Pillar3 disclosures. United Trust Bank Limited

Transcription

1 Pillar3 disclosures United Trust Bank Limited as at 31 December 2017

2 Contents Page 1 Introduction 3 2 Scope 5 3 Risk management objectives and policies 6 4 Capital resources 17 5 Capital adequacy 19 6 Credit risk exposures 21 7 Remuneration 25 8 Appendix 1: Own Funds Disclosure Template 29 9 Appendix 2: Leverage Ratio Template Appendix 3: Asset Encumbrance Disclosure 35

3 1. Introduction This document constitutes the Pillar 3 disclosure of United Trust Bank Limited ( the Bank ). The purpose of this document is to provide information and disclosure to the Bank s stakeholders in relation to the internal procedures and policies adopted by the Bank to manage and mitigate its key risks Overview of Regulatory Framework The Basel lll regulatory framework, which was implemented in Europe through the Capital Requirements Directive IV ( CRD IV ), came into effect on 1 January This package defines the level of capital that banks must hold, having regard for the individual risk profile of each bank. The requirements of CRD IV build upon the preexisting regulations which divides the framework into three pillars as described below. Pillar 1 these requirements set out the minimum capital requirements that each bank must adhere to. Pillar 2 these rules require that each bank perform an Individual Capital Adequacy Assessment Process ( ICAAP ) to assess its own risk profile, and determine the level of additional capital required over and above the Pillar 1 requirements, having regard to those risks. The amount of any additional capital requirement is also assessed by the Prudential Regulatory Authority ( PRA ) during its Supervisory Review and Evaluation Process (SREP) and is used to determine the overall capital resources required by a bank. Pillar 3 these rules are designed to promote market discipline by enhancing the level of disclosure made by banks to their stakeholders, allowing them to assess a bank s key risk exposures and the adequacy of a bank s risk management process to mitigate these risks Measure of capital resources The Bank uses the standardised approach in measuring its Pillar 1 capital requirements Basis of disclosure The Bank s Pillar 3 disclosure document has been prepared in accordance with the CRD IV requirements. Where disclosure has been withheld as proprietary or omitted on the basis of materiality as the rules permit, we comment as appropriate. All disclosures within this report have been prepared as at 31 December 2017, which is the Bank s latest financial yearend, and include the 2017 audited profits which the Board approved on 22 February Page 3 of 35

4 1.4. Frequency of disclosure are made at least annually and more frequently should management determine that significant events justify such disclosures. The Bank s are published on its website ( Verification of information The Bank s are approved by the Board and are not subject to external audit. Page 4 of 35

5 2. Scope of Pillar 3 disclosure This section of the document provides an outline of the structure of the Bank and the nature of its business. This document is applicable to United Trust Bank Limited, which has no trading subsidiaries. The Bank is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Bank s primary activity is the provision of credit on a secured basis in niche markets within the United Kingdom. The Bank provides short to mediumterm property loans for both the development of residential dwellings and the bridging of completed properties and property portfolios, as well as regulated mortgage products. The Bank finances plant, machinery and wheeled assets to small and medium sized enterprises ( SMEs ) and shortterm working capital financing solutions to the professional services sector. All of the lending activities are funded by the Bank s capital base, and the provision of a range of fixed and notice period deposit products to individuals and SMEs. All banking activities are conducted by United Trust Bank Limited. Page 5 of 35

6 3. Risk management objectives and policies 3.1. Risk management objectives Risk is inherent in all aspects of the Bank s business. A governance and risk management framework is in place to ensure that all material risks faced by the Bank are identified and measured, and that appropriate controls are in place to ensure that each risk is mitigated to an acceptable degree. The Board maintains ultimate responsibility for ensuring that an effective risk management framework is in place. The Board has Risk and Audit subcommittees which monitor the risk management framework, internal control environment and that the risk exposures are within the defined risk appetite. The Bank has established risk management policies that aim to identify the risks faced by the Bank, to set appropriate risk limits in line with the Bank s risk appetite, to establish operational procedures and controls, and to monitor adherence to the limits. Management committees, including the Credit, Operations, Compliance and Asset and Liability Committees ( ALCO ), are responsible for monitoring key risks. The Chief Risk Officer is responsible for overseeing all aspects of risk management policy within the Bank, including its implementation and effectiveness. The risk management framework is also a key input into the Bank s strategic planning processes to ensure that the future development of the Bank s business does not expose it to an excessive level of risk. This framework is based on a three lines of defence model. The three lines of defence are detailed below: Business Operations Risk and Control in the Business It is the responsibility of management to ensure all key risks have been identified, assessed and evaluated. Risk profiles are proactively reviewed, updated and modified for any changes in the business environment, ensuring all key risks are identified, controlled and mitigated; Oversight Functions Oversight functions include the Bank s committees (see section 3.2 below), Compliance, and Financial Control functions, as well as the Board. These functions set risk appetite and direction, define policies, and provide challenge, assurance and oversight over business processes and risks; Internal Audit Review Internal audit act as a third line of defence, providing independent, objective assurance to ensure policies and procedures have been compiled with. Internal audit also evaluate the effectiveness of risk management, controls and governance procedures. Page 6 of 35

