united trust bank report & accounts · lending activities are funded through the bank’s...

united trust bank report & accounts 2012

1 Chairman’s Report

3 Director’s Report

5 Directors

7 Property Market View

8 Asset Finance Market View

9 Case Studies

12 Corporate Information

13 Directors’ Statement

14 Auditor’s Report

15 Profit and loss Account

16 Balance Sheet

17 Notes to the Financial Statements

United Trust Bank Limited

80 Haymarket London SW1Y 4TE

Registration No. 549690

T: 020 7190 5555 F: 020 7190 5550

E: [email protected] www.utbank.co.uk

Authorised and regulated by the Financial Services Authority

report & accounts 2012

Contents

An extremely successful year isdescribed fully in the Directorsreport. Our increased capital,expanded staff levels andsignificant investment insystems have provided theplatform for growth, serving ourcustomers in a market to someextent vacated by the largerbanks. The Board believes thisopportunity for growth willremain with us for some time.

The Banking industry continues to be thefocus of intense regulatory scrutiny andpublic attention and much is currentlywritten about the lack of an appropriateculture to guide the Banks.

For us it is clear. Our primary obligation isto those who entrust their savings with usby way of deposits or other loans. It is ourduty to ensure that these moniesalongside those provided by ourshareholders are prudently invested andlent on a well spread basis and that wehold adequate liquidity to match ouractual and potential maturing liabilities. Inaddition we have obligations to ourcustomers, to our shareholders and tosociety as a whole. We wish to treat ourborrowing customers fairly and supportthem in their endeavours. Throughmaintaining a stable business we cancontribute best to the communities inwhich we operate and act as a goodcorporate citizen. And we believe thatguided by these principles our

shareholders over time will be rewardedwith an acceptable and competitive returnon their invested capital.

So guided, we believe we can provide ourstaff with an opportunity to work in achallenging but secure environment. I amsure that all our staff and our shareholdersunderstand and share these views thathelp define our culture.

The Board believes that this bodes well forthe continued growth of our businesswhich rests on solid foundations.

Chairman’sReport

Nicholas Clegg CBENon-Executive Chairman

28 February 2013

01

For decades there have notbeen enough homes tomeet the needs of ourageing and growingpopulation

02

The year to December 2012 hasbeen characterised in developednations by the lowest bondyields in living memory and thecreative measures adopted bycentral banks to diffuse thebanking crisis and promoteeconomic growth.

Economic background

The experience of the past year in the UKturned out to be better than some hadpredicted and the deleveraging taking placeacross communities and business hasestablished a new normal of expectationsthat are more sober and within reach ofcurrent activity levels. However, the macrorisks from inflation and the need to unwindmassive central bank accommodationensures that substantial tail risks remain.While predictions concerning future ratesof growth remain speculative, the slow butdiscernible improvement in trend is clearand confidence is returning.

It is against this background that United Trust Bank (“UTB”) has generated asound return on equity and written muchhigher levels of business, as largecommercial banks exit niche areas andrestructure their balance sheets. UTB builtmarket position in niche areas and incapacity early in this recovery cycle andcontinues to do so. We anticipate thisgrowth will continue and that a sound andincreasing amount of new business will beachievable so long as the extreme tail risksdo not materialise. Expectations have beenreset and confidence in meeting thesemore realistic expectations is the primepromoter of growth and new investment.

Principal Activities

The Bank’s primary lending activity is theprovision of secured finance in nichemarkets. In the main the Bank funds shortto medium term property loans for boththe development of property and forbridging completed property as well asproviding asset finance for SMEs. All theselending activities are funded through theBank’s capital base and the provision of arange of fixed and notice period depositproducts to individuals, charities and SMEs.

Review of Operations

The net result before taxation for the yearended 31 December 2012 is £2.21 million(2011: £1.01 million) representing a 14.8%pre-tax return on equity over the year.

Operating income before tax and bad debtprovisions, representing the true growthin the current operating performance, rose106% to £3.9 million (2011: £1.89 million)for the year. The result was generatedfrom strong performances in all operating units.

Net interest income grew 40% to £5.48million with the net interest incomemargin holding constant over the twoyears. Fee income grew by 80.5% to £3.71million, with material contributions fromall loan sectors. Loan turnover againincreased with total loan repayments of88% (2011: 60%) of the loan bookoutstanding at the beginning of the year.This increase reflects the growth in ourshort term lending operations and thesuccess our clients are achieving, postcrisis, in sales of development property.The speed with which well-designed andappropriate developments are sellingsupports the fact that there is asignificant undersupply of quality familyhousing near transport nodes andavailable work. This has resulted in ahigher proportion of our loan exposurebeing focused in London and the SouthEast of the United Kingdom, where theseconditions are more prevalent.

Total assets have grown by 51.1% (2011:29.4%) to reach £215.8 million at yearend. This was supported by increasedcapital available for banking purposes of£5 million, through new matchedcontributions from a family office andexisting shareholders in addition tosubordinated debt placed with thirdparties. It is expected that during thispost crisis period of growth anddevelopment, capital will best beprovided by family offices combined withmanagement and existing shareholders.These parties understand the significantreturns that can be achieved in the nextfew years as the banking sectorrestructures and small niche banks suchas UTB are able to broaden their productsets and client bases, and achievebenefits from scale. The Bank’s ratio ofcapital to risk weighted assets is 18.9%which is well in excess of agreedregulatory limits and provides capacityfor further growth.

Director’sReport

03

Treasury

Total customer deposits grew by 53.6%(2011: 29.0%) to £185.3 million and by48% in the number of customers. UTB hasalways chosen to focus on its retaildeposit base to finance growth in thebelief that the supply of wholesale fundingis too variable for a small and specialistbank. The majority of the deposit bookremains, as in prior years, fixed term,ensuring that the Bank has a steady sourceof stable medium-term funding to matchthe duration of its lending books.

The basic products remain those that areeasily understood, are transparent andhave a low cost of administration.

During the year, the Bank agreed itsLiquidity Adequacy Assessment with theFSA. Given the high degree of liquiditymaintained by the bank, this did notmaterially change its liquidity policies, butdid result in a proportion of the excesscash holdings being maintained inprescribed liquid buffer assets. Whileinterest rates remain extremely low, theBank will invest in short duration assets tolimit its market risk from rate increases,albeit that such an increase is notanticipated soon.

Regulatory

The Bank has now finalised its capital andliquidity requirements with the FSA. It hassubmitted its Recovery and Resolutionplan to the FSA and expects feedbackduring the current year. In all theseactivities, it has sought to develop its ownunderstanding and expertise. This policyhas brought a steady and importantgrowth in the Bank’s knowledge andunderstanding of the ever changingregulatory requirements. The results ofcurrent discussions between the Treasuryand the European Commission willpotentially have far reaching consequencefor the regulation of specialist banks.

Directors

A full list of directors is on page 5. Alldirectors served throughout the year.

Dividend

No dividend has been declared or paidduring the current or prior year.

Auditor and Directors’ Confirmation

Each person who is a director at the date ofthe approval of this report confirms that:

• so far as each of the directors isaware, there is no relevant auditinformation of which the Company’sauditor is not aware; and

• the director has taken all the stepsthat he ought to have taken to makehimself aware of any relevant auditinformation and to establish theCompany’s auditor is aware of thatinformation.

This confirmation is given and shall beinterpreted in accordance with theprovisions of Section 418 of theCompanies Act 2006.

Pursuant to Section 386 of the CompaniesAct 1985, an elective resolution waspassed on 25 March 2004 dispensing withthe requirement to appoint auditorsannually. This election was in forceimmediately before 1 October 2007.Accordingly, Deloitte LLP are deemed tocontinue as auditor.

