Arbuthnot Regulatory News (ARBB)

13 Mar 2008 07:01

Arbuthnot Banking Group PLC13 March 2008 ARBUTHNOT BANKING GROUP PLC Final results for the year to 31 December 2007 Arbuthnot Banking Group PLC ("Arbuthnot") today announces audited final resultsfor the year ended 31 December 2007. Arbuthnot is the holding company forArbuthnot Securities Limited, Arbuthnot Latham & Co., Limited and Secure TrustBank PLC. Financial Highlights restated 2007 2006 IncreaseOperating income £68.8m £58.2m +18%Profit before tax and exceptional items £8.6m £7.6m +13%Profit before tax £8.6m £14.1m -39%Basic earnings per share (pre exceptional items) 23.8p 32.0p -26%Basic earnings per share 23.8p 63.0p -62%Total dividend per share 33.0p 32.5p +2%Total assets £414m £365m +13%Total equity £42.5m £42.2m +1%Tier 1 & 2 Capital £46.7m £48.2m -3% Commenting on the results, Henry Angest, Chairman and Chief Executive ofArbuthnot, said: "Arbuthnot Banking Group made good progress in 2007 with underlying profitsincreasing from 2006. We are particularly pleased that Arbuthnot Securitiesagain substantially raised its profits and that the liquidity of the two bankingsubsidiaries remained strong throughout the year. " Press enquiries: Arbuthnot Banking Group PLC: Tel: 020 7012 2400 Henry Angest, Chairman and Chief ExecutiveAndrew Salmon, Chief Operating OfficerPaul Sheriff, Group Finance Director Maitland: Tel: 020 7379 5151Emma BurdettLydia Pretzlik Operational Highlights Investment Banking - Arbuthnot Securities • Operating income up 35% to £29.3m (2006: £21.7m)• Profit before tax and exceptional items up 62% to £8.1m (2006: £5.0m)• 49 transactions including five IPOs in 2007• Corporate client list increased from 71 to 85 Private Banking - Arbuthnot Latham • Operating income up 27% to £17.3m (2006: £13.6m)• Profit before tax and exceptional items increased to £1.5m (2006: £0.3m)• 8% asset growth, 12% deposit growth and 22% loan book growth• Customer deposits to loan ratio 1.9:1. Committed bank lines undrawn throughout 2007 Retail Banking - Secure Trust Bank • Operating income reduced by 3% to £22.8m (restated 2006: £23.6m)• Unsecured loan book reduced by 30% to £21.2m (restated 2006: £30.4m)• Profit before tax and exceptional items reduced by 25% to £4.6m (restated 2006: £6.1m) Switzerland • Regulatory submission made in December 2007 The 2007 Annual Report will be posted and available on the Arbuthnot BankingGroup website http://www.arbuthnotgroup.com/Presentations.aspx on 26 March 2008.Copies may be obtained from the Company Secretary, Arbuthnot Banking Group PLC,Arbuthnot House, 20 Ropemaker Street, London EC2Y 9AR. CONSOLIDATED INCOME STATEMENT Profit Profit before Year before Exceptional Year exceptional Exceptional ended exceptional items ended items items 31 December items 31 December 2007 2007 2007 2006 2006 2006 restated restated Note £000 £000 £000 £000 £000 £000 Interest and similar income 23,758 - 23,758 18,973 - 18,973Interest expense and similarcharges (12,314) - (12,314) (9,042) - (9,042) -------- -------- -------- -------- -------- --------Net interest income 11,444 - 11,444 9,931 - 9,931 -------- -------- -------- -------- -------- --------Fee and commissionincome 5 54,014 - 54,014 48,417 - 48,417Fee and commission expense (1,107) - (1,107) (4,241) - (4,241) -------- -------- -------- -------- -------- --------Net fee and commissionincome 52,907 - 52,907 44,176 - 44,176 -------- -------- -------- -------- -------- --------Gains less losses fromdealing in securities 4,442 - 4,442 4,102 - 4,102 -------- -------- -------- -------- -------- --------Operating income 68,793 - 68,793 58,209 - 58,209 -------- -------- -------- -------- -------- --------Gain on sale of ArbuthnotHouse - - - - 12,623 12,623Impairment losses onloans and advances 15 (2,237) - (2,237) (1,986) (2,900) (4,886)Operating expenses 6 (57,977) - (57,977) (48,672) (3,212) (51,884) -------- -------- -------- -------- -------- --------Profit before income tax 8,579 - 8,579 7,551 6,511 14,062Income tax expense 8 (2,792) (2,792) (1,531) (1,953) (3,484) -------- -------- -------- -------- -------- --------Profit for the year 5,787 - 5,787 6,020 4,558 10,578 -------- -------- -------- -------- -------- --------Attributable to:Equity holders of the Company 3,555 - 3,555 4,716 4,558 9,274Minority interest 2,232 - 2,232 1,304 - 1,304 -------- -------- -------- -------- -------- -------- 5,787 - 5,787 6,020 4,558 10,578 -------- -------- -------- -------- -------- --------Earnings per share for profit attributable to the equity holders of the Company during the year (expressed in pence per share): - basic and fully diluted 10 23.8p - 23.8p 32.0p 31.0p 63.0p The notes on pages 22 to 49 are an integral part of these consolidated financialstatements As announced in the Pre Close Trading Statement on 11 January 2007, there areprior year adjustments relating primarily to income recognition on the unsecuredloan book at Secure Trust Bank. This has resulted in 2006 opening retainedearnings being restated downwards by £1.0 million, pre tax profits beingrestated downwards by £0.7 million in 2006 and post tax profits being restateddownwards by £0.1 million in 2006. The impact of this restatement on 2006earnings per share is 0.8p, being a 1% reduction. CONSOLIDATED BALANCE SHEET At 31 December 2007 2006 restated Note £000 £000AssetsCash 11 520 181Loans and advances to banks 12 39,708 54,214Trading securities - long positions 13 23,070 9,095Loans and advances to customers 14 171,953 153,538Debt securities held-to-maturity 16 122,306 105,961Current tax asset 2,198 -Financial investments 17 6,201 5,856Intangible assets 18 3,138 3,025Property, plant and equipment 19 11,451 10,638Other assets 20 33,558 22,397 -------- --------Total assets 414,103 364,905 -------- --------LiabilitiesDeposits from banks 21 12,726 7,729Trading securities - short positions 13 5,105 2,303Deposits from customers 22 300,920 270,448Other liabilities 23 41,884 29,886Current tax liabilities - 2,575Debt securities in issue 24 10,708 9,773Deferred tax liabilities 25 274 35 -------- --------Total liabilities 371,617 322,749 -------- --------EquityShare capital 27 150 150Share premium account 27 21,085 21,085Retained earnings 28 15,419 16,721Other reserves 28 1,402 1,402 -------- --------Capital and reserves attributable to equity holdersof the parent 38,056 39,358Minority interest 32 4,430 2,798 -------- --------Total equity 42,486 42,156 -------- --------Total equity and liabilities 414,103 364,905 -------- --------The notes on pages 22 to 49 are an integral part of these consolidated financialstatements CHAIRMAN'S STATEMENT This year Arbuthnot Latham & Co., the cornerstone of our Group, celebrates its175th anniversary. For the name to have survived for such a long time andthrough many turbulent years is due to the achievements and sometimes sheerdetermination of past and present management. The fortunes of the Company havefluctuated with that of London and the City in particular. Yet again we seem tobe at a tipping point. In February, as Senior Warden of the Worshipful Company of InternationalBankers, I spoke at this year's Bankers' Banquet at the Guildhall. I firstattended this function some 30 years ago when I came to work in the City ofLondon. Since then we have seen a tremendous transformation in the prosperityand success of the British financial services industry from which Arbuthnot, asmany others, have benefited. In the presence of the Chancellor of the Exchequerand a large number of leading City personalities I used the opportunity, perhapsnot in accordance with normal City practice, to express my deep concern about anumber of recent issues which could lead to a large part of the progressachieved over the last 30 years being irreversibly damaged. The reason for my current concern is that I believe the City's pre-eminentposition is very fragile. Threats include the high cost of living, an inadequatetransport system, a worrying crime rate, as well as competitive pressure fromother financial centres. But the two most important issues are: First, the increasing number of complex and sometimes counterproductive andcostly regulations, such as the proliferating labour laws, excessive health andsafety rules, and the EU's extensive financial services legislation. Second, there is the increasingly uncompetitive and ever changing tax system.The proposed changes for Capital Gains Tax are controversial and, regarding thenew tax for non domiciled residents, the Daily Telegraph warned: "talk aboutkilling the golden goose". The non-dom tax is particularly dangerous because it damages confidence and,once people have left the UK, they are unlikely to return. If these threats are not adequately addressed, London's position could beseriously jeopardised. I hope the authorities recognise the seriousness of thesituation and that the City, as it has in the past, will rise again to thechallenge in order to safeguard its pre-eminent position. Against this background Arbuthnot Banking Group had a very successful 2007. TheGroup's pre tax pre exceptional profits increased by 13% to £8.6 million.Capital ratios and liquidity were strong throughout 2007. The results arecharacterised by an outstanding performance in Investment Banking andsatisfactory results from the Retail and Private Banks that are going through aperiod of transition. The investment banking subsidiary, Arbuthnot Securities, had another excellentyear with pre tax pre exceptional profits rising by 62%. During the yearArbuthnot Securities acted on a total of 49 transactions. These included 29 fundraisings (including 5 IPOs) which raised a total of £672 million for clients. Inaddition, Arbuthnot Securities advised on 20 M&A deals with a combined value ofapproximately £1 billion. Notwithstanding the challenging market, the businesssuccessfully completed all the fund raisings it embarked upon in 2007. At theend of the year the retained corporate client list had grown to 85 with anaverage market capitalisation of £130 million. Due to the conservative philosophy of the Group, the two banking subsidiaries,Secure Trust Bank and Arbuthnot Latham, were not adversely affected by events inthe money markets. Both are funded through retail deposits and not through thewholesale markets. These businesses collectively placed £163 million into themoney markets at the year end. The deposit to loan ratio for the Group was about2:1 at the year end, and the substantial and confirmed banking lines availableto the business have not been utilised throughout the year. The secured loan book of £124 million in Arbuthnot Latham, being the largestloan book in the Group, has an average loan to collateral value of 37%. InSecure Trust Bank, the decision to reduce the level of activity in unsecuredlending, taken in 2006, resulted in the loan book reducing by 30% to £21.2million. At Secure Trust Bank, the new management team appointed at the end of 2006, havestarted implementing their strategy to arrest the decline and restore growth. In2007, the core OneBill proposition was strengthened through the addition ofancillary benefits for customers, the business was rebranded to Moneyway and themajority of new unsecured lending was brokered to EveryDay Loans. At Arbuthnot Latham, significant profits were generated through facilitation ofproperty transactions. The core banking business remained profitable with thewealth management offering still to reach breakeven. In October, Mike Bussey wasappointed as Chief Executive to continue to drive the business towards enhancedprofitability. Another important factor for the growth of Arbuthnot Latham's franchise is thedevelopment of its own offshore capability through the establishment of a bankin Switzerland. The application for a banking licence was submitted to theregulators in Switzerland in December 2007 and a response is anticipated in thefirst half of this year. The Group has successfully made the transition to the new Basel II regime, and was advised by the Financial Services Authority of its formal Individual CapitalGuidance assessment in December 2007. The Group has sufficient capital to meetits requirements. Board Changes and Personnel There have been a number of changes to the Arbuthnot Banking Group PLC Boardduring 2007. Mike Bussey was appointed Chief Executive of Arbuthnot Latham andjoined the Board in October 2007. Sir Christopher Meyer and Sir Michael Peat were appointed non executivedirectors and joined the Board in October 2007 and January 2008 respectively. These results once again reflect the continuing hard work and dedication of ouremployees. On behalf of the Board I extend our thanks to all staff for theircommitment which contributed to the Group's success in 2007. Dividend The Board is proposing an increased final dividend per share of 22.5p, up from22p last year, bringing the total dividend per share for the year to 33p (2006:32.5p). If approved, the final dividend will be paid on 28 May 2008 toshareholders on the register at 28 March 2008. This year we are, for the first time, introducing a scrip dividend for half ofthe final dividend. We believe this enables shareholders to buy additionalshares at a low dealing cost and it provides greater flexibility to the Group inorder to maintain its long held policy of paying a significant dividend while atthe same time pursuing a long term investment strategy. The policy means thatearnings and dividend cover can fluctuate significantly. Outlook We believe 2008 will be a challenging year for Arbuthnot Banking Group given theuncertainty in the business and economic environment. The Group will continue toreview carefully the efficiency of its businesses and will contain costs at anappropriate level in response to the business environment. Whilst income for thefirst two months in Arbuthnot Securities is lower than the corresponding periodin 2007, the corporate pipeline is in line with this time last year. BUSINESS REVIEW PRIVATE BANKING - ARBUTHNOT LATHAM 2007 2006 Increase Operating income £17.3m £13.6m +27%Customer deposits £273.6m £244.0m +12%Customer loans £146.6m £120.1m +22%Total assets £309.2m £286.0m +8% The past year saw a marked improvement in income and profits for ArbuthnotLatham with pre tax pre exceptional profits increasing from £0.3 million to £1.5million. These results are characterised by profits from the banking businessand transactional services business. Arbuthnot Latham has always had a philosophy of funding its lending operationsthrough retail deposits and not being reliant on the wholesale money markets. Atthe end of 2007, the customer deposit to loan ratio was 1.9:1 with £140 millionbeing placed into the wholesale money markets. As a result of this strategy,liquidity has remained strong throughout 2007 and the substantial committedbanking lines remained undrawn throughout 2007. The underlying profitability of the banking business has proved resilient andthe bank is well placed for 2008. In 2007, customer deposits grew by 12% to £274million and the loan book grew by 22% to £147 million. Arbuthnot Lathamcontinued to expand its transaction services capability and facilitated a numberof property transactions. This resulted in significant income and profit. Although 2007's performance represented progress, Arbuthnot Latham has still todeliver profits in line with its potential, especially on the wealth managementside, which remains loss making. During the year, significant changes have been made to the management team inArbuthnot Latham. In October, Mike