Secure Trust Bank PLC Final Results (2569A)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Secure Trust Bank Plc	LSE:STB	London	Ordinary Share	GB00B6TKHP66	ORD 40P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	-16.00	-2.27%	688.00	672.00	694.00	698.00	690.00	698.00	121,328	16:35:30

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Commercial Banks, Nec	185.5M	24.3M	1.2796	5.41	131.41M

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RNS Number : 2569A

Secure Trust Bank PLC

23 March 2017

PRESS RELEASE

Thursday 23 March 2017

For immediate release

SECURE TRUST BANK PLC

Audited Final Results for the year to 31 December 2016

A year of tremendous progress delivers record profits

Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is pleased to announce a record total Group profit after tax of GBP137.5m for the year to 31 December 2016. This result includes the profit on disposal of the Everyday Loans Group ("ELG") in the first half of the year. The Bank has traded strongly throughout the year, generating underlying profit before tax, which excludes the profit on disposal, of GBP32.9m which is 23% higher than the previous year. The Group also completed its move to a Premium Listing on the Main Market of the London Stock Exchange in the second half of the year. The record profit has further strengthened the Group's balance sheet and capital ratios, creating capacity for the Group to continue its growth despite the evolving economic environment.

FINANCIAL HIGHLIGHTS

 
      --   Total profit after tax GBP137.5m (2015: GBP28.7m) 
            up 379% 
      --   Underlying profit before tax* GBP32.9m (2015: GBP26.7m) 
            up 23% 
      --   Statutory profit before tax* GBP25.0m (2015: GBP24.8m) 
            up 1% 
      --   Common equity tier 1 ratio of 17.4% (2015: 13.6%) 
            up 3.8 percentage points 
      --   Operating income* GBP118.2m (2015: GBP92.1m) up 
            28% 
      --   Gain on disposal of ELG confirmed at GBP116.8m 
      --   Basic earnings per share 754.1p (2015: 157.8p) up 
            378% 
      --   Underlying earnings per share* 137.7p (2015: 114.3p) 
            up 20% 
      --   Ordinary dividends for 2016 of 75p per share including 
            interim dividend of 17p per share paid in September 
            2016 and proposed final dividend of 58p per share 
            payable in May 2017 
      --   Special interim dividend of 165p per share paid 
            in July 2016

OPERATIONAL HIGHLIGHTS

 
      --   Business model repositioned with sale of ELG sub-prime 
            unsecured personal loan business, closure of the 
            basic current account product and cessation of unsecured 
            personal loan originations 
      --   Customer deposits increased to GBP1,151.8m (2015: 
            GBP1,033.1m) up 11% 
      --   Overall loan book increased to GBP1,321.0m (2015: 
            GBP960.6m*) up 38% 
      --   Total customer numbers increased to 754,968; a 42% 
            increase on 2015: 532,278* 
      --   Lending to house builders closely managed with overall 
            LTGDV of portfolio 58% 
      --   High levels of customer satisfaction as measured 
            by FEEFO 
      --   Investors In People Gold status achieved 
      --   Invoice Finance business trading profitably within 
            2 years of commencement

*excluding ELG.

Lord Forsyth, Chairman, said:

"The record profit after tax of GBP137.5m in 2016 enabled Secure Trust Bank to increase shareholder equity from GBP141.2m to GBP236.0m whilst distributing GBP43.1m in dividends. The Bank of England's recent consultation on ways to help create a more level competitive playing field in respect of capital is a possible step forward. Our successful move to the premium segment of the Main Market of the London Stock Exchange and our very strong capital and liquidity resources open up a wide range of strategic options as we enter our 65(th) year of operation."

Paul Lynam, Chief Executive, said:

"This has been a year of tremendous progress for Secure Trust Bank. We have repositioned the actitivies of the Group, almost doubled our capital base, increased our customer numbers by 42%, and delivered excellent levels of customer satisfaction. Having generated total shareholder returns of 247%, including dividends, in the five years since our AIM flotation in late 2011, we are in a strong position to pursue our strategic priorities, as we develop our existing businesses, diversify into new areas and remain open to potential M&A activities."

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

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

Enquiries:

Secure Trust Bank PLC

Paul Lynam, Chief Executive Officer

Neeraj Kapur, Chief Financial Officer

Tel: 0121 693 9100

Stifel Nicolaus Europe Limited (Joint Broker)

Robin Mann

Gareth Hunt

Stewart Wallace

Tel: 020 7710 7600

Canaccord Genuity Limited (Joint Broker)

Andrew Buchanan

Sunil Duggal

Tel: 020 7523 8000

Bell Pottinger

Dan de Belder

Molly Stewart

Tel: 020 3772 2500

Forward looking statements

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

Group strategy and business model

Secure Trust Bank PLC ('the Bank') is an established, well-funded and capitalised UK retail bank. The Bank was incorporated in 1954, was admitted to AIM in November 2011 and, in October 2016, successfully listed on the Main Market of the London Stock Exchange. The Bank and its subsidiaries are referred to as 'the Group'.

Group strategy

The Group's strategy is to build on its current position as an established UK retail bank through a focus on carefully selected and attractively priced segments of the consumer and business markets, prudent underwriting and a prudent approach to capital and liquidity. The Group intends to continue growing its business through professional and responsible lending across existing and new lending divisions and selective acquisitions of loan books and businesses, funded by capital and customer deposits.

The strategy is underpinned by three strategic themes and six values, which are embedded within the Group's culture and are used to evaluate each employee's personal performance:

Themes

 
 Grow      To maximise shareholder value through strong 
            lending growth by delivering great customer 
            outcomes in both our existing and new markets. 
 Sustain   To protect the reputation, integrity and 
            sustainability of the Bank for all of our 
            customers and stakeholders via prudent balance 
            sheet management, investment for growth and 
            robust risk and operational control. Controlled 
            growth is one of the top strategic priorities 
            for the Bank. 
 Love      To ensure that the fair treatment of customers 
            is central to corporate culture and that 
            the Bank is a highly rewarding environment 
            for all staff and one where they can enjoy 
            progressive careers.

Values

 
 Customer focused    Good customer outcomes are at the heart of 
                      everything we do. 
 Risk aware          Understanding of risk keeps our customers 
                      and us safe and secure. 
 Change orientated   Embracing change and implementing good ideas 
                      gives us a competitive advantage. 
 Teamwork            Companies achieve more when staff work well 
                      together. 
 Ownership           Personal responsibility and taking tasks 
                      through to completion benefits the individual 
                      as well as customers. 
 Performance         Secure Trust Bank will only become the best 
  driven              bank in Britain by each employee taking personal 
                      accountability for their performance.

Business model

The Group's diversified lending portfolio currently focuses on two sectors:

 
 --   Business Finance through its Real Estate Finance, 
       Asset Finance and Commercial Finance divisions and 
 --   Consumer Finance through its Personal Lending, Motor 
       Finance and Retail Finance divisions.

The Group intends to use its strong capital base to develop a broad based portfolio, balanced in the longer term across these sectors and residential mortgage lending.

This lending is primarily funded by customer deposits ranging from instant access to seven year bonds. Deposit accounts are promoted to meet funding needs and to broadly match the maturity profiles of loans and deposits. Through carefully targeted lending products, the absence of large fixed overheads in the form of a branch network and a policy of not cross-subsidising loss making products with profitable ones, the Group is able to offer competitive deposit interest rates and has been successful in attracting deposits from a wide range of customers.

The Group operates principally from its head office in Solihull, West Midlands, and had 726 employees (full-time equivalent) as at 31 December 2016. Lending business is sourced primarily through carefully selected business partners and through online channels. The Consumer Finance division utilises underwriting technology to make lending decisions quickly, resulting in high customer satisfaction scores, while exercising strong risk management to minimise losses through bad debts.

Financial and operating highlights

 
                                        2016         2015       2014 
-------------------------------  -----------  -----------  --------- 
                                    GBP129.3     GBP132.5    GBP97.9 
 Operating income                    million      million    million 
 Underlying profit before tax        GBP32.9      GBP26.7    GBP23.8 
  *                                  million      million    million 
                                     GBP27.5      GBP36.5    GBP26.1 
 Profit before tax                   million      million    million 
 Common Equity Tier 1 ('CET1') 
  capital ratio                        17.4%        13.6%      18.7% 
 Loan to deposit ratio**                115%         104%       102% 
                                       754.1        157.8      122.3 
 Earnings per share                    pence        pence      pence 
                                  GBP1,510.0   GBP1,247.4   GBP782.3 
 Total assets                        million      million    million 
-------------------------------  -----------  -----------  ---------

* Underlying profit is the profit attributable to continuing operations, adjusted for items that are outside of the Group's normal recurring business activities. A reconciliation of underlying profit before tax to statutory profit before tax is provided on page 26.

** This excludes the UK Treasury Bills borrowed from the Bank of England under the Funding for Lending Scheme, which have subsequently been pledged as part of a sale and repurchase agreement. If these were included the loan to deposit ratio would be 108% (2015: 101%, 2014: 100%).

 
                                               Loans 
                        New business    and advances 
                             volumes    to customers 
                                2016            2016 
                          GBPmillion      GBPmillion 
---------------------  -------------  -------------- 
 
 Real Estate Finance           218.0           451.0 
 Asset Finance                  84.7           117.2 
 Commercial Finance             39.5            62.8 
 Personal Lending               39.0            65.5 
 Motor Finance                 146.8           236.2 
 Retail Finance                396.3           325.9 
 Other                          40.0            62.4 
---------------------  -------------  -------------- 
                               964.3         1,321.0 
---------------------  -------------  -------------- 
 
 
                                          2016         2015         2014 
                                    GBPmillion   GBPmillion   GBPmillion 
---------------------------------  -----------  -----------  ----------- 
 Loans and advances to customers       1,321.0      1,074.9        622.5 
---------------------------------  -----------  -----------  ----------- 
 
 
      --   Total customer lending balances across the STB Group 
            increased by 23% to GBP1,321.0 million. 
      --   Business Finance lending balances increased by 35% 
            to GBP631.0 million. 
      --   Consumer Finance lending balances increased by 36% 
            to GBP627.6 million, on a continuing operations 
            basis. 
      --   The Group closed its Current Account business and 
            withdrew its Unsecured Personal Lending product. 
      --   Customer deposits increased by 11% to GBP1,151.8 
            million. 
      --   Customer numbers increased 42% to 754,968. 
      --   Customer FEEFO ratings (from the Feedback Forum, 
            mark out of 5 based on star rating from approximately 
            400 reviews): 4.5 stars. 
      --   Employee survey engagement score (based on 2016 
            all staff survey): 85%. 
      --   The Customer Service Excellence Award was renewed 
            in 2016. The Group has also achieved gold accreditation 
            for Investors in People.

Chairman's statement

I am delighted to report that Secure Trust Bank has enjoyed another year of excellent progress in 2016. This success is a tribute to the work of our excellent Chief Executive, Paul Lynam and to the outstanding leadership Sir Henry Angest has given as our Chairman for more than three decades. Henry has diligently and carefully grown the company taking it public with an IPO on AIM in the fourth quarter of 2011. In the five years since, STB has continued to grow in a disciplined manner and rewarded investors with total shareholder returns of 247%1. Henry's determination to focus on our customers and prudent lending ensured the bank traded successfully and profitably during the last crisis when others fell by the wayside. I am pleased he is remaining on the Board and consider it a great privilege and challenge to have been chosen to succeed him. I and the Board are committed to building on his considerable legacy in the years ahead.

(1) based on the appreciation of the share price since the IPO, assuming all dividends have been reinvested.

One of the most important developments, in October of 2016, was the move from AIM to the premium segment of the Main Market of the London Stock Exchange. It was a complex and time consuming exercise and I am grateful to the project team for delivering it so seamlessly.

Since then I have sought to strengthen the Board and was delighted to welcome Ann Berresford and Victoria Stewart as new independent Non-Executive Directors in November. Ann has joined the Audit and Nomination Committees and Victoria serves on the Remuneration Committee. Their skills and experience complement those of the existing directors and they are already making important contributions to our deliberations. Paul Marrow has been appointed Senior Independent Director and was approved by the regulator in December.

The Group continues to focus on customer satisfaction by offering straightforward transparent products delivered by friendly and professional staff and has retained the Customer Service Excellence award, which was introduced by the Cabinet Office in 2010 to replace the kite mark. This independent external assessment of customer service standards is consistent with the feedback provided by FEEFO where consistently high scores are achieved across the product range.

The 2016 annual staff opinion survey was, for the first time, conducted by an independent specialist consultancy. Over 84% participated and STB comfortably exceeded the external benchmarks. This year a record number of employees took advantage of the Group's personal development schemes with qualifications obtained ranging from certificates in Retail Banking to MBAs. Congratulations to all of them. We are also proud of our colleagues who supported local and national charities. STB has a matching funding scheme and the busy charity committee coordinated more than 700 hours of activity this year.

I have no doubt that this commitment by and to our employees contributed to STB being awarded a Gold Standard for Investors in People in late 2016. I helped to launch this scheme as an Employment Minister nearly 25 years ago and it is gratifying to know its exacting standards place the Group in the top 7% of all participating businesses.

Despite the significant growth in the bank's operations and balance sheet in recent years we remain a relatively small player in UK banking. The share of the market controlled by the five largest banks and the Nationwide Building Society is now higher, at 85%, than it was before the demise of Northern Rock and HBOS in the financial crisis of 2008. The somewhat feeble Competition and Market Authority investigation sadly failed to propose remedies, whilst acknowledging the barriers to competition facing smaller banks. These include capital requirement differentials, funding cost disadvantages and increased taxation to part fund a reduction in the bank levy on the systemic banks. We will continue to argue for a fairer competitive market in 2017.

Our management philosophy of exercising prudence in respect of capital, funding and lending remains unchanged. Having generated a profit after tax of GBP137.5 million, the Group finished 2016 with strong capital and liquidity ratios, notwithstanding the substantial distributions paid to shareholders during the year. The Board proposes to pay a final dividend of 58 pence per share. This, when added to the interim dividend of 17 pence, and the special dividend of 165 pence, would mean a full year dividend of 240 pence per share. If approved, the final dividend will be paid on 12 May 2017 to shareholders on the register as at 18 April 2017.

STB enters 2017 well placed to pursue its strategic priorities by developing its business model organically and pursuing M&A opportunities. This, coupled with the Main Market premium listing and substantial capital resources, means the Group is set fair to navigate an uncertain economic and regulatory environment.

Finally the members of Board would like to express their thanks to all of our colleagues across the Group and to our investors for making this year one of considerable achievement.

Lord Forsyth

Chairman

22 March 2017

Chief Executive's statement

A year of tremendous progress

2016 has been a year of tremendous progress for Secure Trust Bank ('STB'). The divestment of the Everyday Loans business ('ELG') was completed in the first half, the move from AIM to a premium listing on the Main Market of the London Stock Exchange was concluded in the second half and throughout the year various external customer service and staff related accolades were awarded. In financial terms, the combined performance of the continuing businesses and the one-off profit arising from the sale of ELG resulted in another record annual profit after tax. Setting this in context, STB started 2016 with shareholders' equity of GBP141.2 million. The overall profit after tax of GBP137.5 million represents a 97.4% return on the equity held at the start of the year and an 11.9% underlying return on the average equity held over the full year. This has enabled us to significantly increase shareholders' equity whilst paying progressive increases in the ordinary dividend and a special dividend of GBP30 million (GBP1.65 per share).

All of this has been achieved whilst continuing to deliver positive outcomes for customers and sustaining very high levels of customer satisfaction.

I would like to echo the Chairman's sentiments by congratulating and thanking all of my colleagues for their unrelenting customer focus and professionalism throughout an exceptionally busy year.

Customer base continues to increase and customer satisfaction levels remain very positive

Across our chosen markets we are serving a record 754,968 customers which is an increase of 42% on the total customer base of 532,278 as at 31 December 2015.

We continue to focus on consistently delivering good outcomes for customers and ensuring that the design of our products is appropriate for their needs. From a conduct and behaviour perspective we do not cross-subsidise losses or low profits on some products with super profits on others. Nor do we discriminate between customers by, for example, paying very low deposit interest rates to existing loyal customers whilst offering relatively high rates to new ones. We believe that our approach is the appropriate way to interact with our customers for the long term benefit of all parties.

Customer satisfaction is measured in a number of ways, including STB being the only bank that uses FEEFO. This data, freely available for all to see on the internet, reflects how our customers actually experience us. Given its importance, customer feedback data and trends remains the first thing we discuss at our weekly management meeting. I am pleased to note that, once again, we have consistently achieved customer satisfaction ratings in excess of 90% across all of our products during the year.

Whilst being pleased with external accolades and ongoing high customer satisfaction scores we are in no way complacent. We are focused on improving our existing service and products and diversifying our customer proposition via targeted investment in people, systems, processes and products.

Prudent balance sheet and risk management

Our priority is, as ever, to safeguard the reputation and sustainability of STB through prudent balance sheet management, investment for growth and robust risk and operational controls.

In this respect our funding strategy is unchanged. We seek to limit exposure to short term wholesale funding and interbank markets and to broadly match fixed term fixed rate customer lending with customer deposits of the same tenor and interest rate basis. This helps us to minimise maturity transformation and interest rate basis risk. During 2016 the market rate for retail deposits fell and the differential in the spread between short and longer term deposits narrowed considerably. This enabled us to increase the average duration of the deposit book and the proportion held in fixed rates, whilst achieving an overall reduction in the average funding cost paid.

Our year end loan to deposit ratio was 115% (2015: 104%). We have temporarily used surplus capital to fund some lending activity as this is more effective than raising customer deposits whilst we have excess capital on a reserve account at the Bank of England paying a mere 0.25%. As this surplus capital is invested in balance sheet growth, the loan to deposit ratio will move back towards 100%. As noted, to lock in lower term funding rates we increased the average tenor of our deposits over the year with fixed term deposits rising to 66% of total deposits. This compares to 57% as at 31 December 2015.

Over the last couple of years we have been investing in a new online customer deposit platform. Whilst our existing platform has served us well and remains fit for purpose it does not have the flexibility to offer a wider range of products. The new platform, when launched later this year, will enable us to offer instant access and cash ISA products thereby significantly broadening available markets to provide funding at lower margins. This new technology is expected to enhance our customer service proposition whilst delivering operational efficiencies.

We do not expect any material change in the competitive dynamics in the market for customer deposits and foresee no difficulties in sustaining our current funding strategies.

Very strong capital ratios and modest leverage

Given the profits generated during 2016 our year end CET1 capital levels are extremely robust. The CET1 ratio of 17.4% compares to the 2015 year end position of 13.6%. This is after taking into account the increase in the risk weights on the residential development lending activities from 100% to 150% as advised to us by the Bank of England in December 2016. The net effect of these changes was to reduce the CET1 ratio by 1.6%.

The Bank of England via the Prudential Regulation Authority ('PRA') has acknowledged that the formulaic application of Basel standardised risk weights under Pillar 1 combined with various Pillar 2 add ons can result in situations where some banks end up holding more capital, at the aggregate level, than is required. The PRA have indicated that they will seek to add more judgement to this 'sum of the parts' approach when determining the total amount of capital they require individual firms to hold by flexing the Pillar 2 component of the overall capital calculation, where they consider appropriate. Depending upon how this plays out in practice it could reduce the impact of the increase in capital we now have to hold to support the loans we continue to provide to smaller UK housebuilding firms. The net effect of this new approach should become more apparent in the second half of 2017.

As at 31 December 2016 STB's leverage ratio was 14.1% (2015: 10.4%). This ratio is comfortably ahead of minimum requirements and demonstrates significant capacity to continue growing customer lending balances whilst retaining regulatory capital headroom relative to our minimum requirements.

Record profits

The sale of ELG and the decision to discontinue providing a current account product necessitates an accounting treatment which complicates the presentation of the total profit performance during 2016. Concurrent with the release of these accounts we have published, on the Group's website, an investor presentation which contains slides translating the technical accounting treatment into the underlying performance of the Group during 2016.

In simple terms, the profit before tax from the continuing and discontinued operations amounts to GBP144.3 million, being profit before tax of GBP27.5 million and gain recognised on disposal of GBP116.8 million. The total profit after tax for 2016 equates to GBP137.5 million.

On an underlying basis, pre-tax profits for 2016 of GBP32.9 million are 23.2% higher than the prior year of GBP26.7 million. This growth has been achieved notwithstanding the significant ongoing investment in people and technology, especially in the mortgage operations and the new customer deposit proposition.

Excluding discontinued operations, the Group's operating income grew by 28.3% to a record level of GBP118.2 million (2015: GBP92.1 million) whilst operating costs rose 29.7% to GBP65.5 million from GBP50.5 million in 2015. Loan impairments of GBP27.7 million (2015: GBP16.8 million) rose by 64.9% reflecting growth in sub-prime motor, an increase in the levels of interest bearing balances written in Retail Finance and a further increase in the collective provision relating to the potential for uncertainty in the period ahead.

Costs continue to be robustly managed as reflected in the cost to income ratio of 55.4% (2015: 54.8%). The move to the main market gives rise to increased costs reflecting the different regulatory environment in which the Group now operates and the strengthening of the Board.

Customer lending activities

Strong double digit growth was achieved across the Group's loan portfolio in 2016 notwithstanding the increasingly cautious stance taken as the year progressed. Total new business lending volumes grew 19% to GBP964.3 million (2015: GBP808.5 million) which translated to an increase of 37.5% in overall balance sheet lending assets to GBP1,321.0 million (2015: GBP960.6 million for continuing operations).

Our strategy remained to prioritise growth in our consumer finance lending in Retail Finance and Motor Finance with a limited appetite to write new unsecured personal loans. Reflecting this, the Retail Finance point of sale business, net of provisions, grew strongly as intended, with balances at 31 December 2016 increasing 47.9% to GBP325.9 million (2015: GBP220.4 million). Our Retail Finance business has continued to evolve as our balance sheet has strengthened. Whilst remaining very well established in the cycle and music sectors, we have been able to continue pitching for and win larger retailer relationships across the leisure and home furnishing sectors. As a result we are writing a broader spectrum of business including increased levels of interest bearing lending. This lending has higher levels of impairments compared to interest free finance and this is factored into our pricing to ensure we achieve our targeted risk adjusted return.

2016 was a mixed year for our Motor Finance activities. The non-prime motor finance market, over the last eighteen months, has seen extremely aggressive competition from non-bank new market entrants and certain existing lenders who historically focused only on prime lending. These new players compete by charging relatively low rates of interest to borrowers, offering very high introducer commission rates and competing aggressively to attract customers. Rather than getting sucked into a 'race to the bottom' and permanently resetting loan margins below what we regarded as a sensible risk adjusted yield, the Group took the tactical decision not to compete for the specific customer segments targeted by these lenders. In the short term this affected the mix of new business written as some better quality lending previously presented to STB was instead directed to the newer entrants due to their aggressive pricing and commission. As we expected we have seen the behaviour of competitors moderate during the second half of 2016 and the overall quality of the business written by STB has improved in recent months.

Notwithstanding the challenge to our Motor Finance business, the Group has been able to achieve strong lending with lending balances, net of provisions, growing 42.5% to GBP236.2 million at 31 December 2016 (2015: GBP165.7 million). The impairment picture for the year is complicated by a number of factors. The sub-prime lending we began writing in 2015, whilst profitable and generating a higher return on equity than would be achieved leaving surplus equity in our Bank of England reserve account, has not met our expectations and we have needed to address this through changes to credit underwriting and pricing. In view of the current uncertainty in the market we have increased the loan loss emergence period which drives a mathematical increase in provisioning. The Finance and Leasing Association reported an 86% increase in voluntary terminations across the whole motor finance industry. Voluntary terminations arise when customers repay more than half of their credit agreement and use a clause in the Consumer Credit Act to hand the vehicle back to the lender and cancel their agreement. Whilst these are not credit losses, STB has historically accounted for these provisions through the impairment line as the charge has thus far been immaterial. The voluntary termination charge of GBP1.5 million for 2016 is material and in order to address matters going forward we have adjusted the amortisation profile of our loans such that more customers should have positive equity in the underlying vehicle once they have repaid half of the credit agreement and thus should be less inclined to surrender the vehicle.

Unsecured personal lending ('UPL') balances, net of provisions, continued to contract and were reduced by 12% to GBP65.5 million at 31 December 2016 (2015: GBP74.3 million). During 2015 and 2016 we consistently highlighted our unease at the competitive dynamics in this market. This is by far the easiest lending market to enter as all that is required is money to on lend and a way to originate loans. As the economy has continued to grow we have seen an increase in the activity of bank and non-bank lenders in this space with inevitable consequences for credit underwriting standards and pricing. The situation that now exists is that despite what many see as a peak in job creation, which could foreshadow an increase in unemployment and a steady increase in inflation which will reduce household disposable income, some lenders are offering fixed rate UPLs at the lowest ever rates. We share the regulators' concerns about the trends in the UPL market which we regard as unsustainable, hence our decision to cease originating new UPL business for the time being. STB has a large amount of experience in the UPL market, having been active since STB's formation in 1952, but at times has elected to reduce our exposure, for instance substantially reducing our UPL activity in 2006-08, in response to an unattractive competitor pricing environment at the time. We intend to re-enter the UPL market once the risk adjusted yields available become more attractive.

We have grown the Group's SME lending operations as planned having adjusted our risk appetite in the Real Estate and Asset Finance markets in case the outcome of the EU referendum created increased uncertainty. Real Estate Finance lending balances increased by 22.6% to GBP451.0 million as at 31 December 2016 (2015: GBP368.0 million). In determining new business volumes we have also been mindful of the potential for the PRA to increase capital requirements in respect of home building activities. The bias of this portfolio is now towards residential investment finance. STB remains wary of commercial property lending and has a very limited appetite for these assets. We continue to see the residential properties financed by us selling faster and for higher prices than anticipated when we made the original loans. This positive feature does mean that loans are being repaid sooner than originally contemplated which enables us to reprice the new front book lending to take account of the increased regulatory capital requirements imposed in December 2016. The exception is inner London where prices have fallen and properties have taken longer to sell. We therefore remain cautious about the London market and retain our maximum Loan to Gross Development Value limit of 50%. We are happy to continue lending to proven residential developers. During 2016 we have recruited a number of highly experienced bankers which is enabling us to structure larger loans with bigger counterparties. We remain confident about the medium term prospects of this sector given fundamental supply and demand dynamics.

Secure Trust Bank Commercial Finance, the invoice finance division of the Bank, has continued to build out a profitable business. We are rapidly approaching the point where we will have funded over GBP1 billion of customers' invoices, which gives a sense of the progress made since operations began, as a start-up, in late 2014. Customer lending balances, net of provisions grew 114% to GBP62.8 million at 31 December 2016 (2015: GBP29.3 million). I believe we have one of the most capable teams of invoice financiers in the UK, supported by a scalable modern IT platform. This, coupled with Group management's experience in SME and corporate lending, gives STB a distinct advantage when it comes to structuring transactions and responding rapidly to opportunities. As STBCF's profile has risen we have 'punched above our weight' winning and writing complex, and remunerative, transactions in competition with much larger lenders. We expect to make further positive progress in 2017.

We have continued to successfully foster the Asset Finance strategic partnership with Haydock Finance during 2016. Customer lending balances, originated by Haydock Finance Limited but written by STB and fully conforming to STB's credit policies, grew 66% to GBP117.2 million at 31 December 2016 (2015: GBP70.7 million). The full year profit contribution and loan impairments have been in line with expectations. Responding to the possibility of an economic slowdown, which could impact used asset values, we reduced our Loan to Value criteria in the second half of 2016. Other lenders have not reacted in the same manner as STB. Indeed some have become more aggressive on price and leverage as they seek to grow market share. Our more prudent stance has resulted in us writing lower volumes of new business albeit of a better quality.

Fee based accounts

As highlighted in the 2016 Interim Report we closed our current account product in September 2016. This decision was influenced by a number of factors not least of which was the agreement between HM Government and the large High Street banks whereby those banks will provide a fee free basic bank account to all customers. It was not equitable for us to continue to charge customers for a product that became available for free elsewhere. The nature of the product also requires constant IT investment and consumes considerable management time and focus. Therefore the closure of the current account is freeing up operational capacity to invest elsewhere across the Group. The financial impact of this decision is relatively immaterial and protects us from the capital consequences of having a substantial current account customer base. I expand on this aspect under Competitive and Regulatory Environment below.

As expected, the OneBill customer numbers continue to decline over time, following its closure to new accounts in 2009, with customer numbers falling to 19,995 by 31 December 2016 compared to 21,236 a year earlier.

Debt Managers Services ('DMS')

The markets for those debt collection agencies fully authorised by the Financial Conduct Authority improved in 2016 as some operators exited the market, in part because they did not wish to pursue full authorisation. There appears to be an upward trend in customer defaults in a number of sectors and the Bank of England Credit Conditions Survey for Q4 2016 noted 'lenders responding to the CCS reported a second consecutive significant increase in the default rate on other unsecured loans in Q4'. Whilst it is difficult to assess definitively how these trends might evolve, it seems likely that a sustained increase in inflation coupled with an increase in unemployment will impact consumer default levels. This will translate into more opportunities for DMS in the third party debt collection and portfolio acquisition spaces. DMS has purchased a number of portfolios in 2016 which have performed well. Overall the annual loss before tax of GBP0.5 million incurred in 2015 was reversed in 2016 into a profit before tax of GBP0.2 million. DMS is in the Group in part because of its counter cyclical nature and we expect this to benefit DMS in 2017.

Competitive and regulatory environment

In my annual statement last year I noted that whilst progress towards a more level competitive playing field had been frustratingly slow there were signs that things were changing and some traction was being achieved with key decision makers. Developments in 2016 have served to vindicate this view and provide grounds for optimism.

The Bank of England in its written submissions to the Competition and Market Authority ('CMA') has acknowledged that some of the differentials in the capital risks weights used by the systemic banks under their own Internal Ratings Basis approach and the multitude of smaller banks using the standardised approach are too high to be justified on prudential grounds. These extremes are most pronounced in the residential mortgage market where, using Bank of England data provided to the CMA, a 50% loan to value owner occupied mortgage would be risk weighted by a systemic bank, on average, at 3.3% whereas smaller lenders would risk weight the exact same loan at 35%. Thus the systemic bank can set aside 960% less capital than a smaller competitor for taking the exact same risks.

It is no surprise therefore that the systemic banks and Nationwide Building Society utterly dominate the mortgage market in both owner occupied and buy to let lending. Lloyds Banking Group alone controls nearly half of the market for buy to let with a 42% market share. RBS's admissions that it will not meet the requirement to divest itself of Williams & Glyn and the announcement by Co-op Bank in January 2017 that it is unlikely to meet its Individual Capital Guidance over the planning period to 2020, illustrate the ongoing issues of the Too Big To Fail banks.

One of the regulatory responses is the introduction of the Minimum Requirement for Own Funds and Eligible Liabilities ('MREL') regime. The Bank of England has directed that 'the largest and most complex firms will be required to maintain sufficient MREL to absorb losses and, in the event of their failure, be recapitalised so that they continue to meet the Prudential Regulation Authority's conditions for authorisation. The aim is that the firm is able to operate without public support'. In layman's terms it seems the plan is to require the systemic banks to hold sufficient bail in capital, in addition to their existing minimum regulatory capital requirements, that they can't go bust. All banks with more than 40,000 current accounts and GBP15 billion in assets will, by 2022, need to hold MREL equivalent to their existing capital requirements. This effectively doubles their total capital requirements and implies that banks with material current account customer bases will need to hold capital ratios of 20%+ from 2022. Smaller firms (like STB) which the Bank of England 'assesses do not provide services of a scale considered critical', will be subject to a modified insolvency process and will meet their MREL simply by meeting their existing capital requirements.

The Basel Committee on Banking Supervision was due to announce the outcome of its consultations in respect of the capital regimes in January 2017. It now appears that it will be March 2017, at the earliest, before any clarification emerges. I understand that a key sticking point relates to proposals to introduce a capital floor under the IRB approach used by the largest banks, with the US pushing for a floor of 75% of the risk weights used under the standardised approach. There are rumours that a compromise could be for the floor to be initially set at 55% from 2021 with this rising to 75% by 2025 to allow time for the systemic banks to transition to these new standards in an orderly fashion. The risk weight floors proposed will be set as a percentage of the standardised risk weights. This has given rise to the somewhat ironic situation where I have personally witnessed systemic banks claiming that the standardised risk weights are too high and should be reduced. Indeed it is being indicated that the lowest standardised risk weights for residential owner occupied could be reduced from 35% to 20%. The final decisions from Basel are awaited and the picture could become further complicated by the stance of the Trump administration. Smaller banks will certainly welcome the changes being mooted as these have the potential to largely remove the substantial capital advantages enjoyed by the systemic banks in certain lending classes thereby creating a much more level competitive playing field.

I outlined above the PRA's intention to adopt a holistic rather than 'sum of the parts' approach when determining the levels of regulatory capital required to be held by the smaller banks. We wait to see how this will translate in practice but it could be a pragmatic and positive development.

Clearly the positions here are very fluid and it remains to be seen what actually comes to pass. What is apparent is that the direction of travel is to reduce the capital differentials between the systemic and non-systemic firms which should ultimately bode well for smaller banks in the future. It should also benefit consumers and SMEs by fostering competition thereby creating more innovation and choice and reducing the risks that the taxpayer will need to fund the bail out of failed banks in the future.

Strategic priorities

In the five years since Secure Trust Bank PLC undertook its AIM IPO in November 2011 we have increased customer numbers by 440%, increased our workforce by 176% and generated total underlying shareholder returns over the period of 247%1. I believe this reflects the effectiveness of the strategy we agreed and subsequently pursued under Sir Henry Angest's chairmanship. I fully concur with Lord Forsyth's comments about Sir Henry and would add that I have thoroughly enjoyed and am grateful for the close and effective working relationship we have had since I joined STB in September 2010.

(1) based on the appreciation of the share price since the IPO, assuming all dividends have been reinvested.

It will come as no surprise that we do not intend to deviate much from the current growth strategy which is focused on three strategic priorities: (i) organic growth, (ii) diversification and (iii) M&A activity. Having completed a number of highly complex and time consuming projects during 2016 management now has increased capacity to consider M&A activities which offer a good strategic fit and risk adjusted economic profile.

During 2016 we curtailed new lending to those sectors we considered most exposed to potential uncertainty arising from the EU referendum decision, particularly in higher Loan to Value asset finance and central London housebuilding. We retain a cautious short term stance here and are encouraged to see the Bank of England in February 2017 significantly upgrade its GDP forecasts for the UK for 2017 and 2018. It is however also pertinent to note their forecasts of inflation running persistently above the 2% target over the next three years which could impact consumer spending and business investment.

These factors and the evolving regulatory regime clearly influence our strategic thinking and plans. We will continue to grow our Retail Point of Sale (V12) and Motor propositions in the Consumer Finance sector. V12 has grown its lending balances from GBP30 million when we acquired it in January 2013, to over GBP325 million as at 31 December 2016. It has consistently delivered profit growth whilst remaining a modest player in a multi GBPbillion market. In order to support this success we continue to invest heavily in our operations in Cardiff. We have acquired an additional freehold office building of 8,500 square feet to accommodate the expanding workforce needed to provide excellent service to a growing customer base. V12 has a number of competitive advantages not least of which is the quality of its IT platform and the ease that this can be integrated with online and instore retail channels. The pace of IT advancement is relentless and in order to sustain our competitive advantages we remain focused on further improving our core customer propositions and IT capabilities.

The market for Motor Finance in the UK is nearly GBP20 billion. This is a highly fragmented and competitive space where we have a GBP0.2 billion share predominantly in non-prime lending. This remains an important and profitable line of business for us. All of our Motor Finance lending currently trades under our 'Moneyway' brand. This is seen by dealers and brokers as a recognised, trusted and consistent brand. These are positive attributes. However it has become apparent that a brand exclusively associated with the non-prime market does not lend itself to a successful and progressive entry into the prime market. We see opportunities to continue to grow our non-prime franchise whilst building a prime lending business. Putting this in context we note there are bank and non-bank lenders operating at the more prime end of the market with customer lending balances, in aggregate, approaching GBP2 billion. The reality is that there is nothing these lenders are doing that STB cannot do if we made some targeted investment, recruited the right management and potentially create a new sister brand for Moneyway. In order to progress our thinking we have changed both the Managing Director and Finance Director in our motor finance team and will provide a further strategic update when appropriate.

Mark Twain said, 'buy land, they don't make it anymore'. This neatly summarises the UK's housing crisis. A finite supply of land upon which to construct properties to accommodate a growing population is a major challenge. HM Government is pursuing a pro construction policy agenda and we will be happy to continue supporting proven residential property developers to build homes in areas of known demand. Our Loan to Gross Development Value limits will remain modest to ensure that the borrower has hard equity in any deal and to provide a buffer lest market values fall, however unlikely some might think this is.

The UK Invoice Finance and Asset Finance markets are large, fragmented and growing markets of around GBP20 billion each. We are pleased with the progress made by STB Commercial Finance and the profits being generated here and in our asset finance business line. We see significant future growth potential and could be interested in acquiring businesses in these spaces if the risk profile and economics of any transaction are attractive.

Our longer term ambition remains to grow a broad based portfolio, balanced across consumer finance, SME finance and residential mortgage lending. During 2016 we have built out the operating platform necessary to support the launch into the residential mortgage market. There are no changes to our plans to initially focus on the owner occupied segment as this is by far the largest part of the market and the area that could benefit most from some of the potential regulatory capital changes. Our lending will be specialist and manually underwritten enabling us to serve those customers shunned by the automated processes used by the systemic banks. We expect to compete against other challenger banks and specialist non-bank lenders. As is to be expected we will incur a 'J' curve effect from this start up business and attractive returns on equity will take time to materialise whilst we work through the front book: back book dynamic that is a prominent feature of mortgage lending. We are interested in potentially accelerating our entry into this market via acquisition if we can identify existing mortgage lenders and/or portfolios which offer acceptable risk and economic profiles.

Current trading and outlook

There has been no material change to the underlying performance of the business in the early months of 2017. We continue to see potential to grow our lending portfolio in line with our ambition and have a clear growth strategy and a pipeline of organic and external new business opportunities.

We noted, with much interest, RBS's recent announcement that they are proposing a range of measures, including a GBP750m fund, to promote competition in SME banking. We would consider ourselves one of the 'eligible challenger banks' they refer to and will study in depth their full proposals lest these enable us to profitably deploy our surplus capital faster than we currently envisage.

I am optimistic about the potential, for a variety of different reasons, for a more level and more competitive playing field in respect of regulation to emerge which will ultimately open up a much larger share of the market for smaller non-systemic banks to compete in. I continue to believe greater levels of competition are in the best interests of UK consumers and SMEs by providing more choice, more innovation and less concentration in the UK banking market. This also offers less risk to taxpayers.

The successful completion of a number of complex projects in 2016 including the divestment of the sub-prime unsecured personal loan business of ELG, the closure of the current account product and the step up from AIM to the Main Market puts us in a strong position to pursue our strategic priorities by developing our business model organically and pursuing M&A opportunities. This coupled with the Main Market premium listing and substantial capital resources, positions the Group well to navigate the evolving economic and regulatory environment and to seek to take full advantage of any opportunities that may arise during 2017.

Paul Lynam

Chief Executive Officer

22 March 2017

Strategic report

Business review - Business Finance

This section of the Report and Accounts contains the Strategic Report required by the Companies Act 2006 to be prepared by the directors of the Bank. It describes the component parts of the Group's business; the principal risks and uncertainties; the development and performance of the business during the financial year; and the position of the business at the end of the year.

Financial and other key performance indicators are used where appropriate. Reference is made to and additional explanations provided about amounts that are included in the Group's Accounts.

Real Estate Finance

Real Estate Finance was formed as a division within the Group in 2013. The division supports SMEs in providing finance principally for residential development and residential investment.

What we do

Residential development

The Group lends to enable the development of new build property, commercial to residential conversions (including those with permitted development rights) and refurbishment projects.

Residential investment

The Group lends on portfolios of residential property where the rental income will repay the underlying borrowing over a term period. The Group has no exposure to the regulated buy to let mortgage sector and has no plans to enter this sector.

Other lending

The Group has limited appetite for commercial lending (either development or investment) and has limited exposure to mixed development schemes.

How we do it

Financing is typically provided over a term of up to five years with prudent loan to value targets, with a 60% Loan to Gross Development Value to residential house builders but more restrictive policies are implemented from time to time as required; for instance the Group reduced its financing of residential developments in Central London in 2015. The Group's Loan to Gross Development Value / Loan to Value ratios average 58% across all lending areas. The Group has no significant exposure to any one property scheme or developer.

The Real Estate Finance team is staffed by experienced bankers with proven property lending expertise. The team provides full support to customers and introducers over the life of the products.

Revenue and lending performance vs prior years

 
                            2016         2015         2014 
                      GBPmillion   GBPmillion   GBPmillion 
-------------------  -----------  -----------  ----------- 
 Lending revenue            28.4         20.3          2.5 
 Lending balance           451.0        368.0        133.8 
 Impairment losses           0.1            -            - 
-------------------  -----------  -----------  -----------

2016 performance

The Real Estate Finance business continued to show controlled growth in 2016, as the Group responded cautiously to the uncertainties created from the UK vote to leave the European Union, as well as addressing the increased capital requirements placed on development lending by the regulator. Lending balances were GBP451.0 million as at 31 December 2016, a 23% increase in the year, leading to an overall 40% increase in revenue from the book. The balance of the book has continued to shift towards residential investment loans, driven by new business in this sector coupled with repayments of GBP138 million on the development book as projects have either been completed, part-sold or refinanced. Residential investment represented 63% of the book at the end of December. This has been achieved with no individual credit impairments having arisen to date, reflecting the prudent credit policies that have been adopted, and close monitoring of the portfolio.

The book equally continues to consist primarily of residential lending, with lending with a commercial element remaining low at 7%, most of which is not pure commercial property lending but rather lending with a mix of residential and commercial units.

Looking forward

The business remains committed to further growth, with a good pipeline of both development and investment opportunities, albeit the business remains cautious in its outlook given ongoing market uncertainty.

Asset Finance

Asset Finance was formed as a division within the Group in December 2014.

What we do

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

How we do it

The Asset Finance business is operated via a strategic partnership with Haydock, a well-established asset finance company operating across the UK. Haydock provides a full business process outsourcing service to the Group and also assists the Group in sourcing new business and providing support to the Group's clients on an ongoing basis. All of the lending written fully conforms to the Group's credit policies, risk appetite or other specific authorisations.

The current route to market is via introducers who are supported by the Group's marketing resource and a targeted web and social media presence. The Group offers hire purchase and finance lease arrangements with terms of up to five years.

The Group also offers asset refinancing whereby the Group takes ownership of the customer's existing equipment and enters into a hire-purchase financing arrangement with the customer for a set period of time.

Revenue and lending performance vs prior years

 
                            2016         2015         2014 
                      GBPmillion   GBPmillion   GBPmillion 
-------------------  -----------  -----------  ----------- 
 Lending revenue             7.8          2.4            - 
 Lending balance           117.2         70.7          4.5 
 Impairment losses           0.6            -            - 
-------------------  -----------  -----------  -----------

2016 performance

The Asset Finance Division achieved strong growth in 2016, with lending balances growing by 66% to GBP117.2 million at 31 December. This growth has been the driver for the increase in revenues from the business during 2016. Growth has slowed in the second half of the year as a result of two key factors:

 
      --   A reduction of credit appetite amongst corporates, 
            coupled with an adjustment in our credit appetite 
            to take account of the more uncertain credit conditions, 
            particularly in certain sectors, notably construction. 
      --   A desire to maintain yields and not to chase volume 
            at the expense of yield.

Whilst some credit losses have arisen during the year, the level of overall impairment charge has been in line with expectation at 0.6 % (based on average lending balances), and the overall levels of arrears remain low in comparison with industry comparatives.

Looking forward

The Group sees clear potential to build a scale and sustainable business either by replicating the successful approach adopted in the Invoice Finance market or by acquiring an existing operator that can be grown with the benefit of our funding and capital.

The asset finance market is extremely competitive as newer players compete aggressively with established asset financiers for market share. Some lenders are underwriting deals that are at very thin margins and there are downward pressures on margins in the sector generally. The Group does not regard this behaviour as sustainable. The Group is therefore tempering its ambition in this sector until the market normalises and capital can be safely and profitably deployed.

Commercial Finance

Commercial Finance was formed as a division within the Group in 2014.

What we do

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

Invoice discounting services provide access to funding and releases typically up to 90% of the value of unpaid invoices in a manner that is non-customer facing and allows customers to stay in control of sales ledger management.

Factoring services, where the sales ledger management is passed onto the Group, may also provide access to funding of typically up to 90% of the value of invoices and often results in the Group managing credit control, cash allocation, statement and reminder letter distribution.

How we do it

Commercial Finance complements the broader SME lending proposition which has been developed by the Group. The business also provides SME commercial owner occupiers with finance to buy the property they trade from in conjunction with other financing facilities.

The division has built a strong team of proven business development, credit and operational professionals who have delivered a robust and compliant operational model.

Revenue and lending performance vs prior years

 
                            2016         2015         2014 
                      GBPmillion   GBPmillion   GBPmillion 
-------------------  -----------  -----------  ----------- 
 Lending revenue             4.6          1.6          0.1 
 Lending balance            62.8         29.3          5.0 
 Impairment losses           0.2          0.3            - 
-------------------  -----------  -----------  -----------

2016 performance

After only two full years of trading STB Commercial Finance moved into the top ten independent providers of Asset Based Lending facilities in the UK, with total facility limits agreed in excess of GBP125 million. A customer focussed approach has been central to this growth and the team has built key strategic partnerships and shown a high degree of flexibility in the way it manages facilities. The Group has handpicked a team of twenty people and whilst the team's head office is domiciled in Manchester it has both origination and client servicing capability across the UK. The business has been underpinned by robust processes and controls which has been reflected in a strong credit performance to date.

Looking forward

Commercial Finance has continued to deliver on a key strategic objective of fostering strong relationships with the professional community and specifically those involved in the Private Equity market. The portfolio has continued to grow with a range of tailored lending solutions which are genuinely bespoke to the client's needs. New technology and an expanded product offering will continue to allow the team to enhance the client experience and at the same time ensure that it maintains a fully compliant process.

Strategic report

Business review - Consumer Finance

Personal Lending

Following the sale of ELG in April 2016, the Group continued to provide unsecured personal loans through its Moneyway branded business. In January 2017, the Group announced its intention to cease originating new personal loans and this segment is now closed to new business.

Personal unsecured loans are fixed rate, fixed term products with payments received monthly in arrears. Loan terms are between 12 months and 60 months with advances varying from GBP1,000 to GBP15,000. Loans were provided to customers for a variety of purposes including home improvements, personal debt consolidation and for the purchase of vehicles.

Revenue and lending performance vs prior years

 
                            2016         2015         2014 
                      GBPmillion   GBPmillion   GBPmillion 
-------------------  -----------  -----------  ----------- 
 Lending revenue            11.2         17.2         15.1 
 Lending balance            65.5         74.3         87.5 
 Impairment losses           4.4          4.8          3.3 
-------------------  -----------  -----------  -----------

2016 performance

Under the Moneyway brand, the Group took a cautious stance to lending throughout the year, with personal lending volumes in the year of GBP39.0 million being contained in line with those of the previous year. As a result, lending balances have fallen by 12% to GBP65.5 million (2015: GBP74.3 million), with revenue decreasing by 35% to GBP11.2 million (2015: GBP17.2 million).

The credit risks in the lending book are continually scrutinised with this data being used, prior to the closure to new business, to inform changes in risk appetite and pricing. Impairment losses were GBP4.4 million compared to GBP4.8 million in 2015.

Looking forward

In the light of a potential slowing of the economy, current economic uncertainty and the competitive dynamics in the personal lending market, the Group has reviewed its risk appetite for this product. In January 2017 it announced its intention to withdraw its personal lending offer. The Group intends to re-enter the market once risk adjusted yields become more attractive.

Motor Finance

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

What we do

The Bank's Motor Finance business began lending in 2008 under the Moneyway brand and provides hire purchase lending products to a wide range of customers including those who might otherwise be declined by other finance companies. The Bank helps our customers gain the freedom and flexibility that motoring gives to their lives as well as helping introducers to sell more cars.

Motor Finance agreements are fixed rate, fixed term hire purchase agreements and are secured against the vehicle being financed.

As the Group is lending into the non-prime market the majority of vehicles financed are predominantly volume franchise used cars.

How we do it

The Bank distributes its Motor Finance products via UK motor dealers, brokers and internet introducers. New dealer relationships are established and managed by our UK-wide Motor Finance sales team with all introducers subject to a strict vetting policy, which is reviewed on a regular basis.

The technology platform used allows Moneyway to receive applications online from its introducers, to provide an automated decision, document production through to pay-out to dealer and ongoing in-life management.

Motor lending is administered in the Group head office in Solihull; however the UK motor dealers and brokers are UK-wide.

Lending performance v prior years

 
                            2016         2015         2014 
                      GBPmillion   GBPmillion   GBPmillion 
-------------------  -----------  -----------  ----------- 
 Lending revenue            40.5         33.3         27.2 
 Lending balance           236.2        165.7        137.9 
 Impairment losses          14.6          7.3          3.9 
-------------------  -----------  -----------  -----------

2016 performance

New business volumes for motor lending increased from GBP85.7 million to GBP146.8 million, an increase of 71% year on year. This generated a significant increase in lending assets during the year. Income has increased by 22% to GBP40.5 million.

In the second half of 2015 the business widened its credit parameters in order to drive profitable growth supported by our strong introducer relationships.

Impairment losses including voluntary terminations for the year increased from GBP7.3 million to GBP14.6 million. The motor finance sector has seen an increase in the instance of voluntary terminations and this has featured in our impairment losses as the book matures. This reflects the continued growth and maturity of the loan book, and refinement of the provisioning methodology.

Looking Forward

Into 2017 Moneyway will continue to optimise its performance in the non-prime sector of the market through existing introducer channels.

The division will also continue to develop its prime proposition across its existing introducer channels to complement non-prime products, enabling the Group to offer a product for every potential customer.

