Final Results

FOR IMMEDIATE RELEASE 3 March 2016

Manx Financial Group PLC (the 'Company')

Report and accounts for the year ended 31 December 2015

Manx Financial Group PLC (LSE: MFX), the financial services group which includes Conister Bank Limited, Edgewater Associates Limited, Conister Card Services Limited and Manx Incahoot Limited, presents its final results for the year ended 31 December 2015.

Jim Mellon, Executive Chairman, commented: "I am pleased to announce that we have secured a record Profit Before Tax for the year, which has increased by 34% to £2.31 million (2014: £1.73 million), providing a Return on Equity of 17.3% (2014: 15.9%) which, in relative terms to the banking sector, is extremely high."

The 2015 Audited Annual Report and Accounts will be available from the Company's website shortly and will also be posted to shareholders. www.mfg.im 

Financial Highlights

Contacts: 

Manx Financial Group PLC

Denham Eke, Chief Executive

Tel: +44 (0)1624 694694

Britton Financial PR

Tim Blackstone

Tel: +44 (0)7957 140416

Chairman's Statement

Review of performance

Dear Shareholders,

I am pleased to announce that we have secured a record Profit Before Tax for the year, which has increased by 34% to £2.31 million (2014: £1.73 million), providing a Return on Equity of 17.3% (2014: 15.9%) which, in relative terms to the banking sector, is extremely high. This is the sixth period running where we have demonstrated unbroken growth and, as a result, our balance sheet is stronger than ever. Of particular note is that Conister Bank, our principal banking subsidiary, increased Profit Before Tax by 95% to £2.24 million (2014: £1.15 million).

We have achieved this result against an ever increasing global concern over the world's banking system which has given rise to increased regulation and capital support requirements. In the Isle of Man and UK, this will manifest itself through the introduction of Basel III and the adoption of recommendations of the various committees that were established in the aftermath of the 2008 crisis. In particular, the regulation of consumer credit lending in the UK, an area we have long identified as providing profitable opportunities, has been strengthened by the UK Financial Conduct Authority ("FCA") taking oversight of this market from the Office of Fair Trading. As part of this change of regulator, the FCA is reviewing all consumer credit licence holders. Currently, we hold interim licences as our existing licences are reviewed and we would expect to have completed the re-application process by the end of 2016 with new full licences being granted. In tandem, we have strengthened our banking subsidiary's risk evaluation and compliance processes to ensure we continue to grow in a controlled and disciplined manner. In the last two years alone, our net assets have increased by more than a third and this investment in such an important element of our infrastructure will prove to be invaluable as we continue to grow in an ever increasing competitive market.

Our strategy for growth is through innovative product diversification. This allows us to leverage our existing expertise for both direct lending and lending through trusted relationships. As well as supporting growth, this strategy will provide an insulation against the wider increase in liquidity that is now returning to our lending markets.

New developments in financial technology have enabled fleet-footed lenders to create ever smarter distribution networks for their customers' advantage. In the last two years, we have seen developments that will materially improve the efficiency of financial institutions. In order to match these benefits, we will continue with the process of upgrading our key banking systems which we believe will inevitably lead to both the improved delivery of our products and the achievement of financial efficiencies.

Manx Financial Group PLC

Turning to our financial performance, Net Interest Income increased by 34% to £14.55 million (2014: £10.83 million), with Net Trading Income rising by 23% to £8.93 million (2014: £7.25 million). This led to a 24% increase in Operating Income to £9.10 million (2014: £7.35 million). Although Total Costs increased by 21% to £6.79 million (2014: £5.62 million), including a 20% increase in Personnel expenses to £3.52 million (2014: £2.93 million), the Profit Before Tax increased by 34% to £2.31 million (2014: £1.73 million). As a result, our 2015 Profit After Tax rose by 32% to £2.10 million (2014: £1.59 million), leading to a 32% increase in our basic earnings per share to 2.06 pence (2014: 1.56 pence).

Our balance sheet showed a similar improvement, whereby Loans and Customer Advances increased by 13% to £101.36 million (2014: £89.34 million), supported by Deposits of £106.33 million (2014: £100.26 million) and Cash of £7.16 million (2014: £6.12 million). Total Assets increased by 9% to £130.01 million (2014: £119.51 million) and Equity increased by 22% to £12.15 million (2014: £9.98 million).