Going Concern

The Directors have, as is appropriate,adopted the going concern basis inpreparing the financial statements. Furtherdetails regarding the going concern basiscan be found in Note 1 Statement ofAccounting Policies in the FinancialStatements.

Financial Risk Management

The disclosures required to be included inthe Director’s Report in respect of theCompany’s exposure to financial risk andits financial risk management policies aregiven in note 22 to the accounts.

The Pillar 3 disclosures are available on our website.

Prospects and Staff

The year has seen strong growth in all the Bank’s areas of operation, and ashortening of the trading cycle for loansand their repayment. The return on capital continues to improve and, barring a significant change in theeconomic outlook, should increase againduring 2013.

The decision to seek out and employ seniorexperienced people early in the recoverycycle has resulted in a strong and nowwell-integrated team. The Bank is wellpositioned to cope with the increasedbusiness expected as economic conditionscontinue to improve.

The development of a culture takes time,consistency and effort and UTB’s culture isboth maturing and becoming ingrained inthe way in which we do business. UTBstaff have adapted positively to the open,consensual and co-operative behaviourrequired of them, while complying with astrict discipline in reaching decisions andmaintaining client service levels. We shallcontinue to work diligently in pursuingthis approach.

There remains a significant opportunity inthe markets in which we operate tocontinue to build the business and ourmarket share. The Directors and staff arecommitted to the growth strategy and are constantly looking to employexperienced and talented staff to supportthis objective.

All of our staff are key to the muchimproved position that we find ourselves inat the start of 2013. We thank all of themfor their efforts in achieving this result.

Approved by the Board and signed on itsbehalf by:

Graham DavinChief Executive Officer. 28 February 2013

Director’s Report

04

Ehsan Mani Non-Executive Director

Ehsan Mani, 68, iscurrently a Director ofPlaces for People Groupand has been involved inreal estate projects andinvestments in the UnitedKingdom for many years.He is a charteredaccountant, a pastPresident of theInternational CricketCouncil and previouslyserved as a Director of theUnited National Bank. Hehas also been a member ofthe Pakistan Government’sPrime Minister’s InspectionCommission and of theAdvisory Body of the TaskForce for HumanDevelopment.

Andrew Herd Non-Executive Director

Andrew Herd, 54, is theManaging Director ofLancashire Court CapitalLimited, a London-basedinvestment andconsultancy business. He was previously anExecutive Director ofAspers Group, the Anglo-Australian Leisure andentertainment company.He is a charteredaccountant and worked asa merchant banker formany years. He wasManaging Director andHead of FinancialInstitutions at SG Hambrosand held senior roles withParibas Capital Marketsand Morgan Grenfell.

Michael Lewis Non–Executive Director

Michael Lewis, 54, hasbeen involved ininvestment managementsince 1983, havingworked at Ivory & Simeand Lombard Odier. He isChairman of OceanaInvestment CorporationLimited (UK), ExecutivePartner of OceanaInvestment Partners (UK),and a director of TheFoschini Group Limited(South Africa), AxelSpringer AG (Germany),Histogenics Inc. (USA),Cheyne CapitalManagement Limited(UK) and StrandbagsLimited (Australia).

Harley KaganExecutive Director

Harley Kagan, 43, is aManaging Director ofUnited Trust Bank and achartered accountant. Hewas previously theFinance Director of theUK operations of Insingerde Beaufort. He hasworked extensively incorporate finance,concentrating onacquisitions anddisposals, and as astrategy consultant withCap Gemini.

Noel MeredithExecutive Director

Noel Meredith, 57, is acareer banker. He joinedMidland Bank aftergraduating from theUniversity of Cambridge.He was previously atCounty Bank and SvenskaHandelsbanken and hasbeen at United Trust Bankfor 13 years. He hasextensive experience incorporate and propertylending and heads theProperty DevelopmentFinance team.

Barry Townsley CBENon-Executive Director

Barry Townsley, 66, isChairman of Hobart CapitalMarkets, the principalsponsor of the StockleyAcademy, Hillingdon,Director of the William J.Clinton FoundationInsamlingsstiftelse, ViceChairman of the SerpentineGallery and a Patron of theTrinity Hospice.

Nicholas Clegg CBEChairman

Nicholas Clegg, 76, waspreviously a Director ofHill Samuel & Co Ltd, Co-Chairman of DaiwaEurope Ltd andChairman of DaiwaEurope Bank plc. He hasserved as a Director ofthe InternationalPrimary MarketsAssociation and a senioradviser to the Bank ofEngland on bankingsupervision. As well asother appointments healso served as a memberof the supervisory boardof Bank Insinger deBeaufort NV and aDirector of Insinger deBeaufort Holdings.

Graham Davin Chief Executive Officer

Graham Davin, 57, is theprincipal stakeholder of United Trust Bank. Hewas previously ChiefFinancial Officer andHead of CorporateFinance of Investec Bank and a main boardDirector of Investec for16 years. He was afounding partner of theInsinger de BeaufortGroup and a Director ofits listed parent and itsDutch bank.

Roger Tidyman Executive Director

Roger Tidyman, 63, is aManaging Director ofUnited Trust Bank. He isa chartered banker andwas previously Head ofBanking and Director ofBHF-Bank AG’s Londonbusiness, followingsenior positions inKleinwort Benson andHSBC Investment Bank.

Directors

05

Short-term bridging financewill play a valuable rolein supporting themortgage sector in 2013and beyond

06

Demand for Credit

The UK property and debt marketsconditions have encouraged us to growour dedicated property lending businessessubstantially in the last year. Large bankscontinue to shrink their balance sheets tomeet more stringent capital and operatingrequirements. Consequently the aggregatesupply of credit remains limited and likelyto be so for some considerable time longer.Conversely the demand for housingsteadily increases. Despite the coalitiongovernment’s attempts to improve theplanning system, the shortfall between thenumber of households and housing in theUK continues to increase. The UKpopulation continues to grow throughbirth and immigration and this trend isforecast to continue. Most commentatorsagree that the UK is increasingly short ofresidential accommodation, particularly soin the stronger economic regions ofLondon and the South East. The shortfall isreflected in the increasing rental yieldlandlords are achieving in these areas.

Development Finance

In the last year our residentialdevelopment business has provided recordlevels of construction finance. The majorityof our commitments are to funddevelopments in London and the SouthEast. We do, however, finance elsewhere inthe country, where we are convinced thereis evident demand for the built product.Our case study of a development inCornwall illustrates our capacity to meetloan demand elsewhere in the UK wherewe have a strong experienced developerand can establish unsatisfied local demandfor the houses being developed.

The shortage of first time and second timebuyer mortgage provision is decreasing,but still depresses purchaser activity. Thesebuyers’ usual first purchase is anapartment. Consequently we generally donot seek to fund the development of suchaccommodation other than in and aroundLondon, close to transport nodes. We havesubstantial purchase evidence to confirmthat apartment demand is extremelystrong and the supply unable to satisfythis product in the right location. Anotherof our case studies shows that we helped acustomer with a mixed use site in CentralLondon to acquire a site next door, achievevalue enhancing planning permission anddevelop more accommodation.

Elsewhere in England and Wales buyerstend to be equity rich and we havefocused on funding good family housing.We are happy to fund such schemes inareas of good demand which tend to beareas with good local employment,schools, services and transport links.

House Prices

Last year we pessimistically expected a 2%decline in prices nationwide and levelprices in the capital. Academetrics latestsurvey advises that last year pricesincreased by 10% in London, and inEngland & Wales by 3% (Acadametrics Dec2012). As evidence of the strength of theLondon market, Acadametrics concludesthat without London’s growth the increasein prices throughout England & Waleswould only have been 1.4% last year.

