Arbuthnot Regulatory News (ARBB)

17 March 2016

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

Audited Final Results for the year to 31 December, 2015

Diversification of business streams underway

Arbuthnot Banking Group today announces a record profit before tax of £34.2m including the results of Everyday Loans, a 52% increase on the prior year.

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

The agreed disposal of Everyday Loans announced on 4 December 2015 is progressing as planned and ownership is expected to transfer before the end of April 2016. The Board is proposing a special dividend for 2016 of 25p, which is contingent on the completion of the transaction at which time further details will be announced.*

FINANCIAL HIGHLIGHTS

· Statutory Profit before tax on continuing operations of £22.6m (2014: £13.9m)

· Profit before tax of £34.2m (2014: £22.5m) including the results of Everyday Loans

· Special dividend of 25p is proposed dependent on the completion of Everyday Loans disposal*

· Operating income grew by 38% to £126.7m (2014: £92m)

· Customer lending exceeded £1.5bn for the first time; 2015: £1.6bn (2014: £1.2bn)

· Positive operating leverage of 8% (2014: 13%)**

· Earnings per share of 86.3p (2014: 58.6p)

· Final dividend per share of 17p (2014: 16p), an increase of 6%

· Total dividend per share of 29p (2014: 27p), an increase of 7%

· Net assets per share of 1,253p (2014: 1136p), an increase of 10%

OPERATIONAL HIGHLIGHTS

Private Banking - Arbuthnot Latham

· Profit before tax of £6m (2014: £3.6m), an increase of 65%

· Customer loans up 15% to £619m (2014: £536m)

· Customer deposits grew 53% to £897m (2014: £586m)

· Assets under management increased 11% to £739m (2014: £666m)

· Purchased mortgage portfolio performing well and now eligible for use in the Funding for Lending Scheme

Retail Banking - Secure Trust Bank

(a) Profit before tax of £36.8m (2014: £26.3m), which includes the results of Everyday Loans

(b) Customer lending balances increased by 73% to £1.1bn including ELL (2014: £0.6bn)

(c) Total customer numbers increased to 570,759 (2014: 429,507)

(d) Good progress in the development of the SME lending businesses

(e) Disposal of Everyday Loans agreed to Non Standard Finance for £127m, realising an expected gain of £115m

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "This has been another good year for the Group with both Banks performing well. With the disposal of Everyday Loans we will have capitalised the future earnings of our highest risk lending and strengthened the Group's resources to support future growth."

*Completion includes 1) Regulatory approval of the change of control, 2) transfer of ownership and 3) recognition of the gain in the regulatory capital base of the Group.

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

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

ENQUIRIES: 

Arbuthnot Banking Group

Sir Henry Angest, Chairman and Chief Executive 0207 012 2400

Andrew Salmon, Chief Operating Officer

James Cobb, Group Finance Director

David Marshall, Director of Communications

Canaccord Genuity Ltd (Nominated Advisor)

Sunil Duggal 0207 665 4500

Numis Securities Ltd (Broker)Chris Wilkinson 0207 260 1000

Bell Pottinger (Financial PR)

Ben Woodford 0203 772 2566

Dan de Belder

The 2015 Annual Report and Notice of Meeting will be posted and available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 8 April 2015. Copies may be obtained from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.

Consolidated statement of comprehensive income

Consolidated statement of financial position

Chairman's statement

I am pleased to report that Arbuthnot Banking Group ("ABG" or "the Group") has made a record profit before tax in 2015 of £34.2m (2014: £22.5m), which is an increase of 52%. Once again, I find myself bemused by the accounting rules. As a result of agreeing the sale of our consumer finance lending business, Everyday Loans ("ELL"), we are required to show its profits as discontinued in the 2015 report and as a result they are not included in the headline reported profit before tax of £22.6m. It is my belief that it understates the performance of the Group, as we have carefully managed this business throughout the year and this should be reflected in the headline profit measure.

The story of our ownership of ELL, I believe epitomises the essence of Arbuthnot Banking Group. Our stable and supportive shareholder register has enabled us, over time, to take a long term view on our investment decisions and business strategies. This approach was best demonstrated by our cautious attitude to liquidity in the years leading up to the financial crisis, which meant we remained strong while others struggled to survive. At the height of the financial credit boom, we also recognised that the economic risk and reward had shifted in favour of brokers and introducers and away from lenders that had put their balance sheets at risk. Thus, contrary to the market, we ceased lending in the over competitive unsecured markets and instead referred our customers onto other lenders, including ELL. When the banking crisis occurred, the Group was well positioned not only to weather the storm, but more importantly, to prosper as the lending markets reopened at more appropriate levels of return.

We were able to complete two significant acquisitions of non-bank lenders that had suffered as a result of the withdrawal of liquidity from the market. In 2012 we were able to acquire ELL for £1, as we had the liquidity to refinance their book of approximately £64m. We returned it to a phase of growth. This involved not only increasing its balance sheet but also its geographical foot print, as it opened new branches. Now, at the end of 2015, we have agreed to sell the business to Non Standard Finance ("NSF") for £127m, realising an expected profit of £115m, which will be recognised in 2016. This is on top of the earnings the business has contributed to the Group over the past three years.

We recognised that under our ownership ELL was not maximising its potential, as we were careful to restrict the interest rate levels charged to customers. The transaction made sense to both parties with NSF more experienced in this type of lending and better positioned to test other demographics of the market.

