Secure Trust Bank PLC Interim results for the six months to June 2019

Fecha : 07/08/2019 @ 01:00
Fuente : UK Regulatory (RNS & others)
Emisora : Secure Trust Bank Plc (STB)
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Secure Trust Bank PLC Interim results for the six months to June 2019

Secure Trust Bank (LSE:STB)
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RNS Number : 1427I

Secure Trust Bank PLC

07 August 2019

PRESS RELEASE

Wednesday 7 August 2019

For immediate release

SECURE TRUST BANK PLC

Interim Results for the six months to 30 June 2019

Continued positive momentum yielding strong first half performance

Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is pleased to announce a 19.9% increase in Group profit before tax to GBP18.1m for the six months to 30 June 2019.

The Group's diversified business model has allowed capital to be allocated to attractive market segments where customer demand has been higher than anticipated. There has been continued growth in both Business Finance and Consumer Finance, resulting in increased earnings and continued improvement in the quality of the loan book.

The first phase of the Motor Finance transformation programme has been delivered alongside the launch of V12 Vehicle Finance, and the Group expanded its savings offering with the launch of its fixed rate Cash ISA. Capital and liquidity positions remain strong and the Group's flexible business model means it is well placed to meet demand and manage risk across its product range.

FINANCIAL HIGHLIGHTS

   --      Statutory profit before tax up 19.9% to GBP18.1m (2018: GBP15.1m) 
   --      Adjusted profit before tax of GBP18.8m (2018: GBP16.5m), up 13.9% 
   --      Continued improvement in loan book quality has reduced cost of risk to 1.7% (2018: 1.9%) 

-- Healthy common equity tier 1 ratio of 12.8%* (2018: 13.8%) supporting the strong growth in the loan portfolios

   --      Total capital ratio of 15.2%* (2018: 13.8%) 
   --      Operating income GBP81.4m (2018: GBP72.5m) up 12.3% 
   --      Basic earnings per share 79.0p (2018: 68.7p) up 15.0% 
   --      Adjusted earnings per share 82.3p (2018: 74.7p) up 10.2% 
   --      Adjusted return on average equity of 12.7% (2018: 12.3%) 
   --      Interim dividend of 20p per share (2018: 19p per share), to be paid in September 2019 

-- Total assets GBP2,607.1m, up 6.7% from year end (December 2018: GBP2,444.3) and up 19.2% from same point last year (June 2018: GBP2,187.1m)

* Note: After accounting for the 2019 interim dividend, the CET 1 ratio is 12.6% (2018: 13.6%) and the total capital ratio is 15.0% (2018: 13.6%)

OPERATIONAL HIGHLIGHTS

   --      Total customer numbers increased by 31.9% to 1,446,342 (2018: 1,096,854) 
   --      Customer satisfaction scores, as measured by FEEFO, continue to be in the 90-95% range 
   --      New Cash ISA products launched in April 2019 
   --      V12 Vehicle Finance brand launched and first phase of motor transformation plan implemented 

-- Overall loan book GBP2,278.3m, up 12.3% from year end (December 2018: GBP2,028.9m) and up 23.9% from same point last year (June 2018: GBP1,839.1m)

-- Total Consumer Finance balances now exceed GBP1bn, with Retail Finance balances growing by 12.5% since December 2018 to GBP671.7m

-- Total Business Finance balances rose to GBP1,142.4m following continued strong growth in Real Estate Finance and Commercial Finance balances

-- The Commercial Finance invoice financing operation has now funded over GBP3bn of customer invoices since inception in 2014

   --      Customer deposits increased to GBP2,001.5m (2018: GBP1,656.8m) up 20.8% 

Lord Forsyth, Chairman, said:

"Our diverse business has again demonstrated its growth potential with pre-tax profits up by almost 20% in the first half of this year. Earnings have grown strongly enabling us to propose an improved interim dividend payment of 20 pence per share. We have maintained the momentum of 2018 and are looking to the future with confidence and optimism."

Paul Lynam, Chief Executive, said:

"The positive financial results for the first half of 2019 bode well for the remainder of the year, assuming an orderly Brexit. The Group has delivered on a number of strategic objectives, with the launch of our Cash ISA product and completion of the first phase of our motor transformation plan. Our capital and liquidity positions remain healthy and have enabled us to take advantage of market opportunities in the first half of the year whilst retaining flexibility to manage economic uncertainty.

Our customer numbers grew by more than 30% from June last year and I am very grateful to our employees who continually strive to deliver positive outcomes with great customer service."

This announcement together with the associated investors' presentation are available on:

www.securetrustbank.com/results-reports/results-reports-presentations

Enquiries:

Secure Trust Bank PLC

Paul Lynam, Chief Executive Officer

Neeraj Kapur, Chief Financial Officer

Tel: 0121 693 9100

Stifel Nicolaus Europe Limited (Joint Broker)

Robin Mann

Gareth Hunt

Stewart Wallace

Tel: 020 7710 7600

Canaccord Genuity Limited (Joint Broker)

Sunil Duggal

David Tyrrell

Tel: 020 7523 8000

Tulchan Communications

Tom Murray

Sheebani Chothani

Tel: 020 7353 4200

Forward looking statements

This document contains forward looking statements with respect to the business, strategy and plans of Secure Trust Bank PLC and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Secure Trust Bank PLC's or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Secure Trust Bank PLC's actual future results may differ materially from the results expressed or implied in these forward looking statements as a result of a variety of factors. These include UK domestic and global economic and business conditions, risks concerning borrower credit quality, market related risks including interest rate risk, inherent risks regarding market conditions and similar contingencies outside Secure Trust Bank PLC's control, any adverse experience in inherent operational risks, any unexpected developments in regulation or regulatory and other factors. The forward looking statements contained in this document are made as of the date hereof, and Secure Trust Bank PLC undertakes no obligation to update any of its forward looking statements.

Chairman's statement

Secure Trust Bank PLC has made good progress in the first half of 2019, sustaining the positive momentum seen during 2018 and building on the strategic repositioning of the business over recent years.

The Group has delivered another good set of financial results with statutory profit before tax of GBP18.1 million being 20% higher than the statutory profit before tax of GBP15.1 million reported for the first half of 2018.

The first six months of 2019 have seen further growth in customer numbers, net customer lending and net customer deposit balances. The Group continues to broaden its customer proposition. A cash ISA product was launched to coincide with the new tax year in April and the demand for this has been very encouraging. Significant investment continues to be made in the Motor Finance business and the new V12 Vehicle Finance brand has been well received in the market. Our Retail Finance business has developed a strong position in the season ticket finance market. I am also delighted that the Group has been recognised as one of the UK's best workplaces following an external assessment, based on a comprehensive survey of employees, with the Group ranked 29th overall and 14th as a best place to work for women.

We have diverse businesses with good growth potential. Our strategy and business model remain unchanged. The Group is well placed to meet demand in the consumer and business segments in which it operates. Our risk appetite remains cautious and we continue to assess carefully any potential impact on our business from changes in the economy. We stay alert to operational risks and challenges and the need for operational resilience in our business.

Our two new independent Non-Executive Directors have settled in well and are contributing to the Group. The new Group Employee Council is now fully engaged with direct lines of communication to the Board. We have made changes to our governance so as to comply with the latest version of the Corporate Governance Code that came into effect on 1 January 2019.

As part of our succession planning, Mark Stevens has been promoted from Deputy Company Secretary to Company Secretary, replacing Alan Karter who has stepped down as Company Secretary for personal reasons. Alan has done an outstanding job as Company Secretary and will continue as our General Counsel.

We are committed to operating as a responsible business. Details of the Group's relationship with customers and employees, and its social and environmental impact, were set out in the Corporate Responsibility section of the Group's 2018 Annual Report and Accounts. We will provide an update on our activities in these areas in our year end reporting.

As a result of the strong first half performance and consistent with our progressive dividend policy, the Board proposes to pay an interim dividend of 20p per share (June 2018 interim: 19p) representing a 5.3% increase on the prior year. This will be paid on 27 September 2019 to shareholders on the register as at 20 August 2019.

Finally, I would like to take this opportunity, on behalf of the Board, to thank all of our employees for their commitment and hard work which has delivered strong growth and consistently high levels of customer satisfaction. Given the resources at our disposal, the talents of our people, the flexibility of our business model and our clear strategy we can face the future, however uncertain, with confidence and optimism.

Lord Forsyth

Chairman

6 August 2019

Financial highlights

 
                     June 2019  June 2018 
-------------------  ---------  --------- 
Earnings per share       79.0p      68.7p 
-------------------  ---------  --------- 
Dividends                  20p        19p 
-------------------  ---------  --------- 
 

Chief Executive's statement

I am very pleased to report that the strong momentum seen throughout 2018 has continued into the first half of 2019.

We have achieved good progress across a range of customer, people, product and risk metrics which, assuming an orderly Brexit, bodes well for the full year results. The Group's diversified business model has enabled us to allocate capital across our portfolios to meet higher than anticipated consumer demand whilst continuing to support existing business customers without compromising on risk.

The financial results for the first half of 2019 reflect these positive dynamics with the statutory profit before tax for the first half increasing by 19.9% to GBP18.1 million compared to GBP15.1 million for the first half of last year. Adjusted profit before tax on the same basis has increased by 13.9% to GBP18.8 million (2018: GBP16.5 million). Basic adjusted earnings per share increased by 10.2%.

The economic and political uncertainty during the first half of 2019 has weighed on business investment sentiment and demand from SMEs for lending facilities. By contrast there has been no discernible change in the behaviour of the Bank's consumer customers who are benefiting from low and falling inflation, record employment and rising earnings.

The Group has been presented with additional opportunities, within its existing risk appetite, to successfully deploy its capital and funding in the first half of 2019 as a result of non-bank lenders citing difficulties in obtaining or renewing credit lines. The resulting curtailment, and in some cases ceasing, of new business by these lenders has helped support record levels of monthly new business volumes in Motor Finance and Retail Finance in April and again in May.

Strong customer satisfaction

I remain grateful for the ongoing commitment of our team members who continue to strive to deliver good customer outcomes in a friendly and professional manner, as the Group's lending and deposit taking activities grow. This in turn is reflected in customer satisfaction levels which are independently measured by FEEFO and are consistently in the 90-95% range.

Customer numbers continue to grow and at 1,446,342 are over 30% higher than at 30 June last year (30 June 2018: 1,096,854).

Healthy Capital and Liquidity positions

The Bank's capital and funding positions remain healthy.

Our Common Equity Tier one ratio was 12.8% as at 30 June 2019 compared to 13.8% at the same point last year. Our overall leverage ratio was 9.5% (June 2018: 10.4%), and the total capital ratio was 15.2% (June 2018: 13.8%).

The year-on-year movement is a function of the change in our balance sheet composition with the addition of Tier 2 capital and investment of capital to support the strong growth in the loan portfolios. When considering our capital ratios it is important to note that as at 30 June 2019 the residual contractual average life of the Group's assets was just 1.9 years. On a behavioural basis the duration would be even shorter. This balance sheet structuring provides major advantages, one of which is the Group's ability to react rapidly and efficiently to sudden changes in market conditions.

For example, if the UK exit from the EU causes economic disruption, we will be able to degear our balance sheet much more quickly than many banks and in so doing reduce the absolute levels of credit risk taken whilst simultaneously materially increasing our capital ratios.

Secure Trust Bank has continued to fund its lending activities primarily from customer deposits. Our loan to deposit ratio was 113.8% at 30 June 2019 which compares to 111.0% at 30 June 2018. The Bank has continued broadly to match-fund its customer lending with customer deposits. This strategy seeks to mitigate maturity transformation and interest basis risks. Customer demand for our deposit products remains strong, and it is encouraging that over 60% of customers with maturing medium-term savings bonds chose to reinvest their funds into deposit products with us.

Operational progress

We have continued to invest in both our Treasury capabilities and new deposit product development. The launch of the new Cash ISA products in April 2019 was an important strategic milestone for the Group. Cash ISAs are the second biggest pool of consumer deposit liquidity in the UK and typically attract margins around 20% below non-cash ISA deposits. Being able to access these sources of funding will be helpful as the Term Funding Scheme unwinds.

Motor Finance remains an important and profitable line of business for us. As part of our wider strategic shift towards prime and near-prime lending, we have initiated a transformation programme which will see us offering an entirely new market solution to dealers and brokers. The existing lenders in this space enjoy attractive returns on equity and we believe that the combination of the competitive funding costs provided via our banking licence and a new technology platform will allow us to gain market share and grow a sizable business in this space over the next 3-5 years. The motor transformation programme is split into four phases and includes the provision of dealer stocking finance (phases 1 and 2) and a wider motor proposition for consumers (phases 3 and 4).

We launched our new V12 Vehicle Finance brand on 4 June 2019 in conjunction with our key business partner, Aston Barclay. Aston Barclay are one of the UK's largest vehicle auction houses. Our partnership has been well received and the first phase of the motor transformation plan (auction stock funding) is now live and generating very significant levels of interest with car dealerships.

Operational resilience remains a key matter for regulatory scrutiny and we have adopted a proactive approach, having carefully considered the PRA's Discussion Paper on 'Building the UK finance sector's operational resilience'. We have updated our plan to ensure we continue to focus on, and invest in, ensuring the Group is adequately identifying, assessing and managing its risks. This extends to managing the third party risks that arise when outsourcing activities. In response to the PRA's Supervisory Statement 'Enhancing banks' and insurers' approaches to managing the financial risks from climate change' the Group is formalising its plan to respond to these future risks and will provide further detail and progress within its year end disclosures.

Lending activities

Our strategic repositioning has guided the allocation of capital to support growth particularly in lower risk lending activities during the period. Overall net customer lending as at 30 June 2019 of GBP2,278 million represents 23.9% growth compared to last year (June 2018: GBP1,839 million). 50.1% of these lending balances are in secured lending (30 June 2018: 53.3%). The total volume of new loans written in the period was GBP712.0 million representing a 16.6% increase on the GBP610.4 million for the same period last year.

Motor Finance balances have grown to GBP299.8 million from GBP272.0 million a year ago representing 10.2% growth. As previously disclosed, we stopped writing new subprime motor loans in January 2017 and have largely run off this part of the book. The run off assets are being replaced by lower risk, albeit lower margin loans. These dynamics are reflected in the balance sheet growth and profit metrics.

We have continued to prioritise Retail Point of Sale lending given the uncertain economic outlook, due to the quality and short duration nature of this lending. Balances have grown to GBP671.7 million from GBP508.0 million a year ago and GBP597.0 million as at 31 December 2018 representing 32.2% and 12.5% growth respectively.

The mortgage market has continued to exhibit significant competitive pressures, with lenders competing on price and risk appetite to drive new business volumes. The Bank of England recently noted that interest spreads on mortgage lending which were 3.10% in January 2010 had fallen to 1.60% in April 2019. The compression of mortgage net interest margins was a significant factor in our decision to cease originating new loans in Q1 2019 and this has subsequently proven a trend with other lenders in the market. Our staff responded to this decision professionally and continued focusing on delivering high quality service to our customers. Fulfilment of our pipeline led to our mortgage lending balances increasing from GBP37.3 million as at 30 June 2018 to GBP113.2 million as at 30 June 2019, being growth of 203.5%. This book is performing in line with our expectations.

As at 30 June 2019, Real Estate Finance lending balances have grown to GBP879.0 million from GBP704.8 million a year ago and GBP769.8 million as at 31 December 2018, representing 24.7% growth and 14.2% growth respectively. The loan book is performing well and remains heavily biased in favour of modestly leveraged residential investment lending. This is reflected in the portfolio composition, which in round terms is split 70%/30% in favour of investment lending.

As at 30 June 2019, Invoice Finance lending balances have grown to GBP220.7 million from GBP187.5 million a year ago and GBP194.7 million as at 31 December 2018, representing growth of 17.7% and 13.4% respectively. During this period we surpassed the milestone of having funded over GBP3 billion of customers' invoices since we started invoice finance operations in September 2014. Notwithstanding a more challenging economic environment the quality of our management team and our risk and control frameworks have helped to minimise credit losses in this part of our business.

Asset Finance lending balances have contracted as forecast as the book is in run-off. Balances were GBP42.7 million as at 30 June 2019 compared to GBP87.9 million a year ago.

In overall terms the loan portfolios have performed as expected during the first half of 2019 with the benefits of the strategic repositioning remaining evident. This is reflected in a reduction in the cost of risk from 1.9% for H1 2018 to 1.7% for H1 2019, driven by the improving book quality and consequent reduction in probability of default. This improvement would have been more pronounced save for two notable factors which influenced the IFRS 9 models. The first is the rapid growth in season ticket finance during the second quarter which drove higher IFRS 9 provisions in V12 which in turn weighs a little on the capital and cost of risk ratios. These loans are short term, typically of six to nine months duration, meaning the bulk of the benefits are expected to be delivered during the second half of 2019 as the loans are repaid. The second factor was the UK car market experiencing unusually severe seasonal falls in asset values during the second quarter of 2019. Used car values reduced on average by 14% during this period. Whilst we do not expect to see a continuation of these trends, the sensitivity of the IFRS 9 models means we are taking these reductions in values into account within our H1 2019 impairment provisioning.

We have continued to refine our credit risk appetite and acceptance criteria during this period. As a matter of course, we regularly review our credit criteria and pricing to take into account our view of the current and future economic conditions. We have also undertaken more work during this period to better understand how we might utilise artificial intelligence and machine learning to further refine our credit decisions.

Fee based services

The OneBill service closed for new business in 2010, is running off in line with management's expectations and becoming increasingly immaterial. Customer numbers ended the period at 17,514 (2018: 18,438).

Profits at our debt collection business, Debt Managers (Services) Limited, have continued to grow in line with our expectations.

Strategic priorities

Our strategy remains unchanged. The benefits of a diversified business model have been evident over the last six months. Despite a slowing economy we have been able to continue to increase customer lending balances and profit before tax by taking market share in our chosen market segments, without compromising our targeted risk parameters.

The focus for 2019 remains:

1. Organic growth in responsible lending across a diverse portfolio of attractive segments

2. Continued investment in broadening our product offerings to customers

3. Pursuing M&A activity in line with our strategy

4. Optimising our capital and liquidity strategies

5. Continuing to target delivery of profit growth in the medium term to create shareholder value

We have been active across all five of these areas during the last six months and will remain disciplined and focused here for the rest of 2019 and beyond.

Outlook

It is pleasing to report the positive momentum and strong profit growth during the period. We expect further progress during the second half of the year but need to be mindful that our own and other external forward looking economic indicators are pointing to a period of low business confidence and tepid economic growth. We are not detecting any discernible change in consumer behaviour but will remain vigilant as the rescheduled Brexit date of 31 October 2019 approaches. The Bank's lending portfolio is well positioned for the current conditions and the short duration nature of our asset portfolio means we can react quickly to both opportunities and threats. Assuming an orderly exit from the EU, we expect the UK economic outlook to improve which the Group will seek to leverage as it continues to execute its clearly defined growth strategy. We are well placed to support an increase in demand for working capital funding from businesses and residential development finance from house builders. We would expect stronger economic growth to be positive for retail sales and for our Retail Finance business. We are progressing significant investment in our Motor Finance business with the first of a four phase transformation plan now live. We see potential for this portfolio to grow considerably over the next five years.

In overall terms we are well positioned in a number of attractive lending classes and have started 2019 strongly. Therefore our base case assumption is for good progress to be made in meeting our goals over the coming period.

Paul Lynam

Chief Executive Officer

6 August 2019

Highlights of 2019 to date

-- Statutory profit before tax increased by 19.9% compared to the comparative period

-- Adjusted profit before tax increased by 13.9% compared to the comparative period

-- Customer numbers up by more than 30%

-- Customer satisfaction scores continue to be in the 90-95% range

-- Launch of new Cash ISA products in April 2019

-- V12 Vehicle Finance brand launched and first phase of motor transformation plan implemented

-- Customer lending balances grown by 23.9% over the year to 30 June 2019

Growth in customer numbers

>30%

(1,446,342)

2018: 1,096,854

FEEFO customer satisfaction ratings

90-95%

Strategy

The Group's strategy is based on three strategic themes. Over 2019, the strategy has developed as we focus on our near to mid-term objectives.

Grow

To maximise shareholder value through strong lending growth by delivering great customer outcomes in both our existing and new markets.

Progress made in 2019

Strong growth has continued in both the Consumer Finance and Business Finance divisions, with Retail Finance again the fastest growing area. The first stage of the Motor transformation project has concluded with the launch of the V12 Motor Finance dealer stocking product - see page 25 for more details.

