united trust bank report & accounts 2011

Contents

Chairman’s report 1

Director’s report 3

Directors 5

Property Market View 7

Asset Finance Market View 8

Case studies 9

Corporate information 12

Directors’ Statement 13

Auditor’s report 14

Profit and loss account 15

Balance sheet 16

Notes to the financial statements 17

United Trust Bank Limited

80 Haymarket London SW1Y 4TE

T: 020 7190 5555 F: 020 7190 5550

E: info@utbank.co.uk www.utbank.co.uk

Regulated by the Financial Services Authority

1

Despite anaemic growth in the UK economy during the year under review, the Bank’s results reflect animpressive and continuingimprovement.

The Board has fully supported theprogramme to expand the business and toadd strength and diversity to ourmanagement and staff.

The UK coalition government has remainedsteadfast in emphasising the overridingneed to bring the public finances into amore sustainable position. Internationalinvestors have shown confidence in UKpolicy particularly in light of the problemsstill affecting the Eurozone countries.However, for the economy in general theneed to search for growth is becomingmore apparent.

We expect interest rates to remain low fora considerable time. Barring unforeseenaccidents in resolving the Eurozone crisis,we believe the improving confidence levelsin the UK economy should avoid a doubledip recession. As always much will dependon the USA and the resolution of theenduring fragility in the banking system inEurope and the UK.

Despite these uncertain times we areconfident that in our chosen niche markets we will maintain steady progress.We are well capitalised and maintainstrong liquidity, a position which weregard as a fundamental guarantee for our future.

On behalf of the Board I would again liketo congratulate our Management andStaff for all they have done to improveperformance in our business. I have everyconfidence that this will continue.

Chairman’sReport

Nicholas Clegg CBENon Executive Chairman

27 February 2012

Chairman’s Report

3

The year under review has seena welcome return to reasonablelevels of profitability andcontinuing improvement inboth the volume and quality oflending activities across allsectors of the Bank.

While equity markets have been buffetedthroughout 2011 by a range of dramaticand unpredictable global events, the low-interest environment in the UK hasfacilitated a steady deleveraging bycorporates and individuals and a gradualbut necessarily painful readjustment ofinvestment and consumption.

The markets in which UTB operates have,over the last three and a half years, bornethe full brunt of the credit crisis – with theresult that a significant number ofcompetitors have left or been forced out ofthese sectors. For those still active lenders,like UTB, the current market has thrown upmany opportunities. UTB benefits fromfunding assets which are at cyclically lowvalues and the Bank is well positioned tobenefit from the new market conditions.

At the time of writing, the main economicdebate relates to the speed and degree ofgovernment cuts and the potential for thisto precipitate a double-dip recession. Therisks of a change in sentiment are seen inthe degree to which investment andconsumption will be affected.

Principal Activities

The Bank’s primary activities are theprovision of secured asset finance, short-term property finance and propertydevelopment finance. The Bank alsoprovides a range of deposit products.

Review of Operations

The net result for 2011 after bad debts andbefore taxation is £1.01 million (2010: £0.3million) representing a 7.2% return onaverage equity over the period. Given theeconomic circumstances, this result isgratifying. Net interest income increased26.3% over the prior year and is now135% above that earned in 2009 at theheight of the credit crisis.

Fee income increased by 29.4% over theyear, driven equally from new businessfees and redemption fees on all assetclasses. Volumes of new business writtenhave also increased in excess of thegrowth in fee and margin income and thebenefit from this will be reflected in the2012 year.

The Bank continues to turn over loans atan increasing rate with loan repaymentsincreasing 47% during the year to £52million. This has resulted in netrealisations of bad debts on the historicbook amounting to £739,000. Anadditional £142,000 is automaticallyprovided through the Bank’s generalprovisioning policy and is related to thenet growth of the loan books.

Total assets grew by 29.4% to reach £143million. Most notably, this growth haslargely been in areas other than the Bank’straditional property development financelending, which now represents only 56.3%of total assets. The balance of assetsrepresents asset finance loans (mostlymachinery and vehicles), short-termbridging loans and liquid assets.

During the year, the Bank actively went ona drive to recruit experienced staff in bothfront and back office roles andsuccessfully employed many people atvarious levels in the organization. Theeffect is reflected in an increase inadministrative costs of 31.6% to just over£4.0 million. Notwithstanding thisincrease, the management are confidentthat current conditions provide a uniqueopportunity for a small specialist banksuch as UTB to employ excellent staff andthat the anticipated additional growth inincome will reduce the cost to incomeratio in the next year to acceptable levels.No material increase in staff expenditureis expected for 2012.

Director’sReport

4

Treasury

Total customer deposits grew 29.0% to£120.6 million over the year. The Bankcontinues to attract customers to its rangeof simple, but effective deposit products.The majority of deposit products are fixed-term ensuring the Bank has a steadysource of medium-term funding to matchthe terms of its loan books.

As a participant in the Financial ServicesCompensation Scheme, the Bank’s fundingbenefited from increased risk aversion ascustomers sought to diversify theirdeposits and seek out high servicespecialist banks for their savings.

The Treasury team continues to focus onhigh service levels with easily understoodbasic products, a strategy which has provedso successful over the past five years.

The process of agreeing a liquidity planwith the FSA will be undertaken in 2012.This is not expected to result in muchchange to the level of liquidity maintainedby the Bank, but will affect the way theliquid asset buffer is invested.

Capital

The Bank maintained high levels of capitalthroughout the year. It continues tooperate with capital of 19.4%, well inexcess of agreed regulatory levels.However, given the planned growth andincreased spread of business, the need forfurther capital will continue especiallygiven the opportunities to acquire smallpools of assets at attractive levels.

Regulatory

There has been some respite in the volumeof new regulation that has been issuedboth for consultation and compliance, asthe post crisis changes are implementedand form part of the regular operatingenvironment. We continue to invest incompliance and internal audit and costs inthis area have grown materially.

For a bank like UTB, risk arises fromuncertainty in how the detailed rulesarising from the recommendations of theIndependent Commission of Banking willbe drafted and agreed. While it is commoncause that national and internationalpolicy issues are determined with largebanks as a target, there are as yet no deminimis limits that would insulate a smallbank from the unintended consequencesof this widely framed regulation.

