Arbuthnot Regulatory News (ARBB)

30 March 2023

For immediate release

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

Audited Final Results for the year to 31 December 2022

Profit growth accelerates path to "Future State".

Arbuthnot Banking Group today announces its audited results for the year ended 31 December 2022.

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

FINANCIAL HIGHLIGHTS

· Profit Before Tax of £20.0m (2021: £4.6m)

· Operating income increased to £137.4m (2021: £88.7m)

· Earnings per share of 109.6p (2021: 45.2p)

· Final dividend declared increased by 3p to 25p (2021: 22p)

· Total ordinary dividend per share increased by 4p (11%) to 42p (2021: 38p)*

· Net assets of £212.0m (2021: £200.9m)

· Net assets per share of 1411p (2021: 1337p)

· CET1 ratio of 11.6% (2021: 12.3%) and total capital ratio of 14.0% (2021: 14.9%), significantly greater than the Group's minimum requirements

· Substantial surplus liquidity at the year end of £535m

OPERATIONAL HIGHLIGHTS

Arbuthnot Latham

· Profit before tax and group recharges of £32.9m (2021: £15.3m), an increase of 115%

· Average net margin at 5.1% (2021: 4.1%)

· Customer loans increased 10% to £2.2bn (2021: £2.0bn)**

· Customer deposits increased 9% to £3.1bn (2021: £2.8bn)

· Assets under management decreased 2% to £1.33bn (2021: £1.36bn) mainly due to market performance

· Successful implementation of a significant upgrade to the banking platform following 18-month project, improving resilience and agility

· Launch of new lending automation system improving the loan origination process for commercial and private clients

· Medium term "Future State" pre-tax return on capital objective achieved ahead of plan, with further ambitious targets introduced

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "The Group made good progress in 2022 after investing over many years in a business model built on relationship-based banking, while also diversifying our lending to higher margin specialist sectors. These results demonstrate the benefits of this strategy."

Note: * This excludes the special dividend of 21p per share paid in 2021.

** This balance includes both Customer loans and assets available for lease.

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

The 2022 Annual Report and Notice of Meeting will be available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 24 April 2023. Copies will then be available from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN, when practicable.

Consolidated statement of comprehensive income

Consolidated statement of financial position

Chairman's statement

Arbuthnot Banking Group ("ABG" or "the Group") is pleased to report a profit before tax of £20.0m.

This represents a significant increase over the prior year result of £4.6m and is due to a number of factors but the most important of those is the increase of the Bank of England ("BoE") base rate during the year.

I always thought that after nearly 15 years of historically low interest rates, that once rates started to rise, they would move at a speed and quantum greater than anybody expected. This has proven to be the case in 2022 with eight separate rate increases, with BoE base rate finishing the year at 3.5% compared to 0.25% at the start of the year.

I have consistently believed that the strength of a bank should be measured on the quality and diversity of its deposit base and as a result of this philosophy we have spent the last few years developing and investing in the Bank's business model that is based on good quality relationship driven deposits. This approach was taken in the belief that interest rates would normalise in due course. We are now seeing the benefits of this business model.

I should however add a word of caution; given that we have regularly maintained a very prudent approach to the amount of excess liquidity that we deposit at the BoE, this asset has no natural hedge in our balance sheet, so the revenues that relate to this cash will be subject to further changes to the base rate, both up and down.

Given the improved longer term prospects of the Group we plan to increase the dividend payment by adding an additional 2p to the usual 1p increase in the final dividend of 2022. This takes the final dividend to 25p per share (2021: 22p).

Highlights

The clear highlight of 2022 is the financial performance of the Group recording more than a 400% increase in profit before tax despite having recognised a loss of £4.6m on the sale of our commercial property located in King Street in the heart of the West End. Given that commercial property indices are forecast to fall by over 20% over the next two years we were pleased to complete this sale. Along with the continued exclusion of the profit on sale of trucks in our subsidiary Asset Alliance of £6.5m, which continues to be excluded from our financial results, this means the underlying profitability of the Group was approximately £31m.

I was also pleased with the continued progress against our medium term "Future State Plan". We are on course to achieve the most important milestone in that plan, namely the pre-tax return on capital, during 2023. This is considerably earlier than we had initially hoped and enables us to revise this plan with more ambitious targets for future growth.

Having noted that deposits are the life blood of any bank, I was delighted that our customer deposits exceeded £3 billion during the third quarter of the year and continued to grow strongly to close the year at £3.1bn. With the onset of a more negative sentiment in the economy, we decided to exercise greater caution in our underwriting processes on residential property. As a result, our lending volumes reduced in the second half of the year but the overall customer lending balances, including leased assets, increased by 11% during the year.

Much of the planned evolution in our Future State Plan was the growth in our specialist divisions, giving us access to higher margin lending markets and also bringing greater diversity to the assets held by the Group.

As a result of the conflict in Ukraine, Asset Alliance Group continued to see further disruption to supply chains which affected the availability of new trucks. However, despite this, the business was able to display strong growth in its customer balances, which grew by 47% to end the year at £189.1m.

Renaissance Asset Finance experienced strong demand for its range of financing solutions and saw its customer balances increase by nearly 40% to close at £133.8m.

Arbuthnot Commercial Asset Based Lending saw strong growth in both client acquisition and balances. Customer balances grew by 48% finishing the year at £268.8m. Five years after opening for business, ACABL delivered a profit before tax of £5.2m after paying internal financing costs of £7.9m.

Our Wealth Management division continued to display strong performance in attracting criteria clients. The gross inflows for the year were in excess of £200m, an increase of 21% on the prior year. We hope that these inflows will be supplemented in 2023 by business generated in the Independent Financial Advisor (IFA) sector following the launch by the division of its Platform Model Portfolio Service Proposition in the final quarter of the year.

Although we are proud to provide a personalised banking service to our clients, it must not be forgotten that our Bank is also founded on a suite of modern operating platforms and we continued to invest in this foundation during the year, successfully upgrading our Oracle banking platform to the latest version and adding the Ncino loan system. This continuous programme of investment has allowed us to process nearly one million of inbound and outbound payments in the year, an increase of 24% on 2021.

In light of the cost of living crisis I was pleased that we were able to help our employees through these difficult times by making a cost of living payment to all employees in September of £1,500 amounting to approximately £1 million across the Group.

As with all banks and market participants, we have noted the developments which have followed Silicon Valley Bank's failure in the US and the sale of its subsidiary to HSBC. Throughout our history of serving clients, Arbuthnot Latham has proven its ability to adapt and to grow, even during times of market turbulence. Core to our bank's ability to do this is a sustained focus on the long-term. It is when faced with circumstances such as those we have witnessed in the last few weeks that the characteristics which make Arbuthnot Latham attractive to our clients, and which have made the bank successful, show their benefit. Arbuthnot Latham adopts a conservative operating model that targets long-term stability over short-term gain. We maintain strong levels of capital and liquidity and maintain a high-quality loan book. This strong underlying position means our bank is well placed to endure any continued economic uncertainty.

Board Changes and Personnel

At the last AGM Sir Christopher Meyer retired from the Board after fourteen years of valuable service; however, we were saddened to learn of his sudden passing last July and I would like to express my condolences to his wife Baroness Meyer.

Also, as previously indicated, Ruth Lea retired as a Senior Economic Advisor to our Board after sixteen years' service to the Group and I am happy to report that she has recently been elevated to the House of Lords.

Lastly in September I was pleased to welcome Frederick Angest to the Group Board.

As always, the continued success of the Group reflects the hard work and commitment of our members of staff. On behalf of the Board, I extend our thanks to all of them for their contribution in 2022. Finally, I would like to thank my fellow directors on both Boards for their help and advice during the year.

Dividend

Given the increased profits of the Group in 2022 and the improving outlook, the Board has decided to accelerate the growth trajectory of the dividend and is recommending a final dividend of 25p per share. This is an increase of 3p compared to the final dividend of 2021 and an additional increase of 2p over the normalised 1p increase. The final dividend, if approved at the 2023 AGM, will be paid on 2 June 2023 to shareholders on the register at close of business on 21 April 2023.

Together with the interim dividend of 17p per share, it gives a total dividend for the year of 42p per share, which compares to the total dividend of 59p per share paid in 2021 which included a special dividend of 21p per share.

Outlook

During 2022, the increase in the Bank of England base rate clearly provided a significant and positive impact on the performance of the Group. There has already been further rate increases in 2023 which will have a further beneficial impact on revenues.

However, the prospects for the UK economy are less clear; the increase in the cost of living will almost certainly have an impact on the Group's cost base and could also affect the ability of our borrowers to maintain payments on loan facilities.

We remain alert to these headwinds, but remain optimistic as we continue to focus on developing and diversifying the Group.

The Group has seen a significant increase in profitability in 2022 reporting profit before tax of £20.0m compared to £4.6m for the prior year. Multiple successive increases in the Bank of England Base Rate have increased interest income generated from not only the Bank's lending balances, but also its treasury assets, including those held at the Bank of England. In response the Bank has increased its rates payable on deposits in line with the market. However, unexpired fixed term deposits raised in prior periods at lower rates, have resulted in interest payable by the Bank being suppressed until the deposits mature and are renewed at current higher rates, therefore deposit pricing has increased at a slower pace compared to the loan book and treasury assets.

As the economy enters a new economic cycle, the Bank continues to maintain its long-held credit principles and discipline as a key strategy to mitigate credit losses. However with any lending business, credit losses are inevitable. The IFRS9 impairment charge for the year is made up of two factors: firstly, more pessimistic economic assumptions due to the economy's performance and medium-term outlook resulting in adjustments totalling £0.9m; in this regard, the Bank has applied an average 11.6% fall in residential property values and a 21.2% fall in commercial property values compared to a 1.2% increase and 1.7% fall respectively in 2021 for its UK property-based lending business. The second element of the impairment charge comprises two specific bad debt cases totalling £3.0m, of which one was the first credit loss incurred by Arbuthnot Commercial Asset Based Lending - the specialist invoice discounting business launched in 2018. Despite these two cases, the non-performing loan book has reduced to its lowest level for over two years and is showing no signs of material stress in the credit metrics. The average loan to value ("LTV") against the loan book remains low at 52.5%, giving significant levels of security to withstand and minimise the effect of any potential falls in the property markets.

As the business model has benefitted from improved conditions resulting from the base rate increases, the major headwind on the horizon for the Group is the upward pressure on its cost base. Although higher inflation will affect all costs, the most significant will be accelerated increases in staff costs, as the cost-of-living crisis starts to interact with full employment and competition for talent intensifies. In September the Board took the decision to award a one-off cost of living payment to all employees of £1,500. The cost of this payment was approximately £1m.

During 2022, deposit balances exceeded £3bn for the first time in the Bank's history. The Bank finished the year with total deposits of £3.1bn compared to £2.8bn for the prior year. Deposit growth for 2022 was lower than in recent years. The Bank continued to pursue its strategy of funding the specialist lending divisions with cheaper yet sticky balances from relationship driven deposit account clients. Whilst the Bank experienced upward pressure on rates, it did not compete for deposits on the non-relationship aggregator platforms. Consequently, during the year up to £100m of non-relationship deposits matured and were not renewed, to be ultimately replaced by direct relationship balances.

Overall demand for lending products has continued across the divisions with balances (including lease assets) growing to £2.2bn, an increase of 10% from the previous year end 2021 balance of £2.0bn. However, given the current market uncertainty, the Bank has tightened its credit appetite, particularly in its real estate lending business, as well as stressing the affordability of interest payments to levels in excess of the 2% increase in rates as prescribed by the Prudential Regulation Authority. The effect of this reduces the LTV for new lending below the Bank's historic guidance of 60%. It is also expected that the change in appetite will reduce lending volumes in the short term. However, given the increased levels of profitability, the Bank is well positioned to retain financial resources for future opportunities that are expected to arise given the market dislocation.

