Annual Financial Report

2 March 2017

Aldermore Group PLC

2016 Results

Underlying profit before tax¹ up 34% to £133m (2015: £99m)

· Reported profit before tax increased by 36% to £129m (2015: £95m)

· Underlying cost/income ratio¹ further improved to 45% (2015: 51%) demonstrating scale benefits and cost control

Delivering a high-teens return on equity

· Underlying return on equity¹ of 18.0% (2015: 20.6%)

· Basic earnings per share grew by 11% to 25.2p (2015: 22.7p)

Continued strong, profitable organic growth and robust credit control across the diversified portfolio

· Excellent loan origination; up by 24% to £3.2bn (2015: £2.6bn)

· Loan growth of 22% to £7.5bn (31 December 2015: £6.1bn)

· Asset Finance +17%; SME Commercial Mortgages +12%; Buy-to-Let +38%; Residential Mortgages +7%

· Strong net interest margin at 3.5% (2015: 3.6%)

· Continued robust credit performance; cost of risk at 23bps (2015: 19bps) in line with expectations

Strong capital position maintained

· Total capital ratio of 15.6% (31 December 2015: 15.1%)

· CET1 capital ratio of 11.5%, up from 11.0% at H1 2016 (31 December 2015: 11.8%)

· Tangible book value per share 21% to 153p (31 December 2015: 126p)

Continuing to delight our customers

· Net Promoter Score increased 14 points to +43 from +29 in 2015

· 94% of customers who reviewed Aldermore online would recommend us

· Awards in the year include 'Leasing and Asset Finance Provider of the Year' (NACFB), 'Best Specialist Mortgage Lender' (Your Mortgage) and 'Best Business Savings Provider' (Moneynet)

Phillip Monks OBE, Chief Executive Officer, commented:

"2016 was another remarkable year for the Group. We've continued our track record of delivering strong growth, achieving record underlying profitability of £133m before tax, up 34%. This has been achieved whilst maintaining a healthy net interest margin of 3.5%, and by using the scalability of our operations to become even more efficient.

"More than 220,000 businesses and individuals now choose Aldermore for their banking needs and in 2016 the amount we lent to customers increased by £1.3bn to £7.5bn, driven by record levels of organic origination across both our Mortgage and Business Finance divisions. Our straightforward savings business grew by 16%, with around 30% of balances coming from businesses. Growth has been achieved across our diversified portfolio whilst maintaining a robust approach to risk management.

"The Group maintains a strong capital position and, as planned at IPO, the Bank reached the key milestone of becoming capital self-sufficient in the second half of 2016.

"We generated an underlying return for our shareholders of 18% in 2016 and we remain focused on continuing to deliver returns around this level over the medium term. We have made a strong start to 2017, continuing to balance growth, risk and returns across the Group."

¹ Underlying basis excludes goodwill impairment of £4.1m (pre-tax and post-tax) in 2016 and IPO related costs of £4.1m pre-tax and £3.4m post-tax in 2015.

Enquiries

A live webcast of the analyst presentation will be broadcast on our IR website www.investors.aldermore.co.uk at 9:30am on 2 March 2017 and is available via a listen only conference call by dialling +44 (0) 20 3059 8125. An indexed version of the webcast will be made available on the website shortly after the event.

Important disclaimer

This document contains certain forward-looking statements with respect to the business, strategy and plans of Aldermore Group PLC ("Aldermore") and its current goals and expectations relating to its future financial condition and performance. Such forward-looking statements include, without limitation, those preceded by, followed by or that include the words "targets", "believes", "estimates", "expects", "aims", "intends", "will", "may", "anticipates", "projects", "plans", "forecasts", "would", "could", "should" or similar expressions or negatives thereof. Statements that are not historical facts, including statements about Aldermore's, its directors' and/or management's beliefs and expectations, are forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by Aldermore or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in exchange rates, stock markets, inflation, deflation, interest rates and currencies; policies of the Bank of England, the European Central Bank and other G8 central banks; the ability to access sufficient sources of capital, liquidity and funding when required; changes to Aldermore's credit ratings; the ability to derive cost savings; changing demographic developments, and changing customer behaviour, including consumer spending, saving and borrowing habits; changes in customer preferences; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the potential for countries to exit the European Union (the "EU") or the Eurozone, and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural and other disasters, adverse weather and similar contingencies outside Aldermore's control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses to those acts; geopolitical, pandemic or other such events; changes in laws, regulations, taxation, accounting standards or practices, including as a result of an exit by the UK from the EU; regulatory capital or liquidity requirements and similar contingencies outside Aldermore's control; the policies and actions of governmental or regulatory authorities in the UK, the EU or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; market relating trends and developments; exposure to regulatory scrutiny, legal proceedings, regulatory investigations or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and the success of Aldermore in managing the risks of the foregoing.

Any forward-looking statements made in this document speak only as of the date they are made and it should not be assumed that they have been revised or updated in the light of new information of future events. Except as required by the Prudential Regulation Authority, the Financial Conduct Authority, the London Stock Exchange PLC or applicable law, Aldermore expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this document to reflect any change in Aldermore's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The information, statements and opinions contained in this document and subsequent discussion do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments.

Aldermore

Aldermore Bank PLC is an operating entity of Aldermore Group PLC. Aldermore Group PLC's shares (ALD.L) are listed on the Main Market of the London Stock Exchange. Aldermore Bank PLC is authorised by the Prudential Regulation Authority, regulated by the Financial Conduct Authority and the Prudential Regulatory Authority and is registered under the Financial Services Compensation Scheme.