Focus for the year ahead

Growth is expected to continue in Real Estate Finance, Commercial Finance, Motor Finance and Retail Finance, with no immediate plans to re-enter the Asset Finance or Mortgages markets. Motor transformation activity will include the development of further consumer products including in the prime market.

Performance measures

The key performance measures, shown on the following page, in respect of this theme show the growth of the lending book and the margin that the Group earns on this lending.

Sustain

To protect the reputation, integrity and sustainability of the Bank for all of our customers and stakeholders via prudent balance sheet management, investment for growth and robust risk and operational control. Controlled growth is one of the top strategic priorities for the Bank.

Progress made in 2019

The Group has continued to maintain a strong balance sheet with reduced cost of risk compared with the equivalent period in 2018. The potential funding base has been widened by the introduction of a fixed rate ISA product, and post half year the Group has developed hedging capabilities with interest rate swaps, providing increased flexibility to manage its interest rate risk exposures within risk appetite.

Focus for the year ahead

The move into the prime Motor market will further improve the credit quality of the Group's balance sheet. Activity will continue to widen the funding base, as described on page 27, and the Group will build up its portfolio of interest rate swaps in order to manage its balance sheet effectively.

The Group has initiated a programme to review its critical processes and further enhance operational resilience.

Performance measures

Measures in respect of the Sustain theme focus on the control of operational costs, funding costs and impairment losses. In addition, funding ratios are measured to ensure the Group is holding sufficient liquidity in relation to its loan books. Regulatory capital metrics demonstrate the Group's capacity to continue to grow while remaining well above regulatory limits.

Love

To ensure that the fair treatment of customers is central to corporate culture and that the Bank is a highly rewarding environment for all staff and one where they can enjoy progressive careers.

Progress made in 2019

Secure Trust Bank has won a number of awards already in 2019 that show its commitment to customer service, including Best Savings Provider, Best Fixed Rate Bond Provider and Best Notice Account Provider at the 2019 Savings Champion Awards. The Group has also been awarded Feefo Gold Trusted Service Award, their highest accolade, for three years running.

Based on employee feedback and external assessment, the Group was recognised as a UK Best Workplace(TM) in May 2019, at the Great Place to Work(R) annual awards.

Focus for the year ahead

The Group continues to use feedback from its customers and employees in order to improve its products, services and working environment. Alongside its use of Feefo to gauge customer satisfaction, the Group reviews Net Promoter Scores and is developing additional monitoring of social media and review platforms. The new Group Employee Council will enable direct communication with the Chief Executive Officer and the Board.

Performance measures

The Group's non-financial KPIs assess customer and employee satisfaction, as well as impacts on the environment. Only the customer satisfaction measure is updated at the half year, as the employee survey is annual and environmental impact is measured annually.

Key Performance Indicators

The key performance indicators shown are the primary measures used by management to assess the performance of the Group.

The Remuneration Report, starting on page 94 of the 2018 Annual Report and Accounts, sets out how executive pay is linked to the assessment of key financial and non-financial performance metrics.

These KPIs represent alternative performance measures that are not defined or specified under IFRS. Definitions of the financial KPIs and their calculation can be found in the Appendix to the interim report on page 56.

The employee survey and environmental intensity assessment are carried out on an annual basis and are therefore not available for reporting at the interim period.

In the narrative of the Interim Financial Review, KPIs are identified by being in bold font.

Margin ratios

 
                        June 2019  June 2018  Dec 2018 
----------------------  ---------  ---------  -------- 
Net interest margin %         6.7        7.6       7.4 
----------------------  ---------  ---------  -------- 
 

Why we measure this

Shows the interest margin earned on the Group's loan books, net of funding costs

 
                       June 2019  June 2018  Dec 2018 
---------------------  ---------  ---------  -------- 
Net revenue margin %         7.7        8.6       8.3 
---------------------  ---------  ---------  -------- 
 

Why we measure this

Shows the overall net margin earned on the Group's loan books, including fees and commissions

 
                         June 2019  June 2018  Dec 2018 
-----------------------  ---------  ---------  -------- 
Gross revenue margin %         9.8       10.6      10.4 
-----------------------  ---------  ---------  -------- 
 

Why we measure this

Shows the yield of the Group's loan books, including fee and commission income

Cost ratios

 
                  June 2019  June 2018  Dec 2018 
----------------  ---------  ---------  -------- 
Cost of funds %         2.1        1.8       2.0 
----------------  ---------  ---------  -------- 
 

Why we measure this

Measures the cost of the Group's customer deposits and other funding sources

 
                         June 2019  June 2018  Dec 2018 
-----------------------  ---------  ---------  -------- 
Cost to income ratio %        55.9       56.7      55.7 
-----------------------  ---------  ---------  -------- 
 

Why we measure this

Measures how efficiently the Group utilises its cost base to produce income

 
                 June 2019  June 2018  Dec 2018 
---------------  ---------  ---------  -------- 
Cost of risk %         1.7        1.9       1.8 
---------------  ---------  ---------  -------- 
 

Why we measure this

Measures how effectively the Group manages impairment losses

Growth

 
                                       June 2019  June 2018  Dec 2018 
-------------------------------------  ---------  ---------  -------- 
Loans and advances to customers GBPm     2,278.3    1,839.1   2,028.9 
-------------------------------------  ---------  ---------  -------- 
 

Why we measure this

Shows the growth in the Group's lending balances, which generate income

Funding ratios

 
                          June 2019  June 2018  Dec 2018 
------------------------  ---------  ---------  -------- 
Loan to deposit ratio %       113.8      111.0     109.8 
------------------------  ---------  ---------  -------- 
 

Why we measure this

Measures the adequacy of liquidity by comparing loan balances to customer deposits

 
                        June 2019  June 2018  Dec 2018 
----------------------  ---------  ---------  -------- 
Total funding ratio %       112.2      116.6     118.2 
----------------------  ---------  ---------  -------- 
 

Why we measure this

Measures the adequacy of liquidity by comparing all funding held by the Group to loan balances

Delivering

Adjusted profit

 
                                  June 2019  June 2018  Dec 2018 
--------------------------------  ---------  ---------  -------- 
Adjusted profit before tax GBPm        18.8       16.5      36.7 
--------------------------------  ---------  ---------  -------- 
 

Why we measure this

Adjusts profit to improve comparability of information between reporting periods

 
                                 June 2019  June 2018  Dec 2018 
-------------------------------  ---------  ---------  -------- 
Adjusted profit after tax GBPm        15.2       13.8      29.9 
-------------------------------  ---------  ---------  -------- 
 

Why we measure this

Adjusts profit to improve comparability of information between reporting periods

EPS

 
                                 June 2019  June 2018  Dec 2018 
-------------------------------  ---------  ---------  -------- 
Basic earnings per share pence        79.0       68.7     153.2 
-------------------------------  ---------  ---------  -------- 
 

Why we measure this

Demonstrates the earnings attributable to each shareholder

 
                                          June 2019  June 2018  Dec 2018 
----------------------------------------  ---------  ---------  -------- 
Adjusted basic earnings per share pence        82.3       74.7     161.8 
----------------------------------------  ---------  ---------  -------- 
 

Why we measure this

Demonstrates the earnings attributable to each shareholder, adjusted to improve comparability of information between reporting periods

Return ratios

 
                                      June 2019  June 2018  Dec 2018 
------------------------------------  ---------  ---------  -------- 
Adjusted return on average equity %        12.7       12.3      13.1 
------------------------------------  ---------  ---------  -------- 
 

Why we measure this

Measures the Group's ability to generate profit from the equity available to it

 
                                       June 2019  June 2018  Dec 2018 
-------------------------------------  ---------  ---------  -------- 
Adjusted return on required equity %        13.6       14.6      14.8 
-------------------------------------  ---------  ---------  -------- 
 

Why we measure this

Relates profitability to the capital that the Group is required to hold

 
                                      June 2019  June 2018  Dec 2018 
------------------------------------  ---------  ---------  -------- 
Adjusted return on average assets %         1.2        1.4       1.4 
------------------------------------  ---------  ---------  -------- 
 

Why we measure this

Demonstrates how profitable the Group's assets are in generating revenue

Non-financial KPIs

 
                               June 2019  June 2018  Dec 2018 
-----------------------------  ---------  ---------  -------- 
Customer FEEFO ratings Stars         4.6        4.6       4.7 
-----------------------------  ---------  ---------  -------- 
 

Why we measure this

Measures customer satisfaction: mark out of 5 based on star ratings from 1,156 reviews (June 2018: 510 reviews, December 2018: 1,175 reviews)

 
                                       June 2019   June 2018  Dec 2018 
------------------------------------  ----------  ----------  -------- 
Employee survey trust index score %          N/A         N/A        77 
------------------------------------  ----------  ----------  -------- 
 

Why we measure this

Employee satisfaction: not measured at half year (December 2018 based on 2018 all staff survey)

 
                                     June 2019   June 2018  Dec 2018 
----------------------------------  ----------  ----------  -------- 
Environmental intensity indicator          N/A         N/A       3.5 
----------------------------------  ----------  ----------  -------- 
 

Why we measure this

Ensures that the Group's environmental impact, measured in respect of greenhouse gas emissions, remains low. Not measured at half year (December 2018 measures tonnes carbon dioxide per GBP1 million group income)

Interim financial review

Profit and earnings

Profit before tax for the period rose significantly on both a statutory and adjusted basis, driven by increased revenues and well managed impairments and costs. The statutory profit for the first six months of the year increased by 19.9%, from GBP15.1 million to GBP18.1 million, while the adjusted profit before tax for the period increased by 13.9% from GBP16.5 million to GBP18.8 million.

Earnings per share rose as a consequence, from 68.7p at June 2018 to 79.0p at June 2019 on a basic earnings per share basis and from 74.7p to 82.3p on an adjusted basic earnings per share basis. Detailed disclosures of earnings per ordinary share are shown in Note 5.

Return measures

The Group measures adjusted returns on average assets, average equity and required equity as set out in the KPIs table on page 14. Return on average assets demonstrates how profitable the Group's assets are in generating revenue. Return on average equity is a measure of the Group's ability to generate profit from the equity available to it. Return on required equity relates profitability to the capital that the Group is required to hold.

The returns on average assets and on required equity have fallen slightly from June 2018 to June 2019. The return on average equity improved from 12.3% at June 2018 to 12.7% at June 2019, driven by rising earnings.

The components of the Group's profit are set out in the sections below.

Interest, fee and commission income

Interest, fee and commission income is made up of interest income, which is predominantly earned on loans and advances to customers, and fee and commission income, which consists principally of fees from the OneBill, Commercial Finance, Retail Finance and Motor Finance products and commissions earned on debt collection activities in DMS.

Interest income increased by 16.5% to GBP92.3 million (June 2018: GBP79.2 million). This was driven by the growth of the Group's loan books, with loans and advances to customers increasing by 23.9% over the same period from GBP1,839.1 million at June 2018 to GBP2,278.3 million at June 2019. The shift in the profile of Motor Finance lending to better quality customers has reduced the level of interest income on this product. This is the main reason for the increase in interest income being lower that the increase in loan balances.

 
                                                30 June 2019   30 June 2018  31 Dec 2018 
Adjusted profit reconciliation                    GBPmillion     GBPmillion   GBPmillion 
---------------------------------------------  -------------  -------------  ----------- 
Interest, fee and commission income                    103.5           89.0        188.6 
---------------------------------------------  -------------  -------------  ----------- 
Interest, fee and commission expense                  (22.1)         (16.5)       (37.0) 
---------------------------------------------  -------------  -------------  ----------- 
Operating income                                        81.4           72.5        151.6 
---------------------------------------------  -------------  -------------  ----------- 
Impairment losses                                     (17.8)         (16.3)       (32.4) 
---------------------------------------------  -------------  -------------  ----------- 
Operating expenses                                    (45.5)         (41.1)       (84.5) 
---------------------------------------------  -------------  -------------  ----------- 
Profit before tax                                       18.1           15.1         34.7 
---------------------------------------------  -------------  -------------  ----------- 
Adjustments to profit before tax (see below)             0.7            1.4          2.0 
---------------------------------------------  -------------  -------------  ----------- 
Adjusted profit before tax                              18.8           16.5         36.7 
---------------------------------------------  -------------  -------------  ----------- 
Adjusted tax                                           (3.6)          (2.7)        (6.8) 
---------------------------------------------  -------------  -------------  ----------- 
Adjusted profit after tax                               15.2           13.8         29.9 
---------------------------------------------  -------------  -------------  ----------- 
Adjusted basic earnings per share (pence)               82.3           74.7        161.8 
---------------------------------------------  -------------  -------------  ----------- 
 
Statutory results 
---------------------------------------------  -------------  -------------  ----------- 
Profit before tax                                       18.1           15.1         34.7 
---------------------------------------------  -------------  -------------  ----------- 
Tax                                                    (3.5)          (2.4)        (6.4) 
---------------------------------------------  -------------  -------------  ----------- 
Profit after tax                                        14.6           12.7         28.3 
---------------------------------------------  -------------  -------------  ----------- 
Basic earnings per share (pence)                        79.0           68.7        153.2 
---------------------------------------------  -------------  -------------  ----------- 
 
Adjustments to profit before tax 
---------------------------------------------  -------------  -------------  ----------- 
Fair value amortisation                                  0.1            0.1          0.3 
---------------------------------------------  -------------  -------------  ----------- 
Transformation costs                                     0.6            0.4          0.4 
---------------------------------------------  -------------  -------------  ----------- 
Bonus payments                                             -            0.9          1.3 
---------------------------------------------  -------------  -------------  ----------- 
Adjustments to profit before tax                         0.7            1.4          2.0 
---------------------------------------------  -------------  -------------  ----------- 
 

Fee and commission income increased by 14.3% to GBP11.2 million (June 2018: GBP9.8 million). The increase was driven by fees earned in Real Estate Finance and Commercial Finance.

The gross revenue margin reduced from 10.6% to 9.8%. This reflects the change in the risk profile of Motor Finance lending, referenced above.

Interest, fee and commission expense

Interest, fee and commission expenses is made up of interest expense, which is incurred in respect of deposits from customers, subordinated liabilities and Term Funding Scheme ('TFS') borrowings, and fee and commission expense, comprising mainly fees and commissions on the Motor product, and commissions paid on debt collection activities in DMS.

Interest expense increased by 40.6% to GBP21.8 million for the period to June 2019 (June 2018: GBP15.5 million). The Group's cost of funds has been impacted by the rise in the Bank of England base rate during 2018 and the raising of subordinated debt in that year, as set out in Note 14. This cost increased from 1.8% at June 2018 to 2.0% at December 2018 and was 2.1% at June 2019. This increase, the 20.8% increase of deposit balances over the year and the fact that the subordinated debt was raised in the second half of 2018 all contributed to the higher interest expense.

The Group's net interest margin reduced from 7.6% at 30 June 2018 to 6.7% at June 2019, primarily due to the reduced Motor Finance yields referred to above.

Fee and commission expense was GBP0.3 million (June 2018: 1.0 million). The main reductions arose in DMS and OneBill.

Financial highlights

 
                             June 2019  June 2018 
                                  GBPm       GBPm 
---------------------------  ---------  --------- 
Interest income                   92.3       79.2 
---------------------------  ---------  --------- 
Interest expense                  21.8       15.5 
---------------------------  ---------  --------- 
Fee and commission income         11.2        9.8 
---------------------------  ---------  --------- 
Fee and commission expense         0.3        1.0 
---------------------------  ---------  --------- 
Impairment losses                 17.8       16.3 
---------------------------  ---------  --------- 
Operating expense                 45.5       41.1 
---------------------------  ---------  --------- 
 

Operating income

Operating income increased by 12.3% to GBP81.4 million (June 2018: GBP72.5 million).

The net revenue margin for 2019 was 7.7% compared with 8.6% at June 2018. The reduction in this margin is primarily due to the reduction in Motor Finance yields.

Impairment losses

Impairment losses during the period were GBP17.8 million (June 2018: GBP16.3 million). The fact that impairment losses rose by only 9.2% compared with the comparative period despite a 23.9% increase in loans and advances to customers since June 2018 shows the benefit of the strategic repositioning referred to in previous annual and interim reports. The improving quality of the Motor Finance book in advance of the full Motor Transformation programme has also been a key factor in this reduction in impairments, counterbalancing the accelerated recognition of losses that the IFRS 9 methodology brings to the Group's rapidly growing consumer loan books. As noted in the Motor Finance Business Review on page 25, a significant element of the provision charge for the period was related to a fall in used vehicle valuations rather than to the probability of default, which has continued to improve.

These improvements are reflected in the reduction in cost of risk, from 1.9% at June 2018 to 1.7%. Further analysis of the Group's loan book and its credit risk exposures is provided in Notes 6 and 8.

The provision charge includes the impact of applying expert credit judgement, resulting in overlays being added to provision levels estimated using the Group's models. The level of these overlays remain modest compared to the modelled provision level, as detailed in Note 8.

Operating expenses

Operating expenses increased by 10.7% to GBP45.5 million (June 2018: GBP41.1 million). The Group has continued to invest in its lending businesses to support growth targets. There has also been increased investment in the Savings team, to increase the volume of deposit funding, develop a wider product offering and significantly enhance the Group's digital proposition. The Group has further strengthened its compliance and risk function, including investment in respect of the prevention of financial crime, and invested further in its IT infrastructure.

The growth in costs is proportionately lower than the increase in the Group's lending balances, demonstrating efficiencies derived from increasing scale. Despite the reduction in the gross revenue margin referred to above, the cost to income ratio reduced to 55.9% from 56.7% at June 2018.

Taxation

The effective adjusted tax rate has increased to 19.1% (June 2018: 16.4%).

The effective rate for the period to June 2018 was reduced by a deferred tax credit of GBP0.5 million arising from a reassessment of the rates that the deferred tax asset on the IFRS 9 transition adjustment would reverse out over the next nine years. The effective rate for the current period has reverted back to being close to the corporation tax rate of 19%.

The tax charge reflects Bank Corporation Tax Surcharge of 8% on taxable profits of Secure Trust Bank PLC in excess of GBP25.0 million. Future effective tax rates for the Group will be sensitive to the quantum of projected profits in the Bank and other Group companies as well as the level of corporation tax which is due to reduce to 17% with effect from 1 April 2020. Current forecasts continue to show that the effective tax rate is expected to increase by up to 4% over the forecast period, as the effect of the banking surcharge becomes more significant.

Distributions to shareholders

The directors have declared an interim dividend of 20 pence per share (June 2018: 19 pence per share).

Balance sheet

The assets of the Group increased by 6.7% to GBP2,607.1 million in the six month period to June 2019, driven by 12.3% growth in the Group's loan portfolios over the same period, offset by lower levels of cash and debt securities held.

The liabilities of the Group increased by 7.2% to GBP2,366.8 million over the same period, primarily driven by the increase in deposits from customers, providing funding for the Group's lending activities.

Loans and advances to customers

Loans and advances to customers include secured and unsecured loans and finance lease receivables. At December 2018, the loan book was split broadly equally between Consumer Finance lending, which includes Consumer Mortgages, and Business Finance lending, and this remains the case at June 2019.

Loan originations in the year, being the total of new loans and advances to customers entered into during the year, increased by 16.6% to GBP712.0 million (June 2018: GBP610.4 million). Over half of the new business volume (GBP372.6 million) was generated by the Retail Finance business.

Further analysis of loans and advances to customers, including a breakdown of the arrears profile of the Group's loan books, is provided in Notes 6, 8 and 19.

Debt Securities

Debt Securities consist solely of sterling UK Government treasury bills. These are used primarily to provide collateral against Term Funding Scheme drawings with the Bank of England.