Real wages and employment are notincreasing in the economy and wetherefore expect little if any house priceincrease, taking England and Walestogether, and modest price increases inLondon in 2013. In some regions, notablythose with a greater percentage of publicsector employment, price falls are likely tocontinue as the squeeze on governmentexpenditure continues.

Bridging

Our Bridging and Short Term Loan Businesshas thrived given the dearth of creditavailable in the marketplace. We have lentrecord volumes on traditional housepurchases and downsizings. Additionallyborrowers, unable to access workingcapital finance from deleveraging largebanks, have borrowed from us againsttheir property security. A further casestudy demonstrates how we funded aborrower to fulfil a short term contractsecured against the borrower’s UK home,which exemplifies this trend.

Most importantly we have enabled severalborrowers to temporarily refinanceproperty portfolios from UK Clearing bankskeen to reduce their loan books. Thesetransactions were all of a significant size.Some of these were lent to principals withwhom we had previously transacted goodbusiness, and other borrowers were new tous. In all cases the borrowers werecreditworthy and the property portfolioswere sound. Often the borrowing

structures were complicated and weneeded to understand the complexity oftheir position and use our specialist skillsto structure appropriate solutions toenable longer term mortgage banks torefinance us, following agreed actions.

UTB’s experienced specialised propertylending skills have enabled theserestructurings to be funded successfully.We expect to refinance further portfoliosthis year given the continued trend ofdeleveraging by large banks.

UTB’s Market

UTB has a strong market position,competent and knowledgeable specialiststaff and we pride ourselves on the servicewe provide. In 2012 we again won theaward run by Bridging and Commercial forbest regulated bridging lender. Thecombination of banking skills and theproximity of a bridging and developmentbook enabled us to complete some bridgedplanning uplifts followed by constructionfunding of the resultant approved site. Webenefit from a substantial number ofdevelopers repeatedly borrowing from usfor successive development projects inaddition to strong demand from newborrowers in a market which has anundersupply of the right houses in placeswhere there is most demand.

Consequently we look forward to thefuture with confidence and expect 2013 to be another good year for both ourproperty bridging and developmentlending businesses.

PropertyMarket View

07

The challenging economicclimate continues to provideopportunities for specialistlenders operating in the assetfinance sector and 2012 provedto be a successful year for UTB.

We provide a highly competitive servicefor our broker partners. When weextended the range of suitable wheeledand tracked assets to fund, our increasedappetite for lending resulted in aconsiderable rise in new business levelsthroughout the year.

The credit squeeze on UK SMEs continues,but growing companies still requirecapital and debt to invest in theirbusiness and to take advantage ofopportunities as they arise. Flexible andpragmatic niche lenders such as UnitedTrust Bank have stepped up to fill some ofthe gap left by mainstream banks whichhave withdrawn from certain sectors ofthe market. UTB is consequently providingasset-based credit solutions for a diverserange of business purposes.

Our first Asset Finance case studyillustrates how existing assets can berefinanced to provide the capital forbusiness investment, something we haveseen many times over the last 12 months.A well-established haulage companywished to upgrade its warehousingfacilities at various sites around thecountry and we were able to offer asubstantial facility secured againstseveral unencumbered trucks in theirexisting fleet. The investment in theirinfrastructure allowed them to win newcontracts and improve the service to theirexisting customers.

The second case study is a good exampleof how a flexible, specialist lender canoffer a bespoke financial solution inunusual circumstances. The company hadonly been trading for six months.However the directors had impressivetrack records and we were prepared toback their experience and expertise intheir industry sector. The directorsdemonstrated that securing funds to buyrather than rent a specialist excavatorwould enable them to win new contracts and substantially improve their profitability.

The third case study again shows how wecan work closely with our broker partnersto structure a transaction that meets thespecific requirements of a long termcontract, and move quickly from initialproposal stage to credit approval, assetinspection, sign up and pay out within avery short timescale. This level of serviceis crucial to our brokers and the ability to deliver it demonstrates the advantages of dealing with a nichefunder such as ourselves.

We have recruited several highlyexperienced new staff to join the asset finance team and are planning togrow asset finance lending significantly in 2013. We plan tocontinue to provide an excellent bespokeservice to an increasing number ofbrokers and customers.

Market ViewAsset FinanceMarket View

Asset finance is helpingbusiness unlock capitalacross the UK

08

Residential Development

Providing funding for a multi-millionpound Cornwall development

An experienced West Country developer,and previous UTB borrower, had workedwith the owners of a prime hilltop site inCornwall to create a prestigious newdevelopment. The plan was to demolish theexisting buildings and create seven newfamily houses and two affordable flats.

Having successfully obtained planningpermission the client was seeking ourassistance to complete the purchase of theland and deliver the new development.UTB agreed to lend £1.76m to assist withthe purchase of the land and for 100% ofthe construction costs and professionalfees. The client will be appointing a localrecognised third party contractor on afixed price JCT.

Loan amount: £1,760,000Loan to value: 55%

Providing funding for developers toacquire next door site

Developers with considerable experience inCentral London already owned a partresidential, part commercial building withno debt. This was the rump of a previousportfolio break up transaction. Planningpermission had been obtained to add afurther floor and convert the building toground floor retail with eight flats above.While they wished to carry out thisdevelopment an opportunity presenteditself to purchase the next door building,currently five flats with ground floor retail.This property offered the possibility ofobtaining planning consent to increase thedensity to eight flats.

UTB were able to provide a facility to fullyfund the purchase of the next doorbuilding, the development of the firstproperty and subject to grant of a suitableplanning consent, the re-development ofthe second property. With someuncertainty due to the need to obtainplanning permission post-completion, wehad to analyse and consider a number ofalternative scenarios.


Good relationship leads to flexibilityfollowing lower valuation

Customers with a good track record ofborrowing from United Trust Bankapproached us to fund the purchase anddevelopment of a site with detailedplanning permission for ten flats.

The approved floor layouts were not themost attractive. Nevertheless theborrowers proposed to reorganise theinternal layouts to produce accommodationwhich would be better received in themarket place. We were additionallyinfluenced by the location of the sitewhich has a mainline railway station andseveral bus routes within a two minutewalk. In our view the finished units werelikely to appeal strongly to both the owneroccupier and rental markets and this offeredthe prospect of an alternative exit viarefinancing if sales were unexpectedly slow.

A facility of £1.46m equivalent to 55% ofGDV was subsequently agreed. Thevaluation came in a little below ourexpectations such that the facility equatedto 57% of GDV. Given our past experienceof these borrowers we were content tocontinue with the loan at the original level.


Case Studies

09

Case Studies

Asset Finance

Re-finance facility to help with plannedimprovements and expansion

An existing UTB broker approached us for are-finance facility for one of its longstanding customers. The facility was used toinvest in improved warehousing facilities attheir various sites around the country.

Upgrading their sites was key to theirexpansion plans, to enable them to win newcontracts as well as improve service to theirexisting customer base.

The company had been trading for manyyears in the haulage industry and with thechallenging trading conditions beingexperienced in this sector they felt thatexternal funding would be a better optionthan approaching their current bankers.

Several unencumbered tractor units ofvarious ages were offered as security and afacility of £200,000 was quickly agreed.

We worked closely with our broker to swiftlydocument the transaction and carry out aspeedy inspection of the fleet of vehicles tomeet the customer’s requirements.

Loan Amount: £200,000

Finance for an excavator

An established broker connectionintroduced a new start company requiringfinance for a large excavator with aspecialist jaw attachment.

Although the company had been tradingfor only six months, the management ofthe company were highly experiencedindividuals. They had spent many yearsemployed by large companies within the specialist industry sector in which they were now seeking to develop theirnew business.