Included in the result for the year is a charge of £4.6m, following the sale of the King Street property in the second half of the year. The building was valued at £60m based on a yield of 3.75%. However, following an extensive refurbishment and upgrade, the building was in the process of being let out and so two subsequent purchase price adjustments were made; firstly, any tenant incentives outstanding at the time of completion were deducted from the proceeds and secondly, an adjustment for the void period required to find the remaining tenants to fill the building was made via an escrow account and limited to 12 months of the expected rental income for each vacant floor. As in the prior year, the Group's profit also needs to be reduced for the profit on the sale of trucks generated by Asset Alliance of £6.5m (2021: £5.8m), which is required to be excluded from our accounts as a result of the acquisition accounting in the prior year. It is expected that the majority of the remaining vehicles which were acquired and subject to the adjustment will be disposed of over the coming year, resulting in any gains or losses on disposal recognised in the income statements for future periods, as and when they are sold.

Following a strategic review of its portfolio of businesses in 2023, the Bank announced its intention to cease new business for Arbuthnot Specialist Finance Ltd, its specialist lending division. All committed facilities will be honoured and the book will be wound down over the next 12 to 24 months.

Banking

The Banking business continued its track record of recent years, delivering growth in client acquisition, deposits and lending in 2022. 

The acquisition of criteria clients continued to support growth in relationship call/current deposit products as well as growth in fixed term deposits, which has supported our cost of deposits in the changing market. During 2022, deposits increased by £255m to £3.1bn, equating to 9% year on year growth. Given the increased interest rate environment, the importance of continuing to attract and retain criteria clients who value the Bank's service led proposition remains a key priority.

Loan balances across Private & Commercial Banking increased to £1.5bn in 2022. In addition to this, £35m of Commercial Real Estate loans were originated under the forward flow arrangement with a third party. The strategy allows the Bank to support clients with more capital-intensive borrowing needs, whilst continuing to pursue its objectives of the "Future State" plan.

Following the global pandemic in the previous periods, the Bank tightened its credit appetite. Given the turbulent economic environment and global macro-economic developments in 2022, the Bank continued this strategy throughout the year to ensure new loans were appropriately structured. Additionally, the Bank proactively worked with existing clients to review loan structures in order to navigate the new higher rate interest rate environment.

During 2022 the Bank launched a review of its Customer Value Proposition. The outputs from this project, which encompass client feedback along with external insights are guiding key strategic initiatives for 2023. Areas of focus include improving digital capability, automation and efficiency, and enhancing client engagement, which demonstrate the Bank's commitment to its service-led proposition. 

Wealth Management

Assets Under Management (AUM) finished the year at £1.3bn, resulting in a 2% decrease over the year. This was despite strong gross inflows of £209m, representing 16% of AUM at the start of the year, and an increase of 21% compared to the previous year. After taking into account outflows, there was a net increase in AUMs of £72m. However, market turbulence in part as a consequence of the Russia's war in Ukraine, along with domestic inflationary pressure resulted in adverse market performance, offsetting the net inflows during the year.

Following the pandemic, the business returned to a new normal of agile working both in the office and virtually. The business remains committed to delivering advice through a combination of face to face and virtual client meetings, with client service as the priority.

New business distribution momentum developed further with the delivery of a new strategic initiative for external Independent Financial Advisers. In the fourth quarter the Wealth Management business launched its Platform MPS proposition and Discretionary Portfolio Service for high-net-worth private clients, which has received positive initial feedback from intermediaries.

Mortgage Portfolios

Balances for the Banks's acquired mortgage portfolio was £149m at the year-end. The portfolio continues to perform in line with expectations.

Arbuthnot Commercial Asset Based Lending ("ACABL")

ACABL reported a profit before tax of £5.2m (2021: £4.7m).

In its fifth year the ACABL business recorded strong growth in both client acquisition and lending.

At the year-end, the business reported drawn balances of £268.8m with a further £91.8m available for drawdown, equating to a 47% increase from the prior year.

ACABL completed 30 new transactions in 2022 with £155m of facilities written. Notably, 60% of these were alongside Private Equity firms where the business saw continued demand for its products in the transactional acquisition space where ACABL has a strong reputation.

The average deal size increased from £4.8m to £5.1m with a total client base of 102 at year-end, an increase of 40% from the prior year, supported by lower than expected client attrition. This was partly a result of Private Equity firms remaining invested for longer due to the impact of the pandemic, supply chain challenges and the current economic outlook. Facility limits increased 36% on the prior year to £523m across a broad range of sectors, underlining the spread and diverse nature of the portfolio.

The business continued to participate in the Government sponsored lending schemes and was approved during the year to participate in the Recovery Loan Scheme Phase 3. The amount issued under these schemes in 2022 represented a small proportion of overall lending but allowed the business to support both existing clients and be incorporated into financing structures for new clients.

In line with the reported strong growth, the business processed £2bn of invoices during the year, up from £1.3bn and made in excess of 13,000 client payments totalling £1.85bn.

Included in the result is a £2m impairment charge for an exposure that was placed into administration by the directors of the business in December 2022.

Renaissance Asset Finance ("RAF")

RAF continues to experience strong demand for its asset finance facilities. The business delivered strong balance sheet growth in 2022 with the loan book increasing by nearly 40%, finishing the year at £133.8m.

The Block Discounting business held back profitability in the year due to the investment cost of setting up this business and the time taken for new business to draw. However, overall RAF delivered a profitable outcome for the year and with balances now at the highest level ever seen, revenue in 2023 should grow. RAF benefits from scale in its cost base, and therefore is set to make another positive contribution in 2023.

During the pandemic the business saw a sharp increase in watchlist clients, notably in the Black-Taxi cab sector. This trend has since stabilised, with some accounts now being reclassified to performing.

Arbuthnot Specialist Finance ("ASFL")

ASFL made progress during 2022 with year end balances at £15m, up £5m year on year. However, with the current economic climate, rising interest rates and a more uncertain property market, the decision was taken to exit this market and ASFL is now closed for new business. All committed facilities will be honoured and the book is expected to be wound down over the next 12 to 24 months.

Asset Alliance Group ("AAG")

As at 31 December 2022 AAG had assets available for lease totalling £171.7m.

The global economy limited the scale of growth in what was a strong year for AAG. The continued worldwide computer chip shortage and the immediate consequences of Russia's War in Ukraine had an adverse effect on the availability of new commercial vehicles. This was exacerbated by fuel price increases and general economic recession impacting orders.

Delays in pre-ordered stock from manufacturers limited the fleet growth potential of AAG. Consequently, the leasing strategy re-focussed on contract extensions and prioritising oldest asset replacement to mitigate increasing maintenance costs. This was successfully implemented with 40% of the managed fleet replaced during the year, with the fleet size showing modest growth to over 4,100 assets.

The shortage of new assets did however result in a continued high demand for good quality, second-hand assets, which was a key factor in driving strong performance from the truck sales division, generating an underlying net profit of £12.4m from the sale of 1410 end-of lease trucks and trailers during the year. £6.5m of this profit has already been included in the bargain purchase calculation as part of the fair value uplift at acquisition and is therefore excluded from the consolidated Group accounts.

Owned Properties

During the year the Bank sold three properties from its Owned Property portfolio. 

Firstly, following the major refurbishment completed in 2021, the King Street property was sold with gross sale proceeds of £60m. After deductions for unexpired incentives of £2.4m and void periods of £0.96m, a charge of £4.6m was recognised in the income statement.

Secondly, the Bank completed the sale of two of its overseas properties. The Bank retains four assets in its property portfolio of which one is overseas.

Operations

The Bank continues to see strong growth in the acquisition of new banking clients with over 1,000 new clients onboarded during 2022 and 5,000 new accounts opened.

Nearly 1 million inbound and outbound payments were processed in 2022, a growth of 24% on the previous year, with 98% of outbound payments originating online. In addition, there were over 870,000 card transactions in 2022, an increase of nearly 35% on the previous year. Confirmation of Payee capability was added to the Bank's online banking proposition in the first quarter, further strengthening the Bank's anti-fraud controls.

In respect of the regulatory requirements under the Supervisory Statement (SS) 1/21: Impact Tolerances for Important Business Services, the Bank completed the required self-assessment of compliance with the expected standards in March 2022. This continues to be an important area of focus as the Bank continues its investment in new IT systems.

November 2022 saw the successful implementation of a significant upgrade to the Bank's Oracle Banking Platform following an 18-month project. The new platform supports more efficient payment processes and ensures payments are compatible with future payment standards. The platform has been delivered in a new cloud hosted environment, improving resilience and agility, and enabling the Bank to more readily adapt to future market changes.

Another major programme delivered in 2022 saw the launch of a new lending automation system improving the loan origination process for commercial and private clients streamlining the operations and management of key lending artefacts. 

Further investment was made in the investment operations, continuing to focus on increasing automation and streamlining of processes.

Sustainability

The business has made a commitment to reduce its environmental impact and to improve its environmental performance as an integral part of its business strategy. In 2022 the business continued its sustainability project with focus around five pillars to ensure a more sustainable Group: Governance, Employees, Community, Environment and Clients. Further information is given in the Sustainability Report on pages 26 to 38.

Strategic Report - Financial Review

Arbuthnot Banking Group adopts a pragmatic approach to risk taking and seeks to maximise long term revenues and returns. Given its relative size, it is nimble and able to remain entrepreneurial and capable of taking advantage of favourable market opportunities when they arise.

The Group provides a range of financial services to clients and customers in its chosen markets of Banking, Wealth Management, Asset Finance, Asset Based Lending, Specialist Lending and Commercial Vehicle Finance. The Group's revenues are derived from a combination of net interest income from lending, deposit taking and treasury activities, fees for services provided and commission earned on the sale of financial products. The Group also earns rental income on its properties and holds financial investments for income.

In the prior year the Group acquired Asset Alliance Group Holdings Limited, which completed on 1 April 2021. The business was acquired at a discount to its fair valued net assets resulting in a bargain purchase of £8.6m. In 2022 £6.5m (2021: £5.8m) of profits earned on the sale of trucks were consolidated out, as it formed part of the bargain purchase, when these assets were measured at fair value on date of acquisition.

In 2022, the King Street property was sold at a loss of £4.6m. The offer price took into consideration outstanding tenant incentives and expected void periods while tenants were found for vacant areas of the building.

The credit provisions of £5.5m under IFRS 9, include more pessimistic economic assumptions and also two specific bad debt cases totalling £3m. In 2021 there was one case of £2.1m incurred by one of the Group's specialist businesses, Renaissance Asset Finance. The provision was against the total exposure to Arena TV, a highly publicised business collapse, which reportedly had up to £285m of outstanding debt to 55 lenders.

Total operating income earned by the Group was £137.4m compared to £88.7m for the prior year. The average net margin on client assets was 5.1% (2021: 4.1%). Included in operating income is revenue from AAG leased assets. This has contributed 0.2% (2021: 0.5%) to the average yield generated from the Group's assets.

The Group's operating expenses increased to £113.5m compared to £93.4m for the prior year, with staff costs increasing by £13.6m mainly due to the accrual for bonuses.

Total assets increased by £0.2bn to £3.6bn (2021: £3.4bn); £165m was due to loan book growth from both the Core Bank and the Specialist Lending subsidiaries, while leased assets in AAG and treasury assets increased by £50.1m and £99.1m respectively. The Group maintained its conservative funding policy of relying only on retail deposits and targeting a loan to deposit ratio of between 65-80%. Included in other assets is the Group's investment property, which is held at fair value of £6.6m (2021: £6.6m). Also included in other assets are £19.6m of properties classified as inventory (2021: £87.1m).

The net assets of the Group now stand at £14.11 per share (2021: £13.37).

Segmental Analysis

The segmental analysis is shown in more detail in Note 46. The Group is organised into nine operating segments as disclosed below:

1) Banking - Includes Private and Commercial Banking. Private Banking - Provides traditional private banking services. Commercial Banking - Provides bespoke commercial banking services and tailored secured lending against property investments and other assets.

2) Wealth Management - Financial planning and investment management services.

3) Mortgage Portfolios - Acquired mortgage portfolios.

4) RAF - Specialist asset finance lender mainly in high value cars but also business assets.

5) ACABL - Provides finance secured on either invoices, assets or stock of the borrower.

6) ASFL - Provides short term secured lending solutions to professional and entrepreneurial property investors.