Effective adjusted tax rate

 
                                       30 June 2019                   30 June 2018               31 December 2018 
                        Effective adjusted tax rate    Effective adjusted tax rate    Effective adjusted tax rate 
                                         GBPmillion                     GBPmillion                     GBPmillion 
-------------------  ------------------------------  -----------------------------  ----------------------------- 
Tax                                             3.6                            2.7                            6.8 
-------------------  ------------------------------  -----------------------------  ----------------------------- 
Profit before tax                              18.8                           16.5                           36.7 
-------------------  ------------------------------  -----------------------------  ----------------------------- 
Effective rate (%)                            19.1%                          16.4%                          18.5% 
-------------------  ------------------------------  -----------------------------  ----------------------------- 
Effective statutory tax rate 
----------------------------------------------------------------------------------------------------------------- 
                                       30 June 2019                   30 June 2018               31 December 2018 
                       Effective statutory tax rate   Effective statutory tax rate   Effective statutory tax rate 
                                         GBPmillion                     GBPmillion                     GBPmillion 
-------------------  ------------------------------  -----------------------------  ----------------------------- 
Tax                                             3.5                            2.4                            6.4 
-------------------  ------------------------------  -----------------------------  ----------------------------- 
Profit before tax                              18.1                           15.1                           34.7 
-------------------  ------------------------------  -----------------------------  ----------------------------- 
Effective rate (%)                            19.3%                          15.9%                          18.4% 
-------------------  ------------------------------  -----------------------------  ----------------------------- 
 

Summarised balance sheet

 
                                            June         June     December 
                                            2019         2018         2018 
                                      GBPmillion   GBPmillion   GBPmillion 
-----------------------------------  -----------  -----------  ----------- 
Assets 
-----------------------------------  -----------  -----------  ----------- 
Cash and balances at central banks         101.9        126.7        169.7 
-----------------------------------  -----------  -----------  ----------- 
Debt securities                            110.0        150.0        149.7 
-----------------------------------  -----------  -----------  ----------- 
Loans and advances to banks                 67.3         34.2         44.8 
-----------------------------------  -----------  -----------  ----------- 
Loans and advances to customers          2,278.3      1,839.1      2,028.9 
-----------------------------------  -----------  -----------  ----------- 
Other assets                                49.6         37.1         51.2 
-----------------------------------  -----------  -----------  ----------- 
                                         2,607.1      2,187.1      2,444.3 
-----------------------------------  -----------  -----------  ----------- 
Liabilities 
-----------------------------------  -----------  -----------  ----------- 
Due to banks                               263.5        263.3        263.5 
-----------------------------------  -----------  -----------  ----------- 
Deposits from customers                  2,001.5      1,656.8      1,847.7 
-----------------------------------  -----------  -----------  ----------- 
Tier 2 subordinated liabilities             50.5            -         50.4 
-----------------------------------  -----------  -----------  ----------- 
Other liabilities                           51.3         42.0         45.6 
-----------------------------------  -----------  -----------  ----------- 
                                         2,366.8      1,962.1      2,207.2 
-----------------------------------  -----------  -----------  ----------- 
 

Due to banks

The amount due to banks consists solely of drawings from the Bank of England Term Funding Scheme. The Group has drawn modest levels of this low cost source of funding to supplement customer deposit funding.

Deposits from customers

Customer deposits include term, notice and sight deposits, as well as the Group's OneBill product. Customer deposits grew by 8.3% during the period to GBP2,001.5 million (December 2018: GBP1,847.7 million), to fund the increased lending balances.

Tier 2 subordinated liabilities

Tier 2 subordinated liabilities represent two GBP25 million tranches of 6.75% Fixed Rate Callable Subordinated Notes, including interest accrued. Further details of the note issuances are provided in Note 14. The notes qualify as Tier 2 capital.

New accounting standards

IFRS 16 'Leases' became effective for the period beginning on 1 January 2019, replacing the previous leases standard, IAS 17, and related interpretations. Adoption of the standard has changed the way in which the Group accounts for a number of its property leases and motor vehicle leases, where the Group is the lessee. The standard requires such leases to be recognised on the balance sheet as 'the lease liability' with the right to use the underlying asset ('the right-of-use asset') also recognised. The Group has elected to recognise the initial impact of implementing IFRS 16 through the opening balance of retained earnings and has not restated comparatives. Further detail is provided in Note1.

Capital and liquidity

Capital

The CET1 capital ratio is the ratio of CET1 capital divided by the Total Risk Exposure. The total capital ratio is total capital divided by Total Risk Exposure. The CET1 capital and total capital ratios remained healthy at 12.8% and 15.2% respectively, providing a capital buffer for continued growth. When taking account of the 2019 interim dividend, the CET1 capital ratio is 12.6% and the total capital ratio is 15.0% (30 June 2018: both ratios 13.6%).

The Basel III leverage ratio is defined by the Capital Requirements Regulation as Tier 1 capital divided by on and off-balance sheet asset exposure values, expressed as a percentage. The UK leverage ratio framework sets a minimum ratio of 3.25%. As shown in the table, the Group's leverage ratio remains comfortably ahead of the minimum requirement.

The Group's regulatory capital is divided into:

-- CET1 which comprises shareholders' funds, after adding back the IFRS 9 transition adjustment and deducting intangible assets, both of which are net of attributable deferred tax

-- Tier 2 capital, which is subordinated debt net of unamortised issue costs, capped at 25% of the capital requirement. In July 2018, the Group issued GBP25.0 million of Tier 2 capital and a further GBP25.0 million was issued in October 2018.

The Group has elected to adopt the IFRS 9 transitional rules. For 2019, this allows 85% (2018: 95%) of the initial IFRS 9 transition adjustment, net of attributable deferred tax, to be added back to eligible capital. Further information is provided in the Group's Pillar 3 report available at www.securetrustbank.com/investor-information.

Capital

 
                      30 June  30 June  31 December 
                         2019     2018         2018 
                            %        %            % 
--------------------  -------  -------  ----------- 
CRD IV ratios 
--------------------  -------  -------  ----------- 
CET1 capital ratio       12.8     13.8         13.8 
--------------------  -------  -------  ----------- 
Total capital ratio      15.2     13.8         16.3 
--------------------  -------  -------  ----------- 
Leverage ratio            9.5     10.4         10.0 
--------------------  -------  -------  ----------- 
 

Capital resources

 
                           30 June      30 June  31 December 
                              2019         2018         2018 
                        GBPmillion   GBPmillion   GBPmillion 
---------------------  -----------  -----------  ----------- 
CET1 capital                 253.5        239.4        251.8 
---------------------  -----------  -----------  ----------- 
Total Tier 2 capital          49.3            -         45.7 
---------------------  -----------  -----------  ----------- 
Total capital                302.8        239.4        297.5 
---------------------  -----------  -----------  ----------- 
Total Risk Exposure        1,987.6      1,729.2      1,824.6 
---------------------  -----------  -----------  ----------- 
 

The Group operates the standardised approach to credit risk, whereby risk weightings are applied to the Group's on and off balance sheet exposures. The weightings applied are those stipulated in the Capital Requirements Regulation.

The Group's Individual Capital Adequacy Assessment Process ('ICAAP') includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. All regulated entities within the Group have complied during the period with relevant regulatory capital requirements.

The Total Capital Requirement, set by the PRA, includes both the calculated requirement derived using the standardised approach and the additional capital derived in conjunction with the ICAAP. In addition, capital is held to cover generic buffers set at a macro-economic level by the PRA. These buffers have risen significantly in recent years, with the requirement at 30 June 2019 being GBP69.6 million.

Management of capital

The Group's capital management policy is focused on optimising shareholder value over the long term. Capital is allocated to achieve targeted risk adjusted returns whilst ensuring appropriate surpluses are held above the minimum regulatory requirements.

Key factors influencing the management of capital include:

-- The level of buffers set by the PRA

-- Estimated credit losses calculated using IFRS 9 methodology, and the applicable transitional rules

-- New business volumes

-- The product mix of new business.

These last two factors are actively managed by the Group in order to balance growth, profitability and conservation of capital. The variation in the risk weightings applied to the Group's key lending assets, as shown in the table on the following page, and the Group's willingness and ability to adapt its lending volumes and mix, provide significant flexibility in the Group's management of capital.

Capital requirements

 
                                   30 June      30 June  31 December 
                                      2019         2018         2018 
                                GBPmillion   GBPmillion   GBPmillion 
-----------------------------  -----------  -----------  ----------- 
Total Capital Requirement            198.8        173.0        182.7 
-----------------------------  -----------  -----------  ----------- 
Capital conservation buffer*          49.7         32.4         34.2 
-----------------------------  -----------  -----------  ----------- 
Countercyclical buffer*               19.9          8.6         18.2 
-----------------------------  -----------  -----------  ----------- 
Total                                268.4        214.0        235.1 
-----------------------------  -----------  -----------  ----------- 
 

Typical risk weighting

 
                                                Risk weighting % 
--------------------------------------------   ----------------- 
Standard on-balance sheet risk weighting 
--------------------------------------------    ---------------- 
Real Estate Finance: residential investment                   35 
----------------------------------------------  ---------------- 
Real Estate Finance: commercial investment                   100 
----------------------------------------------  ---------------- 
Real Estate Finance: development**                           150 
----------------------------------------------  ---------------- 
Commercial Finance***                                        100 
----------------------------------------------  ---------------- 
Retail Finance                                                75 
----------------------------------------------  ---------------- 
Motor Finance                                                 75 
----------------------------------------------  ---------------- 
Debt Management                                              100 
----------------------------------------------  ---------------- 
Consumer Mortgages (up to 80% LTV)                            35 
----------------------------------------------  ---------------- 
 

Liquidity

 
                          30 June      30 June  31 December 
                             2019         2018         2018 
                       GBPmillion   GBPmillion   GBPmillion 
--------------------  -----------  -----------  ----------- 
Liquid assets 
--------------------  -----------  -----------  ----------- 
Aaa - Aa3                   211.9        276.7        319.4 
--------------------  -----------  -----------  ----------- 
A1 - A3                      62.2         29.2         39.7 
--------------------  -----------  -----------  ----------- 
Unrated                       5.1          5.0          5.1 
--------------------  -----------  -----------  ----------- 
Liquidity exposures         279.2        310.9        364.2 
--------------------  -----------  -----------  ----------- 
 

Note: 31 December 2018 and 30 June 2019 ratios and capital resources are stated using the IFRS 9 transitional rules basis.

* The countercyclical buffer increased from 0.5% to 1% on 28 November 2018. The Capital conservation buffer increased from 1.875% to 2.5% on 1 January 2019.

** The Group has entered into an ENABLE Guarantee with the British Business Bank, whereby the UK Government will take on a portion of the risk on a portfolio of loans to smaller business in return for a fee. When the Guarantee is triggered it will reduce the net risk weighting applied to Real Estate Finance development lending.

*** A lower risk weighting than 100% is applied to Commercial Finance lending where the customer is a small to medium

enterprise due to applying an 'SME factor'.

Liquidity

At 30 June 2019 and throughout the period, the Group had significant surplus liquidity over the minimum requirements due to its stock of High Quality Liquid Assets ('HQLA'), in the form of the Bank of England Reserve Account and UK Treasury Bills. Total liquid assets were GBP279.2 million at 30 June 2019, with the High Quality Liquid Assets balance being GBP211.9 million.

The Group uses a number of measures to manage liquidity. These include:

-- The Overall Liquidity Adequacy Requirement ('OLAR'), which is the Board's view of the Group's liquidity needs as set out in the Board approved Internal Liquidity Adequacy Assessment Process ('ILAAP')

-- The Liquidity Coverage Ratio ('LCR'), which is a regulatory measure that assesses net 30 day cash outflows as a proportion of HQLA

-- Total funding ratio, as defined in the Appendix to the interim report.

The OLAR was maintained significantly higher than regulatory levels throughout the period, and the LCR was also significantly higher than the regulatory requirement over the period. At 30 June 2019, the total funding ratio was 112.2% (30 June 2018: 116.6%, 31 December 2018: 118.2%).

For LCR purposes the HQLA excludes UK Treasury Bills which are encumbered to provide collateral as part of the Group's Term Funding Scheme with the Bank of England. The total of unencumbered HQLA for LCR purposes is GBP181.5 million (30 June 2018: GBP155.1 million, 31 December 2018: GBP240.8 million).

The Group continues to manage its liquidity on a conservative basis by holding High Quality Liquid Assets and utilising predominantly retail funding from customer deposits. It has continued to attract new fixed and variable rate deposits and, as shown in the Savings section of the Interim Business Report on page 27, is enhancing its digital proposition and increasing the number of funding options available to it. Secure Trust Bank is a participant in the Bank of England's Sterling Money Market Operations under the Sterling Monetary Framework and has drawn GBP263.0 million under the Term Funding Scheme, this level being unchanged from that reported at 30 June 2018 and 31 December 2018.

The Group has no liquid asset exposures outside of the United Kingdom and no amounts that are either past due or impaired.

Interim business review

Business Finance

Strong growth, focused on Real Estate Finance and Commercial Finance, has continued to generate increasing revenues with very low impairment losses.

Revenue and lending performance vs prior periods

Real Estate Finance

 
                    June 2019  June 2018  Dec 2018 
------------------  ---------  ---------  -------- 
Lending revenue          23.5       18.3      41.2 
------------------  ---------  ---------  -------- 
Lending balance         879.0      704.8     769.8 
------------------  ---------  ---------  -------- 
Impairment losses         0.2        0.5       0.5 
------------------  ---------  ---------  -------- 
 

Asset Finance

 
                    June 2019  June 2018  Dec 2018 
------------------  ---------  ---------  -------- 
Lending revenue           1.9        3.8       6.6 
------------------  ---------  ---------  -------- 
Lending balance          42.7       87.9      62.8 
------------------  ---------  ---------  -------- 
Impairment losses         0.3        0.9       2.2 
------------------  ---------  ---------  -------- 
 

Commercial Finance

 
                    June 2019  June 2018  Dec 2018 
------------------  ---------  ---------  -------- 
Lending revenue           8.4        6.2      13.4 
------------------  ---------  ---------  -------- 
Lending balance         220.7      187.5     194.7 
------------------  ---------  ---------  -------- 
Impairment losses         0.2        0.2 
------------------  ---------  ---------  -------- 
 

Real Estate Finance

The division supports SMEs in providing finance principally for residential development and residential investment.

2019 performance

The business has continued to grow its Real Estate Finance business, building on the increase in origination staff in 2018. Growth during H1 2019 has been focused on the investment book, reflecting the continued cautious approach to development lending, with the consequence that the level of investment lending increased to back over 70% of the portfolio. This has driven the increase in balances during H1 2019, with the book now 25% higher than at H1 2018, having grown by 14% in H1 2019. Revenues consequently grew by 28% from H1 2018 due to the balance increase, whilst also aided by some one-off transactional fee income arising in 2019. Impairment losses remain low as the quality of the book has remained stable in H1 2019, with no crystallised impairments arising.

Looking forward

The business continues to remain cautious around credit policy in the light of more uncertain market conditions, and can react quickly to any threats which may emerge, whilst also seeking out opportunities within the Group's chosen appetite. Growth will continue to be managed carefully to ensure that returns are maximised whilst maintaining credit quality.

Asset Finance

Asset Finance provides funding to support SME businesses in acquiring commercial assets, such as building equipment, commercial vehicles and manufacturing equipment.

2019 performance

Following the decision to cease new business in 2018, the portfolio has continued to run-off with lending balances continuing to reduce in 2019, down by 51% against H1 2018, and 32% since December 2018, with a consequent impact on income levels. It is equally of note that impairment levels have also reduced, with a charge of GBP0.3 million in H1 being GBP0.6 million (66%) lower than in H1 2018 and 77% lower than in H2 2018. This reflects the continued robustness of the portfolio and the management of collections within the book.

Looking forward

The business ceased originating asset finance business in 2018, and accordingly expects the book to continue to reduce in line with contractual repayments from customers. The business continues to assess its options in this market, whilst ensuring an orderly run-down of the current portfolio.

Commercial Finance

Commercial Finance specialises in providing a full range of invoice financing solutions to UK businesses including invoice discounting and factoring.

2019 performance

The Commercial Finance business continued to grow in the first half of 2019, with lending balances increasing by 13%. Income growth was also very positive whilst costs remained unchanged. Impairment levels were minimal as a result of the strong culture of risk management.

The business is now benefiting from the regional model that was rolled out in 2018, with fully operational offices in Leeds, Manchester, Birmingham and London. Recruitment and engagement of high calibre people, combined with the ongoing support of the Group, remains key to success.

Looking forward

The team has built a reputation for high quality service, particularly within the market sectors that the Group is focusing on. As a result, the prospects for future growth are encouraging. Further national expansion through development of its regional footprint will provide the Group with a more scalable business model.

Consumer Finance

The Consumer Finance portfolios continue to grow, with the first phase of the Motor Finance transformation programme delivered and improving credit quality in this portfolio.

Revenue and lending performance vs prior periods

Retail Finance

 
                    June 2019  June 2018  Dec 2018 
------------------  ---------  ---------  -------- 
Lending revenue          36.1       29.4      62.8 
------------------  ---------  ---------  -------- 
Lending balance         671.7      508.0     597.0 
------------------  ---------  ---------  -------- 
Impairment losses         9.1        9.0      19.3 
------------------  ---------  ---------  -------- 
 

Motor Finance

 
                    June 2019  June 2018  Dec 2018 
------------------  ---------  ---------  -------- 
Lending revenue          24.3       23.8      48.5 
------------------  ---------  ---------  -------- 
Lending balance         299.8      272.0     276.4 
------------------  ---------  ---------  -------- 
Impairment losses         8.0        6.4      11.3 
------------------  ---------  ---------  -------- 
 

Debt Managers (Services) Limited

 
                    June 2019  June 2018  Dec 2018 
------------------  ---------  ---------  -------- 
Lending revenue           4.4        3.1       7.0 
------------------  ---------  ---------  -------- 
Lending balance          42.3       28.3      32.3 
------------------  ---------  ---------  -------- 
Impairment losses         N/A        N/A       N/A 
------------------  ---------  ---------  -------- 
 

Consumer Mortgages

 
                    June 2019  June 2018  Dec 2018 
------------------  ---------  ---------  -------- 
Lending revenue           1.7        0.4       1.5 
------------------  ---------  ---------  -------- 
Lending balance         113.2       37.3      84.7 
------------------  ---------  ---------  -------- 
Impairment losses         0.1        0.0       0.2 
------------------  ---------  ---------  -------- 
 

Retail Finance

Retail Finance includes lending products for use by in-store and online retailers to enable consumer purchases.

2019 performance

The Retail Finance business has continued to grow strongly, with new gross lending volumes increasing to GBP372.6 million (an increase of 20% on the equivalent period last year). This has driven a further significant increase in lending assets, which during the year rose to GBP671.7 million (June 2018: GBP508.0 million).

Each of the three largest sub-markets for the business (sports and leisure, furniture and jewellery) have contributed to this growth, which as in previous years has been achieved through a combination of gaining increased market share and sector growth.

Following the exit of a major competitor within the football season ticket sector in March 2019, the Retail Finance business has secured a significant increase in its market share within this area.

Lending revenue increased by 23% to GBP36.1 million (June 2018: GBP29.4 million). Impairment losses were well controlled at GBP9.1 million (June 2018: GBP9.0 million) and reflect a more stable provisioning under IRFS 9 than last year.

Looking forward

The Group plans to maintain growth within its Retail Finance business and the expectation is that this will be across all existing retail sectors with particular focus on the furniture and football season ticket markets.

To underpin the continued growth, the Group continues to invest in initiatives to further enhance its systems capabilities, to ensure that quality of service to both retailers and customers is maintained or improved. This includes the roll-out of improved telephony systems across customer facing staff and further enhancements to online account management service, which allows customers to view their statement online and make routine self-serve changes to their account.

Motor Finance

Finance is arranged through motor dealerships, brokers and internet introducers and involves fixed rate, fixed term hire purchase arrangements, predominantly on used cars.

2019 performance

The Motor Finance business saw an increase in new business volumes from GBP77.2 million for the period ended 30 June 2018 to GBP89.0 million for the period to 30 June 2019 following the appointment of experienced sales resources at the end of 2018. New business continues to reflect a higher credit quality following changes to credit criteria in 2017. Revenues have increased from GBP23.8 million to GBP24.3 million, despite the increased mix of lower margin higher credit quality loans.

Impairment losses for the period have increased from GBP6.4 million to GBP8.0 million. A proportion of the increase is as a result of the deterioration in the used vehicle market over and above expected seasonal changes in valuations. The underlying cost of risk reflects the continued improvement in the quality of the book and improved collections performance.

Looking forward

The long-term strategy for Motor Finance is to expand operations into the prime credit market, whilst maintaining and growing the near prime portfolio, to drive long-term receivables growth and sustainable earnings outcomes through improved portfolio credit quality. The Group believes the market has a long-term opportunity for innovative and technology-led funding providers. The key target market for growth is the middle tier independent and lower/middle tier franchise dealer segments. A full range of products will be offered to this market and a programme of work is underway to deliver a new platform and business transformation through 2019/2020 with GBP3.9 million already invested as at June 2019.

As part of this programme of work, Motor Finance have developed a new Used Vehicle Stocking product allowing motor dealerships to finance used vehicles on their forecourts. This product has initially been developed in partnership with Aston Barclay Auctions and the first vehicles were funded on 8 July 2019 under a new brand, V12 Vehicle Finance.

The business will continue to develop its broker and online introducer relationships, to grow primarily near prime volumes.

Debt Managers (Services) Limited

Debt Managers (Services) Limited ('DMS') is the Bank's debt collection business.