Directors

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

Dividend

No dividends have been declared or paidduring the current or prior year.

Auditor and Directors Confirmation

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

• So far as each of the directors is aware,there is no relevant audit informationof which the Company’s auditor isunaware, and

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

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

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

Going Concern

The Directors have, as is appropriate, adoptedthe going concern basis in preparing thefinancial statements. Further detailsregarding the going concern basis can befound in the Statement of AccountingPolicies in the Financial Statements.

Financial Risk Management

The disclosures required to be included inthe directors’ report in respect of theCompany’s exposure to financial risk andits financial risk management policies aregiven in note 23 to the accounts.

The Basel accord has been implemented inthe European Union via the CapitalRequirements Directive, and the Bank falls under the new 3 ‘Pillars’ framework.The Pillar 3 disclosures are available on our website.

Prospects and Staff

The continued strong return to growththat is reflected in the current report isexpected to continue into the newfinancial year. The Bank continues to beable to lend to better quality borrowers atmore conservative loan to value ratios, andearn its required yield.

The UTB team, as augmented with ableand experienced members from theindustry, are well bonded together andprovide the necessary capacity to widenthe lending scope and manage thegrowing asset base.

Our staff are the key to our future and wecontinue to work to provide a stable,supportive and challenging career for all ofthem. We expect continued growth in theyear ahead and thank all our staff whomake that possible on a daily basis.

Approved by the Board and signed on itsbehalf by:

Graham DavinChief Executive Officer. 27 February 2012

Director’s Report

5

Ehsan Mani Non-Executive Director

Ehsan Mani, 67, iscurrently a Director ofPlaces for People Groupand has been involved inreal estate projects andinvestments in the UnitedKingdom for many years.He is a charteredaccountant a pastPresident of theInternational CricketCouncil and previouslyserved as a Director of theUnited National Bank. Hehas also been a member ofthe Pakistan Government’sPrime Minister’s InspectionCommission and of theAdvisory Body of the TaskForce for HumanDevelopment.

Andrew Herd Non-Executive Director

Andrew Herd, 53, is theManaging Director ofLancashire Court CapitalLimited, a London-basedinvestment andconsultancy business. He was previously anExecutive Director ofAspers Group, the Anglo-Australian leisure andentertainment company.He is a charteredaccountant and worked asa merchant banker formany years. He wasManaging Director andHead of FinancialInstitutions at SG Hambrosand held senior roles withParibas Capital Marketsand Morgan Grenfell.

Michael Lewis Non–Executive Director

Michael Lewis, 53, hasbeen involved ininvestment managementsince 1983, havingworked at Ivory & Simeand Lombard Odier. He isChairman of OceanaInvestment CorporationLimited (UK), ExecutivePartner of OceanaInvestment Partners (UK),and a director of TheFoschini Group Limited(South Africa), AxelSpringer AG (Germany),Histogenics Inc. (USA),Cheyne CapitalManagement Limited(UK) and StrandbagsLimited (Australia).

Harley KaganExecutive Director

Harley Kagan, 42, is aManaging Director ofUnited Trust Bank and achartered accountant. Hewas previously theFinance Director of theUK operations of Insingerde Beaufort. He hasworked extensively incorporate finance,concentrating onacquisitions anddisposals, and as astrategy consultant withCap Gemini.

Noel MeredithExecutive Director

Noel Meredith, 56, is acareer banker. He joinedMidland Bank aftergraduating fromCambridge University. Hewas previously at CountyBank and SvenskaHandelsbanken and hasbeen at United TrustBank for 12 years. He hasextensive experience incorporate and propertylending and heads ourDevelopment Financeteam.

Barry Townsley CBENon-Executive Director

Barry Townsley, 65, isChairman of Hobart CapitalMarkets, the principalsponsor of the StockleyAcademy, Director of theWilliam J. ClintonFoundationInsamlingsstiftelse, ViceChairman of the SerpentineGallery, Chairman of thePatrons of SheffieldInstitute Foundation forMotor Neurone Diseaseand a Patron of the TrinityHospice.

Nicholas Clegg CBEChairman

Nicholas Clegg, 75, waspreviously a Director ofHill Samuel & Co Ltd, Co-Chairman of DaiwaEurope Ltd andChairman of DaiwaEurope Bank plc. He hasserved as a Director ofthe InternationalPrimary MarketsAssociation and a senioradviser to the Bank ofEngland on bankingsupervision. As well asother appointments healso served as a memberof the supervisory boardof Bank Insinger deBeaufort NV and aDirector of Insinger deBeaufort Holdings.

Graham Davin Chief Executive Officer

Graham Davin, 56, is theprincipal stakeholder ofUnited Trust Bank. Hewas a founding partnerof the Insinger deBeaufort Group and aDirector of its listedparent and its Dutchbank. He was previouslyChief Financial Officerand Head of CorporateFinance of Investec Bankand a main boardDirector of Investec for16 years.

Roger Tidyman Executive Director

Roger Tidyman, 62, is aManaging Director ofUnited Trust Bank. He isa chartered banker andwas previously Head ofBanking and Director ofBHF-Bank AG’s Londonbusiness, followingsenior positions inKleinwort Benson andHSBC Investment Bank.

Directors

Directors

7

United Trust Bank’s propertyloan book increased by 25% in2011. This is a significantincrease and in marked contrastto the vast majority of lendersin the UK marketplace. Both ofour property lending businesseshave increased their exposureto their respectivemarketplaces.

Our Bridging business provides short termlending to creditworthy customers, whoexhibit the capacity to refinance or repay uswithin the term of our finance. This policyleads us to focus on prime customers. Ourcustomers use our bridging finance forvarious purposes. Although we financetraditional “chain breaking” and customer“downsizing”, the reader can see from thecase studies later in this report that our fundsare used by our bridging borrowers for manyand varied purposes. Three of the case studiesillustrate the use of our bridging funding forthree different corporate finance purposes.