Rental of the equipment they wereplanning to purchase was not a problembut a saving of 40% per week on rentalcosts could be achieved if they couldsecure funding on advantageous terms. Wewere able to agree terms and advance£110,000, within time constraints, and withthe support of the directors enabling thecompany to secure contracts whichsignificantly increases their profitability.


Flexibility pays off when buying newmidi-buses

We were approached by a broker partnerwith an opportunity to finance three newmidi-buses for a long term councilcontract. The structuring of thetransaction was critical to the company inorder to achieve their financing planswithin a strict budget.

The customer was well established and asubstantial operator in the local area. Thebroker had a long standing relationshipwith the directors and had transactedmany previous deals successfully.

By working closely with our broker and thecustomer we structured a payment profilewith a realistic residual payment whichallowed the customer to achieve themonthly cost that fitted their budgetwithin the short timeframe required.


10

Bridging

Traditional house purchase

UTB’s Bridging Department provided a£394,000 facility with a 9 month term toenable our customer to move to a new,smaller property.

Our customer resided in a Grade II listedtwo storey property in a rural West Sussexvillage. The property was too large for herneeds and she wished to complete on thepurchase of a smaller bungalow moresuited to her needs but which requiredminor refurbishment.

The Bank advanced the full purchase price and a small amount to refurbish thebungalow. The security comprised a firstcharge over both properties. The loan will be repaid by the sale of the existing residence which was already being marketed for sale at the time theloan commenced.

This loan is a good example of how a shortterm loan can be used to assist peoplewho require 100% of the purchase price oftheir new property and do not require aterm mortgage.

Loan amount: £394,000Loan to value: 39%

Multi million pound property portfoliorefinancing

Our customer had a property portfolioworth in excess of £15m consistingpredominantly of Central Londonresidential properties as well as severalproperties in the South East of Englandincluding a country estate.

As is often the case with such portfolios,ownership structures vary significantly andcan involve a combination of individualsand companies.

Accordingly, our customer required a bankacting with flexibility who couldunderstand not only his ownershipstructure, but also the nature and balanceof costs of the refurbishment of some ofthe properties that had already commenced.

As an experienced lender used to dealingwith complex structures and refurbishment,UTB was able to dedicate the time andresource to the transaction to enable thefunding to take place within a relativelytight time frame of a few weeks.

Loan Amount: £9,382,000Loan to Value: 62%

Business venture cashflow

Our customer was an experiencedbusinessman who was in the process ofdeveloping a business in Africa.

He urgently required £550,000 to supply aconsignment to a distributor in order tocomplete a contract as well as to assistwith a brand launch.

We met with the customer and hisbusiness partner and were impressed bytheir experience and business plans.

The loan was secured against ourcustomer’s unencumbered home with hiswife taking independent legal advice.There are several possible ways that thebridging loan can be repaid including astandard residential mortgage if required.

Loan Amount: £550,000Loan to Value: 65%

Case Studies

11

CorporateInformation

Board of Directors

Non-Executive ChairmanNicholas Clegg CBE

Non-Executive DirectorsAndrew HerdMichael LewisEhsan ManiBarry Townsley CBE

Executive Directors and Management CommitteeGraham Davin (C)Harley KaganNoel MeredithRoger Tidyman

Operations CommitteeHarley Kagan (C)Shane BannertonGraham DavinWilliam DobbieAlan MargolisNoel MeredithMartin NixonRoger TidymanChristine Wareham

Key Employees

Credit and RiskRoger Tidyman (D)Stan RodenAndrew StonemanGerard Wright

Development FinanceNoel Meredith (D)Ian AndrewsJoanne GaryPaul KeayJonathan NailGemma SquirrelChris WaltersNatalie Williams

Bridging FinanceAlan Margolis (D)Satya DesaiGina FryBradley IllmanRob LoveGerard Morgan JacksonDawn RickettsKira Vallier

Asset FinanceMartin Nixon (D)Lee ChandlerPaul TaylorJasmit Ubhi

Deposits and TreasurySharron Liddle (D)Shetal NaranNicholas Wakefield

Finance, Administration and AuditShane Bannerton (D)William Dobbie (D)Sarah DennyKaren FranklinJonathan HazellChristine Wareham (D)

Professional Advisors

BankersBarclays Bank Plc1 Churchill PlaceLondonE14 5HP

Lloyds TSB Bank Plc25 Gresham StreetLondonEC2V 7HN

AuditorDeloitte LLPLondon

Legal AdvisorsNabarro Lacon House84 Theobald’s RoadLondon WC1X 8RW

Company SecretaryWilliam Dobbie

Registered Office80 HaymarketLondon SW1Y 4TE

Websitewww.utbank.co.uk

Registered Number549690

Corporate Information

C = Chairman D = Department Head

12

The directors are responsible forpreparing the annual report andthe financial statements inaccordance with applicable lawand regulations.

Company law requires the directors toprepare financial statements for eachfinancial year. Under that law thedirectors have elected to prepare thefinancial statements in accordance withUnited Kingdom Generally AcceptedAccounting Practice (United KingdomAccounting Standards and applicable law).Under company law the directors must notapprove the financial statements unlessthey are satisfied that they give a true andfair view of the state of affairs of thecompany and of the profit or loss of thecompany for that period. In preparingthese financial statements, the directorsare required to:

• select suitable accounting policies andthen apply them consistently;

• make judgements and accountingestimates that are reasonable andprudent;

• state whether applicable UKAccounting Standards have beenfollowed, subject to any materialdepartures disclosed and explained inthe financial statements; and

• prepare the financial statements onthe going concern basis unless it isinappropriate to presume that thecompany will continue in business.

The directors are responsible for keepingadequate accounting records that aresufficient to show and explain thecompany’s transactions and disclose withreasonable accuracy at any time thefinancial position of the company and toenable them to ensure that the financialstatements comply with the CompaniesAct 2006. They are also responsible forsafeguarding the assets of the companyand hence for taking reasonable steps forthe prevention and detection of fraud andother irregularities.

The directors are responsible for themaintenance and integrity of thecorporate and financial informationincluded on the company’s website.Legislation in the United Kingdomgoverning the preparation anddissemination of financial statements may differ from legislation in otherjurisdictions.

Statement of Directors’ Responsibilities inRespect of the Financial Statements

13

We have audited the financialstatements of United Trust BankLimited for the year ended 31December 2012 which comprisethe Profit and Loss Account, theBalance Sheet, and the relatednotes 1 to 25.

The financial reporting framework that hasbeen applied in their preparation isapplicable law and United KingdomAccounting Standards (United KingdomGenerally Accepted Accounting Practice).

This report is made solely to the company’smembers, as a body, in accordance withChapter 3 of Part 16 of the Companies Act2006. Our audit work has beenundertaken so that we might state to thecompany’s members those matters we arerequired to state to them in an auditor’sreport and for no other purpose. To thefullest extent permitted by law, we do notaccept or assume responsibility to anyoneother than the company and thecompany’s members as a body, for ouraudit work, for this report, or for theopinions we have formed.

Respective responsibilities of directorsand auditor

As explained more fully in the Directors’Responsibilities Statement, the directorsare responsible for the preparation of thefinancial statements and for beingsatisfied that they give a true and fairview. Our responsibility is to audit andexpress an opinion on the financialstatements in accordance with applicablelaw and International Standards onAuditing (UK and Ireland). Thosestandards require us to comply with theAuditing Practices Board’s EthicalStandards for Auditors.