Summary financials

¹ Underlying basis excludes goodwill impairment of £4.1m (pre-tax and post-tax) in 2016 and IPO related costs of £4.1m pre-tax and £3.4m post-tax in 2015.

² Non-performing loans ratio is calculated as individually impaired loans as a percentage of gross loans at the period end.

³ The effective tax rate for 2016 is impacted by the introduction, from 1 January 2016, of the UK bank surcharge levied on profits above £25m as well as the goodwill impairment which is not allowable for tax purposes.

CEO review

Banking as it should be

The key drivers of our performance in 2016 are rooted in our purpose. Since the Bank was founded in 2009, we have sought to challenge the status quo and empower more people across Britain to seek and seize opportunities in their professional and personal lives by providing "banking as it should be". In doing so, we are addressing a market opportunity that is as real today as it was in the aftermath of the global financial crisis. In fact, as the market has matured, companies and individuals have increasingly recognised that a different kind of banking experience is both possible and available.

As a specialist bank, we don't compete head on with the traditional banks in their main markets. We go beyond their one-size fits all approach by employing specialist underwriters to understand each individual, and by making sure we offer a service that works for them. We operate in carefully selected segments where we have the necessary experience and expertise to deliver strong and sustainable risk-adjusted returns through responsible lending. We benefit from a modern infrastructure and an efficient distribution model, using an approved network of specialist intermediaries and, increasingly, direct relationships with customers online or by telephone, without the need for a costly branch network.

A record year

It is with great pride that we are reporting another record year for Aldermore, demonstrating continued progress on the journey we described at IPO. I am particularly pleased that we were able to deliver such a strong performance despite the uncertainty presented by the UK's referendum on EU membership. While the full political and economic implications of this decision are as yet unknown, the UK economy has remained resilient to date, and we continue to closely monitor our operating environment for any change.

Throughout the year, the Group has performed well and customer confidence remained high. We ended the year with strong growth, a robust credit performance and a healthy pipeline, giving us confidence that we are well positioned for further success.

Continuing commitment to UK businesses, homeowners, landlords and savers

Net loans to customers increased by £1.3bn, or 22%, to £7.5bn at the end of 2016, driven by record levels of organic origination. This record performance was seen across both Business Finance and Mortgages where, respectively, £1bn and £2bn of new customer loans were provided.

In Business Finance, we focus in both the asset finance and invoice finance markets. In Asset Finance we have leveraged our efficient broker-led distribution model to build a market leading position in this channel. Our specialist underwriting advantage in transport, plant & machinery, and other areas of expertise, enabled us to grow net lending by 17% to £1.6bn during 2016.

Across our Mortgages franchise we grew lending by 24% to £5.7bn. This was led by our broad customer offering in Buy-to-Let (BTL) which enabled us to grow BTL lending by 38% to £3.3bn. In SME Commercial Mortgages, where we have particular expertise in underwriting multi-let investment properties, lending grew by 12% to £930m. In our Residential Mortgages business we are committed to truly understanding our customers' circumstances which, with our focus on creditworthy segments of the market, enabled us to grow lending by 7% to £1.5bn.

Loan growth continues to be primarily funded by our award-winning deposit franchise. The performance of our savings business is driven by our straightforward and transparent proposition and our promise that savers get "great returns effortlessly". Our dynamic online franchise enables customers to tailor products to their needs and our transparent approach means we don't use teaser rates. This approach drove an increase in deposits of 16% to £6.7bn in 2016. Business customers provide both c30% of this balance and a high level of advocacy, with 97% of customers surveyed saying they would recommend Aldermore to others.

Profit before tax up by over a third

Reported profit before tax rose 36% to a record high of £129m, driven by continued benefits from our growing franchises, a healthy net interest margin of 3.5% and further improvement in operational leverage reflected in the cost to income ratio falling below 45%. Our management of risk remains robust as demonstrated in our cost of risk at just 0.23% and less than 0.5% of our loans by value being classed as non-performing.

CEO review continued

Enhanced balance sheet strength and strong shareholder returns

2016 was also an important year in further strengthening our balance sheet. While our fully loaded CRD IV CET1 ratio reduced by 0.3% to 11.5% over 2016, we reached the point of capital self-sufficiency in the second half of the year when our ratio rose by 0.5%. This increase was driven by record levels of profitability and was in line with our guidance at IPO. We expect our CET1 capital ratio to continue rising in the coming years as we deliver strong, sustainable earnings.

Overall, the Group generated underlying earnings per share of 26.4p and an underlying return on equity of 18%, or 20% prior to the impact of the 8% bank tax surcharge introduced in 2016.

Strengthening the team

The excellent progress seen in 2016 is the result of the experience and effort that everyone at Aldermore puts into supporting customers on a daily basis and for this I extend gratitude to all my colleagues across the Group.

During the year I was delighted to welcome three new members to the Executive team. Christine Palmer joined us as Chief Risk Officer, Dana Cuffe joined as Chief Operating Officer and Rob Divall joined as the Group HR Director. All of my new Executive colleagues have tremendous experience in their fields and it is a real testament to the business and the progress we have made that we can continue to attract such high calibre executives, who share our vision and can help successfully drive us forward.

Strategic priorities

As we seek to further enhance the sustainability of returns, our strategic priorities will continue to be delivering further growth, increasing efficiency and maintaining our robust approach to risk management.

