Arbuthnot Regulatory News (ARBB)

PRESS RELEASE

For immediate Release

20 March 2014

SECURE TRUST BANK PLC

Audited Final Results for the year to 31 December 2013

Continued growth and record profits

Secure Trust Bank PLC ("STB" or "the Company") today announces continued strong progress during 2013. An increase in customer lending balances of 31% and an increase in overall customer numbers of 51% demonstrate the appeal of STB's simple straightforward banking philosophy. Record underlying profits before tax of £25.2m, an increase of 52% from 2012 provide another positive set of results.

 Financial Highlights

· Underlying* profit before tax increased by 52% to £25.2m (2012: £16.6m)

· Statutory profit before tax was £17.1m (2012: £17.2m)

· Operating income increased by 68% to £79.0m (2012: £47.0m)

· Loan to deposit ratio 90% (2012: 75%)

· Underlying* post-tax return on average equity 31% (2012: 32%)

· Post-tax return on average equity 21% (2012: 39%)

· Reported earnings per share 78.3p (2012: 108.9p)

· Underlying* earnings per share 118.2p (2012: 89.2p)

· Proposed final dividend per share of 47p (2012: 43p)

· Proposed total dividend per share of 62p (2012: 57p)

· Core Tier 1 Capital ratio at year end of 20% (2012: 23%)

Operational Highlights

· Customer numbers grew 51% to 350,861

· Customer lending balances increased by 31% to £391.0m

· Customer deposits increased by 9% to £436.6m

· Impairments have continued to be lower than the level expected at origination

· Renewal of Customer Service Excellence Award, introduced by the Cabinet Office in 2010 to replace the Kite Mark.

· Renewal of Fairbanking Foundation 4 star mark in respect of the current account product

· Strong contribution from Everyday Loans following the acquisition in June 2012

· V12 integration completed and substantial pipeline of new business being pursued

· Secure Trust Bank Real Estate Finance operational with substantial pipeline of opportunities

· Secure Trust Bank Invoice Finance platform build progressing and expect to begin writing business in H1 2014

Henry Angest, Chairman, said:

 "Secure Trust Bank is delighted to announce record levels of underlying profits today which reflect the progress made in executing our strategic plan. Our very strong balance sheet gives us the ability to increase our loan book further and continue to provide strong returns to shareholders."

Paul Lynam, Chief Executive Officer, said:

 "2013 was another excellent year for Secure Trust Bank. We have generated strong returns from the existing core businesses whilst achieving high levels of customer satisfaction as evidenced by a number of external awards and Feefo (a customer review and feedback system) ratings in the range of 90 - 95%. The current momentum and the creation of a new SME lending division give us confidence for the current year and beyond."

 * Before acquisition costs (2013: £0.9m; 2012: £3.1m), fair value adjustments (2013: £4.9m cost; 2012: £6.9m income), costs associated with share based payments (2013: £2.2m; 2012: £1.6m) and Arbuthnot Banking Group management charges (2013: £0.1m; 2012: £0.1m), income from acquired portfolios (2012: £0.4m) and excess funding costs incurred prior to completion of acquisitions (2012: £1.9m). All numbers quoted are before tax.

-ENDS-

The 2013 Annual Report and Notice of Meeting will be posted and available on the Secure Trust Bank website http://www.securetrustbank.com/general/results-presentations by the 4th April 2014. Copies may also be obtained from the Company Secretary, Secure Trust Bank PLC, One Arleston Way, Solihull, West Midlands, B90 4LH.

Consolidated statement of comprehensive income

Consolidated statement of financial position

Chairman's statement

I am pleased to report another year of significant progress across the Secure Trust Bank Group. We have continued to execute our strategy of outstanding customer service, meeting their needs with simple straightforward banking solutions while taking further steps to develop our business model. This approach has proved popular. Customer satisfaction levels have been consistently high and overall customer numbers increased from 231,713 to 350,861 during 2013, an increase of 51%.

Underlying profit before tax for 2013 is £25.2m, representing an increase of 52% on the prior year and an increase of over 220% from £7.9m in 2011, at the time of IPO. Over the same period customer lending balances have increased over 180% and customer numbers have grown from 145,174 to 350,861 over these two years, representing an increase of 140%. These measures serve to highlight the demand for our products and the positive progress the Group has made since its IPO.

Consistent with our management philosophy, we have continued to proactively grow and control our lending portfolio which has resulted in impairment losses being less than expected when we originated the loans. With the economic recovery looking more assured we are expanding into SME lending activities, building on the expertise many of our executives have in these markets. This strategy will add secured loans to our balance sheet and further our ambition to have a more diversified portfolio of customers and assets.

Once again in 2013 we have heard much from commentators about the need for greater competition in the UK banking industry. Unfortunately, despite the rhetoric, there has not been the tangible change necessary to create a level playing field allowing existing smaller banks to compete on a like for like basis with the dominant incumbents. This has led to suggestions for caps on market share and the potential break up of larger banks. I believe these proposals are driven by a failure to understand the root cause of the issue. The larger banks dominate for three principal reasons:

1) Deemed by markets to be too big to fail, the big banks benefit from an implicit subsidy from the UK Government in the form of an implicit guarantee that they will not be allowed to fail. The Bank of England published a report in May 2012 which included one estimate of this subsidy being worth as much as £100bn to the big banks. This allows them to fund their lending activities considerably more cheaply than smaller banks which do not benefit from any implicit government guarantee.

2) Added to their huge funding cost disadvantages, the smaller banks continue to be required to hold considerably more capital relative to the larger players. In context the Independent Commission on Banking's report highlighted that a small bank can be required to hold up to seven times more capital for prime mortgage lending.

3) The big banks completely control the payments infrastructure and in so doing dominate the current account market. This means they get £100bns of free funding via the balances held on customers' accounts. In order to protect this vital source of cheap funding and their dominance of the 'free if in credit' current account market, the clearing banks levy punitive fees against smaller banks seeking to access the payments infrastructure.

I firmly believe that by addressing these three factors, the so called Challenger Banks, which are already the fastest growing UK banks in percentage terms would be able to grow even more quickly and in so doing contribute more to the economic recovery and help address the too big to fail problem. I therefore call on the Government to take immediate, tangible and decisive steps by:

1) Setting up a specific 'Challenger Bank Growth Fund'. This should be available to all banks with balance sheet assets of less than £5bn and allow these banks to borrow term funding from HM Treasury at the same price as the big banks fund themselves as a result of the implicit government guarantee.

2) Allow all established banks, regardless of size, to risk weight their lending assets at the average of the top ten banks and building societies. Those large banks with a truly lower risk profile would still gain an advantage but the overall disadvantage suffered by the smaller banks would be substantially addressed.

3) HM Government should compel the Payments Council and the clearing banks which control the Council to allow immediately small banks to access the payments infrastructure at cost.

Secure Trust Bank has started 2014 with robust capital and funding positions and significant organic and external business development opportunities. I am confident that the Group will continue to demonstrate profitable and sustainable growth over the coming period. The Board proposes to pay a final dividend of 47p per share. This when added to the interim dividend of 15p would mean a full year dividend of 62p per share. If approved, the final dividend will be paid on 9 May 2014 to shareholders on the register as at 11 April 2014.

Finally my Board and I would like to thank all of our employees for their commitment and hard work and I would like to express my appreciation to my fellow Directors for their support during the year and to welcome Lord Forsyth to the Board.

Chief Executive's statement

Throughout 2013 we have continued to execute our stated and proven strategy to very good effect. The core businesses have performed as expected, Everyday Loans made a good contribution in its first full year within the Group and the acquisitions and subsequent integrations of V12 Retail Finance and Debt Managers proceeded smoothly. As a result, we have delivered a strong set of financial results and continued to build on our successful track record of underlying earnings growth. This gives us a robust capital position and the confidence to continue to grow the dividend.

