United Trust Bank Limited Pillar 3disclosures · United Trust Bank Limited Pillar 3 disclosures Page 4 of 29 1.4. Verification of information The Bank’s Pillar 3 disclosures are

Pillar3 disclosuresUnited Trust Bank Limited

as at 31 December 2015

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 23

8 Appendix 1: Own Funds Disclosure Template 26

United Trust Bank Limited Pillar 3 disclosures

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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.

1.1. 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 2014. 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.

1.2. Measure of capital resources

United Trust Bank uses the standardised approach in measuring its capital resources

requirements on a Pillar 1 basis.

1.3. Basis of disclosure

The Bank’s Pillar 3 disclosure document has been prepared in accordance with the CRD IV

requirements.

All disclosures within this report have been prepared as at 31 December 2015, which is the

Bank’s latest financial year-end, and include the 2015 audited profits which the Board

approved on 25 February 2016.


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1.4. Verification of information

The Bank’s Pillar 3 disclosures are not subject to external audit.


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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.

These Pillar 3 disclosures relate only 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 refinancing and trading in

completed properties. A regulated second charge mortgage product is offered via brokers.

The Bank finances plant, machinery, wheeled assets and technology 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.


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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), Human

Resources, 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.


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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.

3.2.1 The Board

The Board of Directors includes the non-executive chairman, four non-executive directors

and five executive directors. The Board is chaired by Mr Nicholas Clegg CBE and he is

responsible for its effectiveness. The size and composition of the Board is kept under review

to ensure an appropriate balance of skills and experience is represented.

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 approach to 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.

The Board has oversight of how management implement these strategies and retains control

through challenge at the Board and committee meetings. All members of the Board receive

accurate and timely information to enable them to make contributions to any discussions.


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The performance of the Board is kept under review through a process of board evaluation

and self-evaluation. 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.


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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 2015 At 31 Dec 2014 % Change

Operating Income £31.6m £23.6m 33.9%

Operating Profit £16.8m £12.3m 36.7%

Cost Income Ratio 46.9% 48.0% (2.3)%

Return on Equity 32.0% 28.3% 13.1%

Gross New Lending £521m £342m 52.3%

Loan Book £434m £293m 48.1%

Deposit Book £476m £326m 46.0%

Staff Numbers 109 80 36.3%

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 2015 in addition to their roles within the Bank were:

Name Position Total Positions held

Mr A Herd Non-Executive Director 2

Mr M Lewis Non-Executive Director 5

Mr S Lockley Non-Executive Director 1

Mrs T Blackwell Non-Executive Director 3

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 2015, 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

robust and will ensure that members of the Management Committee are involved in key

selection processes.


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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.

3.2.2 Board Committees

The main committees of the Board are:

Management Committee

This committee is chaired by the Chief Executive, Graham Davin, and includes the executive

directors of the Bank and hence provides a direct linkage to the Board. The committee meets

monthly to discuss and implement the strategy of the Bank, as formulated 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 sub-committees (refer to section 3.2.3). It considers all exceptional items and

reviews the capital, liquidity and performance of the business.

Risk Committee

This committee is chaired by Stephen Lockley, a non-executive director, and includes

Andrew Herd, a non-executive director; Dr Christos Gabrielides, the Chief Risk Officer; Roger

Tidyman, an executive director; Shane Bannerton, Head of Finance & Company Secretary;

and Robert Sherr, the Chief Credit Officer. 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 the ongoing process of the 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, risk tolerance and risk limits, taking into account the Bank’s capital

adequacy and the external financial environment. It considers, oversees and advises the

Board on, and provides challenge on the Bank’s exposure to, all significant risks to the

business and 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.


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Audit Committee

This 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, sets

the internal audit programme and examines completed internal and external audit reports. It

considers the major findings and ensures, via the Management, that recommendations are

implemented where necessary. Any significant judgements in relation to financial reporting

are reviewed and challenged by the committee.

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 auditor and considers whether internal audit is

adequately resourced. The committee reviews the appointment of external auditors at

intervals of not more than three years and approves the audit fees.

The Audit Committee has assessed Internal Audit resources and is satisfied that these are

appropriate to fulfil their responsibilities.

Remuneration Committee

This committee is chaired by Michael Lewis, a non-executive director, and includes Nicholas

Clegg, the Chairman. The role of this committee is to consider remuneration policy,

regulatory obligations and specifically to approve the remuneration and other terms of

service of executive directors and senior managers.