1. Customer-driven: Helping more customers to seek and seize opportunities

We will continue helping more customers across Britain to seek and seize opportunities, whether that's growing their business, buying their first home or securing a fair return on their savings. Our focus remains on serving diverse pools of customer demand and adjacent markets, where we can operate as an agile, service-focused specialist player in large markets, providing us with multiple levers for growth.

Highlights in 2016:

• 2016 was a record year for originations with over £3bn lent across Business Finance and Mortgages. Total customer numbers also reached an all-time high at over 220,000, while our customer advocacy continued to improve as NPS grew from +29 to +43

• We received further recognition for our service, products and expertise in 2016, winning awards across all of our franchises, including 'Leasing and Asset Finance Provider of the Year' (NACFB), 'Best Specialist Mortgage Lender' (Your Mortgage) and 'Best Business Savings Provider' (Moneynet)

• Our market-leading breadth of offering in Buy-to-Let helped us support more landlords than ever, as we grew customer numbers by 25% to c20,000, originating over £1.2bn of loans, despite the increased market complexity

• We continued to serve specialist segments of the residential mortgage market and invested in enhancing our propositions, including those for the self-employed and first time buyers

• We also invested in developing our retention strategy in Mortgages, providing greater choice and support for customers looking for their next product

CEO review continued

2. Simply delivered: Developing our scalable, effective and efficient operating model

Aldermore benefits from modern, scalable systems and an efficient online broker-led distribution model, as opposed to a costly branch network. We continue to invest in key capabilities and technology, optimising our operating model to support the delivery of growth with enhanced levels of service, capability and efficiency.

Highlights in 2016:

• We generated greater operational leverage in the business, bringing the underlying cost to income ratio below 45%

• As well as introducing new Executives we also bolstered the wider teams during 2016, strengthening expertise across the Group including a new Head of Enterprise Risk, Chief Information Officer and Chief Data Officer

• We progressed a number of improvement initiatives over the year, including enhanced digital capability, process simplification, platform upgrades and a refresh of our brand and customer segmentation

3. Securely managed: maintaining a diverse and low-risk business model

As specialist underwriters, our ability to understand our customers' circumstances and the value of underlying assets is a source of competitive advantage. Growth is supported and controlled by a consistent risk appetite and robust risk management framework, which drives our prudent approach across all areas of the Group.

Highlights in 2016:

• Our credit quality remained well within our appetite as we incurred a cost of risk of 23bps and maintained non-performing loans below 0.5% of our portfolio

• We continue to originate in line with centrally controlled underwriting standards, including stress testing affordability, before going on to re-score the portfolio on a monthly basis

• We made a number of enhancements to our credit risk models through our on-going work to become IFRS9 compliant ahead of the January 2018 implementation date

An ever-evolving market

Aldermore is focused entirely in the UK so what happens in the local economy matters to us. In 2016, the vote to leave the European Union (EU) created elevated levels of political and economic uncertainty. This uncertainty manifested itself in volatile financial markets and lower expectations for future UK economic growth, to which the Bank of England responded by lowering the base rate and enhancing quantitative easing by launching the Term Funding Scheme (TFS).

For Aldermore, the effect of the lower base rate was broadly neutral whilst the TFS presents us with an opportunity to access funding at a lower cost. The UK economy has remained resilient in the face of the uncertainty and we have seen no material change in customer confidence or demand for loans. We continue to closely monitor our operating environment for any change.

2016 also saw the announcement or introduction of a number of changes to regulation and legislation directly relevant to Aldermore and our customers. As first set out in 2015, a tax surcharge of 8% applicable to banks' profits exceeding a £25m threshold was introduced from 1 January 2016, resulting in a higher tax bill for Aldermore than would have otherwise been incurred. A 3% Stamp Duty Land Tax surcharge was also applied to purchases of second homes and Buy-to-Let properties from 1 April 2016. Aside from elevating completions during Q1, the changes did not materially affect demand in 2016, as our customers, notably professional landlords, tend to have longer investment horizons over which the additional cost can be recovered.

CEO review continued

In 2017, we expect the majority of our customers and chosen markets to remain largely unaffected by any notable legal or regulatory change. In Buy-to-Let meanwhile, we will see the implementation of several changes; amended affordability tests from January 2017, the beginning of a phased reduction in mortgage interest tax deductibility from April 2017; and changes to the rules applied to underwriting portfolios of Buy-to-Let properties from September 2017. It is too early to accurately predict how the market will respond to these changes. However, whilst there remains a shortage of housing stock and new homebuilding continues to lag Government targets, the fundamentals supporting demand remain strong. Whilst regulatory changes to underwriting and affordability testing could reduce the overall rate of market growth, we expect to benefit from the anticipated increase in professionalisation of demand and to continue outgrowing the market, building on our small market share.

A confident outlook

The process of Britain's exit from the EU may result in economic conditions deviating from current forecasts but for 2017 there is unlikely to be any material impact. We expect to continue delivering a return on equity in the high teens over the medium term, through a combination of focused loan growth, margin management and the robust control of both operational expenses and risk.

As we deliver on the first priority of our strategy, we expect to grow our loan book by between 10% and 15% in 2017 with further growth thereafter and the portfolio mix remaining broadly stable. The exact pace of growth will be dependent on our ability to grow within our prudent risk appetite, while delivering strong and sustainable returns.