7) AAG - Provides vehicle finance and related services, predominantly in the truck & trailer and bus & coach markets.

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

9) Group Centre - ABG Group management.

The analysis presented below, and in the business review, is before any consolidation adjustments to reverse the impact of the intergroup operating activities and also intergroup recharges and is a fair reflection of the way the Directors manage the Group.

Banking reported a profit before tax of £19.1m (2021: £6.5m). This equated to a near threefold increase from the prior year. Net interest income grew by 43%, while lending increased by 4% and deposit balances by 17%. The significantly higher net interest income is the result of successive increases in the Bank of England Base Rate, with the Bank earning higher income from both customer loans and excess deposits held mainly at the Bank of England reserve account. This was partly offset by higher interest paid on deposit balances. However, this rate increase was at a slower pace as fixed term deposits only reprice at maturity.

There was a net impairment charge of £1.5m compared to a release of £0.4m for the prior year. This was due to revised economic scenarios applied in the expected credit loss models due to a more negative future outlook. The most significant and relevant to the Banking book was a net decline of 11.6% for residential property values and a net decline of 21.2% for commercial property values compared to a 1.2% increase and 1.7% fall respectively for the prior year.

Operating costs increased by £5.4m largely due to higher staff costs from higher bonus accrual.

Customer loan balances increased by £56.6m to £1.5bn and customer deposits also increased to £3.1bn (2021: £2.7bn). The average loan to value was 52.5% (2021: 51.7%).

Wealth Management reported a loss before tax of £4.1m (2021: loss of £2.1m), but made a £1m profit before contributing to overheads, but remains a key pillar in building and maintaining relationships with clients. Fee income remained flat year on year, while AUMs decreased by 2%, mainly due to market performance, and finished the year at £1.3bn (2021: £1.4bn).

The Mortgage Portfolios reported a profit of £3.8m (2021: £5.6m). The decrease against the prior year is due to £2.2m of other income which related to the net profit on sale of the Tay Portfolio in February 2021.

The remaining Santiago mortgage portfolio performed as expected and the year-end balance was £149.0m (2021: £178.1m).

Renaissance Asset Finance returned a profit of £0.2m (2021: loss before tax of £0.1m).

Net interest income reduced by 6% to £5.5m (2021: £5.9m) as it paid £3.3m to the Bank for internal cost of funding. Operating expenses increased by £0.8m, mainly due to higher staff costs from increased staff numbers.

A more pessimistic economic outlook under the IFRS9 expected credit loss assessment resulted in higher credit provisions in 2022. However, the prior year also included a £2.2m charge for Arena TV Limited.

Customer loan balances increased by 38% to £133.8m (2021: £97.1m). The average yield for 2022 was 8.1% (2021: 8.9%).

ACABL recorded a £5.2m profit before tax (2021: £4.7m).

Client loan balances increased 48% to £268.8m at the end of the year (2021: £182.1m), with issued facilities increasing to £523m (2021: £384m). The higher client balances throughout the year resulted in an increase in operating income of £3.2m after paying an increased £5.2m for internal funding. Operating expenses increased by £0.7m, mainly due to an increase in staff costs.

The impairment charge increase mainly due to £2m charge relating to one client that was placed into administration.

ASFL recorded a loss before tax of £0.9m (2021: loss of £1.0m).

The decision was taken to exit this market in early 2023.

Customer loan balances closed the year at £15.0m (2021: £10.1m).

The business generated a loss before tax of £2.1m (2021: profit of £3.8m for the period).

The prior period of 9 months included a bargain purchase credit to the income statement of £8.6m. As part of the bargain purchase at acquisition the carrying value of the truck fleet was adjusted by an overall average increase of 15.95% resulting in an uplift totalling £19.5m. £6.5m (2021: £5.8m) of this uplift has been realised through sales in the year, but this has been excluded from the consolidated result. The current year includes £4.9m internal cost of funding compared to £2.3m in the prior 9 months.

Operating expenses increased by £6.6m from the prior period. The prior period only included 9 months of expenditure and the current year also includes higher costs with the expansion of the business, mainly relating to staff.

Credit provisions reduced by £0.6m.

As at 31 December 2022 the business had £171.7m (2021: £121.6m) of assets available for lease.

The aggregated profit before tax of other divisions was £11.7m (2021: loss of £2.3m). 

Operating income increased by £17.3m to £25.5m (2021: £8.2m), mostly due to the increase in the Bank of England Base Rate, with higher income from intercompany accounts and treasury assets.

Reported within the other divisions in other income was rental income on our property portfolio of £0.5m (2021: £0.3m). The prior year also included an adjustment to the RAF deferred consideration of £0.6m, along with dividends received totalling £0.1m.

Operating expenses increased mainly due to higher staff costs from higher staff numbers and increased bonus provisions.

The Group costs increased to £12.9m (2021: £10.6m). Subordinated loan interest increased by £0.5m due to the rising interest rate environment.

The Group received £0.4m dividends from STB in 2021, while there was no dividend in 2022 as all shares were sold in the prior year. 

The increase in operating expenses of £1.3m is mainly due to higher staff costs with the accrual for bonuses including national insurance increasing by £1m.

Capital

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

The Group and the individual banking operation are authorised by the Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and are subject to EU Capital Requirement Regulation (EU No.575/2013) ("CRR") which forms part of the retained EU legislation (EU legislation which applied in the UK before 11.00 p.m. on 31 December 2020 has been retained in UK law as a form of domestic legislation known as 'retained EU legislation') and the PRA Rulebook for CRR firms. One of the requirements for the Group and the individual banking operation is that capital resources must be in excess of capital requirements at all times. 

In accordance with the parameters set out in the PRA Rulebook, the Internal Capital Adequacy Assessment Process ("ICAAP") is embedded in the risk management framework of the Group. The ICAAP identifies and assesses the risks to the Group, considers how these risks can be mitigated and demonstrates that the Group has sufficient resources, after mitigating actions, to withstand all reasonable scenarios.

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

The ICAAP document will be updated at least annually, or more frequently if changes in the business, strategy, nature or scale of the Group's activities or operational environment suggest that the current level of capital resources is no longer adequate. The ICAAP brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. The Group's regulated entity is also the principal trading subsidiary as detailed in Note 45.

The Group's regulatory capital is divided into two tiers:

• Common equity Tier 1 ("CET1"), which comprises shareholder funds less regulatory deductions for intangible assets, including Goodwill and deferred tax assets that do not arise from temporary differences.

• Tier 2 comprises qualifying subordinated loans.

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

Risks and Uncertainties

The Group regards the monitoring and controlling of risks and uncertainties as a fundamental part of the management process. Consequently, senior management are involved in the development of risk management policies and in monitoring their application. A detailed description of the risk management framework and associated policies is set out in Note 6.

The principal risks inherent in the Group's business are reputational, macroeconomic and competitive environment, strategic, credit, market, liquidity, operational, cyber, conduct and, regulatory and capital.

Reputational risk

Reputational risk is the risk to the Group from a failure to meet reasonable stakeholder expectations as a result of any event, behaviour, action or inaction by ABG itself, its employees or those with whom it is associated. This includes the associated risk to earnings, capital or liquidity.

ABG seeks to ensure that all of its businesses act consistently with the seven corporate principles as laid out on page 3 of the Annual Report and Accounts. This is achieved through a central Risk Management framework and supporting policies, the application of a three-lines of defence model across the Group and oversight by various committees. Employees are supported in training, studies and other ways and encouraged to live out the cultural values within the Group of integrity, energy and drive, respect, collaboration and empowerment. In applying the seven corporate principles, the risk of reputational damage is minimised as the Group serves its shareholders, customers and employees with integrity and high ethical standards. 

Macroeconomic and competitive environment

The group is exposed to indirect risk that may arise for the macroeconomic and competitive environment.

In recent years there have been a number of global and domestic events which have had significant implications on the Group's operating environment, namely: Russia's War in the Ukraine, Coronavirus and Brexit. The culmination of these events has led to significant turmoil in both global and domestic markets. The most significant economic effect from these events includes record inflation driven by high fuel costs, leading to sharp and significant increases in the cost of borrowing. Indicators suggest that conditions may have improved since the year end however there still remains significant uncertainty around the state of the UK economy which may have an impact on the group's customers and assets.

Climate change

Climate change presents financial and reputational risks for the banking industry. The Board consider Climate change a material risk as per the Board approved risk appetite framework which provides a structured approach to risk taking within agreed boundaries. The assessment is proportional at present but will develop over time as the Group generates further resources and industry consensus emerges. The assessment is maintained by the Chief Risk officer and has been informed by the ICAAP review and workshops for employees.

Whilst it is difficult to assess how climate change will unfold, the Group is continually assessing various risk exposures. The UK has a legally binding target to cut its greenhouse gas emissions to "net-zero" by 2050. There is growing consensus that an orderly transition to a low-carbon economy will bring substantial adjustments to the global economy which will have financial implications while bringing risks and opportunities.

The risk assessment process has been integrated into existing risk frameworks and will be governed through the various risk governance structures including review and recommendations by the Arbuthnot Latham Risk Committee. Arbuthnot Latham has been assessed against the Task Force on Climate-related Financial Disclosures' ("TCFD") recommended disclosures and where appropriate the FCA/PRA guidance as per the Supervisory Statements.

In accordance with the requirements of the PRA's Supervisory Statement 'Enhancing banks' and insurers' approaches to managing the financial risks from climate change', the Group has allocated responsibility for identifying and managing the risks from climate change to the relevant existing Senior Management Function. The Bank is continuously developing a suitable strategic approach to climate change and the unique challenges it poses.

The FCA have issued 'Climate Change and Green Finance: summary of responses and next steps'. In addition to the modelling of various scenarios and various governance reviews, the Group will continue to monitor requirements through the relationship with UK Finance.

Strategic risk

Strategic risk is the risk that the Group's ability to achieve its corporate and strategic objectives may be compromised. This risk is particularly important to the Group as it continues its growth strategy. However, the Group seeks to mitigate strategic risk by focusing on a sustainable business model which is aligned to the Group's business strategy. Also, the Directors normally meet once a year outside a formal Board setting to ensure that the Group's strategy is appropriate for the market and economy.

Credit risk

Credit risk is the risk that a counterparty (borrower) will be unable to pay amounts in full when due. This risk exists in Arbuthnot Latham, which currently has a loan book of £2.2bn (2021: £1.9bn). The lending portfolio in Arbuthnot Latham is extended to clients, the majority of which is secured against cash, property or other high quality assets. Credit risk is managed through the Credit Committee of Arbuthnot Latham.

Market risk

Market risk arises in relation to movements in interest rates, currencies, property and equity markets. The Group's treasury function operates mainly to provide a service to clients and does not take significant unmatched positions in any market for its own account. As a result, the Group's exposure to adverse movements in interest rates and currencies is limited to interest earnings on its free cash and interest rate re-pricing mismatches. The Group actively monitors its exposure to future changes in interest rates. However, at the current time the Group does not hedge the earnings from the free cash which currently totals £732.7m. The cost of hedging is prohibitive.

The Group is exposed to changes in the market value of its properties. The current carrying value of Investment Property is £6.6m and properties classified as inventory are carried at £19.6m. Any changes in the market value of the property will be accounted for in the Income Statement for the Investment Property and could also impact the carrying value of inventory, which is at the lower of cost and net realisable value. As a result, it could have a significant impact on the profit or loss of the Group.

Liquidity risk

Liquidity risk is the risk that the Group, although solvent, either does not have sufficient financial resources to enable it to meet its obligations as they fall due, or can only secure such resources at an excessive cost. The Group takes a conservative approach to managing its liquidity profile. Retail client deposits and drawings from the Bank of England Term Funding Scheme fund the Bank. The loan to deposit ratio is maintained at a prudent level, and consequently the Group maintains a high level of liquidity. The Arbuthnot Latham Board annually approves the Internal Liquidity Adequacy Assessment Process ("ILAAP"). The Directors model various stress scenarios and assess the resultant cash flows in order to evaluate the Group's potential liquidity requirements. The Directors firmly believe that sufficient liquid assets are held to enable the Group to meet its liabilities in a stressed environment.