We pride ourselves in our excellent personalservice and won the 2011 “ServiceExcellence” award from brokers polled byBridging and Commercial. We intend to growour bridging finance business significantly in2012 with the assistance of our strong andgrowing broker network.

Our other business secured by property assetsis construction finance. We finance thedevelopment of housing in England andWales. Given the shortage of mortgagefinance, the greatest current demand for newhousing provision comes from equity richborrowers. Successive Governments haveestimated that the UK is short of almost twomillion homes. Underlying demand forhousing is therefore strong. However housingaffordability is poor other than for thosepotential buyers who have substantial equityin their own homes or their children, whomthey can support to buy, based on theparent’s equity. This sector of society canafford the deposits required by mortgagelenders. Even in these market places, many ofthese buyers are discretionary and theirappetite reduces when sentimentdeteriorates. We saw this effect in reducedsales of our developer client’s finished

housing product in the second half of 2011following buyer’s concerns at the prolongeddiscussions to resolve the debt problems ofsome European economies.

We therefore seek to fund developments ofproperties attractive to these marketsegments and we allow a longer time periodfor sales to be achieved to enable our loans tobe repaid. Our facilities tend to funddevelopments in areas of good employmentof, either, quality family housing close to goodschools and services or apartments close togood transport links and services.Consequently, last year, the vast majority ofour funding for development helped constructhousing in London and the South East ofEngland. However as the first case study of aWest Country mixed social/private schemeillustrates we consider each scheme anddeveloper customer on their merits.

Given the dearth of construction financeavailable and our continued and growingpresence in the market we are seeing newcustomers of increasing size and expertiseand we expect this improving customerprofile to continue. Our business developmentstaff have each been lending for constructionfor at least 20 years and have a depth ofindustrial knowledge which our customersand potential customers value.

In the last year we expected UK house pricesto decline more than they have done. OverallAcademetrics* report a 0.7% decline in 2011with London the only region increasing by3.1% in that period. Prices reduced to agreater extent in regions where the publicsector was a higher proportion of overallemployment. We believe the public sectorcuts in expenditure have taken time to feedthrough to consumer behaviour and weexpect further declines in those regions thisyear with more resilience the closer housesare to London. However we do not expectany material increase in prices in London, asthe continued uncertainty and volatility inthe financial marketplaces will lead toincreases in unemployment in the financialservices industry, which is the largest sectorof London employment. In 2012 we areexpecting an average 2% decline over all theUnited Kingdom.

This expectation does not lessen our desireto lend in these property marketplaces butincreases our intention to choose the bestcustomers, projects and property security.

*Academetrics- A research Based Consultancyfocussing on the Housing marketplace.

Forecast 2012 2013 2014 2015 2016

UK -9.5% -2.0% 0.5% 1.0% 2.0% 4.5% 6.0%

London -2.9% -0.6% 1.0% 5.0% 6.0% 6.5% 19.1%

South East -7.7% -1.0% 1.0% 4.0% 5.0% 6.0% 15.7%

South West -8.0% -1.5% 0.5% 2.5% 3.5% 5.0% 10.3%

East -9.1% -1.0% 1.0% 3.5% 4.5% 5.5% 14.1%

East Midlands -10.3% -1.5% 0.5% 2.0% 3.0% 5.0% 9.2%

West Midlands -10.6% -2.0% -1.0% 0.0% 0.0% 3.5% 0.4%

North East -13.3% -2.6% -1.5% -1.5% -0.5% 3.0% -3.1%

North West -14.0% -2.0% -1.0% -1.0% 0.0% 3.5% -0.6%

Yorks & Humber -12.2% -2.0% -1.5% -1.0% -1.0% 3.0% -2.6%

Wales -10.4% -2.0% 0.5% 0.5% 1.5% 4.5% 5.0%

Scotland -9.6% -4.0% 0.0% 0.0% 0.5% 2.0% -1.6%

5 years to2016

Savill’s 5 Year Regional House Price Projections

Change from peakto date

PropertyMarket View

8

We are keen to grow ourexisting asset finance businessfurther both organically and byacquisition. In the last year wehave recruited and established aspecialist, experienced team ofasset finance staff who areincreasing our lending beyondour historic base. We seek tolend secured by wheeled andtracked assets in all UK businessmarketplaces.

Despite the current difficult economicconditions, where several commentatorsbelieve the UK may fall back into recession,businesses still need to replace their fleetsas they age and to acquire fleets andvehicles when contracts are won.

Our first and third case studies illustrateour assistance to customers winning newcontracts. In the first study, we assistedour customer acquire a fleet of trailersfrom the company which had lost thatcontract. In the third study, we assisted anexperienced and able management teamto acquire two used coaches to fulfil acontract won from a national operatorwithdrawing from a certain type of work.

As with other marketplaces, the provisionof asset finance has significantly reducedover the last four years, with manyproviders leaving the marketplace.Consequently we are seeing goodopportunities to provide funds on hirepurchase or finance lease to wellestablished and creditworthy businesses.Our second case study illustrates ourcapacity to assist a well establishedcompany to refinance a balloon repaymenton a substantial crane, when the originalfunder had left the marketplace.

In summary, United Trust Bank is wellpositioned to expand all its lendingbusinesses profitably in 2012 and hasspecific business plans in its two propertylending businesses and its asset financebusiness to do so.

Market ViewAsset FinanceMarket View

9

Residential Development

Providing funding for a phaseddevelopment

We were approached by an experienceddeveloper to assist in the delivery of a 31unit residential scheme of local familyhousing in the West Country. The borroweralready owned the site and had agreed asale of the social units to a HousingAssociation. Initially they were looking forfinancial assistance to build Phase 1 being8 houses for sale on the open market. Theborrower has made excellent progress todate with Phase 1. Following exchangesof contracts for the sale of 2 of the unitswe have agreed to provide the funding forPhase 2 consisting of a further 6 detachedhouses for the open market and 9 “value”houses for members of the localcommunity.