Conister Bank Limited

The 2015 outcome is a reflection of the Group as a whole. Interest Income grew by 29% to £17.56 million (2014: £13.63 million) leading to a 23% increase in Net Trading Income to £7.38 million (2014: £6.02 million). Operating Income grew by 24% to £7.62 million (2014: £6.15 million). We have prudently increased Provisions by £1.06 million during the year (2014: £0.55 million) to a total of £2.06 million (2014: £1.81 million), representing 1.6% of our gross loan book. Personnel, Depreciation and all other Costs decreased by 3% to £4.32 million (2014: £4.45 million), which resulted in an 95% improvement in Profit Before Tax to £2.24 million (2014: £1.15 million).

Being totally funded by Isle of Man deposits remains a key strength and our Loan to Deposit ratio improved by 5.6% to 94.6% (2014: 89.0%). We remain committed to our very conservative liquidity policy: one which has no behavioural adjustments and no negative cumulative mismatches. This, along with our high regulatory Risk Asset Ratio of 16.4% (2014: 16.6%), provides additional comfort to our deposit base. Our reputation for prudent stewardship will assist deposit acquisition as we continue to grow our balance sheet.

I am pleased to welcome Ian Morley to the Bank's board as an independent Non-executive Director. Ian has advised Central Banks, International Regulators and other International Organisations, such as the EU and OECD on matters related to Economics, Markets and Regulation. Ian joins Neil Duggan who, as already reported, succeeded Don McCrickard as Chairman of the bank, following Don's retirement on 30 June 2015.

Edgewater Associates Limited

In my last annual report, I predicted an annual run rate of £0.36 million and I am pleased to report that our adjusted performance achieved this goal. During the year, we reviewed our cost base and incurred several one-off costs relating to moving office accommodation. The business is now housed in the same building as Conister Bank and the full impact of the cost savings achieved by this move will flow through to the 2016 Income Statement. With an annual adjusted return on equity of 18% and a fully developed 'back office' offering, this market sector is one I am keen on investing further in. As such we continue to review potential IFA acquisitions to bolt onto this business.

Conister Card Services Limited

Whilst progress towards our ambition of monetising our MasterCard® licence has been slow, I am content that proper due diligence and contract negotiations take precedence to any short term gain. We have a number of opportunities within in pre-paid card space which are in the process of development.

Other operating subsidiaries

We continue to incubate new business lines, including foreign exchange services, peer-to-peer lending and loan broking, both to test market competitiveness and to broaden the suite of financial services we offer. We continue to nurture those that show promise and I look forward to reporting in more detail about these ventures in future reports.

Outlook

I believe further liquidity will return to the traditional lending markets forcing pressure on yields and that interest rates in the UK will continue to remain at their historic low levels for most of 2016. With this backdrop, I believe that our lending strategy of growth through product extension will continue to be successful as we further increase our product range and source our liquidity through our fixed term rate structure. Our fixed term deposits will also provide a partial shield against yield pressure in the more competitive lending markets. Thus I see no current reason as to why the year-end 2016 should not continue our profit growth at the same or similar rate.

Whilst our strategy is not acquisition led we will continue to review acquisition opportunities where they make good, sound financial sense.

Finally, I would like to take this opportunity to thank you, our shareholders, our staff, your Board and our wider stakeholders for their continued support. I look forward to working with you all to continue to grow Manx Financial Group into an enlarged and diversified financial services company.

Jim Mellon

Executive Chairman

29 February 2016

Consolidated Income Statement

Consolidated Statement of Other Comprehensive Income

Consolidated and Company Statement of Financial Position

Consolidated Statement of Cash Flows

Consolidated and Company Statement of Changes in Equity

Notes to the Consolidated Financial Statements

1. Reporting entity

Manx Financial Group PLC is a company incorporated in the Isle of Man. The consolidated financial statements of Manx Financial Group PLC (the "Company") for the year ended 31 December 2015 comprise the Company and its subsidiaries (the "Group").

A summary of the principal accounting policies, which have been applied consistently, are set out below.

2. Basis of preparation

(a) Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and International Financial Reporting Interpretations Committee ("IFRIC") interpretations applicable to companies reporting under IFRS, including International Accounting Standards ("IAS").

The Group has continued to apply the accounting policies used for the 2014 annual report, with the exception of those detailed below.