Bussey joined as Chief Executive, havingpreviously been Chief Executive of the Private Banking and Trust business ofN.M. Rothschild. In addition, Steve Hicks has been appointed as Chief OperatingOfficer having previously worked at Barclays. A strategic review of Arbuthnot Latham in the first quarter of 2008 hasconcluded that the business should be refocused on the provision of Banking,Investment Management and Financial Planning services mainly to the "Affluent"segment (investable assets of £0.5 million to £10 million). The back office andsupport infrastructure of the Musical Instrument Finance Company is to berelocated shortly from London to Hastings in order to realise synergies withArbuthnot Commercial Finance. In addition, management is assessing the division's cost base with a view toidentifying opportunities for savings in 2008. INVESTMENT BANKING - ARBUTHNOT SECURITIES 2007 2006 Increase Operating income £29.3m £21.7m +35%Corporate clients 85 71 +20%Gross trading & commission income £10.4m £9.6m +8%Corporate finance fees £19.2m £12.1m +59% Despite markedly more difficult market conditions in 2007, Arbuthnot Securitiescontinued to make strong progress reflecting the momentum that the business hasbuilt up over the last three years. Profit before tax and exceptional items roseby 62% to £8.1 million compared to a £5.0 million profit in 2006, a £2.8 millionprofit in 2005 and a £1.6 million loss in 2004. Corporate fee and retainer income amounted to £19.2 million (2006: £12.1million). During the year Arbuthnot Securities acted on a total of 49transactions (2006: 35 transactions). These included 29 fund raisings (including5 IPOs) which raised a total of £672 million for clients. In addition, ArbuthnotSecurities advised on 20 M&A deals which had a combined value of approximately£1 billion. Notwithstanding the challenging market, the business successfullycompleted all the fund raisings it embarked upon in 2007, including a £85million C share issue for Utilico Emerging Markets, a £50 million C share issuefor CQS Oil Rig Fund and a £64 million rights issue for Costain. The corporate client list also grew significantly from 71 at the start of theyear to 85 at the year end with an average market capitalisation of £130million. New client wins during the year included a third FTSE 250 client. The FTSE small cap index ended the year 12% down, while the AIM market has beenin a 'bear' market since May 2006. Secondary commission and trading incomeincreased by 8% during the year to £10.4 million (2006: £9.6 million) despitethe downturn in markets. Total headcount ended 2007 where it started the year at 74. Notwithstanding thisprudent stance on headcount, the research offering has been broadened anddeepened during the year by adding coverage of oil and gas and renewable energysectors. The performance of Arbuthnot Securities has been transformed over the last fouryears. In 2004, the first full year in which this business was owned byArbuthnot Banking Group, the business recorded a loss of £1.6 million. In thatyear, revenues were £12.3 million and headcount peaked at 98. The transformedperformance has been achieved by more than doubling revenue, whilst reducingboth costs and headcount significantly. At the same time, corporate clientnumbers have nearly doubled from a low of 45 in early 2005. As a result of theseachievements, Arbuthnot Securities is now a robust business strongly positionedto grow further in its highly competitive marketplace. Market conditions have deteriorated further in the first months of 2008, and ifthe volatility shown by the market so far continues through the year then theperformance of Arbuthnot Securities, cannot avoid being affected. However, thesuccessful turnaround programme of the last three years has put ArbuthnotSecurities in a strong position to emerge from the current market turbulencewith a stronger market position. RETAIL BANKING - SECURE TRUST BANK restated 2007 2006 Increase Operating income £22.8m £23.6m -3%Unsecured lending £21.2m £30.4m -30%Expenses £16.8m £16.0m +5%Customer numbers ('000) 44 46 -4% Despite the increasingly competitive environment and the continuing reduction incustomer numbers, the Retail Banking Division delivered operating income of£22.8 million and profits before tax and exceptional items of £4.6 million. The new management team completed a strategic review of the business in early2007 and produced a strategy to arrest the decline and restore growth. Keythemes include a move towards participation in the market for debt management,reduced risk in unsecured lending outside of the OneBill account, arresting thedecline in OneBill customer numbers and growing the mortgage broking business. As a result of the changing landscape for unsecured personal lending in the UK,Secure Trust Bank reduced its appetite for new lending outside the OneBillaccount in 2006. In June 2007, Secure Trust Bank formed a broking arrangementwith EveryDay Loans which has seen the majority of new unsecured loans beingwritten without financial risk to Secure Trust Bank. This decision has resultedin a significant reduction in the unsecured loan book of 30% during 2007.Overall unsecured exposures, after allowing for impairment provisions, reducedby 32% to £16.4 million. The OneBill account has seen a fall in the number of closures of accounts in theyear. Prior to the rebranding in the middle of the year, the marketing activitywas reduced resulting in a lower number of new customers in the first half. Akey component of growing the number of OneBill customers is through affinityarrangements and a number of arrangements are under discussion. The business has historically traded under a number of different brandsincluding OneBill, Secure Trust Bank, Secure Homes and Secure Direct leading toconfusion within the customer base. In 2007, the business was rebranded Moneywaywith the core product being branded 'OneBill from Moneyway'. The core 'OneBill'product was further strengthened with the addition of ancillary benefitsincluding free ID Theft insurance and home emergency cover. In debt management, the business has re-entered this market through Moneyfreedomand recruited a new senior manager towards the end of the year. Earlyindications are encouraging although the impact on the 2008 financials is likelyto be marginal. The investment programme in 2007 delivered the enhanced proposition for OneBill,the brand relaunch and various new systems. This resulted in an income statementexpense of £0.8 million. The focus for 2008 will be improving this division'sprofitability by aligning the cost base and processes with the current scale ofthe business. FINANCIAL REVIEW HighlightsSummarised Income Statement £'000 restated 2007 2006 Net interest income 11,444 9,931Net fee and commission income 52,907 44,176Gains less losses from dealing in securities 4,442 4,102Operating income 68,793 58,209Operating expenses (57,977) (48,672)Impairment losses (2,237) (1,986)Exceptional items - 6,511Profit on continuing activities before tax 8,579 14,062Basic earnings per share (pence) 23.8 63.0 Summarised Balance Sheet £'000 restated 2007 2006AssetsLoans and advances to customers 171,953 153,538Liquid assets 162,534 160,356Other assets 79,616 51,011 ----------- -----------Total assets 414,103 364,905LiabilitiesCustomer deposits 300,920 270,448Other liabilities 70,697 52,301Total liabilities 371,617 322,749Equity 42,486 42,156Total equity and liabilities 414,103 364,905 The aim of Arbuthnot Banking Group is to maximise revenues and profits throughproviding a range of financial services to customers and clients in its threechosen niche markets of private banking (Arbuthnot Latham), investment banking(Arbuthnot Securities) and retail banking (Secure Trust Bank/OBC InsuranceConsultants). The Group's revenues are derived from a combination of netinterest income from its lending, deposit-taking and money market activities;fees for services provided to customers and clients; commissions earned on thesale of financial instruments and products and equity market-making profits. Background market conditions were challenging for financial services companiesin 2007. The events of August and September led to a re-pricing of risk acrossthe industry, a tightening of liquidity and significant losses being incurred bymany banks. Due to the Group's philosophy of funding loans through customerdeposits and adopting a risk based approach to lending, liquidity and capital ratios have remained strong throughout 2007. The decision to scale back exposure to unsecured credit at Secure Trust Bank in 2006, whilst reducing short term profitability, should result in lower bad debt charges going forward.Despite deteriorating market conditions in investment banking during the secondhalf of 2007, Arbuthnot Securities was able to maintain first half performancein the second half and produce significant growth in both revenue and profitscompared to 2006. The statutory profit before tax for the Group is shown above. The Board believesa truer reflection of the Group's on-going business is given by 'Adjusted profitbefore tax' and 'Adjusted earnings per share' that excludes items that areone-off or non-recurring and not part of the on-going business profitability. £'000 restated 2007 2006 Operating income 68,793 58,209Operating expenses (57,977) (48,672)Impairment losses (2,237) (1,986)Adjusted profit before tax 8,579 7,551Adjusted earnings per share (pence) 23.8 32.0 Adjusted profit before tax rose by 13% to £8.6 million giving an adjusted basicearnings per share of 23.8p. The reduction in adjusted earnings per sharereflects the increased profits at Arbuthnot Securities leading to a higher levelof minority interest and the full year effect of the rights issue in 2006. Although the Group's total operating income increased by 18% to £68.8 million,profit before tax reduced by 39% to £8.6 million principally due to the sale andleaseback transaction in 2006. Earnings per share reduced by 62% to 23.8p as aresult of the sale and leaseback transaction in 2006, an increased contributionfrom Arbuthnot Securities giving a higher minority interest and the full yeareffect of the rights issue in 2006. Balance Sheet Strength and Cash flow Total assets of the Group increased by 13% to £414.1 million (2006: £364.9million) as a result of the ability to attract customer deposits in the privatebank. Net assets of the Group remained broadly unchanged at £42.5 million (2006:£42.2 million). The Group's total liquid resources (including longer duration certificates ofdeposit) remained broadly unchanged at £162.5 million (2006: £160.4 million). Prior Year Adjustments Prior year adjustments decreased prior year retained earnings by £1.0 millionpre 2006 and £0.1 million in 2006. The adjustments relate to unsecured lendingat Secure Trust Bank and tax. The adjustments to unsecured lending at SecureTrust Bank have resulted in retained earnings being overstated pre 2006 by £1.0million and pre tax profits being overstated by £0.7 million in 2006 (£0.5million post tax). This is principally as a result of income having beenrecognised on non performing loans over a number of years. The tax adjustmentrelates to the utilisation of tax losses previously not recognised and thesubsequent re-allocation of group relief. The overall adjustment is to decreasethe tax charge in 2006 by £0.4 million. The impact of this restatement on 2006earnings per share is 0.8p, being a 1% reduction. Segmental Analysis The segmental analysis in note 34 to the Consolidated Financial Statements tothe Annual Report highlights the disclosures required under IAS 14, 'SegmentalReporting'. The primary business segments are Private Banking (Arbuthnot Lathamand Arbuthnot Commercial Finance), International Private Banking (Arbuthnot AG),Investment Banking (Arbuthnot Securities), Retail Banking (Secure Trust Bank andOBC Insurance Consultants) and Group costs. Arbuthnot Latham (including Arbuthnot Commercial Finance) £'000 2007 2006 Net interest income 7,921 5,910Net fee and commission income 9,343 7,645Operating income 17,264 13,555Operating expenses (15,070) (13,428)Impairment losses (740) (43)Profit on disposal of Arbuthnot House - 12,623Profit before tax 1,454 12,707Profit on disposal of Arbuthnot House - (12,623)Restructuring costs - 257 ----------- -----------Adjusted profit before tax 1,454 341 ----------- ----------- £'000 2007 2006AssetsAdvances (including Group companies) 146,551 120,082Liquid assets 140,189 149,442Other assets 22,486 16,465 ----------- -----------Total assets 309,226 285,989LiabilitiesCustomer deposits (including Group companies) 273,580 243,975Other liabilities 8,488 13,988Total liabilities 282,068 257,963Capital 27,158 28,026 309,226 285,989 Note: The above balance sheet is for Arbuthnot Latham only Operating income rose by 27% as a result of a 34% rise in net interest incomeand a 22% rise in fee and commission income. The net interest income increase isprincipally as a result of the 22% increase in the loan book, a 12% increase indeposits and increased deposit interest margin. The fee and commission increaseis primarily due to the fees earned on property transactions in 2007. Thecontinued investment in new staff led to a 12% rise in expenses. Adjusted profitbefore tax in 2007 increased to £1.5 million compared to £0.3 million in 2006. Total assets increased by 8% to £309.2 million (2006: £286.0 million) with loansincreasing by 22% and customer deposits by 12%. Arbuthnot Latham's liquidity remained strong throughout 2007 and the £40 millionof available bank lines remained unutilised throughout 2007. The secured loanbook at Arbuthnot Latham, representing 84% of the total loan book, had anaverage loan to collateral value of 37% at the end of 2007. Switzerland Costs associated with establishing the Swiss bank were £0.3 million in 2007. Arbuthnot Securities £'000 2007 2006 Net interest income (324) 338Net fee and commission income 25,328 17,304Gains less losses from dealing in securities 4,342 4,102Operating income 29,346 21,744Operating expenses (21,270) (17,059)Profit before tax 8,076 4,685Restructuring costs - 274Adjusted profit before tax 8,076 4,959 Operating income rose 35% to £29.3 million with expenses rising 25% to £21.3million. Adjusted profit before tax rose 62% to £8.1 million in 2007. Under the terms of the Arbuthnot Securities Long Term Incentive Plan, the Grouphas sold 40.4% of the issued ordinary share capital in Arbuthnot SecuritiesLimited to its staff via the Arbuthnot No. 2 ESOP Trust. Secure Trust Bank (including OBC Insurance Consultants) £'000 restated 2007 2006 Net interest income 4,600 4,331Net fee and commission income 18,236 19,227Operating income 22,836 23,558Operating expenses (16,839) (15,992)Impairment losses (1,447) (4,843)Profit before tax 4,550 2,723Restructuring costs - 458Bad debt provision (affinity bad debt) - 2,900Adjusted profit before tax 4,550 6,081 Operating income fell by 3% to £22.8 million with operating expenses (beforerestructuring and investment costs) broadly unchanged. Adjusted profit before tax fell 25% to £4.6 million. The adjusted profit for2007 includes a charge of £0.8 million for investment expenditure. If this isexcluded, the underlying performance of the business fell by 12%. Impairmentlosses (before affinity bad debt) fell by 26% to £1.4 million as a result oflower arrears on the unsecured loan book. The unsecured loan book reduced by 30% from £30.4 million to £21.2 million. Theexposure to unsecured