Bank and Clients plc Annual Report & Accounts 2018 Contents

S trategic Report 3 Who we are and what we do 4 Annual report Highlights 4 2018 CEO’s statement 6 Strategic framework 8

Governance 11 Chairman’s letter 12 Board of Directors 13 Directors’ Report 20

Risk management 23 Overview 24 Risk ownership 24 Risk governance 25 Principal risks 31 Credit risk 37

Independent Auditor’s Report 45

Financial Statements 51 Statement of Profit or Loss and Statement of Other Comprehensive Income 52 Statement of Financial Position 53 Statement of Changes in Equity 54 Statement of Cash Flows 55 Notes to the Financial Statements 56

Company Information 85

2 Bank and Clients PLC Strategic Report Strategic Report This is B&C

Who we are and what we do Inspired by the traditions of private banking, B&C focuses on excellent service to support individuals and businesses by providing tailored solutions and user friendly savings options.

Driven by clients’ needs Focused on specialised products Committed with a long-term view • We work hard to truly understand We offer: • We continuously invest in our people the needs of our clients and infrastructure • Residential Mortgage products and • We use our expertise to build lending Commercial real estate loans using our • We treat our clients responsibly and solutions that help our clients reach specialist underwriting skills to build strive to develop trust and long their goals relevant solutions lasting relationships • W e operate efficiently and deliver • Corporate lending and advisory • We aim to develop a sustainable excellent service to our clients solutions helping entrepreneurs to banking business with the support of grow their businesses our shareholders • Competitive rates and clear terms on all savings products

Highlights

4 Net Interest Income (£m) Tier 1 Capital (£m) Loss before tax (£’000) 16 7000 3.5 16 New Tier 1 New Tier 1 3 capital6000 injection6,992 capital injection 12 Tier5000 1 capital Tier 1 capital 5,326 2 2.3 10 4000 4,986Tier 1 capital Loss before tax £'000 8 9 3000

1 4 2000 1000 0 0.3 0 0 2016 2017 2018 2016 2017 2018 2016 2017 2018

Savings £159m Deposits (£m) Savings by products Savings Key Metrics 160 1% 2018 2017 159 1% 140 9% On demand FSCS protected accounts 83% 86% Euro 120 9% On demand 116 39% Fixed term Euro 100 Notices 94 39% Fixed term 80 51% Notices 60 51% On demand 40 Euro On demand 20 Fixed term Euro 0 Notice 2016 2017 2018 Fixed term Looking after all of our depositors is vital to the success of our during normal working hours and to assist clients as required. Bank. Notice We do not offer teaser rates or other gimmicks; we offer the Our experienced Uk-based savings team adopts high levels of same products to all of our retail clients. client service to meet the needs of individuals and businesses. B&C is part of the Financial Services Compensation Scheme We don’t outsource client enquiries to third parties or overseas (FSCS) so eligible depositors savings up to £85,000 are jurisdictions and are always available to answer questions protected.

4 Bank and Clients PLC Lending £136m Total loans and advances to customers (£m)

140140 1515 CRECRE 120120 88 CorporateCorporate loans loans 100100 MoMortgagesrtgages CRE CRE 80 80 1414 Corporate Loans 60 65 113 Corporate Loans 60 65 113 Mortgages 40 Mortgages 40 7 20 7 20 16 0 162016 2017 2018 0 2016 2017 2018

Mortgages Commercial Real Estate (CRE) Corporate lending and advisory Lending £113m Lending £15m Lending £8m New lending £60m New lending £15m New lending £0.4m

Mortgages by products CRE by products C2%orporate lending by sectors

2% Finance 9% Owner Residential industry 20% 9% occupier Owner occupier Retail Residential30% Finance 20% Manufacturing Commercial Commercial Hotel/ Retail industry 29% 43% 30% Retail/ Buy to let leisure Manufacturing 62% Buy to 43%let 68%Hotel/ wholesale trade 51% 31% Offices leisure 40% Retail/ Offices Owner occupier wholesale tradeResidential Retail/wholesale trade 6% 31% 68% Manufacturing Buy to let Owner occupier Retail Residential 6% Retail/wholesale trade Commercial Hotel/leisure Finance industry Buy to let Retail Manufacturing Offices New mortgage book key metrics CRE key metrics Corporate lending book keCommercialy metrics Hotel/leisure Finance industry New Book only 2018 2017 2018 2018 2017 Offices Average Loan size £476k £504k average Loan size £2,165k Average Loan size £1,377k £2,041k Average LTV 45% 44% Average LTV 59% Advisory fees £467k - London exposure 62% 60% London exposure 27%

We are willing and able to structure We provide loans of £2m to £10m B&C’s corporate lending and advisory loans that are secured against a wide to experienced commercial property strategy is driven by a traditional variety of residential property assets, investors. banking relationship spirit, and with our individually or collectively, as well as to private bank ethos. borrowers with complex incomes. The smaller size segment of the market is underserved by our competitors and B&C looks to develop a deep We judge each case on its merits and offers good diversity in terms of tenant, understanding of its clients’ business structure mortgages through dialogue property mix and region. model and trajectory as well as the with brokers. economic forces that impact them. We have seen this year that our manual All of our mortgage underwriting is underwriting approach, willingness B&C’s size and organisation allow it carried out on an individual basis by our to engage to ensure an in-depth to be both client and product focused, experienced team, enabling us to make a understanding of our customers and and to develop a dialogue at Executive comprehensive and unbiased assessment certainty of delivery is an attractive level (CEO, CFO) or with shareholders, of each mortgage application. proposition for our clients. leading to a variety of possible outcomes for the client. We believe satisfied customers result in a Our decisions are grounded in expertise lasting relationship. and knowledge of the commercial B&C will generate ideas and build property market, and backed by best in tailored solutions to address client class risk management practices. challenges.

Annual Report 2018 5 CEO’s Statement the Bank remained loss making during 2018. the loss for the year reduced by £340k to £4,986k (2017: £5,326k). this was I am pleased to report that 2018 has been a consolidating year achieved through a £1,166k increase in interest income and for Bank and Clients Plc (B&C). managing the costs base within a framework of supporting long-term growth. During the year we undertook a review Throughout 2018 B&C has continued to build on the of our cost base, which resulted in the contraction of our foundations laid in 2017, which were designed to deliver an monthly administration expenses. Concurrently a number of attractive proposition to clients across all its activities. investments were made to strengthen our risk management Loan and advances to customers increased by 70% to framework, including credit models to back our credit analysis £135.8m at year end (2017: £79.8m), leading to an increase in and quantify risk, and our It infrastructure, including an net interest income of 50% to £3.5m (2017: £2.3m). enhanced treasury system.

B&C continued to provide mortgages to borrowers requiring We recognise that our people are our strength. Our average specialist underwriting and to those whose financial number of employees is 54 (2017: 51). We endeavour to be circumstances do not easily fit with the more standardised an organisation in which our people can grow and make best offerings provided by mainstream lenders. The Bank use of their talents, for our clients’ benefit. In this context we originated £60m of new mortgage lending, while in line decided to co-locate our deposit and mortgage administration with its lending policy, maintaining the portfolio’s low LTV; services, previously based in Yeovil, to London in order to which remains below 50%. We have strengthened our valued achieve greater operational efficiency and control and to relationships with the broker community and look forward enhance our client service. to further building our reputation and position as a specialist We take pride in the diversity of our workforce. Whilst our lender providing excellent service and efficient decision Board comprises 30% women, women form 60 % of our making, grounded in knowledge and expertise. Executive committee and 50% of our staff. We are also proud During 2018 B&C launched a Commercial Real Estate to count 10 different nationalities in our London based lending proposition, applying its specialist underwriting skills team of banking professionals which makes our team truly to the commercial property market. I am pleased to report international, with a diverse knowledge of legal jurisdictions, that the Bank was able to complete 7 transactions amounting local cultures, languages and working practices. We intend to to £15.0m, with an average LTV of 59%. We seek to become a draw on this competitive advantage in the future. trusted financial partner in the commercial property industry. Our corporate culture is one that drives each of us to always We believe our willingness to understand clients’ needs and be relevant, clear, responsible and service-driven both to our ability to deliver efficient decision making creates a valuable clients and to our colleagues. We believe in the positive and differentiator. compounding effect of always trying to do the right thing, On the corporate lending and advisory side, our team in the way we organise ourselves and working for all our continued to offer support to clients wishing to grow. stakeholders.

Deposits grew to £159.1m (2017: £115.9m) and the Bank B&C benefitted from capital injections of £6m and £5m in launched a number of new products, notably additional fixed January and September 2018 respectively, totalling £11m term accounts and notice accounts, and whilst it increased its for 2018 from Ocean Industries S.a. (OI), the long-term range of distribution channels. We have a solid base of long- shareholder which has continuously supported us since the term loyal customers. Our treasury department managed our inception of the Bank. During the year ended 31 December deposit book effectively throughout the year, maintaining our 2018 capital was reduced by £4.9m as a result of ongoing cost of funds in line with the business plan. losses incurred as part of the journey to achieving critical mass. at 31 December 2018, the Bank’s CEt 1 was £15.9m and the Bank’s CEt 1 Ratio was 22%.

6 Bank and Clients PLC We will seek to strengthen our capital base in order to further enable B&C to grow its lending proposition for mortgage borrowers and mid-market companies and to develop its range B&C has of savings solutions for depositors. We will seek to expand our lending activities in segments of the market where we can be relevant to clients while adhering to our current risk appetite continued to and preserving the risk return profile of our portfolio ultimately delivering sustainable profitability. Our success in building the business so far has been built on build on the excellent service and certainty of delivery to our clients and network of intermediaries. In 2019 we will enhance our operational efficiency and automate certain of our underwriting processes to deliver efficient, clear and safe credit foundations decisions. Work is under way to explore tactical technological solutions allowing a future lower cost income ratio. the macro-economic uncertainty around Brexit continues. laid in 2017 Despite this, we believe our current low-cost structure and low-risk profile provide resilience in the face of potential future economic uncertainty. this year, we have again benefited from the loyalty of our customers and business partners, the commitment of our Board members and the strong motivation of our employees. I would like to thank our Executive Management team which relentlessly supported B&C through this year’s transformational changes. I look forward to entering another phase in B&C’s journey, in which B&C will apply its continued passion to delivering expertise, excellent service and good products to corporates and individuals.

Claire Bridel Chief Executive Officer & Director 24 April 2019

Annual Report 2018 7 Strategic Framework Mortgage Lending

Our ultimate goals 2018 Progress 2019 Objectives • To use our mortgage • £60m of new mortgages in 2018 (£51m in • To continue developing the Bank’s mortgage expertise and 2017) were written, of which approximately offer through the design of new products underwriting skills to half were generated by a new fixed-rate product • To continue fostering outstanding service serve our individual • B&C developed its team of skilled delivery, focusing on the automation and clients for the underwriters and enhanced its credit process to streamlining of the pre-completion process acquisition of owner deliver quick, clear and safe decisions occupied or buy-to-let • To continue investing in our people and properties. • B&C strengthened relationships with the processes to deliver quick and safe decision broker community making • B&C improved its risk quantification • To further develop our relationships with capabilities and management information. brokers and actively focus on geographic diversification.

Commercial Real Estate (CRE) Lending

Our ultimate goals 2018 Progress 2019 Objectives • To provide credit • £15m of new loans (nil in 2017) were written • To continue developing the Bank’s CRE solutions to activity, focusing upon the sub £10m segment • B&C launched this new activity after defining individuals and a marketing approach based on size of • To continue fostering outstanding service corporates for lending, speed of turn-around and certainty of delivery and efficient decision making the investment execution; targeting professional clients grounded in our expertise of the property in UK residential market and commercial • B&C built an efficient risk management properties. framework including risk assessment models • To build on our reputation as a specialist lender backed by a market-leading credit model and trusted partner of the commercial property industry. • B&C developed relationships with valuation firms and real estate specialist law firms.

Corporate Lending and Advisory

Our ultimate goals 2018 Progress 2019 Objectives • To support corporate • B&C offered debt advisory and corporate • To develop origination in the UK whilst clients in their finance services to medium sized companies keeping our international focus aspirations for growth. • B&C embedded its improved credit • To continue strengthening our underwriting governance framework and developed an and credit teams to meet the diverse needs of internal rating capability backed by a market our corporate clients and to deliver a responsive leading credit assessment model. service and efficient decision-making • To continue supporting businesses wishing to grow with our extended corporate products offering and our team of experienced bankers.

8 Bank and Clients PLC Savings

Our ultimate goals 2018 Progress 2019 Objectives • To develop a stable • B&C launched new fixed-rate savings • To enhance B&C’s customer experience and diversified products, corporate savings products and ISa through the implementation of an online funding base, to products, raising £97m in deposits to support service protect and retain our lending activities • To continue diversifying and enhance B&C’s depositors and contain • B&C continued to develop relationships with savings products offering, including the clear our cost of funds. funding partners giving access to a wider range expression of terms and expansion of delivery of clients. channels • To continue answering our existing clients’ needs and attract new clients.

Operating model

Our ultimate goals 2018 Progress 2019 Objectives • To be operationally • B&C continued to invest in systems and • To continuously assess our outsourcing partners efficient and scalable processes across businesses to allow greater and third party providers to ensure B&C’s for growth. automation and preserve operational integrity operating model is efficient and fit for purpose • B&C co-located deposit and mortgages • To continue training our people and enhance administration services in London for greater our processes to lay sound foundations for cost efficiency efficiency growth • B&C trained its operational people to foster • To develop enhanced project management high quality of service and operational practices. awareness.

Annual Report 2018 9 10 Bank and Clients PLC Governance Governance

Significant governance Chairman’s letter Dear Shareholders, enhancements Firstly, on behalf of the Board, I would like to thank Claire Bridel, CEO for her leadership and inspiration since taking the helm a year ago. Her strong stewardship over the last were embedded 12 months has overseen considerable internal change with the aim of best positioning the Bank for success as we move forwards to growth. across the entire 2018 remained challenging, yet was rewarding. In 2018 Claire and her team refined and added additional products and services across all Deposit, Mortgage and Corporate Real Estate lending portfolios; completed the hiring of all Senior organisation Manager Function positions, notably adding a seasoned CRO and appointing new Internal Auditors to the team. Significant governance enhancements were embedded across the entire organisation. I would like to end with my sincere thanks to those employees who were based in our former Yeovil Office for their service I am also delighted to note that the newly constituted over the 40 years since the Bank’s inception in the South West. Board as at the beginning of 2018, has worked tirelessly and It is, however, intended that the combination of our effectively together to bring both challenge and support to the administration and operational services, with the remainder of Executive team. our employees at one site in our London headquarters, will bring both enhanced operational effectiveness, and customer 2018 saw the Bank enhance its corporate governance and delivery and service. cement its culture, focusing on the effectiveness and soundness of our internal operating processes to provide outstanding It leaves me therefore finally to thank all current employees and customer service. We developed further the Bank’s culture and Board members for their contributions. There is still much to code of conduct under Claire’s leadership honing the skills and achieve and I look forward to a successful 2019 consolidating expertise necessary to support B&C’s development, including B&C’s positioning in the challenger bank market. that of its employees.

Understandably this year has seen the Board consider the implications of Brexit and what this means for the Bank’s business plan and operations. I am delighted to say that the board firmly supports the Bank’s proposition as a UK bank supporting UK businesses and customers as well as those from overseas territories wherever we are able to do so from a regulatory perspective. Lord Strathclyde Non-Executive Chairman 24 April 2019

12 Bank and Clients PLC Karen McCormick Board of Directors Independent Non-Executive non-executive Directors Karen has held a broad industry career which began in accountancy and progressed into business leadership with a lord strathclyde particular interest in business performance improvement with Independent Chairman a focus on people. Lord Strathclyde became Chairman of B&C in June 2016. He has a long and distinguished career in public service, and Karen has worked across a diverse range of sectors and held was latterly Leader of the House of Lords and Chancellor of senior leadership roles including; Chief Executive Officer at the Duchy of Lancaster. He has served on the boards of several Cheshire Building Society, Group HR Director at private- financial services companies including Scottish Mortgage equity backed Care UK, vice President HR at Kellogg’s Investment trust Plc, Marketform Plc, Hampden agencies Ltd Europe, People Performance Director at Sainsbury’s and and trafigura Bv. Currently Lord Strathclyde is a senior adviser HR Director at GUS Home Shopping / Reality. Her early to international businesses and is Chairman of the Battersea career was spent in financial services. All of these roles have Power Station advisory Board. been transformational in nature as each business was facing a significant challenge in their market. Roger Barlow Senior Independent Non-Executive and Chair of Risk and Karen is also a Non-Executive Director at Stafford Railway Compliance Committee and Audit Committee. Building Society and has extensive exposure working with Roger has more than 40 years’ business and corporate senior executives and Boards to improve business performance experience and is a Chartered accountant having been an from the formation of vision and strategy to delivery at the audit Partner at kPMG until 2000. Subsequently he was front line. She is also an effective coach with the ability to CFO for an aIM listed corporate finance company. He is now identify potential and develop talent. a Non-Executive Director of anexo Plc (also an aIM listed company), the independent member of the audit Committee William Charnley at the Information Commissioner’s Office and has recently Non-Executive and Chair of Nominations and Remuneration joined the Loughborough Building Society as a Non-Executive Committee Director. William is a London based Partner and the Head of the Corporate Practice at King & Spalding International LLP, a Anthony Ward large global law firm. Independent Non-Executive tony is an acknowledged expert in mortgages, risk He has broad corporate experience advising on IPOs and management and funding solutions. During his career, which securities offerings, takeovers, private equity transactions, spans more than 40 years, he developed kleinwort Benson’s mergers & acquisitions and joint ventures. William has innovative mortgage originating and securitisation business, also advised bank boards on regulatory and policy changes, Mortgage Funding Corporation PLC and was CFO then corporate governance and risk issues. CEO of mortgage lender Britannic Money (now Mortgage Trust). He is a Fellow of both the association of Corporate Treasurers and the Royal Society of arts and a Member of the Institute of Credit Management. He is also a past Deputy Chairman of the Council of Mortgage Lenders and Chairman of Intermediary Mortgage Lenders association. additionally, tony is a Non-Executive Chairman of Landbay Partners Limited, a Chairman of Link Mortgage Services (a division of Link Group) and has led Home Funding since 2006.

Annual Report 2018 13 Executive Directors Claire Bridel Chief Executive Officer & Director Claire has more than 20 years’ experience in finance. Claire began her career at Coopers & Lybrand and has held a number of senior roles including EMEA Chief Operating Officer of Natixis CIB and Chief Operating Officer Europe and Middle East for FIMAT and Newedge. Claire also holds a Certificate in Quantitative Finance. Between 2011 and 2016 she worked as a consultant to support operational improvement programs by advising COOs and CEOs of rapidly growing companies.

Nicole Coll Chief of Finance and Operations & Director Nicole joined B&C from the Bank of England where she held the position of Chief Financial Accountant. Nicole also served as the Head of Financial Control and CFO at Societe Generale Newedge in London for seven years and previously held senior finance positions at broker-dealers in New York and London. Nicole is a qualified chartered accountant having worked at Deloitte in South Africa and in the USA.

Edouard Bridel Head of Business Development & Director Edouard has been based in London for 25 years where he developed his expertise in the banking industry. After a career in large investment banks and mergers and acquisitions, Edouard co-founded Ocean Capital Associates in 2002 to focus on lending money to medium to large companies in Europe and North America.

