Final Results

Manx Financial Group PLC (LSE: MFX), the financial services group which includes Conister Bank Limited, Conister Finance & Leasing Ltd, Payment Assist Limited, Blue Star Business Solutions Limited, Edgewater Associates Limited and MFX Limited presents its audited final results for the year ended 31 December 2023.

Jim Mellon, Executive Chairman, commented: "I am pleased to report another set of record results with a 35% increase in Profit Before Tax to £7.0 million."

The 2023 Audited Annual Report and Accounts will be posted to Shareholders and will be available from the Company's website www.mfg.im shortly. Details concerning the 2023 Annual General Meeting will be announced in due course.

596/2014 on market abuse.

With the continuing conflicts in Ukraine and Palestine, together with rising energy costs and the disruption in the Red Sea to world supply chains, the global economy remained inflationary and fragile. Our home markets in the Isle of Man and UK were not immune to these factors. Indeed, the Bank of England continued to grapple with stubbornly high inflation throughout the year and, as a consequence, approved five interest rate increases as part of their strategy to bring inflation back into their target range of less than 2%. The higher than targeted inflation rate was not offset by a corresponding increase in wages which has put many families and businesses under a real cost of living crisis.

Despite this negative backdrop, thus far the Group has not experienced a corresponding increase in arrears. This reflects positively on the integrity of our underwriting, the products we offer, and the markets we continue to serve.

Our financial performance for the year also reflects this resilience and I am pleased to report another set of record results with a 35% increase in Profit Before Tax to £7.0 million (2022: £5.2 million), with our basic Earnings Per Share increasing to 4.59p (2022: 3.77p) - an improvement of 21.8%. At the Profit After Tax payable level of £6.1 million (2022: £4.7 million), £5.3 million (2022: £4.3 million) was due to the Group's shareholders, and £0.9 million (2022: £0.3 million) was due to minority interests. This improvement was due to a number of factors including operating income growth - augmented with a full year's impact from Payment Assist Limited, a gain in debt securities and a lower charge for provisioning and impairments.

Our financial performance also strengthened our balance sheet with total assets increasing by £101.4 million to £480.7 million (2022: £379.3 million), and our shareholder equity increased by £6.2 million to £36.0 million (2022: £29.8 million). This outcome allows the Board to recommend continuing our policy of returning 10% of the Group's profit available to shareholders in the form of cash and/or shares. This year the total dividend available for payment is £0.53 million (2022: £0.43 million). Thus, the amount recommended for shareholder approval at our Annual General Meeting will be 0.4551 pence per share (2022: 0.3764 pence per share) - a 20.9% uplift.

On a separate note, I appreciate there has been a lot of media comment surrounding the FCA announcement that they are reviewing whether customers have lost out as a result of variable commission arrangements on lending to the motor finance sector. The outcome and potential impact of the FCA's review will not be known until they report their findings, expected to be sometime later this year. Despite having some exposure in this area, our initial review suggests that any liability will be minimal with no present need for any provision. Notwithstanding, the Board recognises the requirement to plan for a range of possible outcomes but currently it does not expect the issue to materially impact the Group's results, if at all.

Financial Performance

This year's financial performance is again a record despite the previously mentioned economic headwinds impacting on both of our trading locations.

For the third year running, Conister Bank Limited ("Conister") set a new lending record of £352.5 million (2022: £231.4 million), an increase of 52.3%. With increases in the cost of deposits reflecting the five increases in the UK interest rate, our cost of funds was negatively impacted with yield compression of 12.7% to 71.3% (2022: 84.0%) in the year. Nevertheless, our net interest income increased substantially by £8.0 million to £32.4 million (2022: £24.4 million).

With other operating subsidiaries again making a positive contribution, notably Conister Finance & Leasing Ltd, Payment Assist Limited and MFX Limited, this resulted in operating income increasing by £5.4 million to £31.5 million (2022: 26.1 million). Operating income has now increased by 57.0% over the last two years.

Operating expenses, excluding provisions, increased by £3.4 million to £20.3 million (2022: £16.9 million), reflecting the full cost of consolidating Payment Assist Limited into the Group along with an incremental increase in overheads relating to obtaining our UK Branch deposit taking licence. Provisions increased by £0.1 million to £4.1 million (2022: £4.0 million).

Turning to the Group's balance sheet, total assets increased by £101.1 million to £480.7 million (2022: £379.3 million). This was driven by a £71.2 million increase in the net loan book and a £35.5 million increase in Treasury Bills to support regulatory liquidity requirements. Isle of Man deposits grew by £86.2 million to £390.4 million (2022: £304.2 million). Total liabilities stood at £444.7 million (2022: 349.5 million), leading to an increase in equity of £6.2 million to £36.0 million (2022: £29.8 million). The debt to asset ratio, measured as being total debt as a percentage of total tangible assets, remains robust at 95.5% (2022: 95.5%) meaning liabilities are covered by assets 1.1 times (2022: 1.1 times).

Key Objectives

After a period of economic uncertainty, I am cautiously optimistic that over the next 24 months we will move to a more normalised interest and inflation rate environment. Until we get to that position, our key objective will continue to be to increase shareholder value as prudently as possible. Thus, our strategic focus remains unchanged, namely to:

§ Provide the highest quality of service throughout our operations to all customers, ensuring that their treatment is both fair and appropriate

§ Continue adopting a pro-active strategy to managing risk, including climate risk, within a structured and compliant manner

§ Concentrate on developing our core business by considered acquisitions, increasing prudential lending, and augmenting the range of financial services we offer

§ Prudently progress the implementation of an enhanced and scalable IT infrastructure to better service the operational requirements of a growing Group without the requirement for a disproportionate increase in headcount and other associated operational costs

§ Continue to develop our Treasury management to improve the return on the liability side of our balance sheet; and

§ Manage our balance sheet to exceed the regulatory requirements for capital adequacy

To continue to grow shareholder value, we will need to grow the balance sheet as our scale is still sub-optimal. With organic growth this year partially dependent upon an improved economic environment, we need to re-focus our non-dilutive acquisition strategy. Further details are included under "Business Model and Strategy" on page 8 of the Annual Report.

Environmental, Social and Corporate Governance

The Group takes social responsibility seriously and remains committed to reducing its impact on the environment, and to making a positive contribution to the communities in which we live and work.

Our Environmental, Social, and Governance ("ESG") initiatives, are integral to our commitment to sustainable development and corporate responsibility. This year, more than ever, we have witnessed the importance of resilience and adaptability, and our ESG policy has been at the heart of our strategy to navigate these challenges. We have made significant strides in embedding our ESG principles across all levels of operations. Our commitment to a whole business approach, focusing on what matters, applying best practices, using our influence responsibly, and ensuring accountability, has driven meaningful progress towards our sustainability goals.

In particular, our efforts towards better understanding our carbon footprint, enhancing product development for sustainability, and embedding diversity, equity, and inclusion into our corporate culture have been noteworthy. We are also proud of the progress made in upskilling our workforce on ESG matters and integrating these principles. The financial results for this period reflect not only our economic resilience but also our commitment to social and environmental responsibility. Our financial performance, while robust, is just one aspect of our success. The true measure of our achievements lies in our positive impact on society and the environment, as guided by our comprehensive ESG policy.

Looking ahead, we remain dedicated to advancing our ESG commitments, aware that our journey towards sustainability is continuous. We will keep pushing the boundaries of what is possible and fostering a culture of responsibility and inclusiveness.

Our ESG progress is available on page 11 of the Annual Report and our Corporate Governance Report outlining our adherence to the Quoted Companies Alliance Code is detailed on page 23 of the Annual Report.

Operating Unit Review

Our principal operating subsidiaries continued with their strategy of growth through gaining market share in recession-proof markets as demand for our products remained buoyant which resulted in record advances in the year.

Conister Bank Limited and Conister Finance & Leasing Ltd

Conister, together with its wholly owned subsidiary, Conister Finance & Leasing Ltd, remained the driver of the Group's financial performance recording a Profit After Tax of £2.2 million (2022: £1.8 million).

In its home market, Conister continues to grow its loan book, lending £56.3 million (2022: £50.5 million) during the year. The net loan book stands at £78.1 million (2022: £68.4 million). This book continues to have exceptionally low arrears, 1.89% (2022: 1.95%).