Significant growth in customer base and high satisfaction levels

Secure Trust Bank is committed to providing customers with simple straightforward banking solutions coupled with great service delivered by friendly and professional staff. This is nothing new. We have been doing this for nearly 62 years. All of our products are specifically designed to be as easy for customers to understand as possible whilst also representing good value for money. As an example, unlike many banks, we do not believe in offering products with features that we regard as gimmicks such as deposit accounts that come with an initial introductory bonus which, once expired, leaves customers with poor savings rates.

The benefit of such a customer focused philosophy came into sharp focus in 2013 when the Financial Conduct Authority announced its intention to undertake a 'thematic review' of the use of 'teaser rates' by banks. Whilst I am watching developments with interest, I am reassured to note that, as we do not offer such products, we will not need to divert resources to assist with this review nor will we be directly impacted if the regulator imposes penalties or orders financial redress to customers negatively impacted by teaser rates.

To underscore further our commitment to giving our customers the best service we subscribed to use the FEEFO service during 2013. FEEFO stands for Feedback Forum which is an online tool that enables customers to rate our service and record any comments. Unlike the more traditional 'internal surveys' the control sits with the customers who are free to say whatever they want. At one level this could be viewed as a bit unnerving but I prefer to view it as a great way of collecting real time customer feedback which reflects how our customers actually experience us. This is valuable information which we discuss at our weekly management meeting every Monday.

The combination of our product design and obsession with great service has been reflected in FEEFO scores of 92% (current and deposit accounts) and 95% (lending products) for 2013. Interested parties can access our FEEFO data at www.securetrustbank.com.

This approach to customer service is helping us to do business with an increasing number of intermediaries who are attracted to us because of our reputation.

In addition, we have continued to be awarded external accolades and remain the only bank in the UK to hold the Customer Service Excellence award (CSE). This award was introduced by the Cabinet Office in 2010 to replace the Kite Mark. The CSE is a strong independent endorsement of the way customer focus is embedded in the culture of the business and the improvements we are making to our products and services.

During the fourth quarter of 2013 we also received confirmation that the Fairbanking Foundation had renewed our 4 star mark making us the only bank in the UK to hold such a mark in respect of our current account product.

We cannot rest on our laurels and we continue to invest in people, systems and processes to improve our service and products still further.

As ever the acid test is whether high quality service is driving growth and I am pleased to be able to note that all of the activities above have helped us to grow our overall customer base by 51% during 2013.

Controlling growth

The Board's on-going top strategic priority is to protect the reputation and sustainability of the bank via prudent balance sheet management, investment for growth and robust risk and operational controls. We have continued to invest in our risk control and governance capabilities during 2013 to reflect the growth in the business and the evolving regulatory environment. In addition to continuing to operate an 'out sourced' internal audit strategy with audit specialists from EY we have also boosted the capabilities of our own discreet Audit, Operational Risk, Compliance and Credit Risk functions. Recognising the increased pace of technological change and the potential opportunities that it may give rise to we have also recruited a new Chief Technology Officer who started earlier this month. He joins following a successful career with a number of larger financial institutions including Citigroup.

Solid Funding Profile

Our funding strategy was largely unchanged during 2013 save for modest utilisation of the Funding for Lending Scheme. As at 31 December 2013 we had no direct exposure to wholesale funding or interbank markets. All of our lending activities continued to be funded by customer deposits with our year end loan to deposit ratio being 90%. The Funding for Lending Scheme remains available to us but it is our intention only to use this to provide surplus liquidity over and above a core loan to deposit ratio of less than 100%. To achieve a broadly matched assets to liabilities position we increased the average tenor of our deposits over the year with fixed term deposits rising to 44% of total deposits. This compares with 39% as at 31 December 2012. This treasury management has largely mitigated the bank's current exposure to interest rate basis risk whilst improving our resilience in the event of unexpected major market shocks. The bank continues to enjoy strong demand for its deposit products and since the year end we have gathered in further 3, 5 and 7 year term deposits as we believe the interest rates are attractive and will help to position the balance sheet favourably should interest rates rise faster than is expected.

Robust Capital ratios and modest leverage

Our year end Tier 1 Capital ratio of 19.7% remains very healthy (2012: 23.3%). Comparing the relative balance sheet strength of individual banks is extremely difficult due to the differing methodologies used under Basel II which can lead to a picture of seemingly similar capital ratios despite the underlying gross leverage positions being wildly different. As at 31 December 2013 the Secure Trust Bank leverage ratio (calculated as total customer lending divided by equity capital) was only 14.9% (6.7x), representing a modest increase on the 17.2% (5.8x) leverage reported for 2012 and partially reflects the deployment of capital raised in the December 2012 Placing.

The advent of CRD IV has sought to standardise leverage ratio disclosures. Using this methodology our leverage ratio is 11.1% which is a much stronger ratio when compared to those disclosed by major UK banks over recent weeks. This serves to highlight the scope we have to increase our lending activities whilst remaining modestly leveraged on a comparable basis.

Powerful underlying profit growth

The underlying profit for 2013 of £25.2m represents a 52% increase on the £16.6m underlying profit before tax in 2012. The statutory pre-tax profits for 2013 of £17.1m are broadly unchanged compared to the £17.2m reported for 2012. As the Chairman notes in his statement, the statutory profits have been heavily influenced by the acquisition accounting treatment arising from the purchase of Everyday Loans in June 2012. The 2012 statutory profit included a one off profit of £9.8m, much of which is required to be amortised in subsequent periods.

Costs continue to be rigorously controlled but increased regulatory requirements and in particular the demand for experienced risk and compliance staff by the larger banks is exerting upward pressure in these areas. As I note above, we have continued to invest in our overall management capability to ensure that our growth is well controlled and sustainable. This investment in our organisational capabilities inevitably means the short term cost to income ratio is higher than if the business had a slower growth profile.

Lending portfolio performing as expected

We monitor all aspects of risk extremely closely with particular attention to the performance of our lending book. In absolute quantum terms our impairment levels have risen given our growing and maturing lending portfolio, but importantly these remained below the level which we had assumed within our pricing models when writing the business in the motor, personal unsecured and retail finance portfolios. We continue to adopt a robust and dynamic formulaic approach to impairment provisioning. We do not seek to manage our impairments via forbearance activities, instead the Group has looked to support customers who are in financial difficulty and we seek to engage in early communication with borrowers experiencing difficulty in meeting their repayments. Once again the impairment numbers reported for 2013 are lower than expectations at origination which we believe reflects our ongoing prudent underwriting standards and the improving economy.

Lending operations

In my statement last year I said 'With the economic outlook remaining very difficult to predict it is appropriate for us to exercise prudence and caution. We have therefore positioned the bank to continue to grow at a good pace and in a sustainable manner whilst maintaining low balance sheet leverage and robust capital and funding positions'. This is reflected in the changes to the lending portfolio below.

2013 saw continued controlled growth. Overall new business lending volumes including full year contributions from Everyday Loans and V12 grew 50% to £304.7m (2012: £202.5m) which translated to an increase of 31% in overall balance sheet lending assets to £391.0m (2012: £297.6m).

Motor finance increased lending, net of provisions, to £114.7m at 31 December 2013 (2012: £89.6m). This business, which focuses on the near prime market segment, continues to service the majority of the Top 100 UK car dealer groups.

Personal unsecured lending balances, net of provisions, increased to £77.8m at 31 December 2013 (2012: £68.2m). A significant delay in the commencement of a new bank to bank loan referral arrangement negatively impacted on anticipated growth volumes in this portfolio. This is now live with Sainsbury's Bank and should deliver benefits in 2014.

Retail Point of sale business, net of provisions, grew strongly driven by retailer demand and the V12 acquisition with balances at 31 December 2013 increasing to £114.4m (2012: £64.2m). This activity represents the highest credit quality lending that we currently write and it is an area we will be looking to grow further in 2014.

Everyday Loans balances, net of provisions, grew to £81.4m at 31 December 2013 (2012: £73.8m). We continue to manage this business to focus on profit maximisation rather than dramatic loan growth.