Loan AmountPhase 1 - £1,775,000 - LTV 50%Phase 2 - £1,560,000 - LTV 55%

Providing funding for acquisition,planning gain and development

The borrower sought our assistance toacquire a derelict property in an attractiveSurrey village. Their intention was toapply for planning consent to convertthese institutional studios and flats into14 family houses which would be more inkeeping with the location. As a backstopthe borrower established that there wasthe possibility of carrying out arefurbishment of the existing units whichcould then be sold and in this way had afall back plan in case their planningapplication encountered opposition fromthe planning authorities. We were able toassist by providing a loan of 50% of theinitial purchase cost, before planning was granted.

The borrower subsequently pursued andreceived a formal consent for theconversion of the buildings to 14 familyhomes. Having achieved the desiredplanning we were able to increase our loanby providing for 100% of constructioncosts which enabled the customers tocarry out the intended redevelopmentproject.

Initial Facility £1,110,000 – LTV 50%Revised Facility post Planning -£2,519,000 - LTV 53%

Planning gain followed by development finance

We were approached by an existingcustomer to assist with the purchase of adevelopment opportunity in a desirableWest London location. The site hadplanning consent to convert the existingVictorian buildings into 10 flats with anunderground car park. However ourcustomer considered that a scheme forfamily housing, part conversion and partnew build would be more appropriate.After a site visit and meeting, we werequickly able to provide a facility in goodtime to enable the purchase to take place.

The revised planning consent was achievedwithin three months and thereafter wehave gone on to provide developmentfunding to cover 100% of the constructioncosts and assist with professional fees. Thedevelopment is in process and proceedingwell.

Initial Facility £1.5m – LTV 55%Revised Facility post Planning £4.5m -LTV 51%

Case Studies

10

Case Studies

Asset Finance

Enabling a customer to acquire a largetrailer fleet at short notice

We enabled a long established haulagecompany to purchase a used trailer fleetfrom a multi-national group of companiesfrom whom they were acquiring a numberof large contracts at short notice. Thetrailers were specialized units andtherefore detailed industry knowledge wasrequired to value and assess the loanrequirements. Using our in-houseexpertise, backed up by our extensivecontacts in the commercial vehicle andtrailer sector, we were quickly able toagree terms and complete the transactionin line with our customer’s deadline, thusensuring a seamless handover of thecontract.

Loan amount £170,000 - LTV 85% - Term 36 months

Refinancing a balloon

A well established crane hire companywished to refinance a balloon paymentdue on one of their large mobile cranes.The original funder had long since pulledout of the asset finance market, leavingthe company with the prospect of havingto sell the crane without further fundingbeing available. We were quickly able tocarry out a full inspection of the crane andagree a five year repayment plan whichgreatly assisted the company’s cashflow.

Loan amount £250,000 - LTV 90% -Term 60 months

Funding new coaches for a new businessventure

A recently incorporated coach hirecompany, whose Directors had a wealth ofexperience in the industry, wished topurchase two used coaches to enable themto take over a contract from a muchlarger, national operator who waswithdrawing from this particular type ofwork. The company required a competitivepackage from a funder who understoodthis sector, with a low deposit to assisttheir initial cashflow requirements, and arepayment plan in line with the projectedrevenue flow. Based on our due diligenceof both the contract and our own vehiclevaluations, we structured an attractivesolution which satisfied our customer’sneeds.

Loan amount £160,000 - LTV 80% -Term 36 months

11

Bridging

Providing living expenses

Our customers reside overseas where theyown substantial assets in addition to aproperty in the UK.

Due to an unexpected change in theirpersonal situation, our customers foundthemselves requiring a sum of money toenable them to continue to meet the highcost of living overseas pending theresolution of their personal affairs.We advanced the customers £258,600secured against their UK property withrepayment being achieved by the sale ofthe customers’ overseas residence.

Loan amount £258,600 - LTV 21% -Period 24 months

Assisting developers with an acquisition

Our customer is an offshore companywhich owned a flat in Central London. Itsprincipals include an architect andsurveyor who undertake high qualityrefurbishment projects.

The principals sought to purchase anotherflat and had been let down by their chosenbank. A Notice to Complete had alreadybeen served. We structured the transactionwhereby two security properties wereprovided; one owned by the borrowercompany and the other by the principals.We advanced an amount of £413,500 andthe borrower company was able tocomplete on its purchase within thedeadline. The loan will be repaid by thesale of one of the security properties.

Loan amount £413,500 - LTV 39% -Period 10 months

Assisting with the completion of anoverseas development

Our customers are experienced propertydevelopers who specialise in high qualitydevelopments in Italy. Their latestdevelopment was nearing completion, butmonies were required to finish thecommunal swimming pool and landscaping.

The customers had substantial equity intheir UK residential property which we wereable to take as security for the loan. One of the Bridging Team flew to Italy tomeet the customers who were personallysupervising the project and we advanced anamount of £696,600. The loan will be repaidby the sale of units at the Italiandevelopment or alternatively by thecustomers remortgaging their UK residence.

Loan amount £696,900 - LTV 65% - Period 6 months

Case Studies

12

CorporateInformation

Board of Directors

Non-Executive ChairmanNicholas Clegg CBE

Non-Executive DirectorsAndrew HerdMichael LewisEhsan ManiBarry Townsley CBE

Executive DirectorsGraham DavinHarley KaganNoel MeredithRoger Tidyman

Operations CommitteeShane BannertonGraham DavinWilliam DobbieHarley KaganAlan MargolisNoel MeredithMartin NixonRoger TidymanGerard Wright

Key employees

Development FinanceIan AndrewsJoanne GaryColin JonesPaul KeayNoel MeredithJonathan NailGemma SquirrelChris Walters

Bridging FinanceSatya DesaiGina FryRob LoveAlan MargolisDawn RickettsKira Vallier

Asset FinanceLee ChandlerMartin Nixon Paul Taylor

Deposits and TreasurySharron LiddleShetal NaranJasmit Ubhi

Credit and RiskStan RodenAndrew StonemanDavid StranksRoger TidymanGerard Wright

Finance, Administration and AuditShane BannertonWilliam DobbieKaren FranklinLora JonesChristine Wareham

Professional Advisors

BankersBarclays Bank PLC1 Churchill PlaceLondonE14 5HP

Lloyds Bank25 Gresham StreetLondonEC2V 7HN

AuditorDeloitte LLPLondon

Legal AdvisorsNabarro Lacon House84 Theobald’s RoadLondon WC1X 8RW

Company SecretaryWilliam Dobbie

Registered Office80 HaymarketLondon SW1Y 4TE

Registered Number549690

Corporate Information

Authorised and regulated by the Financial Services Authority. Members of the British Bankers’ Association.