7 3.2 Risk governance structures Board Audit Committee Remuneration Committee Risk Committee Management Committee This section describes the committee and management structures in place within the Bank in order to identify and manage risk and ensure that the appropriate standards of corporate governance are maintained. Significant risks are reviewed by the management of the Bank, with the aim of:! identifying and assessing the risks faced by the Bank;! assessing the appropriateness of risk measurement policies and practices; and! assessing and commenting on the adequacy of the Bank s ability to measure, monitor and manage risks. Any material breaches of the Bank s risk management policies, controls and procedures are reported to the Risk Committee and the Board and Audit Committee where appropriate. The Audit Committee is assisted by Internal Audit, which undertakes regular and ad hoc reviews of risk management controls and procedures. The Bank recognises that its future success as a financial institution depends on its ability to conduct its affairs with prudence and integrity and to safeguard the interests of its stakeholders The Board The Board of Directors includes the nonexecutive chairman, five nonexecutive directors and four executive directors, as listed in the Bank s annual report. The Board is chaired by Richard Murley who is responsible for its effectiveness. The size and composition of the Board is kept under review to ensure an appropriate balance of skills and experience is maintained. The Board meets eight times during the year, based on a defined timetable, and additionally when required. The Board is responsible for establishing and monitoring the Bank s strategy and risk appetite and approving related policy statements. These policy statements establish the Bank s overall appetite for risk and set out the control environment within which it operates. Implementation of these policies is the responsibility of the Management Committee who report to the Board. Page 7 of 35

8 The Board has oversight of how management implement these strategies and retains control through challenge at Board and committee meetings. All members of the Board receive accurate and timely information to enable them to participate in discussions. The performance of the Board is kept under review through an evaluation process. Regular training is also provided to members of the Board to ensure they are kept up to date with any changes to the regulatory environment within which the Bank operates. The risk appetite established by the Board incorporates a balanced mix of both quantitative and qualitative measures. The Bank s quantitative targets include: Capital adequacy; Capital buffers; Liquidity limits; Liquidity buffers; Interest rate risk limits; Large exposure limits; Loan to Security Value (LTV) limits; Credit Risk Rating (CRR) limits; Qualitative measures include: Managing reputational risk; Management stretch; Allocation of roles and responsibilities (SYSC); Regulatory compliance. The Bank chooses to measure and monitor its risk appetite on a more quantitative basis, whilst qualitative issues remain a matter of judgement for management. In setting the Bank s risk appetite and risk tolerance levels, the Board and Senior Management have taken into account all the relevant risks that the Bank faces. The Bank has a strong risk culture and its risk measures are well understood within the business. It is important that all the Bank s risks are regularly considered. Any change to business objectives can cause a change to the risk profile of the business. Consequently, under the guidance of the Management, the business regularly reviews its objectives, assesses the risks which may prevent these objectives being achieved, and ensures there is defined ownership of the risks and corresponding controls. The likelihood and impact of any risk is assessed and appropriate controls are designed to be effective, taking into account the severity of the risk faced. The output from these processes is provided to Internal Audit, to enable them to give assurance as part of the audit plan that controls are working properly and all risks have been properly identified. Page 8 of 35

9 The profitability and growth of the Bank also has a key impact in the setting of the risk appetite. The Board monitors key performance indicators, including: Measure At 31 Dec 2017 At 31 Dec 2016 % Change Operating Income 50.2m 40.8m 23.0% Operating Profit 27.4m 22.5m 21.8% Cost to Income Ratio 45.4% 44.8% 0.6pp Return on Equity 26.7% 28.8% 2.1pp Gross New Lending 782m 663m 17.9% Loan Book 861m 617m 39.5% Deposit Book 873m 665m 31.3% Staff Numbers % Board Declaration on the Adequacy of Risk Management Arrangements The Board considers that its risk management arrangements, including its risk management systems and controls, are adequate with regards to the Bank s profile and risk. Directorships held by members of the Board The number of external directorships, LLP memberships and partnerships held by the Executive and NonExecutive Directors who served on the Board for the year ended 31 December 2017 in addition to their roles within the Bank were: Name Position Total Positions held Ms A Altemaire NonExecutive Director 1 3 Mrs T Blackwell NonExecutive Director 3 Mr A Herd NonExecutive Director 3 Mr M Lewis NonExecutive Director 4 Mr S Lockley NonExecutive Director 1 Mr G Davin Executive Director 1 Mr C R Tidyman Executive Director 2 1 In line with SYSC 4.3A.7, the above table only considers commercial directorships, and does not include charities and trusts. Multiple directorships held within the same group are considered to count as a single directorship. Members of the Board, who did not hold any other directorships in addition to their role within the Bank, for the year ended 31 December 2017, have been excluded. Recruitment and Selection The Bank is an equal opportunities employer and will always seek to find the most appropriate person for the role regardless of background. The recruitment of members of the management body is managed by the CEO and the Head of HR. The Bank either selects and appoints an executive search agency which is appropriate for the sector or advertises publicly. Once the role is defined, an initial list is prepared and interviews undertaken. The 1 Appointed 28 September Resigned 28 September 2017 Page 9 of 35