The Everyday Loans portfolio credit quality remained stable throughout 2013 in keeping with the rest of the Secure Trust Bank Group portfolio. The portfolio derived from the branch-based lending model comprises a wide spread of unsecured personal loan customers with a relatively low average balance (£2,700) geographically spread across the UK, thereby minimising any concentration of risk.

Focus on sustainability

A core objective in 2013 was to improve our self-sufficiency and organisational resilience by reducing our reliance on third party brokers and introducers, especially in Personal Lending and Retail Finance. I am pleased to report considerable positive progress here.

Our new personal lending volumes in January 2014 were 18% higher than in January 2013 when our largest single introducer accounted for 82% of all the business written. In January 2014 this introducer accounted for approximately half of the personal loans written under the Moneyway brand. The remainder of the new business volumes is being originated via a range of other sources, the largest of which is our direct to market proposition which accounts for roughly 20% of our volume. This is our most cost effective personal loan distribution channel. During 2014 we will continue to broaden our sources of new personal lending business and aim to replicate the referral scheme in place with Sainsbury's Bank with other banks. This sort of unsecured consumer lending is the most exposed to sudden rises in mortgage rates and these factors will influence the volume of new lending we write here during 2014 relative to other forms of lending such as Retail Finance and Motor Finance.

The acquisition of V12 Retail Finance in January 2013 was a vital development as it gave us a complete end to end retail finance platform. Since the acquisition we have invested heavily in the V12 business as part of our strategy to grow the Retail Finance business faster than our other lending portfolios. We have merged the Secure Trust Bank and V12 Retail Finance operations and are operating this business on a single platform. This is giving rise to operational efficiencies and an improved customer proposition. We have successfully renewed our exclusive contract with the Association of Cycle Traders for a further five years whilst also extending our contract with Evans Cycles for another two years. V12 has achieved some notable new business wins and has now gone live with Halfords. Halfords have not provided any form of retail finance in any of their 450 stores or online in recent years. The move into Retail Finance was an important development for them and we were delighted to win this business in December despite stiff competition. Our entry into the sports season ticket finance market is also going well and we are now live with several large Premiership clubs. Finally, plans to diversify into the provision of season ticket finance for commuters are progressing with East Midlands Trains selecting V12 as its finance provider. We expect this business line to begin in the second half of 2014.

Fee based accounts

As at 31 December 2013 current account customers numbered 22,860, representing a 9% increase on the prior year of 20,962. Customer satisfaction levels are high but achieving significant growth in customer numbers is constrained in part because the operational costs arising from accessing the payments infrastructure make the product appear to be uncompetitive compared to 'free if in credit' current accounts from other banks. We have therefore decided to reduce our focus on this product going forward to free up time to invest in more profitable areas.

As expected, the OneBill customer numbers continue to decline over time. £8.0 million of income was generated in 2013 compared to £8.9 million in 2012. We continue to explore the potential to offer a next generation OneBill product with a number of parties including Government agencies. This is proving to be very slow and is not an area of significant focus at present.

Debt Managers has performed broadly in line with expectations since the acquisition with a modest pre-tax loss recorded for 2013. The management team has spent much of 2013 restructuring the business and positioning it for growth. The benefits of this work should be seen in 2014.

Our people 

As the saying goes, 'businesses don't achieve success, people do'. A key factor in our ongoing success is the way in which our staff interact with our customers and the business partners and intermediaries we deal with. We place great emphasis on the training and development of our people and on recognising their excellence. In 2013 this emphasis included extensive internal training programmes through to the sponsorship of our staff to take external academic qualifications ranging from foundation courses in Retail Banking with the IFS University College to Masters Degrees in Human Resources Management. I remain delighted that so many staff are willing to commit to their own development which is helping them to improve their day to day performance and give them the skills needed to take on the larger roles that will inevitably arise as the business continues to expand. During 2013 our approach to the development of our employees was recognised by the awarding of Bronze status by Investors in People (IIP). This places the Group in the top 13% of all businesses that are accredited by IIP. We plan to build on this during 2014.

Secure Trust Bank employees have remained heavily involved in charitable activities during the year. Numerous events took place ranging from participation in the annual 'movember' campaign in aid of prostate cancer charities through to making our call centres available for free to support the various 'Relief' events. Indeed, we will be supporting the 2014 Sports Relief event. I am very proud of all the work done to help those less fortunate than ourselves and I applaud my colleagues for both their charitable work and the sheer commitment to delivering great service in a very friendly manner to our customers throughout the year.

Current developments

There has been no material change to the underlying performance of the business in the early months of 2014. We continue to see potential to grow our lending portfolio in line with our ambition and have a clear growth strategy and a pipeline of organic and external new business opportunities.

We are particularly focused on balancing good organic growth in our lending portfolios, especially in Motor and Retail Finance, with the creation and growth of SME lending activities. Secure Trust Bank Real Estate Finance is now operational with some loans drawn down by customers already and an encouraging pipeline of potential new business being developed.

Another key objective is to begin the process of entering SME lending markets to create new engines of profit growth and to further diversify the lending portfolio via the addition of secured lending assets over time. I am delighted to report that we have recruited a proven high quality team to join us and create a new Invoice Finance business that will be called Secure Trust Bank Commercial Finance. This will be headed by John Bevan who joins us from Barclays where he was Managing Director of Trade and Working Capital UK and Ireland. John has over thirty years banking experience and is a former chairman of the trade body, the Asset Based Finance Association. The intention is that this 'de novo' business grows in a controlled manner over the next five years. The business will be loss making until 2015 due to the initial costs of setting up the business and running sub-scale. We would consider small acquisitions if identified and if they represent good value and allow us to accelerate our plans in this space.

It has become clear to us that considerable potential exists to write good quality Real Estate Finance transactions at attractive yields without needing to offer aggressive structures. We have written some highly selective business in 2013 and plan to expand in this area in 2014 and beyond. We have therefore recruited a small team of proven property lenders who have previously worked for me to exploit this opportunity. The focus of the team will be on quality and profit rather than simply volume.

With the economic recovery appearing to gain traction we believe the time is right to diversify our lending activities into sectors that are well understood by me and a number of my senior colleagues. We expect to see demand for credit to rise as the economy improves and businesses and consumers gain confidence. We believe we are well positioned to benefit from this and are confident of making further positive progress with our strategic plan during 2014.

Finally I should acknowledge the ongoing media speculation regarding a number of banks potentially looking to IPO in the coming periods. We are the only bank to float since the credit crunch and have consistently delivered on the commitments made to the market. As the Chairman notes in his statement, in the two full years since our flotation underlying profits have risen over 220%. We have achieved this whilst being consistent with our prudent risk management philosophies and without making any material use of cheap funding mechanisms such as Funding for Lending to enhance short term profits. Over the same period our share price has quadrupled and we have fostered relationships with existing and potential new shareholders who understand the significance of the challenger bank landscape and the advantage that the first mover will hold as new entrants appear. We remain focused on our growth strategy and consider ourselves well positioned should other opportunities arise that we believe are in the best interests of our shareholders.

Business reviews

Personal Lending

What we do

As a Company, Secure Trust Bank is well established in personal unsecured lending, having been lending for over 35 years, with Moneyway being the Company's personal lending brand. During 2012 the Company acquired Everyday Loans which represented a significant strategic development for the bank in the area of personal lending.

The personal loans which the Group offers are fixed rate, fixed term products which are unsecured. Loan terms are between 12 months and 60 months with advances varying from £500 to £15,000. Loans are provided to customers for a variety of purposes which might include, for example, home improvements, personal debt consolidation and the purchase of vehicles.

Everyday Loans has continued to operate alongside Moneyway through their equally well-known brand name and this will enable it to expand whilst creating significant synergistic benefits for the Group.

