Arbuthnot Regulatory News (ARBB)

24 March 2022

For immediate release

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

Audited Final Results for the year to 31 December 2021

Strong growth has returned the Group to profitability.

Arbuthnot Banking Group today announces its audited results for the year ended 31 December 2021.

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

FINANCIAL HIGHLIGHTS

• Profit Before Tax of £4.6m (2020: loss £1.1m*)

• Operating income increased to £88.7m (2020: £72.5m)

• Earnings per share of 45.2p (2020: negative 8.9p)

• Final dividend declared of 22p (2020: nil**)

• Special dividend of 21p and interim dividend of 16p already paid in the year (2020: nil)

• Net assets of £200.9m (2020: £194.0m)

• Net assets per share of 1315p (2020: 1270p)

• Total capital ratio of 14.9% (2020: 18.7%)

OPERATIONAL HIGHLIGHTS

Arbuthnot Latham

• Profit before tax and group recharges of £15.3m (2020: £8.3m), an increase of 84%

• Average net margin at 4.1% (2020: 4.1%)

• Customer loans increased 25% to £2bn*** (2020: £1.6bn)

• Customer deposits increased 18% to £2.8bn (2020: £2.4bn)

• Assets under management increased 18% to £1.36bn (2020: £1.15bn) driven by both strong net inflows and investment performance

• Completed acquisition of commercial truck leasing business, Asset Alliance, generating a bargain purchase of £8.6m

• Continued modernisation of our digital channels including introduction of Apple and Google pay facilities to complement the upgraded Arbuthnot Card app

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "The Group made good progress in 2021, returning to growth and restoring profitability, notwithstanding the ultra-low interest rate environment prevailing in the period.

The Group delivered well against our Future State plan achieving significant growth and continuing to diversify through the development of specialist finance businesses, with the successful acquisition and integration of Asset Alliance, a significant strategic step.

Our lending businesses performed well with lending balances growing 25 per cent and reaching two billion pounds for the first time in the Bank's history.

The return to profitability has allowed us to reinstate our normal practice of paying interim and final dividends, and with the special dividend paid earlier in the year this indicates the Board's confidence in the Group's future prospects."

Note:

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

The 2021 Annual Report and Notice of Meeting will be available on the Arbuthnot Banking Group website

http://www.arbuthnotgroup.com on or before 15 April 2022. 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") has reported a profit before tax of £4.6m. The improved performance has allowed the business to restore the paying of dividends to shareholders. During the year the Group paid a special dividend in respect of the 2019 final dividend, that was previously cancelled after the general guidance to the banking industry from the Group's Regulator. The Group has also returned to its normal practice of paying an interim and a final dividend.

The year has seen substantial progress in the growth of the balance sheet and assets under management, both of which have grown by over 15%. This, together with the positive impact from the reversal of the sharp reduction in interest rates, means that the Group is well positioned for the year ahead. Achieving this £4.6m of profit before tax I believe is very creditable, given that the Group has had a number of adverse items that have impacted the results. The Group has once again had to operate in an ultra-low interest rate environment. The continuation of the Bank of England base rate at 0.1% for almost the entire year cost the Group £11.5m in interest earnings compared to when the base rate was at 75 basis points, which is where it was prior to the onset of the COVID-19 pandemic. In addition, the Group had to absorb the cost of an industry wide asset finance fraud and the write down of a property asset, together totalling £5.9m. 

Given the success of the vaccination programme, the Group was able to make a phased return to working from our offices, while adopting an Agile Working Policy. Employees gradually started to come into the office throughout the summer to meet clients and this increased in frequency until the office was fully occupied in October. 

It was pleasing to see the levels of activity in both our offices and on the streets of London returning. However, I believe that working practices may not for a long time, if ever, be the same again, and perhaps we may have even witnessed a modern-day industrial revolution. It is therefore important that we embrace this change and ensure that we continue to deliver the highest levels of client service in all of our businesses, regardless of which format or channel our clients prefer to interact with us. We must also strive to make agile working a benefit to the business and our employees and in time examine the opportunities that it will present, allowing us for example to be even more relevant on a national scale. Moreover, we should continue to seek out efficiencies that can be realised. However, this must not be at the expense of training and equipping our next generations with the skills and experiences to take the Group forward.

Highlights

In 2020 the Group articulated a medium term strategic and capital allocation plan. This was titled "Future State". During 2021 the Group made good progress on its plan to deliver this Future State.

On 1 April the acquisition of Asset Alliance Group Holdings Limited ("Asset Alliance or AAG"), a market leading provider of leasing solutions for the commercial truck sector, was completed.

The acquisition generated a net bargain purchase of £8.6m. This is sometimes known as negative goodwill but is recorded in the profit and loss account in full on completion. This profit reflects the negotiation of a favourable acquisition price, and I am pleased to report that after nearly a year as part of the Group, Asset Alliance has established itself as an important contributor to the Group's growth. Despite the lack of availability of new trucks because of the well-publicised scarcity of microchips, the business has performed well and is on track to complete its integration plans.

Being a major part of the market for new truck sales, Asset Alliance has managed to negotiate a good supply of new trucks for 2022 and is already placing orders for delivery in 2023. This will enable Asset Alliance to return to growing its balance sheet.

Our lending businesses, after being constrained during the pandemic, returned to growth. Overall, customer loan balances (including assets available for lease) grew by 25% to close the year at a fraction under £2bn, an historic level for Arbuthnot Latham. This growth rate is even more impressive if the balances related to the Tay Mortgage Portfolio, which was sold in March 2021, are added back. This would show a growth in loan balances of 29%.

I was also pleased that we continued to support both our clients and the wider economy by contributing a further £77m to the CBILS and RLS government backed loan schemes. As we restricted our criteria to lending only to our existing clients, we expect to see our experience of fraud on these loans to remain at extremely low levels.

Once again the diversification of our deposit raising activities served the Bank well during the year, as client deposit levels grew to £2.8bn, an increase of 20% and at favourable rates. As a result, the overall cost of our funding declined to 32bps at the end of the year, averaging 39bps across the whole year.

I would like to draw attention also to the performance of our Wealth Management Division. Given that our investment strategies are mainly developed to preserve capital rather than take excessive risks, the performance is most noticeable in times of market turmoil, as our losses are minimised and this is appreciated by our clients. The continued professional diligence in protecting the wealth of our clients has proved attractive and our client AUM balances increased by 18% during the year to close at £1.4bn. This is a continuation of the recent trends which have shown compound annual growth rates of 8% over the past 5 years. 

Finally, our steady progress to provide modern day banking facilities to our clients reached another milestone during the year, when we were able to introduce Apple and Google pay to our suite of products. In the increasingly cashless economy, it is important that we provide all forms of contactless payment mechanisms, which allows us to maintain our strapline that we are a "relationship and service-led bank, powered by modern technology."