Scope of the audit of the financialstatements

An audit involves obtaining evidenceabout the amounts and disclosures in thefinancial statements sufficient to givereasonable assurance that the financialstatements are free from materialmisstatement, whether caused by fraud orerror. This includes an assessment of:whether the accounting policies areappropriate to the company’scircumstances and have been consistentlyapplied and adequately disclosed; thereasonableness of significant accountingestimates made by the directors; and theoverall presentation of the financialstatements. In addition, we read all thefinancial and non-financial information inthe annual report to identify materialinconsistencies with the audited financialstatements. If we become aware of anyapparent material misstatements or

inconsistencies we consider theimplications for our report.

Opinion on financial statements

In our opinion the financial statements:

• give a true and fair view of theCompany’s affairs as at 31 December2012 and of its profit for the year then ended;

• have been properly prepared inaccordance with United KingdomGenerally Accepted AccountingPractice; and

• have been prepared in accordancewith the requirements of theCompanies Act 2006.

Opinion on other matter prescribed bythe Companies Act 2006

In our opinion the information given in theDirectors’ Report for the financial year forwhich the financial statements areprepared is consistent with the financialstatements.

Matters on which we are required toreport by exception

We have nothing to report in respect ofthe following matters where theCompanies Act 2006 requires us to reportto you if, in our opinion:• adequate accounting records have not

been kept, or returns adequate for ouraudit have not been received frombranches not visited by us; or

• the financial statements are not inagreement with the accountingrecords and returns; or

• certain disclosures of directors’remuneration specified by law are notmade; or

• we have not received all theinformation and explanations werequire for our audit.

Alan Chaudhuri

(Senior Statutory Auditor)for and on behalf ofDeloitte LLPChartered Accountants and Statutory AuditorLondon, United Kingdom28 February 2013

Auditor's ReportIndependent Auditor’s Report to theMembers of United Trust Bank Limited

14

Note 2012 2011

£’000 £’000

Interest receivable and similar income 10,796 7,869

Interest payable and similar charges (5,319) (3,950)

Net interest income 5,477 3,919

Fees and commissions 3,709 2,055

Operating income 9,186 5,974

Administrative expenses 2 (5,211) (4,019)

Depreciation 4 (79) (62)

Provision for bad and doubtful debts 8 (1,688) (881)

Operating profit on ordinary activities before tax 2,208 1,012

Tax charge for the year 5 (645) (357)

Profit after tax retained for the financial year 16 1,563 655

There are no recognised gains or losses for the current or preceding financial year other than as stated in the profit and loss account.

All results derive from continuing operations. The notes on pages 17 to 27 form an integral part of these financial statements.

Profit and Loss Accountfor the year ended31 December 2012

15

Balance Sheetat 31 December 2012

Note 2012 2011

£’000 £’000

AssetsLoans and advances to banks and building societies 6 45,619 31,074

Loans and advances to customers 7 155,522 108,800

Loans to group companies 9 625 565

Debt Securities 10 10,070 -

Tangible fixed assets 11 694 97

Other assets 12 3,243 2,254

Total assets 215,773 142,790

LiabilitiesDeposits from customers 13 185,303 120,643

Other liabilities 14 4,428 2,668

Long-term subordinated debt 18 8,000 5,000

197,731 128,311

Capital and reservesCalled-up share capital 15 8,800 8,000

Share premium account 16 6,220 5,020

Profit and loss account 16 3,022 1,459

Shareholders’ funds 18,042 14,479

Total equity and liabilities 215,773 142,790

Memorandum items:Guarantees and assets pledged as security 101 129

Commitments 19 49,741 36,508

The notes on pages 17 to 27 form an integral part of these financial statements.

The financial statements of United Trust Bank Limited were approved by the board of directors and authorised for issue on 28 February 2013.

They were signed on its behalf by:

H Kagan Director C R Tidyman Director

28 February 2013 28 February 2013

16

1. Accounting policies

A summary of the principal accounting policies, allof which have been consistently applied by theBank throughout the year and in the precedingyear is set out below:

Basis of Accounting

The financial statements have been preparedunder the historical cost convention and inaccordance with the provisions of StatutoryInstrument No 410 “Large and Medium sizedcompanies and groups” – schedule 2 part 1,relating to banking groups, applicable UnitedKingdom accounting standards and theStatements of Recommended Practice issued bythe British Bankers’ Association.

Going Concern

The Bank’s business activities, together with thefactors likely to affect its future developmentand performance are set out in the Directorsreport. The Bank currently has considerablefinancial resources with approximately 26% oftotal assets in cash or cash equivalents. Thedirectors continue to keep the Bank’s loan bookunder review and take action where necessary.The directors believe that the Bank is wellplaced to manage its business risks set out inNote 22 to the financial statements.

After considering the review of the Bank’soperations included in the Directors’ Report onpage 3 and having made suitable enquiries, thedirectors have a reasonable expectation that theBank has adequate resources to continue itsoperations for the foreseeable future. Accordingly,they continue to adopt the going concern basis inpreparing the annual report and accounts.

Cash Flow Statements

The Bank utilises the exemption under FRS 1(Revised) not to present a cash flow statement onthe basis that 90% or more of the voting rightsare controlled within the group, whose financialstatements are publicly available.

Income Recognition

Interest income is recognised in the profit and lossaccount as it accrues, other than interest ofdoubtful collectability which is excluded frominterest income.

Fees receivable for arranging and structuringadvances are recognised on the basis of work doneand those in lieu of interest are recognised overthe period of the advance or risk exposure.Redemption fees are recognised when thecontractual terms are met.

Amounts due from lessees under finance leasesand hire purchase contracts are recorded asreceivables at the amount of the Bank’s netinvestment in the contract. Finance income isallocated to accounting periods so as to reflect a

constant periodic rate of return on the Bank’s netinvestment outstanding in respect of the lease orhire purchase contract.

Taxation

Current tax is provided at amounts expected to bepaid (or recovered) using the tax rates and lawsthat have been enacted or substantively enactedby the balance sheet date.

Deferred tax is recognised in respect of all timingdifferences that have originated but not reversedat the balance sheet date where transactions orevents that result in an obligation to pay more taxin the future or a right to pay less tax in the futurehave occurred at the balance sheet date. Timingdifferences are differences between the Bankstaxable profits and its results as stated in thefinancial statements that arise from the inclusionof gains and losses in tax assessments in periodsdifferent from those in which they are recognisedin the financial statements.

A net deferred tax asset is regarded as recoverableand therefore recognised only to the extent that,on the basis of all available evidence, it can beregarded as more likely than not that there will besuitable taxable profits from which the futurereversal of the underlying timing differences canbe deducted.

Tangible Fixed Assets

Tangible fixed assets are stated at cost lessaccumulated depreciation and any impairment invalue. Depreciation is provided at rates calculatedto write off the cost, less estimated residual value,of each asset on a straight-line basis over itsexpected useful life as follows:

Computer equipment, softwareand office equipment - between 10%

and 33% per annum

Leasehold improvements - over the life ofthe lease

Motor vehicles - between 20% and 33% per annum

Leases

Rentals under operating leases are charged on astraight-line basis over the lease term, even if thepayments are not made on such a basis. Benefitsreceived and receivable as an incentive to sign anoperating lease are similarly spread on a straight-line basis over the lease term.

Provisions for bad and doubtful debts

Provisions for bad and doubtful debts are based onthe year end appraisal of loans and advances.Specific provisions have been made in respect ofall identified impaired advances. A generalprovision has been made in respect of losseswhich, although not yet specifically identified, areknown from experience to be present in any

portfolio of bank advances. The general provisionis charged as a percentage of loans written.

Loans and advances are written off to theextent that there is no realistic prospect ofrecovery. Interest of doubtful collectability isheld in suspense.