14 Bank and Clients PLC Corporate Governance Role of the Board The Board of Directors includes the Independent Non- Framework Executive Chairman, four Independent Non-Executive B&C is not required to comply with the Financial Reporting Directors and three Executive Directors, as listed on pages 13 Councils’ UK Corporate Governance Code (the Code). to 14.

However, B&C has embraced the principles of the Code During 2018, the Board met 5 times. insofar as they are considered appropriate to the Bank’s size and circumstances. As a regulated institution, B&C also The Board is responsible for establishing the Bank’s business complies with the Prudential Regulatory Authority’s and the model, strategy and risk appetite and approving related policy Financial Conduct Authority’s rules. statements as well as providing appropriate challenge and oversight of the Executive Committee.

These policy statements establish the Bank’s overall approach Board Changes to risk and set out the control environment in which it B&C undertakes periodic governance reviews, including operates. Implementation of these policies is the responsibility considerations as to its Board and senior management of the Executive Management which reports to the Board. effectiveness. Accordingly B&C has further developed its Board Committee structures to enhance both Board and During the year the Board focused on ensuring that the Executive level governance and oversight. governance committees shown below were formed and were functioning within their terms of reference. In January 2018 Claire Bridel was appointed CEO, having completed a year in her previous role as COO.

Board

Board Risk Board Audit Ex ecutive Nominations Board Credit and Compliance Committee Committee & Remuneration Committee Committee Committee

Executive Risk Asset Ne w Operations Human Ex ecutive and Compliance and Liability Product and IT Resources Credit Committee Committee Committee Committee Committee Committee

Pricing Watchlist Committee Committee

Annual Report 2018 15 Key Board roles In addition to Board effectiveness reviews, the Bank the chairman undertakes periodic Board planning and strategy sessions to review B&C’s business strategy as well as initiatives to support as well as organising the business of the Board, Lord the development and maintenance of a culture that supports Strathclyde oversees the performance of the Board in setting the achievement of the Bank’s business objectives. the Bank’s strategy and risk appetite. the Chairman is responsible for leading the Board’s work in developing the Meeting Attendance Bank’s culture and procedures for the recruitment, induction, training and development of all Directors. the Chairman also Board CRCo ARCCo RemCo plays an important role in maintaining dialogue with the Bank’s shareholders and regulators. Lord Strathclyde 5/5 6/6 5/5 Claire Bridel 5/5 6/6 the chief executive officer Claire Bridel, who took on this role in January 2018, oversees Anthony Ward 5/5 5/6 5/6 the activities of the Bank on a day to day basis. the Chief Karen McCormick 3/5 6/6 4/5 Executive Officer is accountable to the Board for B&C’s Roger Barlow 5/5 6/6 6/6 operational and financial performance. William Charnley 5/5 5/5 the senior Independent Director Edouard Bridel 5/5 6/6 Roger Barlow is the Senior Independent Director, supporting the Chairman in managing and organising the business of the Nicole Coll 4/5 5/6 Board. In addition he acts, where necessary, as an intermediary for shareholders and is also the whistleblowing champion. training and Induction to ensure effective oversight, B&C has bolstered its Board to ensure there are sufficient Non Executives with the mix of appropriate skills and current experience relevant to the Bank’s major business areas. In particular, during 2018 the Bank welcomed anthony Ward and karen McCormick who respectively have brought extensive experience in the mortgage field and retail banking sectors. B&C has developed and implemented a process to ensure the ongoing training of existing Board members and to provide a thorough business induction for new Board appointees. the process, which is overseen by the Chairman, is regularly updated. B&C operates a new joiner induction programme and an on-going training programme for all employees which includes both technical skills and regulatory updates. the Bank supports the professional development and recognition of its people with several staff benefiting from the Bank’s study support programme. Board evaluation Evaluation of corporate governance is important to support the ongoing success of the Bank and the Board recognises that the inclusion of Non-Executive Directors who are also principal shareholders of the Bank is a particular feature of its membership. as such the Board is subject to independent review every two years and to its own formal and rigorous performance review every year. the latest independent review was conducted in 2016 and an internal audit review was completed during 2018 which addressed culture, governance and the SMR, following which the Bank has added additional training for Non-Executive Directors and new Board members as detailed above who bring the relevant skill sets to support the Bank.

16 Bank and Clients PLC Board committees BRiCC is responsible for: • Reviewing and monitoring the risk profile of the Bank through the ongoing process of the identification, evaluation capital and Recovery committee (cRco) and management of all material risks including longer term the Capital and Recovery Committee was extremely active in strategic threats to the Bank. the Committee also reviews, 2018 chaired by Lord Strathclyde. It included Claire Bridel, challenges and recommends to the Board for approval, the Nicole Coll, anthony Ward, Roger Barlow and Edouard Risk appetite Statement, risk measures, risk tolerance and Bridel as members. risk limits, taking into account the Bank’s capital adequacy requirements and the external financial environment.BRiCC It met regularly to proactively manage the Bank’s capital reviews periodically a risk monitoring dashboard with position, particularly in light of the capital raising efforts to qualitative and quantitative metrics. increase CEt 1 capital. • Considering, overseeing and advising the Board on, and testing the Bank’s exposure to, all significant risks to the business to ensure that current and forward looking aspects of Board credit committee (Bcc) risk exposure are examined, particularly for risks that could the Board Credit Committee was established early in 2019. impact the strategy, reputation or long term viability of the the BCC will challenge, consider and ratify the Executive Bank Credit Committee (ECC) decisions which fall outside of its • Reviewing the Bank’s Compliance Framework and delegated authority. monitoring its ongoing implementation • Reviewing arrangements or employee whistleblowing Board Audit committee (BAc) in relation to confidential matters or other forms of impropriety. Board Risk and compliance committee (BRicc) Activities in 2018 During 2018, ARCCo’s work focused on: together previously the Audit, Risk and compliance committee (ARcco) • Areas of judgement and estimate relevant to the Bank’s financial reporting. No significant issues arose in relation to It was determined in early 2019, that aRCCo should be split the financial statements in the current year other than into two separate committees; Board audit Committee and IFRS9, see note 1.9 and 28 for details Board Risk and Compliance Committee as a reflection of the • Assessing the effectiveness of the external audit process by progress and development of the Bank. Both are now chaired reviewing the plan for the external audit, considering the by the Senior Independent Non-Executive Director Roger reports from the external auditor on accounting and control Barlow. karen McCormick and anthony Ward complete the matters, and engaging with them on key areas of judgement membership. the committee meets at least four times a year and in 2018 met six times. • Monitoring the level of non-audit services provided by the external auditors. aRCCo did not consider the level of such Claire Bridel and Nicole Coll as well as senior members of the work to have impacted external auditor objectivity nor internal audit, risk management and compliance teams attend independence during the year. Mazars were appointed as the BaC and BRiCC meetings as required. Bank’s external auditor in 2014; their appointment is assessed annually and subject to shareholder approval. BaC is responsible for: • Monitoring the integrity of the Bank’s financial statements B&C from 2019 has an out-sourced internal audit function and the effectiveness of the Bank’s internal controls. Any provided by Grant thornton. the committee requested significant judgements or estimates in relation to financial proposals from three firms and was unanimous in appointing reporting are reviewed and challenged by the Committee Grant thornton. aRCCo reviewed and approved the internal audit charter and set out an annual audit Plan including • Approving the internal audit programme and examining specific areas to be reviewed. completed internal and external audit reports. It considers the major findings and ensures that recommendations are During 2018, aRCCo reviewed and was satisfied by the implemented via the Executive Committee where necessary adequacy and effectiveness of the compliance function and risk management systems under the direction and leadership of the • Reviewing the performance of the external auditor, selecting Bank’s new Chief Risk Officer (CRO), and additional resources and recommending their appointment and reappointment as to support the second line of defence for both credit risk and well as approving terms of reference and fees. operational risk.

Annual Report 2018 17 nominations and Remuneration Diversity committee (Remco) B&C does not currently have a formal diversity policy, but the Board recognises the ethical and commercial benefits of a the Nominations and Remuneration Committee is chaired diverse workforce when making recruitment decisions. by William Charnley and has Lord Strathclyde and karen McCormick as members. Currently approximatively 50% of the Bank’s employees are women with a strong female representation at the Executive the Committee is responsible for determining the appropriate management and Board levels. In addition the Bank has 10 composition of the Board by assessing a number of interrelated different nationalities in its London office. factors including: as B&C develops and expands, the Board is committed to • Assessing the time required from each Non-Executive adopting a formal diversity policy to ensure the Bank benefits Director in order to fulfil his or her duties from a wide range of skills and expertise. • Performing an annual review of the structure, size and composition (including the skills, knowledge and experience) of the Board executive committee (exco) • Setting remuneration including recommendations to the the Executive Committee oversees the day to day running Board with regard to any changes of the Bank, ensuring that operations are implemented in a compliant manner and in-line with the agreed business plan. • Identifying and nominating, for the approval of the Board, the Executive Committee is responsible for implementing candidates to fill Board vacancies as and when they arise and and maintaining the policies, procedures, systems and controls making recommendations concerning their remuneration of the Bank and, as directed by the Board, implementing • Consideration of succession planning, taking into account the the strategy and business plan of the Bank. to aid the challenges and opportunities facing the Bank as well as the skills board activities, the Executive Committee oversees further and expertise needed on the Board in the future in order to committees and sub-committees as detailed below, each sustain the ability of the Bank to compete effectively in the responsible for a different area of oversight: marketplace • Preparing a description of the role and capabilities required for a particular appointment, to be approved by the Board executive Risk & compliance committee • Considering candidates from a wide range of backgrounds, (eRicc) including from underrepresented groups to increase the Chaired by the CRO, the Risk Committee ensures appropriate Board’s diversity. policies, procedures and controls are in place, monitors risk related issues, ensures regulatory obligations are met, and Activities in 2018 ensures business continuity plans are in place and tested. The main areas considered by the Committee in 2018 were: • Succession planning for key executive appointments and Assets and liabilities committee (Alco) considerations of other key man risks Chaired by the Chief of Finance and Operations (CFO), the • The appointment of a CRO assets and Liabilities Committee ensures that assets and liabilities • The appointment of one shareholder new Non- are appropriately managed, and that the impact on capital of Executive Director ExCo decisions is understood and monitored. the Committee manages interest rate, market and liquidity risk, and oversees • Remuneration for the Non-Executive Directors and for and manages balance sheet risk. the aLCo has a sub-committee, members of the Executive Committee. the Pricing Committee, which approves and reviews all pricing Remuneration policy decisions in relation to the Bank’s products and services. B&C’s remuneration policies are designed to promote the long-term success of the company and do not encourage staff pricing committee (pc) to take risks to enhance their personal remuneration. Chaired by the CFO, the Pricing Committee is a B&C further considers the PRA’s Remuneration Code sub-committee of aLCo and is responsible for making to the extent relevant. In addition, the Bank undertakes recommendations to aLCo of all pricing matters relating to remuneration benchmarking reviews from time to time to products and services. ensure its remuneration policy is in line with market norms.

18 Bank and Clients PLC new product committee (npc) Chaired by the treasurer, the New Product Committee oversees the development and launch of all new products and services and any variances thereto. operations and It committee (oItc) Chaired by the Head of Operations and IT, the Operations and It Committee oversees all operational aspects of the Bank including people, systems and office infrastructure. the OItC is responsible for the identification and mitigation of operational risk and implementation of the Bank’s Risk Control Self-assessment.

HR committee (HRc) Chaired by the CFO, the HR Committee meets regularly to oversee all HR related matters including on-boarding, employee training, appraisals and performance management and oversight of the Certified Employee programme. executive credit committee (ecc) Chaired by the CEO, the Credit Committee provides credit approval, reviews and implements credit policy and monitors aggregate exposures and asset performance. the ECC has a sub-committee, the Watchlist Committee, which oversees and monitors any credit exposures which merit additional scrutiny and oversight.

Watchlist committee (Wc) Chaired by the CRO, the Watchlist Committee is a sub- committee of the Credit Committee and has responsibility for oversight of loans for which there are credit risk concerns.

Relations with shareholders the Board takes the maintenance of good relations with its shareholders very seriously and provides regular updates as to the performance of the Bank through a range of channels including face to face meetings and financial reporting.

Despite B&C’s status as a privately held entity the whole Board is responsible for ensuring that a positive dialogue with shareholders takes place under the stewardship of the Chairman, the CEO and the Senior Independent Non- Executive Director.

Annual Report 2018 19 Directors’ Report the principal risks and uncertainties affecting the Bank are described in the risk management section 4a of the Risk the Directors present their annual Report and the Audited Management Report on page 31. Financial Statements for the year ended 31 December 2018. pensions Directors the Bank operates two defined contribution pension a full list of the Directors can be found on pages 13-14. schemes, one for those ex Church House Trust staff and another for all other staff employed by the Bank. the pension two Non-Executive Directors, karen McCormick and charge represents the amounts payable by the Bank to the anthony Ward, joined the Board on 5 January 2018. fund in respect of the year. the Bank has no legal or Pedro Errazuriz former CEO and Director resigned on 20 constructive obligation to pay further contributions. February 2018. Directors’ powers and indemnities Anti-bribery and corruption B&C reviews annually its anti-bribery and corruption Specific indemnities are in force under which the Bank agrees programme including a review of all relevant policies and to indemnify each Director individually, to the extent procedures pertaining to areas of financial crime, bribery and permitted by law and the Bank’s articles of association, in corruption, whistleblowing, expenses including gifts & respect of all losses arising out of, or in connection with, entertainment, potential conflicts of interests, procurement as the execution of their powers, duties and responsibilities, as well as charitable and political giving. B&C has a zero Directors of the Bank. tolerance approach to bribery and corruption and senior the Bank has also arranged Directors’ and Officers’ Insurance management is actively involved in monitoring the Bank’s on behalf of the Directors in accordance with the provisions programmes and in educating staff. the Chair of the BRiCC of the Companies act 2006. is ultimately responsible for overseeing the effective implementation of the Bank’s programme. Dividends and share issuance During the year, 11m shares in the Bank were issued at £1 corporate responsibility nominal for cash consideration. No dividends were paid in B&C considers its responsibility as a business in terms of 2018. a further 2.7m shares were issued in as £1 par value in serving its clients, employees and also the broader community. March 2019. the economic environment in which the Bank operates affects both its operating strategy and its actions with regard Going concern to corporate responsibility. However, regardless of external In preparing the financial statements the Directors carried out factors, the Bank’s focus is on areas which align the aims of its an appropriate assessment of going concern to satisfy business with its responsibilities as a corporate citizen. themselves that it is reasonable to adopt the going concern • Clients We are committed to providing access to Responsible basis, taking into account all available information about the Banking services to assist our clients in the financial planning future and factors likely to affect the future position of the and security Bank, including current and projected performance, capital and liquidity requirements. • Employees We are committed to ensuring diversity within the workforce, whether by gender, race, age or disability and Subsequent to the year end the existing shareholders have we further support our employees with relevant training continued to support the Bank with a further capital injection • Community We are currently considering a number of of £2.7m in March 2019 and a further commitment of up to strategic partnerships with whom we would like to work; £1m. this together with the forecasts and projections, particularly to encourage entrepreneurial endeavors and incorporating a number of scenarios and potential strategies enterprise by those disadvantaged within the community. up to December 2020, demonstrates the Bank has sufficient capital to mitigate continued losses and permit the Bank to continue to adopt the going concern basis of accounting. after undertaking this extensive assessment the Directors are satisfied that actions can be taken to ensure that the Bank has adequate capital, liquidity and other resources to continue for the foreseeable future. On this basis the Directors have concluded that it continues to be appropriate to adopt the going concern basis in preparing the financial statements.

20 Bank and Clients PLC subsequent events • Provide additional disclosures when compliance with In March 2019, a capital injection of £2.7m was received specific requirements in IFRS is insufficient to enable users from Ocean Industries S.a. and a further commitment of up to understand the impact of particular transactions, other to £1m. events and conditions on the entity’s financial position and financial performance; and In March 2019, the Bank entered into an agreement for the • Prepare the financial statements on the going concern basis sale of its Yeovil office for amount of £349k. building an unless it is inappropriate to presume that the Bank will Information presented in other sections continue in business. Certain information to be included in a Director’s Report The Directors are responsible for keeping adequate accounting can be found in other sections of the annual Report as records that are sufficient to show and explain the Bank’s described below. all of the information presented in these transactions and disclose with reasonable accuracy at any time sections is incorporated by reference into this Director’s the financial position of the Bank and enable them to ensure Report and is deemed to form part of this report. that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Bank and hence for taking reasonable steps for the • Commentary on the Company results for the year, assets prevention and detection of fraud and other irregularities. and capital together with likely future developments in the business of the company is included in the CEO and Auditor and disclosure of information to the auditor Chairman’s Report So far as every Director is aware at the date of this report, • Commentary on the company’s principal risks and there is no relevant audit information needed in preparation of uncertainties is set out in the Risk Management section the auditor’s report of which the auditor is not aware.

• A description of the company’s Risk Management The Directors have taken the steps they need to have taken objectives and policies and its exposures to risk arising from as Directors to make themselves aware of any relevant audit its use of financial instruments are set out in the Risk information and to establish that the auditor is also aware of Management section. that information.