Operational risk

Operational risk is the risk that the Group may be exposed to financial losses from conducting its business. The Group's exposures to operational risk include its Information Technology ("IT") and Operations platforms. There are additional internal controls in these processes that are designed to protect the Group from these risks. The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance section of the Annual Report.

In line with further guidance issued by the Regulator, the Bank has continued to focus on ensuring that the design of systems and operational plans are robust to maintain operational resilience in the face of unexpected incidents. During 2021 the Bank continued to review these plans and undertook tests to ensure backup and recovery processes were effective even when working in a hybrid working model.

During the year the FCA, PRA and BoE published their final policy papers on building operational resilience. The Bank completed the required self-assessment of compliance with the expected standards in March 2022. This continues to be an important area of focus as the Bank continues its investment in new IT systems.

Cyber risk

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

Conduct risk

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

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

Regulatory and capital risk

Regulatory and capital risk includes the risk that the Group will have insufficient capital resources to support the business and/or does not comply with regulatory requirements. The Group adopts a conservative approach to managing its capital. The Board of Arbuthnot Latham approves an ICAAP annually, which includes the performance of stringent stress tests to ensure that capital resources are adequate over a three year horizon. Capital and liquidity ratios are regularly monitored against the Board's approved risk appetite as part of the risk management framework.

Strategic Report - Stakeholder Engagement and s.172 Report

Stakeholder Engagement and S. 172 (1) Statement

This section of the Strategic Report describes how the Directors have had regard to the matters set out in section 172 (1) (a) to (f) of the Companies Act 2006 when making decisions. It forms the Directors' statement required by ABG as a large-sized company under section 414CZA of the Act.

The Directors have acted in a way that they considered, in good faith, to be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so had regard, amongst other matters, to:

• the likely consequences of any decision in the long term;

• the interests of the Company's employees;

• the need to foster the Company's business relationships with suppliers, customers and others;

• the impact of the Company's operations on the community and the environment;

• the desirability of the Company maintaining a reputation for high standards of business conduct; and

• the need to act fairly as between members of the Company.

The Arbuthnot Principles and Values set out on page 3 explain the Board's approach to its stakeholders. Details of how the Directors had regard to the interests of its key stakeholders during the year are set out below, in the Group Directors Report on page 42 and in the Corporate Governance Report on page 45.

The Board has regard to the interests of all its key stakeholders in its decision making since the Directors are conscious that their decisions and actions have an impact on them. The stakeholders we consider in this regard are our shareholders, employees, customers, suppliers, regulators and the environment in which we operate.

Likely consequences of any decision in the long term

The Directors make their decisions to ensure that long-term prospects are not sacrificed for short term gain, reflecting the values and support of Sir Henry Angest, Chairman and Chief Executive and majority shareholder, which have proved successful in creating and maintaining value for all shareholders for over 40 years. This was demonstrated in the year by a number of Board decisions.

In February 2022, the Board considered a number of options to manage the capital resources of the Group, without slowing its lending plans as the divisions build towards the "future state" strategy. This was necessary because of the reintroduction by the Financial Policy Committee of the Bank of England of the countercyclical capital buffer at 1% from December 2022 with a further increase to 2% in July 2023. As a consequence, a decision was taken to allocate capital away from non-core assets and accordingly to sell the Group's long leasehold West End office property situated at 20 King Street in July with completion in October. 

In July 2022, as part of its succession planning, the Board appointed Frederick Angest as a Director, subject to the approval of Grant Thornton as Nominated Adviser and Aquis Stock Exchange (AQSE) Corporate Adviser which was given at the end of August.

Interests of the Company's employees

Also in July 2022, the Directors endorsed the decision of the Remuneration Committee to approve a one-off payment to all executive directors and employees in the Group of £1,500 in order to assist them with the increased costs of living being experienced. It was determined that the payment would be reduced pro rata to part time employees and for those who had been with the business less than one year. The Directors were able to agree to this payment of c. £1m, having assured themselves that the business had the resources to make it because of its trading considerably in excess of the planned budget.

Executive Directors and senior management are fully engaged with the workforce, most of whom interact on a daily basis. Employees are also able to raise concerns in confidence with the HR Team, with grievances followed up in line with a specified process which satisfies all legal requirements. As explained in the section 172 (1) Statement of Arbuthnot Latham, the Company's banking subsidiary, one of its non-executive directors has been designated by its board as the director to engage with Arbuthnot Latham group's workforce whereas the Company itself has fewer than 20 employees, all of whom have direct access to Board members.

As set out in the Whistleblowing Policy, Ian Dewar, a non-executive director and chairman of the Audit Committee, is the Company's Whistleblowing Champion and is available at all times in this role. There is an anonymous whistleblowing service via an external provider. There is also protection for employees deriving from the Public Interest Disclosure Act 1998. Any material whistleblowing events are notified to the Board and to the applicable regulator.

The Board receives an update on human resource matters at each of its meetings. It is also kept informed of the results of employee surveys including one on Diversity & Inclusion, conducted in November 2021, which received a 76% response rate. In November 2022 it considered the results of the engagement survey, launched in September 2022 to assess how engaged employees felt with the business, obtaining feedback on key areas that affect engagement including Leadership, 'My Manager', Wellbeing, Cultural Values, Diversity & Inclusion, Reward & Recognition and employees' views in relation to 2022 ways of working and effectiveness of the Agile Working approach which was established and endorsed by the Board in 2021 to enable the business and its employees to benefit from a practical combination of office and remote working. The Agile Working Policy resumed at the end of February 2022 with all employees on average working in the office for a minimum of three days per week. This followed its suspension in mid-December 2021 with the introduction of temporary working arrangements in light of the Government's request in response to the Covid-19 Omicron variant that individuals should work from home where possible. The engagement survey received an 82% response rate from employees, 87% of whom were proud to work for the business. The Board regards the maintenance of a high level of employee engagement as key to the Company's future success as an organisation on every level and the focus will be to develop our working environment to achieve this aim.

Company's business relationships with suppliers, customers and others

The Directors attach great importance to good relations with customers and business partners. In particular, our clients are integral to our business and forging and maintaining client relationships are core to Arbuthnot Latham's business and crucial for client retention. Regular contact was maintained with clients throughout the year, including with the resumption again of meetings in the office in February 2022.

The Company is committed to following agreed supplier payment terms. There is a Supplier Management Framework in place covering governance around the Company's procurement and supplier management activities. For due diligence and compliance purposes, suppliers are assessed through an external registration system. The Modern Slavery Statement, approved by the Board in March as part of its annual review of the Company's stance and approach to the Modern Slavery Act, explains the risk-based approach that the Company has taken to give assurance that slavery and human trafficking are not taking place in its supply chains or any part of its business. The Board requires that Arbuthnot Latham implements a Modern Slavery Policy, procedures and processes in relation to the AL Group, which reflects the commitment to act ethically and with integrity, in all their respective business relationships and additionally, to ensure that slavery and human trafficking are not taking place anywhere in the AL Group or in the AL Group's supply chain.

Other stakeholders include the Company's Regulators, the PRA and the FCA, with whom open and regular dialogue is maintained.

Balancing stakeholder interests

An illustration of the balancing of the interests of our stakeholders in their long-term interest was the Board's decision in July 2022 to return to its progressive dividend policy, resolving to pay an interim dividend of 17p per share to shareholders. This was an increase of 1p per share from the normal interim dividend paid in 2021. Given the increased profits of the Group in 2022 and the improving outlook, the Board have decided to accelerate our growth trajectory of the dividend and are recommending a final dividend of 25p; this is an increase of 3p compared to the final dividend of 2021 and an additional increase of 2p over the normalised 1p increase.

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

As part of the management information reviewed at its regular meetings, the Board receives a Risk Management report, containing a report on Environmental, Social and Governance (ESG) matters which includes a Climate Change Dashboard, monitoring climate change measures in place including Scope 1, 2 and 3 GHG emissions. The Board is updated on the steps the Group is taking to become more sustainable, given its exposure to climate change transition risk as the UK evolves to a low carbon economy. It is also kept informed of the formal approach to ESG established to develop over time, which will underpin the Arbuthnot Principles and Values within the workplace under five 'pillars of sustainability' - governance, employees, community, environment and clients (ESG Pillars). The ESG actions taken are in recognition of the Group's responsibility to make a positive societal impact and the political, regulatory and legal pressure with clients and investors increasingly interested in the Group's ESG stance. The Board has again approved an energy and carbon report meeting the requirements of the Streamlined Energy and Carbon Reporting standards, as set out on page 37 of the Sustainability Report.

Desirability of the Company maintaining a reputation for high standards of business conduct

The Directors believe that the Arbuthnot culture set out in the Arbuthnot Principles and Values manifests itself at Board level and in the external view of the Group as a whole. The importance of the Group's reputation is considered at each Board meeting. These Principles are encapsulated in five Group cultural values, embedded into day-to-day activities. These values are integrity, respect, empowerment, energy and drive, and collaboration.

Acting fairly as between members of the Company

The majority shareholder, Sir Henry Angest, is the Company's Chairman and Chief Executive. There is continuing engagement with other major shareholders and the Directors make their decisions on behalf of all shareholders. The Board welcomes engagement with them and will continue to maintain communications via one-to-one meetings as appropriate. The Directors treat all shareholders equally, albeit that holders of non-voting shares do not have the right to vote in shareholder meetings.

Strategic Report - Sustainability Report

Introduction

The Group is committed to ensuring its business activities have a positive impact not just for clients and shareholders, but also for employees, society and the environment. Two of our key business principles, reciprocity and stability, rely on recognising our own responsibility to make a positive societal impact.

The world is in the middle of a profound transition when it comes to sustainability and we recognise the role we must play in that transition. Climate change is an important topic for consumers and investors alike. In parallel, inclusive growth and the impact organisations have on society is increasingly a focus. More than ever before, organisations are being held accountable for their impacts on society.

We focus on how we can improve to build a future that delivers growth, sustainability and inclusion. This means operating with a strong emphasis on our environmental and societal impact and on our governance procedures.

The Group approaches ESG by considering the impact from our practices and outputs across five categories of sustainability - Governance, Employees, Community, Environment and Clients.

Governance

The Group has a solid system of governance in place, endorsing the principles of openness, integrity and accountability which underpin good corporate governance. The Group operates to high standards of corporate accountability with an effective Board and Board committees. This, together with the role and overall holding of Sir Henry Angest, the ultimate majority shareholder, and compliance with PRA and FCA regulations and with those of the London Stock Exchange Alternative Investment Market and the Aquis Exchange, is fundamental to our success as a business.

Employees

Our employees and culture set us apart from others in our industry. Our high engagement scores are a testament to this: from a response rate of 89% to the most recent employee engagement survey (Non-financial Key Performance Indicator), conducted in September 2022, 87% of employees state they are proud to work for the Group. As a relationship-led bank, our employees are at the heart of everything we do.

We are committed to providing a healthy working environment and improving the quality of working lives for all our employees. Our wellbeing strategy and offering aims to support and reflect the Group's mission and core values of Integrity, Respect, Empowerment, Energy & Drive and Collaboration in the recognition that our employees are our greatest asset.

February 2022 saw the resumption of the Group's Agile Working Policy, introduced in October 2021 to enable the business and its employees to benefit from a practical combination of office and remote working. The policy reflects the Board's view that there are substantial benefits from balancing office working with working from home. The policy resumed following its suspension during January 2022 owing to the necessity for employees to work from home in line with the Government's advice regarding the Covid-19 Omicron variant. The vast majority of employees indicated their support for the policy. In July 2022, following a review of the policy, a small adjustment was made to it with the Senior Leadership Team attending the office four days a week and for key governance meetings to be held in the office, given our culture to be mainly office based. As a service and relationship business, it is important that we meet clients and that our employees meet on a regular and frequent basis. 

At the same time the Board agreed to make a cost of living payment to all employees in September 2022 due to the prevailing high inflation rate in order to help alleviate some of the burden of these increased costs on employees. A further cost of living payment is to be made in 2023 to those employees earning salaries of up to £50,000 pa. and who joined the Group before 1 January 2023.

