(STB) Secure Trust Bnk

15 March 2012

For Immediate Release

SECURE TRUST BANK PLC

Audited Final Results for the year to 31 December 2011

A milestone year

Secure Trust Bank PLC ("STB" or the "Company") has had another successful year, with both the lending and deposit-gathering businesses demonstrating strong, controlled organic growth.

Financial Highlights

·      Operating income £28.5m

·      Profit before tax* £9.6m

·      Adjusted earnings per share* 55.6p

·      Capital, liquidity and balance sheet remain strong

·      Pre-tax return on average equity* 52.2%

·      Stub dividend 4.2 p per share

Operational income

·      Lending volumes increased to £135.9 million (51% increase on 2010)

·      Customer deposits increased to £272.1 million (77% increase on 2010)

·      Fee based current accounts grew to 17,178 (79% increase on 2010)

* Before IPO costs and ABG management charges

The underlying growth potential of the business has been enhanced by the successful IPO of the Company in November through which STB raised new capital to support significant growth in the lending businesses. STB enters its 60^th year very well positioned to take advantage of the many opportunities available to it. Looking forward the company's stance will be consistent with the historic approach of providing simple, straightforward banking, in a cautious and customer focused manner. 

Commenting on the results, Paul Lynam, Chief Executive Officer, said "2011 has been a milestone year for the development of Secure Trust Bank. We have delivered a strong underlying financial performance whilst putting in place the foundations necessary to control our ambitious growth plans across a diversified portfolio of products. With strong organic business volumes written in the early months of 2012 and good work continuing on a large pipeline of significant organic and external business opportunities we are in a cautiously confident mood". 

Enquiries:

The 2011 Annual Report, Notice of Meeting and accompanying letter from the Chairman will be posted and available on the Secure Trust Bank website http://www.securetrustbank.com/general/results-presentation by 5th April 2012. Copies may also be obtained from the Company Secretary, Secure Trust Bank plc, One Arleston Way, Solihull, B90 4LH.

Consolidated statement of comprehensive income

Consolidated statement of financial position

Chairman's statement

2011 has been a milestone year in Secure Trust Bank's successful 59 year history. Notwithstanding extremely challenging market conditions we successfully concluded the IPO of the business on the AIM Market on 2 November. The firm demand for the shares in the IPO and subsequent strong increase in the share price reflect well on both our historic track record and the considerable potential ahead.

In preparation for the IPO the Board was reorganised with James Cobb, Kevin Hayes, David Nield, Dean Proctor, Atholl Turrell and Robert Wickham all resigning from the Board. Kevin and David remain as key members of the Executive Committee.  I extend my thanks to them for all their commitment and contribution. I was delighted to welcome Paul Marrow and Carol Sergeant to the Board as Independent Non Executive Directors and look forward to working with them going forward.

The IPO was the culmination of a series of actions undertaken during the year to make the bank safer, stronger and more sustainable in order to take advantage of growth opportunities.  This is consistent with our ongoing determination to manage the business prudently which saw us finish the year with robust capital ratios, strong liquidity, a diversified lending portfolio and modest gross leverage ratios.

The consumer finance joint venture referred to both at the time of Arbuthnot Banking Group's interim results and the admission document did not materialise as, despite exhaustive efforts, we were unable to agree a structure which met regulatory requirements and fell within our risk appetite.  Whilst disappointing for all concerned this is a tangible demonstration that the Board will not put short term profitability ahead of the longer term interests of the company and its shareholders.

We remain true to our philosophy of simple straightforward banking, with a customer focus and are greatly encouraged that the 45% increase in overall customer numbers would seem to show that this approach has significant appeal to UK consumers.

The Board proposes to pay a final dividend of 4.2p per share relating to the stub period from the admission to AIM to 31 December 2011.  If approved, the dividend will be paid on 18 May 2012 to shareholders on the register as at 20 April 2012

With the benefit of its new listed status, increased profile and strong momentum, the Board is confident that Secure Trust Bank will continue to demonstrate profitable and sustainable growth over the coming period.    

Chief Executive's statement

Secure Trust Bank is determined to be a profitable and sustainable bank by providing a genuine alternative to the traditional high street banking model. The growth I have detailed below is well diversified across the lending portfolio and wider business and evidences the demand for our products and services by consumers either unhappy with other banks or those underserved by them. This represents a very substantial opportunity for us which the successful listing of Secure Trust Bank will, in part, help to unlock.