Directors’ statement of responsibilities Mazars LLP is the appointed external auditor in accordance The Directors are responsible for preparing the Strategic with Section 489 of the Companies Act 2006. Mazars LLP Report, Directors’ Report and the financial statements in will be proposed for reappointment at the Annual General accordance with applicable law and regulations. Meeting of the Bank at which the Bank’s annual accounts and reports for the previous financial year are laid. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and applicable law. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Bank and of the profit or loss of the Bank for that period. Claire Bridel In preparing these financial statements, the Directors are Chief Executive Officer required to: 24 April 2019 • Select suitable accounting policies and then apply them consistently • Make judgements and accounting estimates that are reasonable and prudent • State whether IFRS as adopted by the European union have been followed subject to any material departures disclosed and explained in the financial statements

Annual Report 2018 21 22 Bank and Clients PLC Risk Management Risk Management

1.Overview critical mass to drive the efficacy of true portfolio management and the overarching business need to reach an ongoing cash- 1.1.Introduction positive operating position. Our risk management processes Effective risk management is fundamental to the successful have proved effective throughout 2018 in achieving this development of B&C’s business activities and in meeting the balance. Executive management remained closely involved in expectations of its shareholders and regulators. It is important important risk management initiatives, which have focused therefore to achieve an appropriate balance between risk and particularly on preserving appropriate levels of liquidity and reward in our business, and to continue to build and enhance capital, and effectively managing the risk portfolios. the risk management capabilities that assist in delivering our growth plans in a controlled and risk aware environment. 1.2. Focus Areas for 2019 In addition to continuing to maintain an oversight and Responsibility and accountability for risk management resides control environment that facilitates business development at all levels, from the Board down through the organisation to whilst ensuring that risk appetite is not exceeded the Bank’s each business manager and risk specialist. Risks are controlled risk management priorities include the following: at the level of individual exposures and at portfolio level, as well as in aggregate across all businesses and risk types. • to continue to develop and refine the risk governance framework to meet and maintain our corporate objective of 2018 has seen significant progress in the development of top quartile status in peer group; the Bank’s risk management capabilities at all levels, with • to ensure that the Bank’s capital, liquidity and funding the introduction of enhanced risk management and appetite profiles are at all times at least sufficient to support its frameworks, a new suite of risk policies and procedures which business strategy; capture the Bank’s full risk universe, the development of more advanced risk measurement tools and comprehensive MI • to further develop risk measurement capability and reliability; packages. • to further develop risk reporting capability and reliability; This has been achieved through a combination of staff additions • to ensure that operational resilience remains sufficiently and wider dissemination of an open, risk aware culture which robust to mitigate the risk of major disruption to the Bank’s permeates through and is understood by all B&C units. The activities; and importance of this all-inclusive, risk culture cannot be understated as it is the key enabler for introducing necessary enhancements • to ensure that the Bank’s resolution strategy remains credible whilst contemporaneously maintaining “business as usual”. and proportionate to the scale and complexity of the Bank’s activities. Risk management is now firmly at the core of the B&C’s operating structure in both design and, more importantly, practice. We seek to limit adverse variations in earnings and 2. Risk Ownership capital by managing risk exposures within agreed levels of risk The Bank adopts a three lines of defence approach to appetite. Our risk management approach includes minimising risk management generally. The guiding principle is that, undue concentrations of exposure, limiting potential losses structurally, ownership of risk demonstrably resides with the from stress events and ensuring the continued adequacy of business units and certain support functions (e.g. treasury all our financial resources. For the present however, we have (including deposits), finance, IT and Operations). also, at all times, to remain cognisant of both the need for

First Line of Defence Business Unit Principal owners of risk. The process of assessing, evaluating and measuring Management risk is ongoing and is integrated into the day-to-day activities of the business. This process includes implementing the Bank’s risk management framework, identifying issues and taking remedial action where required. Second Line of Defence Risk Management The risk management function is primarily accountable for designing Function and recommending the Bank’s risk management framework and policy. It provides oversight and independent reporting, ultimately to the Board through the Board Risk and Compliance Committee. Integral to these processes is the independent overview of the effectiveness of risk management by the first line of defense. Third Line of Defence Internal Audit Function Provides an independent assessment of the adequacy and effectiveness of the overall risk management framework and risk governance structures, and reports to the Board through the Board Audit Committee. The Bank outsources its internal audit duties to a leading third party service provider in order to ensure the required depth and breadth of coverage.

24 Bank and Clients PLC 3. Risk Governance 3.1 Approach and Structure B&C’s approach to risk management is based on well- established governance processes and relies on both individual responsibility and collective oversight, supported by comprehensive reporting.

this approach balances strong corporate oversight at Board The RMF is built upon committee structure which includes level with independent risk management structures within a number of risk focused bodies enabling visibility of the full individual business units. In accordance with Bank’s approach range of risk exposure to both executive management and the to risk ownership business unit heads are primarily responsible Board providing the opportunity to self-evaluate and consider for managing risk within each of their businesses in accordance the effectiveness of the group’s management of these risks. These with the principles established in the Bank’s Risk Management risk committees are integral to the Bank’s wider governance Framework and self-certify through Risk and Control Self structure further ensuring that risk management and awareness assessments (RCSa). the Risk Function oversees adherence is integral to the full range of the Bank’s activities. to these principles through independent monitoring and soft audit processes. all RCSas are reviewed each month by the The Board Risk and Compliance Committee (BRiCC) Bank’s Executive Risk Committee (ERiCC). and Board Audit Committee (BAC) review regularly the effectiveness of the Bank’s Risk Management Framework 3.2 strategy and report back to the Board. This is achieved through the Bank’s Strategy establishes the Bank’s mission statement and the examination of reports received from Internal Audit, provides a high-level vision of what the Bank aims to be, what it Compliance, Risk and Finance. BAC agrees the annual does and with whom, how and where it operates. Strategy is set internal audit plan. by the Directors, in consultation with Executive Management, and is formally reviewed annually. It may be reviewed and/ or reset more frequently should circumstances or business performance dictate. It is the principal driver of the Bank’s Business Plan and Risk appetite Framework and Statement. 3.3 High level Governance the Board is responsible for setting the Bank’s Risk Management Framework (RMF) which includes people, processes and systems allowing the identification, management, monitoring and reporting of risks.

Annual Report 2018 25 3.4 Committee Risk Management Responsibilities The following tables set out the principle responsibilities which relate directly to the RMF. Board Committees Committee Key RMF Responsibilities Board (Board) • To ensure the strategic development and effective management of the Bank’s operations • To approve the strategy, business plan, risk framework and appetite • To define and oversee capital raising strategy and execution • To ensure the financial soundness of the Bank; protecting depositors and treating customers fairly • To define and promote the Bank’s culture • To appoint key risk personnel and committee membership • To approve prudential regulatory submissions (ICAAP, ILAAP, RRP etc.) • To oversee compliance with the provisions of the Senior Managers’ Regime • To approve the budget • To approve the annual accounts • To undertake an annual governance and effectiveness review • To approve corporate borrowing • To approve its and its sub-committees’ Terms of Reference. Board Risk and • To monitor and oversee compliance of risk profile with risk appetite Compliance (BRiCC) • To monitor and oversee implementation of the RAF, including the linkage to the Bank’s culture, Business Plan and decision-making processes • To report any material deficiencies in the RAF to the Board and provide a comprehensive independent view of the RaF •To assess the design, effectiveness and integrity of risk and compliance management techniques and MI used to monitor the risk profile relative to the risk appetite limits and triggers • To recommend for approval to the Board the Bank's policies • To oversee the Bank’s Compliance and Financial Crime Programmes including but not limited to anti Money Laundering, anti Bribery & Corruption, Fraud and Whistleblowing.

Board audit (BaC) • To appoint and oversee the performance of internal and external audit function • To approve the internal audit annual plan • To receive internal audit reports in accordance with the audit plan and oversee completion of remedial actions • To approve accounting policies, all financial statements, including all material information presented with the financial statement • To approve provisions.

26 Bank and Clients PLC Committee Key RMF Responsibilities Nomination and • To review and recommend appointment and/or dismiss of any Executive or Non-Executive Remuneration (RemCo) Directors • To review and recommend any service contract and/or letter of appointment of any executive and Non-Executive Directors having considered the time required from each Non-Executive Director to fulfill their respective duties • To review and recommend on an annual basis, the structure, size and composition (including the skills, knowledge and experience) of the Board • To review and recommend on an annual basis, proposed remuneration for the Board, including where relevant, acting in its sole discretion, commissioning a benchmarking exercise to consider Board remuneration • To review and recommend on a periodic basis or as it deems necessary a succession plan taking into account the challenges and opportunities facing the Bank and the skills and expertise therefore needed on the Board and within the Executive team in the future • To approve the Directors’ Remuneration Policy • To recommend for approval to the Board the appointment of key Executives. Board Credit (BCC) • To challenge, consider and ratify any relevant ECC decisions which fall outside of its respective delegated authority • To veto or impose conditions upon any relevant ECC decisions • To recommend changes to the Board in the delegated authority enjoyed by ECC.

Executive Committees Committee Key RMF Responsibilities Executive (EXCo) • To establish in its sole discretion any sub-committees of the EXCo that it deems necessary and relevant to ensure that the EXCo can fulfill and carry out its duties • To approve the Terms of Reference and all members of all sub-Committees of the EXCo • To recommend to the BRiCC all policies and procedures adopted by the Bank • To approve the Signing Authorities • To approve the Purchasing Spending Authorities • To approve the Lending Authorities • To approve Specimen Signatures • To oversee the Risk Management Framework including the Risk Appetite Statement, and internal systems and controls • To review all Management Information • To develop and recommend for approval to the Board or a delegated Committee of the Board, the Bank’s Strategy; Business Plan; Risk appetite Statement; ICaaP; ILaaP; Recovery and Resolution Plan; annual accounts • To recommend for approval to the Board the Bank’s Budget • To review monthly management accounts • To consider Reputational Risk matters • To approve new products • To oversee appropriate management of IA findings and actions.

Annual Report 2018 27 Committee Key RMF Responsibilities Executive Risk and LEGAL Compliance (ERiCC) • To approve all standard form documentation to be issued by the Bank • To oversee all litigation matters • To approve Panel Firms.

RISK • To maintain the Bank’s Risk Register • To develop business continuity plans and monitoring thereof • To recommend for approval to the EXCo the Bank wide Risk Assessments • To review monthly RCSA output by department and oversee any recommendations and remediation relating thereto • To oversee Incident Management Plans and remediation exercises • To monitor RAS, dashboards and all breaches’ limits.

COMPLIANCE • To recommend for approval to the EXCo all policies, procedures and controls including the appropriate allocation of each policy to a policy owner • To oversee remediation of any material breaches of the Bank’s policies and procedures • To oversee remediation of all Internal Audit and findings for approval by the BAC • To oversee all conduct risk related issues including complaints • To approve the Compliance Training Programme • To centralise co-ordination of all open action points and appropriate remediation. Assets and liabilities (Alco) • To recommend for approval to the EXCo all policies, procedures and controls relating to financial risk management • To recommend for approval to the EXCo the Bank’s liquidity strategies, policies, processes and systems relating to the management of liquidity risk • To approve the Bank’s liquidity transactions and/or investments • To recommend for approval to the EXCo on an annual basis, the Bank’s funding strategy and plans, including contingency funding plans and relevant methods of implementation • To recommend for approval to the EXCo the Bank’s market risk parameters and exposure to market risk • To recommend for approval to the EXCo the Bank’s Individual Capital Adequacy Assessment Process (to include any additional or superseding requirements of the Prudential Regulation authority and other relevant regulators) and the ILaaP process • To recommend for approval to the EXCo the Bank’s FX and interest rate risk management strategies • To recommend for approval to the EXCo all treasury investments by the Bank • To review and approve all compensation payments made to customers. New Product (NPC) • To approve all new products and services launched by the Bank • To approval all material changes to current products and services of the Bank • To approval all material third party relationships and operations required to support the launch of any new product or material change to any existing product.

28 Bank and Clients PLC Committee Key RMF Responsibilities Operations and IT (OITC) • To oversee all operational aspects of the Bank including offices, people and systems • To oversee the Bank’s disaster recovery programme • To identify, manage and monitor operational risks • To review the results of the RCSA every month and oversee action plan • To develop IT strategy in relation to applications for processing the Bank’s transactions • To develop and oversee the Business Continuity Plan and Incident Management Plan • To measure and monitor operation costs, establish budget and monitor actual spend against budget • To provide oversight of IT and operational efficiency and integrity improvements • To approve all Operations and IT Policies and related procedures • To approve the Bank’s cyber risk assessment and programme • To approve the Bank’s outsourcing arrangements • To approve the Bank’s Technology infrastructure. Executive Credit (ECC) • To approve all new corporate lending • To approve all new mortgage lending • To approve wholesale counterparty risk lines • To approve changes made to an existing loan which might alter its risk profile • To approve changes to loan documentation • To approve decisions to restructure a loan • To approve court settlements regarding a loan • To approve security enforcements • To recommend credit loss provisions • To periodically review the Credit Risk Monitoring Report/Dashboard produced by the Mortgage team and the Corporate Lending team • To have oversight of all impaired loans as managed by the Watch List Committee • To review and approve Credit Policies and ensure adherence • To ensure adherence to the credit element of Risk Appetite Statement as approved by the Board • To provide functional sign-offs for any new loan including Compliance, Legal, Finance and Operations. Pricing (PC) • To recommend for approval to the ALCo all pricing matters relating to products and services. Watch List (WLC) • To recommend changes made to an existing loan which might alter its risk profile • To recommend decisions to restructure a loan • To recommend security enforcements • To recommend to the ECC credit loss provisions • To provide oversight of all impaired loans as managed by the Watch List Committee.

Annual Report 2018 29 Committee Key RMF Responsibilities Human Resources (HRC) • To approve all HR policies and procedures • To approve and provide oversight of the SMR and Certified Employee Programmes • To identify key man risk • To review staffing levels • To approve Employee Training Programme • To approve Board Training Programme • To provide oversight of efficient recruitment process of vacant positions • To provide oversight of the Bank’s annual review process • To approve all employment related pro forma contracts and/or documentation • To approve probation reviews and ratification thereof • To recommend for approval to the EXCo HR consultant and recruitment costs (if above the Delegated Spending authority threshold) • To periodically benchmark the Bank’s remuneration/benefits offering to other small banks for recommendation to the EXCo • To review and approve flexible working requests • To review and approve maternity and related leave requests • To review and approve study leave requests • To establish and monitor relevant HR KRIs/KPIs • To monitor staff leave usage and ensuring the implementation of compulsory leave for relevant staff • To approve business unit managers requests to permit roll over of pay/unused leave • To review and determine the SMR and Certification Regime employees.

3.5 Risk Appetite Framework and Risk Appetite The RAF is determined through evaluation of: Statement a) Business Strategy In addition to establishing the Bank’s Risk management the The Business Strategy defines the operating environment Board is responsible for determining the risks it is prepared within which the RAF is required to be effective and is drawn for the Bank to take in order to achieve its strategic objectives. from both the Bank’s Strategic Objectives and its Business These are summarised in the Board’s Risk Appetite Framework Plan. It identifies short and medium term business objectives (RAF) Risk Appetite Statement (RAS). and defines key stakeholders together with their expectations The RAF is a management instrument used to assist with the of the Bank and applies them to the Bank’s activities. alignment of overall corporate strategy, capital allocation, and Business objectives are considered under four broad categories risk. The RAS details the limits and triggers which define the boundaries of the Bank’s appetite for the various risks inherent • Financial to its business activities. • Business The RAF and RAS are formally reviewed at least annually. • Risk The ongoing appropriateness of limits and triggers and the • Culture. Bank’s risk profile generally are considered regularly by the Bank’s Executive Risk Committee (ERiCC) which meets at The Bank’s key stakeholders are considered to be its least monthly. Any amendments required as the Bank evolves • Shareholders must be referred to the Board, via BRiCC, for approval. • Customers

30 Bank and Clients PLC • Regulators these factors are then rationalised into six Principal Risk categories. • Employees • Suppliers. 4. principal Risks The Bank’s principal activities are In order to manage risk effectively its nature and potential • Mortgage lending impact must be understood. the Bank’s current activities and • CRE lending markets expose it to a variety of risks, which may generally be divided into six broad categories, as follows: • Corporate lending and advisory • Treasury and finance a) Financial and Business - capital Risk the risk that the Bank will be unable to generate sufficient • Operations and IT revenues and/or raise sufficient capital to maintain its business • Deposit taking. as a going concern and/or meet its regulatory thresholds. b) Business Risk Culture the Bank is actively managing its utilisation of capital whilst Consideration of the Business Risk Culture takes into account continuing to source additional capital funding. both the overall structure of the Bank in the context of its the Bank’s definition of financial and business risk excludes operating environment together with the risk profile and exposure Liquidity and Funding Risk which is the risk that the Bank of each of its business lines and products. This consideration fails to maintain sufficient liquidity to remain solvent and/ identifies the Bank’s key risk and performance drivers and the or meet regulatory thresholds and/or fund its lending degree and nature of inherent risk required to achieve its Business commitments. this is considered in Market, Liquidity and Strategy. It also considers the controls and indicators available to Funding Risk below. mitigate inherent risk and forms the framework from which risk limits, thresholds and parameters may be derived. Ongoing financial performance is monitored against budget at business unit and entity levels by both the relevant BUH These have been summarised as (Business Unit Head) and the CFO and reported to ERiCC, • Business objectives which are predicated on income and fees EXCo and BRiCC as standing agenda items. Certain financial generated from lending and associated activities across three and business risks are included within RaS measures and business lines predominantly, but not exclusively, within the limits. UK. Fulfilment of these objectives is dependent upon: Root causes of material financial and business risks – regulatory authorisation crystallising are generally related to strategy, typically by design – capital or implementation failure, and are often the final manifestation of failure to effectively manage other risk – funding and liquidity categories. Control is exercised at senior management level – market demand and may be through adjustment to target markets, resourcing, pricing, systems etc. – saleable products Where appropriate financial and business risks are also – effective delivery channels captured within departmental RCSa which are prepared and – effective underlying support systems self-certified on a monthly basis. Exceptions identified within • Stakeholder objectives which require the Bank to: RCSa are specifically presented for information and discussion at each ERiCC meeting. – be sustainable key metrics are reported and monitored in accordance with – be profitable the provisions of the Bank’s governance structure and capture, – provide competitive products inter alia, capital adequacy, earnings, budgeting and reporting and stress testing. – provide efficient service – be compliant with regulation and applicable laws b) credit Risk the risk of loss arising from a counterparty failing to meet its – maintain an operating environment which supports a repayment or performance obligations in accordance with capable workforce agreed terms. the provision of credit is the Bank’s principal – manage suppliers and outsourced services in a responsible activity and the volume of transactions means that the risk manner. of loss arising from any given counterparty failing to meet its repayment or performance obligations in accordance with

Annual Report 2018 31 agreed terms is inherently very high. The quantum, and these risks are monitored through “lessons learned” therefore materiality, of individual credit risk exposures does requirements in Watch List reports and the RCSa process. however vary considerably and may also be relatively volatile. the governance hierarchy provides a reporting conduit for observations to be relayed to senior management. In order to address these characteristics exposure to credit risk is monitored at portfolio and individual levels through a c) Market, liquidity and Funding Risk variety of means, stages in the credit lifecycle, frequencies and the risk of losses in on and off-balance sheet positions arising organisational seniority. All credit related matters are monitored from adverse movements in market prices/the risk that the Bank by ECC/WLC and overseen by ERiCC and, ultimately, BRiCC fails to maintain sufficient liquidity to remain solvent and/or through quarterly risk reporting and RAS measures. meet regulatory thresholds and/or fund its lending commitments.

The tables below highlights some of the metrics adopted. the drivers of market, liquidity and funding risk are outside of the Bank’s control. It follows that risk management in these Portfolio Exposure areas is highly dependent upon the effectiveness of monitoring and the insight it provides into reacting in the manner most Business line concentration appropriate to the Bank’s prevailing needs. Product concentration the Bank’s activities are such that the risk of losses arising Sector concentration from adverse movements in market prices is, in material terms, Jurisdictional concentration limited to interest rate and associated hedging risks. Regional concentration the Bank’s current exposure to interest rate risk, whilst carrying the propensity to be significant, is driven Portfolio return on risk predominantly by changes in base rate and portfolio structure Credit quality (portfolio rating/LGD) both of which are subject to evolution rather than revolution and has, therefore, low volatility.

Individual Exposure the Bank’s exposure to interest rate risk is monitored daily by the treasurer and CFO and reported formally to aLCo and Adherence to limits (exception reporting) ERiCC on a monthly basis. SLOD oversight is maintained through daily reports together with CRO membership of Adherence to terms (exception reporting) aLCo and ad hoc (exception) escalation of material changes Ongoing credit quality (overdue reviews) by the treasurer. Monthly aLCo reports include current and historic trend data. Ongoing credit quality (classified exposures) the CFO and CRO are both attendees at BRiCC which Materiality (new large exposures) ensures representation at senior management/Board level. Quarterly RaS reporting includes interest rate risk metrics. An element of credit loss is an inevitable consequence of a lending business and incidences within expected loss the Bank’s business model is predicated on retail deposits as parameters are viewed in this light. However credit losses it sole source of funding and liquidity. accordingly, significant consistently in excess of expectation (credit risk appetite) may adverse developments in the Bank’s deposit base represent be a direct consequence of a number of root causes including: a fundamental risk to the Bank’s sustainability and, from a • misguided or ill-conceived business strategy pricing perspective, profitability. Deposits are reported daily to all members of aLCo and PC. Daily reporting includes, • flawed or failed credit approval processes inter alia, maturity profiling and the loan to deposit ratio. It • flawed or failed credit assessment, structuring and evaluation is supplemented, on a weekly basis with a liquidity forecast processes (including models) which also includes the status of regulatory (and RaS) Liquidity Coverage Ratio and Net Stable Funding Ratio • flawed or failed ongoing credit monitoring. metrics as well as a survivability indication. Monthly aLCo reports include current and historic trend data. Excessive credit losses may also be an indirect consequence of operational risk e.g. Deposit pricing is a market related risk which is monitored, • flawed or failed drawdown processes and where appropriate, acted upon by PC on a monthly basis or more frequently where circumstances dictate. • flawed or failed loan documentation processes • fraud.