The committee ensures that the remuneration policy is managed in a way that is appropriate

to its size, internal organisation and the nature, scope and complexity of its 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 for all staff and additionally as required.

3.2.3 Management Committees

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


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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 Managing Director, Harley Kagan, and includes the

Treasurer, William Dobbie, the Head of Deposits, Sharon Liddle, the Head of Finance &

Company Secretary, Shane Bannerton, the Chief Risk Officer, Christos Gabrielides, the Chief

Financial Officer, Jonathan Ayres, and the Chief Executive, Graham Davin. 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

Chief Executive, Graham Davin, the Compliance Manager, Flora Kong, the Head of Conduct

Risk, Mark Heaphy and the Head of Finance & Company Secretary, Shane Bannerton. 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; and

Reputational risk.

Credit risk

This 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 markets segments where it has specific expertise; through limiting

exposures; by maintaining detailed lending policies; and through rigorous underwriting

processes.

The Bank’s Credit Committee includes executive directors, credit managers and business

development managers. The Credit Committee 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.


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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, UK banks and UK building societies, is secured on

assets. On a geographical basis, the credit exposure of the Bank, including contingent

liabilities and commitments, is predominantly to the UK. The Bank holds collateral against

loans and advances to customers.

Concentration risk

Concentration risk arises from having high or excessive exposures in one sector,

geographical area or counterparty which can lead to a significant loss 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.

Although there is diversification within the Bank’s portfolios and operations, there are

certain features of the Bank’s activity which contain an element of concentration:

The Bank operates within the UK, with a focus in 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.

The sectors the Bank operates within have been selected due to the Bank’s expertise and/or

the security and other risk mitigants available.

Concentration risk of Treasury assets is managed and controlled through a counterparty

placements policy and limits.

Liquidity risk

This is the risk that the Bank is not 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 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, less capital, to deposits

and the value of deposits taken from a single source. The Bank has no wholesale funding,


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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

This is the risk that the value of the Bank’s assets and liabilities or profitability will fluctuate

because of changes in market interest rates.

The Bank finances its loan book and money market deposits primarily through customer

deposits. The ALCO meets regularly to review the rates offered on the various deposit

products. The deposits are spread between variable and fixed rate deposits to help manage

the risk in the portfolios.

The Bank’s lending to customers is at interest rates currently prevailing in the market. The

money market deposits are placed at the best rates available in the market. 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, if earlier, the dates on which the assets and liabilities mature.

A positive interest rate sensitivity gap exists where more assets than liabilities re-price

during a given period. A positive gap position tends to benefit net interest income in an

environment where interest rates are rising. However, the actual effect will depend on a

number of factors including actual repayment dates and interest rate sensitivity within the

banding period.

Interest rate risk exposures are measured weekly, and reported to ALCO. The position is

also reported to the Board.

At 31 December 2015, the Bank’s interest rate gap sensitivity, being the potential impact on

the Bank’s economic value, resulting from a +/- 200bps parallel shift in the yield curve, was

£1.5m and -£1.5m respectively, on the basis that rates can go below 0.0%. Assuming a

0.0% interest rate floor, the impact was £1.5m and -£0.5m respectively. This takes into

account appropriate behavioural adjustments.

Operational risk

This 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 a

detailed procedures manual 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 to ensure they can

be implemented in a timely manner should events dictate.

To give further assurance, the Internal Audit function regularly reviews operational areas to

ensure that risks and controls are appropriate and effective.


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Regulatory, compliance & conduct risk

Regulatory and compliance risk is the risk that any part of the Bank fails to meet the

requirements or expectations of the regulatory authorities. It can also arise where changes

to regulations are not anticipated or managed properly. The Compliance Management

Committee meets monthly to review compliance obligations and processes. Compliance

reports are reviewed regularly by the Board and Audit Committee and management monitor

regulatory pronouncements.

Conduct risk is the risk that the business strategy, the culture, and the manner in which the

business is run, is not focused on the customer. The Bank is centred on doing the right thing

for customers and monitors customer outcomes via management information, which is

reported directly to the Board. Specialist staff have been appointed to manage this risk.

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, exit of key employees or

difficulty in recruiting new staff. The Bank is proactive in the development and preservation

of its reputation in the market.