10 skills and expertise of the candidates are thoroughly checked via this process, and by the use of testing where necessary. Proposed candidates for senior roles and the management body are interviewed by one or more NonExecutive Directors before a decision to appoint is made. The process is robust and will ensure that members of the Management Committee are involved in key selection processes. Diversity United Trust Bank is fully committed to the elimination of unlawful and unfair discrimination and values the differences that a diverse workforce brings to the organisation. The Bank will not discriminate because of age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race (which includes colour, nationality and ethnic or national origins), religion or belief, sex or sexual orientation. It will not discriminate because of any other irrelevant factor and will build a culture that values meritocracy, openness, fairness and transparency Board Committees The Board maintains ultimate responsibility for ensuring that an effective risk management framework is in place. The Board delegates certain powers for some matters to committees, which are set out below. The outputs from the committees are reported to the Board, ensuring that the Board retains the appropriate oversight. The main committees of the Board are: Management Committee The Management Committee is chaired by the Chief Executive, Graham Davin, and includes the executive directors of the Bank, the Chief Risk Officer, the Chief Credit Officer and the director of the mortgage division. The directors provide a direct linkage to the Board. The committee meets monthly to discuss and implement the strategy of the Bank, as approved by the Board, and to oversee the effective monitoring and control mechanisms within the Bank. The Committee considers the major projects of the Bank, its response to market conditions, key personnel and significant events. It does not focus on daytoday operations which are delegated to other committees (refer to section 3.2.3) and are the responsibility of line managers. It considers all exceptional items and reviews the capital, liquidity and performance of the business. Page 10 of 35

11 Risk Committee The Risk Committee is chaired by Stephen Lockley, a nonexecutive director, and includes Andrew Herd, a nonexecutive director. The Risk Committee is responsible for advising the Board on the Bank s risk management framework. The committee considers the Bank s risk profile relative to current and future strategy and risk appetite and identifies any risk trends, concentrations of exposures and any requirements for policy change. The risk profile of the Bank is reviewed and monitored, through a continuous process of identification, evaluation and management of all material risks including the longer term strategic threats to the Bank. The committee also reviews, challenges and recommends to the Board for approval, the risk appetite, risk measures and risk limits, taking into account the Bank s capital and liquidity adequacy, the Bank s operational capabilities and the external financial environment. It considers, oversees and advises the Board on, and provides challenge on, the Bank s exposure to all significant risks to the business. It ensures that current and forward looking aspects of risk exposure are considered, especially for risks that could undermine the strategy, reputation or long term viability of the Bank. Audit Committee The Audit Committee is chaired by Andrew Herd, a nonexecutive director, and includes Stephen Lockley, a nonexecutive director; both are chartered accountants. The committee reviews the effectiveness of the Bank s internal controls, approves the internal audit programme and examines completed internal and external audit reports. It considers the major findings and ensures, via management, that recommendations are implemented where necessary. Any significant judgements in relation to financial reporting are reviewed and challenged by the committee. The committee has assessed Internal Audit resources and is satisfied that these are appropriate to fulfil their responsibilities. The committee ensures the financial statements give a true and fair view, as well as provide the reader with sufficient information to assess the Bank s performance. The committee also appraises the performance of the internal audit function. The committee reviews the appointment of external auditors at intervals of not more than three years and approves the audit fees. Remuneration Committee The Remuneration Committee is chaired by Michael Lewis, a nonexecutive director, and includes Richard Murley, the Chairman. The role of this committee is to consider remuneration policy, regulatory obligations and specifically to approve the level of remuneration and other terms of service of Significant Management Functions ( SMFs ) staff and Material Risk Takers ( MRTs ). The committee ensures that the remuneration policy is managed in a way which is appropriate to the Bank s size, internal organisation and the nature, scope and complexity of the Bank s activities. This policy provides a framework to attract, retain and motivate employees to achieve the objectives of the Bank within its stated risk appetite and risk Page 11 of 35

