Arbuthnot Regulatory News (ARBB)

20 March 2014

For immediate release

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

Audited Final Results for the year to 31 December, 2013

Significant Growth

Arbuthnot Banking Group today announces a 25 percent increase in profit before tax of £15.7m. Significant progress has been made across the Group during the year as we continue to realise our ambitions to grow.

Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited and Secure Trust Bank PLC.

FINANCIAL HIGHLIGHTS

· Profit before tax £15.7m (2012: £12.6m)

· Underlying Profits of £18.6m (2012: £11.6m)

· Operating Income exceeded £100m for the first time (2012: £65.6m)

· Achieved positive operating leverage of 14%*

· Earnings per share 52p (2012: 53p)

· Total dividend per share 44p (2012: 25p) including a special dividend of 18p

· Total assets increased to £1.1bn (2012: £1.0bn)

· Net assets per share 570.5p (2012: 449.3p) an increase of 27%

OPERATIONAL HIGHLIGHTS

Private Banking - Arbuthnot Latham

· Profit before tax £7.7m (2012: £2.1m)

· Customer loans up 18% to £341.0m (2012: £289.3m)

· Customer deposits grew £24m to £519.7m (2012: £495.7m)

· Assets under Management increased 40% to £528m (2012: £377m)

Retail Banking - Secure Trust Bank

· Profit before tax £17.2m (2012: £17.3m) with underlying profits of £25m

· Acquired V12 loans adding £36.8m of customer loans

· Lending balances increased by 31% to £391.0m (2012: £297.6m)

· Total customer numbers increased to 350,861 (2012: 231,713)

· SME Lending commenced

Commenting on the results, Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "This has been another significant year. Both banks have made good progress. We have substantially increased the net assets of the Group and at the same time been able to pay shareholders a special dividend."

*Percentage difference between the increase in Operating Income and Operating Expenses

Note: Secure Trust Bank is also making its final results announcement today which should be read in conjunction with this statement.

ENQUIRIES:

Arbuthnot Banking Group

Henry Angest, Chairman and Chief Executive 020 7012 2400

Andrew Salmon, Chief Operating Officer

James Cobb, Group Finance Director

David Marshall, Director of Communications

Canaccord Genuity Ltd (Nominated Advisor)

Lawrence Guthrie 020 7665 4500

Sunil Duggal

Numis Securities Ltd (Broker)Chris Wilkinson 020 7260 1000

Mark Lander

Bell Pottinger (Financial PR)

Ben Woodford 020 7861 3917

Zoë Pocock

The 2013 Annual Report and Notice of Meeting will be posted and available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 7 April 2014. Copies may be obtained from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 20 Ropemaker Street, London, EC2Y 9AR.

Consolidated statement of comprehensive income

Consolidated statement of financial position

Chairman's statement

I am pleased to report that Arbuthnot Banking Group ("ABG" or "the Group") has delivered a profit before tax of £15.7m (2012: £12.6m) which represents a 25% increase on 2012.

But more importantly, I note that both banks have been realising their ambitions for growth. It has always been a philosophy of the Group to build a varied source of income streams and to spread its risks, rather than become overly reliant or concentrated on a small number of business lines.

Notably, Secure Trust Bank ("STB") continued its diversification, as it completed the acquisitions of V12 Finance Group and Debt Managers Ltd early in 2013. These were complementary to the purchase of Everyday Loans made in 2012. All of these businesses have been successfully integrated into the Group.

At the same time Arbuthnot Latham ("AL") opened for business in Dubai, agreed a client custody arrangement with Pictet one of the largest Private Banks in Geneva, that allows Arbuthnot Latham's clients to use their services in Switzerland, Singapore and Hong Kong, installed a new operating platform for its investment management business and grew its total customer account balances to £1.05bn (2012: £872.3m).

During the year the Group took further steps to underpin the long term growth potential of both businesses by completing two significant transactions. First, we entered into a sale and lease back agreement on the Group's new headquarters at 7-21 Wilson Street. Having purchased the freehold in August 2012 for £15.7m, we could not refuse an offer that produced a net profit of £6.5m only a year later. Secondly, the Group continued to provide more liquidity to the market, by selling 580,000 shares in STB on 13 December 2013. Although we are prevented from showing the transaction as a profit by those curious accounting rules, the gain on sale of £14.4m has further increased the financial strength of the Group. Such is this strength and confidence for the future, the Directors were able to declare a special dividend of 18 pence to mark the 180 year anniversary of Arbuthnot Latham.

In last year's Chairman's Statement, I made reference to the regulatory environment in which both our banks operate and how the rules create a "glass ceiling" which prevents small banks becoming true challengers. During this year I have been pleased to detect a change in sentiment. In October the Governor of the Bank of England announced that it was open for business and would play its part in helping the banking industry with the introduction of new liquidity support mechanisms. These would be made available to all banks and not just the large lenders, who were usually the only ones able to offer mainstream forms of collateral, that were previously required to participate. The Bank's view is now that as long as it could assess the credit risk of assets, they would be welcome as collateral.

This may seem like a small step forward, but to a well-managed banking Group such as ours, that has for years been excluded from such schemes, the news was welcome. We trust that the Bank of England truly understands the important role that the small banks can play in delivering an excellent service to its customers and also in helping to sustain the economic recovery.