Regulation

In my Chairman's Statement last year, I expressed a view that the Government needed to be bold to take advantage of the freedoms that Brexit would offer. Therefore, I was heartened when the PRA published its discussion paper on how smaller banks would be set free from the European rules that had been applied to all banks, regardless of their size or indeed their systemic importance to the overall economy. This project was titled "strong and simple". I hope that this will eventually lead to a regulatory environment whereby the smaller banks can operate under a more proportionate regulatory regime than they currently face. I was pleased to see that despite our limited resources we participated fully in the discussion paper, putting forward a full and reasoned response. 

However, this glimmer of hope was rapidly extinguished when the Bank of England announced in December 2021 its plan for the reintroduction of the countercyclical capital buffer. Not only is this buffer being restored to levels twice those that which existed before the pandemic, but it is also being introduced at a speed that is incomprehensible, especially given the very uncertain economic future. It is clear to me that the current capital buffer regime has created many unintended consequences, as banks simply do not use these buffers in the way that they were originally designed; this is creating a vast quantity of dead capital in the system, which could be put to better use in the wider economy. The accelerated timescale in which the buffer is being brought back will, I fear, lead to mistrust between the banking sector and the Regulator in the future. When asked to lend to help the economy in downturns, banks may in future be apprehensive that they might not be allowed sufficient time to restore this buffer in the recovery phase, thus they will refuse to use the buffer in the first place, making the framework nonsensical.

If the buffer regime is not addressed in the near future, the incremental capital demanded will add approximately 15-20% to our minimum requirement and will consequently reduce our return on capital by a proportionate amount. The Board has considered the reintroduction of this capital buffer and feel that given the current opportunities that exist for the businesses across the Group, it would be undesirable for our future growth plans to be reduced to accommodate the increased capital requirement. The Group has a number of options available to manage its capital. This may include optimising the revenue generating assets to focus on core strategic areas. Also, the recent and predicted future rises in the Bank of England base rate will generate higher than planned profit reserves.

Board Changes and Personnel

During the year there were no changes to the Board. I would like to thank my colleagues on the Board for their continued helpful and committed collaboration despite the difficulties and restrictions on being able to meet face to face. Since the year end, we have announced that Nigel Boardman has been appointed as Deputy Chairman of Arbuthnot Latham & Co., Ltd. I wish him well in his new role.

Also, Sir Christopher Meyer has informed the Board of his intention to retire from the Board at the forthcoming AGM. He has been with us for fourteen years and I will miss his wise counsel and his entertaining welcome speeches at our annual reception party. I wish him well for the future.

Finally, I would like to pay tribute to Ruth Lea, who after sixteen years with the Group has decided to retire. Ruth served nine years as a Non-Executive Director and a further seven years as a farsighted senior economic advisor. I wish her otium cum dignitate.

As always, the progress of the Group reflects the hard work and commitment of our members of staff. I believe that our employees have continued to respond well in these difficult circumstances. On behalf of the Board, I extend our thanks to all of them for their efforts in 2021.

Dividend

The Board announced on the 18 February 2021 that it would pay a special dividend of 21p in-lieu of the final dividend relating to 2019 that was cancelled following guidance from the PRA. Subsequently the Board also declared a second interim dividend of 16p (nil: 2020), which was paid on 24 September 2021. Additionally, the Board is recommending a final dividend of 22p to be paid on 31 May 2022 to shareholders on the register at close of business on 22 April 2022. This gives a regular total dividend excluding the special dividend for the year of 38p and a total dividend for the year of 59p (nil: 2020).

Ukraine

The deplorable events currently taking place in Ukraine have brought to light the fact that many private banks and institutions have developed considerable client relationships with Russian wealth. 

All businesses engaged in any kind of international work must reflect on what Russia's invasion of Ukraine means for their operations and relationships. Arbuthnot Latham has always had very limited appetite to have clients with high risk factors, and this includes Russian clients, whether based in or outside of Russia. Well before the invasion of Ukraine, we had classified Russia as a high risk country and we would only take on clients with any links to Russia in exceptional circumstances and where their financial activities were straightforward. We have also never operated a Russian desk. This longstanding approach means our exposure to Russian clients of any description is limited to only seven out of our total client base of six thousand.

For the avoidance of doubt, we have no clients that have been included or mentioned in any of the Government sanctions, and we do not and will not work with individuals or entities that could reasonably be seen to be controlled by, under the influence of, or connected with the Russian regime.

Outlook

It appears that given the success of the vaccination programme, the economy is returning to sustained growth. However, in addition to the situation in Ukraine, the macro-economic outlook appears to have several headwinds, the most significant being the rising rate of inflation. This is currently being caused by supply side factors but could migrate to a wage inflation cycle, which may become even more serious. The Bank of England's response of raising interest rates will have a beneficial impact on the Bank's revenues in the short to medium term. 

In the meantime, we remain focused on delivering our Future State strategy.

Strategic Report - Business Review

Arbuthnot Latham & Co., Ltd has reported a profit before tax and Group recharges of £15.3m (2020: £8.3m profit). Included in the result are a number of individual items that should be noted. Firstly, the Group acquired AAG, a business which provides vehicle finance and related services, predominantly in the truck & trailer and bus & coach markets. Operating from five locations, it is the UK's leading independent specialist in commercial vehicle financing with over 4,000 vehicles available to lease. The transaction completed on 1 April 2021 for a purchase price of £10.0m. The discount against the net assets resulted in a bargain purchase credit to the income statement of £8.6m.

The most significant fair value adjustment arose from the valuation of the leased truck fleet. The global shortage of computer chips, which are used in the manufacture of vehicles, has curtailed the supply of new trucks and therefore increased the market value for second-hand vehicles. Upon acquisition the adjustment to the asset values was an overall average increase of 15.95% on the carrying value of the truck fleet resulting in an uplift totalling £19.2m.

The acquisition of AAG is a significant addition and complements the Group's continued diversification away from consumer finance to specialist commercial finance as part of the "Future State" vision. The "Future State" forms the Group's key objective of generating sufficient profits and capital whilst making sure employees and shareholders are suitably rewarded.

Secondly, during the year the Group completed the sale of one of its residential mortgage portfolios known as Tay Mortgages to 5D Finance Limited, a subsidiary of OneSavings Bank plc. The portfolio consisted of the remaining mortgage accounts from the acquisition made in December 2014 related to the Dunfermline Building Society administration. At the time of sale customer loan balances totalled £54.9m, which were sold for £53.8m, representing 97.9% of the outstanding loans. Upon sale the Group released a credit to the profit and loss account for the remaining original discount resulting in a gain on sale of £2.2m.

Despite the sale of the Tay portfolio, the Group's client assets (Customer Loans and Assets Available for Lease) grew 25% to finish the year at £2.0bn, with loan book growth from the Banking and specialist lending businesses. The Group continued its long-established strategy to hold high levels of liquidity, with lending growth matched with growth in deposits of 20% to finish the year at £2.8bn.