12 management framework. The committee also ensures the remuneration policy is in accordance with the regulatory framework as set out in the Remuneration Code. The Chief Executive and Chairman recommend the fees payable to the nonexecutive directors, which are approved by the Remuneration Committee. The committee meets to consider the annual salary and bonus proposals, and additionally as required Management Committees The Bank has established risk management policies that aim to identify the risks faced by the Bank, to set appropriate risk limits in line with the Bank s risk appetite, to establish operational procedures and controls, and to monitor adherence to the limits. Management committees including the Credit, Operations, Compliance and Asset and Liability Committees ( ALCO ) are responsible for monitoring key risks. The Chief Risk Officer is responsible for overseeing all aspects of risk management policy within the Bank, including its implementation and effectiveness. Operations Committee This committee is chaired by the Managing Director, Harley Kagan, and includes each of the divisional and functional heads of the business. The operations committee meets monthly to review matters relating to the Bank s daytoday operations. Credit Committee This committee is chaired by the Chief Credit Officer, Robert Sherr, and comprises of a cascading level of members depending on the credit type and scale. This forum sanctions the larger counterparty limits and ensures credit risk is mitigated to an acceptable level. It regularly reviews loan performance, large exposures and adequacy of provisions. Its role is to ensure that the credit policy is prudent, taking into account changing market trends. In respect of counterparty limits sanctioned by delegated authority, the Bank s credit department provides oversight to ensure such sanctioning complies with the Bank s credit policies and procedures. Asset and Liability Committee This committee is chaired by the Chief Financial Officer, Jonathan Ayres. The committee recommends the policy for liquidity and interest rate risk. It regularly reviews the Bank s balance sheet to ensure that it is positioned prudently and meets the agreed policies taking into account prevailing markets, and projections of business growth. A NonExecutive Director attends at least semiannually. Compliance Committee This committee is chaired by the Chief Risk Officer, Christos Gabrielides, and includes the CEO, Graham Davin and Head of Compliance and MLRO, Mark Heaphy. The committee meets monthly to monitor the Bank s management of regulatory, compliance and conduct risk, and to monitor changes to the regulatory environment. It sets and reviews the internal compliance programme. Page 12 of 35

13 3.3 Major risks The major risks associated with the Bank s business are: Credit risk; Concentration risk; Liquidity risk; Interest rate risk; Operational risk; Regulatory, Compliance & Conduct risk; Reputational risk; and Strategic Risk. Credit risk Credit risk is the risk that counterparties will be unable or unwilling to meet their obligations to the Bank as they fall due. It arises on lending to customers, treasury assets and interbank deposits held with other banks. The Board seeks to mitigate credit risk by focusing on niche market segments where it has specific expertise; through limiting and spreading its exposures; by maintaining detailed lending policies; and through rigorous underwriting processes. The Bank s Credit Committee includes executive directors, credit managers and business development managers. The Credit Committee sanctions larger credit exposures and in so doing has to reach a unanimous consensus with a valid quorum before approving a credit exposure. Exposures beyond a certain threshold require additional authorisation. Certain smaller lending exposures may be authorised by delegated authority; the Bank s Credit department oversees such authorisations to ensure they comply with the Bank s credit policies and procedures. Credit limits for all lending, treasury assets and interbank deposits are reviewed regularly. The Bank has a focused business strategy and has considerable expertise in its chosen sectors. The vast majority of the Bank s lending, excluding treasury assets and interbank deposits which are predominantly with the Bank of England and other UK banks, is secured on assets. On a geographical basis, the credit exposure of the Bank, including contingent liabilities and commitments, is to the UK. Concentration risk Concentration risk arises from having high or excessive exposures to one sector, geographical area, counterparty or group of counterparties which can lead to correlated losses. Concentrations can arise from large individual exposures or a number of exposures to a group of related counterparties. The Bank assesses and monitors its exposure to a range of characteristics, including sector, region, counterparty and security type. Concentration risk is managed and controlled through the use of appropriate limits for each business area. Reported exposures against concentration limits are regularly monitored and reviewed. Page 13 of 35

14 The Bank operates within the UK and limits its focus to certain sectors. These sectors have been selected due to the Bank s expertise and/or the security and other risk mitigants available. Although there is diversification within the Bank s portfolios and operations, the Bank s activities do contain an element of concentration: While the Bank operates across the UK, the majority of its business is in the South East of England; Notwithstanding the range of business activities, the Bank has a sector focus on residential real estate business activities; and The Bank has one primary source of liquidity which is the retail and SME deposits market. Concentration risk arising on treasury assets and interbank deposits is managed and controlled through a counterparty placements policy and limits. Liquidity risk Liquidity risk is the risk that the Bank will not be able to meet its financial obligations as they fall due, or can do so only at excessive cost. It can arise from the withdrawal of customer deposits, the drawdown of existing customer facilities or asset growth. The Bank s liquidity policy ensures prudent management of liquidity and adherence to regulatory guidelines. This policy is developed and implemented by the ALCO. The Bank s Treasury function has responsibility for daytoday liquidity management. Limits on potential cash flow mismatches over defined time horizons form the principal basis of liquidity control. Limits are also placed upon the ratio of loans, less capital, to deposits and the value of deposits taken from a single source. The Bank has limited wholesale funding (other than the Funding for Lending Scheme) which reduces its liquidity risk. Procedures are in place to monitor the Bank s daily liquidity position under normal and stressed conditions. Interest rate risk Interest rate risk is the risk that the value of the Bank s assets and liabilities or its profitability will fluctuate due to changes in interest rates. Interest rate risk exposures are measured weekly and reported to ALCO and the Board. The Bank finances its loan book, treasury assets and interbank deposits primarily through customer deposits. The ALCO meets regularly to review the risk profile of the Bank s assets and liabilities and rates offered on deposit products. Deposits are spread by duration and between variable and fixed rate products to manage interest rate risk. The Bank s lending to customers is at interest rates prevailing in the market. Interbank deposits are placed in the market at the best rates available to the Bank. In common with other banks, the Bank earns part of its return by controlled mismatching of the dates on which interest receivable on assets and interest payable on liabilities are reset to market rates and the dates on which the assets and liabilities mature. Page 14 of 35