Once the transaction is completed, the gain will significantly increase the capital strength of the Group, which will allow our more mainstream banking activities to continue to grow at robust levels as our diversification strategy is maintained.

At the end of 2014, Arbuthnot Latham purchased a portfolio of residential mortgages from the administrator of the Dunfermline Building Society. This portfolio has been successfully transferred to the ownership of the Bank and a new servicer has been appointed and is operating well. Recently, the portfolio was accepted into the Funding for Lending Scheme ("FLS"). We believe this to be the first acquired portfolio to be included in the scheme by the Bank of England. However, more importantly, the portfolio has performed according to our expectations.

Given the success of the transaction, we were keen to explore further opportunities that may exist in the market to acquire other portfolios. Accordingly, we had made good progress in negotiations to acquire a larger mortgage book. This process was brought to a sudden halt following the publication in December by the Basel Committee of its second proposal to revise the Standardised Capital Rules. Despite an extensive consultation of its first proposal and with many leading regulators stating that the intention of the revisions was not to increase overall capital levels in the system, these new proposals will not achieve this. In fact, the capital requirements of the transaction we were contemplating would nearly double under the new proposals.

I have always accepted that the Financial Services Industry has been highly regulated and we have managed our business accordingly. However, this example of how the regulatory environment can impact the business has led me to believe that, as new rules are developed, they should not be applied retrospectively to the back book. Rather, they should only be applicable to transactions or lending that takes place after they are implemented. This would allow the industry to take decisions with certainty on how rules will be applied without having to second guess regulatory developments that may take place in the future.

As a result of the decisive outcome of the General Election in May, we have detected an upsurge in customer sentiment across our businesses. However, this result also meant that a referendum will be held to determine the United Kingdom's continued membership of the European Union. The City is a resilient and dynamic industry and I have no doubt that it will be able to flourish regardless of the final result of the ballot.

Private Banking - Arbuthnot Latham & Co., Ltd

The Private Bank has reported a profit of £6m (2014: £3.6m), which represents an increase of 65%. However, importantly, the business has also taken several additional significant steps forward. The Bank originated £250m of new loans, an increase of 45% on the previous year and a new record. Meanwhile, it attracted on average 50 new clients per month, and our Dubai office not only broke even, it returned a small overall profit for the year, ahead of plan.

As part of the continued strengthening of the infrastructure of the Bank, new premises were occupied in London and in Exeter where we moved the business to larger and more modern offices. We have signed contracts with our preferred partner to implement our new banking system, which should be largely completed during 2016.

Retail Banking - Secure Trust Bank PLC

Our Retail Banking business has delivered a pre-tax profit including ELL of £36.8m (2014: £26.3m), which is an increase of 40%. However, excluding the profits from ELL, the Bank made £25.2m (2014: £ 17.8m), which is an increase of 42%. This higher growth rate reflects well on our strategy to diversify our business, in particular the investment we have made in SME lending. At the end of 2015 the combined lending balances of the SME divisions stood at £468m (2014: £143m), which is a robust growth rate in excess of 200%.

Our management philosophy of exercising prudence in respect of capital, funding and lending remains unchanged. The Bank continues to be well capitalised and liquid, with interest rate risk generally mitigated by matching the tenor of our lending assets and customer deposits.

Board Changes and Personnel

During the year the following changes to the ABG Board occurred. Ian Dewar joined on 1 August and Robert Wickham retired on 31 December after 22 years of loyal and distinguished service. I would like to thank my colleagues on the Board for their generous and continued support and for the dedication they have shown to the Group.

The results of the Group also reflect the hard work and commitment of the members of staff. On behalf of the Board I extend our thanks to all of them for their contribution in 2015.

Dividend

The Board is proposing a final dividend of 17p per share, an increase of 1p on last year. Along with the interim dividend of 12p, this combines to give a total dividend for the year of 29p (2014: 27p), an increase of 2p.

If approved, the dividend will be paid on 13 May 2016 to shareholders on the register at close of business on 15 April 2016.

The disposal of Everyday Loans is proceeding as expected. Once it has completed, the Board is also proposing a special dividend of 25p for 2016. This dividend is dependent on the completion of the transaction, which includes regulatory approval of changes of control, transfer of ownership and inclusion of the gain within the Group's capital resources. Details of the arrangements to pay this dividend will be announced once the transaction has been finalised.

Outlook

The global economic outlook has become increasingly uncertain. The collapse in the commodities market, in particular the oil price, has had a knock on impact in the equity markets.

The Federal Reserve Bank in the US has increased interest rates for the first time in ten years, but the other major economies do not look like following suit at present.

On top of this, the UK has the uncertainty of the outcome of the EU referendum. However, despite these headwinds, both our banks are well capitalised and highly liquid. They remain well positioned to continue their good progress and we are optimistic about their prospects.

Strategic Report

Arbuthnot Latham & Co., Limited ("AL") has reported a profit before tax of £6m (2014: £3.6m), which is a robust rate of growth of 65%. Also, in line with the rapid expansion of the business, the Bank commenced its programme of enhancing its operational capabilities. The most significant is the replacement of its banking technology platform. As a result of this investment, the profits are stated after having incurred in excess of £1m of costs related to this project.