lending, including impairment provisions, reduced by 32%to £16.4 million. Group & Other Costs £'000 2007 2006 Operating Income 100 -Group costs (3,022) (3,104)Group head office property costs (1,560) (78)Subordinated loan stock (753) (648)Long Term Bonus - (1,900)Restructuring Costs - (323)Total group & other costs (5,335) (6,053)Loss before tax (5,235) (6,053)Long Term Bonus - 1,900Restructuring Costs - 323Adjusted loss before tax (5,235) (3,830) Total group and other costs decreased by 12% in 2007 primarily due to theincreased property costs following the sale and leaseback of Arbuthnot House in2006 offset by the non recurrence of the long term bonus in 2006. Group costsdecreased by 3% to £3.0 million in 2007. Capital The international measure for capital adequacy under BASEL I is the risk assetratio which relates regulatory capital to on and off balance sheet assets. Theserules applied to the Group in 2007. In 2008, the new requirements of BASEL IIwere implemented in the UK through the Capital Requirements Directive. The FSAreviewed the Group's capital requirements in December 2007 and gave the Groupand its subsidiaries guidance on the level of capital the Group is required tohold under the new rules from January 2008. The Group's regulatory capital is divided into two tiers defined by the EuropeanCommunity Banking Consolidation Directive as implemented in the UK by the FSA'sCapital Requirements Directive. Tier 1 comprises mainly shareholders' funds andminority interest, after deducting goodwill and other intangible assets. Tier 2comprises qualifying subordinated loan capital and revaluation reserves. Tier 2capital cannot exceed 50% of tier 1 capital. Total capital is reduced bydeducting investments in subsidiaries that are not consolidated for regulatorypurposes. Risk weighted assets are determined according to a broad categorisation of thenature of each asset or exposure and counterparty. £'000 2007 2006 Tier 1 35,292 37,543Tier 2 12,205 11,456Less deductions (828) (828) ---------- ---------Total capital 46,669 48,171 Total risk weighted assets 220,790 211,423 Risk asset ratio 21.1% 22.8% The Group's capital position has largely remained unchanged during 2007, as aresult of retained earnings being used to fund the Group's dividend. The Grouphas capacity to raise further Tier 2 capital should this be required. The Group's capital management policy is to optimise shareholder value. There isa clear focus on delivering organic growth and capital resources are sufficientto support planned levels of growth. The Board regularly reviews the capitalposition. The Board has reviewed the capital position and concluded that the Groupcurrently has sufficient capital following the implementation of the BASEL IIregime. Risk Management The Group regards the monitoring and controlling of risks as a fundamental partof the management process. Consequently, senior management are involved in thedevelopment of risk management policies and in monitoring their application. TheGroup's overall approach to managing internal control and financial reporting isdescribed in the Corporate Governance section of the Annual Report. The principal non-operational risks inherent in the Group's business are credit,liquidity and market risks. A detailed description of the risk managementpolicies in these areas is set out in Note 3 to the financial statements. Creditrisk is managed through the Credit Committees of Secure Trust Bank and ArbuthnotLatham & Co., with significant exposures also being approved by the Group RiskCommittee. Of the total gross loan book of £177.7 million at 31 December 2007,some £21.2 million represents largely unsecured loans to customers of SecureTrust Bank and £156.5 million represents the lending portfolio, most of which iswell secured against cash, property, factored debts or other assets. A provisionof £5.7 million (3.2% of total lending) is carried against the loan book. Market risk arises in relation to movements in interest rates, currencies andequity markets. The Group's treasury function operates mainly to provide aservice to clients and does not take significant unmatched positions in anymarkets for its own account. Hence, the Group's exposure to adverse movements ininterest rates and currencies is limited to the interest earnings on its freecash and interest rate repricing mismatches. Through Arbuthnot Securities the Group is also involved in market-making andunderwriting in UK equities. The market-making book is well controlled and netlong positions outstanding at 31 December 2007 were £18.0 million. Themarket-making book is subject to Group-approved limits, both in aggregate and inrelation to individual stocks. Outstanding positions are monitored against theselimits both intraday and overnight. All significant underwriting transactionsare individually approved by the Group Risk Committee. A conservative approach is also taken to managing the liquidity profile andcapital of the Group. Both of the banking subsidiaries operate with liquiditymargins and risk asset ratios in excess of the minimum levels set by theregulators. Dividend The Board proposes a final dividend of 22.5 pence per share to be paid on 28 May2008, giving a total dividend for the year of 33 pence (2006: 32.5 pence) pershare. This is consistent with the progressive dividend policy of previousyears. A scrip dividend alternative will be available in respect of half of the finaldividend. Accounting Policies This is the third set of Group consolidated financial statements prepared inaccordance with International Financial Reporting Standards (IFRS). This is thefirst set of accounts to include the disclosure requirements under IFRS 7Financial Instruments. Going Concern After making appropriate enquiries, the directors are satisfied that the Companyand the Group have adequate resources to continue in operation for theforeseeable future. The financial statements are, therefore, prepared on thegoing concern basis. Statement of changes in equity Attributable to equity holders of the Company Share Share premium Other Retained MinorityConsolidated capital account reserves earnings interest Total Note £000 £000 £000 £000 £000 £000 Balance at 1 January 2006 143 17,115 3,395 11,111 1,312 33,076Restatement of loans to customers and tax 9b - - - (1,028) - (1,028) -------- -------- -------- -------- -------- -------Restated balance at 1 January 2006 143 17,115 3,395 10,083 1,312 32,048Issue of shares 7 3,970 - - - 3,977Release on sale of freeholdpremises - - (2,828) 2,828 - -Release of deferred taxon sale of freehold premises - - 835 (835) - -Sale of minority interest inArbuthnot Securities Limited - - - - 187 187Profit for 2006 - - - 9,274 1,304 10,578Final dividend relating to 2005 (3,060) (5) (3,065)Interim dividend relating to 2006 - - - (1,569) - (1,569) -------- -------- -------- -------- -------- --------At 1 January 2007 150 21,085 1,402 16,721 2,798 42,156 Purchase of minority interest in Arbuthnot Commercial FinanceLimited - - - - (73) (73)Sale of minority interest inArbuthnot Securities Limited - - - - 64 64Profit for 2007 - - - 3,555 2,232 5,787Final dividend relating to 2006 - - - (3,287) (591) (3,878)Interim dividend relating to 2007 - - - (1,570) - (1,570) -------- -------- -------- -------- -------- --------At 31 December 2007 150 21,085 1,402 15,419 4,430 42,486 -------- -------- -------- -------- -------- -------- Attributable to equity holders of the CompanyCompany Share capital Share premium Other reserves Retained Total account earnings £000 £000 £000 £000 £000 Balance at 1 January 2006 143 17,115 20 9,493 26,771Restatement of tax liabilities 9a - - - (901) (901) -------- -------- -------- -------- --------Restated balance at 1 January 2006 143 17,115 20 8,592 25,870Issue of shares 7 3,970 - - 3,977Profit for 2006 - - - 5,112 5,112Final dividend relating to 2005 - - - (3,060) (3,060)Interim dividend relating to 2006 - - - (1,569) (1,569) -------- -------- -------- -------- --------At 1 January 2007 150 21,085 20 9,075 30,330 Profit for 2007 - - - 782 782Final dividend relating to 2006 - - - (3,287) (3,287)Interim dividend relating to 2007 - - - (1,570) (1,570) -------- -------- -------- -------- --------At 31 December 2007 150 21,085 20 5,000 26,255 -------- -------- -------- -------- -------- Company balance sheet At 31 December 2007 2006 restated Note £000 £000Current assetsDue from subsidiary undertakings 1,607 8,708Financial investments 17 1,773 3,902Other debtors 2,145 2,767Non-current assetsShares in subsidiary undertakings 33 29,121 28,989Property, plant and equipment 19 102 136Due from subsidiary undertakings 8,350 7,350 -------- --------Total assets 43,098 51,852 -------- --------Current liabilitiesBorrowings 1,276 -Due to subsidiary undertakings 3,650 8,892Accruals 1,209 2,857Non-current liabilitiesDebt securities in issue 24 10,708 9,773 -------- --------Total liabilities 16,843 21,522 -------- --------Net assets 26,255 30,330 -------- --------Capital and reservesShare capital 27 150 150Share premium account 27 21,085 21,085Capital redemption reserve 28 20 20Profit and loss account 28 5,000 9,075 -------- --------Equity shareholders' funds 26,255 30,330 -------- -------- The Company has elected to take the exemption under section 230 of the CompaniesAct 1985 to not present the parent Company profit and loss account. The profit for the parent Company for the year is presented in note 28. Consolidated cash flow statement Year ended 31 December 2007 2006 restated Note £000 £000 -------- --------Cash flows from operating activitiesInterest and similar income received 23,758 18,973Interest and similar charges paid (12,314) (9,042)Fees and commissions received 52,907 44,176Net trading and other income 4,442 4,102Recoveries on loans previously written off 500 10Cash payments to employees and suppliers (58,104) (51,816)Taxation paid (6,996) (2,470) -------- --------Cash flows from operating profits before changesin operating assets and liabilities 4,193 3,933Changes in operating assets and liabilities:- net increase in trading securities (11,173) (4,194)- net increase in loans and advances to customers (18,414) (17,874)- net (increase) / decrease in other assets (11,149) 3,797- net increase / (decrease) in deposits fromother banks 4,997 (1,461)- net increase in amounts due to customers 30,472 31,015- net increase in other liabilities 11,870 2,927 -------- --------Net cash from operating activities 10,796 18,143 -------- --------Cash flows from investing activitiesDisposal of financial investments 3,772 -Purchase of financial investments (4,429) (3,435)Purchase of minority interest (110) -Disposal of minority interest 118 187Purchase of computer software 18 (493) (428)Purchase of property, plant and equipment 19 (2,529) (2,253)Proceeds from sale of property, plant andequipment 501 34,244Purchases of debt securities (301,560) (139,481)Proceeds from sale of debt securities 271,597 122,648 -------- --------Net cash from investing activities (33,133) 11,482 -------- --------Cash flows from financing activitiesIssue of shares 27 - 3,977Repayment of debt securities - (2,610)Dividends paid (5,448) (4,633) -------- --------Net cash used in financing activities (5,448) (3,266) -------- --------Net (decrease)/increase in cash and cashequivalents (27,785) 26,359Cash and cash equivalents at beginning of year 83,718 57,359 -------- --------Cash and cash equivalents at end of year 30 55,933 83,718 -------- -------- Company cash flow statement Year ended 31 December 2007 2006 restated Note £000 £000 -------- --------Cash flows from operating activitiesDividends received from subsidiaries 4,545 9,100Interest and similar income received 622 585Interest and similar charges paid (753) (979)Net trading and other income 448 -Cash payments to employees and suppliers (5,505) (6,258)Taxation received 1,584 1,815 -------- --------Cash flows from operating profits beforechanges in operating assets and liabilities 941 4,263Changes in operating assets and liabilities:- net decrease / (increase) in Group companybalances 1,706 (875)- net decrease / (increase) in other assets 497 (979)- net (increase) / decrease in otherliabilities (1,648) 2,693 -------- --------Net cash from operating activities 1,496 5,102 -------- --------Cash flows from investing activitiesLoans to subsidiary companies (1,000) -Acquisition of subsidiary (42) -Purchase of minority interest (110) -Disposal of minority interest 118 187Disposal of financial investments 3,772 -Purchase of financial investments (1,955) (2,002)Disposal of property, plant and equipment 69 -Purchase of property, plant and equipment 19 (43) (25) -------- --------Net cash from investing activities 809 (1,840) -------- --------Cash flows from financing activitiesIssue of shares 27 - 3,977Repayment of debt securities - (2,610)Increase in borrowings 1,276 -Dividends paid (4,857) (4,629) -------- --------Net cash used in financing activities (3,581) (3,262) -------- --------Net decrease in cash and cash equivalents (1,276) -Cash and cash equivalents at beginning of year - - -------- --------Cash and cash equivalents at end of year (1,276) - -------- -------- Principal accounting policies The principal accounting policies applied in the preparation of theseconsolidated financial statements are set out below. These policies have beenconsistently applied to all the years presented, unless otherwise stated. 1. Basis of presentation The Group's consolidated financial statements and the Company's financialstatements have been prepared in accordance with International FinancialReporting Standards as adopted by the European Union (IFRSs as adopted by theEU), IFRIC interpretations and the Companies Act 1985 applicable to Companiesreporting under IFRS. The consolidated financial statements have been preparedunder the historical cost convention, as modified by the revaluation of land andbuildings, available-for-sale financial assets, and financial assets andfinancial liabilities at fair value through profit or loss. The 2006 comparatives have been restated as described in note 9. Additionallycertain expenses, in 2006, have been reclassified and consequently fee andcommission income has increased by £1,113,000 and operating expenses have beenreduced by the corresponding amount. In addition, a number of presentationalchanges have been made to the prior year numbers. The preparation of financial statements in conformity with IFRS requires the useof certain critical accounting estimates. It also requires management toexercise its judgement in the process of applying the Group's accountingpolicies. The areas involving a higher degree of judgement or complexity, orareas where assumptions and estimates are significant to the consolidatedfinancial statements are disclosed in note 2. 1.a) Standards, amendments and interpretations effective in 2007 IFRS 7, 'Financial instruments: Disclosures', and the complementary amendment toIAS 1, 'Presentation of financial statements - Capital disclosures', introducesnew disclosures relating to financial instruments and does not have any impacton the classification and valuation of the Group or Company's financialinstruments, or the disclosures relating to taxation and trade and otherpayables. IFRIC 8, 'Scope of IFRS 2', requires consideration of transactions involving theissuance of equity instruments, where the identifiable consideration received isless than the fair value of the equity instruments issued in order to establishwhether or not they fall within the scope of IFRS 2. This standard does not haveany impact on the Group or Company's financial statements. IFRIC 10, 'Interim financial reporting and impairment', prohibits the impairmentlosses recognised in an interim period on goodwill and investments in equityinstruments and in financial assets carried at cost to be reversed at asubsequent balance sheet date. This standard does not have any impact on theGroup or Company's financial statements. 