United Trust Bank Limited. Pillar 3 disclosures

Transcription

1 as at 31 December 2016

2 Contents Page 1 Introduction 3 2 Scope 5 3 Risk management objectives and policies 6 4 Capital resources 16 5 Capital adequacy 18 6 Credit risk exposures 20 7 Remuneration 24 8 Appendix 1: Own Funds Disclosure Template 28 9 Appendix 2: Asset Encumbrance Disclosure 32

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 pre-existing 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 United Trust Bank uses the standardised approach in measuring its capital resources requirements on a Pillar 1 basis 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 2016, which is the Bank s latest financial year-end, and include the 2016 audited profits which the Board approved on 23 February Page 3 of 32

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 32

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 medium-term property loans for both the development of residential dwellings and the bridging of completed properties and property portfolios, as well as regulated second charge mortgage products. The Bank finances plant, machinery and wheeled assets to small and medium sized enterprises ( SMEs ) and short-term 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 32

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 have been 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 Audit and Risk sub-committees which monitor the internal control environment and the risks undertaken 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 Assets & Liabilities Committee (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 32

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 controls to measure, monitor and manage risks based on information provided or obtained. Any material breaches of the Bank s risk management policies, controls and procedures are reported to the Audit and Risk Committees and the Board. 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 the stakeholders The Board The Board of Directors includes the non-executive chairman, four non-executive directors and five executive directors, as listed on page 8 of the annual report. The Board is chaired by Richard Murley who is responsible for its effectiveness. Richard Murley is an experienced Chairman, a lawyer and corporate finance executive. He has been Director General of the panel on Takeovers and Mergers. 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 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 32

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 make contributions to any 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 System (CRRS); 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 32

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 2016 At 31 Dec 2015 % Change Operating Income 40.8m 31.6m 29.1% Operating Profit 22.5m 16.8m 33.9% Cost to Income Ratio 44.8% 46.9% -2.1pp Return on Equity 28.8% 32.0% -3.2pp Gross New Lending 663m 521m 27.3% Loan Book 617m 434m 42.2% Deposit Book 665m 476m 39.7% 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 Non-Executive Directors who served on the Board for the year ended 31 December 2016 in addition to their roles within the Bank were: Name Position Total Positions held Mrs T Blackwell Non-Executive Director 3 Mr A Herd Non-Executive Director 3 Mr M Lewis Non-Executive Director 4 Mr S Lockley Non-Executive Director 1 Mr G Davin Executive Director 1 Mr C R Tidyman Executive Director 1 In line with SYSC 4.3A.7, the above table only considers commercial directorships. 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 2016, have been excluded. Recruitment and Selection The Company 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 a Head Hunter who is appropriate for the sector or advertises publicly. Once the role is defined, an initial list is prepared and interviews undertaken. The 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 Non-Executive Directors before a decision to appoint is made. The process is Page 9 of 32

10 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 and the Chief Risk Officer and thus provides 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 day-to-day operations which are delegated to other committees (refer to section 3.2.3). It considers all exceptional items and reviews the capital, liquidity and performance of the business. Risk Committee The Risk Committee is chaired by Stephen Lockley, a non-executive director, and includes Andrew Herd, a non-executive 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 Page 10 of 32

11 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 non-executive director, and includes Stephen Lockley, another non-executive director. Mr Herd and Mr Lockley are both 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 non-executive director, and includes Richard Murley, the Chairman. The role of this committee is to consider remuneration policy, regulatory obligations and specifically to approve the the level of remuneration of Significant Control Functions ( SFs ) 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 management framework. The Chief Executive and Chairman recommend the fees payable to the non-executive 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. Page 11 of 32

12 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 day-to-day 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 majority of 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. Non-Executive Directors attend by rotation. Compliance Committee This committee is chaired by the Chief Risk Officer, Christos Gabrielides; and includes the 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. 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 from lending transactions. 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. Page 12 of 32