During the year, Arbuthnot Latham celebrated its 180 year anniversary. I am proud of the history of our Private Bank, having been involved in shaping the City of London into one of the pre-eminent financial centres of the world. As part of the celebrations we published a book that recorded this history and I was particularly delighted that the Mayor of London, Boris Johnson, accepted our invitation to write the foreword to the book. He observed that despite its lack of natural resources, the City has built its success based on entrepreneurial spirit and free market forces.

I am, however, alarmed at the recent developments and rhetoric that have been aimed at restricting the free market. These have included wage control, caps on interest rates charged, limits on market share, regulating profitability, breaking up bank branch networks and raising the tax burden levied on the entrepreneurial classes and finally the threat of a financial transaction tax, all of which creates uncertainty for investors. This can only be unhelpful in maintaining the economic recovery, which is clearly underway.

Private Banking - Arbuthnot Latham & Co., Ltd

The Private Banking business has reported a pre-tax profit of £7.7m (2012: £2.1m). This result was clearly flattered by the gain of £6.5m that was generated from the sale and lease back transaction on the Wilson Street property. However, this should not overshadow the real progress that was made by Arbuthnot Latham during the year. As mentioned previously, we took the conscious decision to invest for the long term future. These investments are clearly coming to fruition when I reflect on the momentum that is being generated.

We have always held a long term ambition to develop our distribution capabilities to cover overseas markets. I feel we reached a major milestone this year, when we opened for business in Dubai. The predominately wealth management service appears to have been well received by the market in Dubai. The generation of new business there has exceeded our initial expectations. We have also added further options for our customers who wish to gain exposure to other overseas markets, via our custody arrangements with Pictet, which were initiated during the year.

In order to keep pace with the growing scale of our Investment Management business, the operating platform was replaced with new technology. This now offers the customers online facilities, which allows them immediately to review their portfolios. Early in 2014 we also launched our new mobile banking application as we continue to respond to the ever increasing needs of our clients.

Retail Banking - Secure Trust Bank PLC

The reported pre-tax profits of Secure Trust Bank were £17.2m (2012: £17.3m). However, once again the reported numbers do not tell the entire story of the progress being made by our retail bank. The underlying profits for STB were £25.2m, which is a record for the bank.

The business has maintained its focus on serving customers well and meeting their needs with simple straight forward banking solutions. This resulted in our customer numbers growing by 51% to close the year at 350,861 (2012: 231,713).

STB has continued to diversify its operations by adding to the acquisition of Everyday Loans in 2012 with further purchases this year of V12 Finance Group and Debt Managers Ltd. All these entities have been successfully integrated into the Group and the existing businesses have begun to leverage their expertise. The retail finance offering has been consolidated onto the V12 operating platform. Our personal loan portfolios are being managed as one business, to ensure we have an attractive offering to all our customers regardless of their standing. We have also transferred some of our existing impaired loans to Debt Managers Ltd to improve the financial returns involved in recovering these assets.

Board Changes and Personnel

The Board has remained unchanged throughout the year. I would like to take this opportunity to express my thanks to my colleagues on the Board for their generous support and the dedication they have given to the Group and me personally.

The results of the Group reflect the hard work and commitment of both existing and new members of staff who, with few exceptions, have performed well. On behalf of the Board I extend our thanks to all of them for their contributions in 2013.

Dividend

The Board is proposing a final dividend of 15p, an increase of 1p on last year, together with the interim dividend of 11p and the special dividend of 18p making a total dividend for the year of 44p (2012: 25p). If approved, the dividend will be paid on 16 May 2014 to shareholders on the register at close of business on 18 April 2014.

Outlook

With the economic recovery underway, both banks have worked hard to be in a position to prosper as the economy grows. We are therefore optimistic that we can continue to make good steady progress, while remaining focussed on the needs and aspirations of our customers. The outlook is bright, the economy is improving and business is prospering. This will last as long as politics does not interfere with it.

Arbuthnot Latham celebrated its 180th anniversary in 2013 and during the year made good progress across many areas of business. The core business of private banking and wealth management, grew all key components of its business during the year and finished with a strong underlying momentum. The first international office for Arbuthnot Latham was opened in Dubai and through the establishment of international custody arrangements with Pictet, the Bank is now able to offer its services to wealthy clients from overseas who wish to have a private banking relationship in London. In addition, the sale and leaseback arrangement concluded for our new headquarters building produced a profit of £6.5m.

The year-end reported profit for Arbuthnot Latham was £7.7m with the core private banking and wealth management business delivering a profit of £4.9m (2012: £3.5m) before credit provisions.

The strategy to grow the private banking and wealth management business through the addition of several experienced bankers and the overall strengthening of the client proposition began to produce positive results during the year. With the recent upheaval across the financial services industry caused by the financial crisis, there is a significant opportunity for a client focused bank such as Arbuthnot Latham to benefit from clients looking to establish a new financial relationship.

This growth in new clients was reflected in the financial results. Client deposits ended the year at £521.2m (2012: £495.7m), an increase of 5%. The Bank was also able to draw on the Funding for Lending Scheme and by the year end had drawn £40m under this scheme. The overall cost of deposits fell during the year thereby enhancing the net interest income position of the Bank.