15 At 31 December 2017, the Bank s interest rate gap sensitivity, being the potential benefit on the Bank s economic value, resulting from a +/ 200bps parallel shift in the yield curve, was 4.7m and 13.0m respectively, on the basis that rates can go below 0.0%. Assuming a 0.0% interest rate floor, the benefit was 4.7m and 8.9m respectively. This takes into account appropriate behavioural adjustments. Operational risk Operational risk is the risk that the Bank may suffer financial loss as a result of system or process failure, human error, fraud, cyber attack or through inadequate controls and procedures. The Bank has detailed procedure manuals in place and ensures that all operational risks are evaluated and appropriately controlled. Contingency plans are in place to ensure continuity in the event of any unforeseen serious disruption to business operations. These plans are reviewed and tested regularly to ensure they can be implemented in a timely manner should events dictate. To give further assurance, the Internal Audit function regularly reviews operational areas to ensure that risks and controls are appropriate and effective. Regulatory, compliance & conduct risk Regulatory and Compliance risk is the risk that any part of the Bank may fail to meet the requirements or expectations of the regulatory authorities. It can also arise where changes to regulations are not anticipated or managed properly. Conduct risk is the risk that the Bank s operating model, culture or actions result in unfair outcomes for customers. The Bank s conduct risk is aligned with its strategy and overall risk appetite. The Compliance Management Committee meets monthly to review compliance obligations, processes and conduct risk. Compliance and conduct reports are reviewed regularly by the Board and Risk Committee and management monitor regulatory pronouncements. Reputational risk Reputational risk is the risk that the Bank may suffer reputational damage which may lead to negative publicity, loss of revenue, litigation, loss of clients, loss of key employees or difficulty in recruiting new staff. The Bank is proactive in the development and preservation of its reputation in the market. The Bank maintains effective communication channels with its employees, customers and other stakeholders. Strategic risk Strategic risk is the risk that arises from changes in the economic and business environment, adverse business decisions or ineffective or improper implementation of decisions. The Bank operates in a highly dynamic and diversified economic environment and is currently in a period of significant growth. Strategic risk is mitigated through a well Page 15 of 35

16 established planning and budgeting process which includes reporting mechanisms, monitoring of economic developments and outlooks, the assessment of risks inherent in strategic decision and monitoring of the implementation of the strategy. In addition the Bank reevaluates business plans and budgets in order to reflect the changing economic and business environment. Page 16 of 35

17 4. Capital resources As at 31 December 2017, and throughout the period to 31 December 2017, the Bank maintained its capital resources at a level above the minimum capital adequacy requirements. 4.1 Eligible Capital Resources The Eligible Capital of the Bank as at 31 December 2017: Tier 1 % of Total 31/12/ % of Total 31/12/ % Growth Share Capital 9,850 9,692 Share Premium 16,330 13,488 Profit and Loss 63,284 42,755 Account Less Intangible (1,234) (1,117) Assets Total CET % 88, % 64, % Additional Tier 1 16,851 4,700 Total Tier % 105, % 69, % Tier 2 Subordinated Loans 18,048 18,048 Collective 836 1,364 Impairments Total Tier % 18, % 19, % Eligible Capital 100.0% 123, % 88, % Deferred Tax: In accordance with Article 48 of the Capital Requirements Regulation ( CRR ), the Bank s deferred tax asset of 1,726k is not deducted from Eligible Capital. Additional Tier 1 Capital: Additional Tier 1 consists of 2 tranches of Fixed Rate Reset Additional Tier 1 Perpetual Subordinated Contingent Convertible Securities ( AT1 Securities ), issued in 2015 and On 31 July 2015 the Bank issued 5 million AT1 Securities. Net proceeds arising from the issuance, after deducting issuance costs, totalled 4,699,977. These AT1 Securities bear interest at an initial rate of 11.85% per annum until 31 July 2020 and thereafter at a fixed margin over the 1year midswap rate as provided in the Securities Certificate. Interest is payable annually in arrears on each interest payment date and commenced on 30 November Page 17 of 35