The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2015:

n Defined Benefit Plans: Employee Contributions (Amendments to IAS 19);

n Annual Improvements to IFRS 2010 - 2012 Cycle; and

n Annual Improvements to IFRS 2011 - 2013 Cycle.

No significant changes followed the implementation of these standards and amendments.

(b) Basis of measurement

The financial statements are prepared on a historical cost basis except:

n financial instruments at fair value through profit or loss and available for sale financial instruments are measured at fair value; and

n equity settled share-based payment arrangements are measured at fair value.

(c) Functional and presentation currency

These financial statements are presented in pounds sterling, which is the Group's functional currency. Except as indicated, financial information presented in pounds sterling has been rounded to the nearest thousand. All subsidiaries of the Group have pounds sterling as their functional currency.

(d) Use of estimates and judgements

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

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

In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described in note 3(p).

3. Significant accounting policies

(a) Basis of consolidation of subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Group has power over an investee, exposure or rights to variable returns from its involvement with the investee and the ability to use its power to affect those returns. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Intra-Group balances, income and expenses and unrealised losses or gains arising from intra-Group transactions, are eliminated in preparing the consolidated financial statements.

(b) Accounting for business combinations

Business combinations are accounted for by using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable.

The Group measures goodwill at the acquisition date as:

n the fair value of the consideration transferred; plus

n the recognised amount of any non-controlling interests in the acquiree; plus

n if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less

n the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognised immediately in the income statement.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in the income statement.

(c) Property, plant and equipment and intangible assets

Items of property, plant and equipment are stated at historical cost less accumulated depreciation (see below). Historical cost includes expenditure that is directly attributable to the acquisition of the items.

The assets' residual values and useful economic lives are reviewed, and adjusted if appropriate, at each reporting date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate items of property, plant and equipment.

An intangible asset is an identifiable non-monetary asset without physical substance. An item is identifiable if it is separable or arises from contractual or other legal rights. The initial measurement of an intangible asset depends on whether it has been acquired separately or has been acquired as part of a business combination.

Intangible assets that are acquired by an entity and having finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses.

Intangible assets acquired as part of a business combination, with an indefinite useful live are measured at fair value. Intangible assets with indefinite useful lives are not amortised but instead are subject to impairment testing at least annually.

Depreciation and amortisation

Assets are depreciated or amortised on a straight-line basis, so as to write off the book value over their estimated useful lives. The useful lives of property, plant and equipment and intangibles are as follows:

Property, plant and equipment

Leasehold improvements to expiration of the lease

Equipment 4-5 years

Vehicles 4 years

Furniture 10 years

Intangible assets

Customer contracts to expiration of the agreement

Business intellectual property rights indefinite

Website development costs indefinite

(d) Financial assets

Management have determined the classification of the Group's financial assets into one of the following categories:

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money directly to a customer with no intention of trading the receivable. This classification includes advances made to customers under HP and finance lease agreements, litigation, finance loans, personal loans, block discounting, secured commercial loans and stocking plans.

Loans are recognised when cash is advanced to the borrowers. Loans and receivables are carried at amortised cost using the effective interest rate method with all movements being recognised in the income statement after taking into account provision for impairment losses (see note 3(e)).

Financial assets at fair value through profit or loss

A financial asset is classified in this category if it is acquired principally for the purpose of selling in the short term or if so designated by management. The fair value of the financial asset at fair value through profit or loss is based on the quoted bid price at the reporting date.

Available for sale financial instruments

Available for sale investments are non-derivative investments that are designated as available for sale or are not classified as another category of financial assets. Available for sale investments are carried at fair value.

Dividend income is recognised in the income statement when the Group becomes entitled to the dividend. Other fair value changes are recognised in other comprehensive income until the investment is sold or impaired, whereupon the cumulative gains and losses previously recognised in other comprehensive income are recognised in the income statement.

Investments in subsidiary undertakings

Investments in subsidiary undertakings in the parent company statement of financial position are measured at cost less any provision for impairment.

Fair value

The fair value hierarchy is applied to all financial assets. Refer to note 4(c) for further information.

(e) Impairment of financial assets

The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. This arises if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset, or group of financial assets, that can be reliably estimated. Impairment losses are recognised in the income statement for the year.

Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers.

Loans and other receivables are reviewed for impairment where there are repayment arrears and doubt exists regarding recoverability. The impairment allowance is based on the level of arrears together with an assessment of the expected future cash flows, and the value of any underlying collateral after taking into account any irrecoverable interest due. Amounts are written off when it is considered that there is no further prospect of recovery.