The loan book grew in 2013 by 18% to end the year at £341.0m (2012: £289.3m). The Bank continued its focus towards supporting the objectives of the client base with good quality lending transactions. The loan to deposit ratio at the end of the year was 66% (2012: 59%) which continued to reflect our prudent approach to the management of our balance sheet.

In the wealth management business, the strengthening of the client proposition and the attraction to clients of the independent approach of the Bank in its investment management services resulted in a 40% increase in assets under management which finished the year at £527.9m (2012: £376.6m).

Following the strategic decision to open an office in Dubai, the Bank received its licence to operate in the Dubai International Financial Centre from the Dubai Financial Services Authority in late July 2013. The business in Dubai is focused towards international private banking and wealth management services. Since opening the office, an encouraging and positive foundation has been established with several new accounts opened and the business is proceeding to plan. Dubai is a growing market for international financial services and Arbuthnot Latham is now well placed to share in the growth that this market is expected to experience over the next few years.

Our structured product distribution business, Gilliat Financial Solutions, experienced a challenging year with resulting weaker income margins across the business. While the UK distribution base continued to grow and the offshore business established some very positive distribution relationships, the business made a loss for the year of £0.4m (2012: £0.6m profit). The business has undertaken a review of its activities and we are confident that 2014 will see a return to profit.

Secure Trust Bank ("STB") has reported pre-tax profits of £17.2m (2012: £17.3m). The fact that the reported number is largely unchanged from the previous year does not reflect the true growth in profitability that is being generated by the bank. Shareholders will recall that the 2012 statutory profit included a fair value adjustment arising from the acquisition of Everyday Loans. The underlying profit of STB for 2013 is £25.2m, which represents a 51% increase on the prior year underlying profit of £16.8m. It should also be noted that since the IPO in November 2011, the bank's underlying profit before tax has increased by 220% from £7.9m.

Ultimately the success of the business will depend on the ability of STB to attract and serve its customers. During 2013 its strategy of providing simple and straight forward banking solutions has proved successful, as the number of customers grew by 51% to close the year at 350,861. This figure also represents a 142% increase since the flotation on the AIM market. As the opportunity to provide credit solutions remains attractive, given the reduced level of funding available from the high street banks, the lending operations of the bank have become the engine for growth in recent times. Once again this was the case in 2013.

Overall, new business lending volumes grew by 50% to £304.7m (2012: £202.5m). In turn, this resulted in an increase of 31% in total customer loans at £391m (2012: £297.6m). The Motor finance business, which focusses on the near prime market segments, continues to service the majority of the top 100 UK car dealer groups. The growth in the portfolio for the year was 28%, as balances closed at £114.6m (2012: £89.6m).

The personal unsecured loan portfolio increased by 14% to £77.9m (2012: £68.2m). The rate of growth in this portfolio was partly constrained by a significant delay in the commencement of a new bank to bank loan referral arrangement. This activity is now operational with Sainsbury's Bank and should deliver benefits in 2014.

This year saw STB take a significant step forward in developing its retail point of sale business. The growth in balances was as a result of strong demand from retailers and also the acquisition of V12 Finance. Accordingly, the customer balances grew by 78% to close the year at £114.4m (2012: £64.2m). The business made good progress in integration, creating a single retail finance offering. The existing STB relationships have been transferred to the V12 platform. This has allowed the bank to offer a compelling proposition and has led to greater success in attracting retailers, notably including the recently announced Halfords agreement.

Everyday Loans portfolio grew to £81.4m (2012: £73.8m). This branch based unsecured lending portfolio serves relatively high credit risk customers with low average balance (£2,700) accounts. Given the higher risk in this business, the strategy has been to grow the portfolio in a controlled fashion, concentrating on profit maximisation rather than simply growth in volumes.

Once again the overall growth in the bank's lending portfolios has resulted in a higher level in the value of reported impairments. Given our prudent underwriting criteria, the actual rate of impairments remains lower than the level anticipated at origination and therefore below the rates at which the loans were priced.

The robust growth in the customer loan portfolios has continued to be matched by customer deposits. The balance sheet remains entirely funded by retail deposits with the year end loan to deposit ratio being 90%. However, as the markets begin to signal an eventual rise in interest rates, the profile of the average tenor of the bank's deposits has been extended. Fixed term deposits now represent 44% of the total deposit book, compared to 39% in the prior year.

Finally, to initiate the next phase of growth, the bank is in the process of entering the SME lending markets. The bank has already written a number of good quality real estate finance transactions and is exploring asset based finance opportunities. All of these are expected to develop further in 2014.

Strategic Report - Financial Review

Arbuthnot Banking Group PLC adopts a pragmatic approach to risk taking and seeks to maximise long term revenues and returns. Given its relative size, it is 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 customers and clients in its chosen markets of Private Banking (Arbuthnot Latham & Co., Limited) and Retail Banking (Secure Trust Bank PLC). The Group's revenues are derived from a combination of net interest income from lending, deposit-taking and money market activities, fees for services provided to customers and clients and commission earned on the sale of financial instruments and products.