2019 performance

In the first half of 2019, DMS has further invested in purchased debt with the valuation of purchased debt increasing 32% on the year end, whilst revenue has increased 42% on the same period last year. This has been achieved through the development of relationships with new and existing clients and a broadening of service offerings.

Looking forward

Strong relationships and forward flow contracts with existing clients will ensure the positive momentum is carried into the second half of the year. This is likely to result in continued growth of both revenue and profit. Leveraging new technologies will enhance the Company's customer engagement and will facilitate penetration of new sectors. The Company's bank ownership means it is well placed to identify and take advantage of growth opportunities in the coming year.

Consumer Mortgages

Lending to individuals to purchase a property or remortgage their current property.

2019 performance

The Group ceased originating new consumer mortgages in the first quarter of 2019. Fulfilment of the pipeline saw balances grow to GBP113.2 million by the end of the period.

Savings

The Group's award-winning Savings offering has seen balances grow in line with lending activities, and an extension to the product set with the launch of fixed term Cash ISAs.

Revenue and lending performance vs prior periods

 
                       June 2019  June 2018  Dec 2018 
---------------------  ---------  ---------  -------- 
Notice deposits            613.7     451.4*     516.4 
---------------------  ---------  ---------  -------- 
Fixed Term Savings       1,368.6   1,190.4*   1,316.8 
---------------------  ---------  ---------  -------- 
Sight/Instant Access        19.2       15.0      14.5 
---------------------  ---------  ---------  -------- 
 

*At December 2018, accrued interest was reclassified from Other liabilities to Deposits from customers, as this better represented the commercial reality of the arrangement, so the June 2018 figures have been restated accordingly.

The Group attracts funding primarily via retail savings; offering individuals competitive, simple products, applied for online and serviced through a highly commended internet banking service. These products offer UK-based online and telephone customer service and are backed by the protection provided by the UK Financial Services Compensation Scheme.

H1 2019 performance

In the first six months of 2019, Savings balances have grown by GBP154 million, an 8% growth from the end of 2018. This represents over 13,000 new accounts and over 4,000 new customers joining the Group, whilst 63% of existing customers have also chosen to retain their savings or open new accounts with us. Including the OneBill account, total customer deposits now exceed GBP2 billion.

The Group also achieved its largest monthly inflow of new funds on record with over GBP122 million deposited in Savings accounts during June. This inflow was supported by the launch of the Group's first Fixed Rate ISA. At an attractive rate of 1.60%, the Bank attracted over GBP10 million across almost 400 accounts on this first product in a matter of weeks. This evidences the Bank's growing ability to access deeper liquidity pools and attract marginally lower cost funds.

So far in 2019, the Group has been awarded the Feefo Trusted Award for its independent review scores. The Trusted Service awards are given to businesses using Feefo to collect genuine reviews and who also meet the criteria of excellence needed to achieve a Trusted Service Award. Only the businesses providing the best experience for their customers, as rated by them, make the grade. The Group also collects independent customer reviews on TrustPilot.

The Group has also been recognised by independent industry stakeholders, winning awards for its overall Savings offer which gives consideration to the competitiveness of interest rates, customer service and online services. The Group has won a number of coveted awards; taking top place for Best Notice Account Provider and being Highly Commended as Best Fixed Account Provider and Best Bank Savings Provider in the Moneyfacts Awards.

These latest awards underline the strength of the Group's Savings offer, which was also recognised in the 2019 Savings Champion awards as the winner of Best Savings Provider and Finalist for Best Online Savings Provider.

The introduction and adoption of online servicing from 2018 has continued, with nearly two-thirds of the savings customer base actively logging on and making use of the Internet Banking functionality. New customers opening accounts have an almost 100% registration rate, with 74% of the last 20,000 new accounts actively logging in. Further activity is planned for 2019 to enhance the Group's digital services and invite more existing customers to register.

Looking forward

The Group plans continued Savings growth through 2019. With the launch of short-dated notice accounts in 2018 and fixed term Cash ISAs in 2019, the Group has gained access to some of the largest savings markets in the UK, broadening access to large liquidity pools at lower marginal cost.

The planned introduction of an instant access product in 2019, the largest market by value, will extend this access further. This significant expansion of the Group's savings offer will reduce cost of funds, increase the range of funding options, allow access to a new significant pool of potential customers and improve the ability to retain existing customers.

The UK savings market is experiencing increasing competition from an overall increase in the number of providers and products available, at a point in time where there is also potential for an increase in demand for funds as a result of TFS drawings being refinanced in the savings market. Alongside the extension to its product range, the Group is continuing to invest in its digital services, whilst actively examining new distribution opportunities for its savings products.

Risk management and principal risks

Risk overview

On an ongoing basis, the directors carry out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.

Details of the Group's risk management framework, including risk appetite statements, key policies and risk governance can be found on the Group's website: www.securetrustbank.com/our-corporate-information/risk-management.

Changes to the Group's risk profile

Changes to the Group's risk profile since the position set out in the 2018 Annual Report and Accounts are set out in the following sections:

Credit risk

Consumer Finance Credit Risk

The Group made the strategic decision to withdraw the Mortgage product at the start of 2019, largely due to excessively aggressive competition by lenders relaxing their lending criteria in an uncertain macro-economic climate.

The Point of Sale Retail Finance business has continued to grow strongly through the acquisition of high quality business in the first half of 2019. Motor Finance has also seen good growth in the first half of the year as the Bank continues to reposition its book in the better quality near-prime sector of the motor finance market. The improvement in quality has been reflected in the Group's impairment charge for the period, as shown in the Financial Review on page 18.

Business Finance Credit Risk

Real Estate Finance and Commercial Finance lending balances have continued to grow in line with the Group's existing credit appetite, with no material impairments arising in the period. Guided by the Group's approved lending policies and the significant experience within the lending teams, the ongoing focus on both the ability of customers to service their obligations and the quality of the underlying collateral has continued to result in strong portfolio performances. The Real Estate portfolio in particular remains heavily weighted towards the residential investment sector, which continues to perform in line with expectations.

All Business Finance lending areas remain cognisant of the current political uncertainty in the UK and regularly review risk appetite for any asset classes which could be impacted by any wider political change.

The Asset Finance portfolio continues to amortise, following the decision to cease new lending in this division in early 2018. No material impairments have arisen from the portfolio as balances continue to run-off.

Concentration risk

Management assesses the potential concentration risk from geographic, product and individual loan concentrations. Due to the nature of the Group's lending operations the directors consider the lending operations of the Group as a whole to be well diversified. The security on the Real Estate Finance and Consumer Mortgages businesses is principally located in London and the South East of the United Kingdom, whilst the remainder of the loan book is spread around the country broadly in proportion to the population.

UK withdrawal from European Union

The Group continues to monitor very closely the uncertain political and economic environment associated with the withdrawal from the EU. The expected impact on the Group is described in the Principal Risks and Uncertainties section of the 2018 Annual Report and Accounts, and the Group's view has not significantly changed since that assessment. The direct impact to the Group is limited, even in a no deal scenario. The most significant indirect impact continues to be in respect of credit risk, and the Group's ongoing analysis of the macro-economic position and the performance of its own lending portfolios continues to suggest that the Group can withstand a disorderly exit.

 
Risk              Description 
----------------  -------------------------------------------------------------------------------------------- 
Credit Risk       The risk that a counterparty will be unable to pay amounts in full when due 
----------------  -------------------------------------------------------------------------------------------- 
Liquidity Risk    The risk that the Group will encounter difficulty in meeting obligations associated with its 
                   financial liabilities that are settled by delivering cash or another financial asset 
----------------  -------------------------------------------------------------------------------------------- 
Operational Risk  The risk of direct or indirect loss arising from a wide variety of causes associated with 
                   the Group's processes, personnel, technology and infrastructure, and from external factors 
                   other than the risks identified above 
----------------  -------------------------------------------------------------------------------------------- 
Capital Risk      The risk that the Group will have insufficient capital resources to support the business 
----------------  -------------------------------------------------------------------------------------------- 
Market Risk       The risk that the value of, or revenue generated from, the Group's assets and liabilities 
                   is impacted as a result of market movements, predominantly interest rates 
----------------  -------------------------------------------------------------------------------------------- 
Conduct Risk      The potential for customers (and the business) to suffer financial loss or other detriment 
                   through the actions and decisions made by the business and its staff 
----------------  -------------------------------------------------------------------------------------------- 
Regulatory Risk   The risk that the Group fails to be compliant with all relevant regulatory requirements 
----------------  -------------------------------------------------------------------------------------------- 
 

Liquidity risk

The Group has continued to use competitive interest rates to attract new fixed and variable rate deposits over terms ranging up to seven years. A moderate amount of borrowing under the Bank of England's Term Funding Scheme has also been used, with GBP263.3 million drawn up to 30 June 2019. All drawings will be repaid ahead of contractual maturity in February 2022.

The Overall Liquidity Adequacy Requirement is the Board's own view of the Group's liquidity requirement covering a 90-day stressed period and has been maintained significantly above regulatory levels throughout the period. The Liquidity Coverage Ratio ('LCR'), which assesses stressed outflows over a 30-day period as a proportion of High Quality Liquid Assets, was also significantly higher than the regulatory requirement throughout the period.

At 30 June 2019, the total funding ratio remained well within the Bank's risk appetite at 112.2% (30 June 2018: 116.6%, 31 December 2018: 118.2%). Definitions of this ratio, its calculation and the reasons for its use can be found in the Appendix to the interim report on page 56.

Operational risk

The Group's operational risk process and standards are defined and embedded through a formal Operational Risk Policy and Framework, which is aligned to the Basel Committee on Banking Supervision criteria for the sound management of operational risk. The objective of operational risk management is to:

-- Identify and manage operational risks within acceptable levels and defined risk appetite statements/metrics/thresholds and to limit operational losses

-- Develop a transparent risk culture that seeks to understand its risk profile, the incidents and losses they are incurring and to respond with proportionate and expeditious action to thematic areas of concern

-- Develop consistent and robust policies and controls that are understood and embedded across all business areas.

Key Risk themes of Operational Risk focus in 2019 include:

-- Operational Resilience - The Group recognises that any disruption to the services it provides could cause detriment to its customers and could affect the Group's financial stability. In 2019, the Group is rolling out a programme of work to review its critical processes and identify opportunities to further enhance the resilience of its operations.

-- Supplier Management - The Group uses a number of third parties to support its IT and operational processes. The Group recognises that it is important to effectively manage these suppliers and is introducing an enhanced control framework and developing its assurance requirements.

-- Information Security and Cyber Risk - As a financial institution, the Group is subject to a heightened risk of actual or attempted IT security breaches by sophisticated cybercrime groups. Any failure by the Group's intrusion detection and anti-penetration software to anticipate, prevent or mitigate a breach of the Group's IT network could significantly disrupt the Group's operations. The Group continues to invest in its information security controls in response to emerging cybercrime threats and to seek to ensure that controls for known threats remain robust.

Capital risk

At 30 June 2019, the CET1 Ratio was 12.8% (30 June 2018: 13.8%, 31 December 2018: 13.8%) and the total capital ratio was 15.2% (30 June 2018: 13.8%, 31 December 2018: 16.3%). The Leverage Ratio was 9.5% (30 June 2018: 10.4%, 31 December 2018: 10.0%) on a Group consolidated basis. All capital ratios remain healthy and the Group has no immediate plans to raise additional capital.

In the longer term, should the Group wish to increase its capital resources, it has access to additional forms of capital, as demonstrated by the issue of GBP50 million of Tier 2 Fixed Rate Reset Callable Subordinated Notes in the second half of 2018 at a rate of 6.75%. Further details of the Group's capital resources are provided in Note 15.

Market risk

Secure Trust Bank continues to maintain a broadly-matched asset and liability profile but is susceptible to movements in interest rates which can affect the Bank's earnings and the overall value of its interest rate sensitive assets and liabilities where unmatched.

Interest rate risk in the banking book is monitored by reference to the following measures:

-- Earnings at Risk ('EaR')

-- Market Value Sensitivity ('MVS'), and

-- Economic Value of Equity ('EVE').

The Group remained within its market risk appetite throughout the year.

The Group has a small exposure to foreign exchange risk through its Commercial Finance lending, which is subject to hedging activities.

The Group does not operate a trading book.

Conduct risk

In line with the Operational Risk Framework, the conduct risk and control assessments have been reviewed by the business units with self-attestations by first line risk owners.

Monthly review and challenge of Key Risk Indicators takes place in the product ExCo meetings, with the Customer Focus Committee providing oversight of the first line activities to assure senior management that the first line are identifying conduct risks when they arise and taking appropriate actions to mitigate them.

Training on conduct risk is provided to first line staff as part of an annual training and communication programme, with an eLearning module completed by staff during the period.

Regulatory risk

In the period, the Group continued to work on new and revised regulations and legislation that will come into force over the next 18 months and beyond, including the extension of the Senior Managers and Certification Regime to the Group's subsidiaries.

Consolidated statement of comprehensive income

 
                                                                                        June         June     December 
                                                                                        2019         2018         2018 
                                                                                   Unaudited    Unaudited      Audited 
                                                                           Note   GBPmillion   GBPmillion   GBPmillion 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Income statement 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Interest income and similar income                                                      92.3         79.2        169.2 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Interest expense and similar charges                                                  (21.8)       (15.5)       (35.5) 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Net interest income                                                                     70.5         63.7        133.7 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Fee and commission income                                                               11.2          9.8         19.4 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Fee and commission expense                                                             (0.3)        (1.0)        (1.5) 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Net fee and commission income                                                           10.9          8.8         17.9 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Operating income                                                                        81.4         72.5        151.6 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Impairment losses on loans and advances to customers                          8       (17.8)       (16.3)       (32.4) 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Operating expenses                                                                    (45.5)       (41.1)       (84.5) 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Profit before income tax                                                                18.1         15.1         34.7 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Income tax expense                                                            4        (3.5)        (2.4)        (6.4) 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Profit for the period                                                                   14.6         12.7         28.3 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Other comprehensive income 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Items that will not be reclassified to the income statement 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Revaluation reserve                                                                        -            -        (0.3) 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Taxation                                                                               (0.2)            -          0.1 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Other comprehensive income for the period, net of income tax                           (0.2)            -        (0.2) 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Total comprehensive income for the period                                               14.4         12.7         28.1 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
 
Profit attributable to: 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Equity holders of the Company                                                           14.6         12.7         28.3 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Total comprehensive income attributable to: 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Equity holders of the Company                                                           14.4         12.7         28.1 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
 
Earnings per share for profit attributable to the equity holders of the 
Company during the 
period (pence per share) 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Basic earnings per share                                                      5         79.0         68.7        153.2 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
Diluted earnings per share                                                    5         78.3         67.6        150.9 
-------------------------------------------------------------------------  ----  -----------  -----------  ----------- 
 

Consolidated statement of financial position

 
                                                           June         June     December 
                                                           2019         2018         2018 
                                                      Unaudited    Unaudited      Audited 
                                              Note   GBPmillion   GBPmillion   GBPmillion 
--------------------------------------------  ----  -----------  -----------  ----------- 
ASSETS 
--------------------------------------------  ----  -----------  -----------  ----------- 
Cash and balances at central banks                        101.9        126.7        169.7 
--------------------------------------------  ----  -----------  -----------  ----------- 
Loans and advances to banks                                67.3         34.2         44.8 
--------------------------------------------  ----  -----------  -----------  ----------- 
Loans and advances to customers                  6      2,278.3      1,839.1      2,028.9 
--------------------------------------------  ----  -----------  -----------  ----------- 
Debt securities                                           110.0        150.0        149.7 
--------------------------------------------  ----  -----------  -----------  ----------- 
Property, plant and equipment                              16.5         11.6         11.0 
--------------------------------------------  ----  -----------  -----------  ----------- 
Leasing right-of-use asset                       7          4.0            -            - 
--------------------------------------------  ----  -----------  -----------  ----------- 
Intangible assets                                           9.2         10.3          9.9 
--------------------------------------------  ----  -----------  -----------  ----------- 
Deferred tax assets                                         7.8          7.4          7.9 
--------------------------------------------  ----  -----------  -----------  ----------- 
Other assets                                               12.1          7.8         22.4 
--------------------------------------------  ----  -----------  -----------  ----------- 
Total assets                                            2,607.1      2,187.1      2,444.3 
--------------------------------------------  ----  -----------  -----------  ----------- 
LIABILITIES AND EQUITY 
--------------------------------------------  ----  -----------  -----------  ----------- 
Liabilities 
--------------------------------------------  ----  -----------  -----------  ----------- 
Due to banks                                     9        263.5        263.3        263.5 
--------------------------------------------  ----  -----------  -----------  ----------- 
Deposits from customers                         10      2,001.5      1,656.8      1,847.7 
--------------------------------------------  ----  -----------  -----------  ----------- 
Current tax liabilities                                     3.4          2.8          4.2 
--------------------------------------------  ----  -----------  -----------  ----------- 
Lease liabilities                               11          4.9            -            - 
--------------------------------------------  ----  -----------  -----------  ----------- 
Other liabilities                                          42.1         37.6         40.1 
--------------------------------------------  ----  -----------  -----------  ----------- 
Provisions for liabilities and charges          12          0.9          1.6          1.3 
--------------------------------------------  ----  -----------  -----------  ----------- 
Subordinated liabilities                                   50.5            -         50.4 
--------------------------------------------  ----  -----------  -----------  ----------- 
Total liabilities                                       2,366.8      1,962.1      2,207.2 
--------------------------------------------  ----  -----------  -----------  ----------- 
Equity attributable to owners of the parent 
--------------------------------------------  ----  -----------  -----------  ----------- 
Share capital                                               7.4          7.4          7.4 
--------------------------------------------  ----  -----------  -----------  ----------- 
Share premium                                              81.2         81.2         81.2 
--------------------------------------------  ----  -----------  -----------  ----------- 
Revaluation reserve                                         0.9          1.3          1.1 
--------------------------------------------  ----  -----------  -----------  ----------- 
Retained earnings                                         150.8        135.1        147.4 
--------------------------------------------  ----  -----------  -----------  ----------- 
Total equity                                              240.3        225.0        237.1 
--------------------------------------------  ----  -----------  -----------  ----------- 
Total liabilities and equity                            2,607.1      2,187.1      2,444.3 
--------------------------------------------  ----  -----------  -----------  ----------- 
 

Consolidated statement of changes in equity

 
                                                             Share        Share  Revaluation     Retained 
                                                           capital      premium      reserve     earnings        Total 
Unaudited                                               GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Balance at 1 January 2019 (as previously stated)               7.4         81.2          1.1        147.4        237.1 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
IFRS 16 transition adjustment net of tax (see Note 1)            -            -            -        (0.1)        (0.1) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Balance at 1 January 2019 (as restated)                        7.4         81.2          1.1        147.3        237.0 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Total comprehensive income for the period 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Profit for the six months ended 30 June 2019                     -            -            -         14.6         14.6 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Tax on revaluation reserve                                       -            -        (0.2)            -        (0.2) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Total other comprehensive income                                 -            -        (0.2)            -        (0.2) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Total comprehensive income for the period                        -            -        (0.2)         14.6         14.4 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
 
Transactions with owners, recorded directly in equity 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Contributions by and distributions to owners 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Dividends                                                        -            -            -       (11.8)       (11.8) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Share-based payments                                             _            _            _          0.6          0.6 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Tax on share-based payments                                      -            -            -          0.1          0.1 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Total contributions by and distributions to owners               -            -            -       (11.1)       (11.1) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Balance at 30 June 2019                                        7.4         81.2          0.9        150.8        240.3 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Unaudited 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Balance at 1 January 2018                                      7.4         81.2          1.3        133.4        223.3 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Total comprehensive income for the period 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Profit for the six months ended 30 June 2018                     -            -            -         12.7         12.7 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Transactions with owners, recorded directly in equity 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Contributions by and distributions to owners 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Dividends                                                        -            -            -       (11.3)       (11.3) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Share-based payments                                             -            -            -          0.3          0.3 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Total contributions by and distributions to owners               -            -            -       (11.0)       (11.0) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Balance at 30 June 2018                                        7.4         81.2          1.3        135.1        225.0 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
 