18 On 29 September 2017 the Bank issued 12.2 million AT1 Securities. Net proceeds arising from the issuance, after deducting issuance costs, totalled 12,151,000. These AT1 Securities bear interest at an initial rate of % per annum until 20 November 2022 and thereafter at a fixed margin over the 1year midswap rate as provided in the Securities Certificate. Interest is payable annually in arrears on each interest payment date and commenced on 30 November The AT1 Securities are convertible into Ordinary Shares of the Bank in the event of the Bank s Common Equity Tier 1 ( CET1 ) ratio falling below 7 per cent. Tier 2 Subordinated Debt: Tier 2 consists of 3 tranches of subordinated debt notes; fully described in Note 19 of the Annual Report. The 2013 subordinated debt bears interest between 8% and 9% payable semiannually and is callable at the Bank s option from 30 April 2019, with a final redemption date of 30 April The 2014 subordinated debt bears interest at 9% payable semiannually and is callable at the Bank s option from 30 April 2020, with a final redemption date of 30 April The 2016 subordinated debt bears interest at 8.5% payable semiannually and is callable at the Bank s option from 30 October 2021, with a final redemption date of 30 October Leverage Ratio Disclosures The tables in Appendix 2 summarise the leverage ratio disclosures, as required by Basel lll, as at 31 December The Bank operates within an acceptable range for leverage. It manages its exposures and monitors leverage to ensure that it remains within this range. The leverage ratio has remained relatively stable throughout the year with no significant movements. 4.3 Return on Assets The Bank s return on assets was 2.4% in the year to 31 December 2017 (2016: 2.4%). 4.4 Encumbered Assets The Bank encumbers assets through identifying loans as collateral to support access to the Bank of England s Funding for Lending Scheme. Details can be seen in Appendix 3 Asset Encumbrance Template. Page 18 of 35

19 5. Capital adequacy The Bank maintains a strong capital base to support its lending activities and to comply with capital requirements and its Total Capital Requirement ( TCR ) at all times. Capital adequacy is monitored by the Board, and is reported to the PRA on a quarterly basis. Capital forecasts, covering a 3year period, are prepared on an annual basis as part of the Bank s annual budgeting cycle. During the year, additional reforecasts are also reviewed by the Board to take into account the effects of events that were not reflected in the original budgets Internal Capital Adequacy Assessment Process On an annual basis, the Bank undertakes an Internal Capital Adequacy Assessment Process ( ICAAP ) which is an internal assessment of its capital needs. This internal process is designed to consider all material risks which the Bank faces and determines whether additional capital is required to ensure the Bank is adequately capitalised. Included within the ICAAP are capital projections, which reflect not only the Bank s chosen strategy and potential growth prospects, but also the results of stress testing these plans. This process is designed to ensure that adequate capital is retained by the Bank to meet not only its current requirements, but also to cover the medium term. The ICAAP therefore represents the view of management and the Board, of the risks faced by the Bank Pillar 1 capital requirement The Pillar 1 capital requirement, determined in accordance with the rules contained within Basel lll as applied to the Bank, consists of the following components: Credit risk capital component the Bank has adopted the standardised approach to determine its Pillar 1 credit risk capital. This involves the application of standard rates to each exposure class. Operational risk capital requirement the Bank has adopted the basic indicator approach to determine its Pillar 1 operational risk capital. This calculation is based on the Bank s operating income for the past three years. Market risk the Bank does not have a trading book and as such its exposure to market risk is immaterial. The table below sets out the Pillar 1 capital requirements as at 31 December 2017 determined in accordance with CRD IV: Page 19 of 35

20 Description Main Components 8% Capital Required 000 s Central Government or central banks Government Gilts / TBills / BoE Reserve Account Institutions Cash placed with financial institutions 408 Retail Secured & Unsecured Lending 4,456 Of which: SME Secured & Unsecured Lending 4,091 Secured by mortgages on immovable Mortgage 51,994 properties Of which: SME Mortgage 41,418 Exposures in default Mortgage 3,805 Other items Sundry Debtors and Fixed Assets 986 Credit risk minimum capital requirement 61,649 Operational risk (basic indicator approach) 6,133 Pillar 1 capital requirement 67,782 Of which: Tier 1 50,836 Tier 2 16,945 Capital resources (refer to section 4.1) Tier 1 105,081 Tier 2 18,884 Total Capital Resources 123,965 Excess of capital resources over Pillar 1 capital requirement Tier 1 54,245 Tier 2 1,939 Total Excess of Capital over Pillar 1 requirement 56,184 The Bank benefits from a surplus of capital resources over and above its Pillar 1 regulatory capital requirement. The Bank s Common Equity Tier 1 ( CET1 ) ratio at 31 December 2017 was 10.4% (2016: 10.0%) and total capital ratio was 14.6% (2016: 13.7%) The Bank is also required to hold additional capital in the form of a Bank specific addon (Pillar 2A), which is part of its Total Capital Requirement plus regulatory buffers. These regulatory buffers include a Capital Conservation Buffer ( CCB ) and a Countercyclical Capital Buffer ( CCyB ). Pillar 2A must be met by a minimum of 75% Tier 1 capital and no more than 25% Tier 2 capital. 100% of the regulatory buffers must be met by CET1 Capital. On 1 January 2018, the CCB was set at 1.875% of Total Risk Exposure Amount and will settle at 2.5% from 1 January The CCyB is set at 0.5% as from 27 June 2018 and 1% as from 28 November The Bank s Total Capital Requirement, excluding regulatory buffers is 10.8%. Page 20 of 35