Simple, straightforward banking

We fundamentally agree with the principles of treating customers fairly which guide the way in which we interact with our customers and the products and services we provide to them. Ultimately the effectiveness of how well we treat our customers will be measured by the sustained growth in their numbers so we are pleased to note that our overall customer numbers have increased by 45% over the last 12 months to 139,693 (2010: 96,446). 

Our internal Net Promoter Score surveys point to high levels of customer satisfaction which is further evidenced by low customer complaint levels. Externally, we were delighted to receive unsolicited third party recognition of our customer focus last year. This included being the only UK bank to receive a Fairbanking Award in respect of its current account and being named as the Association of Cycle Traders' partner of the year award for the second year running.

Strong funding profile

The Secure Trust Bank balance sheet has continued to be run on a prudent basis throughout 2011. As at 31 December we had no direct exposure to wholesale funding or interbank markets. All of our lending activities continued to be funded by customer deposits. Our Loan to Deposit ratio at the year end was a modest 57%. Our robust funding profile was further improved with the highly successful introduction of unbreakable fixed term, fixed rate deposit products in May 2011. These proved very popular with customers enabling the bank broadly to match its tenor of lending against deposits. This strategy helped to reduce the bank's exposure to interest rate basis risk and substantially strengthened its funding profile. 

Modestly leveraged balance sheet

In capital terms our year end Tier 1 Capital ratio was a very robust 21% and Total Capital ratio stood at 23%. Comparing the relative balance sheet strength of individual banks is extremely difficult due to the differing methodologies used under Basel II which can lead to a picture of seemingly similar capital ratios despite the underlying gross leverage positions being wildly different. As at 31 December the Secure Trust Bank Gross Leverage ratio (total lending divided by tier one capital) was only 6.7x.

Robust underlying profit growth

The adjusted 2011 pre-tax profits of Secure Trust Bank, before IPO costs and group recharges from Arbuthnot Banking Group PLC, were £9.6 million (2010: £9.6 million). This rather understates the much stronger underlying picture and the actual momentum in the business. The 2010 results were heavily influenced by the profits generated by the portfolios acquired from LV and Citi in 2009. These portfolios are in run-off, their income contribution peaked in 2010 at £6.1 million and reduced by £4.4 million in 2011.  Income from personal lending, motor finance and retail finance increased to £19.5 million in 2011 from £9.3 million in 2010.  We have also invested heavily in people and infrastructure terms to create the platform needed to control the ambitious growth plans we have. Additionally, as highlighted in the Chairman's statement, we had anticipated creating a Joint Venture in the second half and geared up our deposit balances to fund the expected initial portfolio purchase of circa £50 million. We announced on 10^th January 2012 that we had been unable to agree a structure which fell within our risk appetite and the JV would not be proceeding as anticipated. The costs incurred with this project have been expensed during the year. The cost of carrying the surplus deposits for the JV reduced our 2011 profit before tax by in excess of £1 million. Taking these three factors into consideration we are pleased with the underlying growth in the business during 2011 of 119%.   

Lending operations

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

Motor finance, a business which we started cautiously during 2009, grew lending, net of provisions to £63.4 million at 31 December 2011 (2010: £31.3 million). This business, which targets the near prime market segment, substantially expanded its network of brokers and dealers to the point where it has national coverage and a fully independent sales force which services the majority of the Top 100 UK car dealer groups.

Personal unsecured lending also delivered strong growth with the 31 December 2011 balance sheet increasing to £43.6 million (2010: £22.4 million). The bank has continued to broaden its distribution capabilities in this market and entered into a number of significant new introducer relationships during the year.

Retail point of sale business grew strongly driven by retailer demand for our in store and online services with balances at 31 December 2011 increasing to £42.6 million (2010: £21.6 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: £10.7 million).

Fee based current account

2011 has seen a significant investment in our operational infrastructure which in particular will enhance the competitiveness of our current account offering. Despite tempering the growth rate of this product pending a new on-line platform going live, 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 we continue to see substantial potential here.