In the UK, growth has been driven by our Structured Finance products with lending increasing by £93.1 million to £246.2 million (2022: £153.1 million). The structuring of these facilities continues to minimise the risk of default and is proving a successful mechanism for growth in this difficult environment.

The Isle of Man deposit base has again proved very loyal with an 77% retention rate (2022: 78%). This, along with new deposits of £156.0 million (2022: £106.3 million), provided ample liquidity to allow Conister to achieve its record growth and to provide support for the future.

In October 2023, Conister obtained its UK Branch Deposit Taking permissions which, as well as providing an alternative source of liquidity, will allow the Bank to access new lending and liquidity opportunities. We anticipate taking UK deposits in the second half of 2024, principally via a user-friendly online process.

Overheads, excluding provisions, increased by £1.5 million to £11.9 million (2022: £10.4 million) as the business geared up to become operationally ready to take deposits in the UK. Prudently, it has bolstered its Credit and Collections teams to continue to protect Conister during these challenging times.

Provisions reduced by £0.3 million to £9.3 million (2022: £9.6 million) and now represent 2.6% of the net loan book (2022: 3.3%). This reduction provides a positive reflection on the quality of the loan book.

The Bank's total assets have increased by £97.8 million to £451.8 million (2022: £354.0 million), driven by loan book growth of £68.0 million. Liabilities have increased by £90.8 million, with deposits increasing by £86.2 million to £390.4 million. As a result, Conister's equity has increased by £7.0 million to £41.5 million (2022: £34.5 million).

Following the award of the UK Banking Licence, Conister Finance & Leasing Ltd will be restructured during 2024, with the regulated activities merged into Conister. The Basingstoke office will continue as the Conister's UK branch for deposit taking and regulated lending.

MFX Limited

Our foreign exchange brokerage continued with an impressive performance considering these turbulent times and earned a profit of £0.7 million (2022: £1.4 million). Dividends paid to the Group in the year were £0.8 million (2022: £1.8 million).

Payment Assist Limited

This is the first full financial year that this business's result has been consolidated into the Group's annual accounts. The business operates mostly in the short-term lending market and exceeded our financial expectations in the year by delivering £4.0 million to the Group in terms of interest income to Conister and recharges for Group services.

Turnover was £10.8 million (2022: £10.1 million), Operating Profit was £2.7 million (£2022: £1.8 million) leading to a Profit After Tax of £2.1 million (2022: £0.8 million). As previously reported, the Group owns 50.1% of Payment Assist Limited, with the opportunity to acquire the remaining percentage from the beginning of 2027.

Edgewater Associates Limited

We restructured the company at the end of 2023 and, as a result, there are signs of a more sustained profitability for the future. Edgewater Associates Limited contributed £0.4 million (2022: £nil) in dividends to the Group.

Other operating subsidiaries

All other operating subsidiaries contributed positively to the Group's results.

Outlook

I believe that the high interest rate environment will persist during 2024 and this will continue to dampen our net interest margin, but it should not reduce the demand for our products. Shorter term lending in particular - loans less than 12 months - will continue to be much in demand for small businesses and consumers alike. Whilst I remain cautious about overall organic growth this year, accretive acquisition opportunities are available. We will remain prudent in our approach to these opportunities, and we will only progress such acquisitions if they can be delivered without any shareholder dilution.

Looking further ahead, the unwinding of the pressure on our net interest margin will naturally drive organic growth. This, along with any accretive acquisitions we make in the meantime, will create an even more robust, diversified financial services Group which will support our ongoing objective of continuously enhancing shareholder value.

Conclusion

I would like to take this opportunity to thank our staff and Board of Directors for their support in making this result possible and for setting the Group on the right footing for the opportunities and challenges that lie ahead. I would also like to thank the Executives for gaining the new UK Branch deposit taking licence in less than 12 months - a magnificent achievement and well done to all involved. Finally, I would like to thank my fellow shareholders for their continued support.

Jim Mellon

Executive Chair

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

Items that will never be reclassified to profit or loss

Earnings per share - Total comprehensive income for the year

The Directors believe that all results derive from continuing activities.

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

The Directors believe that all results derive from continuing activities.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

There are £42,000 of non-cash investing activities with respect to the Group's acquisition of 10.0% shareholding in Lesley Stephen & Co Limited. (see note 30).

COMPANY STATEMENT OF CASH FLOWS

The notes form part of these financial statements.

NOTES TO THE CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS

Reporting entity

Manx Financial Group PLC ("Company") is a company incorporated in the Isle of Man. The Company's registered office is at Clarendon House, Victoria Street, Douglas, Isle of Man, IM1 2LN. The consolidated financial statements of the Company for the year ended 31 December 2023 comprise the Company and its subsidiaries ("Group") including Conister Bank Limited (the "Bank"). The Group is primarily involved in the provision of financial services.

The Company's financial statements are the separate financial statements of the Company.

Basis of accounting

The consolidated and the separate financial statements of the Company have been prepared in accordance with international accounting standards in accordance with UK-adopted international accounting standards ("UK-adopted IFRS" or "IFRSs"), on a going concern basis as disclosed in the Directors' Report.

• Functional and presentation currency
• Use of judgements and estimates

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.

Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties at year-end that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year is included in the following notes:

§ Note 23 and 34 - impairment test of intangible assets and goodwill: key assumptions underlying recoverable amounts; and

§ Note 44(G)(vi) and Note 7(A) - key assumptions of Expected Credit Loss ("ECL") allowance for loans and advances to customers and assessment of impairment allowances where loans are in default or arrears.

Financial instruments - Classification

For description of how the Group classifies financial assets and liabilities, see note 44(G)(ii).

The following table provides reconciliation between line items in the statement of financial position and categories of financial instruments.

Financial instruments - Fair values

For description of the Group's fair value measurement accounting policy, see note 44(G)(vi).

The following table shows the carrying amounts and fair values of Group financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.

All Company financial assets and liabilities carrying amounts are deemed to be reasonable approximation of fair value.

Measurement of fair values

Valuation techniques and significant unobservable inputs

Level 3 recurring fair values

Reconciliation of Level 3 fair values

The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values.

Sensitivity analysis

For the fair value of contingent consideration, reasonably possible changes at the reporting date to one of the significant unobservable inputs, holding other inputs constant would have the following effects.

Profit or loss

Financial risk review

Risk management

This note presents information about the Group's exposure to financial risks and the Group's management of capital. For information on the Group and Company's financial risk management framework, see note 42.

Group Credit risk

For definition of credit risk and information on how credit risk is mitigated by the Group, see note 42.

Credit quality analysis

Loans and advances to customers

Explanation of the terms 'Stage 1', 'Stage 2' and 'Stage 3' is included in note 44(G)(vii).

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

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

The following table sets out information about the overdue status of loans and advances to customers in Stage 1, 2 and 3:

For Stage 3 loans and advances, the Bank holds collateral with a value of £13,410,000 (2022: £12,927,000) representing security cover of 35.0% (2022: 48.0%).

* Please refer to Note 20.

Debt securities, cash and cash equivalents

The following table sets out the credit quality of liquid assets:

The analysis has been based on Standard & Poor's ratings. The above debt securities, cash and cash equivalents are considered to be Stage 1 as there is no evidence of significant deterioration in credit quality and hence no material expected credit loss allowance is observed.

Collateral and other credit enhancements

The Group holds collateral in the form of the underlying assets (typically private and commercial vehicles, plant and machinery) to loan arrangements as security for HP, finances leases, vehicle stocking plans, block discounting, wholesale funding arrangements, integrated wholesale funding arrangements and secured commercial loan balances, which are sub-categories of loans and advances to customers. In addition, the Group will take debentures, mortgages, personal and corporate guarantees, fixed and floating charges on specific assets such as cash and shares.

The terms of enforcing such security can only occur on default, and when realised can only be used to settle the amount of debt and related collection fees. On occasion the Bank may realise a surplus if the defaulting party loses title to the underlying security as part of enforcement. In addition, the commission share schemes have an element of capital indemnified.

As at 31 December 2023, 13.0% of loans and advances had an element of capital indemnification (2022: 4.0%). 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.

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 12 for further details). Collateral is valued at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired.

