Arbuthnot Regulatory News (ARBB)

21 Mar 2006 07:02

Arbuthnot Banking Group PLC21 March 2006 Arbuthnot Banking Group PLC Preliminary results for the year to 31 December 2005 Key Points • Arbuthnot Banking Group PLC achieved a total profit for 2005 before taxation and minority interests of £9.1 million (2004: £3.3 million) on operating income of £56.3 million (2004: £48.0 million). • Earnings per share more than doubled to 45.8 pence (2004: 22.0 pence). • Profit on continuing activities before tax and exceptional gains rose 68% to £7.4 million. • Earnings per share on continuing activities before exceptional gains were up 20% to 32.6 pence. • Dividends per share increased to 32 pence (2004: 31.5 pence). • Strong performance by Arbuthnot Securities, which made a profit before tax and exceptional gains of £2.8 million. • Building on the momentum in private banking, the planned expansion of Arbuthnot Latham into overseas markets to be financed by a proposed issue of new ordinary shares at a price expected to be 600 pence per share, to raise £4 million. • Board cautiously optimistic about the Group's outlook. Chairman, Henry Angest, commented: "I am pleased to report that after a long winter the first signs of spring havearrived. The strong turnaround in the performance of Arbuthnot Securities isvery pleasing and the business is well positioned for 2006. The restructuringof Arbuthnot Latham is now essentially complete and the fundraising that we haveannounced today will enable us to build on the opportunities created." 21 March 2006 Press enquiries: Arbuthnot Banking Group PLC: Henry Angest, Chairman and Chief Executive Tel: 020 7012 2400Stephen Lockley, Group Finance Director Tel: 020 7012 2055Andrew Salmon, Chief Operating Officer Tel: 020 7012 2424College Hill:Tony Friend Tel: 020 7457 2020Richard Pearson Tel: 020 7457 2020 CHAIRMAN'S STATEMENT Arbuthnot Banking Group PLC achieved a total profit for 2005 before taxation andminority interests of £9.1 million (2004: £3.3 million). Earnings per sharemore than doubled to 45.8p (2004: 22.0p). The profit on continuing activities before tax and exceptional gains increasedto £7.4 million from £4.4 million in the previous year. Earnings per share oncontinuing activities before exceptional gains rose to 32.6p from 27.2p in 2004. Including an exceptional accounting profit of £0.8 million arising on the saleof a minority interest in Arbuthnot Securities to its staff and exceptionaloperating costs of £0.5 million (2004: £1.4 million), profit on continuingactivities before tax for 2005 was £7.7 million (2004: £3.0 million). Afteradding the profit on discontinued activity after taxation of £1.4 million, whichrelates to the sale of Arbuthnot Insurance Brokers in October 2005, anddeducting the minority interest of £0.4 million relating to the proportion ofthe share capital of Arbuthnot Securities now owned by its staff, profit aftertaxation for the year attributable to equity holders of the Company was £6.5million (2004: £2.9 million). These figures are presented under InternationalFinancial Reporting Standards. The Board proposes an increase in the final dividend to 21.5p, from 21p lastyear, bringing the total dividend for the year to 32p (2004: 31.5p). Ifapproved at the Annual General Meeting, the final dividend will be paid on 25May 2006 to shareholders on the register at 27 April 2006. These results reflect the benefits of the Group's strategy of developing a widerange of income streams from a diversity of financial services activities.Whilst it has been a difficult year for our retail banking division, SecureTrust Bank, this has been counterbalanced by a very strong performance from theinvestment banking activities of Arbuthnot Securities, which increased revenuesby some 58%, contributing to an overall increase in the Group's operating incomeof 17% to £56.3 million. Arbuthnot Securities Building on the turnaround reported in the interim results, I am pleased torecord that Arbuthnot Securities achieved a profit before tax and exceptionalitems in 2005 of £2.8 million. Gross revenues rose by 58% to £19.4 million, ofwhich some £12.1 million was achieved in the second half of the year. This reflects an increase in market share in all areas of the company'soperations as well as a helpful market environment. In corporate finance, weraised some £285 million for clients during 2005, compared to £101 million in2004. In particular, we have established a strong position in the launch ofclosed-end investment funds, having successfully carried out IPOs for the NorthAmerican Banks Fund, Utilico Emerging Markets Fund and India Capital GrowthFund. The number of corporate clients that we act for has grown from 51 to 64. We also advised on a number of high profile M & A transactions, including thesale by BUPA of a portfolio of nine hospitals to Legal & General Ventures, theacquisition of Little Chef and the takeover of regional brewer Jennings Brothersby Wolverhampton & Dudley Breweries. Significant transactions in the secondarymarket included placing 30% of the share capital of PD Ports on behalf of NikkoPrincipal Investments. We have also been active in bringing companies to AIMand in May 2005 sponsored the first ever survey of investors' attitudes towardsAIM which reflected the views of over 50 of the top institutional investors inAIM, all of whom judged the market to have been a success. Arbuthnot Latham The past year has marked a period of further significant progress for theprivate banking division. We have completed the merger of the activities ofArbuthnot Latham & Co., Arbuthnot Fund Managers, Arbuthnot Pensions &Investments and Arbuthnot Pension Trustees to form a seamless wealth managementoffering for clients. At the same time, the division's investment managementoffering has been significantly restructured and improved. Our range of alternative investment products has seen further development and,in particular, we continue to offer our clients interesting and profitableinvestment opportunities in the property market, building on a number oftransactions completed successfully during the year. We are also developing anumber of niche asset finance businesses, beginning with the acquisition of theMusical Instrument Finance Company in November. Specialist financing is an areawhere we intend to continue broadening the Group's activities in the future. The number of banking clients grew by 10% during the year. The loan bookincreased by 20% compared with December 2004 to £107 million, customer depositsrose by 26% to £207 million and funds under management grew by 22%. As a resultof this continued growth in volumes of business with recurring revenues,operating income rose by 11%. This has not been achieved without ongoinginvestment, such that costs rose faster than income and profit before tax andexceptional items was £0.4 million (2004: £0.7 million). Both of these figuresexclude the results of Arbuthnot Insurance Brokers which was sold last Octoberand the results of which are included as part of the profit on discontinuedactivity in the income statement. Including the profit on discontinuedactivity, the division's profit before tax was £1.9 million. Secure Trust Bank Against the background of a difficult environment for consumer lending andintense competition from other financial services providers affecting allaspects of Secure Trust Bank's operations, the business nevertheless achieved anincrease in operating income. New personal lending volumes remained healthyand, together with higher cash balances, this contributed to a rise of 11% ininterest receivable. At the same time, the bank's deposit-taking activitiesmade good progress with balances in the flagship Secure Tracker product risingby 59%. As a result, interest payable was also higher than in 2004 and netinterest income was at a similar level to the prior year. During the course of the year, we decided to exit from two affinity arrangementsin our motor insurance consultancy, SecureDirect, where the quality of thebusiness provided by the introducers was unacceptable. As a result, the numberof motor policies sold by SecureDirect fell slightly compared to the previousyear. In my interim statement, issued in September 2005, I referred to an increase inthe level of bad debts arising on our consumer lending. The arrears profile ofthe consumer loan book has remained at a higher level than in 2004, as a resultof which the division's charge for bad debt provisions in the year rose to £1.6million (2004: £1.0 million). Combined with an increase in overheads, thisresulted in the division's profit before tax and exceptional items being £5.5million compared with £6.7 million in the prior year. Corporate Developments and Capital Raising At the Annual General Meeting last May, shareholders approved the change of theCompany's name to Arbuthnot Banking Group PLC from Secure Trust Banking GroupPLC. At the same time, the Board resolved to move the Company from the mainmarket of the London Stock Exchange to AIM. This has enabled us to operatewithout the excessive formality of The Combined Code on Corporate Governance andhas improved the tax treatment for many of our private shareholders. In no way,however, does it diminish the degree of supervision of our operations by the FSAor the high importance we attach to looking after the best interests of ourcustomers and shareholders at all times. Sadly, it also does not protect usagainst the ever increasing avalanche of regulation emanating from Brussels. Looking to the future, we plan to develop our private banking offering overseas.This expansion will have two focuses. The first is to establish an offshorecapability, where our research has led us to the conclusion that we should forma new bank in Switzerland, and the second is to develop into the high growthmarkets of the Far East, where we presently favour opening an office in HongKong. We are well advanced with these plans, particularly in relation toSwitzerland, where we now are seeking regulatory approval, and are todayannouncing a proposed placing and offer of 710,000 new ordinary shares at aprice expected to be 600 pence per share to raise approximately £4 million tofinance this expansion. Finances At the beginning of 2005, we strengthened the balance sheet by raising £3.8million via an open offer of new ordinary shares to existing shareholders. Thiswas followed in October by the sale of Arbuthnot Insurance Brokers, whichrealised £2 million in cash and resulted in a profit on sale of some £1.2million. Then, in November, we raised €15 million (approximately £10 million)of 30 year subordinated loan notes, around £7.8 million of which is being usedto redeem early the existing subordinated loan notes which are due to mature in2009 and are therefore less efficient as regulatory capital. The Group'sfinances thus remain in a very healthy state and, together with the proposedplacing and offers referred to earlier, this will put us in a strong position tocontinue investing in the future development of existing and new businesses. Staff and Management I am delighted that Ruth Lea, who initially served the Group for a short time asan economic adviser, accepted our invitation to become a non-executive directorin November 2005. Her economic insights and advice are valued by the Board.Mark Brown joined the Board in February 2005, having been with the Group sinceSeptember 2004 as Chief Executive of Arbuthnot Securities. I welcome both ofthese colleagues to the Board. After 12 years with us, our Group Finance Director, Stephen Lockley, hasconcluded that the time is right for him to seek a fresh challenge and he willtherefore be leaving the Group. In order to allow us time to find a replacementfor Stephen and to achieve an orderly handover, he has agreed to remain on theBoard until 30 September and to be available to us on a consultancy basis for aperiod thereafter. I thank Stephen for the significant contribution he has madeto the Group over many years and wish him well in the future. These results once again reflect the continuing hard work and dedication of ouremployees. On behalf of the Board I extend our thanks to all staff for theircontribution to the Group's success in 2005. Outlook The trends seen last year have continued into the early part of 2006. ArbuthnotSecurities' stockbroking revenues continue to progress and its corporate financepipeline is stronger than at this time a year ago, albeit that fees from thisactivity cannot be predicted with any certainty until the underlyingtransactions have been completed. Arbuthnot Latham has made a satisfactorystart to the year but Secure Trust Bank has begun somewhat slowly. Taking allof these factors into account, we remain cautiously optimistic about the Group'soutlook. Henry AngestChairman CONSOLIDATED INCOME STATEMENT Year to Year to 31.12.05 31.12.04 £000 £000 Interest and similar income 18,070 14,973Interest expense and similar charges (8,573) (6,285) Net interest income 9,497 8,688 Fee and commission income 44,869 38,721Fee and commission expense (1,088) (578)Net fee and commission income 43,781 38,143 Net trading income 3,069 1,158 Operating income 56,347 47,989 Gain on sale of minority interest in subsidiary 850 -Impairment losses on loans and advances (1,641) (1,235)Operating expenses (47,880) (43,758) Profit on continuing activities before tax 7,676 2,996 Taxation (2,197) (421)Profit on discontinued activity after taxation 1,405 294 Profit for the year 6,884 2,869 Attributable to: Equity holders of the Company 6,489 2,852Minority interest 395 17 6,884 2,869 Earnings per share for profit attributable to the equityholders of the Company during the year (expressed in pence per share):- basic and fully diluted 45.8p 22.0p CONSOLIDATED BALANCE SHEET 31.12.05 31.12.04 £000 £000 ASSETS Cash 188 139 Loans and advances to banks and building societies 28,587 52,367Trading securities - long positions 5,383 5,899Loans and advances to customers 140,151 129,809Debt securities held-to-maturity 88,389 50,500Intangible assets 3,000 3,642Property, plant and equipment 31,458 32,125Current tax asset - 1,224Other assets 28,948 14,681 Total assets 326,104 290,386 LIABILITIES Deposits from banks 9,190 30,830Trading securities - short positions 2,785 1,159Deposits from customers 239,433 202,996Debt securities in issue 12,716 7,923Other liabilities 26,998 20,311Current tax liabilities 790 -Deferred tax liabilities 1,116 1,077 Total liabilities 293,028 264,296 EQUITY Share capital 143 130Share premium account 17,115 13,370Retained earnings 11,111 9,106Other reserves 3,395 3,395 Capital and reserves attributable to the Company's equityholders 31,764 26,001Minority interest 1,312 89Total equity 33,076 26,090 Total equity and liabilities 326,104 290,386 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to equity holders of the Company Share Share Other Retained Minority Total capital premium reserves earnings interest account £000 £000 £000 £000 £000 £000Balance at 1 January 2004 130 13,370 2,314 9,684 77 25,575Surplus on revaluation of freeholdproperties net of deferred tax - - 1,666 - - 1,666Profit for 2004 - - - 2,852 17 2,869Final dividend relating to 2003 - - - (2,655) (5) (2,660)Interim dividend relating to 2004 - - - (1,360) - (1,360)Transfer from general bankingreserves - - (585) 585 - - At 31 December 2004/1 January 2005 130 13,370 3,395 9,106 89 26,090Issue of shares 13 3,745 - - - 3,758Sale of minority interest inArbuthnot Securities Limited - - - - 832 832Profit for 2005 - - - 6,489 395 6,884Final dividend relating to 2004 - - - (2,989) (4) (2,993)Interim dividend relating to 2005 - - - (1,495) - (1,495) At 31 December 2005 143 17,115 3,395 11,111 1,312 33,076 CONSOLIDATED CASH FLOW STATEMENT Year to Year to 31.12.05 31.12.04 £000 £000Cash flows from operating activitiesInterest received 18,099 15,016Interest paid (8,573) (6,285)Fees and commissions received 45,193 39,858Net trading and other income 3,069 1,158Recoveries on loans previously written off 178 14Cash payments to employees and suppliers (47,062) (43,226)Taxation paid (226) (1,499) Cash flows from operating profits before changes in operatingassets and liabilities 10,678 5,036 Changes in operating assets and liabilities: - net decrease in trading securities 2,142 (4,095)- net increase in loans and advances to customers (11,328) (20,395)- net increase in other assets (16,604) (3,559)- net decrease in deposits from other banks (21,640) 12,676- net increase in amounts due to customers 36,437 15,701- net increase in other liabilities 10,269 2,889 Net cash from operating activities:Continuing activities 9,086 7,957Discontinued activity 868 296 9,954 8,253 Cash flows from investing activities Investment in subsidiaries (1,093) -Disposal of subsidiary, net of cash disposed 926 -Disposal of minority interest 1,682 -Purchase of property, plant and equipment (1,273) (4,587)Purchase of computer software (310) (473)Proceeds from sale of property, plant and equipment 209 914Net purchases of debt securities (782) (6,736) Net cash used in investing activities (641) (10,882) Cash flows from financing activitiesIssue of shares 3,758 -Issue of debt securities 10,149 -Repayment of debt securities (5,356) (162)Dividends paid (4,488) (4,020)Net cash from financing activities 4,063 (4,182) Net increase in cash and cash equivalents:Continuing activities 11,582 (7,107)Discontinued activity 1,794 296 13,376 (6,811) Cash and cash equivalents at beginning of year 71,770 78,581 Cash and cash equivalents at end of year 85,146 71,770 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of theseconsolidated financial statements are set out below. These policies have beenconsistently applied to all the years presented, unless otherwise stated. 1. Basis of presentation The Group's consolidated financial statements have been prepared in accordancewith International Financial Reporting Standards (IFRS) as adopted by theEuropean Commission. This means those International Accounting Standards,International Financial Reporting Standards and related Interpretations(SIC-IFRIC interpretations), subsequent amendments to those standards andrelated interpretations, future standards and related interpretations issued oradopted by the International Accounting Standards Board (IASB) that have beenendorsed by the European Union. The consolidated financial statements have beenprepared under the historical cost convention, as modified by the revaluation ofcertain fixed assets and financial assets and financial liabilities held at fairvalue through profit or loss. These consolidated financial statements are the first full financial statementsprepared by the Group in accordance with IFRS. The impact of the change from UKGenerally Accepted Accounting Policies ("UK GAAP") is summarised in Note 2. TheGroup has elected not to restate business combinations that took place prior to1 January 2004. Comparative information for 2004 has been restated to complywith IFRS. 2. Consolidation Subsidiaries are all entities (including special purpose entities) over whichthe Group has the power to govern the financial and operating policies,generally accompanying a shareholding of more than one-half of the votingrights. The existence and effect of potential voting rights that are currentlyexercisable or convertible are considered when assessing whether the Groupcontrols another entity. Subsidiaries are fully consolidated from the date onwhich control is transferred to the Group. They are de-consolidated from thedate that control ceases. The purchase method of accounting is used to account for the acquisition ofsubsidiaries by the Group. The cost of an acquisition is measured as the fairvalue of the assets given, equity instruments issued and liabilities incurred orassumed at the date of exchange, plus costs directly attributable to theacquisition. Identifiable assets acquired and liabilities and contingentliabilities assumed in a business combination are measured initially at theirfair values at the acquisition date, irrespective of the extent of any minorityinterest. The excess of the cost of acquisition over the fair value of theGroup's shares of the identifiable net assets acquired is recorded as goodwill.If the cost of acquisition is less than the fair value of the net assets of thesubsidiary acquired, the difference is recognised directly in the incomestatement. Inter-company transactions, balances and unrealised gains on transactionsbetween Group companies are eliminated. Unrealised losses are also eliminatedunless the transaction provides evidence of impairment of the asset transferred.Accounting policies of subsidiaries have been changed where necessary toensure consistency with the policies adopted by the Group. 3. Segment reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. 4. Foreign currency translation (a) Functional and presentation currency All Group entities operate primarily in the United Kingdom and items included intheir financial statements are measured using pounds sterling ('the functionalcurrency'). The consolidated financial statements are presented in poundssterling, which is the Company's functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreignexchange gains and losses resulting from the settlement of such transactions andfrom the translation at year-end exchange rates of monetary assets andliabilities denominated in foreign currencies are recognised in the incomestatement. 5. Interest income and expense Interest income and expense are recognised in the income statement for allinstruments measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of afinancial asset or a financial liability and of allocating the interest incomeor interest expense over the relevant period. The effective interest rate isthe rate that exactly discounts estimated future cash payments or receiptsthrough the expected life of the financial instrument or, when appropriate, ashorter period to the net carrying amount of the financial asset or financialliability. When calculating the effective interest rate, the Group takes intoaccount all contractual terms of the financial instrument but does not considerfuture credit losses. The calculation includes all fees paid or receivedbetween parties to the contract that are an integral part of the effectiveinterest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been writtendown as a result of an impairment loss, interest income is recognised using therate of interest used to discount the future cash flows for the purpose ofmeasuring the impairment loss. 6. Fee and commission income Fees and commissions are generally recognised on an accrual basis when theservice has been provided. Loan commitment fees are deferred and recognised asan adjustment to the effective interest rate on the loan. Commission and feesarising from negotiating, or participating in the negotiation of, a transactionfor a third party - such as the issue or the acquisition of shares or othersecurities or the purchase or sale of businesses - are recognised on completionof the underlying transaction. Asset and other management, advisory and servicefees are recognised based on the applicable service contracts, usually on atime-apportioned basis. The same principle is applied for financial planningand insurance services that are continuously provided over an extended period oftime. 7. Financial assets The Group classifies its financial assets in the following categories:financial assets at fair value through profit or loss; loans and receivables;held-to-maturity investments; and available-for-sale financial assets.Management determines the classification of its investments at initialrecognition. (a) Financial assets at fair value and through profit or loss This category comprises financial assets held for trading. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. They arise whenthe Group provides money, goods or services directly to a debtor with nointention of trading the receivable. (c) Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed ordeterminable payments and fixed maturities that the Group's management has thepositive intention and ability to hold to maturity. (d) Available-for-sale Available-for-sale investments are those intended to be held for an indefiniteperiod of time, which may be sold in response to needs for liquidity or changesin interest rates, exchange rates or equity prices. The Group held no suchassets during the two financial years ended 31 December 2005. Purchases and sales of financial assets at fair value through profit or loss arerecognised on trade-date - the date on which the Group commits to purchase orsell the asset. Loans are recognised when cash is advanced to the borrowers.Financial assets are initially recognised at fair value plus transaction costsfor all financial assets not carried at fair value through profit or loss.Financial assets are derecognised when the rights to receive cash flows from thefinancial assets have expired or where the Group has transferred substantiallyall risks and rewards of ownership. Financial assets at fair value through profit or loss are subsequently carriedat fair value. Loans and receivables and held-to-maturity investments arecarried at amortised cost using the effective interest method. Gains and lossesarising from changes in the fair value of the 'financial assets at fair valuethrough profit or loss' category are included in the income statement in theperiod in which they arise. The fair values of quoted investments in active markets are based on current bidprices for long positions and offer prices for short positions (taking intoaccount the size and liquidity of the holding). 8. Offsetting Financial Instruments Financial assets and liabilities are offset and the net amount reported in thebalance sheet when there is a legally enforceable right to offset the recognisedamounts and there is an intention to settle on a net basis, or realise the assetand settle the liability simultaneously. 9. Impairment of financial assets The Group assesses at each balance sheet date whether there is objectiveevidence that a financial asset or group of financial assets is impaired. Afinancial asset or a group of financial assets is impaired and impairment lossesare incurred if, and only if, there is objective evidence of impairment as aresult of one or more events that occurred after the initial recognition of theasset (a 'loss event') and that loss event (or events) has an impact on theestimated future cash flows of the financial asset or group of financial assetsthat can be reliably estimated. If there is objective evidence that an impairment loss on loans and receivablesor held-to-maturity investments carried at amortised cost has been incurred, theamount of the loss is measured as the difference between the asset's carryingamount and the present value of estimated future cash flows discounted at thefinancial asset's original effective interest rate. The carrying amount of theasset is reduced through the use of an allowance account and the amount of theloss is recognised in the income statement. If a loan or held-to-maturityinvestment has a variable interest rate, the discount rate for measuring anyimpairment loss is the current effective interest rate determined under thecontract. When a loan is uncollectable, it is written off against the related provisionfor loan impairment. Such loans are written off after all the necessaryprocedures have been completed and the amount of the loss has been determined.Subsequent recoveries of amounts previously written off decrease the amount ofthe provision for loan impairment in the income statement. 10. Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets of the acquired subsidiaryat the date of acquisition. Goodwill on acquisitions of subsidiaries isincluded in 'intangible assets'. Goodwill is tested annually for impairment andcarried at cost less accumulated impairment losses. Gains and losses on thedisposal of an entity include the carrying amount of goodwill relating to theentity sold. (b) Computer software Acquired computer software licenses are capitalised on the basis of the costsincurred to acquire and bring to use the specific software. These costs areamortised on the basis of the expected useful lives (three to five years). Costs associated with developing or maintaining computer software programs arerecognised as an expense as incurred. 11. Property, plant and equipment Land and buildings comprise mainly branches and offices and are stated at latestvaluation with subsequent additions at cost less depreciation. Plant andequipment is stated at historical cost less depreciation. Historical costincludes expenditure that is directly attributable to the acquisition of theitems. Land is not depreciated. Depreciation on other assets is calculated using thestraight-line method to allocate their cost to their residual values over theirestimated useful lives, applying the following annual rates: Freehold buildings 2%Office equipment 5% to 15%Computer equipment 20% to 33%Motor vehicles 25% Gains and losses on disposals are determined by comparing proceeds with carryingamount. These are included in the income statement. 12. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprisebalances with less than three months' maturity from the date of acquisition,including cash, loans and advances to banks and building societies andshort-term highly liquid debt securities. 13. Post-retirement benefits The Group contributes to a defined contribution scheme and to individual definedcontribution schemes for the benefit of certain employees. The schemes arefunded through payments to insurance companies or trustee-administered funds atthe contribution rates agreed with individual employees. The Group has no further payment obligations once the contributions have beenpaid. The contributions are recognised as an employee benefit expense when theyare due. Prepaid contributions are recognised as an asset to the extent that acash refund or a reduction in the future payments is available. There are no post-retirement benefits other than pensions. 14. Deferred tax Deferred tax is provided in full, using the liability method, on temporarydifferences arising between the tax bases of assets and liabilities and theircarrying amounts in the consolidated financial statements. Deferred tax isdetermined using tax rates (and laws) that have been enacted or substantiallyenacted by the balance sheet date and are expected to apply when the relateddeferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised where it is probable that future taxableprofits will be available against which the temporary differences can beutilised. 15. Borrowings Borrowings are recognised initially at fair value, being their issue proceeds(fair value of consideration received) net of transaction costs incurred.Borrowings are subsequently stated at amortised cost; any difference betweenproceeds net of transaction costs and the redemption value is recognised in theincome statement over the period of the borrowings using the effective interestmethod. 