How we do it

Distribution of the Group's personal loans is through brokers, existing customers and affinity partners, and targeted to UK-resident customers who are either employed or self-employed. Loans are made to individuals over 21 years of age with an annual income generally over £20,000, whilst Everyday Loans specifically is a provider of unsecured loans to a customer base predominantly in lower income groups. They offer any purpose unsecured loans for tenants as well as homeowners.

The Group has broadened its online distribution capabilities in the personal lending segment and has entered into significant introducer relationships, including Shop Direct.

The business utilises highly automated underwriting systems which, in addition to providing significant cost advantages, ensure that consistent credit decisions are made which improves on-going performance monitoring and future policy decision making. Differential pricing that reflects the credit risk of the underlying customer is standard for the Group. These systems have enabled the business to control risk whilst retaining the speed of service needed to support introducers.

The levels of credit impairments on all portfolios have been below the levels priced for when the loans were originated. The credit risks in the lending book are continually scrutinised with this data being used to inform changes in risk appetites and pricing. The Group continues to invest to ensure the growth in its business model is reflected in its overall risk and control framework.

Where we do it

Everyday Loans operates through a network of offices where loans are originated, serviced and collected. Applications are made by phone or online.

Secure Trust Bank through its brand Moneyway offers loans via the internet and a phone service utilising an experienced team of UK based advisers.

Revenue and lending performance vs prior years

Personal lending revenue 2011 £6.0 million 2012 £24.2 million 2013 £41.8 million

Personal lending portfolios 2011 £43.6 million 2012 £142.0 million 2013 £159.2 million

2013 performance

The Group's lending operations continued to grow in a controlled way, with new personal lending volumes in the year, including Everyday Loans, increasing to £105.1 million from £77.8 million in the previous year. This generated an increase in personal lending assets during the year which, at the year-end, including Everyday Loans, totalled £159.2 million (December 2012 : £142.0 million).

The growth in personal lending new business volumes has again not been at the expense of price or quality. Income from personal lending increased by 73% to £41.8 million whilst impairment losses were £10.3 million compared to £5.3 million in 2012.

Motor Finance

What we do

Secure Trust Bank's motor finance business started lending in 2009. Motor finance loans are fixed rate, fixed term hire-purchase agreements and are secured against the vehicle being financed. Only passenger vehicles with certain features including an engine size of less than three litres, an age ranging from new to a maximum of ten years old by the end of the hire-purchase agreement and with a maximum mileage of 100,000 miles are financed. The majority of vehicles are used cars. Finance term periods range from 24 months to 60 months with a maximum loan of £15,000.

How we do it

The Company distributes its motor finance products via UK motor dealers and motor dealer brokers. New dealer relationships are established by our UK-wide motor finance sales team with all introducers subject to a strict vetting policy, which is reviewed on a regular basis.

Where we do it

Motor lending is administered in the Group head office in Solihull, however the UK motor dealers and brokers are UK-wide.

Revenue and lending performance vs prior years

Motor finance revenue 2011 £9.9 million 2012 £16.9 million 2013 £23.0 million

Motor finance portfolios 2011 £63.4 million 2012 £89.6 million 2013 £114.7 million

2013 performance

New business lending volumes for motor lending increased to £60.3 million, an increase of 18% on the previous year. This generated a significant increase in lending assets during the year, which at the year-end totalled £114.7 million (December 2012: £89.6 million).

Income from motor lending increased by 36% to £23.0 million whilst impairment losses were 33% higher at £3.6 million, compared to £2.7 million in 2012.

Retail Finance

What we do

Secure Trust Bank's retail finance business commenced lending in 2009 and provides point of sale finance for in-store and online retailers.

Retail finance products are unsecured, fixed rate and fixed term loans with payments received monthly in arrears. Loans range in term from 6 months to 48 months and the size of the loans vary from £250 to £25,000 depending on the type of product being financed. The loans are either interest bearing or have promotional credit subsidised by retailers or suppliers. Secure Trust Bank does not pay retailers commissions and lending is restricted to UK residents who are either employed or self-employed.

The three largest sub-markets for retail finance at 31 December 2013 are the provision of finance for the purchase of musical instruments, cycles and the leasing of computer equipment. The latter of these is transacted through the Company's subsidiary undertaking STB Leasing Limited. For the second successive summer, cycle finance has seen positive new business levels, undoubtedly as a consequence of the success of British cyclists in the Tour de France, the Olympics and Paralympics over the last two years.

Other markets in which the Group provides finance include gym equipment, motor parts, outdoor pursuits, furniture, leisure, jewellery and funerals. The Group provides finance through a range of retailers including household names such as Evans Cycles, PC World and DFS. The Company has arrangements in place with a number of affinity partners including the Arts Council, ACTSmart and RentSmart.

How we do it

In addition to in-store finance, the bank has an online eFinance service to retailers which is operated by V12 Retail Finance, providing finance to customers through an online paperless processing system. This serves retailers across a number of sectors including furniture, jewellery, dental and sports season tickets.

Where we do it

Retail lending is administered in both the Group head office in Solihull and the V12 Finance Group's offices in Cardiff. The dedicated retail lending team aims to provide a quality service to both retailers and customers.

The acquisition of the V12 Finance Group during the year was complementary to the Group's existing retail finance proposition and the V12 management team continued in the business. The acquisition enabled the group to integrate its existing retail lending business with that of the V12 Finance Group to generate synergistic benefits from the use of a group-wide point of sale system.

Revenue and lending performance vs prior years

Retail finance revenue 2011 £3.6 million 2012 £5.8 million 2013 £14.5 million

Retail finance portfolios 2011 £42.6 million 2012 £64.2 million 2013 £114.4 million

2013 performance

New business lending volumes for retail lending increased to £139.2 million, an increase of 89% on the previous year. This generated a significant increase in lending assets during the year, which at the year-end totalled £114.4 million (December 2012: £64.2 million).

Income from Retail lending increased by 150% to £14.5 million. Impairment losses were a modest £1.8 million in 2013, compared to £0.7 million in 2012.

Current Accounts

What we do

Secure Trust Bank's current account is open to everyone regardless of credit history and comes with a prepaid card which can be used for effective personal budgeting. The current account is a simple and transparent bank account which has been designed to help customers manage their money and keep control of their finances by only letting them spend the money they have available each month. The account does not have an overdraft facility so the account holders can only spend money that they have available.

The account comes with a prepaid card, onto which money must be loaded before it can be used, similar to a 'pay as you go' mobile phone top-up. This can help the customers manage their money more effectively because the money loaded onto the prepaid card is separated from the money in their current account, so they can shop safe in the knowledge that the bills will be paid from the money in their current account. Customers generally make sure that they have enough money in their current account to cover direct debits, standing orders and any other regular payments, with the remaining money transferred onto their card to spend at over 30 million outlets, for online and telephone purchases and to make cash withdrawals at ATMs showing the MasterCard® acceptance mark.

How we do it

Current accounts are distributed via the Company's website, price comparison websites, including Moneysupermarket and Compareprepaid, debt management companies and through a direct outbound sales team.

Once the account is opened the account holder can register for the online and telephone banking service which gives access to their account 24 hours a day, 7 days a week and allows the free movement of money to and from their current account and prepaid card.

The fees are simple and transparent with no hidden or unexpected charges. For example, there are no charges should a direct debit or standing order payment fail. Customers welcome the transparent monthly account management fee, in return for which credit interest is paid at base rate and customers have the ability to earn cash rewards of up to 4% paid into their account on purchases made with their card, both online and in store, at over 30 participating major high street retailers. Any cash rebated as a consequence of customer spending at the retailers on the scheme can help to reduce or offset the monthly account charge. The account holder can have additional cards linked to their account for family members at home or abroad, at no extra monthly fee, with all cards eligible to earn rewards. Participating retailers include well known stores such as Asda, Argos, Boots, Debenhams, B&Q and Marks & Spencer.

Where we do it

The business has developed an on-line capability to service and sign up accounts. It is now possible for a customer to open an account on-line, be provided with the new account details and transfer automatically all their direct debits and standing orders in minutes.