For portfolios where the Group has never had a default in its history or has robust credit enhancements such as credit insurance or default indemnities for the entire portfolio, then no IFRS 9 provision is made. At 2023 year-end, 28.0% had such credit enhancements (2022: 29.0%).

The following table sets out the principal types of collateral held against different types of financial assets.

There have been no significant changes in the quality of collateral as a result of a deterioration or changes to the Group's collateral policies during the reporting period.

Amounts arising from ECL

Inputs, assumptions and techniques used for estimating impairment

See accounting policy in note 44(G)(vii).

Significant increase in credit risk

When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group's historical experience and expert credit assessment and including forward looking information.

§ A Significant Increase in Credit Risk ("SICR") is always deemed to occur when the borrower is 30 days past due on its contractual payments. If the Group becomes aware ahead of this time of non-compliance or financial difficulties of the borrower, such as loss of employment, avoiding contact with the Group then a SICR has also deemed to occur.

§ A receivable is always deemed to be in default and credit-impaired when the borrower is 90 days past due on its contractual payments or earlier if the Group becomes aware of severe financial difficulties such as bankruptcy, individual voluntary arrangements, abscond or disappearance, fraudulent activity or other similar events.

Credit risk grades

The Group allocates each exposure to a credit risk grade based on a variety of data that is determined to be predictive of the risk of default and applying experienced credit judgement. Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower.

Credit risk grades are defined and calibrated such that the risk of default occurring increases exponentially as the credit risk grade deteriorates. Loans are graded A to C depending on the level of risk. Grade A relates to agreements with the lowest risk, Grade B with medium risk and Grade C relates to agreements with the highest of risk.

Each exposure is allocated to a credit risk grade on initial recognition based on available information about the borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade. The monitoring typically involves the use of the following data:

Definition of default

The Group considers a financial asset to be in default when:

§ the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held);

§ the borrower is more than 90 days past due on any material credit obligation to the Group; or

§ it is becoming probable that the borrower will restructure the asset as a result of bankruptcy due to the borrower's inability to pay its credit obligations.

In assessing whether a borrower is in default, the Group considers indicators that are:

§ qualitative: e.g. breaches of covenant;

§ quantitative: e.g. overdue status and non-payment on another obligation of the same issuer to the Group; and

§ based on data developed internally and obtained from external sources.

Inputs into the assessment of whether a financial instrument is in default and their significant may vary over time to reflect changes in circumstances. The definition of default largely aligns with that applied by the Group for regulatory capital purposes.

Incorporation of forward-looking information

The Group incorporates forward looking information into the measurement of ECL.

The Group has identified and documented key drivers of credit risk and credit losses its financial instruments and using an analysis of historical data, has estimated the relationship between macroeconomic variables and credit risk and credit losses. The key drivers for credit risk for corporate, retail and wholesale portfolios include gross domestic product (GDP) growth, unemployment rates and consumer price index (CPI) inflation. The Group estimates each key driver for credit risk over the active forecast period of three years. The table below lists the UK macroeconomic assumption used in the base scenarios over the five year forecast period:

Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analysing historical data over the past 8 years.

Changes to ECL assumptions from the prior year

As of 31 December 2023, the Group has updated its economic projections utilised in the expected credit loss calculation, shifting from the 2022 figures. This adjustment is prompted by a higher than anticipated inflation and GDP growth rate. Additionally, the forecast duration has been prolonged from two to five years, and an additional key indicator, unemployment rate, has been incorporated.

Concentration of credit risk

Geographical

Lending is restricted to individuals and entities with Isle of Man, UK or Channel Islands 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, vehicle stocking plan loans and wholesale funding agreements. In addition, the Bank lends via significant introducers into the UK. There was one introducer that accounted for more than 20.0% of the Bank's total lending portfolio at the end of 31 December 2023 (2022: none).

Group Liquidity risk

For the definition of liquidity risk and information on how liquidity risk is managed by the Group, see note 42.

Exposure to liquidity risk

The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers and short-term funding. For this purpose, net liquid assets includes cash and cash equivalents and investment-grade debt securities for which there is an active and liquid market.

Details of the reported Group ratio of net liquid assets to deposits from customers at the reporting date and during the reporting year were as follows:

• Maturity analysis for financial liabilities and financial assets

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 reporting date (undiscounted):

The table below shows the carrying amount of the Group's assets and liabilities by their expected maturities.

Expected maturity of assets and liabilities at the reporting date:

Company

All the Company's assets (excluding Investment in subsidiaries, Property, plant and equipment, Intangible assets, Investment in subsidiaries and Subordinated loans) are due within one year. The Subordinated loans are due in more than five years.

All the Company's creditors (excluding Loan notes) are due within one year. The maturity profile £12.3 million of loan notes are due within one year, £14.8 million within 3 years and £12.3 million within five years.

Liquidity reserves

The following table sets out the components of the Group's liquidity reserves:

Group Market risk

For the definition of market risk and information on how the Group manages the market risks of trading and non-trading portfolios, see note 42.

The following table sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios:

Market risk measure

Exposure to interest rate risk

The following tables present the interest rate mismatch position between assets and liabilities over the respective maturity dates. The maturity dates are presented on a worst-case basis, with assets being recorded at their latest maturity and deposits from customers at their earliest.

The Bank monitors the impact of changes in interest rates on interest rate mismatch positions using a method consistent with the FSA required reporting standard. The methodology applies weightings to the net interest rate sensitivity gap in order to quantify the impact of an adverse change in interest rates of 2.0% per annum (2022: 2.0%). The following tables set out the estimated total impact of such a change based on the mismatch at the reporting date:

• Group Capital Management
• Regulatory capital

MFG and its subsidiaries maintain sufficient capital stock to cover risks inherent in their principal operating activities. The lead regulator of the Group's wholly owned subsidiary, the Bank, is the FSA. The FSA sets and monitors capital requirements for the Bank. The Bank maintains a capital base to meet the capital adequacy requirements of the FSA. There have been no changes to its approach to capital management from the prior year.

The Bank's regulatory capital consists of the following elements.

§ Common Equity Tier 1 ("CET1") capital, which includes ordinary share capital, retained earnings and reserves after adjustment for deductions for goodwill, intangible assets and intercompany receivable.

§ Tier 2 capital, which includes qualifying subordinated liabilities and any excess of impairment over expected losses.

The Bank's Tier 1 and Total Capital regulatory ratios stood at 11.52% (2022: 12.20%) and 16.50% (2022: 15.90%) respectively as at 31 December 2023. The Bank complied with all capital requirements externally imposed on it in the year with minimum Tier 1 and Overall Capital ratio of 8.73% (2022: 8.50%) and 15.29% (2022: 14.00%) respectively.

The FSA's approach to the measurement of capital adequacy is primarily based on monitoring the relationship of the capital resources requirement to available capital resources. The FSA sets individual capital guidance ("ICG") for the Bank in excess of the minimum capital resources requirement. A key input to the ICG setting process is the Bank's internal capital adequacy assessment process ("ICAAP").

The Bank is also regulated by the FCA in the UK for credit and brokerage related activities.

Further details of the Bank's management of capital are described in the Risk Management Report on page 16 of the Annual Report.

Capital allocation

Management uses regulatory capital ratios to monitor its capital base. The allocation of capital between specific operations and activities is, to a large extent, driven by optimisation of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily on regulatory capital requirements.

Credit risk

The Company is exposed to credit risk primarily from deposits with banks and from its financing activities of Group entities. These balances include Trade and other receivables, Amounts due from Group undertakings, Investment in subsidiaries and Subordinated loans. Cash balances are held with institutions with a credit rating of A to A+. The Group's primary credit exposure is to the Bank. The Investment in subsidiary and subordinated loan balance counterparties are disclosed in Notes 31 and 35 respectively. Amounts due from Group undertakings relate to balances advanced to the Group's subsidiary (MVL) for the acquisition of other subsidiaries including PAL, BBSL, BLX and NRF. The Group manages its credit risk by ensuring that sufficient resources are allocated to credit management and capital allocation and using reputable financial institutions to hold its cash balances.

Liquidity risk

The value and term of short term assets are monitored against those of the Company's liabilities. The Company maintains sufficient liquid assets to meet liabilities as they fall due either by retaining Interest income from the Subordinated loan, Dividend income from subsidiary companies or raising funds through the issue of Loan notes. Amounts due to / from Group undertakings are unsecured, interest-free and repayable on demand. The capital on subordinated loan notes is repayable to the Company in more than 5 years. £12.3m (2022: £6.1m) of loan notes are repayable within one year.