The business momentum within the Bank remained strong throughout the year, as it continued to take advantage of the opportunities that exist to grow its client base and volumes of business. The ability to offer a high quality relationship led service is attractive to clients and this resulted in a flow of, on average, over 50 new clients per month.

Customer loan balances closed the year at £619m (2014: £536m), an increase of 15%. The bespoke nature of many of the loan facilities reflects the objective of the Bank to support clients in the development and realisation of their entrepreneurial projects, where appropriate. The demand for such lending reached record levels for the Bank, with gross lending volumes reaching £250m (2014: £172m), which is an increase of 45% on the prior year.

The Bank continues to be funded by retail deposits with customer balances reaching £897m (2014: £586m), an increase of 53%. Investment assets under management grew by 11% to £739m (2014: £666m). The growth of each of these key metrics demonstrates the success of the strategy to develop the business against the background of a more stable economic environment.

In the latter part of the year, the Bank commenced an initiative to build a wider commercial banking business, initially driven by client demand to provide banking services for the corporate structures of entrepreneurial clients in the media sector. The Bank intends to broaden the initial focus and develop its services for clients in the commercial real estate and also the professional services sectors.

While the principal geographic focus of AL is towards London and the South East, an increasing proportion of the Bank's business is being generated across the UK and particularly through its offices in Exeter and Manchester. In Exeter, the Bank moved into new premises during the year, which has had a positive effect on the local profile. In Manchester, the office was further strengthened with additional recruitment and a healthy momentum is being created in the local market. Overseas, the Dubai office goes from strength to strength and the local Gulf market offers significant opportunities for further growth in the years ahead.

Business Review - Retail Banking - Secure Trust Bank

Secure Trust Bank ("STB") has made profits of £36.8m (2014: £26.3m), which includes £11.7m (2014: £8.6m) from Everyday Loans ("ELL"). On a statutory basis STB has made profits on its continuing operations of £25.2m (2014: £17.8m). We have agreed to sell ELL to Non Standard Finance for £127m and it is expected to be transferred by the end of April 2016, realising an anticipated gain of £115m.

Following the IPO of STB in 2011, the acquisition of ELL was the first significant transaction by the Group and set STB on its current trajectory of growth. However, we were always aware that despite its profitability, the ownership of ELL by STB would ultimately slow its potential growth. Our conservative approach to consumer lending was evident by the cap that we imposed on the interest rates that the business could offer to its borrowers. This resulted in a large demographic of potential customers being excluded from its markets. The sale of the business we believe will be beneficial to our shareholders, as the additional capital that it will generate can be deployed in our other businesses that have faster growth rates and larger potential markets from which to gain their share of business.

The continuing businesses in STB have been proactively managed to result in a good composition of portfolios, with a balance between consumer and SME lending assets, and this will be augmented in 2016 with a new mortgage offering that we believe will be well received in the market place and still deliver our required return on equity.

Once again, the growth in income for the Bank has been achieved by significant increases in the lending businesses. In total new business lending volumes grew by 65% to reach £903m (2014: £546m). This resulted in an overall increase in customer lending assets of 73%, with balances reaching £1.1bn (2014: £0.6bn). This is another milestone in the Bank's history as customer balances have exceeded £1bn for the first time.

Within the consumer finance division, the Retail Finance business led the way with balances increasing by 89% to £220m (2014: £117m). This business has a very strong position within the music and cycle sectors, but has been successfully broadening its reach into the leisure and home furnishing sectors. The business has also seen an increase in the volume of interest bearing lending. This has naturally resulted in higher levels of impairments, which were anticipated in the pricing of the products.

The Motor Finance balances increased by 20% to £166m (2014: £138m). This business, which focuses on the near prime market segment, continues to service the majority of the Top 100 UK car dealer groups and enjoys strong relationships with a number of specialist motor intermediaries. During the year the business tested the prime lending market, and the initial results were positive. It is therefore anticipated that activities in this area will increase during 2016.

The Group's Commercial lending operations have grown as planned. Real Estate Finance increased by 175% to £368m (2014: £134m). This lending is split roughly between residential development funding and residential investment finance. To date, our experience in the residential development lending has been that properties being developed are selling faster and for higher prices than anticipated when the loans were originated.

The residential investment lending is not a regulated mortgage business and is not designed for amateur landlords. As such, it is difficult to predict how the recent fiscal changes will affect the market in the future, but it is our initial belief that it will have a neutral impact.

In its first full year Secure Trust Commercial Services, the invoice finance division, funded in excess of £220m of customers' invoices. Customer lending balances grew £24m to £29m (2014: £5m). However, given the fact that the key customer proposition for this business is built on long term relationships, it will take a while longer before the business reaches critical mass.

The Asset Finance partnership with Haydock Finance has proved successful. Haydock is a long established and well regarded asset finance company. They provide STB with a full business process outsourcing service, while adhering to STB's credit policies and risk appetite. This business closed the year with balances at £71m (2014: £5m), an increase of 1,457%.

STB maintained its principle of funding its lending mainly from the retail deposit market, with balances increasing by 83% to close the year at £1.1bn (2014: £0.6bn). Again, the Bank attempted to minimise the interest rate risk by mainly offering fixed term deposits and bonds. This strategy would appear to be the most sensible, with current forecasts indicating that interest rates will remain low for some time to come.