32 Bank and Clients PLC d) Operational Risk review and identification of key compliance risks to the Bank, The risk of loss resulting from inadequate or failed internal the implementation of relevant controls to those risks and processes, people and systems or from external events. This the monitoring of those controls. In doing so, the SLOD definition includes legal risk but excludes strategic and Compliance function monitors: reputational risk. Model Risk is also regarded as a subset of • national and international legislation/regulation and any operational risk. applicable upcoming regulatory developments Operational risk resides in all of the Bank’s activities and • relevant rules and guidance processes. It is characterised by its wide range of impact • market developments and indicators materiality, likelihood of occurrence and unpredictability. • industry best practice, typically by reviewing policies and The Bank’s primary defense against operational risk is through procedures relevant to regulators’ ad hoc publications the creation of an effective control environment through its policies and procedures and associated preventative/detective • regulatory findings and sanctions developments controls. Monitoring is therefore focused upon the performance • the SLOD Compliance function monitors all incidents and of the control environment and is differentiated between breaches of policy and procedures, across all activities, and Mission Critical Processes (those surrounding the Bank’s primary conducts root cause analysis of reasons to prevent further functions) which are incorporated in RAS metrics and other occurrences. The Bank monitors all regulatory submissions processes which are self-certified through the RCSA process. and reports to ensure completion in a timely manner. Any delays are reported. Reporting is to ERICC by way of MI Operational risk is monitored and reported upon on the basis production. of actual incidents and “near misses” on a business line basis by the respective BUH and captured within departmental RCSA, Exceptions identified within RCSA are specifically presented which are prepared and self-certified each month. for information and discussion at each monthly ERiCC meeting. RAS measures (which are included within the RCSA) Exceptions identified within RCSA are specifically presented are further overseen by BRiCC on a quarterly basis. for information and discussion at each monthly ERiCC meeting. RAS measures (which are included within the RCSA) Conduct Risk is the risk that an action of the Bank or any are further overseen by BRiCC on a quarterly basis. of its employees leads to customer detriment or negatively impacts market stability. Material conduct breaches are The high degree of self-determination demands a further reportable under SMCR and may trigger additional exposure level of monitoring surrounding incident reporting to compliance risk. RAS measures capture the key elements of and maintenance of effective controls. The provision of the bank’s exposure to conduct risk. independent assurance regarding the effectiveness of the control environment is a key tenet of the internal audit Exposure to conduct risk is monitored on an ongoing basis function and this is further supplemented by unannounced by SLOD Compliance in relation to complaints received “soft” audits undertaken periodically by SLOD. and their handling; ongoing compliance with policies and procedures in so far as TCF applies and other regulatory e) Regulatory Risk requirements relevant to the provision of the bank’s products For the purpose of this analysis Regulatory Risk is determined and services; training and employee development, fitness and to have three principal components: proprietary matters. In doing so, the SLOD Compliance • Compliance Risk - the risk of having the ‘licence to operate’ function monitors adherence to the Bank’s compliance withdrawn by a regulator, or having conditions or sanctions training programme; monitoring and testing the FLOD applied (retrospectively or prospectively) that adversely function for adherence to compliance with procedures impact the economic value of an enterprise (technical compliance) and the FCA Code of Conduct (behavioural compliance) both at Individual as well as Senior • Conduct Risk - the risk that an action of the Bank or any Manager Conduct level and reports on such matters to ERiCC of its employees leads to customer detriment or negatively by way of MI production. impacts market stability Exceptions identified within RCSA are specifically presented • Financial Crime - the risk that the Bank is used inadvertently for information and discussion at each monthly ERiCC to permit/facilitate financial crime activities including for meeting. RAS measures (which are included within the RCSA) example money laundering, terrorist financing, bribery, are further overseen by BRiCC on a quarterly basis. corruption, breach of sanctions, market abuse and/or fraud.

Exposure to compliance risk is monitored on an ongoing basis by the SLOD Compliance function. Compliance risk monitoring is achieved through, though not limited to, the

Annual Report 2018 33 Financial Crime is the risk that the Bank is used inadvertently otherwise) the Bank’s failure to act properly. Monitoring is to permit/facilitate financial crime activities including for therefore largely embedded within other risk management example money laundering, terrorist financing, bribery, oversight practices and the Bank’s risk culture generally. corruption, breach of sanctions, market abuse and/or fraud etc. The management of financial crime risk is monitored Reputational risk is reported upon on the basis of actual through a number of product specific systems, risk-based (e.g. incidents on a business line basis by the respective BUH and enhanced due diligence for high risk clients/accounts) controls captured within departmental RCSA, which are prepared and and general guidance advice to support the relevant BUH self-certified each month. in relation to specific Financial Crime risk. A business and Exceptions identified within RCSA are specifically presented product Financial Crime risk assessment is conducted annually for information and discussion at each monthly ERiCC which, inter alia, helps to ensure that the control environment meeting. RAS measures (which are included within the RCSA) is sufficiently broad and robust to deliver effective mitigation. are further overseen by BRiCC on a quarterly basis. f) Reputational Risk In addition all BUH and Senior Managers are required to be Reputational risk is the risk of loss resulting from damage particularly vigilant toward reputational risk and especially to the Bank’s reputation, whether justifiable or not. It has to those incidents which have the capacity to expand from characteristics similar to those associated operational risk but customer specific to a more wide-reaching impact. Whilst is less tangible. It is most typically generated as a by-product there are no specific RAS measures in this regard such of other risks crystallising as a consequence (perceived or instances are required to be reported immediately to EXCo.

Principal Risks Summary Table category Key Risk Driver(s) Mitigation Financial/Business • Capital adequacy • business • Plan to meet capital requirements on a forward- - Capital looking basis, through a rigorous Board challenged • be sustainable • stakeholders. annual Business Plan and ICAAP process • be profitable. • Ongoing review of business performance and active cost control. Credit (Product • saleable products • business • Consistently apply approved credit policies and delivery) • provide competitive • stakeholders. • Undertake ongoing management of the credit products portfolio through the Watchlist Committee. • be profitable. Market, Liquidity • funding and liquidity • business. • Maintain a sufficient level of High Quality Liquid and Funding Assets (HQLA) to absorb both macro-economic • market demand. and idiosyncratic liquidity shocks • Undertake an annual ILAAP • Active ongoing monitoring of the Bank’s liquidity position with monthly reporting to ALCO. Operational • effective delivery channels • business • Active identification, management and monitoring (Process) of operational risks via the OITC • effective underlying support • stakeholders. systems • Embedded and monitored Risk Control Self-Assessment (RCSA) through which the • provide efficient service effectiveness of controls is assessed and tested • maintain an operating • A culture and systems to support risk event environment which reporting supports a capable workforce • A focus on IT resilience and the emerging risks such as cyber to which the Bank may be exposed. • manage suppliers and outsourced services in a responsible manner.

34 Bank and Clients PLC Category Key Risk Driver(s) Mitigation Regulatory • regulatory authorisation • business • Regulatory horizon scanning (including • be compliant with • stakeholders. • A culture which focuses on fair customer outcomes compliance, regulation and applicable conduct and • Clear recruitment, training and performance laws financial crime) management processes • manage suppliers and • Remuneration policies which support the risk outsourced services in a appetite responsible manner. • Ongoing programme of customer checks including money laundering and fraud. Reputational • be compliant with • stakeholders. • Maintain a clear and well understood media and regulation and applicable communications policy laws • Maintain a vigilance towards potential reputational • maintain an operating risk events. environment which supports a capable workforce • manage suppliers and outsourced services in a responsible manner. the RaS is the final translation of the RaF into measurable Examples of potential mitigating actions include reviewing risk limits, thresholds and parameters. It provides the high- and changing risk limits, limiting exposures and hedging level metrics which enable management and Board to monitor strategies. that the Bank’s overall and specific exposures are within appetite. Ongoing compliance with RaS limits is monitored the principal stress tests presently applied by the Bank relate monthly by ERiCC and quarterly by BRiCC. the Risk to the primary risks associated with a high concentration Management Framework establishes escalation procedures in of lending predicated upon the Uk property market and the event of limit breach. sensitivities to its net interest margin. 4.1 Risk policies and procedures the Bank has also implemented reverse stress testing to complement the overarching stress testing programme. B&C has in place a suite of risk specific policies which Reverse stress testing identifies those scenarios that could underpin the RaF. these provide the final translation of the prevent the group from meeting its financial and strategic vision expressed in the strategy and high-level governance and objectives, and serves to inform what management action set out “what” the Bank does. Underlying procedures define should be taken to mitigate this risk. “how” the Bank operates. 4.3 emerging Risks 4.2 stress testing the Bank considers emerging risks to be forward-looking risks Stress testing involves identifying possible events or future as those risks that may impact the Bank but for which the changes in economic conditions that could have an impact on likelihood and impact cannot be readily determined at this the Bank and is an integral component of the group’s Internal time. Capital Adequacy Assessment Process (ICaaP), and is used to assess and manage the adequacy of regulatory and economic capital. the appropriateness of the stress scenarios and the severity of the relevant scenarios are approved by BRiCC based on ERiCC’s recommendations, and are reviewed at least annually.

Management considers the outcomes of stress testing on earnings and capital adequacy in determining risk appetite and, where necessary, determines appropriate mitigating actions to minimise and manage the risks induced by potential stresses.

Annual Report 2018 35 The following are currently considered emerging risks:

Emerging Risk Overview B&C Commentary Failure to comply The GDPR regulation which was Following initial implementation of GDPR with General Data implemented on 25 May 2018, strengthens compliance and ongoing monitoring programme Protection Regulation the data protection requirements for will be implemented and overseen by BRiCC. (GDPR) individuals in the EU. Brexit Brexit outcomes remain unclear at this time. the Bank continues closely to monitor and consider B&C is predominantly a Uk Bank and a the impact of Brexit on the Bank’s business strategy. key risk is considered a Brexit related general Internal stress testing indicates that the conservative downturn in the Uk economy. risk profile of its loan assets provides sufficient cushion to accommodate even the Bank of England worst case scenarios from a security coverage perspective. the Bank is of the opinion that the impact on borrower serviceability cannot reasonably be modelled at this time, given market uncertainty and absence of general consensus of outcome under any scenario. the Bank’s monitoring processes have nonetheless been further enhanced to offer better early indication of customers in hardship and there is established governance surrounding forbearance and treating customers fairly. the bigger potential challenge for the Bank’s business is considered to be a general economic slowdown and loss of consumer confidence which, should either occur, would impact on the Bank’s growth strategy; our current view is however that the pre-Brexit uncertainty is at least as great an impairment to new mortgage business, in particular, and that in the short-term activity will increase once the terms of Brexit have been finalised. Heightened There are an ever increasing number of new The Bank continues to monitor closely market trends competition banks being approved by the regulator as well and consider the external environment when making an increasing presence of non-bank lenders. pricing decisions. This may lead to margin compression or increased cost of funds. Cyber crime Cyber-crime remains an ever increasing threat The OITC reviews the Bank’s IT strategy and seeks to notably in respect of data breaches. embed information security awareness across the Bank. Failure of an outsource The Bank has a number of outsource or third- The Bank maintains governance and controls in provider or supplier party arrangements, the failure of one of these relation to selection as well as ongoing monitoring of could impact the Bank operationally. outsourced providers or suppliers.

5. Capital Risk The Bank’s capital resources are reflected below: Capital risk is the risk that the Bank has insufficient capital 2018 2017 to cover its regulatory capital requirements and support the £’000 £’000 business growth needs. During 2018, the CRC was actively Core tier 1 involved in seeking additional capital to ensure that the Bank mitigates capital risk. Ordinary share capital 38,602 27,602 Retained (loss) including current year (loss) (22,673) (17,493) total tier 1 capital and total capital resource 15,929 10,109

36 Bank and Clients PLC In March 2019 an additional £2.7m cash capital injection 6.1 Maximum exposure to credit risk increased the total tier 1 capital and capital resources to The Bank’s maximum exposure to credit risk for loans, debt £18.6m as at 31 March 2019. securities, derivatives and other on-balance sheet financial instruments is the carrying value and for loan commitments the Bank’s RWA, capital and leverage ratios are shown below: is the full amount of any commitment to lend that is either 2018 2017 irrevocable or revocable only in response to material adverse change. Risk weighted assets - Pillar 1 (£'000) 73,816 52,178 B&C’s net credit risk exposure as at 31 December 2018 has Common Equity tier 1 Ratio (%) 21.6 19.4 increased by in excess of 41% largely due the increases in Leverage Ratio (%) 9.0 7.9 gross loans and advances to customers and cash balances with central banks. 6. credit Risk 2018 2017 Credit Risk is the largest single risk category effecting the Audited £’000 £’000 Bank. The risk of credit loss is determined through application of the following metrics: Assets Treasury assets 38,556 46,526 i. the probability of default by the customer on contractual obligations of which: ii. the exposure at default by the customer on contractual Cash and balances at central banks 34,313 28,263 obligations Loans and advances to banks 3,257 18,263 iii. the likely recovery of defaulted obligations Debt instruments at fair value through 986 - other comprehensive income The Board seeks to mitigate credit risk by: Loans and advances to customers 135,834 79,786 • Focusing on niche market segments where it has specific expertise; of which: Residential property 108,508 59,750 • Limiting the absolute size of exposures, and their loan to value percentage; Commercial property 19,185 5,750 Corporate loans 8,141 14,286 • Maintaining detailed lending policies; • Regularly reviewing credit limits on all lending, including 174,390 126,312 treasury and interbank lines; Contractual commitments 16,429 6,415 • Maintaining a rigorous underwriting process; Maximum exposure to credit risk 190,819 132,727 • D eveloping internal models to assess customer probability of default and loss given default Collateral on secured loans • Actively monitoring the performance, collections and All residential and commercial property loans are secured recoveries of credit portfolios against property. Corporate loans are secured against fixed and floating charge against the borrowers’ company’s assets. • Stress testing and scenario analysis, to simulate a range of The general creditworthiness of a corporate body tends to be outcomes and calculate the risk impact of macroeconomic the most relevant indicator of a loan extended to it. However, and idiosyncratic conditions. collateral provides additional security and the Bank generally Internal models have been developed to better assess customer requests that corporates borrowers provide it. probability of default, exposure at default and loss given 6.2 Credit quality and performance of loans default as well as external models being used to provide independent data, to support the internal analysis. these The tables below break out the Bank’s maximum credit risk credit risk models are used throughout the Bank to support exposure to loans and advances, based on: the analytical elements of the credit risk management • Whether they are performing i.e. neither past due or framework, in particular the quantitative risk assessment as impaired part of the ongoing credit monitoring as well as portfolio level analysis and reporting. • Past due but not individually impaired or individually impaired.

Annual Report 2018 37 Audited Corporate Mortgages Real Estate Corporate Loans Treasury Total Stage 1 £’000 £’000 £’000 £’000 £’000 Balance Imp Balance Imp Balance Imp Balance Imp Balance Imp Balance at 31 Dec 2017 65,587 88 -- 14,287 - 46,526 - 126,400 88 IFRS9 opening adjustment ---- - 194 --- 194 Move to Stage 2 ------Move from Stage 2 ------Move to Stage 3 ------Move from Stage 3 ------Current year adjustment 47,197 59 15,154 96 (6,024) (70) (7,970) - 48,357 85 Balance at 31 Dec 2018 112,784 147 15,154 96 8,263 124 38,556 - 174,757 367

Corporate Mortgages Real Estate Corporate Loans Treasury Total Stage 2 £’000 £’000 £’000 £’000 £’000 Balance Imp Balance Imp Balance Imp Balance Imp Balance Imp Balance at 1 Jan 2018 ------IFRS9 opening adjustment ------Move to Stage 1 ------Move from Stage 1 ------Move from Stage 3 ------Current year adjustment ------

Balance at 31 Dec 2018 ------

Corporate Mortgages Real Estate Corporate Loans Treasury Total Stage 3 £’000 £’000 £’000 £’000 £’000 Balance Imp Balance Imp Balance Imp Balance Imp Balance Imp Balance at 31 Dec 2017 5 5 - - 2,922 2,922 -- 2,927 2,927 IFRS9 opening adjustment ------Move to Stage 1 ------Move from Stage 1 ------Move to Stage 2 ------Current year adjustment (1) (1) -- (2,922) (2,922) -- (2,923) (2,923) Balance at 31 Dec 2018 4 4 ------4 4

38 Bank and Clients PLC Impairment losses in 2018 assessed on expected loss basis refer IFRS9 note 1.9 and 28. Residential Commercial Corporate Treasury Audited property property loans assets Total 2017 £’000 £’000 £’000 £’000 £’000 Neither past due nor impaired 58,929 5,758 14,287 46,526 125,500 Past due but not impaired 669 - - - 669 Past due and impaired 236 - 2,922 - 3,158 59,834 5,758 17,209 46,526 129,327 Allowance for impairment losses (85) (8) (2,922) - (3,015) Net balance sheet carrying value 59,749 5,750 14,287 46,526 126,312

Impairment losses in 2017 assessed on IAS39 basis refer note 1.20. 6.2.1 Arrears Staging is driven by arrears as follows by: Stage 1 Stage 2 Stage 3 Mortgages 0 to 90 days 91 to 120 days 121 days + Commercial Retail Estate 0 to 30 days 30 to 60 days 121 days + Corporate Loans 0 to 30 days 30 to 60 days 121 days +

The table below shows the arrears status:

Residential Commercial Corporate Treasury Audited property property loans assets Total 2018 £’000 £’000 £’000 £’000 £’000 0-1 month 436 - - - 436 1-2 month 197 - - - 197 2-3 month 1,725 - - - 1,725 3-6 month - - - - - Greater than 6 months* - - - - - 2,358 - - - 2,358 *The corporate loan included in greater than 6 months is after capital reductions have been applied

Residential Commercial Corporate Treasury Audited property property loans assets Total 2018 £’000 £’000 £’000 £’000 £’000 0-1 month 658 - - - 658 1-2 month 11 - - - 11 2-3 month - - - - - 3-6 month - - - - - Greater than 6 months - - - - - 669 - - - 669

Annual Report 2018 39 6.3 Forbearance Forbearance is any arrangement made with the borrower to delay foreclosure. Some borrowers may experience financial difficulties which impact their ability to meet their obligations as per the contractual terms.T he Bank has a policy and process for contacting borrowers who have missed payment and their loan has gone into arrears. The Bank may on a case-by-case basis consider the use of forbearance measures. There were nil forbearance cases at 31 December 2018 (2017: nil). 6.4 Credit concentration by segment Concentration risk arises from having high or excessive exposures to one sector, geographical area or counterparty which can lead to correlated losses in the event of an adverse movement in the strength or creditworthiness of the borrower(s) or security. Concentrations can arise from large individual exposures or a number of exposures to a group of related counterparties.