Market risk

The Company does not have exposure to foreign exchange risk as transactions are made in and balances held in Sterling. The Company has both interest-bearing assets and liabilities. In order to manage interest rate risk, the Companies Subordinated loans and Loan notes are charged exclusively at fixed rates.

Operating segments

Segmental information is presented in respect of the Group's business segments. The Directors consider that the Group currently operates in one geographic segment comprising of the Isle of Man, UK and Channel Islands. The primary format, business segments, is based on the Group's management and internal reporting structure. The Directors consider that the Group operates in three (2022: three) product orientated segments in addition to its investing activities: Asset and Personal Finance (including provision of HP contracts, finance leases, personal loans, commercial loans, block discounting, vehicle stocking plans and wholesale funding agreements); Edgewater Associates Limited (provision of financial advice); and MFX Limited (provision of foreign currency transaction services).

Included in other expenses above is Goodwill impairment of £0.2 million relating to the Edgewater Associates segment (see note 34). All revenues are earned from the entity's one geographic segment. All non-current assets are located in the entity's one geographic segment.

Net interest income

Net fee and commission income

In the following table, fee and commission income from contracts with customers in the scope of IFRS 15 - Revenue from Contracts with Customers is disaggregated by major type of services. The table includes a reconciliation of the disaggregated fee and commission income with the Group's reportable segments. See note 44D regarding revenue recognition.

Fee and commission expense relates to commission paid to Brokerages which introduce new business to the Bank.

Personnel expenses

The Company's personnel expenses consist exclusively of Directors remuneration and fees for services rendered to the Company.

Other expenses

Impairment on loans and advances to customers

The charge in respect of allowances for impairment comprises, excluding loss allowances on financial assets managed on a collective basis.

The credit in respect of allowances for impairment on financial assets managed on a collective basis comprises:

Profit before tax payable

The profit before tax payable for the year is stated after charging:

The main rate of corporation tax in the Isle of Man is 0.0% (2022: 0.0%). However, the profits of the Group's Isle of Man banking activities are taxed at 10.0% (2022: 10.0%). The profits of the Group's subsidiaries that are subject to UK corporation tax are taxed at a rate of 25.0% (2022: 19.0%). The Company is subject to 0.0% tax.

The value of tax losses carried forward reduced to nil and there is now a temporary difference related to accelerated capital allowances resulting in a £392,000 liability (2022: £353,000 liability). This resulted in an expense of £171,000 (2022: £171,000) to the Consolidated Income Statement.

Earnings per share

The basic earnings per share calculation is based upon the profit for the year after taxation and the weighted average of the number of shares in issue throughout the year.

Reconciliation of weighted average number of Ordinary Shares in issue between basic and diluted

Reconciliation of profit for the year between basic and diluted

The diluted earnings per share calculation assumes that all convertible loan notes and share options have been converted / exercised at the beginning of the year where they are dilutive.

Reconciliation of total comprehensive income for the year between basic and diluted

The weighted average number of ordinary shares and earnings per share have been adjusted retrospectively.

Cash and cash equivalents

Cash at bank includes an amount of £1,653,000 (2022: £24,000) representing receipts which are in the course of transmission.

Debt securities

UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in other comprehensive income. There were realised gains of £1,893,000 (2022: £292,000) and unrealised gains of £324,000 (2022: £131,000) during the year.

Financial assets

The Bank acquired a new equity instrument in the previous financial year (see note 33).

Loans and advances to customers

Collateral is held in the form of underlying assets for HP, finance leases, vehicles stocking plans, block discounting, secured commercial and personal loans and wholesale funding arrangements.

* The gross value and impairment allowance as at 31 December 2022 has each been adjusted from £305,698k and £14,223k by £1,954,000 to appropriately reflect the gross value and impairment allowances of the loans and advances to customers. The adjustment did not have any impact on the carrying value of the loans and advances to customers nor of the statement of profit or loss or cash flows.

The following table provides an explanation of how significant changes in the gross carrying amount of financial instruments during the period contributed to changes in loss allowance:

The contractual amount outstanding on financial assets that were written off during the reporting period and are still subject to enforcement activity are £nil (2022: £nil). Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2023 £1,699,794 (2022: £1,228,334) had been lent on this basis. In the Group's ordinary course of business, advances may be made to Shareholders, but all such advances are made on normal commercial terms (see note 36).

At the end of the current financial year 8 loan exposures (2022: 13) exceeded 10.0% of the capital base of the Bank:

HP and finance lease receivables

Loans and advances to customers include the following HP and finance lease receivables:

The investment in HP and finance lease receivables net of unearned income comprises:

1Included in motor vehicles are operating leases with the Group as lessor. Depreciation on leasing assets was £nil (2022: £16,000).

Buildings with an original cost of £160,000 were revalued by independent valuers Vospers Limited to £175,000 on the basis of market value as at 15 September 2021. The valuation conforms to International Valuation Standards and was based on recent market transactions on arm's length terms for similar properties. The Directors consider the valuation of the buildings as at 31 December 2023 remains £175,000. The carrying amount that would have been recognised had the building been carried under the cost model would be £150,400 (2022: 153,600).

Deferred consideration

Deferred consideration relates to contingent payments due to the sellers on the acquisition of BBSL and BLX respectively.

On the acquisition of BLX on 11 October 2021, the Group agreed that a further conditional consideration of up to £483,663 is payable to the sellers in addition to the cash consideration paid. The total amount payable is contingent on the recovery of certain loans and advances found to be in default at acquisition. The fair value on acquisition date was determined to be £387,000. The Group made a payment of £67,000 (2022: £156,093) to the sellers during the period.

JM - Two loans, one loan of £1,250,000 maturing on 26 February 2025 with interest payable of 5.4% per annum, convertible to ordinary shares of the Company at a rate of 9.0 pence, one of £500,000 maturing on 31 July 2027, paying interest of 7.5% per annum and convertible to ordinary shares of the Company at a rate of 8.0 pence.

BL - Three loans, one of £1,200,000 maturing on 31 July 2027, paying interest of 7.5% per annum, convertible to ordinary shares of the Company at a rate of 8.0 pence, one of £1,000,000 maturing 25 February 2025, paying interest of 5.4% per annum, and one of £1,000,000 maturing 28 September 2025 paying interest of 6.0% per annum. Jim Mellon is the beneficial owner of BL and Denham Eke is also a director.

CR - One loan consisting of £1,000,000 maturing on 12 October 2025, paying interest of 6.0% per annum. Greg Bailey, a director, is the beneficial owner of CR.

UP - Forty loans (2022: Forty), the earliest maturity date is 22 January 2024 and the latest maturity is 10 October 2028. The average interest payable is 5.87% (2022: 5.52%)

Pension liability

The Conister Trust Pension and Life Assurance Scheme ("Scheme") operated by the Bank is a funded defined benefit arrangement which provides retirement benefits based on final pensionable salary. The Scheme is closed to new entrants and the last active member of the Scheme left pensionable service in 2011.

The Scheme is approved in the Isle of Man by the Assessor of Income Tax under the Income Tax (Retirement Benefit Schemes) Act 1978 and must comply with the relevant legislation. In addition, it is registered as an authorised scheme with the FSA in the Isle of Man under the Retirement Benefits Scheme Act 2000. The Scheme is subject to regulation by the FSA but there is no minimum funding regime in the Isle of Man.

The Scheme is governed by two corporate trustees, Conister Bank Limited and Boal & Co (Pensions) Limited. The trustees are responsible for the Scheme's investment policy and for the exercise of discretionary powers in respect of the Scheme's benefits.

Exposure to risk

The Company is exposed to the risk that additional contributions will be required in order to fund the Scheme as a result of poor experience. Some of the key factors that could lead to shortfalls are:

§ investment performance - the return achieved on the Scheme's assets may be lower than expected; and

§ mortality - members could live longer than foreseen. This would mean that benefits are paid for longer than expected, increasing the value of the related liabilities.