13 The Bank s Credit Committee includes executive directors, credit managers and business development managers. The Credit Committee sanctions the majority of credit limits and in so doing has to reach a unanimous consensus by a valid quorum before authorising a credit exposure. Exposures beyond a certain threshold require additional authorisations. Credit limits on all lending, including treasury and interbank lines, are reviewed regularly. Exposures within a certain threshold can be authorised by delegated authority. In such circumstances, the Bank s Credit department provides oversight to ensure such sanctioning complies with the Bank s credit policies and procedures. The Bank has a focused business strategy and has considerable expertise in its chosen sectors. The vast majority of the Bank s lending, excluding interbank placements which are predominantly with the Bank of England and UK banks, is secured on assets. On a geographical basis, the credit exposure of the Bank, including contingent liabilities and commitments, is predominantly to the UK. Concentration risk Concentration risk arises from having high or excessive exposures to one sector, geographical area or counterparty which can lead to inter-related losses in the event of an adverse movement in the strength or creditworthiness of the borrower(s) or security. 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. The Bank operates within the UK and limits its focus on 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. The Bank has one primary source of liquidity which is retail and SME deposits. Concentration risk of Treasury assets is managed and controlled through a counterparty placements policy and limits. Page 13 of 32

14 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 day-to-day 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, 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 also reduces its liquidity risk. Procedures are in place to monitor the Bank s 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 profitability will fluctuate because of changes in interest rates. Interest rate risk exposures are measured weekly and reported to ALCO and the Board. The Bank finances its loan book and money market deposits primarily through customer deposits. The ALCO meets regularly to review the rates offered on deposit products. Deposits are spread between variable and fixed rate to manage interest rate risk. The Bank s lending to customers is at interest rates prevailing in the market. Money market deposits are placed in the market at the best rates available. 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 next reset to market rates or the dates on which the assets and liabilities mature. At 31 December 2016, 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 5.8m and 3.0m respectively, on the basis that rates can go below 0.0%. Assuming a 0.0% interest rate floor, the benefit was 5.8m and 2.9m 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, 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. Page 14 of 32

15 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 may 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 and other stakeholders. Strategic risk Strategic risk is the risk that arises from changes in the business environment, adverse business decisions, and 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 - 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 re-evaluates business plans and budgets in order to reflect the changing economic and business environment. Page 15 of 32

16 4. Capital resources As at 31 December 2016, and throughout the period to 31 December 2016, 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 2016: Tier 1 % of Total 31/12/ % of Total 31/12/ % Growth Share Capital 9,692 9,500 Share Premium 13,488 11,280 Profit and Loss Account 42,755 26,551 Less Intangible Assets (1,117) (955) Total CET % 64, % 46,376 Additional Tier 1 4,700 4,700 Total Tier % 69, % 51, % Tier 2 Subordinated Loans 18,048 14,500 Collective Impairments 1, Total Tier % 19, % 15, % Eligible Capital 100.0% 88, % 66, % In accordance with Article 48 of the Capital Requirements Regulation (CRR), the Bank s deferred tax asset of 1,291k is not deducted from Eligible Capital. 4.2 Leverage Ratio Disclosures The tables below summarise the leverage ratio disclosures, as required by Basel lll, as at 31 December Summary reconciliation of accounting assets and leverage ratio exposures 31/12/16 31/12/15 000s 000s Total assets as per published financial statements 766, ,726 Collective impairments and other adjustments 771 1,597 Leverage ratio disclosure base 767, ,323 Page 16 of 32

17 4.2.2 Leverage ratio common disclosure 31/12/16 31/12/15 000s 000s Total on-balance sheet exposures 767, ,323 Total off-balance sheet exposures 20,233 16,859 Total Exposures 787, ,182 Tier 1 Capital 69,518 51,076 End of period leverage ratio 8.8% 8.9% Split of on-balance sheet exposures CRR leverage ratio exposures 31/12/16 31/12/15 000s 000s Total on-balance sheet exposures, of which 767, ,323 Central banks 114,967 74,062 Central governments and MDB - 3,226 Institutions 26,406 34,995 Secured by mortgages on immovable properties 506, ,113 Retail exposures 94,220 81,376 Exposures in default 19,292 10,692 Other exposures 6,281 6,859 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 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 2016 (2015: 2.7%). 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 2- Asset Encumbrance Template. Page 17 of 32

18 5. Capital adequacy The Bank maintains a strong capital base to support its lending activities and to comply with capital requirements and its Individual Capital Guidance (ICG) at all times. Capital adequacy is monitored by the Board, and is reported to the PRA on a quarterly basis. Capital forecasts, covering a 3-year period, are prepared on an annual basis as part of the Bank s annual budgeting cycle. During the year, additional re-forecasts 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 2016 determined in accordance with CRD IV: Page 18 of 32

