Inflationary pressures have also increased pressure on wages across the sector, further increasing the importance of succession planning and mitigating key person risk. · Supplier management - The Group uses a number of third parties to support its IT and operational processes. The Group recognises that it is important to effectively manage these suppliers and has embedded a suite of standard controls for all its material suppliers to reduce the risk of operational impacts on these critical services. This has been particularly important during the COVID-19 pandemic, so we have remained in regular contact with our key suppliers and gained assurances over their ongoing ability to support our operations. Further tools have been developed, and are being rolled out, to help understand the quality of the resilience controls in operation at our critical suppliers. This will continue to be an area of focus for 2022. · Operational and IT resilience - Many elements of the Operational Risk Framework support the ongoing resilience of the Group's operational and IT services, including business continuity management, disaster recovery, incident management, process management, and the cyber strategy. The Group has defined a formal plan to respond to the new requirements of the Consultation Papers issued on this subject by the Financial Conduct Authority ('FCA') and PRA. Compliance with these requirements and continuing to enhance the resilience of our services remains a key priority. · Information security and cyber risk - The Group has paid considerable attention to ensuring the effective management of risks arising from a failure or breach of its information technology systems that could result in customer exposure, business disruption, financial losses, or reputational damage. · Change Management - The effective delivery of Change Management programmes plays an important role in meeting the Group's regulatory requirements, improving services and delivering our strategic plans. Ineffective change management processes could lead to poor customer outcomes, business disruption, financial loss and regulatory breaches. Change Management processes and governance are defined and embedded across the Group.
Change during the year - Stable The Group uses the 'The Standardised Approach' for assessing its operational risk capital, in recognition of the enhancements made to its framework and embedding this across the Group. The Group continues to invest in resource, expertise and systems to support the Operational Risk Framework and Policy. In 2021 the Group has continued to enhance these standards and has introduced a number of improvements to the control frameworks in place across our principal operational risks. Whilst the pandemic increased the inherent operational risk across a number of key areas of our business, the Group continues to adapt successfully to the new working conditions and demonstrated its operational resilience. Overall, the assessment is that the level of risk has remained stable.

Conduct risk
Description We define Conduct Risk as the risk that the Group's products and services, and the way they are delivered, result in poor outcomes for customers, or harm to the Group. This could be as a direct result of poor or inappropriate execution of the Group's business activities or staff behaviour.
Mitigation The Group takes a principles-based approach and includes retail and commercial customers in our definition of 'customer', which covers all business units and both regulated and unregulated activities. Detailed policies are in place to address the fair treatment of customers, with the Conduct Risk Policy setting out the overarching approach to managing conduct risk.
Change during the year - Stable The Group has continued to operate within overall risk appetite, remaining focused on delivering good customer outcomes. As reported in the 2021 Interim Report, pressure has been seen on some conduct risk metrics. For example some contact centre service levels have been outside tolerance for some periods with resources not matching requirements. The number of affordability complaints received has also been flagged for attention in Vehicle Finance - increased volumes have also been noted by other motor finance lenders according to the Finance & Leasing Association. The Group anticipates that the drivers of conduct risk will continue to be the ongoing resourcing challenges (being experienced across the financial services industry as competition for recruitment increases) and related conduct considerations, and the long-term impact of the pandemic on the Group's customers.

Regulatory risk
Description Regulatory Risk is the risk that the Group fails to be compliant with all relevant regulatory requirements. This could occur if the Group failed to interpret, implement and embed processes and systems to address regulatory requirements, emerging risks, key focus areas and initiatives or deal properly with new laws and regulations.
Mitigation The Group seeks to manage regulatory risks through the ERMF. The Group Compliance and Regulatory Risk Committee, Group Financial Crime Committee and Prudential Horizon Scanning forum are responsible for reviewing and monitoring regulatory changes. The committees monitor operational incidents with a regulatory impact, and ensure that appropriate actions are taken. They also review and approve the relevant risk management framework.
Change during the year - Stable In the year ended 31 December 2021, new and revised regulations and legislation that have come into force have been actioned. These changes included the introduction of Breathing Space through the Debt Respite Scheme, the FCA's guidance on vulnerability, the application of the FCA Directory requirements to other entities in the Group, changes to identification of Material Risk Takers, and the PRA's final rules for the implementation of Basel Standards. The Group took part in a number of FCA reviews and surveys during the year, including car repossessions prior to the FCA COVID-19 guidance being changed, forbearance survey, credit broking survey, coronavirus financial resilience survey and the pilot diversity and inclusion survey. Notifications were submitted to the regulators in the year relating to the sale of the asset finance, and mortgage portfolios; and material outsourcings. Projects and initiatives are in place for changes in 2022 including outsourcing and third-party risk management, regulatory returns, operational resilience, UK GDPR data transfers. The Group's horizon scanning activities track industry and regulatory developments including the PRA's work on a strong and simple prudential framework for non-systemic banks and building societies, the FCA's new Consumer Duty, the Government's national data strategy and the PRA and FCA's transformation agendas related to data.