1.b) Standards, amendments and interpretations effective in 2007 but notrelevant The following standards, amendments and interpretations to published standardsare mandatory for accounting periods beginning on or after 1 January 2007 butthey are not relevant to the Group or Company's operations: • IFRS 4, 'Insurance contracts';• IFRIC 7, 'Applying the restatement approach under IAS 29, Financial reporting in hyper-inflationary economies'; and• IFRIC 9, 'Re-assessment of embedded derivatives'. The application of these new interpretations will not have a material impact onthe Group's financial statements in the period of initial application. 1.c) Standards, amendments and interpretations to existing standards that arenot yet effective and have not been early adopted by the Group and Company The following standards, amendments and interpretations to existing standardshave been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2008 or later periods, but the Group and Company have not early adopted them: • IFRIC 11, 'IFRS 2 - Group and treasury share transactions' (effective from 1March 2007). IFRIC 11 provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent's shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. The Group will apply IFRIC 11 from 1 January 2008, but it is not expected to have any impact on the Group or Company's accounts. • IAS 23 (Amendment), 'Borrowing costs' (effective from 1 January 2009). Theamendment to the standard is still subject to endorsement by the European Union.It requires an entity to capitalise borrowing costs directly attributable to theacquisition, construction or production of a qualifying asset (one that takes asubstantial period of time to get ready for use or sale) as part of the cost ofthat asset. The option of immediately expensing those borrowing costs will beremoved. The Group will apply IAS 23 (Amended) from 1 January 2009, subject toendorsement by the EU but is currently not applicable to the Group or Company asthere are no qualifying assets. • IFRS 8, 'Operating segments' (effective from 1 January 2009). IFRS 8 replacesIAS 14 and aligns segment reporting with the requirements of the US standardSFAS 131, 'Disclosures about segments of an enterprise and related information'.The new standard requires a 'management approach', under which segmentinformation is presented on the same basis as that used for internal reportingpurposes. The Group will apply IFRS 8 from 1 January 2009. The expected impact is still being assessed in detail by management, but it appears likely that thereportable segments will remain unchanged. As goodwill is allocated to Groups ofcash-generating units based on segment level, the change will also requiremanagement to reallocate goodwill to the newly identified operating segments.Management does not anticipate that this will result in any material impairmentto the goodwill balance. • IFRIC 14, 'IAS 19 - The limit on a defined benefit asset, minimum fundingrequirements and their interaction' (effective from 1 January 2008). IFRIC 14provides guidance on assessing the limit in IAS 19 on the amount of the surplusthat can be recognised. It also explains how the pension asset or liability maybe affected by a statutory or contractual minimum funding requirement. The Groupwill apply IFRIC 14 from 1 January 2008, but it is not expected to have anyimpact on the Group or Company's accounts. • IFRIC 12, 'Service concession arrangements' (effective from 1 January 2008).IFRIC 12 applies to contractual arrangements whereby a private sector operatorparticipates in the development, financing, operation and maintenance ofinfrastructure for public sector services IFRIC 12 is not relevant to the Groupor Company's operations because none of the Group's companies provide for publicsector services. • IFRIC 13, 'Customer loyalty programmes' (effective from 1 July 2008). IFRIC 13clarifies that where goods or services are sold together with a customer loyaltyincentive (for example, loyalty points or free products), the arrangement is amultiple-element arrangement and the consideration receivable from the customeris allocated between the components of the arrangement using fair values. IFRIC13 is not relevant to the Group or Company's operations because none of theGroup's companies operate any loyalty programmes. 1.2. Consolidation (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over whichthe Group has the power to govern the financial and operating policies,generally accompanying a shareholding of more than one-half of the votingrights. The existence and effect of potential voting rights that are currentlyexercisable or convertible are considered when assessing whether the Groupcontrols another entity. Subsidiaries are fully consolidated from the date onwhich control is transferred to the Group. They are de-consolidated from thedate that control ceases. The purchase method of accounting is used to account for the acquisition ofsubsidiaries by the Group. The cost of an acquisition is measured as the fairvalue of the assets given, equity instruments issued and liabilities incurred orassumed at the date of exchange, plus costs directly attributable to theacquisition. Identifiable assets acquired and liabilities and contingentliabilities assumed in a business combination are measured initially at theirfair values at the acquisition date, irrespective of the extent of any minorityinterest. The excess of the cost of acquisition over the fair value of theGroup's shares of the identifiable net assets acquired is recorded as goodwill.If the cost of acquisition is less than the fair value of the net assets of thesubsidiary acquired, the difference is recognised directly in the incomestatement. Inter-company transactions, balances and unrealised gains on transactionsbetween Group companies are eliminated. Unrealised losses are also eliminatedunless the transaction provides evidence of impairment of the asset transferred.Accounting policies of subsidiaries have been changed where necessary to ensureconsistency with the policies adopted by the Group. (b) Transactions and minority interests The Group applies a policy of treating transactions with minority interests astransactions with parties external to the Group. Disposals to minority interestsresults in gains and losses for the Group that are recorded in the incomestatement. Purchases from minority interests result in goodwill, being thedifference between any consideration paid and the relevant share acquired of thecarrying value of net assets of the subsidiary. 1.3. Segment reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. 1.4. Foreign currency translation (a) Functional and presentation currency All Group entities, except Arbuthnot AG, operate primarily in the United Kingdomand items included in their financial statements are measured using poundssterling ('the functional currency'). The consolidated financial statements arepresented in pounds sterling, which is the Company's functional and presentationcurrency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of suchtransactions and from the translation at year-end exchange rates of monetaryassets and liabilities denominated in foreign currencies are recognised in theincome statement. (c) Group companies The results and financial position of all the group entities (none of which hasthe currency of a hyperinflationary economy) that have a functional currencydifferent from the presentation currency are translated into the presentationcurrency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and • all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the netinvestment in foreign operations, and of borrowings and other currencyinstruments designated as hedges of such investments, are taken to shareholders'equity. When a foreign operation is partially disposed of or sold, exchangedifferences that were recorded in equity are recognised in the income statementas part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate. 1.5. Interest income and expense Interest income and expense are recognised in the income statement for allinstruments measured at amortised cost using the effective interestmethod. The effective interest method is a method of calculating the amortised cost of afinancial asset or a financial liability and of allocating the interest incomeor interest expense over the relevant period. The effective interest rate is therate that exactly discounts estimated future cash payments or receipts throughthe expected life of the financial instrument or, when appropriate, a shorterperiod to the net carrying amount of the financial asset or financial liability.When calculating the effective interest rate, the Group takes into account allcontractual terms of the financial instrument but does not consider futurecredit losses. The calculation includes all fees paid or received betweenparties to the contract that are an integral part of the effective interestrate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been writtendown as a result of an impairment loss, interest income is recognised using therate of interest used to discount the future cash flows for the purpose ofmeasuring the impairment loss. 1.6. Fee and commission income Fees and commissions which are not considered integral to the effective interestrate are generally recognised on an accrual basis when the service has beenprovided. Loan commitment fees are deferred and recognised as an adjustment tothe effective interest rate on the loan. Commission and fees arising from negotiating, or participating in thenegotiation of, a transaction for a third party - such as the issue or theacquisition of shares or other securities or the purchase or sale of businesses- are recognised on completion of the underlying transaction. Asset and other management, advisory and service fees are recognised based onthe applicable service contracts, usually on a time apportioned basis. The sameprinciple is applied for financial planning and insurance services that arecontinuously provided over an extended period of time. 1.7. Gains less losses arising from dealing in securities This includes the net gains arising from both buying and selling securities andfrom positions held in securities, including related interest incomeand dividends, recognised on trade-date - the date on which the Group commits topurchase or sell the asset. 1.8. Exceptional items Exceptional items are events or transactions that fall within the activities ofthe Group and which by virtue of their size or incidence have been disclosedseparately in order to improve a reader's understanding of the financialstatements. 1.9. Financial assets The Group classifies its financial assets in the following categories: financialassets at fair value through profit or loss; loans and receivables;held-to-maturity investments; and available-for-sale financial assets.Management determines the classification of its investments at initialrecognition. (a) Financial assets at fair value through profit or loss This category comprises financial assets held for trading and listed securities.Purchases and sales of financial assets at fair value through profit or loss arerecognised on trade-date - the date on which the Group commits to purchase orsell the asset. Financial assets at fair value through profit or loss aresubsequently carried at fair value. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. They arise whenthe Group provides money, goods or services directly to a debtor with nointention of trading the receivable. Loans are recognised when cash is advancedto the borrowers. Loans and receivables and held-to-maturity investments arecarried at amortised cost using the effective interest method. (c) Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed ordeterminable payments and fixed maturities that the Group's management has thepositive intention and ability to hold to maturity. (d) Available-for-sale Available-for-sale investments are those intended to be held for an indefiniteperiod of time, which may be sold in response to needs for liquidity or changesin interest rates, exchange rates or equity prices. Included in available-for-sale are equity investments in special purposevehicles set up to acquire and enhance the value of commercialproperties. These investments are of a medium term nature. There is no openmarket for these securities and due to the nature of the underlying assets theycannot be reliably valued. Consequently, the Directors believe that it isappropriate to hold the investments at cost. Other financial assets are initially recognised at fair value plus transactioncosts for all financial assets not carried at fair value through profit or loss.Financial assets are de-recognised when the rights to receive cash flows fromthe financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. The Group has entered into equity investments in unquoted vehicles. There is noopen market for these assets, therefore the Group has valued them usingappropriate valuation methodologies. 1.10. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in thebalance sheet when there is a legally enforceable right to offset the recognisedamounts and there is an intention to settle on a net basis, or realise the assetand settle the liability simultaneously. 1.11. Impairment of financial assets (a) Assets carried at amortised cost On an ongoing basis the Group assesses whether there is objective evidence thata financial asset or group of financial assets is impaired. A financial asset ora group of financial assets is impaired and impairment losses are incurred if,and only if, there is objective evidence of impairment as a result of one ormore events that occurred after the initial recognition of the asset (a 'lossevent') and that loss event (or events) has an impact on the estimated futurecash flows of the financial asset or group of financial assets that can bereliably estimated. The criteria that the Group uses to determine that there is objective evidenceof an impairment loss include, but are not limited to, the following: • Delinquency in contractual payments of principal or interest; • Cash flow difficulties experienced by the borrower; • Initiation of bankruptcy proceedings; • Deterioration in the value of collateral; • Deterioration of the borrower's competitive position; If there is objective evidence that an impairment loss on loans and receivablesor held-to-maturity investments carried at amortised cost has been incurred, theamount of the loss is measured as the difference between the asset's carryingamount and the present value of estimated future cash flows discounted at thefinancial asset's original effective interest rate. The carrying amount of theasset is reduced through the use of an allowance account and the amount of theloss is recognised in the income statement. If a loan or held-to maturityinvestment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. When a loan is uncollectible, it is written off against the related provisionfor loan impairment. Such loans are written off after all the necessaryprocedures have been completed and the amount of the loss has been determined.Subsequent recoveries of amounts previously written off decrease the amount ofthe provision for loan impairment in the income statement. (b) Assets classified as available for saleThe Group assesses at each balance sheet date whether there is objectiveevidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, asignificant or prolonged decline in the fair value of the security below itscost is considered as an indicator that the securities are impaired. If any suchevidence exists for available-for-sale financial assets, the cumulative loss -measured as the difference between the acquisition cost and the current fairvalue, less any impairment loss on that financial asset previously recognised inprofit or loss - is removed from equity and recognised in the income statement.Impairment losses recognised in the income statement on equity instruments arenot reversed through the income statement. The Group also makes equity investments in special purpose vehicles set up toacquire and enhance the value of commercial properties. These investments arelikely to be of a medium term nature. There is no open market for thesesecurities and due to the nature of the underlying assets any valuation wouldcontain significant estimation. Consequently these investments are held at cost. (c) Renegotiated loansLoans that are either subject to collective impairment assessment orindividually significant and whose terms have been renegotiated are no longerconsidered to be past due but are treated as new loans. In subsequent years, theasset is considered to be past due and disclosed only if renegotiated. 