21 6. Credit risk exposures 6.1. Summary of the Bank s credit risk exposures The table below summarises the regulatory credit risk exposure at 31 December 2017: Description Exposures at 31 December Average Exposures Year to 31 December Central governments or central banks 115, ,095 Institutions 25,482 27,697 Retail 95,331 94,437 Of which: SME 89,259 89,235 Secured by mortgages on immovable properties 733, ,219 Of which: SME 432, ,075 Exposures in default 34,911 26,523 Other items 9,698 8,177 1,013, ,148 All lending exposure is to the UK, and as such we have not disclosed the above table by geographic area. The residual maturity of these exposures at 31 December 2017 is shown below. Description Up to 1 year years 000 More than 5 years 000 Noninterest bearing 000 Total 000 Central governments or central banks 115, ,247 Institutions 25,482 25,482 Retail 40,326 53,783 1,222 95,331 Secured by mortgages on immovable 468, , , ,179 properties Exposures in default 33, ,113 34,911 Other items 9,698 9, , , ,775 9,698 1,013,848 At 31 December 2017, the Bank s Loans secured by mortgages on immovable properties were predominantly to customers within the United Kingdom. All loans in this exposure class are secured by properties within the United Kingdom. All other exposure classes are to customers within the United Kingdom. Loans and advances to customers are reviewed regularly to determine if there is any evidence of impairment. The distribution of loans and advances as at 31 December 2017 by credit quality is shown below. For the purpose of reporting, past due but not impaired relate Page 21 of 35

22 to loans that are in arrears, but the loan does not meet the definition of an impaired asset as the expected recoverable amount exceeds the carrying amount. At 31 December 2017 At 31 December 2016 Loans and Loans and Loans and Loans and advances to advances to advances to advances to customers banks customers banks Neither past due nor impaired 816, , , ,347 Past due but not impaired: Loans and receivables at amortised cost: Less than three months 12,996 17,854 Three to twelve months 15,278 8,982 One to five years 4,450 Impaired 3,844 2,494 Repossessions 15,487 4,793 Less: provisions (2,601) (3,270) 861, , , ,347 Note that all lending exposure is to the UK, and as such we have not disclosed the above table by geographic area. The past due loans are subject to close oversight. In the main they relate to transactions that have reached maturity and the Bank has decided not to extend, albeit the loan to value remains acceptable Provisioning Policy The underlying drivers of credit risk have been described in section 3 of this document. The purpose of this section is to provide more detail in relation to the Bank s credit risk profile and specifically those loans where there may be doubt as to whether the amount loaned will be recovered in full. The Bank prepares its financial statements in accordance with the Financial Reporting Standards 102 ( FRS 102 ) issued by the Financial Reporting Council. Thus, it is required to make individual impairments against bad or doubtful debts such that the carrying value of each loan is no higher than the present value of the future cash flows that the Bank expects to recover. Bad debts are defined as those accounts that are in default and where the Bank has crystallised a loss on the account. Page 22 of 35

23 Doubtful debts are defined as those accounts where the full recovery of the balance is not considered probable, either as a result of a client falling behind their repayment schedule, or more likely in the case of both development and bridging finance, the value of the security is impaired. Such impairment would therefore result in a shortfall between the discounted future cash flows and the client s balance outstanding. Individual impairments have been made against all bad and doubtful debts, based on the expected loss measured on a case by case basis. Loans and advances are written off to the extent that there is no longer any realistic prospect of recovery. Additionally the Bank s experience in credit markets confirms its view that there are inherent unforeseen losses in any loan portfolio. Consequently the Bank makes a collective impairment as a percentage of loan assets on its balance sheet to cover these unforeseen losses. The following sections explain how these general principles are applied in relation to the Bank s asset portfolios Provision for impairment losses Loans & Advances Movement Individual Collective Total Individual Collective Total At 1 January 1,906 1,364 3,270 2, ,731 Charge 1,716 (528) 1,188 2, ,592 Released (12) (12) (436) (436) Written off (1,411) (1,411) (2,142) (2,142) Unwinding of PV discount (434) (434) (475) (475) At 31 December 1, ,601 1,906 1,364 3, Impairment losses taken to income statement Individual impairments 1,704 1,743 Collective impairment (528) 413 Charge / (recoveries) during the year (94) (293) 1,082 1, Credit risk management For all property lending, the Bank takes security in the form of legal charges over the property against which funds are advanced and where appropriate guarantees are taken from the principal beneficiaries of the transactions being financed. These are the primary methods used by the Bank to mitigate credit risk. Each security is valued at inception by a qualified surveyor. In isolated cases, the Bank may also hold cash collateral in relation to certain residual liabilities associated with a development scheme. Page 23 of 35

24 For Asset Finance and Professional Lending agreements the Bank has a charge over the assets financed and/or where appropriate guarantees are taken from the borrower or company directors. The Bank does not use derivatives or other financial instruments as a means of mitigating credit risk. Page 24 of 35