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4. Capital resources

As at 31 December 2015, and throughout the period to 31 December 2015, 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 2015:

Tier 1 % of

Total

31/12/15

£’000

% of

Total

31/12/14

£’000

%

Growth

Share Capital 9,500 9,000

Share Premium 11,280 7,020

Profit and Loss Account 26,551 14,219

Less Intangible Assets (955) -

Total CET 1 46,376 30,239

Additional Tier 1 4,700 0

Total Tier 1 76.8% 51,076 65.9% 30,239 68.9%

Tier 2

Subordinated Loans 14,500 14,500

Collective Impairments 952 1,168

Total Tier 2 23.2% 15,452 34.1% 15,668 -1.4%

Eligible Capital 100.0% 66,528 100.0% 45,907 44.9%

In accordance with Article 48 of the Capital Requirements Regulation (CRR), the Bank’s

deferred tax asset of £1,493k 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 2015.

4.2.1 Summary reconciliation of accounting assets and leverage ratio exposures

31/12/15 31/12/14

£’000s

£’000s

Total assets as per published financial statements 552,726 378,210

Collective impairments and other adjustments 1,597 1,412

Leverage ratio disclosure base 554,323 379,622


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4.2.2 Leverage ratio common disclosure

31/12/15 31/12/14

£’000s

£’000s

Total on-balance sheet exposures 554,323 379,622

Total off-balance sheet exposures 16,859 12,861

Total Exposures 571,182 392,483

Tier 1 Capital 51,076 30,239

End of period leverage ratio 8.9% 7.7%

4.2.3 Split of on-balance sheet exposures

CRR leverage ratio exposures 31/12/15 31/12/14

£’000s

£’000s

Total on-balance sheet exposures, of which 554,323 379,622

Central banks 74,062 0

Central governments and MDB 3,226 17,059

Institutions 34,995 63,851

Secured by mortgages on immovable properties 343,113 219,085

Retail exposures 81,376 58,327

Exposures in default 10,692 16,882

Other exposures 6,859 4,418

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 2.7% at 31 December 2015 (2014: 2.2%).

4.4 Encumbered Assets

The Bank held no encumbered assets at 31 December 2015.


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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.

5.1. 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.

5.2. 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 2015

determined in accordance with CRD IV:


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Description Main Components 8% Capital

Required

£000’s

Central Government or central banks Government Gilts / T-Bills / BoE

Reserve Account

0

Institutions Cash placed with financial institutions 560

Retail Secured & Unsecured Lending 3,750

- Of which: SME Secured & Unsecured Lending 3,638

Secured by mortgages on immovable

properties

Mortgage 29,979

- Of which: SME Mortgage 25,113

Exposures in default Mortgage 917

Other items Sundry Debtors and Fixed Assets 559

Credit risk minimum capital requirement 35,765

Operational risk (basic indicator approach) 3,447

Pillar 1 capital requirement 39,212

Of which: Tier 1 29,409

Tier 2 9,803

Capital resources (refer to section 4.1)

Tier 1 51,076

Tier 2 15,452

Total Capital Resources 66,528

Excess of capital resources over Pillar 1 capital requirement

Tier 1 21,667

Tier 2 5,649

Total Excess of Capital 27,316

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 Planning Buffer (CPB) (Pillar 2B). Pillar 2A must comprise a

minimum of 75% Tier 1 capital and no more than 25% Tier 2 capital.

The Pillar 2B CPB requirement can currently be met with Tier 2 capital. From 1 January 2016

the Bank will be required to meet the Pillar 2B requirement with a mix of Tier 1 and Tier 2

capital.

The Bank benefits from a surplus of capital resources over and above its Pillar 2 regulatory

capital requirement.


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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 2015:

Description Exposures

at

31 December

2015

£000

Average

Exposures Year

to 31 December

2015

£000

Central governments or central banks 77,288 47,079

Multilateral development banks - 3,043

Institutions 34,995 42,930

Retail 81,376 72,466

Of which: SME 79,500 70,665

Secured by mortgages on immovable properties 343,113 286,178

Of which: SME 237,167 202,585

Exposures in default 10,692 12,575

Other items 6,859 6,353

554,323 470,624

The residual maturity of these exposures at 31 December 2015 is shown below.