The Bank has large exposures for regulatory purposes (i.e. an exposure which exceeds 10% of the Bank’s CET 1 Capital) to individual counterparties as shown in the table below: Audited Non-financial institution 2018 2017 large exposures £’000 £’000 Corporate loans 8,141 14,287 Secured on freehold property 34,351 26,003 42,492 40,290

The loans within the mortgage lending portfolio are analysed by indexed loan-to-value (LTV) in the following table:

Audited 2018 2017 Gross LTV% £’000 £’000 0%-30% 10,623 8,260 30%-50% 29,773 15,292 50%-60% 44,368 22,026 60%-70% 37,233 16,756 70%-80% 5,941 3,253 80%-100% 4 5 127,942 65,592

40 Bank and Clients PLC The loans within the lending portfolio are analysed by balance The overall exposure to foreign currency market risk at 31 in the following table: December 2018 is less than £0.1m (2017: £0.1m).

Audited If the Euro strengthened against GBP by 10% the impact would be a £2k (2017: £32k) reduction in profit. Gross mortgage loan size 2018 2017 by outstanding balance £’000 £’000 7.2 Liquidity Risk £0 - £50k 2,215 2,724 Liquidity risk represents the risk of being unable to pay liabilities as they fall due and arises from the mismatch in cash £50k - £100k 1,721 1,993 flows generated from current and expected assets, liabilities £100 k- £150k 801 815 and derivatives. The Bank’s policy is to maintain a robust liquidity management framework with a liquidity risk appetite £150k - £500k 35,597 16,380 based on maintaining sufficient liquidity resources to survive a £500k - £1m 30,132 17,643 variety of stress events. >£1m 57,476 26,037 Under the framework: 127,942 65,592 • The Bank ensures that there is adequate liquidity by operating within a clear and well defined risk appetite. the 6.5 Credit risk of treasury assets Risk appetite Statement directly reflects the overall liquidity adequacy rule to maintain sufficient liquidity resources Credit risk of treasury assets is considered to be relatively low to meet the Bank s liquidity outflows under both normal and and is made up of exposure to Bank of England, High Street ' stressed conditions. the Bank assesses the amount of Banks and the European Central Bank. No assets are held for liquidity that needs to be held by running potential stress speculative purposes or actively traded. Certain liquid assets scenarios and measuring these outcomes against the quality are held in order to maintain the appropriate level of High and quantity of the Bank’s liquidity portfolios Quality Liquid Assets (HQLA) in order to maintain regulatory liquidity ratios. • The absolute minimum level of liquidity held in liquid assets is defined by the Bank’s Individual Liquidity adequacy Credit risk on derivatives is controlled through a policy of assessment Process as agreed with the Prudential Regulation only entering into contracts with a small number of UK credit authority institutions, with an investment grade credit rating. Derivative contracts are collateralised through the receipt/payment of • The liquidity framework governance structure operates daily cash margin calls to cover the mark to market value of within the Board’s delegated authorities and reports into the the asset/liability. At 31 December 2018, the market value of Executive Committee and the Board. the Treasury derivatives was a liability of £55k (2017: £16k). and Finance functions monitor liquidity using cash flow liquidity reports together with movement reports, liquidity performance indicators, portfolio analysis and maturity 7. Market, Liquidity and Funding Risk profiles. the asset and Liability Committee (aLCo) are required to review on a weekly basis proposed daily cash flows There is the risk of losses in on and off-balance sheet positions to ensure key liquidity performance indicators are met. any arising from adverse movements in market prices/the risk that changes in legislation, regulation and other guidance which the Bank fails to maintain sufficient liquidity to remain solvent may affect the Bank’s liquidity position are reported directly and/or meet regulatory thresholds and/or fund its lending to the Chief Financial Officer. aLCo are required to receive commitments. and review monthly liquidity analysis and profiles and report directly to the Executive Committee, which makes 7.1 Market Risk recommendations to the Board for its approval. The Bank makes loans and takes deposits in Sterling, Euros and Canadian Dollars and uses foreign exchange derivative contracts to manage its exposure to foreign exchange rate movements. The Bank’s policy is to minimise foreign exchange exposure and monitors exposure daily against approved limits.

At 31 December 2018, the Bank held £1.0m (2017: £16m) assets in Euro with a net exposure of less than £0.1m (2017: £0.1m) and £nil (2017: £2.2m) assets in Canadian Dollars, which have all matured in 2018, with a net exposure of £nil (2017: £nil). The Canadian Dollar exposure was managed using foreign exchange derivatives, see note 22.

Annual Report 2018 41 The table below analyses the Bank’s assets and liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date.

Assets and liabilities – maturity groupings Repayable on Within 3 Audited Demand months 3-12 months 1-5 years After 5 years Total 2018 £’000 £’000 £’000 £’000 £’000 £’000 Assets Cash and cash at central banks 34,313 - - - - 34,313 Loans and advances to banks 3,257 - - - - 3,257 Gross loans and advances to 116 4,554 12,565 95,920 31,020 144,175 customers Investment securities - - 42 898 - 939 Financial assets 37,686 4,554 12,607 96,818 31,020 182,684 Liabilities Customer accounts (20,423) (71,265) (52,059) (15,542) - (159,289) Derivative financial instruments - (14) (44) (181) - (239) Other liabilities - (607) - - - (607) Financial liabilities (20,423) (71,886) (52,103) (15,723) - (160,135) Net liquidity gap 17,263 (67,332) (39,496) 81,095 31,020 22,549

Repayable on Within 3 Audited Demand months 3-12 months 1-5 years After 5 years Total 2017 £’000 £’000 £’000 £’000 £’000 £’000 Assets Cash and cash at central banks 28,263 - - - - 28,263 Loans and advances to banks 18,263 - - - - 18,263 Gross loans and advances to customers - 3,557 9,918 55,841 33,736 103,052

Financial assets 46,526 3,357 9,918 55,841 33,736 149,578 Liabilities Customer accounts (13,634) (54,430) (43,434) (5,122) - (116,620) Derivative financial instruments - - (16) - - (16) Other liabilities - (497) - - - (497) Financial liabilities (13,634) (54,927) (43,450) (5,122) - 117,133 Net liquidity gap 32,892 (51,370) (33,532) 50,719 33,736 32,445

42 Bank and Clients PLC 7.3 Interest Rate Risk The Bank uses a number of measures to monitor interest rate Interest rate sensitivity arises from the relationship between risk and sensitivity. One such measure evaluates the difference interest rates and net interest income resulting from the in principal value between assets and liabilities repricing in periodic repricing of assets and liabilities. Balances with the various gap periods. The following table gives an analysis of Bank of England are remunerated at Bank of England base rate. the repricing periods of assets and liabilities on the Statement of Financial Position at 31 December 2018. The interest rate Interest rate risk consists of: sensitivity gap at longer maturities has reduced as a result of the launch of fixed rate deposit products to mitigate the fixed • Exposure to the timing of repricing of asset and liabilities or interest rate exposure on lending. • To a sudden spike in a key underlying base reference measure. Contractual cash flows are allocated to time bands in the table below by reference to the earlier of the next contractual interest Management monitor interest rate risks on a monthly basis rate repricing date and the residual maturity date. by performing a sensitivity analysis on the Bank’s financial assets and financial liabilities.T he Bank’s policy is to monitor the potential loss as a result of a rise or fall in market interest rates of 200 basis points against approved limits. The potential impact of a rise or fall in market interest rates of 200 basis points should have a +/- impact of £117k for the results for the year (2017: £250k).

Assets and liabilities by next contractual interest rate reset:

Within 3 After 5 Non interest Audited months 3-12 months 1-5 years years bearing Total 2018 £’000 £’000 £’000 £’000 £’000 £’000 Assets Cash and cash at central banks 34,313 - - - - 34,313 Loans and advances to banks 3,257 - - - - 3,257 Loans and advances to customers 100,245 4,836 30,753 - - 135,834 Investment securities - - 986 - - 986 Other assets - - - - 1,341 1,341

Total assets 137,815 4,836 31,739 - 1,341 175,731 Liabilities Customer accounts (111,073) (32,191) (15,876) - - (159,140) Derivative financial instruments (18,838) (2,000) 20,783 - - (55) Other liabilities - - - - (607) (607) Total liabilities (129,911) (34,191) 4,907 - (607) (159,802) Total interest rate sensitivity gap 7,904 (29,355) 36,646 - 734 15,929

Cumulative interest rate sensitivity gap 7,904 (21,451) 15,195 15,195 15,929

Annual Report 2018 43 Within 3 After 5 Non interest Audited months 3-12 months 1-5 years years bearing Total 2017 £’000 £’000 £’000 £’000 £’000 £’000 Assets Cash and cash at central banks 28,263 - - - - 28,263 Loans and advances to banks 18,263 - - - - 18,263 Loans and advances to customers 65,789 1,946 11,882 169 79,786 Investment securities ------Other assets - - - - 1,126 1,126

Total assets 112,315 1,946 11,882 169 1,126 127,438 Liabilities Customer accounts (94,048) (18,481) (3,386) - - (115,915) Derivative financial instruments (16) - - - - (16) Other liabilities - - - - (1,398) (1,398) Total liabilities (94,064) (18,481) (3,386) - (1,398) (117,329) Total interest rate sensitivity gap 18,251 (16,535) 8,496 169 (272) 10,109

Cumulative interest rate sensitivity gap 18,251 1,716 10,212 10,381 10,109

44 Bank and Clients PLC INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BANK AND CLIENTS PLC

Opinion Conclusions relating to going concern We have audited the financial statements of Bank and Client We have nothing to report in respect of the following matters PLC (the ‘Bank’) for the year ended 31 December 2018 in relation to which the ISAs (UK) require us to report to you which comprise the Statement of Profit or Loss and Other where: Comprehensive Income, the Statement of Financial Position, the Statement of Changes in Equity, the Statement of Cash • The Directors’ use of the going concern basis of accounting Flows and notes to the financial statements, including a in the preparation of the financial statements is not summary of significant accounting policies.T he financial appropriate; or reporting framework that has been applied in their preparation • The Directors have not disclosed in the financial statements is applicable law and International Financial Reporting any uncertainties that may cast significant doubt about the Standards (IFRSs) as adopted by the European Union. Bank’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the In our opinion, the financial statements: date when the financial statements are authorized for issue. • give a true and fair view of the state of the Bank’s affairs as at 31 December 2018 and its loss for the year then ended; Key audit matters • have been properly prepared in accordance with IFRSs as Key audit matters are those matters that, in our professional adopted by the European Union; and judgement, were of most significance in our audit of the • have been prepared in accordance with the requirements of financial statements of the current period and include the the Companies Act 2006. most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the Basis for opinion allocation of resources in the audit; and directing the efforts We conducted our audit in accordance with International of the engagement team. These matters were addressed in the Standards on auditing (Uk) (ISas (Uk)) and applicable context of our audit of the financial statements as a whole, law. Our responsibilities under those standards are further and in forming our opinion thereon, and we do not provide a described in the auditor’s responsibilities for the audit of the separate opinion on these matters. financial statements section of our report. We are independent We summarise below the key audit matters in forming of the Bank in accordance with the ethical requirements our audit opinion above, together with an overview of the that are relevant to our audit of the financial statements in principal audit procedures performed to address each matter the Uk, including the FRC’s Ethical Standard, as applied to and, where relevant, key observations arising from those public interest entities and we have fulfilled our other ethical procedures. responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient These matters, together with our findings, were and appropriate to provide a basis for our opinion. communicated to those charged with governance through our Audit Completion Report. the impact of uncertainties due to United kingdom exiting the European Union on our audit. the Directors’ view on the impact of Brexit is disclosed on page 36. the terms on which the United kingdom may withdraw from the European Union, are not clear, and it is therefore not currently possible to evaluate all the potential implications to the Bank’s trade, customers, suppliers and the wider economy.

We considered the impact of Brexit on the Bank as part of our audit procedures, applying a standard firm wide approach in response to the uncertainty associated with the Bank’s future prospects and performance.

However, no audit should be expected to predict the unknowable factors or all possible implications for the Bank and this is particularly the case in relation to Brexit.

Annual Report 2018 45 Area of focus How our audit address the area of focus credit Risk in relation to loan loss provisions We have assessed the design, and tested the operating effectiveness, of the key controls operating at the Bank in relation to credit risk for all financial Loan loss provisions are an inherently judgemental assets and relevant financial commitments. Furthermore we performed the area due to the use of subjective assumptions and a following procedures: high degree of estimation. • We have reviewed all watch list loans and a sample of performing loans; the implementation of IFRS 9 has changed the focus • Performed credit assessment for a sample of performing financial assets, of the impairment provisions from an incurred loss with focus on the corporate loans; model to an expected loss model. • Performed substantive procedures to identify indicators of impairment the Bank developed a model to determine the or deterioration in credit quality including verifying post balance sheet expected losses requiring judgement to the input date receipts; and parameters and assumptions. • We have reviewed the collateral valuation report on a sample of the accounting policy is set out in note 1.9 of the mortgages. financial statements. We have assessed the model used by management for expected credit loss Note 1.17 sets out the critical estimates applied calculations under IFRS 9. We have: in determining the ECL in respect of mortgages, corporate loans and corporate real estate loans. • Considered the appropriateness of methodology used by management • Reviewed assumptions used in applying the methodology adopted and the expected credit loss provision is set out in note 6 assessed for reasonableness; of the financial statements. • Tested the completeness of the loan portfolio applied to the model; the impact of first adoption is set out in note 28 of the financial statements. • Tested the process in place at the Bank to allocate loans to the IFRS 9 risk categories; and • Assessed the suitability and relevance of the key assumptions applied to determine probability of default and loss given default.

We found the approach taken in respect of loan loss provisions to be consistent with the requirements of IFRS 9 and judgements made were reasonable.

46 Bank and Clients PLC Area of focus How our audit address the area of focus Risk of fraud in revenue recognition We have assessed the design, and tested the operating effectiveness of the key controls operating at the Bank in relation to revenue recognition, in as the majority of the Bank’s revenue is system particular around fee income and expense recognised on an EIR basis. generated, the risk of fraud in revenue recognition This included testing data inputs and checking calculations. specifically relates to the recognition of fees and commission income which are recognised on an We have performed substantive procedures across all forms of revenue in effective interest rate method. the year as follows: as set out in note 1.7. all transaction cost, premiums, • We verified the appropriateness of the basis of fees recognised in the discounts and fees are an integral part of the EIR income statement; calculation. • We recalculated income on all instruments that generated material revenue in the year and a sample of the remainder by recalculating the Judgements are made to determine whether fees fee and interest income in accordance with the underlying contract; are recognised as EIR or recognised when a service has been performed. Judgements are also made in • Re-performed the EIR calculations; determining the average expected life of the loans . • We assessed management’s consideration as to recognition of fees as EIR or on the performance of a service; and • We considered the appropriateness of judgements applied, relative to the Bank’s specific circumstances, in determining the basis of evenuer recognition.

For fees, we performed tests of detail including inspecting the loan/fee agreements to verify the accounting treatment applied and challenged management’s judgement regarding fee income recognition.

We found that the judgements applied in determining the basis for revenue recognition were appropriate and income recognised in accordance with IFRS 15 and IFRS 9. Going concern basis of preparation Our audit procedures over the applicability of the going concern basis of preparation of the financial statements and the adequacy and the Directors have summarised their assessment appropriateness of the related financial statement disclosures included, of the applicability of the going concern basis of but were not limited to, the following: preparation within the Directors’ Report on page 20 and in the summary of significant accounting policies • Verified the additional £2.7m capital injection in March 2019 ; in note 1.3 of the financial statements. theB ank has • Reviewed and challenged management assessment of going concern reported a loss on operations during the period and including assessment of scenarios considered up to December 2020; reported losses since 2014. • We have verified the principal assumptions and input of the data into the Bank is required to maintain adequate regulatory the forecast financial impact of the most extreme scenario; capital and has in the past been reliant on its • Reviewed the adequacy of disclosures provided in the financial shareholders. It received a capital injection of £2.7m statements and whether management’s consideration of the in March 2019 and the shareholder has committed uncertainties identified represented a material uncertainty. to a further £1m capital injection in april 2019. this, together with the forecasts and projections The Directors have a reasonable basis for concluding that the going incorporating a number of scenarios and potential concern basis of preparation of the financial statements is appropriate. strategies up to December 2020, demonstrates the We found the related financial statement disclosures are adequate and Bank has sufficient capital to mitigate continued losses appropriate. and permit the Bank to adopt the going concern basis of accounting.

In the light of the above, we have identified the applicability of the going concern basis of preparation of financial statements and the adequacy and appropriateness of the related financial statement disclosures a key audit matter.

Annual Report 2018 47 Our application of materiality timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating The scope of our audit was influenced by our application the effect of misstatements, both individually and on the of materiality. We set certain quantitative thresholds for financial statements as a whole. asedB on our professional materiality. These, together with qualitative considerations, judgement, we determined materiality for the financial helped us to determine the scope of our audit and the nature, statements as a whole as follows:

Overall materiality £223,000 How we determined it 1.5% of net assets was used in determining our materiality. Rationale for benchmark applied We believe that the benchmark of net assets is most appropriate because the Bank is still in the “start-up” phase and is still loss making. Furthermore relatively low income is being generated from the interest. Results are volatile as a result of the start-up phase. Equity has remained more stable due to the need to maintain sufficient levels of capital. We have therefore used equity given its importance to the Bank’s solvency and regulatory capital resources. Performance materiality Performance materiality is set to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in the financial statements exceeds materiality of the financial statements as a whole.

Similarly, performance materiality relating to a materiality level determined for a particular class of transactions, account balance or disclosure set to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in that particular class of transactions, account balance or disclosure exceeds the materiality level for that particular class of transactions, account balance or disclosure. Performance materiality of £156,000 was applied in the audit. Reporting threshold We agreed with the Audit, Risk and Compliance Committee that we would report to them misstatements identified during our audit above £6,700 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

An overview of the scope of our audit work to be able to give an opinion on the financial statements as a whole. We used the outputs of a risk assessment, our as part of designing our audit, we determined materiality understanding of the Bank and the accounting processes and and assessed the risk of material misstatement in the financial controls and its environment and considered qualitative factors statements. In particular, we looked at where the Directors in order to ensure that we obtained sufficient coverage across made subjective judgements such as making assumptions on all financial statement line items. significant accounting estimates. Our tests included, but were not limited to, obtaining We gained an understanding of the legal and regulatory evidence about the amounts and disclosures in the financial framework applicable to the Bank and the industry in which statements sufficient to give reasonable assurance that the it operates. We considered the risk of acts by the Bank which financial statements are free from material misstatement, were contrary to the applicable laws and regulations including whether caused by irregularities including fraud or error, fraud. We designed our audit procedures to respond to those review of minutes of Directors’ meetings in the year and identified risks, including non-compliance with laws and enquiries of management. as a result of our procedures, regulations (irregularities) that are material to the financial we did not identify any key audit Matters relating to statements. irregularities, including fraud.

We focused on laws and regulations that could give rise to a the risks of material misstatement that had the greatest effect material misstatement in the financial statements, including, on our audit, including the allocation of our resources and but not limited to, the Companies act 2006. We tailored effort, are discussed under “key audit matters” within this the scope of our audit to ensure that we performed sufficient report.