19 Description Main Components 8% Capital Required 000 s Central Government or central banks Government Gilts / T-Bills / BoE - Reserve Account Institutions Cash placed with financial institutions 423 Retail Secured & Unsecured Lending 4,377 - Of which: SME Secured & Unsecured Lending 4,170 Secured by mortgages on immovable properties Mortgage 40,026 - Of which: SME Mortgage 34,336 Exposures in default Mortgage 1,716 Other items Sundry Debtors and Fixed Assets 512 Credit risk minimum capital requirement 47,054 Operational risk (basic indicator approach) 4,754 Pillar 1 capital requirement 51,808 Of which: Tier 1 38,856 Tier 2 12,952 Capital resources (refer to section 4.1) Tier 1 69,518 Tier 2 19,412 Total Capital Resources 88,930 Excess of capital resources over Pillar 1 capital requirement Tier 1 30,662 Tier 2 6,460 Total Excess of Capital 37,122 As shown in the table above, the Bank benefits from a surplus of capital resources over and above its Pillar 1 regulatory capital requirement. The Bank is also required to hold additional capital in the form of a Bank specific add-on (Pillar 2A) and a Capital Conservation Buffer (CCB). Pillar 2A must be met by a minimum of 75% Tier 1 capital and no more than 25% Tier 2 capital. On 1 January 2017, the CCB was set at 1.25% of Total Risk Exposure Amount and increase by 0.625% per annum to a maximum of 2.5%. The Bank is required to meet the CCB requirement with CET1 Capital. The Bank benefits from a surplus of capital resources over and above its Pillar 2 regulatory capital requirement. Page 19 of 32

20 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 2016: Description Exposures at 31 December Average Exposures Year to 31 December Central governments or central banks 114, ,803 Institutions 26,406 32,764 Retail 94,220 90,856 Of which: SME 90,759 87,651 Secured by mortgages on immovable properties 506, ,582 Of which: SME 340, ,828 Exposures in default 19,292 15,340 Other items 6,281 6, , ,771 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 2016 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 114, ,967 Institutions 26, ,406 Retail 41,285 52, ,220 Secured by mortgages on immovable 365,606 83,694 57, ,456 properties Exposures in default 19, ,292 Other items ,281 6, , ,609 57,176 6, ,622 At 31 December 2016 of 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 2016 by credit quality is shown below. For the purpose of reporting, past due but not impaired relate Page 20 of 32

21 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 2016 At 31 December 2015 Loans and advances to customers Loans and advances to banks Loans and advances to customers Loans and advances to banks Neither past due nor 582, , , ,932 impaired Past due but not impaired: Loans and receivables at amortised cost: - Less than three months 17,854-6, Three to twelve months 9,790-2, One to five years 4,444-6,156 - Impaired 6,486-6,050 - Less: provisions (3,270) - (3,731) - 617, , , ,932 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 Provisions 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 in default, where the client has failed to meet the terms of their loan, or where insolvency proceedings have been commenced against the client. Page 21 of 32

22 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 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 2, ,731 2,689 1,167 3,856 Charge 2, ,592 1,750 (216) 1,534 Released (436) - (436) (70) - (70) Written off (2,142) - (2,142) (921) (921) Unwinding of PV discount (475) - (475) (668) - (668) At 31 December 1,906 1,364 3,270 2, , Impairment losses taken to income statement Individual & collective impairment charge 2,592 1,534 Provision released (436) (70) Charge / (recoveries) during the year (293) 129 1,863 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 22 of 32

23 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. Following the credit crisis in 2008 the Bank tightened its credit conditions and reorganised and strengthened its Credit Risk department. Since these changes were made, the Bank has experienced excellent credit quality. The individual impairment charges recognised in recent years predominantly related to the historic legacy book, which now stands at 0.9% of total loan assets and is expected to be substantially realised by the end of Page 23 of 32

24 7. Remuneration This remuneration disclosure is a requirement under Article 450 of the CRR. Remuneration policies and practices for categories of staff whose professional activities have a material impact on the company's risk profile (Material Risk Takers ( MRTs )). MRTs include staff who hold Significant Management Functions ( SFs ) 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 Significant Control Functions ( SFs ) and MRTs. The Committee currently comprises 2 independent non-executive directors. During 2016, the members of the Committee were: o Michael Lewis- Chairman o Richard Murley (appointed 31 st July 2016) o Nicholas Clegg (resigned 31 st July 2016) 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 SF staff and MRTs. There are no sub-committees of the committee and it operates under delegated authority from the Board. It reports to the Board and reports any matters within its remit in respect of which it considers that action or improvement is needed and make recommendations as to the steps to be taken. The Committee prepares a final report to the Board once all salaries and bonuses have been agreed. 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, SFs and MRTs the Committee also takes account of the overall approach to reward for employees in the company 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 24 of 32