Description Up to 1

year

£’000

1-5

years

£’000

More than

5 years

£’000

Non-

interest

bearing

£’000

Total

£’000

Central governments or central banks 77,288 - - - 77,288

Multilateral development banks - - - - -

Institutions 34,995 - - - 34,995

Retail 36,763 44,613 - - 81,376

Secured by mortgages on immovable

properties

296,804 38,456 7,853 - 343,113

Exposures in default 10,692 - - - 10,692

Other items - - - 6,859 6,859

456,542 83,069 7,853 6,859 554,323

At 31 December 2015 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, with the

exception of multilateral development banks, are to customers within the United Kingdom.


Page 21 of 29

6.2. 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 discounted 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.

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.


Page 22 of 29

6.3. Provision for impairment losses

6.3.1 Loans &

Advances Movement

2015

Individual

2015

Collective

2015

Total

2014

Individual

2014

Collective

2014

Total

£’000 £’000 £’000

£’000 £’000 £’000

At 1 January 2,689 1,167 3,856 3,452 1,183 4,635

Charge 1,750 (216) 1,534 2,832 (16) 2,816

Released (70) - (70) (160) - (160)

Written off (921) (921) (2,397) (2,397)

Unwinding of discount (668) - (668) (1,038) - (1,038)

At 31 December 2,780 951 3,731 2,689 1,167 3,856

6.3.2 Impairment losses taken to income

statement

2015

£’000

2014

£’000

Individual & collective impairment charge 1,534 2,816

Provision released (70) (160)

Charge / (recoveries) during the year 129 (117)

1,593 2,539

6.4. 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.

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 1.6% of total

loan assets and is expected to be substantially realised by the end of 2016.


Page 23 of 29

7. Remuneration

7.1 Remuneration Committee

In accordance with the principles of SYSC 19A and the Remuneration Code, the Bank

operates a Remuneration Committee which ensures that remuneration is managed in a way

which is appropriate to its size, internal organisation and the nature, scope and complexity

of its activities. The remuneration policy of the Bank (which includes adherence to the

remuneration code) is determined by this Committee, which comprises two non-executive

directors of the Bank. The Committee operates under an agreed terms of reference from the

Board of Directors.

7.2 Forms of Remuneration

The 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.

Remuneration may comprise base salary, annual cash bonus and share options. Benefits

may include holiday allowance, company car, pension scheme, life assurance, private

medical insurance, permanent health insurance, and staff loans.

Base salary is designed to align the value the individual provides to the Bank, including the

skills and competencies required and the contribution to the Bank, in the context of the UK

Financial Services market. This is achieved through a job evaluation system based on the job

descriptions which assess the knowledge and skills required for the job, the level of thinking

and problem solving involved and the degree of accountability or decision making required.

Salaries are reviewed annually by the Committee.

Non-executive directors receive fees, which are recommended by the Chief Executive and

Chairman and approved by the Remuneration Committee. In the past non-executive

directors have been awarded share options, but no longer receive variable remuneration.

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.

Share options, which vest over a period of up to four years, are awarded to senior staff and

executive directors. Share options are designed to drive and reward long term performance,

as well as help retain key personnel within the Bank. The Committee approves the issue of

all share options.

The shareholders of the Bank have approved the increase of the variable remuneration limit

(cash bonus plus LTIP options, see section 7.5) of up to a total of 200% of fixed

remuneration.


Page 24 of 29

7.3 Remuneration Statistics

The Banks remuneration for the past two years was:

2015

£’000

2014

£’000

%

Growth

Total wages and salaries

- Directors (including Non-Executives’ fees) 2,425 1,532

- All other 7,425 4,953

9,850 6,485 51.9%

Social security costs 1,111 666

Pension costs 438 232

11,399 7,383 54.4%

Number of Staff at Year-end 109 80 36.3%

Average Number of Staff 100 67 49.3%

Total Remuneration / Net Income 36.0% 31.3%

Total Remuneration / Average Employee £114 £110

Remuneration for the year ended 31 December 2015 for the Bank by business area was as

follows:

Lending Treasury

and

Central

Services

Total

£’000 £’000 £’000

Salaries 4,434 2,322 6,756

Cash Variable Remuneration 1,234 1,312 2,546

Value of Share Options 176 372 548

5,844 4,006 9,850

Social security costs 712 399 1,111

Pension costs 303 135 438

Total remuneration 6,859 4,540 11,399

Average Number of Staff 60 40 100

7.4 Code Staff Remuneration

The remuneration (including variable remuneration and benefits) for the year ended

31 December 2015 in respect of Directors and others considered as Code Staff (senior staff

members and risk takers including Non-Executive Directors) was as follows:


Page 25 of 29

2015

£’000

2014

£’000

Salaries 1,710 1,170

Pension & Insurances 96 63

Cash Variable Remuneration 1,332 926

Value of Share Options 391 490

Total remuneration 3,529 2,649

Number of Code Staff 14 13

The number of code staff who earned more than €1m is 1 (2014: 1).