Retail Finance

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

What we do

The Bank's Retail Finance business commenced lending in 2009 and provides unsecured, prime lending products to the UK customers of its retail partners to facilitate the purchase of a wide range of consumer products across in-store, mail order and online channels. The acquisition of the V12 Finance Group in January 2013 was complementary to the Group's existing retail finance proposition and the V12 management team continued in the business. V12 Retail Finance has provided finance in cooperation with their retail partners for more than 20 years. The acquisition enabled the Group to integrate its existing retail lending business with that of the V12 Finance Group to generate synergistic benefits from the use of a Group-wide point of sale system. All of the Group's retail partners are now on the V12 platform and Retail Finance is administered in V12 Retail Finance's offices in Cardiff.

Retail Finance products are unsecured, fixed rate and fixed term loans of up to 84 months in duration with a maximum loan size of GBP25,000. The average new loan is for GBP900 over a 20 month term. Lending is restricted to UK residents who are either employed or self-employed.

The finance products are either interest bearing or have promotional credit subsidised by retailers, allowing customers to spread the cost of purchases into more affordable monthly payments or paying later for the goods.

How we do it

The Group operates an online eCommerce service to retailers, providing finance to customers through an online paperless processing system. This includes allowing customers to digitally sign their credit agreements, thereby speeding up the pay-out process, and removing the need to handle and copy sensitive personal documents through electronic identity verification.

The Group serves retailers across a broad range of retail sectors including cycle, music, furniture, outdoor/leisure, electronics, dental, jewellery and football season tickets.

The Group provides finance to customers of a large number of retailers including household names such as Evans Cycles, AO.com, Jessops, Halfords, DFS and Watchfinder.

Revenue and lending performance vs prior years

 
                            2016         2015         2014 
                      GBPmillion   GBPmillion   GBPmillion 
-------------------  -----------  -----------  ----------- 
 Lending revenue            36.7         24.2         13.6 
 Lending balance           325.9        220.4        116.7 
 Impairment losses           9.5          5.2          1.2 
-------------------  -----------  -----------  -----------

2016 performance

The three largest sub-markets for the Retail Finance business are the provision of finance for the purchase of sports and leisure equipment (including cycles), furniture and consumer electronics. Cycle finance has seen positive new business levels influenced by the continued success of British cyclists in the Tour de France, the Olympics and Paralympics.

The Retail Finance business has continued to grow strongly, with new lending volumes increasing to GBP396.3 million (an increase of 35% on the previous year). Each of the core business sectors have contributed towards this growth which has been achieved through a combination of gaining increased market share and sector growth (as seen in the cycle market). This growth has generated a significant increase in lending assets during the year, which at the year-end totalled GBP325.9 million (December 2015: GBP220.4 million).

Income from retail lending increased by 52% to GBP36.7 million (2015: GBP24.2 million). Impairment losses were well controlled at GBP9.5 million in 2016 (2015: GBP5.2 million).

Looking forward

The Group plans continued growth in Retail Finance during 2017 with the focus on acquiring increased market share across its target markets. A number of initiatives are underway to further enhance systems capabilities to ensure that quality of service to both retailers and customers is maintained or improved as the business continues to expand. To further support the maintenance of service levels the business intends to continue the expansion of its workforce whilst investing in additional office and support facilities.

The Group undertakes its funding primarily via retail savings deposits, attracting balances with competitive rates of interest.

Strategic report

Business review - Savings

What we do

The Group's deposits consist of notice accounts and fixed term savings, with a small proportion of instant access accounts, available to individuals as well as private businesses and non-profit enterprises.

Accounts are simple in design with competitive interest rates easily applied for online and deposits are covered by the UK Financial Services Compensation Scheme (up to the specified limits).

The key terms of accounts that are usually offered from time to time are summarised below:

 
      --   Mixture of products ranging from 60 to 183 day notice 
            periods and fixed term savings with one to seven 
            year maturities. 
      --   Minimum balance of GBP1,000. 
      --   Maximum balance of GBP1 million for sole account 
            holders and GBP2 million for business and joint 
            accounts.

The fee-based current account product previously offered by the Group was closed to new applicants at the end of 2015 and all current accounts were closed by the end of September 2016.

The OneBill account had been in operation for many years and was designed to aid customers with their household budgeting and payments process. Customers provided the Group with details of their annual bills (including rent, utility bills, insurance and telephone line rental) which the Group aggregated and then calculated a fixed weekly or monthly payment schedule to ensure the bills were paid on time. This enabled customers to spread the cost of their bills throughout the year in addition to receiving direct debit discounts and all supplier contact being handled by the Group. The Group charges a monthly fee for this service. The product was closed to new customers in 2009.

How we do it

By virtue of a focus on higher margin lending, the absence of a branch network and a policy of not cross-subsidising loss making products with profitable ones, the Group is able to offer competitive rates and has been successful in attracting high volumes of deposits, particularly in short timescales, from a wide range of customers. This provides a funding profile which gives additional financial security to the business.

The Group enters the market for deposits as and when it is necessary and maintains a funding strategy of broadly matching the term and tenor of its customer deposits to the desired maturity profiles of the Group which are primarily determined by the interest rates and terms offered on loans and advances to customers. This strategy seeks to help mitigate maturity transformation and interest basis risks. The marketing methods employed include providing information about the deposit accounts offered on price comparison websites (for example Moneysupermarket), newspaper best buy tables and articles and via online endorsement (for example Money Saving Expert).

The Group is able to adjust the mix of interest rate offered and term of deposit or notice period in a manner that allows it to raise funding quickly. As part of this funding strategy, the Group may only offer deposit accounts for limited periods of time and, from time to time, may not offer deposit accounts to customers at all. The Group will cease offering deposit products when the Group's need for deposit funding at that time has been satisfied.

The Bank is a member of the Financial Services Compensation Scheme.

Savings balances vs prior years

 
                               2016         2015         2014 
                         GBPmillion   GBPmillion   GBPmillion 
----------------------  -----------  -----------  ----------- 
 Notice deposits              373.8        404.9        239.5 
 Fixed Term Savings           762.8        588.7        331.2 
 Sight/Instant Access          15.2         39.5         37.7 
----------------------  -----------  -----------  ----------- 
 Total Balances             1,151.8      1,033.1        608.4 
----------------------  -----------  -----------  -----------

2016 performance

The Group's customer deposits primarily comprise notice deposits, term deposits, and instant access, as well as OneBill accounts. At 31 December 2016 deposits totalled GBP1,151.8 million (December 2015: GBP1,033.1 million). This represents an increase of GBP118.7 million against the last year end. Balance growth was muted overall in light of the level of free funding the Group had on its balance sheet following the sale of ELG and its moderate use of the Bank of England facilities: the Funding for Lending Scheme and Term Funding Scheme.

During the year the Group was able to adjust its funding costs in light of market conditions whilst retaining its competitive pricing. It also successfully launched 1, 2 and 5 year bonds, closing its 1 year bond within 5 days; evidence of the strength of demand for the Group's savings products and its ability to raise funds promptly.

Looking forward

The Group expects interest rates on savings accounts to remain broadly at their current levels in the coming year, with a marginal increase in the market cost of funds for notice and fixed term savings driven by increasing competition as a result of the continued entrance of new providers and now established challengers.

The strategy is to continue to fund the business primarily via retail deposits with balanced use of the Bank of England's Term Funding Scheme following the approach of broadly matching term and interest rates to mitigate both maturity transformation and interest basis risks. The Group will compete for deposits via competitive rates of interest on both personal and business accounts with notice and fixed term products, with customers able to apply online and be covered by the UK Financial Services Compensation Scheme (up to the specified limits).

In the second half of 2017, the Group intends to introduce internet banking for deposit products and diversify its product set to include ISAs, providing access to an additional market of GBP270 billion of deposits (Source: Bank of England, as at November 2016).

Strategic report

Financial review

 
                                   2016           2016         2016          2015           2015         2015 
                             Continuing   Discontinued                 Continuing   Discontinued 
                             operations     operations        Total    operations     operations        Total 
 Summarised income 
  statement                  GBPmillion     GBPmillion   GBPmillion    GBPmillion     GBPmillion   GBPmillion 
-------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Interest, fee and 
  commission income               146.3           11.2        157.5         117.4           40.7        158.1 
 Interest, fee and 
  commission expense             (28.1)          (0.1)       (28.2)        (25.3)          (0.3)       (25.6) 
-------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Operating income                 118.2           11.1        129.3          92.1           40.4        132.5 
 Impairment losses               (27.7)          (2.6)       (30.3)        (16.8)          (7.5)       (24.3) 
 Operating expenses              (65.5)          (6.0)       (71.5)        (50.5)         (21.2)       (71.7) 
 Profit before tax                 25.0            2.5         27.5          24.8           11.7         36.5 
 
 Fair value amortisation            0.9              -          0.9           0.9              -          0.9 
 Share based incentive 
  scheme                          (0.7)              -        (0.7)           0.7              -          0.7 
 Net Arbuthnot Banking 
  Group management 
  recharges                         0.2              -          0.2           0.3              -          0.3 
 Transformation costs               3.4              -          3.4             -              -            - 
 Costs of moving to 
  Main Market                       1.4              -          1.4             -              -            - 
 Discontinued operations              -          (2.5)        (2.5)             -         (11.7)       (11.7) 
 Bonus payments made 
  in respect of ELG 
  sale                              3.5              -          3.5             -              -            - 
 Other items relating 
  to ELG sale                     (0.8)              -        (0.8)             -              -            - 
 Underlying adjustments 
  to profit                         7.9          (2.5)          5.4           1.9         (11.7)        (9.8) 
-------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Underlying profit 
  before tax                       32.9              -         32.9          26.7              -         26.7 
-------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Tax                              (6.3)          (0.5)        (6.8)         (5.5)          (2.3)        (7.8) 
 Tax on underlying 
  adjustments                     (1.5)            0.5        (1.0)         (0.4)            2.3          1.9 
-------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Underlying tax                   (7.8)              -        (7.8)         (5.9)              -        (5.9) 
-------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Profit after tax                  18.7            2.0         20.7          19.3            9.4         28.7 
 Underlying adjustments 
  after tax                         6.4          (2.0)          4.4           1.5          (9.4)        (7.9) 
-------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Underlying profit 
  after tax                        25.1              -         25.1          20.8              -         20.8 
-------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 
 Underlying basic 
  earnings per share 
  (pence)                         137.7              -        137.7         114.3              -        114.3 
-------------------------  ------------  -------------  -----------  ------------  -------------  -----------

The underlying adjustments to profit relate to items that fall outside of the Group's normal recurring business activities.

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

The share based incentive scheme movements have been driven primarily by market conditions, specifically the volatility of UK share prices, rather than factors controllable by the Group.

Arbuthnot Banking Group management charges will no longer be levied following the sale of their controlling interest in the Group, and so do not represent recurring expenditure.

Transformation costs comprise the costs of setting up the Group's mortgage operation and of closing the Current Account and Unsecured Personal Lending products.

The move to the Main Market and sale of ELG also represent non-recurring events.

On 13 April 2016 the sale of the Group's branch based non-standard consumer lending business, ELG, to Non-Standard Finance Plc ('NSF') completed generating a gain on disposal of GBP116.8 million. Results relating to ELG have therefore been analysed as discontinued operations throughout these annual report and accounts. Unless otherwise stated, the analyses presented below relate to continuing operations, which represents all of the Group's divisions, excluding ELG.

Operating Income

Operating income from continuing operations increased by 28% to GBP118.2 million. Operating income comprises net interest receivable, being interest earned on assets less interest expense on liabilities, plus net fees and commissions earned.

The Group measures net revenue margin, calculated as operating income as a percentage of the average loan book. The net revenue margin for 2016 was 10.4% compared with 12.4% for 2015.

The Group also measures gross revenue margin, being interest income plus net fees and other income as a percentage of the average loan book. The gross revenue margin for 2016 was 12.9% compared with 15.8% for 2015. The reductions in these margins are driven by the change in the composition of the loan book, with an increase in the proportion of the book represented by lower interest-bearing Business Finance lending. The component parts of operating income are further analysed below:

Net Interest Receivable

 
                                   2016           2016         2016          2015           2015         2015 
                             Continuing   Discontinued                 Continuing   Discontinued 
                             operations     operations        Total    operations     operations        Total 
                             GBPmillion     GBPmillion   GBPmillion    GBPmillion     GBPmillion   GBPmillion 
-------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Interest receivable 
  and similar income              130.0           11.1        141.1         100.5           39.2        139.7 
 Interest expense 
  and similar charges            (26.3)              -       (26.3)        (21.6)              -       (21.6) 
-------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Net interest receivable          103.7           11.1        114.8          78.9           39.2        118.1 
-------------------------  ------------  -------------  -----------  ------------  -------------  -----------

Interest receivable and similar income, which is predominantly earned on loans and advances to customers, increased to GBP130.0 million from GBP100.5 million in 2015, for continuing operations. The increase was driven by the growth of the Group's loan books over the year.

Interest expense and similar charges represents interest in respect of deposits from customers. Interest expense and similar charges increased to GBP26.3 million from GBP21.6 million in 2015, for continuing operations. The increase is due to the increase in customer deposits over the year. The cost of funding, measured as interest expense and similar charges as a percentage of the average loan book, reduced from 2.9% for 2015 to 2.3% for 2016. This reflects the market for funding, in which the Group has been able to replace maturing term deposits with new deposits of the same tenor but at lower fixed rates.

The Group's net interest margin, calculated as interest receivable and similar income less interest expense and similar charges as a percentage of the average loan book, reduced from 10.6% in 2015 to 9.2% in 2016. The net interest margin reduced as a result of the change in book composition, partially offset by the reduction achieved in funding costs.

Fees and commissions

 
                                  2016           2016         2016          2015           2015         2015 
                            Continuing   Discontinued                 Continuing   Discontinued 
                            operations     operations        Total    operations     operations        Total 
                            GBPmillion     GBPmillion   GBPmillion    GBPmillion     GBPmillion   GBPmillion 
------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Fee and commission 
  income                          16.3            0.1         16.4          16.9            1.5         18.4 
 Fee and commission 
  expense                        (1.8)          (0.1)        (1.9)         (3.7)          (0.3)        (4.0) 
------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Net fee and commission 
  income                          14.5              -         14.5          13.2            1.2         14.4 
------------------------  ------------  -------------  -----------  ------------  -------------  -----------

Fee and commission income consists principally of weekly and monthly fees from the OneBill and Current Account products, and commissions earned on debt collection activities in DMS. Fee and commission income reduced from GBP16.9 million in 2015 to GBP16.3 million in 2016, for continuing operations. The fee income relating to Current Account and OneBill has decreased year on year as these products have been closed to new business; OneBill in 2009 and Current Account in 2015. This income has been replaced in part by increasing levels of fees earned on Commercial Finance and Retail Finance lending.

Fee and commission expense consists primarily of fees and commissions relating to the Current Account product. Fee and commission expense decreased from GBP3.7 million in 2015 to GBP1.8 million in 2016, following the closure of the Current Account product.

Impairment Losses

Impairment losses during the year were GBP27.7 million (2015: GBP16.8 million). This increase is primarily due to the growth of the business and consequent increase in the size of loans and advances to customers.

The Group measures cost of risk, calculated as net impairment losses on loans and advances to customers as a percentage of the average loan book. The cost of risk for 2016 was 2.4%, compared with 2.3% for 2015. Further analysis of the Group's loan book and its credit risk exposures is provided in Notes 10, 12 and 29.

Operating Expenses

Operating expenses have increased, reflecting the investments made in the infrastructure and human capital of the Group to achieve growth targets, from GBP50.5 million in 2015 to GBP65.5 million in 2016, for continuing operations. The Group's cost to income ratio remained stable at 55.4% (2015: 54.8%).

Taxation

The effective underlying tax rate has increased to 23.7% (2015: 22.1%), which is mainly due to adjustments in respect of prior years of GBP1.8 million. The new Bank Corporation tax surcharge of 8%, which is effective from 1 January 2016, would apply to any future taxable profits of Secure Trust Bank Plc company that were in excess of GBP25.0 million.

Distributions to shareholders

The directors recommend the payment of a final dividend of 58 pence per share which, together with the interim dividend of 17 pence per share paid on 18 September 2015, and the special dividend of 165 pence per share paid on 27 July 2016 following completion of the sale of ELG, represents a total dividend for the year of 240 pence per share (2015: 68 pence per share).

Earnings per share

Detailed disclosures of earnings per ordinary share are shown in Note 8 to the financial statements. Basic earnings per share increased by 378% to 754.1 pence per share (2015: 157.8 pence), whilst the underlying basic earnings per share increased by 20% to 137.7 pence per share (2015: 114.3 pence per share).

 
                                           2016          2015           2015         2015 
                                                   Continuing   Discontinued 
                                          Total    operations     operations        Total 
  Summarised balance sheet           GBPmillion    GBPmillion     GBPmillion   GBPmillion 
----------------------------------  -----------  ------------  -------------  ----------- 
 Assets 
 Cash and balances at central 
  banks                                   112.0         131.8              -        131.8 
 Debt securities held-to-maturity          20.0           3.8              -          3.8 
 Loans and advances to banks               18.2           9.8            1.7         11.5 
 Loans and advances to customers        1,321.0         960.6          114.3      1,074.9 
 Other assets                              38.8          22.9            2.5         25.4 
----------------------------------  -----------  ------------  -------------  ----------- 
                                        1,510.0       1,128.9          118.5      1,247.4 
----------------------------------  -----------  ------------  -------------  ----------- 
 Liabilities 
 Due to banks                              70.0          35.0              -         35.0 
 Deposits from customers                1,151.8       1,033.1              -      1,033.1 
 Other liabilities                         52.2          29.4            8.7         38.1 
----------------------------------  -----------  ------------  -------------  ----------- 
                                        1,274.0       1,097.5            8.7      1,106.2 
----------------------------------  -----------  ------------  -------------  -----------

The 2016 balance sheet includes only continuing operations.

The assets of the Group, on a continuing basis, increased by 34% to GBP1,510.0 million, primarily driven by the growth in the Group's loan portfolios. The underlying return on average assets, calculated as the underlying profit after tax for the year as a percentage of average assets, was 1.9% for 2016, compared with 2.2% for 2015.

The liabilities of the Group, on a continuing basis, increased by 16% to GBP1,274.0 million, primarily driven by the increase in deposits from customers, providing funding for the Group's lending activities.

Loans and Advances to Customers

Loans and advances to customers includes secured and unsecured loans and finance lease receivables. The following table shows the increase in loans and advances to customers year on year, and the change in composition of the book as the Business Finance loan books continue to grow faster than the more mature Consumer Finance books.

 
                                      2016     2016         2015     2015 
                                               % of                  % of 
                                GBPmillion    total   GBPmillion    total 
-----------------------------  -----------  -------  -----------  ------- 
 Business Finance: 
 Real Estate Finance                 451.0    34.0%        368.0    34.3% 
 Asset Finance                       117.2     8.9%         70.7     6.6% 
 Commercial Finance                   62.8     4.8%         29.3     2.7% 
 Consumer Finance: 
 Retail Finance                      325.9    24.7%        220.4    20.5% 
 Motor Finance                       236.2    17.9%        165.7    15.4% 
 Personal Lending                     65.5     5.0%         74.3     6.9% 
 Other                                62.4     4.7%         32.2     3.0% 
 Discontinued operations and 
  assets held for sale: 
 Personal Lending                        -       0%        114.3    10.6% 
-----------------------------  -----------  -------  -----------  ------- 
 Total                             1,321.0   100.0%      1,074.9   100.0% 
-----------------------------  -----------  -------  -----------  -------

Loan originations in the year, being the total of new loans and advances to customers entered into during the year arising from continuing operations, was GBP964.3 million (2015: GBP808.5 million).

Further analyses of loans and advances to customers, including a breakdown of the arrears profile of the Group's loan books, is provided in Notes 10, 11 and 12.

Deposits from Customers

Customer deposits include term, notice and sight deposits, as well as the Group's Current Account and OneBill products. Customer deposits grew by 11.5% during the year to close at GBP1,151.8 million, to fund the increased lending balances. The Group also held GBP70.0 million of wholesale deposits at the year-end, following the sale and repurchase of Funding for Lending Scheme Treasury Bills.

Key Performance Indicators

The following key performance indicators are the primary measures used by management to assess the performance of the Group:

 
                                                       2016       2015 
------------------------------------------------  ---------  --------- 
 Financial KPIs: 
 Net Revenue Margin(1)                                10.4%      12.4% 
 Cost of Risk(2)                                       2.4%       2.3% 
 Cost to Income Ratio(3)                              55.4%      54.8% 
                                                    GBP32.9    GBP26.7 
 Underlying Profit Before Tax                       million    million 
 Underlying Return on Average Assets                   1.9%       2.2% 
 Underlying Return on Average Equity                  11.9%      15.8% 
 Non-Financial KPIs: 
 Customer FEEFO ratings (mark out of 5 based 
  on star rating from 400 reviews)                      4.5        N/A 
 Employee survey engagement score (based 
  on 2016 all staff survey)                             85%        N/A 
 Environmental intensity indicator (tonnes 
  carbon dioxide per GBP1 million group income)         5.4        N/A 
------------------------------------------------  ---------  ---------

The underlying return on average assets and underlying return on average equity have both fallen as expected as a result of the sale of ELG, the proceeds of which have increased the Group's equity and capital and have not yet been fully reinvested.

Comparatives have not been provided for the non-financial KPIs. The customer FEEFO ratings and employee survey scores were not measured on a comparable basis in the prior year. As noted in the Directors' Report, this is the first year of measurement of environmental emissions and this year is being used as the baseline year.

The Remuneration Report, starting on page 92, sets out how executive pay is linked to the assessment of key financial and non-financial performance metrics.

(1) Net revenue margin is calculated as operating income as a percentage of average loan book .

(2) Cost of risk is calculated as net impairment losses on loans and advances to customers as a percentage of average loan book .

(3) Cost to income ratio is calculated as operating expenses as a percentage of operating income.

Underlying profit is the profit attributable to continuing operations, adjusted for items that are outside of the Group's normal recurring business activities. A reconciliation of underlying profit before tax to statutory profit before tax is provided on page 26.

Annualised underlying return on average assets is calculated as the underlying profit after tax for the previous 12 months as a percentage of average assets .

Annualised underlying return on average equity is calculated as the underlying profit after tax for the previous 12 months as a percentage of average equity. Average equity is calculated as the mean of the total equity at the 13 previous month ends.

The calculation of average loan book is the average of the monthly balance of loans and advances to customers, net of provisions and excluding ELG.

The calculation of average assets is the average of the monthly balance of total assets, excluding ELG.

Underlying profit after tax (PAT) is profit after tax attributable to continuing operations, adjusted for items that are outside of the Group's normal recurring business activities. A reconciliation of underlying profit after tax to statutory profit after tax is provided on page 26.

All revenue, income, profit and earnings figures used in the calculation of key performance indicators are on a continuing operations basis.

Strategic report

Principal risks and uncertainties

Risk overview

The directors have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity. The principal risks are as follows:

 
 Risk               Description 
-----------------  ------------------------------------ 
                    The risk that a counterparty 
                     will be unable to pay amounts 
 Credit Risk         in full when due 
-----------------  ------------------------------------ 
                    The risk that the value of, 
                     or revenue generated from, 
                     the Group's assets and liabilities 
                     is impacted as a result of 
                     market movements, predominantly 
 Market Risk         interest rates 
-----------------  ------------------------------------ 
                    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 
 Liquidity Risk      asset 
-----------------  ------------------------------------ 
                    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 
 Operational Risk    the risks identified above 
-----------------  ------------------------------------ 
                    The risk that the Group will 
                     have insufficient capital 
                     resources to support the 
 Capital Risk        business 
-----------------  ------------------------------------ 
                    The potential for customers 
                     (and the business) to suffer 
                     financial loss or other detriment 
                     through the actions and decisions 
                     made by the business and 
 Conduct Risk        its staff 
-----------------  ------------------------------------ 
                    The risk that the Group fails 
                     to be compliant with all 
 Regulatory Risk     relevant regulatory requirements 
-----------------  ------------------------------------

Notes 28 to 32 to the financial statements provide further analysis of financial risks.

Further details of the principal risks, the changes in risk profile since the previous financial year and the Group's risk management framework are given below:

Credit risk

 
 Description                      Mitigation 
-------------------------------  -------------------------------------- 
 Credit risk is the risk that     Credit risk is managed through 
  a counterparty will be unable    the Group's internal controls 
  to pay amounts in full when      and credit risk policies 
  due. Counterparties include      and is monitored on a monthly 
  the consumers to whom the        basis by the Credit Risk 
  Group lends on an unsecured      Committee, with oversight 
  basis and the SMEs to whom       provided by the Board Risk 
  the Group lends on a secured     Committee. The Credit Risk 
  basis as well as the market      Committee reviews the performance 
  counterparties with whom         of significant portfolios 
  the Group deals.                 including new business volumes, 
                                   collections performance, 
                                   provisioning levels and provisioning 
                                   methodology across the Group's 
                                   consumer and commercial business 
                                   areas. 
 
                                   The Group structures the 
                                   levels of credit risk it 
                                   undertakes by placing limits 
                                   on the amount of risk accepted 
                                   in relation to individual 
                                   borrowers or groups of borrowers. 
 
                                   For Real Estate Finance and 
                                   Commercial Finance, lending 
                                   decisions are made on an 
                                   individual transaction basis, 
                                   using expert judgement and 
                                   assessment against criteria 
                                   set out in the lending policies. 
                                   Asset Finance lending is 
                                   outsourced to Haydock, who 
                                   operate in line with the 
                                   Group's credit policies and 
                                   risk appetite. The Group's 
                                   employees based in Haydock's 
                                   premises assess this lending 
                                   for compliance with policy. 
 
                                   Exposure to credit risk is 
                                   also managed in part by obtaining 
                                   collateral. Motor Finance 
                                   loans are secured against 
                                   motor vehicles. Real Estate 
                                   Finance and Asset Finance 
                                   loans are secured against 
                                   property and tangible assets 
                                   respectively. 
 
                                   The Board monitors the ratings 
                                   of the counterparties in 
                                   relation to the Group's loans 
                                   and advances to banks. There 
                                   is no direct exposure to 
                                   the Eurozone and peripheral 
                                   Eurozone countries. 
 
                                   Forbearance 
                                   The Group does not routinely

                                   reschedule contractual arrangements 
                                   where customers default on 
                                   their repayments. It may 
                                   offer the customer the option 
                                   to reduce or defer payments 
                                   for a short period, in which 
                                   cases the loan will retain 
                                   the normal contractual payment 
                                   due dates and will be treated 
                                   the same as any other defaulting 
                                   cases for impairment purposes. 
-------------------------------  --------------------------------------

Change - STABLE but some deterioration in motor impairments

Consumer Finance Credit Risk

The size of the Unsecured Personal Lending product has been reducing over the last 18 months, largely due to excessively aggressive competition by lenders that now offer unsecured loans in the near-prime market driving prices and margins down below the Group's risk appetite. The continuation of this unattractive pricing environment led to the Group's decision to withdraw its Personal Lending offer.

The Retail business continues to grow as expected, with the Group retaining its existing major contracts with retailers and acquiring a number of valuable new relationships. This includes growth of the Interest Bearing and Buy Now Pay Later segments of the book, which carry more inherent risk, particularly in the consumer electronics business. The differential in inherent risks in interest bearing lending relative to interest free finance is built into our pricing methodologies to derive the desired risk adjusted yield. The Credit Risk Team is continually monitoring acquisition and performance trends to ensure this portfolio delivers expected performance. The Group expects this excellent growth and account performance to continue into 2017.

As with Retail Finance, the motor product has seen significant growth, largely through internet brokers. Competition within motor lending has become much greater with companies attracted by the returns that are available within the non-prime sector. The Group decided not to compete directly with a number of lenders using aggressive pricing and commission structures to gain a foothold in the non-prime market. In the short term this affected the mix of new business written as some better quality lending previously presented to STB was instead directed to the newer entrants. This business mix change and a higher volume of sub-prime new business have resulted in an increase in average impairments. This cohort of loans whilst ultimately profitable has failed to meet the Group's expectations in terms of profitability and measures have been taken to address this. We have also noticed, as expected, a tempering of the activity of some competitors. The quality of the loans written has shown a discernible improvement since the final quarter of 2016 and this should have a positive effect on the portfolio mix as 2017 progresses.

Business Finance Credit Risk

Lending to this sector has continued to grow, with continued application of robust risk governance, credit appetite and lending policies, alongside the significant experience within the lending teams. This has served the Group well to date as it continues to assess the impacts of the Referendum result, particularly in the Central London Real Estate Market, where risk appetite has been substantially reduced.

A programme to develop probability of default modelling for each of the Business Finance portfolios commenced in 2015 and is now entering into a testing and calibration phase. Ultimate delivery will be during 2017.

Business Finance impairments and arrears have remained minimal to date. Management continue to closely monitor the portfolios and the external events and environment that could impact on each of them.

Concentration risk

Management assesses the potential concentration risk from geographic, product and individual loan concentration. Due to the well diversified nature of its lending operations, the Group does not consider there to be a material exposure arising from concentration risk.

Market risk

 
 Description                          Mitigation 
-----------------------------------  ------------------------------------ 
 For the Group, market risk           Market risk is managed by 
  is primarily limited to interest     the Company's Treasury function 
  rate risk, being the potential       and is overseen by the Assets 
  adverse impact on the Group's        and Liabilities Committee 
  future cash flows from changes       ('ALCO'). The Group's policy 
  in interest rates arising            is not to take significant 
  from the differing interest          unmatched own account positions 
  rate risk characteristics            in any market. The key measure 
  of the Group's assets and            used to monitor the risk 
  liabilities. When interest           is the Interest Rate Sensitivity 
  rates change, the present            Gap pursuant to which, the 
  value and timing of future           Group seeks to 'match' interest 
  cash flows change. This in           rate risk on either side 
  turn changes the underlying          of the Statement of Financial 
  value of the Group's assets,         Position. 
  liabilities and off-balance 
  sheet instruments and hence          The Group monitors the interest 
  its economic value. Changes          rate mismatch on a daily 
  in interest rates also affect        basis, considering the impact 
  the Group's earnings by altering     across the maturity bandings 
  interest-sensitive income            of the book on a parallel 
  and expenses, affecting its          scenario for 100 and 200 
  net interest income.                 basis points movements. This 
                                       typically results in an immaterial 
  The Group is also exposed            pre-tax mismatch, with the 
  to market risk as a result           same immaterial impact to 
  of the NSF Shareholding resulting    equity pre-tax. 
  from the ELG disposal. Any 
  deterioration in NSF's financial 
  performance could negatively 
  impact the price of NSF's 
  shares and reduce the value 
  of the Group's holding in 
  NSF exposing the Group to 
  potential losses. 
 
  The principal currency in 
  which the Group operates 
  is Sterling, although a small 
  number of transactions are 
  completed in US dollars and 
  Euros in the Commercial Finance 
  business. All currency exposures 
  are swapped to Sterling. 
  The Group has no significant 
  exposures to foreign currencies 
  and therefore there is no 
  significant currency risk. 
-----------------------------------  ------------------------------------

Change - STABLE

The Group has continued to focus on interest rate risk in the banking book by monitoring the Interest Rate Sensitivity Gap. It has continued to operate a broadly matched asset and liability model.

The Group remained within risk appetite in respect of interest rate risk throughout the year.

Liquidity risk

 
 Description                           Mitigation 
------------------------------------  -------------------------------------- 
 The Group's approach to managing      The liquidity requirements 
  liquidity is to ensure, as            of the Group are met through 
  far as possible, that it              withdrawing funds from its 
  will always have sufficient           Bank of England reserve account 
  liquidity to meet its liabilities     to cover any short-term fluctuations 
  when due, under both normal           and longer term funding to 
  and stressed conditions,              address any structural liquidity 
  without incurring unacceptable        requirements. The Group is 
  losses or risking damage              exposed to daily calls on 
  to the Group's reputation.            its available cash resources 
                                        from maturing deposits and 
  The Group is funded by capital        loan draw-downs, and maintains 
  and customer deposits, comprising     significant cash resources 
  deposit accounts and fee              to meet all of these needs 
  based accounts. The Group             as they fall due. 
  has limited borrowings under 
  Bank of England schemes,              The Group has a formal governance 
  but besides these has no              structure in place to manage 
  exposure to wholesale markets.        and mitigate liquidity risk 
                                        on a day to day basis. The 
  The matching and controlled           Board sets and approves the 
  mismatching of the maturities         Group's liquidity risk management 
  and interest rates of assets          strategy. The ALCO, comprising 
  and liabilities is fundamental        senior executives of the 
  to the management of the              Group, meets monthly to review 
  Group. It is unusual for              liquidity risk against set 
  banks to be completely matched,       thresholds and risk indicators 
  as transacted business is             including early warning indicators, 
  often of uncertain term and           liquidity risk tolerance 
  of different types.                   levels and Internal Liquidity 
                                        Adequacy Assessment Process 
  The maturities of assets              ('ILAAP') metrics. Key liquidity 
  and liabilities and the ability       risk management information 
  to replace, at an acceptable          is monitored daily. 
  cost, interest bearing liabilities 
  as they mature are the key            The PRA requires a firm to 
  factors in assessing the              maintain at all times liquidity 
  liquidity of the Group and            resources which are adequate, 
  its exposure to changes in            both as to amount and quality, 
  interest rates.                       to ensure that there is no

                                        significant risk that its 
                                        liabilities cannot be met 
                                        as they fall due. There is 
                                        also a requirement that a 
                                        firm ensures its liquidity 
                                        resources contain an adequate 
                                        buffer of high quality, unencumbered 
                                        assets (i.e. government securities) 
                                        in the liquidity asset buffer, 
                                        and it maintains a prudent 
                                        funding profile. The liquidity 
                                        assets buffer is a pool of 
                                        highly liquid assets that 
                                        can be called upon to create 
                                        sufficient liquidity to meet 
                                        liabilities on demand, particularly 
                                        in a period of liquidity 
                                        stress. The liquidity resources 
                                        outside the buffer must either 
                                        be marketable assets with 
                                        a demonstrable secondary 
                                        market that the firm can 
                                        access, or a credit facility 
                                        that can be activated in 
                                        times of stress. 
 
                                        The Group has a Board approved 
                                        ILAAP, which is updated annually. 
                                        The liquidity buffer required 
                                        by the ILAAP is in place 
                                        and liquidity resources outside 
                                        of the buffer are made up 
                                        of deposits placed at the 
                                        Bank of England. 
------------------------------------  --------------------------------------

Change - STABLE

During the year ended 31 December 2016, the Group regularly attracted new fixed and variable rate deposits over terms ranging from one to seven years. These were issued to broadly match the term lending by the Group.

The primary measure used by management to assess the adequacy of liquidity is the Overall Liquidity Adequacy Requirement, which is the Board's own view of the Group's liquidity needs as set out in the Board approved ILAAP. The Group maintained liquidity in excess of the Overall Liquidity Adequacy Requirement through the year ended 31 December 2016.

Other key measures used by the Group for managing liquidity risk are the overall Funding to Loans ratio and the Liquidity Coverage Ratio ('LCR'). The Funding to Loans ratio at 31 December 2016 was 110.4% (2015: 112.5%).

The LCR regime has applied to the Group from 1 October 2015, requiring management of net 30 day cash outflows as a proportion of High Quality Liquid Assets. The Group has set a more prudent internal limit than that proposed in guidance from the regulator. The actual LCR has significantly exceeded both limits throughout the year ended 31 December 2016.

Operational risk

 
 Description                               Mitigation 
----------------------------------------  ------------------------------------- 
 Operational Risk is the Risk              The Group has adopted an 
  that the Group may be exposed             Operational Risk Policy and 
  to direct or indirect loss                Framework designed in accordance 
  arising from inadequate or                with the 'Principles for 
  failed internal processes,                the Sound Management of Operational 
  personnel, technology/ infrastructure,    Risk' issued by the Basel 
  or from external factors.                 Committee on Banking Supervision. 
 
  The scope of Operational                  The approach ensures appropriate 
  Risk is broad and includes                governance is in place to 
  Business Process, Business                provide adequate and effective 
  Continuity, Third Party,                  oversight of the Group's 
  Financial Crime, Change,                  operational risk. The governance 
  Human Resources, Information              framework includes the Board 
  Security & IT Risk.                       Risk Committee and Group 
                                            Operational Risk Committee. 
 
                                            The Group has a defined set 
                                            of qualitative and quantitative 
                                            Operational Risk Appetite 
                                            measures. Quantitative measures 
                                            cover operational losses, 
                                            complaints, key operational 
                                            risks, systems availability 
                                            and information security. 
                                            The appetite measures are 
                                            reported and monitored on 
                                            a monthly basis. 
----------------------------------------  -------------------------------------

Change - IMPROVED

In 2016, the Group continued to invest in resource, expertise and systems to support the development of its operational risk capabilities. The Group's operational risk process and standards are defined and communicated through a formal Operational Risk Framework and Policy. This Framework defines and facilitates the following activities:

 
 --   A biannual Risk and Control Self Assessments process 
       to identify, assess and mitigate risks across all 
       business units through improvements to the control 
       environment. 
 --   The Governance arrangements for managing and reporting 
       these risks. 
 --   All risk appetite measures and associated thresholds 
       and metrics. 
 --   An incident management process that defines how incidents 
       should be managed and associated remediation, reporting 
       and root-cause analysis.

Key Risk themes of Operational Risk focus in 2016 include:

 
 --   Supplier Management - The Group uses a number of third 
       parties to support its IT and operational processes. 
       The Group recognises that it is important to effectively 
       manage these suppliers. 
 --   IT Resilience - Having adequate and effective servers, 
       networks and storage systems. The Group tested its 
       disaster recovery and business continuity processes 
       in 2016 and further improved its process of identifying, 
       assessing and managing its critical IT assets and 
       processes. 
 --   Information Security and Cyber Risk - As a financial 
       institution, the Group is subject to a heightened 
       risk of actual or attempted IT security breaches by 
       sophisticated cybercrime groups. Any failure by the 
       Group's intrusion detection and anti-penetration software 
       to anticipate, prevent or mitigate a breach of the 
       Group's IT network could significantly disrupt the 
       Group's operations. The Group continues to invest 
       in its information security controls in response to 
       emerging cybercrime threats and to seek to ensure 
       that controls for known threats remain robust.

Cyber risk is considered to be one of the key emerging risks facing the Group and is covered in more detail in the 'Strategic and emerging risks' section below.

Capital risk

 
 Description                       Mitigation 
--------------------------------  -------------------------------------- 
 Capital risk is the risk          The Group's capital management 
  that the Group will have          policy is focused on optimising 
  insufficient capital resources    shareholder value, in a safe 
  to meet minimum regulatory        and sustainable manner. The 
  requirements and to support       Board regularly reviews the 
  the business. The Group adopts    capital position to ensure 
  a conservative approach to        capital resources are sufficient 
  managing its capital and          to support planned levels 
  at least annually assesses        of growth. 
  the robustness of the capital 
  requirements as part of the       In accordance with the EU's 
  Group's Internal Capital          Capital Requirements Directive 
  Adequacy Assessment Process       IV ('CRD IV') and the required 
  ('ICAAP').                        parameters set out in the 
                                    EU's Capital Requirement 
                                    Regulation, the Group maintains 
                                    an ICAAP which is updated 
                                    at least annually. The ICAAP 
                                    is a process that brings 
                                    together the management framework 
                                    (i.e. the policies, procedures, 
                                    strategies and systems that 
                                    the Group has implemented 
                                    to identify, manage and mitigate 
                                    its risks) and the financial 
                                    disciplines of business planning 
                                    and capital management. 
 
                                    Not all material risks can 
                                    be mitigated by capital, 
                                    but where capital is appropriate 
                                    the Board has adopted a 'Pillar

                                    1 plus' approach to determine 
                                    the level of capital the 
                                    Group needs to hold. This 
                                    method takes the Pillar 1 
                                    capital formula calculations 
                                    (standardised approach for 
                                    credit, market and operational 
                                    risk) as a starting point, 
                                    and then considers whether 
                                    each of the calculations 
                                    delivers a sufficient capital 
                                    sum adequately to cover management's 
                                    anticipated risks. Where 
                                    it is considered that the 
                                    Pillar 1 calculations do 
                                    not reflect the risk, an 
                                    additional capital add-on 
                                    in Pillar 2 is applied, as 
                                    per the Individual Capital 
                                    Guidance issued by the PRA. 
--------------------------------  --------------------------------------

Change - IMPROVED

Stringent stress tests are performed to ensure that capital resources are adequate over a future three year horizon. At 31 December 2016, the CET1 Ratio was 17.4% (2015: 13.6%) and the Leverage Ratio was 14.1% (2015: 10.4%) on a solo-consolidated basis.

Both ratios are significantly higher than regulatory requirements. The solo-consolidated capital resources increased significantly to GBP226.3 million as at 31 December 2016 (31 December 2015: GBP138.9 million) reflecting the gain on the sale of ELG following transaction completion in April 2016.

Conduct risk

 
 Description                        Mitigation 
---------------------------------  ------------------------------------ 
 The Group defines conduct          The Group takes a principles 
  risk as the risk that the          based approach and includes 
  Group's products and services,     retail and commercial customers 
  and the way they are delivered,    in its definition of 'customer', 
  result in poor outcomes for        which covers all business 
  customers, or harm to the          units and both regulated 
  Group. This could be as a          and unregulated activities. 
  direct result of poor or 
  inappropriate execution of         Across the Group, conduct 
  the Group's business activities    risk exposure is managed 
  or staff behaviour.                via monthly review and challenge 
                                     of key risk indicators ('KRIs') 
                                     at the Customer Focus Committee, 
                                     which oversees complaints, 
                                     FEEFO and Customer Service 
                                     Excellence as well as conduct 
                                     risk. Conduct risk management 
                                     information is also reviewed 
                                     at Executive Committee meetings 
                                     at product level. 
 
                                     The Key Risk Indicators vary 
                                     across the business units 
                                     to reflect the relevant conduct 
                                     risks; the business units' 
                                     Key Risk Indicators are aggregated 
                                     for measurement against the 
                                     Group's risk appetite, which 
                                     is reported to the Group 
                                     Executive Committee and the 
                                     Board. 
---------------------------------  ------------------------------------

Change - STABLE

In 2016, the Conduct Risk framework was standardised to align to the Operational Risk Framework, the conduct risk and control assessments were refreshed with the business units and integrated into the new Operational Risk Management System, and a regular cycle of self attestations established with first line senior managers.

Monthly review and challenge of Key Risk Indicators in the Customer Focus Committee provides oversight of the first line activities to assure senior management that the first line are identifying conduct risks when they arise and taking appropriate actions to mitigate them.

Further training on conduct risk has been delivered to first line staff, with an eLearning module completed by staff during the year.

Regulatory risk

 
 Description                            Mitigation 
-------------------------------------  ---------------------------------- 
 Regulatory risk is the risk            The Group seeks to manage 
  that the Group fails to be             regulatory risks through 
  compliant with all relevant            the Group wide risk management 
  regulatory requirements.               framework. The Group Compliance 
  This could occur if the Group          and Regulatory Risk Committee 
  failed to interpret, implement         is responsible for reviewing 
  and embed processes and systems        and monitoring regulatory 
  to address regulatory requirements,    changes, and ensuring that 
  emerging risks, key focus              appropriate actions are taken, 
  areas and initiatives or               and also reviewing and approving 
  deal properly with new laws            the compliance risk management 
  and regulations.                       framework. Further details 
                                         are given on page 48. 
-------------------------------------  ----------------------------------

Change - STABLE

In the year ended 31 December 2016, the Group has delivered changes to address new and revised regulations and legislation that have come into force.

STB Leasing, a wholly owned STB subsidiary which is the lessor of assets to consumers arising out of the activities outsourced to RentSmart Limited, received its authorisation for Limited Permissions for consumer hire at the end of February 2016.

Strategic and emerging risks

In addition to the principal risks above, the Board considers strategic and emerging risks, including key factors, trends and uncertainties which can influence the results of the Group. These risks include the following:

Macroeconomic environment and market conditions

The Group operates exclusively within the UK and its performance is influenced by the macroeconomic environment in the UK. The economy affects demand for the Group's products, margins that can be earned on lending assets and the levels of loan impairment.

The UK economy continued to grow in 2016, despite uncertainty inherent both before the referendum to leave the EU and following the result. The longer term effects of the vote remain unclear, though the Group expects that the increase in liquidity in the market and increases in the capital held by banks since the last downturn will act as mitigants against any downward economic pressure. The Group's diverse lending portfolio, strong capital and liquidity positions and relatively low exposure to net interest margin compression leave the Group well placed to compete in the evolving UK economy.

On 4 August 2016, the Monetary Policy Committee announced a base rate cut to 0.25%. Base rate falls have an impact on the net interest margins of lenders. The Group is less exposed to net interest margin compression than the systemically important banks and building societies, and is therefore well positioned to take advantage should these organisations curtail their lending. As rising interest rates may expose borrowers to difficulties making interest payments, the continuing low base rate position has a mitigating effect on credit risk.

House prices recovered to pre-crisis levels in 2013 and have since continued to rise. UK housing stock remains in short supply. The Group will continue to monitor the mortgage market in connection with its residential mortgage product.

Interest rate levels and volatility

The net interest income earned by the Group and hence its levels of profit depend on the growth of the Group's loan portfolios and the net interest margin in respect of those portfolios. Competition between lenders can place downward pressure on lending asset yields and hence on net interest margins. Given the Group's strategy of targeting specialist areas of the market, many of which are under-served by larger lenders, competition has not had a significant impact on the margins achieved over the year.

Competition

The Group faces competition from established providers of financial services, including banks and building societies, some of which have substantially greater scale and financial resources, broader product offerings and more extensive distribution networks than the Group. In addition, while the Group utilises the Basel 'standardised' approach for assessing credit risk, which tends to overestimate credit risk of lending portfolios, leading to higher risk-weighted assets, larger competitors who utilise the internal ratings-based approach can hold less capital against their lending than the standardised approach, thus making it more economic for them to do lower risk and lower priced lending.

In particular, the Group faces extensive competition from both established banks and specialist finance providers in certain of its niche segments, such as motor finance. Increased competition within the markets in which the Group operates could result in a loss of customers for the Group and increased pressure on the Group's pricing which may lead to narrower margins.

The Group closely monitors the competitive dynamics in all of its key markets, and has shown itself to be adaptable, as evidenced by the diversification into SME lending over recent years and the closure of its personal lending and current account activities. The evolution of financial technology and its impact on the Group's markets is also monitored, and the Group continues to invest in its own technology in order to continually improve its customer proposition.

Cyber crime

The Group continues to increase focus on enabling the effective management of risks arising from a failure or breach of its information technology systems, whether internal or affecting our supply chain. The Group recognises that financial services organisations face an increasing number and variety of cyber-attacks that could result in customer exposure, business disruption, financial losses, legal penalties or reputational damage.

Maintaining resilience against emerging cyber threats requires an understanding of the tactics and motivations of potential attackers. The Group adopts strategies and comprehensive measures to keep abreast of these tactics and to prevent, detect, disrupt and facilitate rapid recovery from attacks.

Strategic report

Going concern and business viability

Going concern

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

The directors are satisfied that the Company and the Group have adequate resources to continue to operate for the foreseeable future as going concerns. For this reason they continue to adopt the going concern basis in preparing these financial statements.

Business viability

In accordance with provision C2.2 of the UK Corporate Governance Code, the directors confirm that there is a reasonable expectation that the Company and the Group will be able to continue in operation and meet their liabilities as they fall due, for the period up to 31 December 2019. The assessment of ongoing viability covers this period as it is the Group's planning horizon and the period covered by the Group's stress testing. While the directors are confident of the Group's viability over the longer term, the inherent uncertainties regarding the economic, regulatory and market environment that the Group operates in may compromise the reliability of longer range forecasts.

The directors have based the assessment on:

 
      --   The latest annual budget, which contains information 
            on the expected financial position and performance 
            for the period to 31 December 2019 and by considering 
            the potential impact of the principal risks facing 
            the Group, as set out on pages 32 to 43. 
      --   The analysis of key sensitivities, undertaken as 
            part of the budget process, which could impact on 
            profitability for the forthcoming financial year. 
            Assumptions made to calculate risk weighted assets 
            and capital requirements are clearly stated and 
            additional scenarios are modelled to demonstrate 
            the potential impact of risks and uncertainties 
            on capital. 
      --   The Group's ILAAP, which uses stress scenarios to 
            assess the adequacy of liquidity resources. 
      --   The Group's ICAAP, which considers a macroeconomic 
            stress and a severe shock scenario in order to assess 
            the adequacy of capital resources. 
      --   Consideration of the other principal risks as set 
            out on pages 32 to 43, to identify any other severe 
            but plausible scenarios that could threaten the 
            Group's business model, future performance, solvency 
            or liquidity.

In making this statement, the Board has sought input from the Audit Committee and the Risk Committee.

Strategic report

Risk management

Overview

A fundamental element of the Group's strategy is the effective management of risk in order to protect the Group's depositors, borrowers and shareholders, and to ensure that the Group maintains sufficient capital, liquidity and operational control at all times, and acts in a reputable way. This is reflected in the Group's strategy and values, in particular the 'Sustain' strategy and 'Risk Aware' value, which demonstrate the Group's commitment to protect the reputation, integrity and sustainability of the Bank for all of its customers and stakeholders via prudent balance sheet management, investment for growth and robust risk and operational control.

The Group's Chief Risk Officer is responsible for leading the Group's Risk Function, which is independent from the Group's operational and commercial functions. The Risk Function is responsible for ensuring that appropriate risk management processes and controls are in place, and that they are sufficiently robust, so as to ensure that key risks are identified, assessed, monitored and mitigated. The Chief Risk Officer is responsible for providing assurance to the Board that the Group's principal risks are appropriately managed and that it is operating within its risk appetite.

The Group's risk management framework, policies and procedures are regularly reviewed and updated to ensure that they accurately identify the risks that the Group faces in its business activities and are appropriate for the nature, scale and complexity of the Group's business.