25 7. Remuneration This remuneration disclosure is a requirement under Article 450 of the CRR. The below disclosure covers remuneration policies and practices for categories of staff whose professional activities have a material impact on the Bank's risk profile (Material Risk Takers ( MRTs )), and staff who hold Significant Management Functions ( SMFs ) as designated by the regulatory authorities. 7.1 Decision making process The Remuneration Committee of the Board of the Bank is responsible for governance of remuneration for Executive Directors, staff in SMFs and MRTs. The Committee currently comprises 2 independent nonexecutive directors. During 2017, the members of the Committee were: o o Michael Lewis (Chairman) Richard Murley The Committee met twice during the financial year The committee holds a minimum of two meetings in each financial year with additional meetings held where appropriate. The Remuneration Committee is responsible for determining on behalf of the Board, the overall remuneration policy for all staff and in particular, the policy and the level of remuneration of SMF staff and MRTs. There are no subcommittees of the committee and it operates under delegated authority from the Board. The committee approves remuneration proposals on an annual basis, and reports any matters within its remit in respect of which it considers that action or improvement is needed and makes recommendations as to the steps to be taken. In agreeing the remuneration policy, the Committee does not obtain independent external advice. The Committee considers advice from the Chief Executive Officer, Group Managing Director, Head of Human Resources and the Company Secretary as relevant (though not in relation to their own remuneration). In the design of pay structures for Executive Directors, SMFs and MRTs the Committee also takes account of the overall approach to reward for employees in the Bank as a whole. 7.2 The link between pay and performance The Remuneration Committee has approved remuneration principles which support a clear link between pay and performance. The principles include: o striking an appropriate balance between risk taking and reward; o rewarding the achievement of the overall business objectives and values of the Bank; o encouraging and supporting the Bank s culture of excellent customer service; and o guarding against risk taking over and above the Bank s risk appetite. Page 25 of 35

26 7.3 Remuneration structures and their purpose Fixed pay In order to attract, retain and motivate employees to achieve the objectives of the Bank within its stated risk appetite and risk management framework, employees are paid fixed base salaries, and benefits such as holiday allowance, company car allowances, pension scheme, life assurance, private medical insurance, permanent health insurance and may access staff loans. These elements are set at a level so as to ensure that there is not an excessive dependence on variable remuneration. Annual bonus The annual cash bonus is performance based and designed to drive and reward medium term results. It considers financial and nonfinancial (such as adherence to Bank values) results and metrics at Bank, division and individual level. The Committee approves the bonus amount, and any proposed payment. Long term incentive plans All senior staff may from time to time be offered options over shares in UTB Partners Limited. Options are generally issued at the money and granted over a vesting period of four years and must be exercised within 10 years. Malus & clawback Even though Malus and Clawback are disapplied as a regulatory requirement because the Bank is a Tier 3 bank, contracts for all senior staff employed since November 2014 have included a clause to provide for Clawback and Malus if required. 7.4 Deferred remuneration policy Revenue generating staff in certain lending divisions may have up to 30% of their annual bonus deferred each year. Payment of this deferred element is contingent upon the performance of the relevant loans. 7.5 Ratios between fixed and variable remuneration The Capital Requirements Directive ( CRD ) limits variable remuneration to no more than that paid as a fixed salary. Variable remuneration does include the value of options granted to staff, notwithstanding that an option grant may relate to vesting periods over multiple years. Accordingly, where the Bank grants options to its senior staff, both as a reward and inducement to remain with the group, the full value of these options is included in the year of grant with the result that the ratio of fixed to variable remuneration may exceed the 1:1 limit. Current legal advice is that in terms of the proportionality rule, this ratio may be exceeded. Page 26 of 35

27 7.6 Remuneration Statistics The Banks remuneration for the past two years was: Total wages and salaries % Growth Directors (including NonExecutives fees) 2,383 2,133 All other 10,736 8,578 13,119 10,711 22% Social security costs 1,607 1,333 Pension and other benefits 1,071 1,064 15,798 13,108 21% Number of Staff at Yearend % Average Number of Staff % Total Remuneration / Net Income 31.5% 32.1% Total Remuneration / Average Employee ( 000s) Remuneration for the year ended 31 December 2017 for the Bank by business area was as follows: Lending Treasury and Central Services Total Salaries 6,161 3,896 10,057 Cash Variable Remuneration 1,573 1,490 3,062 7,734 5,386 13,119 Social security costs ,607 Pension costs ,071 Total remuneration 9,336 6,462 15,798 Average Number of Staff The above two tables are based on remuneration committed and costs accrued during the year, as charged to the Income Statement. Bonuses for the year are estimated at the yearend date. Page 27 of 35

28 The table below provides quantitative information set out in accordance with clauses 1(h) (i) to (vi) of CRR Article Senior Management (Board) Other SMFs and MRTs No. of recipients '000s No. of recipients '000s Fixed remuneration during , ,091 Variable remuneration awarded for 2017 performance: Cash (paid) Cash (deferred by 12 months) Other noncash remuneration Share options exercised Signon payments or awards Severance payments Total Remuneration 2,383 4,002 The above table is prepared based on remuneration committed during the year. They exclude estimated bonuses accrued at 31 December 2017, but include bonuses paid during 2017 in relation to the 2016 financial year. MRT staff aggregate remuneration of EUR 1m or more for 2017 Total remuneration bands (EUR) 1,000,000 1,500, ,500,001 2,000, ,000,001 2,500, ,500,001 3,000,000 0 Executive Directors and other MRT Staff (no.) Page 28 of 35