48 Bank and Clients PLC the primary responsibility for the prevention and detection Strategic Report or the Directors’ Report. of irregularities including fraud rests with both those charged with Governance and management. as with any audit, there We have nothing to report in respect of the following remained a risk of non-detection of irregularities, as these matters in relation to which the Companies Act 2006 may involve collusion, forgery, intentional omissions, requires us to report to you if, in our opinion: misrepresentations or the override of internal controls. • adequate accounting records have not been kept by the Bank or returns adequate for our audit have not been received from branches not visited by us or other information • the financial statements are not in agreement with the the Directors are responsible for the other information. accounting records and returns; or the other information comprises the information included in the annual Report and accounts other than • certain disclosures of Directors’ remuneration specified the financial statements and our auditor’s report thereon. by law are not made; or Our opinion on the financial statements does not cover • we have not received all the information and the other information and, except to the extent otherwise explanations we require for our audit. explicitly stated in our report, we do not express any form of assurance conclusion thereon. Responsibilities of Directors In connection with our audit of the financial statements, our responsibility is to read the other information and, as explained more fully in the Directors’ responsibilities in doing so, consider whether the other information is statement set out on page 21, the Directors are responsible materially inconsistent with the financial statements or for the preparation of the financial statements and for being our knowledge obtained in the audit or otherwise appears satisfied that they give a true and fair view, and for such to be materially misstated. If we identify such material internal control as the Directors determine is necessary to inconsistencies or apparent material misstatements, we enable the preparation of financial statements that are free are required to determine whether there is a material from material misstatement, whether due to fraud or error. misstatement in the financial statements or a material misstatement of the other information. If, based on the In preparing the financial statements, theD irectors are work we have performed, we conclude that there is a responsible for assessing the Bank’s ability to continue as material misstatement of this other information, we are a going concern, disclosing, as applicable, matters related required to report that fact. to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate We have nothing to report in this regard. the Bank or to cease operations, or have no realistic alternative but to do so. opinions on other matters prescribed by the companies Act 2006 Auditor’s responsibilities for the audit of the financial statements In our opinion, based on the work undertaken in the course of the audit: Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from • the information given in the Strategic Report and the material misstatement, whether due to fraud or error, Directors’ Report for the financial year for which the and to issue an auditor’s report that includes our opinion. financial statements are prepared is consistent with the Reasonable assurance is a high level of assurance, but is financial statements; and not a guarantee that an audit conducted in accordance • the Strategic and the Directors’ Report have been with ISas (Uk) will always detect a material misstatement prepared in accordance with applicable legal when it exists. Misstatements can arise from fraud or requirements. error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Matters on which we are required to financial statements. report by exception a further description of our responsibilities for the In light of the knowledge and understanding of the Bank audit of the financial statements is located on the and its environment obtained in the course of the audit, Financial Reporting Council’s website at www.frc.org.uk/ we have not identified material misstatements in the auditorsresponsibilities. this description forms part of our Auditor’s Report. other matters which we are required to address Following the recommendation of the audit committee, we were appointed by the audit, Risk and Compliance Committee on 26 October 2018 to audit the financial statements for the year ending 31 December 2018 and subsequent financial periods. the period of total uninterrupted engagement is 5 years, covering the years ending 31 December 2014 to 31 December 2018. the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Bank and we remain independent of the Bank conducting our audit.

Our audit opinion is consistent with the additional report to the audit, Risk and Compliance committee. use of the audit report this report is made solely to the Bank’s members as a body in accordance with Chapter 3 of Part 16 of the Companies act 2006. Our audit work has been undertaken so that we might state to the Bank’s members those matters we are required to state to them in an auditor’s report and for no other purpose. to the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Bank and the Bank’s members as a body for our audit work, for this report, or for the opinions we have formed.

Greg simpson Senior Statutory Auditor for and on behalf of Mazars LLP, Chartered accountants and Statutory auditor tower Bridge House St katharine’s Way London E1W 1DD

24 april 2019

50 Bank and Clients PLC Financial Statements For the year ended 31 December 2018 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018

2018 2017 Note £’000 £’000 Interest income 2 5,529 3,394

Interest expense 3 (2,069) (1,100)

Net interest income 3,460 2,294 Fee and commission income 4 762 1,383

Fee and commission expense 5 (167) (160)

Credit losses and other credit impairment 6 28 (793)

Other operating income/expense 7 34 (8)

Net operating income 4,117 2,716

Personnel expenses 8 (5,296) (4,408)

Depreciation of property and equipment 9 (156) (162)

Other operating expenses 10 (3,651) (3,472)

Total operating expenses (9,103) (8,042)

Loss/Profit before tax (4,986) (5,326) Statement of comprehensive income

Debt instruments at fair value through other comprehensive income: Net change in fair value during the year - -

Total comprehensive income (4,986) (5,326)

the notes on pages 54 to 84 form an integral part of these financial statements.

52 Bank and Clients PLC StatEMENt OF FINaNCIaL POSItION aS at 31 DECEMBER 2018

2018 2017 Assets Note £’000 £’000

Cash and balances with central banks 14 34,313 28,256 Due from banks 14 3,257 18,263 Financial investments 15 986 - Loans and advances to customers 16 135,834 79,786

Other assets 17 584 609 Property, plant and equipment 18 409 524 Intangible assets 19 42 - Non-current assets held for sale 20 306 - Total assets 175,731 127,438 Liabilities Due to banks - 114 Derivative financial instruments 21 55 16 Due to customers 22 159,140 115,915 Current tax liabilities 23 - - Due to group undertakings - 242 Other liabilities 24 607 1,042 Total liabilities 159,802 117,329 Equity attributable to equity holders Issued capital 25 38,602 27,602 Retained earnings (22,673) (17,493)

Total equity 15,929 10,109 Total equity and liabilities 175,731 127,438 the notes on pages 54 to 84 form an integral part of these financial statements. the financial statements were approved and authorised for issue by the Board and were signed on its behalf on 24 april 2019.

Claire Bridel Chief Executive Officer Registered Number: 00980698

Annual Report 2018 53 STATEMENT OF CHANGES IN EQUITY AS AT 31 December 2018

Financial assets Retained Retained Issued capital at OCI reserve earnings earnings £’000 £’000 £’000 £’000 At 31 December 2017 27,602 - ( 17,493) 10,109 Impact of IFRS 9 note 27 (194) ( 194) At 1 January 2018 27,602 - (17,687) 9,915 total comprehensive income net of tax Loss for the year (4,986) (4,986) Net change in fair value of debt instrument at FVOCI* - - - Total comprehensive income net of tax - (4,986) (4,986) Issue of share capital 11,000 11,000 At 31 December 2018 38,602 - (22,673) 15,929

*Securities were revalued with a net change of £343

Financial assets Retained Retained Issued capital at OCI reserve earnings earnings £’000 £’000 £’000 £’000 At 31 December 2016 21,152 - ( 12,167) 8,985 total comprehensive income net of tax Loss for the year ( 5,326) ( 5,326) total comprehensive income net of tax - ( 5,326) (5,326) Issue of share capital 6,450 6,450 At 31 December 2017 27,602 - ( 17,493) 10,109 the notes on pages 54 to 84 form an integral part of these financial statements.

54 Bank and Clients PLC StatEMENt OF CaSH FLOfl aS at 31 DECEMBER 2018

2018 2017 Note £’000 £’000 net cash flows from operating activities Loss before taxation (4,986) (5,326) adjusted for:

IFRS 9 adoption adjustment 27 (194) Depreciation 9, 18, 20 154 162 Loss on sale of fixed assets 2 Net impairment losses 6 (28) 793 Elimination of exchange differences 75 (134) (4,977) (4,505) changes in operating assets and liabilities Net (increase) in loans and advances to customers 16 (55,897) (58,461) Net decrease/(increase) in other debtors 64 (108) Net (increase) in prepayments (43) (100) Net increase in derivative financial instruments 39 16 Net increase in customer accounts 22 42,955 21,437 Net (decrease)/increase in other liabilities 24 (492) (401) Net increase in accruals and deferred income 110 214 net cash (outflow)/inflow from operating activities (18,241) (41,908) net cash flows from investing activities Sale of debt instruments 8,567 76 Purchase of debt instruments (9,473) - Property, plant and equipment 18, 20 (389) (234) net cash flows from investing activities (1,295) (158) net cash flows from financing activities Issued capital 25 11,000 6,450 net cash used in financing activities 11,000 6,450 net (decrease)/increase in cash and cash equivalents (8,536) (35,616) Exchange differences in respect of cash and cash equivalents (413) 134

Cash and cash equivalents at start of year 46,519 82,001 cash and cash equivalents at year end 14 37,570 46,519 the notes on pages 54 to 84 form an integral part of these financial statements.

Annual Report 2018 55 Notes for the Financial Statements for the year ended 31 December 2018

1. Accounting Policies A summary of the material accounting policies is set out below. The accounting policies set out below have been applied consistently to all periods presented in these financial statements unless otherwise stated. 1.1 Reporting entity Bank and Clients Plc is a bank incorporated and registered in England and Wales. 1.2 Basis of accounting The Bank financial statements, which should be read in conjunction with the Strategic Report and the Directors’ Report, have been prepared on a going concern basis in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). The financial statements are drawn up in accordance with the Companies Act 2006.

During the period ended 31 December 2018, the Bank has adopted the following amendments to accounting standards which became effective for periods starting on or after 1 January 2018. • IFRS 9 “Financial Instruments” replaces IAS 39 “Finacial Instruments: Recognition and Measurement” and encompasses the classification and measurement of financial instruments, the measurement of impairement losses on an expected loss model and revised hedge accounting requirements. the implementation of IFRS 9 has resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated. For full details of the adjustments made on transition to IFRS 9, please refer to note 27 • IFRS 15 “Revenue from contracts with customers” which provides a principles-based approach to revenue recognition and introduces the concept of recognizing revenue for obligations as they are satisfied. adoption of this standard has no material affects on the accounts.

1.3 Going concern the financial statements are prepared on a going concern basis as the Directors are satisfied that the Bank has adequate resources to continue in business for the foreseeable future, which was taken as 12 months from the date of approval of the financial statements.

Subsequent to the year end the existing shareholders have continued to support the Bank with a further capital injection of £2.7m in March 2019 and a further commitment of up to £1m. This together with the forecasts and projections, incorporating a number of scenarios and potential strategies up to December 2020, demonstrates the Bank has sufficient capital to mitigate continued losses and permit the Bank to continue to adopt the going concern basis of accounting.

After undertaking this extensive assessment the Directors are satisfied that actions can be taken to ensure that the Bank has adequate capital, liquidity and other resources to continue for the foreseeable future. On this basis the Directors have concluded that it continues to be appropriate to adopt the going concern basis in preparing the financial statements.

The principal risks and uncertainties affecting the Bank are described in the risk management section 4a of the Risk Management Report on page 31. 1.4 Basis of measurement the financial statements have been prepared under the historical cost convention except for the following items (Refer to individual accounting policies for details):

• Financial instruments - Fair value through profit or loss.

• Financial instruments - Fair value through other comprehensive income. 1.5 Functional and presentation currency Functional and presentation currency The financial statements are presented in Pounds Sterling which is the Company’s functional and presentation currency, and all amounts, unless otherwise indicated, are stated in thousands (£’000).

56 Bank and Clients PLC Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

1. AccountInG polIcIes (continued) 1.5 Functional and presentation currency (continued) transactions and balances Foreign currency transactions are translated into Sterling at exchange rates prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities, denominated in foreign currencies, at year end exchange rates are recognised in the income statement.

Exchange rate differences on non-monetary items are accounted for based on the classification of the underlying items. Non- monetary assets and liabilities denominated in foreign currencies that are measured at historical cost, are translated using the exchange rate at the transaction date. Foreign exchange gains and losses on financial assets measured at fair value through other comprehensive income (“OCI”), are recognised in OCI reserve. 1.6 cash flow statement For the purposes of the cash flow statement, cash and cash equivalents comprise balances repayable on demand, including cash and non-restricted balances with central banks.

For the purpose of the cash flow statement the Bank’s operating activities include cash flows from loans and advances, customer deposits and derivative financial instruments. the Bank’s financing activities comprise movements in issued share capital. 1.7 Interest income and expense Interest income and expense are recognised in the income statement using the effective interest rate method (“EIR”). the effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Bank estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses, except where the financial asset is considered credit impaired at initial recognition, then these initial expected credit losses are included and interest income continues to be recognised using the original EIR on the revised carrying amount. the calculation of the effective interest rate includes all transaction costs, premiums or discounts and all fees paid or received that are an integral part of the effective interest rate. transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability.

Once a financial asset or group of similar assets have been written down as a result of an impairment loss, interest income continues to be recognised using the original EIR on the revised carrying amount. 1.8 Fees and commissions and other operating income Where they are not included in the effective interest calculation, fees and commissions are recognised on an accruals basis when the service has been provided or received. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related incremental direct costs) and recognised as an adjustment to the effective interest rate on the loan.

Corporate advisory fees are recognised when the related performance obligations have been met.

Other operating income and expense arises from all realised and unrealised fair value changes on non-trading derivatives held for risk management purposes as well as foreign exchange movements due to retranslation of non-Sterling balance sheet items. 1.9 Financial instruments A. Recognition and initial measurement Financial instruments include all financial assets and liabilities. these instruments are typically held for liquidity, investment, commercial or hedging purposes. all financial instruments are initially recognised at fair value on the date of initial recognition (including transaction costs, other than financial instruments held at fair value through profit and loss). the Bank initially recognises loans and advances, and deposits when it becomes party to the contractual provision of the instruments.

B. subsequent measurement Subsequent to initial measurement, financial instruments are measured either at fair value or amortised cost, depending on their classification.

Annual Report 2018 57 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

1. Accounting Policies (Continued) 1.9 Financial instruments (Continued) C. Classification of Financial assets IFRS 9 defines three new measurement categories: • Measured at amortised cost • Measured at fair value through other comprehensive income (“FVOCI”) • Measured at fair value through profit or loss (“FVPL”)

IFRS 9 applies one classification approach for all types of financial assets, including customer lending and treasury assets.T wo criteria are used to determine how financial assets should be classified and measured: • Business model

How an entity manages its financial assets in order to generate cash flows by collecting contractual cash ws,flo selling financial assets or both. Factors considered in determining the business model for a group of assets include, for example, past experience on how the cash flows for these assets were collected, how their performance is assessed and how their managers have been compensated; and • SPPI test

Whether contractual cash flows are consistent with a basic lending arrangement; that is whether cash flows are solely comprised of payments of principal and interest (“SPPI”). If assets pass the SPPI test, and are within a business model that holds to collect contractual cash flows, they are measured at amortised cost. If assets pass the SPPI test, and are within a business model that holds to collect contractual cash flows and for sale, they are measured at FVOCI. If an asset does not meet the criteria for amortised cost or FVOCI, it is measured at FVPL.

Under IFRS 9, assets will only move between categories if there is a significant change to the business model within which they are held; this is expected to be infrequent.

D. Financial liabilities all financial liabilities are classified and subsequently measured at amortised cost, except for those designated at fair value through profit or loss at initial recognition. Financial liabilities are derecognised when they are extinguished, i.e. when the obligation specified in the contract is discharged or cancelled or expires.

Financial liabilities at amortised cost Financial liabilities at amortised cost are recognised initially at fair value, which equates to issue proceeds net of transaction costs incurred. they are subsequently stated at amortised cost. any difference between proceeds net of transaction costs and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

58 Bank and Clients PLC Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

1. AccountInG polIcIes (continued) 1.9 Financial instruments (continued) E. Impairment of financial assets Under IFRS 9, the Bank assesses on a forward-looking basis the expected credit losses (“ECL”) associated with the assets carried at amortised cost and FVOCI and recognises a loss allowance for such losses at each reporting date.

Impairment provisions are driven by changes in credit risk of loans and securities, with a provision for lifetime expected credit losses recognised where the risk of default of an instrument has increased significantly. all risk of default and expected credit losses calculations incorporate forward looking and macroeconomic information. a. loans and advances Rating models, have been developed specifically for each of the Bank’s loan portfolios: corporate loans; commercial real estate; and mortgages. these models facilitate the calculation of expected credit losses for all drawn loans.

In general terms, the ECL for a loan is calculated using the following formula: ecl = probability of default x loss given default x exposure at default key model inputs and judgements include: • Consideration of when a significant increase in credit risk occurs • Probability of default, loss given default, and exposure at default • Macro-economic scenarios to be applied

IFRS 9 requires a higher level of expected credit loss to be recognised for underperforming loans. IFRS 9 requires this to be considered on a staging approach basis. the Bank has aligned its staging process to its Watch List Policy. the Watch List Policy classifies deteriorating credit exposures into four bands:

• Special Mention (“SM”) A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. • Substandard (“SS”) A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterised by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. • Doubtful (“D”) An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. • Loss (“L”) Assets classified loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not

Annual Report 2018 59 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

1. Accounting Policies (Continued) 1.9 Financial instruments (Continued) practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

Stage Description ECL recognised Stage 1 – performing loans Loans that have had no significant increase in 12 month expected credit losses credit risk since initial recognition or that have Losses expected on defaults which may occur low credit risk at the reporting date. within the next 12 months. Loans in this category would typically be loans on which repayments are being received and there are no other indicators of a significant increase in credit risk. Loans that are classified on theW atch List as Special Mention remain in this stage. Stage 2 – underperforming Loans that have had a significant increase in Lifetime expected credit losses loans credit risk since initial recognition but that do Losses expected on defaults which may occur not have objective evidence of impairment. at any point in a loan’s lifetime. Losses are Loans in this category will appear on the adjusted for probability- weighted macro- Watch List as substandard or doubtful or have economic scenarios. triggered quantitative criteria stated below. Doubtful loans can at the discretion of management be classified as non-performing based on a review of available evidence. Stage 3 – non-performing loans Loans that have objective evidence of Lifetime expected credit losses impairment at the reporting date. Losses expected on defaults which may occur Loans in this category will be on the Watch at any point in a loan’s lifetime. Losses are List as Doubtful or Loss. Typically these loans adjusted for probability- weighted macro- have been identified as significant stress which economic scenarios. indicates an unwillingness or inability to pay or Interest income is calculated on the carrying have triggered quantitative criteria stated below. amount of the loan net of credit allowance.

A significant increase in credit risk may be identified in a number of ways:

• Qualitative criteria For example, the borrower is included on the watch list, or there are clear signs that the customer is unwilling to pay. For corporate clients a year-on-year downgrade of two notches or more on the Bank’s internal rating scale or three notches or more from the rating at the time the original credit decision was taken.

• Quantitative criteria these are based around arrear payments and the Bank uses the following:

Stage 1 Stage 2 Stage 3 Mortgages 0 to 90 days 91 to 120 days 121 days + Commercial Retail Estate 0 to 30 days 30 to 60 days 121 days + Corporate Loans 0 to 30 days 30 to 60 days 121 days +

60 Bank and Clients PLC Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

1. Accounting Policies (Continued) 1.9 Financial instruments (Continued) The nature of client payment history is such that 90 days is more representative of default than the normally acceped 30 days. There is no restriction to movement between stages e.g. it is permissible for a loan to move directly from Stage 1 to Stage 3 or from Stage 2 to Stage 1, however, there is a curing period of 6 months before loans move upward in the stages e.g. from Stage 2 to Stage 1.