Risk appetite statement

The Group's risk appetite statement confirms the risk parameters within which the strategic aims and vision of the Group are to be achieved. The Board has identified risk themes, risk drivers and major risk categories relevant to the business to enable it to produce the following risk appetite statements which underpin the strategy of the Group:

 
 Key theme         Risk appetite statement                          Risk categories 
----------------  -----------------------------------------------  ---------------- 
 Profitability     The Group is profit and growth orientated        Market risk 
                    whilst seeking to maintain a conservative        Credit risk 
                    and controlled risk profile. The Group 
                    manages credit risk through a pricing 
                    for risk model, which drives a potential 
                    post tax return on equity in excess 
                    of 20% in aggregate. 
 Financial         The Group's financial strength is                Credit risk 
  strength          safeguarded by a strong capital base             Liquidity 
                    and a prudent approach to liquidity              risk 
                    management. The Group's governance               Capital 
                    and capital planning processes and               risk 
                    procedures are designed to ensure 
                    that capital levels will not fall 
                    below the Group's individual capital 
                    guidance requirements. Liquidity is 
                    maintained at a level above the overall 
                    liquidity adequacy requirement with 
                    the majority of loans funded typically 
                    by retail deposits. 
 Conduct           The Group conducts its business in               Conduct 
  with customers    a way that seeks to avoid negative               risk 
  and reputation    outcomes for customers by consistently 
                    treating them fairly. The Group is 
                    straightforward and fair with its 
                    customers and seeks to achieve excellent 
                    customer service standards. The Group's 
                    aim is to be seen as a sound and professional 
                    business in the marketplace. It has 
                    no appetite for reputational risk 
                    arising from the way in which it or 
                    its partners behave. It seeks to remain 
                    fully compliant with all relevant 
                    regulatory requirements. 
 Business          The appetite of the Group for operational        Operational 
  processes         risk is to have well defined, scalable           risk 
  and people        and controlled processes, running                Regulatory 
                    on robust and resilient systems, effective       risk 
                    delivery of change and business continuity 
                    management. It does not tolerate operational 
                    losses above its pillar 1 capital 
                    requirement. 
----------------  -----------------------------------------------  ----------------

The Group's risk appetite statements are subject to regular monitoring and review.

Risk appetite framework

The Group's risk management framework supports decision-making across the Group and is designed to ensure that each risk is managed, monitored and overseen through a dedicated risk-specific committee. The Group operates a 'Three Lines of Defence' model for the management of its risks in which each risk has a defined risk appetite which is controlled and managed through documented policies and frequent reporting, and is overseen by one or more committees as part of the Group's governance process.

The Group's risk management framework is summarised in the table below, which sets out for each risk the relevant policy governing the risk, the method of reporting and the responsible committee(s).

 
 Risk          Credit          Market          Liquidity       Operational     Capital      Conduct      Regulatory 
------------  --------------  --------------  --------------  --------------  -----------  -----------  -------------- 
 Key control   Consumer        Treasury        Treasury        Operational     ICAAP        Conduct      Compliance 
  documents    Credit           Policy          Policy         Risk                          Risk         Manual 
               Risk             and ILAAP       and ILAAP      Policy                        Policy 
               Policy                                          and Framework 
               Business 
               and 
               Commercial 
               Credit 
               Risk 
               Policy 
 Reporting     Credit          ALCO            ALCO            Operational     ICAAP        Conduct      Compliance 
                Risk            and Treasury    and Treasury    Risk            and other    Risk         Reports 
                Reports         Reports         Reports         MI and          capital      MI and 
                                                                Reporting       reports      Reporting 
 Monitoring    Consumer        ALCO            ALCO            Group           ALCO         Customer     Group 
  committee     Credit                                          and Business                 Focus       Compliance 
                Risk                                            Level                        Committee   and 
                Committee                                       Operational                              Regulatory 
                SME Credit                                      Risk                                     Risk 
                Committee                                       Committees                               Committee 
 Oversight     Risk            Risk            Risk            Risk            Risk         Risk         Risk 
  committee     Committee       Committee       Committee       Committee       Committee    Committee    Committee 
------------  --------------  --------------  --------------  --------------  -----------  -----------  --------------

Risk governance

The 'Three Lines of Defence' model is implemented by the following individuals and/or units within the Group. These are:

(1) the Business Line Managers and Risk Owners;

(2) the Risk and Compliance Functions; and

(3) Internal Audit.

Each line of defence effectively ensures a robust operational risk framework within the Group. The Group ensures that each line understands its respective responsibilities and those of the other lines, and has the appropriate resource and expertise in order to fulfil its responsibilities.

First Line of Defence - Business Line Managers and Risk Owners: As the First Line of Defence, the management and staff of each business unit are responsible and accountable for identifying, assessing, controlling and mitigating operational risks. They are the owners of the risks and controls that operate within their business. However there may be additional controls that are managed for them elsewhere within the business or functional teams.

Each business unit or subsidiary is responsible for the recording and maintenance of its own risks, and is subject to an annual review and challenge, presented to the Group Operational Risk Committee and the Board Risk Committee. Risks may be managed by a designated manager, but the risk owner is ultimately accountable for the risks in their business.

Second Line of Defence - Information Security, Operational Risk, Financial Crime and Compliance Teams: The role of the Second Line of Defence is to support and guide the Group in order to operate within the risk appetite, by assisting the business in assessing and controlling operational risks, and by reporting to the Board and group risk committees on the effectiveness of the controls.

The Second Line of Defence enables the Group to adopt a common strategy and approach to operational risk management. It sets Group-wide policies and designs an operational risk management framework that helps businesses to control risks and that provides consistent insight into the risk profile.

Third Line of Defence - Group Internal Audit: Group Internal Audit periodically gives independent assurance on the organisational setup and effectiveness of risk management within the Group. The Third Line of Defence acts as an additional control to prevent risks from remaining unidentified.

Internal Audit provides the Audit Committee, the Board and Senior Managers with detailed independent and objective assurance on the effectiveness of the governance, risk management, and internal controls. This includes the manner in which the First and Second Lines of Defence achieve risk management and control objectives.

The scope of this assurance covers a broad range of objectives, including:

 
      --   efficiency and effectiveness of operations 
      --   safeguarding of assets 
      --   reliability and integrity of reporting processes 
      --   compliance with laws, regulations, policies, procedures, 
            and contracts.

The remit extends to a number of areas: group-wide processes; subsidiaries; business units and enabling functions, business processes including customer lifecycle, sales, marketing and operations, and enabling functions such as finance, HR, operational risk, compliance and IT.

The monitoring and control of risk is a fundamental part of the management process within the Group. The responsibilities of the Board, Risk Committee and Audit Committee in this respect are described in the Corporate Governance Report starting on page 56. The following committees also form a key part of the Group's risk management governance structure:

Assets and Liabilities Committee ('ALCO')

The ALCO is a sub-committee of the Risk Committee and is responsible for implementing and controlling the liquidity and asset and liability management risk appetite of the Group, ensuring the high level control over the Group's balance sheet and associated risks. The committee sets and controls capital deployment, Treasury strategy guidelines and limits focusing on the effects of the future plans and strategy on the Group's assets and liabilities.

Consumer Credit Risk Committee

This committee ensures that there is control of credit and lending decisions and related risks. Retail, Motor and Personal Lending loans are reviewed in alternate months to ensure a detailed analysis is undertaken of the entire portfolio. This committee determines whether the credit strategies and risk polices are working and will make recommendations on any changes required.

SME Credit Committees

The Group operates a Credit Committee structure for its Business Finance operations, with lending authorities approved at the Board Risk Committee. There is no local sales authority with all deals going via the respective Credit Risk functions for manual underwrite and where required under the mandate approval at the STB Credit Committee level.

Group Operational Risk Committee

This committee reviews and monitors the adequacy, the implementation and the level of embeddedness of the operational risk management framework across the Group. It recommends and undertakes improvements where required. The committee assesses the operational risks across the Group and recommends, initiates and monitors any further mitigating action that is required.

Group Compliance and Regulatory Risk Committee

This committee reviews and monitors regulatory change with which the Group is required to comply and it provides oversight that appropriate co-ordinated and controlled action is taken to deliver the required changes to an acceptable standard, which achieves compliance in a timely manner. This committee also reviews and approves the compliance risk management framework, the compliance universe and annual monitoring plan, anti-money laundering and financial crime systems of governance and control. It ensures that the Compliance function offers close and continual support to the first line of defence in understanding regulatory requirements and delivery of required outcomes.

Customer Focus Committee

This committee reviews and challenges customer experience ensuring its treating customers fairly principles, conduct risk, and customer service excellence requirements are met and good customer outcomes are achieved.

Information Security Management Committee

This committee oversees the Group's management of information, including safeguarding the personal information of its customers.

Lord Forsyth

Chairman of the Board

22 March 2017

Strategic Report

Capital, leverage and liquidity

Capital

The Group's capital management policy is focused on optimising shareholder value over the long-term. Processes exist to ensure that capital is allocated to achieve targeted risk adjusted returns whilst ensuring appropriate surpluses are held above the minimum regulatory requirements. The Board reviews the capital position at every Board meeting.

In accordance with the EU's Capital Requirements Directive and the required parameters set out in the EU's Capital Requirements Regulation, the Group's ICAAP is embedded in the risk management framework of the Group. It is subject to ongoing updates and revisions where necessary, but as a minimum an annual review is undertaken as part of the business planning process. The ICAAP brings together the risk management framework, including stress testing using a range of scenarios, and the financial disciplines of business planning and capital management.

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a 'Pillar I plus' approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations as a starting point, and then considers whether each of the calculations delivers a sufficient capital sum adequate to cover anticipated risks. Where it is considered that the Pillar I calculations do not reflect the risk, an additional capital add-on in Pillar 2 is applied, as per the Individual Capital Guidance issued to the Bank by the PRA.

The Group's regulatory capital is divided into:

 
 --   CET1 which comprises shareholders' funds, after 
       deducting intangible assets and deferred tax assets 
       which have arisen due to losses. 
 --   Tier 2 capital which comprises the collective allowance 
       for impairment.

The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. All regulated entities within the Group have complied during the financial year with all of the externally imposed capital requirements to which they are subject.

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

The Group is required by the PRA to report its capital on a solo consolidated basis. The solo-consolidated group includes all entities where a solo consolidation waiver has been received from the PRA; this includes all subsidiary undertakings, except the V12 Finance Group and DMS. At the year end the solo-consolidated group had the following capital resources and Total Risk Exposure. In accordance with Capital Requirements Regulation, the Total Risk Exposure reflects both credit risks and operational risks.

 
                                           2016         2015 
                                     GBPmillion   GBPmillion 
----------------------------------  -----------  ----------- 
 Capital 
 CET1 capital                             221.0        135.8 
 Total Tier 2 capital                       5.3          3.1 
----------------------------------  -----------  ----------- 
 Total capital                            226.3        138.9 
----------------------------------  -----------  ----------- 
 Total Risk Exposure                    1,266.9        998.6 
----------------------------------  -----------  ----------- 
 
                                           2016         2015 
                                              %            % 
----------------------------------  -----------  ----------- 
 CRD IV ratios 
 CET1 capital (solo-consolidated)          17.4         13.6 
 Leverage ratio                            14.1         10.4 
----------------------------------  -----------  -----------

The increase in CET1 capital has been driven predominantly from the sale of ELG and from the retained profit on continuing operations. An analysis of CET1 capital can be found in Note 32 to the financial statements.

Total Risk Exposure has increased by 27% to GBP1,266.9 million reflecting the significant growth in both Business Finance and Consumer Lending, and the increase in the risk weights applied to residential development lending activities from 100% to 150% as advised to us by the Bank of England in December 2016.

The CET1 capital ratio is the ratio of CET1 capital divided by the Total Risk Exposure and was 17.4% at the year end. This compares to 13.6% at the end of 2015. The sale of ELG has increased the CET1 capital ratio and provided significant capital for continued growth.

Leverage

The Basel III framework introduced a relatively simple, transparent, non-risk based leverage ratio to act as a supplementary measure to the risk-based capital requirements. The leverage ratio is intended to restrict the build-up of leverage in the banking sector to avoid destabilising deleveraging processes that can damage the broader financial system and the economy, whilst reinforcing the risk-based requirements with a complementary simple, non-risk based 'backstop' measure.

The Basel III leverage ratio is defined by the Capital Requirements Regulation as Tier 1 capital divided by on and off balance sheet asset exposure values, expressed as a percentage. The Basel committee on Banking Supervision will continue to test a minimum requirement of 3% for the leverage ratio during the parallel run period (i.e. from 1 January 2013 to 1 January 2017). Based on the results of the parallel run period, any final adjustments to the definition and calibration of the Basel III leverage ratio will be carried out by 2017, with a view to migrating to a Pillar 1 treatment on 1 January 2018 based on appropriate review and calibration.

As shown in the table above, the Bank has a leverage ratio at 31 December 2016 of 14.1%, comfortably ahead of the transitional minimum requirement.

Liquidity

The Group continues to manage its liquidity on a conservative basis by holding High Quality Liquid Assets and utilising predominantly retail funding from customer deposits, with only limited funding coming from the wholesale markets. In December 2012, Secure Trust Bank was admitted as a participant in the Bank of England's Sterling Money Market Operations under the Sterling Monetary Framework, to participate in the Discount Window Facility. From July 2013, the Group was permitted to draw down facilities under the Funding for Lending Scheme. Funding for Lending Scheme monies are maintained as a liquidity buffer, above that required to support lending.

At 31 December 2016 and throughout the year, the Group had significant surplus liquidity over the minimum requirements due to its stock of High Quality Liquid Assets, in the form of the Bank of England Reserve Account and Bank of England Treasury Bills. As shown in the table below, total liquid assets increased by 3% from GBP145.4 million to GBP150.2 million, with the High Quality Liquid Assets balance of GBP132.0 million.

 
                                        2016         2015 
                                  GBPmillion   GBPmillion 
-------------------------------  -----------  ----------- 
 Liquid assets 
 Aaa - Aa3                             132.0        135.6 
 A1 - A3                                13.2          6.2 
 Unrated                                 5.0          5.3 
-------------------------------  -----------  ----------- 
                                       150.2        147.1 
 Less assets held-for-sale                 -        (1.7) 
-------------------------------  -----------  ----------- 
 Statutory balance sheet total         150.2        145.4 
-------------------------------  -----------  -----------

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

The Group's loan to deposit ratio has increased from 104% in 2015 to 115% in 2016, due to the Group using capital generated from the sale of ELG to fund new loans, rather than having to raise new deposits. Additionally, fixed term deposits have increased from 57% in 2015 to 66% in 2016.

The LCR, introduced by the Basel Committee on Banking Supervision in 2013, applied to the Group from 1 October 2015. The objective of the LCR is to promote the short term resilience of the liquidity risk profile of banks, by ensuring that they have an adequate stock of unencumbered High Quality Liquid Assets that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario.

The PRA completed its consultation on the minimum LCR requirements to apply in the United Kingdom in 2015, and set levels marginally higher than those prescribed in the Capital Requirements Regulation during the transition period. The PRA have set the minimum at 80% from 1 October 2015, 90% from 1 January 2017 and 100% from 1 January 2018, coming into line with the Capital Requirements Regulation at this point.

The Group's LCR, and other measures used by management to manage liquidity risk, are described in the Principal Risks and Uncertainties section of the Strategic Report.

Strategic report

Culture and employees

The culture of the Group reflects the Group's promise to deliver straightforward and transparent banking and is based on the core values outlined in its strategy. These values are supported through an employee culture which has colleague and customer centric attitudes at its heart, rewards innovative and inspiring behaviours and sets work expectations around staff being trustworthy, compliant and safe.

Producing great customer outcomes is central to the Group's strategy. Making sure that this is reflected in the experience of customers and stakeholders is dependent on the Secure Trust Bank team, which is why the Group continues to invest in initiatives which nurture the culture of the Group.

Developing talent

This year the Group built on its existing Business Leader Development Programme with the introduction of a Raising the Bar Programme, aimed at helping business leaders to unlock their full potential. The programme also has features designed to embed the culture and values among employees. This is further supported by a comprehensive in-house learning and development programme and induction process.

In 2016 a record number of employees signed up to take an external Banking Qualification as part of their career development. The Banking Qualifications are delivered by the London Institute of Banking & Finance (previously the IFS) and are available to all employees. Wider career and skills development is also encouraged with financial support and study time allowances to facilitate relevant continued learning. The growth of the Group has also provided career development opportunities as evidenced by the record number of internal promotions made during the year.

The Group takes steps to address the wider needs and concerns of its staff. For example, a focus on health and wellbeing was launched as part of the Group's first 'Wellbeing at Work Week' which encouraged employees to think about their mental and physical health. The Group also held a 'Learning at Work Week' which allowed employees to showcase some of their wider talents.

Investors in People

As an internationally recognised accreditation held by over 14,000 organisations across the world, Investors in People sets the standard for what it means to lead, support and manage people well. This year the Group built on its existing Investors in People accreditation not once but twice. In May Secure Trust Bank was awarded Investors in People Silver across the entire Group and in December it joined a select group of organisations which meet the Investors in People Gold standard.

Only seven per cent of accredited companies achieve the Gold standard which demonstrates the Group's commitment to excellence when it comes to people management. The assessment includes a mix of hard assessment metrics, combined with softer interview based data collection to build a robust picture of performance. The Group's open and transparent culture and a strong commitment to equality and diversity were cited as two reasons why employees demonstrate high levels of trust in the Group's leadership team and are motivated, engaged and proud to work for the Group.

The assessment also acknowledged the clarity of the Group's goal of achieving its vision of building the best bank in Britain and how employees demonstrate a high degree of buy in to the organisation's strategic direction and live this through day-to-day activities.

Employee Engagement and Recognition

Research has consistently shown a clear link between enhanced levels of performance and teams that are fully engaged and share the values of the organisation that they work for. The annual Your Voice employee engagement survey measures the Group's progress in this area.

This year the Group engaged an independent specialist in employee feedback to run the survey, ensuring enhanced objectivity and allowing us to benchmark results against other similar sized companies in our sector. A participation rate of 84% meant that the results were representative and it was very reassuring to find that positive feedback across 42 key indicators was consistently above the external benchmark in over 95% of areas. The Group continues to look at areas for improvement at both a corporate and team level and is in the process of developing initiatives which will address issues raised by employees.

The progress in employee engagement was also recognised this year at the Midlands and Yorkshire Contact Centre Awards where the Group received the Highly Commended accolade for Employee Engagement Strategy of the Year. The award was judged on various aspects of employee engagement, including communication, empowerment and reward. High standards of communication at a personal level and corporate level were recognised.

The Group's recognition schemes and annual incentive programme continue to help embed excellence within the culture. Employees who demonstrate behaviour which promotes the customer first culture regularly receive recognition and are rewarded via a number of schemes which include:

Be valued awards: these awards recognise and reward every member of staff who lives and breathes our company values with a gift and certificate. Colleagues can nominate their peers at any time and as often as they like.

Customer Service Excellence Awards: colleagues who go the extra mile when it comes to exceptional internal and external customer service are recognised at our monthly Customer Service Excellence Award.

Outstanding Achievers: these are given to colleagues who stand out for their fantastic contribution to the business. Winners are nominated by their peers and then selected by a panel of judges.

Incentive Programme: the Group's incentive scheme links tangible performance targets which are based on the Group's strategy and values, to the outcomes of the scheme.

Customer focus

Customer focus is at the heart of the Group's business model. It is enshrined in the Group's values and mission to provide straightforward, transparent banking and embedded through the culture. In addition to recognition and reward structures, which embed this behaviour, the Group also uses a number of recognised independent tools to monitor and improve its customer service standards.

The Group collects feedback through FEEFO, an independent global ratings and reviews provider used by the world's most trusted brands. Comments and ratings are reported on a daily basis allowing service levels to be maintained and improved. The Group's average FEEFO rating for the year based on nearly 400 reviews stood at 4.5 out of 5 in December 2016 and any poor ratings are followed up by attempting to resolve the issue with the customer. The ratings and comments are available on the Group's websites:

www.securetrustbank.co.uk

www.moneyway.co.uk

The Group is proud to be the only bank to have been awarded the Customer Service Excellence Award which tests organisations in great depth on those areas which are a priority for consumers, with particular focus on delivery, timeliness, information, professionalism and staff attitude. The standard also examines an organisation's ability to develop customer insight, understand its users' experience and put in place robust measures of service satisfaction. It is an award which the Group retained for the fourth year running following on site assessments in December 2016. The report outlined the high standards demonstrated by the Group's employees and made specific reference to their professionalism, honesty and positivity about working at Secure Trust Bank, as well as commenting on the organisation's ethics.

Responsible business

As a responsible business the Group seeks to assess the impact of its business model and the delivery of its services on its customers, as well as on the wider community in which it operates. The Board does not consider there to be any environmental social or governance matters that are significant to the business of the Group.

As a financial services provider, the Group's operations do not have a significant impact on the environment. This year, the Group has started to report on its greenhouse gas emissions and, to ensure its environmental impact remains low, has included it as a key performance indicator. The key performance indicators are shown on page 31 and further details of greenhouse gas emissions are given in the Directors' Report, starting on page 99.

As well as through its customer focus, the Group's commitment to social and community issues is demonstrated by the Group's charitable activities. The Group Charity Committee is made up of representatives from its different businesses which drive forward a wide range of successful charitable activities. The committee is supported by business specific charity teams which also organise at least one flagship event each year. This year the Group also introduced a pound for pound matching scheme to encourage and empower staff to raise money for charities and good causes. A wide range of fundraising activities have been held raising over GBP40,000 for good causes during 2016.

A new community volunteering scheme was also launched by the Group in 2016, allowing employees to take one day paid leave to help make a difference to charities or community groups in their area. The scheme has resulted in more than 700 man hours being given to provide practical support to a wide range of initiatives from homeless charities and foodbanks to environmental community projects.

Human rights and tackling modern slavery

The Group is subject to the European Convention on Human Rights and the UK Human Rights Act 1998. The fair treatment of customers is central to the Group's strategy and values, and the Group opposes all forms of discrimination.

The Group is committed to tackling modern slavery and human trafficking and has taken steps to ensure it is considered and addressed in its business and throughout its supply chain, consistent with its obligations under the Modern Slavery Act 2015. The full Board statement on Slavery and Human Trafficking can be found on the Group's website:

www.securetrustbank.co.uk

Gender diversity

At the year end, the split by gender of the Group's employees was as follows:

 
                    Male   Female 
-----------------  -----  ------- 
 Directors           75%      25% 
 Senior managers     83%      17% 
 Other employees     39%      61% 
 All employees       46%      54% 
-----------------  -----  -------

By order of the Board

Neeraj Kapur

Chief Financial Officer

22 March 2017

Corporate Governance Report

Chairman's Introduction

On behalf of the Board I am pleased to introduce our report on Corporate Governance. This explains the Group's governance arrangements and how the Group has applied the principles of the UK Corporate Governance Code (the 'Code'). On 12 October 2016 the Company's shares were admitted to the premium listing segment of the official list of the Financial Conduct Authority and to trading on the Main Market for listed securities of the London Stock Exchange ('Admission'). At the same time, the admission of the shares to trading on the AIM market operated by the London Stock Exchange was cancelled.

In the prospectus published in connection with Admission the Board stated its intention to comply with the applicable requirements of the Code and to report to shareholders on compliance with the Code.

In our last annual report and accounts, for 2015, the Board confirmed its endorsement of the principles of openness, integrity and accountability which underlie good corporate governance. Following Admission the Group is now required to describe its compliance with the Code and to provide specific information to shareholders about this.

I was appointed as an independent Non-Executive Director of the Group on 1 March 2014. Following Admission and on receipt of regulatory approval Sir Henry Angest stepped down as Chairman and I was appointed Chairman of the Board in his place on 19 October 2016. Further information is provided later in this report about other Board appointments in 2016.

In 2016 and in particular in conjunction with Admission, the Board reviewed the governance arrangements and made some changes that are described further in this report. The governance structures that had served the Company well during its time as a public company on AIM have not been fundamentally changed, and in particular, the structure of Board Committees with separate Audit and Risk Committees has worked well. The opportunity was taken to recognise the particular role and functions of the ALCO which now reports directly to the Risk Committee. The ALCO monitors important indicators relating to the business of the Group.

Since Admission, the Remuneration Committee has given careful consideration to remuneration related matters, including the formulation of a Remuneration Policy which is to be put to shareholders at the 2017 Annual General Meeting and which is set out later in this report.

The Board is committed to maintaining and developing high standards of corporate governance. This is an evolving area and it is expected that further developments and improvements in the Group's governance will be made in 2017.

The Annual General Meeting in May 2017 will be the first at which the Group is a premium listed company, marking another milestone in the development of the Group. The Board looks forward to engaging with shareholders at the Annual General Meeting.

Lord Forsyth

Chairman of the Board

Corporate Governance Report

Board of Directors

The Rt Hon Lord Forsyth of Drumlean PC Kt - Non-Executive Chairman

Lord Forsyth is a director of J&J Denholm and Denholm Logistics, former Chairman of Hyperion Insurance Group, and former Deputy Chairman of JP Morgan UK and Evercore Partners International. He was appointed to the Privy Council in 1995, knighted in 1997, and joined the House of Lords in 1999. He was a member of the House of Commons for 14 years and served in Government for 10 years, latterly as a Cabinet Minster. He was appointed to the board of Secure Trust Bank on 1 March 2014. Michael is chairman of the Nomination Committee and a member of the Audit and Remuneration Committees. He was appointed Chairman of the Company on 19 October 2016.

Paul Lynam ACIB, AMCT, Fifs - Chief Executive Officer

Paul Lynam joined Secure Trust Bank as Chief Executive Officer in September 2010, having spent 22 years working for NatWest and RBS. He is an Associate of the Chartered Institute of Bankers and has Associate Membership of the Association of Corporate Treasurers. Paul was a governor and trustee of IFS University College. Prior to leaving RBS, Paul was the Managing Director, Banking, for RBS/NatWest's SME banking business across the UK. Before that Paul spent four years as the Managing Director of Lombard North Central PLC. During his career Paul has undertaken roles in branch banking, business banking, corporate and commercial banking, strategy, performance management, lending and central head office functions. Paul is the chairman of the British Bankers Association Challenger Bank Panel and a member of the board of the British Bankers Association. He is a Fellow of the IFS University College and an Associate of the Chartered Institute of Bankers and the Association of Corporate Treasurers. Paul chairs the ALCO and is a member of the Risk Committee. Paul is a director of Arbuthnot Banking Group.

Neeraj Kapur B.Eng, ACGI, FCA, CF, FCIBS - Chief Financial Officer

Neeraj Kapur has over 25 years' financial services experience spent in both the accounting and banking industries. He holds a degree in Aeronautical Engineering from Imperial College, London, is a fellow of the Chartered Institute of Bankers in Scotland, a fellow of the Institute of Directors, a fellow and a member of the Council of the Institute of Chartered Accountants in England & Wales ('ICAEW'), and Chair of the ICAEW Financial Services Faculty. Neeraj qualified as a Chartered Accountant in 1993 at Arthur Andersen and spent 11 years working in professional practice. He joined RBS in 2001 and has undertaken a number of roles which included Chief Financial Officer of Lombard North Central PLC. Neeraj was appointed to the board of Secure Trust Bank on 31 May 2011. Neeraj is a member of the ALCO.

Sir Henry Angest LLL - Non-Executive Director

Sir Henry Angest was appointed to the Board by Arbuthnot Banking Group. He is an experienced and respected banker. He is a past Master of the Worshipful Company of International Bankers, Chairman and Chief Executive of Arbuthnot Banking Group and Chairman of Arbuthnot Latham & Co., Limited. He gained extensive national and international experience as an executive of the DOW Chemical Company and DOW Banking Corporation. He was chairman of the banking committee of the London Investment Banking Association and a director of the Institute of Directors. He has a law degree from the University of Basel. Sir Henry stepped down as Chairman of the Company on 19 October 2016. Sir Henry is chairman of the Remuneration Committee and a member of the Nomination Committee and was Chairman of the Company between 1982 and 2016.

Andrew Salmon ACA - Non-Executive Director

Andrew Salmon joined Arbuthnot Banking Group in 1997 and is its Chief Operating Officer and Head of Business Development. He was previously a director of Hambros Bank Limited and qualified as a Chartered Accountant with KPMG. Andrew is appointed by Arbuthnot Banking Group to the board of Secure Trust Bank. Andrew is a member of the Audit, Assets and Liabilities, Remuneration, Risk and Nomination Committees.

Paul Marrow ACIB - Independent Non-Executive Director (Senior Independent Director)

Paul Marrow has over 40 years' banking experience and has, in the past, been responsible for the Commercial Banking and Specialist Corporate Banking business divisions of RBS Group in the UK and been the chair of JCB Finance Limited. Paul holds banking qualifications, gained by examination. Paul is also an independent non-executive director of Arbuthnot Latham & Co. Limited, a wholly owned subsidiary of Arbuthnot Banking Group and provides consultancy services to Arbuthnot Latham & Co., Limited. Paul was appointed to the board of Secure Trust Bank on 3 March 2011. Paul is chairman of the Audit and Risk Committees and a member of the Nomination and Remuneration Committees. Paul is the Senior Independent Director.

Ann Berresford - Independent Non-Executive Director

Ann Berresford is a Chartered Accountant with a background in the financial services and energy sectors. She has held positions at Triodos Renewables plc, Hyperion Insurance Group, the Pension Protection Fund, Bank of Ireland Group, Clyde Petroleum plc and Grant Thornton. She is currently a non-executive director of the Bath Building Society and the Pensions Regulator and is an independent trustee to the Avon Pension Fund. Ann was appointed a director of the Company on 22 November 2016. Ann is a member of the Audit and Nomination Committees.

Victoria Stewart - Independent Non-Executive Director

Victoria Stewart has for many years been a fund manager and investor in UK small companies. She has knowledge of corporate structures and capital markets with particular experience in smaller companies listed on the Main Market and AIM. She has held a number of positions at Royal London Group and Chiswell Associates (formerly Cantrade Investment Management Limited and now part of Sarasin & Partners). Victoria was appointed as a director of the Company on 22 November 2016. Victoria is a member of the Remuneration Committee.

Alan Karter LLB (Hons) - Company Secretary

Alan Karter is a Scottish and English qualified solicitor. He joined Arbuthnot Banking Group as Head of Legal Affairs in February 2012 and was appointed Company Secretary of Secure Trust Bank Plc on 31 August 2014. On 1 September 2016 he ceased to be employed by Arbuthnot Banking Group and was appointed General Counsel of Secure Trust Bank. He remains the Company Secretary of Secure Trust Bank.

Corporate Governance Report

Corporate Governance statement

UK Corporate Governance Code ("Code") - Statement of Compliance

The Code sets out principles relating to the good governance of companies. The Code is available at www.frc.org.uk.

Prior to Admission in October 2016 the requirements under the Listing Rules in relation to the Code did not apply to the Group.

The Board confirms that from Admission to the date of this report the Group has complied with the requirements of the Code save that until the appointment of Ann Berresford as a member of the Nomination Committee a majority of the members of the Nomination Committee were not independent Non-Executive Directors. This was rectified on 21 February 2017.

The following sections of this report describe how the Board has applied the principles of the Code and describes the Group's governance arrangements with particular reference to leadership, effectiveness, accountability, remuneration and relations with shareholders.

Role of the Board

The Board provides strategic leadership to the Group, sets the Group's long term strategic objectives and exercises oversight over the implementation of the strategy and the activities of management. The Board is responsible to shareholders for promoting the long term success of the Group. The setting of a risk appetite and the oversight of risk management practices is an important part of the role of the Board.

The Board meets regularly and both as a Board and through its committees provides direction, oversight and challenge of and to management.

The Board has delegated specific authorities to its committees. The Board exercises oversight of the work of its committees.

The Board is led by the Chairman.

There is a schedule of matters reserved for consideration by the Board. Matters reserved for exclusive determination by the Board include the determination of dividends, material acquisitions or disposals and the issue of new shares.

The Board has delegated authority to executive management to run the business and to implement the strategy set by the Board. Two members of executive management, the CEO and the CFO, are members of the Board.

The CEO is supported by an executive management team.

Board composition

The Board is composed of eight members, being the Non-Executive Chairman, two Executive Directors, three independent Non-Executive Directors and two Non-Executive Directors.

Sir Henry Angest and Andrew Salmon were appointed to the Board by Arbuthnot Banking Group when Arbuthnot Banking Group owned the Group's entire issued share capital and remain Non-Executive Directors of the Group. There is an understanding between the Group and Arbuthnot Banking Group that for so long as Arbuthnot Banking Group holds ten per cent. or more of the issued share capital of the Group, Arbuthnot Banking Group would expect two directors of the Group to be nominees of Arbuthnot Banking Group.

In October 2016, following Admission to the Main Market, Sir Henry Angest stepped down as Chairman of the Company (but remained a Non-Executive Director) and Lord Forsyth was appointed Chairman of the Board in his place.

On 22 November 2016 Ann Berresford and Victoria Stewart were appointed as additional independent Non-Executive Directors of the Group. Ann Berresford has become a member of the Audit and Nomination Committees. Victoria Stewart has become a member of the Remuneration Committee.

On 20 December 2016, Paul Marrow's appointment as Senior Independent Director became effective. The Code recommends that the Board should appoint one of the independent Non-Executive Directors as Senior Independent Director. The Senior Independent Director should be available to shareholders if they have concerns which contact through the normal channels of Chairman, Chief Executive Officer or other Executive Directors has failed to resolve or for which such contact is inappropriate.

Appointments to the Board are the responsibility of the full Board, on the recommendation of the Nomination Committee. On appointment, new Non-Executive Directors enter into a formal appointment letter which sets out the terms and conditions of their appointment as Non-Executive Directors. The terms and conditions of appointment of the Non-Executive Directors and the service contracts of Executive Directors are available for inspection at the Group's registered office during normal business hours.

Conflicts of Interest

All directors are required to disclose to the Board any outside interests which may pose a conflict with their duties to the Group. The Board is required to approve any actual or potential conflicts of interest. On appointment new directors are required to disclose their other interests. Conflicts of interest are also governed by the Articles of Association of the Company and company law.

Role of the Chairman

The Chairman's role is to ensure good corporate governance and the smooth and effective operation of the Board. His responsibilities include leading the Board, ensuring the effectiveness of the Board in all aspects of its role, ensuring effective communication with shareholders, setting the Board's agenda and ensuring that all Directors are encouraged to participate fully in the activities and decision making process of the Board.

The Chairman of the Board and the Chairman of the Remuneration, Risk and Audit Committees and the Senior Independent Director are all Senior Managers for the purposes of the regulatory regime.

Separation of roles of Chairman and Chief Executive

The roles of the Chairman and the Chief Executive Officer are separate, clearly defined in writing and have been approved by the Board.

Meetings and attendance

The Board meets at regular intervals. There is a comprehensive Board pack and agenda which is circulated in advance of the meeting and minutes and actions are documented. There is an annual Board calendar at which certain items are considered by the Board at certain times of the year, including the report and accounts, regulatory filings and review of risk appetite. Additional meetings of the Board are held as required and, in addition to the standing committees of the Board, the Board may appoint ad hoc committees to deal with particular matters from time to time.

In 2016 the Board was closely involved in the arrangements for Admission, including the review and approval of the prospectus.

The table below sets out attendance of Board and Committee members during the year. Figures are only provided where the Board member is a member of the Committee concerned:

 
                                    Audit         Risk   Remuneration   Nomination 
                       Board    Committee    Committee      Committee    committee 
--------------------  ------  -----------  -----------  -------------  ----------- 
 Number of meetings 
  during 2016             12            6            4              6            3 
 Lord Forsyth             12            5          N/A              5            2 
 Sir Henry Angest         12          N/A          N/A              6            3 
 Ann Berresford*           1            1          N/A              -          N/A 
 Paul Lynam               12          N/A            4              -          N/A 
 Neeraj Kapur             12          N/A          N/A              -          N/A 
 Paul Marrow              12            6            4              4            2 
 Andrew Salmon            12            6            4              6            3 
 Victoria Stewart*         1          N/A          N/A              -            - 
--------------------  ------  -----------  -----------  -------------  -----------

*Ann Berresford and Victoria Stewart were appointed to the Board on 22 November 2016.

From time to time decisions are taken and recorded by unanimous agreement of the directors. Such decisions are not included in the table above.

Company Secretary

The Company Secretary acts as Secretary to the Board and its Committees and is responsible for ensuring that Board processes and procedures are followed and support effective decision making. All directors have access to the Company Secretary's advice and services. Directors may obtain independent professional advice in the course of their duties, if necessary, at the Company's expense in order to assist them in carrying out their duties.

The Company Secretary provides support and acts as a first point of contact for the Chairman and Non-Executive Directors. The Company Secretary is also responsible for the induction of the new independent Non-Executive Directors.

The role of the members of the Board

The Chairman leads the Board and ensures its effectiveness in all areas. He sets the Board's agenda with the support of the Company Secretary.

The Chief Executive Officer is responsible for the day-to-day management of the Group within the delegated authority and risk appetite approved by the Board. He recommends the Group strategy and leads the executive management team in the execution of the strategy approved by the Board. He leads the relationship with institutional shareholders and ensures that timely and accurate information is disclosed to the market.

The Chief Financial Officer manages the Group's financial affairs and supports the Chief Executive Officer in the management of the business. He has particular responsibility for the financial and regulatory reporting of the Group and balance sheet and liquidity management.

The Senior Independent Director acts as a sounding board for other Non-Executive Directors and the Chairman. The Senior Independent Director also conducts the Chairman's annual performance evaluation, collecting views from the Non-Executive Directors.

The Non-Executive Directors provide independent and constructive challenge of the Executive Directors and scrutinise the delivery of the strategy within the risk and control framework set by the Board. Non-Executive Directors also determine Executive Director remuneration.

Executive management

The Chief Executive Officer and Chief Financial Officer are supported by an executive team who sit on an Executive Committee which operates under authorities delegated from the Board.

Committees

The Board has established Audit, Nomination, Remuneration and Risk Committees. There is also an ALCO which reports to the Risk Committee. Each committee has formally delegated duties and responsibilities and written terms of reference. The terms of reference of the Board committees are available on www.securetrustbank.com.

All Board committees have access to independent advice and the services of the Company Secretary.

The Chairman of each committee reports to the Board.

The terms of reference of each committee are reviewed regularly and each committee monitors its effectiveness.

Further information about the Board committees is set out later in this governance report, including information about membership of the committees, meetings held during the year and the attendance of committee members.

Below the Executive Committee there is a comprehensive governance structure involving a number of committees linked to business lines and functions.

Election of Directors

The Articles of Association contain provisions for the retirement by rotation of directors.

Since the last Annual General Meeting two new independent Non-Executive Directors have been appointed and, in accordance with the provisions of the Code, they are submitting themselves to re--election at the first Annual General Meeting following their appointment by the Board.

At the beginning of 2016, Arbuthnot Banking Group controlled the majority of the share capital of the Company. Following sell-down by Arbuthnot Banking Group and Admission, Arbuthnot Banking Group now owns 18.9% of the Company and is no longer classified as a 'controlling shareholder'. The two directors of the Group appointed by Arbuthnot Banking Group, Sir Henry Angest and Andrew Salmon, are proposed for re--election at the forthcoming Annual General Meeting. Sir Henry Angest, who was chairman of the Company before the AIM IPO in 2011, and during the period that the Company was on AIM, has steered the Group through its development. He has demonstrated significant entrepreneurial flair in his leadership of the Group and the Board continues to value his wise counsel. Andrew Salmon, who has been a director of the Company since 2003, has contributed significantly to the success of the Group, providing advice and guidance to oversight of management. The Board recommends both Sir Henry Angest and Andrew Salmon for re-election at the 2017 Annual General Meeting.

The Board also recommends the re-election of Ann Berresford and Victoria Stewart. Although they have only been directors since November 2016 both have already made valuable contributions to Board discussions and the Board looks forward to their further contribution as independent Non-Executive Directors to the long term success of the Company.

In connection with Admission the Board reviewed the composition of the Board and the independence of Non-Executive Directors. The Board concluded that Sir Henry Angest and Andrew Salmon were not independent within the meaning of the Code, having regard to the relationship between the Company and Arbuthnot Banking Group. The Board is satisfied that Ann Berresford, Paul Marrow and Victoria Stewart are all independent Non-Executive Directors within the meaning of the Code and that Lord Forsyth, on his appointment as Chairman, met the independence compliance criteria set out in the Code. As a smaller company within the meaning of the Code, the Company is required to have at least two independent Non-Executive Directors.

Appointments to the Board

Further information about the procedure followed in relation to Board appointments is provided later in this report by reference to the work of the Nomination Committee in 2016.

At the time of Admission the terms of appointment of all Non-Executive Directors were reviewed and new letters of appointment were entered into by Non-Executive Directors. Letters of appointment in a similar form were used in relation to the subsequent Board appointments. The letters of appointment of Non-Executive Directors are available for inspection at the Company's registered office during normal business hours and at the Annual General Meeting.

Induction, training and professional development

On appointment, all new directors receive a comprehensive and tailored induction. The induction involves provision of information about the Group as well as face-to-face meetings with directors and senior management. New directors have access to historic Board material and, in 2016, were provided with information produced in connection with Admission, including the prospectus and other Admission related documentation. New directors are also provided with briefing notes on regulatory and legal matters, including their duties and responsibilities under the Companies Act 2006.

The Board receives detailed reports from executive management on the performance of the Group at its meetings. Updates are provided on relevant legal, corporate governance and financial reporting developments. Directors are encouraged to attend external seminars on areas of relevance to their role.

Training is also made available to directors both by way of internal on-line training and bespoke Board training on topics such as regulatory developments. Directors are also encouraged to devote time to professional development and to record this.

Board effectiveness

The composition of the Board and its committees and the performance of directors were rigorously evaluated as part of the process leading to Admission. Following the appointment of Lord Forsyth as Chairman in October 2016 further consideration has been given to the composition and responsibilities and performance of the Board committees including by way of discussion between the Chairman and the Chairmen of the committees about the work of the committees and any need for improvement.

Formal evaluations of the performance of the Audit and Risk committees took place during the year and the result of those evaluations was that the performance of each committee was considered to be satisfactory.

The Remuneration Committee has been extensively involved in the formulation of the remuneration policy and related matters since Admission. Once that work has been completed it is intended to review the performance of the Remuneration Committee.

The Board has discussed its effectiveness and how it performs, along with other board related governance matters, including the provision of information to the Board and the induction of new directors. The directors were mindful of the provisions of the Code and their responsibilities as directors and, where applicable, as senior managers under the regulatory regime. Directors are encouraged to monitor their professional development and to keep a record of training and related activities.

A formal self-evaluation of the effectiveness of the Board will be conducted in 2017 and, in some future years, an externally facilitated evaluation will be conducted.

Diversity

The Board embraces the benefits of diversity in the boardroom and considers that diversity benefits governance. In considering the appointment of new directors, the Board will give careful consideration to diversity as well as the skill, experience and knowledge of the candidates. The Board has approved a Board Diversity Policy which operates in conjunction with the Equality and Diversity Policy applicable throughout the Group. Appointments to the Board are made on merit and having regard to the balance of skills and experience of the board and the candidates. The Board has not set targets for representation of any particular group on the Board. Female membership of the Board currently stands at 25%.

Financial reporting

A description of the responsibilities of the directors in relation to the preparation of the annual report and accounts is set out on page 106.

The approach taken by the Board to ensuring that the annual report and accounts are fair, balanced and understandable is set out on page 72 and the information necessary for shareholders to assess the Company's position and performance is set out in the Strategic Report starting on page 14.

A statement of the responsibility of the external auditors in relation to the report and accounts is set out on page 113.

The explanation of the business model and the strategy for delivering the objectives of the Company is set out on pages 1 to 2.

The basis on which the Board reached its decision to adopt the going concern basis of accounting is described on page 44.

Internal Control

The Board has overall responsibility for the Group's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable but not absolute assurance against the risk of material misstatement or loss.

The Board has adopted a Group Risk Appetite Statement which sets out the Board's attitude to risk and internal control. Key risks identified by the Directors are formally reviewed and assessed at least once a year by the Board and are also reviewed by the Risk Committee at its meetings. Key business risks are also identified, evaluated and managed on an ongoing basis. The Board and the Risk Committee also receive regular reports on any material risk matters. Significant risks identified in connection with the development of new activities are considered by the Board and the Risk Committee in conjunction with the approval of any such new activity.

The effectiveness of the internal control system is reviewed regularly by the Board and the Audit Committee, which also receives reports of reviews undertaken by the internal audit function. The Audit Committee also receives reports from the external auditors, KPMG LLP, which include details of internal control matters that they have identified. Certain aspects of the system of internal control are also subject to regulatory supervision, the results of which are monitored closely by the Board and its Committees.

Key elements of the Group's system of internal control include regular meetings of the Executive and business unit risk committees, together with annual budgeting, monthly financial and operational reporting for all businesses within the Group. Conduct and compliance is monitored by management, the Risk team, Internal Audit and Compliance and, to the extent necessary to support its audit report, the external auditor. Oversight is also exercised by the Board and Board Risk Committee.

During 2016 the Group continued to invest in its risk management capability and this on--going investment will continue during 2017.

The Board regularly reviews actual and forecast performance compared with annual plans as well as other key performance indicators described in the report and accounts.

Lines of responsibility and delegated authorities are clearly defined. The Group's policies and procedures are reviewed and regularly updated and a training programme applies in relation to the roll-out of policies.

Relations with shareholders

The Company maintains a regular dialogue with its principal shareholders and makes full use of the Annual General Meeting to communicate with investors. All Directors are expected to make themselves available to shareholders at the Annual General Meeting. The Chairmen of the Board Committees will be available to answer questions about the work of their committees.

The Board recognises the importance of maintaining good relationships with shareholders. The Chief Executive Officer and the Chief Financial Officer would normally expect to meet with institutional shareholders on a regular basis, including following the publication of financial information or updates by the Group. The Chairman has joined them in some meetings following his appointment in October 2016. The Group's brokers also facilitate communication between the Group and its institutional shareholders.

The Chairman is responsible for ensuring that appropriate channels of communication are established between the directors (and in particular the Chief Executive Officer and Chief Financial Officer) and shareholders and ensuring that the views of shareholders are made known to the Board.

The Chief Executive Officer provides written reports prepared by the Group's brokers to all Directors on meetings held with institutional shareholders.

The Group recognises the importance of ensuring effective communication with all of its shareholders. An annual financial report is distributed to all shareholders. This report, together with the half-yearly financial report, regulatory announcements and current details of the Group's share price are made available on the Company's website.

Annual General Meeting

The Group's first Annual General Meeting as a premium listed entity will be held at Arbuthnot House, 7 Wilson Street, London, EC2M 2SN at 3.00 p.m. on Wednesday 3 May 2017. The Notice of Annual General Meeting, together with an explanation of the items of business to be discussed at the meeting will be posted to shareholders and made available at www.securetrustbank.com.

Members of the Board will be in attendance at the 2017 Annual General Meeting which will provide an opportunity to engage with shareholders and to respond to any questions from shareholders.

Approval

This Corporate Governance statement was approved by the Board on 22 March 2017 and signed on its behalf by:

A J Karter

Secretary

Corporate Governance Report

Nomination Committee Report

Having assumed the role of Chairman of the Board and of the Nomination Committee on 19 October 2016, I am pleased to present my first report of the work of the Nomination Committee.

The principal activity in connection with Admission and subsequently has been to seek to achieve the right balance of skills, knowledge and experience on the Board. The Group had already been listed on AIM for five years, but it was acknowledged that Admission would result in additional expectations of the Board and that it would benefit the Board to increase the number of independent Non-Executive Directors.

The Committee and the Board were, therefore, engaged in the recruitment and appointment of new Board members in 2016 as well as work relating to my own appointment as Chairman.

The Committee has also considered the composition of the Board in the context of succession planning (for the Board, its Committees and senior management).

On 21 February 2017 Ann Berresford was appointed as an additional member of the Committee.

Further information on the activities of the Committee is provided in the following report.

Lord Forsyth

Chairman of the Nomination Committee

Nomination Committee membership

The Nomination Committee is composed of five members. Three are independent Non-Executive Directors (Lord Forsyth, Ann Berresford and Paul Marrow) and the other two (Sir Henry Angest and Andrew Salmon) are Non-Executive Directors. The Chairman of the Nomination Committee is Lord Forsyth. The Company is therefore compliant with the Code provision regarding the composition of the Nomination Committee.

Lord Forsyth was appointed as Chairman of the Board on 19 October 2016 following the retirement of Sir Henry Angest as Chairman of the Board. At the same time he was also appointed as Chairman of the Nomination Committee, although Sir Henry Angest remains a member of the Nomination Committee.

Ann Berresford was appointed as a member of the Nomination Committee on 21 February 2017.

Role and activities of the Nomination Committee

The Nomination Committee assists the Board in discharging its responsibilities relating to the structure, size and composition of the Board. The Nomination Committee is responsible for, amongst other matters, evaluating the balance of skills, knowledge, independence, experience and diversity of the Board, and makes recommendations to the Board on such matters. The Nomination Committee also considers succession planning, taking into account the skills and expertise that will be needed on the Board in the future.

The Code provides that a majority of the members of the Nomination Committee should be independent Non-Executive Directors and the chairperson should be the chairman or an independent Non-Executive Director. Between Admission and 21 February 2017 a majority of the members of the Nomination Committee were not independent Non-Executive Directors. That has now been rectified.

From Admission, meetings will be held at least two times per year. The number of meetings held during 2016 and the attending directors are shown in the table below:

 
                                   Nomination 
                                    Committee 
--------------------------------  ----------- 
 Number of meetings during 2016             3 
 Sir Henry Angest                           3 
 Paul Marrow                                2 
 Lord Forsyth                               2 
 Andrew Salmon                              3 
--------------------------------  -----------

The Chairman of the Nomination Committee reports to the Board on the outcome of meetings.

During the year the Nomination Committee was involved in the identification, assessment and appointment of additional independent Non-Executive Directors. This culminated in the recommendations of the Nomination Committee that Ann Berresford and Victoria Stewart be appointed as directors of the Company.