Once again the Group has continued to trade robustly in 2013 and has reported a profit before tax of £15.7m (2012: £12.6m), which on a statutory basis represents an increase of 25%. However, the financial results for 2013 and those of 2012 contain a number of individually significant items. The Annual Report and Accounts for 2012 detail the bargain purchase gain that arose from the acquisition of Everyday Loans. This year the Group has recognised a £6.5m gain from the sale and lease back of the new head office building. Once the impact of these and a small number of other non-recurring items such as the recognition of the 180 year anniversary (£0.4m) are excluded from the results, the Group has underlying earnings of £18.5m (2012: £11.6m) which represents an increase in excess of 60%. Similarly, the statutory Earnings Per Share ("EPS") is 51.9 pence (2012: 52.6 pence), but the underlying EPS has increased by 6% to 40.6 pence (2012: 38.2 pence).

The Operating Income for the Group has exceeded £100m for the first time in the Group's history increasing by 53% as the full year impact of the acquisitions and the strong organic growth have emerged in the financial results. The largest component of the operating income remains Net Interest Income, which is now 73% of the total income. The approximate blended yield of Net Interest Income compared to average customer loans has increased to 11% against the prior year 9%. This is mainly as a result of the increasing proportion that Secure Trust Bank's higher yielding loan portfolios represent of the Group's asset base. Net Interest Income has also benefitted from lower deposit rates prevalent in the market, which has been brought about by the introduction of the Funding for Lending Scheme ("FLS").

The overall expense base increased to £73.6m (2012: £53m), which is an increase of 39%. Once again, the increase is mainly due to the full year impact of acquisitions and the cost of investment for growth. Relative to the growth in operating income, the Group has produced a positive operating leverage of 14%.

As expected, given the growth in the Group's lending portfolios, the impairment costs have increased by 60% in total. However, the total impairment charge compared to the total customer loan portfolio has held steady at a blended rate of below three percent (2013: 2.6%, 2012: 2.2%).

The Group tax charge has returned to a more normal level in 2013 following the significantly reduced amount of 2012 which was caused by the impact the bargain purchase gain had on the overall tax rate.

In the previous year the Group's total assets exceeded £1bn for the first time in its history. Once again the Group delivered strong growth in its total assets posting an increase of 9%. This was despite the fact that the level of liquid assets reduced by 13% in the year. The assets growth was as a result of the performance of the lending portfolios. In aggregate, customer loans increased by 25% to £732.2m (2012: £587m). The acquisition of V12 Finance contributed £36.8m.

The Group's lending remains entirely funded by customer deposits, which increased by 7% to £957.8m (2012: £894.5m). As a result, the overall loan to deposit ratio closed the year at 76.4% (2012: 65.5%). This increase was largely planned as both the Group's banks have been admitted into the Funding for Lending Scheme, which has provided access to a valuable source of new liquidity.

Also, shareholders should note that the net assets of the Group increased by £18.2m (27%) even after the payment of the special dividend. Contributing to this increase was not only the record earnings, but also the gain that arose on the sale by the Group of 580,000 shares in STB. This generated a non taxable gain of £14.4m that is required to be accounted for in the Statement of Changes in Equity. The net asset value per share of the Group is now 570.5p (2012: 449.3p).

Segmental Analysis

The segmental analysis in note 43 to the Consolidated Financial Statements of the Annual Report highlights the disclosures required under IFRS 8 'Operating Segments'. The operating segments are Private Banking (Arbuthnot Latham & Co., Limited) and Retail Banking (Secure Trust Bank PLC). Group costs and intercompany elimination journals are shown separately to reconcile back to the Group consolidated result.

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

The profit before tax increased to £7.7m (2012: £2.1m). However, as previously discussed, the results of the bank include the gain that arose on the sale of the Wilson Street property, which generated £6.5m. Also, as part of the year end analysis, the business took a more pessimistic view on its small number of equity investments that have been held in its Available-for-Sale portfolio. This resulted in incremental losses of £0.8m. The remaining equity investment portfolio now totals £1.8m.

As indicated to the market throughout 2013, the bank benefitted from a 20% increase in Net Interest Income, which was as a result of not only a larger customer asset portfolio but also a widening of customer margins of over 100 basis points. This was brought about by the impact of FLS on the market for deposit rates.

The investment made in the upgrade of the private banking front office began to pay off, resulting in growth in the assets under management of 40%. Accordingly, the bank saw an increase in the fees and commissions earned of 7%.

With greater confidence that the business model has sustainable momentum, further investments were made, not only in the front office but also the Dubai office which officially opened midway through the year. Additionally, a new investment management operating platform came online in the year, all of which resulted in an increase in operating expenses of 19%.

The credit losses declined to £1.8m (2012: £2.0m) which, on a larger portfolio, saw the actual loss rate fall to 0.6%.

The loan book remains well secured and of high quality, with an overall LTV of 50% with negligible losses emerging from the front book that has been developed in recent years.

Finally, Gilliat Financial Solutions reversed its financial progress made in the previous year by posting a loss of £0.4m (2012: profit £0.6m). This was due to overtrading during the year. Sales volumes actually increased by more than 20%, but in response to the positive signs from the IFA market, the business over purchased its stock of products and in the end had to discount its margins heavily. This strategy has been revised for 2014 and products are being purchased in line with demand from the IFAs rather than in advance. This should see the unit return to profitability in 2014.