Revenue and customer numbers vs prior years

Revenue 2011 £2.9 million 2012 £3.9 million 2013 £4.8 million

Customer numbers 2011 17,178 2012 20,962 2013 22,860

2013 performance

At 31 December 2013, the current account product had been taken up by almost 23,000 customers with the account experiencing new account openings averaging just under 800 per month for the 12 months to 31 December 2013. The current account generated income of over £4.8 million in the year, which represented growth of 23% over the previous year. The growth in the current account volumes has continued to outstrip the reduction in the OneBill accounts. OneBill, a household budgeting product, generated income of £8.0 million in the year, but the Company has closed this product to new customers.

Savings

What we do

The Bank's savings accounts consist of deposit accounts, notice accounts and fixed term bonds. At Secure Trust Bank, savings accounts offer a simple way to save money. Interest rates offered are competitive and provide value for money.

Deposit accounts can be opened for as little as £1 and withdrawals can be made without notice or loss of interest.

The notice deposit accounts are made available in periods ranging from 60 days to 183 days, with the majority at the 120 day term, depending on the Group's funding requirements.

Fixed Price Deposit Bonds are launched to achieve the desired maturity profiles of the Group.

How we do it

By virtue of a focus on higher margin lending, the absence of large fixed overheads in the form of a branch network and a policy of not cross-subsidising loss making products with profitable ones, the Bank is able to offer competitive rates and has been successful in attracting term deposits from a wide range of personal and non-personal customers. This provides a secure funding profile which again gives additional financial security to the business.

The Bank is a member of the Financial Services Compensation Scheme (FSCS).

Where we do it

Methods of attracting deposits include product information on price comparison websites (such as Moneysupermarket), best buy tables and newspaper articles about the deposit accounts offered by the Group.

All savings products are administered in the Group head office in Solihull.

Savings performance vs prior years

Current/demand accounts 2011 £31 million 2012 £32 million 2013 £36 million

Term deposits 2011 £241 million 2012 £367 million 2013 £400 million

2013 performance

The Company continues to manage its liquidity on a conservative basis with none of its funding coming from the wholesale markets. In December 2012, Secure Trust Bank was admitted as a participant in the Bank of England's Sterling Money Market Operations under the Sterling Monetary Framework, to participate in the Discount Window Facility. From July 2013, the Group was permitted to draw down facilities under the Funding for Lending Scheme (FLS). FLS monies are maintained as a liquidity buffer, above that required to support lending.

Secure Trust Bank's deposit activities comprise deposit accounts and fee-based accounts, being fee-based current accounts and the OneBill accounts. At 31 December 2013 customer deposits totalled £436.6 million. This represents an increase of £38 million since the last year end.

The Bank's notice deposits totalled £207 million at the year-end (December 2012: £212 million). A new 180 day notice account was introduced in July and was highly successful, raising additional new deposits of £14 million during the second half of the year.

During the year, the Bank launched further fixed rate deposit bonds, predominantly with two and five year maturities broadly to match its lending profile. These again were very successful as the Group raised new deposits of over £63 million, achieving its desired funding maturity profile. At the year-end term deposit bond balances totalled £193 million.

Financial review

Income analysis

Operating income increased by 68% to £79.0 million. Growth was achieved primarily through increased levels of activity in the personal lending and retail finance product areas. Income from personal lending grew by 73% partly due to the full year effect of the Everyday Loans business acquisition which was completed mid-way through the prior year. Income from retail finance increased by 150%, which was helped through the acquisition and integration of the V12 Finance Group and its lending portfolio. Secure Trust Bank intends to create diversified and balanced growth in the lending books which will serve the business well when the market becomes more competitive.

Income from the current account with a prepaid card increased by 23%, and this partially offset the expected decline in the OneBill account following its closure to new accounts in 2009. The current account closed the year with 22,860 customer accounts (2012: 20,962) and OneBill ended the year with 24,297 customer accounts (2012: 26,154).

Impairment losses were £15.6 million (2012: £8.9 million). This is a modest increase as a percentage of income despite the inclusion of a full year's worth of Everyday Loans losses in 2013 (2012: 6 months and 3 weeks) and a significant increase in the collective provision. We believe this is a function of prudent underwriting and an improving economy.

Operating expenses have increased, in line with expectations, as a result of the full year effect of the Everyday Loans acquisition and the acquisition of V12 and Debt Managers in 2013 as well as the organic growth of the business.

Underlying profit before tax was £25.2 million, which is an increase of 52% on the 2012 underlying profit before tax.

Acquisition related items

During the year, expenses were incurred of £0.9 million relating to costs arising on the acquisition of the V12 Finance Group and Debt Managers, partially offset by the £0.4 million gain from a bargain purchase arising on the acquisition of the Debt Managers business. During the previous year, expenses were incurred of £1.4 million relating to costs arising primarily on the acquisition of Everyday Loans. The acquisition of Everyday Loans in June 2012 generated a fair value gain of £9.8 million.

Taxation

The effective tax rate on profit before tax is 28% (2012: 9%), due primarily to acquisition adjustments relating to deferred tax. The prior year's tax rate reflected the effects of non-taxable income during the year, primarily the gain from a bargain purchase.

Distributions to shareholders

The directors recommend the payment of a final dividend of 47 pence per share which, together with the interim dividend of 15 pence per share paid on 20 September 2013, represents a total dividend for the year of 62 pence per share (2012: 57 pence per share).

Earnings per share

Detailed disclosures of earnings per ordinary share are shown in note 11 of the financial statements. Basic earnings per share reduced by 28% to 78.3p per share (2012: 108.9p), due principally to the recognition of the exceptional gain from a bargain purchase of £9.8 million in 2012. However, the underlying basic earnings per share increased by 33% to 118.2p per share (2012: 89.2p per share).

The total assets of the Group increased by 10% primarily due to the continued growth in the personal lending, motor finance and retail finance portfolios. Total assets now exceed half a billion pounds. During the year the retail finance business increased its portfolio size by 78% or £50.2 million to close at £114.4 million, as a result of organic growth and the acquisition of the V12 Finance Group. Personal lending grew by £17.2 million as the business was able to source new business from online brokers and affinity partners. Motor finance increased its portfolio size by £25.1 million through a growing number of dealer relationships.

Customer deposits grew by 9.5% to close at £436.6 million to fund the increased lending balances. The Group continues with its conservative funding policy, its lending remaining entirely funded by customer deposits, ending the year with a loan to deposit ratio of 90% (2012: 75%).

Capital

The Group's capital management policy is focused on optimising shareholder value over the long term. Processes exist to ensure that Capital is allocated to derive targeted risk adjusted returns whilst ensuring appropriate surpluses are held above the minimum regulatory requirements. The Board reviews the capital position at every board meeting.

In accordance with the EU's Capital Requirements Directive (CRD) and the required parameters set out in the Prudential Regulation Authority Handbook (BIPRU 2.2), the Arbuthnot Banking Group's Internal Capital Adequacy Assessment Process (ICAAP), of which the Group is a major component, is embedded in the risk management framework of the Group. It is subject to ongoing updates and revisions where necessary, but as a minimum an annual review is undertaken as part of the business planning process. The ICAAP is a process which brings together the risk management framework and the financial disciplines of business planning and capital management.

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar I plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations as a starting point, and then considers whether each of the calculations delivers a sufficient capital sum adequate to cover anticipated risks. Where it is considered that the Pillar I calculations do not reflect the risk, an additional capital add-on in Pillar 2 is applied, as per the Individual Capital Guidance (ICG) issued by the Prudential Regulation Authority.

The Group's regulatory capital is divided into:

Tier 1 which comprises shareholders' funds and non-controlling interests, after deducting intangible assets.

Tier 2 which comprises the collective provision and revaluation reserves.

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

Tier 1 capital £60.1 million 19.7% of Basel II Risk Weighted Assets

Tier 2 capital £1.9 million

Total capital after deductions £58.2 million 19.1% of Basel II Risk Weighted Assets

Changes relating to the commencement of the implementation of Capital Requirements Directive IV (CRD IV) in 2014 will not have a material impact on the capital resources of the Group.