In connection with Admission the Board considered the structure, size and composition of the Board and, having concluded that the Board should be strengthened as a result of the step up, the Nomination Committee began a process to identify additional independent Non-Executive Directors. The Nomination Committee considered the number of appointments in contemplation. The Nomination Committee considered the process to follow in relation to the recruitment and concluded that, at least initially, the Company should seek to identify candidates by utilising contacts of the directors. This resulted in a number of potential candidates being identified. After consideration of the potential candidates approaches were made to establish the willingness of the candidates to be considered for appointment as an independent Non-Executive Director of the Company. Having completed this initial identification of candidates phase, the Nomination Committee then established a process for the assessment of the candidates, including by way of interview. Following the assessment phase the Nomination Committee selected the two candidates that it proposed to recommend to the Board. At this stage further checks were carried out in relation to the candidates. The appointment process was completed on the appointment of the two recommended candidates by the Board.

The Nomination Committee was also involved in the appointment of Lord Forsyth as Chairman following the decision of Sir Henry Angest to step down as Chairman (but to remain as a Non-Executive Director). The Nomination Committee was satisfied that, subject to regulatory approval, Lord Forsyth, who had expressed a willingness to be appointed as Chairman, satisfied the requirements and would make an excellent Chairman. The decision to appoint Lord Forsyth as Chairman was made before Admission and disclosed in the prospectus issued by the Company in connection with Admission.

The Nomination Committee considered and recommended to the Board a Board policy on diversity, including gender. The policy is described in the opening section of this corporate governance report.

The Nomination Committee has considered the Company's succession plans and focused on Board (executive and non-executive) and Senior Manager succession. Consideration has been given to potential internal candidates, short term solutions in the event of unsuspected changes in circumstances and external recruitment as well as re--allocating responsibilities on a short term or longer basis. The need for regulatory approval of the persons performing Senior Manager functions under the regulatory regime has also been taken into account.

The Nomination Committee considered whether to engage the services of an external search consultancy in relation to the Board changes in 2016 but concluded that the Company would derive minimal benefit from this. The Nomination Committee reached this decision having regard to the Board's wide range of contacts in the financial services sector and the recent experience of directors who had been involved in a similar search where leading external consultants were appointed. These considerations also informed the Nomination Committee decision not to use open advertising. The Nomination Committee was pleased to have been able to recommend Ann Berresford and Victoria Stewart for appointment as directors following the selection process described above.

A full copy of the terms of reference for the Nomination Committee can be obtained by request to the Company Secretary or via the Group's website at www.securetrustbank.com.

Corporate Governance Report

Audit Committee Report

I am pleased to present the first report of the Audit Committee as a premium listed company.

In 2016 the Audit Committee was involved in both business as usual activities and also activities specific to Admission.

In relation to Admission, the Committee was closely involved in the related financial statements, including the distinction between continuing and discontinued businesses, as well as reviewing the working capital statement and related papers, together with work carried out by external advisers on the financial position and prospects report.

The Committee also considered matters relating to the sale of ELG.

In terms of business as usual, the Committee was closely involved in the review of the 2015 annual accounts and the interim results for the six month period to 30 June 2016 plus the associated press releases and results presentations. The key accounting judgments were reviewed to ensure that they were appropriate and reflected the performance of the business. These included income recognition (the treatment of fees and commissions and whether they should be recognised immediately or included in the effective interest rate and effectively recognised over the behavioural life of the loan) and impairment provisions (including adequacy of provisioning by reference to the emergence period used for each product and whether a provision should be held, in excess of that calculated for individual product portfolios, to reflect continued uncertainty in the UK economy). The Committee was also closely involved in the planning process for the 2016 annual accounts in light of the additional disclosures resulting from Admission.

Following the development of the Group's internal audit function, the Committee has worked closely in 2016 with Internal Audit to support their work in relation to internal control and risk management. The Chief Internal Auditor reports directly to me and we meet monthly to review internal control and risk management and the work of the Internal Audit function.

Other on-going matters that were considered by the Committee include the implementation of the new financial instruments standard IFRS 9, regulatory reporting and whistleblowing.

In November 2016, Ann Berresford was appointed as a member of the Committee following her appointment as an independent Non-Executive Director of the Company.

2017 will be another busy year, particularly as the Group adapts to the requirements of being a main market listed company with the additional regulatory and disclosure responsibilities that brings, and makes final preparations for the adoption of IFRS 9 in 2018.

Further information on the activities of the Audit Committee is provided in the following report.

Paul Marrow

Chairman of the Audit Committee

Audit Committee membership and meetings

The Audit Committee is composed of four members; the Chairman of the Company (Lord Forsyth), who was considered independent on appointment as Chairman, two independent Non-Executive Directors (Ann Berresford and Paul Marrow) and Andrew Salmon, who is a Non-Executive Director. Andrew Salmon and Ann Berresford are considered by the Board to have recent and relevant financial experience. The chairman of the Audit Committee is Paul Marrow.

The Code provides that for smaller companies, such as the Company, the Board should establish an Audit Committee of at least two independent Non-Executive Directors. In addition, the Chairman of the Company may be a member of, but not chair, the Committee if he/she was considered independent on appointment as Chairman. The Company complies with this provision.

The Audit Committee meets formally at least four times a year and otherwise as required.

The number of meetings held during 2016 and the attending directors are shown in the table below:

 
                                       Audit 
                                   Committee 
--------------------------------  ---------- 
 Number of meetings during 2016            6 
 Paul Marrow                               6 
 Ann Berresford*                           - 
 Lord Forsyth                              5 
 Andrew Salmon                             6 
--------------------------------  ----------

*Ann Berresford was appointed to the Board on 22 November 2016 and joined the Audit Committee on that day, but after the meeting of the Audit Committee on that day which she attended as an observer.

The Company Secretary acts as Secretary to the Audit Committee. Other individuals attend at the request of the Audit Committee chairman and during the year the external auditor lead partner, Chief Executive Officer, Chief Financial Officer and Chief Internal Auditor attended meetings to report to the Audit Committee.

Role of the Audit Committee

The Audit Committee assists the Board in, amongst other matters, discharging its responsibilities with regard to regulatory reporting, financial reporting, including reviewing the Company's annual financial statements, reviewing and monitoring the extent of the non-audit work undertaken by external auditors, advising on the appointment, reappointment, removal and independence of external auditors and reviewing the effectiveness of the Company's internal audit activities, internal controls and risk management systems. The ultimate responsibility for reviewing and approving the annual report and accounts and the half-yearly reports remains with the Board.

A full copy of the terms of reference for the Audit Committee can be obtained by request to the Company Secretary or via the Group's website at www.securetrustbank.com.

Matters discussed at Audit Committee meetings since 1 January 2016

The Audit Committee has a schedule of meetings with standing agenda items. Meetings are planned to coincide with key dates in the Group's financial reporting cycle, enabling the Committee to deal with matters on a timely basis over the course of the year. In addition to standing agenda items the Committee also deals with other matters that arise during the year. In 2016 this included matters relating to Admission and the sale of ELG.

During the year the Audit Committee reviewed and approved its Terms of Reference, the schedule of standing agenda items, the Internal Audit Charter and the engagement contract with the external auditors.

The principal matters considered by the Audit Committee during the year and up to the date of this report are set out below.

Financial reporting

The Audit Committee has reviewed the following matters in connection with the annual and interim financial statements:

 
 Subject area          Matters considered 
--------------------  ------------------------------------------------- 
 Accounting            The Audit Committee reviewed the key 
  policies, key         accounting judgments made by management 
  judgements            in preparing the financial statements 
  and assumptions       for the year ended 31 December 2016 (including 
  used in preparing     comparatives for the year ended 31 December 
  interim and           2015), the interim financial statements 
  annual financial      for the six months ended 30 June 2016, 
  statements            and historical financial information 
                        covering the three and a half years (financial 
                        years ending 30 December 2013, 2014, 
                        2015 and the half year ended 30 June 
                        2016) included in the prospectus for 
                        the Main Market listing, as well as the 
                        press releases and analysts presentations 
                        that were prepared when the financial 
                        statements were released. 
 
                        In particular the Committee considered 
                        at its meeting in November 2016 a paper 
                        on the key accounting judgments relating 
                        to the 2016 annual report and accounts. 
                        Among other matters the Committee considered 
                        income recognition and impairments. In 
                        relation to income recognition the treatment 
                        of fees and commissions was considered 
                        together with the assessment of the appropriate 
                        expected lives for different products. 
                        This is relevant to the calculation of 
                        the effective interest rate for the product. 
                        In relation to impairment provisions 
                        the Committee considered the adequacy 
                        of provision cover, including the emergence 
                        period for different products, factors 
                        relevant to the loss given default assumptions 
                        used for consumer products and the need 
                        for an overlay to the modelled impairment 
                        provision to reflect increased uncertainty 
                        in the UK economy. 
 
                        In making its recommendations to the 
                        Board to approve the annual and interim 
                        financial statements the Committee has 
                        taken into account matters raised by 
                        the external auditor on matters of judgment 
                        and disclosures in relation to non-recurring 
                        or sensitive items. 
 Use of the            The financial statements are prepared 
  Going concern         on the basis that the Group and Company 
  basis in preparing    are each a going concern. The Audit Committee 
  the financial         has reviewed management's explanations 
  statements            as to the appropriateness of the going 
  and long term         concern basis in preparing the Group 
  viability of          and Company financial statements. 
  the STB Group 
                        The financial statements for 2016 also 
                        include statements that provide shareholders 
                        with the Board's views on the long term 
                        viability of the Group. The Audit Committee 
                        has reviewed and challenged the basis

                        for assessing long term viability, including 
                        the period by reference to which viability 
                        is assessed, the principal risks to long 
                        term viability and actions taken or planned 
                        to manage those risks. 
 Presentation          The Audit Committee, having reviewed 
  of a 'fair,           the content of the Annual Report and 
  balanced and          considering relevant matters including 
  understandable'       the presentation of material sensitive 
  Annual Report         items, the representation of significant 
  and Accounts          issues, the consistency of the narrative 
                        disclosures in the 'front half' with 
                        the financial statements, the overall 
                        structure of the Annual Report and the 
                        steps taken to ensure the completeness 
                        and accuracy of the matters included, 
                        has advised the Board that the 2016 Annual 
                        Report and Accounts include a 'fair, 
                        balanced and understandable' assessment 
                        of the Group and company's businesses. 
 The potential         The Committee has considered changes 
  impact of future      to financial reporting requirements that 
  accounting            are not yet effective but that are likely 
  changes               to impact the reported results or financial 
                        position of the Group in the future. 
                        One significant future development is 
                        the implementation of International Financial 
                        Reporting Standard 9 (Financial Instruments) 
                        which becomes effective in 2018 and for 
                        which the Company has established an 
                        implementation project. The Committee 
                        has reviewed progress in responding to 
                        the requirements of IFRS9 and has this 
                        matter as a standing agenda item, considering 
                        matters such as: key decisions taken; 
                        credit loss modelling under the new and 
                        existing standards; systems and controls 
                        requirements to embed IFRS9; and risks 
                        to the successful completion of the project. 
--------------------  -------------------------------------------------

Internal controls and risk management

The Audit Committee monitors the effectiveness of the Group's governance, risk and control framework and is encouraged by the progress being made.

Whistleblowing

The Audit Committee has reviewed the effectiveness of whistleblowing arrangements in place within the Group and adherence to the Financial Conduct Authority Rules on Whistleblowing which became effective in September 2016. During the year enhanced arrangements have been implemented to enable staff to whistleblow in complete anonymity. The chairman of the Committee is the whistleblowing champion for the Group.

External audit

The Audit Committee has reviewed and approved the external audit terms of engagement, the scope of the external audit, timetable, materiality, strategy and fees. The Audit Committee has also considered matters that might impair the independence of the external auditor, including the extent of non-audit fees which in 2016 were substantial, and has confirmed that it was satisfied as to the independence of the external audit firm KPMG. KPMG were the reporting accountants in connection with Admission.

The Audit Committee reviews written reports prepared by the external auditors setting out their audit approach and conclusions on matters of judgment impacting the financial statements, disclosures in relation to non-recurring or sensitive items and any internal control findings identified in the courses of the external audit.

During the year the Audit Committee assessed the effectiveness of the work of the external auditors using a questionnaire which considered matters such as the quality of the team, the scope of the work, communications and fees. The Committee concluded that the external auditors are performing well.

The Committee maintains a close dialogue with the external auditors and undertakes meetings with them without management when considered appropriate.

At its meeting in September 2016 the Committee assessed the objectivity and independence of KPMG as external auditor. The Committee considered general procedures to safeguard independence and objectivity, independence and objectivity considerations relating to the provision of non-audit services and independence and objectivity considerations relating to other matters. In particular, consideration was given to the fees payable to KPMG for their work as reporting accountants in relation to Admission and other non-audit fees payable to KPMG. KPMG fees incurred during 2016 in respect of audit and non-audit services were respectively GBP213,000 and GBP548,000. The non-audit services comprised acting as reporting accountants, non-statutory audit of historic financial information, interim profits verification, tax advisory services and assurance services in connection with the Funding for Lending Scheme. The Committee is satisfied that these non-audit services did not adversely impact the independence of KPMG's audit services.

The Group has agreed a policy on the provision of non-audit services by its external auditor. The policy ensures that the engagement of the external auditor for such services requires approval by appropriate levels of management and does not impair the independence of the external auditor, and that such engagements are reported to the Audit Committee on a quarterly basis. The external auditor will only be selected for such services when they are best suited to undertake the work and there is no conflict of interest.

KPMG has also confirmed to the audit committee that it has policies and procedures in place to satisfy the required standards of objectivity, independence and integrity and that these comply with the Auditing Practices Board's Ethical Standards for Auditors. This ensures that the objectives of the proposed engagement are not inconsistent with the objectives of the audit; allows the identification and assessment of any related threats to KPMG's objectivity; and assesses the effectiveness of available safeguards to eliminate such threats or reduce them to an acceptable level. KPMG do not carry out non-audit services where no satisfactory safeguards exist.

KPMG (and their predecessor firm) were appointed as the Company's auditor in 2009, and therefore the audit will be required to be subject to an external tender process no later than 2019. The current audit partner is Andrew Walker who has been the audit partner for four years and who can therefore continue until 2017 at the latest. The Company would expect to conduct an external tender process following the change in audit partner.

The Committee recommended to the Board that a resolution to re-appoint KPMG be proposed at the 2017 Annual General Meeting. This is addressed in the Notice of 2017 Annual General Meeting.

Internal audit

The Group has an independent Internal Audit function led by the Chief Internal Auditor.

The Audit Committee has reviewed and approved the rolling internal audit plan and does so twice each year. The rolling internal audit plan, which has been developed based on the Internal Audit function's assessment of risk, sets out the matters to be covered by internal audit in the following 18 months and the resource requirements to execute that plan. The Audit Committee also reviews other matters which are not currently contemplated in the plan but which may be appropriate for inclusion in the future. The Audit Committee approved the Internal Audit budget and was satisfied that Internal Audit has the appropriate resources to deliver the 2016 and 2017 internal audit plan.

In each meeting the Audit Committee considers the risk and control matters identified in internal audit reports issued since the previous meeting along with management's responses to those points and progress in taking action to resolve control weaknesses and any positive or adverse indicators regarding the culture observed throughout the Group from internal audit reviews.

The Internal Audit function provides the Audit Committee with an annual assessment of the overall effectiveness of the governance and risk and control framework of the Group.

During the year the Audit Committee commissioned a third party evaluation of the effectiveness of the Group's Internal Audit function. The review involved a qualitative assessment of the work of internal audit including its context and role within the Group governance framework and the relevance and quality of the internal audit output. The conclusions, which highlighted a number of particular strengths, were that the function provides a good source of assurance for the Audit Committee. Some areas for further enhancement were identified and the Audit Committee is reviewing progress made by the Chief Internal Auditor in adopting these.

The Chief Internal Auditor reports directly to the chairman of the Audit Committee and they meet regularly.

The Internal Audit function has been further strengthened in 2016 by the recruitment of additional staff. In addition to the internal resource it is also able to draw on a panel of external subject matter experts.

Audit Committee effectiveness

During the year the Committee considered and evaluated its own performance. It did this by means of a questionnaire which members of the Committee completed. The chairman of the Committee then collected the responses and produced a report to the Committee. The result of the evaluation was that the Committee considered that it was performing effectively.

Corporate Governance Report

Risk Committee Report

I am pleased to present the first report of the Risk Committee as a premium listed company on the Main Market.

From the time of joining AIM in 2011, the Group has had separate Audit and Risk Committees.

During the period of being a public company listed on AIM prior to Admission, it had been involved in a process of enhancing the risk management in the Group and this continued in 2016. The adequacy and effectiveness of the Group's risk frameworks and risk management arrangements were also reviewed in connection with Admission and as a result the ALCO now reports to the Risk Committee. The Group has invested in this area of its business and continues to do so.

The Risk Committee is regularly involved in the review of risks and monitoring the management of risk in the Group's businesses. The Committee looks at all areas, including new business areas and emerging regulatory requirements.

In 2016 cyber security has been an important issue that has been considered by the Committee and is now a standing agenda item at meetings of the Committee.

The Committee also considers regulatory filings and compliance monitoring.

Further information on the activities of the Committee during the year is provided in the following report and further information about risk related matters can be found in the sections of the report and accounts on pages 32 to 43.

Paul Marrow

Chairman of the Risk Committee

Risk Committee membership and meetings

The Risk Committee is composed of three members; Andrew Salmon, a Non-Executive Director, Paul Marrow, an independent Non-Executive Director and Paul Lynam, the Chief Executive Officer. Paul Marrow replaced Andrew Salmon as chairman of the Risk Committee with effect from 10 February 2016. This change was prompted by changes in governance arising from the implementation of the individual accountability regime. There were no changes to the membership of the Committee in 2016.

The Risk Committee has met formally at least three times a year and otherwise as required. For 2017 and following the step up to the Main Market there will be a minimum of six meetings a year, plus ad hoc meetings as required.

The number of meetings held during 2016 and the attending directors are shown in the table below:

 
                                        Risk 
                                   Committee 
--------------------------------  ---------- 
 Number of meetings during 2016            4 
 Paul Marrow                               4 
 Paul Lynam                                4 
 Andrew Salmon                             4 
--------------------------------  ----------

The Company Secretary acts as Secretary to the Risk Committee. Other individuals attend at the request of the Risk Committee Chairman and during the year the Chief Risk Officer, Chief Internal Auditor and other senior managers attended meetings to report to the Committee.

Role of the Risk Committee

The Risk Committee reviews the design and implementation of risk management policies and risk related strategies and the procedures for monitoring the adequacy and effectiveness of this process; considers the Group's risk appetite in relation to the current and future strategy of the Group; oversees the Group's ICAAP and ILAAP and outputs from these; and exercises oversight of the risk exposures of the Group.

The Committee exercises its internal control and risk management role through the reports it receives from the ALCO, the Chief Risk Officer, the Chief Internal Auditor, the Chief Executive Officer, the Chief Financial Officer and other members of management and its engagement with executive management, internal and external auditors and consultants.

Other matters within the remit of the Committee are the risk profile of the Group, risk appetite, frameworks and limits, the risk management operating model, the technology infrastructure supporting the risk management framework, operational risk and regulatory and compliance matters.

A full copy of the terms of reference for the Risk Committee can be obtained by request to the Company Secretary or via the Group's website at www.securetrustbank.com.

Key topics discussed at Risk Committee meetings since 1 January 2016

The Risk Committee has a schedule of meetings with standing agenda items so that all relevant matters are dealt with over the course of the year.

During the year the Committee reviewed and approved its Terms of Reference.

The principal matters discussed in the year were as follows:

 
 Subject area       Matters considered 
-----------------  --------------------------------------------------- 
 Group level        The Group's key risk appetite metrics, which 
  risk appetite      are reviewed and approved on an annual basis. 
  statements         The Committee reviews last quarter performance 
  and Key Risk       on the Key Risk Indicator metrics in each 
  Indicators         meeting. 
 Strategic          Strategic risks (those arising from the 
  risks              internal environment and the external environment 
                     that could have an effect on management's 
                     ability to deliver on the Group strategic 
                     plan) are discussed and challenged on an 
                     annual basis. 
 Credit risk        Credit risk performance for all businesses 
                     and 'deep dive' reviews on status and plans 
                     for individual account balances or portfolios 
                     that warrant specific focus. 
                     The Committee has a mandate to approve some 
                     Group-wide mandates and policies including 
                     single counterparty limits and Credit Risk 
                     policies set for individual business areas. 
 Operational        Oversight of the Operational Risk framework 
  risk               including metrics and KPI reporting and 
                     business unit management risk and control 
                     self-assessment. Complaints data. Governance, 
                     including review of the Group Governance 
                     Manual. 
 Capital risk       The Committee has primary responsibility 
                     for reviewing and making a recommendation 
                     to the Board on the Bank's ICAAP and ILAAP 
                     and the Resolution and Recovery Plans. Specific 
                     matters such as the Pillar 2A capital requirement 
                     and the results of stress testing were reviewed 
                     and debated. 
 Cyber resilience   The strategies undertaken within the Group 
  risk               to understand, identify, monitor and respond 
                     to cyber threats including the current state 
                     and planned activity. 
 Regulatory         The key risk exposures and monitoring metrics 
  and conduct        that are used to manage and mitigate these 
  risk               key risks. The Compliance Monitoring Plan. 
 Whistleblowing     The arrangements to permit whistleblowing. 
-----------------  ---------------------------------------------------

Further enhancement of the Group's risk management systems and controls will take place in 2017 as the framework established in previous years is embedded throughout the Group. The focus on cyber resilience that came into increasing prominence in 2016 will continue to be an important area of focus of the Committee as the Group implements its cyber strategy. The Committee will also be involved in the 2017 ICAAP. The Committee also expects that the Group's response to further regulatory change, such as implementation of the General Data Protection Regulation, will require overview by the Committee.

Risk Committee effectiveness

Corporate Governance Report

Statement by the Chairman of the Remuneration Committee

On behalf of the Board, as Chairman of the Remuneration Committee, I am pleased to present our first Directors' Remuneration Report as a company listed on the Main Market of the London Stock Exchange.

The report is divided into two principal sections:

 
      --   the Remuneration Policy report which sets out the 
            Group's forward-looking Remuneration Policy (the 
            'Remuneration Policy') for Executive and Non-Executive 
            Directors, and 
      --   the Annual Remuneration Report which explains the 
            operation of remuneration related arrangements for 
            2016 and a summary of the intended operation of 
            the Remuneration Policy in 2017.

The Remuneration Policy will be subject to a binding shareholder vote at the 2017 Annual General Meeting and the Annual Remuneration Report will be subject to an advisory shareholder vote.

The Remuneration Committee assists the Board in fulfilling its responsibilities in relation to remuneration including, amongst other matters, determining the individual remuneration and benefits package of each of the Executive Directors and recommending and monitoring the remuneration of senior management below Board level.

How we link executive remuneration to our strategy

The Group has had a Remuneration Committee since the Admission to AIM in 2011. The step up to the Main Market has provided an opportunity for us to review our executive remuneration arrangements and to develop a new Remuneration Policy that is appropriate for a Main Market premium listed company.

The key principles behind the Group's Remuneration Policy are:

 
      --   to be simple and transparent in order to reflect 
            the Group's mission statement of straightforward, 
            transparent banking, 
      --   to promote the long term success of the Group, with 
            transparent and demanding performance conditions, 
      --   to provide alignment between executive reward and 
            the Group's values, risk appetite and shareholder 
            returns, and 
      --   to have a competitive mix of base salary and short 
            and long term incentives, with an appropriate proportion 
            of the package linked to the delivery of sustainable 
            long term growth.

In developing the policy we have also had regard to regulatory requirements and the responsibilities of senior managers under the regulatory regime.

The Group is currently a level 3 firm within the classifications applied by the regulators for their remuneration codes for regulated entities. That means that the Group is not required to satisfy in full all elements of the remuneration codes. Notwithstanding this, in formulating the Remuneration Policy the Committee has had regard to the remuneration codes.

The new Remuneration Policy will bring greater clarity to the criteria that have to be achieved both for a variable pay award and to achieve vesting. In addition, the new variable pay arrangements will be subject to malus and clawback and the annual bonus will be deferred for a longer period than previously applied (three years instead of one year) and to a greater extent (50% of the bonus earned instead of 25% of the bonus earned). In line with best practice, long term incentive awards will be subject to a two year holding period following the end of the three year performance period.

The new Remuneration Policy also limits the normal maximum annual bonus opportunity to 100% of salary and the normal maximum long term incentive opportunity granted in respect of a financial year to 100% of salary which is more restrictive than many peer group companies. The maximum annual bonus may be increased to 200% of salary in exceptional circumstances.

Composition of the Remuneration Committee and remuneration of Non-Executive Directors

Following the step up to the Main Market we strengthened the Board with the appointment of Ann Berresford and Victoria Stewart on 22 November 2016. As contemplated in the prospectus issued in October 2016, I retired as Chairman of the Group and Lord Forsyth was appointed as Chairman in my place.

These changes and the step up to the Main Market have prompted us to review the remuneration arrangements that we have in place for Non-Executive Directors.

As result of that review which included a comparison with other similar organisations, the Board agreed that the structure of fees for the Non-Executive Directors would include a basic fee and separate fees for further responsibilities (including committee chairmanship fees, committee membership fees and holding the office of Senior Independent Director). The Non-Executive Director fee structure effective from 1 January 2017 is set out in further detail on page 97 of the Annual Remuneration Report.

The UK Corporate Governance Code contemplates that, in relation to the Company, the board should establish a Remuneration Committee of at least two independent Non-Executive Directors. The Company chairman may also be a member of the Committee where, as is the case with STB, he was considered independent on appointment as chairman. The Remuneration Committee now comprises five members including the Board Chairman. Victoria Stewart joined the Committee on her appointment as a Director on 22 November 2016. All the members of the Committee are Non-Executive Directors and Paul Marrow and Victoria Stewart are independent Non-Executive Directors. The Company therefore now complies with the Code provision in relation to the composition of the Remuneration Committee.

The Remuneration Committee meets as frequently as its chairman may require and also at regular intervals to deal with routine matters and in any event not less than twice in each financial year. A full copy of the terms of reference of the Remuneration Committee can be obtained by request to the Company Secretary or via the Group's website at www.securetrustbank.com.

Performance and variable pay outcomes for the year ended 31 December 2016

2016 was a momentous year for the Group. A number of complex projects were successfully completed, including the sale of ELG and the step up to the Main Market. In determining appropriate rewards for executive management the Remuneration Committee has had regard to the achievements of 2016 and the challenges faced in realising those projects.

The Remuneration Committee considered the bonus arrangements in relation to the Executive Directors for 2016 under the arrangements that applied before the adoption of the Remuneration Policy. These arrangements have to date operated on a largely discretionary basis but the Remuneration Committee has taken into account the financial performance of the Group and personal performance. For the year ended 31 December 2016 bonus awards for the CEO and CFO comprise two separate payments:

 
      --   a 2016 bonus award of GBP500,000 for the CEO and 
            GBP200,000 for the CFO taking into account the outstanding 
            financial performance in 2016, a successful transition 
            from AIM to the Main Market, the successful implementation 
            of ICAAP and ILAAP procedures and the achievement 
            of high customer satisfaction levels. Further details 
            of the record profits, strong return on equity and 
            operational and regulatory performance is detailed 
            in the Annual Remuneration Report and elsewhere 
            in these financial statements; and 
      --   a one-off bonus to the CEO and CFO equal to GBP1,500,000 
            and GBP200,000 respectively following the sale of 
            ELG. As previously disclosed the Group acquired 
            the Everyday Loans Group in June 2012 for a consideration 
            of GBP1. Through subsequent effective management 
            and very skilled negotiation the Group disposed 
            of this asset for a consideration of GBP235,000,000 
            in April 2016. This was a transformational transaction 
            which generated a profit after tax of GBP116,800,000 
            which almost doubled the equity base of the company 
            and facilitated the payment of a special dividend 
            of GBP1.65 per share or GBP30m in special distributions 
            to shareholders. The committee considered that one-off 
            bonuses were warranted in recognition of the scale 
            of this exceptional achievement.

The Remuneration Committee, in determining appropriate awards for Executive Directors, also has had regard to the risk culture of the Group and regulatory matters as well culture and employee engagement.

Share options granted to the CEO, CFO and Andrew Salmon on 2 November 2011 with an exercise price of GBP7.20 per share vested on 2 November 2016. Secure Trust's mid-market closing share price on the date of vesting was GBP23.32 and this has been used to calculate the gain at vesting in accordance with the remuneration reporting regulations. Notwithstanding this, the actual value realised by Andrew Salmon on exercise of his vested options was GBP22.00 per share. The CEO and CFO did not exercise their share options when they vested.

No awards were granted to the Executive Directors under the existing cash settled share based payment scheme in 2016.

Executive remuneration arrangements for 2017

2017 will see the first year of operation of our Directors' Remuneration Policy. The policy is subject to a binding shareholder vote at the 2016 AGM and, subject to approval by shareholders, will become effective from that date. A summary of the intended operation of the Remuneration Policy in 2017 is set out on page 82.

In outline:

 
      --   As disclosed in the Prospectus, the CEO's base salary 
            was increased to GBP1,200,000 for 2016. This reflected 
            his leadership and contribution to the Company's 
            growth. He will not receive a salary increase in 
            2017. 
      --   The CFO's base salary was increased to GBP400,000 
            with effect from 1 January 2017, reflecting Admission 
            to the Main Market, his contribution to the business, 
            his experience in his current role and the positioning 
            of his salary compared to peers. 
      --   The maximum annual bonus opportunity for the year 
            ending 31 December 2017 will be equal to 100% of 
            salary. The bonus will be subject to stretching 
            performance metrics based on a balanced business 
            scorecard of financial, customer, operational and 
            staff metrics. Up to an additional 100% of salary 
            may be awarded under the annual bonus in exceptional 
            circumstances (such as in order to recognise exceptional 
            performance during the year). 
      --   50% of any bonus earned will be deferred into shares 
            under the Deferred Bonus Plan. Deferred shares will 
            vest in equal tranches after one, two and three 
            years following deferral and will be subject to 
            malus and clawback. 
      --   New long term incentive arrangements up to 100% 
            of salary are expected to be implemented in 2017 
            and are as described further on pages 84 and 85. 
            A summary of the key provisions of the new long 
            term incentive arrangements are set out in the 2017 
            Circular containing the Notice of AGM.

We encourage an active interest from our investors in our Remuneration Policy and look forward to engaging with our shareholders in relation to the Remuneration Policy. We welcome dialogue with shareholders on remuneration and would expect to engage regularly with shareholders on this topical subject.

Sir Henry Angest LLL

Chairman of the Remuneration Committee

Corporate Governance Report

Remuneration Policy

This Directors' Remuneration Policy will be submitted to the 2017 AGM for shareholder approval. If approved by shareholders, it will formally take effect from the date of the AGM. The Directors' Remuneration Policy has been prepared in accordance with the regulations set out in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.

Policy table for Executive Directors

 
 Element               Operation                        Maximum opportunity                        Performance metrics 
  and purpose 
--------------------  -------------------------------  -----------------------------------------  -------------------- 
 Base salary           Salaries are                     While there is                             N/A 
  To enable             usually reviewed                 no maximum salary, 
  the Group             annually taking                  increases will 
  to recruit            into account: --   underlying    normally be in 
  and retain                   Group performance;        line with the 
  the services           --   role, experience           typical range 
  of individuals               and individual            of salary increases 
  of a suitable                performance;              awarded (in percentage 
  calibre.               --   competitive                of salary terms) 
                               salary levels             to other employees 
                               and market                in the Group. 
                               forces; and               Salary increases 
                         --   pay and conditions         above this level 
                               elsewhere                 may be awarded 
                               in the Group.             to take account 
                                                         of individual 
                                                         circumstances, 
                                                         such as, but 
                                                         not limited to: --   where an Executive 
                                                                Director has 
                                                                had an increase 
                                                                in responsibility; 
                                                          --   where an Executive 
                                                                Director has 
                                                                been promoted 
                                                                or has had 
                                                                a change in 
                                                                scope; 
                                                          --   an individual's 
                                                                development 
                                                                or performance 
                                                                in role (e.g. 
                                                                to align a 
                                                                newly appointed 
                                                                Executive 
                                                                Director's 
                                                                salary with 
                                                                the market 
                                                                over time); 
                                                                and 
                                                          --   where an Executive 
                                                                Director's 
                                                                salary is 
                                                                no longer 
                                                                market competitive 
                                                                (for example, 
                                                                due to an 
                                                                increase in 
                                                                size and complexity 
                                                                of the business). 
 
 
                                                         Increases may 
                                                         be implemented 
                                                         over such time 
                                                         period as the 
                                                         Committee deems 
                                                         appropriate. 
 Benefits              Executive Directors              Whilst the Committee                       N/A 
  To provide            receive benefits                 has not set an 
  benefits              in line with                     absolute maximum 
  that will             market practice,                 on the level 
  be valued             and these include                of benefits Executive 
  by the recipient.     a car allowance,                 Directors may 
                        medical insurance,               receive, the 
                        life assurance                   value of benefits 
                        and disability                   is set at a level 
                        insurance.                       which the Committee 
                        Other benefits                   considers to 
                        may be provided                  be appropriately 
                        based on individual              positioned taking 
                        circumstances.                   into account 
                        These may include,               relevant market 
                        for example,                     levels based 
                        relocation and                   on the nature 
                        travel allowances.               and location 
                                                         of the role and 
                                                         individual circumstances. 
 Pension               Executive Directors              Employer pension                           N/A 
  To provide            are eligible                     contributions 
  an appropriate        to participate                   are limited to 
  level of              in the Group                     5% of base salary. 
  retirement            defined contribution             The maximum cash 
  benefit               pension plan.                    supplement in 
  (or cash              In appropriate                   lieu of pension 
  allowance             circumstances,                   is 5% of base 
  equivalent).          such as where                    salary (less 
                        contributions                    any employer 
                        exceed the annual                pension contribution). 
                        or lifetime allowance, 
                        Executive Directors 
                        may be permitted 
                        to take a cash 
                        supplement in 
                        lieu of contributions 
                        to a pension 
                        plan. 
 Annual bonus          Awards are based                 The normal maximum                         Targets are set 
  Rewards               on performance                   annual bonus                              annually reflecting 
  performance           (measured over                   opportunity is                            the Group's 
  against               a year) against                  100% of base                              strategy 
  targets               metrics determined               salary.                                   and aligned with 
  which support         by the Committee.                An additional                             key financial, 
  the strategic         Pay-out levels                   annual bonus                              strategic and/or 
  direction             are determined                   opportunity of                            individual targets. 
  of the Group.         by the Committee                 up to 100% of                             The annual bonus 
                        after the year                   base salary may                           will be assessed 
                        end based on                     be awarded in                             against key 
                        performance against              exceptional circumstances.                financial 
                        those targets.                                                             performance metrics 
                        The Committee                                                              of the business 
                        has discretion                                                             and non-financial 
                        to amend the                                                               strategic/personal 
                        pay-out should                                                             objectives, in 
                        any formulaic                                                              such proportions

                        output not reflect                                                         as the Committee 
                        the Committee's                                                            considers 
                        assessment of                                                              appropriate. 
                        overall business                                                           Financial metrics 
                        performance.                                                               At least 50% 
                        To further link                                                            of the maximum 
                        the Executive                                                              potential will 
                        Directors' pay                                                             be paid for 
                        to the interests                                                           on-target 
                        of shareholders,                                                           performance and 
                        Executive Directors                                                        all of the maximum 
                        are required                                                               potential will 
                        to defer 50%                                                               be paid for maximum 
                        of any bonus                                                               performance. 
                        earned into shares                                                         Non-financial 
                        under the Deferred                                                         strategic or 
                        Bonus Plan ('DBP').                                                        individual metrics 
                        Deferred share                                                             Vesting of the 
                        awards vest in                                                             non-financial 
                        equal tranches                                                             strategic or 
                        after one, two                                                             individual metrics 
                        and three years                                                            will apply on 
                        following deferral.                                                        a scale between 
                        Deferred share                                                             0% and 100% based 
                        awards will typically                                                      on the Committee's 
                        take the form                                                              assessment of 
                        of a nil-cost                                                              the extent to 
                        / nominal-cost                                                             which a 
                        share option                                                               non-financial 
                        but may be structured                                                      performance metric 
                        as an alternative                                                          has been met. 
                        form of share                                                              Deferred share 
                        award.                                                                     awards are not 
                        The Committee                                                              subject to any 
                        may decide to                                                              additional 
                        pay the whole                                                              performance 
                        of the bonus                                                               metrics. 
                        earned in cash 
                        where the amount 
                        to be deferred 
                        is less than 
                        GBP50,000 and 
                        would therefore, 
                        in the opinion 
                        of the Committee, 
                        make operation 
                        of the DBP administratively 
                        burdensome. 
                        Clawback provisions 
                        will apply to 
                        annual bonus 
                        awards and malus 
                        and clawback 
                        provisions will 
                        apply to deferred 
                        share awards 
                        as detailed at 
                        the foot of this 
                        table. 
 Long Term             The first awards                 The normal maximum                         Performance metrics 
 Incentive              will be granted                  award is 100%                             are selected 
 Scheme ('LTIP')        in 2017, subject                 of salary in                              that reflect 
 To provide             to approval of                   respect of a                              underlying business 
 an effective           the LTIP at the                  financial year.                           performance. 
 long-term              2017 AGM.                        The Committee                             Performance metrics 
 incentive              Awards will be                   will take into                            and their weighting 
 award to               in the form of                   account Company                           where there is 
 motivate,              nil-cost / nominal-cost          and personal                              more than one 
 incentivise            share options,                   performance during                        metric are reviewed 
 and assist             conditional shares               the preceding                             annually to 
 in the retention       or other such                    financial year                            maintain 
 of the services        form as has the                  when determining                          appropriateness 
 of key individuals.    same economic                    the maximum award                         and relevance. 
                        effect. Awards                   to be granted.                            Awards will vest 
                        will be granted                                                            between 25% and 
                        with vesting                                                               100% for 
                        dependent on                                                               performance 
                        the achievement                                                            between 'threshold' 
                        of performance                                                             performance (the 
                        conditions set                                                             minimum level 
                        by the Committee,                                                          of performance 
                        normally over                                                              that results 
                        at least a three                                                           in any level 
                        year performance                                                           of vesting) and 
                        period.                                                                    'maximum' 
                        Awards will usually                                                        performance. 
                        be subject to 
                        a two year holding 
                        period following 
                        the end of the 
                        performance period 
                        (with the exception 
                        that sufficient 
                        awards may be 
                        sold to meet 
                        any income tax 
                        and National 
                        Insurance liabilities). 
                        The holding period 
                        does not apply 
                        to awards with 
                        a face value 
                        of GBP150,000 
                        or less at the 
                        time of grant. 
                        Awards may be 
                        settled in cash 
                        (or granted as 
                        a right to a 
                        cash amount) 
                        at the election 
                        of the Committee. 
                        Malus and clawback 
                        provisions will 
                        apply to awards 
                        as detailed at 
                        the foot of this 
                        table. 
 All employee          Executive Directors              Participant limits                         Not applicable. 
  share schemes         are entitled                     are those set 
  To create             to participate                   by the UK tax 
  alignment             in a HMRC tax-qualifying         authorities from 
  with the              all-employee                     time to time. 
  Group and             Sharesave Scheme 
  promote               under the same 
  a sense               terms as other 
  of ownership.         Group employees.

--------------------  -------------------------------  -----------------------------------------  --------------------

Application of malus and clawback

Malus: The ability to reduce, cancel or impose further conditions on unvested awards in the circumstances set out below.

Clawback: The ability to cancel an award that has not been released (in relation to an award which is subject to a holding period) or exercised (in relation to share options), or require the repayment of some or all of an award in the circumstances set out below.

Malus and clawback provisions will apply over the following time periods:

 
 Element        Malus               Clawback 
-------------  ------------------  ------------------------------------- 
 Annual bonus   To such time as     Up to three years following 
  award          payment is made.    payment. 
 Deferred       To such time as     Tranche of award deferred for 
  bonus award    the award vests.    one year: Up to two years following 
                                     vesting. 
                                     Tranche of award deferred for 
                                     two years: Up to one year following 
                                     vesting. 
                                     Tranche of award deferred for 
                                     three years: No clawback provisions 
                                     apply. 
 LTIP award     To such time as     Up to two years following vesting. 
                 the award vests. 
-------------  ------------------  -------------------------------------

Malus may apply in the following circumstances:

 
 --   The Executive Director's service agreement is terminated 
       for gross misconduct or the Executive Director receives 
       a formal written warning for gross misconduct, as 
       defined by the Company's disciplinary policy. 
 --   The Company suffers a material loss arising from 
       the Executive Director operating outside of agreed 
       risk policy parameters and as such the Committee 
       considers a material failure in risk management has 
       occurred. 
 --   The level of the award is not considered sustainable 
       when assessing the overall financial viability of 
       the Company. 
 --   The Executive Director is subject to regulatory censure 
       in respect of a material failure in control.

Clawback may apply in the following circumstances:

 
 --   Discovery of a material misstatement resulting in 
       an adjustment in the audited consolidated accounts 
       of the Company. 
 --   The assessment of any performance target or condition 
       in respect of an award was based on material error 
       or materially inaccurate or misleading information. 
 --   The discovery that any information used to determine 
       the DBP and/or LTIP was based on material error, 
       or materially inaccurate or misleading information. 
 --   Action or conduct of an Executive Director which, 
       in the reasonable opinion of the Board, amounts to 
       fraud or gross misconduct. 
 --   The Executive Director is subject to regulatory censure 
       in respect of a material failure in control.

Non-Executive Directors

 
 Element and      Approach of the Company 
  purpose 
---------------  -------------------------------------------------- 
 Chairman and     Fees are normally reviewed annually. 
  Non-Executive 
  Director fees    Fees paid to Non-Executive Directors for 
  To enable        their services are approved by the Board. 
  the Group        Fees may include a basic fee and additional 
  to recruit       fees for further responsibilities (for 
  and retain       example, chairmanship and membership of 
  Non-Executive    Board committees or holding the office 
  Directors        of Senior Independent Director). Fees are 
  of a suitable    based on the level of fees paid to Non-Executive 
  calibre.         Directors serving on the board of similar-sized 
                   UK listed companies and the time commitment 
                   and contribution expected for the role. 
 
                   Non-Executive Directors cannot participate 
                   in any of the Company's share schemes or 
                   annual bonus and are not eligible to join 
                   the Company's pension scheme. 
 
                   Non-Executive Directors may be eligible 
                   to receive benefits such as private medical 
                   insurance, the use of secretarial support, 
                   travel costs or other support that may 
                   be appropriate. 
---------------  --------------------------------------------------

Explanation of performance metrics chosen

Performance metrics are selected that are aligned with the performance of the Group and the interests of shareholders. Stretching performance targets are set each year for the annual bonus and LTIP awards. When setting these performance targets, the Committee will take into account a number of different reference points, which may include the Group's business plans and strategy and the economic environment. Full vesting will only occur for what the Committee considers to be stretching performance.

The annual bonus performance targets have been selected to provide an appropriate balance between incentivising Directors to meet financial targets for the year and achieving strategic and/or personal objectives.

Long-term performance metrics provide a robust and transparent basis on which to measure the Group's performance over the longer term and provide further alignment with the business strategy.

The Committee retains the ability to adjust or set different performance metrics or targets if events occur (such as a change in strategy, a material acquisition and/or a divestment of a Group business or a change in prevailing market conditions) which cause the Committee to determine that the metrics are no longer appropriate and that amendment is required so that they achieve their original purpose.

Awards and options may be adjusted in accordance with the scheme rules in the event of a variation of share capital, demerger, delisting, special dividend or other event which may affect the Company's share price.

Policy for the remuneration of employees more generally

Remuneration arrangements are determined throughout the Group based on the same principle that reward should be achieved for delivery of the business strategy and should be sufficient to attract and retain high calibre talent.

Recruitment remuneration

The policy aims to facilitate the appointment of individuals of a suitable calibre. When appointing a new Executive Director, the Committee seeks to ensure that arrangements are in the best interests of the Group and not to pay more than is appropriate.

The Committee will take into consideration a number of relevant factors, which may include the calibre of the individual, the candidate's existing remuneration package, and the specific circumstances of the individual including the jurisdiction from which the candidate was recruited.

When hiring a new Executive Director, the Committee will typically align the remuneration package with the above policy. The Committee may include other elements of pay which it considers are appropriate, however, this discretion is capped and is subject to the principles and the limits referred to below:

 
      --     Base salary will be set at a level appropriate to 
              the role and the experience of the Executive Director 
              being appointed. This may include agreement on future 
              increases up to a market rate, in line with increased 
              experience and/or responsibilities, subject to good 
              performance, where it is considered appropriate. 
      --     Pension and benefits will be provided in line with 
              the above policy. 
      --     The Committee will not offer non-performance related 
              incentive payments (for example a 'guaranteed sign-on 
              bonus'). 
      --     Other elements may be included in the following 
              circumstances: 
        o      an interim appointment being made to fill an Executive 
                Director role on a short-term basis; 
        o      if exceptional circumstances require that the 
                Chairman or a Non-Executive Director takes on 
                an executive function on a short-term basis; 
        o      if an Executive Director is recruited at a time 
                in the year when it would be inappropriate to 
                provide a bonus or long-term incentive award for 
                that year as there would not be sufficient time 
                to assess performance. Subject to the limit on 
                variable remuneration set out below, the quantum 
                in respect of the months employed during the year 
                may be transferred to the subsequent year so that 
                reward is provided on a fair and appropriate basis; 
                and 
        o      if the Executive Director will be required to 
                relocate in order to take up the position, it 
                is the Company's policy to allow reasonable relocation, 
                travel and subsistence payments. Any such payments 
                will be at the discretion of the Committee. 
      --     The Committee may also alter the performance metrics, 
              performance period and vesting period of the annual 
              bonus, DBP or LTIP, if the Committee determines 
              that the circumstances of the recruitment merit 
              such alteration. The rationale will be clearly explained 
              in the following Directors' Remuneration Report. 
      --     The maximum level of variable remuneration which 
              may be granted (excluding 'buyout' awards as referred 
              to below) will be within the maximum limits set 
              out in the policy table.

Any share awards referred to in this section will be granted as far as possible under the Company's existing share plans. If necessary, and subject to the limits referred to above, recruitment awards may be granted outside of these plans as permitted under the Listing Rules which allow for the grant of awards to facilitate, in unusual circumstances, the recruitment of an Executive Director.

The Committee may make payments or awards in respect of hiring an employee to 'buyout' remuneration arrangements forfeited on leaving a previous employer. In doing so the Committee will take account of relevant factors including any performance conditions attached to the forfeited arrangements and the time over which they would have vested. The Committee will generally seek to structure buyout awards or payments on a like-for-like basis to the remuneration arrangements forfeited. Any such payments or awards are limited to the expected value of the forfeited awards. Where considered appropriate, such special recruitment awards will be liable to forfeiture or 'malus' and/or 'clawback' on early departure.

Where a position is filled internally, any ongoing remuneration obligations or outstanding variable pay elements shall be allowed to continue according to the original terms.

Fees payable to a newly-appointed Chairman or Non-Executive Director will be in line with the fee policy in place at the time of appointment.

Service agreements and letters of appointment

Executive Directors' service agreements are on a rolling basis and may be terminated on 12 months' notice by the Company or the Executive Director. Service agreements for new Executive Directors will generally be limited to 12 months' notice by the Company.

All Non-Executive Directors' letters of appointment are on a rolling basis and may be terminated on six months' notice by the Company or the Non-Executive Directors. All Non-Executive Directors are subject to re-election at intervals of not more than three years.

Details of the Directors' service agreements, letters of appointment and notice periods are set out below:

 
 Name                        Commencement      Notice 
                               of current      period 
                 service/agreement/letter 
                           of appointment 
-------------  --------------------------  ---------- 
 P Lynam                          28 July   12 months 
                                     2010 
 N Kapur                       27 October   12 months 
                                     2011 
 M Forsyth(1)                   6 October    6 months 
                                     2016 
 H Angest(1)                    6 October    6 months 
                                     2016 
 A Berresford                 22 November    6 months 
                                     2016 
 P Marrow(1)                    6 October    6 months 
                                     2016 
 A Salmon(1)                    6 October    6 months 
                                     2016 
 V Stewart                    22 November    6 months 
                                     2016 
-------------  --------------------------  ----------

(1) Entered into new letters of appointment prior to the Company's transition from the AIM to the Main Market.