In order to assess the sensitivity of the Scheme's pension liability to these risks, sensitivity analysis have been carried out. Each sensitivity analysis is based on changing one of the assumptions used in the calculations, with no change in the other assumptions. The same method has been applied as was used to calculate the original pension liability and the results are presented in comparison to that liability. It should be noted that in practice it is unlikely that one assumption will change without a movement in the other assumptions; there may also be some correlation between some of these assumptions. It should also be noted that the value placed on the liabilities does not change on a straight line basis when one of the assumptions is changed. For example, a 2.0% change in an assumption will not necessarily produce twice the effect on the liabilities of a 1.0% change.

Exposure to risk

No changes have been made to the method or to the assumptions stress-tested for these sensitivity analyses compared to the previous period. The investment strategy of the Scheme has been set with regard to the liability profile of the Scheme. However, there are no explicit asset-liability matching strategies in place.

Restriction of assets

No adjustments have been made to the statement of financial position items as a result of the requirements of IFRIC 14 - IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, issued by IASB's International Financial Reporting Interpretations Committee.

Scheme amendments

There have not been any past service costs or settlements in the financial year ending 31 December 2023 (2022: none).

Funding policy

The funding method employed to calculate the value of previously accrued benefits is the Projected Unit Method. Following the cessation of accrual of benefits when the last active member left service in 2011, regular future service contributions to the Scheme are no longer required. However, additional contributions will still be required to cover any shortfalls that might arise following each funding valuation.

The most recent triennial full actuarial valuation was carried out at 31 March 2022, which showed that the market value of the Scheme's assets was £1,432,000 representing 65.2% of the benefits that had accrued to members, after allowing for expected future increases in earnings. As required by IAS 19: Employee Benefits, this valuation has been updated by the actuary as at 31 December 2023.

The amounts recognised in the Consolidated Statement of Financial Position are as follows:

The assumptions used by the actuary are best estimates chosen from a range of possible assumptions, which due to the timescale covered, may not necessarily be borne out in practice.

Sensitivity analysis

Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below.

The 2023 Group closing balance is represented by £19,384,000 share capital (2022: £19,195,000), £39,317,000 of loan notes (2022: £31,332,000) and £1,358,000 lease liability (2022: £1,614,000).

The 2023 Company closing balance is represented by £19,384,000 share capital (2022: £19,195,000), £39,317,000 of loan notes (2022: £31,332,000) and £91,000 lease liability (2022: £208,000).

Dividends

On 30 May 2023, MFG declared a dividend of £433,000 (2022: £279,000) which could either be taken up in cash or new ordinary shares of 418,993 new shares (2022: 781,349 new shares) were admitted to the Alternative Investment Market ("AIM") at 21.8974 pence per share (2022: 8.0205 pence per share), at a total cost of £91,000 (2022: £62,000).

Convertible loans

There are three convertible loans totalling £2,950,000 (2022: £2,950,000) (refer to note 27).

• Share options and Restricted Stock Units
• Issued during the financial year ended 31 December 2023

On 5 July 2022, 27 October 2022 and 29 November 2023 MFG granted Restricted Stock Units ("RSUs") under its 2022 RSU Plan. The Group has issued, in total, RSUs over 4,687,500 ordinary shares representing 4.1% of the issued share capital of the Group, including 2,900,000 to certain directors and 1,787,500 to certain employees. The RSUs will have a 2-year term and are subject to certain vesting conditions based upon an overall growth in profitability. Any RSUs granted will fall away should the recipient leave employment before the 2-year term expires. Should the individual vesting conditions be satisfied at the end of the term, the stock will be exercised at nil cost.

The Group directors who received RSUs are as follows:

§ Douglas Grant, Group Chief Executive Officer was issued 1,925,000 RSUs. Including the 1,243,129 Ordinary Shares in the Company he currently owns, he would hold a total of 3,168,129 on a fully diluted basis, being 2.0% of the new issued share capital of the Company; and

§ James Smeed, Group Finance Director, was issued 475,000 RSUs. On the same basis, he would hold 0.3% of the new issued share capital of the Company.

The terms and conditions of the grants are as follows: and will be settled by the physical delivery of shares.

^ Based on past 3 years

* Annual rates

The charge for the year for share options granted was £113,000 (2022: £18,000).

On 23 June 2014, 1,750,000 share options were issued to Executive Directors and senior management within the Group at an exercise price of 14 pence per share.

The options vest over three years with a charge based on the fair value of 8 pence per option at the date of grant. The period of grant is for 10 years less 1 day ending 22 June 2024, with the condition of three-years continuous employment being met.

Of the 1,750,000 share options issued, 350,000 (31 December 2022:1,050,000) remain outstanding.

On 30 November 2023, Douglas Grant, Chief Executive Officer, exercised options over 700,000 ordinary shares of no par value ("New Ordinary Shares") in the Company (the "Options"), at an exercise price of 14 pence per New Ordinary Share, for an aggregate consideration of £98,000.

List of associates

Set out below is a list of associates of the Group:

In August 2018, 30% of the share capital of PIML was acquired for £90,000 consideration. The Group's resulting share of the associate's total comprehensive income during the year was £nil (2022: £18,000).

As part of the Bank providing loan finance to LSC, on 29 June 2023 the Group acquired 10% of its issued share capital for nil consideration. The receipt of the issued share capital is considered to be linked to the loan facilities financed and therefore its term and interest rate implicit in the finance agreement have been used as the basis to discount the fair value of the gratis shares issued.

The Group possesses the capacity to engage in policy-making processes within LSC through its right to designate an individual to attend all board meetings as an observer. Via its representative, the Group also holds the ability to introduce topics for discussion on the agenda, although it doesn't have voting rights in this regard. Moreover, the Group has introduced constraints on LSC's board, effectively preventing specified significant actions from being taken without the Group's consent. The fair value of the financial instrument received has been determined as £42,000 at initial recognition based on the proportionate share of the net asset value of LSC. As part of the transaction, the Group has been granted two warrants to acquire further shares. The first warrant is for 10% of the share capital and the second warrant is for a further 10% of the share capital. The two warrants are exercisable dependent upon the profit before tax achieved by LSC relative to target profit before tax for the relevant financial period. The fair value of the two warrants has been determined to be nil due to the significant uncertainty that exists at acquisition date of achieving such targets. For these reasons the financial instrument is accounted for as an Associate in accordance with IAS 28. The Group's resulting share of the associate's total comprehensive income during the year was £nil (2022: £nil).

Moreover, the Group has introduced constraints on LSC's board, effectively preventing specified significant actions from being taken without the Group's consent.

The Group continues to obtain information necessary to measure the fair value of the shares obtained. The fair value of the financial instrument received has been provisionally determined as £42,000 at initial recognition based on the proportionate share of the net asset value of LSC. As part of the transaction, the Group has been granted two warrants to acquire further shares. The first warrant is for 10% of the share capital and the second warrant is for a further 10% of the share capital.

The two warrants are exercisable dependent upon the profit before tax achieved by LSC relative to target profit before tax for the relevant financial period. The fair value of the two warrants has been determined to be nil due to the significant uncertainty that exists at acquisition date of achieving such targets.

For these reasons the financial instrument is accounted for as an Associate in accordance with IAS 28.

List of subsidiaries

Set out below is a list of direct subsidiaries of the Group:

All subsidiaries are incorporated in the Isle of Man.

Set out below is a list of indirect significant subsidiaries of the Group:

Non-controlling interests in subsidiaries

The following table summarises the information about the Group's subsidiaries that have material NCI, before any intra-group eliminations.

Financial Instruments

Rivers Finance Group PLC ("RFG")

On 9 June 2021 the Group acquired 10% of the issued share capital of RFG for nil consideration. The receipt of the issued share capital is considered to be a commitment fee receivable by the Group in order to originate loan facilities in aggregate not exceeding £6,250,000 to RFG. The commitment fee is an integral part of the effective interest rate of the associated loan facilities issued to RFG.

The Group is not considered to have a significant influence over RFG as it holds less than a 20% shareholding and is not considered to participate in the policy making decisions of the entity. The 10% shareholding has thus been classified as a financial instrument.

The Group continues to obtain information necessary to measure the fair value of the shares obtained. The fair value of the financial instrument received has been determined as £138,000 (2022: £122,000) based on the proportionate share of the net asset value of RFG. There has been no change to fair value at year-end.

As part of the transaction, the Group has been granted two warrants to acquire further shares. The first warrant is for 5% of the share capital and the second warrant is for a further 5% of the share capital.