Credit provisions for the year were £3.2m (2020: £2.8m). As a result of the UK economy emerging from the pandemic and showing signs of recovery, the Bank's future economic scenarios as part of its IFRS9 expected credit loss assessment resulted in a release of provisions. This release was largely attributable to assumptions on the UK Property market compared to the view at the previous year-end. The Bank has applied average growth of 1.2% compared to a 5.5% decline in 2020 for its UK property-based lending.

Also included in credit provisions is a net £2.1m charge for Arena TV Limited, an outside broadcast equipment provider that collapsed in November 2021 and is currently under investigation for an alleged sophisticated fraud affecting 54 other lenders. Through its specialist lender, Renaissance Asset Finance, the Group had financed a portfolio of filming equipment. This charge represented the Group's total exposure to the company and no further impairments are expected.

The Bank welcomed the increase in the Bank of England base rate in December. However, this had limited effect on the 2021 results with the rate remaining at the historically low rate of 0.1% for most of the year. Arbuthnot Latham's cautious approach to liquidity, by maintaining high levels of cash reserves at the Bank of England, as opposed to placing them in the higher yielding wholesale money markets or operating at higher loan to deposit ratios, meant that the Bank had substantially lower revenues. However, this approach has protected the Bank during periods of economic uncertainty.

Following a strategic review of its international business in the prior year, the Bank closed its Dubai office in the year, with operations ceasing in May 2021. Where the client relationship has been retained, the assets continue to be held in London, but where the client has decided to seek alternative providers, the business has worked to ensure a smooth transfer of their assets and business.

Following a return to profitability, the Group was able to reward high performing staff with discretionary bonuses totalling £6.1m for the period.

In December 2021 the Bank of England announced an increase to the Counter Cyclical Capital Buffer to 1% effective from December 2022 and also indicated that a further increase of 1% will be introduced in June 2023. The Bank is currently reviewing its strategy, forecast regulatory capital and asset allocation in order to manage its deployed capital and maximise returns.

Banking

The Banking business, including Private & Commercial Banking, recorded strong growth across client acquisition, deposits and lending in 2021. 

The Bank's deposits grew £465m to finish the year at £2.8bn, equating to a 20% increase year on year, with a continued emphasis on attracting and generating high quality client relationships. The cost of deposits reduced as older higher priced deposits matured and were replaced at lower market rates.

Net loan growth for the year was £263m, resulting in a 23% increase year on year, with a year-end loan book of £1.4bn. During the period the Bank intentionally repositioned its lending strategy towards more capital efficient lending. The Bank also participated in the Government sponsored lending schemes; the (now closed) Coronavirus Business Interruption Lending Scheme ("CBILS") and more recently the Recovery Loan Scheme ("RLS"). The amount issued under these schemes represented a small proportion of the overall lending in the year, but allowed the Bank to support additional businesses through the pandemic. The Bank has also been approved to participate in the extension to the RLS in 2022. 

During the year the Bank agreed terms to originate and sell loans to a third party. The majority of the loans will be 100% risk weighted commercial investment loans. The strategy leverages the Bank's expertise in the specialist commercial lending sector. However, it also enables the Bank to continue to provide funding to clients where it would not otherwise be attractive due to capital consumption as part of the "Future State" vision.

The ongoing strategy to not compromise its credit risk appetite for the sake of growth continued to minimise loss rates. New lending showed signs of downward pressure on pricing in certain asset classes namely residential investment property lending. However, the Bank continued to support clients who valued the service-led proposition rather than low rates.

Wealth Management

Assets under Management ("AUM") increased to £1.4bn with record gross inflows, 67% higher than the prior year, contributing to 18% net growth in AUMs year on year. 

The portfolio strategies benefited from equity market returns and active management that tilted portfolios toward sectors benefiting from the reopening of the economy. At the year-end all model portfolios were positive in absolute terms, with double digit returns observed for medium and higher risk level core services.

Wealth Planning continued its strategy of event based financial planning with clients paying for advice on a transactional basis with no ongoing fees attached. The proposition generated revenue of £0.4m. The business continued to offer bespoke advice delivered through a combination of face to face and virtual client meetings.

Mortgage Portfolios

After the sale of the Tay Portfolio in February 2021, balances for the Santiago Portfolio were £178.1m at the year-end. The portfolio continues to perform to expectations, with no active COVID payment holidays at the year end.

Arbuthnot Commercial Asset Based Lending ("ACABL")

ACABL reported a profit of £4.7m (2020: £2.0m).

As business activity increased in the wider economy, ACABL continued to experience strong demand for its products and enjoyed success in the transactional MBO and acquisition market.

At the year-end, the business reported drawn balances of £182.1m with a further £73m available for drawdown equating to an 82% increase from the prior year.

ACABL completed 33 new transactions with £160m of facilities written in the year, representing a 74% increase on the previous year. The average deal size increased from £4.3m to £4.8m with a total client base of 76 at the year-end. Facility limits increased 40% on the prior year to £384m (2020: £244m).

Following accreditation by the British Business Bank in 2020 to provide CBILs and then loans under the RLS earlier in the year, ACABL wrote 25 CBIL loans totalling £25.9m and 10 RLS loans totalling £21.2m to both existing clients and as part of financing structures to attract new clients. 

The business received £1.3bn in debtor receipts in the year, up from £740m for the prior year. The number of client payments processed during the year exceeded 9,000, totalling £1.3bn, resulting in an annual increase of 83%.

Renaissance Asset Finance ("RAF")

RAF reported a loss of £0.1m (2020: profit of £2.1m), with balances as at the year-end of £97.1m (2020: £91.9m).

The business experienced strong demand for its asset finance facilities with new business advances totalling £55m for the year, along with new business proposals and acceptances operating at pre-pandemic levels as confidence returned to the economy. However, supply chain issues for business assets, as a result of market dislocation, continued to prolong the deal origination process.

Loans under forbearance measures fell from their peak in 2020 and were confined to the London purpose-built taxi market. These exposures continue to fall as the London taxi market reopens.

Included in the result is a net £2.1m impairment charge for Arena TV, an outside broadcast equipment provider that collapsed in November, and is currently the subject of an investigation for alleged fraud. RAF was part of a group of 55 lenders, where industry wide losses have been estimated to be £282m. The charge represents the total exposure to the borrower.

Arbuthnot Specialist Finance ("ASFL")

As at the year-end the loan book exceeded £10.1m compared to £6.0m for the prior year. The business reported a loss of £1.0m (2020: loss of £1.0m).

Following a restructure of the management team in the first half of the year, the business made progress towards its relaunch planned for the first half of 2022, where it will complement the Group's "Future State" strategy as a specialist commercial lender. At the year-end business flow was positive with a strong pipeline of business building for 2022.

Asset Alliance Group ("AAG")

AAG was acquired by the Group on 1 April 2021 with assets available to lease totalling £136.9m.