Payments for loss of office

The principles on which the determination of payments for loss of office will be approached are set out below:

 
                   Policy 
----------------  ------------------------------------------------------ 
 Payment in        The Company has discretion to make a payment 
  lieu of notice    in lieu of notice to Executive Directors 
                    and Non-Executive Directors. Such a payment 
                    would include base salary or fees for the 
                    unexpired period of notice. 
 Annual bonus      This will be at the discretion of the Committee 
                    on an individual basis and the decision as 
                    to whether or not to award an annual bonus 
                    award in full or in part will be dependent 
                    on a number of factors, including the circumstances 
                    of the individual's departure and their contribution 
                    to the business during the annual bonus period 
                    in question. Any annual bonus award amounts 
                    paid will normally be pro-rated for time 
                    in service during the annual bonus period 
                    and will, subject to performance, be paid 
                    at the usual time (although the Committee 
                    retains discretion to pay the annual bonus 
                    award earlier in appropriate circumstances). 
                    Any annual bonus earned for the year of departure 
                    and, if relevant, for the prior year may 
                    be paid wholly in cash at the discretion 
                    of the Committee. 
 Deferred Bonus    The extent to which any unvested award will 
  Plan              vest will be determined in accordance with 
                    the rules of the DBP. 
                    Unvested awards will normally lapse on cessation 
                    of employment. However, if a participant 
                    leaves due to death, ill-health, injury, 
                    disability, the sale of his employer or any 
                    other reason at the discretion of the Committee, 
                    the Committee shall determine whether the 
                    award will vest at cessation or at the normal 
                    vesting date. In either case, the extent 
                    of vesting will be determined by the Committee, 
                    taking into account, unless the Committee 
                    determines otherwise, the period of time 
                    elapsed from the date of grant to the date 
                    of cessation relative to the deferral period. 
                    Awards in the form of nil-cost or nominal-cost 
                    share options may then be exercised during 
                    such period as the Committee determines. 
                    Awards in the form of nil cost or nominal-cost 
                    share options which have vested but remain 
                    unexercised at the date of cessation may 
                    be exercised if a participant leaves due 
                    to death, ill-health, injury, disability, 
                    the sale of his employer or any other reason 
                    at the discretion of the Committee. Awards 
                    may then be exercised for such period as 
                    the Committee determines. 
 LTIP              The extent to which any unvested award will 
                    vest will be determined in accordance with 
                    the rules of the LTIP. 
                    Unvested awards will normally lapse on cessation 
                    of employment. However, if a participant 
                    leaves due to death, ill-health, injury, 
                    disability, the sale of his employer or any 
                    other reason at the discretion of the Committee, 
                    the Committee shall determine whether the 
                    award will vest at cessation or at the normal 
                    vesting date. In either case, the extent 
                    of vesting will be determined by the Committee 
                    taking into account the extent to which the 
                    performance condition is satisfied and, unless 
                    the Committee determines otherwise, the period 
                    of time elapsed from the date of grant to 
                    the date of cessation relative to the performance 
                    period. Awards in the form of nil-cost or 
                    nominal-cost share options may then be exercised 
                    during such period as the Committee determines. 
                    If a participant leaves for any reason (other 
                    than summary dismissal) after an award has 
                    vested but before it has been released (i.e. 
                    during a 'holding period'), his award will 
                    ordinarily continue until the normal release 
                    date when it will be released. The Committee 
                    retains discretion to release awards when 
                    the participant leaves. 
                    Awards in the form of nil cost or nominal-cost 
                    share options which have vested and been 
                    released but remain unexercised at the date 
                    of cessation may be exercised if a participant 
                    leaves for any reason (other than summary 
                    dismissal). Awards may then be exercised 
                    for such period as the Committee determines. 
 Phantom Share     The extent to which any unvested award will 
  Option Plan       vest will be determined in accordance with 
  (PSOS)            the rules of the PSOS. 
                    Unvested awards will normally lapse on cessation 
                    of employment. However, if a participant 
                    leaves due to death, ill-health, injury, 
                    disability, redundancy, the sale of his employer 
                    or any other reason at the discretion of 
                    the Committee, the award may be exercised 
                    for up to six months following the date of 
                    cessation or such period as the Committee 
                    determines. The extent of exercise will be 
                    determined by the Committee taking into account 
                    the extent to which the performance metric 
                    is satisfied and the period of time elapsed 
                    from the date of grant to the date of cessation 
                    relative to the performance period, unless 
                    the Committee determines otherwise.

 Change of         The extent to which unvested awards under 
  control           the DBP, LTIP and PSOS will vest will be 
                    determined in accordance with the rules of 
                    the relevant plan. 
                    Awards under the DBP will vest in full in 
                    the event of a takeover, merger or other 
                    relevant corporate event. 
                    Awards under the LTIP will vest early on 
                    a takeover, merger or other relevant corporate 
                    event. The Committee will determine the level 
                    of vesting taking into account the extent 
                    to which the performance condition is satisfied 
                    and, unless the Committee determines otherwise, 
                    the period of time elapsed from the date 
                    of grant to the date of the relevant corporate 
                    event relative to the performance period. 
                    In the event of a takeover, merger or other 
                    relevant corporate event, awards under the 
                    PSOS may be exercised within six months of 
                    the relevant corporate event or such period 
                    as the Committee determines. The Committee 
                    will determine the level of vesting taking 
                    into account the extent to which the performance 
                    metric is satisfied and the period of time 
                    elapsed from the date of grant to the date 
                    of the relevant corporate event relative 
                    to the performance period, unless the Committee 
                    determines otherwise. 
 Mitigation        Termination payments may be reduced where 
                    the Executive Director commences alternative 
                    employment during the notice period. 
 Other payments    Payments may be made either in the event 
                    of a loss of office or a change of control 
                    under the Sharesave Scheme, which is governed 
                    by its rules and the legislation relating 
                    to such tax-qualifying plans. There is no 
                    discretionary treatment for leavers or on 
                    a change of control under these plans. 
                    In appropriate circumstances, payments may 
                    also be made in respect of accrued holiday, 
                    outplacement and legal fees. 
----------------  ------------------------------------------------------

Where a buy-out award is made under the Listing Rules then the leaver provisions would be determined at the time of the award.

The Committee reserves the right to make additional exit payments where such payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of settlement or compromise of any claim arising in connection with the termination of a Director's office or employment.

Where the Committee retains discretion it will be used to provide flexibility in certain situations, taking into account the particular circumstances of the Director's departure and performance.

There is no entitlement to any compensation in the event of Non-Executive Directors' fixed-term agreements not being renewed or the agreement terminating earlier with the exception of a payment in lieu of notice as detailed in the table above.

Consideration of employment conditions elsewhere in the Company

The Committee considers the general basic salary increase, remuneration arrangements and employment conditions for the broader employee population when determining remuneration policy for the Executive Directors. There is no consultation with employees on Director remuneration.

Shareholder views

The Committee is committed to an ongoing dialogue with shareholders and welcomes feedback on Executive and Non-Executive Directors' remuneration. Should any significant changes be proposed to the policy going forward, the Company will engage with its shareholders to seek their views.

Existing contractual arrangements

The Committee retains discretion to make any remuneration payment or payment for loss of office outside the policy in this report:

 
 --   where the terms of the payment were agreed before 
       the policy came into effect; 
 --   where the terms of the payment were agreed at a time 
       when the relevant individual was not a Director of 
       the Company, and in the opinion of the Committee, 
       the payment was not in consideration of the individual 
       becoming a Director of the Company; and 
 --   to satisfy contractual arrangements under legacy remuneration 
       arrangements, including any arrangements in place 
       prior to Admission.

For these purposes, 'payment' includes the satisfaction of awards of variable remuneration, and in relation to an award involving shares the terms of the payment are agreed at the time the award is granted.

The Committee may satisfy any Phantom Share Option granted under the PSOS and may adjust the terms of any such Phantom Share Option to take account of any variation of share capital, demerger, delisting, special dividend or other event which may affect the Company's share price.

The Committee may make minor changes to this policy which do not have a material advantage to Directors, to aid in its operation or implementation, taking into account the interests of shareholders but without the need to seek shareholder approval.

Corporate Governance Report

Remuneration Report

The information provided in this section has been audited.

Single figure table

The following table sets out total remuneration for each Director in respect of the year ended 31 December 2016 and the prior year.

 
                                                                                               2011 share 
                         Salary                                          Annual                   option                                          Total 
                         and fees                Benefits                 bonus                   scheme                  Pension              remuneration 
                       2016        2015        2016        2015        2016        2015        2016        2015        2016        2015        2016        2015 
                  GBP'000's   GBP'000's   GBP'000's   GBP'000's   GBP'000's   GBP'000's   GBP'000's   GBP'000's   GBP'000's   GBP'000's   GBP'000's   GBP'000's 
---------------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 Executive Directors 
 P Lynam              1,200         900          23          24       2,000         500    2,284(5)           -          35          35       5,542       1,459 
 N Kapur                325         275          22          22         400         175      571(5)           -          25          25       1,343         497 
 Non-Executive Directors 
 M Forsyth(1)            95          55           1           -           -           -           -           -           -           -          96          55 
 H Angest(1,2)           55          54           -           -           -           -           -           -           -           -          55          54 
 A 
  Berresford(3)           7           -           -           -           -           -           -           -           -           -           7           - 
 P Marrow               102          85           -           -           -           -           -           -           -           -         102          85 
 A Salmon(2)             55          54           -           -           -           -    2,284(5)           -           -           -       2,339          54 
 V Stewart(3)             7           -           -           -           -           -           -           -           -           -           7           - 
---------------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
                      1,846       1,423          46          46       2,400         675       5,139           -          60          60       9,491       2,204 
---------------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------

(1)Lord Forsyth was appointed as Chairman of the Board on 19 October 2016 following the retirement of Sir Henry Angest as Chairman. Sir Henry Angest remains on the Board as a Non-Executive Director.

(2)Fees for the services of Sir Henry Angest and Andrew Salmon as Non-Executive Directors are paid to Arbuthnot Banking Group by whom they are employed. Prior to the step up to the Main Market total fees of GBP81,000 were paid in respect of these directors in 2016. Following the step up, fees of GBP5,000 per director per month were paid. These figures exclude VAT.

(3)Ann Berresford and Victoria Stewart were appointed to the Board on 22 November 2016.

Paul Lynam and Neeraj Kapur earned a bonus equal to GBP500,000 and GBP200,000 respectively in respect of performance for the financial year ended 31 December 2016. Paul Lynam and Neeraj Kapur also earned a one-off bonus equal to GBP1,500,000 and GBP200,000 respectively following the sale of ELG. Further information regarding the one-off bonuses is provided below in the disclosure regarding pre Main Market Admission bonus arrangements.

(5) Details of awards vesting under the 2011 share option scheme (a pre Main Market Admission long term incentive) are set out on page 151. Neither Paul Lynam nor Neeraj Kapur exercised their options in 2016 and accordingly they did not receive a cash payment in respect thereof.

The figures in the single figure tables above are derived from the following:

 
  Salary and        The amount of salary / fees received in 
   fees              the year. 
  Benefits          The taxable value of benefits received 
                     in the year. These are principally private 
                     medical health insurance and car allowances. 
  Annual bonus      The cash value of the bonus earned in 
                     respect of the financial year (including 
                     a proportion of the amount earned which 
                     is deferred for one year). 
  2011 share        The intrinsic value (as at the date of 
   option scheme     vesting) of share options that vested 
                     during the financial year. 
  Pension           The amount of payments in lieu of Company 
                     pension contributions received in the 
                     year. 
----------------  -----------------------------------------------

Additional disclosures in respect of the single figure table

Base salary and fees

As disclosed in the Prospectus, base salaries for the Executive Directors in respect of the year ended 31 December 2016 are as follows:

 
              2016 base 
                 salary 
                 GBP000 
---------    ---------- 
 P Lynam          1,200 
 N Kapur            325 
-----------  ----------

Secure Trust delivered a fifth straight record year of profits and strong operational and regulatory performance in 2015. In light of this, and to reflect Paul Lynam's leadership and contribution to the Company's growth over recent years, and the increase in his responsibilities arising under the regulatory regime, the Committee considered it appropriate to increase his base salary for 2016 to GBP1,200,000.

The Committee also considered it appropriate to increase Neeraj Kapur's base salary for 2016 to GBP325,000 to reflect his contribution to the business, his experience in his current role and the positioning of his salary compared to peers.

Pre Main Market Admission bonus arrangements

Bonuses for the Executive Directors for the financial year ended 31 December 2016 comprise two separate payments: one in relation to the normal bonus arrangements applicable before the adoption of the Remuneration Policy; and a one-off bonus following the sale of ELG.

The normal annual bonus for 2016 was determined on a discretionary basis, taking into account Company and personal performance during the year. Paul Lynam earned a bonus equal to GBP500,000 and Neeraj Kapur earned a bonus equal to GBP200,000. The bonuses were determined by the Committee taking into account:

 
 --   The delivery of record profits. 
 --   Strong Return On Equity performance (underlying 
       return on average equity 11.9%). 
 --   A successful transition from the AIM to the Main 
       Market. 
 --   Strong operational and regulatory performance. 
 --   The successful implementation of ICAAP and ILAAP 
       procedures. 
 --   The achievement of high customer satisfaction levels.

25% of the bonus earned is deferred in cash for one year (Paul Lynam: GBP125,000, Neeraj Kapur: GBP50,000).

Paul Lynam and Neeraj Kapur also earned a one-off bonus equal to GBP1,500,000 and GBP200,000 respectively following the sale of ELG. As previously disclosed the Group acquired the Everyday Loans Group in June 2012 for a consideration of GBP1. Through subsequent effective management and very skilled negotiation the Group disposed of this asset for a consideration of GBP235,000,000 in April 2016. This was a transformational transaction which generated a profit after tax of GBP116,800,000 which almost doubled the equity base of the company and facilitated the payment of a special dividend of GBP1.65 per share or GBP30m in special distributions to shareholders. The committee considered that one-off bonuses were warranted In recognition of the scale of this exceptional achievement.

Pre Main Market Admission long term incentives

Awards vesting in respect of financial year

2011 Share Option Scheme

On 2 November 2011 Paul Lynam and Andrew Salmon were both granted 283,333 share options with an exercise price of GBP7.20 per share. On the same day, Neeraj Kapur was granted 70,833 share options with an exercise price of GBP7.20 per share. 50% of the share options vested and became immediately exercisable on 2 November 2014. 50% of the share options vested and became immediately exercisable on 2 November 2016.

Share options that vested on 2 November 2016 were subject to dividends paid by the Company between the grant date and vest date (the vesting period) increasing in percentage terms (when compared to an assumed dividend of GBP8 million in respect of the financial year ended 31 December 2012) by a minimum of the higher of: (1) the increase in the Retail Price Index during the vesting period; and (2) 5% per annum during the vesting period.

Secure Trust's mid-market closing share price on the date of vesting was GBP23.32 and this has been used to calculate the gain at vesting in accordance with the remuneration reporting regulations. Notwithstanding this, the actual value realised by Andrew Salmon on exercise of his vested options was GBP22.00 per share.

Paul Lynam and Neeraj Kapur have not exercised the share options that vested on 2 November 2016.

Awards granted during the financial year

No awards were granted during the financial year ended 31 December 2016.

Payments made to former Directors during the year

No payments were made in the year to any former Director of the Company.

Payments for loss of office made during the year

No payments for loss of office were made in the year to any Director of the Company.

Statement of Directors' shareholding and share interests

No formal shareholding guidelines are currently in place. However, Paul Lynam has committed to building up and maintaining a shareholding of at least 100% of base salary, over time, by retaining all awards under the new LTIP to be put to shareholders for approval at the 2017 AGM that vest (net of income tax and National Insurance).

The interests of the Directors and their connected persons in the Company's ordinary shares as at 31 December 2016 were as set out below. There have been no changes to those interests between 31 December 2016 and the date of signing of these financial statements.

 
                                                    Vested       Vested 
                                                    during          and 
                                                       the    exercised        Sold         Unvested,          Total 
                                                      year       during      during           subject          as at 
                                      Owned            but          the         the    to performance    31 December 
 Director        Type              outright    unexercised         year        year        conditions           2016 
--------------  ---------------  ----------  -------------  -----------  ----------  ----------------  ------------- 
 P Lynam         Shares               9,110              -            -           -                 -          9,110 
  Share Options                           -        141,667            -           -                 -        141,667 
  Phantom share 
   options                                -              -            -           -           187,500        187,500 
 N Kapur         Shares               1,000              -            -           -                 -          1,000 
  Share Options                           -         35,417            -           -                 -         35,417 
  Phantom share 
   options                                -              -            -           -            31,250         31,250 
 M Forsyth       Shares               2,000              -            -           -                 -          2,000 
 H Angest        Shares                   -              -            -           -                 -              - 
 A Berresford    Shares                   -              -            -           -                 -              - 
 P Marrow        Shares               5,440              -            -           -                 -          5,440 
 A Salmon        Shares               7,500              -      141,667   (141,667)                 -          7,500 
 V Stewart       Shares                   -              -            -           -                 -              - 
--------------  ---------------  ----------  -------------  -----------  ----------  ----------------  -------------

(1) Each Phantom Share Option was granted on 23 March 2015 and entitles the holder on exercise to a cash payment equal to the difference between the market value of a share on the date of exercise and a notional exercise price of GBP25.00 per share. Each Phantom Share Option may be exercised on or after 3 November 2018 subject to the satisfaction of a performance condition that over the period from 23 March 2015 to 3 November 2018 the dividends paid by the Company have increased in percentage terms when compared to the dividend of GBP12.3 million in respect of the financial year ended 31 December 2014 by at least the higher of the increase in RPI during that period and 5% per annum.

(2) Andrew Salmon exercised and sold his shares shortly after the date of vesting.

Historical Chief Executive Officer remuneration outcomes

The table below shows details of the total remuneration bonus and share options vesting (as a percentage of the maximum opportunity) for the Chief Executive Officer over the last five financial years. Pre Main Market Admission bonuses have been determined by the Committee on a discretionary basis taking into account Group financial and individual performance during the financial year.

 
                               Share options 
                                      as a % 
          Total remuneration      of maximum 
                     GBP'000     opportunity 
------   -------------------  -------------- 
 2016                  5,542            100% 
 2015                  1,459             N/A 
 2014                  3,671            100% 
 2013                  1,031             N/A 
 2012                    870             N/A 
-------  -------------------  --------------

CEO pay increase in relation to all employees

The table below sets out the percentage change (from the financial year ending 31 December 2015) in base salary, value of taxable benefits and bonus for the Chief Executive Officer compared with the average percentage change for all employees.

 
                      Chief Executive 
 Percentage change            Officer   Wider workforce 
-------------------  ----------------  ---------------- 
 Salary                        33.33%           4.7%(1) 
 Taxable benefits                  0%                0% 
 Annual bonus                    300%                0% 
-------------------  ----------------  ----------------

(1) Actual award was 3% for wider workforce but additional spend was applied to address pay concerns in some areas of Lending.

(2) Paul Lynam earned a bonus equal to GBP500,000 in respect of performance for the financial year ended 31 December 2016 (equal to the bonus earned in respect of performance for the financial year ended 31 December 2015). Paul Lynam also earned a one-off bonus equal to GBP1,500,000 following the sale of ELG.

Spend on pay

The following table sets out the percentage change (from the financial year ending 31 December 2015) in dividends and the overall expenditure on pay (as a whole across the organisation).

 
                                       2016         2015   Change 
                                 GBPmillion   GBPmillion        % 
------------------------------  -----------  -----------  ------- 
 Dividends and share buybacks          43.1         12.6    242.1 
 Overall expenditure on pay            39.5         39.7    (0.5) 
------------------------------  -----------  -----------  -------

Implementation of Directors' Remuneration Policy for the financial year ending 31 December 2016

As described in the Chairman's Statement, the Committee has undertaken a detailed review of the Directors' Remuneration Policy in light of the Company's transition from the AIM to the Main Market. Details on how Secure Trust intends to implement the Directors' Remuneration Policy for the financial year ending 31 December 2017 is set out below.

Salary

Paul Lynam will not receive a salary increase in 2017. Neeraj Kapur's salary was increased to GBP400,000 with effect from 1 January 2017, reflecting Admission to the Main Market, his contribution to the business, his experience in his current role and the positioning of his salary compared to peers.

Fees

The following table sets out the Non-Executive Director fee structure effective from 1 January 2017:

 
                                        2017 fee 
 Role                                  GBP'000's 
----------------------------------    ---------- 
 Chairman                                    200 
 Non-Executive Director (basic 
  fee)                                        65 
 Senior Independent Director                  20 
 Chairman of Audit Committee                  20 
 Chairman of Risk Committee                   20 
 Chairman of Remuneration 
  Committee                                   10 
 Member of Audit Committee                     5 
 Member of Risk Committee                      5 
 Member of Remuneration Committee              5 
------------------------------------  ----------

The considerations that were taken into account by the Committee in determining these fees are described in the Chairman of the Remuneration Committee's Statement and reflect the increased work load reflecting the role and responsibilities of the Non-Executive Directors following the transition to the Main Market, the growth in the business of the Group and additional regulatory responsibilities and time commitment.

The information provided in the remainder of the Directors' Remuneration Report is not subject to audit.

Annual bonus

The proposed maximum annual bonus opportunity for the year ending 31 December 2017 will be equal to 100% of salary. The bonus will be subject to stretching performance metrics based on a balanced business scorecard. 70% of the bonus will be subject to financial performance metrics and the remaining 30% of the bonus will be subject to a mixture of customer, operational and staff performance metrics. The Committee considers that the targets are commercially sensitive. A description of the performance metrics and targets will be disclosed in the Annual Report on Remuneration for the year ending 31 December 2017.

Up to an additional 100% of salary may be awarded in exceptional circumstances (such as in order to recognise exceptional performance during the year). To the extent that any additional bonus is awarded, full details of the award and rationale will be disclosed in the Annual Report on Remuneration for the year ending 31 December 2017.

50% of any bonus earned will be deferred into shares under the Deferred Bonus Plan. Deferred shares will vest in equal tranches after one, two and three years following deferral.

LTIP

The Company proposes to grant the first awards under the Secure Trust 2017 LTIP in 2017. Awards will be granted in the form of nil-cost or nominal share options at the level of 100% of salary and will be subject to EPS, Relative TSR and risk management performance metrics. Performance will be assessed over a three year performance period.

The proposed EPS and relative TSR performance targets are set out in the table below:

 
                                        EPS growth         Relative 
                                    (40% of award)              TSR 
                                                            (40% of 
 Vesting (% of maximum)                                      award) 
------------------------------    ----------------  --------------- 
 0%                                      Less than     Below Median 
                                     10% per annum 
 25%                                 10% per annum           Median 
 100%                                30% per annum   Upper quartile 
 Straight-line vesting between 
  points. 
------------------------------    ----------------  ---------------

The Committee intends to use the following group of selected peers for assessing TSR performance: (Aldermore Group, Arbuthnot Banking Group, Close Brothers, OneSavings Bank, Metro Bank, Paragon Group of Companies, Provident Financial, S&U, Shawbrook Group and Virgin Money).

20% of the award will be based on risk management performance objectives aligned with the Company's risk management framework.

Consideration by the Directors of matters relating to Directors' remuneration

The Remuneration Committee is composed of five members; the Chairman of the Board (Lord Forsyth), two independent Non-Executive Directors (Paul Marrow and Victoria Stewart) and two Non-Executive Directors (Sir Henry Angest, and Andrew Salmon). The chairman of the Committee is Sir Henry Angest.

The Committee's principal responsibilities are:

 
 --   reviewing the on-going appropriateness and relevance 
       of remuneration policy; 
 --   reviewing and approving the remuneration packages 
       of the Executive Directors; 
 --   recommending and monitoring the level and structure 
       of remuneration of senior management; and 
 --   production of the annual report on the Directors' 
       remuneration.

During the financial year ended 31 December 2016, the Committee received assistance from representatives from Management, Human Resources, Risk and Legal.

The Committee received no independent advice from external consultants during the financial year ended 31 December 2016.

Statement of voting at AGM

This will be the first year that the Directors' Remuneration Report is put to shareholders for approval. The results of the vote will be disclosed in the 2017 Annual Report on Remuneration.

Approval

This Report was approved by the Board on 22 March 2017 and signed on its behalf by:

Sir Henry Angest

Chairman of the Remuneration Committee

Directors' report

Report and financial statements

The directors submit their report, the related Strategic Report and Corporate Governance Report and the audited financial statements of Secure Trust Bank PLC and its subsidiaries (the 'Group') for the year ended 31 December 2016. The Strategic Report is set out beginning on page 14. This Directors' Report also includes additional disclosures required by the UKLA's Disclosure and Transparency Rules and Listing Rules. Some of the matters normally included in the Directors' Report are included by reference as indicated below.

Principal activities and review

The principal activity of the Group is banking including deposit taking and secured and unsecured lending.

The business review and information about further developments, key performance indicators and principal risks are contained in the Strategic Report.

Corporate governance

The Corporate Governance report contains information about the Group's corporate governance arrangements, includes the Group's compliance with the UK Corporate Governance Code. Until Admission in October 2016 the Code did not apply to the Company although the Company did take account of its principles.

Results

The results for the year are shown on page 114. The Group made a profit before tax for the year of GBP144.3 million (2015: GBP36.5 million), being profit before tax of GBP27.5 million and gain recognised on disposal of GBP116.8 million and a profit after tax of GBP137.5 million (2015: GBP28.7 million). The reconciliation of statutory results to underlying results is set out in the Financial Review in the Strategic Report.

For the purposes of DTR 4.15R2 and DTR 4.1.8 this Directors' Report and the Strategic Report on pages 14 to 55 comprise the management report.

Dividends

The directors recommend the payment of a final dividend of 58 pence per share which, together with the interim dividend of 17 pence per share paid on 23 September 2016, represents total dividends for the year of 75 pence per share (2015: 72 pence per share) excluding the special dividend of 165 pence per share paid on 27 July 2016 following completion of the sale of ELG. The final dividend, if approved by members at the Annual General Meeting, will be paid on 12 May 2017 to shareholders on the register at the close of business on 18 April 2017.

Dividend Policy

The directors reviewed the dividend policy of the Company in connection with the step up to the Main Market and have adopted a progressive dividend policy which takes into account the Company's capital requirements, earnings and cash flow in the long term.

The Directors will have regard to current and projected capital, liquidity, earnings and market expectations in determining the amount of the dividend. On occasion, the Company may declare and pay a special dividend resulting from special circumstances, however no such special dividend is currently envisaged.

Share capital

The share capital of the Company comprises one class of ordinary shares with a nominal value of 40p each. As at 31 December 2016 the Company had 18,475,229 ordinary shares in issue. Each ordinary share entitles the holder to one vote.

All the ordinary shares are fully paid and rank equally in all respects and there are no special rights to dividends or in relation to control of the Company.

283,335 shares were issued during 2016.

Details of the Company's share capital and movements in the Company's issued share capital during the year are provided in Note 25 of the consolidated financial statements.

The powers of the Directors, including in relation to the issue or buyback of the Company's shares are set out in the Companies Act 2006 and the Company's Articles of Association. Shareholders will be asked to grant authority to the Directors to issue and allot shares at the 2017 Annual General Meeting.

Under section 551 of the Companies Act 2006, the Directors may allot equity securities only with the express authorisation of shareholders which may be given in General Meeting, but which cannot last more than five years. Under section 561 of the Companies Act 2006, the Board may also not allot shares for cash (otherwise than pursuant to an employee share scheme) without first making an offer to existing shareholders to allot such shares to them on the same or more favourable terms in proportion to their respective shareholdings, unless this requirement is waived by special resolution of the shareholders.

Resolutions permitting such actions will be proposed at the 2017 Annual General Meeting. Details of the resolutions for such authority are included in the Notice of the 2017 Annual General Meeting and in the related explanatory notes.

There are no specific restrictions on the transfer of the shares in the Company which are governed by the general provisions of the Articles of Association and prevailing legislation.

On a show of hands, each member has the right to one vote at General Meetings of the Company. On a poll, each member is entitled to one vote for every share held. The shares carry no rights to fixed income. No person has any special rights of control over the Company's share capital and all issued shares are fully paid.

Under section 701 of the Companies Act 2006 a company may make a market purchase of its own shares if the purchase has first been authorised by a resolution of the company.

The Company did not repurchase any of the issued ordinary shares during the year or up to the date of this report, although it was granted authority to do so by shareholders at the 2016 Annual General Meeting on 4 May 2016. That authority expires on 31 May 2017 or, if earlier, the conclusion of the 2017 Annual General Meeting.

At the 2017 Annual General Meeting a special resolution will be proposed authorising the Company to make market purchases of ordinary shares within the limits set out in the resolution. The resolution is in a similar form to that proposed at the 2016 Annual General Meeting. The directors have no present intention of exercising the authority granted by the resolution, but regard it as a useful tool to have available.

Substantial shareholders

In accordance with Disclosure and Transparency Rules DTR5, the Company as at 20 March 2017 (being the latest practicable date before publication of this report), has been notified of the following disclosable interests in its issued ordinary shares:

 
                                                  Percentage 
                                                 of ordinary 
                                     Ordinary          share 
                                       shares        capital 
-------------------------------    ----------  ------------- 
 
 Arbuthnot Banking Group 
  PLC                               3,444,538          18.64 
 Invesco Limited                    2,805,262          15.18 
 Threadneedle Asset Management 
  (Ameriprise Financial, 
  Inc.)                             2,426,858          13.14 
 Steven A Cohen                     1,510,412           8.18 
 Ruffer                             1,324,979           7.17 
 Wellington Management 
  Company                           1,297,610           7.02 
 Unicorn Asset Management           1,091,209           5.91 
 BAE Systems Pension Fund 
  Investment Management               782,741           4.24 
 Standard Life Investments            724,967           3.92 
---------------------------------  ----------  -------------

Relationship with major shareholder

On the AIM IPO in 2011 the Company entered into a Relationship Agreement with its majority shareholder, Arbuthnot Banking Group PLC. Following the sell down by Arbuthnot Banking Group in 2016 the Relationship Agreement terminated. Nevertheless, the Company has an understanding with Arbuthnot Banking Group that for so long as Arbuthnot Banking Group holds 10% or more of the issued share capital of the Company, Arbuthnot Banking Group would expect two directors of the Company to be nominees of Arbuthnot Banking Group.

Directors

The directors of the Company are Lord Forsyth, Neeraj Kapur, Paul Lynam, Sir Henry Angest, Paul Marrow, Ann Berresford, Andrew Salmon and Victoria Stewart. All the directors, other than Ann Berresford and Victoria Stewart, served on the Board throughout the financial year and up to the date of signing these financial statements. Ann Berresford and Victoria Stewart were appointed as directors on 22 November 2016. Biographical information about each director is shown on page 57. All the Non-Executive Directors (other than Ann Berresford and Victoria Stewart) entered into new letters of appointment on 6 October 2016 in connection with the step up to the Main Market. Ann Berresford and Victoria Stewart entered into letters of appointment on their appointment. Paul Lynam and Neeraj Kapur are Executive Directors of the Company.

Sir Henry Angest and Mr A A Salmon retire under Article 82 of the Articles of Association and, being eligible, offer themselves for re-election at the 2017 Annual General Meeting.

In accordance with the recommendations of the UK Corporate Governance Code, Ann Berresford and Victoria Stewart, who were appointed as directors during 2016, offer themselves for re-election at the 2017 Annual General Meeting.

Directors' Interests

The directors' interests (and those of any persons connected with them) in the share capital of the Company from Admission and as at 31 December 2016 are set out on pages 94 and 95 in the Directors Remuneration Report.

Powers of directors

The directors' powers are conferred on them by UK legislation and by the Company's Articles of Association. Changes to the Company's Articles of Association must be approved by shareholders by way of a special resolution and must comply with the provisions of the Companies Act 2006 and the Financial Conduct Authority's Disclosure and Transparency Rules.

It is proposed to adopt new Articles of Association at the 2017 Annual General Meeting and a description of the changes to the Articles is set out in the separate Circular giving notice of the Annual General Meeting.

Appointment and retirement of directors

The appointment and retirement of the directors is governed by the Company's Articles of Association, the UK Corporate Governance Code and the Companies Act 2006.

Directors' indemnities

The Company's Articles of Association provide that, subject to the provisions of the Companies Act 2006, the Company may indemnify any director or former director of the Company or any associated company against any liability and may purchase and maintain for any director or former director of the Company or any associated company insurance against any liability.

The Group has maintained directors and officers liability insurance throughout 2016.

The letters of appointment of the Non-Executive Directors incorporate by reference the provisions of the Articles of Association into the contract established by the letter of appointment between the Non-Executive Director and the Company.

Consideration is being given to each of the directors entering into a deed of indemnity with the Company under which the director is indemnified by the Company in respect of liabilities incurred in his or her role as a director. The deed, when entered into, would indemnify the director to the extent permitted by the Companies Act 2006 and the Articles of Association of the Company. The indemnities, when entered into, would be qualifying third party indemnities provisions within the meaning of the legislation.

Disclosure of information under Listing Rule 9.8.4R

Additional information, where not already contained in the Directors' Report, where applicable to the Company can be found in the following sections of the Annual Report.

 
 Item                                             Page reference 
===============================================  =============== 
 Details of any long term incentive schemes       84 
===============================================  =============== 
 Allotments of cash of equity securities          Note 26, 
  otherwise than to shareholders in proportion     page 151 
  to their holdings 
===============================================  ===============

Significant contracts

Details of related party transactions are set out in Note 35 to the financial statements.

There are no contracts of significance in which a director is interested.

There are no agreements between any Group company and any of its employees or any director of any Group company which provide for compensation to be paid to an employee or a director for termination of employment or for loss of office as a consequence of a takeover of the Company.

There are no significant agreements to which the Company is party that take effect, alter or terminate upon a change of control following a takeover bid for the Company.

Employment policies and equal opportunities

The Group is an inclusive and equal opportunities employer and opposes all forms of discrimination. Applications from people with disabilities will be considered fairly and if existing employees become disabled, every effort is made to retain them within the workforce wherever reasonable and practicable. The Group also endeavours to provide equal opportunities in the training, promotion and general career development of disabled employees.

Group policies seek to create a workplace that has an open atmosphere of trust, honesty and respect. Harassment or discrimination of any kind is not tolerated. This principle applies to all aspects of employment from recruitment and promotion, through to termination and all other terms and conditions of employment.

The Group has processes in place for communicating with its employees. Employee communications include information about the performance of the Group, on major matters affecting their work, employment or workplace and to encourage employees to get involved in social or community events. These communications aim to achieve a common awareness for all employees of the financial and economic factors affecting the performance of the Group. The Group conducts employee surveys and uses the results to improve performance. The Group utilises a range of means of communication with employees, including by means of a staff council.

Employee share schemes

New employee share schemes are proposed to be adopted at the 2017 Annual General Meeting. Further details are set out in the Circular containing the Notice of AGM.

Research and development

The Group does not undertake research and development activities.

Political donations and expenditure

The Group made no political donations and incurred no political expenditure during the year (2015: GBPnil).

Post balance sheet events

There have been no significant events between 31 December 2016 and the date of approval of the financial statements which would require a change to or additional disclosure in the financial statements.

Disclosure of information to auditor

Each director in office at the date of this Directors' Report confirms that so far as the director is aware, there is no relevant audit information of which the Company's auditor is unaware and each director has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of the Companies Act 2006.

Going concern

The financial statements have been prepared on a going concern basis. Further information about this is to be found on page 44.

Fair, Balanced and Understandable

The Directors are satisfied that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable, and provide the information necessary for members and other stakeholders to assess the Group's position and performance, strategy and business model.

Details of the governance procedures which have been used to support this assertion can be found in the Audit Committee Report.

Future developments and financial risk management objectives and policies

Information about future developments, internal control and financial risk management systems in relation to financial reporting and financial risk management objectives and policies in relation to the use of financial instruments can be found in the following sections of the annual report which are incorporated into this report by reference:

Future developments - see Strategic Report on pages 14 to 55.

Internal control and financial risk management systems in relation to financial reporting - see Corporate Governance Report on pages 56 to 98.

Financial risk management objectives and policies in relation to the use of financial instruments - see Risk Management Report on pages 45 to 48 and Note 28 to the financial statements.

Methodology

The Group intends to report on all of the emission sources required under the Companies Act 2006 (Strategic Report and Directors' Report) Regulation 2013. This is the first Greenhouse Gas report that the Group has had to issue under the above Regulation and as such it has only included emission sources where accurate and consistent data is available for the complete reporting period.

Greenhouse Gas emissions from our operations

The Group's Greenhouse Gas emissions are shown below.

 
                                                      Carbon dioxide 
                                                            (tonnes) 
---------------------------------------------------  --------------- 
 Scope 1 - direct emissions from combustion 
  of fuel                                                       93.0 
 Scope 2 - indirect emissions from electricity 
  purchased                                                    555.6 
 Scope 3 - other indirect emissions from purchased 
  electricity transmission and distribution                     50.3 
---------------------------------------------------  --------------- 
 Total scope 1 to 3 emissions                                  698.9 
---------------------------------------------------  --------------- 
 Environmental intensity indicator (tonnes 
  carbon dioxide per GBP1 million group income)                  5.4 
---------------------------------------------------  ---------------

Scope 1 emissions resulting from the combustion of natural gas for heating the Group's buildings and Scope

2 and 3 emissions associated with the consumption of purchased electricity are included within the Greenhouse Gas report. The Group has excluded Scope 1 emissions resulting from the use of company owned/leased vehicles and the fugitive escape of refrigerants used in air conditioning and heat pump systems. All Scope 3 sources, except for purchased electricity transmission and distribution emissions, have been excluded from this report.

Systematic procedures have now been established to collect accurate data for Scope 1 company vehicle and fugitive refrigerant emissions with effect from 1(st) January 2017. It is the Group's intention to set 2017 as its Greenhouse Gas baseline year and reports from 2018 will show emissions for the current year and for each subsequent year following the baseline year.

In compiling this Greenhouse Gas report the Group has used the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (revised edition) and energy supplier invoice data. The Group reports its greenhouse gas emissions as a single total, by converting them to the equivalent amount of CO(2) using emission factors from the UK Government's Greenhouse Gas Conversion Factors for Company Reporting 2016.

Auditor

KPMG LLP was reappointed as auditor at the Annual General Meeting held in 2016. Resolutions for its reappointment as auditor and giving the directors authority to determine their remuneration will be proposed at the 2017 Annual General Meeting. KPMG LLP has indicated its willingness to continue in office.

Annual General Meeting

The 2017 Annual General Meeting will be held at 3pm on 3 May 2017 at Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.

By order of the Board

A J Karter

Secretary

22 March 2017

Directors' responsibility statement

The directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare group and parent company financial statements for each financial year. As required by the Listing Rules they are required to prepare the group financial statements in accordance with IFRS as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to:

 
      --   select suitable accounting policies and then apply 
            them consistently; 
      --   make judgements and estimates that are reasonable 
            and prudent; 
      --   state whether they have been prepared in accordance 
            with IFRS as adopted by the EU; and 
      --   prepare the financial statements on the going concern 
            basis unless it is inappropriate to presume that 
            the group and the parent company will continue in 
            business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge:

 
      --   The financial statements, prepared in accordance 
            with IFRS as adopted by the European Union, give 
            a true and fair view of the assets, liabilities, 
            financial position and profit or loss of the Company 
            and the undertakings included in the consolidation 
            taken as a whole; 
      --   The strategic report includes a fair review of the 
            development and performance of the business and 
            the position of the Company and the undertakings 
            included in the consolidation taken as a whole, 
            together with a description of the principal risks 
            and uncertainties that they face; and 
      --   The Annual Report and financial statements, taken 
            as a whole, are fair, balanced and understandable 
            and provide the information necessary for shareholders 
            to assess the Company's performance, business model 
            and strategy.

This responsibility statement was approved by the Board of directors on 22 March 2017 and is signed on their behalf by:

 
 P A Lynam                    Neeraj Kapur 
 Chief Executive Officer   Chief Financial 
                                   Officer

Consolidated statement of comprehensive income

 
                             Note         2016           2016         2016         2015           2015         2015 
                                    Continuing   Discontinued        Total   Continuing   Discontinued        Total 
                                    GBPmillion     GBPmillion   GBPmillion   GBPmillion     GBPmillion   GBPmillion 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Income statement 
 Interest receivable 
  and similar income                     130.0           11.1        141.1        100.5           39.2        139.7 
 Interest expense 
  and similar charges                   (26.3)              -       (26.3)       (21.6)              -       (21.6) 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Net interest income            4        103.7           11.1        114.8         78.9           39.2        118.1 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Fee and commission 
  income                                  16.3            0.1         16.4         16.9            1.5         18.4 
 Fee and commission 
  expense                                (1.8)          (0.1)        (1.9)        (3.7)          (0.3)        (4.0) 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Net fee and commission 
  income                                  14.5              -         14.5         13.2            1.2         14.4 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Operating income                        118.2           11.1        129.3         92.1           40.4        132.5 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Net impairment 
  losses on loans 
  and advances to 
  customers                    12       (27.7)          (2.6)       (30.3)       (16.8)          (7.5)       (24.3) 
 Operating expenses             5       (65.5)          (6.0)       (71.5)       (50.5)         (21.2)       (71.7) 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Profit before income 
  tax                                     25.0            2.5         27.5         24.8           11.7         36.5 
 Income tax expense             7        (6.3)          (0.5)        (6.8)        (5.5)          (2.3)        (7.8) 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Profit after income 
  tax                                     18.7            2.0         20.7         19.3            9.4         28.7 
 Gain recognised 
  on disposal                  37            -          116.8        116.8            -              -       - 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Profit for the 
  period                                  18.7          118.8        137.5         19.3            9.4         28.7 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Other comprehensive 
  income 
 Items that will 
  not be reclassified 
  to the income statement 
 Revaluation reserve                       1.2              -          1.2            -              -            - 
 Taxation                                (0.2)              -        (0.2)            -              -            - 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
                                           1.0              -          1.0            -              -            - 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Items that may 
  subsequently be 
  reclassified to 
  the income statement 
 Available-for-sale 
  reserve                                (2.8)              -        (2.8)            -              -            - 
 Taxation                                    -              -            -            -              -            - 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
                                         (2.8)              -        (2.8)            -              -            - 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Other comprehensive 
  income for the 
  period, net of 
  income tax                             (1.8)              -        (1.8)            -              -            - 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Total comprehensive 
  income for the 
  period                                  16.9          118.8        135.7         19.3            9.4         28.7 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 
 Profit attributable 
  to: 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Equity holders 
  of the Company                          18.7          118.8        137.5         19.3            9.4         28.7 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 
 Total comprehensive 
  income attributable 
  to: 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Equity holders 
  of the Company                          16.9          118.8        135.7         19.3            9.4         28.7 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 
 Earnings per share 
  for profit attributable 
  to the equity holders 
  of the Company 
  during the period 
  (pence per share) 
 Basic earnings 
  per share                     8        102.6          651.5        754.1        106.1           51.7        157.8 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  ----------- 
 Diluted earnings 
  per share                     8        101.8          646.9        748.7        104.1           50.7        154.8 
--------------------------  -----  -----------  -------------  -----------  -----------  -------------  -----------

Consolidated statement of financial position

 
                                                      At 31 December 
                                                        2016         2015 
                                           Note   GBPmillion   GBPmillion 
----------------------------------------  -----  -----------  ----------- 
 ASSETS 
 Cash and balances at central banks                    112.0        131.8 
 Loans and advances to banks                  9         18.2          9.8 
 Loans and advances to customers             10      1,321.0        960.6 
 Debt securities held-to-maturity            13         20.0          3.8 
 Equity instruments available-for-sale       14         13.5            - 
 Property, plant and equipment               15         11.4          8.5 
 Intangible assets                           16          9.0          7.0 
 Deferred tax assets                         18            -          0.3 
 Other assets                                19          4.9          7.1 
 Assets held-for-sale                        37            -        118.5 
----------------------------------------  -----  -----------  ----------- 
 Total assets                                        1,510.0      1,247.4 
----------------------------------------  -----  -----------  ----------- 
 LIABILITIES AND EQUITY 
 Liabilities 
 Due to banks                                20         70.0         35.0 
 Deposits from customers                     21      1,151.8      1,033.1 
 Current tax liabilities                                 1.7          3.2 
 Deferred tax liabilities                    18          0.2            - 
 Other liabilities                           22         49.0         24.2 
 Provisions for liabilities and charges      23          1.3          2.0 
 Liabilities held-for-sale                   37            -          8.7 
----------------------------------------  -----  -----------  ----------- 
 Total liabilities                                   1,274.0      1,106.2 
----------------------------------------  -----  -----------  ----------- 
 Equity attributable to owners of the 
  parent 
 Share capital                               25          7.4          7.3 
 Share premium                                          81.2         79.3 
 Revaluation reserve                                     1.2          0.2 
 Available-for-sale reserve                  14        (2.8)            - 
 Retained earnings                                     149.0         54.4 
----------------------------------------  -----  -----------  ----------- 
 Total equity                                          236.0        141.2 
----------------------------------------  -----  -----------  ----------- 
 Total liabilities and equity                        1,510.0      1,247.4 
----------------------------------------  -----  -----------  ----------- 
 
 
 The financial statements on pages 114 to 175 were approved 
  by the Board of Directors on 22 March 2017 and were 
  signed on its behalf by: 
 
 
 P Lynam 
  Chief Executive Officer 
 
 
 
 N Kapur 
  Chief Financial Officer

Company statement of financial position

 
                                                      At 31 December 
                                                        2016         2015 
                                           Note   GBPmillion   GBPmillion 
----------------------------------------  -----  -----------  ----------- 
 ASSETS 
 Cash and balances at central banks                    112.0        131.8 
 Loans and advances to banks                  9         16.5          9.2 
 Loans and advances to customers             10      1,289.2        932.7 
 Debt securities held-to-maturity            13         20.0          3.8 
 Equity instruments available-for-sale       14         13.5            - 
 Property, plant and equipment               15          6.2          4.2 
 Intangible assets                           16          6.2          3.2 
 Investments                                 17          3.7          3.7 
 Deferred tax assets                         18          0.1          0.6 
 Other assets                                19         35.3        146.0 
----------------------------------------  -----  -----------  ----------- 
 Total assets                                        1,502.7      1,235.2 
----------------------------------------  -----  -----------  ----------- 
 LIABILITIES AND EQUITY 
 Liabilities 
 Due to banks                                20         70.0         36.4 
 Deposits from customers                     21      1,151.8      1,033.1 
 Current tax liabilities                                 0.8          0.3 
 Other liabilities                           22         57.0         28.2 
 Provisions for liabilities and charges      23          1.3          2.0 
----------------------------------------  -----  -----------  ----------- 
 Total liabilities                                   1,280.9      1,100.0 
----------------------------------------  -----  -----------  ----------- 
 Equity attributable to owners of the 
  parent 
 Share capital                               25          7.4          7.3 
 Share premium                                          81.2         79.3 
 Revaluation reserve                                     0.5            - 
 Available-for-sale reserve                  14        (2.8)            - 
 Retained earnings                                     135.5         48.6 
 Total equity                                          221.8        135.2 
----------------------------------------  -----  -----------  ----------- 
 Total liabilities and equity                        1,502.7      1,235.2 
----------------------------------------  -----  -----------  ----------- 
 
 
 The Company has elected to take the exemption under 
  section 408 of the Companies Act 2006 not to present 
  the parent company income statement. The profit for 
  the parent company for the year is presented in the 
  Company Statement of Changes in Equity. 
 