Definitions of ECL components:

• Expected Credit Loss (“ECL”) Expected Credit Loss is the expression of the inherent credit risk within the loan portfolio. It is a quantitative measure and is the product of: • exposure at default (“EAD”); • probability of default (“PD” or “EDF”); and • loss given default (“LGD”).

It is calculated on a loan by loan basis and aggregated for accounting and overall risk measurement purposes.

• Exposure at Default (“EAD”) Exposure at default is the amount due to the Bank at the time of default. As the Bank has insufficient historic data to model EAD its policy is to assume the worst case balance (i.e. maximum possible exposure under the facility agreement) plus 2% to accommodate any interest accrued but not yet charged. EAD is expressed as the monetary amount outstanding.

• Loss Given Default (“LGD”) Loss given default is the expected proportion of a loan that would be lost should default occur. As the Bank has insufficient historic data to model LGD its policy is to deduct the expected realisable value of any security (as determined in accordance with the Bank’s Collateral and Documentation Policy as approved from time to time) from the EAD. LGD is expressed as a percentage representing the amount of the EAD that the Bank expects to lose in the event of default. In the event that the Bank has an unsecured exposure the going concern assessment which forms part of the Bank’s Rating Model may be applied as a proxy for the realisable security value.

• Probability of Default Probability of default (“PD” or “EDF”) is a statistical estimate of the likelihood of a borrower defaulting. It is determined through the Bank’s Rating Models the mechanics of which are detailed in the relative Methodology and Architecture documents. In accordance with the provisions of IFRS 9 the PD for credit exposures where credit quality is being maintained in accordance with expectation is limited to a 12-month horizon. Where a material deterioration in credit quality is identified the 12-month horizon will be extended to the full remaining life of the facility. The probability of default is adjusted for the weighted average outcome of three macro-economic scenarios: baseline, upside and downside.

• Qualitative adjustments adjustments to the model-driven ECL results are raised by management to address known impairment model limitations or macro-economic indicators. Macro-economic indicators include forecast for housing and economic outlook. This data is published by government and quasi organisations. b. Debt instruments Debt instruments are assessed for impairment in the same way as loans. If impairment is deemed to have occurred or have a strong likelihood of occurring, the cumulative decline in the fair value of the instrument that has previously been recognised in OCI. this may be reversed if there is evidence that the circumstances of the issuer have improved. c. Reversal of financial assets at FV through ocI impairments If, in a subsequent period, the fair value of an impaired debt instrument increases and the increase can be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed through the income statement; otherwise, any increase in fair value is recognised through OCI.

Annual Report 2018 61 Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

1. AccountInG polIcIes (continued) 1.9 Financial instruments (continued) F. Hedge accounting the new requirements of IFRS 9 align hedge accounting more closely with risk management. the revised standard establishes a more principles-based approach to hedge accounting. IFRS 9 includes an accounting policy choice to remain with IaS 39 hedge accounting. the Bank has not applied hedge accounting during 2018 or 2017.

G. Fair value measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. a market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.

If a market for a financial instrument is not active, then the Bank establishes fair value using a valuation technique that maximises the use of market inputs, relies as little as possible on estimates specific to the Bank, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. the best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received. When transactions price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in the income statement on an appropriate basis over the life of the instrument. assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price.

H. Derecognition of financial instruments Financial assets are derecognised when the contractual rights to receive cash flows from the financial assets have expired, or where the Company has transferred its contractual rights to receive cash flows on the financial asset such that it has transferred substantially all the risks and rewards of ownership of the financial asset.

When a financial asset is derecognised in its entirety, the difference between the carrying amount and the sum of the consideration received is recognised in the income statement. When financial assets are derecognised, the cumulative gain or loss, excluding that previously recognised in OCI reserves for investment in equity instruments, is recognised in the income statement. a financial liability is derecognised when the obligation is discharged, cancelled or expires. any difference between the carrying amount of a financial liability derecognised and the consideration paid is recognised in the income statement.t rade receivables are written off (i.e. derecognised) when there is no reasonable expectation of recovery. Failure to make payment and failure to arrange an alternative payment plan amongst others are considered indicators of no reasonable expectation of recovery.

I. offsetting financial instruments Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle the asset and the liability on a net basis, or to realise the asset and settle the liability simultaneously.

Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions.

J. Derivative financial instruments the Bank enters into derivative transactions only for the purpose of reducing exposures to fluctuations in foreign currencies and interest rates; they are not used for proprietary purposes. all derivatives are carried at fair value with movements in fair values recorded in the income statement. Derivative financial instruments are valued based on valuations obtained from counterparties.

62 Bank and Clients PLC Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

1. AccountInG polIcIes (continued) 1.9 Financial instruments (continued) K. Write-off policy the Bank writes off financial assets, in whole or part, when it has exhausted all practical recovery efforts and has concluded there is no reasonable expectation of recovery. Indications that there is no reasonable expectation of recovery include (i) ceasing enforcement activity and (ii) where the Bank’s recovery method is focused on collateral and the value of collateral is such that there is no reasonable expectation of recovering in full. the Bank may write-off assets that are still subject to enforcement activity. the Bank still seeks to recover amounts it is legally owed in full, but which have been partially written off due to no reasonable expectations of full recovery. 1.10 taxation the Bank is subject to direct and indirect taxation. there may be transactions and calculations for which the ultimate tax determination has an element of uncertainty during the ordinary course of business. the Bank recognises liabilities based on estimates of the quantum of taxes that may be due. Where the final tax determination is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax expense in the year in which such determination is made.

Deferred tax the recognition of a deferred tax asset relies on an assessment of the profitability and sufficiency of future taxable profits. as a result of prior and current year trading losses, the Bank has carried forward tax losses for which no deferred tax asset has been recognised in the financial statements for the years ended 31 December 2018 and 2019. 1.11 property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and provision for impairment as appropriate. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. additions and subsequent expenditure are included in the asset’s carrying value or are recognised as a separate asset only when they improve the expected future economic benefits to be derived from the asset. all other repairs and maintenance are charged to the income statement in the period in which they are incurred.

Depreciation is provided using the straight line method to allocate costs less residual values over estimated useful lives, as follows:

Freehold property –Buildings 50 years

Office equipment 3-10 years assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.

Impairment of property, plant and equipment

Property, plant and equipment assets are assessed for indications of impairment at each reporting date, or more frequently where required by events or changes in circumstances. If indications of impairment are found, these assets are subject to an impairment review. 1.12 non-current assets held for sale Non-current assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. they are stated at the lower of carrying amount and fair value less costs to sell. 1.13 Intangible assets computer software Software acquired by the Bank is capitalised as an intangible asset where the software is an identifiable asset which will generate future economic benefits. Intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. amortisation is calculated, using the straight-line method, to allocate the depreciable amount of the assets to their residual values over the estimated useful lives of the software, which are between 3 and 5 years.

Costs associated with maintaining computer software are recognised as an expense as incurred.

Annual Report 2018 63 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

1. AccountInG polIcIes (continued) 1.14 provisions Provisions are recognised for present obligations arising from past events where it is more likely than not that outflows of resources will be required to settle the obligations and they can be reliably estimated.

Contingent liabilities are possible obligations whose existence depends upon the outcome of uncertain future events or are present obligations where the outflows of resources are uncertain or cannot be reliably measured. Contingent liabilities are not recognised in the financial statements but are disclosed unless they are remote. 1.15 pension and employee benefits the Bank operates two defined contribution pension schemes, one for those ex Church ouseH trust staff and another for all other staff employed by the Bank. the pension charge represents the amounts payable by the Bank to the fund in respect of the year. the Bank has no legal or constructive obligation to pay further contributions. 1.16 Impairments of non-financial assets the carrying amounts of the Bank’s non-financial assets are reviewed at least annually to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount (being the greater of fair value less costs to sell and value in use) is estimated. Value in use is calculated by discounting the future cash flows from continuing use of the asset. If the carrying value of the asset is more than the greater of the value in use and the fair value less costs to sell, an impairment loss is recognised in the income statement. an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 1.17 critical accounting estimates and judgements the preparation of the accounts in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. these estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. although these estimates are based on management’s best knowledge of the amount, event or actions, actual results may differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

Effective interest rate (“EIR”) the effective interest rate method applies a rate that discounts estimated future cash payments or receipts relating to a financial instrument to its net carrying amount. the estimated future cash flows take into account all contractual terms of the financial instrument including transaction costs and all other premiums or discounts but excludes future credit losses. Except when the financial asset is considered credit impaired at initial recognition, then these initial expected credit losses are included.the EIR determines the timing of revenue recognition and is calculated at a portfolio level. the EIR model calculation has been consistently applied in both the current and prior year. the calculation of an effective interest rate requires the Bank to make assumptions around the average expected lives of loan instruments. In determining these expected lives, the Bank uses historical data together with management judgement. these assumptions are regularly reviewed for reasonableness, taking into account changes in actual experience. If the Directors consider that a change in assumption is needed, the impact of the change on the carrying value of the loan it would be reflected immediately in the income statement.

Expected Credit losses – Corporate Lending (“CL”) and Commercial Real Estate (“CRE”) agreement receivables the corporate loan portfolio comprise a small numbers of loans with dissimilar risk characteristics while the commercial real estate portfolios comprise a small numbers of loans with similar assets and risk characteristics, due to the small number of loans. Each loan is assessed at least annually to calculate impairment allowances. the key assumptions used in the impairment model are the probability of default (“PD”), and the loss given default (“LGD”). the Bank has opted to use two industry standard models to assess loans, the Moody’s model for CL and Radley’s Model for CRE, as they use a large customer base to generate

64 Bank and Clients PLC Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

1. AccountInG polIcIes (continued) 1.17 critical accounting estimates and judgements (continued) more prudent PD’s and LGD’s, as the Bank has limited historical data to provide a meaningful PD or LGD. Judgement is needed in selecting how the models are implemented, utilized and customized within the Bank. Loans are considered credit- impaired when instalments are due and unpaid and/ or loan covenants are breeched. the impairment allowance reflected in the financial statements for these loans is considered to be reasonable and supportable. expected credit losses – Mortgage loans the two mortgage loan portfolios (purchased and originated) comprise large numbers of small homogenous assets with similar risk characteristics, where statistical techniques are used to calculate impairment allowances on a portfolio basis. these statistical analyses use as primary inputs the extent to which accounts in the portfolio are in arrears and historical information on the eventual losses encountered from such delinquent portfolios. the key assumptions used in the impairment model are the probability of default (“PD”), and the loss given default (“LGD”). Judgement is needed in selecting the statistical methods when the models are developed or revised. Loans are considered credit-impaired when instalments are due and unpaid. the impairment allowance reflected in the financial statements for these portfolios is considered to be reasonable and supportable. a change of 1 percentage point in the LGD would result in a £1,500 change in the value of the impairment and a change of 1 percentage point in the PD would result in a £1,500 change in the value of the impairment. credit impairments under IAs 39 In determining whether an impairment should be recorded, judgements are made as to whether there is objective evidence that a financial asset or portfolio of financial assets is impaired as a result of loss events that occurred after recognition of the asset, examining appropriate macro-economic and other events which impact the asset directly and by the reporting date. the calculation of an impairment loss is management’s best estimate of losses incurred in the portfolio at the balance sheet date and reflects expected future cash flows based on both the likelihood of a loan being written off and the estimated loss on such a write- off. the Bank’s accounting policy for loan impairment provisions on financial assets classified as loans and receivables is described in Note 1.9. 1.18 standards, interpretations and amendments to published standards that are not yet effective and the early adoption of standards the Bank has not “early adopted” any standards or interpretations during 2018. at the date of authorising the following statements, amendments and interpretations are in issue but not yet effective. these standards, amendments and interpretations have not been adopted early and have not been applied to these financial statements.

IFRs 16 - leases this standard will replace the existing standard, IaS 17 Leases, and sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, being the lessee (customer) and the lessor (supplier). the core principle of this standard is that the lessee and lessor should recognise all rights and obligations arising from leasing arrangements on balance sheet. the most significant change pertaining to the accounting treatment of operating leases is from the lessees’ perspective. IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IaS 17 and introduces a single lessee accounting model, where a right of use asset together with a liability for the future payments is to be recognised for all leases with a term of more than 12 months, unless the underlying asset is of low value. the lessor accounting requirements in IaS 17 has not changed substantially in terms of this standard. as a result, a lessor continues to classify its leases as operating leases or finance leases and accounts for these as it currently does in terms of IaS 17. In addition, the standard requires the lessor to provide enhanced disclosures about its leasing activities and in particular about its exposure to residual value risk and how it is managed.

IFRS 16 will be effective for annual periods beginning on or after 1 January 2019. the standard will not have a material impact on the Company’s results.

Annual Report 2018 65 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

1. AccountInG polIcIes (continued) 1.19 presentation of risk and capital disclosures the disclosure required under IFRS7 “Financial instruments disclosures” and IaS1 “Presentation of financial statements” have been included within the audited sections of the Risk Report on page 23. Where information is marked as audited, it is incorporated into these financial statements by this cross reference and is covered by the Independent audit Report on page 45. 1.20 Accounting policies used for financial instruments in 2017 financial account preparation Financial assets can be classified in the following categories: • loans and receivables; and • available for sale

Management determines the classification of its financial instruments at initial recognition. The Bank measures all of its financial liabilities at amortised cost. Purchases and sales of financial assets available-for-sale are recognised on the trade date – the date on which the Bank commits to purchase or sell the asset. loans and receivables at amortised cost the Bank’s loans and advances to banks and customers are classified as loans and receivables. Loans and receivables are non- derivative financial assets with fixed or determinable payments that are not quoted in an active market, whose recoverability is based on the credit risk of the customer and collateral and where the Bank has no intention of trading the loan. Both loans and receivables and financial liabilities are initially recognised at fair value including direct and incremental transaction costs. Subsequent recognition is at amortised cost using the effective interest rate method less any provision for impairment. offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the Statement of Financial Position when there is a currently legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

Available-for-sale financial assets available-for-sale financial assets are non-derivative assets that are either designated as available-for-sale or are assets that do not meet the definition of loans and receivables and are not derivatives or assets held at fair value through profit or loss. these can comprise of investment securities intended to be held for an indefinite period of time which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. they are initially measured at fair value including direct and incremental transaction costs. Fair values are obtained from quoted market prices in active markets or for unquoted investments using modelling techniques. Subsequent measurement is at fair value, with changes in fair value being recognised in other comprehensive income except for impairment losses and translation differences, which are recognised in the statement of profit or loss. Upon derecognition of the asset, or where there is objective evidence that the investment security is impaired, the cumulative gains and losses recognised in other comprehensive income are removed from other comprehensive income and recycled to the statement of profit or loss.

Financial liabilities Borrowings, including deposits and debt securities in issue are recognised initially at fair value, being the issue proceeds net of premiums, discounts and transaction costs incurred. all borrowings are subsequently measured at amortised cost using the effective interest rate method. amortised cost is adjusted for the amortisation of premiums, discounts and transaction costs. the amortisation is recognised in interest expense using the effective interest rate method. the Bank does not hold any financial liabilities classified as held for trading (2017: none).

66 Bank and Clients PLC Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

2. InteRest IncoMe 2018 2017 £’000 £’000 Interest - loans and advances to banks 250 120 Interest - mortgage 3,865 1,906 Interest - commercial real estate 241 - Interest - corporate loan interest 1,173 1,366 Interest - investment securities - 2 total interest income 5,529 3,394

3. InteRest eXpense 2018 2017 £’000 £’000 Interest – banks 3 - Interest – customer accounts 2,046 1,100 Interest - derivatives 15 - Interest - investment securities 5 - total interest expense 2,069 1,100

4. Fee AnD coMMIssIon IncoMe 2018 2017 £’000 £’000 Corporate loan fees 552 1,191 Mortgage loan fees 201 187 Sundry income 9 5 total fee and commission income 762 1,383

5. Fee AnD coMMIssIon eXpense 2018 2017 £’000 £’000 Mortgage start up fees 167 160 total fee and commission expense 167 160

Annual Report 2018 67 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

6. CREDIT LOSS AND OTHER CREDIT IMPAIRMENT

2018** 2017* credit loss £’000 £’000 at 1 January 3,015 2,272 Charge for impairment losses (28) 743 amounts written off in the year (2,616) - amounts recovered in the year - - At 31 December 371 3,015 analysis by impairment type Loans and advances to customers 371 3,015 Other debtors - At 31 December 371 3,015

*Prepared under IaS39 methodology **Prepared under IFRS9 methodology

7. otHeR opeRAtInG INCOME / (EXPENSE) 2018 2017 £’000 £’000 Foreign exchange (losses) /gains (67) 36

Derivative financial instruments losses (14) (44)

Loss on sale of debt securities (27) Release of accrual 142 total other operating income / (expense) 34 (8)

8. peRsonnel eXpenses 2018 2017 £’000 £’000 Gross 3,909 3,392 National Insurance 476 400 Pension costs 101 26 Health Scheme 22 26 agents and sub contractors 788 564 total personnel expenses 5,296 4,408

Average number of employees 2018 2017 Number Number Office Staff 54 51

68 Bank and Clients PLC Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

9. DEPRECIATION OF PROPERTY AND EQUIPMENT

2018 2017 £’000 £’000 Depreciation 156 162 Total depreciation costs 156 162

10. OTHER OPERATING EXPENSES

2018 2017 £’000 £’000 FSCS Levies1 15 19 Other admin costs2 3,636 3,453 Total other operating expenss 3,651 3,472

1 Financial services compensation scheme (Fscs) as a regulated deposit taker, the Bank pays levies to the FSCS. the FSCS levy consists of two parts: • A management expense levy in respect of running the scheme • A compensation levy to cover claims

The FSCS levy at 31 December 2018 represents the expense for the 2017/2018 scheme year.

2 Auditors’ remuneration included in administrative costs 2018 2017 £’000 £’000 Audit fee 100 80 Non audit fee – other services 3 15 Total Auditors’ remuneration 103 95

11. DIRECTORS’ REMUNERATION 2018 2017 £’000 £’000 Remuneration* 824 723 Defined contribution pension contributions 8 1 Total Directors’ remuneration 832 724

*Includes any advance, credit and guarantees.

2018 2017 Number Number Directors accruing pension benefits 1 3

The above amounts include £269,000 (2017: £260,000) in respect of the highest paid Director.

Two of the Executive Directors are related parties and their combined remuneration for 2018 was £285,667.

Annual Report 2018 69 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

12. RETIREMENT BENEFIT OBLIGATIONS The Bank contributes to individual defined contributions plans for the benefit of employees.

As of November 2017, the Bank has commenced pension auto-enrolment in line with the requirements of the Pensions Act 2008. The Bank made contributions of £52,879 during the year (2017: £26,436).

From October 2018 the Bank has introduced an optional salary exchange pension scheme for all eligible employees. A total of £48,469 in contributions were made in total in 2018.