                                                             Share        Share  Revaluation     Retained 
                                                           capital      premium      reserve     earnings        Total 
Audited                                                 GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Balance at 1 January 2018                                      7.4         81.2          1.3        133.4        223.3 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Total comprehensive income for the period 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Profit for the 12 months ended 31 December 2018                  -            -            -         28.3         28.3 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Revaluation reserve                                              -            -        (0.3)            -        (0.3) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Tax on revaluation reserve                                       -            -          0.1            -          0.1 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Total other comprehensive income                                 -            -        (0.2)            -        (0.2) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Total comprehensive income for the period                        -            -        (0.2)         28.3         28.1 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Transactions with owners, recorded directly in equity 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Contributions by and distributions to owners 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Dividends                                                        -            -            -       (14.8)       (14.8) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Share-based payments                                             -            -            -          0.8          0.8 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Tax on share-based payments                                      -            -            -        (0.3)        (0.3) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
Total contributions by and distributions to owners               -            -            -       (14.3)       (14.3) 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
Balance at 31 December 2018                                    7.4         81.2          1.1        147.4        237.1 
-----------------------------------------------------  -----------  -----------  -----------  -----------  ----------- 
 

Consolidated statement of cash flows

 
                                                                                        June         June     December 
                                                                                        2019         2018         2018 
                                                                                   Unaudited    Unaudited      Audited 
                                                                                  GBPmillion   GBPmillion   GBPmillion 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Cash flows from operating activities 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Profit for the period                                                                   14.6         12.7         28.3 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
 
Adjustments for: 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Income tax expense                                                                       3.5          2.4          6.4 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Depreciation of property, plant and equipment                                            1.1          0.4          1.3 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Loss on disposal of computer software                                                      -            -          0.1 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Amortisation of intangible assets                                                        1.0          1.0          1.8 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Impairment losses on loans and advances to customers                                    17.8         16.3         32.4 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Amortisation of subordinated liabilities issue costs                                     0.1            -            - 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Share-based compensation                                                                 0.6          0.3          0.8 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Cash flows from operating profits before changes in operating assets and 
 liabilities                                                                            38.7         33.1         71.1 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Changes in operating assets and liabilities: 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
- net decrease/(increase) in debt securities                                            39.7      (145.0)      (144.7) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
- net increase in loans and advances to customers                                    (267.2)      (288.9)      (494.8) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
- net decrease/(increase) in other assets                                                9.9        (2.4)       (17.0) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
- net increase in deposits from customers                                              140.0        162.2        364.5 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
- net increase/(decrease) in other liabilities                                          16.4          7.3        (0.5) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Income tax paid                                                                        (4.0)        (3.1)        (6.4) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Interest paid on lease liabilities                                                     (0.1)            -            - 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Net cash outflow from operating activities                                            (26.6)      (236.8)      (227.8) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Cash flows from investing activities 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Purchase of property, plant and equipment                                              (6.1)        (0.5)        (1.1) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Purchase of computer software                                                          (0.3)        (0.9)        (1.4) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Net cash outflow from investing activities                                             (6.4)        (1.4)        (2.5) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Cash flows from financing activities 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Net increase in amounts due to banks                                                       -        150.0        150.0 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Issue of subordinated liabilities                                                          -            -         50.0 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Subordinated liabilities issue costs                                                       -            -        (0.8) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Repayments of principal under lease liabilities                                        (0.5)            -            - 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Dividends paid                                                                        (11.8)       (11.3)       (14.8) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Net cash (outflow)/inflow from financing activities                                   (12.3)        138.7        184.4 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Net decrease in cash and cash equivalents                                             (45.3)       (99.5)       (45.9) 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Cash and cash equivalents at start of period                                           214.5        260.4        260.4 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Cash and cash equivalents at end of period                                             169.2        160.9        214.5 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
 

Notes to the interim report

1. Accounting policies

The principal accounting policies applied in the preparation of this interim report are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.

1.1 Reporting entity

Secure Trust Bank PLC is a public limited company incorporated in England and Wales in the United Kingdom (referred to as 'the Company') and is limited by shares. The Company is registered in England and Wales and has the registered number 00541132. The registered address of the Company is One Arleston Way, Solihull, West Midlands, B90 4LH. The interim report of the Company as at and for the period ended 30 June 2019 comprise Secure Trust Bank PLC and its subsidiaries (together referred to as 'the Group' and individually as 'subsidiaries'). The Group is primarily involved in banking and financial services.

1.2 Basis of presentation

The interim report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006, and has been prepared in accordance with International Financial Reporting Standards, as adopted or early adopted by the Group and endorsed by the EU, the Companies Act 2006 applicable to companies reporting under IFRS and IAS 34 Interim Financial Reporting.

A copy of the statutory accounts for the year ended 31 December 2018 has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the previous auditors drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The results for the periods ending 30 June 2019 and 30 June 2018 are unaudited. The results for the year ending 31 December 2018 are audited.

The interim report has been prepared under the historical cost convention, as modified by the revaluation of land and buildings. The interim report is presented in pounds sterling, which is the functional and presentational currency of the entities within the Group.

The preparation of the interim report in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity or areas where assumptions and estimates are significant to the interim report are disclosed in Note 2.

The directors have assessed, in the light of current and anticipated economic conditions, the Group's ability to continue as a going concern. The directors confirm they are satisfied that the Group has adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the 'going concern' basis for preparing accounts.

In assessing the Group as a going concern, the directors have given consideration to the factors likely to affect its future performance and development, the Group's financial position and the principal risks and uncertainties facing the Group, as set out in the Interim Business Report. The Group uses various short and medium-term forecasts to monitor future capital and liquidity requirements and these include stress testing assumptions to identify the headroom on regulatory compliance measures.

1.3 Accounting policies

The accounting policies applied in preparing the unaudited condensed interim report are consistent with those used in preparing the audited statutory financial statements for the year ended 31 December 2018, except for the following:

1.3.1 IFRS 16 'Leases'

The new standard is effective for annual periods beginning on or after 1 January 2019, and sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer ('lessee') and the supplier ('lessor'). It replaces the previous leases standard, IAS 17 'Leases', and related interpretations.

IFRS 16 uses a new single model that applies to all leases, thus eliminating the classification of leases as either operating leases or finance leases for a lessee. Applying that model, on commencement of a lease, the lessee recognises a liability to make lease payments ('the lease liability'), an asset representing the right to use the underlying asset during the lease term ('the right-of-use asset'), and depreciation of right-of-use assets is shown separately from interest on lease liabilities in the income statement.

The lease liability is initially measured based on the net present value of the lease payments to be made over the remaining lease term, using the lessee's incremental borrowing rate as the discount rate. After commencement of the lease, the lease liability is measured on an amortised cost basis, with interest being calculated on an effective interest rate basis on the remaining balance of the liability, and lease payments reducing the lease liability when paid.

The right-of-use asset is initially measured at cost, being the amount of the initial measurement of the lease liability, adjusted for any prepaid rentals less any lease incentives plus any initial direct costs incurred by the lessee and dismantling or restoration costs. Subsequently, the right-of-use asset is amortised on a straight-line basis over the remaining term of the lease.

Transition choices

The Group has elected to recognise the cumulative effect of implementing IFRS 16 as an adjustment to the opening balance of retained earnings at 1 January 2019. Accordingly, prior year comparatives shall not be restated. As a practical expedient, the Group will apply the new standard only to contracts that had previously been identified as leases. Therefore, the new standard will not be applied to contracts that had not previously been identified as leases.

The Group has also elected not to apply IFRS 16 to the following:

-- Short-term leases of 12 months or less.

-- Leases for which the underlying asset is of low value.

This has resulted in the new standard only being applicable to a number of property leases and motor vehicle leases.

The Group has chosen to measure the initial right-of-use asset for property leases at its carrying amount as if the standard has been applied since the commencement date, but discounted using the incremental borrowing rate as at 1 January 2019. The initial right-of-use asset for all other leases is measured at an amount equal to the lease liability.

The adjustments (net of tax) arising from the adoption of IFRS 16 on 1 January 2019, and their effect on the 31 December 2018 balance sheet, were as follows:

 
                                     As originally      IFRS 16 
                                            stated   adjustment  As restated 
                                       31 December    1 January    1 January 
                                              2018         2019         2019 
                                        GBPmillion   GBPmillion   GBPmillion 
-----------------------------------  -------------  -----------  ----------- 
Assets 
-----------------------------------  -------------  -----------  ----------- 
Cash and balances at central banks           169.7            -        169.7 
-----------------------------------  -------------  -----------  ----------- 
Debt securities                              149.7            -        149.7 
-----------------------------------  -------------  -----------  ----------- 
Loans and advances to banks                   44.8            -         44.8 
-----------------------------------  -------------  -----------  ----------- 
Loans and advances to customers            2,028.9            -      2,028.9 
-----------------------------------  -------------  -----------  ----------- 
Lease right-of-use assets                        -          4.5          4.5 
-----------------------------------  -------------  -----------  ----------- 
Deferred tax                                   7.9          0.2          8.1 
-----------------------------------  -------------  -----------  ----------- 
Other assets                                  43.3        (0.4)         42.9 
-----------------------------------  -------------  -----------  ----------- 
Total assets                               2,444.3          4.3      2,448.6 
-----------------------------------  -------------  -----------  ----------- 
Liabilities 
-----------------------------------  -------------  -----------  ----------- 
Due to banks                                 263.5            -        263.5 
-----------------------------------  -------------  -----------  ----------- 
Deposits from customers                    1,847.7            -      1,847.7 
-----------------------------------  -------------  -----------  ----------- 
Tier 2 subordinated liabilities               50.4            -         50.4 
-----------------------------------  -------------  -----------  ----------- 
Lease liabilities                                -          5.5          5.5 
-----------------------------------  -------------  -----------  ----------- 
Other liabilities                             45.6        (1.1)         44.5 
-----------------------------------  -------------  -----------  ----------- 
Total liabilities                          2,207.2          4.4      2,211.6 
-----------------------------------  -------------  -----------  ----------- 
 
Share capital                                  7.4            -          7.4 
-----------------------------------  -------------  -----------  ----------- 
Share premium                                 81.2            -         81.2 
-----------------------------------  -------------  -----------  ----------- 
Revaluation reserve                            1.1            -          1.1 
-----------------------------------  -------------  -----------  ----------- 
Retained earnings                            147.4        (0.1)        147.3 
-----------------------------------  -------------  -----------  ----------- 
Total equity                                 237.1        (0.1)        237.0 
-----------------------------------  -------------  -----------  ----------- 
Total liabilities and equity               2,444.3          4.3      2,448.6 
-----------------------------------  -------------  -----------  ----------- 
 

Of the total right-of-use asset of GBP4.5 million recognised at 1 January 2019, GBP4.2 million related to leases of property, and GBP0.3 million related to leases of motor vehicles.

Adjustments to other assets

These relate to the release of rent prepayments that are no longer required now that the leases are recognised as right-of-use assets.

Adjustment to other liabilities

This relates to the release of a reverse lease premium, which, under IAS 17, was included in accruals and was being spread over the term of the lease.

The weighted average incremental borrowing rate applied to lease liabilities recognised in the statement of financial position on transition at 1 January 2019 was 2.61%.

The table below presents a reconciliation from operating lease commitments disclosed at December 2018 to lease liabilities recognised at 1 January 2019:

 
                                                                     GBPmillion 
-------------------------------------------------------------------  ---------- 
Operating lease commitment disclosed under IAS 17 at December 2018          7.4 
-------------------------------------------------------------------  ---------- 
Effect of discounting                                                     (1.9) 
-------------------------------------------------------------------  ---------- 
                                                                            5.5 
-------------------------------------------------------------------  ---------- 
 

In terms of the income statement impact, the application of IFRS 16 resulted in a decrease in other operating expenses and an increase in depreciation and interest expense compared to IAS 17. During the period, in relation to leases under IFRS 16 the Group recognised the following amounts in the consolidated income statement:

 
                   GBPmillion 
-----------------  ---------- 
Depreciation              0.5 
-----------------  ---------- 
Interest expense          0.1 
-----------------  ---------- 
 

Lessor accounting

Lessor accounting remains unchanged from IAS 17.

1.3.2 Taxation

Taxes on profits in interim periods are accrued using the tax rate that will be applicable to expected total annual profits.

1.3.3 Standards in issue but not yet effective

There are no new standards in issue but not yet effective that have a material effect on the Group.

2. Critical judgements and estimates

2.1 Judgements

No critical judgements have been identified.

2.2 Key sources of estimation uncertainty

Estimations which could have a material impact on the Group's financial results and are therefore considered to be key sources of estimation uncertainty are outlined below.

2.2.1 Impairment losses on loans and advances to customers

As discussed in Note 1.10 of the Group's Annual Report for the year ended 31 December 2018, ECLs are calculated by multiplying three main components: the PD, EAD and LGD. These variables are derived from internally developed statistical models and historical data, adjusted to reflect forward looking information. The determination of both the PD and LGD require estimation which is discussed further below.

2.2.2 Probability of default ('PD')

As set out in Note 1.10 Exogenous, Maturity, Vintage ('EMV') modelling is used in the production of forward looking lifetime PDs in the calculation of ECLs. As the Group's performance data does not go back far enough to capture a full economic cycle, the proxy series of the quarterly rates of write offs for UK unsecured lending data is used to build an economic response model ('ERM') to incorporate the effects of recession.

The portfolios for which external benchmark information represents a significant input into the measurement of expected credit loss ('ECL') are Real Estate Finance, Asset Finance and Commercial Finance. The benchmarks used for all three portfolios are Standard & Poor's Ratings and Bank of England UK Possessions as proxy data for ERM.

A 10% change in the PD for Motor Finance would impact the ECL allowance by GBP1.8 million (June 2018: GBP2.2 million, December 2018: GBP1.8 million).

With the exception of the Motor Finance portfolio, sensitivity to reasonably possible changes in PD is not considered to result in material changes in the ECL allowance.

The composition of the Retail Finance portfolio remains stable with minimal movement in PDs. The ECL allowance held for the Business Finance, Consumer Mortgages and Other portfolios remains low. Reasonably possible changes in the PD for these portfolios are not considered to result in a material change in the ECL allowance.

2.2.3 Loss given default ('LGD')

The Group's policy for the determination of LGD is outlined in Note 1.10 of the Group's Annual Report for the year ended 31 December 2018.

With the exception of the Motor Finance portfolio, the sensitivity of the ECL allowance to reasonably possible changes in the LGD is not considered material. For the Motor Finance portfolio a 10% change in the LGD is considered reasonably possible due to historic data showing movements in vehicle collection rates once a loan is in repossession stage. A 10% change in the vehicle recovery rate assumption element of the LGD for Motor Finance would impact the ECL allowance by GBP1.5 million (June 2018 GBP1.7 million, December 2018: GBP1.6 million). Vehicle collection rates and proceeds received on sale of vehicles at auction remained broadly stable over 2018, and therefore there was no material change to ECL as a result of LGD changes.

2.2.4 Incorporation of forward looking data

The Group incorporates forward looking information into both its assessment of whether the credit risk of a financial asset has increased significantly since initial recognition and its measurement of expected credit loss by developing a number of potential economic scenarios and modelling expected credit losses for each scenario. Further detail on this process is provided in Note 1.10. Whilst not material and therefore not required by IAS 1, the Group has included the disclosure below as it is considered useful to readers of the Interim Report.

The macro-economic scenarios and weightings applied are summarised below:

 
                                                                                                  Weighting  Weighting 
                                                                                           30 June 2019 and    30 June 
Scenario        Derivation                                                                 31 December 2018       2018 
--------------  ------------------------------------------------------------------------  -----------------  --------- 
                Derived from external consensus forecasts and used in the Group's 
                 strategic planning and budgeting 
Base case        processes.                                                                             65%        80% 
--------------  ------------------------------------------------------------------------  -----------------  --------- 
                Assumes macro-economic variables will move with a more positive 
Benign case      trajectory than the base case.                                                         10%         5% 
--------------  ------------------------------------------------------------------------  -----------------  --------- 
                Management's assessment, based on historic data, of an adverse scenario 
                 that could occur once 
Stressed case    every seven to eight years.                                                            20%        10% 
--------------  ------------------------------------------------------------------------  -----------------  --------- 
                Based on the scenario used by the PRA for the ICAAP. This can be found 
                 on the Bank of England's 
Deeper stress    website: www.bankofengland.co.uk                                                        5%         5% 
--------------  ------------------------------------------------------------------------  -----------------  --------- 
 

Weightings applied to the macro-economic scenarios were reviewed and reconfirmed at the July 2019 Assumptions Committee.

The sensitivity of the ECL allowance to reasonably possible changes in macro-economic scenario weighting is presented below:

 
                                                                              June         June     December 
                                                                              2019         2018         2018 
Increase in stressed case weighting by 5% and reduction in base case    GBPmillion   GBPmillion   GBPmillion 
---------------------------------------------------------------------  -----------  -----------  ----------- 
Motor Finance                                                                  0.1          0.1          0.1 
---------------------------------------------------------------------  -----------  -----------  ----------- 
Retail Finance                                                                 0.1          0.1          0.1 
---------------------------------------------------------------------  -----------  -----------  ----------- 
 
 
                                                                                   June         June     December 
                                                                                   2019         2018         2018 
Increase in deeper stress case weighting by 5% and reduction in base case    GBPmillion   GBPmillion   GBPmillion 
--------------------------------------------------------------------------  -----------  -----------  ----------- 
Motor Finance                                                                       0.4          0.3          0.3 
--------------------------------------------------------------------------  -----------  -----------  ----------- 
Retail Finance                                                                      0.8          0.8          0.8 
--------------------------------------------------------------------------  -----------  -----------  ----------- 
 

The sensitivity of other portfolios to reasonably possible changes in macro-economic scenario weightings is not considered material.

3. Operating segments

The Group is organised into seven main operating segments, which consist of the different products available, disclosed below:

Business Finance

1) Real Estate Finance: residential and commercial investment and development loans secured by UK real estate.

2) Asset Finance: loans to small and medium-sized enterprises to acquire commercial assets.

3) Commercial Finance: invoice discounting and invoice factoring.

Consumer Finance

4) Motor Finance: Hire purchase agreements secured against the vehicle being financed.

5) Retail Finance: Point of sale unsecured finance for in-store and online retailers.

6) Debt Management: Debt collection.

7) Consumer Mortgages: Residential mortgages for the self-employed, contract workers, those with complex income and those with a recently restored credit history, sold via select mortgage intermediaries.

Other

The 'Other' segment includes other products which are individually below the quantitative threshold for separate disclosure and fulfils the requirement of IFRS 8.28 by reconciling operating segments to the amounts reported in the interim report.

Other includes principally OneBill (the Group's consumer bill management service, which has been closed to new customers since 2009) and RentSmart (principally the funding and operation of finance leases through a disclosed agency agreement with RentSmart Limited).

Currently, the Debt Management and Consumer Mortgages segments both fall below the quantitative threshold for separate disclosure, but the directors consider that they represent sufficiently distinct types of business to merit separate disclosure. The June 2018 figures have been restated accordingly, in order to separately disclose Debt Management, as this change had already been made at December 2018. Also, now that the Group has ceased new mortgage originations, the Consumer Mortgages business is now managed as part of Consumer Finance, so both prior periods have been restated accordingly.

Management review these segments by looking at the income, size and growth rate of the loan books, impairments and customer numbers. Except for these items no costs or balance sheet items are allocated to the segments.