 The financial statements on pages 114 to 175 were approved 
  by the Board of Directors on 22 March 2017 and were 
  signed on its behalf by: 
 
 
 P Lynam 
  Chief Executive Officer 
 
 
 N Kapur 
  Chief Financial Officer 
 
 
 Registered number: 00541132

Consolidated statement of changes in equity

 
                                   Share        Share   Revaluation   Available-for-sale     Retained 
                                 capital      premium       reserve              reserve     earnings        Total 
                              GBPmillion   GBPmillion    GBPmillion           GBPmillion   GBPmillion   GBPmillion 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 Balance at 1 January 
  2015                               7.3         79.3           0.2                    -         38.1        124.9 
 
 Total comprehensive 
  income for the period 
 Profit for 2015                       -            -             -                    -         28.7         28.7 
 Total comprehensive 
  income for the period                -            -             -                    -         28.7         28.7 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 
 Transactions with 
  owners, recorded 
  directly in equity 
 Contributions by 
  and distributions 
  to owners 
 Dividends                             -            -             -                    -       (12.6)       (12.6) 
 Charge for share 
  based payments                       -            -             -                    -          0.2          0.2 
 Total contributions 
  by and distributions 
  to owners                            -            -             -                    -       (12.4)       (12.4) 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 Balance at 31 December 
  2015                               7.3         79.3           0.2                    -         54.4        141.2 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 
 Total comprehensive 
  income for the period 
 Profit for 2016                       -            -             -                    -        137.5        137.5 
 
 Other comprehensive income, 
  net of income tax 
 Revaluation reserve                   -            -           1.0                    -            -          1.0 
 Available-for-sale 
  reserve                              -            -             -                (2.8)            -        (2.8) 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 Total other comprehensive 
  income                               -            -           1.0                (2.8)            -        (1.8) 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 Total comprehensive 
  income for the period                -            -           1.0                (2.8)        137.5        135.7 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 
 Transactions with 
  owners, recorded 
  directly in equity 
 Contributions by 
  and distributions 
  to owners 
 Issue of shares 
  under a share option 
  scheme                             0.1          1.9             -                    -            -          2.0 
 Dividends                             -            -             -                    -       (43.1)       (43.1) 
 Charge for share 
  based payments                       -            -             -                    -          0.2          0.2 
 Total contributions 
  by and distributions 
  to owners                          0.1          1.9             -                    -       (42.9)       (40.9)

---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 Balance at 31 December 
  2016                               7.4         81.2           1.2                (2.8)        149.0        236.0 
---------------------------  -----------  -----------  ------------  -------------------  -----------  -----------

Company statement of changes in equity

 
                                   Share        Share   Revaluation   Available-for-sale     Retained 
                                 capital      premium       reserve              reserve     earnings        Total 
                              GBPmillion   GBPmillion    GBPmillion           GBPmillion   GBPmillion   GBPmillion 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 Balance at 1 January 
  2015                               7.3         79.3             -                    -         26.1        112.7 
 
 Total comprehensive 
  income for the period 
 Profit for 2015                       -            -             -                    -         34.9         34.9 
 Total comprehensive 
  income for the period                -            -             -                    -         34.9         34.9 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 
 Transactions with 
  owners, recorded 
  directly in equity 
 Contributions by 
  and distributions 
  to owners 
 Dividends                             -            -             -                    -       (12.6)       (12.6) 
 Charge for share 
  based payments                       -            -             -                    -          0.2          0.2 
 Total contributions 
  by and distributions 
  to owners                            -            -             -                    -       (12.4)       (12.4) 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 Balance at 31 December 
  2015                               7.3         79.3             -                    -         48.6        135.2 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 
 Total comprehensive 
  income for the period 
 Profit for 2016                       -            -             -                    -        129.8        129.8 
 
 Other comprehensive income, 
  net of income tax 
 Revaluation reserve                   -            -           0.5                    -            -          0.5 
 Available-for-sale 
  reserve                              -            -             -                (2.8)            -        (2.8) 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 Total other comprehensive 
  income                               -            -           0.5                (2.8)            -        (2.3) 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 Total comprehensive 
  income for the period                -            -           0.5                (2.8)        129.8        127.5 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 
 Transactions with 
  owners, recorded 
  directly in equity 
 Contributions by 
  and distributions 
  to owners 
 Issue of shares 
  under a share option 
  scheme                             0.1          1.9             -                    -            -          2.0 
 Dividends                             -            -             -                    -       (43.1)       (43.1) 
 Charge for share 
  based payments                       -            -             -                    -          0.2          0.2 
 Total contributions 
  by and distributions 
  to owners                          0.1          1.9             -                    -       (42.9)       (40.9) 
---------------------------  -----------  -----------  ------------  -------------------  -----------  ----------- 
 Balance at 31 December 
  2016                               7.4         81.2           0.5                (2.8)        135.5        221.8 
---------------------------  -----------  -----------  ------------  -------------------  -----------  -----------

Consolidated statement of cash flows

 
                                                                Year           Year 
                                                               ended          ended 
                                                         31 December    31 December 
                                                                2016           2015 
                                                 Note     GBPmillion     GBPmillion 
----------------------------------------------  -----  -------------  ------------- 
 Cash flows from operating activities 
  - Continuing operations 
 Profit for the year                                            18.7           19.3 
 
 Adjustments for: 
 Income tax expense                                 7            6.3            5.5 
 Depreciation of property, plant and 
  equipment                                        15            0.6            0.5 
 Loss on sale of property, plant and 
  equipment                                                      0.2              - 
 Amortisation of intangible assets                 16            1.6            1.3 
 Impairment losses on loans and advances 
  to customers                                                  27.7           16.8 
 Share based compensation                                        0.2            0.2 
----------------------------------------------  -----  -------------  ------------- 
 Cash flows from operating profits 
  before changes in operating assets 
  and liabilities                                               55.3           43.6 
 Changes in operating assets and liabilities: 
  - net (increase)/decrease in debt 
   securities held-to-maturity                                (16.2)           12.5 
  - net decrease in loans and advances 
   to banks                                                        -           15.0 
  - net increase in loans and advances 
   to customers                                              (388.1)        (448.8) 
  - net decrease/(increase) in other 
   assets                                                        2.2          (2.6) 
  - net increase in amounts due to 
   banks                                                        35.0           19.1 
  - net increase in deposits from 
   customers                                                   118.7          424.7 
  - net increase /(decrease) in other 
   liabilities                                                  22.9          (6.0) 
 Income tax paid                                               (6.3)          (4.2) 
----------------------------------------------  -----  -------------  ------------- 
 Net cash (outflow)/inflow from operating 
  activities - Continuing operations                         (176.5)           53.3 
----------------------------------------------  -----  -------------  ------------- 
 Cash flows from investing activities 
 Purchase of property, plant and equipment         15          (2.5)          (1.1) 
 Purchase of computer software                     16          (3.6)          (2.3) 
 Net cash outflow from investing activities 
  - Continuing operations                                      (6.1)          (3.4) 
----------------------------------------------  -----  -------------  ------------- 
 Cash flows from financing activities 
 Shares issued                                                   2.0              - 
 Dividends paid                                               (43.1)         (12.6) 
----------------------------------------------  -----  -------------  ------------- 
 Net cash flows from financing activities 
  - Continuing operations                                     (41.1)         (12.6) 
----------------------------------------------  -----  -------------  ------------- 
 Net (decrease)/increase in cash and 
  cash equivalents - Continuing operations                   (223.7)           37.3 
 Sale of subsidiary undertakings                   37          209.9              - 
 Net increase in cash and cash equivalents 
  - Discontinued operations                                      0.7              - 
 Cash and cash equivalents at 1 January                        143.3          106.0 
----------------------------------------------  -----  -------------  ------------- 
 Cash and cash equivalents at 31 December          27          130.2          143.3 
----------------------------------------------  -----  -------------  -------------

Company statement of cash flows

 
                                                                Year           Year 
                                                               ended          ended 
                                                         31 December    31 December 
                                                                2016           2015 
                                                 Note     GBPmillion     GBPmillion 
----------------------------------------------  -----  -------------  ------------- 
 Cash flows from operating activities 
 Profit for the year                                           129.8           34.9 
 
 Adjustments for: 
 Income tax expense                                              4.4            2.0 
 Depreciation of property, plant and 
  equipment                                        15            0.4            0.3 
 Loss on sale of property, plant and 
  equipment                                                      0.2              - 
 Profit on sale of subsidiary undertakings                   (120.5)              - 
 Amortisation of intangible assets                 16            0.5            0.3

 Impairment losses on loans and advances 
  to customers                                                  28.6           17.1 
 Share based compensation                                        0.2            0.2 
----------------------------------------------  -----  -------------  ------------- 
 Cash flows from operating profits 
  before changes in operating assets 
  and liabilities                                               43.6           54.8 
 Changes in operating assets and liabilities: 
  - net (increase)/decrease in debt 
   securities held-to-maturity                                (16.2)           12.5 
  - net decrease in loans and advances 
   to banks                                                        -           15.0 
  - net increase in loans and advances 
   to customers                                              (385.1)        (449.7) 
  - net decrease/(increase) in other 
   assets                                                        2.6         (29.8) 
  - net increase in amounts due to 
   banks                                                        33.6           20.5 
  - net increase in deposits from 
   customers                                                   118.7          424.7 
  - net increase in other liabilities                           28.1            7.7 
 Income tax paid                                               (3.5)          (3.2) 
----------------------------------------------  -----  -------------  ------------- 
 Net cash (outflow)/inflow from operating 
  activities                                                 (178.2)           52.5 
----------------------------------------------  -----  -------------  ------------- 
 Cash flows from investing activities 
 Sale of subsidiary undertakings                   37          212.3              - 
 Purchase of property, plant and equipment         15          (2.0)          (0.8) 
 Purchase of computer software                     16          (3.5)          (2.2) 
 Net cash inflow/(outflow) from investing 
  activities                                                   206.8          (3.0) 
----------------------------------------------  -----  -------------  ------------- 
 Cash flows from financing activities 
 Issue of shares                                                 2.0              - 
 Dividends paid                                               (43.1)         (12.6) 
----------------------------------------------  -----  -------------  ------------- 
 Net cash flows from financing activities                     (41.1)         (12.6) 
----------------------------------------------  -----  -------------  ------------- 
 Net (decrease)/increase in cash and 
  cash equivalents                                            (12.5)           36.9 
 Cash and cash equivalents at 1 January                        141.0          104.1 
----------------------------------------------  -----  -------------  ------------- 
 Cash and cash equivalents at 31 December          27          128.5          141.0 
----------------------------------------------  -----  -------------  -------------

Notes to the consolidated financial statements

   1.      Accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

1.1. Reporting entity

Secure Trust Bank PLC is a company incorporated in the United Kingdom (referred to as 'the Company'). The Company is registered in England and Wales and has the registered number 00541132. The registered address of the Company is One Arleston Way, Solihull, West Midlands, B90 4LH. The consolidated financial statements of the Company as at and for the year ended 31 December 2016 comprise Secure Trust Bank PLC and its subsidiaries (together referred to as 'the Group' and individually as 'subsidiaries'). The Group is primarily involved in banking and financial services.

1.2. Basis of presentation

The Group's consolidated financial statements and the Company's financial statements have been prepared in accordance with International Financial Reporting Standards, as adopted or early adopted by the Group and endorsed by the EU and the Companies Act 2006 applicable to companies reporting under IFRS. They have been prepared under the historical cost convention, as modified by the revaluation of equity instruments available-for-sale and land and buildings and financial instruments at fair value through profit or loss. The consolidated financial statements are presented in pounds sterling, which is the functional and presentational currency of the entities within the Group.

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

The directors have assessed, in the light of current and anticipated economic conditions, the Group's ability to continue as a going concern. The directors confirm they are satisfied that the Company and the Group have adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the 'going concern' basis for preparing accounts, as set out in the going concern and viability section of the Strategic Report starting on page 14.

The consolidated financial statements were authorised for issue by the Board of Directors on 22 March 2017.

The following International Financial Reporting Standards have been issued which are not yet effective and which have not been adopted early:

 
      --   IFRS 9 'Financial instruments' (effective for annual 
            periods beginning after 1 January 2018). This is 
            the International Accounting Standards Board's replacement 
            of IAS 39 'Financial Instruments: Recognition and 
            Measurement'. Phase one of this standard deals with 
            the classification and measurement of financial 
            assets and represents a significant change from 
            the existing requirements in IAS 39. The standard 
            contains three primary measurement categories for 
            financial assets: 'amortised cost', 'fair value 
            through other comprehensive income' and 'fair value 
            through profit or loss' and eliminates the existing 
            categories of 'held-to-maturity', 'available-for-sale' 
            and 'loans and receivables'. Phase two of the standard 
            covers impairment, with a new expected loss impairment 
            model that will require expected credit losses to 
            be accounted for from when financial instruments 
            are first recognised and lowers the threshold for 
            the recognition of full lifetime expected losses. 
            Phase three covers general hedge accounting and 
            introduces a substantially reformed model for hedge 
            accounting with enhanced disclosure about risk management 
            activity. The new model aligns the accounting treatment 
            with risk management activities. Details of the 
            Group's implementation of this standard is set out 
            in Note 29. 
      --   IFRS 15 'Revenue from contracts with customers' 
            (effective for annual periods beginning after 1 
            January 2018). This standard replaces a number of 
            existing standards and interpretations and applies 
            to contracts with customers, but does not apply 
            to insurance contracts, financial instruments or 
            lease contracts, which are in the scope of other 
            IFRS. It also does not apply if two companies in 
            the same line of business exchange non-monetary 
            assets to facilitate sales to other parties. The 
            standard specifies how and when an IFRS reporter 
            will recognise revenue as well as requiring such 
            entities to provide users of financial statements 
            with more informative relevant disclosures. It introduces 
            a new revenue recognition model that recognises 
            revenue either at a point in time or over time. 
            The model features a principles-based five-step 
            model to be applied to all contracts with customers. 
            Following consideration of the Group's operating 
            model, this standard is considered unlikely to have 
            a material impact on the Group. 
      --   IFRS 16 'Leases' (effective for annual periods beginning 
            after 1 January 2019). The standard sets out the 
            principles for the recognition, measurement, presentation 
            and disclosure of leases for both parties to a contract 
            i.e. the customer ('lessee') and the supplier ('lessor'). 
            IFRS 16 replaces the previous leases standard, IAS 
            17 'Leases', and related interpretations. IFRS 16 
            eliminates the classification of leases as either 
            operating leases or finance leases for a lessee. 
            Instead all leases, except short term and low value 
            leases, are treated in a similar way to finance 
            leases applying IAS 17. Leases are 'capitalised' 
            by recognising the present value of the lease payments 
            and showing them either as lease assets (right-of-use 
            assets) or together with property, plant and equipment. 
            If lease payments are made over time, a company 
            also recognises a financial liability representing 
            its obligation to make future lease payments. The 
            most significant effect of the new requirements 
            in IFRS 16 will be an increase in lease assets and

            financial liabilities. The effect of this standard 
            is currently being assessed, but it is unlikely 
            to be substantial. Lessor accounting remains unchanged 
            from IAS 17.

IFRS9 and IFRS 15 have been endorsed by the EU in November 2016 and September 2016 respectively, however IFRS16 has not yet been endorsed by the EU.

1.3. Consolidation

Subsidiaries

Subsidiaries are all investees controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group.

The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income.

The parent company's investments in subsidiaries are recorded at cost less, where appropriate, provision for impairment in value.

Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Non-current assets held-for-sale and discontinued operations

Subsidiaries are de-consolidated from the date that control ceases. Under IFRS 5, the Group classifies a non-current asset as held-for-sale if its carrying amount will be recovered mainly through selling the asset rather than through usage. The classification also applies to disposal groups, which are a group of assets and liabilities which an entity intends to dispose of in a single transaction.

The conditions for a non-current asset or disposal group to be classified as held-for-sale are as follows:

 
      --   the asset must be available for immediate sale in 
            its present condition and its sale must be highly 
            probable; 
      --   the asset must be currently marketed actively at 
            a price that is reasonable in relation to its current 
            fair value; 
      --   the sale should be completed, or expected to be so, 
            within a year from the date of the classification; 
            and 
      --   the actions required to complete the planned sale 
            will have been made, and it is unlikely that the 
            plan will be significantly changed or withdrawn.

Discontinued operations are a component of an entity that either has been disposed of, or is classified as held-for-sale, and represents a major line of business and is part of a single co-ordinated disposal plan.

In 2015, discontinued operations were included in the income statement as a single amount, with further analysis in the notes to the accounts. In 2016, the income statement was restated to include discontinued operations on a line-by-line basis, rather than in the notes, as the directors consider that this presentation improves clarity.

1.4. Interest income and expense

Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost using the effective interest method.

The effective interest method calculates the amortised cost of a financial asset or a financial liability and allocates the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

1.5. Net fee and commission income

Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accruals basis when the service has been provided. Fees and commissions income consists principally of weekly and monthly fees from the OneBill and Current Account products along with associated insurance commissions and commissions earned on debt collection activities in DMS. Fee and commission expenses consist primarily of fees and commission relating to the Current Account product.

1.6. Financial assets and financial liabilities

The Group classifies its financial assets at fair value through profit or loss, loans and receivables, held-to-maturity or available-for-sale and classifies its financial liabilities as other financial liabilities. Management determines the classification of its investments at initial recognition. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue.

   (a)     Financial assets at fair value through profit or loss

This category comprises derivative financial instruments which are utilised by the Group for hedging purposes. Financial assets at fair value through profit or loss are initially recognised on the date from which the Group becomes a party to the contractual provisions of the instrument. Subsequent measurement of financial assets held in this category are carried at fair value through profit or loss.

   (b)   Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans are recognised when the funds are advanced to customers. Loans and receivables are carried at amortised cost using the effective interest method (see below).

   (c)    Held-to-maturity

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold to maturity. Held-to-maturity investments are carried at amortised cost using the effective interest method.

   (d)   Available-for-sale

Available-for-sale investments are those not classified as another category of financial assets. These include investments in special purpose vehicles and equity investments in unquoted vehicles. They may be sold in response to liquidity requirements, interest rate, exchange rate or equity price movements. AFS investments are initially recognised at cost, which is considered as the fair value of the investment including any acquisition costs. AFS securities are subsequently measured at fair value in the Statement of Financial Position. Fair value changes on the AFS securities are recognised directly in equity (AFS reserve) until the investment is sold or impaired. Once sold or impaired, the cumulative gains or losses previously recognised in the AFS reserve are recycled to the profit or loss.

   (e)   Other financial liabilities

Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all of the risks and rewards of ownership. In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. There have not been any instances where assets have only been partially derecognised. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire.

Amortised cost measurement

The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal payments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.

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. The fair value of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market for a financial instrument is not active the Group establishes a fair value by using an appropriate valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis.

1.7. Foreign currencies

Transactions in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated into the Company's functional currency at the rates prevailing on the balance sheet date. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income statement for the period.

1.8. Impairment of financial assets

Assets carried at amortised cost

On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. Objective evidence is the occurrence of a loss event, after the initial recognition of the asset, that impacts on the estimated future cash flows of the financial asset or group of financial assets, and can be reliably estimated.

The criteria that the Group uses to determine that there is objective evidence of an impairment loss include, but are not limited to, the following:

 
      --   Delinquency in contractual payments of principal 
            or interest; 
      --   Breach of financial covenants or contractual obligations; 
      --   Cash flow difficulties experienced by the borrower; 
            and 
      --   Initiation of bankruptcy proceedings.

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Statement of Comprehensive Income. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

The Group considers evidence of impairment for loans and advances at both an individual asset and collective level. All individually significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. In assessing collective impairment the Group uses historical trends of the probability of default, emergence period, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends.

When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the Statement of Comprehensive Income.

Business finance

In assessing objective evidence of a loss event for business loans, the following factors are considered:

 
      --   If any contractual repayment date has been missed; 
      --   Covenant breaches; and 
      --   In Commercial Finance, a loan may be considered 
            for potential impairment if the financial prospects 
            of the borrower's customers deteriorates.

Consumer finance

For retail loans, cash flows are estimated based on past experience combined with the Group's view of the future considering the following factors:

 
      --   Our exposure to the customer; 
      --   Based on the number of days in arrears at the Statement 
            of Financial Position date, the likelihood that 
            a loan will progress through the various stages 
            of delinquency and ultimately be written off; and 
      --   The amount and timing of expected receipts and recoveries.

Modification of loans

A customer's account may be modified to assist customers who are in or have recently overcome financial difficulties and have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Loans that have renegotiated or deferred terms, resulting in a substantial modification to the cash flows, are no longer considered to be past due but are treated as new loans recognised at fair value, provided the customers comply with the renegotiated or deferred terms.

Equity investments available--for--sale

In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss, is removed from equity and recognised in the profit or loss.

A significant or prolonged decline in the fair value of an equity security is objective evidence of impairment. The Group regards a decline of more than 20 percent in fair value as 'significant' and a decline in the quoted market price that persists for nine months or longer as 'prolonged'.

1.9. Intangible assets

   (a)    Goodwill

Goodwill represents the excess of the cost of the acquisition over the fair value of the Group's share of the net identifiable assets acquired at the date of acquisition. Goodwill is held at cost less accumulated impairment losses and is deemed to have an infinite life.

The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken place. Impairment losses are recognised in the Statement of Comprehensive Income if the carrying amount exceeds the recoverable amounts.

   (b)   Computer software

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives, which are between three to ten years.

Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred unless it is probable that the expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance.

   (c)    Other intangibles

The acquisition of subsidiaries is accounted for in accordance with IFRS 3 'Business Combinations', which requires the recognition of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. As part of this process, it is necessary to recognise certain intangible assets which are separately identifiable and which are not included on the acquiree's balance sheet.

Other intangible assets include trademarks, customer relationships, broker relationships and technology. The intangible assets recognised as part of the V12 Finance Group acquisition have been recorded at fair value and are being amortised over their expected useful lives, which are between five and ten years. The intangible assets recognised as part of ELG acquisition were also recognised at fair value, and were being amortised over a similar period, apart from broker relationships, which were being amortised over three years. The intangible asset relating to ELG was reclassified as an asset held-for-sale as at 31 December 2015, and was not amortised between the date that the conditional sale was agreed in December 2015 and its disposal in 2016.

   1.10.      Property, plant and equipment

Property is held at historic cost as modified by subsequent revaluations less depreciation. The Group has elected under IAS 16.31 to measure its property at fair value. Revaluations are kept up to date such that the carrying amount does not differ materially from its fair value as required by IAS 16.34. Revaluation of assets and any subsequent disposal are addressed through the revaluation reserve and any changes are transferred to retained earnings.

Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, which are subject to regular review:

 
 Land                     not depreciated 
 Freehold buildings       50 years 
 Leasehold improvements   shorter of life 
                           of lease or 7 years 
 Computer equipment       3 to 5 years 
 Other equipment          5 to 10 years

Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the Statement of Comprehensive Income.

   1.11.      Leases 
   (a)    As a lessor

Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets are held subject to finance leases, 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. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return.

   (b)   As a lessee

Rentals made under operating leases are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease.

   1.12.      Cash and cash equivalents

For the purposes of the Statement of Cash Flows, cash and cash equivalents comprise cash in hand and demand deposits, and cash equivalents comprise highly liquid investments which are convertible into cash with an insignificant risk of changes in value with a maturity of three months or less at the date of acquisition, including certain loans and advances to banks and short-term highly liquid debt securities.

   1.13.      Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issuance costs. Any amounts received over nominal value are recorded in the share premium account, net of direct issuance costs.

Incremental costs directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments. Costs associated with the listing of shares are expensed immediately.

   1.14.      Employee benefits 
   (a)    Post-retirement obligations

The Group contributes to defined contribution schemes for the benefit of certain employees. The schemes are funded through payments to insurance companies or trustee-administered funds at the contribution rates agreed with individual employees. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. There are no post-retirement benefits other than pensions.

   (b)   Share-based compensation

The fair value of equity settled share-based payment awards are calculated at grant date and recognised over the period in which the employees become unconditionally entitled to the awards (the vesting period). The amount is recognised as personnel expenses in the income statement, with a corresponding increase in equity. The Group adopts a Black-Scholes valuation model in calculating the fair value of the share options as adjusted for an attrition rate of members of the scheme and a probability of pay-out reflecting the risk of not meeting the terms of the scheme over the vesting period. The number of share options that are expected to vest are reviewed at least annually.

The fair value of cash settled share-based payments is recognised as personnel expenses in the profit or loss with a corresponding increase in liabilities over the vesting period. The liability is remeasured at each reporting date and at settlement date based on the fair value of the options granted, with a corresponding adjustment to personnel expenses.

When share-based payments are changed from cash settled to equity settled and there is no change in the fair value of the replacement award, it is seen as a modification to the terms and conditions on which the equity instruments were granted and is not seen as the settlement and replacement of the instruments. Accordingly, the liability in the Statement of Financial Position is reclassified to equity and the prospective charge to the profit or loss from the modification reflects the spreading of the initial grant date fair value of the award over the remaining vesting period in line with the policy on equity settled awards.

   1.15.      Taxation

Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.

Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the Statement of Financial Position date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, when they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary differences can be utilised.

   1.16.      Dividends

Dividends on ordinary shares are recognised in equity in the period in which they are approved.

   1.17.      Significant items

Items which are material by both size and nature (i.e. outside of the normal operating activities of the Group) are treated as significant items and disclosed separately on the face of the Statement of Comprehensive Income. The separate reporting of these items helps to provide an indication of the Group's underlying business performance.

   1.18.      Funding for Lending Scheme

Under the applicable International Accounting Standard, IAS 39, if a security is lent under an agreement to return it to the transferor, as is the case for eligible securities lent by institutions to the Bank of England under the Funding for Lending Scheme, then the security is not derecognised because the transferor retains all the risks and rewards of ownership. The UK Treasury Bills borrowed from the Bank of England under the Funding for Lending Scheme are not recognised on the Statement of Financial Position of the institution until such time as they are subject to a repurchase agreement with a third party, as they will not meet the criteria for derecognition by the Bank of England. When the UK Treasury Bills are pledged as part of a sale and repurchase agreement with a third party, amounts borrowed from the third party are recognised in the Statement of Financial Position.

   2.      Critical judgements and estimates

The Group makes certain judgements and estimates which affect the reported amounts of assets and liabilities. Critical judgements and the assumptions used in calculating estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

2.1. Impairment losses on loans and advances to customers

Where financial assets are individually evaluated for impairment, management uses their best estimates in calculating the net present value of future cash flows. Management has to make judgements on the financial position of the counterparty and the net realisable value of collateral (where held), in determining the expected future cash flows.

In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends.

Consumer finance

The Group reviews its Consumer loan portfolios to assess impairment at least on a half-yearly basis. The basis for evaluating impairment losses is described in accounting policy 1.8. In determining whether an impairment loss should be recorded in the Statement of Comprehensive Income, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from financial assets, or a group of financial assets.

This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Loans and advances are identified as impaired by taking account of the age of the debt's delinquency and the product type. The impairment provision is calculated by applying a percentage rate to the balance of different ages and categories of impaired debt. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and recent actual loss experience.

The key judgements made in calculating the Consumer individual provisions are the probability of default rates and the loss given default. Uplifting the probability of default rates and loss given default used by 10% would result in an estimated increase in the Consumer individual provisions as follows:

 
                                 10%          10% 
                            increase     increase 
                      in probability      in loss 
                          of default        given 
                               rates      default 
                          GBPmillion   GBPmillion 
------------------  ----------------  ----------- 
 Personal Lending                0.2          0.3 
 Motor Finance                   0.3          1.6 
 Retail Finance                  0.1          0.4 
------------------  ----------------  ----------- 
                                 0.6          2.3 
------------------  ----------------  -----------

Of the GBP1.6 million sensitivity to loss given default in Motor Finance above, an estimated GBP0.8 million relates to the expected loss on the sale of repossessed vehicles.

The sensitivities to loss given default rates above are also impacted by the estimates of cash collection made by DMS. A 10% increase in the estimated cash collected would reduce Consumer individual provisions by GBP0.3 million.

The collective provision for the consumer portfolio assumes an emergence period of 2 months for the Motor and Personal Loan portfolios and 1 month for the Retail portfolio. Increasing this assumption by 1 month would result in an estimated increase in the collective impairment allowance as follows:

 
                            1 month 
                           increase 
                       in emergence 
                             period 
                         GBPmillion 
------------------   -------------- 
 Personal Lending               0.5 
 Motor Finance                  0.8 
 Retail Finance                 0.9 
-------------------  -------------- 
                                2.2 
 ------------------  --------------

Business Finance

Within the Real Estate Finance and Asset Finance businesses, accounts which are impaired are assessed against the discounted cash flows expected to arise in order to identify any impairment provisions. Collective provisions are assessed only to the extent that there is sufficient data to justify an inherent level of losses within the current portfolios.

For specific Invoice Finance clients assessment is made as to the collectability of outstanding invoices in relation to the amounts lent against them. If there is a deficit against outstanding invoices then other security is considered in terms of value and collectability. If there is an overall shortfall then the unsecured amount is assessed as to whether a provision is required. For collective provisions a view of the overall level of non-collectability in the portfolio is taken. The level of provision required is under review as the product is yet to mature, and therefore data is developing, so we have estimated a level appropriate based on other data available in the industry.

The Business Finance portfolio is largely assessed on an individual basis with minimal losses experienced to date. The decision on whether or not an impairment trigger has occurred for Real Estate Finance loans is made based on the Group's knowledge of the counterparty and assessment of their ability to repay their loan balance. The Real Estate Finance portfolio is exposed to deteriorations in property prices, in the event of borrower default. However, given the low loan to value ratios of loans held within the portfolio, this exposure is not considered significant.

The collective provision for the Asset Finance portfolio assumes an emergence period of 3 months. The collective provision for the Commercial Finance and Real Estate Finance portfolios are based on peer group experience of comparable groups of financial assets and determined as 0.15% and 0.1% of gross balances net of specific provisions respectively.

2.2. Acquisition accounting

The Group recognises identifiable assets and liabilities at their acquisition date fair values. The exercise of attributing a fair value to the balance sheet of the acquired entity requires the use of a number of assumptions and estimates, which are documented at the time of the acquisition. These fair value adjustments are determined from the estimated future cash flows generated by the assets.

2.3. Share Option Scheme valuations

The valuation of the equity settled Share Option Scheme was determined at the original grant date of 2 November 2011 using Black-Scholes valuation models. The final options under this scheme vested on 2 November 2016 and consequently there will be no further change to the valuation of the remaining outstanding options.

The valuation of the cash settled Share Option Scheme was determined at 31 December 2016 using Black-Scholes valuation models.

The most significant judgement relates to share price volatility. See Note 26 for further details.

2.4. Average life of lending

IAS 39 requires interest earned from lending to be measured under the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset.

Management must therefore use judgement to estimate the expected life of each instrument and hence the expected cash flows relating to it. The accuracy of these estimates would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions. The Group also needs to identify which cash flows relating to each instrument should be subject to the effective interest rate method.

A one month increase in the assumed behavioural life would change the income received in the year as follows:

 
                      GBPmillion 
------------------   ----------- 
 Personal Lending              - 
 Motor Finance               0.1 
 Retail Finance            (0.6) 
-------------------  ----------- 
                           (0.5) 
 ------------------  ----------- 
 
   3.      Operating segments

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

Business finance

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

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

3) Commercial Finance: invoice discounting and invoice factoring.

Consumer finance

4) Personal Lending: Unsecured consumer loans sold to customers via broker aggregators and business partners.

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

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

Other

Other includes Current Account, OneBill, STB Leasing Limited, debt collection and a GBP30 million loan to NSF as part of their purchase of ELG.

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

 
                                                                                  Net 
                                                                           impairment 
                                  Interest                                     losses 
                                receivable           Fee      Revenue        on loans           Loans 
                                       and           and         from             and             and 
                                   similar    commission     external        advances        advances 
                                    income        income    customers    to customers    to customers 
                                GBPmillion    GBPmillion   GBPmillion      GBPmillion      GBPmillion 
---------------------------   ------------  ------------  -----------  --------------  -------------- 
 Year ended 31 December 
  2016 
 Business finance 
   Real Estate Finance                28.3           0.1         28.4             0.1           451.0 
   Asset Finance                       7.8             -          7.8             0.6           117.2 
   Commercial Finance                  1.5           3.1          4.6             0.2            62.8 
 Consumer finance 
   Personal Lending                   11.2             -         11.2             4.4            65.5 
   Motor Finance                      39.6           0.9         40.5            14.6           236.2 
   Retail Finance                     34.3           2.4         36.7             9.5           325.9 
 Other                                 7.3           9.8         17.1           (1.7)            62.4 
----------------------------  ------------  ------------  -----------  --------------  -------------- 
 Continuing operations               130.0          16.3        146.3            27.7         1,321.0 
 Discontinued operations 
  and assets held-for-sale 
   Personal Lending                   11.1           0.1         11.2             2.6               - 
----------------------------  ------------  ------------  -----------  --------------  -------------- 
                                     141.1          16.4        157.5            30.3         1,321.0 
 ---------------------------  ------------  ------------  -----------  --------------  -------------- 
 
 
                                                                                  Net 
                                                                           impairment 
                                  Interest                                     losses 
                                receivable           Fee      Revenue        on loans           Loans 
                                       and           and         from             and             and 
                                   similar    commission     external        advances        advances 
                                    income        income    customers    to customers    to customers 
                                GBPmillion    GBPmillion   GBPmillion      GBPmillion      GBPmillion 
---------------------------   ------------  ------------  -----------  --------------  -------------- 
 Year ended 31 December 
  2015 
 Business finance 
   Real Estate Finance                20.2           0.1         20.3               -           368.0 
   Asset Finance                       2.4             -          2.4               -            70.7

   Commercial Finance                  0.4           1.2          1.6             0.3            29.3 
 Consumer finance 
   Personal Lending                   17.2             -         17.2             4.8            74.3 
   Motor Finance                      33.2           0.1         33.3             7.3           165.7 
   Retail Finance                     22.5           1.7         24.2             5.2           220.4 
 Other                                 4.6          13.8         18.4           (0.8)            32.2 
----------------------------  ------------  ------------  -----------  --------------  -------------- 
 Continuing operations               100.5          16.9        117.4            16.8           960.6 
 Discontinued operations 
  and assets held-for-sale 
   Personal Lending                   39.2           1.5         40.7             7.5           114.3 
----------------------------  ------------  ------------  -----------  --------------  -------------- 
                                     139.7          18.4        158.1            24.3         1,074.9 
 ---------------------------  ------------  ------------  -----------  --------------  --------------

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

As interest, fees, commission and operating expenses are not aligned to operating segments for day to day management of the business and cannot be allocated on a reliable basis, profit by operating segment has not been disclosed.

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

   4.      Net interest income 
 
                                                 2016         2015 
                                           GBPmillion   GBPmillion 
----------------------------------------  -----------  ----------- 
 Cash and balances at central banks               0.6          0.7 
 Loans and advances to banks                        -          0.2 
 Loans and advances to customers                129.4         99.6 
 Interest receivable and similar income         130.0        100.5 
----------------------------------------  -----------  ----------- 
 
 Deposits from customers                       (26.3)       (21.6) 
----------------------------------------  -----------  ----------- 
 Interest expense and similar charges          (26.3)       (21.6) 
----------------------------------------  -----------  ----------- 
 
 Net interest income                            103.7         78.9 
----------------------------------------  -----------  -----------

Net interest income shown above excludes GBP11.1 million (2015: GBP39.2 million) of interest on loans and advances to customers in respect of discontinued operations, as shown in the Consolidated Statement of Comprehensive Income set out on page 114.

   5.      Operating expenses 
 
                           Continuing   Discontinued        Total   Continuing   Discontinued        Total 
                                 2016           2016         2016         2015           2015         2015 
                           GBPmillion     GBPmillion   GBPmillion   GBPmillion     GBPmillion   GBPmillion 
------------------------  -----------  -------------  -----------  -----------  -------------  ----------- 
 Staff costs, including 
  those of directors: 
  Wages and salaries             32.0            3.0         35.0         24.7           10.0         34.7 
  Social security 
   costs                          3.1            0.3          3.4          2.6            1.1          3.7 
  Pension costs                   0.9            0.2          1.1          0.7            0.6          1.3 
  Share based payment 
   transactions                 (0.5)              -        (0.5)          1.4              -          1.4 
 Depreciation of 
  property, plant 
  and equipment (Note 
  15)                             0.6              -          0.6          0.5            0.1          0.6 
 Amortisation of 
  intangible assets 
  (Note 16)                       1.6              -          1.6          1.4            0.9          2.3 
 Operating lease 
  rentals                         1.6            0.3          1.9          1.2            0.8          2.0 
 Other administrative 
  expenses                       26.2            2.2         28.4         18.0            7.7         25.7 
------------------------  -----------  -------------  -----------  -----------  -------------  ----------- 
 Total operating 
  expenses                       65.5            6.0         71.5         50.5           21.2         71.7 
------------------------  -----------  -------------  -----------  -----------  -------------  -----------

Remuneration of the auditor and its associates, excluding VAT, was as follows:

 
 '                                           GBP'000   GBP'000 
------------------------------------------  --------  -------- 
 Fees payable to the Company's auditor 
  for the audit of the Company's annual 
  accounts                                       149       190 
 Fees payable to the Company's auditor 
  for other services: 
 The audit of the Company's subsidiaries, 
  pursuant to legislation                         63       122 
 Audit related assurance services                 13        21 
 Other assurance services                        521         - 
 Tax advisory services                             -        49 
 All other non-audit services                     15       146 
------------------------------------------  --------  -------- 
                                                 761       528 
------------------------------------------  --------  --------

All other non-audit services incurred during 2016 related to reporting accountant work on the Main Market listing.

   6.      Average number of employees 
 
                     2016     2015 
                   Number   Number 
----------------  -------  ------- 
 Directors              6        7 
 Management           101       78 
 Administration       590      621 
----------------  -------  ------- 
                      697      706 
----------------  -------  -------

The above figures include employees of ELG for the period of ownership by the Group.

   7.      Income tax expense 
 
                              Continuing   Discontinued                 Continuing   Discontinued 
                              operations     operations        Total    operations     operations        Total 
                                    2016           2016         2016          2015           2015         2015 
                              GBPmillion     GBPmillion   GBPmillion    GBPmillion     GBPmillion   GBPmillion 
--------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Current taxation 
 Corporation tax charge 
  - current year                     4.2            0.6          4.8           5.4            2.5          7.9 
 Corporation tax charge 
  - adjustments in 
  respect of prior 
  years                              1.8              -          1.8           0.6          (1.0)        (0.4) 
--------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
                                     6.0            0.6          6.6           6.0            1.5          7.5 
--------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 
 Deferred taxation 
 Deferred tax charge 
  - current year                       -          (0.1)        (0.1)         (0.5)          (0.1)        (0.6) 
 Deferred tax charge 
  - adjustments in 
  respect of prior 
  years                              0.3              -          0.3             -            0.9          0.9 
--------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
                                     0.3          (0.1)          0.2         (0.5)            0.8          0.3 
--------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Income tax expense                  6.3            0.5          6.8           5.5            2.3          7.8 
--------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 
 Tax reconciliation 
 Profit before tax                  25.0            2.5         27.5          24.8           11.7         36.5 
 Tax at 20.0% (2015: 
  20.25%)                            5.0            0.5          5.5           5.0            2.4          7.4 
 Permanent differences             (0.8)              -        (0.8)         (0.3)              -        (0.3) 
 Prior period adjustments            2.1              -          2.1           0.8          (0.1)          0.7 
--------------------------  ------------  -------------  -----------  ------------  -------------  ----------- 
 Income tax expense 
  for the year                       6.3            0.5          6.8           5.5            2.3          7.8 
--------------------------  ------------  -------------  -----------  ------------  -------------  -----------

The current taxation adjustment in respect of prior years primarily relates to non-deductible expenditure.

On 2 July 2013 the Government substantively enacted a reduction in the main rate of UK corporation tax from 23% to 21% with effect from 1 April 2014 and then from 21% to 20% with effect from 1 April 2015. Further reductions to 19% (effective from 1 April 2017) and to 17% (effective 1 April 2020) have also been substantively enacted. This will reduce the Company's future current tax charge accordingly.

   8.      Earnings per ordinary share

Basic

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

 
                                          2016         2015 
 Profit attributable to equity 
  holders of the parent (GBP 
  millions) 
 Continuing operations                    18.7         19.3 
 Discontinued operations                 118.8          9.4 
---------------------------------  -----------  ----------- 
                                         137.5         28.7 
  -------------------------------  -----------  ----------- 
 
 Weighted average number of 
  ordinary shares (number)          18,234,588   18,191,894 
---------------------------------  -----------  -----------

Diluted

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

 
                                           2016         2015 
--------------------------------    -----------  ----------- 
 Weighted average number of 
  ordinary shares                    18,234,588   18,191,894 
 Number of dilutive shares in 
  issue at the year end                 130,200      352,147 
----------------------------------  -----------  ----------- 
 Fully diluted weighted average 
  number of ordinary shares          18,364,788   18,544,041 
----------------------------------  -----------  ----------- 
 Dilutive shares being based 
  on: 
 Number of options outstanding 
  at the year end                       177,084      460,419 
 Exercise price (pence)                     720          720 
 Average share price during 
  the period (pence)                      2,720        3,062 
----------------------------------  -----------  ----------- 
 
   9.      Loans and advances to banks 
 
                                        Group        Group      Company      Company 
                                         2016         2015         2016         2015 
                                   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
--------------------------------  -----------  -----------  -----------  ----------- 
 Placements with banks included 
  in cash and cash equivalents 
  (Note 27)                              18.2          9.8         16.5          9.2 
--------------------------------  -----------  -----------  -----------  -----------

Included within loans and advances to banks are amounts placed with Arbuthnot Latham & Co., Limited, a related company prior to the sale of its controlling stake in the Group, of GBP5.0 million (31 December 2015: GBP5.3 million).

Moody's long-term ratings are as follows:

 
                                         Group        Group      Company      Company 
                                          2016         2015         2016         2015 
                                    GBPmillion   GBPmillion   GBPmillion   GBPmillion 
---------------------------------  -----------  -----------  -----------  ----------- 
 A1                                        4.6          0.1          4.6          0.1 
 A2                                          -        (1.4)            -            - 
 A3                                        8.6          5.8          6.9          3.8 
 Arbuthnot Latham & Co., Limited 
  - No rating                              5.0          5.3          5.0          5.3 
---------------------------------  -----------  -----------  -----------  ----------- 
                                          18.2          9.8         16.5          9.2 
---------------------------------  -----------  -----------  -----------  -----------

The GBP1.4 million negative balance in the Group 2015 figures above represented an overdraft attributable to continuing operations. When amounts included in loans and advances to banks attributable to discontinued operations are taken into account, the overall balance is in credit.

None of the loans and advances to banks are either past due or impaired.

   10.   Loans and advances to customers 
 
                                         Group        Group      Company      Company 
                                          2016         2015         2016         2015 
                                    GBPmillion   GBPmillion   GBPmillion   GBPmillion 
---------------------------------  -----------  -----------  -----------  ----------- 
 Gross loans and advances              1,381.5        994.9      1,316.9        953.3 
 Less: allowances for impairment 
  on loans and advances (Note 
  12)                                   (60.5)       (34.3)       (27.7)       (20.6) 
---------------------------------  -----------  -----------  -----------  ----------- 
                                       1,321.0        960.6      1,289.2        932.7 
---------------------------------  -----------  -----------  -----------  -----------

The fair value of loans and advances to customers is shown in Note 34. For a maturity profile of loans and advances to customers, refer to Note 30.

Group and Company

At 31 December 2016 loans and advances to customers of GBP180.6 million were pre-positioned under the Bank of England's Funding for Lending Scheme and were available for use as collateral within the scheme (2015: GBP56.4 million).

At 31 December 2016, GBP86.0 million of UK Treasury Bills were drawn under the Funding for Lending Scheme (2015: GBP36.0 million). During the period, these Treasury Bills were pledged as part of a sale and repurchase agreement with an original maturity period of six months (2015: six months). Monies arising as a result are disclosed in Note 20.

GBP0.2 million (2015: GBP0.2 million) is a standard mortgage loan, with a loan to value ratio of 64% (2015: 72%), secured upon residential property, and is neither past due nor impaired.

GBP451.0 million (2015: GBP368.0 million) of the loans are secured upon residential or commercial property and these are neither past due nor impaired. All portfolios of loans secured are at an initial loan to value ratio of less than 80%. All property valuations at loan inception, and the majority of development stage valuations, are performed by independent Chartered Surveyors, who perform their work in accordance with the Royal Institution of Chartered Surveyors Valuation - Professional Standards.

GBP236.2 million (2015: GBP165.7 million) of the loans are secured against motor vehicles where the security is discharged when the buyer exercises an option to buy the goods at a predetermined price at the end of the loan term. Management's estimate of the fair value of the motor vehicles was GBP173.4 million (2015: GBP127.1 million), giving a loan to value ratio of 136.2% (2015: 130.4%).

Group

GBP2.9 million (2015: GBP3.7 million) of collateral is held from RentSmart, against loans of GBP18.7 million (2015: GBP23.5 million). This collateral is included in trade payables at 31 December 2016. This is based upon the balance of customer receivables and expected new agreements during the following month.

   11.   Finance lease receivables

Loans and advances to customers include finance lease receivables as follows:

 
                                             Group        Group      Company      Company 
                                              2016         2015         2016         2015 
                                        GBPmillion   GBPmillion   GBPmillion   GBPmillion 
-------------------------------------  -----------  -----------  -----------  ----------- 
 Gross investment in finance 
  lease receivables: 
  - No later than 1 year                     163.5        121.4        151.7        103.9 
  - Later than 1 year and no 
   later than 5 years                        347.0        244.0        338.9        232.3 
  - Later than 5 years                         1.5          0.9          1.5          0.9 
-------------------------------------  -----------  -----------  -----------  ----------- 
                                             512.0        366.3        492.1        337.1 
 Unearned future finance income 
  on finance leases                        (151.2)      (109.0)      (146.2)      (103.3) 
-------------------------------------  -----------  -----------  -----------  ----------- 
 Net investment in finance leases            360.8        257.3        345.9        233.8 
-------------------------------------  -----------  -----------  -----------  ----------- 
 The net investment in finance 
  leases may be analysed as follows: 
  - No later than 1 year                      98.0         73.3         89.9         60.3 
  - Later than 1 year and no 
   later than 5 years                        261.5        183.2        254.7        172.7 
  - Later than 5 years                         1.3          0.8          1.3          0.8 
-------------------------------------  -----------  -----------  -----------  ----------- 
                                             360.8        257.3        345.9        233.8 
-------------------------------------  -----------  -----------  -----------  ----------- 
 
   12.   Allowances for impairment of loans and advances

Group

 
                                Individual   Collective                Provision 
                                 provision    provision        Total       cover 
                                GBPmillion   GBPmillion   GBPmillion           % 
-----------------------------  -----------  -----------  -----------  ---------- 
 Year ended 31 December 2016 
 Business finance 
   Real Estate Finance                   -          0.5          0.5        0.1% 
   Asset Finance                       0.4          0.1          0.5        0.4% 
   Commercial Finance                  0.4          0.1          0.5        0.8% 
 Consumer finance 
   Personal Lending                    3.5          0.7          4.2        6.0% 
   Motor Finance                      10.6          3.0         13.6        5.4% 
   Retail Finance                      4.0          0.9          4.9        1.5% 
 Other                                36.3            -         36.3       36.8% 
-----------------------------  -----------  -----------  -----------  ---------- 
                                      55.2          5.3         60.5        4.4% 
-----------------------------  -----------  -----------  -----------  ---------- 
 
 
                                Individual   Collective                Provision 
                                 provision    provision        Total       cover 
                                GBPmillion   GBPmillion   GBPmillion           % 
-----------------------------  -----------  -----------  -----------  ---------- 
 Year ended 31 December 2015 
 Business finance 
   Real Estate Finance                   -            -            -           - 
   Asset Finance                         -            -            -           - 
   Commercial Finance                  0.3            -          0.3        1.0% 
 Consumer finance 
   Personal Lending                    5.2          0.7          5.9        7.4% 
   Motor Finance                       7.2          0.7          7.9        4.6% 
   Retail Finance                      2.2          0.5          2.7        1.2% 
 Other                                17.4          0.1         17.5       35.2% 
-----------------------------  -----------  -----------  -----------  ---------- 
                                      32.3          2.0         34.3        3.4% 
-----------------------------  -----------  -----------  -----------  ----------

Provisions included in 'Other' are in respect of DMS and various legacy products. This segment also includes loans of GBP18.7 million (2015: GBP23.5 million) held in STB Leasing Limited. The credit risk associated with those loans is retained by its partner, RentSmart. Accordingly, no provision is held against the RentSmart loans.

The Group net impairment losses disclosed in the Consolidated Statement of Comprehensive Income can be analysed as follows:

 
                                      Continuing   Continuing   Discontinued        Total 
                                            2016         2015           2015         2015 
                                      GBPmillion   GBPmillion     GBPmillion   GBPmillion 
-----------------------------------  -----------  -----------  -------------  ----------- 
 Individual provision: charge 
  for impairment losses                     25.1         16.6            7.7         24.3 
 Collective provision: charge 
  for impairment losses                      3.3          0.9            0.2          1.1 
 Loans written off, net of amounts 
  utilised                                   1.2          0.3            0.7          1.0 
 Recoveries of loans written 
  off                                      (1.9)        (1.0)          (1.1)        (2.1) 
                                            27.7         16.8            7.5         24.3 
-----------------------------------  -----------  -----------  -------------  -----------

A reconciliation of the allowance accounts for losses on loans and advances is as follows:

 
                                                     2016         2015 
                                               GBPmillion   GBPmillion 
--------------------------------------------  -----------  ----------- 
 Individual allowances for impairment 
 At 1 January                                        32.3         32.1 
 Charge for impairment losses                        25.1         24.3 
 Amounts utilised                                  (10.7)        (9.5) 
 Changes to presentation in respect of debt 
  sales                                               8.5        (9.9) 
 Transfer to assets held-for-sale                       -        (4.7) 
--------------------------------------------  -----------  ----------- 
 At 31 December                                      55.2         32.3 
--------------------------------------------  -----------  ----------- 
 
 Collective allowances for impairment 
 At 1 January                                         2.0          2.0 
 Charge for impairment losses                         3.3          1.1 
 Transfer to assets held-for-sale                       -        (1.1) 
 At 31 December                                       5.3          2.0 
--------------------------------------------  -----------  ----------- 
 
 Total allowances for impairment                     60.5         34.3 
--------------------------------------------  -----------  -----------

Loans and advances to customers can be further summarised as follows:

 
                                         2016     2016         2015     2015 
                                   GBPmillion        %   GBPmillion        % 
--------------------------------  -----------  -------  -----------  ------- 
 Neither past due nor impaired        1,246.2    90.3%        939.1    94.4% 
 Not past due but impaired                0.6     0.0%            -     0.0% 
 Past due but not impaired               12.4     0.9%            -     0.0% 
 Past due up to 90 days and 
  impaired                               59.7     4.3%         24.8     2.5% 
 Past due after 90 days and 
  impaired                               62.6     4.5%         31.0     3.1% 
--------------------------------  -----------  -------  -----------  ------- 
 Gross                                1,381.5   100.0%        994.9   100.0% 
 Less: allowance for impairment        (60.5)                (34.3) 
--------------------------------  -----------  -------  -----------  ------- 
 Net                                  1,321.0                 960.6 
--------------------------------  -----------  -------  -----------  -------

Gross amounts of loans and advances to customers that were past due up to 90 days and impaired were as follows:

 
                                   2016         2015 
                             GBPmillion   GBPmillion 
------------------------    -----------  ----------- 
 Past due up to 30 days            44.3         16.5 
 Past due 30 - 60 days              9.8          5.5 
 Past due 60 - 90 days              5.6          2.8 
 Total                             59.7         24.8 
--------------------------  -----------  -----------

Gross amounts of loans and advances to customers that were past due but not impaired were as follows:

 
                                    2016         2015 
                              GBPmillion   GBPmillion 
-----------------------      -----------  ----------- 
 Past due up to 30 days              4.6            - 
 Past due 30 - 60 days               7.8            - 
 Total                              12.4            - 
-----------------------      -----------  -----------

Company

 
                                Individual   Collective                Provision 
                                 provision    provision        Total       cover 
                                GBPmillion   GBPmillion   GBPmillion           % 
-----------------------------  -----------  -----------  -----------  ---------- 
 Year ended 31 December 2016 
 Business finance 
   Real Estate Finance                   -          0.5          0.5        0.1% 
   Asset Finance                       0.4          0.1          0.5        0.4% 
   Commercial Finance                  0.4          0.1          0.5        0.8% 
 Consumer finance 
   Personal Lending                    3.5          0.7          4.2        6.0% 
   Motor Finance                      10.6          1.6         12.2        4.9% 
   Retail Finance                      4.0          0.9          4.9        1.5% 
 Other                                 3.5          1.4          4.9       13.4% 
-----------------------------  -----------  -----------  -----------  ---------- 
                                      22.4          5.3         27.7        2.1% 
-----------------------------  -----------  -----------  -----------  ---------- 
 
 
                                Individual   Collective                Provision 
                                 provision    provision        Total       cover 
                                GBPmillion   GBPmillion   GBPmillion           % 
-----------------------------  -----------  -----------  -----------  ---------- 
 Year ended 31 December 2015 
 Business finance 
   Real Estate Finance                   -            -            -           - 
   Asset Finance                         -            -            -           - 
   Commercial Finance                  0.3            -          0.3        1.0% 
 Consumer finance 
   Personal Lending                    5.2          0.7          5.9        7.4% 
   Motor Finance                       7.2          0.7          7.9        4.6% 
   Retail Finance                      2.2          0.5          2.7        1.2% 
 Other                                 3.6          0.2          3.8       10.6% 
-----------------------------  -----------  -----------  -----------  ---------- 
                                      18.5          2.1         20.6        2.2% 
-----------------------------  -----------  -----------  -----------  ----------

The Company net impairment losses included in the Company Statement of Comprehensive Income can be analysed as follows:

 
                                              2016         2015 
                                        GBPmillion   GBPmillion 
-----------------------------------    -----------  ----------- 
 Individual provision: Charge 
  for impairment losses                       25.8         16.5 
 Collective provision: Charge 
  for impairment losses                        3.2          1.0 
 Loans written off, net of amounts 
  utilised                                     0.9          0.2 
 Recoveries of loans written 
  off                                        (0.3)            - 
 Profit on sale of debt                      (1.0)            - 
                                              28.6         17.7 
  -----------------------------------  -----------  -----------

A reconciliation of the allowance accounts for losses on loans and advances is as follows:

 
                                                 2016         2015 
                                           GBPmillion   GBPmillion 
----------------------------------------  -----------  ----------- 
 Individual allowances for impairment 
 At 1 January                                    18.5         16.9 
 Charge for impairment losses                    25.8         16.5 
 Utilised                                       (8.5)        (2.8) 
 Release of allowance for impairment on 
  the sale of debt                             (13.4)       (12.1) 
 At 31 December                                  22.4         18.5 
----------------------------------------  -----------  ----------- 
 
 Collective allowances for impairment 
 At 1 January                                     2.1          1.1 
 Charge for impairment losses                     3.2          1.0 
 At 31 December                                   5.3          2.1 
----------------------------------------  -----------  ----------- 
 
 Total allowances for impairment                 27.7         20.6 
----------------------------------------  -----------  -----------

Loans and advances to customers can be further summarised as follows:

 
                                         2016     2016         2015     2015 
                                   GBPmillion        %   GBPmillion        % 
--------------------------------  -----------  -------  -----------  ------- 
 Neither past due nor impaired        1,227.9    93.3%        916.0    96.1% 
 Not past due but impaired                0.6     0.0%            -     0.0% 
 Past due but not impaired               12.4     0.9%            -     0.0% 
 Past due up to 90 days and 
  impaired                               59.4     4.5%         24.5     2.6% 
 Past due after 90 days and 
  impaired                               16.6     1.3%         12.8     1.3% 
--------------------------------  -----------  -------  -----------  ------- 
 Gross                                1,316.9   100.0%        953.3   100.0% 
 Less: allowance for impairment        (27.7)                (20.6) 
--------------------------------  -----------  -------  -----------  ------- 
 Net                                  1,289.2                 932.7 
--------------------------------  -----------  -------  -----------  -------

Gross amounts of loans and advances to customers that were past due up to 90 days and impaired were as follows:

 
                                   2016         2015 
                             GBPmillion   GBPmillion 
------------------------    -----------  ----------- 
 Past due up to 30 days            44.1         16.3 
 Past due 30 - 60 days              9.7          5.5 
 Past due 60 - 90 days              5.6          2.7 
 Total                             59.4         24.5 
--------------------------  -----------  -----------

Gross amounts of loans and advances to customers that were past due but not impaired were as follows:

 
                                    2016         2015 
                              GBPmillion   GBPmillion 
-----------------------      -----------  ----------- 
 Past due up to 30 days              4.6            - 
 Past due 30 - 60 days               7.8            - 
 Total                              12.4            - 
-----------------------      -----------  -----------

The impairment provision calculation is based on the individual past-due status of each loan.