Where past experience has indicated that, over time, a particular category of financial assets has suffered a trend of impairment losses, a collective impairment allowance is made for expected losses to reflect the continuing historical trend.

(f) Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents comprise cash and deposit balances with an original maturity date of three months or less.

(g) Financial liabilities

Financial liabilities consist of customer deposit accounts, other creditors, loan notes and accrued charges. Customer accounts are recognised immediately upon receipt of cash from the customer. Interest payable on customer deposits is provided for using the interest rate prevailing for the type of account.

(h) Long term employee benefits

Pension obligations

The Group has pension obligations arising from both defined benefit and defined contribution pension plans.

A defined contribution pension plan is one under which the Group pays fixed contributions into a separate fund and has no legal or constructive obligations to pay further contributions. Defined benefit pension plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and remuneration.

Under the defined benefit pension plan, in accordance with IAS 19 Employee benefits, the full service cost for the period, adjusted for any changes to the plan, is charged to the income statement. A charge equal to the expected increase in the present value of the plan liabilities, as a result of the plan liabilities being one year closer to settlement, and a credit reflecting the long-term expected return on assets based on the market value of the scheme assets at the beginning of the period, is included in the income statement.

The statement of financial position records as an asset or liability as appropriate, the difference between the market value of the plan assets and the present value of the accrued plan liabilities. The difference between the expected return on assets and that actually achieved in the period, is recognised in the income statement in the year in which they arise. The defined benefit pension plan obligation is calculated by independent actuaries using the projected unit credit method and a discount rate based on the yield on AA rated corporate bonds.

The Group's defined contribution pension obligations arise from contributions paid to a Group personal pension plan, an ex gratia pension plan, employee personal pension plans and employee co-operative insurance plans. For these pension plans, the amounts charged to the income statement represent the contributions payable during the year.

Share-based compensation

The Group maintains a share option programme which allows certain Group employees to acquire shares of the Group. The change in the fair value of options granted is recognised as an employee expense with a corresponding change in equity. The fair value of the options is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options.

At each statement of financial position date, the Group revises its estimate of the number of options that are expected to vest and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

The share option programme was originally set up for Group employees to subscribe for shares in Conister Trust Limited (now Conister Bank Limited). Since the Scheme of Arrangement, the shareholders of Conister Bank Limited became shareholders of Manx Financial Group PLC. The share option programme is now operated by Manx Financial Group PLC. The fair value is estimated using a proprietary binomial probability model. The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised.

Other obligations

Provision is made for short-term benefits payable for salaries, holiday pay, social security costs and sick leave on a pro-rata basis and is included within creditors and accrued charges.

(i) Leases

A Group company is the lessor

Finance leases and HP contracts

When assets are subject to a finance lease or HP contract, the present fair value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. HP and lease income is recognised over the term of the contract or lease reflecting a constant periodic rate of return on the net investment in the contract or lease. Initial direct costs, which may include commissions and legal fees directly attributable to negotiating and arranging the contract or lease, are included in the measurement of the net investment of the contract or lease at inception.

A Group company is the lessee

Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

(j) Current and deferred taxation

Current taxation relates to the estimated corporation tax payable in the current financial year. Deferred taxation is provided in full, using the liability method, on timing differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred taxation is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred tax is realised. Deferred taxation assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

(k) Interest income and expense

Interest income and expense are recognised in the income statement using the effective interest rate method.

Effective interest rate

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts of the financial instrument to the net carrying amount of the financial asset or financial liability. The discount period is the expected life or, where appropriate, a shorter period. The calculation includes all amounts receivable or payable by the Group that are an integral part of the overall return, including origination fees, loan incentives, broker fees payable, estimated early repayment charges, balloon payments and all other premiums and discounts. It also includes direct incremental transaction costs related to the acquisition or issue of the financial instrument. The calculation does not consider future credit losses.

Once a financial asset or a group of similar financial assets has been written down as a result of impairment, subsequent interest income continues to be recognised using the original effective interest rate applied to the reduced carrying value of the financial instrument.

(l) Fees and commission income

Fees and commission income other than that directly related to the loans is recognised over the period for which service has been provided or on completion of an act to which the fees relate.