Finally, STB has been able to maintain its reputation with its customers and staff. It was re-affirmed as the only bank to hold the Customer Service Excellence Award. For the fourth year running the Bank was awarded the four star mark by the Fair Banking Foundation.

Strategic Report - Financial Review

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

The Group provides a range of financial services to customers and clients in its chosen markets of Private Banking and Retail Banking. The Group's revenues are derived from a combination of net interest income from lending, deposit taking and treasury activities, fees for services provided to customers and clients and commission earned on the sale of financial instruments and products.

Once again the Group has traded well during 2015. The reported profit before tax is £22.6m (2014: £13.9m). However, this number does not include the results from Everyday Loans ("ELL"), which is reported as "discontinued" due to the fact we reached agreement to sell this business to Non Standard Finance on 4 December 2015. The business was fully under the managerial influence of the Group during the year, so if their results are included, the overall Group's profit before tax would be £34.2m (2014: £22.5m), representing an increase of 52%. The overall result of £34.2m would be another record year of earnings for the Group.

The tables above also give an indication of the underlying momentum that exists in the Group's earnings. The reported results are adjusted for a small number of items that are included but represent significant investments for the future enhancement of the business or are accounting adjustments required by IFRS rules.

In aggregate, the Group's reported profit increases from £22.6m to an underlying result of £26m (2014: £17.8m), which shows an increase in profit of 46%. Arbuthnot Latham returned an increase in underlying profit of 63%.

The total Basic Earnings per share ("EPS") of the Group have increased by 47% to 86.3p (2014: 58.6p), with the underlying EPS closing the year at 101.2p (2014: 84.5p).

The Group exceeded £100m in operating income in 2014 (when ELL was included in the results). The continued growth in the business, particularly driven by the performance of the lending business, has resulted in the operating income increasing by 38%. Net interest income is now 82% of the overall Group operating income, which is up from last year's comparison of 74%.

The Group's expense base increased to £86.1m (2014: £66.2m), an increase of 30% due to the full year impact of the SME lending divisions, which commenced trading in 2014 and also the investment spending by Arbuthnot Latham ("AL"), mainly on the transformation project which is upgrading operational processes and ultimately replacing its core banking system.

However, despite this increased investment spending, the overall Group's operating leverage still increased by a positive 8%.

Impairment losses rose to £18m (2014: £11.6m), an increase of £6.4m, which is largely explained by three factors. Firstly, the prior year results were artificially lowered by £1m due to the provision releases that arose from a review of the carrying value of written off loans. Secondly, the volume of the balance sheet was increased, which in turn naturally leads to higher levels of expected impairments, especially in the retail lending business. Finally, our motor finance and retail lending divisions have been exploring higher yielding opportunities in their markets. This in turn leads to higher anticipated impairments.

Overall the Return on Equity of the Group was 14.6% (2014: 13.2%), which is somewhat lower than the marginal returns that the Group is capable of generating. This lower amount is due to the fact that the Group has carried a significant surplus of capital set aside for future growth, in particular for the commercial lending businesses. If this surplus is excluded, the Return on Equity deployed is 18.4% (2014: 18.3%).

During 2015 the Group's total assets exceeded £2bn for the first time, closing the year at £2.2bn (2014: £1.4bn), an increase of 54%. At the same time the Group's lending to customers reached £1.6bn (2014: 1.2bn), which is a growth rate of 33%.

Once again the Group's lending remains almost entirely funded by customer deposits, which increased by 62% and are now approaching £2bn. The Group has also developed access to other sources of liquidity, most notably Funding for Lending ("FLS"). Following the recent notification from the Bank of England that the Dunfermline Building Society mortgage portfolio is considered eligible collateral, the Group has £198m of assets that may be used to generate further liquidity.

The net assets of the Group now stand at £192m. This does not include the impact of the gain that will be recognised following the completion of the disposal of Everyday Loans. This is anticipated to be £115m, so the Group's net assets will exceed £300m or the equivalent of approximately £20 per share.

Segmental Analysis

The segmental analysis in Note 40 of the consolidated Financial Statements in the Annual Report highlights the disclosures required under IFRS 8 "Operating Segments". The operating segments are Private Banking (Arbuthnot Latham & Co., Limited) and Retail Banking (Secure Trust Bank PLC). Group costs and intercompany elimination journals are shown separately to reconcile back to the Group consolidated results.

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

The profit before tax for the year was reported as £6m (2014: £3.6m). This is an increase of 65%. As already indicated publicly, the Bank has been carrying out an investment project to transform the operational process within the Bank. Accordingly, the results are after including not only £1.1m of costs for this project, but also £300k start-up costs for the commercial banking business and £400k of expenses for an aborted acquisition of a mortgage portfolio. If these items are added back, the Private Bank would have made £7.9m.

The proportion of the bank's income that is dependent on the balance sheet has increased during the year, with net interest income 72% of total operating income compared to 67% in the prior year.

At the same time net customer margin remained consistent with prior years at around 4.4% each month.

Operating expenses have increased by 24% to £29.7m as a result of the items noted above and also the full year impact of the hiring of new private bankers in the prior year. Also as a result of the rapid expansion of employees, the Bank moved into new premises in Exeter and agreed to occupy 9,839 square feet of new office space in the City, in addition to the headquarters in Wilson Street.