1.12. Intangible assets (a) GoodwillGoodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is includedin 'intangible assets'. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. (b) Computer softwareAcquired computer software licences are capitalised on the basis of the costsincurred to acquire and bring to use the specific software.These costs are amortised on the basis of the expected useful lives (three tofive years). Costs associated with developing or maintaining computer software programs arerecognised as an expense as incurred. 1.13. Property, plant and equipment Land and buildings comprise mainly branches and offices and are stated at latestvaluation with subsequent additions at cost less depreciation.Plant and equipment is stated at historical cost less depreciation. Historicalcost includes expenditure that is directly attributable to the acquisition ofthe items. Land is not depreciated. Depreciation on other assets is calculated using thestraight-line method to allocate their cost to their residual values over theirestimated useful lives, applying the following annual rates, which are subjectto regular review: Freehold buildings 2%Office equipment 5% to 15%Computer equipment 20% to 33%Motor vehicles 25% Gains and losses on disposals are determined by comparing proceeds with carryingamount. These are included in the income statement. 1.14. Leases (a) As a lessorWhen assets are held subject to finance leases, the present value of the leasepayments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return. When assets are held subject to operating leases, the underlying assets are heldat cost less accumulated depreciation, The assets are depreciated down to their estimated residual values on a straight line basis over the lease term. Lease rental income is recognised on a straight line basis over the lease term. (b) As a lesseeRentals made under operating leases are recognised in the income statement on astraight line basis over the term of the lease. 1.15. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprisebalances with less than three months' maturity from the date of acquisition,including cash, loans and advances to banks and building societies andshort-term highly liquid debt securities. 1.16. Employee benefits (a) Post-retirement obligationsThe Group contributes to a defined contribution scheme and to individual definedcontribution schemes for the benefit of certain employees. The schemes arefunded through payments to insurance companies or trustee-administered funds atthe contribution rates agreed with individual employees. The Group has no further payment obligations once the contributions have beenpaid. The contributions are recognised as an employee benefit expense when theyare due. Prepaid contributions are recognised as an asset to the extent that acash refund or a reduction in the future payments is available. There are no post-retirement benefits other than pensions. (b) Share-based compensationThe Group operates a number of equity-settled, share-based compensation plans.The fair value of the employee services received in exchange for the grant ofthe options is recognised as an expense. The total amount to be expensed overthe vesting period is determined by reference to the fair value of the optionsgranted, excluding the impact of any non-market vesting conditions (for example,profitability and sales growth targets). Non-market vesting conditions areincluded in assumptions about the number of options that are expected to vest.At each balance sheet date, the entity revises its estimates of the number ofoptions that are expected to vest. It recognises the impact of the revision tooriginal estimates, if any, in the income statement, with a correspondingadjustment to equity. The proceeds received net of any directly attributable transaction costs arecredited to share capital (nominal value) and share premium when the options areexercised. The grant by the Company of options over its equity instruments to the employeesof subsidiary undertakings in the group is treated as a capital contribution.The fair value of employee services received, measured by reference to the grantdate fair value, is recognised over the investing period as an increase toinvestment in subsidiary undertakings, with a corresponding credit to equity. 1.17. Deferred tax Deferred tax is provided in full, using the liability method, on temporarydifferences arising between the tax bases of assets and liabilities and theircarrying amounts in the consolidated financial statements. Deferred tax isdetermined using tax rates (and laws) that have been enacted or substantiallyenacted by the balance sheet date and are expected to apply when the relateddeferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised where it is probable that future taxableprofits will be available against which the temporary differences can beutilised. 1.18. Borrowings Borrowings are recognised initially at fair value, being their issue proceeds(fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any differencebetween proceeds net of transaction costs and the redemption value is recognisedin the income statement over the period of the borrowings using the effectiveinterest method. 1.19. Share capital (a) Share issue costsIncremental costs directly attributable to the issue of new shares or options orto the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds. (b) Dividends on ordinary sharesDividends on ordinary shares are recognised in equity in the period in whichthey are approved. 1.20. Fiduciary activities The Group commonly acts as trustees and in other fiduciary capacities thatresult in the holding or placing of assets on behalf of individuals, trusts,retirement benefit plans and other institutions. These assets and income arisingthereon are excluded from these financial statements, as they are not assets ofthe Group. 2. Critical accounting estimates and judgements in applying accounting policies The Group makes estimates and assumptions that affect the reported amounts ofassets and liabilities within the next financial year. Estimates and judgementsare continually evaluated and are based on historical experience and otherfactors, including expectations of future events that are believed to bereasonable under the circumstances. Impairment losses on loans and advancesThe Group reviews its loan portfolios to assess impairment at least on ahalf-yearly basis. In determining whether an impairment loss should be recordedin the income statement, the Group makes judgements as to whether there is anyobservable data indicating that there is a measurable decrease in the estimatedfuture cash flows from a portfolio of loans before the decrease can beidentified with an individual loan in that portfolio. This evidence may includeobservable data indicating that there has been an adverse change in the paymentstatus of borrowers in a group, or national or local economic conditions thatcorrelate with defaults on assets in the Group. Management uses estimates basedon historical loss experience for assets with credit risk characteristics andobjective evidence of impairment similar to those in the portfolio whenscheduling its future cash flows. The methodology and assumptions used forestimating both the amount and timing of future cash flows are reviewedregularly to reduce any differences between loss estimates and actual lossexperience. TaxationSignificant estimates are required in determining the provision for taxation.There are many transactions and calculations for which the ultimate taxdetermination is uncertain during the ordinary course of business. The Grouprecognises liabilities for anticipated tax audit issues based on estimates ofwhether additional taxes will be due. Where the final tax outcome of thesematters is different from the amounts that were initially recorded, suchdifferences will impact the current tax and deferred tax provisions in theperiod in which such determination is made. 3. Financial risk management StrategyBy their nature, the Group's activities are principally related to the use offinancial instruments. The Directors and senior management of the Group haveformally adopted a Group Risk and Controls Policy which sets out the Board'sattitude to risk and internal controls. Key risks identified by the Directorsare formally reviewed and assessed at least once a year by the Board, inaddition to which key business risks are identified, evaluated and managed byoperating management on an ongoing basis by means of procedures such as physicalcontrols, credit and other authorisation limits and segregation of duties. TheBoard also receives regular reports on any risk matters that need to be broughtto its attention. Significant risks identified in connection with thedevelopment of new activities are subject to consideration by the Board. Thereare well-established budgeting procedures in place and reports are presentedregularly to the Board detailing the results of each principal business unit,variances against budget and prior year, and other performance data. The principal non-operational risks inherent in the Group's business are credit,market and liquidity risks. a.) Credit riskThe Group takes on exposure to credit risk, which is the risk that acounterparty will be unable to pay amounts in full when due. Impairmentprovisions are provided for losses that have been incurred at the balance sheetdate. Significant changes in the economy, or in the health of a particularindustry segment that represents a concentration in the Group's portfolio, couldresult in losses that are different from those provided for at the balance sheetdate. Credit risk is managed through the Credit Committees of the bankingsubsidiaries, with significant exposures also being approved by the Group RiskCommittee. The Group structures the levels of credit risk it undertakes by placing limitson the amount of risk accepted in relation to one borrower or groups ofborrowers. Such risks are monitored on a revolving basis and subject to anannual or more frequent review. Limits on the level of credit risk are approvedperiodically by the Board of Directors and actual exposures against limits aremonitored daily. Exposure to credit risk is managed through regular analysis of the ability ofborrowers and potential borrowers to meet interest and capital repaymentobligations and by changing these lending limits where appropriate. Exposure tocredit risk is also managed in part by obtaining collateral and corporate andpersonal guarantees. The Group employs a range of policies and practices to mitigate credit risk. Themost traditional of these is the taking of collateral for fund advances, whichis common practice. The principal collateral types for loans and advancesinclude, but are not limited to: • Charges over residential and commercial properties;• Charges over business assets such as premises, inventory and accounts receivable;• Charges over financial instruments such as debt securities and equities;• Personal guarantees; and• Charges over other chattels Upon initial recognition of loans and advances, the fair value of collateral isbased on valuation techniques commonly used for the corresponding assets. In subsequent periods, the fair value is updated by reference to market price or indexes of similar assets. In order to minimise any potential credit loss the Group will seek additionalcapital from the counterparty as soon as impairment indicators are noticed forthe relevant individual loans and advances. Commitments to extend credit represent unused portions of authorisations toextend credit in the form of loans, guarantees or letters of credit. Withrespect to credit risk on commitments to extend credit, the Group is potentiallyexposed to loss in an amount equal to the total unused commitments. However, thelikely amount of loss is less than the total unused commitments, as mostcommitments to extend credit are contingent upon customers maintaining specificcredit standards. The Group's maximum exposure to credit risk before collateral held or othercredit enhancements is as follows: 2007 2006 £000 £000 -------- --------Credit risk exposures relating to on-balance sheet assets are as follows:Loans and advances to banks 39,708 54,214Loans and advances to customers - secured - Arbuthnot Latham 103,604 88,076Loans and advances to customers - secured - Secure Trust Bank 225 241Overdrafts - secured 20,219 18,611Factoring debtors - Arbuthnot Commercial Finance 18,455 14,925Loans and advances to customers - unsecured - Arbuthnot Latham 6,232 2,850Loans and advances to customers - unsecured - Secure Trust Bank 16,398 24,126Overdrafts - unsecured - Arbuthnot Latham 6,024 4,045Credit cards - unsecured 796 664Debt securities held-to-maturity 122,306 105,961Financial investments 6,201 5,856Other assets 33,558 22,397 Credit risk exposures relating to off-balance sheet assets are as follows:Financial guarantees 1,131 333Loan commitments and other credit related liabilities 15,570 11,099 -------- --------At 31 December 390,427 353,398 -------- -------- The above table represents the maximum credit risk exposure (net of impairment)to the Group at 31 December 2007 and 2006, without taking account of anycollateral held or other credit enhancements attached. For on-balance-sheetassets, the exposures are based on the net carrying amounts as reported in thebalance sheet. As shown above, 10% of the total maximum exposure is derived from loans andadvances to banks (2006: 15%); 31% represents investments in debt securitiesissued by banks (2006: 30%). Management is confident of its ability to continue to control the creditexposure to the Company resulting from both its loan and advances portfolio and debt securities based on the following: - All of the exposures to banks, including debt