Pension Costs and other Post Retirement Benefits

The Bank maintains a policy of supporting thedefined contribution pension schemes of itsemployees. The amounts charged to the profitand loss account in respect of pension costs arethe contributions payable in the year.Differences between contributions payable inthe year and contributions actually paid areshown either as accruals or prepayments in thebalance sheet.

Investments

Investments are held at cost less impairments, if any.

Foreign Currency

Transactions in foreign currencies are recordedat the rate of exchange at the date of thetransaction or, if hedged, at the forwardcontract rate. Monetary assets and liabilitiesdenominated in foreign currencies at thebalance sheet date are reported at the rates ofexchange prevailing at that date or, ifappropriate, at the forward contract rate.

Financial Liabilities and Equity

Financial liabilities and equity instruments areclassified according to the substance of thecontractual arrangements entered into. Anequity instrument is any contract that evidencesa residual interest in the assets of the Bankafter deducting all of its liabilities.

Share-based Payments

The Group issues equity-settled share-basedpayments to certain employees of the Bank andapplied the requirements of FRS 20 Share-basedPayment. Equity-settled share-based paymentsare measured at fair value (excluding the effectof non market-based vesting conditions) at thedate of grant. The fair value determined at thegrant date of the equity-settled share-basedpayments is expensed on a straight-line basisover the vesting period, based on the Group’sestimate of shares that will eventually vest andadjusted for the effect of non market-basedvesting conditions.

Fair value is measured by use of the BlackScholes pricing model. The expected life used inthe model has been adjusted, based onmanagement’s best estimate, for the effects ofnon-transferability, exercise restrictions, andbehavioural considerations.

Notes to the Financial Statements for the year ended 31 December 2012

17

2. Administrative expenses2012 2011

£’000 £’000

Staff costs

- wages and salaries 2,867 2,435

- social security costs 351 280

- other pension costs 71 57

Auditor’s Remuneration - audit of annual accounts 55 54

- tax services 10 10

- other assurance services - 1

Other administrative expenses 1,857 1,182

5,211 4,019

The average monthly number of people employed by the Bank (including Executive Directors) during the year was 36 (2011 – 29). At the end of the year, the Bank employed

37 people (2011 – 33). The staff costs include Directors’ Remuneration set out in Note 3.

3. Directors’ remuneration

Remuneration

The remuneration of the directors was as follows:

2012 2011

£’000 £’000

Emoluments and incentive schemes 928 877

Pensions

The number of directors who were members of pension schemes was as follows:

2012 2011

No. No.

Money purchase schemes 1 1

The above amounts for remuneration include the following in respect of the highest paid director:

2012 2011

£’000 £’000

Emoluments and incentive schemes 287 246

Fair Value of options granted 127 -

On 30 November 2012, the Banks holding company, UTB Partners Limited issued 8,000 options over its shares to the Directors of the Company.

4. Operating profit on ordinary activities

Operating profit on ordinary activities is stated after charging:

2012 2011

£’000 £’000

Auditor’s Remuneration – audit of annual accounts 55 54

– tax services 10 10

- other assurance services - 1

Depreciation 79 62

Operating lease: property 148 125

18

5. Tax on profit on ordinary activities

i) Analysis of tax charge on ordinary activities 2012 2011

£’000 £’000

Corporation tax 476 -

Deferred tax – assessed profits 260 493

Deferred tax – movement on timing difference (91) (136)

645 357

ii) Factors affecting tax charge for the year

The tax assessed for the year is lower than that resulting from applying the standard rate of corporation tax in the UK: 24.5% (2011: 26.5%).

The differences between the total current tax shown above and the amount calculated by applying the standard rate of corporation tax on the profit before tax are explained below:

2012 2011

£’000 £’000

Profit on ordinary activities before tax 2,208 1,012

Tax charge at 24.5% (2011: 26.5%) thereon: 541 268

Effects of:

Expenses and provisions deductible for tax purposes 60 47

Excess of depreciation over capital allowances 135 178

Assessed profit for the year applied to deferred taxation (260) (493)

Tax charge for the year 476 -

6. Loans and advances to banks and building societies 2012 2011

£’000 £’000

Amounts falling due within one year:

Loans & advances to Banks 38,619 27,574

Loans & advances to Building Societies 7,000 3,500

45,619 31,074

7. Loans and advances to customers2012 2011

£’000 £’000

Property finance 132,734 98,355

Finance lease and hire purchase receivables 22,788 10,445

155,522 108,800

Property finance

Amounts falling due

- within one year 129,647 97,802

- over one year but less than five years 6,144 4,850

- more than five years 247 27

136,038 102,679

General and specific bad and doubtful debt provisions (see note 8) (3,304) (4,324)

132,734 98,355

Of which repayable on demand or short notice 21,244 37,637

19

2012 2011

£’000 £’000

Finance lease and hire purchase receivables

Gross investment in receivable:



- over five years - 4

27,065 12,529

Less: Unearned future finance income (4,127) (2,003)

Net investment in finance lease and hire purchase receivables 22,938 10,526

Net investment in finance leases and hire purchase receivable:



- over five years - 4

Net investment in finance leases and hire purchase receivables 22,938 10,526

General bad and doubtful debt provisions (note 8) (150) (81)

22,788 10,445

2012 2011

£’000 £’000

The amount receivable under finance leases and hire purchase contracts comprises:

Finance leases 4,456 2,614

Hire purchase 18,482 7,912

22,938 10,526

8. Provision for bad and doubtful debts

Balance Sheet movement 2012 2012 2012 2011 2011 2011

Specific General Total Specific General Total

£’000 £’000 £’000 £’000 £’000 £’000

At 1 January 3,644 761 4,405 2,872 619 3,491

Charge 1,670 141 1,811 1,022 142 1,164

Released (49) - (49) (250) - (250)

Written off (2,713) - (2,713) - - -

At 31 December 2,552 902 3,454 3,644 761 4,405

Property Finance 2,552 752 3,304 3,644 680 4,324

Asset Finance - 150 150 - 81 81

2,552 902 3,454 3,644 761 4,405

Bad and doubtful debts movement in the Profit & Loss account 2012 2011

£’000 £’000

Specific and general provision charge 1,811 1,164

Provision released (49) (250)

Recoveries during the year (74) (33)

1,688 881

20

Interest and fees in suspense

2012 2011

£’000 £’000

At 1 January 6,437 3,606

Suspended during the year 1,869 2,885

Written off (6,984) -

Released - (54)

At 31 December 1,322 6,437

9. Loans to group companies

2012 2011

£’000 £’000

Repayable on demand:

- Loan to parent 625 565

10. Debt securities

2012 2011

£’000 £’000

Issued by public bodies

- Government securities 6,120 -

Issued by other issuers

- Listed debt securities 3,950 -

10,070

At 1 January - -

Additions (Net of premium and maturities) 10,070 -

At 31 December 10,070 -

Maturity of debt securities:

Due within one year 8,034 -

Due one year and over 2,036 -

10,070 -

Fair value of debt securities:

Issued by public bodies

- Government securities 6,086 -

Issued by other issuers

- Listed debt securities 3,954 -

10,040

21

11. Tangible fixed assets

Tangible fixed assets comprise: Leasehold Computer Motor Total

improvements equipment, vehicles

software

& office

equipment

£’000 £’000 £’000 £’000

Cost:

At 1 January 2012 41 609 37 687

Additions 27 632 17 676

Disposals - - (13) (13)

At 31 December 2012 68 1,241 41 1,350

Depreciation:

At 1 January 2012 37 531 22 590

Charge 5 64 10 79

Disposals - - (13) (13)

At 31 December 2012 42 595 19 656

Net book value:

At 31 December 2011 4 78 15 97

At 31 December 2012 26 646 22 694

12. Other assets

2012 2011

£’000 £’000

Deferred tax asset 624 793

Accrued interest receivable 1,636 1,088

Prepayments 227 169

Other debtors 756 204

3,243 2,254

Deferred tax asset:

As at 1 January 793 1,150

Charge for the year (169) (357)

As at 31 December 624 793

A deferred tax asset of £624k has been recognised at 31 December 2012 (2011: £793K). The directors are of the opinion, based on recent and forecast performance of the Bank,

that the level of profits in the current and next financial year will exceed those in the previous years.