Impairment losses on loans declined from £3m to below £1.3m during the year, as the impact of the legacy credit portfolio began to decline. This portfolio has now largely been resolved.

It is worth noting that the Dubai office achieved break even in July 2015 and overall returned a small profit for the whole year.

Total customer assets increased by 15% to close the year at £619m (2014: £536m). However, the total volume of new loans originated in 2015 was £250m (2014: £172m), which is an increase of 45%. The actual balance sheet lagged behind this volume growth as we experienced an uptick in redemptions following the decisive result of the General Election in May 2015, which seemed to give confidence to the housing market during the summer months. After this, the balance sheet returned to good growth levels in the final quarter.

Overall the book remains well secured with an average LTV of 46% (2014: 43%).

Following the hiring of a number of high quality private bankers, the Bank is now able to gather robust levels of new deposits and therefore the customer deposit book grew to almost £900m (2014: £586m), an increase of 53%.

In total the Bank has surpassed £1bn in total assets for the first time in its history.

The net assets of the Bank now stand at £53m (2014: £40m), a 32% increase, as the Group made further capital contributions to facilitate additional growth, on top of the organically generated reserves that arise from net earnings. As a result, the Private Bank had a total capital ratio of 10.4% (2014: 10.8%) and a core tier 1 ratio of 10.4% (2014: 9.4%).

The reported profit before tax is £25.2m (2014: £17.8m), which is an increase of 42%. These figures are the continuing operations within Secure Trust Bank. If the results for Everyday Loans are included, the Retail Bank made a profit before tax of £36.8m (2014: £26.3m), an increase of 40%.

The largest increase in the components of revenue has been derived from the Net Interest Income line, which has grown by 60% to close the year at £78.9m (2014: £49.1m). Net Interest Income is now 86% of revenues compared to 77% in the prior year. Net interest margin was 15.7% (2014: 17.1%) as the impact of the SME lending starts to add a counter balance to the consumer finance lending from prior years.

Operating expenses increased 34% to £50.1m (2014: £37.3m), largely due to the investments made in growing the SME lending divisions. However, the overall cost income ratio stands at 51% (2014: 57%). The operating leverage grew by a positive 10%.

Impairment losses were £16.8m (2014: £8.7m), with the increase due to three items. Firstly, the prior year was artificially low due to the £1m provision release. Secondly, the increase in the overall lending balances led to higher impairment losses. Finally, the Retail and Motor Finance operations have been lending to higher margin sectors of the markets, which has in turn resulted in higher levels of expected impairments.

Overall the customer lending balances closed the year at £961m (2014: £622m), an increase of 54%. Once again the Motor, Retail and Business Finance portfolios have all shown good levels of growth. Motor Finance increased by 20% as it started to widen its product offering across the risk spectrum and including prime lending for the first time. The Retail Finance business has grown by 59% due in some degree to the additional strength the STB funding profile brings to the proposition. This has enabled it to pitch and win new business relationships that previously were beyond the V12 business. Secondly, the business has developed momentum in interest bearing products as opposed to interest free. This has resulted in higher expected impairments, but still at levels lower than anticipated when the products were priced.

The Business Finance divisions have grown by more than 200% with good growth in all three segments.

Customer deposits grew by 70% to stand at £1bn (2014: £608m). The Bank remains almost entirely funded by retail deposits. These deposits have been sourced mainly via the best buy tables and are largely in the form of fixed term deposits and bonds. This has the additional benefit not only of certainty of funding terms but also in managing the interest rate basis risk that can arise with longer term fixed rate lending business.

The net assets of the company have increased to £141m (2014: £125m), which is before recognising the gain from ELL. After this it is anticipated that the net assets of the company will be in excess of £250m. The Bank is well capitalised with a total capital ratio of 11.9% (2014: 16.3%) and a core tier 1 ratio of 12.2% (2014: 16.6%).

Total Group costs increased from £7.5m to £8.6m as a result of an increase in staff costs due to higher salaries and additional employees in the Group centre, to oversee the growth within the wider Group and to manage the greater requirements arising from regulation, compliance and corporate governance.

Capital

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

The Group's lead regulator, the Prudential Regulation Authority ('PRA'), sets and monitors capital requirements for the Group as a whole and for the individual banking operations. The lead regulator adopted the Basel III capital requirements with effect from 1 January 2014. As a result, the Group's regulatory capital requirements have been based on Basel III since 2014.

In accordance with the EU's Capital Requirements Directive (CRD) and the required parameters set out in the PRA Handbook (BIPRU 2.2), the Individual Capital Adequacy Assessment Process (ICAAP) is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. The Group's regulated entities are also the principal trading subsidiaries as detailed in Note 39.

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar 1 plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations deliver a sufficient capital sum adequate to cover management's anticipated risks. Where the Board considers that the Pillar 1 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 PRA.

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

• Tier 1 comprises mainly shareholders' funds, non-controlling interests and revaluation reserves, after deducting goodwill and

other intangible assets.

• Lower Tier 2 comprises qualifying subordinated loan capital and collective provisions. Lower Tier 2 capital cannot exceed 50%

of Tier 1 capital.

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

Risks and Uncertainties

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

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

Strategic risk

Strategic risk is the risk that may affect the Group's ability to achieve its corporate and strategic objectives. This risk is important to the Group as it continues its growth strategy. However, the Group seeks to mitigate strategic risk by focusing on a sustainable business model which is aligned to the Group's business strategy. Also, the Board of Directors meets once a year to hold a two day board meeting to ensure that the Group's strategy is appropriate for the market and economy.