securities, have at least an A2 credit rating;- 75% of the loans are considered to be neither past due nor impaired (2006: 67%);- Only 4% of the loans and advances to customers are considered individually impaired (2006: 5%);- The average loan to collateral value of the loans and advances to customers is 37% (2006: 35%). b.) Market riskPrice riskThe Group is exposed to equity securities price risk because of investments heldby the Group and classified on the consolidated balance sheet either asavailable-for-sale or at fair value through the income statement. The Group isnot exposed to commodity price risk. To manage its price risk arising frominvestments in equity securities, the Group diversifies its portfolio.Diversification of the portfolio is done in accordance with the limits set bythe Group. Based upon the trading book exposure given in note 13, a hypothetical fall of10% in market prices would result in a £2,020,800 (2006: £1,154,000) decrease inthe Group's income and net assets on the equity trading book. Currency riskThe Group takes on exposure to the effects of fluctuations in the prevailingforeign currency exchange rates on its financial position and cash flows. TheBoard sets limits on the level of exposure for both overnight and intra-daypositions, which are monitored daily. The table below summarises the Group'sexposure to foreign currency exchange rate risk at 31 December 2007. Included inthe table overleaf are the Group's assets and liabilities at carrying amounts,categorised by currency. £ US$ Euro Other TotalAt 31 December 2007 £000 £000 £000 £000 £000 -------- -------- -------- -------- --------AssetsLoans and advances to banks 31,045 5,814 2,799 50 39,708Loans and advances to customers 165,373 898 5,682 - 171,953Debt securities 117,321 4,985 - - 122,306Financial investments 3,793 - 2,408 - 6,201Other assets 72,724 993 218 - 73,935 -------- -------- -------- -------- --------Total assets 390,256 12,690 11,107 50 414,103 -------- -------- -------- -------- --------LiabilitiesDeposits from banks 12,679 42 5 - 12,726Deposits from customers 287,531 11,742 1,641 6 300,920Debt securities in issue - - 10,708 - 10,708Other liabilities 46,792 37 405 29 47,263 -------- -------- -------- -------- --------Total liabilities 347,002 11,821 12,759 35 371,617 -------- -------- -------- -------- --------Net on-balance sheet position 43,254 869 (1,652) 15 42,486 -------- -------- -------- -------- --------Credit commitments 15,221 27 322 - 15,570 -------- -------- -------- -------- -------- The table below summarises the Group's exposure to foreign currency exchangerisk at 31 December 2006: £ US$ Euro Other Total £000 £000 £000 £000 £000 -------- -------- -------- -------- --------At 31 December 2006Total assets 345,084 7,934 11,856 31 364,905Total liabilities 293,317 7,806 21,619 7 322,749 -------- -------- -------- -------- --------Net on-balance sheet position 51,767 128 (9,763) 24 42,156 -------- -------- -------- -------- --------Credit commitments 10,859 42 198 - 11,099 -------- -------- -------- -------- -------- Interest rate riskInterest rate risk is the potential adverse impact on the Group's future cashflows from changes in interest rates; and arises from the differing interestrate risk characteristics of the Group's assets and liabilities. In particular,fixed rate savings and borrowing products expose the Group to the risk that achange in interest rates could cause either a reduction in interest income or anincrease in interest expense relative to variable rate interest flows. The Groupseeks to "match" interest rate risk on either side of the balance sheet.However, this is not a perfect match and interest rate risk is present on: Moneymarket deposits of a fixed rate nature, Fixed rate loans and Fixed rate savingsaccounts. The principal interest rate mismatch is in Arbuthnot Latham and thisis monitored on a daily basis in conjunction with liquidity and capital. Theinterest rate mismatch is daily monitored, throughout the maturity bandings ofthe book, on both a parallel and worse case scenario of 50 basis points. Thistypically results in a mismatch of £0.1m to £0.2m. c.) Liquidity riskThe Group is exposed to daily calls on its available cash resources fromovernight deposits, current accounts, maturing deposits, loandrawdowns and guarantees, and from margin and other calls on cash-settled trading securities. The Group does not maintain cash resources to meet all of these needs, as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Group's liquidity is therefore managed on a mismatch basis, the mismatch being the difference between the levels of assets and liabilities in the same maturity bands. The Group's aim is to maintain a prudent liquidity margin when compared with the mismatch criteria set by the regulators. The Group maintains long-term committed bank facilities and use is made of certificates of deposit (debt securities) in the management of liquidity. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain term and of different types. An unmatched position potentially enhances profitability, but also increases the risk of losses. Arbuthnot Latham had committed banking lines of £40m at 31 December 2007,although these have not been required at any point during the year. The maturities of assets and liabilities and the ability to replace, at anacceptable cost, interest-bearing liabilities as they mature are importantfactors in assessing the liquidity of the Group and its exposure to changes ininterest rates and exchange rates. The table below analyses the contractual undiscounted cashflows into relevantmaturity groupings at balance sheet date: More than 3 More than 1 Not more months but year but than 3 less than 1 less than 5 More than 5 months year years years Total At 31 December 2007 £000 £000 £000 £000 £000 -------- -------- -------- -------- --------AssetsLoans and advances to banks 38,708 1,000 - - 39,708Loans and advances to customers 109,785 33,028 23,887 5,253 171,953Debt securities 57,082 65,224 - - 122,306Other assets 62,053 3,113 2,594 12,376 80,136 -------- -------- -------- -------- --------Total assets 267,628 102,365 26,481 17,629 414,103 -------- -------- -------- -------- --------LiabilitiesDeposits from banks 12,726 - - - 12,726Deposits from customers 238,537 61,762 621 - 300,920Other liabilities 18,528 1,571 5 37,867 57,971 -------- -------- -------- -------- --------Total liabilities 269,791 63,333 626 37,867 371,617 -------- -------- -------- -------- --------Net liquidity gap (2,163) 39,032 25,855 (20,238) 42,486 -------- -------- -------- -------- --------At 31 December 2006Total assets 216,707 73,215 27,792 47,191 364,905Total liabilities 251,971 60,826 179 9,773 322,749 -------- -------- -------- -------- --------Net liquidity gap (35,264) 12,389 27,613 37,418 42,156 -------- -------- -------- -------- -------- Fair values of financial assets and liabilitiesThe carrying amounts of those financial assets and liabilities not presented onthe Group's balance sheet at fair value are not materially different from theirfair values. Fiduciary activitiesThe Group provides trustee, investment management and advisory services to thirdparties, which involve the Group making allocation and purchase and saledecisions in relation to a wide range of financial instruments. Those assetsthat are held in a fiduciary capacity are not included in these financialstatements. These services give rise to the risk that the Group may be accusedof maladministration or underperformance. At the balance sheet date, the Group had investment management accounts amounting to approximately £193 million (2006: £170 million).Additionally the Group provides investment advisory services. d.) Concentration riskThe Group is well diversified in the UK, being exposed to retail banking,private banking and investment banking. Management assesses the potentialconcentration risk from a number of areas including: • geographical concentration• product concentration; and• high value residential properties Due to the well diversified nature of the Group and the significant collateralheld against the loan book, the Directors do not consider there to be apotential material exposure arising from concentration risk. 4. Capital management The Group's capital management policy is focused on optimising shareholdervalue. There is a clear focus on delivering organic growth and ensuring capitalresources are sufficient to support planned levels of growth. The Boardregularly reviews the capital position. Capital adequacy and the use of regulatory capital are monitored daily by theGroup's management, employing techniques based on the guidelines developed by the Basel Committee and the European Community Directives, as implemented by the Financial Services Authority (FSA), for supervisory purposes. For the year ended 31 December 2007, under Prudential Source Book for Banks, theFSA requires each bank or banking group to maintain a ratio of total regulatory capital to the risk weighted asset above the minimum amount set by the FSA. From 1 January 2008, the Capital Requirement Directive (CRD) that implementsBasel II took effect. The Group agreed its Individual Capital Guidance ("ICG")with the FSA under the new regime in December 2007 and has moved to the newregime as of 1 January 2008. The Group's regulatory capital is divided into two tiers: • Tier 1 comprises mainly shareholders' funds, minority interest, afterdeducting goodwill and other intangible assets.• Tier 2 comprises qualifying subordinated loan capital and revaluationreserves. Tier 2 capital cannot exceed 50% of tier 1 capital. Total capital is reduced by deducting investments in subsidiaries that are notconsolidated for regulatory purposes. Risk weighted assets are determined according to a broad categorisation of thenature of each asset or exposure and counterparty. The table below summarises the composition of regulatory capital and the ratiosof the Group for the 2 years ended 31 December 2007. During those two years, theindividual entities within the Group and the Group complied with all of theexternally imposed capital requirements to which they are subject. 2007 2006 £000 £000 -------- --------Tier 1 35,292 37,543Tier 2 12,205 11,456Deductions (828) (828) -------- --------Total capital 46,669 48,171 -------- --------Total risk weighted assets 220,790 211,423 -------- --------Risk asset ratio 21.1% 22.8% -------- -------- 5. Fee and commission income Fee and commission income includes loan-related fees of £858,000 (2006:£958,000) which have been recognised under the effective interest method. 2007 2006 £000 £000 -------- --------Fee and commission income:Trust and other fiduciary fees 1,944 1,442Other fees 52,070 46,975 -------- -------- 54,014 48,417 -------- -------- 6. Operating profit on ordinary activities before tax Operating expenses comprise: 2007 2006 £000 £000 -------- --------Staff costs, including Directors:Wages and salaries 29,500 26,062Social security costs 3,540 3,093Pension costs 2,123 1,769Amortisation of computer software (Note 18) 417 403Depreciation (Note 19) 1,248 1,557Profit on disposals of property, plant and equipment (33) (119)Profit on sale of minority interest (Note 32) (54) -Charitable donations 35 10Operating lease rentals 2,366 465Other administrative expenses 18,835 15,432 -------- -------- 57,977 48,672Exceptional operating expenses - 3,212 -------- --------Total operating expenses 57,977 51,884 -------- -------- Exceptional operating expenses comprise in the Company £NIL (2006: £1,900,000)in respect of the long service bonus award made possible by the sale ofArbuthnot House and redundancy and reorganisation costs of £NIL (2006: £323,000)and further redundancy and reorganisation costs in Secure Trust Bank £NIL (2006:£458,000) , Arbuthnot Latham £NIL (2006: £257,000) and Arbuthnot Securities £NIL(2006: £274,000) . The total cost of £NIL (2006: £3,212,000) does not relate tothe ongoing profitability of the Group and is accordingly disclosed as anexceptional item. Corporation tax relief at 30% applies to the total cost. The auditors' remuneration for the audit of the Company's accounts was £41,000(2006: £7,000) and fees payable for the audit of the accounts of associates ofthe Company was £357,000 (2006: £307,000). Remuneration of the auditors fornon-audit services was: services related to taxation £24,000 (2006: £30,000);corporate finance transactions £NIL (2006: £15,000) and all other services£46,000 (2006: £3,000). Interest income of £134,000 (2006: £99,000) has been accrued on impaired loansand advances. 7. Average number of employees 2007 2006 -------- --------Retail banking 367 374Private banking 160 163Investment banking 78 75Group 16 14 -------- -------- 621 626 -------- -------- 8. Income tax expense 2007 2006 £000 £000 -------- --------United Kingdom corporation tax at 30% (2006: 30%)Current 2,563 3,757Deferred 329 (432)Under/(over) provided in prior yearsCurrent (10) (21)Deferred (90) 180 -------- --------Income tax expense 2,792 3,484 -------- --------Tax reconciliationProfit before tax 8,579 14,062Tax at 30% (2006: 30%) 2,574 4,219Capital allowances in excess of depreciation - 5Tax rate change 15 -Expenses not deductible for tax purposes 303 (541)Prior period adjustments (100) (199) -------- --------Corporation tax charge for the year 2,792 3,484 -------- -------- During the year, as a result of the change in UK Corporation Tax rates whichwill be effective from 1 April 2008, deferred tax balances have been remeasured.Deferred tax relating to temporary differences which are expected to reverseprior to 1 April 2008 is measured at 30% and deferred tax relating to temporarydifferences expected to reverse after 1 April 2008 is measured at the tax rateof 28% as these are the tax rates that will apply on reversal. 9. Prior year adjustments a.) Restatement of tax liabilitiesAs a result of the utilisation of tax losses previously not recognised andsubsequent re-allocation of Group Relief, opening balances as at 1 January 2006have been restated. The effect of this restatement on the closing balances as at31 December 2005 is summarised in the table below. Disclosed Tax liabilities Loans to Restated customers 31/12/2005 31/12/2005Company £000 £000 £000 £000 -------- -------- -------- --------Due from subsidiary undertakings 6,453 (901) - 5,552Retained earnings 9,493 (901) - 8,592 b.) Restatement of loans to customers and taxAs a result of errors relating to income recognition on loans and advances tocustomers and unutilised tax losses, opening balances as at 1 January 2006 and 1January 2007 have been restated. The effect of these restatements on the closingbalances as at 31 December 2005 and 31 December 2006 is summarised in the tablesbelow . Disclosed Tax liabilities Loans to Restated customers 31/12/2005 31/12/2005Group £000 £000 £000 £000 -------- -------- -------- --------Current tax liabilities (790) (63) 413 (440)Loans and advances to customers 140,151 - (1,378) 138,773Retained earnings 11,111 (63) (965) 10,083 This restatement has an impact on profits attributable to equity holders for theyear ended 31 December 2006 and reduces attributable profits from £4,833,000 to£4,716,000, the effect of this restatements on the closing balances as at 31December 2006 is summarised below: Disclosed Adjusted Tax liabilities Loans to Restated 01/01/06 customers and tax 31/12/2006 31/12/2006Group £000 £000 £000 £000 £000 -------- -------- -------- -------- --------Current tax liabilities (3,486) 350 359 202 (2,575)Loans and advances to customers 155,594 (1,378) - (678) 153,538Retained earnings 17,866 (1,028) 359 (476) 16,721 10. Earnings per ordinary share Basic and fully dilutedEarnings per ordinary share are calculated on the net basis by dividing theprofit attributable to equity holders of the Company of £3,555,000 (2006:£9,274,000) by the weighted average number of ordinary shares 14,943,944 (2006:14,716,433) in issue during the year. There is no difference between basic andfully diluted earnings per ordinary share. 