13. Deposits from customers

2012 2011

£’000 £’000

Amounts falling due



185,303 120,643

Of which repayable on demand or short notice 5,321 5,182

22

14. Other liabilities

2012 2011

£’000 £’000

Accrued interest payable 2,727 1,965

Accruals and deferred income 1,701 703

4,428 2,668

15. Called-up share capital

2012 2011

£’000 £’000

Issued, allotted, called-up and fully paid:

At 1 January (Ordinary shares of £1 each) 8,000 8,000

Ordinary shares issued during the year 800 -

31 December (Ordinary shares of £1 each) 8,800 8,000

Number of shares ’000 ’000

Issued, allotted, called-up and fully paid:

At 1 January (Ordinary shares of £1 each) 8,000 8,000

Ordinary shares issued during the year 800 -

31 December (Ordinary shares of £1 each) 8,800 8,000

The company issued 400,000 ordinary shares of £1 each on each of 31 August 2012 and 30 November 2012 for a total aggregate amount of £2,000,000.

16. Reserves

2012 2011

£’000 £’000

Share premium account

At 1 January 5,020 5,020

Premium on shares issued (refer to note 15) 1,200 -

At 31 December 6,220 5,020

Profit and loss account

At 1 January 1,459 804

Retained profit for the financial year 1,563 655

At 31 December 3,022 1,459

No dividend was declared or paid during the year (2011: nil).

23

17. Reconciliation of movements in shareholders’ funds

2012 2011

£’000 £’000

Ordinary share issued 2,000 -

Profit for the financial year 1,563 655

Net increase in shareholders’ funds 3,563 655

Opening shareholders’ funds 14,479 13,824

Closing shareholders’ funds 18,042 14,479

18. Long-term subordinated debt

2012 2011

£’000 £’000

Subordinated debt 8,000 5,000

During 2012, the Bank raised £3m of subordinated debt (2011: £4m). The coupon payable on the debt is 12% per annum, payable semi-annually. The subordinated debt ranks as

Lower Tier 2 for regulatory purposes and forms part of the Bank’s regulatory capital base. The loan note is repayable on 28 February 2021.

19. Financial commitments

2012 2011

£’000 £’000

Conditional commitments to lend 49,741 36,508

Commitments to lend comprise lending approvals subject to conditional performance undertakings by customers, and which can be cancelled where the customer is in breach

of the terms and conditions of their facilities.

2012 2011

£’000 £’000

Capital Commitments

Contracted for but not provided for

- Other 135 -

Commitments under annual operating leases for property expiring:

In less than one year 220 109

In two to five years 348 -

20. Related party transactions

Under Financial Reporting Standard 8 the Company is exempt from the requirement to disclose intragroup transactions with related parties on the grounds that the 90% or

more of the voting rights are controlled within the group, whose consolidated accounts are publicly available. Details of the Directors’ remuneration are stated in note 3.

21. Segmental information

The Company operates in one segment of business which is lending. All income on such loans granted arises in the United Kingdom.24

22. Risk management

22.1 Risk management objectives

Risk is inherent in all aspects of the Bank’s business.Within the Bank, a risk management framework is inplace to ensure that all material risks faced by theBank have been identified and measured, and thatappropriate controls are in place to ensure that eachrisk is mitigated to an acceptable degree.

The risk management framework is also a key inputinto the Bank’s strategic planning processes to ensurethat the future development of the Bank’s businessdoes not expose it to an excessive level of risk.

The principal methods used to manage risksidentified by the Bank include:

• Board and management committees to approveinitial risk limits and policies, and to monitoradherence to those policies;

• Management information packs that analyse thelevel of risk exposure at relevant points in time;

• Departmental policies, procedures and mandatesto limit the extent to which individuals cancommit the Bank to accepting additional risk; and

• Independent internal audit coverage to act as a‘third line of defence’ to ensure policies andprocedures have been complied with.

22.2 Risk governance structures

This section describes the committee andmanagement structures in place within the Bank inorder to identify and manage risk, and ensure thatthe appropriate standards of corporate governanceare maintained.

Significant risks faced by the Bank are reviewed bythe Management of the Bank. The key duties ofManagement are:

• assess the risks faced by the Bank;• to review the appropriateness of risk measurement

policies and practices; and• to review and comment on the adequacy of the

Bank’s controls to measure, monitor and managerisk based on information provided or obtained.

Any significant and/or material breaches ofprescribed controls are reported to the Board. TheBank recognises that it is key to its future success asa financial institution to conduct its affairs withprudence and integrity and to safeguard the interestsof the stakeholders.

The predominant types of risk that the Bank faces arecredit risk, liquidity risk, interest rate risk andoperational risk. Additional significant risks are legalrisk, regulatory risk and reputational risk.

The Board

The Board of Directors are responsible forestablishing risk appetite and approve policystatements defining credit risk and liquidity risk.These policy statements establish the Bank’s overallcapacity for risk and set out the parameters withinwhich it operates. Implementation of these policies isthe responsibility of the Management Committeewho report to the Board.

The main committees of the Bank are:

Audit committee

A non-executive director chairs this committee. Itreviews and sets the internal audit programme andexamines completed internal and external auditreports. It considers the major findings and ensures,

via the Management, that recommendations areimplemented where necessary. It also reviews theannual financial statements. The Audit Committeemeets at least three times per year.

Remuneration committee

A non-executive director chairs this committee. The role of this committee is to consider remunerationpolicy and specifically to approve the remuneration andother terms of service of executive directors and seniormanagers. The executive directors decide fees payableto non-executive directors. The committee meets atleast once per year.

Management committee

This committee comprises the Executive Directors ofthe Bank and meets monthly to discuss andformulate the strategic direction of the Bank.

Operations committee

The operations committee meets monthly to discussmatters relating to the Bank’s day-to-day operations. It comprises the Executive Directors and Departmental Managers.

Credit committee

This forum sanctions all counterparty limits. It regularlyreviews loan performance, large exposures and adequacyof provisions. Its role is to ensure that credit policy isprudent, taking into account changing market trends.

Asset and liability committee

This committee recommends the policy for liquidityand interest rate risk. It regularly reviews the Bank’sbalance sheet to ensure that it is positionedprudently and meets the agreed policies taking intoaccount prevailing markets, and projections ofbusiness growth.

Day-to-day control and monitoring of policies,procedures and limits is the responsibility of theManagement.

Regular reports and information are provided to theManagement and the Board, to ensure they fullyunderstand the risk and to demonstrate proper and prudentmeasurement, monitoring and management of risk.

It is important that all the Bank’s risks are regularlyconsidered. Any change to business objectives cancause a change to the risk profile of the business.Consequently, under the guidance of theManagement, the business regularly reviews itsobjectives, assesses the risks to prevent theseobjectives being achieved, and ensures there isdefined ownership of the risks and defined ownershipof the corresponding controls.

The likelihood and impact of any risk is assessed andappropriate controls are designed to be effective,taking into account the severity of the risk faced. Theoutput from these processes is provided to InternalAudit, to enable them to give assurance as part ofthe audit plan that controls are working properly andall risks have been properly identified.