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 a product with these attributes. The growth of profit streams developed over the last three years means that this product is becoming progressively less significant to the profitability of the overall business.  Work continues on the development of a next generation OneBill product and we expect to begin customer trials in the second half of this year.

Risk and governance focus

We monitor all aspects of risk extremely closely.  We have taken progressive steps to strengthen our corporate governance to reflect the growth in the business throughout the year and were very pleased to appoint two highly experienced independent non executive directors in the form of Paul Marrow and Carol Sergeant during 2011.

Our impairments levels have risen as we expected given our growing and maturing lending portfolio, in line with our pricing for risk methodology.  These remained below the level which we had assumed with our pricing models when writing the business. We continue to adopt a robust, formulaic and dynamic approach to impairment provisioning. During the latter stages of 2011 it became increasingly apparent that the economic outlook was deteriorating which we responded to by tightening up our lending criteria and increasing our margins.

Our people 

Our success in creating value for our shareholders and providing a great service for our customers is enabling us to provide job security and career opportunities for our staff. Our staff numbers at 31 December 2011 increased by 42 last year representing a 20% increase on the prior period. In addition to investing in the local community via these new jobs, Secure Trust Bank employees, on average, donated a half day each to charity last year and in so doing generated many thousands of pounds for a range of worthy causes. We were delighted to be identified as 'one to watch' in the Sunday Times Best Companies To Work For survey which reflects our ongoing commitment to our staff .This commitment included changes to ensure our total pay proposition was competitive and each member of staff, on average receiving nearly a week's worth of training during 2011. I thank all my colleagues for their determination and professionalism throughout the year.

Current developments

The business continues to trade in line with management's expectations in the early months of 2012. We continue to see strong demand for all of our core products, with February representing a record month for lending business. We envisage robust organic growth this year. We were delighted to receive the Dealer Finance Provider 2012 award from the Institute of Transport Management in February in recognition of our increased importance to the motor industry.

The IPO has significantly increased our corporate profile and we have seen an increase in the scale, scope and range of opportunities being brought to us for consideration. We have a clear growth strategy and are working on a number of significant projects which will add considerable value to our business model.

Business review - lending

During the year, the bank's lending operations continued to grow in a controlled organic way, with new business lending volumes in the year increasing to £135.9 million from £90.2 million in the previous year.  This generated an increase in lending assets during the year, which at the year-end totalled £154.6 million (December 2010: £89.5 million).  The growth in new business volumes has not been at the expense of price or quality.

The business utilises highly automated underwriting systems which, in addition to providing significant cost advantages, ensure that highly consistent credit decisions are made  which improves ongoing performance monitoring and future policy decision making. Differential pricing that reflects the credit risk of the underlying customer is standard. These systems have enabled the business to control risk whilst retaining the speed of service needed to support its retail partners and their flexibility was a major element in the successful acquisition of retailers and the receipt of various awards during the year.

The bad debt performance on all of the books has been better than the expectations set in the pricing models and this continues to be frequently scrutinised. To support this further the business invested in a new collections system that is more appropriate for the balance sheet size the business now operates.

Motor finance

Secure Trust Bank's motor finance business started lending in 2009. As at 31 December 2011, it represented the Company's largest lending portfolio with net outstanding motor finance loans of £63.4 million (£31.3 million as at 31 December 2010).

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

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

Retail finance

Secure Trust Bank's retail point of sale finance business commenced lending in 2009 and provides point of sale finance for in-store and online retailers. The portfolio at 31 December 2011 totalled £42.6 million (£21.6 million as at 31 December 2010).

Retail point of sale finance products are unsecured, fixed rate and fixed term loans with payments received monthly in arrears. Loans range in term from 6 months to 48 months and the size of the loans vary from £250 to £12,000 depending on the type of product being financed. The loans are either interest bearing or have promotional credit subsidised by retailers or suppliers. Secure Trust Bank does not pay retailers commissions and lending is restricted to UK-residents who are either employed or self-employed.

The Group focuses on ten sub-markets.  The three largest of these at 31 December 2011 are the provision of point of sale finance for the purchase of musical instruments, cycles and the leasing of computer equipment.  The latter of these is transacted through the subsidiary company STB Leasing Limited.