 Principal risks and uncertainties

The Group regards the monitoring and controlling of risks as a fundamental part of the management process. Consequently, senior management are involved in the development of risk management policies and in monitoring their application. The principal risks inherent in the Group's business are credit, market, liquidity, operational and regulatory risks. A detailed description of the risk management policies in these areas is set out in Note 5 to the financial statements; however a short description of the risks faced is detailed below.

Credit risk is the risk that a counterparty will be unable to pay amounts in full, when due. This risk is managed through the Group's internal controls and its credit risk policies as well as through the Credit Committee, with significant exposures also being approved by the Group's Risk Committee.

Market risk as it applies to the Secure Trust Bank Group is primarily limited to interest rate risk. This is managed using Group resources with support from the treasury function of the Arbuthnot Banking Group which does not take significant unmatched positions in any market for its own account. The Group and Company have no exposures to currency fluctuations.

Liquidity risk is the risk that the Group cannot meet its liabilities as they fall due. The Group takes a conservative approach to managing its liquidity profile and is primarily funded by retail customer deposits, placing no reliance on the wholesale lending markets. The loan to deposit ratio is typically maintained at a prudent level below 100%. The Assets and Liabilities Committee ('ALCO'), comprising executive directors and senior executives of the Company and Group, is the formal body that has responsibility for liquidity risk management. The ALCO meets formally on a monthly basis to review liquidity risk against set thresholds and risk indicators including early warning indicators, liquidity risk tolerance levels and Individual Liquidity Adequacy Assessment (ILAA) metrics.

Operational risk is the risk that the Group may be exposed to financial losses from failures of its systems and processes. The Group maintains clear compliance guidelines and provides ongoing training to all staff. The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance Statement in the Annual Report.

Regulatory risk can be split between capital risk and conduct risk. Capital risk is the risk that the Group will have insufficient capital resources to support the business. The Group adopts a conservative approach to managing its capital and at least annually assesses the robustness of the capital requirements as part of the Arbuthnot Banking Group's ICAAP, of which the Group is a major component. Stringent stress tests are performed to ensure that capital resources are adequate over a future three year horizon. Conduct risk is the risk that the Group does not comply with regulatory requirements including, for example, the way it conducts its business or treats its customers. The Group reviews performance against key customer and conduct risks on a monthly basis and seeks feedback from its customers in all its product types.

Funding for Lending Scheme

During the year the Company was admitted to the Funding for Lending Scheme ("FLS"). The FLS is a scheme launched by the Bank of England and HM Treasury, designed initially to incentivise banks and building societies to boost their lending to UK households and non-financial companies. The FLS does this by facilitating funding to banks and building societies for an extended period, at below current market rates, with both the price and quantity of funding provided linked to the institutions' performance in lending to the UK non-financial sector.

The FLS allows participants to borrow UK Treasury Bills from the Bank of England for a period of up to four years in exchange for eligible collateral during a defined drawdown period. The value of the UK Treasury Bills lent by the Bank of England is at a discount to the market value of the eligible securities which are lent to the Bank of England in return. The amount of discount or "haircut" is determined according to the FLS rules, with the level of "haircut" being greater for those eligible securities which are perceived as having greater risk.

The price of each institution's borrowing in the FLS will depend on its volume of lending to the real economy during the reference period. For banks or building societies maintaining or expanding their lending over that period, the fee will be 0.25% pa on the amount borrowed. As banks increase lending, their overall funding costs will fall. For banks or building societies whose lending declines, the fee will increase linearly, up to a maximum of 1.5% pa where lending decreases by 5% or more.

Under the applicable International Accounting Standard, IAS 39, if a security is lent under an agreement to return it to the transferor, as is the case for eligible securities lent by institutions to the Bank of England under the FLS, then the security is not derecognised because the transferor retains all the risks and rewards of ownership. The UK Treasury Bills borrowed from the Bank of England under the FLS are therefore not recognised on the balance sheet of the institution as they will not meet the criteria for de-recognition by the Bank of England.

At 31 December 2013 the Company has pre-positioned £43.9 million of loans and advances to customers and £9.9 million of loans and advances to banks with the FLS, which are available for use as collateral for the Company's participation in the scheme.

Liquidity

One of the Basel committee's key reforms to develop a more resilient banking sector is the Liquidity Coverage Ratio (LCR). The objective of the LCR is to promote the short term resilience of the liquidity risk profile of banks. It does this by ensuring that banks have an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario. At 31 December 2013, the Group had significant headroom over the minimum 100% recommendations due to its significant stock of high quality liquid assets, in the form of Bank of England Treasury Bills.

The Net Stable Funding Ratio (NSFR) supplements the LCR and has a time horizon of one year. It has been developed to provide a sustainable maturity structure of assets and liabilities. At 31 December 2013, the Group had an NSFR of 114%, with significant headroom over the minimum requirement of 100%.

Company statement of financial position

Consolidated statement of changes in equity

Company statement of changes in equity

Consolidated statement of cash flows

Company statement of cash flows

Notes to the consolidated financial statements

1. Accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

1.1 Reporting entity

Secure Trust Bank PLC is a company incorporated in the United Kingdom (referred to as "the Company"). The registered address of the Company is One Arleston Way, Solihull, West Midlands, B90 4LH. The consolidated financial statements of the Company as at and for the year ended 31 December 2013 comprise Secure Trust Bank PLC and its subsidiaries (together referred to as "the Group" and individually as "subsidiaries"). The Group is primarily involved in banking and financial services.

1.2 Basis of presentation

The Group's consolidated financial statements and the Company's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs as adopted or early adopted by the Group and endorsed by the EU) and the Companies Act 2006 applicable to companies reporting under IFRS. They have been prepared under the historical cost convention, as modified by the revaluation of land and buildings and financial instruments at fair value through profit or loss. The consolidated financial statements are presented in pounds sterling, which is the Group's functional and presentational currency.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 2.

The directors have assessed, in the light of current and anticipated economic conditions, the Group's ability to continue as a going concern. The directors confirm they are satisfied that the Company and the Group have adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the 'going concern' basis for preparing accounts.

The consolidated financial statements were authorised for issue by the Board of Directors on 19 March 2014.

a) Standards, interpretations and amendments effective in 2013 or which have been early adopted and are relevant to the Group

· IFRS 7 (Revised), 'Disclosures - Offsetting Financial Assets and Financial Liabilities' (effective 1 January 2013). The revised standard amends the required disclosures to include information that will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with the entity's recognised financial assets and recognised financial liabilities, on the entity's financial position.

· IFRS 13, 'Fair Value Measurement' (effective 1 January 2013). This standard replaces the existing guidance on fair value measurement in different IFRSs with a single definition of fair value, a framework for measuring fair values and disclosures about fair value measurements. This standard applies to assets, liabilities and an entity's own equity instruments that, under other IFRSs, are required or permitted to be measured at fair value or when disclosure of fair value is provided. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

· Improvements to IFRSs. Sets out minor improvements to IFRS standards as part of the annual improvement process.

The above changes did not have any material impact on the financial statements.

b) Standards, amendments and interpretations to existing standards applicable to the Group that are not yet effective and have not been early adopted by the Group

The following standards and amendments to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2014 or later periods, but the Group has not early adopted them:

· IFRS 10, 'Consolidated Financial Statements' and IAS 27 (Revised), 'Separate Financial Statements' (effective 1 January 2014). IFRS 10 supersedes IAS 27 and SIC-12, and provides a single model to be applied in the control analysis for all investees. There are some minor clarifications in IAS 27, and the requirements of IAS 28 and IAS 31 have been incorporated into IAS 27.

· IFRS 11, 'Joint Arrangements' (effective 1 January 2014). This standard replaces the existing accounting for subsidiaries and joint ventures (now joint arrangements) and removes the choice of equity or proportionate accounting for jointly controlled entities, as was the case under IAS 31.