The two warrants are exercisable dependent upon the Group's banking subsidiary, the Bank, contracting with RFG, for a larger facility. The fair value of the two warrants has been determined to be nil due to the significant uncertainty that exists at acquisition date and the period end in issuing a further debt facility.

Goodwill

Management has determined that a reasonably possible change in the key assumptions would not result in the carrying amount to exceed the recoverable amount of the following CGU's and accordingly no impairment of goodwill.

Payment Assist Limited ("PAL")

On 16 May 2022, the Group (through MVL) announced that it entered into an agreement to acquire 50.1% of the shares and voting interests in UK focused, point of sale lender PAL for a total consideration of £4.244 million payable in cash. The acquisition was completed in September 2022. In addition to the acquisition, MVL has agreed an option to acquire the remaining 49.9% of Payment Assist for a variable cash consideration of 2 times the average net profit per share at the point of exercise, subject to a maximum of £5 million (the "Option"). The Option can be exercised by MVL at any time for the period until PAL has declared a dividend for the financial year ended 31 December 2026.

General

The key assumptions used in the estimation of the recoverable amount are set out in this note. The recoverable amount of the CGUs discussed in this note were each based on value in use. The values assigned to key assumptions represents management's assessment of future trends in the relevant industries and have been based on historical data from both external and internal sources.

The estimated recoverable amount in relation to the goodwill generated on the purchase of PAL is based on 10-year forecasted cash flow projections and then discounted using a 14.2% (2022: 14.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0% on single interest income growth rates.

The estimated recoverable amount in relation to the EAL CGU (including also goodwill generated on acquisition of EAL) is based on forecasted 10-year forecasted cash flow projections, using a 2.0% annual increment, and then discounted using a 13.9% (2022: 14.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on stable profit levels. An impairment loss on EAL goodwill of £200,000 has been recognised in the prior year.

The estimated recoverable amount in relation to the goodwill generated on the purchase of BLX is based on10-year interest income using a 0% annual increment, and then discounted using a 14.2% (2022: 14.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0% on single interest income growth rates.

The estimated recoverable amount in relation to the goodwill generated on the purchase of BBSL is based on forecasted 10-year forecasted cash flow projections using a 0% annual increment, with a terminal value calculated using a 2.0% growth rate of net income and then discounted using a 14.2% (2022: 14.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0% on single interest income growth rates.

The estimated recoverable amount in relation to the goodwill generated on the purchase of NRFL is based on 10-year forecasted cash flow projection using a 2.0% annual increment, and then discounted using a 14.2% (2022: 12.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0%. On the basis of the above reviews no impairment to goodwill has been made in the current year.

The estimated recoverable amount in relation to the goodwill generated on the purchase of MCL is based on 4-year sales interest income. This is extrapolated to 10 years using a 2.0% annual increment, and then discounted using a 14.2% (2022: 11.0%) discount factor. The sensitivity of the analysis was tested using additional discount factors up to 20.0%.

The goodwill generated on the purchase of Three Spires has been reviewed at the current year end and is considered adequate given its income streams referred to EAL. Based on the above no impairment to goodwill has been made in the current year.

Loans and amounts due from Group undertakings

Amounts due from and to Group undertakings

Amounts due from and to Group undertakings relate to intra-group transactions and are unsecured, interest-free and repayable on demand. The amounts will be settled either through cash or net settlement.

Subordinated loans

MFG has issued several subordinated loans as part of its equity funding into the Bank and EAL.

Related party transactions

Cash deposits

During the year, the Bank held cash on deposit on behalf of Jim Mellon (Executive Chairman of MFG). At 31 December total deposits amounted to £4,502 (2022: £94,475), at normal commercial interest rates in accordance with the standard rates offered by the Bank.

Key management remuneration including Executive Directors

Employment benefits include gross salaries, performance related pay, employer defined contributions and restricted stock units (See note 29D). At 31 December 2023, Douglas Grant had three amortising loans outstanding to Conister Bank Limited with capital outstanding of £315,524 (2022: £376,163). The maximum original term of the three loans is 61 months and the average interest is 2.57% (2022: 7.0%). James Smeed had an amortising loan outstanding to Conister Bank with capital outstanding of £10,847 (2022: £15,463). The original term of the loan is 49 months and the average interest is 3.01% (2022: 3.01%). No impairment is held in respect of these amounts.

Intercompany recharges

Various intercompany recharges are made during the course of the year as a result of the Bank settling debts in other Group companies.

Loan advance to PIML

On 24 May 2018, a £500,000 loan facility was made available to PIML by the Bank in order to provide the finance required to expand its operations. The facility is for 12 months. Interest is charged at commercial rates. At 31 December 2023, £2,677,000 (2022: £1,241,000) had been advanced to PIML. No impairment is held in respect of these amounts. This loan facility is repayable in cash.

Loan advance to Lesley Stephen & Co Limited ("LSC")

A total £10 million loan facility is available to LSC to provide the finance required to expand its operations. Interest is charged at commercial rates. At 31 December 2023, £10 million had been advanced to LSC. As part of a finance arrangement between the Bank and LSC, Manx Ventures Limited ("MVL") (a related entity) acquired a 10% shareholding in RFG. This loan facility is repayable in cash.

Subordinated loans

The Company has advanced £13,950,000 (2022: £7,450,000) of subordinated loans to the Bank and £278,000 (2022: £278,000) to EAL as at 31 December 2023. See note 35 for more details.

• Leases
• Leases as lessee

The Group leases the head office building in the Isle of Man. The lease's term is 10 years with an option to renew the lease after that date. Lease payments are renegotiated every 10 years to reflect market rentals.

The Group leases an office unit in the United Kingdom and IT equipment with contract terms of 2 to 3 years. These leases are short-term and / or leases of low-value items. The Group has elected not to recognise right-of-use assets and lease liabilities for these leases.

Information about leases for which the Group is a lessee is presented below.

Right-of-use assets

Right-of-use assets related to leased properties that do not meet the definition of investment property are presented as property, plant and equipment.

For company only right of use asset disclosure, refer to note 22.

Amounts recognised in profit or loss

Regulators

Certain Group subsidiaries are regulated by the FSA and the FCA as detailed below.

The Bank and EAL are regulated by the FSA under a Class 1(1) - Deposit Taking licence and Class 2 - Investment Business licence respectively. The Bank is also regulated by the UK's Prudential Regulatory Authority ("PRA") and the UK's Financial Conduct Authority ("FCA").

Contingent liabilities

The Bank is required to be a member of the Isle of Man Government Depositors' Compensation Scheme which was introduced by the Isle of Man Government under the Banking Business (Compensation of Depositors) Regulations 1991 and creates a liability on the Bank to participate in the compensation of depositors should it be activated.

Non-IFRS measures

Non-IFRS measures included in the financial statements include the following:

Subsequent events

There were no subsequent events occurring after 31 December 2023.

• Financial risk management
• Introduction and overview

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

§ credit risk;

§ liquidity risk;

§ market risk; and

§ operational risk.

Risk management framework

The Board has overall responsibility for the establishment and oversight of the Group's risk management framework. The Board has established the ARCC, which is responsible for approving and monitoring Group risk management policies. The ARCC is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the ARCC.

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. The risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, though its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's loans and advances to customers and investment debt securities. Credit risk includes counterparty, concentration, underwriting and credit mitigation risks.

Management of credit risk

The Bank's Board of Directors created the Credit Committee which is responsible for managing credit risk, including the following:

§ Formulating credit policies in consultation with business units, covering collateral requirements, credit assessments, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements;

§ Establishing the authorisation structure for the approval and renewal of credit facilities. Authorisation limits are allocated in line with credit policy;

§ Reviewing and assessing credit risk: The Credit Committee assesses all credit exposures in excess of designated limits, before facilities are committed to customers. Renewals and reviews of facilities are subject to the same review process.

§ Limiting concentrations of exposures to counterparties, geographies and industries, by issuer, credit rating band, market liquidity and country (for debt securities);

§ Developing and maintaining risk gradings to categorise exposures according to the degree of risk of default. The current risk grading consists of 3 grades reflecting varying degrees of risk of default;

§ Developing and maintaining the Group's process for measuring ECL: This includes processes for:

o initial approval, regular validation and back-testing of the models used;

o determining and monitoring significant increase in credit risk; and

o the incorporation of forward-looking information; and

§ Reviewing compliance with agreed exposure limits. Regular reports on the credit quality of portfolios are provided to the Credit Committee which may require corrective action to be taken.

Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises from mismatches in the timing and amounts of cash flows, which is inherent to the Group's operations and investments.

Management of liquidity risk

The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have enough liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The key elements of the Group's liquidity strategy are as follows:

§ Funding base: offering six-months to five-year fixed term deposit structure with no early redemption option. This means the Bank is not subject to optionality risk where customers redeem fixed rate products where there may be a better rate available within the market;

§ Funding profile: the Bank has a matched funding profile and does not engage in maturity transformation which means that on a cumulative mismatch position the Bank is forecast to be able to meet all liabilities as they fall due;

§ Monitoring maturity mismatches, behavioural characteristics of the Group's financial assets and financial liabilities, and the extent to which the Group's assets are encumbered and so not available as potential collateral for obtaining funding;

§ Liquidity buffer: the Bank maintains a liquidity buffer of 10.0% of its deposit liabilities, with strict short-term mismatch limits of 0.0% for sight to three months and -5.0% for sight to six months. This ensures that the Bank is able to withstand any short-term liquidity shock; and

§ Interbank market: the Bank has no exposure to the interbank lending market. The Bank has no reliance on liquidity via the wholesale markets. In turn, if market conditions meant access to the wholesale funding was constrained as per the 2008 credit crisis, this would have no foreseeable effect on the Bank.

The Bank's liquidity position is monitored daily against internal and external limits agreed with the FSA and according to the Bank's Liquidity Policy. The Bank also has a Liquidity Contingency Policy and Liquidity Contingency Committee in the event of a liquidity crisis or potential liquidity disruption event occurring.

The Treasury department receives information from other business units regarding the liquidity profile of their financial assets and financial liabilities and details of other projected cash flows arising from projected future business. Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole.

Regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. The scenarios are developed considering both Group-specific events and market-related events (e.g. prolonged market illiquidity).

Market risk

Market risk is the risk that of changes in market prices; e.g. interest rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor's / issuer's credit standing), will affect the Group's income or value of its holdings of financial instruments. The objective of the Group's market risk management is to manage and control market risk exposures within acceptable parameters to ensure the Group's solvency while optimising the return on risk.

Management of market risks

Overall authority for market risk is vested in the Assets and Liabilities Committee ("ALCO") which sets up limits for each type of risk. Group finance is responsible for the development of risk management policies (subject to review and approval by the ALCO) and for the day-to-day review of their implementation.

Foreign exchange risk

The Bank is not subject to foreign exchange risks and its business is conducted in pounds sterling.

Equity risk

The Group has investment in associates which are carried at cost adjusted for the Group's share of net asset value. The Bank has access to these accounts. The Bank's exposure to market risk is not considered significant given the low carrying amount of the investment.

The Group's does not hold any investments in listed equities.

Interest rate risk

The principal potential interest rate risk that the Bank is exposed to is the risk that the fixed interest rate and term profile of its deposit base differs materially from the fixed interest rate and term profile of its asset base, or basis and term structure risk.

Additional interest rate risk may arise for banks where (a) customers are able to react to market sensitivity and redeem fixed rate products and (b) where a bank has taken out interest rate derivate hedges especially against longer-term interest rate risk, where the hedge moves against the bank. However, neither of these risks apply to the Bank.

Interest rate risk for the Bank is not deemed to be currently material due to the Bank's matched funding profile. Any interest rate risk assumed by the Bank will arise from a reduction in interest rates, in a rising environment due to the nature of the Bank's products and its matched funded profile. The Bank should be able to increase its lending rate to match any corresponding rise in its cost of funds, notwithstanding its inability to vary rates on its existing loan book. The Bank attempts to efficiently match its deposit taking to its funding requirements.

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group's processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks - e.g. those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group's operations.

Management of operational risk

The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and innovation. In all cases, Group policy requires compliance with all applicable legal and regulatory requirements.

The Group has developed standards for the management of operational risk in the following areas:

§ Business continuity planning;

§ Requirements for appropriate segregation of duties, including the independent authorisation of transactions;

§ Requirements for the reconciliation and monitoring of transactions;

§ Compliance with regulatory and other legal requirements;

§ Documentation of controls and procedures;

§ Periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;

§ Requirements for the reporting of operational losses and proposed remedial action;

§ Development of contingency plans;

§ Training and professional development;

§ Ethical and business standards;

§ Information technology and cyber risks; and

§ Risk mitigation, including insurance where this is cost-effective.

Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are reported to the ARCC.

Basis of measurement

The financial statements are prepared on a historical cost basis, except for the following material items:

Material accounting policies

There were no new standards, amendments or interpretations issued and made effective during the current year which have had a material impact on the Group. 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 2023:

§ Disclosure Initiative: Accounting Policies - Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements

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

The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective. New standards and amendments to standards, adopted but not yet effective with an initial application of 1 January 2024:

§ Amendments to IAS 12 - International Tax Reform - Pillar Two Model Rules

§ Lease Liability in a Sale and Leaseback - Amendments to IFRS 16 Leases

§ IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information

§ IFRS S2 Climate-related Disclosures

The Group has assessed the impact of these amendments and expects they will not have a material impact, when adopted, on the Group Financial Statements.

The Group has consistently applied the following accounting policies to all periods presented in these financial statements.

Set out below is an index of the material accounting policies, the details of which are available on the pages that follow:

• Basis of consolidation of subsidiaries and separate financial statements of the Company
• Business combinations

Any contingent consideration is measured at fair value at the date of acquisition. Contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.

Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an entity if it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its control over the entity. The Group reassesses whether it has control if there are changes to one or more of the elements of control. This includes circumstances in which protective rights held (e.g. those resulting from a lending relationship) become substantive and lead to the Group having power over an investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.

Non-controlling interests ("NCI")

NCI are measured initially at their proportionate share of the acquiree's identifiable net assets at the date of acquisition.

Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Separate financial statements of the Company

In the separate financial statements of the Company, interests in subsidiaries, associates and joint ventures are accounted for at cost less impairment.

Interests in equity accounted investees

The Group's interests in equity accounted investees may comprise interests in associates and joint ventures.

Interests in associates and joint ventures are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group's share of the profit or loss and OCI of equity accounted investees, until the date on which significant influence or joint control ceases.

Interest

Interest income and expense are recognised in profit or loss using the effective interest 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 gross carrying amount of the financial asset or amortised cost of the financial liability. When calculating the effective interest rate for financial assets, the Group estimates future cash flows considering all contractual terms of the financial instruments, 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.

Amortised cost and gross carrying amount

The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance.

The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any expected credit loss allowance.

Calculation of interest income and expense

In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit-impaired) or to the amortised cost of the liability.

However, for financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the net carrying amount of the financial asset. If the asset is no longer credit-impaired, then the calculation of interest income reverts to the gross basis.

Fee and commission income

The Group generates fee and commission income through provision of independent financial advice, insurance brokerage agency, introducer of foreign exchange services and commissions from brokering business finance for small and medium sized enterprises.

Independent financial advice and insurance brokerage agency

Income represents commission arising on services and premiums relating to policies and other investment products committed during the year, as well as renewal commissions having arisen on services and premiums relating to policies and other investment products committed during the year and previous years and effective at the reporting date. Income is recognised on the date that policies are submitted to product providers with an appropriate discount being applied for policies not completed. As a way to estimate what is due at the year-end, a "not proceeded with" rate of 10.0% for pipeline life insurance products and 0.0% for non-life insurance pipeline is assumed. Renewal commissions are estimated by taking the historical amount written pro-rata to 3 months.

Other

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 fee relates.

As a lessee

At commencement or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of its relative stand-alone prices. However, for the leases of property the Group has elected not to separate non-lease components and as a result, accounts for the lease and non-lease components as a single lease component.

The Group determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and the type of the asset leased.

Lease payments included in the measurement of the lease liability comprise the following:

§ Fixed payments, including in-substance fixed payments;

§ Amounts expected to be payable under a residual value guarantee; and

Short-term leases and leases of low-value assets

As a lessor

When the Group acts as a lessor, it determines at lease inception whether each lease is a finance or an operating lease.