Financial Crime risk
Description The risk that the Group fails to prevent the facilitation of financial crime by not having effective systems and controls and does not meet regulatory requirements.
Mitigation The inherent risk of the Group is assessed with the use of the recognised ERMF methodology. Investment continues to be made in enhancing skills, systems and controls and this is an area which is closely monitored by the ExCo. This remains an important area of focus for the Group and as such has now been reflected as a separate risk. The Group appointed a new Money Laundering Reporting Officer who was approved by the FCA in December 2020. The Group continues to have no appetite for establishing or maintaining customer relationships or executing transactions that facilitate financial crime and has no appetite for sanctions breaches. Horizon scanning is conducted to identify emerging trends and typologies as well as preparing for new legislation and regulation. This also involves participating in key industry forums (or associations) such as those hosted by UK Finance. Financial Crime policies and standards were updated in 2021 to ensure alignment with our regulatory obligations.
Change during the year - Stable The Group continues to invest in recruitment for both the first and second Lines of defence and in colleagues' development to improve their capabilities through industry-recognised financial crime qualifications. The Group has built a system of controls designed to comply with the UK Bribery Act 2010 and the Criminal Finances Act 2017. To strengthen our financial crime controls there has been focus in areas such as further improving sanctions screening, assessing risks presented by products and appropriate transaction monitoring and reinforcing horizon scanning, policies and governance to adhere to our risk appetite and stay abreast of increasing regulatory expectations. The Financial Crime Risk team own our control framework with accountability for execution owned by our colleagues within the first line. In order to monitor the effectiveness of our control framework, key performance indicators are defined, reported against and escalated through our Governance Committee structure. To support cultural awareness an internal campaign under the banner of "Spot the signs, stop the crimes" has been initiated.

Statement of financial position	As originally stated 2019 £million	Prior year adjustment 2019 £million	Restated 2019 £million
Cloud software development prepayment	6.4	(2.6)	3.8
Deferred tax assets	7.5	0.5	8.0
Other assets	2,668.9	-	2,668.9
Total assets	2,682.8	(2.1)	2,680.7
Total liabilities	2,428.7	-	2,428.7
Total equity	254.1	(2.1)	252.0
Total liabilities and equity	2,682.8	(2.1)	2,680.7

Income statement	As originally stated 2020 £million	Prior year adjustment 2020 £million	Restated 2020 £million
Operating income	166.1	-	166.1
Net impairment charge on loans and advances to customers	(51.3)	-	(51.3)
Losses on modification of financial assets	(3.1)	-	(3.1)
Operating expenses	(91.6)	(1.0)	(92.6)
Profit before income tax	20.1	(1.0)	19.1
Income tax expense	(3.9)	0.2	(3.7)
Profit for the year	16.2	(0.8)	15.4
Basic earnings per share	87.0	4.3	82.7

Statement of financial position	As originally stated 2020 £million	Prior year adjustment 2020 £million	Restated 2020 £million
Cloud software development prepayment	8.2	(3.6)	4.6
Deferred tax assets	5.9	0.7	6.6
Other assets	2,650.0	-	2,650.0
Total assets	2,664.1	(2.9)	2,661.2
Total liabilities	2,393.6	-	2,393.6
Total equity	270.5	(2.9)	267.6
Total liabilities and equity	2,664.1	(2.9)	2,661.2

	Interest income and similar income £million	Fee and commission income £million	Revenue from external customers £million	Net impairment charge/(credit) on loans and advances to customers £million	Loans and advances to customers £million
31 December 2021
Real Estate Finance	54.5	0.3	54.8	0.1	1,109.6
Asset Finance	0.3	-	0.3	0.1	-
Commercial Finance	8.8	8.6	17.4	(0.2)	313.3
Business Finance	63.6	8.9	72.5	-	1,422.9
Retail Finance	65.0	2.7	67.7	5.0	764.8
Vehicle Finance	38.0	1.3	39.3	0.1	263.3
Debt Management	14.3	0.3	14.6	(0.6)	79.6
Consumer Mortgages	1.3	-	1.3	-	-
Consumer Finance	118.6	4.3	122.9	4.5	1,107.7
Other	(2.2)	1.1	(1.1)	-	-
	180.0	14.3	194.3	4.5	2,530.6