· IFRS 12, 'Disclosure of Interests in Other Entities' (effective 1 January 2014). This standard replaces the existing accounting for subsidiaries and joint ventures (now joint arrangements) and contains the disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities.

· IAS 32 (Revised), 'Offsetting Financial Assets and Financial Liabilities' (effective 1 January 2014). This standard was amended to clarify the offsetting criteria, specifically when an entity currently has a legal right of set off; and when gross settlement is equivalent to net settlement.

· IAS 36 (Revised), 'Impairment of Assets' (effective 1 January 2014). This relates to the recoverable amounts disclosure for non-financial assets. The amendment reverses the unintended requirement in IFRS 13 'Fair Value Measurement' to disclose the recoverable amount of every cash-generating unit to which significant goodwill or intangible assets with indefinite lives have been allocated. Under the amendments, recoverable amount is required to be disclosed only when an impairment loss has been recognised or reversed. 1

· IFRIC 21, 'Levies' (effective 1 January 2014). The interpretation defines a levy as an outflow from an entity imposed by a government in accordance with legislation. That levy is recognised as a liability when, and only when, the triggering event specified in the legislation occurs. See note 21. 1

The above standards are unlikely to have a material impact on the Group.

· IFRS 9 'Financial instruments' (effective from 1 January 2017). Phase one of this standard deals with the classification and measurement of financial assets and will replace IAS 39. The requirements of this standard represent a significant change from the existing requirements in IAS 39. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. The standard eliminates the existing IAS 39 categories of 'held to maturity', 'available for sale' and 'loans and receivables'. The potential effect of phase one of this standard is currently being evaluated but it is not expected to have a pervasive impact on the Group's financial statements, due to the nature of the Group's operations. Further development phases for IFRS 9 are scheduled to cover key areas such as impairment and hedge accounting. The impact of these future developments is likely to be material to the Group once it becomes effective. 1

1 These standards and interpretations have not yet been endorsed by the EU.

1.3 Consolidation

Subsidiaries

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group's share 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 the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income.

Inter-company transactions, balances and unrealised gains and losses on transactions between group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

1.4 Interest income and expense

Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost and held to maturity using the effective interest method.

The effective interest method calculates the amortised cost of a financial asset or a financial liability and allocates the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

1.5 Net fee and commission income

Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accruals basis when the service has been provided. Fees and commissions income consists principally of weekly and monthly fees from the One Bill and Current Account products, arrears fees in the Everyday Loans business along with associated insurance commissions and commissions earned on debt collection activities in the Debt Managers business. Fees and commissions expense consists primarily of referral fees and broker commission.

1.6 Financial assets and financial liabilities

The Group classifies its financial assets at fair value through profit or loss or as loans and receivables and classifies its financial liabilities as other financial liabilities. Management determines the classification of its investments at initial recognition. A financial asset or financial liability is measured initially at fair value. At inception transaction costs that are directly attributable to its acquisition or issue, for an item not at fair value through profit or loss, is added to the fair value of the financial asset and deducted from the fair value of the financial liability.

(a) Financial assets at fair value through profit or loss

This category comprises interest rate caps. All caps at 31 December 2013 are in qualifying hedge relationships. These cash flow hedges are used to hedge against fluctuations in future cash flows from interest rate movements on variable rate customer deposits. On initial purchase the derivative is valued at fair value and then the effective portion of the change in the fair value of the hedging instrument is recognised in equity (cash flow hedging reserve) until the gain or loss on the hedged item is realised, when it is amortised; the ineffective portion of the hedging instrument is recognised in the Statement of Comprehensive Income immediately. Fair values are based on quoted market prices in active markets and where these are not available, using valuation techniques such as discounted cashflow models (See also 1.7).

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans are recognised when the funds are advanced to customers. Loans and receivables are carried at amortised cost using the effective interest method (see below).

(c) Other financial liabilities

Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all of the risks and rewards of ownership. In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. There have not been any instances where assets have only been partially derecognised. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire.

Amortised cost measurement

The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal payments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.

Fair value measurement

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction on the measurement date. The fair value of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group establishes a fair value by using appropriate valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis.

1.7 Hedge accounting - cash flow hedges

On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and the hedged items, including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, as to whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125%. The Group makes an assessment for a cash flow hedge of a forecast transaction, as to whether the forecast transaction is highly probable to occur and presents an exposure to variations in cash flows that could ultimately affect profit or loss.

If a hedging derivative expires or is sold, terminated, or exchanged, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. In a discontinued hedge of a forecast transaction the cumulative amount recognised in other comprehensive income from the period when the hedge was effective is reclassified from equity to profit or loss as a reclassification adjustment when the forecast transaction occurs and affects profit or loss. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is reclassified immediately to profit or loss as a reclassification adjustment.

1.8 Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the Statement of Financial Position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

1.9 Impairment of financial assets

Assets carried at amortised cost

On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. Objective evidence is the occurrence of a loss event, after the initial recognition of the asset, that impacts on the estimated future cash flows of the financial asset or group of financial assets, and can be reliably estimated.

The criteria that the Group uses to determine that there is objective evidence of 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; and

• Initiation of bankruptcy proceedings.

If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Statement of Comprehensive Income. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

The Group considers evidence of impairment for loans and advances at both a specific asset and collective level. All individually significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends.

When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the Statement of Comprehensive Income.

1.10 Intangible assets

(a) Goodwill arising on business combinations

Goodwill represents the excess of the cost of the acquisition over the fair value of the Group's share of the net identifiable assets acquired at the date of acquisition. Goodwill is held at cost less accumulated impairment losses and is deemed to have an infinite life.

The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken place. Impairment losses are recognised in the Statement of Comprehensive Income if the carrying amount exceeds the recoverable amounts.

(b) Computer software

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives, which are between three to ten years.

Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred unless it is probable that the expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance.

(c) Other intangibles

The acquisition of subsidiaries is accounted for in accordance with IFRS 3 'Business Combinations', which requires the recognition of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. As part of this process, it is necessary to recognise certain intangible assets which are separately identifiable and which are not included on the acquiree's balance sheet.

The intangible assets recognised as part of the Everyday Loans and V12 Finance Group acquisitions have been recorded at fair value and are being amortised over their expected useful lives, which are between five and ten years, apart from Everyday Loans broker relationships, which are being amortised over three years.

1.11 Property, plant and equipment

Property is held at historic cost as modified by revaluation less depreciation. The Group has elected under IAS 16.31 to measure its property at fair value. Revaluations are kept up to date such that the carrying amount does not differ materially from its fair value as required by IAS 16.34. Revaluation of assets and any subsequent disposal are addressed through the revaluation reserve and any changes are transferred to retained earnings.

Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, which are subject to regular review:

Land not depreciated

Freehold buildings 50 years

Leasehold improvements shorter of life of lease or 7 years

Computer equipment 3 to 5 years

Other equipment 5 to 10 years

Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the Statement of Comprehensive Income.

1.12 Leases

(a) As a lessor

Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets are held subject to finance leases, the present value of the lease payments 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.

(b) As a lessee

Rentals made under operating leases are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease.

1.13 Cash and cash equivalents

For the purposes of the Statement of Cash Flows, cash and cash equivalents comprise cash in hand and demand deposits, and cash equivalents comprise highly liquid investments which are convertible into cash with an insignificant risk of changes in value with a maturity of three months or less at the date of acquisition, including certain loans and advances to banks and building societies and short-term highly liquid debt securities.

1.14 Employee benefits

(a) Post-retirement obligations

The Group contributes to defined contribution schemes and to individual defined contribution schemes for the benefit of certain employees. The schemes are funded through payments to insurance companies or trustee-administered funds at the contribution rates agreed with individual employees. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. There are no post-retirement benefits other than pensions.