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

In addition to in-store finance, Secure Trust Bank has an online e-tailer proposition which is distributed in conjunction with Pay4Later Limited ("Pay4Later"), a UK provider of web interfaces for online point of sale credit. Retailers on the Pay4Later platform include Andertons Music, bathtek.com, Power Plate, SuperFit, The Great Furniture Trading Company, Toolstop and WorldStores.

Personal lending

Secure Trust Bank has provided personal unsecured lending for nearly 35 years. Net outstanding loans totalled £43.6 million at 31 December 2011 (31 December 2010: £22.4 million). Following the decision in 2007 to materially reduce new lending in response to deteriorating lending conditions the portfolio reduced to less than £10 million. New lending was increased in 2009 and since then has delivered annual growth. Net new lending volumes amounted to £34.5 million in the twelve months to 31 December 2011.

Personal unsecured loans are 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. Loans are provided to customers for a variety of purposes which might include, for example, home improvements, personal debt consolidation and for the purchase of vehicles.  Distribution of unsecured personal loans is through brokers, existing customers and Affinity Partners, and targeted to UK-resident customers who are either employed or self-employed.

Business review - current account

The Secure Trust Bank Current Account is a refreshingly simple and transparent bank account. 

In late 2010, Secure Trust Bank relaunched its current account product.  At 31 December 2011, the current account product had been taken up by approximately 17,000 customers with the account experiencing growth averaging 1,000 new accounts per month for the twelve months to 31 December 2011.  The growth in the current account volumes has now outstripped the reduction in OneBill accounts.  OneBill generated income of over £9.3 million in the year, but the Company has closed this product to new customers.

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

The business has developed an on-line capability to both service and sign up accounts. It is now possible for a customer to open an account on-line, be provided with the new account details and automatically to transfer all of their direct debits and standing orders in minutes. The account charges a monthly fee of £12.50 but as part of this the customers get rewarded for using their card by selected retailers and this is between 3% and 4% of the amount spent.  Any cash rebated as a consequence of customer spending at the retailers on the scheme can, in effect, help to reduce or offset the monthly account charge.

A real Current Account with a Prepaid Card

Our Current Account helps the customer control their finances and manage their budget by only letting them spend the money they have available each month.  This is because the account does not have an overdraft facility so the account holder cannot spend money that isn't there. 

The account comes with a Prepaid Card, onto which money must be loaded before it can be used similar to a 'Pay as You Go' mobile phone top-up.  This way, it can help the customers manage their money more effectively because the money set aside on the Prepaid Card is separated from the money in their Current Account, so they can shop safe in the knowledge that the bills will be paid from the money kept aside in the Current Account.

Customers generally make sure that they have enough money in their Current Account to cover Direct Debits, Standing Orders and any other regular payments, and the remaining money can be transferred onto their Prepaid Card to spend at over 30 million outlets and for online and telephone purchases and to make cash withdrawals at ATMs showing the MasterCard® acceptance mark.

Rewards

The Current Account gives the customer the ability to earn cash rewards of up to 4% paid back into the account on purchases made with their Prepaid Card, both online and in store, at over 30 participating major high street retailers. 

The account holder can have additional Prepaid Cards linked to their account for family members at home or abroad, at no extra monthly fee, with all cards eligible to earn Rewards.  Participating retailers include well known stores such as Argos, Boots, Debenhams, Comet, B&Q and M&S.

Putting the account holder in control

Our Current Account is designed to help customers to manage their money and keep control of what they are spending, giving them the peace of mind that the money they spend is money they actually have.

Once the account is opened the account holder can register for our online and telephone banking service which gives access to their account 24 hours a day, 7 days a week and allows the movement of money to and from the Current Account and Prepaid Card free of charge. 

Clear and transparent charges

In addition, there are no charges should a Direct Debit or Standing Order payment fail - our fees are simple and transparent, there are no hidden or unexpected charges. So, unlike most high street banks, if a Direct Debit or Standing Order payment is returned unpaid, there isn't a penalty fee. These fees can be as much as £35 at other banks.

Business review - savings

The Company continues to manage its liquidity on a conservative basis with none of its funding coming from the wholesale markets.  All of the lending is entirely funded by way of customer deposits.

Secure Trust Bank's deposit activities comprise deposit accounts and fee-based accounts, being fee-based current accounts and the OneBill accounts.  As at 31 December 2011 customer deposits totalled £272.1 million. This represents an increase of £118.3 million since the last year end.