Flexibility is applied to the Agile Working Policy, as shown by its relaxation at the time of the Met Office extreme weather warnings in mid-July 2022, during teachers' strikes and during the regular rail and underground strikes which have affected the London office since June 2022. On strike days, employees unable to travel to the London office are encouraged to work from home, thereby mitigating the disruption that would previously have been caused, the pandemic having demonstrated the ability of the business to function remotely when necessary.

Our wellbeing strategy focuses on the physical, financial, mental and social wellbeing of our employees. We have a range of structured internal wellbeing programmes and established an Active Hub to set up team challenges for health wellbeing, building on the solo initiatives launched during the pandemic. In February 2023 we launched the Champion Health app, our new all-in-one wellbeing platform. The platform was created by more than sixty health professionals to make one unified platform that covers all areas of wellbeing for employees and up to three of their friends or family members. We also hold employee webinars on financial wellbeing and education. A Pension Scheme Governance Committee was established in January 2022 and the matters discussed at its six-monthly meetings are communicated to employees, continuing the focus on their financial wellbeing.

As a rapidly growing business, we encourage career progression and seek to develop our people's skills to help them grow within the organisation. We strive to create a working environment that ensures people are treated fairly and that their wellbeing is supported. 

The feedback from our first Diversity & Inclusion Survey, conducted in November 2021, is being used to create an even better working environment for employees and to help attract the best talent. The Group's D&I strategy, approved and communicated to employees during 2022, sets out the value put on the difference people bring and how we are consciously inclusive in all aspects of the way we work, recognising the commercial advantage this brings. We are committed to fostering a more inclusive and dynamic environment, allowing everyone to achieve their full potential. Employees are encouraged to speak about what matters to them and to give feedback on our performance in this area.

The objectives of this strategy are to develop a culture and environment that allow people of various backgrounds, mindsets and ways of thinking to work effectively together and to perform to their highest potential to achieve their objectives and ours; to improve diversity in the Senior Leadership Team; and to increase diversity at all levels. Pilot management D&I programme workshops have been launched in three specific business areas as part of the wider HR agenda and, as part of the Group-wide training strategy, we will include a D&I module each quarter. Our current gender mix emphasises the need for us to develop internal talent to enable internal progression, whilst continuing to attract diverse talent into roles at all levels.

Early Careers: 2022 saw the launch of our first Structured Graduate and Apprenticeship Programmes for a total of 14 participants, along with the second year of our Industrial Placement and Summer internship programmes. The Group now offers five different Early Careers Programmes, including work experience, summer internships, one-year placements, graduate placements and apprenticeships. We also launched our Leadership Development Academy in October 2022, with 14 participants, and have more programmes scheduled for 2023 for existing and aspiring leaders. In January 2023, we hosted an evening inviting 100 female students interested in a career in banking, providing 80 spaces to Year 13 students from the Young Professionals network and 20 for female student referrals from employees. We have partnered with the Young Professionals network, an organisation which works with schools across the UK from different social backgrounds to provide an insight and introduction to different industries, in order to grow the quality and diversity of our Early Careers talent pool.

In November 2022, the existing benefits package was increased as part of the annual benefits window by giving eligible employees the opportunity to enhance at favourable rates their cover for certain benefits including life assurance.

Community

The Group recognises that we must commit to driving positive community impact, creating an impact within the communities in which we exist and operate, and connecting the dots between the charities we support and the social initiatives we run.

Our Corporate Social Responsibility activities are being reviewed with plans for a new strategy to accelerate our effort. Once this new CSR strategy is in place our primary community focus for 2023 will be around financial education and literacy. We will also expand our place-based and skills-based outreach, with greater promotion and engagement from employees. The Group continues to promote philanthropy and fundraising, supported by our volunteer days and pound for pound matching scheme. We are also looking to expand our partnerships with others to help facilitate positive change.

Clients

Relationships with our clients are at the heart of what we do. We take the time to understand what is important to our clients so we can be confident that we are working in their best interests, for business, for family, for life. Being a relationship-led bank, every single one of our clients has a dedicated relationship manager there to guide and support them. This is supported by our strong Net Promoter Score (NPS) (Non-financial Key Performance Indicator) which is reviewed every two years. Our 2022 NPS increased to 64%, up from 47% in 2020, a reflection of our clients' advocacy. Our bankers have been engaging pro-actively with customers, following the tightening of Credit appetite in order to help those struggling due to the impact of increasing interest rates, inflation and high cost of living.

Policies

The Group has adopted a wide range of policies that straddle the five pillars to ensure that employees and management are aware of their responsibilities towards our customers and comply with all regulatory requirements. Some of the key policies are set out below and in the Non-Financial Statement on page 22. 

Environment

The Group takes a long-term view. We recognise as a business that our carbon footprint needs to move towards net-zero over time. This reduction is not just an environmental imperative, but a business one as well. We are committed to having net zero carbon emissions by 2050. As a consequence, we have in place an Environmental Management policy which sets outs the Group's high-level approach to managing environmental issues and provides requirements in helping the Bank work towards achieving its commitments.

The Bank's Credit Policy sets out the Group's limited appetite for financial and reputational risk emanating from climate change, which includes physical risk (extreme weather, flooding etc.) and transitional risk (changes to law, policy, regulation, and culture). The Bank adopts a favourable stance towards a low carbon economy and lending propositions that have a neutral or positive impact on the environment / climate. The Bank will also consider the impact on public perception and potential impact on continuing demand for clients' products and services, as well as any impact on its underlying security. These factors are assessed as part of the credit application process and at least once a year through the annual review process.

Our transition towards sustainability

We are taking steps, guided by our five pillars, to help us become more sustainable. Further information is given on the Group's website at Sustainability | Arbuthnot Latham.

Progress Towards Task Force on Climate-related Financial Disclosures' (TCFD) Alignment

During the year, further progress was made in preparation for reporting on the Group's climate-related risks in line with the recommendations of the global TCFD. For AIM listed companies, new regulations will come into force for the Annual Report for the year ending December 2023, requiring us to provide information on climate change related risks and opportunities, where material. The information to be given will cover how climate change is addressed in corporate governance; the impacts on strategy; how climate related risks and opportunities are managed; and on the performance measures and targets applied in managing these issues. 

The TCFD encourages consistent, reliable and clear measurement and reporting of climate-related financial risks. Its recommendations provide a framework for understanding and analysing how climate change affects our customers, our own operations and our strategy. The recommendations are to assess disclosures around governance, strategy, risk management and metrics and targets.

As stated in the section on Risks and Uncertainties on page 19 above, we have assessed the Group against the TCFD recommended disclosures and in preparation for the new requirements coming into force next year, we set out below our initial assessments.

Streamlined Energy & Carbon Reporting (SECR)

The Group has worked again with a specialist energy management consultancy, Carbon Decoded, to gather the information required to be reported by large unquoted companies under the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018:

· All energy in line with Greenhouse Gas Reporting (GHG) Scope One - gas and owned transport, Scope Two -electricity and Scope Three - non-owned transport. 

· An intensity metric to enable year on year improvements to be tracked.

The report covers data from 1 January to 31 December 2022 for the Company and its subsidiaries. The Group has reported all sources of environmental impact, as required in SECR, over which it has financial control, being the Company and its subsidiaries.

Base Year

This year the Base Year has been changed to a rolling annual comparison. The acquisition of Asset Alliance Group (AAG) in 2021 significantly affected the energy use of the business, making comparisons to the previous 2019 baseline ineffective for energy reduction purposes. The removal of restrictions as a result of the Covid-19 pandemic has also continued tohave an impact on a changing picture of energy use in 2022.

Reporting Methodology

Ø Data has been collected for electricity, gas and transport.

Ø GHG Protocol Corporate Accounting and Reporting Standard has been followed where relevant.

Ø Data was collected specifically for the purpose of SECR.

Ø The 2021 and 2022 UK Government Conversion Factors for Company Reporting were used for all calculations of Carbon emissions.

Ø Data was estimated where necessary, as set out below.

Estimated Data

The following data was estimated in 2022:

Operational Scopes

The report contains all Scope One and Two energy use and Scope Three Grey Fleet for the Group as required by SECR.

Energy consumption for the commercial office properties owned by the Group has been further improved to provide more actual data in 2022 where floors in buildings were unoccupied by tenants and the responsibility for energy consumption returned to the Group. The Group is actively reviewing its premises strategy with specific reference to environmental factors.

Corrective Actions

Data improvement work completed this year has identified a duplication in reporting the diesel carbon tonnes for AAG. In 2021, two sources of information were provided for diesel use; the mileage for HGVs and the amount of diesel held in a tank at Wolverhampton. However, the fuel used by AAG owned HGVs had already been accounted for in the mileage data leading to an overstatement of the amount of diesel tonnes in 2021 which has been restated in the 2021 details above.

Changes from 2021

Scope One

Natural gas and kerosene are used to heat buildings within the portfolio. This has increased from 2021 due to the return to office working and a particularly cold December from 70 to 88 tonnes.

In April 2022 the Government changed the law to restrict the use of gas oil (red oil) which has led to diesel now being used for Fork Lift Trucks and on-site needs. Therefore, gas oil is not reported in 2022 and a new line for diesel - Mixed Onsite Use has been reported. As this is for Fork Life Trucks and refrigerated lorries no metric is available. For 2022 the on-site fuel data has been estimated.

In 2021 AAG owned two HGVs and this has doubled in 2022, which together with an increase in demand, has increased the carbon tonnes from 61 to 155. Company car use has decreased from 84 to 65 tonnes with 60% of the AL fleet now fully electric. The metric has benefited from AAG ensuring the CO2 emissions of their fleet are monitored.

Scope Two

The electricity use has fallen over 2021 as overnight energy use is being better controlled. Electric cars feature for the first time in this section.

Scope three

This section relates to employees using their own cars on company business and is known as grey fleet. This has increased from 2021 as employees have returned to face-to-face meetings, following the lifting of all COVID-19 related restrictions.

Intensity Ratio

An intensity ratio is used to enable year on year comparison. As Arbuthnot is an office-based business and the recognised standard measure is kilowatt-hour per square metre (kWh/m2). This enables the energy use to be compared to industry standard benchmarks. Similarly for transport, the metric is kilowatt-hour per mile (kWh/mile). For reporting purposes, the Carbon Tonnes/floor area and miles have also been reported as required by the Regulations.

Energy Efficiency Actions

The Group is actively reviewing its premises strategy with specific reference to environmental factors. The Wilson Street head office profile data demonstrates that there is improved control of out of office electricity. To improve the understanding of energy use at Wilson Street, sub-metering is being reviewed to enable the site to look for further savings. Lighting reviews were undertaken for Wilson Street and these are now being considered.

AAG have implemented sub-metering effectively at Wolverhampton and have also taken steps to clarify the Diesel used by the business and by clients when HGVs are leased. They have also looked at possible energy savings during the cleaning processes for vehicles.

In terms of improvement in transport emissions AL have changed 60% of their company cars to electric vehicles. AAG are continuing to improve the emissions of their company vehicles.

Group Directors' Report

The Directors present their report for the year ended 31 December 2022.

Business Activities

The principal activities of the Group are banking and financial services. The business review and information about future developments, key performance indicators and principal risks are contained in the Strategic Report on pages 6 to 38.

Corporate Governance

The Corporate Governance report on pages 44 to 51 contains information about the Group's corporate governance arrangements, including in relation to the Board's application of the UK Corporate Governance Code.

Results and Dividends

The results for the year are shown on page 62 of the financial statements. The profit after tax for the year of £16.5m (2021: £6.8m) is included in reserves. The Directors recommend the payment of a final dividend of 25p (2021: 22p) per share which, together with the interim dividend of 17p (2021: 16p) paid on 23 September 2022 represents total dividends for the year of 42p (2021: 59p). This compares with a total dividend in 2021 of 59p which comprised a regular total dividend of 38p together with a special dividend for the year of 21p relating to 2019 that had been cancelled following guidance from the PRA. The final dividend, if approved by members at the 2023 Annual General Meeting ("AGM"), will be paid on 2 June 2023 to shareholders on the register at close of business on 21 April 2023.