 
                         Interest                              Impairment 
                           income                   Revenue     losses on 
                              and      Fee and         from     loans and     Loans and 
                          similar   commission     external   advances to   advances to          Loan 
                           income       income    customers     customers     customers   commitments 
                       GBPmillion   GBPmillion   GBPmillion    GBPmillion    GBPmillion    GBPmillion 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
June 2019 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Real Estate Finance          22.6          0.9         23.5           0.2         879.0         129.3 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Commercial Finance            3.4          5.0          8.4           0.2         220.7          38.3 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Business Finance             27.9          5.9         33.8           0.7       1,142.4         167.6 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Retail Finance               34.2          1.9         36.1           9.1         671.7          30.4 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Motor Finance                23.9          0.4         24.3           8.0         299.8           1.2 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Debt Management               3.8          0.6          4.4             -          42.3             - 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Consumer Mortgages            1.7            -          1.7           0.1         113.2             - 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Consumer Finance             63.6          2.9         66.5          17.2       1,127.0          31.6 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Other                         0.8          2.4          3.2         (0.1)           8.9             - 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
                             92.3         11.2        103.5          17.8       2,278.3         199.2 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
 
 
                         Interest                              Impairment 
                           income                   Revenue     losses on 
                              and      Fee and         from     loans and     Loans and 
                          similar   commission     external   advances to   advances to          Loan 
                           income       income    customers     customers     customers   commitments 
                       GBPmillion   GBPmillion   GBPmillion    GBPmillion    GBPmillion    GBPmillion 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
June 2018 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Real Estate Finance          18.3            -         18.3           0.5         704.8         168.7 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Asset Finance                 3.8            -          3.8           0.9          87.9             - 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Commercial Finance            2.3          3.9          6.2           0.2         187.5          53.2 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Business Finance             24.4          3.9         28.3           1.6         980.2         221.9 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Retail Finance               27.4          2.0         29.4           9.0         508.0          25.8 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Motor Finance                23.2          0.6         23.8           6.4         272.0           0.8 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Debt Management               2.6          0.5          3.1             -          28.3             - 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Consumer Mortgages            0.4            -          0.4             -          37.3          13.8 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Consumer Finance             53.6          3.1         56.7          15.4         845.6          40.4 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Other                         1.2          2.8          4.0         (0.7)          13.3           1.0 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
                             79.2          9.8         89.0          16.3       1,839.1         263.3 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
 
 
                         Interest                              Impairment 
                           income                   Revenue     losses on 
                              and      Fee and         from     loans and     Loans and 
                          similar   commission     external   advances to   advances to          Loan 
                           income       income    customers     customers     customers   commitments 
                       GBPmillion   GBPmillion   GBPmillion    GBPmillion    GBPmillion    GBPmillion 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
December 2018 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Real Estate Finance          41.1          0.1         41.2           0.5         769.8         173.4 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Asset Finance                 6.6            -          6.6           2.2          62.8             - 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Commercial Finance            5.5          7.9         13.4             -         194.7          45.6 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Business Finance             53.2          8.0         61.2           2.7       1,027.3         219.0 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Retail Finance               58.7          4.1         62.8          19.3         597.0          28.3 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Motor Finance                47.4          1.1         48.5          11.3         276.4           0.5 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Debt Management               6.1          0.9          7.0             -          32.3             - 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Consumer Mortgages            1.5            -          1.5           0.2          84.7          15.3 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Consumer Finance            113.7          6.1        119.8          30.8         990.4          44.1 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
Other                         2.3          5.3          7.6         (1.1)          11.2             - 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
                            169.2         19.4        188.6          32.4       2,028.9         263.1 
--------------------  -----------  -----------  -----------  ------------  ------------  ------------ 
 

Funding costs and operating expenses are not aligned to operating segments for day-to-day management of the business, so they cannot be allocated on a reliable basis. Accordingly, profit by operating segment has not been disclosed.

All of the Group's operations relate to continuing operations, and are conducted wholly within the United Kingdom and geographical information is therefore not presented.

4. Income tax expense

 
                                                                          June         June     December 
                                                                          2019         2018         2018 
                                                                    GBPmillion   GBPmillion   GBPmillion 
-----------------------------------------------------------------  -----------  -----------  ----------- 
Current taxation 
-----------------------------------------------------------------  -----------  -----------  ----------- 
Corporation tax charge - current period                                    3.3          2.9          7.3 
-----------------------------------------------------------------  -----------  -----------  ----------- 
Corporation tax charge - adjustments in respect of prior periods             -            -          0.3 
-----------------------------------------------------------------  -----------  -----------  ----------- 
                                                                           3.3          2.9          7.6 
-----------------------------------------------------------------  -----------  -----------  ----------- 
Deferred taxation 
-----------------------------------------------------------------  -----------  -----------  ----------- 
Deferred tax charge - current period                                       0.2        (0.5)        (1.0) 
-----------------------------------------------------------------  -----------  -----------  ----------- 
Deferred tax charge - adjustments in respect of prior periods                -            -        (0.2) 
-----------------------------------------------------------------  -----------  -----------  ----------- 
                                                                           0.2        (0.5)        (1.2) 
-----------------------------------------------------------------  -----------  -----------  ----------- 
Income tax expense                                                         3.5          2.4          6.4 
-----------------------------------------------------------------  -----------  -----------  ----------- 
 

The tax for all the periods above has been calculated at the current effective rate, which is 19%.

The main component of the deferred tax asset is deferred tax on the IFRS 9 transition adjustment, which reverses on a straight-line basis over 10 years commencing in 2018. The Company will incur the 8% corporation tax surcharge on banking company profits in excess of GBP25.0 million during this period, but the quantum of this is uncertain. Any changes in the forecast tax rate of the Company over this period could significantly affect the future tax charge.

5. Earnings per ordinary share

5.1 Basic

Basic earnings per ordinary share are calculated by dividing the profit attributable to equity holders of the parent by the weighted average number of ordinary shares as follows:

 
                                                                           June        June    December 
                                                                           2019        2018        2018 
-------------------------------------------------------------------  ----------  ----------  ---------- 
Profit attributable to equity holders of the parent (GBP millions)         14.6        12.7        28.3 
-------------------------------------------------------------------  ----------  ----------  ---------- 
Weighted average number of ordinary shares (number)                  18,476,628  18,475,229  18,475,229 
-------------------------------------------------------------------  ----------  ----------  ---------- 
Earnings per share (pence)                                                 79.0        68.7       153.2 
-------------------------------------------------------------------  ----------  ----------  ---------- 
 

5.2 Diluted

Diluted earnings per ordinary share are calculated by dividing the profit attributable to equity holders of the parent by the weighted average number of ordinary shares in issue during the period, as noted above, as well as the number of dilutive share options in issue during the period, as follows:

 
                                                                 June        June    December 
                                                                 2019        2018        2018 
---------------------------------------------------------  ----------  ----------  ---------- 
Weighted average number of ordinary shares                 18,476,628  18,475,229  18,475,229 
---------------------------------------------------------  ----------  ----------  ---------- 
Number of dilutive shares in issue at the period end          173,464     319,374     277,234 
---------------------------------------------------------  ----------  ----------  ---------- 
Fully diluted weighted average number of ordinary shares   18,650,092  18,794,603  18,752,463 
---------------------------------------------------------  ----------  ----------  ---------- 
Dilutive shares being based on: 
---------------------------------------------------------  ----------  ----------  ---------- 
Number of options outstanding at the period end               659,802     468,157     511,706 
---------------------------------------------------------  ----------  ----------  ---------- 
Exercise price (pence)                                            498         644         678 
---------------------------------------------------------  ----------  ----------  ---------- 
Average share price during the period (pence)                   1,303       1,924       1,489 
---------------------------------------------------------  ----------  ----------  ---------- 
Diluted earnings per share (pence)                               78.3        67.6       150.9 
---------------------------------------------------------  ----------  ----------  ---------- 
 

6. Loans and advances to customers

 
                                                                        June         June     December 
                                                                        2019         2018         2018 
                                                                  GBPmillion   GBPmillion   GBPmillion 
---------------------------------------------------------------  -----------  -----------  ----------- 
Gross loans and advances                                             2,346.8      1,907.1      2,096.0 
---------------------------------------------------------------  -----------  -----------  ----------- 
Less: allowances for impairment on loans and advances (Note 8)        (68.5)       (68.0)       (67.1) 
---------------------------------------------------------------  -----------  -----------  ----------- 
                                                                     2,278.3      1,839.1      2,028.9 
---------------------------------------------------------------  -----------  -----------  ----------- 
 

The fair value of loans and advances to customers is shown in Note 16.

7. Leasing right-of-use asset

 
                                                                     Leased 
                                                     Leasehold        Motor 
                                                      property     vehicles        Total 
                                                    GBPmillion   GBPmillion   GBPmillion 
-------------------------------------------------  -----------  -----------  ----------- 
Cost 
-------------------------------------------------  -----------  -----------  ----------- 
On transition at 1 January 2019 and 30 June 2019           4.2          0.3          4.5 
-------------------------------------------------  -----------  -----------  ----------- 
Accumulated depreciation 
-------------------------------------------------  -----------  -----------  ----------- 
Depreciation charge                                      (0.4)        (0.1)        (0.5) 
-------------------------------------------------  -----------  -----------  ----------- 
At 30 June 2019                                          (0.4)        (0.1)        (0.5) 
-------------------------------------------------  -----------  -----------  ----------- 
Net book amount 
-------------------------------------------------  -----------  -----------  ----------- 
At 30 June 2019                                            3.8          0.2          4.0 
-------------------------------------------------  -----------  -----------  ----------- 
 

8. Allowances for impairment of loans and advances

 
                                         Not credit impaired  Credit impaired 
--------------------------------  --------------------------  ---------------  -----------  ------------  --------- 
                                     Stage 1: 
                                   Subject to       Stage 2:         Stage 3:                      Gross 
                                     12 month     Subject to       Subject to        Total     loans and  Provision 
                                          ECL   lifetime ECL     lifetime ECL    provision   receivables      cover 
                                   GBPmillion     GBPmillion       GBPmillion   GBPmillion    GBPmillion          % 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
June 2019 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Business Finance: 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Real Estate Finance                       0.5            0.1              0.2          0.8         879.8       0.1% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Asset Finance                             0.1            0.1              1.8          2.0          44.7       4.5% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Commercial Finance                        0.3            0.1              0.5          0.9         221.6       0.4% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Consumer Finance: 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Retail Finance                            9.9           10.0              4.4         24.3         696.0       3.5% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Motor Finance: 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Voluntary termination provision           6.7              -                -          6.7 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Other impairment                          3.9           13.0             16.5         33.4 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
                                         10.6           13.0             16.5         40.1         339.9      11.8% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Debt Management                             -              -                -            -          42.3       0.0% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Consumer Mortgages                        0.3              -                -          0.3         113.5       0.3% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Other                                       -              -              0.1          0.1           9.0       1.1% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
                                         21.7           23.3             23.5         68.5       2,346.8       2.9% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
 
 
                                         Not credit impaired  Credit impaired 
--------------------------------  --------------------------  ---------------  -----------  ------------  --------- 
                                     Stage 1: 
                                   Subject to       Stage 2:         Stage 3:                      Gross 
                                     12 month     Subject to       Subject to        Total     loans and  Provision 
                                          ECL   lifetime ECL     lifetime ECL    provision   receivables      cover 
                                   GBPmillion     GBPmillion       GBPmillion   GBPmillion    GBPmillion          % 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
June 2018 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Business Finance: 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Real Estate Finance                       0.1            0.5                -          0.6         705.4       0.1% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Asset Finance                             0.3            0.1              1.9          2.3          90.2       2.5% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Commercial Finance                        0.2            0.3              0.5          1.0         188.5       0.5% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Consumer Finance: 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Retail Finance                            8.3            7.7              4.0         20.0         528.0       3.8% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Motor Finance: 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Voluntary termination provision           5.7              -                -          5.7 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Other impairment                          5.3           15.4             14.4         35.1 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
                                         11.0           15.4             14.4         40.8         312.8      13.0% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Debt Management                             -              -                -            -          28.3       0.0% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Other                                       -              -              3.2          3.2          16.5      19.4% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
                                         20.0           24.0             24.0         68.0       1,907.1       3.6% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
 
 
                                         Not credit impaired  Credit impaired 
--------------------------------  --------------------------  ---------------  -----------  ------------  --------- 
                                     Stage 1: 
                                   Subject to       Stage 2:         Stage 3:                      Gross 
                                     12 month     Subject to       Subject to        Total     loans and  Provision 
                                          ECL   lifetime ECL     lifetime ECL    provision   receivables      cover 
                                   GBPmillion     GBPmillion       GBPmillion   GBPmillion    GBPmillion          % 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
December 2018 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Business Finance: 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Real Estate Finance                       0.6              -                -          0.6         770.4       0.1% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Asset Finance                             0.2            0.1              2.7          3.0          65.8       4.6% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Commercial Finance                        0.2            0.2              0.4          0.8         195.5       0.4% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Consumer Finance: 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Retail Finance                            8.9            9.8              4.3         23.0         620.0       3.7% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Motor Finance: 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Voluntary termination provision           6.0              -                -          6.0 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Other impairment                          4.2           13.8             15.4         33.4 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
                                         10.2           13.8             15.4         39.4         315.8      12.5% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Debt Management                             -              -                -            -          32.3       0.0% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Consumer Mortgages                        0.2              -                -          0.2          84.9       0.2% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
Other                                       -              -              0.1          0.1          11.3       0.9% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
                                         20.3           23.9             22.9         67.1       2,096.0       3.2% 
--------------------------------  -----------  -------------  ---------------  -----------  ------------  --------- 
 

Total provisions above include expert credit judgements as follows:

 
                                                                                        June         June     December 
                                                                                        2019         2018         2018 
                                                                                  GBPmillion   GBPmillion   GBPmillion 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Expert credit judgements over the Group's IFRS 9 model results                           2.3          4.4          2.0 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Of which: 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
Specific overlays held against credit impaired secured assets held within the 
 Business Finance 
 portfolio                                                                               0.9          1.8          1.4 
-------------------------------------------------------------------------------  -----------  -----------  ----------- 
 

These specific overlays have been estimated on an individual basis by assessing the recoverability and condition of the secured asset, along with any other recoveries that may be made.

Of the remaining GBP1.4 million at June 2019, GBP1.2 million has been applied to the Group's Motor Finance IFRS 9 model results, relating to management judgements in respect of LGD elements of the model of GBP0.9 million and PD elements of the model of GBP0.3 million. The remaining GBP0.2 million is in respect of management judgements over the macro-economic scenarios applies in the Real Estate Finance portfolio (the remaining GBP0.6 million at December 2018 related primarily to the estimated impact of planned enhancements to LGD elements of the models, offset by a net decrease in the ECL due to management judgements in respect of the PD elements of the models, and the remaining GBP2.6 million at June 2018 related to planned model enhancements of the motor model of GBP1.2 million and management judgements in respect of PD elements of the model of GBP1.4 million).

Provisions included in 'Other' are in respect of various legacy products. This segment also includes loans of GBP8.5 million (June 2018: GBP13.0 million, December 2018: GBP10.8 million) held in STB Leasing Limited. The credit risk associated with those loans is retained by its partner, RentSmart. Accordingly, no provision is held against the RentSmart loans.

The impairment losses disclosed in the income statement can be analysed as follows:

 
                                                                            June         June     December 
                                                                            2019         2018         2018 
                                                                      GBPmillion   GBPmillion   GBPmillion 
-------------------------------------------------------------------  -----------  -----------  ----------- 
Charge for impairment losses                                                15.3         13.7         30.4 
-------------------------------------------------------------------  -----------  -----------  ----------- 
Impairment losses in respect of off balance sheet loan commitments             -          0.1            - 
-------------------------------------------------------------------  -----------  -----------  ----------- 
Loans written off, net of amounts utilised                                   2.7          3.2          4.3 
-------------------------------------------------------------------  -----------  -----------  ----------- 
Recoveries of loans written off                                            (0.2)        (0.7)        (2.3) 
-------------------------------------------------------------------  -----------  -----------  ----------- 
                                                                            17.8         16.3         32.4 
-------------------------------------------------------------------  -----------  -----------  ----------- 
 

Reconciliations of the opening to closing impairment allowance for losses on loans and advances are presented below:

 
                                                          Not credit impaired  Credit impaired 
-------------------------------------------------  --------------------------  ---------------  ----------- 
                                                      Stage 1: 
                                                    Subject to       Stage 2:         Stage 3: 
                                                      12 month     Subject to       Subject to        Total 
                                                           ECL   lifetime ECL     lifetime ECL    provision 
                                                    GBPmillion     GBPmillion       GBPmillion   GBPmillion 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
June 2019 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
At start of period                                        20.3           23.9             22.9         67.1 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Increase/(decrease) due to change in credit risk 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
- Transfer to stage 2                                    (2.5)           16.6                -         14.1 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
- Transfer to stage 3                                        -         (11.5)             15.0          3.5 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
- Transfer to stage 1                                      0.6          (1.4)                -        (0.8) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Passage of time                                          (5.9)          (2.0)            (1.2)        (9.1) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
New loans originated                                       8.8              -                -          8.8 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Derecognised loans                                       (0.9)          (2.2)                -        (3.1) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Changes to credit risk parameters                          0.5          (0.1)            (0.8)        (0.4) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Other adjustments                                          2.3              -                -          2.3 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Charge to income statement                                 2.9          (0.6)             13.0         15.3 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Allowance utilised in respect of write offs              (1.5)              -           (12.4)       (13.9) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
At end of period                                          21.7           23.3             23.5         68.5 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
 
 
                                                          Not credit impaired  Credit impaired 
-------------------------------------------------  --------------------------  ---------------  ----------- 
                                                      Stage 1: 
                                                    Subject to       Stage 2:         Stage 3: 
                                                      12 month     Subject to       Subject to        Total 
                                                           ECL   lifetime ECL     lifetime ECL    provision 
                                                    GBPmillion     GBPmillion       GBPmillion   GBPmillion 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
June 2018 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
At start of period                                        18.9           24.9             27.9         71.7 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Increase/(decrease) due to change in credit risk 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
- Transfer to stage 2                                    (3.0)           15.7                -         12.7 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
- Transfer to stage 3                                    (0.1)         (12.2)             16.0          3.7 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
- Transfer to stage 1                                      0.8          (1.8)                -        (1.0) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Passage of time                                          (4.4)          (1.1)            (2.5)        (8.0) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
New loans originated                                       8.5            0.1                -          8.6 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Derecognised loans                                       (0.9)          (1.6)                -        (2.5) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Other adjustments                                          0.2              -                -          0.2 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Charge to income statement                                 1.1          (0.9)             13.5         13.7 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Allowance utilised in respect of write offs                  -              -           (17.4)       (17.4) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
At end of period                                          20.0           24.0             24.0         68.0 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
 
 
                                                          Not credit impaired  Credit impaired 
-------------------------------------------------  --------------------------  ---------------  ----------- 
                                                      Stage 1: 
                                                    Subject to       Stage 2:         Stage 3: 
                                                      12 month     Subject to       Subject to        Total 
                                                           ECL   lifetime ECL     lifetime ECL    provision 
                                                    GBPmillion     GBPmillion       GBPmillion   GBPmillion 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
December 2018 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
At start of year                                          18.9           24.9             27.9         71.7 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Increase/(decrease) due to change in credit risk 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
- Transfer to stage 2                                    (6.3)           33.0                -         26.7 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
- Transfer to stage 3                                    (0.1)         (23.4)             30.8          7.3 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
- Transfer to stage 1                                      1.5          (3.2)                -        (1.7) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Passage of time                                          (6.7)          (1.7)            (3.9)       (12.3) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
New loans originated                                      17.4              -                -         17.4 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Derecognised loans                                       (1.8)          (4.0)                -        (5.8) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Changes to model methodology                             (1.3)          (0.2)                -        (1.5) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Changes to credit risk parameters                        (1.2)          (1.5)              0.6        (2.1) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Other adjustments                                          2.4              -                -          2.4 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Charge to income statement                                 3.9          (1.0)             27.5         30.4 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
Allowance utilised in respect of write offs              (2.5)              -           (32.5)       (35.0) 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
At end of year                                            20.3           23.9             22.9         67.1 
-------------------------------------------------  -----------  -------------  ---------------  ----------- 
 

The table above has been prepared based on the monthly movements in ECL.

Passage of time represents the impact of accounts maturing through their contractual life and the associated reduction in PDs. For stage 3 assets it represents the unwind of the discount applied in calculating the ECL.

Changes to model methodology represents movements that have occurred due to enhancements made to the models during the year.

Changes to credit risk parameters represents movements that have occurred due to the Group updating model inputs. This would include the impact of, for example, updating the macro-economic scenarios applied to the models.

Other adjustments represents the movement in the Motor voluntary termination provision.

Stage 1 write offs arise on the Motor accounts that have exercised their right to voluntarily terminate their agreements.

9. Due to banks

 
                                                  June         June     December 
                                                  2019         2018         2018 
                                            GBPmillion   GBPmillion   GBPmillion 
-----------------------------------------  -----------  -----------  ----------- 
Amounts due to other credit institutions         263.0        263.0        263.0 
-----------------------------------------  -----------  -----------  ----------- 
Accrued interest                                   0.5          0.3          0.5 
-----------------------------------------  -----------  -----------  ----------- 
                                                 263.5        263.3        263.5 
-----------------------------------------  -----------  -----------  ----------- 
 

Amounts due to banks represent monies arising from drawings under the Term Funding Scheme. These are due for repayment between May 2021 and February 2022.

At December 2018, accrued interest was reclassified from Other liabilities to Amounts due to banks, as this better represented the commercial reality of the arrangement, so the June 2018 figures have been restated accordingly.

10. Deposits from customers

 
                                 June         June     December 
                                 2019         2018         2018 
                           GBPmillion   GBPmillion   GBPmillion 
------------------------  -----------  -----------  ----------- 
Current/demand accounts          19.2         15.0         14.5 
------------------------  -----------  -----------  ----------- 
Term deposits                 1,982.3      1,641.8      1,833.2 
------------------------  -----------  -----------  ----------- 
                              2,001.5      1,656.8      1,847.7 
------------------------  -----------  -----------  ----------- 
 

The fair value of deposits from customers is shown in Note 16.