As at 31 December 2021 AAG had assets available for lease totalling £121.6m. The total value of own book lending and leasing of assets since acquisition amounted to £33.8m, with brokered lending of £30.0m.

The worldwide computer chip shortage resulted in an industry-wide reduction in the availability of new vehicles, which has curtailed AAG's ability to grow in 2021. In the absence of new assets, the business continued to support its customers via contract extensions. This has however resulted in an increase to the average age of the fleet and consequently an additional cost to maintaining the assets. Where mutually acceptable, the business has negotiated with its clients to share the increased running costs. However, the shortage of new assets has resulted in an increased demand for good quality, second-hand assets, driving strong performance from the truck sales division with an underlying profit of £6.7m from the sale of trucks and trailers since acquisition. This profit has already been included in the bargain purchase calculation as part of the fair value uplift at acquisition and is therefore reversed in the consolidated accounts.

In the second half of 2021 the business engaged in positive dialogue with the vehicle manufacturers to secure orders for 2022 and 2023, which will allow a significant refresh of the fleet. 

Owned Properties

The Group continues to hold a small number of commercial and residential properties both in the UK and Europe. Most notably the refurbishment of the King Street property to a Prime Grade A standard was completed in the year with a marketing campaign to fully let the property already underway in 2022.

Of the Group's three remaining overseas properties that were acquired as a result of defaulted loans, two are in an advanced stage of negotiations, with sales expected to complete in 2022. Included in the result is a write down of £3.8m relating to a property owned in Majorca, following an agreement to sell.

Operations

Throughout 2021 the Bank continued to operate through a mixture of remote working and office-based working, while adapting to the changing environment as a result of the pandemic. Over this time the Bank continued to invest in technologies to provide colleagues with the ability to work effectively and collaborate in a hybrid working model.

During the year the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and Bank of England (BoE) published their final policy papers on building operational resilience, with the overarching assumption that disruptions will occur.

In line with the guidance issued, the Bank continued to focus on ensuring that the design of systems and operational plans were 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.

New accounts opened in 2021 continued to see strong growth, with customer transaction volumes recovering following the reduced activity in 2020. Non-card related payment transaction volumes exceeded 520,000, 34% higher than 2020 and the number of cards in circulation increased by 19% in 2021, whilst the number of card transactions increased by 22% to over 647,000, returning to pre-pandemic levels.

During the year the Bank continued to invest in technology focused on enhancing the client experience, increasing access to services through improved digital channels. Following the successful launch of the Arbuthnot Card App in 2020, the Bank launched Applepay in November 2021, with a subsequent launch of GooglePay in January 2022.

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 2021 the business launched its sustainability project with a cross section of staff from the organisation involved in the project.

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.

The Bank of England Base Rate which was at 0.1% for most of the year continued to have an adverse effect on the Group's profit. The historically low rate is estimated to have cost the Group £11.5m, with majority of loans to customers yielding reduced interest income. Despite the reduction in revenues the Group continued its cautious approach to liquidity, maintaining low loan to deposit ratios and keeping high levels of cash reserves at the Bank of England. Surplus liquidity resources above the minimum Regulatory requirement operated between £525m and £687m throughout the year resulting in £2.2m of lost revenue.

During the 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.

Total credit provisions for the year were £3.2m. However, the majority of this charge related to one case of £2.1m incurred by one of the Group's specialist business, 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.

The Bank revised its future economic scenarios modelled for its expected credit losses. In the prior year a decline in UK property values of 5.5% was modelled as part of the expected credit loss assessment. For the year ending 2021 the equivalent assumption was an increase of 1.2%, which resulted in a release of provisions totalling £0.3m.

In the previous financial year, as a result of the Group reporting a loss, no discretionary bonuses were awarded to staff. However, for 2021 with a return to profitability, management intend to recognise and reward its high performing staff with discretionary bonuses. The total charge for the year in this respect was £6.6m (2020: £nil).

Total operating income earned by the Group was £88.7m compared to £72.5m for the prior year. The average net margin on client assets was 4.1% (2020: 4.1%). Included in operating income is revenue from AAG leased assets. This has contributed 0.5% to the average yield generated from the Group's assets.

The Group's operating expenses increased to £93.4m compared to £71.4m for the prior year. This was due to three factors. Firstly, staff costs increased by £9.3m, including £6.6m as noted above for discretionary bonus payments. Secondly, £3.8m was due to the write down of the property owned in Majorca and lastly, £7.8m was due to recognition of nine months of costs for the Asset Alliance Group following its acquisition in April.

Balance Sheet Strength

Total assets increased by £0.5bn to £3.4bn (2020: £2.9bn), £282m was due to loan book growth from both the Core Bank and the Specialist Lending subsidiaries with the remaining growth as a result of the acquisition of AAG, which contributed £122m of leased assets. 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 (2020: £6.6m). Also included in other assets are £87.1m of properties classified as inventory (2020: £84.7m). These properties have been fully refurbished with a view to sell in 2022.

The net assets of the Group now stand at £13.15 per share (2020: £12.70). The increase is largely due to the £5.6m increase in the value of the Secure Trust Bank shares before they were sold, which was recorded in Other Comprehensive Income.

Segmental Analysis

The segmental analysis is shown in more detail in Note 45. 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.

During the year the Group started to report the Wealth Management segment separate from the Banking segment. This is the level at which management decisions are made and how the Group will manage the overall business segments going forward. The comparative numbers for the Banking division have therefore been restated to exclude the Wealth Management segment.

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

Banking reported a profit before tax of £6.5m (2020: £4.1m). This equated to a 59% increase from the prior year. Net interest income grew by 7% due to increased lending and deposit balances, both growing 23%.

There was a net release of provisions of £0.4m compared to a charge of £1.6m for the prior year. This was due to revised economic scenarios applied in the expected credit loss models due to a more positive future outlook. The most significant and relevant to the Banking book was a net growth rate of 1.2% for property compared to a decline of 5.5% for the prior year.

Operating costs increased by £2.9m largely due to bonus accruals awarded after the year end in recognition of the contributions and achievements of the business's high performing staff.

Customer loan balances increased by £262.3m to £1.4bn and customer deposits also increased to £2.7bn (2020: £2.2bn). The average loan to value was 51.7% (2020: 53.4%).

Wealth Management reported a loss before tax of £2.1m (2020: loss of £1.8m). Fee income grew by 13% largely due to a year on year increase in AUMs of 18%, which finished the year at £1.4bn (2020: £1.1bn).

The Mortgage Portfolios reported a profit of £5.6m (2020: £4.2m). The increase 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, however, as a consequence of the sale net interest income for the business unit fell 20% compared to the prior year.

The remaining Santiago mortgage portfolio performed as expected generating a gross yield of 2.8%. The year-end balance of the portfolio was £178.1m.