Directors

The names of the Directors of the Company at the date of this report, together with biographical details, are given on page 39 of this Annual Report. Mr. F.A.H. Angest was appointed to the Board on 1 September 2022. All the other Directors listed on those pages were directors of the Company throughout the year. The late Sir Christopher Meyer was also a Director during the year prior to his retirement from the Board on 25 May 2022.

Mr. F.A.H. Angest offers himself for election under Article 75 of the Articles of Association. Sir Nigel Boardman and Sir Alan Yarrow being eligible, offer themselves for re-election under Article 78 of the Articles of Association. Sir Alan, Sir Nigel and Mr. Angest each has a letter of appointment terminable on three months' notice.

Articles of Association

The Company's articles of association may only be amended by a special resolution of the Ordinary shareholders. They were last amended at the AGM in May 2017 and can be viewed at www.arbuthnotgroup.com/corporate_governance.html.

Viability Statement

In accordance with the UK Corporate Governance Code, the Directors confirm that there is a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for the three-year period up to 31 December 2025. A period of three years has been chosen because it is the period covered by the Group's strategic planning cycle and also incorporated in the Individual Capital Adequacy Assessment Process ("ICAAP"), which forecasts key capital requirements, expected changes in capital resources and applies stress testing over that period.

The Directors' assessment has been made with reference to:

• the Group's current position and prospects - please see the Financial Review on pages 11 to 18;

• the Group's key principles - please see Corporate Philosophy on page 3; and

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

The Group's strategy and three-year plan are evaluated and approved by the Directors annually. The plan considers the Group's future projections of profitability, cash flows, capital requirements and resources, and other key financial and regulatory ratios over the period. The ICAAP is embedded in the risk management framework of the Group and is subject to continuing updates and revisions when necessary. The ICAAP process is used to stress the capital position of the Group over the three-year planning period. It is updated at least annually as part of the business planning process.

Going Concern

In assessing the Company's and the Group's Going Concern position, the Directors have made appropriate enquiries which assessed the following factors:

• the Group's strategy, profitability and funding;

• the Group's risk management (see Note 6 to the financial statements) and capital resources (see Note 7);

• the results of the Group's capital and liquidity stress testing;

• the results of the Group's reverse stress testing and the stress levels that have the potential to cause its business plan failure; and

• the Group's recovery plan and potential management actions to mitigate stress impacts on capital and liquidity.

The key Macro-Economic Risks for the stress testing included:

• Property market falls of up to 45% in property values;

• Stock market falls of up to 45% in UK equity prices;

• Interest rate rise/fall; and

• Regulation change.

The key Idiosyncratic Risks for the stress testing included:

• Credit losses;

• Operational events (i.e. fraud, cyber event, etc.);

• Decline in profitability; and

• Liquidity event (i.e. significant deposit outflow).

As a result of the assessment, the Directors are satisfied that the Company and the Group have adequate resources to continue in operation for a period of at least twelve months from when the financial statements are authorised for issue. The financial statements are therefore prepared on the going concern basis.

Share Capital

The Company has in issue two classes of shares, Ordinary shares and Ordinary Non-Voting shares. The Non-Voting shares rank pari passu with the Ordinary shares, including the right to receive the same dividends as the Ordinary shares, except that they do not have the right to vote in shareholder meetings.

Authority to Purchase Shares

Shareholders will be asked to approve a Special Resolution renewing the authority of the Directors to make market purchases of shares not exceeding 10% of the issued Ordinary and Ordinary Non-Voting share capital. The Directors will keep the position under review in order to maximise the Company's resources in the best interests of shareholders. Details of the resolutions renewing this authority are included in the Notice of Meeting on pages 163 and 164. No shares were purchased during the year. The maximum number of Treasury shares held at any time during the year was 390,274 Ordinary shares and 19,040 Ordinary Non-Voting shares of 1p each.

Financial Risk Management

Details of how the Group manages risk are set out in in the Strategic Report and in Note 6 to the financial statements.

Directors' Interests

The interests of current Directors and their families in the shares of the Company at the dates shown, together with the percentage of the current issued share capital held (excluding treasury shares), were as follows:

Substantial Shareholders

The Company was aware at 13 March 2023 of the following substantial holdings in the Ordinary shares of the Company, other than those held by one director shown above:

Significant Contracts

No Director, either during or at the end of the financial year, was materially interested in any contract with the Company or any of its subsidiaries, which was significant in relation to the Group's business. At 31 December 2022, one Director had a loan from Arbuthnot Latham & Co., Limited amounting to £1.4m (2021: £0.5m) and five directors had deposits amounting to £4.4m (2021: £4.0m), all on normal commercial terms as disclosed in Note 44 of the financial statements.

Directors' Indemnities 

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

Employee Engagement

The Company gives due consideration to the employment of disabled persons and is an equal opportunities employer. It also regularly provides employees with information on matters of concern to them, consults on decisions likely to affect their interests and encourages their involvement in the performance of the Company through regular communications and in other ways. Further information on employee engagement is given in the Strategic Report on pages 23 and 24.

Engagement with Suppliers, Customers and Others

Information on engagement with suppliers, customers and other stakeholders is given in the Strategic Report on page 24.

Streamlined Energy & Carbon Reporting

The information required by the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 is set out in the Sustainability Report on pages 35 to 38. These Regulations implement the Government's policy on Streamlined Energy and Carbon Reporting (SECR) to support businesses in understanding their Carbon emissions and to help them establish plans to become Net Zero by 2050.

Political Donations

The Company made political donations of £30,000 during the year (2021: £20,000), being payment for attendance at political functions.

Events after the Balance Sheet Date

Details of material post balance sheet events are given in Note 49.

Annual General Meeting ("AGM")

The Company's AGM will be held on Wednesday 24 May 2023 at which Ordinary Shareholders will be asked to vote on a number of resolutions. Shareholders are encouraged to submit their votes in respect of the business to be discussed via proxy, appointing the Chairman of the meeting as their proxy. This will ensure that votes will be counted if shareholders are unable to attend the meeting in person. The resolutions, together with explanatory notes about voting arrangements, are set out on pages 163 to 167.

Auditor

A resolution for the re-appointment of Mazars LLP as auditor will be proposed at the forthcoming AGM in accordance with section 489 of the Companies Act 2006.

Disclosure of Information to the Auditor

Each of the persons who are Directors at the date of approval of this Annual Report confirm that:

• so far as each director is aware, there is no relevant audit information of which the Company's auditor is unaware; and

• they have taken all the steps they ought to have taken as a director to make themselves aware of any relevant audit

information and to establish that the Company's auditor is aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

Statement of Directors' Responsibilities in Respect of the Strategic Report and the Directors' Report and the Financial Statements

The Directors are responsible for preparing the Strategic Report, the Directors' Report and the Financial Statements in accordance with applicable law and regulations. Company Law requires the Directors to prepare Group and Parent Company Financial Statements for each financial year. As required by the AIM Rules for Companies and in accordance with the Rules of the AQSE Growth Market, they are required to prepare the Group Financial Statements in accordance with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006 and have elected to prepare the Parent Company Financial Statements on the same basis.

Financial Statements

Under Company Law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the Group profit or loss for that period. In preparing each of the Group and Parent Company Financial Statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable, relevant and reliable;

• state whether they have been prepared in accordance with UK-adopted International Financial Reporting Standards (IFRSs) in conformity with the requirements of the Companies Act 2006;

• assess the Group and Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

• use the going concern basis of accounting unless they intend either to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

The Directors confirm that the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and Parent Company's position, performance, business model and strategy.

Corporate Governance

Introduction and Overview

The Company has a strong and effective corporate governance framework. The Board endorses the principles of openness, integrity and accountability which underlie good governance and takes into account the provisions of the UK Corporate Governance Code, published by the Financial Reporting Council in July 2018 ("the FRC Code"), in so far as they are considered applicable to and appropriate for the Company, given its size and circumstances, and the role and overall shareholding of its majority shareholder. The Company has been approved by the Prudential Regulation Authority ("PRA") as a parent financial holding company of its banking subsidiary, Arbuthnot Latham & Co., Limited. Arbuthnot Latham is authorised by the PRA and regulated by the Financial Conduct Authority ("FCA") and by the PRA. Three of its subsidiaries, Asset Alliance Leasing Limited, Forest Asset Finance Limited and Renaissance Asset Finance Limited, are regulated by the FCA. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such a business.

The Board has decided to report against the FRC Code. This decision was made in light of the requirement in the AIM Rules for Companies that AIM listed companies state which corporate governance code they have decided to apply, how the company complies with that code, and where it departs from its chosen code an explanation of the reasons for doing so. The Rules of the AQSE Growth Market also require the Company to adopt, as far as possible, the principles and standards set down in a recognised UK corporate governance code. This information is published on the Company's website and the Company reviews it each year as part of its annual reporting cycle. This section of the Annual Report summarises how the Company applies the FRC Code and in broad terms how it has complied with its provisions throughout the year, giving explanations where it has chosen not to do so.

Leadership and Purpose

The Company is led by the Board which comprises seven members: Sir Henry Angest, the Executive Chairman and Chief Executive; two other executive directors, Andrew Salmon and James Cobb; three independent non-executive directors, Sir Nigel Boardman, Ian Dewar and Sir Alan Yarrow; and one other non-executive Director, Frederick Angest. This means that half of the Board, excluding the Chairman, comprises independent non-executive directors.

The Board sets the long-term focus and customer-oriented culture of the Group. The responsibilities of Sir Henry Angest as Chairman include leading the Board, ensuring its effectiveness in all aspects of its role, ensuring effective communication with shareholders, setting the Board's agenda and ensuring that all Directors are encouraged to participate fully in the activities and decision-making process of the Board.

The Board has for many years led a company which focuses on sustainable growth over the longer-term with a culture to match. Investment in resources has been strong and has continued where and as appropriate, with the focus on the benefit this will bring to bear for stakeholders over time. The aim continues to be for a culture of openness among the workforce which combines with the prudent and effective technological and individual controls in place across the business to ensure strong risk management in the Company's continued long-term success.

The Group's cultural values are reflected in a brand values document linking the Arbuthnot Principles to the Group's culture as a way of communicating culture across the business. These cultural Principles are encapsulated in five Group values which are fully embedded into day-to-day activities. These are integrity, respect, empowerment, energy and drive, and collaboration. A formal approach to Environmental, Social and Governance (ESG) is in place to develop over time under five 'pillars of sustainability' - governance, employees, community, environment and clients.

The Board

A number of key decisions are reserved for the Board. The Schedule of Matters Reserved to the Board is reviewed annually and is published on the Company's website at http://www.arbuthnotgroup.com/corporate_governance.html. The Board met regularly throughout the year, holding seven scheduled meetings, five of which were held jointly with the Board of Arbuthnot Latham with the other two being held to approve the Annual and Interim Reports. It also held a separate strategy meeting, together with the Arbuthnot Latham Directors, in September. Substantive agenda items have briefing papers, which are circulated in a timely manner before each meeting. The Board ensures that it is supplied with all the information that it requires and requests in a form and of a quality to fulfil its duties. 

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

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

New directors receive induction training upon joining the Board, with individual listed company training provided by the Company's AIM Nominated Adviser and AQSE Corporate Adviser. Regulatory and compliance training is provided by the Heads of Compliance and Financial Crime or by an external lawyers, accountants and other subject matter experts. Risk management training is provided, including that in relation to the ICAAP and ILAAP, by the Arbuthnot Latham Chief Risk Officer with an overview of credit and its associated risks and mitigation by the Arbuthnot Latham Chief Credit Officer.

Board Evaluation

The annual Board Effectiveness Review was conducted internally. The 2022 evaluation took the form of a confidential online questionnaire which assessed the performance of the Board and its Committees. The questions were augmented, particularly those concerning clarity of the business, strategy and risk and accountability, whilst continuing to explore the themes developed over recent years including Board effectiveness, Board composition, Board dynamics, alignment of the Board and executive team, interaction with major shareholders, induction, performance and training, Board Committees and the Secretariat. The results were discussed by the Board in November 2022 and proposed actions arising were considered in February 2023. The responses were positive, confirming that the Board was of the view that it receives the correct level of insight into and oversight of the Company, both directly to it and in terms of management information and oral updates provided during meetings. Directors also agreed that the Arbuthnot culture set out in the Arbuthnot Principles and Values manifests itself at Board level and in the external view of the Group as a whole. 