(b) Share-based compensation

The fair value of equity settled share-based payment awards are calculated at grant date and recognised over the period in which the employees become unconditionally entitled to the awards (the vesting period). The amount is recognised as personnel expenses in the profit and loss, with a corresponding increase in equity. The Group adopts a Black-Scholes valuation model in calculating the fair value of the share options as adjusted for an attrition rate of members of the scheme and a probability of pay-out reflecting the risk of not meeting the terms of the scheme over the vesting period. The number of share options that are expected to vest are reviewed at least annually.

The fair value of cash settled share-based payments is recognised as personnel expenses in the profit or loss with a corresponding increase in liabilities over the vesting period. The liability is remeasured at each reporting date and at settlement date based on the fair value of the options granted, with a corresponding adjustment to personnel expenses.

When share-based payments are changed from cash settled to equity settled and there is no change in the fair value of the replacement award, it is seen as a modification to the terms and conditions on which the equity instruments were granted and is not seen as the settlement and replacement of the instruments. Accordingly, the liability in the Statement of Financial Position is reclassified to equity and the prospective charge to the profit or loss from the modification reflects the spreading of the initial grant date fair value of the award over the remaining vesting period in line with the policy on equity settled awards.

1.15 Share issue costs

Incremental costs directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments. Costs associated with the listing of shares are expensed immediately.

1.16 Income taxation

Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.

Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the Statement of Financial Position date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary differences can be utilised.

1.17 Dividends

Dividends on ordinary shares are recognised in equity in the period in which they are approved.

1.18 Significant items

Items which are material by both size and nature (i.e. outside of the normal operating activities of the Group) are treated as significant items and disclosed separately on the face of the Statement of Comprehensive Income. The separate reporting of these items helps to provide an indication of the Group's underlying business performance.

1.19 Funding for Lending Scheme

Under the applicable International Accounting Standard, IAS 39, if a security is lent under an agreement to return it to the transferor, as is the case for eligible securities lent by institutions to the Bank of England under the FLS, then the security is not derecognised because the transferor retains all the risks and rewards of ownership. The UK Treasury Bills borrowed from the Bank of England under the FLS are therefore not recognised on the balance sheet of the institution as they will not meet the criteria for derecognition by the Bank of England.

2. Critical judgements and estimates

The Group makes certain judgements and estimates which affect the reported amounts of assets and liabilities. Critical judgements and the assumptions used in calculating estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

2.1 Impairment losses on loans and advances

The Group reviews its loan portfolios to assess impairment at least on a half-yearly basis. The basis for evaluating impairment losses is described in accounting policy 1.9. In determining whether an impairment loss should be recorded in the Statement of Comprehensive Income, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the Group. Loans and advances are identified as impaired by taking account of the age of the debt's delinquency and the product type. The impairment provision is calculated by applying a percentage rate to the balance of different ages and categories of impaired debt. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

Where financial assets are individually evaluated for impairment, management uses their best estimates in calculating the net present value of future cash flows. Management has to make judgements on the financial position of the counterparty and the net realisable value of collateral (where held), in determining the expected future cash flows.

In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends.

To the extent that the default rates differ from those estimated by 10%, the allowance for impairment on loans and advances would change by an estimated £2.6 million.

2.2 Acquisition accounting

The Group recognises identifiable assets and liabilities at their acquisition date fair values. The exercise of attributing a fair value to the balance sheet of the acquired entity requires the use of a number of assumptions and estimates, which are documented at the time of the acquisition. These fair value adjustments are determined from the estimated future cash flows generated by the assets.

Loans and advances to customers

The methodology of attributing a fair value to loans and advances to customers involves discounting the estimated future cashflows using a risk adjusted discount factor. A fair value adjustment is then applied to the carrying value in the Group's balance sheet.

Intangible assets

Identifying the separately identifiable intangible assets of an acquired company is subjective and based upon discussions with management and a review of relevant documentation. During the current and prior years the acquisition of Everyday Loans and the V12 Finance Group indicated that there were four separately identifiable intangible assets which met the criteria for separation from goodwill, these being Trademarks/Tradenames, Customer Relationships, Broker Relationships and Technology.

Trademarks and Tradenames are valued by estimating the fair value of the estimated costs savings resulting from the ownership of trade names as opposed to licensing them. Customer Relationships are valued through the application of a discounted cashflow methodology to net anticipated renewal revenues. The valuation of Broker Relationships is derived from a costs avoided methodology, by reviewing costs incurred on non-broker platforms versus costs which are incurred in broker commission. Technology is valued by the market derived royalty rate applied to the related cash flows to arrive at estimated savings resulting from the use of the acquired credit decisioning technology.

2.3 Share Option Scheme valuation

The valuation of the equity-settled share option scheme was determined at the original grant date of 2 November 2011 using Black-Scholes valuation models. In the opinion of the directors the terms of the scheme are such that there remain a number of key uncertainties to be considered when calculating the probability of pay out, which are set out below. The directors also considered the probability of option holder attrition prior to the vesting dates, details of which are also set out below.

Much of the Bank's lending is in the near and sub-prime categories, with performance of the book heavily influenced by employment trends. With the UK economy remaining fragile, the impact of a further downturn would be increasing unemployment, potentially causing impairments to rise and new business levels to fall, thereby affecting the bank's ability to sustain the levels of dividend growth required under the terms of the scheme. Depending on the product type, market and customer demographics, the bank's current product range includes expected lifetime losses of between 1% and 20%.

Uncertainties in the regulatory environment continue, with pressure on the government to further constrain the activities of banks following the well reported catalogue of recent issues in the industry. Any tightening of capital requirements will impact on the ability of the Company to exploit future market opportunities and furthermore may inhibit its ability to maintain the required growth in distributions.

Taking these into account, the probability of pay out has been judged as 95% for the first tranche of share options (SOS1) which vest on 2 November 2014 and 80% for the second tranche of share options (SOS2) which vest on 2 November 2016.

One participant in the share option scheme left the Company during 2012 and was consequently withdrawn from the scheme. The directors consider that there is further uncertainty surrounding whether the remaining participants will all still be in situ and eligible at the vesting date. The directors have assumed an attrition rate of 8% for the 2014 options and an attrition rate of 15% for the 2016 options over the scheme period.

2.4 Average life of lending

IAS 39 requires interest earned from lending to be measured under the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset.

Management must therefore use judgement to estimate the expected life of each instrument and hence the expected cash flows relating to it. The accuracy of the effective interest rate would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.

5. Financial risk management

Strategy

By their nature, the Group's activities are principally related to the use of financial instruments. The directors and senior management of the Group have formally adopted a Risk and Controls Policy which sets out the Board's attitude to risk and internal controls. Key risks identified by the directors are formally reviewed and assessed at least once a year by the Board, in addition to which key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data. A more detailed description of the risk governance structure is contained in the Corporate Governance Statement on pages 26 to 27.

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

(a) Credit risk

The Company and Group take on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. A formal Credit Risk Policy has been agreed by the Board whilst credit risk is monitored on a monthly basis by the Credit Risk Committee which reviews performance of key portfolios including new business volumes, collections performance, provisioning levels and provisioning methodology.

The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to individual borrowers or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The limits on the level of credit risk are approved periodically by the Board of Directors and actual exposures against limits monitored daily.

Impairment provisions are provided for losses that have been incurred at the Statement of Financial Position date. Significant changes in the economy could result in losses that are different from those provided for at the Statement of Financial Position date. Management therefore carefully manages its exposures to credit risk as they consider this to be the most significant risk to the business.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral. The assets undergo a scoring process to mitigate risk and are monitored by the Board. Disclosures relating to arrears on loans and advances to customers are disclosed in note 13.

The Board monitors the ratings of the counterparties in relation to the Group's loans and advances to banks. Disclosures of these at the year end are contained in note 12. There is no direct exposure to the Eurozone and peripheral Eurozone countries.

Motor finance loans are secured against motor vehicles. Details of the collateral held in respect of these loans are detailed in note 13.

The maximum exposure to credit risk for the Company and the Group was as follows: