Arbuthnot Regulatory News (ARBB)

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18 October 2011

Update on Placing and Admission of Shares in Secure Trust Bank PLC

Further to the announcement by Arbuthnot Banking Group PLC ("Arbuthnot") on 6 October 2011 of its intention to float Secure Trust Bank PLC ("Secure Trust Bank" or the "Company") on AIM, Arbuthnot announces that Secure Trust Bank has today commenced marketing in connection with the proposed flotation.

The flotation will be effected by means of a placing of new and existing ordinary shares in Secure Trust Bank (the "Placing") and admission of the Company's shares to trading on AIM ("Admission").

Pursuant to the Placing, Secure Trust Bank is intending to raise approximately £10 million to £12 million through the issue of new ordinary shares and Arbuthnot expects to sell approximately £4 million to £5 million of existing ordinary shares in Secure Trust Bank (together, the "Placing Shares"). On Admission, Arbuthnot will retain a substantial majority shareholding in Secure Trust Bank.

Hawkpoint Partners Limited is acting as nominated adviser to Arbuthnot and to Secure Trust Bank and Collins Stewart Europe Limited is acting as broker in connection with the proposed Placing and Admission.

The Placing is only being directed at and made available to certain qualifying investors in the United Kingdom. The Placing is not being made available to the public.

For further information please contact:

FURTHER INFORMATION ON SECURE TRUST BANK

1. Introduction

Secure Trust Bank is a regulated bank operating in the UK. The Company, which was incorporated in England in 1954, operates predominantly from its head office in Solihull and had 260 employees as at 30 June 2011. Since 1985 the Company has been a subsidiary of Arbuthnot. The core of Secure Trust Bank's business is the provision of banking services to UK customers who may not be adequately served by other banks.

In its formative years, the Company focused on providing budgeting services to families across the West Midlands, leading to the Company at that time developing 'OneBill', a budgeting account whereby Secure Trust Bank pays a customer's domestic bills in return for a monthly or weekly fixed payment and fee. The Company has been providing unsecured personal finance to its customers for almost 35 years. Secure Trust Bank materially increased its lending activities in 2009 by entering the motor finance and retail point of sale finance markets and the acquisitions of two loan portfolios.

The Company has a diversified lending portfolio including:

·; Motor finance - fixed rate, fixed term hire purchase agreements secured mainly against used cars. Finance term periods vary from 24 months to 60 months with a maximum loan size of £15,000. The Company targets lending to customers considered to be in socio-economic groups C1, C2 and D. The APR on new lending during June 2011 was in the range of 11.19 per cent. and 35.45 per cent.

·; Retail point of sale finance - unsecured, fixed rate and fixed term loans with payments received monthly in arrears. Loans vary in term from six months to 48 months and range from £250 to £12,000. The Company targets lending to customers considered to be in socio-economic groups A, B and C1. The APR on new lending during June 2011 was up to 19.50 per cent.

·; Personal unsecured lending - fixed rate, fixed term products with payments received monthly in arrears. Loan terms are between 12 months and 60 months with advances varying from £500 to £15,000. The Company targets lending to customers considered to be in socio-economic groups A to D. The average APR on new lending during June 2011 was 19.10 per cent.

As at 30 June 2011, the loan book was £123.9 million.

Lending customers are primarily reached through carefully selected business partners and the internet. The Company has underwriting technology and processes to enable it to make lending decisions quickly, often on an automated basis, and has high customer satisfaction scores.

By virtue of its focus on higher margin lending, the absence of large fixed overheads in the form of a branch network and a policy of not cross-subsidising loss making products with profitable ones, the Company is able to offer competitive deposit interest rates and has been successful in attracting deposits from a wide range of personal and non-personal customers. As at 30 June 2011, the Company's total deposit base was £217.0 million and a significant majority of deposit accounts were below the FSCS limit, which as at the date of this announcement is £85,000.

Secure Trust Bank's strong financial record during the financial crisis of the last three years is evidenced by the growth of profits and payment of dividends during this period. Profit before tax and group recharges in the six months to 30 June 2011 was £5.0 million.

2. Key strengths

·; a scalable, well established UK retail bank;

·; highly experienced management team and board;

·; potential demonstrated by 47 per cent. growth in customer base, to over 120,000 customers, from 30 June 2010 to 30 June 2011;

·; a range of deposit, current and household budget accounts;

·; lending into attractive segments of the market, including motor finance, retail point of sale finance and personal unsecured loans;

·; experiencing significant growth in new lending and demand for banking services (loan book up from £66.5 million as at June 2010, to £89.5 million as at December 2010, to £123.9 million as at June 2011);

·; multiple distribution channels, through Affinity Partners (business relationships entered into by the Company where both parties co-operate in the promotion of their respective businesses), potential joint ventures and direct to customers;

·; funded by customer deposits and capital (no exposure to bank wholesale markets) with proven deposit raising capability;

·; customer loans and deposits broadly matched in maturity over a five year period with no lending exceeding five years and deposit accounts ranging from instant access to five year bonds; and

·; technology-led lending processes which allow for significant business growth.

3. The UK retail banking and consumer credit market

Since late 2008 many UK banks have encountered significant difficulties as the UK (and wider global) economy has experienced recessionary conditions. Certain UK banks continue to face a number of key challenges which, in the opinion of the Directors of Secure Trust Bank, include:

·; the management of significantly impaired legacy loan books;

·; balance sheet restructurings, in particular addressing liquidity, funding and capital issues;

·; sizeable and inefficient infrastructure including multiple IT systems; and

·; in some cases the impact of being wholly or partly nationalised.

Furthermore, since 2007 a number of non-bank credit providers have reduced or ceased their lending driven by, inter alia, a lack of liquidity in wholesale funding markets and deteriorating loan credit performance.

The Directors of Secure Trust Bank believe that the above challenges and distractions faced by the established UK banking and wider consumer credit sector provide Secure Trust Bank with a significant opportunity, as a well-capitalised, deposit funded bank to grow within its chosen markets.

4. Strategy for growth

Secure Trust Bank's strategy is to build on its current position as an established UK retail bank through a focus on carefully selected and attractively priced segments of the market with a prudent approach to capital and liquidity. The Directors of Secure Trust Bank intend to achieve this strategy by building on the Company's key strengths through:

Growth in existing lending segments - Secure Trust Bank has in place a number of successful arrangements with Affinity Partners, such as The Association of Cycle Traders ("ACTSmart") and RentSmart. The Company anticipates establishing relationships with new Affinity Partners and is pursuing a number of potential near term opportunities.

Expansion into new lending segments - a key feature of Secure Trust Bank's lending activities is a focus on under-served markets. The Directors of Secure Trust Bank have identified a number of opportunities beyond Secure Trust Bank's current lending segments, for example personal unsecured loans direct to new customers through the internet, top up motor finance loans, home improvement finance to customers through Affinity Partners and finance to small and medium sized enterprises involved in installing renewable energy systems.

Acquisitions of loan portfolios and businesses - the Directors of Secure Trust Bank believe the ongoing capital and funding constraints experienced by certain other lenders is resulting in potential portfolio acquisition opportunities. In addition, a number of businesses have been identified, which, if acquired by the Company, could enhance the Company's new business origination.

Fee-based current and budget accounts - the fee based current account product has experienced growth, with approximately 14,000 accounts as at 30 June 2011, and new account openings averaging 1,000 accounts per month for the six months ended 30 June 2011. The Company intends to roll out new products in 2012.

Secure Trust Bank is currently in discussions to establish a consumer finance lending joint venture with a third party unsecured personal lender. The unsecured personal lender typically lends to customers who are considered to be from socio-economic groups C and D. It is proposed that the joint venture would acquire a portfolio of personal instalment loans, funded by equity provided by the unsecured personal lender and an initial loan facility of approximately £50 million provided by Secure Trust Bank. The loan facility would expand to fund new loans originated by the joint venture.

5. Summary financial information

Financial information relating to the Company in this announcement is unaudited and may differ from financial information previously released by Arbuthnot for its "Retail Banking" business segment. Such differences primarily relate to intragroup items and Arbuthnot's insurance broking business which, prior to its disposal, was reported by Arbuthnot as part of the Retail Banking segment. This insurance broking business was not part of Secure Trust Bank.

Commentary on summary financial information

Secure Trust Bank's loan portfolio has increased substantially since 2008 from £12.6 million at 31 December 2008 to £123.9 million as at 30 June 2011. The growth in net lending since the start of 2009 has been driven by the introduction of the motor finance and retail point of sale finance businesses, a material increase in personal unsecured lending and the acquisitions of two loan portfolios from Liverpool Victoria and Citigroup. The Company's three core lending segments, motor finance, retail point of sale finance and personal unsecured lending, have grown at compound annual growth rates of 377 per cent., 192 per cent. and 136 per cent. respectively between 31 December 2009 and 30 June 2011.

The growth in Secure Trust Bank's loan book has been entirely funded through customer deposits, with no reliance on wholesale funding markets. Customer deposits have grown from £35.8 million at the end of 2008 to £217.0 million as at 30 June 2011. As at 30 June 2011, the Company had a loan to deposit ratio of 57 per cent.

Growth in the Company's loan portfolio has also driven an increase in net interest income and profits. Net interest income and profits before tax and group recharges have increased at compound growth rates of 119 per cent. and 38 per cent. respectively between the year ended 31 December 2008 and the year ended 31 December 2010. Profit before tax and group recharges in the first six months of the current financial year was £5.0 million compared with £4.6 million in the previous year before the one-off release of provisions held following the disposal of Arbuthnot's insurance broking business (included as Other in the Summary financial information). Net fee and commission income has declined since 31 December 2008, linked to a decline in OneBill customers over the period. The OneBill account was subsequently closed to new customers in 2010.

Since 2009, Secure Trust Bank has incurred a group recharge from Arbuthnot. This recharge will not continue post Admission. For the period following Admission, the Company will enter into a services agreement (the "Services Agreement"), pursuant to which the Company will provide certain services to Arbuthnot and vice versa. The reduction in the Company's operating expenses in 2009 primarily relates to the exit by the Company of its non-core businesses, and the streamlining of its businesses. The increase in operating expenses between 2009 and 2010 reflects the growth in the Company's business by the entry into new segments of the lending market which occurred during this period.

The bad debt charge as a percentage of lending assets for the twelve month period to 30 June 2011 was 2.6 per cent. This compares with the bad debt charge for each of the three years to 31 December 2010 of approximately 4.2 per cent., 2.3 per cent. and 2.4 per cent. respectively.

As at 30 June 2011, the Company had a core tier one capital ratio of 16.4 per cent. and an overall capital ratio of 19.7 per cent., reflecting a prudent approach to capital.

In September 2011, a dividend of £1.6 million was paid to Arbuthnot by Secure Trust Bank.

6. Current Trading and Prospects

Since 30 June 2011, Secure Trust Bank has continued to perform well with total income and net lending ahead of the same period last year. The Company continues to grow its customer base at a net rate of 3 per cent. per month across lending, current accounts and deposit accounts.

The Directors of Secure Trust Bank believe the Company is well positioned to capitalise on the opportunities in its chosen markets and view the financial prospects of the current year with confidence.

7. Relationship with Arbuthnot

On Admission, Arbuthnot will retain a substantial majority shareholding in Secure Trust Bank.

The Company will enter into a relationship agreement with Arbuthnot (the "Relationship Agreement"), which will govern certain aspects of the relationship between the Company and Arbuthnot on Admission. The term of the Relationship Agreement will be from Admission until the earlier of Arbuthnot ceasing to hold 50 per cent. or more of the voting rights attached to Secure Trust Bank's ordinary shares ("Ordinary Shares"), and the Ordinary Shares ceasing to be admitted to trading on AIM or any other regulated investment market.

The Relationship Agreement will provide as follows, subject to the other specific provisions of the Relationship Agreement:

·; the Company will have its own management dedicated to working full-time for the promotion of the success of the Company;

·; it is acknowledged that it is appropriate that the views of Arbuthnot as a substantial shareholder in the Company are taken into account by the Directors of Secure Trust Bank in making decisions in relation to the management and running of the Company; and

·; in making decisions in relation to the management and running of the Company the Directors of Secure Trust Bank shall have regard to the interests of all the shareholders of Secure Trust Bank.

The Relationship Agreement will recognise the right of Arbuthnot to exercise its rights as a holder of Ordinary Shares in what it considers to be in its best interest. It must not do so in breach of the restrictions in the Relationship Agreement on voting on certain related party transactions or to cancel the Company's listing and admission of the Ordinary Shares to trading on AIM. Subject to these limited exceptions Arbuthnot would therefore be free to exercise its rights as shareholder in the Company.

Key matters to be governed by the Relationship Agreement include, inter alia, the following:

·; the right of Arbuthnot to appoint one third of the Directors of the Company;

·; restrictions on the ability of the Directors of Secure Trust Bank appointed by Arbuthnot to count in the quorum and vote on matters which constitute Related Party Transactions (as to be defined in the Relationship Agreement);

·; the right of Arbuthnot to require a dividend to be paid by the Company (subject to the Company's financial position, regulatory requirements and certain other matters); and

·; the Company shall prepare a business plan for each financial year which shall, to be effective, require to be approved and adopted by resolution of the Secure Trust Bank board passed by a majority vote (of which at least one Director of Secure Trust Bank voting in favour is a Director appointed by Arbuthnot) of those Directors of Secure Trust Bank present at a board meeting duly convened and held.

8. Dividend Policy

The Directors of Secure Trust Bank intend to adopt a progressive dividend policy which will take into account the Company's capital requirements, earnings and cash flow whilst maintaining a responsible dividend cover and having regard to the provisions of the Relationship Agreement relating to the payment of dividends.

It is intended that a dividend of £600,000 will be declared by the Company at the time of publishing the Company's final results for the year ended 31 December 2011, in respect of the period from Admission until such date. The Directors intend this to be declared as a final dividend and be paid in May 2012.

It is the current intention of the Directors of Secure Trust Bank, subject to there being no material change in the Company's financial condition and business prospects, that in respect of the financial year ended 31 December 2012, the Company should pay out 40 to 60 per cent. of the Company's profits available for distribution. Thereafter the Directors of Secure Trust Bank currently intend to adopt a progressive dividend policy.

For the financial years ending 31 December 2012 onwards, the Directors of Secure Trust Bank intend that interim and final dividends in respect of each year ending 31 December will be paid respectively in August of that year and May of the following year.

9. Summary of the Placing

The Placing comprises an offer by the Company of Ordinary Shares to raise approximately £10 million to £12 million for the Company and the sale of approximately £4 million to £5 million ordinary shares by Arbuthnot.

Collins Stewart will agree to use reasonable endeavours to procure placees in accordance with the terms of the Placing Agreement. The Placing is not being underwritten.

10. Reasons for Admission and Use of Proceeds

The Placing and Admission should enable Secure Trust Bank to take advantage of the substantial opportunities that the Directors of Secure Trust Bank have identified in the lending market.

The Directors of Secure Trust Bank believe that the Placing and Admission will provide the Company with capital in order to facilitate future growth in its loan book and the potential to make selective acquisitions of loan books and businesses as well as raise its corporate profile and brand awareness. In addition, the Placing and Admission will provide a market and a value for the Ordinary Shares which the Directors of Secure Trust Bank believe will, in conjunction with the Company's share option scheme, help the Company to attract and retain high calibre employees.

The net proceeds of the issue of Ordinary Shares will increase the capital base of the Company, after payment of the dividend of £3.4 million to be paid to Arbuthnot conditional on Admission, further strengthening its ability to both lend and to develop its business.

11. Lock-up Arrangements

Arbuthnot will agree in the Placing Agreement to a six month lock-up arrangement with the Company's broker, Collins Stewart, and Hawkpoint.

The Company has also been informed by Arbuthnot that Arbuthnot recognises that, over time, Secure Trust Bank may require further capital in order to take full advantage of suitable opportunities that may present themselves to Secure Trust Bank, and Arbuthnot would be willing to see its interest in the Company further diluted at an appropriate time, in an appropriate way to enhance value for all shareholders of Secure Trust Bank.

In addition, during the term of the Relationship Agreement, Arbuthnot will only be permitted to purchase additional Ordinary Shares through Collins Stewart. Any such purchase may only be effected with the prior written consent of Collins Stewart and Hawkpoint (such consents not to be unreasonably withheld or delayed). This restriction will not apply in relation to pre-emptive issues of Ordinary Shares.

IMPORTANT NOTICE

This announcement does not constitute or form part of, and should not be construed as, an offer to sell or issue, or a solicitation of any offer to buy or subscribe for, any securities, nor should it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever nor should the fact of its distribution form the basis of, or be relied on in connection with, any contract therefor.

Investors should not subscribe for or purchase any securities referred to in this announcement except on the basis of information in the Admission Document to be issued in due course by Secure Trust Bank in connection with the Placing of and admission of the Ordinary Shares to trading on AIM. In the event of any discrepancy between this announcement and the Admission Document in its final form, the Admission Document will prevail. The information contained in this announcement is for background purposes only. It is not the purpose of this announcement to provide, and reliance may not be placed on this announcement as providing, a complete and comprehensive analysis of Arbuthnot's or Secure Trust Bank's financial or commercial position or prospects.

The date of Admission may be influenced by things such as market conditions. There is no guarantee that Admission will occur and financial decisions should not be based on Arbuthnot's intentions in relation to Admission at this stage. Investments to which this announcement relates may expose an investor to a significant risk of losing all of the amount invested. Persons considering investment in such investments should consult an authorised person specialising in advising on such investments. This announcement does not constitute a recommendation concerning any offer of securities. The value of securities can decrease as well as increase. Potential investors should consult a professional adviser as to the suitability of any investment for the person concerned.

No representation or warranty, express or implied, is or will be made by or on behalf of Hawkpoint Partners Limited ("Hawkpoint"), and no responsibility or liability is or will be accepted by Hawkpoint or its affiliates, as to the accuracy, completeness or verification of the information set out in this announcement, and nothing contained in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. Hawkpoint and each of its affiliates accordingly disclaims, to the fullest extent permitted by law, all and any liability whether arising in tort, contract or otherwise which it might otherwise have in respect of this announcement or any such statement.

The distribution of this announcement outside the United Kingdom may be restricted by law and therefore any persons outside the United Kingdom into whose possession this announcement comes should inform themselves about and observe any such restrictions in connection with the Placing, the acquisition of securities and/or the distribution of this announcement. Any failure to comply with such restrictions may constitute a violation of the securities laws of any jurisdiction outside the United Kingdom. This announcement does not constitute an offer to sell or the solicitation of an offer to buy securities in any jurisdiction in which such offer would be unlawful. In particular, this announcement does not constitute an offer to buy securities, and it is not for distribution, directly or indirectly, in or into the United States, Australia, Canada or Japan. The Ordinary Shares have not been and will not be registered under the US Securities Act of 1933, as amended, any state securities laws in the United States or any securities laws of Australia, Canada or Japan or in any country, territory or possession where to offer them may contravene local securities laws or regulations. Accordingly, the Ordinary Shares may not, subject to certain limited exceptions, be offered or sold, directly or indirectly, in or into the United States, Australia, Canada or Japan.

This announcement includes "forward-looking statements" which include all statements other than statements of historical facts, including, without limitation, those regarding Arbuthnot's or Secure Trust Bank's financial position, business strategy, plans and objectives of management for future operations, or any statements preceded by, followed by or that include the words "targets", "believes", "expects", "aims", "intends", "will", "may", "anticipates", "would, "could" or similar expressions or negatives thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond Arbuthnot's and Secure Trust Bank's control that could cause the actual results, performance or achievements of Arbuthnot or Secure Trust Bank to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding Arbuthnot's and Secure Trust Bank's present and future business strategies and the environment in which Arbuthnot and Secure Trust Bank will operate in the future. These forward-looking statements speak only as at the date of this announcement. Arbuthnot expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Arbuthnot's expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based unless required to do so by applicable law or the AIM Rules for Companies.

Hawkpoint Partners Limited, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting as nominated adviser to Arbuthnot Banking Group PLC and Secure Trust Bank PLC and is acting for no-one else in connection with the Placing and Admission and will not be responsible to anyone other than Arbuthnot Banking Group PLC and Secure Trust Bank PLC for providing the protections afforded to clients of Hawkpoint Partners Limited nor for providing advice in connection with the Placing and Admission or any other matter referred to herein.

The contents of this announcement, which have been prepared by and are the sole responsibility of Arbuthnot, have been approved by Hawkpoint solely for the purposes of section 21(2)(b) of the Financial Services and Markets Act 2000.

Neither the content of Arbuthnot's or Secure Trust Bank's website nor any website accessible by hyperlinks on Arbuthnot's website is incorporated in, or forms part of, this announcement.