Overview of Compliance with the FRC Code, together with Exceptions

The Board focuses not only on the provisions of the Code but on its principles, ensuring as follows:

• The Company's purpose, values and strategy as a prudently managed organisation align with its culture, with a focus on fairness and long-term shareholder returns.

• The Board has an appropriate combination of executive and non-executive directors, who have both requisite knowledge and understanding of the business and the time to commit to their specific roles.

• The Board comprises directors with the necessary combination of skills to ensure the effective discharge of its obligations, with an annual evaluation of the capability and effectiveness of each director as well as the Board as a composite whole; appropriate succession plans are also in place and reviewed annually, or more frequently if appropriate.

• The Board and Audit Committee monitor the procedures in place to ensure the independence and effectiveness of both external and internal auditors, and the risk governance framework of the Company, with all material matters highlighted to the relevant forum (Board/Committee).

• Remuneration policies and practices are designed to support strategy and promote long-term sustainable success, with a Remuneration Committee in place to oversee director and senior management pay.

In respect of the Code's specific provisions, an annual review is carried out, comparing the Company's governance arrangements and practices against them. Any divergences are noted, with relevant rationale considered carefully to determine whether it is appropriate. Consideration is also given to guidance issued, which may require a review of the relevant reasoning intra-year.

In line with the FRC's Guidance on Board Effectiveness, the Board additionally takes into account its suggestions of good practice when applying the Code focusing on the five key principles specified in the Code.

Where the Company's governance does not completely align with the Code, it is generally as a result of the role of its overall majority shareholder, itself adding a level of protection to long-term shareholder interests, and it has had no negative impact on the Company.

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

Provision 5 - The Board has regard to the interests of all its key stakeholders in its decision making. Executive Directors and senior management are fully engaged with the workforce, all of whom interact on a daily basis. Mr. Dewar is the Company's Whistleblowing Champion and is available at all times in this role. It has not been deemed necessary to appoint an employee representative to the Board as the Company has fewer than 20 employees, all of whom have direct access to the Board including its Non-Executive Directors. Given its size, as stated in the s.172 Statement on page 23, one of the non-executive directors of Arbuthnot Latham and its Whistleblowing Champion, has been designated by its board as the director to engage with the Arbuthnot Latham Group's workforce.

Provision 9 - The Chairman was not independent on appointment, though he was appointed prior to the introduction of the provision. Sir Henry Angest carries out the role of Chairman and Chief Executive, given his long-term interest as majority shareholder, itself aligning with the interests of other shareholders. The Company follows the US model that is very successful in ensuring commercial success with strong corporate governance and stakeholder awareness, having a shared Chairman and CEO, with a separate, empowered, Chief Operating Officer. In his role as CEO, Sir Henry Angest is responsible for the effective operation and delivery of the business and ensures that he is surrounded by an exceptional management team which ensures the strong leadership required. In particular, ABG has a strong Group Chief Operating Officer and Group Finance Director ensuring challenge and independence from a business perspective, against the stakeholder focus of the Chairman carrying out his Chairman's role.

Provision 10 ¬ The Board considers Sir Nigel Boardman to be independent, notwithstanding his chairmanship at Arbuthnot Latham since his views and any challenge are firmly independent from executive management in both companies. The Board is of the view that the dual directorships complement one another and that there is a benefit to be derived from the appointment of one independent director to both Boards simultaneously.

Provision 12 - The Board has not appointed a Senior Independent Director, as the main shareholder is the Chairman and other large independent shareholders communicate frequently with the Chairman, the Group Chief Operating Officer and the Group Finance Director and with the Company's stockbroker, Shore Capital.

Provision 14 - Attendance at meetings is not reported. In the event that a Director is unable to attend a meeting, that Director receives relevant papers in the normal manner and relays any comments in advance of the meeting to the Chairman. The same process applies in respect of the Board Committees.

Provision 18 -Directors retire by rotation every three years in accordance with the Company's Articles of Association and company law. The Directors seeking re-election at the 2023 AGM are Sir Nigel Boardman and Sir Alan Yarrow who have served on the Board for 3½ and 6½ years respectively. The contributions of Sir Nigel and Sir Alan have been invaluable in the successful development of the Company. Mr. Frederick Angest, appointed to the Board by the Directors on 1 September 2022 as part of succession planning, will be seeking election by Ordinary shareholders. Accordingly, the Board fully supports the resolutions for their respective reappointment and appointment of these Directors.

Provision 19 - Sir Henry Angest's role as Chairman is critical to and reflective of the overall group structure. It is through the responsibilities that derive from this role that he is able to consider and protect not only the interests of other shareholders, but also his own interests as a majority shareholder as their interests are aligned. It is for this reason that he surrounds himself with notably strong directors who individually, and as a group, ensure the protection of not only his investments, but also those of other shareholders. As such, he remains as Chairman notwithstanding the length of his tenure. 

Provision 23 - The Nomination Committee takes into account the provisions of the Board Diversity Policy and in terms of succession planning the Equality and Diversity Policy which promotes equality of opportunity for all staff. Further information on diversity and inclusion is given in the Sustainability Report on pages 27 and 29, though the gender balance of senior management and their direct reports has not been given.

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

Internal Control and Financial Reporting

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

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

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

There are well-established budgeting procedures in place and reports are presented regularly to the Board detailing the results, in relation to Arbuthnot Latham, of each principal business unit, variances against budget and prior year, and other performance data. The Board receives regular reports on risk matters that need to be brought to its attention, enabling it to assess the Group's principal and emerging risks. Material items are presented to the Board in the Risk Report, which includes a risk dashboard, from the Arbuthnot Latham Chief Risk Officer, who attends the Board meetings held concurrently with those of Arbuthnot Latham. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. The risk dashboard covers key management actions which have included the climate change agenda and its potential longer-term impact on property and other asset classes and on management's approach to sustainability.

In November 2022, the Board received a separate report from the Arbuthnot Latham CRO enabling it to monitor the company's risk management and internal control systems and to carry out its annual review of the effectiveness of the Group's risk management and internal control systems. The report explained the Risk Management Policy, together with principal risks, risk appetite, policies, three lines of defence, systems, processes, procedures and controls and the risk board dashboard. Following its review, the Board confirms the effectiveness of the Company's risk management and internal control systems.

Shareholder Communications

The majority shareholder is Sir Henry Angest, Chairman and Chief Executive. The Company maintains communications with its major external shareholders via one-to-one meetings, as appropriate, by the Chairman and Chief Executive, the Group Chief Operating Officer or the Group Finance Director on governance and other matters. When practicable it also makes use of the AGM to communicate with shareholders in person. The Company aims to present a balanced and understandable assessment in all its reports to shareholders, its regulators, other stakeholders and the wider public. Key announcements and other information can be found at www.arbuthnotgroup.com.

Board Committees

The Board has Audit, Nomination, Remuneration, Donations and Policy Committees, each with formally delegated duties and responsibilities and with written terms of reference, which require consideration of the committee's effectiveness. The Board keeps the governance arrangements under review. Further information in relation to these committees is set out below and the terms of reference of the Audit, Nomination and Remuneration Committees are published on the Company's website. The Board maintains direct responsibility for issues of Risk without the need for its own Risk Committee, since responsibility for large lending proposals is a direct responsibility of its subsidiary, Arbuthnot Latham. Additionally the Chairman of the Arbuthnot Latham Risk Committee reports to the ABG Board at its regular meetings, held jointly with the Arbuthnot Latham Board, on the activities of that Committee which is responsible for monitoring the status of the Arbuthnot Latham group against its principal risks.

Audit Committee

Membership and meetings

Membership of the Audit Committee comprises Ian Dewar (as Chairman), Sir Nigel Boardman (since May 2022) and Sir Alan Yarrow. All of the Committee's members are therefore independent non-executive Directors. The late Sir Christopher Meyer was a member until his retirement as a director on 25 May 2022. Mr. Dewar has recent and relevant financial experience and the Committee as a whole has competence relevant to the financial sector in which the Company operates. The Company Secretary acts as its Secretary.

The Audit Committee oversees, on behalf of the Board, financial reporting, the appropriateness and effectiveness of systems and controls, the work of Internal Audit and the arrangements for and effectiveness of the external audit. The ultimate responsibility for reviewing and approving the Annual Report and Accounts and the Interim Report lies with the Board. The Committee also reviews procedures for detecting fraud and preventing bribery, reviews whistleblowing arrangements for employees to raise concerns in confidence, and reviews, as necessary, arrangements for outsourcing significant operations.

External Audit

The external auditors, Mazars LLP, have held office since their appointment in 2019 following a competitive tender. The Committee assesses the independence and objectivity, qualications and effectiveness of the external auditors on an annual basis as well as making a recommendation to the Board on their reappointment. The Committee received a report showing the level of non-audit services provided by the external auditors during the year and members were satisfied that the extent and nature of these did not compromise auditor independence. The Committee has concluded that Mazars are independent and that their audit is effective.

Activity in 2022

The Audit Committee held four meetings during the year, three of which were held jointly with the Audit Committee of Arbuthnot Latham with the other one being held to review the Annual Report & Accounts and draft results announcement.

Internal Audit

Internal Audit provides the Audit Committee and the Board with detailed independent and objective assurance on the effectiveness of governance, risk management and internal controls. The ultimate responsibility for reviewing and approving the annual report and accounts rests with the Board.

The Audit Committee approves the Internal Audit risk-based programme of work and monitors progress against the annual plan. The Committee reviews Internal Audit resources and the arrangements that: ensure Internal Audit faces no restrictions or limitations to conducting its work; that it continues to have unrestricted access to all personnel and information; and that Internal Audit remains objective and independent from business management.

The Head of Internal Audit reports directly to the Chairman of the Arbuthnot Latham Audit Committee. He provides reports on the outcomes of Internal Audit work directly to the Company's Committee and the Committee monitors progress against actions identified in these reports. Most of the Audit Committee's meetings are now held concurrently with those of the Arbuthnot Latham Audit Committee and, as such, it discusses Arbuthnot Latham's internal audits, all of the reports on which include an assessment of culture.

The Committee received a self-assessment report on Internal Audit from the Head of Internal Audit in September 2022 and it is satisfied with Internal Audit arrangements during the year.

Integrity of Financial Statements and oversight of external audit

The Committee:

• Received and agreed the Audit Plan prepared by the external auditors;

• Considered and formed a conclusion on the critical judgements underpinning the Financial Statements, as presented in papers prepared by management. In respect of all of these critical judgements, the Committee concluded that the treatment in the Financial Statements was appropriate.

• Received reports from the external auditors on the matters arising from their work, the key issues and conclusions they had reached; and

 • Reviewed closely the detailed work carried out by management in respect of Going Concern and Viability.

The reports from the external auditors include details of internal control matters that they have identified as part of the annual statutory financial statements audit. Certain aspects of the system of internal control are also subject to regulatory supervision, the results of which are monitored closely by the Committee and the Board. In addition, the Committee receives by exception reports on the ICAAP and ILAAP which are key control documents that receive detailed consideration by the board of Arbuthnot Latham.

The Committee approved the terms of engagement and made a recommendation to the Board on the remuneration to be paid to the external auditors in respect of their audit services.

Significant areas of judgement and estimation

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

Impairment of financial assets

The Committee reviewed presentations from management detailing the provisioning methodology across the Group as part of the full year results process. The Committee considered and challenged the provisioning methodology applied by management, including timing of cash flows, valuation and recoverability of supporting collateral on impaired assets. The Committee concluded that the impairment provisions, including management's judgements and estimates, were appropriate.

The charge for impaired financial assets totalled £5.5m for the year ended 31 December 2022. The disclosures relating to impairment provisions are set out in Note 4.1(a) to the financial statements.