16. Share capital (a) Share issue costs Incremental costs directly attributable to the issue of new shares or options orto the acquisition of a business are shown in equity as a deduction, net of tax,from the proceeds. (b) Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the period in whichthey are approved. 17. Fiduciary activities The Group commonly acts as trustees and in other fiduciary capacities thatresult in the holding or placing of assets on behalf of individuals, trusts,retirement benefit plans and other institutions. These assets and incomearising thereon are excluded from these financial statements, as they are notassets of the Group. NOTES 1. Adjusted Profit Before Tax The profit before tax on a statutory reporting basis includes certain items thatdo not relate to the profitability of the Group on an ongoing basis. The Boardbelieves that a truer reflection of the performance of the Group's ongoingoperating business is better presented by the measures "Adjusted profit beforetax" and "Adjusted earnings per share", as set out below:- 2005 2004 £000 £000 Profit before tax as reported 7,676 2,996 Less: Gain on sale of minority interest in subsidiary (850) - Add: Exceptional operating expenses 541 1,386 Adjusted profit before tax 7,367 4,382 Adjusted earnings per share (Note 4) 32.6p 27.2p These figures are also referred to in the Chairman's Statement as "profit oncontinuing activities before tax and exceptional gains" and "earnings per shareon continuing activities before exceptional gains". 2. Reconciliation of UK GAAP to IFRS The differences between IFRS and UK GAAP which affect the Group were set out inthe document "Update on the Adoption of International Financial ReportingStandards" which was published on 14 July 2005 and is available on the Company'swebsite. Profit Set out below is the reconciliation of the profit reported under IFRS to theprofit reported under UK GAAP for the year ended 31 December 2004: Year to 31.12.04 £000 Profit for the period - UK GAAP 3,370Effect of transition to IFRS:Timing of revenue recognition, net of tax effect (81)Calculation of specific loan loss provisions, net of tax effect (37)Elimination of goodwill amortisation 202Release of general bad debt provision (585) Profit for the period - IFRS 2,869 Equity Set out below is the reconciliation of equity reported under IFRS to equityreported under UK GAAP as at 1 January 2004 and 31 December 2004: 1.1.04 31.12.04 £000 £000Total equity - UK GAAP 23,569 24,965Effect of revenue recognition, net of tax effect (380) (461)Calculation of specific loan loss provisions, net of tax effect (121) (159)Elimination of goodwill amortisation - 202Release of general bad debt provision 585 -Deferred taxation on unrealised revaluation surplus (733) (1,446)Dividends approved since the period-end removed from liabilities 2,655 2,989 Total equity - IFRS 25,575 26,090 3. Segmental Analysis of Profits Year to 31.12.05 Retail Private Investment Subordinated Head Group banking banking banking loan stock office total property £000 £000 £000 £000 £000 £000 Segment profit 5,549 449 2,801 - (814) 7,985Subordinated loan note interest - - - (618) - (618)Profit before exceptional items 5,549 449 2,801 (618) (814) 7,367Exceptional items (218) (171) 698 - - 309Profit before tax 5,331 278 3,499 (618) (814) 7,676Discontinued activity - 1,405 - - - 1,405 Year to 31.12.04 Retail Private Investment Subordinated Head Group banking banking banking loan stock office total property £000 £000 £000 £000 £000 £000 Segment profit 6,728 746 (1,622) - (887) 4,965Subordinated loan note interest - - - (583) - (583) Profit before exceptional items 6,728 746 (1,622) (583) (887) 4,382Exceptional items (214) (431) (741) - - (1,386) Profit before tax 6,514 315 (2,363) (583) (887) 2,996 Discontinued activity - 294 - - - 294 The profit before tax figures exclude the results of Arbuthnot Insurance BrokersLimited ("AIB") which was sold in October 2005 and the profits of which (up tothe date of sale) are shown as a discontinued activity in the income statement.AIB was previously included within the private banking division. 4. Earnings per ordinary share Basic and fully diluted Earnings per ordinary share are calculated on the net basis by dividing theprofit attributable to shareholders of £6,489,000 (31.12.04: £2,852,000) by theweighted average number of ordinary shares 14,167,472 (31.12.04: 12,951,974) inissue during the period. Adjusted The gain on sale of minority interest in subsidiary and the exceptionaloperating expenses do not relate to the profitability of the Group on an ongoingbasis. Therefore, an adjusted basic and fully diluted earnings per share ispresented as follows: Year to Year to 31.12.05 31.12.04 £000 pence £000 penceBasic and fully diluted 6,489 45.8 2,852 22.0Exceptional items (471) (3.3) 970 7.5Discontinued activity (1,405) (9.9) (294) (2.3)Earnings excluding exceptional itemsand adjusted earnings per share 4,613 32.6 3,528 27.2 5. These preliminary results, which were approved by the Board ofDirectors on 20 March 2006, are unaudited. 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