13

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

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

• select suitable accounting policies andthen apply them consistently;

• make judgements and accountingestimates that are reasonable andprudent;

• state whether applicable UK AccountingStandards have been followed, subjectto any material departures disclosed andexplained in the financial statements;and

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

The directors are responsible for keepingadequate accounting records that aresufficient to show and explain thecompany’s transactions and disclose withreasonable accuracy at any time thefinancial position of the company andenable them to ensure that the financialstatements comply with the CompaniesAct 2006. They are also responsible forsafeguarding the assets of the companyand hence for taking reasonable steps forthe prevention and detection of fraud andother irregularities.The directors are responsible for themaintenance and integrity of thecorporate and financial informationincluded on the company’s website.Legislation in the United Kingdomgoverning the preparation anddissemination of financial statements may differ from legislation in otherjurisdictions.

Statement of Directors’ Responsibilities inRespect of the Financial Statements

14

We have audited the financialstatements of United Trust BankLimited for the year ended 31December 2011 which comprisethe Profit and Loss Account, theBalance Sheet, and the relatednotes 1 to 25. The financialreporting framework that hasbeen applied in theirpreparation is applicable lawand United KingdomAccounting Standards (UnitedKingdom Generally AcceptedAccounting Practice).

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

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

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

Opinion on financial statementsIn our opinion the financial statements:• give a true and fair view of the Company’s

affairs as at 31 December 2011 and of itsprofit for the year then ended;

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

• have been prepared in accordance with the requirements of the CompaniesAct 2006.

Opinion on other matter prescribed bythe Companies Act 2006In our opinion the information given in theDirectors’ Report for the financial year forwhich the financial statements areprepared is consistent with the financialstatements.

Matters on which we are required toreport by exceptionWe have nothing to report in respect ofthe following matters where theCompanies Act 2006 requires us to reportto you if, in our opinion:

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

• the financial statements are not inagreement with the accounting recordsand returns; or

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

• we have not received all the informationand explanations we require for our audit.

Alan Chaudhuri(Senior Statutory Auditor)for and on behalf ofDeloitte LLPChartered Accountants and Statutory AuditorLondon, United Kingdom27 February 2012

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

15

Note 2011 2010£’000 £’000

Interest receivable and similar income 7,869 6,255

Interest payable and similar charges (3,950) (3,151)

Net interest income 3,919 3,104

Fees and commissions 2,055 1,588

Operating income 5,974 4,692

Administrative expenses 2 (4,019) (3,034)

Depreciation 4 (62) (67)

Provision for bad and doubtful debts 8 (881) (1,334)

Operating profit on ordinary activities before tax 1,012 257

Tax charge for the year 5 (357) (63)

Profit after tax retained for the financial year 16 655 194

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

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

Profit and lossaccountfor the year ended31 December 2011

16

Balance sheetat 31 December 2011

Note 2011 2010£’000 £’000

AssetsLoans and advances to banks and building societies 6 31,074 21,520

Loans and advances to customers 7 108,800 85,871

Loans to group companies 9 565 390

Tangible fixed assets 11 97 143

Other assets 12 2,254 2,419

Total assets 142,790 110,343

LiabilitiesDeposits from customers 13 120,643 93,522

Other liabilities 14 2,668 1,997

123,311 95,519

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

Share premium account 16 5,020 5,020

Profit and loss account 16 1,459 804

Shareholders’ funds 14,479 13,824

Long-term subordinated debt 18 5,000 1,000

Total liabilities 142,790 110,343

Memorandum items:Guarantees and assets pledged as security 129 70

Commitments 19 36,508 30,140

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

The financial statements of United Trust Bank Limited were approved by the board of directors and authorised for issue on 27 February 2012.

They were signed on its behalf by:

H Kagan Director C R Tidyman Director

27 February 2012 27 February 2012

17

1. Accounting policies

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

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

Going ConcernThe Banks business activities, together with thefactors likely to affect its future developmentand performance are set out in the Directorsreport. The Bank currently has considerablefinancial resources with approximately 22% oftotal assets in cash or cash equivalents. Thedirectors continue to keep the Bank’s loan bookunder review and take action where necessary.The directors believe that the Bank is wellplaced to manage its business risks set out inNote 23 to the financial statements.

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

Cash Flow StatementsThe Bank utilises the exemption under FRS 1(Revised) not to present a cash flow statementon the basis that it is a wholly-ownedsubsidiary of a group whose financialstatements are publicly available.

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

Front-end fees receivable for the continuingservice of advances are recognised on the basis ofwork done and those in lieu of interest arerecognised over the period of the advance or riskexposure. Redemption fees are recognised whenthe contractual terms are met.

Amounts due from lessees under finance leasesand hire purchase contracts are recorded asreceivables at the amount of the Bank’s netinvestment in the contract. Finance income isallocated to accounting periods so as to reflect aconstant periodic rate of return on the Bank’s netinvestment outstanding in respect of the lease.

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

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

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

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

Computer equipment, softwareand office equipment - between 15%

and 33% per annum

Leasehold improvements - over the life ofthe lease

Motor vehicles - between 15% and 20% per annum

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

Provisions for bad and doubtful debtsProvisions for bad and doubtful debts are based onthe year end appraisal of loans and advances.Specific provisions have been made in respect ofall identified impaired advances. A generalprovision has been made in respect of losseswhich, although not yet specifically identified, areknown from experience to be present in anyportfolio of bank advances. The general provisionis charged as a percentage of loans written.

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

Pension Costs and other Post Retirement BenefitsThe Bank maintains a policy of supporting thedefined contribution pension schemes of itsemployees. The amounts charged to the profit andloss account in respect of pension costs are thecontributions payable in the year. Differencesbetween contributions payable in the year andcontributions actually paid are shown either asaccruals or prepayments in the balance sheet.

InvestmentsInvestments are held at cost less impairments, if any.

Derivative Financial InstrumentsThe Bank only enters into foreign exchangeforward contracts to manage its exposure toforeign exchange risk. The Bank does not hold orissue derivative financial instruments forspeculative purposes. The forward contracts areentered into only to hedge the inflows of theinvestments held in US Dollars or Euros.

For a forward foreign exchange contract to betreated as a hedge the instrument must berelated to actual foreign currency assets orliabilities or to a probable commitment. It mustinvolve the same currency or similar currencies asthe hedged item and must also reduce the risk offoreign currency exchange movements on theBank’s operations. Gains and losses arising onthese contracts are deferred and recognised inthe profit and loss account, or as adjustments tothe carrying amount of fixed assets, only whenthe hedged transaction has itself been reflectedin the Bank’s financial statements.

Foreign CurrencyTransactions in foreign currencies are recorded atthe rate of exchange at the date of the transactionor, if hedged, at the forward contract rate.Monetary assets and liabilities denominated inforeign currencies at the balance sheet date arereported at the rates of exchange prevailing atthat date or, if appropriate, at the forwardcontract rate.

Financial Liabilities and EquityFinancial liabilities and equity instruments areclassified according to the substance of thecontractual arrangements entered into. An equityinstrument is any contract that evidences aresidual interest in the assets of the Bank afterdeducting all of its liabilities.

Notes to the FinancialStatements for the year ended 31 December 2011

18

2. Administrative expenses2011 2010

£’000 £’000

Staff costs

- wages and salaries 2,435 1,756

- social security costs 280 193

- other pension costs 57 48

Auditor’s Remuneration - audit of annual accounts 54 55

- tax services 10 9

- other assurance services 1 -

Other administrative expenses 1,182 973

4,019 3,034

The average monthly number of people employed by the Bank (including Executive Directors) during the year was 29 (2010 – 24). At the end of the year, the Bank employed

33 people (2010 – 24). The staff costs include Directors’ Remuneration set out in Note 3.

3. Directors’ remuneration

Remuneration

The remuneration of the directors was as follows:

2011 2010

£’000 £’000

Emoluments and incentive schemes 877 802

Pensions

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

2011 2010

No. No.

Money purchase schemes 1 1

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

2011 2010

£’000 £’000

Emoluments and incentive schemes 246 219

4. Operating profit on ordinary activities

Operating profit on ordinary activities is stated after charging:

2011 2010

£’000 £’000

Auditor’s Remuneration – audit of annual accounts 54 55

– tax services 10 9

- other assurance services 1 -

Depreciation 62 67

Operating lease: property 125 151

19

5. Tax on profit on ordinary activities

i) Analysis of tax charge on ordinary activities 2011 2010

£’000 £’000

Corporation tax - -

Deferred tax – assessed profits 493 245

Deferred tax – movement on timing difference (136) (182)

357 63

ii) Factors affecting tax charge for the year

The tax assessed for the year is lower than that resulting from applying the standard rate of corporation tax in the UK: 28% (2009: 28%).

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

2011 2010

£’000 £’000

Profit on ordinary activities before tax 1,012 257

Tax charge at 26.5% (2010: 28%) thereon: 268 72

Effects of:

Expenses and provisions deductible/(not deductible) for tax purposes 47 22

Excess of depreciation over capital allowances 178 151

Assessed profit for the year applied to deferred taxation (493) (245)

Tax charge/(credit) for the year - -

6. Loans and advances to banks, building societies and financial institutions2011 2010

£’000 £’000

Amounts falling due within one year:

Loans & advances to Banks 27,574 20,520

Loans & advances to Building Societies 3,500 1,000

31,074 21,520

7. Loans and advances to customers2011 2010

£’000 £’000

Property finance 98,355 78,498

Finance lease and hire purchase receivables 10,445 7,373

108,800 85,871

Property finance

Amounts falling due

- within one year 97,802 80,247

- over one year but less than five years 4,850 1,686

- more than five years 27 -

102,679 81,933

General and specific bad and doubtful debt provisions (see note 8) (4,324) (3,435)

98,355 78,498

Of which repayable on demand or short notice 37,637 29,348

20

2011 2010

£’000 £’000

Finance lease and hire purchase receivables

Gross investment in receivable:

- within one year 4,788 3,097

- over one year but less than five years 7,737 5,762

- over five years 4 57

12,529 8,916

Less: Unearned future finance income (2,003) (1,487)

Net investment in finance lease and hire purchase receivables 10,526 7,429

Net investment in finance leases and hire purchase receivable:

- within one year 3,761 2,419

- over one year but less than five years 6,761 4,957

- over five years 4 53

Net investment in finance leases and hire purchase receivables 10,526 7,429

General bad and doubtful debt provisions (note 8) (81) (56)

10,445 7,373

2011 2010

£’000 £’000

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

Finance leases 2,614 2,956

Hire purchase 7,912 4,473

10,526 7,429

8. Provision for bad and doubtful debts

Balance Sheet movement 2011 2011 2011 2010 2010 2010

Specific General Total Specific General Total

£’000 £’000 £’000 £’000 £’000 £’000

At 1 January 2,872 619 3,491 6,400 512 6,912

Charge 1,022 142 1,164 1,176 107 1,283

Released (250) - (250) - - -

Written off - - - (4,704) - (4,704)

At 31 December 3,644 761 4,405 2,872 619 3,491

Property Finance 3,644 680 4,324 2,872 563 3,435

Asset Finance - 81 81 - 56 56

3,644 761 4,405 2,872 619 3,491

Bad and doubtful debts movement in the Profit & Loss account 2011 2010

£’000 £’000

Specific and general provision charge 1,164 1,283

Provision released (250) -

(Recoveries)/Write off during the year (33) 51

881 1,334

21

Interest and fees in suspense

2011 2010

£’000 £’000

At 1 January 3,606 4,705

Suspended during the year 2,885 2,996

Written off - (3,737)

Released (54) (358)

At 31 December 6,437 3,606

9. Loans to group companies

2011 2010

£’000 £’000

Repayable on demand:

- Loan to parent 565 390

Interest is charged at market rates and the loan is repayable on demand.

10. Debt securities

2011 2010

£’000 £’000

At 1 January - 7,073

Disposals - (7,073)

At 31 December - -

The Bank sold its portfolio of debt securities during the year to 31 December 2010.

22

11. Tangible fixed assets

Tangible fixed assets comprise: Leasehold Computer Motor Total

improvements equipment, vehicles

software

& office

equipment

£’000 £’000 £’000 £’000

Cost:

At 1 January 2011 41 563 76 680

Additions - 46 - 46

Disposals - - (39) (39)

At 31 December 2011 41 609 37 687

Depreciation:

At 1 January 2011 32 477 28 537

Charge 5 54 3 62

Disposals - - (9) (9)

At 31 December 2011 37 531 22 590

Net book value:

At 31 December 2010 9 86 48 143

At 31 December 2011 4 78 15 97

12. Other assets

2011 2010

£’000 £’000

Deferred tax asset 793 1,150

Accrued interest receivable 1,088 1,077

Prepayments 169 148

Other debtors 204 44

2,254 2,419

Deferred tax asset:

As at 1 January 1,150 1,213

Charge for the year (357) (63)

As at 31 December 793 1,150

A deferred tax asset of £793k has been recognised at 31 December 2011 (2010: £1,150k). The directors are of the opinion, based on recent and forecast performance of the

Bank, that the level of profits in the current and next financial year will exceed the losses incurred in the previous years.

13. Deposits from customers

2011 2010

£’000 £’000

Amounts falling due

- within one year 79,903 67,669

- over one year but less than five years 40,740 25,853

120,643 93,522

Of which repayable on demand or short notice 5,182 3,090

23

14. Other liabilities

2011 2010

£’000 £’000

Accrued interest payable 1,965 1,349

Accruals and deferred income 703 648

2,668 1,997

15. Called-up share capital

2011 2010

£’000 £’000

Issued, allotted, called-up and fully paid:

At 1 January and 31 December (Ordinary shares of £1 each) 8,000 8,000

Number of shares ’000 ’000

Issued, allotted, called-up and fully paid:

At 1 January and 31 December (Ordinary shares of £1 each) 8,000 8,000

16. Reserves

2011 2010

£’000 £’000

Share premium account

At 1 January and 31 December 5,020 5,020

Profit and loss account

At 1 January 804 610

Retained profit for the financial year 655 194

At 31 December 1,459 804

No dividend was declared or paid during the year (2010: nil).

24

17. Reconciliation of movements in shareholders’ funds

2011 2010

£’000 £’000

Profit for the financial year 655 194

Net increase in shareholders’ funds 655 194

Opening shareholders’ funds 13,824 13,630

Closing shareholders’ funds 14,479 13,824

18. Long-term subordinated debt

2011 2010

£’000 £’000

Subordinated debt 5,000 1,000

During 2011, the Bank raised £4m of subordinated debt (2010: £1m). The coupon payable on the debt is 12% per annum, payable semi-annually. The subordinated debt ranks as

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

19. Financial commitments

2011 2010

£’000 £’000

Conditional commitments to lend 36,508 30,140

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

the terms and conditions of their facilities.

Commitments under annual operating leases for property expiring:

In less than one year 109 -

In two to five years - 181

20. Related party transactions

Under Financial Reporting Standard 8 the Company is exempt from the requirement to disclose intragroup transactions with related parties on the grounds that it is a wholly-

owned subsidiary of a European Union company whose consolidated accounts are publicly available. Details of Directors remunerations are stated in note 3.

21. Segmental information

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

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22. Derivatives

In prior years the Bank entered into derivative contracts, for non-trading purposes only, to hedge currency risk.

In the table below, notional principal amount indicates the volume of business outstanding at the balance sheet date and does not represent the amount at risk. The fair value

of a derivative financial instrument represents the positive or negative cashflows which would have occurred had the rights and obligations arising from that instrument been

closed out by the Bank in an orderly market transaction at the balance sheet date.

The nominal principal amounts, maturity profiles, and fair value of non-trading derivatives held at 31 December are as follows:

Up to one year One to five years Total Fair value

£’000 £’000 £’000 £’000

Foreign exchange contracts

2011 - - - -

2010 3,076 - 3,076 3,062

23. Risk management

23.1 Risk management objectives

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

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

The principal methods used to manage risks identifiedby the Bank include:

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

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

• Departmental policies, procedures and mandates tolimit the extent to which individuals can committhe Bank to accepting additional risk;

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

23.2 Risk governance structures

This section describes the committee and managementstructures in place within the Bank in order to identifyand manage risk, and ensure that the appropriatestandards of corporate governance are maintained.

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

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

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

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

Any significant and/or material breaches of prescribed

controls are reported to the Board. The Bank recognisesthat it is key to its future success as a financialinstitution to conduct its affairs with prudence andintegrity and to safeguard the interests of thestakeholders.

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

The Board

The Board of Directors are responsible for establishingrisk appetite and approve policy statements definingcredit risk and liquidity risk. These policy statementsestablish the Bank’s overall capacity for risk and set outthe parameters within which it operates.Implementation of these policies is the responsibility ofthe Management Committee who report to the Board.

The main committees of the Bank are:

Audit committee

A non-executive director chairs this committee. Itreviews and sets the internal audit programme andexamines completed internal and external auditreports. It considers the major findings and ensures, viathe Management, that recommendations areimplemented where necessary. It also reviews theannual financial statements. The Audit Committeemeets at least three times per year.

Remuneration committee

The role of this committee is to consider remunerationpolicy and specifically to approve the remuneration andother terms of service of executive directors and seniormanagers. The executive directors decide fees payableto non-executive directors. The committee meets asrequired.

Management committee

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

Operations committee

The operations committee meets monthly to discussmatters relating to the Banks day-to-day operations. Itcomprises the Executive Directors and DepartmentalManagers.