Renaissance Asset Finance recorded a loss before tax of £0.1m (2020: profit of £2.1m).

Net interest income remained flat at £5.9m (2020: £6.0m). Operating expenses increased by £1.0m mainly due to higher staff costs.

Impairment charges against the London purpose-built taxi market reduced as taxi operators reported improving business conditions and loans under forbearance measures reduced, along with a more favourable economic outlook as part of the IFRS9 expected credit loss assessment. However, the net impairment charge for the year increased to £2.3m (2020: £1.2m) largely due to a charge for Arena TV Limited, an outside broadcast equipment provider that collapsed in November. The charge represents the total exposure to the borrower.

Customer loan balances increased by £5.2m or 6% with the majority of the growth in the second half of the year. The average yield for 2021 remained flat at 8.9%.

ACABL recorded a £4.7m profit before tax (2020: £2.0m).

Client loan balances increased 109% to £182.1m at the end of the year (2020: £87.3m), with issued facilities increasing to £384m (2020: £244m). The higher client balances throughout the year resulted in an increase in operating income of £4.4m. Operating expenses increased by £1.6m as staff were hired to support the growing business.

Included in the year-end loan balance were government backed CBIL and RLS loans totalling £62.8m.

ASFL recorded a loss before tax of £1.0m (2020: loss of £1.0m).

The management team was restructured in the first half of the year and progressed towards its relaunch, planned in the first half of 2022.

Customer loan balances closed the year at £10.1m (2020: £6.0m).

AAG

AAG results are based on the nine months since acquisition. The business generated a profit before tax of £3.8m for the period.

The acquisition of AAG completed on 1 April 2021 for a purchase price of £10.0m. The discount against the net assets resulted in a bargain purchase credit to the income statement of £8.6m.

The most significant fair value adjustment arose from the valuation of the leased truck fleet. The global computer chips shortage, used in the manufacture of vehicles, has curtailed the supply of new trucks and therefore increased the market value for second-hand vehicles. Upon acquisition the adjustment to the asset values was an overall average increase of 15.95% on the carrying value of the truck fleet resulting in an uplift totalling £19.5m. Since acquisition £5.8m of this uplift has been realised through sales.

As at 31 December 2021 the business had £121.6m of assets available for lease, compared to £136.3m at acquisition.

The aggregated loss before tax of other divisions was £2.3m (2020: loss of £1.3m). 

Reported within the other divisions in other income was rental income on our Property portfolio of £0.5m (2020: £0.5m) and an adjustment to the RAF deferred consideration of £0.6m, along with dividends received totalling £0.1m.

The Group costs increased to £10.6m (2020: £9.4m). The Group received £0.4m dividends from STB in 2021, while there was no dividend in 2020. 

The increase in operating expenses is mainly due to the accrual for bonuses in 2021 of £1.4m (2020: £nil).

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 are no longer adequate. The ICAAP brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. The Group's regulated entity is also the principal trading subsidiary as detailed in Note 44.

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 it 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 risks that may arise from the macroeconomic and competitive environment.

Russia Ukraine Conflict

On 24 February 2022 Russia initiated an invasion of neighbouring Ukraine. The global community reacted with a series of severe sanctions against Russia. As a global supplier of commodities the effects of the sanctions and war in the region is undetermined, however, it is likely to have a knock on effect to global economies and specifically European nations with a reliance on Russian exports. Global financial markets have reacted with falling stock markets along with significant rises in oil and gas prices. Inflation is expected to increase above previous expectation. The situation could have significant geopolitical implications, including economic, social and political repercussions on a number of regions that may impact the Group and its customers.

Coronavirus

The COVID-19 pandemic continued to have a significant impact on all businesses around the world and the markets in which they operate in 2021. The pandemic has also increased uncertainty for the longer-term economic outlook, adding to existing uncertainties stemming from Brexit.

Uncertainty remains around the impact of possible future variants on both domestic and global economies. As in the prior year, the business continued to operate with staff working remotely, in line with Government guidelines, for much of 2021.

The global economic impact from COVID-19 has improved, with developed economies showing signs of recovery following the most recent wave due to the Omicron variant. The strength of further recovery depends crucially on the degree to which COVID-19 vaccines and treatments allow a return to pre-pandemic levels of economic activity.

Brexit

The Brexit transition period came to an end on 31 December 2020 and the EU and UK agreed the Trade and Cooperation Agreement on 24 December 2020. There is still some uncertainty around the long term consequences of Brexit. Following the closure of the Dubai office during the year, all the Group's income and expenditure is now based in the UK.

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 £1.9bn (2020: £1.6bn). 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.

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 £87.1m. 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 Group is on track to comply with the initial requirements prior to the implementation date of 31 March 2022.

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.

Regulatory change also exists as a risk to the Group's business. Notwithstanding the assessments carried out by the Group to manage regulatory risk, it is not possible to predict how regulatory and legislative changes may alter and impact the business. Significant and unforeseen regulatory changes may reduce the Group's competitive situation and lower its profitability.

Strategic Report - Non-Financial Information Statement

The table below sets out where stakeholders can find information on non-financial matters, as required by Sections 414CA and 414CB of the Companies Act 2006, enabling them to understand the impact of the Group's key policies and activities.

Strategic Report - Stakeholder Engagement and s.172 Report

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 32 and in the Corporate Governance Report on page 37.

The Directors are conscious that their decisions and actions have an impact on stakeholders. 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 March 2021 the Board resolved that the Company should pay a special dividend to replace the dividend that was withdrawn at the request of the regulators at the outset of the pandemic. This reflected new PRA guidance on the suitability and appropriate level of distributions. The Board also determined that no dividend should be paid in respect of earnings for 2020. This seemed an equitable share of the risks and rewards as the employees of the Group received no bonuses or pay rises in the same year. In seeking to restore this equilibrium in July 2021, by which time the future prospects of the business were more positive, the Board declared an interim dividend at the same level as that paid in 2019.

The Board decided to maintain significant investment in modern technology in order to grow the Group's businesses. During the year, it approved further investment in the Bank's core banking system to ensure that the platform is capable of supporting its future growth and development.

A further illustration of the balancing of the interests of our stakeholders in their long-term interest was the decision in October 2021 to approve an arrangement to originate and sell loans to a third party, the majority of which will be 100% risk weighted commercial investment loans. In addition to leveraging the Bank's expertise in the specialist commercial lending sector, this decision was made in order to grow towards the "Future State" vision. The Future State is the name given to the Board's key objective of generating sufficient profits and capital to keep the Bank growing at a good pace whilst making sure employees and shareholders are suitably rewarded, once our capital has been deployed.