Credit risk

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. This risk exists in Arbuthnot Latham & Co., Limited and Secure Trust Bank PLC, which currently have loan books of £619m and £961m respectively. The lending portfolio in Arbuthnot Latham is extended to private banking clients, the majority of which is secured against cash, property or other assets. The portfolios within Secure Trust are extended to retail customers and are largely unsecured. However, the new Real Estate finance business lends mainly secured on properties. Credit risk is managed through the Credit Committees of each bank with significant exposures also being approved by the Group Risk Committee.

Market risk

Market risk arises in relation to movements in interest rates, currencies and equity markets. The Group's treasury function operates mainly to provide a service to clients and does not take significant unmatched positions in any market for its own account. As a result, the Group's exposure to adverse movements in interest rates and currencies is limited to interest earnings on its free cash and interest rate re-pricing mismatches.

Liquidity risk

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

Operational risk

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

Cyber risk

An increasing risk that the Group is subject to within its operational processes is cyber risk. This is the risk that the businesses within the Group are subject to some form of disruption arising from an interruption to its IT and data infrastructure.

Conduct risk

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

The Group adopts a zero risk appetite for any unfair customer outcomes. It maintains clear compliance guidelines and provides ongoing training to all staff. Periodic spot checks and internal audits are performed to ensure these guidelines are being maintained. The Group also has insurance policies in place to cover any claims that may arise.

Regulatory risk

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

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

Macroeconomic and competitive environment

The Group is also exposed to indirect risks that may arise from the macroeconomic and competitive environment. The economic environment is relatively stable within the UK. However, the international landscape is increasingly uncertain. The declining performance of the economies in the EU, Russia and China may have an adverse affect on the UK. In particular this may cause a softening of central London property prices, which may spread out further to the South East.

Over the past year the reduction in oil prices has resulted in a lowering of the interest rate yield curve and has pushed out the time horizon for expectations of an increase in interest rates.

The Group monitors its exposure to future interest rate rises and currently has minimal lending to customers in products that would be directly sensitive to interest rate rises. However, at the current levels of interest rates, the affordability enjoyed by the Group's customers is beneficial.

EU Referendum

At the time of issuing this Annual Report, the date for the UK referendum on its membership of the European Union (EU) has been set for 23 June 2016. It is currently difficult to analyse the impacts that a vote to exit may have on the Arbuthnot Banking Group. However, our only overseas operation is in Dubai, so the vast majority of the Group's income and expenditure is based in the UK. It is therefore anticipated that the financial impact would be minimal assuming there were to be no significant macro economic shock on the UK.

Group Directors' Report

The Directors submit their annual report and the audited consolidated financial statements for the year ended 31 December 2015.

Principal Activities and Review

The principal activities of the Group are banking and financial services. A strategic review in accordance with Section 414 C of the Companies Act 2006 forming part of this report is set out on pages 4 to 15.

Results and Dividends

The results for the year are shown on page 26. The profit after tax for the year of £26.5m (2014: £17.0m) is included in reserves.

The Directors recommend the payment of a final dividend of 17p on the ordinary shares which, together with the interim dividend of 12p paid on 2 October 2015, represents total dividends for the year of 29p (2014: 27p). The final dividend, if approved by members at the Annual General Meeting, will be paid on 13 May 2016 to shareholders on the register at close of business on 15 April 2016.

The Board is also proposing to pay a special dividend of 25p for 2016. This dividend is dependent on the completion of the sale of ELL, which includes regulatory approval of change of control, transferal of ownership and inclusion of the gain within the Group's capital resources. Following completion, the Board would also review the financial position and prospects of the Company before declaring the special dividend.

Going Concern

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

Share Capital

Shareholders will be asked to approve a Special Resolution renewing the authority of the Directors to make market purchases of shares not exceeding 10% of the existing issued share capital. The Directors will keep the position under review in order to maximise the Company's resources in the best interests of shareholders.

Sale of subsidiary

It was announced on 4 December 2015 that the Company's subsidiary, Secure Trust Bank PLC, has agreed the conditional sale of its sub-prime consumer lending business, Everyday Loans Holdings Limited, to Non Standard Finance plc for £107m in cash and £20m in ordinary shares of the purchaser. This transaction is subject to approval by Regulators and is proceeding according to expectations and is anticipated that ownership will be transferred before 30 April 2016.

Financial Risk Management

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

Substantial Shareholders

The Company was aware at 15 March 2016 of the following substantial holdings in the ordinary shares of the Company, other than those held by one director shown below:

All are currently directors and served throughout the year except for Mr. I.A. Dewar who was appointed on 1 August 2015.

Mr. R.J.J. Wickham served as a director throughout 2015 and retired on 31 December 2015. Ms R.J. Lea will retire at the Annual General Meeting and does not seek re-election.

Mr. Dewar, who has wide ranging experience in finance and as a senior statutory auditor, has been appointed chairman of the Audit Committee in succession to Ms Lea and offers himself for election under Article 75 of the Articles of Association.