Finance leases and HP contracts

When assets are subject to a finance lease or HP contract, the present 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.

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 profit or loss and other comprehensive income on a straight-line basis over the period of the lease.

Income tax

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 temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. Deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill and temporary differences related to investments in subsidiaries and associates to the extent that the Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future.

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.

• Financial assets and financial liabilities
• Recognition and initial measurement

The Group initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities on the date on which they are originated. All other financial instruments including regular-way purchases and sales of financial assets are recognised on the trade date, which is the date on which the Group becomes party to the contractual provisions of the instrument.

A financial asset or financial liability is measured initially at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue.

Classification

Financial assets

On initial recognition, a financial asset is classified as measured at amortised cost, FVOCI or FVTPL.

§ The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and

§ The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest ("SPPI").

A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as FVTPL:

§ The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

§ The contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI.

On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis.

All other financial assets are classified as measured at FVTPL.

In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

Business model assessment

The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information provided to management.

Assessment of whether contractual cash flows are solely payments of principal and interest

For the purposes of this assessment, 'principal' is defined as the fair value of the financial asset on initial recognition. 'Interest' is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin.

In assessing whether the contractual cash flows are SPPI, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition.

Financial liabilities

The Group classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost.

Derecognition

Financial assets

Financial liabilities

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire.

Offsetting

Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Group's trading activity.

Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at the date. The fair value of a liability reflects its non-performance risk.

The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements:

§ Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and

For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.

Impairment

A financial instrument that is not credit-impaired on initial recognition is classified in 'Stage 1' and has its credit risk continuously monitored by the Group.

If a SICR since initial recognition is identified, the financial instrument is moved to 'Stage 2' but is not yet deemed to be credit impaired.

§ An SICR is always deemed to occur when the borrower is 30 days past due on its contractual payments. If the Group becomes aware ahead of this time of non-compliance or financial difficulties of the borrower, such as loss of employment, avoiding contact with the Group then an SICR has also deemed to occur; and

§ A receivable is always deemed to be in default and credit-impaired when the borrower is 90 days past due on its contractual payments or earlier if the Group becomes aware of severe financial difficulties such as bankruptcy, individual voluntary arrangement, abscond or disappearance, fraudulent activity and other similar events.

If the financial instrument is credit-impaired, the financial instrument is then moved to 'Stage 3'. Financial instruments in Stage 3 have their ECL measured based on expected credit losses on a lifetime basis.

Loss allowances for lease receivables are always measured at an amount equal to lifetime ECL.

12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Financial instruments for which a 12-month ECL is recognised are referred to as 'Stage 1 financial instruments'.

Lifetime ECL are the ECL that result from all possible default events over the expected life of a financial instrument. Financial instruments for which a lifetime ECL is recognised but which are not credit-impaired are referred to as 'Stage 2 financial instruments'.

Measurement of ECL

After a detailed review, the Group devised and implemented an impairment methodology in light of the IFRS 9 requirements outlined above noting the following:

§ The Group has identified and documented key drivers of credit risk and credit losses its financial instruments and using an analysis of historical data, has estimated the relationship between macroeconomic variables and credit risk and credit losses;

§ The ECL is derived by reviewing the Group's loss rate and loss given default over the past 8 years by product and geographical segment; and

§ If the Group holds objective evidence through specifically assessing a credit-impaired receivable and believes it will go on to completely recover the debt due to the collateral held and cooperation with the borrower, then no IFRS 9 provision is made.

ECL are probability-weighted estimates of credit losses. They are measured as follows:

§ Financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive);

§ Financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; and

§ Undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive.

Credit-impaired financial assets

At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI, and finance lease receivables are credit-impaired (referred to as 'Stage 3 financial assets'). A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.

Evidence that a financial asset is credit-impaired includes the following observable date:

§ Significant financial difficulty of the borrower or issuer;

§ A breach of contract such as a default or past due event;

§ It is becoming probable that the borrower will enter bankruptcy or another type of financial reorganisation; or

§ The disappearance of an active market for a security because of financial difficulties.

A loan that has been renegotiated due to a deterioration in the borrower's condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a retail loan that is overdue for 90 days or more is considered credit-impaired even when the regulatory definition of default is different.

In assessing of whether an investment in sovereign debt is credit impaired, the Group considers the following factors:

§ The market's assessment of creditworthiness as reflected in the bond yields;

§ The rating agencies' assessments of creditworthiness;

§ The country's ability to access the capital markets for new debt issuance;

§ The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness; and

§ The international support mechanisms in place to provide the necessary support as 'lender of last resort' to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria.

Presentation of allowance for ECL in the statement of financial position

Loss allowances for ECL are presented in the statement of financial position as follows:

§ Financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;

§ Loan commitments: generally, as a provision; and

§ Debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in the fair value reserve.

Write-off

Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level.

Recoveries of amounts previously written off are included in 'impairment losses on financial instruments' in the statement of profit or loss and OCI.

Financial assets that are written off could still be subject to enforcement activities in order to comply with the Group's procedures for recovery of amounts due.

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.

Loans and advances

Loans and advances' captions in the statement of financial position include:

§ Loans and advances measured at amortised cost (see note 44 (G)). They are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortised cost using the effective interest method; and

§ Finance lease receivables (see note 44 (E)).

Property, plant and equipment

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. Buildings are carried at a revalued amount, being fair value at the date of revaluation less subsequent depreciation and impairment and are revalued annually.

If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.

If an asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.

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.

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 estimated useful lives of property, plant and equipment and intangibles are as follows:

Property, plant and equipment

Leasehold improvements to expiration of the lease

IT equipment 4 - 5 years

Motor vehicles 2 - 5 years

Furniture and equipment 4 -10 years

Plant and machinery 5 - 20 years

• Intangible assets and goodwill
• Goodwill

Goodwill that arises on the acquisition of subsidiaries is measured at cost less accumulated impairment losses.

Software

Software acquired by the Group is measured at cost less accumulated amortisation and any accumulated impairment losses.

Expenditure on internally developed software is recognised as an asset when the Group is able to demonstrate: that the product is technically feasible, its intention and ability to complete the development and use the software in a manner that will generate future economic benefits, and that it can reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs directly attributable to developing the software and capitalised borrowing costs, and are amortised over its useful life. Internally developed software is stated at capitalised cost less accumulated amortisation and any accumulated impairment losses.

Software is amortised on a straight-line basis in profit or loss over its estimated useful life, from the date on which it is available for use. Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.

Other

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 with indefinite useful lives that are acquired or built are carried at cost less accumulated impairment losses. Intangible assets with indefinite useful lives are not amortised but instead are subject to impairment testing at least annually.

The useful lives of intangibles are as follows:

Customer contracts and lists to expiration of the agreement

Intellectual property rights 4 years - indefinite

Website development costs indefinite

IT Software and website development costs 5 years

Included in intellectual property rights is capitalised costs for acquiring a UK Banking licence. The banking licence is assumed to have an indefinite life as there is no foreseeable limit to the period over which the asset is expected to generate benefits for the business. Costs related to obtaining this asset are held at cost and are not being amortised.

Impairment of non-financial assets

At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. Goodwill and indefinite useful life intangible assets are tested annually for impairment.

For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or Cash Generating Units ("CGUs"). Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.

The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less cost to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.

The Group's corporate assets do not generate separate cash inflows and are used by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGUs to which the corporate assets are located.

• Employee benefits
• 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.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in profit or loss.

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 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 high quality 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 reporting 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 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.

Share capital and reserves

Share issue costs

Incremental costs that are directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments.

Earnings per share ("EPS")

The Group presents basic and diluted EPS data for its Ordinary Shares. Basic EPS is calculated by dividing the profit or loss that is attributable to ordinary Shareholders of MFG by the weighted-average number of Ordinary Shares outstanding during the period. Diluted EPS is determined by adjusting profit or loss that is attributable to Ordinary Shareholders and the weighted-average number of Ordinary Shares outstanding for the effects of all dilutive potential Ordinary Shares, which comprise share options granted to employees.

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.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with any of the Group's other components, whose operating results are regularly reviewed by the CEO who is the chief operating decision maker ("CODM") to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results reported to the CEO include items that are directly attributable to a segment as well as those that can be allocated on a reasonable basis.