Property Portfolio

The Group currently owns two commercial office properties and two repossessed properties. Of these properties, two are held as inventory, one is held for sale and one as an investment property. The properties held as inventory and for sale are held at the lower of cost and net realisable value on the basis of internal discounted cash flow models and external valuation reports. The investment property is held at fair value on the basis of an external valuation report. The Committee discussed the bases of valuation with management and with the auditors who had engaged an internal expert to review management's valuations.

As at 31 December 2022, the Group's total property portfolio totalled £29.4m. The disclosures relating to the carrying value of the investment property and the properties held as inventory and for sale are set out in Notes 4.1(c), 4.1(d), 21, 25 and 31 to the financial statements.

Residual Value Risk

The Committee discussed the fair value adjustment for the portfolio of leased assets of Asset Alliance Group where an uplift had been applied to represent markets at the time of acquisition at 31 March 2021. The Committee also reviewed the maintenance provision, recognised to eliminate temporarily inflated values.  It established that the uplift in lease values at that date appeared to have been completely justified by the subsequent asset sales experience where in aggregate losses had not been made on sales of trucks at the uplifted values. It also established that the residual value provision was deemed sufficient to cover the shortfall between the value of the portfolio and the estimated net sales value.

Going Concern and Viability Statement

The financial statements are prepared on the basis that the Group and Company are each a going concern for a period of at least twelve months from when the financial statements are authorised for issue. The Audit Committee reviewed management's assessment, which incorporated analysis of the ICAAP and ILAAP approved by the Board of Arbuthnot Latham and of relevant metrics, focusing on liquidity, capital, and the stress scenarios. It is satisfied that the going concern basis and assessment of the Group's longer-term viability is appropriate.

Other Committee activities

The Committee reviewed and discussed the minutes of meetings of the Financial Regulatory Reporting Committee whose main responsibility is to ensure that the Company meets the PRA's regulatory reporting expectations. The Audit Committee performs this role since it is concerned with financial reporting as well as with external reporting.

In November 2022, Committee members contributed to the review of the Committee's effectiveness as part of its evaluation by the Board. The outcome of the review was positive and there were no issues or concerns raised by them in regard to discharging their responsibilities. In March 2023 the Committee met separately with each of the Head of Internal Audit and the Senior Statutory Auditor without any other executives present. There were no concerns raised by them in regard to discharging their responsibilities.

On behalf of the Board, the Committee reviewed the financial statements as a whole in order to assess whether they were fair, balanced and understandable. The Committee discussed and challenged the balance and fairness of the overall report with the executive directors and also considered the views of the external auditor. The Committee was satisfied that the Annual Report could be regarded as fair, balanced and understandable and that it provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy. It proposed that the Board approve the Annual Report in that respect.

Nomination Committee

Membership and meetings

The Nomination Committee is chaired by Sir Henry Angest and its other members are Sir Nigel Boardman and Sir Alan Yarrow. Two thirds of the Committee's members are therefore independent non-executive Directors. The late Sir Christopher Meyer was a member until his retirement as a director on 25 May 2022. The Group General Counsel, Nicole Smith, acts as its Secretary. The Committee meets once a year and otherwise as required.

The Nomination Committee assists the Board in discharging its responsibilities relating to the composition of the Board. The Nomination Committee is responsible for and evaluates on a regular basis the balance of skills, experience, independence and knowledge on the Board, its size, structure and composition, retirements and appointments of additional and replacement directors and will make appropriate recommendations to the Board on such matters. The Nomination Committee also considers performance, training requirements and succession planning, taking into account the skills and expertise that will be needed on and beneficial to the Board in the future.

Activity in 2022

The Nomination Committee met three times during the year. It met first to consider a replacement Non-Executive Director to the Audit, Nomination, Remuneration and Donations Committees ahead of the retirement of the late Sir Christopher Meyer. It determined that Sir Nigel Boardman would be a suitable appointment to each Committee, given his significant experience. It further recommended that Mr. Salmon be appointed as a replacement member of the Donations Committee, all with effect from 25 May 2022.

The Committee held a further meeting to consider the appointment of Frederick Angest as a non-executive director, noting that it was appropriate in the context of long-term succession planning in order that the ultimate majority shareholder has representation at all times and in the interests of long-term stability in line with the Arbuthnot Principles. Sir Henry Angest did not participate in the vote in relation to the proposed appointment on the basis that Mr. Angest is his son and as such there was or might be a conflict or perceived conflict of interests in relation to the decision. The Nomination Committee, being Sir Nigel and Sir Alan for this purpose, agreed that it was appropriate to recommend to the Board the appointment of Mr. Angest as an additional non-executive director.

The Committee also met to assess and confirm the collective and individual suitability of Board members. The contribution of Sir Henry Angest remains invaluable in the successful development of the Company. As regards the non-executive Directors' skill sets, Sir Nigel Boardman's credibility, knowledge and reputation have been a real benefit to the Board both in terms of collective and individual suitability and when third parties are considering dealings with the wider group. Ian Dewar, with a wealth of experience as a partner in a major accounting firm, has successfully chaired the Audit Committee. The Board has benefitted from Sir Alan Yarrow's wise counsel, challenge to management and many years' banking experience in the City of London. Frederick Angest, appointed to the Board as part of succession planning, is deepening his knowledge about the business, working at Arbuthnot Latham currently as a private banker, having previously worked within Wealth Management and Credit Risk. 

In terms of individual performance, the Chairman confirmed that his assessment of all Directors was that they were performing well, with the Executive Directors additionally being formally reviewed in the context of the Senior Managers' Regime applicable to Arbuthnot Latham which confirmed continued strong performance. The Committee agreed with this assessment individually in relation to all members of the Board. Collectively, it was agreed that the Board had operated effectively with a wide range of experience and knowledge. As noted, in the responses to the Board Effectiveness Questionnaire, Non-Executives had provided appropriate challenge and guidance.

In terms of the performance of the Company's Board generally, the Committee noted that it takes into account the provisions of the Board Diversity Policy and the Board Suitability Policy. It reviewed the summary of training carried out by each Director during 2022 and noted that Directors had been able to carry out sufficient training both in person and online. 

In November 2022, the Nomination Committee confirmed that the Board's current composition provides the Company with a balanced, knowledgeable, diverse and informed group of directors, bringing strategic acumen, foresight and challenge to the executive, commensurate with the size of the business. The Committee reviewed succession planning and agreed that a sensible and strong plan remained in place. It also agreed that it continued to operate effectively and, as such, no further changes to its membership, composition or activities were proposed to the Board.

Remuneration Committee

Membership and meetings

Membership is detailed in the Remuneration Report on page 52. The Committee meets once a year and otherwise as required. The Remuneration Report on pages 52 to 54 gives information on the Committee's responsibilities, together with details of each Director's remuneration.

Donations Committee

Membership and meetings

The Donations Committee is chaired by Sir Henry Angest and its other members are Andrew Salmon and Sir Alan Yarrow. The late Sir Christopher Meyer was a member until his retirement as a director on 25 May 2022. The Group General Counsel acts as its Secretary. The Committee considers any political donation or expenditure as defined within sections 366 and 367 of the Companies Act 2006. It meets as necessary.

Activity in 2022

The Donations Committee met once during the year. It agreed that the Committee was constituted and continued to operate efficiently with its overall performance and the performance of its individual members effective throughout the year. As such, no changes to its membership or activities were proposed to the Board. 

Policy Committee

Membership and meetings

The Policy Committee is chaired by Andrew Salmon and its other members are James Cobb and Nicole Smith who also acts as its Secretary. Amongst its responsibilities, the Committee reviews the content of policy documentation to ensure that it meets legal and regulatory requirements and approves it on behalf of the Board.

Activity in 2022

The Policy Committee met five times during the year to review and approve Company policies.

Remuneration Report

Remuneration Committee

Membership of the Remuneration Committee is limited to non-executive directors together with Sir Henry Angest as Chairman. The members of the Committee are Sir Henry Angest, Sir Nigel Boardman and Sir Alan Yarrow. Two thirds of its membership therefore comprises independent non-executive Directors. The late Sir Christopher Meyer was also a member until his retirement as a director on 25 May 2022. The Group General Counsel, Nicole Smith, acts as its Secretary. The Committee met twice during the year.

The Remuneration Committee has responsibility for approving the overall remuneration policy for directors for review by the Board. The Committee is also responsible for remuneration more generally including, inter alia, in relation to the Company's policy on executive remuneration determining, the individual remuneration and benefits package of each of the Executive Directors and the fees for Non-Executive Directors. Members of the Committee do not vote on their own remuneration.

The Committee also deals with remuneration-related issues, taking into account the requirements established by the PRA and the FCA.

Remuneration Policy

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

Activity in 2022

The Remuneration Committee met twice during the year. It undertook its regular activities including reviewing the operation of the Remuneration Policy, having regard to the performance of the Company during the year. It also met to approve a single payment of £1,500 to all Group employees and executive directors in order to help them with the increased costs of living. The Committee determined that a set amount would be most beneficial to those on lower salaries where the increased cost of living being experienced was likely to be causing the most difficulty. The payment was also intended to aid employee retention at a time when recruitment was proving more challenging. Sir Henry did not participate in the vote in relation to the payment in respect of himself noting his conflict of interest. Additionally, the Committee, being Sir Nigel and Sir Alan for this purpose, approved the payment to Frederick Angest of a director's fee of £30,000 per annum, being half of the standard fee for a non-executive director, Mr. Angest already receiving a salary in respect of his employment with Arbuthnot Latham. This followed the precedent of a reduced fee in relation to the previous appointments of Sir Nigel as a director of both the Company and of Arbuthnot Latham. Sir Henry did not participate in this decision on the basis that Mr. Angest is his son and as such there was or might be a conflict or perceived conflict of interests in relation to the decision.

The Committee met again to review the Company's Remuneration Policy, the level of fees for Non-Executive Directors and the Executive Directors' remuneration, approving the award of bonuses to Messrs Salmon and Cobb for exceptional performance in the year and, after due consideration of comparable market rates salary rises for Messrs Salmon and Cobb. As in previous years, Sir Henry Angest waived his right to be considered for receipt of a bonus. The Remuneration Committee agreed that it continued to operate effectively with its overall performance and the performance of its individual members effective throughout the year.

The Committee decided not to change the fees for non-executive directors, reflecting the appropriate level of fee to continue to secure the services of a high level non-executive director.

Directors' Service Contracts

Sir Henry Angest, Mr. Salmon and Mr. Cobb each have service contracts terminable at any time on 12 months' notice in writing by either party.

Long Term Incentive Schemes

Grants were made to Messrs Salmon and Cobb on 14 June 2016 under Phantom Option Scheme introduced on that date, to acquire ordinary 1p shares in the Company at 1591p exercisable in respect of 50% on or after 15 June 2020 and in respect of the remaining 50% on or after 15 June 2021 when a cash payment would be made equal to any increase in market value. 

Under this Scheme, these directors were granted a phantom option to acquire 200,000 and 100,000 ordinary 1p shares respectively in the Company. The value of each phantom option is related to the market price of an Ordinary Share. The fair value of these options at the grant date was £1m. The first tranche of share options remained outstanding at 31 December 2022, but will lapse if not exercised at 1591p before 14 June 2023. The second tranche has not vested and so lapsed in 2020 as one of the performance conditions was not met, being the payment of dividends which was not possible in 2020 due to the regulators' response to the pandemic, requiring banks to cease payment of dividends, and to its economic impact.

On 23 July 2021, Messrs Salmon and Cobb were granted further phantom options relating to 200,000 and 100,000 ordinary shares respectively. The fair value of these options at the grant date was £1.4m. The value of each Ordinary Share for the purposes of this grant of phantom options is 990 pence, being the mid-market share price at close of business on 23 July 2021. An increase in the value of an Ordinary Share over 990 pence will give rise to an entitlement to a cash payment by the Company on the exercise of a phantom option. The right to exercise phantom options is subject to the satisfaction of performance conditions. 50% of each director's individual holding of phantom options is exercisable after 23 July 2024 and the other 50% is exercisable after 23 July 2026. These phantom options will lapse if not exercised within seven years of the date of grant, i.e. by 23 July 2028. The fair value of the outstanding options as at 31 December 2022 was £0.1m (2021: £0.1m).

Details of outstanding options are set out below.