Secure Trust Bank 2021 Annual Financial Report

New vision and purpose

Lending performance

Supporting our customers

Our People

Outlook

Profit and earnings

Net interest income

Net fee and commission income

Impairment charge

Disposal of loan books

Operating expenses

Taxation

Distributions to shareholders

Balance sheet

Loans and advances to customers

Debt securities and Due to banks

Deposits from customers

Tier 2 subordinated liabilities

Capital

Management of capital

Capital resources

Capital requirements

Liquidity

Liquidity resources

Management of liquidity

Retail Finance

What we do

2021 performance

Vehicle Finance

What we do

2021 performance

What we do

2021 progress

What we do

2021 performance

What we do

2021 performance

What we do

2021 performance

Risk management

Risk appetite

Governance

Risk overview

Principal risk

Credit risk

Liquidity and Funding risk

Capital risk

Market risk

Operational risk

Conduct risk

Regulatory risk

Financial Crime risk

Climate Change risk

Credit risk

Description

Mitigation

Forbearance

Consumer Finance credit risk

Business Finance credit risk

Concentration risk

Model risk and the impact of IFRS 9

Change during the year - Improving

Liquidity and Funding risk

Description

Mitigation

Risk tolerance and stress testing

Contingency funding plans

Change during the year - Stable

Capital risk

Description

Mitigation

Change during the year - Stable

Market risk

Description

Mitigation

Risk tolerance and stress testing

Change during the year - Stable

Operational risk

Description

	2021 £million	2020 £million
Loans and advances to customers	182.0	193.8
Cash and balances at central banks	0.2	0.4
Debt securities	-	0.1
	182.2	194.3
Expense on financial instruments hedging assets	(2.2)	(1.8)
Interest income and similar income	180.0	192.5

Deposits from customers	(27.3)	(39.4)
Due to banks	(0.3)	(0.7)
Subordinated liabilities	(3.4)	(3.4)
	(31.0)	(43.5)
Income on financial instruments hedging liabilities	1.8	1.9
Interest expense and similar charges	(29.2)	(41.6)

Net interest income	150.8	150.9

	2021 £million	2020 £million
Fee and disbursement income	12.5	14.1
Commission income	1.2	1.3
Other income	0.6	0.6
Fee and commission income	14.3	16.0

Other expenses	(0.6)	(0.8)
Fee and commission expense	(0.6)	(0.8)

Net fee and commission income	13.7	15.2

	2021 Vehicle Finance £million	2021 Retail Finance £million	2021 Total £million	2020 Vehicle finance £million	2020 Retail Finance £million	2020 Total £million
Reduction in net present value
At 1 January	2.5	0.6	3.1	-	-	-
(Credit)/charge to the income statement	(1.1)	(0.4)	(1.5)	2.5	0.6	3.1
Balance remaining to be unwound at 31 December	1.4	0.2	1.6	2.5	0.6	3.1

Financial assets (with loss allowance based on lifetime ECL) modified during the period	2021 £million	2020 £million
Gross loans and advances before modification	-	527.2
Less: allowances for impairments on loans and advances	-	(55.6)
	-	471.6
Loan modification loss	-	(0.9)
Net amortised cost after modification	-	470.7

	Consumer Mortgages £million	Asset Finance £million	Total £million
Consideration received	54.4	5.8	60.4
Carrying value of loan books disposed	(54.5)	(5.8)	(62.4)
Income less disposal costs	(1.2)	(0.1)	0.6
Loss on disposal of loan books	(1.3)	(0.1)	(1.4)

	2021 £million	2020 £million
Fair value hedges
Fair value movement in period - Interest rate swaps	0.9	1.2
Fair value movement in period - Hedged item	(0.8)	(1.2)
	0.1	-

	2021 £million	2020 £million
Cash flow hedges
Fair value movement in period - Interest rate swaps	0.4	-
Interest reclassified to the income statement in the period	-	-
	0.4	-

	2021 £million	Restated 2020 £million
Employee costs, including those of Directors:
Wages and salaries	47.4	44.9
Social security costs	5.8	5.0
Pension costs	2.0	1.9
Share-based payment transactions	0.9	-
Depreciation of property, plant and equipment (Note 21)	1.3	1.4
Depreciation of lease right-of-use assets (Note 22)	0.7	0.7
Amortisation of intangible assets (Note 23)	1.5	2.0
Operating lease rentals	0.6	0.5
Other administrative expenses	43.8	36.2
Total operating expenses	104.0	92.6

	2021 £'000	2020 £'000
Fees payable to the Company's auditor for the audit of the Company's annual accounts	639	443
Fees payable to the Company's auditor for other services:
The audit of the Company's subsidiaries, pursuant to legislation	50	40
Other assurance services	110	58
	799	541

	2021 Number	2020 Number
Directors	8	8
Management	279	254
Other	686	759
	973	1,021