As expected, we are seeing incremental signs of lower pricing within our chosen lending markets, primarily driven by a lower cost of funding across the sector. Our blended cost of funds is anticipated to continue to fall into 2017 as we further utilise the Bank of England's Term Funding Scheme and deposits gradually mature on to the lower rates currently seen across the market. We therefore expect the combined effect of these dynamics to result in our net interest margin remaining broadly stable at around 3.5% in 2017.

Our ability to differentiate through the specialist nature of our underwriting, service and brand, positions us well versus competitors and we will continue to invest in further enhancing our service and digital capabilities to maintain and build upon this advantage.

We expect the cost of ongoing investment, which includes mandatory projects such as preparatory work for IFRS9 and General Data Protection Regulation (GDPR), coupled with further strengthening of our teams in support of our strategy, to result in an increase in underlying costs of between £15m and £20m in 2017. Project expenditure is also expected to result in a larger balance of intangible assets. However, in line with our second strategic priority, operating model enhancements will increase efficiency and operating leverage consistent with our cost to income ratio further declining to below 40% over the medium term.

In line with our third strategic priority, we plan to maintain the credit quality of the book such that we would expect to incur an annual cost of risk of between 25 and 35bps over the medium term. Further information on the effect of changes to IFRS9 on the recognition of impairments will be provided closer to its January 2018 implementation.

We are delighted with the Group's performance in 2016 and remain positive on our outlook notwithstanding the economic uncertainty and potential changes to regulatory capital requirements. The Board will therefore continue to consider the payment of dividends while taking into account the growth opportunities available, anticipated changes in capital requirements, and once the Group's CET1 ratio is above 12%.

In conclusion…

I'm delighted that our record performance in 2016 continues to demonstrate delivery against our business plan and targets and I would like to thank our customers, colleagues and shareholders for their continued support.

We have clear strategic priorities to further create and unlock value across the business, as we continue to serve and delight our customers and generate strong and sustainable returns for our shareholders.

Phillip Monks OBE, Chief Executive Officer

Financial review

Loans to customers up 22% with originations at record levels

2016 loan growth was driven by record levels of origination across both our Business Finance and Mortgages divisions at over £1bn and £2bn respectively, as we continue to build our diversified portfolio. This record level of originations was partly offset by £1.8bn of redemptions in the year. This level of redemptions represents almost a third of the loan portfolio at the start of the year, and an 83% increase on redemptions in 2015, reflecting the growing maturity of the business.

Net loans to customers reached £7.5bn (31 December 2015: £6.1bn), as the number of customers grew by 17% to over 80,000 with more UK businesses, homeowners and landlords choosing Aldermore to serve their borrowing needs.

Business Finance up 15% to £1.7bn

Asset Finance grew by 17% to £1,573m as our expertise in a broad range of asset classes allowed us to maintain our market leading position in the broker-channel and grow our wholesale proposition by 60%.

Invoice Finance continued to focus on returns, moving toward larger invoice discounting for small businesses and structured finance, and away from lower value factoring business. This refocusing was reflected in the 4% decline in loans to £154m, whilst driving an increase in segmental profits of over 50%.

Mortgages increased 24% to £5.7bn

SME Commercial Mortgages saw a growing proportion of customers engaging with us directly, reflecting our growing reputation for expertise and service. This contributed to loan growth of 12% to £930m in 2016, despite tightening our appetite for development-based lending following the EU referendum.

In Buy-to-Let, our broad customer offering enabled us to grow lending by 38% to £3,326m. This strong growth also reflects our operational agility, as we took advantage of the market spikes in the first quarter, ahead of the introduction of an increase in stamp duty, and in the fourth quarter when we successfully took share in an active market.

In Residential Mortgages, our approach to understanding the detailed circumstances of each customer enabled us to grow lending by 7% to £1.494m. This growth was driven by £466m of originations which, over the year, more than offset a high level of redemptions on Help to Buy mortgages written 2 years ago when Aldermore was the first to market with the product.

Financial review continued

Deposit-led funding model, with balances rising 16%

Our funding strategy remains deposit-led, whilst we actively manage wholesale sources, such as Government and central bank schemes, to provide diversification and drive an efficient cost of funds. As at 31 December 2016, our loan to deposit ratio was in line with management expectations at 112% (31 December 2015: 107%).

Our dynamic and innovative online savings franchise, which provides award-winning savings products to c140,000 customers, grew by 16% to £6.7bn (31 December 2015: £5.7bn), benefitting from strong rates of retention at c70%. SME deposits of £1.6bn (31 December 2015: £1.4bn) and our Corporate deposits of £260m (31 December 2015: £156m) now represent almost a third of all deposits.

Wholesale funding increased by 54% to £982m (31 December 2015: £636m) and predominantly consists of on-balance sheet funding via repurchase agreements of Funding for Lending Scheme (FLS) Treasury Bills, drawings through the Term Funding Scheme (TFS) and our Residential Mortgage Backed Security (RMBS).

As at the end of 2016, under the Bank of England's SME lending extension of FLS, the Group had on-balance sheet funding of £355m. We were also the first bank to utilise the Bank of England's newly launched TFS, with £396m of funding having been accessed by the end of 2016.

The outstanding balance on our RMBS as at 31 December 2016 stood at £131m (31 December 2015: £194m). This reduction reflects the capital repayments on the underlying mortgages.

Other wholesale funding predominantly consists of Tier 2 debt capital of £100m (31 December 2015: £38m). In October 2016, £60m subordinated loan notes were successfully issued with a maturity date in 2026 and a call option in 2021. This added to our existing Tier 2 notes which were issued in 2012 and have an option to call in May 2017.