Customer assets increased by 18% to close the year at £341.2m (2012: £289.3m), which was another year of robust growth, but still managed within our conservative risk appetite. Other assets reduced following the disposal of the Wilson Street property.

Customer deposits again saw good inflows with balances increasing by 5%. But more importantly, the mix of deposits was rebalanced, with a number of higher yielding term balances maturing during the year being replaced by accounts with lower rates.

The loan to deposit ratio closed the year at 65% (2012: 59%) as the bank now has access to the FLS liquidity resources. This does allow the bank to operate a higher ratio, while maintaining a conservative policy with regard to liquidity.

The Private bank remains highly liquid and well capitalised with a total capital ratio of 12.8% (2012: 12.4%) and a core tier 1 ratio of 10.5% (2012: 9.9%).

The reported profit before tax is £17.2m (2012: £17.3m) which is largely unchanged on a statutory basis, however, the prior year results included a gain arising from the bargain purchase of Everyday Loans. The underlying profits have grown to £25.2m (2012: £16.8m) for the year, an increase of 51%.

The bank generated a 68% increase in operating income as the continued organic growth in the portfolios was augmented with the full year impact of the acquisitions made in 2012 and early 2013. An increase in high yielding customer assets and lower funding costs resulted in a 199 basis point widening of the blended customer net margin to 16.9% (2012: 15%).

Operating expenses increased by 51%, giving a positive operational leverage ratio of 21.7%. Included in expenses for the year were £1.2m (2012: £0.7m) related to the amortisation of the Everyday Loans intangible and £0.9m (2012: £nil) from the amortisation of the V12 intangible. Also, the cost of the STB share options was £2.2m (2012:£1.6m). Finally, STB also incurred acquisition costs of £0.9m (2012: £3.1m) during the year. The increase in the impairment losses was expected given the growth in the credit portfolios and the continued seasoning of customer accounts. However, the blended average loss rate was 4.3% (2012: 3.9%), still well below the levels anticipated at origination but higher as a result of the change in mix toward the higher yielding accounts.

The Current Account ended the year with 22,860 accounts (2012: 20,962) and Onebill with 24,297 (2012: 26,154).

During the year the asset finance portfolio increased by 49% with only the personal computer portfolio not growing. V12 added £36.8m during the year. Personal loans increased by 14% but growth was held back by delays in implementing the referral arrangement agreed with Sainsbury's Bank. Everyday Loans portfolio increased by 10% as caution has been exercised in the progression of this portfolio.

The bank remains entirely funded by retail deposits which increased by 9% to close the year at £433.4m (2012: £398.9m). The offering by the bank still remains attractive with market leading rates despite some downward corrections to rates during the year.

Total Group costs increased to £9.2m (2012: £6.7m). This was a result of firstly, a lower level of operating income due to the conversion of the subordinated loan issued by STB into equity as part of the placing carried out in November 2012 and, secondly, the prior year containing a one off gain that arose on the sale of the Swiss banking subsidiary (£0.8m).

Group operating expenses increased by £1.1m due to higher salary and bonus awards along with the recognition of the 180 year anniversary (£0.4m) and additional provisions made in the Group's captive insurance cell (£0.3m).

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.

In accordance with the EU's Capital Requirements Directive (CRD) and the required parameters set out in the PRA Handbook (BIPRU 2.2), the Individual Capital Adequacy Assessment Process (ICAAP) is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management.

The Group's regulated entities are also the principal trading subsidiaries as detailed in Note 42.

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar I plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations deliver a sufficient capital sum adequate to cover management's anticipated risks. Where the Board considers that the Pillar I calculations does not reflect the risk, an additional capital add-on in Pillar II is applied.

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

• Tier 1 comprises mainly shareholders' funds and non-controlling interest, after deducting goodwill and other intangible assets.

• Lower Tier 2 comprises qualifying subordinated loan capital and revaluation reserves. Lower Tier 2 capital cannot exceed 50% of tier 1 capital.

The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. All regulated entities have complied with all of the externally imposed capital requirements to which they are subject.

In June 2013, the PRA published a final regulation to give effect to the Basel III framework, which amends the definition of Tier 1 capital. This comes into effect on 1 January 2014. The Group's current capital position is sufficient to meet the Tier 1 capital ratio based on the Tier 1 capital definition under the new regulation.

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 risk management and their associated policies is set out in note 6 to the financial statements.

The principal risks inherent in the Group's business are credit, market, liquidity, operational and regulatory compliance.

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. This risk exists mainly in Arbuthnot Latham & Co., Limited and Secure Trust Bank PLC, which currently have loan books of £341.2m and £391.0m respectively. The lending portfolio in Arbuthnot Latham is extended to private banking clients, the majority of which is secured against cash, property or other assets. The portfolios within Secure Trust are extended to retail customers and are largely unsecured. Credit risk is managed through the Credit Committees of each bank with significant exposures also being approved by the Group Risk Committee.

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

Liquidity risk is the risk that the Group cannot meet its liabilities as they fall due. The Group takes a conservative approach to managing its liquidity profile. It has placed no reliance on the wholesale lending markets and is entirely funded by retail customer deposits. The loan to deposit ratios are maintained at prudent levels. Following introduction of the new liquidity regime, which came into force on 1 October 2010, the Group now maintains liquidity asset buffers which comprise high quality, unencumbered assets such as Government Securities, which can be called upon to meet the Group's liabilities.