7.5 Level of 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.

The CRD however provides that the ratio of variable remuneration to fixed remuneration

may be increased to up to 2:1 upon 66% shareholder approval being obtained. This

increased ratio has been approved by the Bank’s shareholders.


Page 26 of 29

Appendix 1: Own Funds Disclosure Template

Own funds disclosure template 2015

£'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 20,780 26 (1), 27, 28, 29

of which: ordinary share capital 20,780 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 26,551 26 (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) - 84

5a Independently reviewed interim profits net of any foreseeable charge or dividend - 26 (2)

6 Common Equity Tier 1 (CET1) capital before regulatory adjustments 47,331 Sum of rows 1 to 5a

Common Equity Tier 1 (CET1) capital: regulatory adjustments

7 Additional value adjustments (negative amount) - 34, 105

8 Intangible assets (net of related tax liability) (negative amount) (955) 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, 159

13 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), 42

17 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), 44

18 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), 79

19 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), 79


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) - 36 (1) (k) (i), 89 to 91

20c of which: securitisation positions (negative amount) -

36 (1) (k) (ii) 243 (1) (b) 244 (1) (b) 258


Page 27 of 29

20d of which: free deliveries (negative amount) - 36 (1) (k) (iii), 379 (3)

21 Deferred tax assets arising from temporary difference (amount above 10 % threshold , net of related tax liability where the conditions in Article 38 (3) are met) (negative amount)

- 36 (1) (c), 38, 48 (1) (a)

22 Amount exceeding the 15% threshold (negative amount) - 48 (1)

23 of which: direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities

- 36 (1) (i), 48 (1) (b)


25 of which: deferred tax assets arising from temporary difference - 36 (1) (c), 38, 48 (1) (a)

25a Losses for the current financial year (negative amount) - 36 (1) (a)

25b Foreseeable tax charges relating to CET1 items (negative amount) - 36 (1) (l)

27 Qualifying AT1 deductions that exceeds the AT1 capital of the institution (negative amount)

- 36 (1) (j)

28 Total regulatory adjustments to Common Equity Tier 1 (CET1) (955) Sum of rows 7 to 20a, 21, 22 and 25a to 27

29 Common Equity Tier 1 (CET1) capital 46,376 Row 6 minus row 28

Additional Tier 1 (AT1) capital: instruments

30 Capital instruments and the related share premium accounts 4,700 51, 52

31 of which: classified as equity under applicable accounting standards 4,700

32 of which: classified as liabilities under applicable accounting standards -

33 Amount of qualifying items referred to in Article 484 (4) and the related share premium accounts subject to phase out from AT1

- 486 (3)

34 Qualifying Tier 1 capital included in consolidated AT1 capital (including minority interest not included in row 5) issued by subsidiaries and held by third parties

- 85, 86

35 of which: instruments issued by subsidiaries subject to phase-out - 486 (3)

36 Additional Tier 1 (AT1) capital before regulatory adjustments 4,700 Sum of rows 30, 33 and 34

Additional Tier 1 (AT1) capital: regulatory adjustments

37 Direct and indirect holdings by an institution of own AT1 instruments (negative amount)

- 52 (1) (b), 56 (a), 57

38 Holdings of the AT1 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 (negative amount)

- 56 (b), 58

39 Direct, indirect and synthetic holdings of the AT1 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)

- 56 (c), 59, 60, 79

40 Direct, indirect and synthetic holdings of the AT1 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)

- 56 (d), 59, 79


42 Qualifying T2 deductions that exceed the T2 capital of the institution (negative amount)

- 56 (e)

43 Total regulatory adjustments to Additional Tier 1 (AT1) capital - Sum of rows 37 to 42

44 Additional Tier 1 (AT1) capital 4,700 Row 36 minus row 43

45 Tier 1 capital (T1 = CET1 + AT1) 51,076 Sum of row 29 and row 44

Tier 2 (T2) capital: instruments and provisions

46 Capital instruments and the related share premium accounts 14,500 62, 63

47 Amount of qualifying items referred to in Article 484 (5) and the related share premium accounts subject to phase out from T2