Financial review continued

Profits up 36% demonstrating continued strong, sustainable returns

Profit before tax for the year increased by 36% to £128.7m (2015: £94.7m) as we maintained healthy margins across a larger loan book. Excluding £4.1m for both the goodwill impairment in 20161 and the 2015 pre-tax IPO related costs, the underlying profit before tax increased by 34% to £132.8m (2015: £98.8m).

The tax charge for the year increased by 115% to £35.2m (2015: £16.4m). This increase reflects greater profitability as well as the introduction of the 8% bank corporation tax surcharge on taxable profits above £25m from 1 January 2016. The effective tax rate of 27% in 2016 (2015: 17%) comprises the standard 20% corporate tax rate plus the 8% surcharge. Statutory profit after tax therefore increased by 19% to £93.5m (2015: £78.3m).

The return on equity generated in the period was 17.2%, or 18.0% on an underlying basis, and was in line with our commitment to delivering returns in the high teens. The 2016 basic earnings per share was 25.2p, on both a basic and fully diluted basis.

Operating income increases 19% as average net loans rise 24%

During 2016 interest income grew by 19% to £358.2m driven by continuing net loan growth. The Group's average gross yield fell slightly to 5.3% (2015: 5.5%), primarily as a result of the lower rate environment and competition in Asset Finance and a change in mix with the comparatively lower yielding BTL portfolio growing at a faster pace than other portfolios.

Interest expense increased by 17% to £118.8m as we funded our lending growth. We also continued to benefit from a diversified funding base, with access to lower cost Government schemes, which helped support a reduction in our average cost of funds to 1.7% (2015: 1.9%).

As a result, the Group's net interest income increased by 20% to £239.4m (2015: £198.9m) while, as expected, the net interest margin remained broadly stable at 3.5% (2015: 3.6%). Net fee and other operating income rose by 12%, reflecting a higher volume of property valuations as a result of new mortgage lending.

¹ See page 48 for further information.

Financial review continued

Growth in operating expenses controlled to a 3% rise

Operating expenses were well controlled, increasing by 3% to £123.3m (2015: £119.6m), in line with management expectations. Within this, administrative expenses rose by 5% to £113.1m (2015: £107.9m), primarily reflecting the recruitment of colleagues to further support growth and enhance risk management.

Provisions of £0.8m in 2016 were 65% lower than in 2015 due to the payment of the capital element of the Financial Services Compensation Scheme (FSCS) levy having now been completed by the banking industry. Depreciation and amortisation was consistent with last year at £5.3m (2015: £5.3m).

Given their material and one-off nature, costs related to our IPO in 2015 and the impairment of goodwill related to our Invoice Finance business in 2016 are removed from our financial metrics to provide an 'underlying' view of our performance.

Our modern scalable systems and efficient broker network supported us in further leveraging our capabilities, with operating income growing by 19%, while underlying cost growth was controlled to just 3%. This resulted in our underlying cost to income ratio declining by 6 percentage points to 45% (2015: 51%).

Loan impairments rise while cost of risk remains low at 23bps

We maintain a robust approach to risk management and this, combined with a relatively benign credit risk environment, has resulted in our cost of risk remaining low and below expectations at 0.23%. Impairments increased by 49% to £15.5m (2015: £10.4m), within which our collective charge grew by 31% to £4.7m (2015: £3.6m) reflecting the growth of the loan book and a further degree of caution reflecting increased economic uncertainty following the UK's vote to leave the EU. Individual impairments of £10.8m were 58% higher than 2015 due to 2016 having seen impairments taken in relation to a relatively small number of exposures, whereas 2015 was abnormally low in this regard.

Financial review continued

Capital Management

A robust capital position after the Group became capital generative in the second half of 2016

The Group maintains a strong capital position and after becoming capital generative in the second half of 2016, closed the year with a fully loaded CRD IV total capital ratio of 15.6% (31 December 2015: 15.1%) and a CET1 ratio of 11.5% (31 December 2015: 11.8%). These movements reflect the profit after tax of £93.5m, offset by growth in Risk Weighted Assets (RWAs) of £883m and the post-tax AT1 coupon of £6.6m, payable annually in April. The total capital ratio also benefits from the issuance of £60m Tier 2 Notes in October 2016.

RWAs increased by 24% reflecting loan growth of 22% and the increase in the Basic Indicator Approach (BIA) Operational Risk charge which is updated in the first quarter each year based on the average of the last 3 years' net operating income. The Group's leverage ratio at 7.0% (31 December 2015: 7.2%) remains significantly above forthcoming regulatory minimums. The marginal reduction in the year is mainly due to growth in lending assets, partially offset by growth in retained earnings.

As of 1 January 2017, Aldermore's total CET1 requirements under normal operating conditions, which include PRA ICG and Pillar 2B requirements, as well as the phased in CRD IV buffers, are higher than the 7% AT1 conversion level.

We are on track with enhancements to our credit risk models through our work to become IFRS9 compliant for January 2018 when the new accounting standard is introduced. This takes us closer to the sophistication required for an Internal Ratings-Based approach (IRB) to capital which may help to mitigate the risk of future changes in capital requirements. We will continue to monitor the cost and benefits associated to moving to IRB, as the regulatory changes and timeframes for implementation become clear.