Major risks

The major risks associated with the Bank’s business are:

• Credit risk;• Liquidity risk;

• Interest rate risk; • Operational risk; • Legal risk;• Regulatory & Compliance risk; and,• Reputational risk.

Credit risk

This is the risk that counterparties will be unable orunwilling to meet their obligations to the Bank asthey fall due. It arises from lending transactions.

The Bank’s Credit Committee includes ExecutiveDirectors, Credit Managers and Business DevelopmentManagers. The Credit Committee has to reach aunanimous consensus before authorising a creditexposure and each approval is signed by a validquorum. Additionally exposures beyond a certainthreshold require additional authorisations. Creditlimits on all lending, including treasury and interbanklines are reviewed regularly.

The Bank has a focused business strategy and hasconsiderable expertise in its chosen sectors. The vastmajority of the Bank’s lending, excluding interbankplacements, which are predominantly with UK banksand building societies, is secured on assets. On ageographical basis, at least 95% of the credit exposureof the Bank, including contingent liabilities andcommitments, is UK based.

Provisions for bad and doubtful debts are based on theappraisal of loans and advances by the CreditCommittee. Loans and Advances are written off to theextent that there is no realistic prospect of recovery.

Liquidity risk

This risk arises from the inability of the Bank to meetits obligations as they fall due. It can arise from thewithdrawal of customer deposits, the drawdown ofexisting customer facilities and asset growth.

The Bank’s liquidity policy ensures prudentmanagement of liquidity and adherence to FSAregulatory guidelines. This policy is developed andimplemented by the Asset and Liability committee. TheBank’s Treasury function has responsibility for day-to-day liquidity management.

Limits on potential cash flow mismatches over definedtime horizons form the principal basis of liquiditycontrol. Limits are also placed upon the value ofdeposits taken from a single source. A dedicated systemis used to monitor and stress test the Bank’s liquidityposition against different scenarios.

Operational risk

This is the exposure to financial or other damagearising through system or process failure, human error,or through inadequate controls and procedures. TheBank has a detailed procedures manual in place andensures that all operational risks are evaluated andappropriately controlled.

Contingency plans are in place to ensure continuity inthe event of any unforeseen serious disruption tobusiness operations. These plans are reviewed andtested to ensure they can be implemented in a timelymanner should events dictate.

To give further assurance, the Internal Audit functionregularly reviews operational areas to ensure that risks andcontrols are appropriate and effective.

Legal risk

Legal and documentation risk is defined as the risk thatcontracts entered into by the Bank with its clients will not

25

be enforceable, especially with respect to events of defaultby a client. This could lead to a situation where thedocumentation will not give the rights and remediesanticipated when the transaction was entered into,particularly when security arrangements have been agreed.

To mitigate legal risk, the Bank uses independent externallegal advisors to ensure documentation gives theappropriate rights and remedies.

Regulatory & compliance risk

This is the risk that any part of the Bank fails to meet therequirements or expectations of the regulatory authorities. Itcan also arise where changes to regulations are not anticipatedor managed properly. Compliance reports are reviewedregularly by the Board and Audit Committee and managementregularly evaluates regulatory pronouncements.

Interest rate risk

Interest rate risk is the risk that the value of the Bank’sassets and liabilities will fluctuate because of changes inmarket rate.

The Bank finances its loan book and money marketdeposits primarily through customer deposits. The Assetand Liability Committee meets regularly to review the ratesoffered on the various deposit products. The deposits arespread between variable and fixed rate deposits.

The Bank’s lending to customers is at rates linked to theinterest rates currently prevailing in the market. The moneymarket deposits are placed at the best rates available in themarket. In common with other banks, the Bank earns part ofits return by controlled mismatching of the dates on whichinterest receivable on assets and interest payable on liabilitiesare next reset to market rates or, if earlier, the dates on whichthe assets and liabilities mature.

A positive interest rate sensitivity gap exists where moreassets than liabilities re-price during a given period. Apositive gap position tends to benefit net interest incomein an environment where interest rates are rising. However,the actual effect will depend on a number of factorsincluding actual repayment dates and interest ratesensitivity within the banding period. The vast majority ofthe Loans and Advances dealt with in the table belowbenefit from interest rate floors. These cannot easily bedealt with in a gap table but the table is prepared on thebasis that floors are not activated. The table may over-state the economic interest rate mis-match in somecircumstances.

26

Interest rate re-pricing table

2012 Not more than More than More than More than More than Non Totalthree months three months six months one year five years -interest

but not more but not more but less than bearing than six months than one year five years

£’000 £’000 £’000 £’000 £’000 £’000 £’000

Loans and advances to customers 85,866 13,186 39,734 16,489 247 - 155,522

Loans and advances to banks and building societies 45,619 - - - - - 45,619

Loans to group companies 625 - - - - - 625

Debt securities 4,868 - 3,166 2,036 - - 10,070

Other assets - - - - - 3,937 3,937

136,978 13,186 42,900 18,525 247 3,937 215,773

Deposits from customers 35,456 29,166 57,373 63,308 - - 185,303

Other liabilities - - - - - 4,428 4,428

Long term subordinated debt - - - - 8,000 - 8,000

Shareholders’ funds - - - - - 18,042 18,042

35,456 29,166 57,373 63,308 8,000 22,470 215,773

Interest rate sensitivity gap 101,522 (15,980) (14,473) (44,783) (7,753) (18,533)

Cumulative gap 101,522 85,542 71,069 26,286 18,533 -

2011 Not more than More than More than More than More than Non Totalthree months three months six months one year five years -interest

but not more but not more but less than bearing than six months than one year five years

£’000 £’000 £’000 £’000 £’000 £’000 £’000

Loans and advances to customers 86,643 6,629 7,851 7,646 31 - 108,800

Loans and advances to banks and building societies 31,074 - - - - - 31,074

Loans to group companies 565 - - - - - 565

Debt securities - - - - - - -

Other assets - - - - - 2,351 2,351

118,282 6,629 7,851 7,646 31 2,351 142,790

Deposits from customers 43,054 12,261 24,600 40,728 - - 120,643

Other liabilities - - - - - 2,668 2,668

Long term subordinated debt - - - - 5,000 - 5,000

Shareholders’ funds - - - - - 14,479 14,479

43,054 12,261 24,600 40,728 5,000 17,147 142,790

Interest rate sensitivity gap 75,228 (5,632) (16,749) (33,082) (4,969) (14,796)

Cumulative gap 75,228 69,596 52,847 19,765 14,796 -

The fair values of financial assets and liabilities approximate book values.

23. Ultimate controlling company

UTB Partners Limited is the Bank’s immediate parent, owns 95.5% of the Bank and is recognised by the directors as the Bank’s ultimate controlling company. Financialstatements for UTB Partners Limited, which is the smallest and largest group into which the Bank is consolidated, can be obtained from UTB Partners Limited, 80 Haymarket,London SW1Y 4TE. The direct, indirect or attributed interest of the directors in the shares of UTB Partners Limited are disclosed in the accounts of that Company. The directorshave no other interests in the shares of any other group company.

24. Share Based Payments

The Bank’s parent company has a share option scheme for a number of the Banks’ employees. Options are exercisable at the nominal value of the shares on the date of grant.The vesting period is four years. If the options remain unexercised after a period of ten years from the date of grant the options expire. Unexercised options are forfeited if theemployee leaves the Bank before the options vest.

The options outstanding at 31 December 2012 had a weighted average remaining contractual life of ten years. In 2012, options were granted on 30 November 2012. The aggregate of the estimated fair values of the options granted on those dates is £328,600.

25. Subsequent events

There have been no significant events after the balance sheet date.

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