Arbuthnot Regulatory News (ARBB)

15 March 2012

For immediate release

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

Audited Final Results for the year to 31 December, 2011

YEAR OF TRANSFORMATION

Arbuthnot Banking Group has made good progress in 2011 from its continuing activities. The separate flotation of the Retail Banking division and the exit from Investment Banking has created a strong foundation for future growth.

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

FINANCIAL HIGHLIGHTS

·; Group pre-tax profit from continuing activities £5.1m (2010: £4.1m)

·; Successful flotation of Secure Trust Bank increasing reserves by £16m

·; Exit from Investment Banking with sale of Arbuthnot Securities Ltd to Westhouse Holdings PLC

·; Dividend per share (DPS) up 1p to 24p (2010: 23p)

·; Net Asset Value per share increased by 85p to 312p (2010: 227p)

OPERATIONAL HIGHLIGHTS

Private Banking - Arbuthnot Latham

·; Profit before tax increased to £2.0m (2010: £1.0m) as the Bank continued to successfully implement its strategy of providing a full service banking and advisory product offering

·; Customer deposits grew £70.5m to £420.0m (2010: £349.5m) and loans increased by £27.4m to £238.2m (2010: £210.8m) while improving interest margin

·; Loan to deposit ratio at 57%, maintaining strong liquidity

Retail Banking - Secure Trust Bank

·; Profit before tax and IPO costs increased by 13% to £9.6m (2010: £8.5m)

·; Good progress in developing three main lending activities, motor finance loan book doubled in size to £63.4m (2010: £31.3m), point-of sale asset finance grew to £36.2m (2010: £21.4m) and personal loans increased to £43.6m (2010: £22.4m)

·; Customer deposits grew £115.9m to £272.1m (2010: £153.8m) following successful launch of fixed term bonds

·; Total customers numbers increased to 140,000 (2010: 96,000)

·; Current account numbers growing to 17,178 (2010: 9,576) with fee and commission income now reversing its downward trend

Commenting on the results, Henry Angest, chairman and chief executive of Arbuthnot, said: "Overall 2011 was a transformational year for the Arbuthnot Banking Group. Following the successful listing of Secure Trust Bank and the sale of Arbuthnot Securities, the Group has ended the year in a strong position to take advantage of new opportunities"

ENQUIRIES:

The 2011 Annual Report, Notice of Meeting and accompanying letter from the Chairman will be posted and available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com/Presentations.aspx on or before 5 April 2012. Copies may be obtained from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 20 Ropemaker Street, London, EC2Y 9AR.

Consolidated statement of comprehensive income

Consolidated statement of financial position

Chairman's statement

Sometimes I believe we live in a parallel universe. After the successful sale of part of our investment in Secure Trust Bank (STB), Arbuthnot Banking Group (ABG) would have made a "profit" of £10 million in layman's terms. However, the application of the accounting rules resulted in a loss of £7 million, as they do not recognise this gain as a profit. These same accounting rules previously allowed failed banks to show huge imaginary profits on which excessive bonuses were paid out. They also allowed the banks to revalue their own debt showing artificial profits as their credit ratings plunged. I can only live in hope that one day we will return to a saner world, where a spade is called a spade and where profits mean cash in the till.

In the real world, the past year has been a year of transformational changes for ABG. In November we saw the very successful flotation of STB on the AIM market, one of few listings in 2011 and the first by a bank in many years. We used the IPO to increase the capital base of STB in order to take advantage of the many business opportunities available in the present market place and to strengthen the group balance sheet. Giving the bank its own currency has allowed its management increased room for growth, while as majority shareholder ABG will continue to ensure that its principles of careful stewardship of the business will be maintained.

The opposite was true for Arbuthnot Securities (ASL). In the market place for small brokers we could see no improvement in sight and concluded that perhaps the environment may well have changed fundamentally. So we decided to cut our losses and to exit this business. We believe the deployment of our resources in the two Banks will bring better returns for our shareholders. We were pleased to find a good partner for ASL in Westhouse Holdings plc.

Arbuthnot Latham had its own fair share of change. While the business made very good progress and Gilliat has now become profitable, Arbuthnot Latham's capable CEO, Dean Proctor, received an offer he could not refuse. Sadly this is not the only case of a young banking executive with an outstanding future, deciding that he has better economic prospects abroad. Unfortunately for our country, not only are an increasing number of highly mobile young and senior banking and financial services executives leaving the country, but few are coming back and even fewer foreign executives are joining us. This is a reversal of the previous trend and a serious problem. I believe there are two reasons for this:

1. With all the vilification being heaped upon them, it is no surprise that honest bankers - and they are the big majority - are feeling persecuted.

2. There is a lot of talk about fairness, but fairness should be about rewarding hard work and enterprise. A tax rate of 50% or more is not fair. Such a rate is anti-competitive and counterproductive. It damages incentives and undermines economic growth.

Which are the most economically successful countries in the world? Those with moderate or flat tax rates that encourage and reward hard work and entrepreneurship such as Hong Kong, Singapore, Switzerland, USA and not to forget the United Kingdom, when under Lady Thatcher's leadership.

There are many more issues and dangers that affect our business, but I will only mention three. Firstly, the Independent Commission on Banking Report, the Vickers Report. How the Government implements its recommendations is of great importance to Arbuthnot and the whole banking industry. I have given my initial thoughts in an article that was published, together with other views, by the CSFI. The article, which was written with the help of Dr. Atholl Turrell, is reprinted at the back of the Annual Report.

The second issue is the ongoing crisis within the Euro Zone, where politicians seem incapable - or unwilling - to resolve the matter decisively and prefer to procrastinate and postpone the inevitable outcome. Meanwhile, the weakened countries lurch towards default and economic ruin. It is clear that while this debacle continues, the impact on the UK economy and the banking sector can only be negative, albeit I am not as pessimistic as others and I believe with good financial management the UK could avoid the worst and recover quickly.

And thirdly, there is the issue of increasing regulation. As I have said many times, we don't need more regulation, but we could do with a better targeted regime. Since 90% of the prudential regulation now comes from Brussels, it is difficult for our own regulators to do much about it, however they could abstain from gold plating the European edicts.

Private Banking - Arbuthnot Latham & Co., Limited

The Private Banking business performed well, with pre-tax profit of £2.0 million (2010: £1.0 million).

Arbuthnot Latham continued to lend cautiously and maintained the quality of collateral held as security. As a result client loans grew by £27 million to £238 million, a 13% growth over 2010 with credit losses at less than 1% of the asset book.

Client deposits grew by £70 million in 2011 to £420 million, a 20% year on year increase. The resulting loan to deposit ratio closed the year below our target at 57%.

Arbuthnot Latham continues to focus on expanding its asset management and wealth planning offerings, with further investment in people and systems initiated in 2011. These initiatives, when fully implemented, will provide a strong foundation for future organic growth.

From a modest base, discretionary assets under management grew by 40% and fee income from wealth planning grew by 10%. This growth is a result of high net worth clients being attracted to the full wealth management and private banking proposition.

Gilliat Financial Solutions made its first annual profit of £0.2 million (2010:£0.6 million loss) as the business launched in July 2009 continued to build momentum transacting business with an increasing number of Financial Advisors and Intermediaries.

As reported above, Arbuthnot Latham's charismatic CEO, Dean Proctor, has left us. Our best wishes go with him. Fortunately, we were able to find a strong successor in James Fleming. James joins us from Coutts where he had been a senior director.

Retail Banking - Secure Trust Bank PLC

Pre-tax profits of Secure Trust Bank, before IPO costs and group recharges, were £9.6 million (2010: £8.5 million). In isolation the growth of 13% is highly commendable. However, the underlying picture is stronger. The 2010 results were heavily influenced by the profits generated by the portfolios acquired from LV and Citi in 2009. The income benefit of these portfolios, which had a high profit margin, peaked in 2010 and reduced by over £4 million in 2011.

During the year the Bank's lending operations continued to generate very strong, controlled, organic growth. Overall new business lending volumes grew 51% to £136 million (2010: £90 million) which fuelled an increase of 73% in overall customer loans to £155 million (2010: £89 million)

The portfolios of books acquired in 2009 continue to be collected out in line with expectations, with the balance outstanding declining to £2.5 million at 31 December 2011 (2010: £10.7m).

The IPO has significantly raised STB's corporate profile and it has seen an increase in the scale, scope and range of opportunities being brought to it for consideration. There is a clear growth strategy and STB is working on a number of significant projects which will add considerable value to the business if completed.

Board Changes and Personnel

As a result of the sale of our Securities Business Neil Kirton and Atholl Turrell resigned from the Board on 29 December 2011and 31 December 2011 respectively.

As already mentioned Dean Proctor resigned from the Board on 1 March 2012 to move overseas and was replaced on the same day by James Fleming.

I would like to thank the three directors who have left for the contributions that they have made to the Group.

These results once again reflect the continuing dedication and commitment of our employees who have done well in the current environment. On behalf of the Board I extend our thanks to all staff for their contributions made to the Group in 2012

Dividend

The Board is proposing a final dividend of 13p, an increase of 1p on last year, making a total dividend of 24p (2011: 23p). If approved, the dividend will be paid on 18 May 2012 to shareholders on the register at close of business on 20 April 2012.

Outlook

Overall, 2011 was a transformational year for the Arbuthnot Banking Group PLC. The two banking businesses performed well and the Group ended the year on a firm foundation, regulatory capital increased by 27% to £55.7m and the total balance sheet by 36% to £769m and net asset value per share rose by 85p. At the same time high liquidity was maintained. The Group's overall position has strengthened considerably allowing it to continue to grow over the coming years as it exploits the opportunities that are arising, barring any macro-economic upheaval.

Pre-tax profits for the Private Banking division doubled in the year to £2m (2010: £1m) and the underlying growth of the business was somewhat higher as these results include an additional £1m of credit provisions taken against two legacy accounts and a further decline in returns from our surplus funds, as we have held more money with the Bank of England rather than in the wholesale markets.

Total assets increased and for the first time stand at a level greater than half a billion pounds and assets under the bank's direction are now in excess of one billion pounds.

The conditions for lending continued to be favourable during the year and the bank was able to grow its loan portfolio by £27m to £238m while widening lending margins and maintaining the quality of collateral held. The loan to value of the overall book was 48% and retail deposits increased by £70m to £420m to close the year with a loan to deposit ratio of 57%. The returns earned on the surplus funds continued to decrease over the year as the decision was taken to hold more funds at the Bank of England, which given ongoing problems with the Euro Zone banks, was seen as the safer option rather than the wholesale markets. The credit losses experienced by the Bank remain under 1%.

The Bank continues to expand its asset management and wealth planning services and further investments in people and systems were made during the year. These initiatives are providing the foundation for future organic growth.

Arbuthnot Latham became the first UK bank to achieve chartered wealth planning status. This reflects the high quality of service offered and the chartered status of the individual wealth planners. The bank is well placed to thrive as the advisory and investment management business environment continues to evolve leading up to and beyond the implementation of the FSA Retail Distribution Review (RDR) in January 2013. This recognition of the services provided has enabled the discretionary assets under management to grow from a modest base by 40% and wealth planning income to increase by 10%.

The structured notes distribution business, Gilliat Financial Solutions, delivered a full year profit of £0.2m (2010: loss of £0.6m) as it started to return the investment made by the Group since its launch in 2009. The profit was a result of significantly higher revenues as Gilliat was able to generate volumes in excess of £90m. Business is being done with an increasing number of Independent Financial Advisors (IFAs) and other intermediaries. This reflects the growing recognition of the brand within the retail distribution network.

The pre-tax profits of Secure Trust Bank, before IPO costs and group recharges, were £9.6m (2010: £8.5m). In isolation the growth of 13% is commendable. However, this rather understates the much stronger underlying picture. The 2010 results were heavily influenced by the profits generated by the portfolios acquired from LV and Citi in 2009. The income benefit of these portfolios, which had a high profit margin, peaked in 2010 and reduced by over £4m in 2011. These 'run off' profits have all been replaced by organically generated and sustainable new business.

Secure Trust Bank had anticipated creating a joint venture in the second half of the year and geared up its deposit balances to fund the expected initial portfolio purchase of around £50m. It was announced on 10 January 2012 that a structure could not be agreed that met regulatory requirements and which fell within Secure Trust Bank's risk appetite and that the joint venture would not proceed as anticipated. The combination of the cost of carrying the surplus deposits together with direct expenses incurred in setting up the joint venture reduced Secure Trust Bank's 2011 profit before tax by approximately £1m.

During the year Secure Trust Bank's lending operations continued to generate strong, controlled, organic growth. Overall, new business lending volumes grew 51% to £135.9m (2010: £90.2m) which led to an increase of 73% in overall balance sheet lending assets to £154.6m (2010: £89.5m)

Motor finance, a business which Secure Trust Bank entered cautiously during 2009, grew to a book of £63.4m at 31 December 2011 (2010: £31.3m). This business, which focuses on the near prime market segment, substantially expanded its network of brokers and dealers to the point where it now has national coverage and a fully independent sales force which services over 70% of the Top 20 UK car dealer groups.

Personal unsecured lending also evidenced strong growth with the 31 December 2011 balance sheet growing to £43.6m (2010: £22.4m). Secure Trust Bank has continued to broaden its distribution capabilities in this segment and entered into a number of significant new introducer relationships during the year.

Retail Point of Sale business saw balances at 31 December 2011 grow to £42.6m (2010: £21.6m)

The portfolios of books acquired in 2009 continued to be collected in line with expectations, with the balance outstanding declining to £2.5m at 31 December 2011 (2010: £10.7m).

There has been significant investment in Secure Trust Bank's operational infrastructure during 2011 which in particular has enhanced the competitiveness of the current account offering. Despite tempering the growth rate of this product, pending installation of the new platform, net customer numbers increased to 17,178 at the end of the year (2010: 9,576). Over 1,000 new customers are signing up each month and Secure Trust Bank continues to see substantial potential in this area.

As anticipated, OneBill customer numbers continue to decline over time. However, the attrition rates have been somewhat slower than expected which serves to highlight the attraction of this product. Work continues on the development of a next generation OneBill product and it is expected that customer trials will begin in the second half of 2012. The growth of other profit streams developed over the last three years will mean that this product will become progressively less significant to the profitability of the overall business.

Secure Trust Bank continues to see strong demand for all of its core products and envisages robust organic growth this year. The IPO has significantly increased the corporate profile and Secure Trust Bank has seen an increase in the scale, scope and range of opportunities being brought to it for consideration. It has a clear growth strategy and it is working on a number of significant projects which will add considerable value to the business if completed.

Secure Trust Bank was delighted to receive the Dealer Finance Provider 2012 award from the Institute of Transport Management in February in recognition of its increased importance to the motor industry at a time when other finance providers have been reducing their investment or exiting the market.

Financial Review

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

Following the decision to exit from the Investment Banking business, which has been designated as discontinued, it now provides a range of financial services to customers and clients in its two chosen niche markets of Private Banking (Arbuthnot Latham) and Retail Banking (Secure Trust Bank). The Group's revenues are derived from a combination of net interest income from lending, deposit-taking and money market activities, fees for services provided to customers and clients and commissions earned on the sale of financial instruments and products.

Highlights

As noted in last year's financial review, the Group continued to experience two very different types of market conditions across its trading divisions. This led to two transformational decisions for the Group.

The lack of capacity in the lending markets continued as the larger banks continued their retrenchment. However, despite the uncertain economic conditions, the ability of our borrowers to repay their debts has been better than was expected. Given this market opportunity, and the fact that Secure Trust Bank had proven itself capable of exploiting these conditions, it was decided that the next step would be to accelerate its growth and a separate listing of this Bank would enable it to execute this strategy.

The market appetite for IPOs had fallen steadily during 2011, but the fact that we were able to complete a successful flotation in November, demonstrates that the market also strongly supported the strategy. The transaction generated a consolidated "gain on sale" of £16m, which has been recorded directly to reserves in accordance with the accounting rules.

For the Investment Bank, the corporate markets continued to be extremely difficult, primary income levels fell dramatically as the whole industry experienced a lack of appetite for fundraising activities. Also the levels of secondary commission incomes continued their downward trend. As reported in the Interim Results, a restructuring programme was put in place in the third quarter. The results of this appeared to show no signs of improving the performance of the business and the forward looking projections showed no improvement in the medium term. As a result it was decided to exit the business and a successful sale of Arbuthnot Securities Ltd was agreed with Westhouse Holdings PLC on 18 November. The performance of the business and resultant costs to the Group are therefore reported as discontinued operations.

Overall the Group made a profit before tax from its continuing operations of £5.1m and when the cost of listing Secure Trust Bank (£0.5m) is excluded, these businesses increased by nearly 40%, which is in line with the growth levels that our banking businesses have been experiencing in recent years.

Operating income increased by 20% offset by expense growth of approximately 10% resulting in a positive organic operating leverage of 15%.

The Group is reporting a loss after tax of £7m for 2011. However, as mentioned earlier this does not include the gain on sale from the listing of Secure Trust Bank. The better measure of performance in the year would be the increase in net assets. These are shown in the Statement of Changes in Equity. This shows that the net assets of the Group increased from £34.1m to £47.0m, a 38% increase. Given this also equates to an equivalent increase in the Group Regulatory capital, the Group is now well positioned to grow in the future.

Balance Sheet Strength

The total assets of the Group increased by 36% again led by the growth in our lending businesses and our continued conservative approach to maintaining adequate liquidity resources.

The Group's total assets broke through the half billion pound level for the first time in 2010 and during 2011 exceeded £750m remaining on a trajectory to exceed one billion pounds in the near future.

Customer deposits grew by 38% during the year to close at £693.8m. The Group remains entirely funded by retail deposits. The Group closed the year with a loan to deposit ratio of 56.6% (2010: 59.7%).

Segmental Analysis

The segmental analysis in Note 38 to the Consolidated Financial Statements of the Annual Report highlights the disclosures required under IFRS 8 'Operating Segments'. The operating segments are Private Banking (Arbuthnot Latham), International Private Banking (Arbuthnot AG) and Retail Banking (Secure Trust Bank). Group costs and intercompany elimination journals are shown separately to reconcile back to the Group consolidated result. The analysis presented below, and in the business review, is prior to any consolidation adjustments to remove the impact of intergroup operating activities and also intergroup recharges and is a fair reflection of the way the Directors manage the Group.

Private Banking - Arbuthnot Latham

The profit before tax increased to £2m (2010: £1m) as the Private Bank continued to successfully implement its strategy of providing a full service banking and advisory product offering.

The lending opportunities presented to the bank continued to be of high quality and at attractive yields. The advisory services and discretionary management increased its fee income by 32% as a result of an 40% increase in discretionary assets under management.

Profitability continues to be reduced as the interbank market returns remain low. This has also been affected by our decision to hold more funds at the Bank of England than necessary while uncertainty continues in the wider banking market as the financial crisis continues in the Euro Zone.

Impairment losses increased to £2.2m during the year due almost entirely to provisions taken against two legacy loans. Despite this increase the loss rate continues to be below 1% of the customer loan book and the credit quality of the remaining book remains high and well secured.

Gilliat Financial Solutions returned its first full year profit (£0.2m) during 2011 as it has continued to widen its reach within the financial advisor and intermediary networks.

Total assets increased by 33% to £554.9m (2010: £417.9m) with customer lending increasing by 13%. The loan to value on the portfolio remains at a healthy 48%.

The liabilities continued to follow the conservative policy on liquidity seeing an inflow of £70m of customer deposits representing a 20% increase from 2010. The loan to deposit ratio closed the year at 57%.

The Private Bank remains well capitalised with a total capital ratio of 13.3% (2010: 13.1%) and a core tier 1 ratio of 10.2% (2010: 11.1%).

International Private Banking - Arbuthnot AG

Costs associated with the Swiss Bank were £0.1m (2010: £0.1m) as the third party continued in its regulatory application to invest in the Swiss bank.

Retail Banking - Secure Trust Bank

Profit before tax is £9.1m (2010: £8.5m) however, after adding back the cost of listing the business, the adjusted profit before tax is £9.6m which represents a 13% increase during the year.

The profit would have been somewhat higher than reported. However the business incurred in excess of £1m of expenses principally being cost of holding surplus liquidity in readiness for concluding the lending joint venture that was indicated in the interim results for 2011. The business was unable to reach an agreement that satisfied both regulatory requirements and our conservative risk appetite, so the project was terminated. These surplus funds will be deployed by the business during 2012.

The growth in the year was again mainly led by the lending business with good growth across all the portfolios, which is in line with the plan to grow a diversified portfolio of lending books. The growth generated was also able to offset the declining contribution from the acquired portfolios. It is also important to note that the level of fees and commissions halted their downward trend in 2011 and has returned to an upward trajectory, recording income of £13.2m and reaching levels not seen since 2009. This is as a result of the current account revenues now offsetting the decline in revenues from OneBill. The current account closed the year with 17,178 open accounts (2010: 9,576) and OneBill ended the year with 28,698 (2010: 31,720).

During the year the asset finance business increased the overall portfolio size by 97% to end the year at £103.9m, mainly led by the motor vehicle portfolio which doubled in size. The personal computer business grew three fold and the business also launched its internet credit offering in conjunction with Pay4Later.

The personal loan portfolio increased by 84% to £47.5m. The acquired portfolios continued to be collected out as per expectations and closed the year with only £2.5m of balances remaining.

The customer deposit balances grew by 77% to £272.1m following the successful take up of the banks new fixed term bond offerings of 2, 3, 4 and 5 year maturities.

Discontinued operations (Investment Banking - Arbuthnot Securities)

The total impact on the Group's profitability from the discontinued operations was £13.2m, which comprises three items

1) Operating losses totalled £7.9m. This decline was attributable to the significant reduction in fees earned on fundraising activities and the continued decline in secondary commissions. The business also incurred a £0.8m expense in restructuring the business in the third quarter.

2) As a result of agreeing the sale, Arbuthnot Securities has been recorded in the accounts at the lower of the consideration receivable and the net asset value. This results in a charge to profit & loss of £1.6m and effectively brings the predicted loss on sale into the 2011 results, despite the fact that the completion of the transaction did not take place until 20 January 2012.

3) As part of the process of discontinuing the business, the Group has taken impairment provisions of £3.7m, £3.1m of which results from the unwinding of the Long Term Incentive Plan that had been established for the employees of Arbuthnot Securities. The remaining amounts are against illiquid stocks and an outstanding receivable, both of these items were not transferred to Westhouse as part of the sale agreement.

Group & Other Costs

The net Group costs increased by 9% to £5.9m (2010: £5.4m). This was due to higher property costs, higher interest charges on the subordinated loan and one-off items included in other income in the prior year.

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.

In accordance with the EU's Capital Requirements Directive (CRD) and the required parameters set out in the FSA 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 37.

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar I plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations (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 adequately to cover management's anticipated risks. Where the Board considered that the Pillar I calculations did not reflect the risk, an additional capital add-on in Pillar II is applied.

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

• Tier 1 comprises mainly shareholders' funds and non-controlling interest, after deducting goodwill and other intangible assets.

• Lower Tier 2 comprises qualifying subordinated loan capital and revaluation reserves. 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. The latest version of the Group ICAAP is currently in the process of being approved by the Board. All regulated entities have complied with all of the externally imposed capital requirements to which they are subject.

* - Risk Weighted Assets (RWAs)

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 4 to the financial statements.

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

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. This risk exists mainly in Arbuthnot Latham & Co., Limited and Secure Trust Bank PLC, who currently have loan books of £238.2m and £154.6m respectively.

The lending portfolio in Arbuthnot Latham is extended to our 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.

Credit risk is managed through the Credit Committees of each of the two banks with significant exposures also being approved by the Group Risk Committee.

Market risk arises in relation to movement in the 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. Hence, 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 is the risk that the Group cannot meet its liabilities as they fall due. The Group takes a conservative approach to managing its liquidity profile. It has placed no reliance on the wholesale lending markets and is 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 now 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 is the risk that the Group may be exposed to financial losses from conducting its business. The largest exposure to this risk exists in Arbuthnot Latham as mis-selling risk via its wealth management advisory service and its structured product distribution business.

The Group 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.

The Group is also 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.

Regulatory 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 future three year horizon.

Dividend

The Board proposes a final dividend of 13 pence per share to be paid on 18 May 2012, giving a total dividend for the year of 24 pence (2010: 23 pence) per share.

Going Concern

After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see Note 4) and capital resources (see Note 5), 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.

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

Principal accounting policies

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

1.1. Reporting entity

Arbuthnot Banking Group PLC is a company domiciled in United Kingdom. The registered address of the Arbuthnot Banking Group PLC is One Arleston Way, Solihull B90 4LH. The consolidated financial statements of the Arbuthnot Banking Group PLC as at and for the year ended 31 December 2011 comprise the Arbuthnot Banking Group PLC and its subsidiaries (together referred to as the "Group" and individually as "subsidiaries"). The Company is primarily involved in banking and financial services.

1.2. Basis of presentation

The Group's consolidated financial statements and the Company's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs as adopted and endorsed by the EU) and the Companies Act 2006 applicable to companies reporting under IFRS. They have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets, and financial assets and financial liabilities at fair value through profit or loss.

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

The Group's business activities and financial position, the factors likely to affect its future development and performance, and its objectives and policies in managing the financial risks to which it is exposed and its capital are discussed in the Financial Review. The Directors have assessed, in the light of current and anticipated economic conditions, the Group's ability to continue as a going concern. The Directors confirm they are satisfied that the Company and the Group have adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the 'going concern' basis for preparing accounts.

(a) Standards, interpretations and amendments effective in 2011 - relevant to the Group

• IFRS 2 (Revised), 'Share-based payments'. The revised standard clarifies the scope and accounting for group cash-settled share-based payments in the separate financial statements of the entity receiving the goods or services when that entity has no obligation to settle the share-based payment transaction.

• IFRS 3 (Revised), 'Business combinations'. The revised standard continues to apply the acquisition method to business combinations, however, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets. All acquisition-related costs should be expensed.

• IAS 24 (Revised), 'Related party disclosures' (effective from 1 January 2011 - early adopted). The revised standard includes an exemption from the disclosure requirements for related party transactions between "state controlled" entities and includes a revised definition for related parties.

• IAS 27 (Revised), 'Consolidated and separate financial statements'. The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control. Any remaining interest in an investee is re-measured to fair value in determining the gain or loss recognised in profit or loss where control over the investee is lost.

• Improvements to IFRSs. Sets out minor amendments to IFRS standards as part of annual improvements process.

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

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

The following standards, interpretations and amendments to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2012 or later periods, but the Group has not early adopted them:

• IFRS 7 (Revised), 'Disclosures - Transfers of Financial Assets' (effective from 1 July 2011). The revised standard requires additional disclosures for transfers of financial assets and where there are a disproportionate amount of transactions undertaken around the period end. The revised standard will not have any material impact on the Group's financial accounts.

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

• IFRS 10, 'Consolidated Financial Statements' and IAS 27 (Revised), 'Separate Financial Statements' (effective 1 January 2013). IFRS 10 supersedes IAS 27 and SIC-12, and provides a single model to be applied in the control analysis for all investees. There are some minor clarifications in IAS27, and the requirements of IAS 28 and IAS 31 have been incorporated into IAS 27.*

• IFRS 11, 'Joint Arrangements' (effective 1 January 2013). This standard replaces the existing accounting for subsidiaries and joint ventures (now joint arrangements) and removes the choice of equity or proportionate accounting for jointly controlled entities, as was the case under IAS 31.*

• IFRS 12, 'Disclosure of Interests in Other Entities' (effective 1 January 2013). This standard replaces the existing accounting for subsidiaries and joint ventures (now joint arrangements) and contains the disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities.*

• IFRS 13, 'Fair Value Measurement' (effective 1 January 2013). This standard replaces the existing guidance on fair value measurement in different IFRSs with a single definition of fair value, a framework for measuring fair values and disclosures about fair value measurements.*

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

• IFRS 9, 'Financial instruments' (effective from 1 January 2015). This standard deals with the classification and measurement of financial assets and will replace IAS 39. The requirements of this standard represent a significant change from the existing requirements in IAS 39. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. The standard eliminates the existing IAS 39 categories of 'held to maturity', 'available for sale' and ' loans and receivables'. The potential effect of this standard is currently being evaluated but it is expected to have a pervasive impact on the Group's financial statements, due to the nature of the Group's operations.*

* - These standards have not yet been endorsed by the EU.

1.3. Consolidation

(a) Subsidiaries

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

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

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

(b) Special purpose entities

Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets, or the execution of a specific borrowing or lending transaction. SPEs are consolidated when the substance of the relationship between the Group and the entity and the evaluation of the Group's exposure to the risks and rewards of the SPE indicates control. The following circumstances may indicate control by the Group and would therefore require consolidation of the SPE:

• in substance, the activities of the SPE are being conducted on behalf of the entity according to its specific business needs so that the entity obtains benefits from the SPE's operation;

• in substance, the entity has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by setting up an 'autopilot' mechanism, the entity has delegated these decision-making powers;

• in substance, the entity has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks incident to the activities of the SPE; or

• in substance, the entity retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities.

The assessment of whether the Group has control over an SPE is carried out at inception and the initial assessment is only reconsidered at a later date if there were any changes to the structure or terms of the SPE, or there were additional transactions between the Group and the SPE.

(c) Transactions and non-controlling interests

Changes in ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity transactions and no gain or loss is recognised.

1.4. Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the Group Board. The Group Board, which is responsible for allocating resources and assessing performance of the operating segments, has been identified as the chief operating decision maker. All transactions between segments are conducted on an arm's length basis. Income and expenses directly associated with each segment are included in determining segment performance. There are three main operating segments:

• Retail Banking

• International Private Banking

• UK Private Banking

1.5. Foreign currency translation

(a) Functional and presentational currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in pounds sterling, which is the Company's functional and the Group's presentational currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

(c) Group companies

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentational currency are translated into the presentation currency as follows:

• assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that

balance sheet;

• income and expenses for each income statement are translated at average exchange rates (unless this average is

not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in

which case income and expenses are translated at the rate on the dates of the transactions); and

• all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

1.6. Interest income and expense

Interest income and expense are recognised in the statement of comprehensive income for all instruments measured at amortised cost using the effective interest method.

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

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

1.7. Fee and commission income

Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accrual basis when the service has been provided. Loan commitment fees are deferred and recognised as an adjustment to the effective interest rate on the loan.

Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party - such as the issue or the acquisition of shares or other securities or the purchase or sale of businesses - are recognised on completion of the underlying transaction. Asset and other management, advisory and service fees are recognised based on the applicable service contracts, usually on a time apportioned basis. The same principle is applied for financial planning and insurance services that are continuously provided over an extended period of time. Commissions arising from the sale of structured products are recognised at the point of sale as there are no further services provided or due.

1.8. Gains less losses arising from dealing in securities

This includes the net gains arising from both buying and selling securities and from positions held in securities, including related interest income and dividends, recognised on trade-date - the date on which the Group commits to purchase or sell the asset.

1.9. Financial assets and financial liabilities

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

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

This category comprises listed securities and derivative financial instruments. Derivative financial instruments utilised by the Group include embedded derivatives and derivatives used for hedging purposes. Financial assets and liabilities at fair value through profit or loss are initially recognised on trade-date - the date on which the Group becomes a party to the contractual provisions of the instrument. Subsequent measurement of financial assets and financial liabilities held in this category are carried at fair value through profit or loss.

(b) Loans and receivables

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

(c) Held-to-maturity

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold to maturity. Held-to-maturity investments are carried at amortised cost using the effective interest method.

(d) Available-for-sale

Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Included in available-for-sale are equity investments in special purpose vehicles set up to acquire and enhance the value of commercial properties and equity investments in unquoted vehicles. These investments are of a medium term nature. There is no open market for these assets and there are no available-for-sale debt securities. Unquoted equity securities whose fair value cannot reliably be measured are carried at cost. All other available-for-sale investments are carried at fair value. Fair value changes on the equity securities are recognised in other comprehensive income (fair value reserve) until the investment is sold or impaired. Once sold or impaired the cumulative gains or losses previously recognised in other comprehensive income is reclassified to profit or loss.

(e) Other financial liabilities

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

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the statement of financial position. In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. There have not been any instances where assets have only been partially derecognised.

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

Amortised cost measurement

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

Fair value measurement

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

1.10. Derivative financial instruments and hedge accounting

All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets, including recent arm's length transactions or using valuation techniques such as discounted cash flow models. Derivatives are shown in the statement of financial position as assets when their fair value is positive and as liabilities whentheir fair value is negative.