Sir Henry Angest and Sir Christopher Meyer retire under Article 78 of the Articles of Association and, being eligible, offer themselves for re-election. Sir Henry Angest has a service agreement terminable on twelve months' notice. Sir Christopher Meyer, a non-executive director who joined the Board in October 2007, does not have a service agreement.

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

At the year end Mr. Lynam held 9,110 and Mr. Salmon held 7,500 ordinary 40p shares in Secure Trust Bank PLC, a 52% subsidiary of the Company.

On 16 April 2013 Mr. Salmon and Mr. Cobb were granted options to subscribe between April 2016 and April 2021 for 100,000 and 50,000 ordinary 1p shares respectively in the Company at 930p. The fair value of the options at grant date was £125,000.

On 1 April 2014 Mr. Fleming was granted an option to subscribe between April 2017 and April 2022 for 50,000 ordinary 1p shares in the Company at 1185p. The fair value of the option at grant date was £53,000.

Mr. Lynam and Mr. Salmon continue to hold options granted to them on 2 November 2011 to subscribe for 141,667 ordinary 40p shares in Secure Trust Bank PLC at 720p between 2 November 2016 and 2 November 2021. The fair value of the options at grant date was £1m.

Mr. Lynam was granted phantom options on 23 March 2015 to acquire 187,500 ordinary 40p shares in Secure Trust Bank PLC at £25 exercisable on or after 3 November 2018 when a cash payment would be made equal to any increase in value.

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

No director, either during or at the end of the financial year, was materially interested in any contract with the Company or any of its subsidiaries, which was significant in relation to the Group's business. At 31 December 2015 two directors had loans from Arbuthnot Latham & Co., Limited amounting to £2,901,000 and one director had a loan from Secure Trust Bank amounting to £223,000, on normal commercial terms as disclosed in note 38 to the financial statements. At 31 December 2015 five directors had deposits with Arbuthnot Latham & Co., Limited amounting to £2,321,000 and two directors had deposits with Secure Trust Bank PLC amounting to £371,000, all on normal commercial terms as disclosed in note 38 to the financial statements.

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

Board Committees

The report of the Remuneration Committee on pages 22 to 23 will be the subject of an Ordinary Resolution at the Annual General Meeting.

Information on the Audit, Nomination, Risk and Political Donations Committees is included in the Corporate Governance section of the Annual Report on pages 19 to 21.

Employees

The Company gives due consideration to the employment of disabled persons and is an equal opportunities employer. It also regularly provides employees with information on matters of concern to them, consults on decisions likely to affect their interests and encourages their involvement in the performance of the Company through share participation and in other ways.

Political Donations

The Company made political donations of £68,000 to the Conservative Party during the year (2014: £48,000).

Branches outside of the UK

During the year the Arbuthnot Latham & Co., Ltd operated a branch in Dubai which is regulated by the Dubai Financial Services Authority.

Events after the balance sheet date

On 15 January 2016 Arbuthnot Latham & Co., Ltd signed a contract with Oracle to replace its current banking system. The committed cost is £2m.

Auditors

A resolution for the re-appointment of KPMG LLP as auditor will be proposed at the forthcoming Annual General Meeting at a fee to be agreed in due course by the directors.

Statement of Disclosure of Information to Auditors

The Directors confirm that:

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

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

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

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

Corporate Governance

Arbuthnot Banking Group has a strong and effective Corporate Governance framework. The Board endorses the principles of openness, integrity and accountability, which underlie good corporate governance and take into account the provisions of the UK Corporate Governance Code in so far as they are considered appropriate to the Group's size and circumstances. Moreover, the Group contains subsidiaries authorised to undertake regulated business under the Financial Services and Markets Act 2000, which are regulated by the Prudential Regulatory Authority and the Financial Conduct Authority, including two which are authorised deposit-taking businesses. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such businesses.

Directors

The Group is led by an effective Board which comprises five executive directors and three non-executive directors. During 2015, the senior independent non-executive director, and Deputy Chairman, was Robert Wickham. Mr. Wickham retired from the Board on 31 December 2015. Ian Dewar was appointed on 1 August 2015 as an independent non-executive director of the Company and assigned the role of chairman of the Audit Committee in succession to Ruth Lea, who will retire from the Board at the Annual General Meeting. The directors seeking re-election are Sir Henry Angest and Sir Christopher Meyer, who have served on the Board for 30 years and eight years respectively. The contribution of Sir Henry Angest, who beneficially owns more than 50% of the issued share capital, has been invaluable in the successful development of the Company. Sir Christopher Meyer's wide-ranging experience as a diplomat has provided an important independent measure of challenge to executive management. Accordingly, the Board fully supports the resolutions for their reappointment.

The Board

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

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

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

Audit Committee

Membership of the Audit Committee is restricted to non-executive directors and comprises Ian Dewar (as Chairman), Ruth Lea and Sir Christopher Meyer. The Committee met four times during the year.

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

The present auditors have held office since 2009, but the senior statutory auditor changed in 2013. The Board is very satisfied with the effectiveness of their audit. The Committee received a report showing the level of non-audit services provided by the external auditors during the year and members were satisfied that this did not infringe auditor independence.

Remuneration Committee

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

Nomination Committee

The Nomination Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Ruth Lea. The Committee met twice during the year. Before a Board appointment is made the skills, knowledge and experience required for a particular appointment are evaluated and a recommendation made to the Board, with recruitment consultants appointed if appropriate. The Committee has under active consideration the appointment of an additional independent non-executive director to succeed Ruth Lea on her retirement from the Board.