Operational risk is the risk that the Group may be exposed to financial losses from conducting its business. The largest exposure to this risk exists in Arbuthnot Latham as mis-selling risk via its wealth management advisory service and its structured product distribution business. The Group is exposed to operational risks from its Information Technology and Operations platforms. There are additional internal controls in these processes that are designed to protect the Group from these risks. The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance section of the Annual Report.

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

The Group maintains clear compliance guidelines and provides ongoing training to all staff. Periodic spot checks and internal audits are performed to ensure these guidelines are being maintained. The Group also has insurance policies in place to cover any claims that may arise.

Regulatory compliance risk is the risk that the Group will have insufficient capital resources to support the business or does not comply with regulatory requirements. The Group adopts a conservative approach to managing the capital of the Group. The principal regulated entities maintain capital ratios in excess of the minimum level set by the regulator. Capital requirements are forecast as part of the annual budgeting process and these are regularly monitored. Annually, the Group Board assesses the robustness of the capital requirements as part of the Individual Capital Adequacy Assessment Process (ICAAP) where stringent stress tests are performed to ensure that capital resources are adequate over a future three year horizon.

Dividend

The Board proposes a final dividend of 15 pence per share to be paid on 16 May 2014, giving a total dividend for the year of 44 pence (2012: 25 pence) per share, which include a special dividend of 18p paid in November 2013.

Going Concern

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

James Cobb

Group Finance Director

19 March 2014

Group Directors' Report

The Directors submit their annual report and the audited consolidated financial statements for the year ended 31 December 2013.

Principal Activities and Review

The principal activities of the Group are banking and financial services. A strategic review in accordance with Section 414 C of the Companies Act 2006 forming part of this report is set out on pages 4 to 14.

Results and Dividends

The results for the year are shown on page 1. The profit after tax for the year of £11.5 million (2012: £11.1 million) is included in reserves.

The Company sold 580,000 ordinary 40p shares (3.7%) in its subsidiary Secure Trust Bank PLC on 13 December 2013 at a price of £25 per share. This resulted in a net gain of £14.4m which is also included in the Group's reserves.

The Directors recommend the payment of a final dividend of 15 pence on the ordinary shares which, together with the interim dividend of 11 pence paid on 4 October 2013 and a special dividend of 18p paid on 22 November 2013, represents total dividends for the year of 44 pence (2012: 25 pence). The final dividend, if approved by members at the Annual General Meeting, will be paid on 16 May 2014 to shareholders on the register at close of business on 18 April 2014.

Going Concern

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

Share Capital

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 existing issued share capital. The Directors will keep the position under review in order to maximise the Company's resources in the best interests of shareholders.

Remuneration

Shareholders will be asked to approve an Ordinary Resolution permitting bonus payments to be made to executive directors or senior managers not exceeding two times that director's annual basic salary if required by forthcoming regulation. It is the practice of the Company to pay fair and reasonable salaries and to reward exceptional performance under a bonus scheme. The Company seeks to keep down fixed overhead costs but does not welcome the principle of wage control.

Financial Risk Management

Details of how the Group manages risk are set out in in the Strategic Report and in note 6.

Substantial Shareholders

The Company was aware at 19 March 2014 of the following substantial holdings in the ordinary shares of the Company, other than those held by one director shown below:

All directors served throughout the year.

Mr. A.A. Salmon and Mr. P.A. Lynam retire under Article 78 of the Articles of Association and, being eligible, offer themselves for re-election. Both directors have service agreements terminable on twelve months' notice.

According to the information kept under Section 3 of the Disclosure and Transparency Rules 2006, the interests of directors and their families in the ordinary 1p shares of the Company at the dates shown were, and the percentage of the current issued share capital held is, as follows:

At the year end Mr. Lynam held 9,110 and Mr. Salmon 7,500 ordinary 40p shares in Secure Trust Bank PLC, a 67% subsidiary of the Company.

On 16 April 2013 Mr. Salmon exercised the option granted to him on 21 May 2008 to subscribe for 100,000 ordinary 1p shares in the Company at 337.5p and Mr. Cobb exercised the option granted to him on 5 November 2008 to subscribe for 50,000 ordinary 1p shares in the Company at 320p. The exercise price was 930p per share and the Board agreed to make a cash settlement rather than allot new shares.

On the same day Mr. Salmon and Mr. Cobb were granted new options to subscribe between April 2016 and April 2021 for 100,000 and 50,000 ordinary 1p shares respectively in the Company at 930p. The fair value of the options at grant date was £125k.

On 2 November 2011 Mr. Lynam and Mr. Salmon were each granted options to subscribe for 141,666 ordinary 40p shares in Secure Trust Bank PLC at 720p between 2 November 2014 and 1 November 2021, and a further 141,667 shares at 720p between 2 November 2016 and 1 November 2021. The fair value of the options at grant date was £1.6m.

Apart from the interests disclosed above, no director was interested at any time in the year in the share capital of Group companies.

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 2013 three directors had loans from Arbuthnot Latham & Co., Limited amounting to £5,188,000, on normal commercial terms as disclosed in note 41 to the financial statements. At 31 December 2013 three directors had deposits with Secure Trust Bank PLC amounting to £265,000 and five directors had deposits with Arbuthnot Latham & Co., Limited amounting to £2,257,000, all on normal commercial terms as disclosed in note 41 to the financial statements.

The Company maintains insurance to provide liability cover for directors and officers of the Company.

Board Committees

The report of the Remuneration Committee on pages 21 and 22 will be the subject of an Ordinary Resolution at the Annual General Meeting.

Information on the Audit, Nomination, Risk and Donations Committees is included in the Corporate Governance section of the Annual Report on page 18 to 20.

Employees

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 share participation and in other ways.

Political Donations

The Company made a political donation of £27,000 to the Conservative Party during the year (2012: £50,000).

Auditors

Following a review of their corporate structure, our auditors KPMG Audit Plc, have instigated an orderly wind down of business, with future audit work being undertaken by KPMG LLP. The Board has decided to nominate KPMG LLP as auditors and a resolution for their appointment will be proposed at the forthcoming Annual General Meeting at a fee to be agreed in due course by the directors. There is no difference in liability terms between KPMG Audit Plc and KPMG LLP.

The Directors have disclosed to the auditors to the best of their knowledge and belief all relevant information necessary to assist the auditors in the preparation of their report.

By order of the Board

J R Kaye

Secretary

19 March 2014

Corporate Governance

AIM companies are not required to comply with The UK Corporate Governance Code ("The Code"). Nevertheless, the Board endorses the principles of openness, integrity and accountability which underlie good corporate governance and intends to take into account the provisions of The Code in so far as they are appropriate to the Group's size and circumstances. Moreover, the Group contains subsidiaries authorised to undertake regulated business under the Financial Services and Markets Act 2000 and regulated by the Prudential Regulatory Authority, including two which are authorised deposit taking businesses. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such businesses.

Directors

The Group is led and controlled by an effective Board which comprises five executive directors and three non-executive directors.

The senior independent non-executive director is Robert Wickham, who in addition is Deputy Chairman. Although Mr. Wickham has served on the Board for twenty years from the date of his first election, he displays independence in both character and judgement and there are no other relationships or circumstances which could affect his judgement. Accordingly, the Board considers him to be independent.

The Board

The Board meets regularly throughout the year. Substantive agenda items have briefing papers, which are circulated in a timely manner before each meeting. The Board is satisfied that it is supplied with all the information that it requires and requests, in a form and of a quality to enable it to discharge its duties. In addition to ongoing matters concerning the strategy and management of the Company and of the Group, the Board has determined certain items which are reserved for decision by itself. These matters include the acquisition and disposal of other than minor businesses, the issue of capital by any Group company and any transaction by a subsidiary company that cannot be made within its own resources, or that is not in the normal course of its business.

The Company Secretary is responsible for ensuring that Board processes and procedures are appropriately followed and support effective decision making. All directors have access to the Company Secretary's advice and services and 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.

The Board has delegated certain of its responsibilities to Committees. All Committees have written terms of reference.

Audit Committee

Membership of the Audit Committee is limited to non-executive directors and comprises Ruth Lea (as Chairman), Sir Christopher Meyer and Robert Wickham.

The Audit Committee provides a forum for discussing with the Group's external auditors their report on the annual accounts, reviewing the scope, results and effectiveness of the internal audit work programme and considering any other matters which might have a financial impact on the Company, including the Group's arrangements by which staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The Audit Committee's responsibilities include reviewing the Group's system of internal control and the process for evaluating and monitoring risk. The Committee also reviews the appointment, terms of engagement and objectivity of the external auditors, including the level of non-audit services provided, and ensures that there is an appropriate audit relationship.

Remuneration Committee

Information on the Remuneration Committee and details of the Directors' remuneration are set out in the separate Remuneration Report.

Nomination Committee

The Nomination Committee is chaired by Henry Angest and its other members are Robert Wickham and Ruth Lea. Before a Board appointment is made the skills, knowledge and experience required for a particular appointment are evaluated and a recommendation made to the Board.

Risk Committee

The Risk Committee is chaired by Henry Angest and its other members are James Cobb, James Fleming, John Reed (non-executive of Arbuthnot Latham), Paul Lynam (appointed 27 February 2014), Andrew Salmon and Robert Wickham. The role of the Risk Committee is to approve specific risk policies for Group subsidiaries and significant individual credit or other exposures.

Donations Committee

The Donations Committee is chaired by Henry Angest and its other members are Robert Wickham and Ruth Lea. The Committee considers any political donation or expenditure as defined within the Political Parties, Elections and Referendums Act 2000.

Shareholder Communications

The Company maintains a regular dialogue with its shareholders and makes full use of the Annual General Meeting and any other General Meetings to communicate with investors.

The Company aims to present a balanced and understandable assessment in all its reports to shareholders, its regulators and the wider public. Key announcements and other information can be found at: www.arbuthnotgroup.com.