Interests of the Company's employees

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 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. Early on in the pandemic, the decision was taken to prioritise job retention and not to furlough any employees, whilst awarding no bonuses for 2020, in order to provide reassurance to employees in an uncertain time and to protect the business. There were regular communications with staff during the year in order to check on their wellbeing and to communicate the intention to reward them for their hard work and dedication over the period with a resumption of bonuses for 2021, following the return to profitability, and on plans for a return to the office. The results of an employee engagement survey conducted over the summer were reported to the Board; this achieved an 89% response rate, 91% of whom were proud to work for the business. The Board also endorsed a new Agile Working Policy, implemented from October, to enable the business and its employees to benefit from a practical combination of office and remote working.

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 during the year providing support where possible, including with a return to meetings in the office between October and mid-December and again since 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

Following a strategic review of its international representation, the Board concluded that the Dubai office no longer fitted with its future growth plans and so took the decision to close the branch on 31 May 2021. When the office opened in 2013, it represented a good opportunity for the business to build assets under management. At the time, around 85% of the Group's capital was employed in Secure Trust Bank PLC, but over time opportunities were realised to grow AL, deploying capital through lending in the UK. The Dubai business generated a good volume of client relationships for the Bank, but its contribution versus its high cost base made it unviable for the Bank's future growth aspirations. Existing relationships were successfully migrated to the Bank's London based teams for continued client servicing and our employees were offered equivalent jobs in London.

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

In September 2021, the Board reviewed a Climate Change Spotlight, noting the initiatives being taken including an Environmental Social and Governance project. This was established, given the Bank's exposure to climate change transition risk as the UK evolves to a low carbon economy through 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 pages 25 and 26 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 on page 3 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.

Strategic Report - Sustainability Report

The Group is publishing its first Sustainability Report, demonstrating its commitment to ensuring its business activities have a positive impact not just for clients and shareholders, but also for colleagues, society, and the environment. Two of our key business principles, reciprocity and stability, rely on us 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.

This means operating with a strong emphasis on our environmental and societal impact, and on our governance procedures.

The Group approaches ESG by measuring 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 underlie 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, is fundamental to our success as a business.

Employees

Our colleagues and culture set us apart from others in our industry. Our high colleague engagement scores are a testament to this - 91% of colleagues state they are proud to work for the Group. As a relationship-led bank, our colleagues are at the centre of our consideration. Along with a range of structured internal wellbeing programmes, we have also introduced agile working, reflecting the Board's view that there are substantial benefits from balancing office working with working from home. The Agile Working Policy was introduced in October 2021 to enable the business and its employees to benefit from a practical combination of office and remote working. We also introduced revised the Personal Appearance Policy to reflect both the changing nature of the workplace and our broad and diverse client base. In November 2021, we conducted our first Diversity & Inclusion Survey, the results of which will be used to create an even better working environment for employees and to help attract the best talent.

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.

Community

The Group supports philanthropy. We give back to our local communities and to causes we believe in as a group and locally. We have supported young entrepreneurs for six years via our Inspiring Innovators programme and promote fundraising throughout the group.

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, the Board of Arbuthnot Latham has recently approved an Environmental Management policy which sets outs the Group's high-level approach to managing environmental issues and provides requirements in helping the bank to achieve 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 ongoing 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.

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 2021 for the Company and its subsidiaries, including Asset Alliance Group Limited which was acquired on 1 April 2021. 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. A full 12 months' emissions have been reported for AAG in order to make year on year comparison more meaningful in future years.

Base Year

The Base Year chosen was 2019 because 2020 was not considered to provide a representative comparison year due to the impact of the pandemic on office working and travel.

Reporting Methodology

• Data has been collected for electricity, gas and transport

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

• Data was collected specifically for the purpose of SECR reporting

• The 2019 and 2021 UK Government Conversion Factors for Company Reporting were used for all calculations of Carbon emissions.

• Data were estimated where necessary, as set out below.

Estimated Data

The following data were estimated in 2021:

Operational Scopes

Energy consumption for the commercial office properties owned by the Group has been included in 2021 where floors in buildings were unoccupied by tenants and the responsibility for energy consumption returned to the Group since 2019.

Notes:

The figures reported above have been calculated and independently verified by Carbon Decoded. 

The increased carbon tonnage of 342 tonnes, compared to 2019, is stated after the inclusion of AAG which was responsible for 505 tonnes. 

Intensity Ratio

An intensity ratio is used to enable year on year comparison. As the Group is an office-based business, 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 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

In 2021 the number of staff working in the Group's offices was restricted by the impact of the pandemic and the focus was on ensuring their safety and providing our clients with the best possible service. While this limited the opportunities for energy efficiency actions, we were able to save 45% of our baseline energy consumption during the first half of 2021 through the implementation of good energy management practices, such as ensuring that all non-essential equipment was switched off. This necessarily changed as staff returned to the office, initially on a voluntary basis, from 19 July 2021. 

In November 2021 we identified that air conditioning fans coils at the Company's Head Office in Wilson Street, London, were staying on at night when the offices were unoccupied. A trial to manually switch off the fans identified a potential 36% saving on 2021 consumption figures. We are now investigating an automated solution. As a business the Group understands the importance of reducing its carbon emissions; in 2022 we are looking to install sub-metering at our Head Office. This should enable us to understand better where and when energy is being used and allow us to produce an energy saving strategy.

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. 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 scores (NPS).

Policies

The Group has adopted a wide range of policies that straddle the five pillars to ensure that staff 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 21. 

Our transition towards sustainability

We are taking steps, guided by our five pillars, to help us to become more sustainable. Initiatives planned to be taken during 2022 and beyond will be set out on the Group's website in due course.

Group Directors Report

The Directors present their report for the year ended 31 December 2021.

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 7 to 28.

Corporate Governance

The Corporate Governance report on pages 34 to 41 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 55 of the financial statements. The profit after tax for the year of £6.8m (2020: loss of £1.3m) is included in reserves. The Directors recommend the payment of a final dividend of 22p (2020: Nil) per share. This represents total dividends for the year of 59p (2020: Nil), including: the special dividend of 21p paid on 19 March 2021, being equal to and in lieu of the dividend that was declared in March 2020 based on the profits reported in 2019 and which was subsequently withdrawn following the guidance issued by the PRA at that time; and the second interim dividend of 16p (2020: Nil) paid on 24 September 2021. The final dividend, if approved by members at the 2022 Annual General Meeting ("AGM"), will be paid on 31 May 2022 to shareholders on the register at close of business on 22 April 2022.

Directors

The names of the Directors of the Company at the date of this report, together with biographical details, are given on page 29 of this Annual Report. All the Directors listed on those pages were directors of the Company throughout the year.

Sir Christopher Meyer will retire from the Board at the Annual General Meeting and does not seek re-election. Sir Henry Angest, and Mr. A.A. Salmon being eligible, offer themselves for re-election under Article 78 of the Articles of Association. Sir Henry and Mr. Salmon have a service agreement terminable on twelve 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 2024. 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 20;

• 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

After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see Note 6 to the financial statements) 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

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 154 and 155. 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 18 March 2022 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 2021, one Director had a loan from Arbuthnot Latham & Co., Limited amounting to £0.5m (2020: £0.5m) and five directors had deposits amounting to £4.0m (2020: £3.9m), all on normal commercial terms as disclosed in Note 43 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 22 and 23.