At December 2018, accrued interest was reclassified from Other liabilities to Deposits from customers, as this better represented the commercial reality of the arrangement, so the June 2018 figures have been restated accordingly.

11. Lease liabilities

 
                                               June         June     December 
                                               2019         2018         2018 
Charged to the income statement          GBPmillion   GBPmillion   GBPmillion 
--------------------------------------  -----------  -----------  ----------- 
Interest expense on lease liabilities           0.1            -            - 
--------------------------------------  -----------  -----------  ----------- 
 

The Group has elected not to apply the recognition requirements of IFRS 16 'Leases' to short-term leases or leases for which the underlying asset is of low value. Accordingly, the expense incurred under such leases for the period ended June 2019 is not material.

12. Provisions for liabilities and charges

 
                                                                           ECL 
                                                                     Allowance 
                                            Customer                   on loan 
                                             redress        Fraud   commitment        Total 
                                          GBPmillion   GBPmillion   GBPmillion   GBPmillion 
---------------------------------------  -----------  -----------  -----------  ----------- 
June 2019 
---------------------------------------  -----------  -----------  -----------  ----------- 
At start of period                               0.8          0.1          0.4          1.3 
---------------------------------------  -----------  -----------  -----------  ----------- 
(Credited)/charged to income statement         (0.4)            -            -        (0.4) 
---------------------------------------  -----------  -----------  -----------  ----------- 
At end of period                                 0.4          0.1          0.4          0.9 
---------------------------------------  -----------  -----------  -----------  ----------- 
 
 
                                                                           ECL 
                                                                     Allowance 
                                            Customer                   on loan 
                                             redress        Fraud   commitment        Total 
                                          GBPmillion   GBPmillion   GBPmillion   GBPmillion 
---------------------------------------  -----------  -----------  -----------  ----------- 
June 2018 
---------------------------------------  -----------  -----------  -----------  ----------- 
At start of period                               1.2          0.2          0.3          1.7 
---------------------------------------  -----------  -----------  -----------  ----------- 
(Credited)/charged to income statement             -        (0.1)          0.1            - 
---------------------------------------  -----------  -----------  -----------  ----------- 
Utilised                                       (0.1)            -            -        (0.1) 
---------------------------------------  -----------  -----------  -----------  ----------- 
At end of period                                 1.1          0.1          0.4          1.6 
---------------------------------------  -----------  -----------  -----------  ----------- 
 
 
                                                                           ECL 
                                                                     Allowance 
                                            Customer                   on loan 
                                             redress        Fraud   commitment        Total 
                                          GBPmillion   GBPmillion   GBPmillion   GBPmillion 
---------------------------------------  -----------  -----------  -----------  ----------- 
December 2018 
---------------------------------------  -----------  -----------  -----------  ----------- 
At start of period                               1.2          0.2          0.3          1.7 
---------------------------------------  -----------  -----------  -----------  ----------- 
(Credited)/charged to income statement         (0.4)        (0.1)          0.1        (0.4) 
---------------------------------------  -----------  -----------  -----------  ----------- 
At end of period                                 0.8          0.1          0.4          1.3 
---------------------------------------  -----------  -----------  -----------  ----------- 
 

Customer redress provision

The Group provides for its best estimate of redress payable in respect of historical sales of accident, sickness and unemployment insurance, by considering the likely future uphold rate for claims, in the context of confirmed issues and historical experience.

The Financial Conduct Authority has announced a deadline for making these customer redress claims, giving consumers until 29 August 2019 to make a claim. The likelihood of potential new claims is projected forward to this date. The accuracy of these estimates would be affected, were there to be a significant change in either the number of future claims or the incidence of claims upheld by the Financial Ombudsman Service.

Fraud

The fraud provision relates to cases where the Bank has reasonable evidence of suspected fraud, but further investigation is required before the cases can be dealt with appropriately.

ECL allowance on loan commitments

In accordance with the requirements of IFRS 9, the Group holds an ECL allowance against loans it has committed to lend but have not yet been drawn. The majority of the GBP0.4 million allowance held at June 2019 relates to undrawn balances within Retail Finance. For the Real Estate Finance and Commercial Finance portfolios, where a loan facility is agreed that includes both drawn and undrawn elements and the Group cannot identify the ECL on the loan commitment separately, a combined loss allowance for both drawn and undrawn components of the loan is presented as a deduction from the gross carrying amount of the drawn component, with any excess of the loss allowance over the gross drawn amount presented as a provision. At June 2019, no provision was held for losses in excess of drawn amounts.

13. Commitments

The Group's off balance sheet exposure to undrawn loan commitments at June 2019 was GBP199.2 million (June 2018: GBP263.3 million, December 2018: GBP263.1 million). Details of the split by business is given in Note 3.

14. Subordinated liabilities

 
                                 June         June     December 
                                 2019         2018         2018 
                           GBPmillion   GBPmillion   GBPmillion 
------------------------  -----------  -----------  ----------- 
Tier 2 capital                   50.0            -         50.0 
------------------------  -----------  -----------  ----------- 
Unamortised issue costs         (0.7)            -        (0.8) 
------------------------  -----------  -----------  ----------- 
Accrued interest                  1.2            -          1.2 
------------------------  -----------  -----------  ----------- 
                                 50.5            -         50.4 
------------------------  -----------  -----------  ----------- 
 

The Notes are treated as Tier 2 regulatory capital, which is used to support the continuing growth of the business taking into account increases in regulatory capital buffers.

15. Capital

The Group's capital management policy is focused on optimising shareholder value, in a safe and sustainable manner. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.

The following table shows the regulatory capital resources as managed by the Group:

 
                                                                                June          June      December 
                                                                                2019          2018          2018 
                                                                          GBPmillion    GBPmillion    GBPmillion 
                                                                         (unaudited)   (unaudited)   (unaudited) 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Tier 1 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Share capital                                                                    7.4           7.4           7.4 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Share premium                                                                   81.2          81.2          81.2 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Retained earnings                                                              150.8         135.1         147.4 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Revaluation reserve                                                              0.9           1.3           1.1 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Goodwill                                                                       (1.0)         (1.0)         (1.0) 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Intangible assets net of attributable deferred tax                             (8.1)         (9.1)         (8.8) 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Transitional IFRS 9 adjustment                                                  22.3          24.5          24.5 
----------------------------------------------------------------------  ------------  ------------  ------------ 
CET1 capital                                                                   253.5         239.4         251.8 
----------------------------------------------------------------------  ------------  ------------  ------------ 
 
Tier 2 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Subordinated liabilities                                                        50.5             -          50.4 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Less ineligible portion                                                        (1.2)             -         (4.7) 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Total Tier 2 capital                                                            49.3             -          45.7 
----------------------------------------------------------------------  ------------  ------------  ------------ 
 
Own Funds                                                                      302.8         239.4         297.5 
----------------------------------------------------------------------  ------------  ------------  ------------ 
 
Reconciliation to total equity: 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Goodwill and other intangible assets net of attributable deferred tax            9.1          10.1           9.8 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Transitional IFRS 9 adjustment                                                (22.3)        (24.5)        (24.5) 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Eligible subordinated liabilities                                             (49.3)             -        (45.7) 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Total equity                                                                   240.3         225.0         237.1 
----------------------------------------------------------------------  ------------  ------------  ------------ 
CET1 capital                                                                   253.5         239.4         251.8 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Proposed dividends                                                             (3.7)         (3.5)        (11.8) 
----------------------------------------------------------------------  ------------  ------------  ------------ 
CET1 capital including proposed dividends                                      249.8         235.9         240.0 
----------------------------------------------------------------------  ------------  ------------  ------------ 
Own Funds including proposed dividends                                         299.1         235.9         285.7 
----------------------------------------------------------------------  ------------  ------------  ------------ 
 

The capital resources shown in the table above include profits for the period to 30 June 2019. These profits will not be included in the Group's Pillar 3 return for June 2019, as they are not yet approved by the regulator.

The transitional adjustment to capital arises from the Group making an election to phase in the impact of transitioning to IFRS 9 over a five year period, by applying add back factors of 95%, 85%, 70%, 50% and 25% for years one to five respectively. At June 2019, this amounted to 85% of the IFRS 9 transition adjustment of GBP25.8 million, adjusted for the movement in stage 1 and stage 2 impairment allowance between 1 January 2019 and 31 December 2018 of GBP0.4 million (June 2018 and December 2018: 95% of the IFRS 9 transition adjustment of GBP25.8 million).

16. Fair value of loans and advances to customers and deposits from customers

The fair value of loans and advances to customers and deposits from customers is set out below:

 
                                        Total                     Total                     Total 
                                     carrying                  carrying                  carrying 
                                       amount   Fair value       amount   Fair value       amount   Fair value 
                                         June         June         June         June     December     December 
                                         2019         2019         2018         2018         2018         2018 
                                   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
--------------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
Loans and advances to customers       2,278.3      2,288.3      1,839.1      1,910.6      2,028.9      2,032.5 
--------------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 
Deposits from customers               2,001.5      2,018.1      1,656.8      1,655.6      1,847.7      1,859.7 
--------------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 

Freehold land and buildings are carried at fair value. All other assets and liabilities are carried at amortised cost.

17. Share-based payments

The Group has five share-based payment schemes in operation:

-- Share Option Scheme

-- 2017 long term incentive plan

-- 2017 sharesave plan

-- 2017 deferred bonus plan

-- 'Phantom' share option scheme

A summary of the awards under each scheme is set out below:

 
                                                                                                              Weighted 
                             Outstanding      Granted    Exercised     Outstanding                             average 
                            at the start   during the   during the      at the end    Vested and              exercise 
                           of the period       period       period   of the period   exercisable    Vesting      price 
                                  Number       Number       Number          Number        Number       Date        GBP 
------------------------  --------------  -----------  -----------  --------------  ------------  ---------  --------- 
Equity settled 
------------------------  --------------  -----------  -----------  --------------  ------------  ---------  --------- 
Share option scheme              177,084            -            -         177,084       177,084       2016       7.20 
------------------------  --------------  -----------  -----------  --------------  ------------  ---------  --------- 
2017 long term incentive 
 plan                            161,597      134,046            -         295,643             -  2020-2024       0.40 
------------------------  --------------  -----------  -----------  --------------  ------------  ---------  --------- 
2017 sharesave plan              145,009            -            -         145,009             -  2020-2021      13.39 
------------------------  --------------  -----------  -----------  --------------  ------------  ---------  --------- 
2017 deferred bonus plan          14,690       28,775      (1,399)          42,066         3,497  2019-2022       0.40 
------------------------  --------------  -----------  -----------  --------------  ------------  ---------  --------- 
                                 498,380      162,821      (1,399)         659,802       180,581 
------------------------  --------------  -----------  -----------  --------------  ------------  ---------  --------- 
Cash settled 
------------------------  --------------  -----------  -----------  --------------  ------------  ---------  --------- 
'Phantom' share option 
 scheme                          312,917            -            -         312,917       312,917       2019      25.00 
------------------------  --------------  -----------  -----------  --------------  ------------  ---------  --------- 
 

17.1 Share option scheme

The number of unexercised share options as at June 2019 remains unchanged from the position as at June 2018 and December 2018. These awards vested in November 2016 and remain exercisable for seven years following the vesting date. The intrinsic value of unexercised options is GBP2.5 million (June 2018: GBP2.0 million, December 2018: GBP0.8 million).

17.2 Long term incentive plan

The long term incentive plan was established on 3 May 2017.

On 25 April 2019, a further 134,046 share options were granted at an exercise price of 40 pence per share, which are subject to the same rules as the awards granted under the plan during 2018, as disclosed in the 2018 Annual Report and Accounts. Details of the awards under the plan are set out below:

 
                                         Subject to a   Subject 
                                              holding     to no 
                                        period of two   holding 
                                                years    period    Total 
                                               Number    Number   Number 
-------------------------------------  --------------  --------  ------- 
At 1 January 2018                              33,467    34,525   67,992 
-------------------------------------  --------------  --------  ------- 
Awarded on 20 April 2018                       30,429    64,075   94,504 
-------------------------------------  --------------  --------  ------- 
Leavers during 2018                                 -     (899)    (899) 
-------------------------------------  --------------  --------  ------- 
At 30 June 2018 and 31 December 2018           63,896    97,701  161,597 
-------------------------------------  --------------  --------  ------- 
Awarded on 25 April 2019                       54,312    79,734  134,046 
-------------------------------------  --------------  --------  ------- 
At 30 June 2019                               118,208   177,435  295,643 
-------------------------------------  --------------  --------  ------- 
 

The original grant date valuation of the 2019 awards was determined to be GBP9.02 for those awards that are subject to a holding period, and GBP10.48 for those awards not subject to a holding period, using a Black-Scholes model for the EPS and risk management tranches, and a Monte Carlo model for the total shareholder return ('TSR') tranche, and these valuations have been used in the calculation. The share price at date of grant was GBP15.20 and the expected dividend yield was 6.18%. The other measurement inputs and assumptions used at the grant date were as follows:

 
                                                                  Awards     Awards not 
                                                            subject to a   subject to a 
                                                                 holding        holding 
                                                                  period         period 
---------------------------------------------------------  -------------  ------------- 
Expected stock price volatility                                    25.9%          29.1% 
---------------------------------------------------------  -------------  ------------- 
Risk free interest rate                                            0.86%          0.72% 
---------------------------------------------------------  -------------  ------------- 
Average expected life (years)                                       5.00           3.00 
---------------------------------------------------------  -------------  ------------- 
Discount for lack of marketability during holding period          10.00%            N/A 
---------------------------------------------------------  -------------  ------------- 
 

17.3 Sharesave plan

The sharesave plan was established on 3 May 2017.

The number of awards under this scheme remains unchanged from the position as at December 2018, as disclosed in the 2018 Annual Report and Accounts.

17.4 Deferred bonus plan

The deferred bonus plan was established on 3 May 2017.

As disclosed in the Directors' remuneration report in the 2018 Annual Report and Accounts, 50% of the 2018 bonus earned by two Executive directors, amounting to GBP450,000, was deferred into shares under the deferred bonus plan. Accordingly, on 25 April 2019, 28,775 share options were awarded at an exercise price of 40 pence per share, which will vest in three equal tranches after one, two and three years following deferral.

For accounting purposes, the grant date is deemed to be 1 January 2019, as this is the date that there is a shared understanding of the terms and conditions of the arrangement, although the calculation of the number of options awarded only took place upon Remuneration Committee approval in April 2019. The original grant date valuation was determined to be GBP10.69 for those awards vesting after one year, GBP9.94 for those awards vesting after two years and GBP9.59 for those awards vesting after three years, using a Black-Scholes model, and these valuations have been used in the calculation. The share price at date of grant was GBP11.90 and the expected dividend yield was 7.06%. The other measurement inputs and assumptions used at the grant date were as follows:

 
                                           Awards          Awards          Awards 
                                    vesting after   vesting after   vesting after 
                                         one year       two years     three years 
--------------------------------  ---------------  --------------  -------------- 
Expected stock price volatility            27.34%          24.79%          28.82% 
--------------------------------  ---------------  --------------  -------------- 
Risk free interest rate                     0.77%           0.75%           0.75% 
--------------------------------  ---------------  --------------  -------------- 
Average expected life (years)                1.00            2.00            3.00 
--------------------------------  ---------------  --------------  -------------- 
 

17.5 Cash settled share-based payments

The 'Phantom' share option scheme is a cash settled share-based payment scheme and was established on 16 March 2015.

312,917 options were awarded under the scheme, entitling the holders to a cash payment, calculated by reference to the increase in the value of an ordinary share in the Company over an initial value set at GBP25 per ordinary share.

As at June 2019, 312,917 share options remained outstanding. The options vested on 16 March 2019, and remain exercisable for six years following the vesting date.

The estimated fair value as at June 2019 was GBP0.43 pence, prepared using the Black-Scholes model. The share price at June 2019 was GBP14.25 and the expected dividend yield was 5.89%. The other measurement inputs and assumptions used at the grant date were as follows

 
                                      June 
                                      2019 
--------------------------------     ----- 
Expected stock price volatility      27.3% 
-----------------------------------  ----- 
Risk free interest rate              0.64% 
-----------------------------------  ----- 
Average expected life (years)          5.7 
-----------------------------------  ----- 
 

This resulted in the following being recognised in the financial statements:

 
                                       June         June     December 
                                       2019         2018         2018 
                                 GBPmillion   GBPmillion   GBPmillion 
-----------------------------   -----------  -----------  ----------- 
Liability at start of period            0.2          0.2          0.2 
------------------------------  -----------  -----------  ----------- 
Charge for the year                   (0.1)            -            - 
------------------------------  -----------  -----------  ----------- 
Liability at end of period              0.1          0.2          0.2 
------------------------------  -----------  -----------  ----------- 
 

18. Related party transactions

There were no changes to the nature of the related party transactions during the period to June 2019 that would materially affect the position or performance of the Group. Details of the transactions for the year ended December 2018 can be found in the 2018 Annual Report.

19. Credit risk

The Group takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. A formal Credit Risk Policy has been agreed by the Board whilst credit risk is monitored on a monthly basis by the Credit Risk Committees which review performance of key portfolios including new business volumes, collections performance, provisioning levels and provisioning methodology. A credit risk department within the Group monitors adherence to the Credit Risk Policy, implements risk tools to manage credit risk and evaluates business opportunities and the risks and opportunities they present to the Group whilst ensuring the performance of the Group's existing portfolios is in line with expectations.

The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to individual borrowers or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The limits on the level of credit risk are approved periodically by the Board of Directors and actual exposures against limits monitored daily.

Impairment provisions are provided for expected credit losses at the statement of financial position date. Significant changes in the economy could result in losses that are different from those provided for at the statement of financial position date. Management therefore carefully manages its exposures to credit risk as it considers this to be the most significant risk to the business.

Exposure to Consumer Finance credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral, principally motor vehicles on Motor loans and a credit support balance provided by RentSmart. The assets undergo a scoring process to mitigate risk and are monitored by the Board.

For Real Estate Finance and Commercial Finance, lending decisions are made on an individual transaction basis, using expert judgement and assessment against criteria set out in the lending policies. Prior to the closure of the book to new business, Asset Finance credit risk management was outsourced to Haydock, who operate in line with the Group's credit policies and risk appetite. The loans are secured against the assets lent against real estate, trade receivables and commercial plant and equipment, respectively.

The Board monitors the ratings of the counterparties in relation to the Group's loans and advances to banks. There are no direct exposures to non-UK countries.