11. Cash 2007 2006 £000 £000 -------- --------Cash in hand included in cash and cash equivalents (Note 30) 520 181 -------- -------- 12. Loans and advances to banks 2007 2006 £000 £000 -------- --------Placements with banks included in cash and cash equivalents (Note 30) 39,708 54,214 -------- -------- The table below presents an analysis of loans and advances to banks by ratingagency designation as at 31 December, based on Moody's long term ratings: 2007 2006 £000 £000 -------- --------Aaa 3,257 1,466Aa1 10,853 20,929Aa2 18,832 16,506Aa3 3,762 69A1 1,004 5,244A2 2,000 5,000A3 - 5,000 -------- -------- 39,708 54,214 -------- -------- None of the loans and advances to banks is either past due or impaired. 13. Trading securities, all held at fair value through profit or loss 2007 2006 £000 £000 -------- --------Unlisted equity securities:Long positions 1,532 330 -------- --------Listed equity securities:Long positions 21,538 8,765Short positions (5,105) (2,303) -------- -------- 16,433 6,462 -------- -------- The following table shows the Group's trading book exposure to market price riskfor the year ended 31 December 2007: Highest Lowest exposure Average Exposure as at exposure exposure 31 December £000 £000 £000 £000 -------- -------- -------- --------Equities:Long 26,910 9,049 16,182 23,070Short (11,782) (2,495) (5,789) (5,105) -------- -------- -------- -------- The following table shows the Group's trading book exposure to market price riskfor the year ended 31 December 2006: Highest Lowest exposure Average Exposure as at exposure exposure 31 December £000 £000 £000 £000 -------- -------- -------- --------Equities:Long 12,280 4,836 8,385 9,095Short (5,612) (930) (3,495) (2,303) -------- -------- -------- -------- The average exposure has been calculated on a daily basis. The highest andlowest exposures occurred on different dates and therefore a net position ofthese exposures does not reflect a spread of the trading book. The basis onwhich the trading book is valued each day is given in the accounting policies innote 1.9. 14. Loans and advances to customers 2007 2006 £000 £000 -------- --------Gross loans and advances 177,697 160,160Less: allowances for impairment on loans and advances (Note 15) (5,744) (6,622) -------- -------- 171,953 153,538 -------- -------- For a maturity profile of loans and advances to customers, refer to Note 3. Loans and advances to customers include financelease receivables as follows: 2007 2006 £000 £000 -------- --------Gross investment in finance lease receivables:- No later than 1 year 2,239 1,228- Later than 1 year and no later than 5 years 154 268- Later than 5 years - - -------- -------- 2,393 1,496Unearned future finance income on finance leases (120) (150) -------- --------Net investment in finance leases 2,273 1,346 -------- --------The net investment in finance leases may be analysed as follows:- No later than 1 year 2,133 1,109- Later than 1 year and no later than 5 years 140 237- Later than 5 years - - -------- -------- 2,273 1,346 -------- -------- Loans and advances to customers can be further summarised as follows: 2007 2006 £000 £000 -------- --------Neither past due nor impaired 132,956 107,466Past due but not impaired 37,393 44,624Impaired 7,348 8,070 -------- --------Gross 177,697 160,160Less: allowance for impairment (5,744) (6,622) -------- --------Net 171,953 153,538 -------- -------- a.) Loans and advances past due but not impairedGross amounts of loans and advances to customers that were past due but notimpaired were as follows: 2007 2006 £000 £000 -------- --------Past due up to 30 days 8,508 8,136Past due 30 - 60 days 6,681 6,603Past due 60 - 90 days 3,541 3,524Over 90 days 18,663 26,361 -------- --------Total 37,393 44,624 -------- -------- Loans and advances normally fall into this category when there is a delay ineither the sale of the underlying collateral or the completion of formalities toextend the credit facilities for a further period. Management have no materialconcerns regarding the quality of the collateral that secures the lending. b.) Loans and advances renegotiatedRestructuring activities include external payment arrangements, modification anddeferral of payments. Following restructuring, a previously overdue customeraccount is reset to a normal status and managed together with other similaraccounts. Restructuring policies and practices are based on indicators orcriteria which, in the judgement of local management, indicate that payment willmost likely continue. These policies are kept under continuous review.Renegotiated loans that would otherwise be past due or impaired totalled £NIL(2006: £NIL). c.) Collateral heldAn analysis of loans and advances to customers by reference to the fair value ofthe underlying collateral is as follows: 2007 2006 £000 £000 -------- --------Neither past due nor impaired 294,236 238,341Past due but not impaired 43,185 62,793Impaired 1,951 1,059 -------- --------Fair value of collateral held 339,372 302,193 -------- -------- The fair value of the collateral held is £339,372,000 against £124,048,000secured loans, giving an average loan-to-value of 37%. The gross amount of individually impaired loans and advances to customers beforetaking into account the cash flows from collateral held is £7,348,000 (2006:£8,070,000). 15. Allowances for impairment of loans and advances A reconciliation of the allowance account for losses on loans and advances byclass is as follows: 2007 2006 £000 £000 -------- --------At 1 January 6,622 3,017Adjustments for disposals (2,627) -Exceptional provision for loan impairment - 2,900Impairment losses 2,237 1,986Loans written off during the year as uncollectable (988) (1,291)Amounts recovered during the year 500 10 -------- --------At 31 December 5,744 6,622 -------- -------- A further analysis of allowances for impairment of loans and advances is asfollows: 2007 2006 £000 £000 -------- --------Loans and advances to customers - secured - Arbuthnot Latham 306 121Loans and advances to customers - secured - Secure Trust Bank - -Overdrafts - secured 113 -Factoring debtors - Arbuthnot Commercial Finance 30 100Loans and advances to customers - unsecured - Arbuthnot Latham 382 146Loans and advances to customers - unsecured - Secure Trust Bank 4,815 6,127Overdrafts - unsecured - Arbuthnot Latham 38 96Credit cards - unsecured 60 32 -------- --------At 31 December 5,744 6,622 -------- -------- 16. Debt securities held-to-maturity Debt securities represent certificates of deposit. The Group's intention is tohold them to maturity and, therefore, they are stated in the balance sheet atamortised cost. Amounts include £15,705,000 (2006: £29,323,000) with a maturity,when placed, of 3 months or less included in cash and cash equivalents (Note30). The movement in debt securities held to maturity may be summarised as follows: 2007 2006 £000 £000 -------- --------At 1 January 105,961 88,389Exchange difference on monetary assets 102 (278)Additions 301,560 240,897Redemptions (285,317) (223,047) -------- --------At 31 December 122,306 105,961 -------- -------- The table below presents and analysis of debt securities by rating agencydesignation at 31 December, based on Moody's long term ratings: 2007 2006 £000 £000 -------- --------Aaa 22,425 4,999Aa1 26,385 12,035Aa2 44,275 19,144Aa3 1,221 35,748A1 28,000 15,000A2 - 19,035 -------- -------- 122,306 105,961 -------- -------- None of the debt securities held-to-maturity are either past due or impaired. 17. Financial investments 2007 2006Group: £000 £000 -------- --------Financial investments comprise:- Listed securities (at fair value through profit and loss) 3,793 3,902- Unlisted securities (available-for-sale) 2,408 1,954 -------- --------Total financial investments 6,201 5,856 -------- -------- Unlisted securitiesThe Group has made equity investments in unlisted special purpose vehicles setup to acquire and enhance the value of commercial properties. These investmentsare of a medium term nature. There is no open market for these securities anddue to the nature of the underlying assets any valuation would containsignificant estimation. Consequently, the Directors believe that it isappropriate to hold these unlisted investments at cost. The Directors intend todispose of these assets when a suitable buyer has been identified and when theDirectors believe that the underlying assets have reached their maximum value. 2007 2006Company: £000 £000 -------- --------Financial investments comprise:- Listed securities (at fair value through profit and loss) 1,773 3,902 -------- -------- 18. Intangible assets Goodwill 2007 2006 £000 £000 -------- --------Opening net book amount 2,005 2,005Arising on acquisition (Note 32) 37 - -------- --------Closing net book amount 2,042 2,005 -------- -------- Computer software At 1 January 2006Cost 2,266Accumulated amortisation (1,271) -------- Net book amount 995 -------- Year ended 31 December 2006Opening net book amount 995 Additions 428Amortisation charge (403) -------- Closing net book amount 1,020 -------- At 31 December 2006Cost 2,694Accumulated amortisation (1,674) -------- Net book amount 1,020 -------- Year ended 31 December 2007Opening net book amount 1,020Additions 493Amortisation charge (417) -------- Closing net book amount 1,096 -------- At 31 December 2007Cost 3,187Accumulated amortisation (2,091) -------- Net book amount 1,096 -------- 2007 2006 £000 £000 -------- --------Total intangible assets:Goodwill 2,042 2,005Computer software 1,096 1,020 -------- --------Net book amount at 31 December 3,138 3,025 -------- -------- 19. Property, plant and equipment Freehold land Computer and Operating Motor vehicles Total and buildings other equipment leasesGroup: £000 £000 £000 £000 £000 -------- -------- -------- -------- --------At 1 January 2006 27,752 10,454 - 1,895 40,101Accumulated depreciation (276) (7,296) - (1,071) (8,643) -------- -------- -------- -------- --------Net book amount 27,476 3,158 - 824 31,458 -------- -------- -------- -------- --------Year ended 31 December 2006Opening net book amount 27,476 3,158 - 824 31,458Additions - 873 888 492 2,253Disposals (20,878) (396) - (242) (21,516)Depreciation charge (260) (903) (51) (343) (1,557) -------- -------- -------- -------- --------Closing net book amount 6,338 2,732 837 731 10,638 -------- -------- -------- -------- --------At 31 December 2006Cost or valuation 6,581 10,614 888 1,637 19,720Accumulated depreciation (243) (7,882) (51) (906) (9,082) -------- -------- -------- -------- --------Net book amount 6,338 2,732 837 731 10,638 -------- -------- -------- -------- --------Year ended 31 December 2007Opening net book amount 6,338 2,732 837 731 10,638Additions - 1,368 1,046 115 2,529Disposals - - - (468) (468)Depreciation charge (122) (854) (110) (162) (1,248) -------- -------- -------- -------- --------Closing net book amount 6,216 3,246 1,773 216 11,451 -------- -------- -------- -------- --------At 31 December 2007Cost or valuation 6,581 12,008 1,934 928 21,451Accumulated depreciation (365) (8,762) (161) (712) (10,000) -------- -------- -------- -------- --------Net book amount 6,216 3,246 1,773 216 11,451 -------- -------- -------- -------- -------- On 20 December 2006 the Group entered into a sale and leaseback of ArbuthnotHouse. The property was sold for £35 million, which resulted in a profit on sale(after costs) of £12,623,000. The Group has entered into an agreement to leasethe premises for a period of up to 15 years (see note 26). Freehold property was professionally revalued at 31 December 2004 at marketvalue by Grenville Smith & Duncan, Chartered Surveyors, and Fraser Wood Mayo &Pinson, Chartered Surveyors. These valuations were made in accordance with the RICS appraisal and valuationmanual. The Directors do not believe that the fair value of freehold property ismaterially different from the carrying value. All freehold land and buildings are occupied and used by Group companies. Thecarrying value of freehold land not depreciated is £0.5 million (2006: £0.5million). The historical cost of freehold property included at valuation is as follows: 2007 2006 restated £000 £000 -------- --------Cost 3,980 3,980Accumulated depreciation (641) (571) -------- --------Net book amount 3,339 3,409 -------- -------- Computer and Motor Total other equipment vehiclesCompany: £000 £000 £000 -------- -------- --------At 1 January 2006 103 271 374Accumulated depreciation (32) (179) (211) -------- -------- --------Net book amount 71 92 163 -------- -------- --------Year ended 31 December 2006Opening net book amount 71 92 163Additions 10 22 32Disposals - (7) (7)Depreciation charge (5) (47) (52) -------- -------- --------Closing net book amount 76 60 136 -------- -------- --------At 31 December 2006Cost or valuation 113 259 372Accumulated depreciation (37) (199) (236) -------- -------- --------Net book amount 76 60 136 -------- -------- --------Year ended 31 December 2007Opening net book amount 76 60 136Additions 3 40 43Disposals - (36) (36)Depreciation charge (4) (37) (41) -------- -------- --------Closing net book amount 75 27 102 -------- -------- --------At 31 December 2007Cost or valuation 116 164 280Accumulated depreciation (41) (137) (178) -------- -------- --------Net book amount 75 27 102 -------- -------- -------- 20. Other assets 2007 2006 restated £000 £000 -------- --------Trade receivables 27,538 12,816Prepayments and accrued income 6,020 9,581 -------- -------- 33,558 22,397 -------- -------- Prepayments and accrued income include £2,309,000 relating to interest earnedon debt securities held to maturity. 21. Deposits from banks 2007 2006 £000 £000 -------- --------Deposits from other banks 12,726 7,729 -------- -------- For a maturity profile of deposits from banks, refer to Note 3. 22. Deposits from customers 2007 2006 £000 £000 -------- --------Retail customers:- current/demand accounts 153,185 106,726- term deposits 147,735 163,722 -------- -------- 300,920 270,448 -------- -------- Included in deposits from customers are deposits of £11,289,000 (2006:£9,741,000) held as collateral for loans and advances. The fair value of thesedeposits approximates the carrying value. For a maturity profile of deposits from customers, refer to Note 3. 23. Other liabilities 2007 2006 restated £000 £000 -------- --------Trade payables 27,874 14,057Accruals and deferred income 14,010 15,829 -------- -------- 41,884 29,886 -------- -------- Accruals and deferred income include £643,000 relating to interest payable ontime deposits within deposits from customers. 24. Debt securities in issue 2007 2006 restated £000 £000 -------- --------Subordinated loan notes 2035 10,708 9,773 -------- -------- The subordinated loan notes 2035 were issued on 7 November 2005 and aredenominated in Euros. The principal amount outstanding at 31 December 2007 was €15 million. The notes carry interest at 3% over the interbank rate for three month deposits in euros and are repayable at par in August 2035 unless redeemed or repurchased earlier by the Company. The contractual undiscounted amount that will be required to be paid at maturityof the above debt securities is €15,000,000. There were no significant gains or losses attributable to changes in the creditrisk for those financial liabilities designated at fair value in 2007 (2006: £NIL). 