Risk Committee

The Risk Committee is chaired by Sir Henry Angest and its other members are James Cobb, James Fleming, Paul Lynam and Andrew Salmon. The Committee met six times during the year. The principal role of the Risk Committee is to approve significant individual credits or other exposures.

Donations Committee

The Donations Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Ruth Lea. The Committee met three times during the year. The Committee considers any political donation or expenditure as defined within the Political Parties, Elections and Referendums Act 2000.

Shareholder Communications

The Company maintains a regular dialogue with its shareholders and makes full use of the Annual General Meeting and other General Meetings (when held) to communicate with investors. The Company aims to present a balanced and understandable assessment in all its reports to shareholders, its regulators, other stakeholders and the wider public. Key announcements and other information can be found at www.arbuthnotgroup.com.

Internal Control and Financial Reporting

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

The Directors and senior management of the Group have formally adopted a Group Risk and Controls Policy which sets out the Board's attitude to risk and internal control. Key risks identified by the Directors are formally reviewed and assessed at least once a year by the Board. In addition, key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention.

Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are well-established budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data.

The effectiveness of the internal control system is reviewed regularly by the Board and the Audit Committee, which also receives reports of reviews undertaken by the internal audit function, which was outsourced to EY during 2015. The Audit Committee also receives reports from the external auditors, KPMG LLP, which include details of internal control matters that they have identified as part of the annual statutory Financial Statement audit. The ICAAP and ILAAP are considered key issues and are considered in detail by the subsidiary Boards and their Risk Committees. The Board receives reports on these by exception. Certain aspects of the system of internal control are also subject to regulatory supervision, the results of which are monitored closely by the Board.

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

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

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

• select suitable accounting policies and then apply them consistently;

• make judgments and estimates that are reasonable and prudent;

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

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

Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

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

Remuneration Report

Remuneration Committee

Membership of the Remuneration Committee is limited to non-executive directors together with Sir Henry Angest as Chairman. The present members of the Committee are Sir Henry Angest, Sir Christopher Meyer and Ruth Lea. The Committee met four times during the year.

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

Remuneration Policy

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

Directors' Service Contracts

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

Share Option and Long Term Incentive Schemes

This part of the remuneration report is audited information.

At the Annual General Meeting in May 2015, shareholders voted by Ordinary Resolution to extend the Company's Unapproved Executive Share Option Scheme for a further period of 10 years.

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

On 16 April 2013 Mr. Salmon and Mr. Cobb were granted options to subscribe between April 2016 and April 2021 for 100,000 and 50,000 ordinary 1p shares respectively in the Company at 930p. The fair value of the options at grant date was £125,000.

On 1 April 2014 Mr. Fleming was granted an option to subscribe between April 2017 and April 2022 for 50,000 ordinary 1p shares in the Company at 1185p. The fair value of the options at the grant date was £53,000.

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

Under the Unapproved Executive Share Option Scheme of the Company subsidiary, Secure Trust Bank PLC, established in November 2011, Paul Lynam and Andrew Salmon were each granted options over 283,333 shares in that company. The fair value of the options at the grant date was £1m.

On 2 November 2014 Mr. Lynam and Mr. Salmon each exercised options granted to them on 2 November 2011 to subscribe for 141,666 ordinary 40p shares in Secure Trust Bank PLC at 720p and sold the shares at a price of £25. Mr. Lynam and Mr. Salmon continue to hold options granted to them on 2 November 2011 to subscribe for 141,667 ordinary 40p shares in Secure Trust Bank PLC at 720p between 2 November 2016 and 2 November 2021. The fair value of the options at grant date was £0.5m.

On 23 March 2015 Mr. Lynam was granted phantom options to acquire 187,500 ordinary 40p shares in Secure Trust Bank PLC at £25 exercisable on or after 3 November 2016 when a cash payment would be made equal to any increase in value.

Directors' Emoluments

This part of the remuneration report is audited information.

Details of any shares or options held by directors are presented on page 17.

The emoluments of the Chairman were £987,000 (2014: £632,000). The emoluments of the highest paid director were £1,456,000 (2014: £3,671,000) including pension contributions of £35,000 (2014: £35,000).

Mr. R J J Wickham was a director of Calando Finance Limited which received an annual fee of £nil (2014: £14,000) in respect of his services to the Group. This amount is included in the table above. Retirement benefits are accruing under money purchase schemes for five directors who served during 2015 (2014: five directors).

Independent Auditor's Report

We have audited the financial statements of Arbuthnot Banking Group PLC for the year ended 31 December 2015 set out on pages 26 to 102. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

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

Respective responsibilities of directors and auditors

As explained more fully in the Directors' Responsibilities Statement set out on page 21, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

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

www.frc.org.uk/auditscopeukprivate.

Opinion on financial statements

In our opinion:

• the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31

December 2015 and of the Group's profit for the year then ended;

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

• the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as

applied in accordance with the provisions of the Companies Act 2006; and

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

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

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

Matters on which we are required to report by exception

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

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

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

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

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

Richard Gabbertas (Senior Statutory Auditor)

for and on behalf of KPMG LLP, Statutory Auditor

Chartered Accountants

15 Canada Square

London

E14 5GL

16 March 2016

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