There were no unpaid contributions outstanding at the year- end (2017: nil). 13. TAXATION Tax reconciliation The tax on the Bank’s profit before tax differs from the theoretical amount that would arise using the standard weighted average rate of UK corporation tax of 19.00% (2017: 19.25%) as follows: 2018 2017 £’000 £’000 Current tax Loss for the year (4,986) (5,326) Tax using the effective corporation tax rate of 19.0% (2017: 19.25%) (948) (1,025)

Effects of Expenses not deductible for tax purposes 47 61 Short term temporary differences (54) (53) Losses carried forward – where no deferred tax recognised 955 1,017 Total Tax charge - -

70 Bank and Clients PLC Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

14. CASH AND CASH EQUIVALENTS For the purpose of the cash flow statement, cash and cash equivalents comprise loans and advances to credit institutions and central banks at a variable rate and repayable on demand. 2018 2017 £’000 £’000 Cash and balances with central banks 34,313 28,256 Loans and advances to banks 3,257 18,263 Total cash and cash equivalents 37,570 46,519

15. DEBT SECURITIES

Debt instruments at fair value through other 2018 2017 comprehensive income £’000 £’000 Multilateral development banks 986 - As at 31 December 986 -

During the year the Bank purchased Euro 10m Supranational bonds in order to manage Euro liquidity with a view to hold to maturity. Following the strategic decision to reduce Euro exposure, Euro 9m debt security were sold within the year. The remaining position matures in 2020. 16. LOANS AND ADVANCES TO CUSTOMERS 2018 2017 £’000 £’000 Advances secured on residential property 108,687 59,829 Advances secured on non-residential property 19,251 5,758 Corporate loans 8,263 17,209 Total secured loans 136,201 82,796 Unsecured loans 4 5 Gross loans and advances to customers 136,205 82,801

Impairment allowance (371) (3,015) Net loans and advances to customers 135,834 79,786 the Bank’s loans and advances to customers maturity profile and disclosure of the gross carrying amount of financial assets by credit risk rating grades are disclosed in Risk Report on page 38.

Annual Report 2018 71 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

16. LOANS AND ADVANCES TO CUSTOMERS (Continued) Allowances for impairments losses on loans and advances

2018 - £'000 opening balance Increase due to origination changes due to change in credit risk (net) Decrease due to derecognition Decrease in allowance account due to write-offs other adjustments closing balance Residential property 79 119 (6) (12) - (1) 179 Commercial property 8 60 - - - (1) 67 Corporate loans - - (72) -- 194 122 Allowances for financial assets without increase in credit risk since initial recognition (stage 1) 87 179 (78) (12) - 192 368 Residential property 1 - - (1) - - - Commercial property ------Corporate loans ------Allowances for debt credit risk since initial recognition (stage 2) 1 - - (1) - - - Residential property 5 - - (2) - - 3 Commercial property ------Corporate loans 2,922 - - - (2,633) (289) - Other debtors 50 - - (50) - - Allowances for credit-impaired loans (stage 3) 2,977 - - (2) (2,683) (289) 3 total 3,065 179 (78) (15) (2,683) (97) 371

72 Bank and Clients PLC Notes for the Financial Statements (Continued) for the year ended 31 December 2018

16. LOANS AND ADVANCES TO CUSTOMERS (Continued)

SSET - £'000 opening balance Increase due to origination changes due to change in credit risk (net) Decrease due to derecognition Decrease in allowance account due to write-offs other adjustments closing balance Residential property 19 63 (1) (1) - (1) 79 Commercial property 3 6 - (1) - - 8 Corporate loans ------Allowances for financial assets without increase in credit risk since initial recognition (stage 1) 22 69 (1) (2) - (1) 87 Residential property - 1 - - - 1 Commercial property ------Corporate loans ------Allowances for debt credit risk since initial recognition (stage 2) - - 1 - - - 1 Residential property 5 - - - - - 5 Commercial property ------Corporate loans 2,245 - - - - 677 2,922 Other debtors - - 50 - - - 50 Allowances for credit-impaired loans (stage 3) 2,250 - 50 - - 677 2,977 total 2,272 69 50 (2) - 676 3,065

17. otHeR Assets 2018 2017 £’000 £’000 Other assets - 20 Sundry debtors 16 58 Sundry prepayments 568 531 Total accruals and deferred income 584 609

Annual Report 2018 73 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

18. PROPERTY, PLANT AND EQUIPMENT Freehold Office property equipment Total 31 December 2018 £’000 £’000 £’000 Cost As at 1 January 347 859 1,206 Disposals - (32) (32) Additions 90 256 346 Transfer to assets held for sale (437) (437) As at 31 December - 1,083 1,083

Depreciation and impairment losses As at 1 January (97) (585) (682) Disposals 131 30 161 Charged in the year (34) (119) (153)

As at 31 December - (674) (674) Carrying amounts as at 31 December - 409 409

Land and Office buildings equipment Total 31 December 2017 £’000 £’000 £’000 Cost As at 1 January 347 625 972 Disposals - - - Additions - 234 234 As at 31 December 347 859 1,206

Depreciation and impairment losses As at 1 January (88) (432) (520) Disposals - - - Charged in the year (9) (153) (162) As at 31 December (97) (585) (682) Carrying amounts as at 31 December 250 274 524

74 Bank and Clients PLC Notes for the Financial Statements (Continued) for the year ended 31 December 2018

19. INTANGIBLE ASSET Software 31 December 2018 £’000 Cost - As at 1 January - Disposals - Additions 43 As at 31 December 43

Amortisation and impairment losses 31 December 2018 Cost - As at 1 January - Charged in the year 1 As at 31 December 1 Carrying amounts as at 31 December 42

Software 31 December 2017 £’000 Cost - As at 1 January - Disposals - Additions - As at 31 December -

Amortisation and impairment losses 31 December 2018 Cost - As at 1 January - Charged in the year - As at 31 December - Carrying amounts as at 31 December -

20. non-cuRRent Assets HelD FoR sAle Following the decision to co-locate the Deposit and Mortgage administration services in London and the subsequent closure of the Yeovil office, it was decided for the Yeovil property to be advertised for sale. the carrying value of the property at 31 December 2018 was £306k. In March 2019, the Bank entered into an agreement for the sale of its Yeovil office building for an amount of £349k.

Annual Report 2018 75 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

21. DERIVATIVE FINANCIAL INSTRUMENTS Notional 2018 Cash * Net amount Fair value collateral amount £’000 £’000 £’000 £’000 Interest rate derivatives Liabilities 20,783 55 (40) 15 Foreign exchange derivatives Liabilities - - - -

At 31 December 2018 20,783 55 (40) 15

Notional 2017 Cash Net amount Fair value collateral amount £’000 £’000 £’000 £’000 Interest rate derivatives Liabilities - - - - Foreign exchange derivatives Liabilities 2,185 16 0 16

At 31 December 2017 2,185 16 0 16

*Cash held by derivative counterparty.

The Bank enters into derivatives solely for risk management purposes. The derivatives are economic hedges, but do not meet hedge accounting requirements. It is the Bank policy to enter into master netting and margining agreements with all derivative counterparties. Under margining agreements where the Bank has a net asset position valued at current market values, in respect of its derivatives with a counterparty, then that counterparty will place cash collateral with the Bank in order to cover the position. Similarly, the Bank will place cash collateral with the counterparty where it has a net liability position.

The notional amount, recorded gross, is the quantity of the derivative contracts’ underlying instrument. The notional amount indicates the volume of transactions outstanding at the year end and is not indicative of either the market risk or credit risk. 22. CUSTOMER ACCOUNTS 2018 2017 £’000 £’000 Instant access 14,567 13,635

Term deposits and notice accounts 144,573 102,280

Total customer accounts 159,140 115,915

Included in the above are GBP equivalents of £986k (2017:£15,834k) in Euro deposits. The Bank’s customer accounts maturity profile is disclosed in the Risk Report on page 42.

76 Bank and Clients PLC Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

23. DEFERRED TAXATION The deferred tax assets not recognised in the financial statements, in accordance with the Bank’s accounting policy, are as follows:

2018 2017 £’000 £’000 Capital allowances (32) (3)

Short term temporary differences 5 8 Tax losses 4,137 3,195

Unrecognised deferred tax asset 4,110 3,200

The amount of tax losses for which no deferred tax is recognised is £24,210k (2017: £19,035k), there is no expiry date on the losses carried forward. 24. OTHER LIABILITIES 2018 2017 £’000 £’000 Other creditors 273 255

Accruals 334 787

Total other creditors 607 1,042

The Bank’s exposure to liquidity risk related to trade and other payables is disclosed in Risk Management section. Details of amounts due to parent undertaking are disclosed in note 31. All other liabilities are due within one year. 25. SHARE CAPITAL Dates £1 ordinary Number of Authorised shares issued and 2018 2017 £1 shares settled at par £’000 £’000 27,602,000 As at 1 January 27,602 21,152 6,000,000 26 January 2018 6,000 5,000,000 28 September 2018 5,000 12 May 2017 3,200 20 January 2017 3,250 38,602,000 As at 31 December 38,602 27,602

Share capital comprises one class of ordinary shares only. For the purpose of the cash flow statement, the Bank’s Financing Activities comprise share capital only. The movements in the table above represent the only changes in financing activities in the current and preceding year.

A further capital injection of £2.7m was received in March 2019. 2,700,000 shares were authorised in March 2019 and issued and settled in full by Ocean Industries S.A. at par of £1 in March 2019.

Annual Report 2018 77 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

26. ANALYSIS OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES BY MEASUREMENT BASIS Financial Fair value assets and through other liabilities at comprehensive Fair value amortised cost income through P&L Total 2018 £’000 £’000 £’000 £’000 Financial assets Cash and balances with central banks and loans and advances to banks 37,570 - - 37,570 Loans and advances to customers 135,834 - - 135,834 Investment securities 986 986 Total financial assets 173,404 986 - 174,390 Non financial assets 1,341

Total assets 175,731

Financial liabilities Customer accounts 159,140 159,140 Derivative financial instruments - 55 55 Other liabilities 607 - - 607 Total financial liabilities 159,747 - 55 159,802 Non financial liabilities Total liabilities 159,802 Equity 15,929 Total equity and liabilities 175,731

78 Bank and Clients PLC Notes for the Financial Statements (Continued) for the year ended 31 December 2018

26. ANALYSIS OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES BY MEASUREMENT BASIS (Continued) Financial Fair value assets and through other liabilities at comprehensive Fair value amortised cost income through P&L Total 2017 £’000 £’000 £’000 £’000 Financial assets Cash and balances with central banks and loans and advances to banks 46,526 - - 46,526 Loans and advances to customers 79,786 - - 79,786 Total financial assets 126,312 - - 126,312 Non financial assets 1,126

Total assets 127,438

Financial liabilities Customer accounts 115,915 115,915 Derivative financial instruments - 16 16 Other liabilities 1,156 - - 1,156 Total financial liabilities 117,071 - 16 117,087 Non financial liabilities 242

Total liabilities 117,329 Equity 10,109 Total equity and liabilities 127,438

Annual Report 2018 79 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

27. IFRs 9 ADoptIon On 1 January 2018 the Bank adopted IFRS 9 (“Financial Instruments”) which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated, however, opening retained earnings. the table below sets out the effect on the statement of financial position had the comparative figures been restated. 2017 financial postion as currently stated 2017 financial position per Statement of IFRS 9 if restated for IFRS9 financial position adjustment required Adjustment £’000 £’000 £’000 Cash and balances with central banks 28,263 - 28,263 Due from banks 18,263 - 18,263 Derivative financial instruments - - - Debt instruments at fair value through - - - other comprehensive income Loans and advances to customers 79,786 ( 194) 79,592 Other assets 602 602 Property, plant and equipment 524 - 524 Total assets 127,438 (194) 127,244 Due to banks 114 - 114 Derivative financial instruments 16 - 16 Due to customers 115,915 - 115,915 Current tax liabilities - - - Due to Group undertakings 242 - 242 Other liabilities 1,042 - 1,042 Total liabilities 117,329 - 117,329 Equity attributable to equity holders Issued capital 27,602 - 27,602 Retained earnings (17,493) (194) ( 17,687) Total equity 10,109 (194) 9,915 Total equity and liabilities 127,438 (194) 127,244

IFRS 9 sets out new accounting requirements in respect of: classification and measurement of financial instruments, credit impairment and hedge accounting.

Based on assessments undertaken, the total reduction on the Bank's equity at 1 January 2018, on the adoption of IFRS 9, is £194k. this adjustment consists of the following: Impairment provision adoption of IFRS9 expected credit loss models resulted in a £194k increase to impairment provision. the increase is small due to the small loan book held by the Bank and the fact that the 2017 impairment methodology approach closely aligned with the new IFRS 9 impairment models, except for corporate loans which required adjustment.

80 Bank and Clients PLC Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

27. IFRS 9 ADOPTION (Continued) Classification of assets and liabilities No increase or decrease has been required as a result of applying classification criteria of IFRS9, as the Bank’s assets and liabilities are simple in nature and the method of accounting has not changed from that used under IAS39 as shown in the table below:

Analysis of financial assets Category IAS39 Approach IFRS9 Approach Impact Cash and balances with central banks Amortised cost Business model and SPPI test met - use No impact and loans and advances to banks amortised cost Loans and advances to customers Amortised cost Business model and SPPI test met - use No impact amortised cost Investment Securities Available for sale Business Model and SPPI test met - Liquidity No impact risk management business model that holds to collect contractual cash flows and for sale – accounting FVOCI Accrued Interest Disclosed separately Incorporated in asset No impact

Analysis of financial liabilities Category IAS39 Approach IFRS9 Approach Impact Customer Accounts Amortised cost Business model and SPPI test met - use No impact amortised cost Derivatives Not recognised as Hedge Due to macro hedging standard for IFRS9 No impact Accounting FVPL being developed the Bank will not change accounting treatment but will review once the new standard is released (see Note 1.9). – Not recognised as Hedge Accounting FVPL the above adjustment of £194k has no current effect deferred tax assets as deferred tax is not been recognized currently. Refer to note 24.

Annual Report 2018 81 NOtES FOR tHE FINaNCIaL StatEMENtS (CONtINUED) FOR tHE YEaR ENDED 31 DECEMBER 2018

28. cApItAl ResouRces It is the Bank’s policy to develop a stronger capital base to optimise shareholder returns whilst maintaining capital adequacy and satisfying key stakeholders. the Bank manages its capital to meet the regulatory requirements established by the regulator, the Prudential Regulation authority, and support growth. throughout the year, our capital resources remained in excess of the minimum requirements. the following table analyses the regulatory capital resources of the Bank:

2018 2017 Core tier 1 £’000 £’000 Ordinary share capital 38,602 27,602 Retained (loss) including current year (loss) (22,673) (17,493) Deductions from tier 1 capital – available for sale investment securities - - Total Tier 1 capital and total capital resource 15,929 10,109

In the year 2018, a further capital injection of £11m was received from the parent company. 29. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Determination of fair value The table below summarises the fair value measurement basis used for assets and liabilities held on the reporting date at fair value there are three levels to the hierarchy as follows:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, whether directly (i.e. as prices) or indirectly (i.e. derived from prices)

Level 3 – Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The following table summarises the fair values of those financial assets and liabilities presented on the Bank’s statement of financial position at their fair alue,v by the level in the fair value hierarchy into which each fair value measurement is categorised. The accounting policy in note 1.8 sets out the key principles for estimating the fair values of financial instruments.

2018 2017 Total Total Total fair carrying Total fair carrying Level 1 Level 2 Level 3 value value value value £’000 £’000 £’000 £’000 £’000 £’000 £’000 Financial assets Cash and cash at central banks 34,313 34,313 34,313 28,263 28,263 Loans and advances to banks 3,257 3,257 3,257 18,263 18,263 Financial investments 986 986 986 - - Loans and advances to customers 135,834 135,834 135,834 79,786 79,786 Liabilities Customer accounts 159,140 159,140 159,140 115,915 115,915 Derivative financial instruments 55 55 55 16 16

82 Bank and Clients PLC Notes for the fiNaNcial statemeNts (coNtiNued) for the year eNded 31 december 2018

29. FAIR VAlue oF FInAncIAl Assets AnD lIABIlItIes (continued) Valuation methods for the calculation of fair values are set out below. cash and balances with central banks these represent overnight deposits and as such the carrying value is considered a reasonable approximation of fair value. loans and advances to banks these represent overnight deposits and as such the carrying value is considered a reasonable approximation of fair value. loans and advances to customers the Bank provides loans of varying rates and maturities to customers. For both fixed and variable rate lending products, the fair value is considered to approximate to carrying value as the interest rates is considered equivalent to a current market product rate. the fair value of impaired loans is not considered to be significantly different to the carrying value. customer accounts the contractual rate of fixed rate customer accounts has been compared to market rates at the year end and the Bank concludes that fair value approximates to the carrying value. Fair values of deposit liabilities repayable on demand or with variable interest rates are considered to approximate to carrying value.

Financial assets and liabilities the Bank has £986k (2017: £nil) financial assets held at fair value relating to debt securities classified as Level 1. the Bank has £55k (2017: £16k) financial liabilities held at fair value relating to derivative financial instruments classified as Level 2. there have not been any transfers between levels of the fair value hierarchy during the year.

30. FInAncIAl coMMItMents a) operating lease commitments the Bank acquired a lease from Ocean Capital associates LLP as at 1 January 2015. the term of the lease is 10 years with a 5 year break clause, with no escalation clauses in the initial five year period. the earliest that the lease can be terminated is March 2019 subject to appropriate notice. an amount of £268k has been recognised as an expense in respect of 2018 (2017: £268k). at 31 December 2018, the Bank is committed to making the following total lease payments under non-cancellable leases:

2018 2017 £’000 £’000 Not more than one year 268 268 Over one year but not more than five years - 67 Total cash and cash equivalents 268 335 b) Undrawn mortgage loan facilities 2018 2017 £’000 £’000 Not more than one year 16,429 6,415

Undrawn loan facilities are approved loan applications which have not yet been exercised. They are payable on mortgage completion and are usually drawn down or expire within three months.

Annual Report 2018 83 Notes for the Financial Statements (Continued) for the year ended 31 December 2018

31. RELATED PARTY TRANSACTIONS • Capital contributions from related parties as detailed in note 25 the Bank received share capital contributions of £11m (2017: £6.45m) and a further capital contribution of £2.7m in March 2019 and a further commitment of up to £1m from Ocean Industries S.A. • Services from related parties Legal fees: King and Spalding International LLP is the Bank’s appointed legal advisor. William Charnley is a Non–Executive Director of the Bank and a partner of King and Spalding International LLP. Payments made to King and Spalding International LLP in respect of legal services amounted to £139k (2017: £1.125m) of which £5k (2017: £7k) is unpaid at year end.

• Other related party relationships Edouard Bridel, also a shareholder of Ocean Industries S.a has been an Executive Director of the Bank in april 2016. Further details on director’s remuneration can be found in note 11.

In 2018 payments amounting to £324k were made to Ocean Industries S.a.

32. pARent unDeRtAKInG the Bank’s direct and ultimate controlling party is Ocean Industries S.a. which is incorporated in Luxembourg.

33. SUBSEQUENT EVENTS In March 2019, Ocean Industries S.a. contributed £2.7m of capital and provided a commitment to supply additional capital up to £1m. In March 2019, the Bank entered into an agreement for the sale of its Yeovil office building for an amount of £349k. the Directors are not aware of any other significant events occurring after the reporting date.

84 Bank and Clients PLC Company information

Bankers Natwest Lloyds Auditor Mazars LLP Legal Advisors King & Spalding International LLP Company Secretary Georgina Behrens Registered Office 30 King Street London EC2V 8EH Registered Number 00980698 Pillar 3 Disclosures A request for a copy of the Bank’s Pillar 3 Disclosure should be made to the Bank’s registered office. Website www.bankandclients.com

Annual Report 2018 85