Credit committee

This forum sanctions all counterparty limits. It regularlyreviews loan performance, large exposures andadequacy of provisions. Its role is to ensure that creditpolicy is prudent, taking into account changing markettrends.

Asset and liability committee

This committee recommends the policy for liquidity andinterest rate risk. It regularly reviews the Bank’sbalance sheet to ensure that it is positioned prudentlyand meets the agreed policies taking into accountprevailing markets, and projections of business growth.

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

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

It is important that all the Bank’s risks are regularlyconsidered. Any change to business objectives cancause a change to the risk profile of the business.Consequently, under the guidance of the Management,the business regularly reviews its objectives, assessesthe risks to prevent these objectives being achieved,and ensures there is defined ownership of the risks and

26

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

Major risks

The major risks associated with the Bank’s business are:• Credit risk;• Liquidity risk;• Interest rate risk; • Operational risk; • Legal risk;• Regulatory & Compliance risk; and,• Reputational risk.

Credit risk

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

The Bank’s Credit Committee includes ExecutiveDirectors and Business Development Managers. TheCredit Committee has to reach a unanimous consensusbefore authorising a credit exposure and each approvalis signed by a valid quorum. Additionally exposuresbeyond a certain threshold require additionalauthorisations. Credit limits on all lending, includingtreasury and interbank lines are reviewed regularly.

The Bank has a focused business strategy and hasconsiderable expertise in its chosen sectors. The vastmajority of the Bank’s lending, excluding interbankplacements, which are predominantly with UK banks, issecured on assets. On a geographical basis, at least95% of the credit exposure of the Bank, includingcontingent liabilities and commitments, is to the UK.

Liquidity risk

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

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

Limits on potential cash flow mismatches over definedtime horizons form the principal basis of liquiditycontrol. Limits are also placed upon the value ofdeposits taken from a single source, both monthly andin aggregate. A dedicated system is used to monitorand stress test the Bank’s liquidity position againstdifferent scenarios.

Operational risk

This is the exposure to financial or other damagearising through system or process failure, human error,or fraud or through inadequate controls andprocedures. The Bank has a detailed procedures manualin place and ensures that all operational risks areevaluated and appropriately controlled.Contingency plans are in place to ensure continuity inthe event of any unforeseen serious disruption tobusiness operations. These plans are reviewed andtested to ensure they can be implemented in a timelymanner should events dictate.

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

Legal risk

Legal and documentation risk is defined as the risk thatcontracts entered into by the Bank with its clients willnot be enforceable, especially with respect to events ofdefault by a client. This could lead to a situation wherethe documentation will not give the rights andremedies anticipated when the transaction was enteredinto, particularly when security arrangements havebeen agreed.

To mitigate legal risk, the Bank uses independentexternal legal advisors to ensure documentation givesthe appropriate rights and remedies.

Regulatory & compliance risk

This is the risk that any part of the Bank fails to meetthe requirements or expectations of the regulatoryauthorities. It can also arise where changes toregulations are not anticipated or managed properly.Compliance reports are reviewed regularly by the Boardand Audit Committee and management regularlyevaluates regulatory pronouncements.

Currency risk

Non-trading currency risk exposure arises principallyfrom the Bank’s investments in Debt Securities. TheBank entered into derivative contracts for non-tradingpurposes only, in order to hedge currency risk. As aconsequence, the Bank currently has no materialcurrency risk.

Interest rate risk

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

The Bank finances its loan book and money marketdeposits primarily through customer deposits. TheAsset and Liability Committee meets regularly to reviewthe rates offered on the various deposit products. Thedeposits are spread between variable and fixed ratedeposits.

The Bank’s lending to customers is at rates linked tothe interest rates currently prevailing in the market.The money market deposits are placed at the best ratesavailable in the market. In common with other banks,the Bank earns part of its return by controlledmismatching of the dates on which interest receivableon assets and interest payable on liabilities are nextreset to market rates or, if earlier, the dates on whichthe assets and liabilities mature.

A positive interest rate sensitivity gap exists wheremore assets than liabilities re-price during a givenperiod. A positive gap position tends to benefit netinterest income in an environment where interest ratesare rising. However, the actual effect will depend on anumber of factors including actual repayment datesand interest rate sensitivity within the banding period.The vast majority of the Loans and Advances dealt within the table below benefit from interest rate floors.These cannot easily be dealt with in a gap table but thetable is prepared on the basis that floors are notactivated. The table may over-state the economicinterest rate mis-match in some circumstances.

27

Interest rate re-pricing table

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

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

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

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

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

Loans to group companies 565 - - - - - 565

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

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

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

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

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

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

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

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

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

2010 Not more than More than More than More than More than Non Totalthree months three months six months one year five years -interest

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

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

Loans and advances to customers 68,127 6,845 5,889 4,957 53 - 85,871

Loans and advances to banks, building societies and financial institutions 17,870 - 3,650 - - - 21,520

Loans to group companies 390 - - - - - 390

Other assets - - - - - 2,562 2,562

86,387 6,845 9,539 4,957 53 2,562 110,343

Deposits from customers 35,404 9,726 22,502 25,890 - - 93,522

Other liabilities - - - - - 1,997 1,997

Long term subordinated debt - - - - 1,000 - 1,000

Shareholders’ funds - - - - - 13,824 13,824

35,404 9,726 22,502 25,890 1,000 15,821 110,343

Interest rate sensitivity gap 50,983 (2,881) (12,963) (20,933) (947) (13,259)

Cumulative gap 50,983 48,102 35,139 14,206 13,259 -

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

24. Ultimate controlling company

UTB Partners Limited is the Bank’s immediate parent, owns 100% of the Bank and is recognised by the directors as the Bank’s ultimate controlling company. Financialstatements for UTB Partners Limited, which is the smallest and largest group into which the Bank is consolidated, can be obtained from UTB Partners Limited, 80 Haymarket,London SW1Y 4TE. The direct, indirect or attributed interest of the directors in the shares of UTB Partners Limited are disclosed in the accounts of that Company. The directorshave no other interests in the shares of any other group company.

25. Subsequent events

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