Engagement with Suppliers, Customers and Others

Information on engagement with suppliers, customers and other stakeholders is given in the Strategic Report on page 23.

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 25 and 26. 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 £20,000 during the year (2020: £10,000), being payment for attendance at political functions.

Branches outside of the UK

During the year Arbuthnot Latham & Co., Limited operated a branch in Dubai, regulated by the Dubai Financial Services Authority. This office closed at the end of May 2021.

Events after the Balance Sheet Date

Details of material post balance sheet events are given in Note 48.

Annual General Meeting ("AGM")

The Company's AGM will be held on Wednesday 25 May 2022 at which Ordinary Shareholders will be asked to vote on a number of resolutions. Whilst it is assumed that shareholders will be able to attend in person, 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 154 to 156.

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 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 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

Arbuthnot Banking Group has a strong and effective corporate governance framework. The Board endorses the principles of openness, integrity and accountability which underlie good governance and takes into account the provisions of the UK Corporate Governance Code, published by the Financial Reporting Council in July 2018 ("the FRC Code"), in so far as they are considered applicable to and appropriate for it, given its size and circumstances, and the role and overall shareholding of its majority shareholder. The Group's banking subsidiary, Arbuthnot Latham & Co., Limited, is authorised by the Prudential Regulation Authority (the "PRA") and regulated by the Financial Conduct Authority ("FCA") and by the PRA. Four of its subsidiaries, Asset Alliance Limited, 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; two other executive directors, Andrew Salmon and James Cobb; and four independent non-executive directors, Nigel Boardman, Ian Dewar, Sir Christopher Meyer and Sir Alan Yarrow. This means that 67% of the Board, excluding the Chairman, comprises non-executive directors whom the Board considers to be independent.

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 sustainability and growth over the longer-term with a culture to match. Investment in resources has been strong and has continued where and as appropriate (including during the COVID-19 pandemic for example), 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, themselves embedded into day-to-day activities. These are integrity, respect, empowerment, energy and drive, and collaboration.

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, including until September 2021 via video conference. It held 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. 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. Since February 2021, the Directors have participated in the regular Board meetings of Arbuthnot Latham as attendees.

The Board was kept fully informed of the arrangements made by management to run the business remotely during the pandemic. The Chairman and Chief Executive continued to be kept fully informed of all material matters through regular discussions with the Chief Operating Officer and other members of senior management during the period of remote working to September 2021 which resumed from mid-December to end of January 2022.

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 Group Head of Compliance or by an external lawyers and accountants. 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 2021 evaluation took the form of a confidential questionnaire which assessed the performance of the Board and its Committees. The questions were set to explore the themes developed 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 feedback was collated by the Company Secretary and discussed by the Board in November 2021 and proposed actions arising were considered in February 2022. The responses were positive, confirming that the Board was of the view that it receives the correct level of insight into and oversight of the Company, both directly to it and in terms of management information and oral updates provided during meetings. Directors also agreed that the Arbuthnot culture set out in the Arbuthnot Principles and Values manifests itself at Board level and in the external view of the Group as a whole. The 2021 evaluation was augmented by a question, seeking responses to the extent to which the Board understands the Group's obligations in relation to ESG matters (including for these purposes diversity, inclusion and climate change) and ensures that its discussions take these factors into account, together with statutory directors' duties. It was confirmed that there is a sensible and appropriate approach towards this developing area which will require future Board focus.

Overview of Compliance with the FRC Code, together with Exceptions

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

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

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

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

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

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

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

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

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

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

Provision 5 - The Board has regard to the interests of all its key stakeholders in its decision making. The Company has fewer than 20 employees, all of whom have direct access to Board members. As such, it has not been deemed necessary to appoint an employee representative to the Board, nor a formal workforce advisory panel, nor a designated non-executive Director. As stated in the s.172 Statement on page 22, one of the non-executive directors of Arbuthnot Latham and its Whistleblowing Champion, has been designated by its board as the director to engage with the Group's workforce.

Provision 9 - Sir Henry Angest carries out the role of Chairman and Chief Executive, given his long-term interest as majority shareholder, itself aligning with the interests of other shareholders. The Group Chief Operating Officer and the Group Finance Director provide a strong, independent counterbalance, ensuring challenge and independence from a business perspective, against the stakeholder focus of the Chairman carrying out his Chairman's role. The Company follows the US model that is very successful in ensuring commercial success with strong corporate governance and stakeholder awareness, having a shared Chairman and CEO, with a separate, empowered, Chief Operating Officer.

Provision 10 ¬ The Board considers Sir Christopher Meyer to be independent, notwithstanding his serving more than nine years, since his views and any challenge to executive management remain firmly independent. Sir Christopher will be stepping down from the Board at the conclusion of the AGM on 25 May 2022.

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

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

Provision 18 - For the purposes of stability and continuity, the Company continues to offer Directors for re-election on a three-year rolling basis in accordance with the Company's Articles of Association and company law. The Directors seeking re-election at the 2021 AGM are Sir Henry Angest and Andrew Salmon who have served on the Board for 36 and 18 years respectively. The contributions of Sir Henry Angest, who beneficially owns more than 50% of the issued share capital, and of Andrew Salmon, an executive director, have been invaluable in the successful development of the Company. Accordingly, the Board fully supports the resolutions for their reappointment.

Provision 19 - Sir Henry Angest's role as Chairman has extended over nine years and is expected to continue for the foreseeable future, given his key role as majority shareholder both in protecting the stability of his and other shareholder interests and in overseeing a balanced and risk-managed approach to growing the business with a view to the longer-term. For this reason he is surrounded by a strong team of non-executives who ensure the protection of all shareholders' interests.

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 page 27, 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 now attends the Board meetings held concurrently with those of Arbuthnot Latham or otherwise via the Group Chief Operating Officer in March. 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. The Board was also updated during the year on Arbuthnot Latham's Managing Financial Risks of Climate Change Framework which sets out the group's approach to managing the financial risks of climate change through its risk management framework.

In November 2021, 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 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 Christopher Meyer and Sir Alan Yarrow. 100% of the Committee's membership therefore comprises non-executive Directors independent in the view of the Board. 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, qualifications 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 2021

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 2021 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 £3.2m for the year ended 31 December 2021. The disclosures relating to impairment provisions are set out in Note 4.1(a) to the financial statements.

Residual Value Risk

The Committee discussed the acquisition accounting treatment of Asset Alliance Group where the area of focus for the completion accounts at 31 March 2021 had been the fair value adjustment for the leased assets and stock and a review of the maintenance provision. It established that the uplift in lease values at that date appeared to have been completely justified by the subsequent asset sales experience where no losses had been made on sales of trucks at the uplifted values.