Capital resilient under stress

We periodically test the Group's resilience to severe, but plausible adverse scenarios. This process supports calibration of our stress loss buffer, ensuring we are able to withstand an economic downturn over our 5 year planning horizon. The outcome of this process is a key input into other Group processes, including the setting of our risk appetite, the assessment of our capital adequacy and our assessment of risk-adjusted returns.

In 2016, this process included the supervisory H2 2016 Annual Cyclical Scenario in addition to Aldermore's internal scenario. This scenario includes; a rapid fall in property prices, with residential property values declining by 32% and commercial by 42%; an economic downturn with a cumulative 4.3% reduction in GDP; unemployment rising to almost 10%; the BoE base rate falling to 0%; and inflation running at 3.4%.

Under this severe scenario, higher impairments including the effect of changes to IFRS9, operational risk losses and other detrimental factors would reduce our projected CET1. However, at its lowest point post Management actions, the CET1 ratio is expected to be around 8.5%, remaining above the 7% level at which our AT1 security converts to equity and significantly above our current CET1 PRA requirement and CRDIV buffers at 1 January 2017.

Financial review continued

Capital Management continued

¹ The year end 2015 leverage ratio was restated to 7.2% in the published Pillar 3 disclosures following finalisation of off-balance sheet exposures.

Financial review continued

Credit risk

Credit risk is the risk of financial loss arising from the borrower or a counterparty failing to meet their financial obligations to the Group in accordance with agreed terms. The risk arises from our lending activities as a result of a defaulting mortgage, lease or loan contracts. Although credit risk arises from our loan book, it can also arise from off balance sheet activities.

The credit risk section of this report includes information on the following:

1. The Group's maximum exposure to credit risk

2. Credit quality and performance of loans

3. Forbearance granted through the flexing of contractual agreements

4. Diversity and low concentrations within our loan portfolio

5. Details of provisioning coverage and the value of assets against which loans are secured

6. Information on credit risk within our treasury operations

1. The Group's maximum exposure to credit risk

The following table presents our maximum exposure to credit risk of financial instruments on the balance sheet and commitments to lend before taking into account any collateral held or other credit enhancements. The maximum exposure to credit risk for loans, debt securities, derivatives and other on-balance sheet financial instruments is the carrying amount, and for loan commitments the full amount of any commitment to lend that is either irrevocable or revocable only in response to material adverse change.

Our net credit risk exposure grew by 24% in 2016. This was broadly in line with net loans and advances to customers, our largest credit risk exposure, having grown by 22% to £7,504.7m.

Financial review continued

Credit risk continued

2. Credit quality and performance of loans

The tables below provide a split of our £7,504.7m credit risk exposure to loans gross of impairments, on the basis of:

A. Whether they are performing (neither past due nor individually impaired)

B. Payments missed, but no impairment is required (past due but not individually impaired)

C. Loans where a loss has been accounted for, for example, as a result of payments having been missed (individually impaired)¹

The three categories shown above are further analysed over the following pages.

The analysis in this section of the report excludes the Property Development portfolio from a number of tables where it is not relevant (marked with a footnote). Gross property development exposure at 31 December 2016 was £230 million (31 December 2015: 184 million), and net exposure was £229 million (31 December 2015: £179 million).

¹ During 2016, loans which are individually impaired and less than 3 months in arrears have been included within individually impaired loan disclosures. As such, 2015 comparative disclosures in respect of the impaired balances on pages 15 to 24 have been re-presented on this basis.

² The above analysis includes Property Development.

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A. Loans and advances that are neither past due nor individually impaired

The credit quality of assets that are neither past due nor individually impaired is analysed internally as follows:

1 This analysis excludes Property Development.

The categorisation of high, medium and low risk is based on internal grading models utilised in portfolio monitoring. The grading models are used to generate a consistent Group-wide approach for the grading of customer credit risk exposures for all lending businesses, and provide a relative internal ranking of risk. Drivers for the grade mapping include external credit reference agency risk scores, property valuations and qualitative factors. The relative measure of risk reflects a combined assessment of the probability of default by the customer and an assessment of the expected loss in the event of default.

The resulting classification of balances between low, medium and high is consequently driven by a combination of the probability of default ("PD") and loss given default ("LGD") grades as further explained. A matrix of eighteen PD (fifteen of which apply to up to date accounts) and ten LGD grades determine the category within which each loan is categorised, i.e. those accounts that have a low PD and/or LGD are graded as 'low'. Those graded 'high' will be accounts that have either a high PD and/or high LGD.

• Probability of Default refers to the probability of a customer or counterparty defaulting, which is typically taken as three payments past due, within the next 12 months. A default probability model predicts this probability by using credit scores along with financial, behavioural and qualitative inputs.

• Key components of the Loss Given Default are the propensity to "cure", that is the likelihood/propensity for a defaulting account to be restored to a performing status, and the level of security held in relation to the credit exposure. The level of security varies, ranging from a small number of very short term unsecured loans in the Asset Finance business, to highly secured loans on residential property within the Residential Mortgages business. The valuation method for assets is specific to the nature of the collateral and includes indexation for property valuations.

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B. Loans and advances that are past due but not individually impaired

As at the end of 2016 there was a balance of £43.2m relating to loans where customers had missed one or more repayments but no specific loss had yet been taken. This represented a 24% increase in 2016, which was broadly in line with the 22% growth in net loans in the year.

The table below provides further analysis according to the number of months past due:

C. Loans and advances that have been individually impaired

Individually impaired balances are further analysed as follows:

¹ The above analysis includes Property Development.

The fair value of collateral held against the above individually impaired balances at 31 December 2016 of £35.6m (31 December 2015: £28.0m) was £28.8m (31 December 2015: £23.4m). We always seek to pursue timely realisation of collateral in an orderly manner and do not use the collateral for our own operations.

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The in-year movement in impaired loans is analysed as follows:

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3. Forbearance granted through the flexing of contractual agreements

Forbearance is defined as any concessionary arrangement that is made for a period of three months or more where financial difficulty is present or imminent. It is inevitable that some borrowers experience financial difficulties which impact their ability to meet mortgage or SME finance obligations as per the contractual terms. We seek to identify borrowers who are experiencing financial difficulties, as well as contacting borrowers whose loans have gone into arrears, consulting with them in order to ascertain the reason for the difficulties and to establish the best course of action to bring the account up to date. In certain circumstances, where the borrower is experiencing financial distress, we may use forbearance measures to assist the borrower. These are considered on a case-by-case basis and must result in a fair outcome. The forbearance measures are undertaken in order to achieve the best outcome for both the customer and the Group by dealing with financial difficulties and arrears at an early stage.

The most widely used methods of forbearance are temporarily reduced monthly payments, loan term extension, deferral of payment and a temporary or permanent transfer to interest only payments to reduce the borrower's financial pressures. Where the arrangement is temporary, borrowers are expected to resume normal payments within six months. Both temporary and permanent concessions are reported as forborne for twenty four months following the end of the concession. In all cases, the above definitions are subject to no further concessions being made and the customers' compliance with the new terms.

Analysis of forborne accounts by payment status is shown in the tables below:

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As at 31 December 2016, we had undertaken forbearance measures as follows in each of our segments:

¹ 2015 SME Commercial Mortgages balance has been re-presented following a review of exposures classified as forborne.

When forbearance is granted to a borrower on a specific exposure, all exposures which are aggregated with that borrower, e.g. by reason of common ownership, are deemed as forborne for reporting purposes.

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4. Diversity and low concentrations within our loan portfolio

As shown below, we monitor concentration of credit risk by segment, geography, sector and size of loan:

Credit concentration by segment

Details of our net lending by segment are as follows:

1 Analysis includes Property Development.

Credit concentration by geography¹

An analysis of our loans and advances to customers by geography is shown in the table below:

Credit concentration by sector

An analysis of our loans and advances to customers by sector is shown in the table below:

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Credit concentration by quantum of exposure

An analysis of loans and advances to customers by quantum of exposure is shown in the table below:

5. Details of provisioning coverage and the value of assets against which loans are secured

The principal indicators used to assess the credit security of performing loans are loan-to-value ratios for SME Commercial, Buy-to-Let and Residential Mortgages.

SME Commercial Mortgages1

Loan-to-value on indexed origination information on our SME Commercial Mortgage portfolio is set out below:

¹ The above analysis excludes Property Development.

² Indexation methodology has been enhanced during 2016 hence the 2015 balances have been re-stated in accordance with the enhanced methodology.

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Property Development

We use "loan to gross development value" as an indicator of the quality of credit security of performing loans for the Property Development portfolio. Loan to gross development value is a measure used to monitor the loan balance drawn compared against the expected gross development value once the development is complete.

Buy-to-Let

Loan-to-value on indexed origination information on our Buy-to-Let Mortgage portfolio is set out below:

Residential Mortgages

Loan-to-value on indexed origination information on our Residential Mortgage portfolio is set out below:

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Lending at higher LTV bandings is largely as a result of the Group's participation in the Help to Buy Scheme, with in excess of 90% of the portfolio where the loan-to-value is above 85% having an associated government guarantee reducing the Group's risk exposure. As at 31 December 2016, 96% of the exposures with loan-to-value in excess of 85% relate to the Help to Buy Scheme (31 December 2015: 89%). The Help to Buy guarantee portfolio, which makes up the majority of the Help to Buy book, had an average indexed loan-to-value of 87% (31 December 2015: 91%). As at 31 December 2016, the average indexed loan-to-value of the non-Help to Buy owner occupied book is 61% (31 December 2015: 64%).

Invoice Finance

In respect of Invoice Finance, collateral is provided by the underlying receivables (e.g. trade invoices). As at 31 December 2016, the average advance rate against the fair value of sales ledger balances which have been assigned to the Group, net of amounts considered to be irrecoverable, is 62.30% (31 December 2015: 64.99%).

In addition to the value of the underlying sales ledger balances, we will wherever possible, obtain additional collateral before offering invoice finance facilities to a client. These may include limited personal guarantees from major shareholders, charges over personal and other business property, cross guarantees from associated companies and unlimited warranties in the case of frauds or certain other breaches. These additional forms of security are impractical to value given their nature.

Asset Finance

In respect of Asset Finance, collateral is provided by our rights and/or title to the underlying assets, which we are able to repossess in the event of default. Where appropriate, we will also obtain additional security, such as parent company or personal guarantees.

Asset Finance also undertakes a small volume of unsecured lending where we have obtained an understanding of the ability of the borrower's business to generate cash flows to service and repay the facilities provided. As at 31 December 2016, the total amount of such unsecured lending was £40.7 million (31 December 2015: £30.3 million).

Group impairment coverage ratio

Impairment coverage is analysed as follows:

The coverage ratio has increased during the year as the result of a small increase in the number of loans specifically provided for (see Note 13).