With the exception of loans and advances to customers, the carrying amount of financial assets represents the Group's maximum exposure to credit risk. The Group's maximum exposure to credit risk for loans and advances to customers by portfolio and IFRS 9 stage without taking account of any collateral held or other credit enhancements attached was as follows:

 
               Stage 1                  Stage 2                              Stage 3 
              ----------  -----------------------------------  ------------------------------------  ----------- 
                                                                    Excl. 
                                                                purchased    Purchased 
                          <= 30 days   > 30 days                   credit       credit 
                            past due    past due        Total    impaired     impaired        Total        Total 
June 2019     GBPmillion  GBPmillion  GBPmillion   GBPmillion  GBPmillion   GBPmillion   GBPmillion   GBPmillion 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Business 
Finance 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Real Estate 
 Finance           814.4        56.9           -         56.9         8.5            -          8.5        879.8 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Asset 
 Finance            35.4         2.1         5.1          7.2         2.1            -          2.1         44.7 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Commercial 
 Finance           212.7         8.3           -          8.3         0.6            -          0.6        221.6 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Consumer 
Finance 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Retail             605.4        81.5         4.0         85.5         5.1            -          5.1        696.0 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Motor              224.0        92.1         2.2         94.3        21.6            -         21.6        339.9 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Debt 
 Management            -           -           -            -        10.2         32.1         42.3         42.3 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Consumer 
 Mortgages         111.8           -         1.7          1.7           -            -            -        113.5 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Other                9.0           -           -            -           -            -            -          9.0 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Total drawn 
 exposure        2,012.7       240.9        13.0        253.9        48.1         32.1         80.2      2,346.8 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Off balance 
sheet 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Loan 
 commitments       199.2           -           -            -           -            -            -        199.2 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Total gross 
 exposure        2,211.9       240.9        13.0        253.9        48.1         32.1         80.2      2,546.0 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Less: 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Impairment 
 allowance        (21.7)      (19.2)       (4.1)       (23.3)      (23.5)            -       (23.5)       (68.5) 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Provision 
 for loan 
 commitments       (0.4)           -           -            -           -            -            -        (0.4) 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Total net 
 exposure        2,189.8       221.7         8.9        230.6        24.6         32.1         56.7      2,477.1 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
 
 
                 Stage 1                Stage 2                              Stage 3 
              ----------  -----------------------------------  ------------------------------------  ----------- 
                                                                    Excl. 
                                                                purchased    Purchased 
                          <= 30 days   > 30 days                   credit       credit 
                            past due    past due        Total    impaired     impaired        Total        Total 
June 2018     GBPmillion  GBPmillion  GBPmillion   GBPmillion  GBPmillion   GBPmillion   GBPmillion   GBPmillion 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Business 
Finance 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Real Estate 
 Finance           649.5        55.9           -         55.9           -            -            -        705.4 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Asset 
 Finance            76.2         4.6         0.4          5.0         9.0            -          9.0         90.2 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Commercial 
 Finance           170.7        17.2           -         17.2         0.6            -          0.6        188.5 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Consumer 
Finance 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Retail             472.9        47.2         3.4         50.6         4.5            -          4.5        528.0 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Motor              200.5        70.7        22.5         93.2        19.1            -         19.1        312.8 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Debt 
 Management            -           -           -            -         9.3         19.0         28.3         28.3 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Consumer 
 Mortgages          37.4           -           -            -           -            -            -         37.4 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Other               13.4           -           -            -         3.1            -          3.1         16.5 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Total drawn 
 exposure        1,620.6       195.6        26.3        221.9        45.6         19.0         64.6      1,907.1 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Off balance 
sheet 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Loan 
 commitments       263.3           -           -            -           -            -            -        263.3 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Total gross 
 exposure        1,883.9       195.6        26.3        221.9        45.6         19.0         64.6      2,170.4 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Less: 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Impairment 
 allowance        (20.0)      (12.7)      (11.3)       (24.0)      (24.0)            -       (24.0)       (68.0) 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Provision 
 for loan 
 commitments       (0.4)           -           -            -           -            -            -        (0.4) 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
Total net 
 exposure        1,863.5       182.9        15.0        197.9        21.6         19.0         40.6      2,102.0 
------------  ----------  ----------  ----------  -----------  ----------  -----------  -----------  ----------- 
 
 
                Stage 1                  Stage 2                              Stage 3 
               ----------  -----------------------------------  -----------------------------------  ----------- 
                                                                     Excl. 
                                                                 purchased   Purchased 
                           <= 30 days   > 30 days                   credit      credit 
                             past due    past due        Total    impaired    impaired        Total        Total 
December 2018  GBPmillion  GBPmillion  GBPmillion   GBPmillion  GBPmillion  GBPmillion   GBPmillion   GBPmillion 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Business 
Finance 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Real Estate 
 Finance            723.3        47.1           -         47.1           -           -            -        770.4 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Asset Finance        55.6         6.5         0.5          7.0         3.2           -          3.2         65.8 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Commercial 
 Finance            186.1         8.8           -          8.8         0.6           -          0.6        195.5 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Consumer 
Finance 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Retail              537.1        74.1         3.9         78.0         4.9           -          4.9        620.0 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Motor               200.2        92.7         2.4         95.1        20.5           -         20.5        315.8 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Debt 
 Management             -           -           -            -         9.3        23.0         32.3         32.3 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Consumer 
 Mortgages           84.9           -           -            -           -           -            -         84.9 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Other                11.3           -           -            -           -           -            -         11.3 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Total drawn 
 exposure         1,798.5       229.2         6.8        236.0        38.5        23.0         61.5      2,096.0 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Off balance 
sheet 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
 Loan 
  commitments       263.1           -           -            -           -           -            -        263.1 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Total gross 
 exposure         2,061.6       229.2         6.8        236.0        38.5        23.0         61.5      2,359.1 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Less: 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Impairment 
 allowance         (20.3)      (19.9)       (4.0)       (23.9)      (22.9)           -       (22.9)       (67.1) 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Provision for 
 loan 
 commitments        (0.4)           -           -            -           -           -            -        (0.4) 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
Total net 
 exposure         2,040.9       209.3         2.8        212.1        15.6        23.0         38.6      2,291.6 
-------------  ----------  ----------  ----------  -----------  ----------  ----------  -----------  ----------- 
 

19.1 Concentration risk

Management assesses the potential concentration risk from geographic, product and individual loan concentration. Due to the nature of the Group's lending operations the directors consider the lending operations of the Group as a whole to be well diversified. Details of the Group's loan and advances to customers and loan commitments by product is provided in Note 3.

The Group's Real Estate Finance and Consumer Mortgages are secured against UK property only. The geographical concentration of these business loans and advances to customer, by location of the security, is set out below:

 
                                                      June         June     December 
                                                      2019         2018         2018 
                                                GBPmillion   GBPmillion   GBPmillion 
------------------------------------------     -----------  -----------  ----------- 
Real Estate Finance 
------------------------------------------     -----------  -----------  ----------- 
Central England                                       35.0         26.5         35.1 
---------------------------------------------  -----------  -----------  ----------- 
Greater London                                       546.0        389.4        451.5 
---------------------------------------------  -----------  -----------  ----------- 
Northern England                                      36.6         80.2         37.6 
---------------------------------------------  -----------  -----------  ----------- 
South East England (excl. Greater London)            224.1        186.8        209.0 
---------------------------------------------  -----------  -----------  ----------- 
South West England                                    10.3          9.2          9.6 
---------------------------------------------  -----------  -----------  ----------- 
Scotland, Wales and Northern Ireland                  27.8         13.3         27.6 
---------------------------------------------  -----------  -----------  ----------- 
Gross loans and receivables                          879.8        705.4        770.4 
---------------------------------------------  -----------  -----------  ----------- 
Allowance for impairment                             (0.8)        (0.6)        (0.6) 
---------------------------------------------  -----------  -----------  ----------- 
Total                                                879.0        704.8        769.8 
---------------------------------------------  -----------  -----------  ----------- 
Loan-to-value                                          58%          57%          57% 
---------------------------------------------  -----------  -----------  ----------- 
 
 
                                                      June         June     December 
                                                      2019         2018         2018 
                                                GBPmillion   GBPmillion   GBPmillion 
------------------------------------------     -----------  -----------  ----------- 
Consumer mortgages 
------------------------------------------     -----------  -----------  ----------- 
Central England                                       21.6          6.5         16.2 
---------------------------------------------  -----------  -----------  ----------- 
Greater London                                        14.7          6.9         12.2 
---------------------------------------------  -----------  -----------  ----------- 
Northern England                                      22.0          6.7         16.6 
---------------------------------------------  -----------  -----------  ----------- 
South East England (excl. Greater London)             36.9         10.4         26.3 
---------------------------------------------  -----------  -----------  ----------- 
South West England                                    12.1          4.9          9.3 
---------------------------------------------  -----------  -----------  ----------- 
Scotland, Wales and Northern Ireland                   6.2          2.0          4.3 
---------------------------------------------  -----------  -----------  ----------- 
Gross loans and receivables                          113.5         37.4         84.9 
---------------------------------------------  -----------  -----------  ----------- 
Allowance for impairment                             (0.3)        (0.1)        (0.2) 
---------------------------------------------  -----------  -----------  ----------- 
Total                                                113.2         37.3         84.7 
---------------------------------------------  -----------  -----------  ----------- 
Loan-to-value                                          58%          59%          59% 
---------------------------------------------  -----------  -----------  ----------- 
 

Under its credit policy, the Real Estate Finance business lends to a maximum loan-to-value of 70% for investment loans and 60% for residential development loans and up to 65% for pre-let commercial development loans (based on gross development value), and the Consumer Mortgages business lends to a maximum of 90%.

Key performance indicators

(i) Margin ratios

Net interest margin is calculated as interest income and similar income less interest expense and similar charges for the financial period as a percentage of the average loan book, net revenue margin is calculated as operating income for the financial period as a percentage of the average loan book and gross revenue margin is calculated as interest receivable and similar income plus fee and commission income for the financial period as a percentage of the average loan book. The calculation of the average loan book is the average of the monthly balance of loans and advances to customers, net of provisions, over seven or 13 months as appropriate for the financial period. The resulting margins for June 2019 and June 2018 are multiplied by 365/181 to give an annual equivalent comparable to the annual results:

 
                                                June         June     December 
                                                2019         2018         2018 
                                          GBPmillion   GBPmillion   GBPmillion 
---------------------------------------  -----------  -----------  ----------- 
Net interest margin 
---------------------------------------  -----------  -----------  ----------- 
Interest receivable and similar income          92.3         79.2        169.2 
---------------------------------------  -----------  -----------  ----------- 
Interest expense and similar charges          (21.8)       (15.5)       (35.5) 
---------------------------------------  -----------  -----------  ----------- 
Net interest income                             70.5         63.7        133.7 
---------------------------------------  -----------  -----------  ----------- 
Net revenue margin 
---------------------------------------  -----------  -----------  ----------- 
Net interest income                             70.5         63.7        133.7 
---------------------------------------  -----------  -----------  ----------- 
Net fee and commission income                   10.9          8.8         17.9 
---------------------------------------  -----------  -----------  ----------- 
Operating income                                81.4         72.5        151.6 
---------------------------------------  -----------  -----------  ----------- 
Gross revenue margin 
---------------------------------------  -----------  -----------  ----------- 
Interest receivable and similar income          92.3         79.2        169.2 
---------------------------------------  -----------  -----------  ----------- 
Fee and commission income                       11.2          9.8         19.4 
---------------------------------------  -----------  -----------  ----------- 
Gross revenue                                  103.5         89.0        188.6 
---------------------------------------  -----------  -----------  ----------- 
Opening loan book                            2,028.9      1,566.5      1,566.5 
---------------------------------------  -----------  -----------  ----------- 
Closing loan book                            2,278.3      1,839.1      2,028.9 
---------------------------------------  -----------  -----------  ----------- 
Average loan book                            2,135.0      1,699.0      1,818.2 
---------------------------------------  -----------  -----------  ----------- 
Net interest margin                             6.7%         7.6%         7.4% 
---------------------------------------  -----------  -----------  ----------- 
Net revenue margin                              7.7%         8.6%         8.3% 
---------------------------------------  -----------  -----------  ----------- 
Gross revenue margin                            9.8%        10.6%        10.4% 
---------------------------------------  -----------  -----------  ----------- 
 

A reconciliation of the loan book figures used above to the statement of financial position at 1 January 2018 is as follows:

 
                                   GBPmillion 
-----------------------------      ---------- 
Balance sheet loan book               1,598.3 
---------------------------------  ---------- 
IFRS 9 transition adjustment           (31.8) 
---------------------------------  ---------- 
                                      1,566.5 
    -----------------------------  ---------- 
 

The margin ratios all measure the yield of the loan book.

(ii) Cost ratios

Cost of risk is calculated as impairment losses on loans and advances to customers for the financial period as a percentage of the average loan book, cost of funds is calculated at interest expense for the financial period as a percentage of average loan book and cost to income ratio is calculated as operating expenses for the financial period as a percentage of operating income for the financial period. The resulting ratios for June 2019 and June 2018 are multiplied by 365/181 to give an annual equivalent comparable to the annual results:

 
                                                              June         June     December 
                                                              2019         2018         2018 
                                                        GBPmillion   GBPmillion   GBPmillion 
-----------------------------------------------------  -----------  -----------  ----------- 
Impairment losses on loans and advances to customers          17.8         16.3         32.4 
-----------------------------------------------------  -----------  -----------  ----------- 
Average loan book                                          2,135.0      1,699.0      1,818.2 
-----------------------------------------------------  -----------  -----------  ----------- 
Cost of risk                                                  1.7%         1.9%         1.8% 
-----------------------------------------------------  -----------  -----------  ----------- 
Interest expense                                              21.8         15.5         35.5 
-----------------------------------------------------  -----------  -----------  ----------- 
Average loan book                                          2,135.0      1,699.0      1,818.2 
-----------------------------------------------------  -----------  -----------  ----------- 
Cost of funds                                                 2.1%         1.8%         2.0% 
-----------------------------------------------------  -----------  -----------  ----------- 
Operating expenses                                            45.5         41.1         84.5 
-----------------------------------------------------  -----------  -----------  ----------- 
Operating income                                              81.4         72.5        151.6 
-----------------------------------------------------  -----------  -----------  ----------- 
Cost to income ratio                                         55.9%        56.7%        55.7% 
-----------------------------------------------------  -----------  -----------  ----------- 
 

The cost of risk measures how effective the Group has been in managing its impairment losses. The cost of funds measures the cost of money being lent to customers. The cost to income ratio measures how efficiently the Group is utilising its cost base in producing income.

(iii) Return ratios

Annualised adjusted return on average assets is calculated as the adjusted profit after tax for the financial period as a percentage of average assets, annualised adjusted return on average equity is calculated as the adjusted profit after tax for the financial period as a percentage of average equity and annualised adjusted return on required equity is calculated as the adjusted profit after tax for the financial period as a percentage of average required equity.

Further details of adjusted profit are given in Appendix Note (vi), and a reconciliation of adjusted profit after tax to statutory profit after tax is provided on page 16.

Average assets is calculated as the average of the monthly assets balances, over seven or 13 months as appropriate for the financial period, average equity is calculated as the average of the monthly equity balances over seven or 13 months as appropriate for the financial period and average required equity is calculated as the average of the monthly balances of total required equity over seven or 13 months as appropriate for the financial period. Total required equity is calculated as the equity required to achieve a CET1 ratio of 12%. The resulting returns for June 2019 and June 2018 are multiplied by 365/181 to give an annual equivalent comparable to the annual results:

 
                                                       June         June     December 
                                                       2019         2018         2018 
                                                 GBPmillion   GBPmillion   GBPmillion 
----------------------------------------------  -----------  -----------  ----------- 
Adjusted profit after tax                              15.2         13.8         29.9 
----------------------------------------------  -----------  -----------  ----------- 
Opening assets                                      2,444.3      1,866.1      1,866.1 
----------------------------------------------  -----------  -----------  ----------- 
Closing assets                                      2,607.1      2,187.1      2,444.3 
----------------------------------------------  -----------  -----------  ----------- 
Average assets                                      2,476.9      2,035.1      2,182.4 
----------------------------------------------  -----------  -----------  ----------- 
Opening equity                                        237.1        223.3        223.3 
----------------------------------------------  -----------  -----------  ----------- 
Closing equity                                        240.3        225.0        237.1 
----------------------------------------------  -----------  -----------  ----------- 
Average equity                                        240.5        226.2        228.9 
----------------------------------------------  -----------  -----------  ----------- 
Opening required equity                               220.9        173.3        173.3 
----------------------------------------------  -----------  -----------  ----------- 
Closing required equity                               236.9        204.3        220.9 
----------------------------------------------  -----------  -----------  ----------- 
Average required equity                               226.0        190.7        201.7 
----------------------------------------------  -----------  -----------  ----------- 
Annualised adjusted return on average assets           1.2%         1.4%         1.4% 
----------------------------------------------  -----------  -----------  ----------- 
Annualised adjusted return on average equity          12.7%        12.3%        13.1% 
----------------------------------------------  -----------  -----------  ----------- 
Annualised adjusted return on required equity         13.6%        14.6%        14.8% 
----------------------------------------------  -----------  -----------  ----------- 
 

A reconciliation of assets and opening equity to the balance sheet at 1 January 2018 is as follows:

 
                                                Opening 
                                    Assets       equity 
                                GBPmillion   GBPmillion 
-----------------------------  -----------  ----------- 
Balance sheet assets               1,891.6        249.1 
-----------------------------  -----------  ----------- 
IFRS 9 transition adjustment        (25.5)       (25.8) 
-----------------------------  -----------  ----------- 
                                   1,866.1        223.3 
-----------------------------  -----------  ----------- 
 

Return on average assets demonstrates how profitable the Group's assets are in generating revenue. Return on average equity is a measure of the Group's ability to generate profit from the equity available to it. Return on required equity relates profitability to the capital that the Group is required to hold.

(iv) Funding ratios

The loan to deposit ratio is calculated as the loan book, at the period end, divided by deposits from customers at the period end, and the total funding ratio is calculated as the total funding at the period end, being the sum of deposits from customers, borrowings under the Term Funding Scheme, Tier 2 capital and equity, divided by the loan book at the period end:

 
                                                                                     June         June     December 
                                                                                     2019         2018         2018 
                                                                               GBPmillion   GBPmillion   GBPmillion 
----------------------------------------------------------------------------  -----------  -----------  ----------- 
Loan book                                                                         2,278.3      1,839.1      2,028.9 
----------------------------------------------------------------------------  -----------  -----------  ----------- 
Deposits from customers                                                           2,001.5      1,656.8      1,847.7 
----------------------------------------------------------------------------  -----------  -----------  ----------- 
Borrowings under the Term Funding Scheme, or the Funding for Lending Scheme         263.5        263.3        263.5 
----------------------------------------------------------------------------  -----------  -----------  ----------- 
Tier 2 capital (including accrued interest)                                          50.5            -         50.4 
----------------------------------------------------------------------------  -----------  -----------  ----------- 
Equity                                                                              240.3        225.0        237.1 
----------------------------------------------------------------------------  -----------  -----------  ----------- 
Total funding                                                                     2,555.8      2,145.1      2,398.7 
----------------------------------------------------------------------------  -----------  -----------  ----------- 
Loan to deposit ratio                                                              113.8%       111.0%       109.8% 
----------------------------------------------------------------------------  -----------  -----------  ----------- 
Total funding ratio                                                                112.2%       116.6%       118.2% 
----------------------------------------------------------------------------  -----------  -----------  ----------- 
 

The funding ratios measure the Group's liquidity.

(v) Adjusted earnings per share

Adjusted earnings per ordinary share are calculated by dividing the adjusted profit attributable to equity holders of the parent by the weighted average number of ordinary shares as follows:

 
                                                                                    June        June    December 
                                                                                    2019        2018        2018 
----------------------------------------------------------------------------  ----------  ----------  ---------- 
Adjusted profit attributable to equity holders of the parent (GBP millions)         15.2        13.8        29.9 
----------------------------------------------------------------------------  ----------  ----------  ---------- 
Weighted average number of ordinary shares (number)                           18,476,628  18,475,229  18,475,229 
----------------------------------------------------------------------------  ----------  ----------  ---------- 
Adjusted earnings per share (pence)                                                 82.3        74.7       161.8 
----------------------------------------------------------------------------  ----------  ----------  ---------- 
 

(vi) Adjusted profit

Adjusted profit before tax was GBP18.8 million (June 2018: GBP16.5 million, December 2018: GBP36.7 million). Adjusted profit after tax was GBP15.2 million (June 2018: GBP13.8 million, December 2018: GBP29.9 million).

The Group uses adjusted profit for planning and reporting purposes, as it improves the comparability of information between reporting periods. The adjustments to profit relate to non-controllable items or other items that fall outside of the Group's core business activities.

Fair value amortisation relates to the acquisition of V12 Finance Group. The acquisition accounting required identifiable assets and liabilities to be adjusted to their fair value, and these adjustments are subject to amortisation.

Transformation costs for 2019 are made up mainly of the costs of the motor transformation project and the costs to date of setting up the Group's derivatives capability (June 2018: comprised principally the costs of potential M&A activity, December 2018: comprised principally costs of closing the unsecured personal lending product, the cost of potential corporate acquisition work and treasury development.

Bonus payments of GBPnil (June 2018: GBP0.9 million, December 2018: GBP1.3 million) relate to a long term incentive plan that was set up for a small number of employees on the creation of the Commercial Finance business. The scheme is based on profits earned by that business up to the end of 2019, and is payable in 2019 and 2020.

Directors' responsibility statement

The directors confirm that, to the best of their knowledge:

-- the condensed financial statements have been prepared in accordance with International Accounting Standard 34 - 'Interim Financial Reporting', issued by the IASB and as adopted and endorsed by the European Union and give a true and fair view of the assets, liabilities, financial position and profit of the undertakings included in the consolidation as a whole;

-- the interim business review includes a fair review of the information required by Section 4.2.7R of the Disclosure Guidance and Transparency Rules, issued by the UK Listing Authority (that being an indication of important events that have occurred during the first six months of the current financial year and their impact on the condensed financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year); and

-- the interim business review includes a fair review of the information required by Section 4.2.8R of the Disclosure Guidance and Transparency Rules, issued by the UK Listing Authority (that being disclosure of related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or the performance of the enterprise during that period; and any changes in the related party transactions described in the last annual report which could do so).

Approved by the Board of Directors and signed on behalf of the Board.

Paul Lynam Neeraj Kapur

Chief Executive Officer Chief Financial Officer

6 August 2019

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

IR ZMGGRKVMGLZM

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August 07, 2019 02:00 ET (06:00 GMT)

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