The bank's deposit accounts consist of instant access accounts, notice accounts and fixed term, fixed price bonds.

Competitive rates

At Secure Trust Bank, savings accounts offer a simple way to save money.  Interest rates offered are very competitive and offer real value for money.  Methods of attracting deposits include product information on price comparison websites (such as Moneysupermarket), Best Buy tables and newspaper articles about the deposit accounts offered by the Company.

By virtue of a focus on higher margin lending, the absence of large fixed overheads in the form of a branch network and a policy of not cross-subsidising loss making products with profitable ones, the bank is able to offer competitive rates and has been very successful in attracting term deposits from a wide range of personal and non-personal customers.

Notice deposits

The deposit account notice periods range from 60 days to 183 days, with the majority at the 120 day term.  This provides a secure funding profile which again gives additional financial security to the business.  The bank's notice deposits totalled £170 million at the year end (December 2010: £126 million), an increase of £44 million or 35%.  The 183 day notice account was introduced in May 2011 and has been very successful.

Introduction of deposit bonds

In May 2011, the bank launched fixed rate deposit bonds in two, three, four and five year maturities. Within six weeks the Company raised net deposits of £63 million achieving its desired funding maturity profile at that time.  At the year end term deposit balances totalled £71 million.

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

Financial review

Secure Trust Bank adopts a conservative approach to risk taking and seeks to maximise long term revenues and returns.

Operating income increased by 18% to £28.5million.  This growth is largely due to the increased levels of activity in the lending business, which has three main product areas: asset finance, personal lending and acquired portfolios.  Income from motor finance increased by over 190% to £9.9million.  Secure Trust Bank intends to create diversified and balanced growth in our lending books which will serve the business well when the market becomes more competitive.

Income from the current account with a prepaid card increased by 145%, and this offsets the decline in the OneBill account.  The current account closed this year with 17,178 open accounts (2010: 9,576), and OneBill ended the year with 28,698 open accounts (2010: 31,720).

The total assets of the Group increased by 70% due to the continued growth in the lending business, total assets now exceed a quarter of a billion pounds.  Customer deposits grew by 77% to close at £272.1 million.  The Group continues with its conservative funding policy, remaining entirely funded by customer deposits and closed with a loan to deposit ratio of 57% (2010: 58%).

During the year the asset finance business increased its portfolio size by 100% to close at £106.0 million, being predominantly due to a growth in motor vehicle finance of £32.1 million.  Personal lending grew by £21.2 million as the business was able to source new business from online brokers and offer new financing to customers from the acquired portfolios.  The acquired portfolios reduced to £2.5 million as customers continued to repay their loans according to our expectations.

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 reviews the capital position at every Board Meeting.

In accordance with the EU's Capital Requirements Directive (CRD) and the required parameters set out in the 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 where necessary, but as a minimum an annual review as part of the business planning process.  The ICAAP is a process which brings together the risk management framework and the financial disciplines of business planning and capital management.

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar I plus" approach to determine the level of capital the Group needs to hold.  This method takes the Pillar I capital formula calculations as a starting point, and then considers whether each of the calculations deliver a sufficient capital sum adequate to cover 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:

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

Lower Tier 2 comprises qualifying subordinated loan capital and revaluation reserves.  This tier cannot exceed 50% of tier 1 capital.

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

Risk and Uncertainties

The Group regards the monitoring and controlling of risks as a fundamental part of the management process.  Consequently, senior management are involved in the development of risk management policies and in monitoring their application. 

The principal risks inherent in the Company's business are credit, liquidity, market, operational and regulatory risks. A detailed description of the risk management policies in these areas is set out in Note 4 to the financial statements. 

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

Liquidity risk is the risk that the Group cannot meet its liabilities as they fall due.  The Group takes a conservative approach to managing its liquidity profile and is entirely funded by retail customer deposits, placing no reliance on the wholesale lending markets.  The loan to deposit ratios are maintained at prudent levels.

Market risk arises in relation to movements in interest rates.  ABG's treasury function operates on behalf of the Company and it does not take significant unmatched positions in any market for its own account.  The Company also has no significant exposure to currency fluctuations.