(m) Programme costs

Programme costs are direct expenditure incurred in relation to prepaid card programmes. The costs are recognised over the period in which income is derived from operating the programmes.

(n) Segmental reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Group's primary format for segmental reporting is based on business segments.

(o) New standards and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations are not effective for the year and have not been applied in preparing these consolidated financial statements.

The Directors do not expect the adoption of the standards and interpretations to have a material impact on the Group's financial statements in the period of initial application with the exception of IFRS 9 Financial Instruments.

IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and de-recognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.

The Group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 9. Given the nature of the Group's operations, this standard is expected to have a pervasive impact on the Group's financial statements. In particular, calculation of impairment of financial instruments on an expected credit loss basis is expected to result in an increase in the overall level of impairment allowances.

(p) Key sources of estimation uncertainty

Management believe that a key area of estimation and uncertainty is in respect of the impairment allowances on loans and advances to customers, goodwill and the Incahoot bargain purchase. Loans and advances to customers are evaluated for impairment on a basis described in note 4a(i), credit risk. The Group has substantial historical data upon which to base collective estimates for impairment on HP contracts, finance leases and personal loans. The accuracy of the impairment allowances and provisions for counter claims and legal costs depend on how closely the estimated future cash flows mirror actual experience. An impairment review is performed annually for goodwill at different discount rates to allow for any uncertainty.

(q) Fiduciary deposits

Deposits received on behalf of clients by way of a fiduciary agreement are placed with external parties and are not recognised in the statement of financial position. Income in respect of fiduciary deposit taking is included within interest income and recognised on an accruals basis.

(r) Prepaid card funds

The Group could receive funds for its prepaid card activities. These funds would be held in a fiduciary capacity for the sole purpose of making payments as and when card-holders utilise the credit on their cards and therefore would not be recognised in the statement of financial position.

(s) Foreign exchange

Foreign currency assets and liabilities (applicable to the Conister Card Services division only) are translated at the rates of exchange ruling at the reporting date. Transactions during the year are recorded at rates of exchange in effect when the transaction occurs. The exchange movements are dealt with in the income statement.

(t) Commission sharing schemes

This represents the cost incurred in relation to certain loan books where commission is paid based on the overall profitability of the relevant book. Each such lending scheme has its own commercially agreed terms.

(u) Joint ventures

Investments in joint ventures are initially recognised at cost. Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Joint ventures are accounted for using the equity method. The consolidated financial statements include the Group's share of the income and expenses of the equity accounted investees, after adjustments to align the accounting policies with those of the Group, from the date that joint control commences until it ceases. When the Group's share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee.

Unrealised gains on transactions between the Company and its equity accounted investees are eliminated to the extent of the Company's interest in the equity accounted investees. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

Investments in joint ventures and associates are kept under review for impairment. Where, in the opinion of the Directors, the net realisable value of an investment falls below the carrying value, a provision is made against the investment and charged to the income statement.

4. Risk and capital management

(a) Risk management

Introduction and overview

The Group has exposure to the following risks from its use of financial instruments:

n credit risk;

n liquidity risk;

n operational risk; and

n market risk.

This note presents information about the Group's exposure to each of the above risks, the Group's objectives, policies and processes for managing risk and capital within the Bank. The Bank is the main operating entity exposed to these risks.

Risk management framework

The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework within the Group.

The Group's risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions. The Group has a disciplined and constructive control environment, in which all employees understand their roles and obligations.

The Board of Directors of the Bank (the "Board of the Bank") delegate responsibility for risk management to the Executive Risk Committee ("ERC") which reports to the Audit, Risk and Compliance Committee ("ARCC"). It is responsible for the effective risk management of the Bank. Operational responsibility for asset and liability management is delegated to the Executive Directors of the Bank, through the Bank's Assets and Liabilities Committee ("ALCO").

ARCC is responsible for monitoring compliance with the risk management policies and procedures faced by the Group's regulated entities, and for reviewing the adequacy of the risk management framework. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the ARCC.

i) Credit risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure, such as individual obligor default, country and sector risk. The Bank is principally exposed to credit risk with regard to loans and advances to customers, comprising HP and finance lease receivables, litigation funding loans, unsecured personal loans, secured commercial loans, block discounting and stock plan loans. It is also exposed to credit risk with regard to cash balances and trade and other receivables.

Management of credit risk

The Board of the Bank delegates responsibility for the management of credit risk to the Credit Committee ("CC") for loans and ALCO for other assets. The following measures are taken in order to manage the exposure to credit risk:

n explicit credit policies, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements;

n a rigorous authorisation structure for the approval and renewal of credit facilities. Each opportunity is researched for viability, legal/regulatory restriction and risk. If recommended, the proposal is submitted to Board of the Bank or the CC. The CC reviews lending assessments in excess of individual credit control or executive discretionary limits;

n reviewing and assessing existing credit risk and collateral. The CC assesses all credit exposures in excess of designated limits, as set out in the underwriting manual for asset and personal finance;

n limiting concentrations of exposure to counterparties, geographies and industries defining sector limits, lending caps and exposure to minimise interest rate risk;

n ensuring that appropriate records of all sanctioned facilities are maintained;

n ensuring regular account reviews are carried out for all accounts agreed by the CC; and

n ensuring Board of the Bank approval is obtained on all decisions of the CC above the limits set out in the Bank's credit risk policy.

An analysis of the credit risk on loans and advances to customers is as follows:

1 Loans are graded A to C depending on the level of risk. Grade C relates to agreements with the highest of risk, Grade B with medium risk and Grade A relates to agreements with the lowest risk.

Impaired loans

Impaired loans are loans where the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan agreements.

Past due but not impaired loans

Past due but not impaired loans are loans where the contractual interest or principal payments are past due but the Group believes that impairment is not appropriate on the basis of the level of security, collateral available and/or the stage of collection of amounts owed to the Group.

Allowances for impairment

The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss allowance that relates to individually significant exposures, and a collective loan loss allowance, which is established for the Group's assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. The collective loan loss allowance is based on historical experience, the current economic environment and an assessment of its impact on loan collectability. Guidelines regarding specific impairment allowances are laid out in the Bank's Debt Recovery Process Manual which is reviewed annually.

Write-off policy

The Group writes off a loan balance (and any related allowances for impairment losses) when management determines that the loans are uncollectable. This determination is reached after considering information such as the occurrence of significant changes in the borrower's financial position such that the borrower can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure.

Collateral

The Group holds collateral in the form of the underlying assets (typically private and commercial vehicles, plant and machinery) as security for HP, finances leases, vehicle stocking plans, block discounting and secured commercial loan balances, which are sub-categories of loans and advances to customers. In addition, the commission share schemes have an element of capital indemnified, 2015: 57.6% of loans and advances (2014: 53.2%). Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. At the time of granting credit within the sub-categories listed above, the loan balances due are secured over the underlying assets held as collateral (see note 17 for further details).

Concentration of credit risk

Geographical

Lending is restricted to individuals and entities with Isle of Man or UK addresses.

Segmental

The Bank is exposed to credit risk with regard to customer loan accounts, comprising HP and finance lease balances, unsecured personal loans, secured commercial loans, block discounting and vehicle stocking plan loans. In addition, the Bank lends via significant introducers into the UK. There were two introducers that accounted for more than 20% of the Bank's total lending portfolio at the end of 31 December 2015 (2014: one introducer).

ii) Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting financial liability obligations as they fall due.

Management of liquidity risk

The Group's approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

The Group uses various methods, including forecasting of cash positions, to monitor and manage its liquidity risk to avoid undue concentration of funding requirements at any point in time or from any particular source. Maturity mismatches between lending and funding are managed within internal risk policy limits. 

Minimum liquidity

The Isle of Man Financial Services Authority ("FSA") requires that the Bank should be able to meet its obligations for a period of at least one month. In order to meet this requirement, the Bank measures its cash flow commitments, and maintains its liquid balances in a diversified portfolio of short-term bank balances and short dated UK Government Treasury Bills.

Bank balances are only held with financial institutions approved by the Board of the Bank and which meet the requirements of the FSA.

Measurement of liquidity risk

The key measure used by the Bank for managing liquidity risk is the assets and liabilities maturity profile.

The table below shows the Group's financial liabilities classified by their earliest possible contractual maturity, on an undiscounted basis including interest due at the end of the deposit term. Based on historical data, the Group's expected actual cash flow from these items vary from this analysis due to the expected re-investment of maturing customer deposits.

Residual contractual maturities of financial liabilities as at the balance sheet date (undiscounted)

Maturity of assets and liabilities at the balance sheet date