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6. Information on credit risk within our treasury operations

Credit risk exists with treasury assets where we have acquired securities or placed cash deposits with other financial institutions. The credit risk of treasury assets is considered to be relatively low. No assets are held for speculative purposes or actively traded. Certain liquid assets are held as part of our liquidity buffer.

Credit quality of treasury assets

The table below sets out information about the credit quality of treasury financial assets. As at 31 December 2016 and at 31 December 2015, none of the treasury assets were past due or impaired. The analysis presented below is derived using ratings provided by Standard and Poor's (see below disclaimer for further details) and Fitch. The worst rating from the credit agencies for each of the counterparties is used as the basis for assessing credit risk of treasury financial assets.

Standard and Poor's disclaimer notice in relation to the ratings information set out above:

"This may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor's. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES (INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS OR LOSSES CAUSED BY NEGLIGENCE) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice."

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Funding and Liquidity risk management

Liquidity risk is the risk that we are not able to meet our financial obligations as they fall due, or can do so only at excessive cost.

To protect the Group and its depositors against liquidity risks, we maintain a liquidity buffer which is based on our liquidity needs under stressed conditions. The liquidity buffer is monitored on a daily basis to ensure there are sufficient liquid assets at all times to cover cash flow movements and fluctuations in funding, enabling us to meet all financial obligations and to support anticipated asset growth.

Analysis of the liquidity buffer

The components of the Group's liquidity buffer are shown below:

Our liquidity buffer ensures the Group holds sufficient liquidity under stressed conditions. Our ability to monitor stress and ongoing commitments to our balance sheet has considerably improved in the last 12 months with the introduction of a new liquidity reporting tool "QRM" which allows daily granular reporting, providing greater confidence in understanding the balance sheet. We also have further access to liquidity through pre-positioned collateral with the Bank of England (until drawn would remain off-balance sheet so not included within the calculation), providing further comfort.

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Segmental analysis: Asset Finance

Asset Finance predominantly supports capital investment in business critical assets. Leveraging our depth and breadth of expertise, we finance a wide array of assets such as plant and machinery, commercial vehicles, technology, office equipment and cars. This flexibility enables us to meet the needs of customers of all sizes across key industries. In addition, we offer wholesale and block discounting facilities to smaller finance companies and brokerages enabling them to extend credit directly to SMEs.

Performance

Net loans to customers were up by over £200m to £1.6bn, an increase of 17% driven by organic origination of £1bn, extending our Asset Finance franchise to c50,000 small UK businesses.

We maintain a leadership position in the competitive broker-introduced market, supporting a range of customer segments across a significant number of asset classes. We have also expanded our wholesale proposition, up c60% year-on-year. Net interest income was up 15% in the year to £59.4m, with NIM down slightly to 4.1%, driven by changes in mix and tenure, including the expansion of our wholesale channel.

Impairments remained low at £5.6m (2015: £4.8m), with the cost of risk remaining broadly flat at 38bps, reflecting the high quality book backed by high-levels of tangible collateral. The overall segmental profit increased 15% to £45.1m (2015: £39.3m).

Market and Strategy

The asset finance market was worth c£29bn of gross originations in 2016, growing by 7% year-on-year. Aldermore operates as a leader within the £5bn broker segment (which grew 9%) providing both straightforward forms of asset finance, in addition to complex and structured deals which play to our specialist underwriting advantage. We are also increasing our share of smaller transactional deals and "soft assets", which grew 15% year on year.

Consolidating our leadership in the broker market will be driven by our on-going investment programme in digital capability, aimed at enhancing our service offering by making it simpler for brokers to deal with us, especially in less complex cases. This capability can then be leveraged into new market adjacencies, including the £9bn vendor finance market.

The market is likely to remain competitive in 2017, driven by new entrants and consolidation in the broker channel, and we expect to see a continued trend toward wholesale deals. However, customer demand remains robust, with Aldermore well-positioned as market leaders to take our natural share of a growing market.

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Segmental analysis: Invoice Finance

Invoice Finance provides working capital solutions for UK SMEs, ranging from vanilla invoice discounting and full-service factoring to more tailored customer solutions requiring Aldermore's in-house expertise.

Performance

Performance trends in Invoice Finance have shown significant improvement as a result of our strategy to consolidate and focus on larger discounting facilities to small businesses, demonstrated by a 56% increase in segmental profit.

Invoice Finance has a relatively short lifecycle compared to the Group's other portfolios, whilst net lending declined slightly by 4% in 2016 to end the year at £154.1m (2015: £160.8m), 19% growth in originations reflects our continuing focus toward invoice discounting and structured finance and away from lower value factoring business.

Fee income of £14.2m declined by £1m as we refocused and managed down customer numbers, reducing overall operating income by 7% to £19.0m. Administrative expenses were reduced by almost a third, reflecting management action to increase efficiency and focus the customer base, whilst broadly maintaining overall net lending balances.

Impairments remain low, increasing by £0.2m to £1.7m, with a cost of risk at 108bps.

Market and Strategy

The Invoice Finance business continues to offer a vital working capital solution for Britain's small businesses and provides a valuable contribution to the Group, as well as the potential for further opportunities for lending to small businesses.

We will continue to deploy a focused strategy, targeting key clients through enhanced sales capability, where we can develop relationships and support client growth. As we grow the client base and net lending, we will continue to drive efficiencies in the operating structure and enhance profitability.

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Segmental analysis: SME Commercial Mortgages