25 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 non-financial results and metrics at Bank, division and individual level. The Committee approves the bonus amount, and any proposed payment. The amount of the bonus is determined by the achievement of personal objectives. Long term incentive plans ( LTIP ) 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 UTB 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% o f 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 25 of 32

26 7.6 Remuneration Statistics The Banks remuneration for the past two years was: Total wages and salaries % Growth - Directors (including Non-Executives fees) 2,133 2,425 - All other 8,578 7,425 10,711 9, % Social security costs 1,333 1,111 Pension costs ,810 11, % Number of Staff at Year-end % Average Number of Staff % Total Remuneration / Net Income 31.4% 36.0% Total Remuneration / Average Employee ( 000s) Remuneration for the year ended 31 December 2016 for the Bank by business area was as follows: Lending Treasury and Central Total Services Salaries 5,366 3,288 8,654 Cash Variable Remuneration 1, ,057 6,728 3,983 10,711 Social security costs ,333 Pension costs Total remuneration 8,096 4,714 12,810 Average Number of Staff Page 26 of 32

27 The table below provides quantitative information set out in accordance with clauses 1(h) (i) to (vi) of CRR Article Senior Management (Board) Other SFs and MRTs No. of recipients '000s No. of recipients '000s Fixed remuneration during , ,177 Variable remuneration awarded for 2016 performance: - Cash (paid) Cash (deferred by 12 months) Share options exercised Sign-on payments or awards Severance payments Total Remuneration 2,620 4,213 MRT staff aggregate remuneration of EUR 1m or more for 2016 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 27 of 32

28 Appendix 1: Own Funds Disclosure Template Own funds disclosure template 2016 '000s Regulation (EU) No 575/2013 Article Reference Common Equity Tier 1 capital (CET1): instruments and reserves 1 Capital instruments and the related share premium accounts 23, (1), 27, 28, 29 of which: ordinary share capital 23,180 EBA list 26 (3) of which: Instrument type 2 - EBA list 26 (3) of which: Instrument type 3 - EBA list 26 (3) 2 Retained earnings 42, (1) (c) 3 Accumulated other comprehensive income (and any other reserves) - 26 (1) 3a Funds for general banking risk - 26 (1) (f) 4 Amount of qualifying items referred to in Article 484 (3) and the related share premium accounts subject to phase out from CET1-486 (2) 5 Minority interests (amount allowed in consolidated CET1) a Independently reviewed interim profits net of any foreseeable charge or dividend - 26 (2) 6 Common Equity Tier 1 (CET1) capital before regulatory adjustments 65,935 Sum of rows 1 to 5a Common Equity Tier 1 (CET1) capital: regulatory adjustments 7 Additional value adjustments (negative amount) - 34, Intangible assets (net of related tax liability) (negative amount) (1,117) 36 (1) (b), 37 9 Empty set in the EU - 10 Deferred tax assets that rely on future profitability excluding those arising from temporary difference (net of related tax liability where the conditions in Article 38 (3) are met) (negative amount) - 36 (1) (c), 38, 11 Fair value reserves related to gains or losses on cash flow hedges - 33 (1) (a) 12 Negative amounts resulting from the calculation of expected loss amounts - 36 (1) (d), 40, Any increase in equity that results from securitised assets (negative amount) - 32 (1) 14 Gains or losses on liabilities valued at fair value resulting from changes in own credit standing - 33 (1) (b) 15 Defined-benefit pension fund assets (negative amount) - 36 (1) (e), 41, 16 Direct and indirect holdings by an institution of own CET1 instruments (negative amount) - 36 (1) (f), Direct, indirect and synthetic holdings of the CET1 instruments of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negatvie amount) - 36 (1) (g), Direct, indirect and synthetic holdings of the CET1 instruments of financial sector entities where the institution does not have a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) - 36 (1) (h), 43, 45, 46, 49 (2) (3), Direct, indirect and synthetic holdings of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) - 36 (1) (i), 43, 45, 47, 48 (1) (b), 49 (1) to (3), Empty set in the EU - 20a Exposure amount of the following items which qualify for a RW of 1250%, where the institution opts for the deduction alternative - 36 (1) (k) 20b of which: qualifying holdings outside the financial sector (negative amount) - 20c of which: securitisation positions (negative amount) - 36 (1) (k) (i), 89 to (1) (k) (ii) 243 (1) (b) 244 (1) (b) 258 Page 28 of 32