Operational risk is the risk that the Group may be exposed to financial losses from conducting its business.  The Group maintains clear compliance guidelines and provides ongoing training to all staff.  The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance 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 including, for example, the way it conducts its business or treats its customers.  The Group adopts a conservative approach to managing the capital of the Group and at least annually assesses the robustness of the capital requirements as part of ICAAP where stringent stress tests are performed to ensure that capital resources are adequate over a future three year horizon.

Exceptional items

During the year there were exceptional items totalling £0.5 million, relating to the transaction costs on the AIM share listing in November.  During the previous year, there were no exceptional items.

Taxation

The full effective tax rate on underlying profit before tax is 30% (2010: 28%) reflecting the benefit of changes to the UK corporation tax rate during the year which were more than offset by the effect of tax disallowed costs.

Distribution to shareholders

A special interim dividend of 140 pence per share (2010: 50 pence per share) was declared and paid prior to IPO during the year.  The directors propose the payment of a final stub dividend for the period from admission to AIM to the 31 December 2011 of 4.2 pence per share (2010: nil).

Earnings per share

Detailed disclosures of earnings per share are shown in note 10 of the financial statements. Adjusted earnings per share, before IPO costs and ABG management charges, were 55.6p (2010: 55.5p).  Basic earnings per share decreased by 21% to 39.6p per share (2010: 50p).

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

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

1.2 Basis of presentation

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

The Group has not previously prepared Group accounts and therefore the comparatives have been prepared on the basis of the net assets of the subsidiaries being incorporated at the carrying amounts as per the ultimate parent's consolidated financial statements.

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

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

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

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

·      IFRS 7 (Revised), 'Disclosures - Transfers of Financial Assets' (endorsed for use in the EU on 22 November 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.

·      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. ¹

·      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. ¹

·      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. ¹

·      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. ¹

·      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.¹

·      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. ¹

·      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 not expected to have a pervasive impact on the Group's financial statements, due to the nature of the Group's operations.¹

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

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

1.3 Consolidation

Subsidiaries

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

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. 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.

1.4 Interest income and expense

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

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

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

1.5 Net fee and commission income

Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accruals basis when the service has been provided.  Fees and commissions income consists principally of weekly and monthly fees from the One Bill and Current Account products along with associated insurance commissions.  Fees and commissions expense consists primarily of referral fees.

1.6 Financial assets and financial liabilities

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

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

This category comprises interest rate caps.  All caps at 31 December 2011 are in qualifying hedge relationships.  These cash flow hedges are used to hedge against fluctuations in future cash flows from interest rate movements on variable rate customer deposits. On initial purchase the derivative is valued at fair value and then the effective portion of the change in the fair value of the hedging instrument is recognised in equity (cash flow hedging reserve) until the gain or loss on the hedged item is realised, when it is amortised; the ineffective portion of the hedging instrument is recognised in the statement of comprehensive income immediately.  Fair values are based on quoted market prices in active markets and where these are not available, using valuation techniques such as discounted cashflow models.

(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 on origination. 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) 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.

(e) 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. In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. There have not been any instances where assets have only been partially derecognised.

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

(f) 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.

(g) Fair value measurement

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

1.7 Hedge accounting

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

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

1.8 Offsetting financial instruments

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

1.9 Impairment of financial assets

Assets carried at amortised cost

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

The criteria that the Group uses to determine that there is objective evidence of an impairment loss include, but are not limited to, the following:

• Delinquency in contractual payments of principal or interest;

• Cash flow difficulties experienced by the borrower; and

• Initiation of bankruptcy proceedings.

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

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

1.10 Intangible assets

(a) Goodwill

Goodwill represents the excess of the cost of a loan book acquisition over the fair value of the net identifiable assets of the acquired loan book at the date of acquisition.  Goodwill is held at cost less accumulated impairment losses. Goodwill is deemed to have an infinite life.

Goodwill is tested at least annually for impairment or when events or changes in economic circumstances indicate that impairment may have taken place. Impairment losses are recognised in the statement of comprehensive income if the carrying amount exceeds the recoverable amounts.

(b) Computer software

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives (three to five years).

Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred in line with IAS 38.

1.11 Property, plant and equipment

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

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

Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the statement of comprehensive income.

1.12 Leases

(a) As a lessor

Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets are held subject to finance leases, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return.

Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating leases. When assets are held subject to operating leases, the underlying assets are held at cost less accumulated depreciation, The assets are depreciated down to their estimated residual values on a straight line basis over the lease term. Lease rental income is recognised on a straight line basis over the lease term.

(b) As a lessee

Rentals made under operating leases are recognised in the statement of comprehensive income on a straight line basis over the term of the lease.

1.13 Cash and cash equivalents

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

1.14 Employee benefits

(a) Post-retirement obligations

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

(b) Share based payments

As set out in notes 27 and 29, during the year the Group awarded share options to three directors under an equity settled share-based compensation plan.  The costs associated with the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted.  At each balance sheet date, the Group revises its estimate of the number of options that are expected to vest and recognises the impact of the revision to original estimates, if any, in the statement of comprehensive income, with a corresponding adjustment to equity.

The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised.

1.15 Share issue costs

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

1.16 Income taxation

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

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

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

1.17 Dividends

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

Notes to the consolidated financial statements

2.  Critical accounting estimates and judgements in applying accounting policies

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

2.1.  Estimation uncertainty

Credit losses

The Group reviews its loan portfolios and held-to-maturity investments to assess impairment at least on a half-yearly basis. The basis for evaluating impairment losses is described in accounting policy 1.9. Where financial assets are individually evaluated for impairment, management uses their best estimates in calculating the net present value of future cash flows. Management has to make judgements on the financial position of the counterparty and the net realisable value of collateral, in determining the expected future cash flows.  Loans which are forborne are managed in the same pool as non-forborne loans for impairment purposes.

Goodwill impairment

The accounting policy for goodwill is described in note 1.10 (a). Significant management judgements are made in estimations, to evaluate whether an impairment of goodwill is necessary.

Goodwill is monitored for management purposes throughout the period. This will enable management to complete goodwill impairment testing if indicators arise. The accuracy of future cash flows is subject to a high degree of uncertainty in volatile market conditions. During such conditions, management would do impairment testing more frequently than annually to ensure that the assumptions applied are still valid in the current market conditions.

At the time of the impairment testing, if the future expected cash flows decline and/or the cost of capital has increased, then the recoverable amount will reduce.

Purchased Loan Books

Income on purchased books is calculated using the EIR method. Future cash flows were estimated at inception and are reviewed in line with business performance on a regular basis.  Any revisions in estimates are recognised immediately through the statement of comprehensive income in accordance with IAS 39.

Taxation

Significant estimates are required in determining the provision for income taxation. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current tax and deferred tax provisions in the period in which such determination is made.

2.2.  Judgements

Impairment losses on loans and advances

The Group reviews its loan portfolios to assess impairment at least on a half-yearly basis. In determining whether an impairment loss should be recorded in the statement of comprehensive income, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with similar credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

Forbearance is available to support customers who are in financial difficulty and help them re-establish their contractual payment plan.  The main option offered by the Group is an arrangement to reduce payments for a set period.  If the forbearance request is granted the account is monitored in accordance with the Group's policy and procedures. All debts however retain the customer's normal contractual payment due dates.  Arrears tracking and the allowance for impairment is based on the original contractual due dates for both the secured and unsecured lending channels.

Valuation of financial instruments

Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices. 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. The objective of valuation techniques is to determine the fair value of the financial instrument at the reporting date as the price that would have been agreed between active market participants in an arm's length transaction.

The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:

• Level 1: Quoted prices in active markets for identical assets or liabilities.

• Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e.

  as prices) or indirectly (i.e. derived from prices).

• Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Fair value of financial assets and financial liabilities that are traded in active markets are based on quoted market prices.  For all other financial instruments the Group determines fair values using valuation techniques.

The Group uses widely recognized valuation models for determining the fair value of common and more simple financial instruments.  Observable prices and model inputs are usually available in the market for simple over the counter derivatives like interest rate caps.  Availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with the determination of fair values.  Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.

The consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads, assist in the judgement as to whether a market is active. If in the opinion of management, a significant proportion of the instrument's carrying amount is driven by unobservable inputs, the instrument in its entirety is classified as valued using significant unobservable inputs. 'Unobservable' in this context means that there is little or no current market data available from which to determine the level at which an arm's length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).