Property Portfolio

The Group owns three commercial office properties and four repossessed properties. Of these properties, five 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. The investment property is held at fair value on the basis of an internal discounted cash flow valuation, using yields, rental income and refurbishment costs. The Committee discussed the bases of valuation with management and with the auditors who had engaged an outside expert to review management's valuations.

As at 31 December 2021, Arbuthnot Latham's total property portfolio totalled £96.8m. 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.

Going Concern and Viability Statement

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

Other Committee activities

During the year, the Audit Committee received a briefing from Mazars on the BEIS consultation on audit and governance reforms. In November 2021, 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 2022 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 Christopher Meyer and Sir Alan Yarrow. 67% of the Committee's membership therefore comprises independent non-executive Directors. The Group General Counsel 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 2021

The Nomination Committee met once during the year when it assessed and confirmed the collective and individual suitability of Board members. The contribution of Sir Henry Angest remains invaluable in the successful development of the Company. As regards the non-executive Directors' skill sets, 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. Sir Christopher Meyer's wide-ranging experience including as a diplomat at the highest level has provided an important independent measure of challenge to executive management. The Board has benefitted from Sir Alan Yarrow's wise counsel, challenge to management and many years' banking experience in the City of London.

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 2021 and noted that, notwithstanding the continued impact of the pandemic, Directors had been able to carry out sufficient training online.

In November 2021, 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 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 42. The Committee meets once a year and otherwise as required.

The Remuneration Committee assists the Board in determining its responsibilities in relation to remuneration including, inter alia, in relation to the Company's policy on executive remuneration determining, the individual remuneration and benefits package of each of the Executive Directors and the fees for Non-Executive Directors.

The Committee also deals with remuneration-related issues under the IFPRU Remuneration Code of the Financial Conduct Authority. The Remuneration Report on pages 43 and 44 gives further information and details of each Director's remuneration.

Donations Committee

Membership and meetings

The Donations Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Sir Alan Yarrow. The Committee considers any political donation or expenditure as defined within sections 366 and 367 of the Companies Act 2006. It meets as necessary.

Activity in 2021

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, General Counsel 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 2021

The Policy Committee met six 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 Christopher Meyer and Sir Alan Yarrow. 67% of the Committee's membership therefore comprises independent non-executive Directors. The General Counsel acts as its Secretary. The Committee met twice during the year.

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

Remuneration Policy

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

Activity in 2021

The Remuneration Committee met three times during the year. In July it proposed further grants of phantom options to Messrs Salmon and Cobb, as set out on page 144. It also amended the Rules of the Arbuthnot Banking Group PLC Phantom Share Option Scheme 2016 in order to ensure that the Scheme is consistent with regulatory changes made to the IFPRU Remuneration Code since the implementation of the Scheme in 2016, particularly in relation to material risk takers. It made a further change to the Scheme Rules relating to one of the performance conditions, that relating to the payment of dividends. Whilst the Committee is entitled to vary any condition in accordance with the Scheme Rules, specific reference was added to the Rules to its ability to waive the dividend condition, should it consider it appropriate as this is an element that is potentially out of the control of the Board of directors. At subsequent meetings, it reviewed the Company's Remuneration Policy, the level of fees for Non-Executive Directors and the Executive Directors' remuneration, approving the award of bonuses to Messes Salmon and Cobb for exceptional performance in the year and, after due consideration of comparable market rates a salary rise for Mr. 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 2021, 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, following Board approval, 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 2021 was £0.1m (2020: £0.1m).

Details of outstanding options are set out below.

Details of any shares or options held by directors are presented above and on page 144.

The emoluments of the Chairman were £1,268,000 (2020: £1,281,000). The emoluments of the highest paid director were £1,859,000 (2020: £1,281,000) including pension contributions of £35,000 (2020: £nil).

Retirement benefits are accruing under money purchase schemes for two directors who served during 2021 (2020: two directors).

Independent Auditor's Report

Opinion

We have audited the financial statements of Arbuthnot Banking Group PLC (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended 31 December 2021 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Company Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Company Statement of Changes in Equity, the Consolidated Statement of Cash Flows, the Company Statement of Cash Flows, and notes to the financial statements, including a summary of significant accounting policies.

The financial reporting framework that has been applied in their preparation is applicable law and UK- adopted international accounting standards and as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

In our opinion, the financial statements:

• give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2021 and of the Group's profit for the year then ended;

• have been properly prepared in accordance with UK-adopted international accounting standards and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006; and

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

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the "Auditor's responsibilities for the audit of the financial statements" section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council's ("FRC") Ethical Standard as applied to listed entities and public interest entities and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Conclusions relating to going concern

In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

Our audit procedures to evaluate the directors' assessment of the Group's and the Parent Company's ability to continue to adopt the going concern basis of accounting included but were not limited to:

• Undertaking an initial assessment at the planning stage of the audit to identify events or conditions that may cast significant doubt on the Group's and the Parent Company's ability to continue as a going concern;

• Making enquiries of the directors to understand the period of assessment considered by them, the assumptions they considered and the implication of those when assessing the Group's and Parent Company's future financial performance;

• Evaluating management's going concern assessment of the Group and Parent Company and challenging the appropriateness of the key assumptions used in management's forecasts, including assessing the historical accuracy of management's forecasting and budgeting;

• Assessing the sufficiency of the Group's capital and liquidity taking into consideration the most recent Internal Capital Adequacy Assessment Process and Internal Liquidity Assessment Process, and evaluating the results of management stress testing, including consideration of principal and emerging risks on liquidity and regulatory capital;

• Evaluating the Group's Resolution and Recovery plans which includes possible cost saving measures that could be taken in the event circumstances prevent forecast results from being achieved;

• Assessing and challenging key assumptions and mitigating actions put in place in response to the impact of COVID-19 pandemic;

• Reading regulatory correspondence, minutes of meetings of the Audit Committee and the Board of Directors, and post balance sheet events to identify events of conditions that may impact the Group's and the Parent Company's ability to continue as a going concern;

• Considering the consistency of Management's forecasts with other areas of the financial statements and our audit; and

• Evaluating the appropriateness of the directors' disclosures in the financial statements on going concern.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group's and the Parent Company's ability to continue as a going concern for a period of twelve months from when the financial statements are authorised for issue.

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.

In relation to Arbuthnot Banking Group PLC's reporting on how it has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors' statement in the financial statements about whether the director's considered it appropriate to adopt the going concern basis of accounting.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

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

These matters, together with our findings, were communicated to those charged with governance through our Audit Completion Report.

In the prior year, our audit report included a significant risk in relation to Effective Interest Rate ("EIR") accounting within Revenue Recognition. We determined that the nature and complexity of the adjustment no longer contribute significantly to our audit efforts and therefore is no longer considered as a key audit matter.

Our application of materiality and an overview of the scope of our audit

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