25. Deferred taxation 2007 2006 £000 £000 -------- --------The deferred tax liability comprises:Unrealised surplus on revaluation of freehold property 478 611Accelerated capital allowances (140) (475)Short-term timing differences (64) (101) -------- -------- 274 35 -------- -------- At 1 January 35 1,116Profit and loss account 239 (246)Revaluation reserve - (835) -------- --------At 31 December 274 35 -------- -------- 26. Contingent liabilities and commitments Capital commitmentsAt 31 December 2007, the Group had capital commitments of £NIL (2006: £50,000)in respect of equipment purchases. Credit commitmentsThe contractual amounts of the Group's off-balance sheet financial instrumentsthat commit it to extend credit to customers are as follows: 2007 2006 £000 £000 -------- --------Guarantees and other contingent liabilities 1,131 316Documentary letters of credit - 13Commitments to extend credit:- Original term to maturity of one year or less 15,570 11,099 -------- -------- 16,701 11,428 -------- -------- Operating lease commitmentsWhere a Group company is the lessee, the future aggregate lease payments undernon-cancellable operating leases are as follows: 2007 2006 £000 £000 -------- --------Expiring:Within 1 year 2,040 2,145Later than 1 year and no later than 5 years 6,156 8,046Later than 5 years 673 504 -------- -------- 8,869 10,695 -------- -------- On 20 December 2006 the Group entered into a sale and leaseback transaction inrespect of Arbuthnot House (see note 19). The term in respect of this lease is 15 years with a tenant only break clause on the fifth anniversary, with an annual commitment of £1.705 million. 27. Share capital Number of Ordinary shares Share premium shares £000 £000 -------- -------- --------At 1 January 2006 14,234,219 143 17,115Proceeds of shares issued 709,725 7 3,970 -------- -------- --------At 31 December 2006 / 1January 2007 14,943,944 150 21,085 -------- -------- --------Proceeds of shares issued - - - -------- -------- --------At 31 December 2007 14,943,944 150 21,085 -------- -------- -------- The total authorised number of ordinary shares at 31 December 2007 and 31December 2006 was 418,439,000 with a par value of 1 pence per share (2006: 1pence per share). All issued shares are fully paid. 28. Reserves and retained earnings 2007 2006Group £000 £000 -------- --------Revaluation reserve 1,382 1,382Capital redemption reserve 20 20Retained earnings 15,419 16,721 -------- --------Total reserves as 31 December 16,821 18,123 -------- -------- Movements in retained earnings were as follows: 2007 2006 £000 £000 -------- --------At 1 January 16,721 11,111Restatement of loans to customers - (1,028) -------- --------Restatement of balance at 1 January 16,721 10,083Profit for the year 3,555 9,274Interim dividend for the year (1,570) (1,569)Final dividend for prior year (3,287) (3,060)Transfer from revaluation reserve - 1,993 -------- --------At 31 December 15,419 16,721 -------- -------- 2007 2006Company £000 £000 -------- --------Capital redemption reserve 20 20 -------- -------- Movements in retained earnings were as follows: 2007 2006 £000 £000 -------- --------At 1 January 9,075 9,493Restatement of tax liabilities - (901) -------- --------Restatement of balance at 1 January 9,075 8,592Profit for the year 782 5,112Interim dividend for the year (1,570) (1,569)Final dividend for prior year (3,287) (3,060) -------- --------At 31 December 5,000 9,075 -------- -------- 29. Dividend Final dividends are not accounted for until they have been approved at theAnnual General Meeting. At the meeting on 14 May 2008, a dividend in respect of2007 of 22.5 pence per share (2006: actual dividend 22.0 pence per share)amounting to a total of £3,362,387 (2006: actual £3,287,668) is to be proposed.A scrip dividend alternative is proposed in respect of half of the finaldividend. The financial statements for the year ended 31 December 2007 do notreflect the final dividend, which will be accounted for in shareholders' equityas an appropriation of retained profits in the year ending 31 December 2008. 30. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprisesthe following balances with less than three months maturity from the date ofacquisition. 2007 2006 £000 £000 -------- --------Cash (Note 11) 520 181Loans and advances to banks (Note 12) 39,708 54,214Debt securities held to maturity (Note 16) 15,705 29,323 -------- -------- 55,933 83,718 -------- -------- 31. Related-party transactions Other than the Directors' remuneration and payment of dividends there were norelated party transactions within the parent Company.A number of banking transactions are entered into with related parties in thenormal course of business on normal commercial terms. These include loans anddeposits. The volumes of related-party transactions, outstanding balances at theyear end, and relating expense and income for the year are as follows: Directors and key management personnel 2007 2006 £000 £000 -------- --------LoansLoans outstanding at 1 January 1,399 1,060Loans issued during the year 424 838Loan repayments during the year (385) (499) -------- --------Loans outstanding at 31 December 1,438 1,399 -------- --------Interest income earned 121 60 -------- -------- The loans to directors are secured on property or shares and bear interest atrates linked to base rate. No provisions have been recognised in respect ofloans given to related parties (2006: £NIL). Details of Directors' remuneration are given in the Remuneration Report in theAnnual Report. The Directors do not believe that any other key managementdisclosures are required. Directors and key management personnel 2007 2006 £000 £000 -------- --------DepositsDeposits at 1 January 1,607 1,575Deposits received during the year 6,660 4,599Deposits repaid during the year (6,698) (4,567) -------- --------Deposits at 31 December 1,569 1,607 -------- --------Interest expense on deposits 48 77 -------- -------- Arbuthnot Securities Limited received a fee of £15,000 (2006: £15,000) in itscapacity as stockbroker to the Group. Arbuthnot Latham & Co., Limited receivedfees from the Group totalling £NIL (2006: £23,000) for advisory andadministration services provided to the Trustees of the Secure Trust PensionScheme. 32. Minority interests 2007 2006 £000 £000 -------- --------At 1 January 2,798 1,312Sale of minority interest in Arbuthnot Securities Limited 64 187Purchase of minority interest in Arbuthnot Commercial Finance Limited (73) -Profit and loss account 2,232 1,304Dividends paid (591) (5) -------- -------- 4,430 2,798 -------- -------- As described in Note 33, the Group sold 0.7% (2006: 3.9%) of the issued ordinaryshare capital in Arbuthnot Securities Limited to its staff via the Arbuthnot No.2 ESOP Trust. The impact of the transaction on the Group's consolidatedfinancial statements is summarised below: 2007 2006 £000 £000 -------- --------Sale proceeds 118 187Share of net assets sold (64) (187) -------- --------Profit on sale 54 - -------- -------- As described in Note 33, the Group has bought 6.1% of the issued ordinary sharecapital in Arbuthnot Commercial Finance Limited The impact of the transaction on the Group's consolidated financial statementsis summarised below: 2007 2006 £000 £000 -------- --------Purchase price 110 -Share of net assets bought (73) - -------- --------Goodwill 37 - -------- -------- 33. Shares in subsidiary undertakings Shares at cost Impairment Net provisions £000 £000 £000 -------- -------- --------Arbuthnot Banking Group PLC:At 1 January 2007 (restated) 31,973 (2,984) 28,989Sale of minority interest in Arbuthnot Securities Limited (25) 5 (20)Purchase of Arbuthnot AG 42 - 42Purchase of minority interest in Arbuthnot Commercial Finance Limited 110 - 110 -------- -------- --------At 31 December 2007 32,100 (2,979) 29,121 -------- -------- -------- 2007 2006 £000 £000 -------- --------Subsidiary undertakings:Banks 24,486 24,444Other 4,635 4,545 -------- --------Total unlisted 29,121 28,989 -------- -------- On 17 September 2007, under the terms of the Arbuthnot Securities Long TermIncentive Plan, the Group sold 14,000 ordinary shares in Arbuthnot Securities Limited to its staff via the Arbuthnot No. 2 ESOP Trust for a total consideration of £118,300. These shares represent 0.7% of the issuedordinary share capital of Arbuthnot Securities Limited (see Note 32). On 16 April 2007, the Group purchased 30,625 ordinary shares in ArbuthnotCommercial Finance Limited for a total consideration of £110,106. These shares represent 6.1% of the issued ordinary share capital ofArbuthnot Commercial Finance Limited (see Note 32). The principal subsidiary undertakings of Arbuthnot Banking Group PLC at 31December 2007 were: Country of Interest % Principal activity incorporation Secure Trust Bank PLC UK 100 Household cash management and bankingOBC Insurance Consultants Limited UK 100 Motor and general insuranceArbuthnot Latham & Co., Limited UK 100 Private banking Arbuthnot AG Switzerland 100 Private bankingArbuthnot Commercial Finance Limited UK 98 FactoringArbuthnot Securities Limited UK 59.6 Investment banking (i) All the above subsidiary undertakings are included in the consolidatedfinancial statements and have an accounting reference date of 31 December. (ii) All the above interests relate wholly to ordinary shares. 34. Business segments The Group is organised into four main business segments: 1) Retail banking - incorporating household cash management, personal lending and banking and insurance services.2) International Private banking - incorporating private banking and wealth management outside the UK3) UK Private banking - incorporating private banking, wealth management and invoice factoring services.4) Investment banking - incorporating institutional stockbroking, equity trading and corporate finance advice. Transactions between the business segments are on normal commercial terms.Segment assets and liabilities comprise operating assets and liabilities, beingthe majority of the balance sheet. Retail banking International UK private Investment Group costs Subordinated Group total private banking banking banking loan stockYear ended 31 December 2007 £000 £000 £000 £000 £000 £000 £000 ------ -------- -------- -------- -------- -------- --------Segment operating income 22,836 - 17,264 29,346 100 (753) 68,793 ------ -------- -------- -------- -------- -------- --------Segment profit/(loss) 4,550 (266) 1,454 8,076 (4,482) - 9,332Subordinated loan noteinterest - - - - - (753) (753) ------ -------- -------- -------- -------- -------- --------Profit/(Loss) beforeexceptional items 4,550 (266) 1,454 8,076 (4,482) (753) 8,579Exceptional items - - - - - - - ------ -------- -------- -------- -------- -------- --------Profit/(Loss) before income tax 4,550 (266) 1,454 8,076 (4,482) (753) 8,579 ------ -------- -------- -------- -------- -------- --------Segment net assets 7,903 - 28,387 12,049 4,855 (10,708) 42,486 ------ -------- -------- -------- -------- -------- --------Segment total assets 50,889 - 327,741 44,347 (8,874) - 414,103 ------ -------- -------- -------- -------- -------- --------Segment total liabilities 42,986 - 299,354 32,298 (13,729) 10,708 371,617 ------ -------- -------- -------- -------- -------- --------Other segment items:Capital expenditure 1,238 - 1,660 77 47 - 3,022Depreciation andamortisation 793 - 779 90 4 - 1,666Impairmentcharge - loans 1,447 - 740 50 - - 2,237 ------ -------- -------- -------- -------- -------- -------- Retail banking International UK private Investment Group costs Subordinated Group total private banking banking banking loan stockRestated - Year ended 31December 2006 £000 £000 £000 £000 £000 £000 £000 ------ -------- -------- -------- -------- -------- --------Segment operatingincome 23,558 - 13,555 21,744 - (648) 58,209 ------ -------- -------- -------- -------- -------- --------Segment profit/(loss) 6,081 - 341 4,959 (3,182) - 8,199Subordinatedloan noteinterest - - - - - (648) (648) ------ -------- -------- -------- -------- -------- --------Profit/(Loss) beforeexceptional items 6,081 - 341 4,959 (3,182) (648) 7,551Exceptional items (3,358) - 12,366 (274) (2,223) - 6,511 ------ -------- -------- -------- -------- -------- --------Profit/(Loss) before income tax 2,723 - 12,707 4,685 (5,405) (648) 14,062 ------ -------- -------- -------- -------- -------- --------Segment net assets 6,558 - 29,224 7,915 8,232 (9,773) 42,156 ------ -------- -------- -------- -------- -------- --------Segment total assets 50,800 - 302,912 23,835 (12,642) - 364,905 ------ -------- -------- -------- -------- -------- --------Segment total liabilities 44,242 - 273,688 15,920 (20,874) 9,773 322,749 ------ -------- -------- -------- -------- -------- --------Other segment items:Capital expenditure 754 - 1,879 16 32 - 2,681Depreciation andamortisation 1,002 - 780 126 52 - 1,960Impairmentcharge - loans 4,843 - 43 - - - 4,886 ------ -------- -------- -------- -------- -------- -------- Segment profit is shown prior to any intra-group eliminations. Other than the International private banking operations which are inSwitzerland, all the Group's other operations are conducted wholly within theUnited Kingdom and geographical information is therefore not presented. 35. Ultimate controlling party The Company regards Henry Angest, the Group Chairman and Chief ExecutiveOfficer, who has a beneficial interest in 52.6% of the issued share capital ofthe Company, as the ultimate controlling party. Details of his remuneration aregiven in the Remuneration Report and Note 31 to the consolidated financialstatements includes related party transactions with Mr Angest. FIVE YEAR SUMMARY In the table below, the figures for 2005, 2006 and 2007 are presented inaccordance with IFRS. Earlier years' figures have not been restated under IFRSand accordingly are shown on a UK GAAP basis. 2003 2004 2005 2006 2007 (i) (i) (i) Restated £000 £000 £000 £000 £000 -------- -------- -------- -------- --------Profit before tax and exceptional items* 5,789 4,382 7,367 7,551 8,579Profit before tax 3,878 2,996 7,676 14,062 8,579Earnings per shareBasic (p) 20.1 22.0 45.8 63.0 23.8Adjusted* (p) 31.9 27.2 32.6 32.0 23.8Dividends per share (p) 31.0 31.5 32.0 32.5 33.0 * The exceptional items and the adjusted earnings per share reflect, in 2003,redundancy and reorganisation costs together with the write-off of goodwillarising from the professional expenses of the acquisition of ArbuthnotSecurities in 2004, redundancy and reorganisation costs together with the costsof the consolidation of the London offices into Arbuthnot House, in 2005exceptional items included reorganisation and redundancy costs of £486,000, thecosts of moving to AIM of £55,000 and a profit on the sale of minority interestsof £850,000 and in 2006 exceptional items include the profit on disposal ofArbuthnot House of £12,623,000, long term bonuses of £1,900,000, restructuringcosts of £1,312,000 and affinity bad debt of £2,900,000. (i) The prior year adjustments, referred to in Note 9, of £1,028,000 relating toyears earlier than 2006 have not been included in the pre 2006 figures disclosedin the table above. This information is provided by RNS The company news service from the London Stock Exchange