Group and Company

Interest income on loans classified as impaired totalled GBP6.4 million (2015: GBP6.0 million).

   13.   Debt securities held-to-maturity

Debt securities of GBP20.0 million (31 December 2015: GBP3.8 million) represent UK Treasury Bills. The Company's intention is to hold them to maturity and, therefore, they are stated in the Statement of Financial Position at amortised cost.

All of the debt securities held-to-maturity had a rating agency designation at 31 December 2016, based on Moody's long-term ratings of Aa1. None of the debt securities held-to-maturity are either past due or impaired.

   14.   Equity instruments available-for-sale

On 13 April 2016, as part of the sale of ELG to NSF, the Group acquired 23,529,412 shares in NSF Plc at a cost of 69.25 pence per share. At 31 December 2016, these shares had a value of 57.5 pence per share. This equity instrument is considered to be available-for-sale, and therefore fair value changes on the Available-For-Sale securities are recognised directly in other comprehensive income and equity (AFS reserve) until the investment is sold or impaired. The fall in value is not considered to be significant or prolonged, and also given current market volatility, the directors do not consider this investment to be impaired. Accordingly, this reduction in value at 31 December 2016 of GBP2.8 million is recognised in the AFS reserve. A deferred tax asset has not been recognised on this amount.

   15.   Property, plant and equipment

Group

 
                                       Freehold                     Computer 
                                           land                          and 
                                            and       Leasehold        other 
                                      buildings    improvements    equipment        Total 
                                     GBPmillion      GBPmillion   GBPmillion   GBPmillion 
----------------------------------  -----------  --------------  -----------  ----------- 
 Cost or valuation 
 At 1 January 2015                          7.1             0.4          9.3         16.8 
 Additions                                    -             0.2          1.2          1.4 
 Transfer to assets held-for-sale             -           (0.6)        (0.4)        (1.0) 
 At 31 December 2015                        7.1               -         10.1         17.2 
----------------------------------  -----------  --------------  -----------  ----------- 
 Additions                                  1.4               -          1.1          2.5 
 Disposals                                    -               -        (0.3)        (0.3) 
 Revaluation                                0.5               -            -          0.5 
 At 31 December 2016                        9.0               -         10.9         19.9 
----------------------------------  -----------  --------------  -----------  ----------- 
 Accumulated depreciation 
 At 1 January 2015                        (0.5)           (0.3)        (7.9)        (8.7) 
 Depreciation charge                      (0.1)           (0.1)        (0.4)        (0.6) 
 Transfer to assets held-for-sale             -             0.4          0.2          0.6 
----------------------------------  -----------  --------------  -----------  ----------- 
 At 31 December 2015                      (0.6)               -        (8.1)        (8.7) 
----------------------------------  -----------  --------------  -----------  ----------- 
 Depreciation charge                      (0.1)               -        (0.5)        (0.6) 
 Disposals                                    -               -          0.1          0.1 
 Revaluation                                0.7               -            -          0.7 
----------------------------------  -----------  --------------  -----------  ----------- 
 At 31 December 2016                          -               -        (8.5)        (8.5) 
----------------------------------  -----------  --------------  -----------  ----------- 
 
 Net book amount 
----------------------------------  -----------  --------------  -----------  ----------- 
 At 31 December 2015                        6.5               -          2.0          8.5 
----------------------------------  -----------  --------------  -----------  ----------- 
 At 31 December 2016                        9.0               -          2.4         11.4 
----------------------------------  -----------  --------------  -----------  -----------

Company

 
                                            Computer 
                                                 and 
                               Freehold        other 
                               property    equipment        Total 
                             GBPmillion   GBPmillion   GBPmillion 
--------------------------  -----------  -----------  ----------- 
 Cost 
 At 1 January 2015                  2.7          8.7         11.4 
 Additions                            -          0.8          0.8 
 At 31 December 2015                2.7          9.5         12.2 
--------------------------  -----------  -----------  ----------- 
 Additions                          1.4          0.6          2.0 
 Disposals                            -        (0.3)        (0.3) 
 Revaluation                        0.5            -          0.5 
--------------------------  -----------  -----------  ----------- 
 At 31 December 2016                4.6          9.8         14.4 
--------------------------  -----------  -----------  ----------- 
 Accumulated depreciation

 At 1 January 2015                    -        (7.7)        (7.7) 
 Depreciation charge                  -        (0.3)        (0.3) 
 At 31 December 2015                  -        (8.0)        (8.0) 
--------------------------  -----------  -----------  ----------- 
 Depreciation charge              (0.1)        (0.3)        (0.4) 
 Disposals                            -          0.1          0.1 
 Revaluation                        0.1            -          0.1 
--------------------------  -----------  -----------  ----------- 
 At 31 December 2016                  -        (8.2)        (8.2) 
--------------------------  -----------  -----------  ----------- 
 
 Net book amount 
--------------------------  -----------  -----------  ----------- 
 At 31 December 2015                2.7          1.5          4.2 
--------------------------  -----------  -----------  ----------- 
 At 31 December 2016                4.6          1.6          6.2 
--------------------------  -----------  -----------  -----------

The Group's freehold properties are the Registered Office of the Company, which is fully utilised for the Group's own purposes, and Secure Trust House, Boston Drive, Bourne End, SL8 5YS, the majority of which up to the sale of ELG, was also used for the Group's own purposes. Since the sale, it is only partially used for the Group's own purposes. In addition, during the year the Group purchased 25 and 26 Neptune Court, Vanguard Way, Cardiff, CF24 5PJ for GBP1.4 million, the majority of which is used for the Group's own purposes.

The directors have assessed the value of the Group's freehold property at the year end through comparison to current rental yields on similar properties in the same area and an increase in the fair value of freehold property has been recognised and its carrying value has been adjusted accordingly. Changes in the fair value of freehold property are recognized in other comprehensive income, to the extent that any reductions do not exceed the initial increase.

The carrying value of freehold land which is included in the total carrying value of freehold land and buildings and which is not depreciated is GBP1.9 million (2015: GBP1.7 million).

The historical cost of freehold property included at valuation is as follows:

 
                                  Group        Group      Company      Company 
                                   2016         2015         2016         2015 
                             GBPmillion   GBPmillion   GBPmillion   GBPmillion 
--------------------------  -----------  -----------  -----------  ----------- 
 Cost                               7.9          6.5          4.1          2.7 
 Accumulated depreciation         (1.4)        (1.3)        (0.1)        (0.1) 
                                    6.5          5.2          4.0          2.6 
--------------------------  -----------  -----------  -----------  ----------- 
 
   16.   Intangible assets

Group

 
                                                                     Other 
                                                    Computer    intangible 
                                       Goodwill     software        assets        Total 
                                     GBPmillion   GBPmillion    GBPmillion   GBPmillion 
----------------------------------  -----------  -----------  ------------  ----------- 
 Cost or valuation 
 At 1 January 2015                          1.0          7.3           7.3         15.6 
 Additions                                    -          2.3             -          2.3 
 Transfer to assets held-for-sale             -        (0.3)         (5.1)        (5.4) 
 At 31 December 2015                        1.0          9.3           2.2         12.5 
----------------------------------  -----------  -----------  ------------  ----------- 
 Additions                                    -          3.6             -          3.6 
 At 31 December 2016                        1.0         12.9           2.2         16.1 
----------------------------------  -----------  -----------  ------------  ----------- 
 
 Accumulated amortisation 
 At 1 January 2015                            -        (3.8)         (3.6)        (7.4) 
 Amortisation charge                          -        (1.2)         (1.1)        (2.3) 
 Transfer to assets held-for-sale             -          0.2           4.0          4.2 
 At 31 December 2015                          -        (4.8)         (0.7)        (5.5) 
----------------------------------  -----------  -----------  ------------  ----------- 
 Amortisation charge                          -        (1.3)         (0.3)        (1.6) 
 At 31 December 2016                          -        (6.1)         (1.0)        (7.1) 
----------------------------------  -----------  -----------  ------------  ----------- 
 
 Net book amount 
----------------------------------  -----------  -----------  ------------  ----------- 
 At 31 December 2015                        1.0          4.5           1.5          7.0 
----------------------------------  -----------  -----------  ------------  ----------- 
 At 31 December 2016                        1.0          6.8           1.2          9.0 
----------------------------------  -----------  -----------  ------------  -----------

Goodwill above relates to the following cash generating units, which are part of the Retail Finance operating segment:

 
                          2016         2015 
                    GBPmillion   GBPmillion 
----------------   -----------  ----------- 
 Music business            0.3          0.3 
 V12                       0.7          0.7 
-----------------  -----------  ----------- 
 Total                     1.0          1.0 
-----------------  -----------  -----------

Company

 
                                             Computer 
                                Goodwill     software        Total 
                              GBPmillion   GBPmillion   GBPmillion 
--------------------------   -----------  -----------  ----------- 
 Cost or valuation 
 At 1 January 2015                   0.3          3.3          3.6 
 Additions                             -          2.2          2.2 
 At 31 December 2015                 0.3          5.5          5.8 
---------------------------  -----------  -----------  ----------- 
 Additions                             -          3.5          3.5 
 At 31 December 2016                 0.3          9.0          9.3 
---------------------------  -----------  -----------  ----------- 
 
 Accumulated amortisation 
 At 1 January 2015                     -        (2.3)        (2.3) 
 Amortisation charge                   -        (0.3)        (0.3) 
 At 31 December 2015                   -        (2.6)        (2.6) 
---------------------------  -----------  -----------  ----------- 
 Amortisation charge                   -        (0.5)        (0.5) 
 At 31 December 2016                   -        (3.1)        (3.1) 
---------------------------  -----------  -----------  ----------- 
 
 Net book amount 
--------------------------   -----------  -----------  ----------- 
 At 31 December 2015                 0.3          2.9          3.2 
---------------------------  -----------  -----------  ----------- 
 At 31 December 2016                 0.3          5.9          6.2 
---------------------------  -----------  -----------  -----------

Goodwill above relates to the music business cash generating unit, which is part of the Retail Finance operating segment.

The recoverable amount of these cash generating units are determined on a value in use calculation which uses cash flow projections based on financial forecasts covering a three year period, and a discount rate of 8%. Cash flow projections during the forecast period are based on the expected rate of new business. A zero growth based scenario is also considered. The directors believe that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash-generating unit.

   17.   Investments

Company

 
                                            Shares    Impairment            Net 
                                           at cost    provisions    investments 
                                        GBPmillion    GBPmillion     GBPmillion 
-------------------------------------  -----------  ------------  ------------- 
 At 31 December 2015, 1 January 2016 
  and 31 December 2016                         3.7             -            3.7 
-------------------------------------  -----------  ------------  -------------

Shares in subsidiary undertakings of Secure Trust Bank PLC at 31 December 2016 are stated at cost less any provision for impairment. All subsidiary undertakings are unlisted and none are banking institutions. The subsidiary undertakings were all incorporated in the UK and wholly owned via ordinary shares. All subsidiary undertakings are included in the consolidated financial statements and have an accounting reference date of 31 December.

Details are as follows:

 
                                            Principal activity 
----------------------------------  -------------------------- 
 Owned directly 
   Debt Managers (Services) 
    Limited                            Debt collection company 
   Secure Homes Services 
    Limited                                    Property rental 
   STB Leasing Limited                                 Leasing 
   V12 Finance Group Limited                   Holding company 
 Owned indirectly via intermediate 
  holding companies 
   V12 Personal Finance Limited                        Dormant 
                                     Sourcing and servicing of 
   V12 Retail Finance Limited                  unsecured loans 
----------------------------------  --------------------------

The registered office of the Company, and all subsidiary undertakings, is One Arleston Way, Shirley, Solihull, West Midlands, B90 4LH.

The following subsidiaries were sold to NSF on 13 April 2016, and were included in assets held-for-sale at 31 December 2015:

 
                                               Principal activity 
----------------------------------  ----------------------------- 
 Owned directly 
   Everyday Loans Holdings 
    Limited                                       Holding company 
 Owned indirectly via intermediate 
  holding companies 
                                        Sourcing and servicing of 
   Everyday Loans Limited             unsecured and secured loans 
                                        Provider of unsecured and 
   Everyday Lending Limited                         secured loans 
----------------------------------  ----------------------------- 
 
   18.   Deferred taxation 
 
                                             Group        Group      Company      Company 
                                              2016         2015         2016         2015 
                                        GBPmillion   GBPmillion   GBPmillion   GBPmillion 
-------------------------------------  -----------  -----------  -----------  ----------- 
 Deferred tax liabilities: 
 Unrealised surplus on revaluation 
  of freehold property                       (0.2)        (0.2)            -            - 
 Other short term timing differences             -          0.2            -            - 
-------------------------------------  -----------  -----------  -----------  ----------- 
 Deferred tax liabilities                    (0.2)            -            -            - 
-------------------------------------  -----------  -----------  -----------  ----------- 
 
 Deferred tax assets: 
 Other short term timing differences             -          0.3          0.1          0.6 
 Deferred tax assets                             -          0.3          0.1          0.6 
-------------------------------------  -----------  -----------  -----------  ----------- 
 
 Deferred tax liabilities: 
 At 1 January                                    -            -            -            - 
 Income statement                                -            -            -            - 
 Other comprehensive income                  (0.2)            -            -            - 
-------------------------------------  -----------  -----------  -----------  ----------- 
 At 31 December                              (0.2)            -            -            - 
-------------------------------------  -----------  -----------  -----------  ----------- 
 
 Deferred tax assets: 
 At 1 January                                  0.3          1.0          0.6          0.3 
 Income statement                            (0.3)        (0.3)        (0.4)          0.3 
 Other comprehensive income                      -            -        (0.1)            - 
 Transferred to assets held-for-sale             -        (0.4)            -            - 
-------------------------------------  -----------  -----------  -----------  ----------- 
 At 31 December                                  -          0.3          0.1          0.6 
-------------------------------------  -----------  -----------  -----------  -----------

On 2 July 2013 the Government substantively enacted a reduction in the main rate of UK corporation tax from 21% to 20% with effect from 1 April 2015, and on 26 October 2015 substantively enacted further reductions in the main rate of UK corporation tax to 19% with effect from 1 April 2017 and 17% with effect from 1 April 2020. This will reduce the Group's future current tax charge accordingly. Deferred tax has been calculated based on the enacted rates to the extent that the related temporary or timing differences are expected to reverse in the future periods.

   19.   Other assets 
 
                                            Group        Group      Company      Company 
                                             2016         2015         2016         2015 
                                       GBPmillion   GBPmillion   GBPmillion   GBPmillion 
------------------------------------  -----------  -----------  -----------  ----------- 
 Trade receivables                            0.7          1.5          0.6          1.4 
 Amounts due from related companies             -          1.3         31.2        142.0 
 Prepayments and accrued income               4.2          4.3          3.5          2.6 
                                              4.9          7.1         35.3        146.0 
------------------------------------  -----------  -----------  -----------  ----------- 
 
   20.   Due to banks 
 
                                     Group        Group      Company      Company 
                                      2016         2015         2016         2015 
                                GBPmillion   GBPmillion   GBPmillion   GBPmillion 
-----------------------------  -----------  -----------  -----------  ----------- 
 Amounts due to other credit 
  institutions                        70.0         35.0         70.0         36.4 
-----------------------------  -----------  -----------  -----------  -----------

Amounts due to banks for the current year represent monies arising from the sale and repurchase of drawings under the Funding for Lending Scheme. These are due for repayment between January 2017 and May 2017 (2015: March 2016).

   21.   Deposits from customers

Group and Company

 
                                  2016         2015 
                            GBPmillion   GBPmillion 
-------------------------  -----------  ----------- 
 Current/demand accounts          15.2         39.5 
 Term deposits                 1,136.6        993.6 
-------------------------  -----------  ----------- 
                               1,151.8      1,033.1 
-------------------------  -----------  -----------

For a maturity profile of deposits from customers, refer to Notes 30 and 32.

   22.   Other liabilities 
 
                                          Group        Group      Company      Company 
                                           2016         2015         2016         2015 
                                     GBPmillion   GBPmillion   GBPmillion   GBPmillion 
----------------------------------  -----------  -----------  -----------  ----------- 
 Trade payables                            21.2         13.8         17.5          8.3 
 Amounts due to related companies             -          0.1         13.2         10.4 
 Accruals and deferred income              27.8         10.3         26.3          9.5 
                                           49.0         24.2         57.0         28.2 
----------------------------------  -----------  -----------  -----------  -----------

Within Group and Company accruals and deferred income there is GBP15.8 million relating to accrued interest payable (2015: GBPnil).

Financial Services Compensation Scheme Levy

The liability for the Financial Services Compensation Scheme levy is included in accruals and deferred income of both Group and Company.

In common with all regulated UK deposit takers, the Company pays a levy to the Financial Services Compensation Scheme to enable it to meet claims against it. The levy consists of a compensation levy which covers the amount of compensation and a management expenses levy, which covers the costs of running the scheme and interest associated with compensation which the scheme pays.

The Company's Financial Services Compensation Scheme provision, reflects market participation up to the reporting date and the accrual of GBP0.3 million (2015: GBP0.2 million) relates to the levy for the scheme year 2016/17 which is payable in September 2017. This amount was calculated on the basis of the Company's share of protected deposits and the Financial Services Compensation Scheme's estimate of total interest levies payable for each scheme year.

   23.   Provisions for liabilities and charges

Customer redress provision

Details of the provision for outstanding potential customer redress claims are as follows:

 
                                                       2016         2015 
                                                 GBPmillion   GBPmillion 
----------------------------------------------  -----------  ----------- 
 Balance at 1 January                                   2.0          2.0 
 Charged to Statement of Comprehensive Income           0.4          2.6 
 Utilised                                             (1.1)        (2.0) 
 Transferred to assets held-for-sale                      -        (0.6) 
----------------------------------------------  -----------  ----------- 
 Balance at 31 December                                 1.3          2.0 
----------------------------------------------  -----------  -----------

The Group provides for its best estimate of redress payable in respect of historical sales of PPI, by considering the likely future uphold rate for claims, in the context of confirmed issues and historical experience. The likelihood of potential new claims is projected forward to 2019, as management believe this to be an appropriate time horizon, recognising the significant decline in recent claims experience and the increasing subjectivity beyond that. The accuracy of these estimates would be affected, were there to be a significant change in either the number of future claims or, the incidence of claims upheld by the Financial Ombudsman Service.

The Financial Conduct Authority is currently consulting on a proposed deadline for making customer redress claims. The ruling is expected to come into force in the middle of 2017 with a deadline of 2 years from the ruling, which would give consumers until approximately August 2019 to make a claim.

   24.   Contingent liabilities and commitments

Capital commitments

At 31 December 2016, the Group had no capital commitments (2015: GBPnil).

The Company had no capital commitments (2015: GBPnil).

Credit commitments

See Note 29 for details of the Group and Company commitments to extend credit to customers.

Operating lease commitments

Group

The future aggregate lease payments for non-cancellable operating leases are as follows:

 
                                        2016                      2015 
                                     Land                      Land 
                                      and                       and 
                                buildings        Other    buildings        Other 
                               GBPmillion   GBPmillion   GBPmillion   GBPmillion 
----------------------------  -----------  -----------  -----------  ----------- 
 Within 1 year                        0.3          0.4          1.0          0.5 
 Between 1 year and 5 years           0.9          0.1          1.6          0.3 
 Over 5 years                         0.1            -          0.3            - 
----------------------------  -----------  -----------  -----------  ----------- 
                                      1.3          0.5          2.9          0.8 
----------------------------  -----------  -----------  -----------  -----------

Company

The future aggregate lease payments for non-cancellable operating leases are as follows:

 
                                        2016                      2015 
                                     Land                      Land 
                                      and                       and 
                                buildings        Other    buildings        Other 
                               GBPmillion   GBPmillion   GBPmillion   GBPmillion 
----------------------------  -----------  -----------  -----------  ----------- 
 Within 1 year                        0.1          0.3          0.1          0.3 
 Between 1 year and 5 years           0.4          0.1          0.6          0.2 
 Over 5 years                         0.1            -          0.1            - 
----------------------------  -----------  -----------  -----------  ----------- 
                                      0.6          0.4          0.8          0.5 
----------------------------  -----------  -----------  -----------  -----------

There are 4 leases classified as land and buildings in the Group (2015: 35). Other leases include motor vehicles and computer hardware.

   25.   Share capital 
 
                                               Number     Ordinary 
                                            of shares       shares 
                                                        GBPmillion 
----------------------------------------  -----------  ----------- 
 At 1 January 2015 and 31 December 2015    18,191,894          7.3 
 Shares issued during year                    283,335          0.1 
----------------------------------------  -----------  ----------- 
 At 31 December 2016                       18,475,229          7.4 
----------------------------------------  -----------  -----------

Share capital comprises ordinary shares with a par value of 40 pence each.

   26.   Share based payments

Equity settled share based payments

On 17 October 2011, the Group established the Share Option Scheme entitling three directors and certain senior employees to purchase shares in the Company.

The performance conditions of the Scheme are that for the duration of the vesting period, the dividends paid by the Company must have increased in percentage terms when compared to an assumed dividend of GBP8 million in respect of the financial year ending 31 December 2012, by a minimum of the higher of the increase in the Retail Prices Index during that period or 5% per annum.

All dividends paid by the Company each year during the vesting period must be paid from the Company's earnings referable to that year. Also from the grant date to the date the option is exercised, there must be no public criticism by any regulatory authority on the operation of the Company or any of its subsidiaries which has a material impact on the business of the Company.

Options are forfeited if they remain unexercised after a period of more than 10 years from the date of grant. If the participant ceases to be employed by the Group by reason of injury, disability, ill-health or redundancy; or because his employing company ceases to be a shareholder of the Group; or because his employing business is being transferred out of the Group, his option may be exercised within six months after such cessation. In the event of the death of a participant, the personal representatives of a participant may exercise an option, to the extent exercisable at the date of death, within six months after the death of the participant.

On cessation of employment for any other reason (or when a participant serves, or has been served with, notice of termination of such employment), the option will lapse although the Remuneration Committee has discretion to allow the exercise of the option for a period not exceeding six months from the date of such cessation.

In such circumstances, the performance conditions may be modified or waived as the Remuneration Committee, acting fairly and reasonably and taking due consideration of the circumstances, thinks fit. The number of Ordinary Shares which can be acquired on exercise will be pro-rated on a time elapsed basis, unless the Remuneration Committee, acting fairly and reasonably and taking due consideration of the circumstances, decides otherwise. In determining whether to exercise its discretion in these respects, the Remuneration Committee must satisfy itself that the early exercise of an option does not constitute a reward for failure.

On 2 November 2011, 934,998 share options were granted at an exercise price of GBP7.20 per share. Approximately half of the share options vested and became exercisable on 2 November 2014, with the remainder vesting and becoming exercisable on 2 November 2016, being classed as share option tranches SOS1 and SOS2 respectively. On 7 November 2016, 283,335 SOS2 options were exercised, leaving 177,084 SOS2 share options unexercised at 31 December 2016. A total of 14,167 share options have been forfeited since their grant date.

The Share Option Scheme is an equity settled scheme. The original grant date valuation was determined to be GBP1.69 per option and this valuation has been used in the calculation. An attrition rate of option holders has been assumed of nil for the second tranche of share options. Due to the options being fully conditional knockout options, a probability of pay-out has been assigned based on the likelihood of meeting the performance criteria, which is 100% for SOS2. The Company incurred an expense in relation to share based payments of GBP0.1 million during 2016, as disclosed in Note 5 (2015: GBP0.2 million).

 
                                               2016      2016         2015      2015 
 
                                                No.                    No. 
                                          of option              of option 
                                            holders      SOS2      holders      SOS2 
--------------------------------------  -----------  --------  -----------  -------- 
 Directors                                        2   177,084            3   318,751 
 Senior management                                -         -            5   141,668 
--------------------------------------  -----------  --------  -----------  -------- 
 Share options in issue                           2   177,084            8   460,419 
--------------------------------------  -----------  --------  -----------  -------- 
 Exercise price (GBP)                                    7.20                   7.20 
 Grant date value per option 
  (GBP)                                                  1.69                   1.69 
--------------------------------------  -----------  --------  -----------  -------- 
 Fair value of share options, 
  if all share options were exercised 
  (GBPmillion)                                            0.3                    0.8 
--------------------------------------  -----------  --------  -----------  -------- 
 Behavioural assumption (attrition)                         -                      - 
 Probability of pay-out                                  100%                   100% 
--------------------------------------  -----------  --------  -----------  -------- 
 Assumed value of share options 
  on exercise date (GBPmillion)                           0.3                    0.8 
--------------------------------------  -----------  --------  -----------  -------- 
 
 Value of share options at 31 
  December 2016 (GBPmillion)                              0.3                    0.6 
--------------------------------------  -----------  --------  -----------  --------

Cash settled share based payments

On 16 March 2015, a four year 'phantom' share option scheme was established in order to provide effective long-term incentive to senior management of the Group. Under the scheme, no actual shares would be issued by the Company, but those granted awards under the scheme would be entitled to a cash payment. The amount of the award is calculated by reference to the increase in the value of an Ordinary share in the Company over an initial value set at GBP25 per Ordinary share, being the price at which the shares resulting from the exercise of the first tranche of share options under the Share Option Scheme were sold in November 2014.

As at 31 December 2016, 312,917 (2015: 326,917) share options remained outstanding.

As at 31 December 2016, the estimated fair value has been prepared using the Black-Scholes model. Measurement inputs and assumptions used were as follows:

 
                                        2016     2015 
---------------------------------    -------  ------- 
 Expected stock price volatility      40.00%   27.00% 
 Expected dividend yield               3.40%    2.09% 
 Risk free interest rate               0.06%    0.72% 
 Average expected life (years)          1.84     2.85 
-----------------------------------  -------  -------

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

 
                                          2016         2015 
                                    GBPmillion   GBPmillion 
-------------------------------    -----------  ----------- 
 Liability at 1 January                    1.2            - 
 Charge for the year (included 
  in staff costs - see Note 5)           (0.6)          1.2 
---------------------------------  -----------  ----------- 
 Liability at 31 December                  0.6          1.2 
---------------------------------  -----------  ----------- 
 Intrinsic value                             -          0.8 
---------------------------------  -----------  ----------- 
 
   27.   Cash and cash equivalents

For the purposes of the Statement of Cash Flows, cash and cash equivalents comprise the following balances with less than three months' maturity from the date of acquisition.

 
                                          Group        Group      Company      Company 
                                           2016         2015         2016         2015 
                                     GBPmillion   GBPmillion   GBPmillion   GBPmillion 
----------------------------------  -----------  -----------  -----------  ----------- 
 Cash and balances at central 
  banks                                   112.0        131.8        112.0        131.8 
 Loans and advances to banks 
  (Note 9)                                 18.2          9.8         16.5          9.2 
                                          130.2        141.6        128.5        141.0 
 Included in assets held-for-sale 
   Loans and advances to banks 
    (Note 37)                                 -          1.7            -            - 
----------------------------------  -----------  -----------  -----------  ----------- 
                                          130.2        143.3        128.5        141.0 
----------------------------------  -----------  -----------  -----------  ----------- 
 
   28.   Financial risk management strategy

By their nature, the Group's activities are principally related to the use of financial instruments. The directors and senior management of the Group have formally adopted a Group Risk Appetite Statement which sets out the Board's attitude to risk and internal controls. Key risks identified by the directors are formally reviewed and assessed at least once a year by the Board, in addition to which key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data.

A more detailed description of the risk governance structure is contained in the Strategic Report beginning on page 14.

The principal financial risks inherent in the Group's business are credit risk (Note 29), market risk (Note 30), liquidity risk (Note 31), and capital risk (Note 32).

   29.   Credit risk

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

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

Impairment provisions are provided for losses that have been incurred at the Statement of Financial Position date. Significant changes in the economy could result in losses that are different from those provided for at the Statement of Financial Position date. Management therefore carefully manages its exposures to credit risk as they consider this to be the most significant risk to the business.

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

For Real Estate Finance and Commercial Finance, lending decisions are made on an individual transaction basis, using expert judgement and assessment against criteria set out in the lending policies. Asset Finance lending is outsourced to Haydock, who operate in line with the Group's credit policies and risk appetite. The loans are secured against the assets lent against (real estate, trade receivables and commercial plant and equipment, respectively). Disclosures relating to collateral and arrears on loans and advances to customers are disclosed in Notes 10 and 12 respectively.

The Board monitors the ratings of the counterparties in relation to the Group's loans and advances to banks. Disclosures of these at the year end are contained in Note 9. There is no direct exposure to the Eurozone and peripheral Eurozone countries.

The maximum exposure to credit risk for the Company and the Group was as follows:

 
                                          Group        Group      Company      Company 
                                           2016         2015         2016         2015 
                                     GBPmillion   GBPmillion   GBPmillion   GBPmillion 
----------------------------------  -----------  -----------  -----------  ----------- 
 Cash and balances at central 
  banks                                   112.0        131.8        112.0        131.8 
 Loans and advances to banks               18.2          9.8         16.5          9.2 
 Loan and advances to customers         1,321.0        960.6      1,289.2        932.7 
 Debt securities held-to-maturity          20.0          3.8         20.0          3.8 
 Trade receivables                          0.7          1.5          0.6          1.4 
 Amounts due from related parties             -          1.3         31.2        142.0 
 Assets held-for-sale                         -        118.5            -            - 
 
 Credit risk exposures relating 
  to off-balance sheet assets 
  are as follows: 
 Loan commitments                         178.0        138.6        177.8        138.6 
----------------------------------  -----------  -----------  -----------  ----------- 
 At 31 December                         1,649.9      1,365.9      1,647.3      1,359.5 
----------------------------------  -----------  -----------  -----------  -----------

The above table represents the maximum credit risk exposure (net of impairment) to the Company and Group at 31 December 2016 and 2015 without taking account of any collateral held or other credit enhancements attached. For on-balance sheet assets, the exposures are based on the net carrying amounts as reported in the Statement of Financial Position.

Concentration risk

Management assesses the potential concentration risk from geographic, product and individual loan concentration. Due to the well diversified nature of the Group's lending operations the directors do not consider there to be a material exposure arising from concentration risk. The increase in lending balances and loan commitments in the London region is principally due to the increase in Real Estate Finance activities during the year. The concentration by product and location of the Group and Company's lending to customers and loan commitments are detailed below:

Group

 
                                          Loans and advances to 
                                                 customers                            Loan commitments 
                                                                                                Continuing 
                                                                                                operations 
                                         Continuing   Discontinued                                     and 
                                Total    operations     operations        Total        Total         Total 
                                 2016          2015           2015         2015         2016          2015 
                           GBPmillion    GBPmillion     GBPmillion   GBPmillion   GBPmillion    GBPmillion 
------------------------  -----------  ------------  -------------  -----------  -----------  ------------ 
 Concentration by 
  product 
 Business Finance: 
    Real Estate Finance         451.0         368.0              -        368.0         99.4         109.0 
    Asset Finance               117.2          70.7              -         70.7         19.5          20.1 
    Commercial Finance           62.8          29.3              -         29.3         28.9           9.3 
 Consumer Finance:

    Personal Lending             65.5          74.3          114.3        188.6            -             - 
    Motor                       236.2         165.7              -        165.7          0.6           0.2 
    Retail                      325.9         220.4              -        220.4         28.6             - 
    Other                        62.4          32.2              -         32.2          1.0             - 
------------------------  -----------  ------------  -------------  -----------  -----------  ------------ 
 At 31 December               1,321.0         960.6          114.3      1,074.9        178.0         138.6 
------------------------  -----------  ------------  -------------  -----------  -----------  ------------ 
 
 Concentration by 
  region: 
 East Anglia                    113.1          89.4           10.4         99.8         19.7          28.1 
 East Midlands                   52.3          41.4           11.3         52.7          3.0           1.1 
 London                         415.3         300.6           17.0        317.6         61.3          55.0 
 North East                      37.4          24.5              -         24.5          2.2           0.6 
 North West                     120.8          73.4            7.6         81.0         17.0           4.9 
 Northern Ireland                12.5           8.3           15.6         23.9          0.4             - 
 Scotland                        90.3          62.7            3.0         65.7         10.6           2.0 
 South East                     205.0         125.5            5.8        131.3         35.0          28.4 
 South West                      62.6          44.2            8.4         52.6         12.1           4.4 
 Wales                           46.8          35.1            5.3         40.4          4.2           1.4 
 West Midlands                   80.5          59.0            4.9         63.9          5.5           4.0 
 Yorkshire and the 
  Humber                         69.1          52.4           13.5         65.9          3.9           3.0 
 Overseas                        15.3          44.1           11.5         55.6          3.1           5.7 
------------------------  -----------  ------------  -------------  -----------  -----------  ------------ 
 At 31 December               1,321.0         960.6          114.3      1,074.9        178.0         138.6 
------------------------  -----------  ------------  -------------  -----------  -----------  ------------

The above table relates to the location of the borrower. The majority of the overseas borrowers are Real Estate Finance clients. All of the property secured against Real Estate Finance loans is based in the United Kingdom.

Company

 
                                     Loans and 
                                    advances to 
                                     customers             Loan commitments 
                                    2016         2015         2016         2015 
                              GBPmillion   GBPmillion   GBPmillion   GBPmillion 
---------------------------  -----------  -----------  -----------  ----------- 
 Concentration by product: 
 Business Finance: 
    Real Estate Finance            451.0        368.0         99.4        109.0 
    Asset Finance                  117.2         70.7         19.5         20.1 
    Commercial Finance              62.8         29.3         28.9          9.3 
 Consumer Finance: 
    Personal Lending                65.5         74.3            -            - 
    Motor                          236.2        165.7          0.6          0.2 
    Retail                         325.9        220.4         28.6            - 
    Other                           30.6          4.3          0.8            - 
---------------------------  -----------  -----------  -----------  ----------- 
 At 31 December                  1,289.2        932.7        177.8        138.6 
---------------------------  -----------  -----------  -----------  ----------- 
 
 Concentration by region: 
 East Anglia                       110.4         87.0         19.7         28.1 
 East Midlands                      50.1         39.4          3.0          1.1 
 London                            411.2        297.5         61.1         55.0 
 North East                         35.9         23.2          2.2          0.6 
 North West                        117.1         69.9         17.0          4.9 
 Northern Ireland                   11.9          7.8          0.4            - 
 Scotland                           87.1         59.5         10.6          2.0 
 South East                        200.6        122.2         35.0         28.4 
 South West                         60.3         42.6         12.1          4.4 
 Wales                              45.1         33.5          4.2          1.4 
 West Midlands                      77.8         56.4          5.5          4.0 
 Yorkshire and the Humber           66.4         50.0          3.9          3.0 
 Overseas                           15.3         43.7          3.1          5.7 
---------------------------  -----------  -----------  -----------  ----------- 
 At 31 December                  1,289.2        932.7        177.8        138.6 
---------------------------  -----------  -----------  -----------  -----------

Forbearance (relating to continuing operations)

The Group does not routinely reschedule contractual arrangements where customers default on their repayments. It may offer the customer the option to reduce or defer payments for a short period, in which cases the loan will retain the normal contractual payment due dates and will be treated the same as any other defaulting cases for impairment purposes. Arrears tracking will continue on the account with any impairment charge being based on the original contractual due dates for all products.

Implementation of IFRS 9

The Group has continued its project to enable compliance with IFRS 9. The main impact of the standard, which is described more fully in Note 1.2, is in accounting for impairment. The classification and measurement and hedge accounting phases of the standard have no material impact on the Group. The standard fundamentally changes the calculation and recognition of credit losses, by introducing the requirement to base impairment provisions on expected credit losses over the life of the financial asset. It also requires credit losses to be recognised for all loans, in contrast to the current standard (IAS 39) which requires recognition of losses only when there is evidence of impairment. The models used to calculate expected credit losses need to include forward looking factors including macro-economic variables.

The project is sponsored by the Chief Financial Officer and is resourced by the Group's Finance, Credit Risk, IT and Change teams. It has focused on the following areas:

 
      --   Interpreting the requirements of the standard and 
            developing detailed business requirements for a 
            compliant solution. This work has been done in conjunction 
            with external consultants and engagement is underway 
            with the Group's auditors. 
      --   Designing, building and testing credit risk models, 
            that use the historic performance of loans and forward 
            looking factors, including macro-economic effects, 
            to estimate expected credit losses. Model build 
            is well progressed and the Group expects to be able 
            to use the second half of 2017 to run and calibrate 
            the models. As a precursor to building IFRS 9 models 
            for the Business Finance portfolios, credit grading 
            models which assign probabilities of default to 
            these loans have been developed and are now being 
            tested and calibrated. 
      --   Assess data requirements and build the IT support 
            required to run the models and associated processes. 
            To date no significant issues with the availability 
            of data have been identified. Prototype models have 
            been successfully run on the Group's IT systems. 
      --   Develop the disclosures required by IFRS 7 that 
            pertain to IFRS 9, and related internal management 
            information. 
 
   30.   Market risk

Market risks arise from open positions in interest rate and currency products, all of which are exposed to general and specific market movements. The Group and Company have no significant exposures to foreign currencies and therefore there is no significant currency risk.

Interest rate risk

Interest rate risk is the potential adverse impact on the Company and Group's future cash flows from changes in interest rates and arises from the differing interest rate risk characteristics of the Company and Group's assets and liabilities. In particular, fixed rate savings and borrowing products expose the Group to the risk that a change in interest rates could cause either a reduction in interest income or an increase in interest expense relative to variable rate interest flows. The Group seeks to 'match' interest rate risk on either side of the Statement of Financial Position. However, this is not a perfect match and interest rate risk is present on money market deposits of a fixed rate nature, fixed rate loans and fixed rate savings products. The Group monitors the interest rate mismatch on a daily basis in conjunction with liquidity and capital.

The interest rate mismatch is monitored, throughout the maturity bandings of the book on a parallel scenario for 100 and 200 basis points movements. The Group considers the 100 and 200 basis points movement to be appropriate for scenario testing given the current economic outlook and industry expectations. This typically results in a pre-tax mismatch of GBP0.7 million or less (2015: GBP1.0 million or less) for the Company and Group, with the same impact to equity pre-tax.

Interest rate sensitivity gap

The following tables summarise the re-pricing periods for the assets and liabilities in the Company and Group, including derivative financial instruments which are principally used to hedge exposure to interest rate risk. Items are allocated to time bands by reference to the earlier of the next contractual interest rate re-price and the maturity date.

Group

 
                                                 More         More         More 
                                                 than         than         than 
                                             3 months     6 months       1 year 
                                                  but          but          but 
                                                 less         less         less         More          Non 
                                  Within         than         than         than         than     interest 
                                3 months     6 months       1 year      5 years      5 years      bearing        Total 
                              GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 As at 31 December 
  2016 
 ASSETS 
 Cash and balances 
  at central banks                 112.0            -            -            -            -            -        112.0 
 Loans and advances 
  to banks                          18.2            -            -            -            -            -         18.2 
 Debt securities 
  held-to-maturity                  20.0            -            -            -            -            -         20.0 
 Loans and advances 
  to customers                     378.7        119.7        164.8        644.6            -         13.2      1,321.0 
 Other assets                          -            -            -            -            -         38.8         38.8 
 Total assets                      528.9        119.7        164.8        644.6            -         52.0      1,510.0 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 LIABILITIES AND 
  EQUITY 
 Due to banks                       30.0         40.0            -            -            -            -         70.0 
 Deposits from customers           462.4         66.7         63.8        535.9         23.0            -      1,151.8 
 Other liabilities                     -            -            -            -            -         52.2         52.2 
 Equity                                -            -            -            -            -        236.0        236.0 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Total liabilities 
  and equity                       492.4        106.7         63.8        535.9         23.0        288.2      1,510.0 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Interest rate sensitivity 
  gap                               36.5         13.0        101.0        108.7       (23.0)      (236.2) 
---------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 
 Cumulative gap                     36.5         49.5        150.5        259.2        236.2            - 
---------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 
 
                                                 More         More         More 
                                                 than         than         than 
                                             3 months     6 months       1 year 
                                                  but          but          but 
                                                 less         less         less         More          Non 
                                  Within         than         than         than         than     interest 
                                3 months     6 months       1 year      5 years      5 years      bearing        Total 
                              GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 As at 31 December 
  2015 
 ASSETS 
 Cash and balances 
  at central banks                 131.8            -            -            -            -            -        131.8 
 Loans and advances 
  to banks                           9.8            -            -            -            -            -          9.8 
 Debt securities 
  held-to-maturity                   3.8            -            -            -            -            -          3.8 
 Loans and advances 
  to customers                     163.4        138.4        172.2        520.9            -       (34.3)        960.6 
 Other assets                          -            -            -            -            -         22.9         22.9 
 Assets held-for-sale              118.5            -            -            -            -            -        118.5 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Total assets                      427.3        138.4        172.2        520.9            -       (11.4)      1,247.4 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 LIABILITIES AND 
  EQUITY 
 Due to banks                          -         35.0            -            -            -            -         35.0 
 Deposits from customers            97.9        371.0         94.4        432.0         37.8            -      1,033.1 
 Other liabilities                     -            -            -            -            -         29.4         29.4 
 Liabilities held-for-sale           8.7            -            -            -            -            -          8.7 
 Equity                                -            -            -            -            -        141.2        141.2 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Total liabilities 
  and equity                       106.6        406.0         94.4        432.0         37.8        170.6      1,247.4 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Interest rate sensitivity 
  gap                              320.7      (267.6)         77.8         88.9       (37.8)      (182.0) 
---------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 
 Cumulative gap                    320.7         53.1        130.9        219.8        182.0            - 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------

Company

 
                                                 More         More         More 
                                                 than         than         than 
                                             3 months     6 months       1 year 
                                                  but          but          but 
                                                 less         less         less         More          Non 
                                  Within         than         than         than         than     interest 
                                3 months     6 months       1 year      5 years      5 years      bearing        Total 
                              GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 As at 31 December 
  2016 
 ASSETS 
 Cash and balances 
  at central banks                 112.0            -            -            -            -            -        112.0 
 Loans and advances 
  to banks                          16.5            -            -            -            -            -         16.5 
 Debt securities 
  held-to-maturity                  20.0            -            -            -            -            -         20.0 
 Loans and advances 
  to customers                     378.6        119.1        162.3        629.2            -            -      1,289.2 
 Other assets                          -            -            -            -            -         65.0         65.0 
 Total assets                      527.1        119.1        162.3        629.2            -         65.0      1,502.7 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 LIABILITIES AND 
  EQUITY 
 Due to banks                       30.0         40.0            -            -            -            -         70.0 
 Deposits from customers           462.4         66.7         63.8        535.9         23.0            -      1,151.8 
 Other liabilities                     -            -            -            -            -         59.1         59.1 
 Equity                                -            -            -            -            -        221.8        221.8 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Total liabilities

  and equity                       492.4        106.7         63.8        535.9         23.0        280.9      1,502.7 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Interest rate sensitivity 
  gap                               34.7         12.4         98.5         93.3       (23.0)      (215.9) 
---------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 
 Cumulative gap                     34.7         47.1        145.6        238.9        215.9            - 
---------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 
 
                                                 More         More         More 
                                                 than         than         than 
                                             3 months     6 months       1 year 
                                                  but          but          but 
                                                 less         less         less         More          Non 
                                  Within         than         than         than         than     interest 
                                3 months     6 months       1 year      5 years      5 years      bearing        Total 
                              GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 As at 31 December 
  2015 
 ASSETS 
 Cash and balances 
  at central banks                 131.8            -            -            -            -            -        131.8 
 Loans and advances 
  to banks                           9.2            -            -            -            -            -          9.2 
 Debt securities 
  held-to-maturity                   3.8            -            -            -            -            -          3.8 
 Loans and advances 
  to customers                     145.7        133.2        164.9        509.5            -       (20.6)        932.7 
 Other assets                          -            -            -            -            -        157.7        157.7 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Total assets                      290.5        133.2        164.9        509.5            -        137.1      1,235.2 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 LIABILITIES AND 
  EQUITY 
 Due to banks                          -         35.0            -            -            -          1.4         36.4 
 Deposits from customers            97.9        371.0         94.4        432.0         37.8            -      1,033.1 
 Other liabilities                     -            -            -            -            -         30.5         30.5 
 Equity                                -            -            -            -            -        135.2        135.2 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Total liabilities 
  and equity                        97.9        406.0         94.4        432.0         37.8        167.1      1,235.2 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Interest rate sensitivity 
  gap                              192.6      (272.8)         70.5         77.5       (37.8)       (30.0) 
---------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 
 Cumulative gap                    192.6       (80.2)        (9.7)         67.8         30.0            - 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------

The method of allocating deposits from customers to the appropriate time bands has been revised during the year, resulting in a more accurate representation of the contractual interest rate re-price and the maturity dates.

   31.   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.

The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The liquidity requirements of the Group are met through withdrawing funds from its Bank of England Reserve Account to cover any short-term fluctuations and, longer term funding to address any structural liquidity requirements.

The Company has a formal governance structure in place to manage and mitigate liquidity risk on a day to day basis. The Board sets and approves the Company's liquidity risk management strategy. The ALCO, comprising senior executives of the Company, monitors liquidity risk. Key liquidity risk management information is reported by the Treasury function and monitored by the Chief Executive Officer and Chief Financial Officer on a daily basis. The ALCO meets monthly to review liquidity risk against set thresholds and risk indicators including early warning indicators, liquidity risk tolerance levels and ILAAP metrics.

The Company issued fixed rate deposit bonds to customers during the year as set out below:

 
                    2016       2015 
-------        ---------  --------- 
                  GBP299     GBP172 
 Amount          million    million 
                    1 to       1 to 
 Term            7 years    7 years 
-------        ---------  ---------

These were issued to broadly match the term lending by the Company.

The PRA requires a firm to maintain at all times liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due. There is also a requirement that a firm ensures its liquidity resources contain an adequate buffer of high quality, unencumbered assets (i.e. Government Securities in the liquidity asset buffer); and it maintains a prudent funding profile. The liquidity assets buffer is a pool of highly liquid assets that can be called upon to create sufficient liquidity to meet liabilities on demand, particularly in a period of liquidity stress. The liquidity resources outside the buffer must either be marketable assets with a demonstrable secondary market that the firm can access, or a credit facility that can be activated in times of stress.

The Group has a Board approved ILAAP. The ILAAP rules require STB to identify, measure, manage and monitor liquidity and funding risks across different time horizons and stress scenarios, consistent with STB's risk appetite as established by the STB Board. The ILAAP seeks to document STB's approach to liquidity and funding, and demonstrate that it complies with the Overall Liquidity Adequacy Rule. The PRA's approach to liquidity supervision is based on the principle that a firm must have adequate levels of liquidity resources and a prudent funding profile, and that it comprehensively manages and controls liquidity and funding risks. The liquidity buffer required by the ILAAP has been put in place and maintained since that time. Liquidity resources outside of the buffer are made up of deposits placed at the Bank of England. The ILAAP is updated annually.

The primary measures used by management to assess the adequacy of liquidity is the Overall Liquidity Adequacy Requirement, which is the Board's own view of the Group's liquidity needs as set out in the Board approved ILAAP. The Group maintained liquidity in excess of the Overall Liquidity Adequacy Requirement throughout the year ended 31 December 2016.

The LCR regime has applied to the Group from 1 October 2016, requiring management of net 30 day cash outflows as a proportion of High Quality Liquid Assets. STB has set a more prudent internal limit. The actual LCR has significantly exceeded both limits throughout the year.

The Group is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan draw-downs. The Group maintains significant cash resources to meet all of these needs as they fall due.

The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain term and of different types.

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates.

The tables below analyse the contractual undiscounted cash flows for the financial liabilities and assets into relevant maturity groupings:

Group

 
                                                                          More         More 
                                                                          than         than 
                                                                      3 months       1 year 
                                               Gross          Not          but          but 
                                             nominal         more         less         less         More 
                               Carrying      inflow/         than         than         than         than 
                                 amount    (outflow)     3 months       1 year      5 years      5 years 
                             GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 At 31 December 2016 
 Non-derivative financial 
  liabilities 
 Due to banks                    (70.0)       (70.0)       (30.0)       (40.0)            -            - 
 Deposits from customers      (1,151.8)    (1,202.9)      (461.6)      (147.9)      (569.5)       (23.9) 
 Other financial 
  liabilities                    (18.3)       (18.3)       (18.3)            -            -            - 
                              (1,240.1)    (1,291.2)      (509.9)      (187.9)      (569.5)       (23.9) 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Non-derivative financial 
  assets 
 Cash and balances 
  at central banks                112.0        112.0        112.0            -            -            - 
 Loans and advances 
  to banks                         18.2         18.2         18.2            -            -            - 
 Debt securities 
  held-to-maturity                 20.0         20.0         20.0            -            -            - 
 Loans and advances 
  to customers                  1,321.0      1,955.5        349.1        413.9      1,192.2          0.3 
 Other financial 
  assets                            0.9          0.9          0.9            -            -            - 
                                1,472.1      2,106.6        500.2        413.9      1,192.2          0.3 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Liquidity mismatch               232.0        815.4        (9.7)        226.0        622.7       (23.6) 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 
 
                                                                           More         More 
                                                                           than         than 
                                                                       3 months       1 year 
                                                Gross          Not          but          but 
                                              nominal         more         less         less         More 
                                Carrying      inflow/         than         than         than         than 
                                  amount    (outflow)     3 months       1 year      5 years      5 years 
                              GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
---------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 At 31 December 2015 
 Non-derivative financial 
  liabilities 
 Due to banks                     (35.0)       (35.0)       (35.0)            -            -            - 
 Deposits from customers       (1,033.1)    (1,078.0)      (442.9)      (142.7)      (449.5)       (42.9) 
 Other financial 
  liabilities                     (13.8)       (13.8)       (13.8)            -            -            - 
 Liabilities held-for-sale         (8.7)        (8.7)        (8.7)            -            -            - 
                               (1,090.6)    (1,135.5)      (500.4)      (142.7)      (449.5)       (42.9) 
---------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Non-derivative financial 
  assets 
 Cash and balances 
  at central banks                 131.8        131.8        131.8            -            -            - 
 Loans and advances 
  to banks                           9.8          9.8          9.8            -            -            - 
 Debt securities 
  held-to-maturity                   3.8          3.8          3.8            -            -            - 
 Loans and advances 
  to customers                     960.6      1,194.5        130.8        335.6        728.1            - 
 Other financial 
  assets                             2.9          2.9          2.9            -            -            - 
 Assets held-for-sale              118.5        118.5        118.5            -            -            - 
---------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
                                 1,227.4      1,461.3        397.6        335.6        728.1            - 
---------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Liquidity mismatch                136.8        325.8      (102.8)        192.9        278.6       (42.9) 
---------------------------  -----------  -----------  -----------  -----------  -----------  -----------

Company

 
                                                                          More         More 
                                                                          than         than 
                                                                      3 months       1 year 
                                               Gross          Not          but          but 
                                             nominal         more         less         less         More 
                               Carrying      inflow/         than         than         than         than 
                                 amount    (outflow)     3 months       1 year      5 years      5 years 
                             GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 At 31 December 2016 
 Non-derivative financial 
  liabilities 
 Due to banks                    (70.0)       (70.0)       (30.0)       (40.0)            -            - 
 Deposits from customers      (1,151.8)    (1,202.9)      (461.6)      (147.9)      (569.5)       (23.9) 
 Other financial 
  liabilities                    (30.7)       (30.7)       (30.7)            -            -            - 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
                              (1,252.5)    (1,303.6)      (522.3)      (187.9)      (569.5)       (23.9) 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Non-derivative financial 
  assets 
 Cash and balances 
  at central banks                112.0        112.0        112.0            -            -            - 
 Loans and advances 
  to banks                         16.5         16.5         16.5            -            -            - 
 Debt securities 
  held-to-maturity                 20.0         20.0         20.0            -            -            - 
 Loans and advances 
  to customers                  1,289.2      1,921.5        345.7        397.6      1,177.9          0.3 
 Other financial 
  assets                           33.0         33.0         33.0            -            -            - 
                                1,470.7      2,103.0        527.2        397.6      1,177.9          0.3 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Liquidity mismatch               218.2        799.4          4.9        209.7        608.4       (23.6) 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 
 
                                                                          More         More 
                                                                          than         than 
                                                                      3 months       1 year 
                                               Gross          Not          but          but 
                                             nominal         more         less         less         More 
                               Carrying      inflow/         than         than         than         than 
                                 amount    (outflow)     3 months       1 year      5 years      5 years 
                             GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 At 31 December 2015 
 Non-derivative financial 
  liabilities 
 Due to banks                    (36.4)       (36.4)       (36.4)            -            -            - 
 Deposits from customers      (1,033.1)    (1,078.0)      (442.9)      (142.7)      (449.5)       (42.9) 
 Other financial 
  liabilities                     (8.3)        (8.3)        (8.3)            -            -            - 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
                              (1,077.8)    (1,122.7)      (487.6)      (142.7)      (449.5)       (42.9) 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Non-derivative financial 
  assets 
 Cash and balances 
  at central banks                131.8        131.8        131.8            -            -            - 
 Loans and advances

  to banks                          9.2          9.2          9.2            -            -            - 
 Debt securities 
  held-to-maturity                  3.8          3.8          3.8            -            -            - 
 Loans and advances 
  to customers                    932.7      1,160.9        127.1        321.7        712.1            - 
 Other financial 
  assets                            1.4          1.4          1.4            -            -            - 
                                1,078.9      1,307.1        273.3        321.7        712.1            - 
--------------------------  -----------  -----------  -----------  -----------  -----------  ----------- 
 Liquidity mismatch                 1.1        184.4      (214.3)        179.0        262.6       (42.9) 
--------------------------  -----------  -----------  -----------  -----------  -----------  -----------

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing financial liabilities as they mature are important factors in assessing the liquidity of the Company and Group and its exposure to changes in interest rates and exchange rates.

Other financial liabilities, as shown above, do not include non-interest accruals as these are not classed as financial liabilities.

   32.   Capital risk

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

In accordance with CRD IV and the required parameters set out in the Capital Requirements Regulation, the Group's ICAAP is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. Prior to the sale of Arbuthnot's controlling stake in the Group, the Group's ICAAP was aggregated into the Arbuthnot Banking Group's ICAAP.

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a 'Pillar 1 plus' approach to determine the level of capital the Group needs to hold. This method takes the Pillar 1 capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations delivers a sufficient capital sum adequate to cover management's anticipated risks. Where it is considered that the Pillar 1 calculations do not reflect the risk, an additional capital add-on in Pillar 2 should be applied, as per the Individual Capital Guidance issued by the PRA.

Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). Its aim is to encourage market discipline by developing a set of disclosure requirements which would allow market participants to assess key pieces of information on a firm's capital, risk exposures and risk assessment processes. Pillar 3 disclosures for the Group for the year ended 31 December 2016 are published as a separate document on the Group's website.

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

 
                                                          2016         2015 
                                                    GBPmillion   GBPmillion 
-------------------------------------------------  -----------  ----------- 
 Tier 1 
 Share capital                                             7.4          7.3 
 Share premium                                            81.2         79.3 
 Retained earnings                                       140.2         53.1 
 Revaluation reserve                                       1.2          0.2 
 Available-for-sale reserve                              (2.8)            - 
 Goodwill                                                (0.3)        (0.3) 
 Intangible assets net of attributable deferred 
  tax                                                    (5.9)        (3.8) 
 CET1 capital                                            221.0        135.8 
-------------------------------------------------  -----------  ----------- 
 
 Tier 2 
 Collective allowance for impairment of 
  loans and advances                                       5.3          3.1 
-------------------------------------------------  -----------  ----------- 
 Total Tier 2 capital                                      5.3          3.1 
-------------------------------------------------  -----------  ----------- 
 
 Own Funds                                               226.3        138.9 
-------------------------------------------------  -----------  ----------- 
 
 Reconciliation to total equity: 
 Goodwill and other intangible assets net 
  of attributable deferred tax                             6.2          4.1 
 Collective allowance for impairment of 
  loans and advances                                     (5.3)        (3.1) 
 Net cumulative profits of non-solo-consolidated 
  entities                                                 8.8          1.3 
 Total equity                                            236.0        141.2 
-------------------------------------------------  -----------  -----------

The Group ICAAP, which includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. The PRA sets Individual Capital Guidance for each UK bank calibrated by reference to its Capital Resources Requirement, broadly equivalent to 8% of risk weighted assets and thus representing the capital required under Pillar 1 of the Basel III framework. The ICAAP is a key input into the PRA's Individual Capital Guidance setting process, which addresses the requirements of Pillar 2 of the Basel II framework. The PRA's approach is to monitor the available capital resources in relation to the Individual Capital Guidance requirement. The Group maintains an extra internal buffer and capital ratios are reviewed on a monthly basis to ensure that external and internal requirements are adhered to.

The Group is also subject to further capital requirements imposed by the PRA. During the periods, the Group complied with these requirements.

   33.   Maturity analysis of consolidated assets and liabilities

Group

 
                                                              Due 
                                                            after 
                                                 Due         more 
                                              within         than 
                                                 one          one   No contractual 
                                                year         year         maturity        Total 
                                          GBPmillion   GBPmillion       GBPmillion   GBPmillion 
---------------------------------------  -----------  -----------  ---------------  ----------- 
 Contractual maturity analysis 
  at 31 December 2016 
 ASSETS 
 Cash and balances at central 
  banks                                        112.0            -                -        112.0 
 Loans and advances to banks                    18.2            -                -         18.2 
 Loans and advances to customers               663.2        657.8                -      1,321.0 
 Debt securities held-to-maturity               20.0            -                -         20.0 
 Equity instruments available-for-sale             -            -             13.5         13.5 
 Property, plant and equipment                     -            -             11.4         11.4 
 Intangible assets                                 -            -              9.0          9.0 
 Other assets                                    4.9            -                -          4.9 
 Total assets                                  818.3        657.8             33.9      1,510.0 
---------------------------------------  -----------  -----------  ---------------  ----------- 
 LIABILITIES 
 Due to banks                                   70.0            -                -         70.0 
 Deposits from customers                       592.9        558.9                -      1,151.8 
 Current tax liabilities                         1.7            -                -          1.7 
 Deferred tax liabilities                          -          0.2                -          0.2 
 Other liabilities                              47.4          2.9                -         50.3 
 Total liabilities                             712.0        562.0                -      1,274.0 
---------------------------------------  -----------  -----------  ---------------  ----------- 
 
 
                                                         Due 
                                                       after 
                                            Due         more 
                                         within         than 
                                            one          one   No contractual 
                                           year         year         maturity        Total 
                                     GBPmillion   GBPmillion       GBPmillion   GBPmillion 
----------------------------------  -----------  -----------  ---------------  ----------- 
 Contractual maturity analysis 
  at 31 December 2015 
 ASSETS 
 Cash and balances at central 
  banks                                   131.8            -                -        131.8 
 Loans and advances to banks                9.8            -                -          9.8

 Loans and advances to customers          439.7        520.9                -        960.6 
 Debt securities held-to-maturity           3.8            -                -          3.8 
 Property, plant and equipment                -            -              8.5          8.5 
 Intangible assets                            -            -              7.0          7.0 
 Deferred tax assets                          -            -              0.3          0.3 
 Other assets                               7.1            -                -          7.1 
 Assets held-for-sale                     118.5            -                -        118.5 
----------------------------------  -----------  -----------  ---------------  ----------- 
 Total assets                             710.7        520.9             15.8      1,247.4 
----------------------------------  -----------  -----------  ---------------  ----------- 
 LIABILITIES 
 Due to banks                              35.0            -                -         35.0 
 Deposits from customers                  563.3        469.8                -      1,033.1 
 Current tax liabilities                    3.2            -                -          3.2 
 Other liabilities                         22.5          3.7                -         26.2 
 Liabilities held-for-sale                  8.7            -                -          8.7 
----------------------------------  -----------  -----------  ---------------  ----------- 
 Total liabilities                        632.7        473.5                -      1,106.2 
----------------------------------  -----------  -----------  ---------------  -----------

The directors have reviewed behavioural maturity of the loan book and have concluded that it would not significantly affect the analysis above.

Company

 
                                                              Due 
                                                            after 
                                                 Due         more 
                                              within         than 
                                                 one          one   No contractual 
                                                year         year         maturity        Total 
                                          GBPmillion   GBPmillion       GBPmillion   GBPmillion 
---------------------------------------  -----------  -----------  ---------------  ----------- 
 Contractual maturity analysis 
  at 31 December 2016 
 ASSETS 
 Cash and balances at central 
  banks                                        112.0            -                -        112.0 
 Loans and advances to banks                    16.5            -                -         16.5 
 Loans and advances to customers               660.0        629.2                -      1,289.2 
 Debt securities held-to-maturity               20.0            -                -         20.0 
 Equity instruments available-for-sale          13.5            -                -         13.5 
 Property, plant and equipment                     -            -              6.2          6.2 
 Intangible assets                                 -            -              6.2          6.2 
 Investments                                       -            -              3.7          3.7 
 Deferred tax assets                               -          0.1                -          0.1 
 Other assets                                   35.3            -                -         35.3 
---------------------------------------  -----------  -----------  ---------------  ----------- 
 Total assets                                  857.3        629.3             16.1      1,502.7 
---------------------------------------  -----------  -----------  ---------------  ----------- 
 LIABILITIES 
 Due to banks                                   70.0            -                -         70.0 
 Deposits from customers                       592.9        558.9                -      1,151.8 
 Current tax liabilities                         0.8            -                -          0.8 
 Other liabilities                              58.3            -                -         58.3 
 Total liabilities                             722.0        558.9                -      1,280.9 
---------------------------------------  -----------  -----------  ---------------  ----------- 
 
 
                                                         Due 
                                                       after 
                                            Due         more 
                                         within         than 
                                            one          one   No contractual 
                                           year         year         maturity        Total 
                                     GBPmillion   GBPmillion       GBPmillion   GBPmillion 
----------------------------------  -----------  -----------  ---------------  ----------- 
 Contractual maturity analysis 
  at 31 December 2015 
 ASSETS 
 Cash and balances at central 
  banks                                   131.8            -                -        131.8 
 Loans and advances to banks                9.2            -                -          9.2 
 Loans and advances to customers          423.2        509.5                -        932.7 
 Debt securities held-to-maturity           3.8            -                -          3.8 
 Property, plant and equipment                -            -              4.2          4.2 
 Intangible assets                            -            -              3.2          3.2 
 Investments                                  -            -              3.7          3.7 
 Deferred tax asset                           -          0.6                -          0.6 
 Other assets                             146.0            -                -        146.0 
----------------------------------  -----------  -----------  ---------------  ----------- 
 Total assets                             714.0        510.1             11.1      1,235.2 
----------------------------------  -----------  -----------  ---------------  ----------- 
 LIABILITIES 
 Due to banks                              36.4            -                -         36.4 
 Deposits from customers                  563.3        469.8                -      1,033.1 
 Current tax liabilities                    0.3            -                -          0.3 
 Other liabilities                         30.2            -                -         30.2 
 Total liabilities                        630.2        469.8                -      1,100.0 
----------------------------------  -----------  -----------  ---------------  -----------

The directors have reviewed behavioural maturity of the loan book and have concluded that it would not significantly affect the analysis above.

   34.   Classification of financial assets and liabilities

Group

 
                                                                                   Other 
                                                                               financial 
                                                                     Loans        assets        Total 
                                                                       and           and     carrying         Fair 
                       Available-for-sale   Held-to-maturity   receivables   liabilities       amount        value 
                                                                                                                    ---------- 
                                                                                                                          Fair 
                                                                                                                         value 
                                                                                                                     hierarchy 
                               GBPmillion         GBPmillion    GBPmillion    GBPmillion   GBPmillion   GBPmillion       level 
--------------------  -------------------  -----------------  ------------  ------------  -----------  -----------  ---------- 
 At 31 December 
  2016 
 Cash and balances 
  at central                                                                                                             Level 
  banks                                 -                  -         112.0             -        112.0        112.0           1 
 Loans and 
  advances to                                                                                                            Level 
  banks                                 -                  -          18.2             -         18.2         18.2           2 
 Loans and 
  advances to                                                                                                            Level 
  customers                             -                  -       1,321.0             -      1,321.0      1,636.8           3 
 Debt securities                                                                                                         Level 
  held-to-maturity                      -               20.0             -             -         20.0         20.0           1 
 Equity instruments                                                                                                      Level 
  available-for-sale                 13.5                  -             -             -         13.5         13.5           1 
 Other financial                                                                                                         Level 
  assets                                -                  -             -           0.9          0.9          0.9           3 
                                     13.5               20.0       1,451.2           0.9      1,485.6      1,801.4 
--------------------  -------------------  -----------------  ------------  ------------  -----------  -----------

                                                                                                                         Level 
 Due to banks                           -                  -             -          70.0         70.0         70.0           2 
 Deposits from                                                                                                           Level 
  customers                             -                  -             -       1,151.8      1,151.8      1,173.2           3 
 Other financial                                                                                                         Level 
  liabilities                           -                  -             -          18.3         18.3         18.3           3 
                                        -                  -             -       1,240.1      1,240.1      1,261.5 
--------------------  -------------------  -----------------  ------------  ------------  -----------  ----------- 
 
 
                                                                       Other 
                                                                   financial 
                                                        Loans         assets        Total 
                                                          and            and     carrying         Fair 
                              Held-to-maturity    receivables    liabilities       amount        value 
                                                                                                        ----------- 
                                                                                                               Fair 
                                                                                                              value 
                                                                                                          hierarchy 
                                    GBPmillion     GBPmillion     GBPmillion   GBPmillion   GBPmillion        level 
---------------------------  -----------------  -------------  -------------  -----------  -----------  ----------- 
 At 31 December 2015 
 Cash and balances                                                                                            Level 
  at central banks                           -          131.8              -        131.8        131.8            1 
 Loans and advances                                                                                           Level 
  to banks                                   -            9.8              -          9.8          9.8            2 
 Loans and advances                                                                                           Level 
  to customers                               -          960.6              -        960.6       1217.3            3 
 Debt securities                                                                                              Level 
  held-to-maturity                         3.8              -              -          3.8          3.8            1 
 Other financial                                                                                              Level 
  assets                                     -              -            2.9          2.9          2.9            3 
                                                                                                              Level 
 Assets held-for-sale                        -              -          118.5        118.5        118.5            3 
---------------------------  -----------------  -------------  -------------  -----------  ----------- 
                                           3.8        1,102.2          121.4      1,227.4      1,484.1 
---------------------------  -----------------  -------------  -------------  -----------  ----------- 
                                                                                                              Level 
 Due to banks                                -              -           35.0         35.0         35.0            2 
                                                                                                              Level 
 Deposits from customers                     -              -        1,033.1      1,033.1      1,036.2            3 
 Other financial                                                                                              Level 
  liabilities                                -              -           13.8         13.8         13.8            3 
                                                                                                              Level 
 Liabilities held-for-sale                   -              -            8.7          8.7          8.7            3 
---------------------------  -----------------  -------------  -------------  -----------  ----------- 
                                             -              -        1,090.6      1,090.6      1,093.7 
---------------------------  -----------------  -------------  -------------  -----------  -----------

Equity investments held-for-sale are carried at fair value. All other assets and liabilities are carried at amortised cost. Therefore for these assets and liabilities, the fair value hierarchy noted above relates to the disclosure in this note only.

Company

 
                                                                                   Other 
                                                                               financial 
                                                                     Loans        assets        Total 
                                                                       and           and     carrying         Fair 
                       Available-for-sale   Held-to-maturity   receivables   liabilities       amount        value 
                                                                                                                    ---------- 
                                                                                                                          Fair 
                                                                                                                         value 
                                                                                                                     hierarchy 
                               GBPmillion         GBPmillion    GBPmillion    GBPmillion   GBPmillion   GBPmillion       level 
--------------------  -------------------  -----------------  ------------  ------------  -----------  -----------  ---------- 
 At 31 December 
  2016 
 Cash and balances 
  at central                                                                                                             Level 
  banks                                 -                  -         112.0             -        112.0        112.0           1 
 Loans and 
  advances to                                                                                                            Level 
  banks                                 -                  -          16.5             -         16.5         16.5           2 
 Loans and 
  advances to                                                                                                            Level 
  customers                             -                  -       1,289.2             -      1,289.2      1,591.1           3 
 Debt securities                                                                                                         Level 
  held-to-maturity                      -               20.0             -             -         20.0         20.0           1 
 Equity instruments                                                                                                      Level 
  available-for-sale                 13.5                  -             -             -         13.5         13.5           1 
 Other financial                                                                                                         Level 
  assets                                -                  -             -          33.0         33.0         33.0           3 
--------------------  -------------------  -----------------  ------------  ------------  -----------  ----------- 
                                     13.5               20.0       1,417.7          33.0      1,484.2      1,786.1 
--------------------  -------------------  -----------------  ------------  ------------  -----------  ----------- 
                                                                                                                         Level 
 Due to banks                           -                  -             -          70.0         70.0         70.0           2 
 Deposits from                                                                                                           Level 
  customers                             -                  -             -       1,151.8      1,151.8      1,173.2           3 
 Other financial                                                                                                         Level 
  liabilities                           -                  -             -          30.7         30.7         30.7           3 
--------------------  -------------------  -----------------  ------------  ------------  -----------  ----------- 
                                        -                  -             -       1,252.5      1,252.5      1,273.9 
--------------------  -------------------  -----------------  ------------  ------------  -----------  ----------- 
 
 
                                                                     Other 
                                                                 financial 
                                                      Loans         assets        Total 
                                                        and            and     carrying         Fair

                            Held-to-maturity    receivables    liabilities       amount        value 
                                                                                                      ----------- 
                                                                                                             Fair 
                                                                                                            value 
                                                                                                        hierarchy 
                                  GBPmillion     GBPmillion     GBPmillion   GBPmillion   GBPmillion        level 
-------------------------  -----------------  -------------  -------------  -----------  -----------  ----------- 
 At 31 December 2015 
 Cash and balances                                                                                          Level 
  at central banks                         -          131.8              -        131.8        131.8            1 
 Loans and advances                                                                                         Level 
  to banks                                 -            9.2              -          9.2          9.2            2 
 Loans and advances                                                                                         Level 
  to customers                             -          932.7              -        932.7      1,173.1            3 
 Debt securities                                                                                            Level 
  held-to-maturity                       3.8              -              -          3.8          3.8            1 
 Other financial                                                                                            Level 
  assets                                   -              -          142.7        142.7        142.7            3 
-------------------------  -----------------  -------------  -------------  -----------  ----------- 
                                         3.8        1,073.7          142.7      1,220.2      1,460.6 
-------------------------  -----------------  -------------  -------------  -----------  ----------- 
                                                                                                            Level 
 Due to banks                              -              -           36.4         36.4         36.4            2 
                                                                                                            Level 
 Deposits from customers                   -              -        1,033.1      1,033.1      1,036.2            3 
 Other financial                                                                                            Level 
  liabilities                              -              -            8.3          8.3          8.3            3 
-------------------------  -----------------  -------------  -------------  -----------  ----------- 
                                           -              -        1,077.8      1,077.8      1,080.9 
-------------------------  -----------------  -------------  -------------  -----------  -----------

Equity investments available-for-sale are carried at fair value. All other assets and liabilities are carried at amortised cost. Therefore for these assets, the fair value hierarchy noted above relates to the disclosure in this note only.

Fair value classification

The tables above include the fair values and fair value hierarchies of the Group and Company's financial assets and liabilities. The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:

   --     Level 1: Quoted prices in active markets for identical assets or liabilities.

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

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

Cash and balances at central banks

The fair value of cash and balances at central banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.

At the end of each year, the fair value of cash and balances at central banks was calculated to be equivalent to their carrying value.

Loans and advances to banks

The fair value of loans and advances to banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.

Loans and advances to customers

The fair value of loans and advances to customers was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date, and the same assumptions regarding the risk of default were applied as those used to derive the carrying value.

Debt securities held-to-maturity and equity instruments available-for-sale

The fair value of debt securities held-to-maturity and equity instruments available-for-sale is based on the quoted mid-market share price.

At the end of December 2016 the fair value of debt securities held-to-maturity was calculated to be equivalent to their carrying value.

Due to banks

The fair value of amounts due to banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.

At the end of each year, the fair value of amounts due to banks was calculated to be equivalent to their carrying value due to the short maturity term of the amounts due.

Deposits from customers

The fair value of deposits from customers was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date for the notice deposits and deposit bonds. The fair value of instant access deposits is equal to book value as they are repayable on demand.

Dividends and other financial liabilities

The fair value of dividends and other financial liabilities was calculated based upon the present value of the expected future principal cash flows.

At the end of each year, the fair value of dividends and other financial liabilities was calculated to be equivalent to their carrying value due to their short maturity. The other financial liabilities include all other liabilities other than non-interest accruals.

   35.   Related party transactions

Related parties of the Company and Group include subsidiaries, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced, or for which significant voting power is held, by Key Management Personnel or their close family members.

A number of banking transactions are entered into with related parties in the normal course of business on normal commercial terms. These include loans and deposits as set out below. Except for the directors' disclosures, there were no other Key Management Personnel disclosures, therefore the tables below relate to directors only.

 
                                                         Directors 
                                                   2016         2015 
                                             GBPmillion   GBPmillion 
------------------------------------------  -----------  ----------- 
 Loans 
 Loans outstanding at 1 January                     0.2            - 
 Loans advanced                                     3.4          0.2 
 Repayments                                       (0.5)            - 
 Interest applied                                   0.1            - 
 Loans outstanding at 31 December                   3.2          0.2 
------------------------------------------  -----------  ----------- 
 Deposits 
 Deposits outstanding at 1 January                  0.5          0.4 
 Additional deposits made during the year             -          0.1 
 Withdrawals during the year                      (0.1)            - 
 Director retired                                 (0.1)            - 
 Deposits outstanding at 31 December                0.3          0.5 
------------------------------------------  -----------  -----------

The loans outstanding above comprise the following:

 
 --   A GBP0.4 million advance (2015: GBP0.2 million) 
       as part of a GBP2.5 million facility agreed with 
       a company in which a director holds 50% of the voting 
       shares, which is secured by property and personal 
       guarantees. 
 --   A GBP2.8 million advance during the year as part 
       of a GBP4.4 million facility agreed with a director, 
       which is secured by property and certain other undertakings.

Both of these transactions were agreed by the Group's Real Estate Finance business and arose during the normal course of business. Both loans were subject to the usual Board governance and Credit Committee approval procedures and are on substantially the same terms as for comparable transactions with third parties.

The Company undertook the following transactions with other companies in the Secure Trust Bank Group:

 
                                                        2016         2015 
                                                  GBPmillion   GBPmillion 
-----------------------------------------------  -----------  ----------- 
 Debt Managers (Services) Limited - income 
  from sale of debt portfolio                          (2.9)        (2.4) 
 Secure Homes Services Limited - dividend 
  received                                                 -        (2.0) 
 Secure Homes Services Limited - building 
  rental paid                                            0.4          0.4 
 STB Leasing Limited - dividend received                   -        (4.0) 
 V12 Finance Group Limited - dividend received             -        (2.0) 
 V12 Retail Finance Limited - financial 
  intermediary charges - applications proposed           4.5          1.7 
 V12 Retail Finance Limited - financial 
  intermediary charges - applications accepted           2.2          3.4 
 V12 Retail Finance Limited - financial 
  intermediary charges - loan set-up and 
  processing                                             4.4          3.3 
 V12 Retail Finance Limited - loan book 
  management and servicing fees                          7.1          4.0 
-----------------------------------------------  -----------  ----------- 
                                                        15.7          2.4 
-----------------------------------------------  -----------  ----------- 
 No longer related parties 
 Arbuthnot Latham & Co., Ltd - recharge 
  income of shared services                                -        (0.8) 
 Arbuthnot Banking Group PLC - group recharges           0.2          0.4 
 Everyday Loans Holdings Limited - dividend 
  received                                                 -       (11.5) 
 Everyday Lending Limited - interest income 
  on loan receivable                                     1.9        (2.9) 
 Everyday Lending Limited - property and 
  leasing recharges                                        -        (0.2) 
-----------------------------------------------  -----------  ----------- 
                                                         2.1       (15.0) 
-----------------------------------------------  -----------  ----------- 
                                                        17.8       (12.6) 
-----------------------------------------------  -----------  -----------

The loans and advances with, and amounts receivable and payable to, related companies are noted below:

 
                                                 Group        Group      Company      Company 
                                                  2016         2015         2016         2015 
                                            GBPmillion   GBPmillion   GBPmillion   GBPmillion 
----------------------------------------  ------------  -----------  -----------  ----------- 
 Amounts receivable from ultimate 
  parent undertaking                                 -          1.3            -          1.3 
 Amounts receivable from subsidiary 
  undertakings                                       -            -         31.2        140.1 
 Amounts due to subsidiary undertakings              -            -       (13.2)       (10.4) 
 Amounts due to related companies                    -        (0.1)            -            - 
                                                     -          1.2         18.0        131.0 
 -----------------------------------------------------  -----------  -----------  -----------

Directors' remuneration

The directors' emoluments (including pension contributions and benefits in kind) for the year are disclosed in the Remuneration Report beginning on page 92.

At the year end the ordinary shares held by the directors are disclosed in the Directors' Report beginning on page 99. Details of the directors' holdings of share options, as well as details of those share options exercised during the year, are also disclosed in the Directors' Report.

The interests of any directors who hold shares in the ultimate parent company, Arbuthnot Banking Group PLC, which was the ultimate parent company until the sale of their controlling stake, are shown in the Directors' Report of that company.

   36.   Immediate and ultimate parent company

Prior to the sale of its controlling interest on 15 June 2016, the Company regarded Arbuthnot Banking Group PLC, a company registered in England and Wales, as the immediate and ultimate parent company. Sir Henry Angest, the Group Chairman and Chief Executive of Arbuthnot Banking Group has a beneficial interest in 53.7% of the issued share capital of Arbuthnot Banking Group and was regarded by the Company as the ultimate controlling party. A copy of the consolidated financial statements of Arbuthnot Banking Group may be obtained from the Company Secretary, Arbuthnot Banking Group, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.

Since 15 June 2016, the Company has had no ultimate controlling party.

   37.   Discontinued operations and assets and liabilities held-for-sale

On 4 December 2015, the Bank agreed to the conditional sale of its non-standard consumer lending business, ELG, which comprises Everyday Loans Holdings Limited and subsidiary companies Everyday Lending Limited and Everyday Loans Limited, to Non-Standard Finance PLC ('NSF'). Consideration received on completion comprised GBP106.9 million in cash and GBP16.3 million in NSF ordinary shares. The Disposal completed on 13 April 2016, and on completion NSF paid GBP215.0 million to the Group, being the GBP106.9 million cash consideration plus repayment of intercompany debt of GBP108.1 million. Subsequently, NSF took a GBP30.0 million three year loan from STB. After selling costs of GBP2.7 million, this resulted in a gain recognised on disposal of GBP116.8 million. In addition, staff costs of GBP3.5 million were incurred in respect of the sale, which are included in operating expenses.

Under the Bank's ownership, ELG had achieved impressive growth, within the constraints imposed upon it as part of a highly regulated banking group. An unsolicited approach revealed that NSF was prepared to pay an attractive valuation for ELG.

The net effect of the Disposal was therefore to significantly increase the equity base of the Group to GBP228 million, after declaring the special dividend of GBP30 million. This substantially improved STB's capital resources and broadened the range of strategic options available to it.

The Disposal improved the Group's CET1 ratio and Leverage ratios to 20.1% and 15.8% respectively, at 30 June 2016, which was the first reporting date following the sale (from 15.0% and 11.9% on an unadjusted basis as at 30 June 2015). This has generated a substantial capital surplus and significant headroom over PRA minimum leverage requirements, which supports the strong growth in lending of the Group.

While in the short term the Disposal is expected to reduce earnings, given the disposal of ELG's profit streams, the Board is confident that the proceeds can be reinvested to accelerate the Group's growth prospects and secure new income streams.

Details of the net assets disposed of and consequential gain recognised on disposal, assets and liabilities held-for-sale at 31 December 2015 and cash flow of discontinued operations is set out below.

 
                                                           Assets           Assets 
                                                              and              and 
                                                      liabilities      liabilities 
                                                             sold    held-for-sale 
                                                            on 13               at 
                                                            April      31 December 
                                                             2016             2015 
                                                       GBPmillion       GBPmillion 
-------------------------------------------------  --------------  --------------- 
 ASSETS 
 Loans and advances to banks                                  2.4              1.7 
 Loans and advances to customers                            117.9            114.3 
 Property, plant and equipment                                0.5              0.4 
 Intangible assets                                            1.2              1.2 
 Deferred tax assets                                          0.4              0.4 
 Other assets                                                 0.8              0.5 
-------------------------------------------------  --------------  --------------- 
 Total assets                                               123.2            118.5 
-------------------------------------------------  --------------  --------------- 
 LIABILITIES 
 Current tax liabilities                                      4.0              3.4 
 Other liabilities                                            7.4              5.3 
-------------------------------------------------  --------------  --------------- 
 Total liabilities                                           11.4              8.7 
-------------------------------------------------  --------------  --------------- 
 Net assets disposed of/held-for-sale                       111.8            109.8 
-------------------------------------------------  --------------  --------------- 
 
 Consideration 
 Cash (including the settlement of inter-company 
  debt)                                                     215.0 
 NSF Plc shares                                              16.3 
-------------------------------------------------  --------------  --------------- 
                                                            231.3 
 Selling costs                                              (2.7) 
 Net assets disposed of                                   (111.8)

-------------------------------------------------  --------------  --------------- 
 Gain recognised on disposal                                116.8 
-------------------------------------------------  --------------  ---------------

The cash flow from the sale of subsidiary undertakings can be analysed as follows:

 
                                                      Group      Company 
                                                 GBPmillion   GBPmillion 
----------------------------------------------  -----------  ----------- 
 Cash consideration (including the settlement 
  of inter-company debt)                              215.0        215.0 
 Selling costs                                        (2.7)        (2.7) 
 Cash disposed of as part of sale                     (2.4)            - 
----------------------------------------------  -----------  ----------- 
                                                      209.9        212.3 
----------------------------------------------  -----------  -----------

Company

Assets held-for-sale comprised investment in subsidiary undertaking totaling GBP1.

 
                                                          Year           Year 
                                                         ended          ended 
                                                   31 December    31 December 
                                                          2016           2015 
                                                    GBPmillion     GBPmillion 
-----------------------------------------------  -------------  ------------- 
 Cash flows from discontinued operations 
 Cash flows from operating activities 
 Profit for the year                                       2.0            9.4 
 
 Adjustments for: 
 Income tax expense                                        0.5            2.3 
 Depreciation of property, plant and equipment               -            0.1 
 Amortisation of intangible assets                           -            1.0 
 Impairment losses on loans and advances 
  to customers                                             2.6            7.5 
-----------------------------------------------  -------------  ------------- 
 Cash flows from operating profits before 
  changes in operating assets and liabilities              5.1           20.3 
 Changes in operating assets and liabilities: 
  - net increase in loans and advances to 
   customers                                             (6.2)         (27.9) 
  - net increase in other assets                         (0.3)          (0.1) 
  - net increase in other liabilities                      2.1            8.1 
 Income tax paid                                             -          (0.1) 
-----------------------------------------------  -------------  ------------- 
 Net cash inflow from operating activities                 0.7            0.3 
-----------------------------------------------  -------------  ------------- 
 Cash flows from investing activities 
 Purchase of property, plant and equipment                   -          (0.3) 
 Net cash flows from investing activities                    -          (0.3) 
-----------------------------------------------  -------------  ------------- 
 Net increase in cash and cash equivalents                 0.7              - 
 Cash and cash equivalents at 1 January                    1.7            1.7 
-----------------------------------------------  -------------  ------------- 
 Cash and cash equivalents disposed of / 
  at 31 December                                           2.4            1.7 
-----------------------------------------------  -------------  ------------- 
 
   38.   Country by Country reporting

The Capital Requirements (Country-by-Country Reporting) Regulations 2013 introduced reporting obligations for institutions within the scope of CRD IV. The requirements aim to give increased transparency regarding the activities of institutions.

The Country-by-Country Information is set out below:

 
                                                                              Profit          Tax 
                                                                 Number       before         paid 
                                                   Turnover      of FTE          tax    on profit 
                     Nature 
 Name                 of activity    Location    GBPmillion   employees   GBPmillion   GBPmillion 
------------------  --------------  ----------  -----------  ----------  -----------  ----------- 
 31 December 2016 
 Secure Trust        Banking 
  Bank plc            services       UK               157.5         697         27.5          6.3 
------------------  --------------  ----------  -----------  ----------  -----------  ----------- 
 
                                                                              Profit          Tax 
                                                                 Number       before         paid 
                                                   Turnover      of FTE          tax    on profit 
                     Nature 
 Name                 of activity    Location    GBPmillion   employees   GBPmillion   GBPmillion 
------------------  --------------  ----------  -----------  ----------  -----------  ----------- 
 31 December 2015 
 Secure Trust        Banking 
  Bank plc            services       UK               158.1         706         36.5          4.2 
------------------  --------------  ----------  -----------  ----------  -----------  ----------- 
 
   39.   Audited financial statements

The attached announcement, from Group strategy and business model to note 38 above, has been extracted from the audited financial statements of Secure Trust Bank PLC for the year ended 31 December 2016. The audit opinion on those financial statements was unmodified. The full audited financial statements, together with this announcement and the associated investors' presentation are available on:

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

Five year summary (unaudited)

 
                                           2016         2015         2014         2013         2012 
                                     GBPmillion   GBPmillion   GBPmillion   GBPmillion   GBPmillion 
----------------------------------  -----------  -----------  -----------  -----------  ----------- 
 Profit for the year 
 Interest and similar 
  income                                  141.1        139.7         93.6         73.8         44.9 
 Interest expense and 
  similar charges                        (26.3)       (21.6)       (14.2)       (12.9)       (10.5) 
----------------------------------  -----------  -----------  -----------  -----------  ----------- 
 Net interest income                      114.8        118.1         79.4         60.9         34.4 
----------------------------------  -----------  -----------  -----------  -----------  ----------- 
 Net fee and commission 
  income                                   14.5         14.4         18.5         18.1         12.6 
----------------------------------  -----------  -----------  -----------  -----------  ----------- 
 Operating income                         129.3        132.5         97.9         79.0         47.0 
----------------------------------  -----------  -----------  -----------  -----------  ----------- 
 Impairment losses on 
  loans and advances                     (30.3)       (24.3)       (15.3)       (15.6)        (8.9) 
 Gain from a bargain purchase                 -            -            -          0.4          9.8 
 Other income                                 -            -            -            -          0.1 
 Exceptional costs                            -            -            -        (0.9)        (1.4) 
 Arbuthnot Banking Group 
  recharges                                   -        (0.8)        (0.2)        (0.1)        (0.1) 
 Operating expenses                      (71.5)       (70.9)       (56.3)       (45.7)       (29.3) 
----------------------------------  -----------  -----------  -----------  -----------  ----------- 
 Profit before income 
  tax                                      27.5         36.5         26.1         17.1         17.2 
----------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
 
 Earnings per share for profit attributable 
  to the equity holders of the Group during 
  the year 
 (expressed in pence per 
  share) 
  - basic                                 754.1        157.8        122.3         78.3        108.9 
----------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
 
 Financial position 
 Cash and balances at 
  central banks                           112.0        131.8         81.2            -            - 
 Loans and advances to 
  banks                                    18.2         11.5         39.8        110.0        155.3 
 Loans and advances to 
  customers                             1,321.0      1,074.9        622.5        391.0        297.6 
 Debt securities held-to-maturity          20.0          3.8         16.3            -            - 
 Other assets                              38.8         25.4         22.5         24.9         21.7 
----------------------------------  -----------  -----------  -----------  -----------  ----------- 
 Total assets                           1,510.0      1,247.4        782.3        525.9        474.6 
----------------------------------  -----------  -----------  -----------  -----------  ----------- 
 
 Due to banks                              70.0         35.0         15.9          0.1            - 
 Deposits from customers                1,151.8      1,033.1        608.4        436.6        398.9 
 Other liabilities                         52.2         38.1         33.1         27.6         19.8 
 Total shareholders' equity               236.0        141.2        124.9         61.6         55.9 
----------------------------------  -----------  -----------  -----------  -----------  -----------

 Total liabilities and 
  shareholders' equity                  1,510.0      1,247.4        782.3        525.9        474.6 
----------------------------------  -----------  -----------  -----------  -----------  -----------

Glossary

 
 Term                     Explanation 
-----------------------  --------------------------------------------------- 
 
   AIM                      The Alternative Investment Market is the 
                            London Stock Exchange's international market 
                            for smaller growing companies. A wide range 
                            of businesses including early stage, venture 
                            capital backed as well as more established 
                            companies join AIM seeking access to growth 
                            capital. 
 ALCO                     The Assets and Liabilities Committee. The 
                           remit of the Committee is set out on page 
                           47. 
 Bank of England          The Bank of England promotes the good of 
                           the people of the United Kingdom by maintaining 
                           monetary and financial stability. It also 
                           performs a supervisory role of the banking 
                           system via the Prudential Regulation Authority. 
 CET 1 capital            Common Equity Tier 1 capital comprises 
                           a bank's core capital and includes common 
                           shares, stock surpluses resulting from 
                           the issue of common shares, retained earnings, 
                           common shares issued by subsidiaries and 
                           held by third parties, and accumulated 
                           other comprehensive income. 
 CET 1 capital            The Common Equity Tier 1 capital ratio 
  ratio                    is the ratio of the bank's CET 1 capital 
                           to its Total Risk Exposure. This signifies 
                           a bank's financial strength. The CET 1 
                           capital ratio is utilized by regulators 
                           and investors because it shows how well 
                           a bank can withstand financial stress and 
                           remain solvent. 
 CRD IV                   Capital Requirements Directive IV is intended 
                           to implement the Basel III agreement in 
                           the EU. This includes enhanced requirements 
                           for the quality and quantity of capital; 
                           a basis for new liquidity and leverage 
                           requirements; new rules for counterparty 
                           risk; and new macroprudential standards 
                           including a countercyclical capital buffer 
                           and capital buffers for systemically important 
                           institutions. 
 Capital Requirement      The EU regulation implementing CRD IV directly 
  Regulation               across the EU. 
 DBP                      Deferred Bonus Plan. 
 DMS                      Debt Managers (Services) Limited, the wholly 
                           owned subsidiary of Secure Trust Bank PLC, 
                           responsible for carrying out market leading 
                           debt recovery services to the credit industry. 
 ELG                      Everyday Loans Group, which comprised Everyday 
                           Loans Holdings Limited and subsidiary companies 
                           Everyday Lending Limited and Everyday Loans 
                           Limited. 
 EU                       European Union. 
 Financial Conduct        The Financial Conduct Authority is the 
  Authority                conduct regulator for 56,000 financial 
                           services firms and financial markets in 
                           the UK. Its aims are to protect consumers, 
                           enhance market integrity and promote competition. 
 FEEFO                    The Feedback Forum collects independent 
                           reviews from the customers of over 2,500 
                           businesses. 
 Funding for              The Funding for Lending Scheme was designed 
  Lending Scheme           to incentivise banks and building societies 
                           to boost their lending to the UK real economy. 
                           It did that by providing funding to banks 
                           and building societies for an extended 
                           period, with both the price and quantity 
                           of funding provided linked to their lending 
                           performance. This scheme is now in run-off 
                           and is being replaced by the Term Funding 
                           Scheme. 
 The Financial            Set up by Parliament, the Financial Ombudsman 
  Ombudsman Service        Service is the UK's official expert in 
                           sorting out problems with financial services. 
 Financial Services       The Financial Services Compensation Scheme 
  Compensation             protects consumers when authorised financial 
  Scheme                   services firms fail. 
 General Data             The General Data Protection Regulation 
  Protection Regulation    (Regulation (EU) 2016/679) is a regulation 
                           by which the European Parliament, the European 
                           Council and the European Commission intend 
                           to strengthen and unify data protection 
                           for individuals within the European Union. 
                           It also addresses export of personal data 
                           outside the European Union. 
 High quality             High quality liquid assets are assets with 
  liquid assets            a high potential to be converted easily 
                           and quickly into cash. This is comprised 
                           of cash and balances at central banks and 
                           treasury bills that are the subject of 
                           a repurchase agreement (see below). 
 IAS                      International Accounting Standard. 
 ICAAP                    Internal Capital Adequacy Assessment Process. 
                           A firm must carry out an ICAAP in accordance 
                           with the PRA's ICAAP rules. These include 
                           requirements on the firm to undertake a 
                           regular assessment of the amounts, types 
                           and distribution of capital that it considers 
                           adequate to cover the level and nature 
                           of the risks to which it is or might be 
                           exposed. 
 IFRS                     International Financial Reporting Standard. 
 ILAAP                    The Internal Liquidity Adequacy Assessment 
                           Process allows firms to assess the level 
                           of liquidity and funding that adequately 
                           supports all relevant current and future 
                           liquidity risks in their business. In undertaking 
                           this process, a firm should be able to 
                           ensure that it has appropriate processes 
                           in place to ensure compliance with the 
                           CRD IV. This requires firms to develop 
                           and use appropriate risk and liquidity 
                           management techniques. 
 Individual Capital       Guidance given to a firm about the amount 
  Guidance                 and quality of capital resources that the 
                           PRA thinks the Bank should hold at all 
                           times under the overall financial adequacy 
                           rule as it applies on a solo level or a 
                           consolidated level. 
 IPO                      Initial Public Offering of the Company's 
                           shares on AIM in November 2011. 
 LCR                      The Liquidity Coverage Ratio regime has 
                           applied to the Group from 1 October 2015, 
                           requiring management of net 30 day cash 
                           outflows as a proportion of High Quality 
                           Liquid Assets. The Group has set a more 
                           prudent internal limit than that proposed 
                           in guidance from the regulator. 
 LTIP                     Long term incentive plan. 
 MREL                     Minimum Requirement for Own Funds and Eligible 
                           Liabilities regime. 
 NSF                      Non-Standard Finance PLC, the AIM listed 
                           business that bought ELG on 16 April 2016. 
 Overall Liquidity        The Overall Liquidity Adequacy Requirement 
  Adequacy Requirement     is the Board's own view of the Group's 
                           liquidity needs as set out in the Board 
                           approved ILAAP. 
 Pillar 1, Pillar         Basel III uses a 'three pillars' concept 
  2 and Pillar             - (1) Pillar 1 - minimum capital requirements 
  3                        (addressing risk) using a standardised 
                           approach for credit, market and operational 
                           risk, (2) Pillar 2 - supervisory review 
                           process and (3) Pillar 3 - market discipline 
                           and enhanced disclosures. Basel II is the 
                           second of the Basel Accords, (now extended 
                           and partially superseded by Basel III), 
                           which are recommendations on banking laws 
                           and regulations issued by the Basel Committee

                           on Banking Supervision. 
 PRA                      The Prudential Regulation Authority was 
                           created as a part of the Bank of England 
                           by the Financial Services Act (2012) and 
                           is responsible for the prudential regulation 
                           and supervision of around 1,700 banks. 
                           The PRA's objectives are set out in the 
                           Financial Services and Markets Act 2000, 
                           but the main objective is to promote the 
                           safety and soundness of the firms it regulates. 
 PSOS                     Phantom Share Option Scheme. 
 Repurchase agreement     A repurchase agreement is a form of short-term 
                           borrowing for dealers in government securities. 
                           The dealer sells the government securities 
                           to investors, and buys them back at an 
                           agreed point in the future. 
 SOS1                     Share options vesting on 2 November 2014. 
 SOS2                     Share options vesting on 2 November 2016. 
 SME                      Small to medium sized enterprises. 
 Term Funding             The Term Funding Scheme is designed to 
  Scheme                   reinforce the transmission of Bank Rate 
                           cuts to those interest rates actually faced 
                           by households and businesses by providing 
                           term funding to banks at rates close to 
                           Bank Rate. The Term Funding Scheme allows 
                           participants to borrow central bank reserves 
                           in exchange for eligible collateral. 
 Tier 2 capital           Tier 2 capital is the secondary component 
                           of bank capital, in addition to Tier 1 
                           capital, that makes up a bank's required 
                           reserves. Tier 2 capital is designated 
                           as supplementary capital, and is composed 
                           of Collective allowance for impairment 
                           of loans and advances. 
 Total Risk Exposure      Total Risk Exposure is the total of the 
                           bank's risk-weighted assets. 
 UPL                      Unsecured personal lending. 
 V12                      V12 Retail Finance Limited, the wholly 
                           owned subsidiary of Secure Trust Bank PLC, 
                           responsible for retail lending. 
-----------------------  ---------------------------------------------------

This information is provided by RNS

The company news service from the London Stock Exchange

END

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(END) Dow Jones Newswires

March 23, 2017 03:00 ET (07:00 GMT)

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STB Secure Trust Bank Plc