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

The effectiveness of the internal control system is reviewed regularly by the Board and the Audit Committee, which also receives reports of reviews undertaken by the internal audit function which was outsourced to Ernst & Young. The Audit Committee also receives reports from the external auditors, KPMG Audit Plc, which include details of internal control matters that they have identified, as part of the Financial Statement audit. Certain aspects of the system of internal control are also subject to regulatory supervision, the results of which are monitored closely by the Board.

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 and the Directors' Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent Company financial statements on the same basis.

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 Parent Company and of their 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 judgments and estimates that are reasonable and prudent;

• state whether they have been prepared in accordance with IFRSs as adopted by the EU; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent

Company will continue in business.

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 have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group 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.

Statement of Disclosure of Information to Auditors

The Directors confirm that:

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

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

information and to establish that the Company's auditors are aware of that information.

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

Remuneration Report

Remuneration Committee

Membership of the Remuneration Committee is limited to non-executive directors together with Henry Angest as Chairman. The present members of the Committee are Henry Angest, Robert Wickham and Ruth Lea.

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

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; the need to align the interests of executives with those of shareholders; and an appropriate balance between current remuneration and longer term performance-related rewards. The remuneration package can comprise a combination of basic annual salary and benefits (including pension), a discretionary annual bonus award related to the Committee's assessment of the contribution made by the executive during the year and longer term incentives, including executive share options. Pension benefits take the form of annual contributions paid by the Company to individual money purchase schemes. The Remuneration Committee reviews salary levels each year based on the performance of the Group during the preceding financial period. This review does not necessarily lead to increases in salary levels. During 2011 the Group implemented all the provisions required under the FCA Remuneration Code. Accordingly the Group and its subsidiaries are all considered to be Tier 3 institutions.

Remuneration Resolution

Shareholders will be asked to approve an Ordinary Resolution permitting bonus payments to be made to executive directors or senior managers not exceeding two times that director's annual basic salary if required by forthcoming regulation. It is the practice of the Company to pay fair and reasonable salaries and to reward exceptional performance under a bonus scheme. The company seeks to keep down fixed overhead costs but does not welcome the principle of wage control.

Directors' Service Contracts

Henry Angest, James Fleming, Paul Lynam and Andrew Salmon each have service contracts terminable at any time on 12 months' notice in writing by either party. James Cobb has a service contract terminable at any time on 6 months' notice in writing by either party.

Share Option and Long Term Incentive Schemes

This part of the remuneration report is audited information.

In May 2005, the Company extended its Unapproved Executive Share Option Scheme for a further period of 10 years.

The Company has an ESOP ("the Arbuthnot ESOP Trust") under which trustees may purchase shares in the Company to satisfy the exercise of share options by employees including executive directors.

On 16 April 2013 Mr. Salmon exercised the option granted to him on 21 May 2008 to subscribe for 100,000 ordinary 1p shares in the Company at 337.5p and Mr. Cobb exercised the option granted to him on 5 November 2008 to subscribe for 50,000 ordinary 1p shares in the Company at 320p. The exercise price was 930p per share and the Board agreed to make a cash settlement rather than allot new shares.

On the same day Mr. Salmon and Mr. Cobb were granted new options to subscribe between April 2016 and April 2021 for 100,000 and 50,000 ordinary 1p shares respectively in the Company at 930p. The fair value of the options at grant date was £125k.

At the date of this remuneration report, the only outstanding options to directors under the Unapproved Executive Share Option Scheme are those in relation to 100,000 shares for Andrew Salmon and 50,000 shares for James Cobb. 150,500 shares are held in the Arbuthnot ESOP Trust.

Under the Unapproved Executive Share Option Scheme of the Company's subsidiary, Secure Trust Bank PLC, established in November 2011, Paul Lynam and Andrew Salmon were each granted options over 283,333 shares in that company. The fair value of the options at grant date was £1.6m.

Details of any shares or options held by directors are presented on page 16.

The emoluments of the Chairman were £515,000 (2012: £519,000). The emoluments of the highest paid director were £1,523,000 (2012: £870,000) including pension contributions of £35,000 (2012: £35,000).

Mr. R J J Wickham is a director of Calando Finance Limited which received an annual fee of £50,000 (2012: £50,000) in respect of his services to the Group.

These amounts are included in the table above.

Retirement benefits are accruing under money purchase schemes for five directors who served during 2013 (2012: six directors).

Henry Angest

Chairman of the Remuneration Committee

19 March 2014

Independent Auditor's Report

We have audited the financial statements of Arbuthnot Banking Group PLC for the year ended 31 December 2013 set out on pages 25 to 85. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members, as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

As explained more fully in the Directors' Responsibilities Statement set out on page 19, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at

www.frc.org.uk/auditscopeukprivate.

Opinion on financial statements

In our opinion:

• the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2013 and of the Group's profit for the year then ended;

• the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;

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

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

Opinion on other matters prescribed by the Companies Act 2006 and under the terms of our engagement

In our opinion the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

• adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

• the Parent Company financial statements are not in agreement with the accounting records and returns; or

• certain disclosures of directors' remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

Richard Gabbertas (Senior Statutory Auditor)

for and on behalf of KPMG Audit Plc, Statutory Auditor

Chartered Accountants

15 Canada Square

London

E14 5GL

19 March 2014

Company statement of financial position

Consolidated statement of changes in equity

Company statement of changes in equity