- 486 (4)


Page 28 of 29

48 Qualifying own funds instruments included in consolidated T2 capital (including minority interest and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties

- 87, 88

49 of which: instruments issued by subsidiaries subject to phase-out - 486 (4)

50 Credit risk adjustments 952 62 (c) & (d)

51 Tier 2 (T2) capital before regulatory adjustment 15,452

Tier 2 (T2) capital: regulatory adjustments

52 Direct and indirect holdings by an institution of own T2 instruments and subordinated loans (negative amount)

- 63 (b) (i), 66 (a), 67

53 Holdings of the T2 instruments and subordinated loans of financial sector entities where those entities have reciprocal cross holdings with the institutions designed to inflate artificially the own funds of the institution (negative amount)

- 66 (b), 68

54

Direct, indirect and synthetic holdings of the T2 instruments and subordinated loans 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)

- 66 (c), 69, 70, 79

55 Direct, indirect and synthetic holdings of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions) (negative amounts)

- 66 (d), 69, 79


57 Total regulatory adjustments to Tier 2 (T2) capital - Sum of rows 52 to 56

58 Tier 2 (T2) capital 15,452 Row 51 minus row 57

59 Total capital (TC = T1 + T2) 66,528 Sum of row 45 and row 58

60 Total risk-weighted assets 476,134

Capital ratios and buffers

61 Common Equity Tier 1 (as a percentage of total risk exposure amount) 9.74% 92 (2) (a)

62 Tier 1 (as a percentage of total risk exposure amount) 10.73% 92 (2) (b)

63 Total capital (as a percentage of total risk exposure amount) 13.97% 92 (2) (c)

64

Institution specific buffer requirement (CET1 requirement in accordance with article 92 (1) (a) plus capital conservation and countercyclical buffer requirements plus a systemic risk buffer, plus systemically important institution buffer expressed as a percentage of total risk exposure amount)

4.50% CRD 128, 129, 130, 131, 133

65 of which: capital conservation buffer requirement 0.00%

66 of which: countercyclical buffer requirement 0.00%

67 of which: systemic risk buffer requirement 0.00%

67a of which: Global Systemically Important Institution (G-SII) or Other Systemically Important Institution (O-SII) buffer

0.00%

68 Common Equity Tier 1 available to meet buffers (as a percentage of risk exposure amount)

5.24% CRD 128

69 [non-relevant in EU regulation] -



Amounts below the thresholds for deduction (before risk-weighting)

72 Direct and indirect holdings of the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions)

-

36 (1) (h), 45, 46, 56 (c), 59, 60, 66 (c), 69, 70

73 Direct and indirect holdings of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount below 10% threshold and net of eligible short positions

- 36 (1) (i), 45, 48


75 Deferred tax assets arising from temporary difference (amount below 10 % threshold , net of related tax liability where the conditions in Article 38 (3) are met)

- 36 (1) (c), 38, 48

Applicable caps on the inclusion of provisions in Tier 2

76 Credit risk adjustments included in T2 in respect of exposures subject to standardised approach (prior to the application of the cap)

- 62

77 Cap on inclusion of credit risk adjustments in T2 under standardised approach - 62


Page 29 of 29

78 Credit risk adjustments included in T2 in respect of exposures subject to internal rating-based approach (prior to the application of the cap)

- 62

79 Cap for inclusion of credit risk adjustments in T2 under internal ratings-based approach

- 62

Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2014 and 1 Jan

2022)

80 Current cap on CET1 instruments subject to phase-out arrangements - 484 (3), 486 (2) & (5)

81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities)

- 484 (3), 486 (2) & (5)

82 Current cap on AT1 instruments subject to phase-out arrangements - 484 (4), 486 (3) & (5)

83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities)

- 484 (4), 486 (3) & (5)

84 Current cap on T2 instruments subject to phase-out arrangements - 484 (5), 486 (4) & (5)

85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities)

- 484 (5), 486 (4) & (5)

Documents

United Trust Bank Limited Pillar 3disclosures · United Trust Bank Limited Pillar 3 disclosures Page 4 of 29 1.4. Verification of information The Bank’s Pillar 3 disclosures are